Tax

TABLE OF CONTENTS
GENERAL PRINCIPLES INCOME TAXATION TRANSFER TAXES
1 26 116
Annexes to Income Tax............................................................................................................................. 99
Estate Taxes ........................................................................................................................................... 116 Donors Taxes ......................................................................................................................................... 129
VALUE-ADDED TAX TARIFF AND CUSTOMS CODE TAX REMEDIES UNDER THE NIRC LOCAL TAXATION COURT OF TAX APPEALS
133 147 164 205 226
Amendments to Value-Added Tax (Annex)........................................................................................... 144
Annexes to Tariff and Customs .............................................................................................................. 159
Related Revenue Regulations (Annex)...................................................................................................... 195
Specific Provisions on The Taxing and Other Revenue-Raising Powers of Local Government Units ......... 223
Taxpayer Bill of Rights (Annex)............................................................................................................ 234
This is the Intellectual Property of the San Beda College of Law 2008 Centralized Bar Operations. Unauthorized use and reproduction of this material is not allowed.
San Beda College of Law
1 2008 CENTRALIZED BAR OPERATIONS
TAXATION LAW GENERAL PRINCIPLES

GENERAL PRINCIPLES
Power of Taxation
TAXATION. defined. power by which the sovereign through its law-making body raises revenue to defray the necessary expenses of the government. It is a way of apportioning the costs
of the government among those who in some measure are privileged to enjoy its benefits and must bear its burdens.
Nature of the Taxing Power (ILL)

1. It is an inherent attribute of sovereignty the power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of every government. It exists apart from the constitution and without being expressly conferred by the people. BASIS OF TAXATION (Lifeblood Theory) The power of taxation is essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need (Bull vs. United States G.R. No.5270, Jan.15, 1910). The collection of taxes must be made without hindrance if the state is to maintain its orderly existence. The governments ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society (CIR vs. Algue, G.R.No 28896 Feb. 17, 1988). POWER OF TAXATION EXERCISED The power of taxation is sometimes called the power to destroy. Therefore it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector kill the hen that lays the golden egg. And in order to maintain the general publics trust and confidence in the Government this power must be used justly and not treacherously. It does not conform to the sense of justice for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. THEORIES ON TAXATION Necessity Theory Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it
EXECUTIVE COMMITTEE
VISMARCK UY over-all chair, APRIL CABEZA chair academics operations, ALDEAN LIM chair hotel operations, AYN SARSABA vice chair for operations, ANTHONY PURGANAN vice chair for academics, RONALD JOHN DECANO vice chair for secretariat, KARLA FUNTILA vice chair for finance, JEFFREY GALLARDO vice chair for edp, ULYSSES GONZALES vice chair for logistics
TAXATION LAW
IRIS VICTORIA MERIN subject chair MARK JULIUS ESTUR assistant chair DICT V. UNTAYAO edp MARIEL MAILOM general principles, MAUREEN ROSE OBON income taxation, MARK JULIUS ESTUR estate taxation, MINERVA JIMENEZ donors tax and court of tax appeals, MARK ANTHONY DIZON, value added tax, ARLENE ALDAY and NELSON SALVA JR. tax remedies, MAUREEN SEYMOUR JAVIER local taxation and real property taxation, JULIUS BABALCON tariff and customs code, ROWENA MUTIA tables and annexes
MEMBERS:
Maria Evitha Abante, Aldren Abrigo, Herbert Abugan, Julian Adarlo, James Agustin, Karren Amparo, Mary Joy Aquino, Aileen Artificio, Ray John Bangi, Jennifer Bautista, Vincent Cablao, Raul Canon, Jay Martin Celzo, John Ray Concepcion, Maureen De Castro, Ramon Alfredo Dela Cruz, Karla Funtila, Kathryn Joy Hautea, Irene May Junio, Erwin Legaspi, Precious Angela Lledo, Micael Ortiz Luis, Katherine Jane Manarang, Masha Mariano, Leonardo Mendoza II, Joanne Mosquera, Sol Pejo, Ryan Pingol, Donelle Jay Quilates, Diana Rabanal, Mariflor Reyes, Deepee Salazar, Ralph Jerome Salvador, John Zernan Sambahon, Lauren Rose Tanyag, Maria Joy Toledo, Jan Reiner Uy, Jennylyn Valencia, Cristiellane Valerio and Sherwin P. Pascua
2 General Principles has a right to compel all citizens and property within its limits to contribute. Taxation is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. vs. CIR G.R. No.22074, Apr. 30, 1965) Benefits-Protection/Reciprocity Theory The power of the State to demand and receive taxes is based on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. This theory spawned the Doctrine of Symbiotic Relationship (CIR vs. Algue, G.R. No. 28896 Feb. 17, 1988) Every person who is able must contribute his share in the burden of running the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values. 2. It is legislative in character such power is exclusively vested in the legislature except when the Constitution provides otherwise. This is based upon the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must be exercised. (Cooley) SCOPE OF LEGISLATIVE TAXING POWER (PAPKASM) 1. Person, property, occupation, excises or privileges to be taxed provided they are within the taxing jurisdiction. The taxing authority can select the subjects of taxation. Amount or rate of tax Purposes for which taxes shall be levied provided they are for public purposes Kind of tax to be collected Apportionment of the tax (whether the tax shall be general or limited to a particular locality or partly general and partly local) Situs of taxation 3. 7.
MEMORY AID IN TAXATION LAW
Method of collection
IS THE POWER TO TAX THE POWER TO DESTROY? Marshall laid down the rule that the Power to tax is the power to destroy. According to Cooley, this is because such power includes the power to regulate even to the extent of prohibition or destruction. Cooley also emphasized that this should be used to describe not the purposes for which the taxing power may be utilized but the degree of vigor with which the taxing power may be employed in order to raise revenue. According to Justice Cruz, the power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare. But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. According to Holmes, the Power to tax is not the power to destroy while the Supreme Court sits because of the constitutional restraints placed on a taxing power that violate fundamental rights. Although the power to tax is almost unlimited, it must not be exercised in an arbitrary manner. If the abuse is so great so as to destroy the natural and fundamental rights of the people, it is the duty of the judiciary to hold such an act unconstitutional. POWER OF JUDICIAL REVIEW IN TAXATION As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction, the motives behind it, the amount to be raised or the persons, property or other privileges to be taxed. The courts power in taxation is limited only to the application and interpretation of the law. It is subject to constitutional and inherent limitations.
2. 3. 4. 5.
6.
Purposes and Objectives of Taxation

1. Revenue to raise funds or property to enable the State to promote the general welfare and protection of its citizens. Non-Revenue (PR2EP) a. b. c. Promotion of general welfare Regulation Reduction of social inequality possible through progressive system of taxation where the object is to prevent the undue concentration of wealth in the hands of a few individuals. E ncourage economic growth by granting incentives or exemptions in order to encourage investments Protectionism taxes sometimes provide protection to local industries like protective tariffs and custom duties No special or direct benefit is received by the taxpayer merely general benefit of protection Contracts may not be impaired Taxes paid become part of public funds All persons, property and excises Amount of Exaction No limit Limited to the cost of regulation, issuance of the license or surveillance No direct benefit is received; a healthy economic standard of society is attained Contracts may be impaired No transfer but only restraint in its exercise Scope All persons, property, rights and privileges Only upon a particular property No exaction but private property is taken by the State for public purpose A direct benefit results in the form of just compensation to the property owner
2.
Benefits received
d.
e.
Non-impairment of Contracts Contracts may be impaired
Taxation distinguished from Police Power and Eminent Domain TAXATION POLICE POWER Purpose To raise revenue To promote public welfare through regulations To facilitate the taking of private property for public use EMINENT DOMAIN
Transfer of Property Rights Transfer is effected in favor of the State
Aspects of Taxation
1. Levy or imposition of the tax (tax legislation)
enactment of tax laws or statutes; includes the determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes.
2. Enforcement or tax administration (tax

administration) collection of taxes already levied. Collection (including assessment) consists of the manner of enforcement of the obligation on the part of those who are taxed.
Basic Principles of A Sound Tax System /Canons of Taxation (FAT)

1. Fiscal Adequacy sources of government r e v e n u e m u s t b e s u ff i c i e n t t o m e e t government expenditures and other public needs. Administrative Feasibility tax laws must be capable of being effectively enforced. Theoretical Justice a sound tax system must be based on the taxpayers ability to pay (Ability to Pay Theory). Our laws mandate that taxes must be reasonable, fair, just, and conscionable. The Constitution provides that taxation must be uniform and equitable and that the State must evolve a progressive system of taxation.
2. 3.
4 General Principles
Taxes
DEFINITION: enforced proportional contributions from the persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of government and for public needs. 2. ESSENTIAL CHARACTERISTICS (ATTRIBUTES) OF A TAX (SLEP4) 1. 2. 3. It is levied by the state which has jurisdiction over the person or property It is levied by the law making (legislative) body of the state It is an enforced contribution not dependent on the will of the person taxed, not a contract but a positive act of the government It is generally payable in money It is proportionate in character taxes must be based on ability to pay in accordance with the constitutional mandate to Congress to evolve a progressive system of taxation It is levied on persons and property It is levied for public purpose/s b. REQUISITES OF A VALID TAX (JAPUL) 1. 2. That either the person or property taxed be within the jurisdiction of the taxing authority That the assessment and collection of certain kinds of taxes guarantee against injustice to individuals, especially by providing notice and opportunity for hearing Should be for a public purpose The rule of taxation shall be uniform The tax must not impinge on the inherent and Constitutional limitations on the power of taxation b. 4. 3. b. c. Excise or Privilege charge imposed upon the performance of an act, the enjoyment of a privilege or engaging in an occupation, profession or business (ex. Donors tax). Direct tax which is demanded from the person who also shoulders the burden of the tax; the taxpayer is directly or primarily liable which he cannot shift to another. Both the incidence (liability) for the payment of the tax as well as the impact (burden) of the tax falls on the same person. (i.e. Income tax). Indirect tax wherein the incidence or liability for the payment falls on one person but the burden can be shifted or passed on to another (ex. VAT). General, fiscal or revenue tax imposed for the general or ordinary purposes of the Government, to raise revenue for governmental needs (ex. income tax) Special or regulatory tax imposed for a special purpose, to achieve some social or economic ends irrespective of whether revenue is actually raised or not (ex. customs duties) Specific tax of a fixed amount imposed by the head or number or by some standard of weight or measurement; it requires no valuation other than a listing or classification of the objects to be taxed. Ad Valorem (Value) tax of a fixed portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. National levied by the National Government Local levied by the local government Progressive or graduated taxes whereby the tax rate increases as the tax base or bracket increases. Regressive taxes whereby the tax rate decreases as the tax base increases.
As to who bears the burden: a.
4. 5.
As to purpose: a.
6. 7.
As to determination of amount: a.
3. 4. 5.
CLASSIFICATION OF TAXES 1. As to subject matter or object: a. Personal, poll or capitation tax of a fixed amount imposed upon persons residing within a specified territory, whether citizens or not, without regard to their property, occupation or business in which they may be engaged (ex. Community tax). Property tax imposed on property, whether real or personal, in proportion either to its value or some other reasonable rule of apportionment (ex. Real estate tax). 5.
As to taxing authority: a. b.
6.
As to rate: a.
b.
b.

c. Proportionate based on a fixed percentage of the amount of the property, receipts or other basis to be taxed.

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS Non-payment is No imprisonment in case of punished by non-payment (Art. III, Sec. imprisonment except 20 1987 Constitution) in poll tax Imposed only by public authority Can be imposed by private individual Tax and Toll Enforced proportional A sum of money for the use contributions from of something, a persons and property consideration which is paid for the use of a property which is of a public nature; e.g. road, bridge A demand of sovereignty No limit as to the amount of tax A demand of proprietorship Amount of toll depends upon the cost of construction or maintenance of the public improvement used
TAXES DISTINGUISHED FROM OTHER IMPOSITIONS Tax and Special Assessment Imposed on persons, property and excises Personal liability attaches on the person assessed in case of non-payment Not based on any special or direct benefit Levied and paid annually Exemption granted by Art. VI, Sec 28 (3) of the 1987 Constitution is applicable Levied only on land Cannot be made a personal liability of the person assessed Based wholly on benefit
Exceptional both as to time and locality Exemption does not apply. N.B. If property is exempt from Real Property Tax, it is also exempt from Special Assessment. Emanates from police power The purpose is regulatory Amount is limited to the cost of (1) issuing the license, and (2) inspection and surveillance
Tax and License Fee Based on the power of taxation The purpose is to generate revenue Amount is unlimited
Imposed only by the May be imposed by: State 1. Government 2. Private individuals or entities Tax and Penalty Enforced proportional Sanction imposed as a contributions from punishment for violation of a persons and property law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Intended to raise revenue Designed to regulate conduct
Normally paid after Normally paid before the start of a business commencement of business Taxes, being the License fee may be with or lifeblood of the State, without consideration cannot be surrendered except for lawful consideration Non-payment does not make the business illegal but may be a ground for criminal prosecution Non-payment makes the business illegal
May be imposed only May be imposed by: by the government (1) Government (2) Private individuals or entities Tax and Tariff All embracing term to A kind of tax imposed on include various kinds articles which are traded of enforced internationally contributions upon persons for the attainment of public purposes Tax and Compromise Penalty Basic imposition on Collected as a compromise persons, property and in cases involving violations excises of the Tax Code, rules or regulations. Tax and Subsidy Levied by the lawmaking body of the State for the support of the government and for public needs. A source of revenue of the government. A legislative grant of money in aid of a private enterprise deemed to promote the public welfare.
Tax and Debt An obligation imposed Created by contract by law Due to the government in its sovereign capacity Payable in money Does not draw interest except in case of delinquency Not assignable Not subject to compensation or setoff May be due to the government but in its corporate capacity Payable in money, property or services Draws interest if stipulated or delayed Assignable Subject to compensation or set-off
Tax and Revenue A broad term that includes not only taxes but income from other sources as well.
6 General Principles COMPENSATION OR SETOFF OF TAXES General Rule: Taxes cannot be the subject of compensation or set-off because the government and the taxpayer are not creditors and debtors of each other. Obligations in the nature of debts are due to the government in its corporate capacity while taxes are due to the government in its sovereign capacity. (Philex Mining vs. CIR CTA Case No.5200 Aug.21, 1998) Exceptions: 1. Solutio Indebiti Compensation takes place by operation of law, where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable. This is in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo vs. Garlitos G.R. No. 18994, June 29, 1963) If the case involves local government taxes.
TAXPAYERS SUIT A case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, Inc vs. Guingona, Jr. G.R.No. 113375, May 5, 1994) Taxpayers have locus standi for they are parties in interest to be prejudiced or benefited by the avails of the suit but not if executive acts do not involve the use of public funds. (Gonzales vs. Marcos G.R. No. 21897 Oct. 22, 1963) The plaintiff in a taxpayers suit is in a different category from the plaintiff in a citizens suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, plaintiff is but the mere instrument of the public concern. (David vs. Macapagal-Arroyo 489 SCRA 160) REQUISITES FOR TAXPAYERS SUIT 1. The tax money is being extracted and spent in violation of specific Constitutional protections against abuses of legislative power; That public money is being deflected to any improper purpose (Pascual vs. Secretary of Public Works G.R.No.10405 Dec. 29, 1960); and That the petitioner seeks to restrain respondents from wasting public funds through the enforcement of an invalid or unconstitutional law.
2.
Doctrine of Equitable Recoupment where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently being assessed against a taxpayer may be recouped or setoff against the tax whose refund is now barred by prescription. (UST vs. Collector G.R. No. 570 June 23, 1953) The doctrine is NOT followed in the Philippines because of the lifeblood theory.
2.
3.
Inherent Limitations
These proceed from the very nature of the taxing power itself. These are: (SPINE) 1. 2. 3. 4. 5. 1. territoriality or situs of taxation public purpose international comity non-delegability of the taxing power and tax exemptions of the government. TERRITORIALITY OR SITUS OF TAXATION Situs of taxation is the place or authority that has the right to impose and collect taxes (CIR vs. Marubeni Corp. G.R. No. 137377 Dec. 18, 2001). The state where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. General Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised or enjoyed (51 Am. Jur. 87-88). Tax a. b. c. d. e. f. b. laws do not operate beyond the jurisdictional limits of a country. Reasons: a. Taxation is an act of sovereignty which could only be exercised within a countrys territorial limits. This is the result of the concept that taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial boundaries of the taxing state. Factors that determine the situs Kind or classification of the tax being levied Situs of the thing or property taxed Citizenship of the taxpayer Residence of the taxpayer Source of the income taxed Situs of the excise, privilege, business or occupation being taxed Situs of the Subject of Tax

a. Persons poll, capitation or community taxes are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer. Property 1) Real property Real estate is subject to taxation only in the state where it is located whether the owner is a resident or non-resident (51 Am. Jur. 458). This is the principle of lex rei sitei. Reasons: a) The taxing authority has control because of the stationary and fixed character of the property. The place where the real property is situated gives protection to the real property, hence the property or its owner should support the government of that place.
7 2008 CENTRALIZED BAR OPERATIONS the business of which is located in the Philippines; (d) Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and (e) Shares or rights in any partnership, business or industry established in the Philippines (Sec. 104, NIRC) 4) Income Factors that determine the situs of income tax: a. Nationality or citizenship of the taxpayer;
b.
b)
b. Residence or domicile of the taxpayer; and c. Source of the income General Principles of Income Taxation in the Philippines Except when otherwise provided in this Code: a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; A nonresident citizen is taxable only on income derived from sources within the Philippines; An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; A domestic corporation is taxable on all income derived from sources within and without the Philippines; and A foreign corporation, whether engaged or not in trade or
2) Tangible personal property the modern rule is that it is taxable in the state where it has actual situs; where it is physically located although the owner resides in another jurisdiction (51 Am. Jur. 467). Reason: The place where the tangible personal property is found gives it protection. 3) Intangible Personal Property General Rule: The situs is at the domicile of the owner. This is in accordance with the principle of mobilia sequuntur personam or movables follow the person. Exceptions: a) When the property has acquired a business situs in another jurisdiction; or
b.
c.
b) When the law provides for the situs of the subject of tax; Example: For purposes of estate and donors taxes, the following intangible properties are deemed to have a situs in the Philippines: (a) Franchise which must be exercised in the Philippines; (b) Shares, obligations or bonds issued by any corporation organized or constituted in the Philippines in accordance with its laws; (c) Shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of e.
d.
f.
8 General Principles business in the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23 NIRC) 5) Excise or Privilege the power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise nor upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place wherein the act is performed or occupation engaged in (Allied Thread vs. City Mayor of Manila G.R. No.40296 Nov. 21, 1984) 6) G r a t u i t o u s T r a n s f e r t h e transmission of property from a donor to a donee or from a decedent to his heirs may be subject to taxation in the state where the transferor is (was) a citizen or resident, or where the property is located. 2. PUBLIC OR GOVERNMENTAL PURPOSE purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals and is designed to support the services of government for some of the recognized objects of the country. Tests in Determining Public Purpose a. Duty Test whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide. b. Promotion of General Welfare Test whether the proceeds of the tax will directly promote the welfare of the community in equal measure. 3. INTERNATIONAL COMITY The property or income of a foreign state or government may not be the subject of taxation by another. Reasons: a. In par parem non habet imperium. As between equals there is no sovereign. (Doctrine of Sovereign Equality) The rule of international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not be collected. The concept that when a foreign sovereign enters the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other. 3. 4. 4.
NON-DELEGABILITY OF THE TAXING POWER General Rule: The power of taxation being purely legislative, Congress cannot delegate the power to others. This limitation arises from the doctrine of separation of powers among the three branches of government. Exceptions: a. Delegation to the President The Constitution expressly allows Congress to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates, import or export quotas, tonnage and wharfage dues and other duties or imposts. (Sec. 28 [2] Art. VI) Delegation to local governments Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local government (Sec. 5 Art. X, 1987 Constitution) Delegation to administrative agencies also known as the power of subordinate legislation. The delegation must comply with the completeness test and the existence of sufficiently determinate standards test (Pelaez vs. Auditor General G.R. No. 23825 Dec. 24, 1965.) It should only be for tax administration or implementation. Non-delegable legislative powers (cannot be delegated to administrative agencies): 1. 2. Selection of the property to be taxed Determination of the purposes for which taxes shall be levied Fixing of the rate of taxation Rules of taxation in general (1 Cooley 196)
b.
c.
b.
IS THE POWER GRANTED TO THE PRESIDENT TO INCREASE THE VAT RATE TO 12% under RA 9337, AN UNDUE DELEGATION OF POWER? NO. It is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. No discretion will be exercised by the president. Thus, it is a ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by the
c.

Congress. The 12% VAT rate was made effective by Congress on February 1, 2006. 5. EXEMPTION OF THE GOVERNMENT Properties of the national government as well as those of the local government units are not subject to tax, otherwise it will result in the absurd situation of the government taking money from one pocket and putting it in another (Cooley as cited in Board of Assessment Appeals of Laguna vs. CTA). Other Reasons: a. To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itself. So that the functions of the government shall not be unduly impeded (51 Am. Jur. 550-51) To reduce the amount of money that has to be handled by the government in the course of its operations (Maceda vs. Macaraig G.R. No. 88291 June 8, 1993)
9 2008 CENTRALIZED BAR OPERATIONS (Infantry Post Exchange vs. Posadas G.R. No. 33403 Sept. 4, 1930) Rules: a. Administrative Agencies performing: 1) Governmental functions tax exempt unless the law expressly provides otherwise [Sec. 32(B)(7)] 2) Proprietary functions taxable unless exempted by law [Sec. 27(C)] b. Government-owned and -controlled corporations General Rule: Since they are performing proprietary functions, they are subject to taxation. Their income is taxable at the rate imposed upon corporations or associations engaged in similar business, industry, or activity. Except: GSIS, SSS, PHIC and PCSO [Sec. 27(C), NIRC as amended by RA 9337] NOTE: PAGCOR used to be exempt but effective July 1, 2005, RA 9337 removed the exemption. c. Government Educational Institutions 1) Property actually, directly and exclusively used for educational purposes exempt from property or real estate tax but income of whatever kind and character from any of their properties, real or personal, regardless of the disposition, is taxable (Sec. 30, last par., NIRC) 2) Income received by them as such is exempt from taxes. However, their income from any of their activities conducted for profit regardless of the disposition is taxable (Sec. 30, last par., NIRC)
b.
c.
However, the Constitution is silent on whether Congress is prohibited from taxing the properties of the agencies of the government. Therefore, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. (MCIAA vs. Marcos G.R. No. 120082 Sep. 11, 1996) Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its government powers.
Constitutional Limitations
Note: Constitutional grant is not necessary in the exercise of the power of taxation. It is an inherent power of the Sate. Constitutional provisions are mere limitations of the power. the governments law and rule making powers. b. After compliance with fair and reasonable methods of procedure prescribed by law, with notice or hearing or at least an opportunity to be heard whenever necessary . This is Procedural Due Process which limits the actions of judicial and quasi-judicial bodies. In addition as held in Pepsi Cola vs. Mun. of Tanauan G.R. No.31156 Feb. 27, 1976: Due process in taxation requires: 1) 2) Tax must be for public purpose Imposed within territorial jurisdiction
1. DUE PROCESS OF LAW (Art. III, Sec. 1, 1987

Constitution) Any deprivation is with due process if it is done: a. Under the authority of a law that is valid or of the Constitution itself, the tax statute is within the Constitutional authority of Congress to pass, and that it must be reasonable, fair and just. This is Substantive Due Process which limits
10 General Principles 3) No arbitrariness or oppression in a) b) 1) assessment collection
4. PROGRESSIVE SYSTEM OF TAXATION

(Art. VI, Sec. 28 [1], 1987 Constitution) Progressive System of Taxation means that as the resources of the taxpayer become higher, his tax rate likewise increases. This is exemplified by the income tax rate which increases as the net taxable income increases. It is based on the ability to pay and in implementation of the social justice principle that the more affluent should contribute more for the communitys benefit. The Constitution does not really prohibit regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. This is a mere directive upon Congress, not a justiciable right. (Tolentino vs. Secretary of Finance, G.R. No. 115455, August 25, 1994) In case of VAT, it is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT System inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. Nevertheless, the Constitution does not prohibit the imposition of indirect taxes like the VAT. The Constitutional provision has been interpreted to mean simply that direct taxes are to be preferred and as much as possible, indirect taxes should be minimized.
Due process in taxation does NOT require: Determination through judicial inquiry of a) b) 2) a) b) Property subject to tax Amount of tax to be imposed Amount of tax Manner of apportionment
Notice and hearing as to
2. EQUAL PROTECTION (Art. III, Sec.1, 1987

Constitution) Equal protection neither requires equal rates of taxation on different classes of property, nor prohibits unequal taxation so long as the inequality is not based upon arbitrary classification. It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed (Cooley as cited in Sison, Jr. vs. Ancheta G.R. No. 59431 July 25, 1984) The power to select subjects of taxation and apportion the public burden among them includes the power to make classifications. For the classification to be valid, the following requisites must concur: a. b. c. d. I t m u s t b e b a s e d o n s u b s ta n ti a l distinctions; It must apply both to present and future conditions; It must be germane to the purposes of the law; and It must apply equally to all members of the same class. (Ormoc Sugar Company vs. Treasurer of Ormoc G.R. No. 23794 Feb.17, 1968)
5. NON-IMPAIRMENT CLAUSE (Art. III, Sec. 10,

1987 Constitution) The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. (Edwards vs. Kearney, 96 US 607) Examples: a. When a tax exemption based on a contract is revoked by a later taxing statute (Cassanova vs. Hord GR No. 3473 March 22, 1907); A taxpayer enters into a compromise with the BIR; this cannot be impaired without violating the Constitution.
3. UNIFORMITY AND EQUITABILITY (Art. VI,

Sec. 28 [1], 1987 Constitution) Uniformity all taxable articles or properties of the same class shall be taxed at the same rate. (City of Baguio vs. De Leon G.R.No. 24756 Oct. 31, 1968) Different articles or other subjects may be taxed at different rates provided that the rate is uniform on the same class everywhere. (De Villata vs. Standley G.R. No. 8154 December 20, 1915) Equity requires that such apportionment be more or less just in the light of the taxpayers ability to shoulder the tax burden, usually measured in terms of wealth, and, if warranted, on the basis of the benefits he receive from the government. Taxation may be uniform but inequitable where the amount is excessive or unreasonable.
b.
Rationale: When the State grants an exemption on the basis of a contract, consideration is presumed to be paid to the State, and the public is supposed to receive the whole equivalent therefrom. Rules: a. When the exemption is bilaterally agreed upon between the government and the taxpayer it cannot be withdrawn without violating the non-impairment clause.

b. When it is unilaterally granted by law and the same is withdrawn by virtue of another law no violation. When the exemption is granted under a franchise may be revoked because under the Constitution, a franchise is subject to amendment, alteration, or repeal by Congress when the common good so requires. (Art. XII, Sec. 11, 1987 Constitution)
10. TAXATION AND FREEDOM OF THE PRESS

(Art. III, Sec. 4, 1987 Constitution) There is curtailment of press freedom and freedom of thought and expression if a tax is levied in order to suppress this basic right and impose a prior restraint. (Tolentino vs. Secretary of Finance, supra) However, if the fee imposed is not for the exercise of a privilege but only for the purpose of defraying part of the cost of registration, the Constitution is not violated.
c.
6. N O N I M P R I S O N M E N T F O R N O N
PAYMENT OF POLL TAX (Art. III, Sec. 20, 1987 Constitution) A poll tax is imposed on persons without any qualification. An example is the community tax under Sec. 162 of the LGC which provides that a person or corporation which does not own any real property, does not receive any income, or even a minor may be permitted to pay basic community tax and be issued a community tax certificate. One cannot be imprisoned for non-payment of poll tax because payment thereof is not mandatory. Payment is merely permissive; it cannot be imposed compulsorily upon taxpayers. While a person may not be imprisoned for non-payment of poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly so provides.
11. TAXATION AND FREEDOM OF RELIGION

(Art. III, Sec. 5, 1987 Constitution) A Municipal license tax on the sale of bibles and religious articles by a non-stock, nonprofit missionary organization at minimal profit constitutes curtailment of religious freedom and worship which is guaranteed by the Constitution. (American Bible Society vs. City of Manila G.R. No. L-9637 April 30, 1957) Income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable.
12. TA X E X E M P T I O N O F P R O P E R T I E S
ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES (Art. VI, Sec. 28 [3], 1987 Constitution) The foregoing provision exempts religious and educational institutions from real estate tax. Test of Exemption: It is the use of the property and not ownership. Nature of Use: The properties must be actually, directly and exclusively used for the purposes mentioned. Exclusive is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and exclusively is defined, in a manner to exclude; as enjoying a privilege exclusively. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words dominant use or principal use cannot be substituted for the words used exclusively without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. (Lung Center of the Philippines vs. Quezon City, G.R. No. 144104, June 29, 2004) Scope of Exemption: The exemption is not limited to property actually indispensable for religious, charitable or educational purpose. It extends to facilities which are incidental to or reasonably necessary for the accomplishment of said purposes. (Abra Valley College vs. Aquino G.R. No. L-39086 June 15, 1988.)
7. BILLS TO ORIGINATE FROM THE HOUSE

OF REPRESENTATIVES (Art. VI, Sec. 24, 1987 Constitution) It is not the law but the revenue bill which is required by the Constitution to originate exclusively in the House of Representatives. A bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. The Constitution simply means that the initiative for filing the bills must come from the House, on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. (Tolentino vs. Secretary of Finance G.R. No. 115455, August 25, 1994)
8. VETO POWER OF THE PRESIDENT (Art. VI,

Sec. 27 [2], 1987 Constitution)
9. PRESIDENTS POWER TO TAX (Art. VI, Sec.

28 [2], 1987 Constitution) The president may increase tariff rates as authorized by law even for revenue purposes only. (Garcia vs. Executive Secretary GR No. 101273 July 3, 1992)
12 General Principles
13. TAX EXEMPTION GRANTED TO NONSTOCK NON-PROFIT EDUCATIONAL INSTITUTIONS (Art. XIV, Sec. 4 [3], [4], 1987 Constitution) NOTE: Congress is authorized to grant similar exemptions to proprietary educational institutions subject to limitations provided by law. The exemption covers income, property, and donors taxes and custom duties. Exemption also covers interest income of Non-stock Non-profit Educational Institution from bank deposits, deposit substitutes, treasury bills and other government bonds and foreign currency deposits. These are exempted from the 20% final withholding tax without need of certificate of tax exemption provided that the interest income is used actually, directly and exclusively for educational purposes. (San Beda Law Journal, March 2007, St. Marys College of Quezon City, June 17, 2005). General Rule: To be exempt, the revenue and assets must be used actually, directly and exclusively for educational purposes. However, as to income derived from activities conducted by them for profit, there are different views: a. According to the majority view, the Constitution has not made any distinction with respect to the source of the revenues; it merely distinguished with respect to the utilization. Thus, even if the income does not proceed from any school related activity it may be subject to exemption so long as it is actually, directly and exclusively used for educational purposes. And as the Constitution is the basic and paramount law to which all laws must conform, the NIRC provision (last par., Sec. 30) must yield to the former. According to the minority view, the exemption does not extend to income derived by these educational institutions from their property or activities conducted by them for profit regardless of the disposition made of such income because of the provision in the NIRC holding such income taxable (Last par., Sec. 30). But where the transaction is an isolated one, the exemption still applies. (Manila Polo Club vs. CTA G.R. No. L-10854 January 27, 1960) Note: Section 30 of the NIRC speaks of the source of income while the 1987 Constitution refers to the use of the income.
14. APPROPRIATION OF PUBLIC MONEY (Art.

VI, Sec. 29[2], 1987 Constitution) Reasons: a. b. Requirement that taxes can only be levied for a public purpose. In consonance with the inviolable principle of separation of the Church and State.
What the Constitution prohibits is the use of public money or property for the benefit of any priest, etc. as such. When so employed in the armed forces, any penal institution, or government orphanage or leprosarium, they may receive their corresponding compensations for services rendered in their non-religious capacity without violating the Constitutional prohibition.
15. VOTING REQUIREMENT ON GRANT OF

TAX EXEMPTIONS (Art. VI, Sec. 28[4], 1987 Constitution) Reason: The requirement is obviously intended to prevent indiscriminate grant of tax exemptions. The phrase a majority of all the members of the Congress means at least plus 1 of all the members voting separately. In granting tax exemptions, an absolute majority of the members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority is sufficient. Tax amnesties, condonations and refunds are in the nature of tax exemptions, such being the case, a law granting them requires the vote of an absolute majority. A constitutional grant of exemption may be selfexecuting or may require an act of Congress for its operation. Where a Constitutional provision granting an exemption is self-executing, the legislature can neither add nor detract from it. It may, however, prescribe a procedure to determine whether a claimant is entitled to the Constitutional exemption.
b.
16. MUNICIPAL TAXATION (Art. X, Sec. 5, 1987

Constitution) Delegation of legislative taxing power to local governments is justified by the necessary implication that the power to create political corporations for purposes of local selfgovernment carries with it the power to confer on such local government agencies the authority to tax. (Pepsi Cola vs. Municipality of Tanauan G.R. No. L-31156 Feb.27, 1976) Despite the grant of taxing power, judicial admonition is given to the effect that the tax so levied must be for a public purpose, uniform, and must not transgress any constitutional provision or be repugnant to a

controlling statute. (Villanueva vs. City of Iloilo G.R. No. L-26521 Dec. 28, 1968)
13 2008 CENTRALIZED BAR OPERATIONS THE PUBLIC TREASURY (Art. VI, Sec. 29 [1], 1987 Constitution)
17. NONIMPAIRMENT OF THE SUPREME

COURTS JURISDICTION OVER TAX CASES (Art. VIII, Sec. 2 and 5, 1987 Constitution)
20. CONSTITUTIONAL REQUIREMENT ON

THE SUBJECT AND TITLE OF BILLS (Art. VI, Sec. 26 [1], 1987 Constitution)
18. SPECIAL FUND (Art. VI, Sec. 29 [3], 1987

Constitution)
21. PROVISIONS REGARDING ALLOTMENTS

TO LOCAL GOVERNMENTS (Art. X, Sec. 6, 1987 Constitution)
19. NECESSITY OF AN APPROPRIATION

BEFORE MONEY MAY BE PAID OUT OF
Double Taxation
DOUBLE TAXATION (DUPLICATE TAXATION) means taxing the same property twice when it should be taxed only once (CIR vs. Solid Bank Corp. G.R. No 148191 Nov. 25, 2003) It has also been defined as taxing the same person twice by the same jurisdiction over the same thing (Victoria Milling vs. Mun. of Victoria, Negros Occidental G.R. No. L-21183 Sept. 27, 1968). NO PROHIBITION AGAINST DOUBLE TAXATION. According to the Supreme Court (Villanueva vs. City of Iloilo, G.R. No. L-26521 December 28, 1968) there is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is nevertheless permissible. KINDS OF DOUBLE TAXATION 1. Direct Duplicate Taxation / Obnoxious double taxation in the objectionable or prohibited sense. This violates the equal protection clause of the Constitution, hence prohibited. Elements: a. The same property or subject matter is taxed twice when it should be taxed only once Both taxes are levied for the same purpose Imposed by the same taxing authority Within the same jurisdiction During the same taxing period Covering the same kind or character of tax (Villanueva vs. City of Iloilo, supra) Example: A Filipino citizen who received dividend income from the United States. The dividend being remitted to him is taxed in the United States and at the same time taxed in the Philippines. There is double taxation but it is not prohibited because the taxes are imposed by different taxing authorities. INTERNATIONAL JURIDICAL DOUBLE TAXATION This is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. (Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. G.R. No.127105, June 25, 1999) METHODS OF REDUCING THE RIGORS OF DOUBLE TAXATION (CD RET) 1. Tax credits There is no exact legal definition of tax credits however it can be defined by its ordinary usage based on existing laws to wit: a. Tax credit is an alternative remedy to a refund of overpaid taxes which may be applied to offset tax liabilities. Tax credits shall mean credits against taxes and/or duties equal to those actually paid on raw materials used in manufacturing the export products. A reward or incentive granted to certain taxpayers for satisfying certain requirements prescribed by an incentive law.
b. c. d. e. f. 2.
Indirect Duplicate Taxation is permissible double taxation. This is allowed if the taxes are of different nature or character imposed by different taxing authorities. Generally, it extends to all cases in which there is burden of two or more pecuniary impositions. The absence of one or more of the abovementioned elements makes the double taxation indirect.
b.
c.
14 General Principles In Blacks Legal Dictionary, Tax Credit is defined as an amount subtracted from an individuals or entitys tax liability to arrive at the total tax liability. Tax Credits are granted in lieu of the inability of the government to give cash refund to its taxpayers. Tax Credit Certificates are given in lieu of cash which in turn can be used by the holder thereof to settle his or her obligation with the government. Example: In income taxation, foreign taxes imposed and paid on income earned by a resident citizen or domestic corporation from sources within a foreign country may, under certain limitations, be claimed as tax credit against the Philippine tax on the same income. (Sec. 34 [C] [4] [a] and [b], NIRC) 2. Tax deductions tax write-off or reduction in the gross amount on which a tax is calculated Example: Our estate tax law provides for the so-called vanishing deduction (Sec. 86 [A] [2], NIRC). This involves property previously taxed upon transfer from a prior decedent, and the recipient (present decedent), dies within 5 years, who then transfers the same property to another. Deduction is therefore allowed on the subsequent transfer. 3. Reduction of the Philippine income tax rate Example: Tax Sparing Rule the dividend earned by a NRFC within the Phil. is reduced by imposing a lower rate of 15% (in lieu of the 35%), on the condition that the country to which the NRFC is domiciled shall allow a credit against the tax due from the NRFC, which taxes are deemed to have been paid in the Phil. (Sec.28 [B] [5] b) (CIR vs. Procter & Gamble G.R. No 66838 December 2, 1991) 4. Tax Exemptions a grant of immunity to particular persons or corporations from the obligation to pay taxes. Example: Exempt transfers under estate and donors taxation: a. If the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or If the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of 2) b.
the Philippines not residing in that foreign country. (Sec 104 NIRC) 5. Tax treaties Agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned. Methods resorted to by a tax treaty in order to eliminate double taxation: a. The tax treaty sets out the respective rights to tax by the state of source or situs and by the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred in one of the contracting states; however, for other items of income or capital, both states are given the right to tax although the amount of tax that may be imposed by the state of source is limited. The state of source is given a full or limited right to tax together with the state of residence. In this case, the treaty makes it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are 2 ways under the 2nd method: 1) The exemption method the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital. (This may be done using the tax deduction method which allows foreign income taxes to be deducted from gross income, in effect exempting the payment from being further taxed.) The focus here is on the income or capital itself. The credit method although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. (CIR v. S.C Johnson and Son G.R. No. 127105, June 25,1999) The focus is on the tax.
MOST FAVORED NATION CLAUSE IN TAX TREATIES The purpose of the most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the MOST FAVORED among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation.
b.
Forms of Escape From Taxation

There are 6 basic forms of escape: (SE2CAT) 1. SHIFTING The transfer of the burden of tax by the original payer or the one on whom the tax was assessed (impact of taxation/statutory taxpayer) or imposed to another or someone else (incidence of taxation). Direct tax cannot be shifted a tax cannot be shifted when it is purely personal or when it has no relation to any business dealings of the taxpayer. (Schultz and Harris, American Public Finance) Impact of Taxation point on which tax is originally imposed or the one on whom the tax is formally assessed. Incidence of Taxation point on which the tax burden finally rests or settles down. Illustration: Value added tax. The seller is required by law to pay tax, but the burden is actually shifted or passed on to the buyer. Kinds of shifting a. Forward shifting when the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer Backward shifting when the burden is transferred from the consumer through the factors of distribution to the factors of production Onward shifting when the tax is shifted 2 or more times either forward or backward b. 3. Proof of tax evasion: a. Failure to declare for taxation purposes true and actual income derived from business for 2 consecutive years. (Republic vs. Gonzales, G.R. No. L-17962) Substantial under-declaration of income in the tax returns of the taxpayer for 4 consecutive years coupled with intentional overstatement of deductions. (CIR vs. Reyes, 104 PHIL 1061) TAX AVOIDANCE Validity Legal and not subject to criminal penalty Effect Minimization of taxes TAX EVASION Illegal and subject to criminal penalty Almost always results in absence of tax payments
b.
TAX EXEMPTION is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons or corporations generally within the same state or taxing district are obliged to pay. (51 Am. Jur. 503) Kinds of Tax Exemption a. As to manner of creation: 1) Express or affirmative exemption expressly granted by organic or statute law 2) Implied or exemption by omission when particular persons, property or excises are deemed exempt as they fall outside the scope of the taxing provision itself As to extent: 1) Total absolute immunity 2) Partial one where a collection of a part of the tax is dispensed with c. As to object: 1) Personal granted directly in favor of certain persons 2) Impersonal granted directly in favor of a certain class of property d. As to source: 1) Constitutional immunities from taxation that originate from the Constitution 2) Statutory those which emanate from legislation
b.
c.
2.
TAX EVASION A term that connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. (Yutivo Sons Hardware vs. CTA GRN L-13203 January 28, 1961) A scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. (CIR vs. Estate of Benigno Toda Jr. GR No. 78583 March 26, 1990.) Factors of Tax Evasion: a. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that the tax is due. An accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not coincidental. A course of action which is unlawful.
b.
c.
16 General Principles 3) Contractual agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws 4) Treaty 5) Licensing Ordinance EFFECTS/ BENEFITS OF TAX EXEMPTIONS: a. b. c. d. Deduction for income tax purposes Claims for refund Tax amnesty Condonation of unpaid tax liabilities NATURE OF THE POWER TO GRANT TAX EXEMPTION Like the inherent power to tax, the power to exempt is an attribute of sovereignty for the power to prescribe who or what property shall be taxed implies the power to prescribe who or what property shall not be taxed. Municipal corporations have no inherent power to tax. But the moment the power to impose tax is granted, they also have the power to grant exemption unless forbidden by the Constitution or law. NATURE OF TAX EXEMPTION a. b. An exemption from taxation is a mere personal privilege of the grantee. It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment. It implies a waiver on the part of the Government of its right to collect what otherwise would be due to it and prejudicial thereto. (Commissioner vs. Bothelo Shipping G.R. No.216330, June 29, 1967) c.
is the exception. The law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. (SeaLand Service vs. CA G.R. No. 57828 June 14, 1993) REASONS FOR THE APPLICATION OF STRICTISSIMI
JURIS
a. b.
Lifeblood theory To minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers (Maceda vs. Macaraig) Taxation is a high prerogative of sovereignty whose relinquishment is never presumed (Luzon Stevedoring vs. CA G.R. No 58897 Dec. 3, 1987) EXCEPTIONS TO STRICTISSIMI JURIS When the statute granting exemption provides for liberal construction thereof In case of special taxes relating to special cases and affecting only special classes of persons If exemptions refer to the public property In cases of exemptions granted to religious, charitable and educational institutions or their property In cases of exemptions in favor of the government, its political subdivisions or instrumentalities REVOCATION OF TAX EXEMPTIONS
a. b.
c. d.
e.
c.
N.B. Tax Exempt persons are still required to keep books of accounts for examination for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives (Sec. 235 NIRC, last par.) CONSTRUCTION OF TAX EXEMPTIONS General Rule: Exemptions are not favored and are construed strictissimi juris (by the most strict right or law) against the taxpayer. (Comm. of Customs vs. Phil. Acetylene G.R. No. L-22443 May 29, 1971) Exemptions are highly disfavored in law and he who claims tax exemption must be able to justify his claim or fight (Afisco Insurance Corporation vs. Court of Appeals, G.R. No. 112675, Jan. 25, 1999) PRINCIPLE OF STRICTISSIMI JURIS Laws granting tax exemption are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption
Since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. (Mactan Cebu Intl Airport Authority vs. Marcos, supra) RESTRICTIONS ON REVOCATION a. Nonimpairment clause Where the exemption was granted to private parties based on material consideration of a mutual nature, it then becomes contractual and is covered by the nonimpairment clause of the Constitution. Adherence to form If the tax exemption is granted by the Constitution, its revocation may be effected through constitutional amendment only. Where the tax exemption grant is in the form of a special law and not by a general law even if the terms of the general act are broad enough to include the codes in the general law unless there is manifest intent to repeal or alter the special law. (Province of Misamis Oriental vs. Cagayan Electric Power and Light Co. Inc GRN No. 45355 Jan. 12, 1990)
b.
c.

NATURE OF TAX REFUNDS Tax refunds are in the nature of tax exemptions. They are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law (Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 104151 March 10, 1995) NATURE OF TAX AMNESTY 1. General or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. Partakes of an absolute forgiveness or waiver of the government of its right to collect. To give tax evaders, who wish to relent and are willing to reform a chance to do so. RULES ON TAX AMNESTY 1. Tax amnesty a. b. like tax exemption, it is never favored nor presumed construed strictly against the taxpayer (must show complete compliance with the law)
17 2008 CENTRALIZED BAR OPERATIONS Rule III Section 6.4 of Department Order No. 29-07 provides for the filing of the tax amnesty return together with the SALN (statement of assets, liabilities and networth) and the payment of the tax amnesty within six (6) months from the effectivity of said order. The said order became effective last September 6, 2007. Thus, qualified taxpayers have until March 6, 2008 to avail of the said tax amnesty program. Note: Under RMC 29-2008 and Department Order No. 11-08, it is clarified that the last day of availing benefits under RA 9480, otherwise known as Tax Amnesty Act of 2007, shall be 6 months from November 7, 2007 or on May 5, 2008. Effectivity of DOF Department Order 29-07 commenced on November 7, 2007. DOCTRINE OF IMPRESCRIPTIBLY As a rule, taxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may provide for statute of limitations. The rules that have been adopted are as follows: a) National Internal Revenue Code ASSESSMENT If a Tax return is Within three (3) yrs filed on or before from due date the due date If a Tax return is Within three (3) yrs filed after due from date of actual date filing No return is filed or the return filed is false or fraudulent Within ten (10) yrs from discovery of the failure to file the return or the filing of false or fraudulent return.
2.
3.
2.
Government not estopped from questioning the tax liability even if amnesty tax payments were already received. Reason: Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents. Basis: Lifeblood Theory
COLLECTION If a Tax return is filed No return is filed or the return filed is false or fraudulent Within three (5) yrs from receipt of notice of assessment. Within ten (10) yrs from discovery of the failure to file the return or the filing of false or fraudulent return without need of an assessment.
3.
Defense of tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a particular accused and not the character of the acts charged in the information. Tax amnesty Tax exemption Immunity from civil liability only
b) Tariff and Customs Code It does not express any general statute of limitation. It provides, however, that when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the
Immunity from all criminal, civil and administrative liabilities arising from non payment of taxes
Applies only to past tax periods, Prospective hence retroactive application application
18 General Principles absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative. (Sec 1603, TCC) c) Local Government Code Local taxes, fees, or charges shall be assessed within five (5) years from the date they become due. In case of fraud or intent to evade the payment of taxes, fees or charges the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from date of assessment (Sec. 194, LGC) 4. CAPITALIZATION The reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay. TAX AVOIDANCE The exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. (CIR vs. Estate of Benigno Toda Jr. G.R. No. 30554 Feb.28.1983.) A taxpayer has legal right to decrease the amount of what would otherwise be his taxes or altogether avoid them by means which the law permits. (Delpher Trades vs. IAC G.R. No. 69259 Jan. 26, 1988) Example: Availing of all deductions allowed by law or refraining from engaging in activities subject to tax. 6. TRANSFORMATION The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby producing his units at a lower cost.
5.
Tax Laws
NATURE OF TAX LAWS 1. 2. 3. Not political in character Civil in nature, not subject to ex post facto law prohibitions Not penal in character APPLICATION OF TAX LAWS CONSTRUCTION OF TAX LAWS 1. Legislative intention must be considered Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent (51 Am. Jur. 361). Where there is doubt In every case of doubt, in tax statutes imposing payment of tax, laws are construed strictly against the government and liberally in favor of the taxpayer (Manila. Railroad vs. Collector of Customs G.R. No. 10214 Nov.4, 1915). Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. Where language is plain Rule of strict construction against the government does not apply where the language of the tax law is plain and there is no doubt as to the legislative intent (51 Am. Jur. 368). The words employed are to be given their ordinary meaning. Where taxpayer claims exemption Exemptions are construed strictly against the one who asserts the claim of exemption. Public purpose is always presumed. General Rule: Tax laws are prospective in operation. Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent (Cebu Portland Cement vs. Coll. G.R. No. 18649, Feb. 27, 1965). KINDS OF PROVISIONS OF TAX LAWS 1. Mandatory those provisions intended for the security of the citizens or which are designed to insure equality of taxation or certainty as to the nature and amount of each persons tax. Directory those provisions designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings. Importance of Distinction The omission to follow mandatory provisions renders invalid the act or proceeding to which it 6. 5. Provisions of the taxing act are not to be extended by implication. Tax laws are special laws and prevail over general laws.
2.
3.
2.
4.

relates while the omission to follow directory provisions does not involve such consequence. SOURCES OF TAX LAWS 1. 2. Constitution Legislation or statutes, including presidential decrees and executive orders on taxation and tax ordinances, tax treaties and conventions with foreign countries Administrative rules and regulations , rulings and opinions of tax officials particularly the CIR, including opinions of the Secretary of Justice Authority of the Secretary of Finance to promulgate rules and regulations The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC (Sec. 244, NIRC). The statute that is being administered may not be altered or added to by the exercise of a power to make regulations thereunder. Requisites for validity and effectivity of regulation a. b. They must not be contrary to law and the Constitution (Art. 7, Civil Code). They must be published in the official Gazette (Lim vs. Central Bank, Sec. 79-B and 551 Rev. Adm. Code). Force and Effect of Regulations Such regulations once established and found to be in consonance with the general purposes and objects of the law have the force and effect of law and so they must be applied and enforced (De Guzman vs. Lontok G.R. No. 45958 July 22, 1939). Administrative Rulings and Opinions Rulings are less general interpretations of tax laws at the administrative level which are issued by tax officials in the performance of their assessment functions. They are usually rendered by the CIR on request of taxpayers to clarify certain provisions of a tax law. These rulings may be revoked by the Secretary of Finance if the latter finds them not in accordance with law. The Secretary of Finance has the power to revoke, repeal or abrogate the acts of his predecessors in office. The construction of the statute by those administering it is not binding on their successors if thereafter the latter becomes satisfied that a different construction should be given. NonRetroactivity of Repeal Any revocation, modification or reversal of any of the rules and regulations or any of the
19 2008 CENTRALIZED BAR OPERATIONS rulings or circulars promulgated by the CIR cannot be given retroactive effect when such will be prejudicial to the taxpayer but it shall be retroactive in the following cases: a. Where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or Where the taxpayer acted in bad faith (Sec. 246, NIRC).
3.
b.
c.
Opinions they have the character of substantive rules and are generally binding and effective if not otherwise contrary to law and the Constitution. These are also given by the Secretary of Justice. 4. Judicial Decisions decisions of the Supreme Court applying or interpreting existing tax laws are binding on all subordinate courts and have the force and effect of law. They form part of the legal system of the Philippines (Art. 8 Civil Code). They constitute evidence of what the law means (People vs. Licera G.R. No. L-39990 July 22, 1975). Not all sources of tax laws require publication in the Official Gazette. The following require publication as a condition for their effectivity: statues, including those of local application and private laws, presidential decrees and executive orders and administrative rules and regulations if their purpose is to enforce or implement existing law, pursuant to a valid delegation (Taada vs. Tuvera GR. No. L-63915, April 24, 1985). Interpretative regulations and those which are merely internal in nature need not be published. Consequently, in the BIR, the following do not require publication for purposes of effectivity: 1. 2. 3. 4. 5. Revenue Memorandum Orders Revenue Memorandum Circulars Revenue Administrative Orders BIR rulings
Tax Treatises and conventions with foreign countries tax treatises comprehend two objectives: (a) to avoid double taxation in cases where the income is taxed twice and (b) to eliminate or minimize tax evasion through the adoption of exchange of information scheme whereby the signatory countries undertake to furnish each other, on a mutual basis, information on the taxable income and/or activities of any of their nationals or residents.
20 General Principles PRINCIPLE OF LEGISLATIVE APPROVAL OF AN ADMINISTRATIVE INTERPRETATION THROUGH REENACTMENT Where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the legislature thereafter reenacts the provision without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose.
RULE OF NO ESTOPPEL AGAINST THE GOVERNMENT General Rule: The Government is not estopped by the mistakes or errors of its agents; erroneous application and enforcement of law by public officers do not bar the subsequent correct application of statutes (E. Rodriguez, Inc. vs. Collector, G.R. No. L-23041, July 31, 1969). Exception: In the interest of justice and fair play, as where injustice will result to the taxpayer (See CIR vs. CA, G.R. No. 117982, Feb. 6, 1997; CIR vs. CA, G.R. No. 107135, Feb. 3, 1999).
Agencies Involved in Tax Administration and Enforcement

Tax administration refers to the manner and procedure of assessing and collecting or enforcing tax liabilities. BUREAU OF INTERNAL REVENUE It is the administrative agency of the government charged with the primary function of administration of the national internal revenue laws and regulations. For administrative purposes, the BIR is under the executive supervision and control of the Department of Finance which oversees the administration of national taxes in the Philippines. (Sec. 2, NIRC) RMRs; otherwise, the Rulings are null and void ab initio Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. Revenue Bulletins (RB) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public. BIR Rulings are official positions of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws Powers and Duties of the BIR a. b. c. Assessment and collection of all national internal revenue taxes, fees, and charges. Enforcement of all forfeitures, penalties, and fines connected therewith. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Giving effect to and administering the supervisory and police powers conferred to it by this Code or other laws. (Sec. 2, NIRC) Recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement of the provisions of the NIRC. (Sec. 245, NIRC) Organization of the BIR The BIR is under one (1) chief known as the COMMISSIONER OF INTERNAL REVENUE and
CONCEPT OF BUREAU OF INTERNAL REVENUE ISSUANCES Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued
d.
e.

four (4) assistant chiefs known respectively as the Deputy Commissioners. The Bureau consists of National Office and Field Service. a. National Office- its function is confined to general direction, guidance and control of the entire operations of internal revenue service, national policy formulation and program planning for efficient and effective implementation of internal revenue law and regulations. It consists of the Commissioner and four (4) Deputy Commissioners. b. Field Service- the BIR operates under a decentralized system through which is primarily charged with the operational activities of the Bureau. (1) Regional offices (RO) - for effective administration and control, the Philippines has been divided into Regional offices which directly execute and implement the national policies and programs prescribed by the National Office for the enforcement of internal revenue laws. Each office is headed by a Regional Director. Powers and duties of Regional Director a. implement laws, policies, plans, programs, rules and regulations of the department or agencies in the regional area b. administer and enforce internal revenue laws, rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees c. issue letters of authority for the examination of taxpayers within the region d. provide economical, efficient and effective service to the people in the area e. coordinate with regional offices or the departments, bureaus and agencies in the area f. coordinate with local government units in the area g. exercise control and supervision over the officers and employees within the region h. perform such other functions as may be provided by law and may be delegated by the Commissioner. (2) Revenue District Offices (RDO) - under the ROs and headed by revenue district officers who are under the direct control and supervision of the Regional Director. These offices implement programs, methods and procedures necessary for efficient, effective, and economical, 3.
21 2008 CENTRALIZED BAR OPERATIONS assessment and collection of internal revenue taxes in the revenue district. Composition of RDOs a. Field men and examiners performing assessment work b. Collection agents and clerks performing collection work Duties of Revenue District Officers and other Internal Revenue Officers a. ensure that all laws, rules and regulations affecting national internal revenue are faithfully executed and complied with, and to aid in the prevention, detection and punishment of frauds or delinquencies in connection therewith b. Examine the efficiency of all officers and employees of the BIR under his supervision, and to report in writing to the Commissioner through the Regional D i r e c t o r, a n y n e g l e c t o f d u t y, i n c o m p e t e n c y, d e l i n q u e n c y, o r malfeasance in office of any internal revenue officer of which he may obtain knowledge with a statement of all the facts and any evidence sustaining each case. Authority of Revenue District Officers (RDO) a. examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax b. recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself (Section 13 NIRC) POWERS OF THE COMMISSIONER: 1. Exclusive and original jurisdiction to interpret the provisions of the NIRC and other tax laws subject to review by the Secretary of Finance (Sec. 4, NIRC) Decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue subject to exclusive appellate jurisdiction of the CTA (Sec. 4, NIRC) Obtain information, and to summon, examine, and take testimony of persons in ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such
2.
22 General Principles liability, or in evaluating tax compliance (Sec. 5, NIRC) 4. Make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6, NIRC)
made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, he is authorized to: 1. Examine any book, paper, record or other data which may be relevant or material to such inquiry. Obtain on a regular basis information from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the government, its agencies and instrumentalities including BSP and GOCCs any information such as but not limited to, costs and volumes of production, receipts or sales and gross income of taxpayers, names, addresses and financial statements of corporations. Summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts to appear before the Commissioner and to produce such books and to give testimony. Take testimony of the person concerned, under oath. Cause revenue officers and employees to make a canvass from time to time of any revenue district or region. (Sec. 5, NIRC)
I. Power to interpret the provisions of the NIRC and other tax laws This power shall be the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Sec. 4, NIRC) II. Power to decide tax cases The Commissioner shall decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue subject to exclusive appellate jurisdiction of the Court Tax Appeals (Sec. 4, NIRC) Disputed Assessment refers to a tax assessment that is administratively protested within 30 days from the date the taxpayer received the assessment. It includes protested assessments wherein the administrative protest is denied in whole or in part, or is not acted upon by the BIR within 180 days from the submission of all the required documentary evidence, and the taxpayer adversely affected by the decision or inaction appealed the same to the CTA within 30 days from receipt of the decision, or from the lapse of the 180-day period. Pending appeal, such assessments shall continue to be considered as a disputed assessment. The opinion or ruling of the Commissioner of Internal Revenue, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality where there is no showing that it is patently wrong, particularly in a case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals (Afisco Insurance Corp., et al v. CA, G.R. No. 112675, Jan. 25, 1999) Rulings which merely embody administrative opinions on queries submitted do not have the force and effect of laws (Alexander Howden and Co., Ltd. V. Collector of Internal Rev., G.R. No. L-19392, April 14, 1965) III. Power to obtain information, and to summon, examine, and take testimony of persons In ascertaining the correctness of any return, or in making a return when none has been
2.
3.
4. 5.
IV. Power to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6, NIRC). The Commissioner shall have: 1. Authority to examine returns and determine tax due. However, any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn but the same may be modified, changed or amended within three 3 years from the date of such filing PROVIDED that no notice for audit of such return, statement or declaration has in the meantime been actually served upon the taxpayer. (Section 6(A) NIRC) 2. Authority to make assessment based on the Best Evidence Obtainable in the following cases: a. if a person fails to file a return or other document at the time prescribed by law; or b. he willfully or otherwise files a false or fraudulent return or other document. By the use of this method, the Commissioner makes or amends the return from his own knowledge and from such information as he can obtain

through testimony or otherwise. Assessments made as such are deemed prima facie correct and sufficient for all legal purposes. (Section 6(B) NIRC) 3. Authority to conduct inventory-taking, surveillance and prescribe presumptive gross sales and receipts INVENTORY TAKING may be made at any time during the taxable year as a basis for assessment. SURVEILLANCE conducted if there is reason to believe that a person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The findings may be used as a basis for assessing the taxes for other months or quarters of the same or different taxable years. Such assessment shall be deemed prima facie correct. PRESUMPTIVE GROSS SALES AND RECEIPTS if it is found that a person has failed to issue receipts and invoices or when there is reason to believe that the books of accounts do not correctly reflect the declarations made or to be made in the return, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar business under similar situations or after considering other relevant information, may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person. (Sec 6(C) NIRC) 4. Authority to terminate taxable period Commissioner has the authority to terminate the period in the any of the following cases: a. retiring from business subject to tax b. intending to leave the Philippines c. intending to remove his property therefrom d. intending to hide or conceal his property e. performing any act tending to obstruct the proceedings for the collection of tax for the past or current quarter or year f. Performing any act tending to render the same totally or partly ineffective unless such proceedings are begun immediately. (Sec 6(D) NIRC) 5. Authority to prescribe Real property Values Commissioner is authorized to divide the Philippines into different zones or areas and shall upon consultation with competent appraisers, determine the fair market value
23 2008 CENTRALIZED BAR OPERATIONS (FMV) of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be whichever is higher of: (1) the FMV as determined by the Commissioner OR (2) the FMV as shown in the schedule of values of the Provincial and City Assessors. (Sec 6(E) NIRC) 6. Authority to inquire into bank deposits As a rule, Commissioner is not allowed. except: a. determining the gross estate of a decedent b. in case of taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity. (Sec 6(F) NIRC) 7. Authority to accredit and register tax agents Commissioner shall accredit and register based on their professional competence, integrity and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, reports and other papers with, or who appear before the BIR for taxpayers. (Sec 6(G) NIRC) 8. Authority to prescribe additional procedure or documentary requirements. (Sec 6(H) NIRC) Authority of the Commissioner to Delegate Power Commissioner may delegate powers vested in him to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Except with the following powers: a. b. power to recommend the promulgation of rules and regulations power to issue rulings of first impression or to reverse, revoke, or modify any existing ruling of the Bureau power to compromise or abate any tax liability power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. (Sec 7 NIRC) Assigned to any establishment where articles subject to excise tax are produced or kept,
c. d.
Provided that an internal revenue officer:
24 General Principles shall in no case stay in his assignment for more than 2 years. 7.
Assigned to perform assessment or collection functions shall not remain in the same assignment for more than 3 years.
Exclusive jurisdiction over seizure and forfeiture cases under the tariff and customs laws. (Sec. 601, TCC) Territorial Jurisdiction of the BOC Extent The BOC has the right of supervision and police authority over all seas within the jurisdiction of the Philippines, and over all coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable from the sea or not. (Sec. 603 TCC) Exception When a vessel becomes subject to seizure by reason of an act done in Philippine waters in violation of the tariff and customs laws, a pursuit of such vessel begun within the jurisdictional waters may continue beyond the maritime zone and the vessel may be seized on the high seas. LOCAL GOVERNMENT it is primarily in charge of the assessment and collection of the taxes it imposed within its jurisdiction (local and real property taxes).
a.
Agents and Deputies for Collection of National Internal Revenue Taxes a. the Commissioner of Customs and his subordinates with respect to the collection of national internal revenue taxes on imported goods the head of the appropriate government office and his subordinates with respect to the collection of energy tax Banks duly accredited by the Commissioner with respect to the receipt of payments of internal revenue taxes authorized to be made through banks. (Section 12 NIRC) BUREAU OF CUSTOMS It is the administrative agency of the government charged with the administration of the tariff and customs laws and regulations. For the collection of national internal revenue on imported articles, the Commissioner of Customs and his subordinates, together with the heads of appropriate government offices and their subordinates and duly authorized banks are constituted agents of the Commissioner of Internal Revenue. It is also under the supervision of the Secretary of Finance. General Duties, Powers, and Jurisdiction of the BOC: 1. The assessment and collection of the lawful revenues from imported articles and all other dues, fees, charges, fines and penalties accruing under the tariff and customs laws. The prevention and suppression of smuggling and other frauds upon the customs. The supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce. The enforcement of tariff and customs laws and other laws, rules, and regulations relating to tariff and customs administration. The supervision and control over the handling of foreign mails arriving in the Philippines, for the purpose of the collection of the lawful duty on the dutiable articles thus imported and the prevention of smuggling through the medium of such mails The supervision and control over all import and export cargoes, landed or stored in piers, airports, terminal facilities, including container yards and freight stations for the protection of government revenue. b.
b.
c.
Whenever the power to impose and collect a tax or other revenue is exercised under the Local Government Code, that power shall be exercised by the: a. Sangguniang Panlalawigan in the case of provinces, b. Sangguniang Panlungsod in the case of cities, c. S a n g g u n i a n g B a y a n i n t h e c a s e o f municipalities, or d. Sangguniang Barangay in the case of barangays through an appropriate ordinance. ORDINARY COURTS The Regional Trial Courts or the Metropolitan and Municipal Trial Courts, as the case may be, are given jurisdiction over civil and criminal actions for the collection of internal revenue taxes and customs duties in cases which are not within the appellate jurisdiction of the Court of Tax Appeals. The ordinary courts have jurisdiction over non-disputed assessments. They are also given jurisdiction over cases involving local taxes and special taxes not administered by the BIR and the BOC. COURT OF TAX APPEALS It was created by Congress as a centralized court specializing in tax cases. Composition of the CTA The CTA consists of a presiding Justice and 5 Associate Justices each of whom shall be appointed by the President upon nomination of the Judicial and Bar Council. (R.A. 1125 as amended by R.A. 9282)
2. 3.
4.
5.
6.

In appropriate cases, the Court shall sit en banc, or in two Divisions of three (3) justices each, including the presiding justice, who shall be the Chairman of its First Division. (A.M. No. 05-11-07CTA) SUPREME COURT In tax cases, as in other cases, it is the court of last resort to which an appeal or petition for review may be taken by the party adversely affected by
25 2008 CENTRALIZED BAR OPERATIONS a ruling, order or decision of the CA, CTA or RTC. Furthermore, the SC has exclusive appellate jurisdiction in all cases involving the constitutionality or validity of any law, or those involving the legality of any tax, impost, assessment or toll, or any penalty imposed in relation thereto (Secs. 1, 5 [2], Constitution).
END OF GENERAL PRINCIPLES
26 Income Taxation
TAXATION LAW INCOME TAXATION

INCOME TAXATION
Definitions and Principles

Definitions and Principles
Income It is a flow of service rendered by capital by the payment of money from it or any benefit rendered by a fund of capital in a relation to such fund through a period of time (Madrigal vs. Rafferty, G.R. No. 12287, Aug. 8, 1918). An income is an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, income means cash or its equivalent (Conwi vs. Commissioner; G.R. No. 48532 August 31, 1992). Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition (James vs. U.S., 366 U.S. 213). Tests in Determining Income 1. Flow of Wealth Test The determining factor for the imposition of income tax is whether any gain was derived from the transaction. Realization Test there is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. 3. Claim of right doctrine a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain. Principle of Constructive Receipt of Income - Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. 4. Economic-Benefit Principle Test any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable.
2.
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:

Capital vs. Income (Madrigal vs. Rafferty supra.) Income All wealth, which flows into the taxpayer other than as a mere return of capital. Flow of Wealth Service of wealth Fruit Income is subject to tax Capital Fund or property, existing at an instant of time, which can be used in producing goods or services Fund or property Wealth Tree Return of capital is not subject to tax
27 2008 CENTRALIZED BAR OPERATIONS INCOME TAX tax on all yearly profits arising from property, possessions, trade or business, or as a tax on a persons income, emoluments, profits and the like (61 CJS 1559) It is the tax on income, whether gross or net (27 Am. Jur. 308). Tax on income, or that which increases the net worth of the taxpayer from sources other than the mere return of capital. Characteristics of Philippine Income Tax Law 1. It is a direct tax tax burden is borne by the income tax recipient upon whom the tax is imposed. Progressive tax tax rate increases as the tax base increases. Based on the ability to pay principle. Comprehensive system adopts the citizenship principle, the residence principle, and the source principle. Semi-schedular or semi-global American in origin Income Tax Systems
GLOBAL TAX SYSTEM SCHEDULAR TAX SYSTEM SEMI-SCHEDULAR SEMIGLOBAL TAX SYSTEM
REQUISITES FOR INCOME TO BE TAXABLE 1. 2. 3. There must be a gain or profit The gain must be realized or received The gain must not be excluded by law or treaty from taxation 3. 2.
Income Classified as to Source 1. 2. 3. Income from sources within the Philippines Income from sources without the Philippines Income from sources partly within and partly without the Philippines
4. 5.
Taxable Income - The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. Types of Taxable Income 1. Compensation Income income which is derived from the rendering of services under an employer-employee relationship. Professional Income fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like. Business Income gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and longterm construction contracts Passive Income income in which the taxpayer merely waits for the amount to come in. It includes, but is not limited to, interest income, royalty income, dividend income, winnings and prizes. Capital Gain gain from dealings in capital assets N A T U R E
2.
All items of deductions and personal and additional exemptions if any are deducted from all items of gross income. No classificatio n of income.
Income is classified into different types upon which the tax rate applicable is based. Adopted by the Philippines by virtue of BP. No. 135.
3.
GLOBAL as to compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income. SCHEDULAR as to passive income subject to final tax, capital gains from sale and transfer of shares of domestic corporations and sale of real properties. This is the system adopted by R.A. 8424. One income tax return for global tax items. Different sets of returns for scheduler tax items.
4.
One income R tax return E T U R N S
5.
Separate return is filed for the appropriat e type of income received.
28 Income Taxation
GLOBAL TAX SYSTEM SCHEDULAR TAX SYSTEM SEMI-SCHEDULAR SEMIGLOBAL TAX SYSTEM
R One set of A tax rates T E S

T A X B A S E
Graduated or flat income tax rate.
Graduated tax rates for global tax items. Final tax at preferential rates for scheduler tax items.
(a) on his worldwide income, if he resides in the Philippines; or (b) only on his income from sources within the Philippines, if he qualifies as nonresident citizen. 2. Residence Principle a resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines. Source Principle an alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his income from sources within the Philippines such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.
Gross Income
Either Either gross or net gross income or net income
3.
Criteria in Imposing Philippine Income Tax 1. Citizenship Principle A citizen of the Philippines is subject to Philippine income tax:
Classification of Taxpayers
Classification of Taxpayers
TAXPAYER The term "taxpayer" means any person subject to tax imposed by this Title. Summary: A. Individuals a. citizens 1. 2. b. 1. 2. resident citizens (RC) non-resident citizens (NRC) resident aliens (RA) non-resident aliens (NRA) i. ii. Engaged in trade or business within the Phils. (NRAETB) not engaged in trade or business within the Philippines (NRANETB) C. Estates D. Trusts E. Partnerships a. b. General Professional Partnership General Co-partnership B. Corporations a. b. Domestic (DC) Foreign 1. 2. resident foreign corporation (RFC) non-resident foreign corporation (NRFC)
aliens
iii. alien individual employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies iv. alien individual employed by offshore banking units v. alien individual employed by petroleum service contractor and subcontractor
Individuals
1. Citizen a. Resident A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines b. Non-Resident Non-resident Citizen They are taxed for income derived from sources within the Philippines. A nonresident citizen is taxable only on income derived from sources within the Philippines.
abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines A seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. Based on the above provisions, there are three (3) types of nonresident citizens, namely: (1) immigrants; (2) employees of a foreign entity on a permanent basis; and (3) overseas contract workers. Immigrants and employees of a foreign entity on a permanent basis are treated as nonresident citizens from the time they depart from the Philippines. However, overseas contract workers must be physically present abroad most of the time during the calendar year to qualify as nonresident citizens. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. 2. Alien An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 1. Resident alien for income derived from sources within the Philippines
Means, a Filipino citizen: a. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein; who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year; who is previously considered as a non-resident and who arrives in the Philippines at anytime during the taxable year to reside thereat permanently shall be considered non-resident for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival [Sec.22 (E), NIRC]
b.
c.
d.
Means an individual whose residence is within the Philippines and who is not a citizen thereof [Sec.22 (F), NIRC]. One who comes to the Philippines for a definite purpose which in its nature would require an extended stay, and makes his home temporarily in the country becomes a resident alien. Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one year by the end of the calendar year is a resident alien.
NOTE: An overseas contract worker (OCW) is taxable only on income derived from sources within the Philippines [Sec. 23 (B) (C)]. A seaman is considered as an OCW provided the following requirements are met: 1. receives compensation for services rendered abroad as a member of the complement of a vessel; and Such vessel is engaged exclusively in international trade. 2.
2.
An individual citizen of the Philippines who is working and deriving income from
Non-resident alien engaged in trade or business within the Philippines. (NRAETB) - For income derived from sources within the Philippines. Means an individual whose residence is not within the Philippines and who is not a citizen thereof [Sec.22 (G)].
30 Income Taxation Engaged in trade or business The term trade or business includes the performance of the functions of a public office [Sec. 22 (S)]. It shall not include performance of services by the taxpayer as an employee [Sec. 22 (CC)]. A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines Section 22(G) notwithstanding [Sec. 25(A)(1)] 3. Non-resident alien not engaged in trade or business within the
Philippines (NRANETB). For income derived from sources within the Philippines. Special Individuals Individuals whether Filipino or alien employed by: a. Regional or area headquarters and regional operating headquarters of multinational companies in the Philippines. Offshore banking units established in the Philippines Foreign Service contractor or subcontractor engaged in petroleum operations in the Philippines.
b. c.
Corporation
WHO ARE TAXABLE AND FOR WHAT? Domestic The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws. Foreign The term "foreign", when applied to a corporation, means a corporation which is not domestic. RESIDENT NATIONALITY Used to describe a corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. 1. Determined by the application of control test nationality of a corporation is dependent on the nationality of its controlling shareholders or members. DOMICILE Place fixed by the law creating or recognizing them, and which, in the absence thereof, shall be understood to be the place where their legal representation is established or where they exercise their principal functions. a. b. c. d. e. 3. Non-resident Foreign Corporation not engaged in trade or business within the Philippines [Sec. 22(I), NIRC] It is taxable for income derived from sources within the Philippines. Special types of Corporations Proprietary educational institutions and nonprofit hospitals Domestic depositary bank (foreign currency deposit units) Resident international carriers Offshore banking units Regional or Area Headquarters and Regional Operating Headquarters of multinational companies Non-resident cinematographic film owners, lessors or distributors Non-resident owners or lessors of vessels chartered by Philippine nationals. Non-resident lessors of aircraft, machinery and other equipment.
f. g. h.
Domestic Corporation created or organized in the Phils. or under its laws [Sec. 22(C), NIRC] It is taxable for income derived from sources within and without the Philippines.
A CORPORATION INCLUDES: 1. 2. 3. 4. 5. Partnerships, no matter how created or organized; Joint-stock companies; Joint accounts (cuentas en participacion) Associations; or Insurance companies [Sec. 22 (B), NIRC]
2.
Resident Foreign Corporation engaged in trade or business within the Philippines [Sec. 22(H), NIRC] It is taxable for income derived from sources within the Philippines.
A CORPORATION EXCLUDES: 1. 2. General professional partnerships; Joint venture or consortium formed for the purpose of undertaking construction projects

or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. CORPORATIONS EXEMPT FROM INCOME TAXATION UNDER THE NIRC: 1. Those enumerated under Sec. 30. Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income. They are only exempt for income realized as such. 2.
31 2008 CENTRALIZED BAR OPERATIONS With respect to GOCCs: General Rule: these corporations are taxable as any other corporation. Except: a. b. c. d. GSIS SSS PHIC PCSO
NOTE: PAGCOR is now subject to tax under R.A. No. 9337. 3. Regional or Area Headquarters under Sec. 22 (DD) not subject to income tax Regional operating headquarters under Sec. 22(EE) shall pay a tax of 10% of their taxable income.
Estates and Trusts

ESTATE refers to the mass of properties left by a deceased person. RULES ON TAXABILITY OF ESTATE When a person who owns property dies, the following taxes are payable under the provisions of the income tax law: 1. Income tax for individuals under Sec. 24 and 25 (to cover the period beginning January to the time of death); Estate income tax under Sec. 60 if the estate is under administration or judicial settlement. estate, the subsequent distribution thereof is no longer taxable on the part of the recipient. SUMMARY TAXPAYER Distribution in the current year out of the corpus of the estate Distribution in current year out of income in the previous year Distribution in current year out of income of the current year Retention by the estate of the income of 2008 NONE NONE HEIR ESTATE
2.
ESTATES UNDER JUDICIAL SETTLEMENT A. During the Pendency of the Settlement General Rule: An estate under judicial settlement is subject to income tax in the same manner as individuals. Its status is the same as the status of the decedent prior to his death. Exceptions: 1. 2. 3. The entitlement to personal exemption is limited only to P20, 000. No additional exemption is allowed. The distribution to the heirs during the taxable year of estate income is deductible from the taxable income of the estate. Such distributed income shall form part of the respective heirs taxable income. Where no such distribution to the heirs is made during the taxable year when the income is earned, and such income is subjected to income tax payment by the
B. Termination of The Judicial Settlement (Where The Heirs Still Do Not Divide The Property) 1. If the heirs contribute to the estate money, property, or industry with intention to divide the profits between/among them, an unregistered partnership is created and the estate becomes liable for the payment of corporate income tax (Evangelista vs. Collector, G.R. No. L-9996, October 15, 1957; Oa vs. Commissioner, G.R. No. L-19342, May 25, 1972). If the heirs, without contributing money, property or industry to improve the estate, simply divide the fruits thereof between/among themselves, a coownership is created, and individual income tax is imposed on the income received by each of the heirs, payable in their separate and individual capacity (Pascual vs. Commissioner, GR No. L-78133, October 18, 1988; Obillos vs. Commissioner, GR No. L-68118, October 29, 1985).
2.
32 Income Taxation c. ESTATES NOT UNDER JUDICIAL SETTLEMENT Pending the extrajudicial settlement, either of the following situations may arise: 1. If the heirs contribute money, property, or industry to the estate with the intention of dividing the profits between/among themselves, an unregistered partnership is created and the estate becomes liable for the payment of corporate income tax; or If the heirs, without contributing money, property or industry to the estate, simply divide the fruits thereof between/among themselves, a co-ownership is created and income tax is imposed on the income received by each of the heirs, payable in their separate and individual capacity. TRUSTS TRUST A right to the property, whether real or personal, held by one person for the benefit of another. WHEN TRUSTS ARE TAXABLE ENTITIES: 1. 2. 3. The income of a trust, which is to be accumulated. Income of the trust which is to be distributed currently by the fiduciary to the beneficiaries. Income collected by a guardian of an infant which is to be held or distributed as the court may direct A trust in which the fiduciary may, at his discretion, either distribute or accumulate the income.
In the case of trust administered in a foreign country, the income of the trust; undiminished by any amount distributed to the beneficiaries shall be taxed to the trustee.
IRREVOCABLE TRUSTS (irrevocable both as to corpus and as to income) Trust itself, through the trustee or fiduciary, is liable for the payment of income tax. Taxed exactly in the same way as estates under judicial settlement and its status as an individual is that of the trustor. It is entitled to the minimum personal exemption (P20,000) and distribution of trust income during the taxable year to the beneficiaries is deductible from the trusts taxable income.
2.
REVOCABLE TRUSTS the trustor, not the trust itself, is subject to the payment of income tax on the trust income. SUMMARY INCOME IS For the benefit of the grantor Retained by the trust Distributed to beneficiary TAXPAYER GRANTOR FIDUCIARY BENEFICIARY
4.
SUMMARY OF TAX RULES

TAXABLE ESTATE The taxable income shall be determined in the same way as that of individuals, but with a special deduction for any amount of income paid, credited or distributed to the heirs. TAXABLE TRUST The taxable income shall be determined in the same way as that of individuals, but with A special deduction for any amount of income paid, credited or distributed to the heirs. A special deduction for any amount of the income applied fro the benefit of the grantor. The exemption is 20,000 The income tax rates for individuals apply. There is a creditable withholding tax on the heir of 15%. The income tax return shall be filed(if the gross income is P20,000 or more) and the tax paid by the executor or administrator.
RULES ON TAXABILITY OF THE INCOME OF A TRUST 1. The income of the trust for the taxable year, which is to be distributed to the beneficiaries filing and payment of tax lie on the beneficiaries. The income of the trust which is to be accumulated or held for future distribution whether consisting of ordinary income or gain from the sale of assets included in the "corpus" of the estate filing of return and payment of tax become the burden of the trustee or fiduciary. Exceptions: a. In the case of a revocable trust, the income of the trust will be returned by the grantor. In a trust where the income is held for the benefit of the grantor, the income of the trust becomes income to the grantor.
2.
The exemption is 20,000 The income tax rates for individuals apply. There is a creditable withholding tax on the heir of 15%. The income tax return shall be filed (if the gross income is P20,000 or more) and the tax paid by the executor or administrator.
b.

EXEMPTION OF EMPLOYEES TRUST Provided: 1. the employees trust must be part of a pension, stock bonus or profit sharing plan of the employer for the benefit of some or all of his employees; contributions are made to the trust by such employer, or such employees, or both; such contributions are made for the purpose of distributing to such employees both the earnings and principal of the fund accumulated by the trust; and That the trust instrument makes it impossible for any part of the trust corpus or income to be used for or diverted to, purposes other
33 2008 CENTRALIZED BAR OPERATIONS than the exclusive benefit of such employees (Sec. 60B, NIRC). Tax exemption is likewise to be enjoyed by the income of the pension trust; otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund (Commissioner vs. Court of Appeals, Court of Tax Appeals and GCL Retirement Plans, GR No. 95022, March 23, 1992). Any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.
2. 3.
4.
Partnership and Co-ownership

KINDS OF PARTNERSHIP FOR TAX PURPOSES UNDER THE NIRC 1. General Professional Partnerships (GPP) formed by persons for: a. b. the sole purpose of exercising a common profession and No part of the income of which is derived from engaging in any trade or business. [Sec. 22 (B), NIRC]. All other partnerships no matter how created or organized. It includes unregistered joint ventures and business partnerships. However, joint ventures are not taxable as corporations when: a. b. undertaking construction projects; engaged in petroleum, coal and other energy operation under a service contract with the government. 2. by the partners in the same taxable year and shall be taxed to them in their individual capacity whether actually distributed or not [Sec. 73(D), NIRC]. LIABILITY OF A PARTNERSHIP: 1. General Professional Partnership They are not subject to income tax, but are required to file returns of their income for the purpose of furnishing information as to the share of each partner in the net gain or profit, which each partner shall include in his individual return.
2.
Taxable OR Business Partnership:
The partnership shall act as the withholding agent. The net income (income for distribution) shall be computed in the same manner as a corporation. Date of filing of the return is April 15 of each year.
Taxable or Business Partnership The income tax of this type of Partnership is computed and taxed like that of a corporation. This kind of partnership, like a regular corporation, is also required to file a quarterly corporate income tax return. Filing and payment of quarterly return is within 60 days after the end of each quarter while the annual return is on or before April 15 of the following year.
3.
General co-partnerships (GCP) They are partnerships, which are by law assimilated to be within the context of, and so legally contemplated as corporations. The partnership itself is subject to corporate taxation. The individual partners are considered stockholders and, therefore, profits distributed to them by the partnership are taxable as dividends. The taxable income for a taxable year, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received
LIABILITY OF A PARTNER: 1. Share of a partner in general professional Partnership a. Each partner shall report as gross income (business income) his distributed share actually or constructively received in the
34 Income Taxation net income of the partnership. (Sec. 26, NIRC) [The same share shall be subject to creditable withholding tax of 10%.] They are liable in their separate and individual capacity. b. Share of a partner in the loss of a general professional partnership may be taken by the individual partner in his return of income. Each partner in a general professional partnership shall, report as gross income his distributed share in the net income of the GPP, based on his agreed ratio, whether he, avails of itemized or optional standard deduction. Payments made to a partner of a GPP for services rendered shall be considered as ordinary business income subject to Sec. 24A (Effective January 1, 1982) Notes: 1.
Partnerships are not subject to Improperly Accumulated Earnings Tax because the partners therein are taxed whether or not the income is distributed to them. A general professional partnership is not subject to income tax. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
2.
c.
d.
CO-OWNERSHIP There is co-ownership: a. b. When two or more heirs inherit an undivided property from a decedent. When a donor makes a gift of an undivided property in favor of two or more donees. When Co-ownership is not subject to tax a. When the co-ownerships activities are limited merely to the preservation of the co-owned property. In such a case, the co-ownership, as such, is not subject to tax. The co-owners are liable for income tax in their separate and individual capacities. When Co-ownership is subject to tax When the income of the co-ownership is invested by the co-owners in business, the co-owners have in effect constituted themselves into a partnership. In such a case, the co-ownership shall be subject to tax as a corporation.
2.
Share of a partner in Taxable or Business partnership a. Share of a partner in the net income of a taxable or business partnership (dividend) shall be subject to a final tax as follows. Resident Citizen, Non-resident Citizen and Resident Alien (2000 and onward) 10% (Sec. 24B2) Non-resident Alien engaged in trade or business 20% (Sec. 25 A2) Non-resident alien not engaged in trade or business 25% (Sec. 25B)
b.
b.
Share of a partner in the loss of a taxable or business partnership maybe taken by the individual partner in his return of income. Payments made to a partner of a business or taxable partnership for services rendered shall be considered as compensation income subject to Sec. 24(A).
c.
Kinds of Income Taxes Under The NIRC

Kinds of Income Taxes Under The NIRC
SUMMARY: 1. 2. 3. 4. 5. Net Income Tax Gross Income Tax Capital Gains Tax Optional Corporate Income tax Minimum Corporate Income Tax 8. 6. 7. Improperly Accumulated Earnings Tax Preferential Rates or Special Rates of Income Tax Withholding Taxes
Taxation on Individuals
Taxable Income - refers to pertinent items of gross income specified in the NIRC, less deduction and/or personal and additional exemptions, if any, authorized to such types of income by the national internal revenue code or other special laws. INCOME SUBJECTED TO GRADUATED RATES On the taxable income, other than passive income and capital gains which are subject to final tax, derived for each taxable year by: a. resident citizen from all sources within and without the Philippines b. a non-resident citizen including overseas contract workers from all sources within the Philippines c. a resident alien from all sources within the Philippines d. non-resident alien engaged in trade or business from sources within the Philippines. Tax Formula Gross Compensation Income Less: Personal Exemptions Premium Payments on Health and/ or Hospitalization Insurance (if qualified) NET COMPENSATION INCOME Add: Net Business Income or Net Professional Income Other income TAXABLE INCOME SUBJECT TO GRADUATED RATES Net Business Income and Net Professional Income Gross Business/Professional Income Less: Itemized deduction or optional standard deduction NET BUSINESS OR PROFESSIONAL INCOME Sources of Income subject to graduated rate 1. 2. 3. 4. 5. Compensation income Business and professional income Capital gains not subject to final tax Passive income not subject to final tax Other income
Graduated Tax Table - Effective January 1, 1999, top marginal rate shall be 33% and effective January 1, 2000 the rate shall be 32%. INCOME OVER BUT LESS THAN TAX 5% 500 2,500 8,500 22,500 50,000 125,000 OF PLUS EXCESS OVER 10% 15% 20% 25% 30% 32% 10,000 30,000 70,000 140,000 250,000 500,000
10,000 10,000 30,000 30,000 70,000 70,000 140,000 140,000 250,000 250,000 500,000 500,000
Resident Citizen, Non-Resident Citizen, Resident Aliens

The following are income subject to tax: Income subject to Graduated Rates Passive Income Capital Gains Tax from the public [the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time] other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer.

PASSIVE INCOME APPLICABLE TO RESIDENT CITIZEN, NON-RESIDENT CITIZEN, RESIDENT ALIENS 1. Interest income a. From any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.
Tax Rate: 20% EXCEPTION: if the depositor has an employee trust fund or accredited retirement plan, such interest income, yield or other monetary benefit is exempt from the final withholding tax.
deposit substitutes" shall mean an alternative form of obtaining funds
36 Income Taxation
Under P.D. 27 on land reform, the landowner is exempt from income tax on the interest on the price of the land which the tenant-purchaser pays him.
income and not in the actual pursuit and performance of primary purpose. 4. Cash and/or Property Dividends Dividends - are distributions made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholders whether individual or corporate, is a taxable income or deductible loss, as the case may be. (Section 73(A) NIRC)
SOURCE OF DIVIDEND from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer. From foreign corporations TAX RATE 6% beginning January 1, 1998 8% beginning January 1, 1999 10% beginning January 1, 2000 Note: The tax on dividends shall apply on income earned on or after beginning January 1, 1998 (effectivity of NIRC). Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998 be subject to this tax.
b.
From a depository bank under the expanded foreign currency deposit system except non-resident individuals
Tax Rate: RC and RA 7% NRC and NRA-ETB exempt If the loan is granted by a foreign government, or an international or regional financing institution established by governments, the interest income of the lender shall not be subject to the final withholding tax.
c.
From long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP).
Tax Rate: Held for 5 years or more exempt 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20%
2.
Royalties a. b. From books, literary works and musical compositions - Tax Rate: 10% Other royalties (e.g. patents and franchises) - Tax Rate: 20% Prizes exceeding 10,000 shall be subject to tax -Tax rate: 20% Exempt from/not subjected to final tax: Philippine charity sweepstakes and lotto winnings Prizes amounting to P10,000 or less (Prize exempt from final tax but subject to graduated tax rate) Prizes are results of efforts while winnings are products of chances and luck. A game of chance is that which depends more on chance or hazard than on skill or ability. In case of doubt, a game is deemed to be one of a chance. Winnings from horse races are subject to 10% tax. (Section 126 NIRC) Winnings from jueteng and other illegal gambling are subject to 20% final tax. To be subject to final tax of 20%, the royalties must be in the nature of passive
3.
Prizes and other winnings a. b.
For RC: 5-32% For NRC and RA: If considered sources within - 5%-32% If without - exempt See Section 42 (A) (2) NIRC- dividends received from a foreign corporation considered gross income from sources within the Philippines unless less than 50% of the gross income of such FC for the 3 year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines. (Cor r elate Section 42 with Section 23)
Notes: 1.
2. 3. 4.

Notes: 1. The reckoning point of the tax is the time of declaration and not the time of payment of dividends. It is taxable whether actually or constructively received. This is to prevent Improperly Accumulated Earnings tax by declaring dividends but delaying the payment. Moreover, upon declaration, dividends are already considered in determining the selling price of stocks. Therefore, it is already income on the part of the stockholder Dividends declared are considered to have been made from the recently accumulated profits. The previously accumulated profits not declared as dividends may be subjected to improperly accumulated earnings tax if accumulation was done to evade taxation. Tax on income is different from tax on the dividends therefore there is no double taxation (Afisco Insurance Corporation vs. Court of Appeals G.R. No.112675, Jan. 25, 1999) Under Section 16 of the Corporation Law, no corporation may make or declare any dividend except from the surplus profits arising from its business. Any dividend therefore, whether cash or stock, represents surplus profits. They represent profits, and the delivery of the certificate of stock covering said dividend is equivalent to payment of said profits. Said shares may be sold independently of the original shares, just as the offspring of a domestic animal may be sold independently of its mother. (Bachrach vs. Seifert and Elianoff, G.R. No L-1592 Sept. 20, 1949) Notes:
1. Even if a stock dividend is a profit, it is still

unrealized until disposed since it has been converted to capital.
2. R e d e m p t i o n o f s h a r e s - r e p u r c h a s e ,
reacquisition of stock by corporation which issued the stock is exchange for property whether or not the acquired stock in cancelled retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. (CIR vs. Court of Appeals G.R. No. 104151 March 10, 1995).
2.
3. Under the NIRC, the net capital gain from

disposition of shares, such redemption is subject to capital gains tax. Thus, if the redemption of stock is not subject to final tax on dividends, the gains derived therefrom are subject to capital gains. CAPITAL GAINS 1. from sale of shares of stock Not listed or listed but not traded in the stock exchange. Note: If traded in the stock exchange - subject to stock transaction tax (percentage tax)
3.
4.
shares of stock of a domestic corporation sold by a non-dealer in securities Tax Base: net capital gains (the higher of the gross selling price or consideration less cost or adjusted basis). The law speaks of net capital gains for the taxable year. Thus, all transactions for the taxable year must be taken into account including the capital losses in arriving at the taxable gain. Tax Rate: 5% for the first P100,000 10% for the amount in excess of P100,000 Notes: 1. While it is true that only those shares of stock, which are listed may be traded in the local stock exchange, it does not necessarily follow that listed shares may only be traded in the local stock exchange. They may be sold outside the local stock exchange. What is controlling is whether or not the shares of stock are traded in the local stock exchange (Del Rosario vs. Commissioner, CTA Case No. 4796, December 1, 1994). If the stocks are listed and traded in a local stock exchange, it is subject to stock transaction tax of of 1% on its gross selling price.
STOCK DIVIDEND - refers the transfer of surplus to capital account. ARE PROCEEDS FROM REDEMPTION OF SHARES SUBJECT TO TAX? It depends on what source of dividend. a. If its source is the original capital subscription upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of final tax on dividends- not a income but a mere return of capital b. If from stock dividend declarations other than as initial capital investment, the proceeds of redemption is additional wealth - a gain and therefore taxable.
2.
38 Income Taxation 3. Gains from sale of shares of stock in a foreign corporation are NOT subject to the final tax but to graduated rates either as capital gain or ordinary income depending on the nature of the trade or business of the taxpayer. On August 30, 2005, BIR issued RMC No. 43-2005. Accordingly, sale of shares of stock through the stock exchange (1) where the sale is prearranged or (2) the buyer/s is predetermined or (3) where public is in effect excluded by any means from taking part in the trading is subject to capital gains tax (5% or 10%) and not to stock transaction tax (1/2 of 1%). It is submitted by complaining industries that this RMC lacks legal basis. This RMC was revoked with finality.
4.
B. By natural persons, citizens or aliens. However, under the Constitution, aliens are prohibited from acquiring real property located in the Philippines but if they own condominium units, they may avail of the exemption upon sale of such property; C. The proceeds of which is utilized in (a) acquiring or (b) constructing a new principal residence within eighteen (18) calendar months from date of sale or disposition; D. Notify the Commissioner within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail the tax exemption; E. Can be availed of only once every ten (10) years; F. The historical cost or adjusted basis of his old principal residence sold, exchanged or disposed shall be carried over to the cost basis of his new principal residence; and
Note: Recently, BIR again issued same contents in a recent RMC and DOF suspended the same and is still subject to the legality of BIRs RMC taking into consideration the complaints of industries but BIR proposed that this tax concept will increase revenue for the government. 2. From sale of real property
G. If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax. Notes: 1. If the buyer of real property classified as capital asset is the government or any of its political subdivisions or agencies, or to government owned or controlled corporations, the tax liability shall be subject either to the graduated rates (5-32%) or 6% final tax at the option of the taxpayer. In case of sale of real property which is subject to the right of redemption such as extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies, the final tax is due upon the expiration of the redemption period. In relation to definition of capital asset, the real property that is subject to capital gains tax is one which is not used in trade or business or not connected thereto. If the taxpayer constructed a new residence and then sold its old house, is this still exempted from capital gains tax? The law is clear that the proceeds should be used in acquiring and constructing a new principal residence. Therefore, the old residence should first be sold before acquiring or constructing the new residence and not vice-versa. (Dizon Tax reviewer)
Classified as capital asset Located in the Philippines Not sold by a dealer in real estate Gain or loss is immaterial, there being a conclusive presumption of gain Tax Base: The higher between the gross selling price and current fair market value as determined by the Commissioner. Tax Rate: 6% of the tax base.
2.
EXCEPTION: Sale of the principal residence by an individual Principal Residence refer to the dwelling house, including the land on which it is situated, where the husband or wife or an unmarried individual, whether or not qualified as head of the family, and members of his family reside. Actual occupancy of such principal residence shall not be considered interrupted or abandoned by reason of the individuals temporary absence therefrom due to travel or studies or work abroad or such other similar circumstances. Such principal residence must be the dwelling house in which whenever absent, the said individual intends to return (RR No. 14-00; November 20, 2000). Requisites: A. Sale or disposition of the old actual principal residence;
3.
4.

ALIENS MAY ACQUIRE REAL PROPERTIES IN THE PHILIPPINES under the following instances: a. An alien who is a legal or compulsory heir may acquire land through succession. Ascendants, spouse and children whether legitimate or illegitimate are legal heirs.
39 2008 CENTRALIZED BAR OPERATIONS b. Aliens may have acquired real properties before adoption of the 1935 constitution c. aliens may acquire condominium units subject to 60-40% limit d. Former natural born Filipino citizens may acquire real properties under BP. 185 and R.A. 8179.
Non-Resident Engaged in Trade or Business

1. Dividends -
If from a foreign corporation - Tax rate

5-32% (Section 24, Section 25A1 NIRC) if sources within the Philippines.
Tax Rate 20%

A. For cash or property dividends from Domestic Corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of a mutual fund company or from a regional operating headquarter of multinational company B. For share of a non-resident alien individual in the distributable net income after tax of a partnership except general professional partnership, of which he is a partner. C. share of a non-resident alien individual in the net income after tax of an association, joint account, or joint venture taxable as corporation of which he is a member or co-venturer
See Section 42 (A) (2) NIRC- dividends received from a foreign corporation considered gross income from sources within the Philippines unless less than 50% of the gross income of such FC for the 3 year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines. 2. S u b j e c t t o f i n a l t a x o f 2 5 % - f o r cinematographic films and similar works. 3. Royalties, Prizes, other winnings, interest income, capital gains, and interest on long term deposit or investment in banks - see rules as to resident citizen, non-resident citizen, resident alien.
Non-Resident Alien Not Engaged in Trade or Business

A non-resident alien not engaged in trade or business is taxed at the rate of 25% of the gross income. No deductions are allowed. Capital gain rules are applicable to nonresident alien not engaged in trade or business. - see capital gains topic to resident citizen, non-resident citizen, resident alien. Subject to 5-10% capital gains tax on sale of stocks of domestic corporations not listed and traded in the local stock exchange. Subject to 6% final tax on the sale of real property in the Philippines All other income from within the Philippines is subject to a final tax of 25% on its gross amount.
Individuals Especially Employed

Special Individuals Individuals whether Filipino or alien employed by: a. Regional or area headquarters and regional operating headquarters of multinational companies in the Philippines. Offshore banking units established in the Philippines Foreign Service contractor or sub-contractor engaged in petroleum operations in the Philippines. Multinational Company - a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. Tax Rate: 15% Tax Base: Gross income received as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances. The same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these multinational
b. c.
40 Income Taxation companies, offshore banking units and petroleum service contractors and subcontractors. For other sources within the Philippines, income shall be subject to pertinent income tax
(graduated tax rates, final tax on passive income, capital gains depending whether a citizen or an alien), as the case may be.
Allowable Deductions to Individuals

Allowable Deductions to Individuals
DEDUCTIONS 1. Business Expenses and Expenses from Practice of Profession deductible only from gross business income and professional income, respectively but not from compensation income. The expenses to be deducted may either be itemized deductions OR the optional standard deduction. Special deduction for actual premium payments for health and/or hospitalization insurance taken by an individual taxpayer provided that the following requisites are met: a. The taxpayers family gross income does not exceed P250,000 in a taxable year. b. The amount deductible should only be limited to P2,400 per family or P200 per month. In case of a married taxpayer, this can only be claimed by the spouse claiming the additional exemption. c.
3.
2.
Personal Exemptions are fixed at arbitrary amounts intended to substitute for personal and living expenses. They are roughly the equivalent of the taxpayer s minimum subsistence and those of his dependents (Madrigal vs. Rafferty, supra).
Kinds of Personal Exemptions

a. Personal Exemptions Single P20,000 Single individual or married individual, judicially decreed legally separated without qualified independent children. Head of the Family P25,000 Head of the family or married individual judicially decreed legally separated with qualified dependent children. Head of the Family is an unmarried or legally separated person with one or both parents, or one or more brothers or sisters, or one or more legitimate, recognized natural or legally adopted children living with and dependent upon the taxpayer for their chief support; and Chief support means more than one-half of the requirements for support. a. Where such brother/sister or children are not more than 21 years of age, unmarried and not gainfully employed, or where such dependents regardless of age, are incapable of selfsupport because of mental or physical defect. Parents, brothers, sisters and senior citizen living/dependent upon the taxpayer, whether relative or not, may b. qualify the taxpayer, to the personal exemption of P25,000 as head of the family but not to the additional exemption of P8,000. Married P32,000 For each legally married individual. Additional Exemption for Dependents
P8,000 For each of the qualified dependent children not exceeding four (4) in number. The additional exemption refers only to qualified dependent children such as legitimate, recognized natural, illegitimate and legally adopted. The proper claimant of the additional exemption is the husband, being the head of the family except under the following cases: 1. 2. 3. Husband is unemployed; Husband is working abroad like an OFW or a seaman; or Husband explicitly waived his right of the exemption in favor of his wife in the withholding exemption certificate.
b.
Parents and dependents qualify the taxpayer to the personal exemption of P25,000 as head of the family but not to the additional exemption of P8,000.
41 2008 CENTRALIZED BAR OPERATIONS b. Gross selling price and sales discount must be separately indicated in the official receipt or sales invoice issued by the establishment for the sale of goods or services to the senior citizen Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes. The discount can only be allowed as deduction from gross income for same taxable year that the discount is granted The business establishment giving the sales discounts qualified senior citizen Only selected establishments mentioned in R.R. No. 4-2006 may claim the said discount granted as deduction from gross income Employment shall have to continue for a period of at least 6 months Annual taxable income of the senior citizen does not exceed the poverty level as may be determined by the NEDA thru the NSCB. Senior Citizen to submit sworn certification that his annual taxable income does not exceed poverty level. In addition, expenses otherwise deductible may be allowed as a deduction only if the tax required to be deducted and withheld therefrom has been paid to the BIR.
N OTE : NRAETB may deduct personal exemption (not additional exemption), but only to the extent allowed by his country to Filipinos not residing therein, and shall not e x c e e d the aforementioned am ounts (reciprocity rule). NRANETB cannot claim any personal or additional exemptions. RECIPROCITY RULE Requisites: a. b. The country of which he is a subject or citizen has an income tax law; and The income tax law of his country allows personal exemptions to citizens of the Philippines not residing therein, but deriving income therefrom; The personal exemption shall be equal to that allowed by the income tax law of his country to a citizen of the Philippines not residing therein but deriving income therefrom, or the amount provided in the National Internal Revenue Code to citizens of the Philippines, whichever is lower.
c.
d.
e.
c.
f.
Requisites: a. b.
A SENIOR CITIZEN is: a. b. any resident citizen of the Philippines at least sixty 60 years old, including those who have retired from both government offices and private enterprises, and Has an income of not more than Sixty thousand pesos (P60,000) per annum subject to the review of the National Economic Development Authority (NEDA) every three years.
c.
c.
SENIOR CITIZENS DISCOUNT (R.A. 9257) R.A. 9257 (Expanded Seniors Act) in February 2004, which specifically provides that the 20% discount shall be allowed only as a deduction from gross income of the establishment for the taxable year the discount is granted. 1.
DOCTRINES The term cost in Section 4(A) of RA 7432 refers to the amount of the 20% discount extended by private establishments to senior citizens in their purchase of medicines. [Bicolandia Drug Corporation (Formerly Elmas Drug Corp. vs. CIR, 492 SCRA 159] There is a difference between the treatment of the 20% discount; it is considered as tax credit under the Old Senior Citizens Act and Tax Deduction under the Expanded Senior Citizens Act. (Carlos Superdrug Corp vs. DSWD, DOF, and DOJ G.R. No. 166494 June 29, 2007)
Tax deduction based on the net cost of the goods sold or services rendered (Section 4 of R.A. 9257) Availment of establishments of sales discounts as deduction from gross income: a. Only portion of gross sales exclusively used, consumed or enjoyed by the senior citizen shall be eligible for the deductible sales discounts.
2.
42 Income Taxation NOTE: Under Section 4 of the new law, RA 9257 (Expanded Senior Citizens Act of 2003), the 20% sales discount granted to senior citizens may be claimed as a TAX DEDUCTION based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of VAT if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the Tax Code. Revenue Regulations No. 04-06 dated December 12, 2005 provides for the following conditions before establishments may deduct the said sales discounts from their gross income: (1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount. (2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen; (3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes. (4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted. (5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, TIN (removed by BIR Revenue Regulations No. 01-07 dated December 4, 2006), OSCA ID, gross sales/receipts, sales discount granted, dates of transactions and invoice number for every sale transaction to senior citizen. (6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods and/or services may claim the
said discount granted as deduction from gross income, namely: (a) H o t e l s a n d s i m i l a r l o d g i n g establishments; (b) Restaurants; (c) Recreation centers; (d) Theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement; (e) Drug stores, hospital pharmacies, medical and optical clinics and similar establishments dispensing medicines; (f) Medical and dental services in private facilities; (g) Domestic air and sea transportation companies; (h) Public land transportation utilities; and (i) F u n e r a l p a r l o r s a n d s i m i l a r establishments. c. Change of Status 1. If the taxpayer should marry or should have additional dependents during the t a x a b l e y e a r, h e m a y c l a i m t h e corresponding exemptions in FULL for such year. If the taxpayer should die during the taxable year, his estate may claim the corresponding exemptions as if he died at the close of such year. If the spouse or any dependent should die or any dependent should marry or become twenty-one years old during the year, or should become gainfully employed, the taxpayer may claim the exemptions as if the spouse or dependent died or as if such dependent married, became twenty one years old or became gainfully employed at the close of such year. For any other event and for which there are no specific rules applicable from the above-mentioned, the status of the taxpayer at the end of the year shall determine his exemptions (strictly construed against the taxpayer). Examples: became legally separated can only claim P 20,000 25 years old child became incapacitated cannot claim additional exemption
2.
3.
4.
Premium Payments on Health and/or Hospitalization Insurance

Amount of premium on health and/or hospitalization paid by an individual taxpayer (head of family or married), for himself and members of his family during the taxable year. Requisites for Deductibility: 1. 2. Insurance must have actually been taken; The amount of premium deductible from gross income does not exceed P2,400 per family or P200 per month during the taxable year; That said family has a gross income of not more than P250,000 for the taxable year; 2. 4. In case of married individual, only the spouse claiming additional exemption shall be entitled to this deduction. Individual taxpayers earning purely compensation income during the year. Individual taxpayer earning business income or in practice of his profession whether availing of itemized or optional standard deductions during the year.
Who May Avail Of The Deduction? 1.
3.
Corporations
Corporations
A CORPORATION INCLUDES: 1. 2. 3. 4. 5. Partnerships, no matter how created or organized; Joint-stock companies; Joint accounts (cuentas en participacion) Associations; or Insurance companies [Sec. 22 (B), NIRC]. 3. A CORPORATION EXCLUDES: 1. 2. General professional partnerships; Joint venture or consortium formed for the purpose of undertaking construction projects; and Joint venture or consortium for engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Philippine Government.
Domestic Corporation
Classes of taxes imposed on a domestic Corporation 1. 2. 3. 4. 5. 6. 1. Normal Tax Capital Gains Tax Final Tax Minimum Corporate Income Tax Gross Income Tax Improperly Accumulated Earnings Tax Net Income Tax Formula (Normal Tax) Tax Rates: 35%, as amended Tax Base: Net Taxable Income NET INCOME TAX FORMULA: Gross Sales Less: Sales Returns Sales Allowances Sales Discounts NET SALES Less: Cost of Goods Sold GROSS INCOME FROM SALES Add: Incidental income/ Other Income NORMAL TAX GROSS INCOME Less: Allowable deductions NET TAXABLE INCOME x Applicable tax rate INCOME TAX PAYABLE R.A. 9337 amended the income tax rate of corporations from 32% to 35% effective July 1, 2005 but will be reduced to 30% on January 1, 2009.
44 Income Taxation 2. 3. 4. Capital Gains Tax Same rules as those imposed on individuals Final Tax Same rules as those imposed on individuals Minimum Corporate Income Tax MINIMUM CORPORATE INCOME TAX [Section 27 (E)] MCIT is imposed on domestic and resident foreign corporations: a) Whenever such corporation has zero or negative taxable income; or b) Whenever the amount of MCIT is greater than the normal income tax due from such corporation determined under Section 27[A]. Tax Rate: 2% Tax Base: Gross income except income exempt from income tax and income subject to final withholding tax LIMITATIONS: 1. The MCIT shall apply only to domestic and resident foreign corporations subject to the normal corporate income tax (income tax rates under Sec 27[A] of the CTRP). In case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular corporate income tax system.
FORMULA FOR QUARTERLY INCOME TAX DUE (as amended) NORMAL TAX HIGHER Normal Income tax MCIT HIGHER Minimum Corporate Income tax
Less: Quarterly MCIT Less: Quarterly payments of MCIT the current payments of taxable year the current taxable year Quarterly Income tax payments of the current Taxable year Expanded Withholding taxes in the current year Expanded Withholding taxes in the prior year Excess in the MCIT in the prior year/s (subject to the prescriptive period allowed for its creditability) QUARTERLY INCOME TAX DUE QUARTERLY INCOME TAX DUE Quarterly Income tax payments of the current Taxable year Expanded Withholding taxes in the current year Expanded Withholding taxes in the prior year
2.
Cost of Goods Sold shall include all business expenses directly incurred to produce the merchandise to bring them to their present location. Gross income - If apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax, the same items must be included as part of the taxpayers gross income for computing MCIT. This means that the term gross income will also include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax described (RR. No. 12-2007).
In computing for the MCIT due from a resident foreign corporation, only the gross income from sources within the Philippines shall be considered for such purpose MCIT FORMULA: Gross Sales Less: Sales Returns Sales Allowances Sales Discounts NET SALES Less: Cost of Goods Sold MCIT GROSS INCOME x 2% MCIT PAYABLE
When does MCIT commence? MCIT is imposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. The taxable year in which business operations commenced shall be the year when the corporation registers with the BIR not when the corporation started commercial operation.

How much tax is payable by a corporation on its fourth taxable year? The higher between the normal tax and the minimum corporate income tax. CARRY FORWARD OF THE EXCESS MINIMUM TAX: 1. Any excess of MCIT over the normal income tax can be carried forward on an annual and quarterly basis. The excess can be credited against the normal income tax due in the next 3 immediately succeeding taxable years. Any amount of the excess MCIT which cannot be credited against the normal income tax due in the next 3-year period shall be forfeited. In the year to which the excess is carried forward, the normal tax should be higher than the MCIT. The maximum amount that can be deducted is the amount of the normal tax for the year in which the excess MCIT is claimed as credit. 2. 3.
45 2008 CENTRALIZED BAR OPERATIONS Domestic corporations engaged in hospital operations which are non-profit; Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system; Resident foreign corporations engaged in business of international carrier; Resident foreign corporations engaged in business as offshore banking units; Resident foreign corporations engaged in business as regional operating headquarters; and Firms that are under special income tax rate system such as PEZA law, Bases Conversion Act and firms enjoying income tax holiday incentives. AMENDMENTS TO MCIT (RR No. 12-2007) MCIT APPLIES TO QUARTERLY INCOME TAX RETURNS The computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as amended. The final comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year and the payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax. MEANING OF GROSS INCOME EXPANDED If apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax, the same items must be included as part of the taxpayers gross income for computing MCIT. This means that the term gross income will also include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax described MANNER OF FILING AND PAYMENT The minimum corporate income tax (MCIT) shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis. It shall be covered by a tax return designed for the purpose which will be
4. 5. 6.
2.
3.
7.
4.
5.
RELIEF FROM MCIT: The Secretary of Finance is authorized to suspend the imposition of the MCIT upon submission of proof by the applicant corporation that the corporation sustained substantial losses on account of the following (Memorandum No. 6-2002): a. b. c. prolonged labor dispute; force majeure; or legitimate business reverses.
Substantial losses from a prolonged labor dispute" means losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations. Force majeure" means a cause due to an irresistible force as by "Act of God" like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war and insurgency. Legitimate business reverses " shall include substantial losses sustained due to fire, robbery, theft, or embezzlement, or for other economic reasons as determined by the Secretary of Finance.
ENTITIES EXEMPT FROM MCIT: 1. Domestic corporations engaged in proprietary educational institutions;
46 Income Taxation submitted together with the corporation's annual final adjustment income tax return. Domestic corporations shall be required to pay the minimum corporate income tax on a quarterly basis, pursuant to the provisions of Sec. 75 and Sec. 77 of the Code in relation to Section 245 of the same Code, as amended. 5. GROSS INCOME TAX Tax Rate : 15% optional rate beginning January 1, 2000 Tax Base: Gross Income Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). Shall be irrevocable for three (3) consecutive years during which the corporation is qualified under the scheme. Authorized by the President upon recommendation by the Secretary of Finance (Note: The President has not given any authority yet) Conditions precedent to grant of Presidents authority: a) b) c) d) Tax effort ratio of 20% of GNP Income tax collection/total revenues is equal to 40% VAT tax effort of 4% of GNP Consolidated public sector financial position/GNP is equal to 0.9% 2.
to pay dividends tax on the earnings distributed to them by the corporation. Coverage: 1. imposed on improperly accumulated taxable income earned starting January 1, 1998 Domestic corporations as defined under the Tax Code; Corporations which are classified as closely-held corporations.
2. 3.
Those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.
Rules for determining whether a corporation is closely held in stock ownership basis: 1. Stock ownership by individuals: Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as owned proportionately by its shareholders, partners or beneficiaries Family and partnership ownership An individual shall be deemed to own the stock directly or indirectly, by or for his family, or by or for his partner For this purpose, the family of an individual includes his brothers or sisters whether of the whole or half blood, spouse, ancestors, and lineal descendants. 3. Option to Acquire Stocks Each one of a series of option shall be considered option to acquire such stock. 4. Constructive ownership as actual ownership.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) RR NO. 2-2001 DEFINITION: Improperly accumulated earnings (IAE) are the profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of another corporation. Tax Rate: 10% Tax Base: Improperly Accumulated Taxable Income (in addition to other taxes). Rationale behind IAET: If the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed:
Corporations exempted from the coverage (B- PEN- GIFT) 1. 2. 3. 4. Publiclyheld corporations (Sec. 29) Banks and other non-banks financial intermediaries (Sec. 29); Insurance companies (Sec. 29); Taxable partnerships [deemed to have actually or constructively received the taxable income under Sec. 73(D)]; G eneral professional partnerships (exempt; taxable against the partners);
a. in the nature of a penalty t o the

corporation for the improper accumulation of its earnings, and
b. as a form of deterrent to the avoidance of

tax upon shareholders who are supposed
5.

6. 7. Non- taxable joint ventures; E nterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local; and Foreign corporations [RR No. 02-2001] The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Instances indicative of purpose to avoid income tax upon shareholders (UBE) a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; Investment in bonds and other longterm securities; Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business as defined in these Regulations. f.
47 2008 CENTRALIZED BAR OPERATIONS The following constitutes reasonable needs of the business. (PLACES) a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; Earnings reserved for definite corporate e xpansion projects or programs as approved by the Board of Directors or equivalent body; Reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; Reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.
b.
8. 1.
c.
Evidence of purpose to avoid income tax: d.
e.
b. c.
2.
The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove the contrary. Reasonable Needs of the Business
The controlling intention of the taxpayer is that which is manifested at the time of accumulation, not subsequently declared intentions, which are merely the product of afterthought. A speculative and indefinite purpose will not suffice. Definiteness of plan/s coupled with action/s taken towards its consummation is essential. PRIMA FACIE INSTANCES of beyond reasonable needs of a business a. investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; investment in bonds and other long-term contracts; and Accumulation of earnings in excess of 100% of paidup capital, not otherwise intended for the reasonable needs of business.
The accumulated or undistributed earnings shall not be subject to IAET if it is necessary to meet the reasonable needs of the business. IMMEDIACY TEST - The reasonable needs of the business are the: a. b. a. b. Immediate needs of the business; and Reasonably anticipated needs An immediate need for the accumulation of the earnings and profits; or A direct correlation of anticipated needs to such accumulation of profits.
b. c.
Proof Required:
IAET FORMULA Taxable Income for the current year Add: Income exempt from tax Income excluded from gross income Income subject to final tax Amount of net operating loss carry-
48 Income Taxation over (NOLCO) deducted TOTAL Less: Income tax paid/payable for the taxable year Dividends actually or constructively paid Amount reserved fro the reasonable needs of the business IMPROPERLY ACCUMULATED TAXABLE INCOME x IAET RATE (10%) I M P R O P E R LY A C C U M U L AT E D EARNINGS TAX (IAET) Limitation The profit that has been subjected to IAET shall no longer be subjected to IAET in later years even if not declared as dividend. However, profits which have been subjected to IAET, when declared as dividends, shall be subject to tax on dividends except in those
instances where the recipient is not subject thereto. 6. Government Owned and Controlled Corporations GENERAL RULE: All corporations, agencies, or instrumentalities owned or controlled by the GOVERNMENT are capitalize and shall pay such rate of tax upon their taxable income as are imposed on domestic corporations engaged in a similar business, industry, or activity. EXCEPTIONS: a. b. c. d. Government Service Insurance System (GSIS) Social Security System (SSS) Philippine Health Insurance Corporation (PHIC) Philippine Charity Sweepstakes Office (PCSO)
Resident Corporations
Classes of Taxes imposed upon a resident corporation a. b. c. d. e. f. 1. Normal Tax Capital Gains Tax Final Tax on Passive Income Minimum Corporate Income Tax Gross Income Tax Branch Profit Remittance Tax Normal Tax Same rules with domestic corporations but the income taxable must be from within the Philippines. Tax Rate: 35% Tax Base: Net Taxable income In order that a foreign corporation may be regarded as doing business within a S t a t e , there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character (CIR vs. British Overseas Airways Corporation, G.R. No. L-65773-74 April 30, 1987.) 2. 3. Capital Gains Tax Same rules on domestic corporations Final Tax on Passive Income Same rules on domestic corporations. 3. INTERCORPORATE DIVIDENDS
Dividends received from a domestic corporation exempt Dividends received from a foreign corporation - if from sources within subject to 35% tax If from sources outside - exempt Section 42 (A)(2) NIRC- dividends received from a foreign corporation considered gross income from sources within the Philippines unless less than 50% of the gross income of such FC for the 3 year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (Correlate Section 42 with Section 23 NIRC)
1. 2.
Minimum Corporate Income Tax Same rules on domestic corporations Gross Income Tax A resident foreign corporation is granted the privilege to opt to be taxed at 15% on gross income under the same conditions as domestic corporations. Branch Profit Remittance Tax Any profit remitted by a branch to its head office Tax Rate: 15%

Tax Base: Total profit applied or earmarked for remittance without any deduction for the tax component thereof. EXCEPTION : those activities which are registered with the Philippine Economic Zone Authority (PEZA). FORM: Applies whether remitted actually or constructively [ING Bank (Manila Branch) vs. Commissioner, CTA Case No. 6071, March 11, 2002]. Rationale To equalize the tax burden on foreign corporations maintaining, on one hand, local branch offices, and organizing, on the other hand, a subsidiary domestic corporation where at least a majority of all the latters shares of stock are owned by such foreign corporations, the 15% branch profit remittance tax is imposed on the profit actually remitted by the Philippine branch to its head office (Bank of America N.T. and S.A. vs. Court of Appeals et. al., G.R. No. 103106 July 21, 1994).
49 2008 CENTRALIZED BAR OPERATIONS SINGLE ENTITY CONCEPT It is stated as a general rule, that the head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the single entity concept. The income from sources within the Philippines of the foreign head office shall thus be taxable to the Philippine branch. But when the head office of a foreign corporation independently and directly invested in a domestic corporation without the funds passing through the Philippine branch, the taxpayer with respect to the tax on dividend income would be the non-resident foreign corporation itself and the dividend income shall be subject to the tax similarly imposed on non-resident foreign corporation (Marubeni Corporation vs. Commissioner, 177 SCRA 500). Income treated as branch profit Interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.
Non-Resident Corporations
Classes of taxes imposed on a non-resident corporation a. b. c. Capital Gains Tax Final Tax on Passive Income Final Tax on (other) Gross Income from sources within the Philippines Capital Gains Tax allows a tax credit for taxes deemed paid in the Philippines equivalent to 20% or does not impose tax on dividends. 20% represents the difference between the regular income tax of 35% on corporations and the 15% tax on dividends. It is the amount of tax forgone by the Philippine government in favor of the non-resident corporation. THIS IS THE TAX SPARING RULE If the country within which the NRFC is domiciled does NOT allow a tax credit, a final withholding tax at the rate of 35% is imposed on the dividends received from a domestic corporation. TAX SPARING CREDIT A credit granted by the residence country for foreign taxes that for some reason was not actually paid to the source country but that would have been paid under the countrys normal tax rules. For the purpose of encouraging foreign investors to conduct business in the country. 3. Final Tax on (other) Gross Income from sources within the Philippines Tax Rate: 35% Tax Base: gross income received from all sources within the Philippines, such as
1.
Same rules on resident foreign corporation.
The non-resident foreign corporation cannot own real properties in the Philippines, which is the reason why there is no provision for capital gains tax on sale or disposition of real properties. 2. Final Tax on Passive Income
Interest on foreign loans 20% on or after August 1, 1986 Any interest income from transactions with depositary banks under FCDs shall be exempt from income tax.
INTERCORPORATE DIVIDENDS (cash and/ or property) Received from a domestic corporation 15%, as long as the country in which the nonresident foreign corporation is domiciled
50 Income Taxation interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains
EXCEPT capital gains resulting from the sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset.
Special Corporations
1. Proprietary Educational Institutions and Non-profit Hospitals. Tax Rate: 10% Tax Base: on net income except on income subject to capital gains tax and passive income subject to final tax within and without the Philippines. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax of 35% shall be imposed on the entire taxable income. Unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or t h e Te c h n i c a l E d u c a t i o n a n d S k i l l s Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. 2. Depository Banks (Foreign Currency Deposit Units) [Sec. 27 (D) (3) as amended by R.A. 9294 (2004)] Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks. EXCEPTION: Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of 10%. Tax coverage: ONLY income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with: a. b. c. Nonresidents Offshore banking units in the Philippines Local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units Other depository banks under the expanded foreign currency deposit system.
d.
Special Resident Corporations

1. International Carriers Tax Rate: 2.5% Tax Base: Gross Philippine Billings International Air Carrier. refers to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation services/activities or flight operations anywhere in the world. Offline carrier refers to an international air carrier having no flight operations to and from the Philippines (Sec. 2 R.R. No. 15-2002) "Gross Philippine Billings" refers to the amount of: 1. gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document gross revenue from tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines
2.

3. That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
51 2008 CENTRALIZED BAR OPERATIONS recommendation of the Monetary Board to be subject to the regular income tax payable by banks. EXCEPTION: Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of 10%. Tax Coverage: ONLY income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with:
A foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. The test of taxability is the source, and the source is that activity which produced the income (Air Canada vs. CIR CTA Case No. 6572). International Shipping Gross Philippine Billings" means Gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 2. Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec. 28 (A) (4) as amended by RA 9294 (2004)] Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the regular income tax payable by banks. EXCEPTION: Interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of 10%. Tax Coverage: ONLY income derived by offshore banking units from foreign currency transactions with: 1. 2. 3. Nonresidents Other offshore banking units Local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units 4.
Nonresidents Offshore banking units in the Philippines Local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units Other depository banks under the expanded foreign currency deposit system
Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Exempt from all kinds of local taxes, fees, or charges imposed by a local government unit except real property tax on land improvements and equipment. Regional or Area Headquarters (RHQ) An office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not ear or derive income in the Philippines. Not subject to income tax Regional Operating Headquarters (ROHQ) Foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the AsiaPacific Region and in other foreign markets. Tax Rate: 10% Tax Base: Taxable income from within the Philippines ROHQ may engage in the following activities: a. b. c. d. general administration and planning business planning and coordination sourcing and procurement of raw materials and components
3.
Resident Depository Bank (Foreign Currency Deposit Units) [Sec. 28 (D)(7)(b) as amended by RA 9294 (2004)] Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon
52 Income Taxation e. f. g. h. i. corporate finance advisory services marketing control and sales promotion training and personnel management logistic services research and development services and product j. k. l.
development technical support and maintenance data processing and communications, and
m. business development.
Special Non-Resident Foreign Corporations

1. Non-resident cinematographic film owners, lessors or distributors Tax Rate: 25% Tax Base: Gross income from all sources within the Philippines 2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals Tax Rate: 4.5% 3. Tax Base: Gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Authority Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment Tax Rate: 7.5% Tax Base: Gross rentals or fees
Exempt Corporations (Sec. 30 NIRC)

1. 2. Labor, agricultural or horticultural organization not organized principally for profit; Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit; A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment for life, sickness, accident, or other benefits exclusively to the members of such society, order or association, or non-stock corporation or their dependents; Cemetery company owned and operated exclusively for the benefit of its members; Non-stock corporations or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; 8. 9. A non-stock and non-profit educational institution; Government educational institution;
3.
10. Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues or fees collected from members for the sole purpose of meeting its expenses; and 11. Farmers, fruit growers or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. EXCEPTION: Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income. The phrase any of their activities conducted for profit does not qualify the word properties. This makes income from the property of the organization taxable, regardless of how that income is used whether for profit or for lofty nonprofit purposes [CIR vs. Court of Appeals. G.R. No. 124043. Oct. 14, 1998].
4. 5.
6.
7.
Gross Income
Gross Income
GROSS INCOME Means all income derived from whatever source (except those excluded or exempted by law), including but not limited to the following (Sec. 32): (CART-DRIP-GPP) a. c. Compensation; Rents; b. Annuities; d. Gross income from profession, trade or business; e. Dividends; f. Royalties; g. Interests; h. Prizes and winnings; i. j. k. Gains from dealings in property; Pensions; and Partners share in the net income of the general professional partnership The definition provided in Sec. 32 is different from the limited meaning of Gross Income for purposes of Gross Income Tax, which means Gross Sales less Sales Returns, Discounts, and Allowances and Cost of Goods Sold.
Items of Inclusions (Sec. 32A)

The enumeration is not exclusive: Compensation means all remunerations for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Code. It is included ONLY when the taxpayer is subject to Net Income Tax. Requisites: 1. 2. 3. personal services were actually rendered; payment was made for such services; and payment was reasonable Gains from Dealings in Property (Ordinary Assets Only) These include all income derived from the disposition of property (real, personal or mixed) a. For money in case of sale; b. For property in case of exchange; or c. From a combination of both sale and exchange, which results in gain because of the difference between the taxpayers investments of what he disposed of and the amount or value of what he received. Sale of Goodwill Gain or loss from a sale of goodwill results only when the business, or part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of assets, including goodwill. It is immaterial that goodwill may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value of the goodwill sold (Sec. 47, Rev. Reg. 2).
Gains from Profession, Trade, or Business business is any activity that entails time and effort of an individual or group of individuals for purposes of livelihood or profit. Business income refers to income derived from merchandising, manufacturing, mining, and farming operations. Professional income refers received by a professional from the profession, provided that there is employee relationship between clients. to the fees practice of his no employerhim and his
54 Income Taxation
Dealings in Property
A. SALE OR EXCHANGE The sale or exchange of property must be consummated not just perfected SALE OF EXCHANGE OF PROPERTY PROPERTY Delivery of goods for money Tax Formula: Selling price (in terms of money) Less: Cost GAIN OR LOSS Delivery of goods for goods received Tax Formula: Fair market value of the property received in exchange Less: Cost GAIN OR LOSS Requisites: a. The property received in exchange is essentially different from the property disposed of. b. The property received has a market value. b. B. CAPITAL ASSETS vs. ORDINARY ASSETS Under the Tax Code, there is no definition for the term "capital assets." The Tax Code only provides for the meaning of ordinary assets: ORDINARY ASSETS a. Stock in trade of the taxpayer or other properties of a kind which would properly be included in the inventory of the taxpayer; Property held by the taxpayer primarily for sale to customers in the ordinary course of business; Property used in trade or business and subject to depreciation; and Real property used in trade or business. CAPITAL ASSETS Include all property held by the taxpayer whether or not connected in trade or business but not including those enumerated above as ordinary assets.
Definition
COST BASIS MODE OF ACQUISITION Purchase Inheritance Gift Less than full and adequate consideration CAPITAL GAIN The gain derived from the sale or exchange of capital assets. COST BASIS Purchase price Fair market value as of the date of acquisition Value in the hands of the donor Amount paid by the transferee CAPITAL LOSS The loss incurred from the sale or exchange of capital assets.
c.
d.
Treatment of Gains and Losses Ordinary gains are included in the gross income Ordinary losses are deductible from gross income Capital gains derived from sale of stocks of a domestic corporation are subject to capital gains tax. Capital gains derived from sale of real property in the Philippines is subject to capital gains tax. No loss is recognized because gain is presumed. For other capital assets, the rules on capital gains and losses apply in the determination of the amount to be included in gross income.
NET CAPITAL GAIN NET CAPITAL LOSS The excess of the gains from sales/ exchanges of capital assets over the gains from such sales/ exchanges. The excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

C. KINDS OF CAPITAL ASSETS Shares of stocks of a domestic corporation Real property in the Philippines not falling under the enumeration of ordinary assets. Other capital assets.
55 2008 CENTRALIZED BAR OPERATIONS day the shares were sold, transferred or exchanged. When no sale is made in the stock exchange, the FMV shall be the highest selling price on the day nearest to the day of sale, transfer or exchange. For shares not listed in the exchange, the FMV shall be the book value nearest the valuation date
RULES ON SHARES OF STOCKS OF A DOMESTIC CORPORATION SELLER IS NOT A DEALER IN SECURITIES SELLER IS A DEALER IN SECURITIES LISTED AND TRADED IN THE STOCK EXCHANGE NOT LISTED OR LISTED BUT NOT TRADED IN STOCK EXCHANGE
The above rules shall be used in computing for the net capital gain/loss for disposition of shares. IMPORTANT FEATURES: 1. Sale of shares of stock of a domestic corporation listed and traded in a local stock exchange and that of initial public offering shall be subject to Percentage Tax (Business Tax) Capital losses sustained during the year (not listed and traded in a local stock exchange) shall be allowed as a capital loss deductible on the same taxable year only (no carry-over) The entire amount of capital gain and capital loss (not listed and traded in a local stock exchange) shall be considered without taking into account the holding period irrespective of the type/kind of taxpayer (all 100%) Non-deductibility of losses on wash sales. RULES ON REAL PROPERTY LOCATED IN THE PHILIPPINES SELLER IS NOT A REAL ESTATE DEALER PROPERTY PROPERTY IS IS TREATED AN AS CAPITAL ORDINARY ASSET ASSET
2.
Stock treated Subject to Subject to as ordinary stock final capital asset transaction gains tax tax Ordinary Tax Rate: gain is - 5% for Tax Rate: subject to of 1% gains not graduated exceeding Tax Base: income tax Gross P 100, rates for an selling price 000 individual OR or gross - 10% on to normal value in any corporate money of amount income tax in the shares exceeding case of a of stock P 100,000 corporate sold or Tax Base: seller or transferred Net capital transferor gains. Reflected in the Tax is withheld annual income by the tax return stockbroker who effected the sale Reflected in the annual capital gains tax return.
3.
4.
SELLER IS A REAL ESTATE DEALER
WHO ARE LIABLE FOR CAPITAL GAINS TAX? 1. 2. 3. Individual taxpayer, citizen or alien Corporate taxpayer, domestic or foreign Other taxpayers such as estate, trust, trust funds and pension among others Gains derived by dealers in securities; All other gains which are specifically exempt from income tax under existing investment incentives and other special laws.
COMPUTING GAIN OR LOSS
EXCEPTIONS TO THE TAX: 1. 2.
BASIS FOR 146-98):
(BIR Ruling
The fair market value (FMV) of the sale of shares not traded but listed in the stock exchange is the highest closing price on the
Stock treated Subject to Stock as ordinary capital treated as asset gains tax ordinary asset Ordinary Tax Rate: gain is 6% Ordinary subject to gain is Tax Base: graduated the higher subject to income tax between graduated rates for an the gross income tax individual selling rates for an OR to price or individual normal fair market OR to corporate value normal income tax in corporate case of a income tax corporate in case of a seller or corporate transferor seller or transferor
56 Income Taxation OTHER CAPITAL ASSETS REQUISITES LOSS: 1.

FOR RECOGNITION OF
CAPITAL GAIN/
The transaction must involve property classified as capital asset except:

2.
Real property in the Philippines held as capital asset Shares of a domestic corporation
Non-deductibility of Net Capital losses Capital losses are allowed only to extent of the capital gains; hence, the net capital loss is not deductible.
Capital losses are allowed only to extent of the capital gains; hence, the net capital loss is not deductible.
The transaction must be a sale or exchange or one considered as equivalent to a sale or exchange.
SALE OR EXCHANGE OF CAPITAL ASSETS: The following are considered as sale or exchange of capital assets: 1. 2. 3. 4. 5. 6. Retirement of bonds; Short sales of property; Failure to exercise privilege or option to buy or sell property; Securities becoming worthless; Distribution in liquidation of corporations; and Readjustment of interest in a general professional partnership. Net Capital Loss Carry Over Allowed If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.
Exception: If any domestic bank or trust company, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision) Not allowed
Rules on Capital Gains and Losses INDIVIDUAL Holding Period The percentages of gain or loss to be taken into account shall be the following: a. 100% if the capital assets has been held for 12 mos. or less; and b. 50% if the capital asset has been held for more than 12 mos. CORPORATION Capital gains and losses are recognized to the extent of 100%. (There is no holding period)
Tax-Free Exchanges and Other Exempt Transactions

SUMMARY OF TAX TREATMENT OF GAINS/ LOSSES IN THE EXCHANGE OF PROPERTIES: GENERAL RULE: Upon the sale or exchange of property, the entire gain or loss, as the case may be, shall be recognized. [Sec. 40 (C) 1] EXCEPTIONS: GAINS AND LOSSES GAIN IS RECOGNIZED ARE NOT LOSS IS NOT RECOGNIZED Exchange of property solely in kind in pursuance of corporate mergers and consolidations. Exchange by a person of his property for stocks in a corporation as a result of which said person, alone or together with others not exceeding four (4) persons, gains control of said corporation. Transactions between related taxpayers (Sec.36) Illegal transactions (Sec. 96 R.R. 2) Wash sales by nondealers of securities and when not subject to the stock transfer tax. Sales and exchanges that are not arms-length Exchanges of property, not solely in kind, in pursuance of corporate mergers and consolidation. 2. consolidation and the other party corporation (securities for securities). Transfer to a controlled corporation exchange of property for stocks resulting in acquisition of corporate control by a person, alone or together with others not exceeding four.
"Merger" or "consolidation", when used in this Section, shall be understood to mean: a) b) the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Requisites: 1. 2. undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation:
Bona fide purpose In determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Transfer of substantial portion In determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term property shall be taken to include the cash assets of the transferor. Control means ownership of stocks in a corporation amounting to at least 51% of the total voting power of all classes of stocks entitled to vote. EXCHANGE NOT SOLELY IN KIND Exchange not solely in kind this means that there are other considerations given other than those mentioned under transactions solely in kind. In this case, gain is recognized but not the loss.
TAX FREE EXCHANGES: Tax consequence: Exempt donors tax as there is no intent to gain, exempt from capital gains tax, exempt from VAT as the transaction is not engaged in trade or business. Sales or exchanges resulting in non-recognition of gains or losses: 1. Exchange solely in kind in legitimate mergers and consolidation includes: a. Between the corporations which are parties to the merger or consolidation (property for stocks); Between a stockholder of a corporation party to a merger or consolidation and the other party corporation (stock for stock); Between a security holder of a corporation party to a merger or
b.
c.
58 Income Taxation
For The Other Items of Gross Income

Interest Income amount of compensation paid for the use of money, goods, or credit or forbearance from such use.
INCOME PAYMENT Interest from any currency deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements derived from Philippine sources Interest from long term deposit or investment in the form of savings, common or individual trust funds, substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by BSP. Interest income from FCDU deposits Interest from foreign currency loans granted by FCDUs to residents other than OBUs banks or other depositary under the expanded system Interest from foreign currency loans granted by OBUs to residents other than OBUs or local commercial banks, including branches of foreign banks that may be authorized by BSP to transact business with OBUs Interest income on foreign loans contracted on or after August 1, 1986 Any interest income from transactions with depositary banks under FCDs TAX RATE 20% PAYEE DC, RFC, Citizens, RA, NRAETB
fixed sum to be paid at a stated time for the use of the property. Scope: All amount or property received from lease contract, whether used in business or not. Rent income excluded from gross income 1. Those paid to nonresident owner or lessor of vessels chartered by Philippine nationals 4.5% of gross rentals. Those paid to nonresident owner or lessor of aircraft, machineries and other equipment 7.5% of gross rentals or fees. Items considered as rental income a. Agreed amount per month or per year. b. Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease, such as: i. ii. Real estate taxes on leased premises paid by the lessee to the government. Insurance premiums paid by lessee on policy covering leased property.
2.
5% - 4- less Citizens, RA, than 5 years NRAETB 12%- 3 to less than 4 years 20%- less than 3 years (depends on the number of years of the holding period) 7.5% DC, RFC, Citizens and RA Residentswhether individuals or corporations
iii. Dividends paid by lessee to stockholders of lessor-corporation, in lieu of rent. iv. Interest paid by lessee to holder of bonds issued by lessor-corporation, instead of rent. If in the nature of prepaid rentals (advance rental), the entire amount thereof is taxable income to the lessor in the year received, if so received under a claim of right and without restriction as to its use, and whether the lessor is on the cash or accrual method of accounting.
10%
10%
Residentswhether individuals or corporations
If in the nature of a loan, no taxable income to the lessor when received. Security deposit applied to the rental of the terminal month or period of contract must be recognized as income at the time it is applied. If in the nature of security deposit for compliance by the lessee of the terms of the contract, it is not income to the lessor. Income will only be realized in the event that the lessee violates any provision of the contract. Value of permanent improvements made by lessee on leased property that will become the property of the lessor upon the expiration of the lease. The lessor shall report this income under any of the following methods: a. At the time when such buildings improvements are completed, the fair market value thereof, (Outright Method), or He may spread over the life (or remaining period) of the lease, the estimated
20% NRFC
EXEMPT For nonresidents whether individuals or corporations
Rental Income amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a
b.

depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease, an aliquot part thereof. (Spread-out Method) Royalties Like rent, royalties are payments for the use of property. It involves not only the use of the property but also its exhaustion. It includes earnings from copyrights, patents, trademarks, formulas and natural resources under lease. Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain derived therefrom is considered as and active business income subject to normal corporate income tax (BIR Ruling No. 57-2000). When are royalties included in the gross income? It is included in the gross income if the royalties are derived from sources outside the Philippines; hence, do not constitute passive income. When are royalties excluded from the gross income? It is excluded if it is derived from all sources within the Philippines because it is subject to final withholding tax. Are the tax rates imposed on royalties absolute? NO. If the recipient of the royalty paid by a domestic corporation is either a non-resident alien not engaged in trade or business or a nonresident corporation, a lower tax rate may be allowed under an existing treaty. What is the most-favored nation clause in tax treaties? It means that each party to the treaty pledges that any tax concession given to any other treaty country will also be extended to the other party to the treaty; that is, it will not grant more favorable terms to other treaty countries without granting the same concession to the treaty partner involved. Dividends A corporate profit set aside, declared and ordered by the directors of a corporation to be paid to stockholders on demand or at a fixed time. Under the Tax Code, it means any distribution made by a corporation to its stockholders, whether in money, property, or stocks, out of its earnings and profits that accrued since March 1, 1913. Includes: 1. 2. Dividends that do not constitute passive income. Only dividend issued by a foreign corporation to an individual taxpayer (citizen or alien) is included in the computation of gross income. 4. 2.
59 2008 CENTRALIZED BAR OPERATIONS Excluded from gross income for purposes of income taxation: Dividends considered as passive income and those exempt from tax: 1. Dividend received from a domestic corporation by resident citizen, non-resident citizen and resident alien: 1998 6% Final tax 1999 8% Final tax 2000 10% Final tax Dividend received from a domestic corporation by a non-resident alien engaged in business in the Philippines Final tax of 20% Dividend received from a domestic corporation by another domestic corporation and resident foreign corporation ( Intercorporate dividends) Income tax exempt Dividend received from a domestic corporation by a non-resident foreign corporation, under certain conditions Final tax of 15%
3.
FORMS and TREATMENT: 1. Cash, property and scrip dividends SUMMARY RULES ON DIVIDENDS DIVIDEND PAID BY A DIVIDEND PAID BY A TAXPA DOMESTIC FOREIGN YER CORPORA CORPORATION TION RC 10% 5- 32% Source within- 5-32% NRC 10% Source withoutEXEMPT Note: Section 42(A) NIRC in correlation with Section 23 NIRC. Source within- 5-32% RA 10% Source withoutEXEMPT Note: Section 42(A) NIRC in correlation with Section 23 NIRC. Source within- 5-32% NRAETB 20% Source withoutEXEMPT Note: Section 42(A) NIRC in correlation with Section 23 NIRC.
60 Income Taxation DIVIDEND PAID BY A DIVIDEND PAID BY A TAXPA DOMESTIC FOREIGN YER CORPORA CORPORATION TION Source within-25% NRANETB 25% Source withoutEXEMPT Note: Section 42(A) NIRC in correlation with Section 23 NIRC. EXEMPT *35% Source within- 35% RC EXEMPT Source withoutEXEMPT Note: Section 42(A) NIRC in correlation with Section 23 NIRC. Source within-35% NRC 15% - w/ Source withouttax sparing EXEMPT 35% - w/o Note: Section 42(A) tax sparing NIRC in correlation with Section 23 NIRC. b.
Commissioner vs. Court of Appeals, Court of Tax Appeals and ANSCOR, G.R. No. 108576, Jan. 30, 1999)
The recipient is other than the shareholder (Bachrach vs. Seifert, G.R. No. L-2659, October 12, 1950) Change in the stockholders equity results by virtue of the stock dividend issuance. Liquidating dividends when a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is taxable income or deductible loss, as the case may be. (Sec. 73[A]); not a dividend income . The transaction is considered a sale or exchange of property between the corporation and the stockholder. Indirect dividend (i.e. renunciation of dividend) same as cash dividend
a.
DC
Notes: 1. RAMO 1-2000 covers applications for tax treaty relief and includes claims or requests for tax exemption, preferential tax treaty rate, refund, or credit of taxes for the following income or to be derived from tax treaties and one of which covers dividends. General rule: For payments that are made to foreign corporations and alien individuals in case:
Annuities These refer to annuity policies sold by insurance companies, which provide installment payments for life, or for a guaranteed fixed period of time whichever is longer. The portion of each annuity payment that represents return of premium is not taxable while that portion that represents interest is taxable.
Annuities which are not exempt from tax are included in the computation of gross income. If an annuity is exclusion, then it is not to be included in the computation of gross income. But if it fails to comply with the requirements of a tax-exempt annuity, then the same is taxable and included in the computation of gross income.

2.
There is tax treaty- use the tax treaty rates subject to application for tax treaty relief; There is no tax treaty- then we follow the tax code rate as provided.
If resident of tax treaty country, the tax treaty rates under the existing tax treaty between Philippines and country of residence of the payee will apply.
Prizes and winnings amount of money in cash or in kind received by chance or through luck and are generally taxable except if specifically mentioned under the exclusions from the computation of gross income under Sec. 32 (B). SUMMARY RULES FOR PRIZES AND WINNINGS FROM SOURCES WITHIN TAX PAYER RC, NRC, RA, NRAETB PRIZES & WINNINGS AMOUNTING TO 10,000 OR LESS ALL OTHER PCSO & PRIZES AND LOTTO WINNINGS WINMORE THAN NINGS 10,000
2.
Stock dividends General Rule: NOT taxable because this is only paper profit Exceptions (Sec. 73[B], 1997 NIRC): a. there is redemption or cancellation; b. the transaction involves stock dividends; and
The time and manner of the transaction makes it essentially equivalent to a distribution of taxable dividends. (see
5-32%
EXEMPT
20%

Excluded from gross income for purposes of income taxation: Those considered passive income and exempt from income tax: i. ii. Prizes derived within the Philippines and is over P 10,000; Winnings derived within the Phils except PCSO and lotto winnings (Sec. 24 [B] [1]) Prizes and awards made primarily in recognition of religious, charitable, scientific educational, artistic, literary, or civic achievement but only if: b.
61 2008 CENTRALIZED BAR OPERATIONS Optional retirement (10 yrs. of service and 50 yrs. of age) retirement and monetized value of accumulated VL up to 10 days only (excess of VL and all SL is taxable)
4. Amount received by employee or heirs as a

consequence of separation due to circumstances beyond the control of the employee (Sec. 32 [6] [b]) Partners share in the net income of a GPP: a. It is only the partners share in the net income of GPP which is included in the gross income because the GPP is not taxable as an entity. b. The share of a partner in the distributable net income after tax of an ordinary partnership of which he is a partner is subject to final income tax and is not included in the computation of gross income. Income from other sources Embraces all income not expressly exempted within the class of taxable income under the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources, such as: a. Gains arising from expropriation of property which constitute income from dealings in property; Income derived from illegal sources, such as gambling, theft, embezzlement, and smuggling; Compensation for damages if it represents payment for loss of expected profits such as damages from patent infringement suit; (damages to compensate property are not taxable because they are treated as a mere return of capital). Bad debts previously charged-off but afterwards recovered; TAX BENEFIT RULE Bad debts claimed as deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction. o Contest awards and prizes for commercial or non-commercial contests; and Taxes previously deducted as an expense and subsequently refunded. Nontaxable tax refunds 1. 2. 3. Philippine Income tax, except fringe benefit tax Estate or donors tax Special assessment
Exempt subject to the following conditions: o
The recipient was selected without any action on his part to enter the contest or proceeding; and The recipient is not required to render substantial future services as a condition to receiving the prize or award
All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations (Sec.32 [B]).
Pension amount of money received in lump sum or on staggered basis in consideration of services rendered. This is given after the individual reaches the age of retirement. It is taxable to the extent of the amount received except if there is an approved pension plan by the Bureau of Internal Revenue. Excluded from gross income for purposes of income taxation:
b.
c.
1. R.A. 4917 Requisites:

a. b. c. d. Retiree has been employed for at least 10 yrs. by same employer At least 50 yrs. old at the time of retirement Avails of the benefit only once The private benefit plan is approved by the BIR (RR 2-98) Firm has no private retirement trust plan Retiree is at least 60 yrs. of age d.
2. R.A. 7641 Requisites:

a. b.
3. Also EXCLUDED are monetized value of

retirees accumulated vacation leave (VL) and sick leave (SL) subject to the following rules: a. Compulsory retirement (60 yrs. for private corp.; 65 yrs. for Government.; 70 yrs. for Judiciary) retirement and monetized value of accumulated VL and SL o
62 Income Taxation 4. Income tax paid or incurred to a foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred. Stock transaction tax e.
Cancellation of indebtedness Taxable income if the creditor cancels the debt as a consideration of the services performed by the debtor to the creditor. A gift if the creditor cancels the debt without any consideration. A capital transaction if the corporation forgives the debt of its stockholder, it has the effect of payment of an indirect dividend.
5.
The refund of these taxes is not taxable because such taxes are not deductible from the gross income.
Exclusions
Exclusions
Under the 1997 Tax Code, the term exclusions refer to items that are not included in the determination of gross income either because: a) they represent return of capital or are not income, gain or profit; b) they are subject to another kind of internal revenue tax; or c) they are income, gain or profits that are expressly exempt from income tax under the Constitution, tax treaty, Tax Code, or a general or special law. ITEMS OF EXCLUSIONS (Sec. 32[B]) 2. Return of insurance premium if such amounts (when added to amounts already received before the taxable year under such contracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in the gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. No loss is realized on surrender of a life insurance policy for its surrender value. What are excluded in case of a transfer for a valuable consideration? a) Actual value of consideration b) Premiums and other sums subsequently paid by the transferee. ON THE PART OF THE INSURANCE COMPANIES The net additions, if any required by law to be made within the year to reserve funds and sums other than dividends paid within the year on policy and annuity contracts may be deducted from gross income. However, released reserve shall be treated as income for the year of release. Mutual insurance companies (fire and mutual employers liability) in case of these companies requiring members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposit returned to their policyholders but
(MAC-GIRL) 1. Life Insurance 2. Amount received by insured as return of

premium
3. Gifts, bequests, and devises 4. Compensation for injuries or sickness 5. Income exempt under treaty 6. Retirement benefits, pensions, gratuities 7. Miscellaneous items
1. Proceeds of life insurance paid by reason of the death of the insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust. This is considered as indemnity rather than as gain or profit. Note: If such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

shall return as taxable income all income received by them from all sources plus portion of the premium deposits as are retained by companies for purposes other than the payments of losses and expenses and reinsurance reserves.
63 2008 CENTRALIZED BAR OPERATIONS official or employee (e.g. retrenchment, redundancy or cessation of business); The phrase for any cause beyond the control of said official or employee connotes involuntariness on the part of the official or employee; separation must not be asked or initiated by the official or employee. a. social security benefits, retirement gratuities, pensions and other similar benefits received by citizens and aliens who come to reside permanently here from foreign government agencies and other institutions, private or public; benefits due to residents under the laws of the U.S. administered by the U.S. Veterans Administration; SSS benefits; and GSIS benefits.
Mutual marine insurance gross premiums collected and received by them, less amount paid for reinsurance, are included as return of gross income. Assessment Insurance Companies may deduct from their gross income the actual deposit of sums with officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds.
b.
3.
Gift, bequest or devise are excluded but not the income from such property. If the amount received is on account of services rendered, whether constituting a demandable debt or not, or the use of the opportunity to use capital, the receipt is income. (Pirovano vs. Commissioner, G.R. No. 15865 July 31, 1965) They are subject to estate and donors tax.
c. d. 7.
Miscellaneous items Passive income derived in the Philippines by: a. Foreign governments and foreign government controlled financing institutions; Income derived from Philippine government and its subdivisions; Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. Requisites: a. b. d. recipient was selected without any action on his part; and Recipient is not required to render substantial future services.
1. Compensation for personal injuries or

sickness, whether by suit or agreement 4. Note: The phrase personal injuries should be given a restrictive meaning to refer only to physical injuries. The theory for this is that recoupment on account of such losses is not income, since it is not derived from capital, from labor or from both combined. And the fact that the payment of compensation for such loss was voluntary does not change its exempt status. It was in fact compensation for a loss, which impaired petitioners capital.
b. c.
5. 6.
Income exempt under Treaty Retirement benefits, pension, gratuities, etc. a. those derived under R.A. 7641 (pertains to private firms without retirement trust fund); those received by officials and employees of private employers in accordance with a reasonable private benefit plan; Requisites: (1) in the service of the same employer for at least 10 years; (2) at least 50 years old; (3) must be availed of only once; and (4) plan approved by the BIR (RR 2-98). c. separation pay because of death, sickness, or other physical disability or for any cause beyond the control of the
Prizes and awards granted to athletes in sports competitions and sanctioned by their national sports association: a. b. c. 13th month pay and other benefits up to P30,000.00; GSIS,SSS, Medicare and union dues of individuals; Gains derived from bonds, debentures, or other certificate of indebtedness with a maturity of more than 5 years; and Gains from redemption of shares in Mutual Fund. RULES ON FARMING
b.
d.
Who are farmers? All individuals, partnerships or corporations that cultivate, operate or manage farms for gain or profit, either as owners or tenants are farmers.
64 Income Taxation Method of Accounting Used a) Cash method b) Accrual method Rules on computation of taxable income from farming a. A farmer distinguishes between livestock and farm products raised and sold, and livestock and farm products purchased and sold. b. c. d.
For livestock and farm products raised and sold, the measure of gross income is the selling price.
Expenses of raising livestock and farm products are deductions from gross income Proceeds of crop or livestock insurance constitute gross income A farmer on the accrual method of accounting considers inventories at the beginning and at end of the taxable year.
For livestock and farm products purchased and sold, the measure of gross income is the profit from the sale;
Deductions
Deductions
DEDUCTIONS IN GENERAL What are Deductions? Items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. BASIC PRINCIPLES a. The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction. He must be able to prove that he is entitled to the deduction authorized or allowed. (Atlas Consolidated Mining and Devt. Corp. vs. Commissioner, G.R. No. L-26911, January 21, 1981) Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR. [Sec. 34(K), NIRC] Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are to be strictly construed, then it follows that deductions must also be strictly construed. 2. Taxpayers Who Cannot Avail Of Deductions from Gross Income a. Citizens and resident aliens whose income is purely compensation income (except for premium payments on health and/or hospitalization insurance); b. Non-resident aliens not engaged in trade or business in the Philippines; and c. Non-resident foreign corporation SUMMARY RULES ON CLAIMABLE DEDUCTIONS 1. Individuals a. with gross compensation income from employer-employee relationship only (1) premium payments on health and/or hospitalization insurance (2) personal and additional exemptions b. gross income from business or practice of profession (1) Optional Standard Deduction (OSD) (2) Itemized deductions (3) Premium payments on health and/or hospitalization insurance (4) Personal and additional exemptions Corporations Itemized Deductions
b.
c.
d.
Note: For applicable expenses that are subjected to withholding taxes, tax rules provide that the withholding agent must first withhold to the income payment in order to be allowed as deduction to the gross income. (See discussion on withholding taxes and itemized deduction topics)

EXCLUSION vs. DEDUCTION vs. PERSONAL EXEMPTION EXCLUSION DEDUCTION PERSONAL EXEMPTION Are arbitrary amounts allowed by law to an individual taxpayer, theoretically to provide for personal and living expenses
65 2008 CENTRALIZED BAR OPERATIONS Generally a receipt which is excluded from taxable income. Pertains to the computation of gross income Is not a receipt but is generally an expenditure which is permitted to be subtracted from income to determine the amount subject to tax. Pertains to the computation of net income. Something spent or paid in earning gross income It is an immunity or privilege, a freedom of charge or burden to which other are subjected.
REFER TO FLOW OF Refer to the WEALTH WHICH ARE amounts NOT TREATED AS which the law PART OF GROSS allows to be INCOME BECAUSE: subtracted (1) exempted by from gross the fundamental income in law; (2) exempted order to arrive by statute; (3) do at net income not come within the definition of income
Something earned or received by the taxpayer which do not form part of gross income
Theoretical provision of law for the personal and living expenses of the individual.
Kinds of Deduction
1. 2. 3. Optional Standard Deductions (OSD) Special Deductions Itemized Deductions OPTIONAL STANDARD DEDUCTION Deduction, in lieu of the itemized deductions, is merely a privilege that may be enjoyed by certain individual taxpayers. Rules: a) OSD is available only to citizens or resident aliens; thus non-resident aliens are not entitled to claim the optional standard deduction The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions; Such election, when made by the qualified taxpayer, is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years; The amount of standard deduction is limited to ten percent (10%) of the taxpayers gross income. OSD is not available against compensation income arising out of an employer-employee relationship. Proof of actual expenses is not required, but the taxpayer should keep records pertaining to his gross income Since an individual in business or in the practice of profession is required to file quarterly income tax returns, can he choose the Optional Standard Deduction in his quarterly returns and then choose the itemized deductions in his annual income tax return, or vice versa? YES, the Optional Standard Deduction or Itemized Deductions is against the gross income of the year. Quarterly income tax returns are only interim computations on the taxable income for the year. TAX FORMULA FROM MANUFACTURING OR MERCHANDISING CONCERN Gross Sales Less: Cost of Sales Add: Incidental Income if any GROSS INCOME FOR OSD FROM SALE OF SERVICES Gross Receipts Less: Direct Cost of services Add: Incidental Income if any GROSS INCOME FOR OSD
b)
c)
d)
SPECIAL DEDUCTIONS Private proprietary educational institutions [Sec. 34 (A) (2)] in addition to the expenses allowed as deduction: to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or to deduct allowance for depreciation thereof
e)
f)
66 Income Taxation Insurance companies (Sec. 37) can deduct the following: Net additions required by law to be made within the year to reserve funds. Sums other than dividends paid within the year on policy and annuity contracts. Amount of income paid, credited or distributed to the heirs/beneficiaries. Amount applied for the benefit of the grantor. ITEMIZED DEDUCTIONS (D-BIRD-CLEPTD) a) b) c) d) e) f) g) h) i) j) k) ordinary and necessary expenses; interests; taxes; losses; bad debts; depreciation of property; depletion of oil and gas wells and mines; charitable and other contributions; research and development; pension trust contributions of employees; and premium payments on health and/or hospitalization insurance. (This is the only deduction which a compensation income earner may claim as a deduction.) The above enumeration are not allowed deductions from gross income of: ii. d. 2. a. b. c.
those earning purely compensation income non-resident alien not engaged in trade or business non-resident foreign corporation
Estates and trusts (Sec. 61):
In computing taxable income, no deduction shall in any case be allowed for: a. b. personal, living and family expenses any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate when the taxpayer is directly or indirectly a beneficiary under such policy and no deduction shall be allowed for i. losses from sales or exchanges of property interest expense
c.
iii. bad debts Where the transaction is between related taxpayers
Note: 1.
[Allowable Deductions (Sec. 34)]

Itemized Deductions [Allowable Deductions (Sec. 34)]
Itemized Deductions
Ordinary and Necessary Trade, Business and Professional Expenses

being deducted and connection or relation of expense to business/trade; e) if subject to withholding taxes, have been properly withheld and remitted on time to the BIR; Not contrary to law, public policy or morals
Requisites Of Business Expense To Be Deductible: a) b) c) d) ordinary and necessary; paid or incurred within the taxable year; paid or incurred in carrying on a trade or business; substantiated with official receipts or other adequate records which reflect the amount f)

g) Must be reasonable (when the expense is not lavish, extravagant or excessive under the circumstances.
67 2008 CENTRALIZED BAR OPERATIONS 8. The employees qualification and contributions to the business venture, and General economic conditions (CM Hoskins & Co. v. CIR 30 SCRA 434 1969).
9. ORDINARY AND NECESSARY Necessary Expense appropriate and helpful in the development of taxpayer's business and are intended to minimize losses or to increase profits. These are the day-to-day expenses. Ordinary Expense normal or usual in relation to the taxpayers business and the surrounding circumstances. KINDS OF BUSINESS EXPENSES 1. Compensation for Personal Services Requisites for deductibility: a. b. c. Personal services actually rendered Compensation paid is for such services rendered. Must be reasonable 2. c.
Pensions and compensation for injuries, if not compensated for by insurance or otherwise. Grossed-up monetary value (GMV) of fringe benefit provided for, as long as the final tax imposed has been paid. If final income tax thereon had not been paid, as where the fringe benefit is granted to a rank-and-file, then the employer, as taxpayer, cannot avail of this deduction.
d.
Traveling Expenses Requisites for deductibility: a. b. Incurred or paid while away from home. In the pursuit of trade or business. Includes transportation, meals and lodging (Sec. 65, 66, RR No. 2)
Test of reasonableness: If same amount will be paid for similar services by similar enterprise under similar circumstance Deductible expenses under compensation for personal services a. Salaries, wages, commissions, professional fees, vacation-leave pay, retirement pay and other compensation. Bonuses are deductible expenses if paid in good faith as additional compensation for services rendered.
What constitute traveling expenses?
TRAVELING TRAVELING EXPENSE EXPENSE AS AS BUSINESS FRINGE BENEFIT EXPENSE
- granted to -
b.
Bonuses not subjected to withholding tax during the year they were claimed as an expense, the same should be disallowed. ( ING Bank N.V. Manila Branch vs. Commissioner of Internal Revenue CTA Case No. 6187 dated August 9, 2004) TEST FOR DEDUCTIBILITY OF BONUS (2006 BAR) 1. 2. 3. 4. 5. 6. 7. The payment must be made in good faith; The character of the taxpayers business; The volume and amount of its net earnings; Its locality; The type and extent of the services rendered; The salary policy of the corporation; The size of the part icular business; 3.
rank-and-file on account of foreign trip final tax must be paid
- granted to any - covers trip in the

employee Philippines or abroad away from home in pursuit of trade or business
- must be incurred
When is a traveling expense deductible?
Transportation from Office to Home and Home to Office NOT deductible Transportation from Main Office to Branch Office DEDUCTIBLE If trip is combined pleasure and business, expenses should be allocate
Rentals Requisites for deductibility: a. b. Made as a condition to the continued use of, or possession of property; Taxpayer has not taken or is not taking title to the property or has no equity other than that of a lessee, user or possessor; Property must be used in trade or business; and It is subjected to withholding tax of 5% otherwise it shall be disallowed as a deduction.
c. d.
68 Income Taxation Items considered as rental expense (Lease Agreements) 1. Where leasehold is acquired for business purposes for a specified sum, the purchaser may take deduction for an aliquot part of such sum each year based on the number of years the lease will run. Taxes and other obligations of the lessor paid by the lessee under the contract of lease, constitutes additional rent expense which the lessee corporation may deduct from gross income. The cost of leasehold improvements may be recovered by the lessee over the remaining term of the lease, or over the life of the improvements, whichever period is shorter.
purpose of expense, professional or business relationship of expense, and name of person or company entertained with contact details. The deduction shall not exceed such ceilings as the Sec. of Finance may, by Rules and Regulations, prescribe upon the recommendation of the CIR
2.
For taxpayers engaged in sale of goods/properties 0.50% of net sales For taxpayers engaged in sale of services - 1% of net revenues For taxpayers engaged in both sale of goods/properties and services - net sales or net revenues / total net sales and net revenues x EAR expenses. Exclusions from EAR expenses:
3.
Amounts paid for the "right of occupancy" sometimes called "goodwill", do not qualify as rental deduction because they are in the nature of capital advance to secure the lease of the premise it is similar to a purchased goodwill. Leasehold Improvements made by lessee If lessee makes permanent improvement (i.e. building) on land being leased, cost is held to be a capital investment and NOT deducted as a business expense. An annual deduction may be made from Gross Income of an amount equals to cost divided by number of years remaining in the term of lease or useful life of improvement, whichever is shorter, which shall be in lieu of depreciation expense. 4. Entertainment, Amusement and Recreation Requisites for deductibility: a. Expense is directly connected to the development, management and operation of the trade, business, or profession of the taxpayer; Expense is directly related to or in furtherance of the conduct of trade, business, or profession; Expense is reasonable; Expense is not contrary to laws, morals and public policy or public order; Not paid directly or indirectly to an official or employee of the national government, or any local government unit or any GOCC or of a foreign government, or to a private individual, or corporation, or general professional partnership, or a similar entity, if it constitutes a bribe, kickbacks or other similar payments; and It must be substantiated with sufficient evidences such as official receipts or adequate records indicating the amount of expense, date and place of expense, 7. 5.
a. expenses which are treated as

compensation or fringe benefits;
b. expenses for charitable or fund

raising events;
c.
expenses for bona fide business meeting of stockholders, partners or directors; an employee to a business league or professional organization meeting;
d. expenses for attending or sponsoring
e. expenses for events organized for

promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions and other similar events; and
f.
Other expenses of similar nature.
Cost of Materials and Supplies Nature: Deductible only to the amount actually consumed or used in operation during the year.
b.
6.
Repairs Minor or ordinary repairs - deductible from gross income because it keeps the assets in its ordinary working condition. Major or extraordinary repairs - are not deductible since major repairs tend to prolong the life of the asset Expenses Allowed to Private Educational Institutions Purpose: To achieve improvements in educational activities and expansion of school facilities. Option, either [Sec. 34 (A)(2)]: 1. Deduct expenditures otherwise considered as capital outlays of
c. d. e.
f.

depreciable assets incurred for the expansion of school facilities; or 2. 8. Deduct allowance for depreciation thereof. Organization costs are amortized over the life of the corporation. Cost of defending a civil suit affecting the business is deductible, irrespective of the success of the defense. Judgment or other binding adjudication, on account of damages for patent infringement, personal injuries, or other causes, are deductible when the claim is adjudicated and paid.
69 2008 CENTRALIZED BAR OPERATIONS PAID OR INCURRED IN CARRYING ON A TRADE OR BUSINESS Must be paid in connection with the conduct of trade or business, or the exercise of profession by the taxpayer, or attributable to the development, management, or operation of the trade business or profession. SUBSTANTIATED WITH RECEIPTS Lack of receipts excused the lack of supporting vouchers, receipts and other documentary proof, however, may be excused under Sec. 337 (now Sec. 235) of the Tax Code. This provision requires the preservation of the books of accounts and other accounting records for a period of three (3) years from the date of last entry (Basilan Estates vs. Commissioner G.R. No. L-22492 September 5, 1907). COHAN RULE Applies only if the taxpayer has successfully shown that it is usual and necessary in the trade to entertain and to incur similar kinds of expenditures, there being evidence to show the amounts spent and the persons entertained, though not itemized. In such a situation, deduction of a portion of expenses incurred might be allowed even if there are no receipts or vouchers. Absence of invoices, receipts or vouchers, particularly lack of proof of items constituting the expense is fatal to the allowance of deduction (Gancayco vs. Collector, G.R. No. 13325 Apr. 20, 1961). NOT CONTRARY TO LAW, PUBLIC POLICY OR MORALS While illegal income will form part of income of the taxpayer, expenses which constitute bribe, kickback and other similar payment, being against law and public policy are not deductible from gross income [Sec 34 (A) (1)(c)].
Miscellaneous a. b.
PAID OR INCURRED DURING THE TAXABLE YEAR Cash basis expense is deductible in the year paid Accrual upon accrual thereof, although it is paid at a later period Prepaid only the amount corresponding to the current period may be deducted from gross income. WITHHOLDING TAXES HAVE BEEN PAID The obligation of the payor to deduct or withhold the tax arises at the time an income payment is PAID or PAYABLE or ACCRUED or recorded as an expense or asset whichever is applicable in the payors books, WHICHEVER COMES FIRST (Section 2.57.4 of RR 2-98 as amended by Section 4 of R.R. 12-2001). When expense deemed accrued: all events have occurred which determine the liability The amount of liability can be determined with reasonable accuracy. Taxpayer must show that the economic performance test has been met.
Interest
This refers to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of money during the term of the loan as well as for his detention of money after the due date for its repayment (R.R. 13-2000). Requisites for Deductibility (R.R. No. 13-2000) a) There must be an indebtedness; b) c) d) e) f) The indebtedness must be that of the taxpayer; The interest must be legally due The interest must be stipulated in writing; The interest expense must have been paid or incurred during the taxable year; The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;
70 Income Taxation g) The interest arrangement must not be between related taxpayers as provided under Sec. 36(B) of the NIRC; The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer. The amount of interest deducted from gross income does not exceed the limit set forth in the law The taxpayer is liable to pay interest on the indebtedness Must not be incurred to finance petroleum operations In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as capital expenditure.
THE INTEREST MUST BE STIPULATED IN WRITING The interest must have been stipulated in writing. Where there is absence of stipulation in writing concerning interest, interest is properly denied (Limpan Investment Corporation vs. Collector, CTA Case No. 1397, Dec. 11, 1967) NOT BETWEEN RELATED TAXPAYERS Who are related taxpayers? a. Between members of the family; Family includes only the brothers, sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants of the taxpayer. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was a personal holding company or a foreign personal holding company; Between the grantor and a fiduciary of any trust; Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; Between a fiduciary of a trust and a beneficiary of such trust.
h)
i)
j) k) l)
b.
THERE MUST BE AN INDEBTEDNESS A bona fide debt is one which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. The basic test of the existence of a debtor-creditor relationship is whether the debtor is under unconditional obligation to repay the creditor. In deciding whether a relationship represents a bona fide debt, a fact and circumstances approach which examines the substantive nature of the relationship on a case-to-case basis is employed (Philex Mining Corporation vs. Commissioner, CTA Case No. 5200, August 21, 1998). Rule on interest on Business Taxes Interest incurred or paid by the taxpayer on all unpaid business related taxes shall be fully deductible from gross income and shall not be subject to limitation on deduction heretofore mentioned. Thus, such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax (Rev. Reg. No. 13-2000) THE DEBT MUST BE THAT OF THE TAXPAYER Interest on real estate mortgage interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or not secured by such mortgage, may be deducted as interest on his indebtedness. THE INTEREST MUST BE LEGALLY DUE If there exists no obligation or where the obligation is unenforceable, interest paid thereon is not deductible. An obligation is an unconditional and legally enforceable obligation for the payment of money (Collector vs. Prieto, 109 Phil. 592)
c.
d. e.
f.
The fact that the President of one corporation is the Chairman of the Board of another does not mean that he has controlling ownership of such corporations. Evidence must be adduced to show the percentage of ownership of the common officer on the outstanding capital stock of such corporations (Oranbo Realty Corp. vs. CIR, CTA Case No. 5222, April 7, 1997) Arms length interest rate rate of interest which was charged or would have been charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances. NOT EXPRESSLY DISALLOWED BY LAW An individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise [Sec.34(B)2a]: allowed as a deduction in the year the indebtedness is paid If the indebtedness is payable in periodic amortization, the amount of interest which

corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Interest paid on indebtedness between related taxpayer [Sec.34(B)2b] If the indebtedness is incurred to finance petroleum exploration [Sec.34(B)2c] In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as capital expenditure (R.R. 13-2000). DOES NOT EXCEED THE LIMIT SET BY LAW Rules on Deductibility of Interest Expense General Rule: The entire amount of interest expense paid or incurred within a taxable year of indebtedness in connection with the taxpayer's trade, business or exercise of profession shall be allowed as a deduction from the taxpayer's gross income. Limitation: The amount of deductible interest shall be reduced by an amount equal to 42% (effective November 1, 2005) of interest income earned which had been subjected to final withholding tax, provided rate shall be 33% effective January 1, 2009. The limitation applies whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date of the interest-bearing loan and the date the investment was made for as long as during the taxable year, an interest expense was incurred on one side and an interest earned on the other side which income was subjected to final tax. Aim of the Limitation: To discourage so-called back-to-back loans where a taxpayer secures a loan from a bank, turns around and invests the loan proceeds in money market placements. By imposing a limit as to the amount of interest expense that can be deducted from gross income, the previous practice of tax arbitrage was absolutely nullified. Tax Arbitrage is a method of borrowing without entering into a debtor/creditor relationship, often to resolve financing and exchange control problems. In tax cases, back-to-back loan is used to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction. When is the 42% limit not applicable? Interest fully deductible interest incurred or paid on all unpaid BUSINESS-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction. Thus, such interest shall not form part of the expense that is to be diminished by 42% of interest income subjected to final tax, provided the rate shall be 33% effective January 2009.
71 2008 CENTRALIZED BAR OPERATIONS SUMMARY DEDUCTIBLE INTEREST EXPENSES Interest on taxes, such as those paid for deficiency or delinquency, since taxes are considered indebtedness (provided that the tax is a deductible tax, except in the case of income tax). However, fines, penalties, and surcharges on account of taxes are not deductible. The interest on unpaid BUSINESS TAX shall not be subjected to the limitation on deduction. Interest paid by a corporation on scrip dividends Interest on deposits paid by authorized banks of the Bangko Sentral ng Pilipinas to depositors, if it is shown that the tax on such interest was withheld Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said corporation is the legal or equitable owner, even though it is not directly liable for the indebtedness NON-DEDUCTIBLE INTEREST EXPENSES An individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: o allowed as a deduction in the year the indebtedness is paid o If the indebtedness is payable in periodic amortization, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Interest paid on indebtedness between related taxpayer If the indebtedness is incurred to finance petroleum exploration Interest on preferred stock, which in reality is dividend Interest on unpaid salaries and bonuses Interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising under interestbearing obligation Interest paid when there is no stipulation for the payment thereof
Optional Treatment of Interest Expense At the option of the taxpayer, interest incurred to acquire property used in trade, business, or exercise of profession may be allowed as a deduction or treated as capital expenditure [Sec. 34(B)(3), NIRC].
72 Income Taxation Doctrines 1. A domestic corporation, the interest earned by a bank from deposits and similar arrangements are subjected to final withholding tax of 20%- the interest income it receives on the amounts that it lends are 2.
always net of the 20% withheld tax (CIR vs. BPI 492 SCRA 551). The express inclusion of interest income in taxable gross receipts creates a presumption that the entire amount of the interest income, without any deduction is subject to gross receipts.
Taxes
Requisites for Deductibility 1. 2. 3. Payments must be for taxes Tax must be imposed by law on, and payable by the taxpayer (direct tax) Paid or incurred during the taxable year must be in connection with taxpayers trade, business or profession; and Taxes are not specifically excluded by law from being deducted from the taxpayers gross income. 1. 2. 3. 4. NOT SPECIFICALLY EXCLUDED BY LAW Taxes Not Deductible Philippine income tax; foreign income tax, if taxpayer avails of the foreign tax credit; estate and donors tax; special assessments and taxes assessed against local benefits of a kind that tends to increase the value of the property assessed; excess electric consumption tax; final taxes, being in the nature of income tax.
4.
5. 6.
PAYMENTS MUST BE FOR TAXES The word taxes means taxes proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Note: In Sec.4(c) of RR. No. 13-2000, interest paid on delinquent business related taxes is deductible from gross income. Hence, determine first which kind of tax upon which an interest on delinquency is imposed. If it is a business tax (e.g. excise, VAT, percentage), interest is deductible. If it is an interest on income tax delinquency, interest is not deductible. IMPOSED BY LAW UPON THE TAXPAYER Taxes are deductible as such only by the persons upon whom they are imposed by law. Indirect taxes, like the VAT, passed on by sellers are not deductible by the buyers fro their gross income. For NRAETB and RFC, taxes paid or incurred are allowed as deductions only if and to the extent that they are connected from income within the Philippines. EXCEPTIONS to requirement that only such persons on whom the tax is imposed by law can claim deduction thereof: 1. Taxes of shareholder upon his interest as such and paid by the corporation without reimbursement from him, can be claimed by the corporation as deduction. A corporation paying the tax for the holder its bonds or other obligation containing a tax-free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.
INCOME TAX PAID IN FOREIGN COUNTRIES Alternative treatments for income taxes paid in foreign countries: a. Claim as foreign tax credits against Philippine income tax due of citizens and domestic corporations. Claim as deduction from gross income of citizens and domestic corporations;
b.
Taxes allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction (Tax Benefit Rule). FOREIGN INCOME TAX CLAIMED AS TAX CREDIT Tax Credit right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to his foreign country subject to limitation. Who Can Claim Tax Credit: a. b. c. resident citizens of the Philippines resident aliens under the principle of reciprocity domestic corporations which includ e partnerships except general professional partnership beneficiaries of estates and trusts members of general professional partnerships non-resident citizens
2.
d. e. a.
Who Are Not Entitled To Tax Credit:

b. c. aliens, whether residents or non-residents foreign corporations, whether residents or non-residents Rules:
Reason: foreign tax credits are allowed for income derived from sources outside the Philippines, which as taxable in the Philippines. These taxpayers are subject to Philippine income tax only on income derived from sources within the Philippines. BIR requirements include proof of: a. b. total amount of income derived from foreign sources; the amount of income derived from each country, the foreign tax paid or incurred, which is claimed as a credit; and All other information necessary for the verification and computation of such credit. FORMULA FOR COMPUTING LIMITATION Limit A: Per country limitation Taxable income from foreign country x Phil. Income tax Taxable income from all sources Limit B: Over-all limitation Taxable income from outside sources Taxable income from all sources
One foreign country the allowed credit is the lower between limit A and the foreign income tax paid. Two or more foreign countries determine first the lower between limit B and the total foreign income taxes paid. Then compare it with limit the result applying limit A, the lower amount is the allowed credit. WHEN CREDIT FOR TAXES MAY BE TAKEN: The credit for taxes provided by Section 34(C)(3) to (7) may ordinarily be taken either in the return for the year in which the taxes accrued or on which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon cash receipts and disbursements basis. LIMITATIONS ON CREDIT FOR FOREIGN TAXES: 1. The amount of credit in respect to the taxes paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from sources within such country taxable under Title II (Income Tax) bears to his entire net income for the same taxable year; and The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers net income from sources without the Philippines taxable under Title II (Income Tax) bears to his entire net income for the same taxable year.
c.
2. x Phil. Income tax
Losses
Refer to such losses which are not compensated by insurance and do not come under the category of bad debts, inventory losses, depreciation, etc., and which arise in taxpayer's profession, trade or business. General Classifications REQUISITES FOR DEDUCTIBILITY 1. Losses by individual, when deductible: a) b) c) d) e) f) The loss must be that of the taxpayer Actually sustained and charged off during the taxable year; Evidenced by a close and completed transaction; Not claimed as a deduction for estate tax purposes; and Not compensated for by insurance or other form of indemnity; In the case of individual, the loss must be connected with his trade, business or profession or incurred in any transaction entered into for profit though not connected with his trade, business or profession; Notice of loss must be filed with the BIR (i.e. within 45 days) from the DATE OF
1. Those incurred in a trade or business for profit 2. Those incurred in any transaction entered into
for profit though not connected with his trade, business or profession;
3. Casualty losses that arise from fire, storm,

shipwreck, or other casualty, or from theft or robbery, even though not connected with the trade or business of the taxpayer.
g)
74 Income Taxation OCCURRENCE OR DISCOVERY of the c a s u a l t y o r r o b b e r y, t h e f t o r embezzlement. 2. Losses by corporations, when deductible: If such losses are actually sustained and charged off within the year and not compensated for by insurance or otherwise 3. Losses by non-resident aliens and foreign corporations, when deductible: a) b) Losses sustained in business or trade conducted within the Philippines Losses of property within the Philippines arising from fires, storms, shipwreck, or other casualty and from robbery, theft or embezzlement Losses actually sustained in transactions entered into for profit in the Philippines, although not connected with their trade or business.
the owner of the property cannot recover from the property anymore. NOT CLAIMED AS DEDUCTION FOR ESTATE TAX PURPOSES The taxpayer cannot claim double benefits arising from the same casualty loss for income tax and estate tax purposes. He can only choose one. NOT COMPENSATED BY INSURANCE As a general rule, the loss is deductible in the year the loss happens. However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation). The rule is that loss deduction will be denied, if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss (Plaridel Surety and Insurance Co. v. Collector, G.R. No. L, 21520 December 11, 1967). NOTICE OF LOSS FILED Substantiation requirement File a sworn declaration of loss with the nearest RDO. The sworn declaration of loss shall contain the following: 1. 2. 3. 4. the nature of the event giving rise to the loss and the time of its occurrence; a description of the damaged property and its location; items needed to compute the loss; and Amount of insurance or other compensation received or receivable.
c)
LOSS MUST BE OF THE TAXPAYER The loss is personal to the taxpayer and is not transferable or usable by another. The loss of predecessor partnership is not deductible by a successor corporation. The loss of the parent company may not be deducted by its subsidiary. But the loss of the branch within or outside the Philippines is deductible from the gross income of the head office located in the Philippines, since the branch is only an extension of its head office and there is only a single entity. SUSTAINED AND CHARGED OFF DURING THE TAXABLE YEAR The taxpayers failure to record in his books the alleged loss proves that the loss had not been suffered, hence, not deductible (City Lumber vs. Domingo and Court of Tax Appeals, G.R. No. L-18611, January 30, 1964). EVIDENCED BY CLOSED AND COMPLETED TRANSACTION A loss is actually sustained if it is evidenced by a completed transaction. There should be an identifiable event that fixes the loss thus: When a loss results from a sale, the consummation of the sale is the identifiable event which fixes the loss, and the deduction should be claimed in the year the sale was consummated. A sale is consummated when there is delivery. A loss from theft is ordinarily deductible in the year of theft; A loss from embezzlement is deductible in the year in which the embezzlement took place, if
Evidence to support these items should be furnished, if available (Manotok Realty Inc. vs. CIR, CTA Case No. 5485, October 18, 1999). When is a loss non-deductible despite the concurrence of requisites? In case of related taxpayers.

CATEGORY AND TYPES OF LOSSES 1. Ordinary Losses Incurred in trade or business, or practice of profession and losses of property connected with trade or business or profession, if due to casualty, etc. Net Operating Loss CarryOver (NOLCO) This refers to the excess of allowable deductions over gross income of the business for any taxable year, which had not been previously offset as deduction from gross income. It can be carried over as a deduction from gross income for the next 3 consecutive years immediately following the year of such loss. REQUISITES FOR DEDUCTIBILITY OF NOLCO a. Three-year period General Rule: The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss. Exception: any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under NOLCO b. There is no substantial change in ownership NOLCO shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that:
75 2008 CENTRALIZED BAR OPERATIONS Code (e.g. private educational institutions, hospitals, and regional operating headquarters) Special Rule in case taxpayer is an individual - An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO. Further, the three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period. Special Rule in case taxpayer is a corporation - Corporations cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year. The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation. EXCEPTIONS (Who are not entitled to deduct NOLCO): 1. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP); An enterprise registered with the Board of Investments (BOI) with respect to its BOIregistered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO; An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916, as amended, with respect to its PEZAr e g i s t e r e d b u s i n e s s a c t i v i t y. I t s accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO; An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered business activity. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO; Foreign corporations engaged in international shipping or air carriage business in the Philippines; and
2.
3.
Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, if held by or on behalf of the same persons; or Not less than 75% of the paid-up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same person
4.
Taxpayers Entitled to Deduct NOLCO from Gross Income. Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession, and domestic and resident foreign corporations subject to the normal income tax (e.g. manufacturers and traders) or preferential tax rates under the
5.
76 Income Taxation 6. In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO.
Partial Destruction The excess over the net book value immediately before the casualty should be capitalized, subject to depreciation over the remaining useful life of the property.
2.
Capital Losses (Losses are deductible only to the extent of capital gains) a. b. Losses from sale or exchange of capital assets Losses resulting from securities becoming worthless and which are capital assets Losses from short sales of property Losses due to failure to exercise privilege or option to buy or sell property
RULES FOR MINES OTHER THAN OIL AND GAS WELLS For mines other than oil and gas well, net operating loss incurred in any of the first ten years of operation may be carried over for the next 5 years immediately following the year of such loss. The entire amount of loss shall be carried over the first of the 5 taxable years following the loss, and any portion of such loss, which exceeds the taxable income of such first year, shall be deducted in like manner from taxable income of the next remaining 4 years. Requirements: (1) The taxpayer was not exempt from income tax in the year of such net operating loss; (2) The loss was not incurred in a taxable year during the taxpayer was exempt from income tax; and (3) There has been no substantial change in the ownership of the business or enterprise. There is no substantial change in the ownership of the business when: (a) not less than 75% in nominal value of the outstanding issued shares is held by or on behalf of the same persons; or Not less than 75% of the paid up capital is held by or on behalf of the same person.
c. d.
3.
Special Kinds Of Losses a. Wagering losses - deductible only to the extent of gain or winnings [Sec. 34 (D) (6)]; deemed to apply only to individuals. b. Losses on wash sales of stocks - not deductible because these are considered to be artificial loss. Wash sales a sale or other disposition of stock or securities where substantially identical securities are acquired or purchased within 61-day period, beginning 30 days before the sale and ending 30 days after the sale (Sec. 38). Elements of Wash Sales: (1) The sale or other disposition of stock resulted to a loss; (2) There was an acquisition or contract or option for acquisition of stock or securities within 30 days before the sale or 30 days after the sale; and (3) The stock or securities sold were substantially the same as those acquired within the 61-day period. Is there an exception to the rules on losses from wash sales? YES. If the taxpayer is a dealer in securities, and the transaction from which the loss resulted, was made in the ordinary course of the business of such dealer, the loss is deductible in full. What is a short sale? Short sale - means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of the seller. A person shall be deemed to own a security if: (1) he or his agent has title to it
(b)
Note: The 3year period shall continue to run notwithstanding that the corporation paid its taxes under MCIT, or that the individual availed the 10% OSD. Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement.
Total destruction The replacement cost to restore the property to its normal operating condition, but in no case shall the deductible loss be more than the net book value of the property as a whole, immediately before casualty.

(2) he has purchased or has entered into an unconditional contract, binding on both parties thereto, to purchase it and has not yet received it (3) he owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange (4) he has an option to purchase or acquire it and has exercised such option; or (5) H e has ri ghts or w arrants to subscribe to it and has exercised such rights or warrants provided however, that a person shall be deemed to own securities only to the extent he has a net long position in such securities (SEC Reg Code RA 8799) . c. Abandonment losses in petroleum operation and producing well (1) In case a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction. (2) I n c a s e a p r o d u c i n g w e l l i s abandoned, the unamortized cost
77 2008 CENTRALIZED BAR OPERATIONS thereof, as well as the undepreciated cost of equipment directly used therein, shall be allowed as deduction in the year the well, equipment or facility is abandoned. d. Losses due to voluntary removal of building incident to renewal or replacements - deductible expense from gross income. e. Loss of useful value of capital assets due to charges in business conditions deductible expense only to the extent of actual loss sustained (after adjustment for improvement, depreciation and salvage value) f. Losses from sales or exchanges of property between related taxpayers as provided for under Sec. 36 (B) of the NIRC, losses of this nature is not deductible but gains are taxable. g. Losses of farmers if incurred in the operation of farm business, it is deductible. h. Loss in shrinkage in value of stock if the stock of the corporation becomes worthless, the cost or other basis may be deducted by the owner in the taxable year in which the stock became worthless. Any amount claimed as a loss on account of shrinkage in value of the stock through fluctuation in the market or otherwise cannot be deducted from gross income.
Bad Debts
Shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. REQUISITES FOR DEDUCTIBILITY (R.R. No. 5-99 as amended by R.R. No. 25-2002 dated November 19, 2002) a) b) c) Existing indebtedness due to the taxpayer which must be valid and legally demandable; Connected with the taxpayer's trade, business or practice of profession; Must not be sustained in a transaction entered into between related parties enumerated under Section 36(B) of Tax Code; Actually ascertained to be worthless and uncollectible as of the end of the taxable year; and Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year. ASCERTAINED TO BE WORTHLESS AND UNCOLLECTIBLE What does actually ascertained to be worthless means? In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. The factors to be considered include, but are not limited to the following: a) The debtor has no property nor visible income; b) The debtor has been adjudged bankrupt or insolvent; c) Collateral shares have become worthless; and d) There are numerous debtors with small amounts of debts and further action on the accounts would entail expenses exceeding the amounts sought to be collected
d)
e)
78 Income Taxation Is good faith enough? NO. There are two (2) requisites before a taxpayer may charge off and deduct a debt. He must ascertain the debt to be worthless in the year for which the deduction is sought, and that in doing so, he acted in good faith. However, good faith on the part of the taxpayer is not enough. He must show also that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. Where a taxpayer has failed to attach to his tax returns a statement showing the propriety of the deductions therein made for alleged bad debts, the account written off will be disallowed (Collector vs. Goodrich International Rubber G.R. No. L-22265 December 22, 1967). When is there good faith? There are two requisites before a taxpayer may charge off and deduct a debt. He must ascertain the debt to be worthless in the year for which the deduction is sought, and that in doing so, he acted in good faith. However, good faith on the part of the taxpayer is not enough. He must show also that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. Where a taxpayer has failed to attach to his tax returns a statement showing the propriety of the deductions therein made for alleged bad debts, the account written off will be disallowed (Collector vs. Goodrich International Rubber Co., 21 SCRA 1336). General rule: The determination by the Commissioner of Internal Revenue as to the worthlessness of bad debt is adequate: Exceptions: In no case may a receivable from an insurance or surety company be written off from the taxpayers books and claimed as bad debts deduction UNLESS such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner (R.R. No. 25-2002). In case of banks, the Commissioner of Internal Revenue shall determine whether or not bad debts are worthless and uncollectible in the manner provided under RR 5-99.Without prejudice, the taxpayer shall
submit to the BSP/Monetary Board the written approval of the writing off of the indebtedness from banks books of accounts at the end of the taxable year (R.R. No. 25-2002). Equitable Doctrine of Tax Benefit A recovery of bad debts previously deducted from gross income constitutes taxable income if in the year the account was written off, the deduction resulted in a tax benefit (Tax Benefit Rule). ACTUALLY CHARGED OFF AT THE END OF TAXABLE YEAR This phrase means that the amount of money lent by the taxpayer (in the course of his business, trade or profession) to his debtor had been recorded in his books of account as a receivable has actually become worthless as of the end of the taxable year, that the said receivable has been cancelled and written-off from the said taxpayer's books of account. A mere recording in the taxpayer's books of account of estimated uncollectible accounts does not constitute a writeoff of the said receivable, hence, shall not be a valid basis for its deduction as a bad debt expense. In no case may any bad debt deduction be allowed unless the facts pertaining to the money or property lent and its cancellation or write-off from the taxpayer's accounting records, after having been determined that the same has actually become worthless, have been complied with by the taxpayer (Sec. 2, RR 5-99 as amended by RR 25-02). What is the rule if the debts due to a taxpayer arise out of securities? The debts due a taxpayer may arise out of securities held. BUT in a case where securities are ascertained to be worthless and charged off within the taxable year, and are capital assets, the loss to the taxpayer (other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits) will not be treated as bad debts, but as capital loss on the last day of the taxable year. The date that the securities were written off is immaterial [Sec. 34 (E) (2)].
Depreciation
The gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. The term also applies to amortization of intangible assets, the use of which in trade or business is of limited duration. Requisites for Deductibility: a) The allowance for depreciation must be reasonable. b) It must be for property arising out of its use in the trade or business, or out of its not being used temporarily during the year. The allowance must be charged off within the taxable year. Schedule on the allowance must be attached to the return.
c) d)

ALLOWANCE FOR DEPRECIATION MUST BE REASONABLE Agreement as To Useful Life on Which Depreciation Rate Is Based The Bureau of Internal Revenue and the taxpayer may agree in writing on the useful life of the property to be depreciated. The agreed rate may be modified if justified by facts or circumstances. The change shall not be effective before the taxable year on which notice in writing by certified mail or registered mail is served by the party initiating. Special Types of Depreciation: 1. Petroleum Operations Depreciation of all properties directly related to production of petroleum shall be allowed under straight-line (SL) or declining balance (DB) method May shift from DB to SL method Useful life: 10 years or shorter life as allowed by the Commissioner Useful life of property not directly related to production: 5 years under straightline method Depreciation on all properties in mining operations other than petroleum operations at the normal rate if expected life is less than 10 years. If expected life is more than 10 years, depreciation shall be any number of years between 5 years and the expected life.
79 2008 CENTRALIZED BAR OPERATIONS the time. Consequently, of the value of the depreciation of the car may be considered as business related, while thereof represents nondeductible personal expense. The same is true as regards the salary of petitioners driver (Jamir vs. Collector, CTA Case No. 443, November 28, 1959). What if the property was not being used temporarily during the year? Depreciation is allowed not only on depreciable property that is used in the trade, business or profession of the taxpayer, but also on depreciable property that is not being used temporarily during the year (Conwell Bros. Co. vs. Collector, CTA Case No. 411). ALLOWANCE CHARGED OFF DURING THE TAXABLE YEAR-SCHEDULE OF ALLOWANCE ATTACHED TO THE RETURN Who can claim depreciation expense? The person who sustains an economic loss from the decrease in property value due to depreciation gets the deduction. Ordinarily, this is the person who owns and has a capital investment in the property. Nonresident alien or Foreign Corporation A reasonable allowance for the deterioration of property arising out of its use or employment, in trade or business, shall be permitted only when such property is located within the Philippines. Property Held by One Person for Life with the Remainder to another Person The deduction shall be computed as if the life tenant was the absolute owner of the property and, as such, the expense shall accrue to him. Property Held in Trust Allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument created or in the absence of such provisions, on the basis of the trust income allowable to each. Methods of Depreciation The term "reasonable allowance" shall include (but not limited to) an allowance computed in accordance with the regulations prescribed by the Department of Finance under any of the following methods: a) b) c) d) Straight-line method Declining-balance method Sum of the years-digit method Any other method which may be prescribed by the Department of Finance upon recommendation of the Commissioner of Internal Revenue.
2.
Mining Operations
3.
Depreciation deductible by non-resident aliens engaged in trade/business or nonresident corporation only when such property is located in the Philippines.
PROPERTY USED IN TRADE OR BUSINESS There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. The rationale for this is that property gradually approaches a point where its usefulness is exhausted. What if the property is used in business and for personal purposes? The depreciation expense must be pro-rated; only the portion attributable to business use is deductible. From the evidence, it appears that the car of the petitioner was used more for business than for personal purposes. He was, and is until now, a law practitioner, a law professor in two law schools and was, during the year in question, engaged in business as an importer. He had only one car at
80 Income Taxation
Depletion of Oil and Gas Wells and Mines

Exhaustion of natural resources as in mines, oil, and gas wells. The natural resources are called wasting assets. As the physical units representing such resources are extracted and sold, such assets move towards exhaustion. Known as cost of depletion allowance for mines, oil gas wells and other natural deposits starting calendar year 1976 and fiscal year beginning July, 1975. To Whom Allowed: Only mining entities owning economic interest in mineral deposits. Economic interest means interest in minerals in the place of investment therein or secured by operating or contract agreement for which income is derived, and return of capital expected, from the extraction of mineral. Mere economic or pecuniary advantage to be derived by production by one who has no capital investment in the mineral deposit does not amount to economic interest. Features: 1. Intangible exploration and development drilling cost in petroleum exploration shall be treated either as: a. b. revenue expenditures; or capital expenditures
2. The total amount deductible for exploration and development expenditures shall not exceed 50% of net income from mining operation. The excess shall be carried forward to the succeeding year until fully deducted.
Charitable and Other Contributions

Contributions and donations of a taxpayer may be deductible in full, or deductible, but subject to limitations. Requisites for Deductibility: a) The contribution or gift must be actually paid or made to the Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or association specified in the Tax Code; It must be made within the taxable year It must not exceed 10% (individual) or 5% (corporation) of the taxpayers taxable income before charitable contributions. It must be evidenced by adequate receipts or records The amount of charitable contribution of property other than money shall be based on the acquisition cost of said property. Deductible In Full Recipient is an accredited nongovernment organization, organized/ operated for (purposes): a. Scientific b. Educational c. Cultural d. Character e. building/youth and sports development f. Charitable g. Social welfare h. Health i. Research Deductible Subject To Limitation Recipient is an accredited domestic corporation or association organized/operated for (purposes): a. Scientific b. Educational c. Cultural d. Youth and sports development e. Charitable f. Social welfare g. Religious h. Rehabilitation of Veterans If the conditions in Table A is not complied with: Subject to limitation: a. Individual - 10% taxable income from trade business or profession before contribution b. Corporation - 5% taxable income from trade business or profession before contribution
b) c)
d) e)
2 And satisfying the

following conditions: The donation must be utilized not later than the 15th day of the 3rd month following the close of its taxable year The administrative expense must not exceed 30% of total expenses. Upon dissolution, assets must be distributed to another non-profit domestic corporation or to the state.
Deductible In Full
Deductible Subject To Limitation
Recipient is a foreign or Non-government international Organizations organization with an 1 agreement with the Philippine Government on deductibility, or in accordance with special law.

Deductible In Full Recipient is: a. Government of the Philippines b. Any of its agencies or political subdivision c. Any fully-owned government corporation Deductible Subject To Limitation Recipient is: a. Government of the Philippines b. Any of its agencies or political subdivisions For a non-priority activity in any of the areas mentioned in A, and exclusively for a public purpose.
81 2008 CENTRALIZED BAR OPERATIONS PAID OR MADE TO ENTITIES SPECIFIED UNDER THE TAX CODE NOT TO EXCEED 10% (INDIVIDUAL) OR 5% (CORPORATION) OF TAXABLE INCOME For the accredited NGO: Not later than the 15th day after the close of the taxable year in which the contribution is received, makes utilization directly for the active conduct of its activities consisting of the purposes or functions for which it is organized and operated; administration expenses do not exceed the level prescribed by the Secretary of Finance and not exceeding 30% of the total expenses; the assets, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purposes, or to the State for public use, or to be distributed by a court to another organization to be used in such manner that will accomplish the general purposes of the dissolved corporation. IF PROPERTY IS CONTRIBUTED, MUST BE BASED ON ACQUISITION COST Imposed in order to stop the practice of some unscrupulous taxpayers of contributing property based on its fair market value to foundations for purposes of claiming huge deductions as charitable contributions deductible in full.
3 For priority activity in:

1. 2. 3. 4. 5. Science Education Culture Health Economic Development 6. Human Settlement 7. Youth and Sports Development
Research and Development

Research and development costs are for improvements of processes and formula as well as the development of improved or new products. Research and development costs may be expenditures: a. For acquisition or improvements of property subject to depreciation or depletion used in research and development; Other research and development costs. TAX TREATMENT Either as: 1. Revenue Expenditures Requisites: a. Paid or incurred during the taxable year; b. Ordinary and necessary expenses in connection with trade business or profession; and c. Not chargeable to capital account. 2. Deferred Expenses Requisites: a. Paid or incurred in connection with trade, business, or profession; b. Not treated as expense; and c. Chargeable to capital account but not chargeable to property subject to depreciation or depletion. Amount deductible: If treated as a deferred expense, the research and development shall be amortized over a period of not less than 60 months. Exclusion from Research And Development Expenditures: 1. Any expenditure for the acquisition or improvement of land or for the improvement of property to be used in connection with research and development subject to depreciation and depletion. 2. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral including oil or gas.
b.
82 Income Taxation
Pension Trust Contributions

A deduction applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. This deduction is purely business in character. Requisites for Deductibility: a) The employer must have established and funded a pension or retirement plan to provide for the payment of reasonable pensions to his employees; The pension plan is reasonable and actuarially sound; The amount contributed must be no longer subject to the control and disposition of the employer; The payment has not yet been allowed as a deduction; and The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. provides that before availing of the privilege, a certificate of tax exemption for reasonable private benefit plan must be obtained. Summary of Rules on Retirement Benefit Plans/ Pension Trust 1. 2. Exempt from Income Tax employees trust under Sec. 60(B) Exclusion from Gross Income amount received by the employee from the fund upon compliance of certain conditions under Sec. 32(B)(6)
b) c)
d) e)
PENSION OR RETIREMENT PLAN ESTABLISHED AND FUNDED BY EMPLOYER Kinds of Private Retirement Benefit Plans a. b. Trusteed plan Non-trusteed plan/insured plan Premiums paid by employer for the life insurance plans in accordance with R.A. No. 7641 can be claimed by employer as deductible business expense Insurance premiums paid by an employer client-company for group plan are deductible as business expense under Section 34(A) of Tax Code. REASONABLE AND ACTUARIALLY SOUND Reasonable Private Benefit Plan [R.A. No. 4917 and Section 32(B)(6)(a) of the Tax Code]
The rules in the law on deduction for pension payments to employees apply to a pension plan that is funded. An employer does not provide for pension for his employees in his initial years of operations. A pension plan is usually set up after some years of operations have gone by, when the employer is already financially capable of providing benefits to his employees. Since the benefits from any pension plan consider the length of service of the employee, the plan should consider the services of the employees who were already with the employer even before the plan was set up. Such past services will require a lump sum payment to the pension fund; this is called past-service cost. For each year after the pension plan was set up, there should be payment to the fund for pension for the services rendered during the year by the employees. This is called present service cost. LIMITATIONS ON DEDUCTIONS Contribution made to a pension trust may be claimed as deduction in the following manner: a. amount contributed for the present service cost- 100% deductible b. Amount contributed for the past service cost- 1/10 of the amount contributed is deductible in the year the contribution is made, the remaining balance will be amortized equally over 9 consecutive years. NON-DEDUCTIBLE EXPENSES Specific Items (Section 36): 1. 2. Personal, living or family expenses because these are personal expenses; Amount paid out for new buildings or for permanent improvements, or betterment made to increase the value of any property or estate - because these are capital expenditures except that intangible drilling and development cost incurred in petroleum operations are deductible; Amount expended in restoring property or in making good the exhaustion thereof for which
means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for officials or employees or both for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.
NOTE: Section 6 of R.R. No. 1-68 as amended by R.R. No. 1-83 which implement R.A. No. 4917
3.

an allowance has been made because these are capital expenditures; 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy because these are items not normally subject to income tax and therefore not deductible. 5.
83 2008 CENTRALIZED BAR OPERATIONS Losses from sales or exchanges of property between related taxpayers. Tax Consequences under Sec. 36 (B): The following are not deductible: 1. 2. 3. Interest expense [Sec. 34 (B)(2)] Bad debts [Sec. 34 (E)(1)] Losses from sales or exchanges of property [Sec 36 (B)]
Situs/Source of Income
Situs/Source of Income
A. C L A S S I F I C A T I O N O F I N C O M E ACCORDING TO SOURCE a. b. c. Income derived from sources within the Philippines Income derived from sources without the Philippines Income derived from source partly within and partly without the Philippines d. b. trademark, trade brand or other like property or right use of or the right or privilege to use in the Philippines any industrial, commercial or scientific equipment supply of scientific, technical, industrial or commercial knowledge or information supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property/right in (a) such equipment or (b) in knowledge/information in (c) supply of services by a nonresident person or his employee in connection with the use of property/rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme the use of or the right to use:
c.
B. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES 1. 2. interests dividends a. b. From domestic corp. from foreign corp. (unless less than 50% of the gross income of such foreign corp. for the 3-yr. period ending with the close of the taxable year preceding the declaration of such dividends was derived from sources within the Philippines) only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.
e.
f.
3. 4.
services (compensation for labor/personal services) rentals and royalties (from property or use of property located in Philippines or interest therein) Including: a. use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, 5.
g.
motion picture films films or video tapes for use in connection with TV tapes for use in connection with radio broadcasting
Gains, profits and income from the sale of real property located in the Philippines
84 Income Taxation 6. Gains, profits, and income from the sale of personal property as determined in Subsection E of Section 42, NIRC.
or operation of trade/business in the Philippines C. G R O S S I N C O M E F R O M S O U R C E S WITHOUT THE PHILIPPINES 1. 2. 3. Interests (other than those derived from sources within the Philippines) Dividends (other than those derived from sources within the Philippines) Compensation for labor or personal services performed without the Philippines Rental or royalties from property located without the Philippines or from any interest in such property including rentals/royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties Gains, profits and income from the sale of real property located without the Philippines
GENERAL RULE: Gains, profits, and income from the sale of personal property, subject to the following rules: PLACE OF PLACE PURCHASE OF SALE Philippines Abroad EXCEPTION: 1. Gain from the sale of shares of stock in a domestic corporation - treated as derived e n t i rely from sources within the Philippines regardless of where the said shares are sold. Gains from the sale of personal property: o produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines Abroad TREATMENT Income from without
Philippines Income from within
4.
2.
5.
Treated as derived partly from sources within and partly from sources without the Philippines.
ALLOWABLE DEDUCTIONS FROM GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES Gross Income from Without the Phils. Worldwide Gross Income X Unallocated Expenses
ALLOWABLE DEDUCTIONS FROM GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES GENERAL RULE: Deductions: expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business/trade conducted exclusively in the Philippines which cannot definitely be allocated to some items or class of GI. Such deductions are allowed only if fully substantiated by all information necessary for its calculation. Ratable part formula Philippines Gross Income Worldwide Gross Income X Unallocated Expenses
EXPENSES TO BE ALLOCATED TO INCOME FROM WITHOUT Deductions: expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of expenses, interests, losses and other deductions which cannot definitely be allocated to some items or class of gross income. D. INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES 1. Items of gross income in (A) and (B) above shall be allocated or apportioned to sources within or without the Philippines. Gross Income (within and without the Philippines) Less: Deductions Taxable Income Deductions where items of gross income are separately allocated to sources within the Philippines and in case of GI derived from sources partly within and partly without the Philippines - expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of expenses, interests, losses and other deductions which cannot
2.
EXPENSES TO BE ALLOCATED TO INCOME FROM WITHOUT Exception: No deduction for interest paid/ incurred abroad is allowed unless the indebtedness was actually incurred to provide funds for use in connection with the conduct

definitely be allocated to some items or class of Gross Income. 3. Gains, profits and income from the sale of personal property produced by the taxpayer within and sold without the Philippines or produced by the taxpayer without and sold within the Philippines shall be treated as derived partly from without the Philippines Gains, profits and income from the purchase of personal property within and sold without the Philippines or from the purchase of personal property without and sold within the Philippines, shall be treated as derived entirely from sources within the country in which sold. 5.
85 2008 CENTRALIZED BAR OPERATIONS Gain from sales of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. Transfer by a nonresident alien or a foreign corporation to anyone of any shares of stock issued by a domestic corporation shall not be made in its book, unless:
6.
4.
a. Transferor filed a bond with the

Commissioner, or
b. Commissioner certified that the taxes

imposed and due on the gain realized have been paid. It is the duty of transferor and the corporation to advise the transferee of the requirements.
Accounting Methods
Accounting Methods
Accounting Periods
PERIOD FOR ITEM OF INCOME
ITEMS OF GROSS INCOME Included in the gross income for the taxable year in which received by the taxpayer, unless, under As a methods of general accounting rule permitted under Section 43, any such amounts are to be properly accounted for as of a different period. included in computing taxable income for the taxable period in In case which falls the date of of his death, death amounts accrued of the up to the date of taxhis death if not payer otherwise properly includible in respect of such period or a prior period DEDUCTIONS AND CREDITS Taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. Taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period.
GENERAL RULE Taxable income is computed upon the basis of taxpayers annual accounting period (fiscal or calendar year) in accordance with the method of accounting employed.
If no method of accounting is employed or method does not clearly reflect the income, computation shall be made in accordance with such method as the opinion of the Commissioner clearly reflects the income. Taxable income is computed based on calendar year if: 1. 2. 3. 4. accounting period is other than a fiscal year; taxpayer has no accounting period; taxpayer does not keep books; or taxpayer is an individual.
Fiscal year: accounting period of 12 months ending on the last day of any month other than December Calendar year: accounting period from January 1 to December 31
86 Income Taxation CHANGE OF ACCOUNTING PERIOD If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one
fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47.
Methods of Accounting
CASH METHOD Recognition of income and expense dependent on inflow or outflow of cash ACCRUAL METHOD Method under which income, gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income. Examples: Interest or rent income earned but not yet received. Rent expense accrued but not yet paid Wages due to workers but remain unpaid 2. 1. INSTALLMENT BASIS Sales of Dealers in Personal Property Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. Sales of Realty and Casual Sales of Personality In cases of: a) casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or b) sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price How income reported? In the same manner as in sales of dealer in personal property above. What does initial payment mean? The payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. 3. Sales of Real Property Considered as Capital Asset by Individuals. An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under (2) above may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Change from Accrual to Installment Basis If a taxpayer entitled to the benefits of Subsection (1) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or
ACCOUNTING FOR LONG TERM CONTRACTS 'long-term contracts' mean building, installation or construction contracts covering a period in excess of one (1) year. How is income reported? Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. The Return The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. If upon completion of a contract, it is found that the resulting taxable net income has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. Allocation of Income and Deductions In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines)
87 2008 CENTRALIZED BAR OPERATIONS owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.
Withholding Taxes
Withholding Taxes
General Concepts
investigation or reinvestigation/ reconsideration. If above remedies are availed of, the expenses not previously subjected to withholding tax will be allowed as a deduction for income tax purposes. Section 6 of R.R. 17-2003: items for deduction representing return of capital such as those pertaining to purchase of raw materials forming part of finished product or purchases of goods for resale, shall be allowed as deductions upon the withholding agents payment of the basic withholding tax and penalties incident to non-withholding or underwithholding. Is withholding tax a type of tax? Withholding tax is not a tax, although there is a word tax in it. Rather, it is a manner of collecting a kind of tax (advance payment of tax due) which may be INCOME TAX, VAT, PERCENTAGE TAX, etc. In two natures: final withholding tax and creditable withholding tax (Large Taxpayers Quick Guide, Volume II by Large Taxpayers Assistance Division I, May 2006). Rationale: 1. 2. To provide the taxpayer a convenient manner to meet his probable income tax liability. To ensure the collection of the income tax which could otherwise be lost or substantially reduced through the failure to file the corresponding returns. To improve the governments cash flow. To minimize tax evasion, thus resulting in a more efficient tax collection system. Withholding Tax at Source: a. Final Withholding Tax
This practice which is also known as taxation at source, refers to the requirement that taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations and/or persons from payments made to payeescorporation and/or persons for the former to pay the same directly to the BIR. Thus, the taxes are collected practically at the time the transaction is made or when the taxable act occurs. WITHHOLDING TAXES HAVE BEEN PAID The obligation of the payor to deduct or withhold the tax arises at the time an income payment is PAID or PAYABLE or ACCRUED or recorded as an expense or asset whichever is applicable in the payors books, WHICHEVER COMES FIRST (Section 2.57.4 of R.R. 2-98 as amended by Section 4 of R.R. 12-2001). Remedies of withholding agent if expense is disallowed (R.R. 2-98 as amended by R.R. 14-2002): a. Pay the tax due thereon, including the interest incident to failure to withhold tax, and surcharges, if applicable, at the time of the audit investigation or reinvestigation/ reconsideration provided the payees reported the income. Pay the amount that should have been withheld, including the interest incident to the failure to withhold the tax, and surcharges if applicable, at the time of the audit investigation or reinvestigation/ reconsideration if the payees did not report the income and pay the tax. In case of under withholding, pay the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges if applicable, at the time of audit
b.
3. 4.
c.
Kinds: 1.
88 Income Taxation b. 2. Creditable Withholding Tax (Expanded withholding tax) 3. 4.
Withholding Tax on Creditable Value-Added Tax Withholding of Percentage Tax
W i t h h o l d i n g Ta x o n C o m p e n s a t i o n (Withholding Tax on Wages and Fringe Benefit Tax )
The Withholding Agent

What taxes are required to be withheld? Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the final tax on passive income, capital gains tax on sales on shares of stocks and real properties, fringe benefit tax and the 10% tax on cash rewards of informers shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as returns and payment of taxes withheld at source (Section 57 (A) NIRC). How are taxes withheld and remitted to the BIR? Taxes deducted and withheld by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, revenue district officer, collection agent, or duly authorized treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers (Section 58A NIRC). Role of Withholding Agent In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of tax in order to ensure its payments; the payor is the taxpayer - he is the person subject to tax imposed by law; and the payee is the taxing authority. May a withholding agent in such capacity, deemed a taxpayer? No. The withholding agent is merely a tax collector, not a taxpayer. An income taxpayer covers all persons who derive taxable income. If a withholding agent was assessed for deficiency withholding tax under the Code, as such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer (Commissioner of Internal Revenue vs. Court of Appeals G.R. No. 104151 March 10, 1995). Is taxpayer answerable for the nonperformance of the withholding agent? NO. Unless there is collusion and bad faith on the part of the taxpayer. The taxpayer could not be deemed to have evaded the tax had the withholding agent performed its duty. Note: As a matter of business administration, certain mechanical details of the withholding process may be handled by representatives of the employer. Thus, in the case of a corporate employer with branch offices, the branch manager or other representative may actually, as a matter of internal administration, withhold the tax or prepare the statements required under the law. Nevertheless, the legal responsibility for withholding, paying and returning the tax and furnishing such statements rests with the corporate employer (R.R. 2-98, as amended). Persons required to deduct or withhold a) In general, any juridical person, whether or not engaged in trade or business. b) An individual, with respect to payments made in connection with his trade or business. c) However, insofar as taxable sale, exchange or transfer or real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents. d) All government offices including GOCCS as well as provincial, city and municipal governments and barangays. Nature of Withholding Agents Liability: The withholding agent is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittance (Commissioner vs. Procter and Gamble, G.R. No. 66838, December 2, 1991). Consequences for Failure to Withhold: 1. 2. Liable for surcharges and penalties; Liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted (Sec. 251, 1997 NIRC); and Any income payment which is otherwise deductible from the payors gross income will not be allowed as a deduction if it is shown that the income tax required to be withheld is not paid to the BIR (Sec. 2.58.5, R.R. No. 2-98).
3.
Withholding Tax Source

FINAL WITHHOLDING TAX SYSTEM CREDITABLE WITHHOLDING TAX SYSTEM Taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the payee on the said income. otherwise, there would be a violation of prohibited double taxation. 3. The liability for the payment of the tax rests primarily on the payor as withholding agent. 4. The payee is not required to file an income tax return for the particular income subjected to FWT. It is the withholding agent who files the return. 5. The rate of the final tax is multiplied to the gross income. Thus, deductions and/or personal and additional exemptions are not allowed. Time to Withhold Tax at Source: Arises at the time an income is paid or payable, whichever comes first. The term payable refers to the date the obligation becomes due, demandable or legally enforceable (Sec. 2.54.4 R.R. No. 2.98). E X E M P T I O N S F R O M C R E D I TA B L E WITHHOLDING TAX (Large Taxpayers Quick Guide Volume II by Large Taxpayers Assistance Division I, May 2006): 1. National Government and its instrumentalities, including provincial, city or municipal governments Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: a. sale of real property by corporation registered and certified by HLURB or HUDCC as engaged in social housing project where the selling price of house and lot or lot only does not exceed P 300,000 or such adjusted amount of selling price for socialized housing as may later be determined and adopted by HLURB, as provided under R.A. No. 7916 and Omnibus Investment Code of 1987 corporation registered with BOI and enjoying tax exemption from income tax provided under R.A. No. 7916 and Omnibus Investment Code of 1987
AMOUNT OF TAX COLLECTED The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income [Sec. 2.57 (a), R.R. No. 2-98].
WHO IS PRIMARILY LIABLE The liability for payment Liability rests upon the of the tax rests primarily taxpayer on the payor as the withholding agent. NEED TO FILE A RETURN The payee is not required to file an income tax return for the particular income. The income recipient is still required to file an income tax return and/ or pay the difference between the tax withheld and the tax due on the income.
COVERAGE All income subject to Those income final taxes (e.g. payments covered passive, gross by the expanded income of NRAwithholding tax (R.R. NETB) 2-98) Examples: Fringe benefit Informers reward to - Professional persons instrumental fees, talent fees in the discovery of - Fees paid to violations of the medical NIRC and the practitioners discovery and - Income seizure of smuggled payments to goods. partners of GPP
2.
b. FINAL WITHHOLDING TAX 1. It is constituted as a full and final payment of the income tax due from the payee on a particular type of income subject to final withholding tax (FWT). The finality of the withholding tax is limited only to the payees income tax liability and does not extend to other taxes that may be imposed on said income. 2. The income subjected to final income tax is no longer subject to the net income tax; 3.
Corporations which are exempt from income tax under Section 30 of NIRC
However, income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subjected to withholding tax as prescribed in existing regulations. NOTE: Payments to PAGCOR are subjected to withholding tax.
90 Income Taxation Tax-Free Covenant BOND [Sec. 57(C)] Covenant Bonds bonds, mortgages, deeds of trust and other similar obligations of domestic/ resident foreign corporation, which contain a contract/provision by which the obligor agrees:
Income of Recipient [Sec. 58 (d)] Income which any creditable tax is required to be withheld at source shall be included in the return of its recipient. The excess of the amount of tax withheld over the tax due on his return shall be refunded to him, subject to Section 204 (abatement, refund/credit taxes). Return on Creditable Withholding Tax The income payor who withheld a creditable income tax should file a return and pay the tax withheld a. Withholding tax on compensation income a. b. b. Monthly return within ten (10) days after the close of the month Annual return On or before January 31 of the succeeding year Monthly return within ten (10) days after the close of the month Annual return on or before March 1 of the succeeding year
1. to pay any portion of the tax imposed upon

the obligee;
2. to reimburse the obligee for any portion of the

tax; or
3. to pay the interest without deduction for any

tax which the obligor may be required/ permitted to pay or to retain therefrom. Obligor shall deduct and withhold a tax equal to 30% of the interest and other payments whether interest or other payments are payable annually or at a shorter period; whether bonds, securities, obligations had been/will be issued/marketed and the interest and other payments paid within and without the Philippines if the interest or other payment is payable to a non-resident alien or a citizen or resident of the Philippines.
Expanded withholding tax
Withholding Tax on Compensation

The method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted the withholding agent. ELEMENTS OF WITHHOLDING ON COMPENSATION: 1. 2. 3. a. b. c. d. e. f. There must be an employer-employee relationship; There must be payment of compensation or wages for services rendered; and There must be a payroll period. Salaries and wages Commissions Tips Allowances Bonuses Fringe Benefits of rank and file employees 5. Compensation Exempted: 1. 2. 3. 4. Remunerations received as an incident of employment Remunerations paid for agriculture/labor Remunerations paid for domestic services Remunerations for casual not in the course of an employer's trade or business. Compensation for services of a citizen, resident of the Philippines, for a foreign government or an international organization Damages Life insurance Amount received by the insured as return of premium Compensation for injuries and sickness
6. 7. 8. 9.
What Constitutes compensation?
10. Income exempt under treaty 11. Thirteenth (13th) month pay and other benefits 12. G S I S , S S S , P h i l h e a l t h a n d o t h e r contributions, FRINGE BENEFIT TAX it is a final withholding tax imposed on the grossed up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees, whether such
Withholding Tax on Compensation Income The income recipient (i.e., employee) is the person liable to pay the income tax, yet to improve the collection of compensation income of employees, the State requires the employer to withhold the tax upon payment of the compensation income.

employer is an individual, professional partnership or corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities. BASIC RULES 1. Fringe benefit given to a rank and file employee (whether under a collective bargaining agreement or not) is not subject to the fringe benefit tax. Fringe benefit given to a supervisory or managerial employee is subject to the fringe benefit tax. De minimis benefit, whether given to rank and file employee or to supervisory or managerial
91 2008 CENTRALIZED BAR OPERATIONS employee is not subject to the fringe benefit tax. What is the tax implication if the employer gives fringe benefits to rank-and-file employees? Fringe benefits given to a rank-and-file employee are treated as part of his compensation income subject to income tax and withholding tax on compensation income, which must be withheld and deducted by his employer from the compensation income of his employee. Who pays the Fringe Benefit Tax? The employer but he is allowed by law to deduct FBT as a business expense in determining his taxable income.
2.
3.
Taxable Fringe Benefits

What are fringe benefits? TWO VIEWS: A. Only those benefits specifically enumerated in the Tax Code and R.R. No. 3-98. All other benefits are subject to regular WTW. B. Fringe benefits subject to FBT are NOT LIMITED only to those explicitly mentioned in the Tax Code and R.R. No. 3-98. FRINGE BENEFIT means any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employees) such as, but not limited to the following: 1. Housing General Rule: The value to the employee of quarters and meals given by the employer shall be added to his compensation subject to withholding. Exception: if living quarter/meals are furnished to an employee for the convenience of the employer. 2. Expense Account 3. 4. Vehicle of any kind Household personnel, such as maid, driver and others
Expenses for the NRF employees which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be taxable as fringe benefits.
5.
Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted.
If the employer lends money ton his NRF employee free of interest or a rate lower than 12% such interest foregone by the employer or the difference of the interest assumed by the NRF employee and the rate of 12% shall be treated as taxable fringe benefit. The benchmark interest rate of 12% remains in effect until revised by a subsequent regulation. The rule shall apply to installment payments or loans with interest rate lower than 12% starting January 1, 1998.
Fixed and variable transportation, representation and other allowances as a general rule, subject to FBT if NONRANK, but not taxable if incurred or reasonably expected to be incurred by employee in the performance of his duties, subject to the following conditions: a. these are ordinary and necessary in the pursuit of employers business and paid or incurred by employee; These expenses are liquidated or substantiated by receipts or other adequate documentation.
6.
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations
Borne by NRF employee in social and athletic taxable fringe benefit of the NRF employee in full. Fixed and variable transportation, representation and other allowances as a general rule, subject to FBT if NON-
b.
7.
Expenses for foreign travel
92 Income Taxation RANK, but not taxable if incurred or reasonably expected to be incurred by employee in the performance of his duties, subject to the following conditions: a. These are ordinary and necessary in the pursuit of employers business and paid or incurred by employee; These expenses are liquidated or substantiated by receipts or other adequate documentation.
GMV OF THE FRINGE BENEFIT REPRESENTS: 1. The whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received; plus The amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of the employee. GMV of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the Grossedup divisor. The Grossedup divisor is the difference between 100% and the applicable rates. YEAR 1998 1999 2000 onwards EMPLOYEE Citizen, RA, NRA-ETBL NRA-NETB Individuals employed by RHQ or RAHQ; OBU; Foreign service contractor or foreign service subcontractor engaged in petroleum operations in the Philippines Individuals working in special economic zones GROSSED UP DIVISOR 66% 67% 68% RATE 34% FWT 33% FWT 32% FWT RATE 32% FWT2000 and onwards 25%FWT
2.
b.
8.
Holiday and vacation expenses
Holiday and vacation expense of the NRF employee borne by his employer shall be treated as taxable fringe benefit.
9.
Educational assistance to the employee or his dependents; For NRF General Rule: taxable fringe benefit Exception: a. b. Education/study is directly connected with employers trade or business; and With a written contract that employee shall remain employed with the employer for a period of time mutually agreed upon by the parties.
GROSSED UP DIVISOR 68% 75%
In case of NRFs dependents, the same is taxable fringe benefit, except when the assistance was provided through a competitive scheme under the scholarship program of the company employer. 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. General rule: Life or health insurance and other non-life insurance are taxable fringe benefit Exception:
85%
15%FWT
The cost of premiums borne by the employer for the group insurance of his NRF employees ; and Contributions of the employer for the benefit of NRF employee to the SSS, GSIS, and similar contributions arising from provisions of any existing law.
FRINGE BENEFITS NOT SUBJECT TO FBT 1. Fringe benefits not considered as gross income a. b. 2. 3. if it is required or necessary to the business of the employer; or If it is for the convenience or advantage of the employer.
STOCK OPTIONS ARE SUBJECT TO FRINGE BENEFIT The basis is the difference between the fair market value and the exercise price at the time of exercise. TAX RATES AND BASE Tax Base: The grossed up monetary value (GMV) of the fringe benefit
Fringe Benefit that is not taxable under Sec. 32 (B) Exclusions from Gross Income Fringe benefits not taxable under Sec. 33 Fringe Benefit Tax: a. Fringe benefits which are authorized and exempted under special laws, such as the 13th month pay and other benefits with the ceiling of P30,000;

b. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and De minimis benefits benefits which are relatively small in value offered by the employer as a means of promoting goodwill, contentment, and efficiency of employees The term Rank and File Employees shall mean all employees who are holding neither managerial nor supervisory position as defined in the Labor Code. In the case of rank and file employees, fringe benefits other than those excluded from gross income under the Tax Code and other special laws, are taxable under the individual normal tax rate. MANAGERIAL/ SUPERVISORY EMPLOYEES It is subject to income tax Subject to fringe benefit tax RANK AND FILE EMPLOYEES
2. Medical cash allowance to dependents of

employees not exceeding P750.00 per employee per semester or P125 per month; To be considered de minimis medical allowance, the following conditions must concur: 1. 2. The amount given to the EE shall be for his own medical expense; The amount actually given and actually spent shall not exceed P10,000 in any given calendar year; name the medical allowance to be granted (As amended by RR 5-08, Rice subsidy is in the amount of P1,500.00);
c.
d.
3. The EE must fully substantiate with or in his
4. Rice subsidy of P1,000.00 or one (1) sack of

50kg. rice per month amounting to not more than P1,000.00 (As amended by RR 5-08, uniform and clothing allowance not exceeding P4,000 per annum);
5. Uniform and clothing allowance not exceeding

P3,000 per annum;
6. Actual yearly medical benefits not exceeding

P10,000 per annum;
7. Laundry allowance not exceeding P300 per

month;
COMPENSATION/SALARIES/WAGES It is subject to income tax FRINGE BENEFITS Part of compensation and subject to income tax, subject to exceptions Income but not compensation hence not taxable
8. Employees achievement awards e.g. for

length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value of not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of paid employees;
DE MINIMIS BENEFITS Income but not compensation hence not taxable
9. Gifts given during Christmas and major

anniversary celebrations not exceeding P3,000 per employee per annum;
10. Flowers, fruits, books or similar items given to

employees under special circumstances; DE MINIMIS BENEFITS NOT SUBJECT TO FBT (R.R. No. 8-2000 and 10-2000):
11. Daily meal allowance for overtime work not

exceeding 25% of the basic minimum wage. Note: Revenue Regulations No. 5-2008 further amended RR Nos. 2-98 and 3-98, as last amended by RR No. 10-2000, with respect to de minimis benefits" not subject to withholding tax, for rank and file employees as well as managerial employees, as follows: (a) Rice subsidy of P1,500 or one(1) sack of 50 kg rice per month amounting to not more than P1,500.00; and (b) Uniform and clothing allowance not exceeding P4, 000 per annum. NOTE: These are not considered as compensation.
1. Monetized unused vacation leave credits of

PRIVATE employees not exceeding (10) days during the year and the monetized value of leave credits paid to government officials and employees General Rule: Paid VL and SL are subject to FBT for NRF Exception: Monetized value of unutilized VL credits of 10 days or less are NOT SUBJECT TO WTW OR FBT However, monetization of SL credits even if not exceeding 10 days are subject to TAX.
94 Income Taxation De minimis benefit exceeds the ceiling prescribed: If given to managerial/supervisory employee a. The excess is within the P30,000 limit under Sec. 32(b)(7)(e) of the NIRC - the excess is not taxable b. The excess is beyond the P 30,000 limit excess subject to FBT If given to rank and file employee a. The excess is within the P30,000 limit under Sec. 32(b)(7)(e) of the NIRC - the excess is not taxable b. The excess is beyond the P30,000 limit excess is taxable as salary or compensation income. Representation and Transportation Allowance (RATA) and Personnel Economic Relief Allowance (PERA) are not subject to Income Tax and Withholding Tax. Additional Compensation Allowance (ACA) is part of other benefits under Sec. 32(b)(7)(e) of the Tax Code of 1997 which are excluded from gross compensation income provided the total amount of such benefits does not exceed P30,000. It is also not subject to
withholding tax pending its formal integration into basic pay. Compensation Exempted 1. 2. 3. 4. 5. Remunerations received as an incident of employment Remunerations paid for agriculture/labor Remunerations paid for domestic services Remunerations for casual not in the course of an employer's trade or business. Compensation for services of a citizen, resident of the Philippines, for a foreign government or an international organization Damages Life insurance Amount received by the insured as return of premium Compensation for injuries and sickness
6. 7. 8. 9.
10. Income exempt under treaty 11. Thirteenth (13th) month pay and other benefits 12. G S I S , S S S , P h i l h e a l t h a n d o t h e r contributions
Withholding of Percentage Tax

Bureaus, offices, instrumentalities of the government, including GOCCs as well as their subsidiaries, provinces, cities, municipalities making any money payment to private individuals, corporations, partnership or association are required to deduct and withhold taxes due from the payees on account of such money payment.
Returns and Payments

Returns and Payments
Filing of Tax Return and Payment of Tax

Tax Return This is a report made by the taxpayer to the BIR of all gross income received during the taxable year, the allowable deductions including exemptions, the net taxable income, the income tax rate, the income tax due, the income tax withheld, if any, and the income tax still to be paid or refundable. PERSONS REQUIRED TO FILE INCOME TAX RETURN: A. Individual 1. Resident citizen; 2. 3. 4. 5. Non-resident citizen on income from within the Phil.; Resident alien on income from within the Phil.; NRAETB on income from within the Phil. An individual (citizens/aliens) engaged in business or practice of a profession within the Phil. regardless of the amount of gross income; Individual deriving compensation income concurrently from two or more employers at any time during the taxable year; and
6.

7. Individual whose pure compensation income derived from sources within the Phil. exceeds P60, 000.
Individuals Exempt from Filing Income Tax Return: 1. Individual whose gross income does not exceed total personal and additional exemptions; Individual with respect to pure compensation income derived from sources within the Philippines, the income tax on which has been correctly withheld; Individual whose sole income has been subjected to final withholding income tax; and Individual who is exempt from income tax.
Who will assume the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent return. Estate and Trust with gross income of P20,000 Return is filed by the fiduciary The ITR shall be filed on or before April 15 The income tax return shall be signed and filed by the principal officer of the partnership. The ITR shall be filed on or before April 15 Each GPP shall file in duplicate, a return of its income (except those income exempt) Shall set forth: a. b. c. d. items of gross income and deductions allowed; names of partners; TIN; and Address and share of each partner.
B. Taxable Estate and Trust
2.
C. General Professional Partnership
3.
4.
I n d i v i d u a l s R e q u i r e d To F i l e A n Information Return: Individuals not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner. Special Rules Return of Husband and Wife: File one (1) return for the taxable year if the following requisites are complied; a. b. Married individuals (citizens, resident or nonresident aliens) Do not derive income purely from compensation.
D. Corporation 1. 2. Not exempt from income tax; and Exempt from income tax under Sec. 30 of NIRC but has not shown proof of exemption. Corporation subject to tax having existed during the taxable year, whether with income or not; Corporation in the process of liquidation or receivership; Insurance company doing business in the Philippines or deriving income therein; and Foreign corporation having income from within the Philippines
If impracticable to file one return: each spouse shall file a separate return of income but the return so filed shall be consolidated by the Bureau for the purpose of verification for the year. Income of unmarried minors derived from property received by the living parent shall be included in the return of the parent, except: a. ii. when donors tax has been paid on such property, or when transfer of such property is exempt from donors tax.
3.
4. 5.
Unmarried Minor:
6.
How is the return of the Corporation filed? The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.
Persons under Disability: If a taxpayer is unable to make his own return, it may be made by his: a. b. c. d. duly authorized agents; representative; by guardian; or other person charged with the care of his person or property;
96 Income Taxation
Substituted Filing
Substituted filing is when the employers annual return may be considered as the substitute Income Tax Return (ITR) of employee inasmuch as the information provided in his income tax return would exactly be the same information contained in the employers annual return. How Is Substituted Filing Different From Non-Filing? Substituted Filing an individual taxpayer although required under the law to file his income tax return, will no longer have to personally file his own income tax return. But instead the employers annual information return filed is considered the substitute income tax return of the employee inasmuch as the information in the employers return is exactly the same information contained in the employees return. Non-filing applicable to certain types of individual taxpayers who are not required under the law to file an income tax return. Example: employee whose pure compensation income does not exceed P60,000 and has only one employer for the taxable year and whose tax withheld is equivalent to his tax due. Substituted filing of Income tax Returns by Employees Receiving Purely Compensation Income [Section 4, R.R. No. 3-2002; RMC 01-03] Requisites: 1. The employee receives purely compensation income (regardless of amount) during the taxable year; The employee receives the income only from one employer during the taxable year; The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; The employee's spouse also complies with all three (3) conditions stated above; The employer files the annual information return (BIR Form No. 1604-CF); and The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each employee. 3. 2. not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return; 3. Employees whose monthly gross compensation income does not exceed P5,000 or the statutory minimum wage, whichever is higher, and opted for nonwithholding of tax on said income; Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final tax; Individuals receiving purely compensation income from a single employer although the income tax of which has been correctly withheld, but whose spouse falls under 1 to 4 above; Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, nonprofession-related income.
4.
5.
6.
Note: Non-filing of ITR, for employees who are qualified for the substituted filing shall be OPTIONAL for the taxable year 2001, the returns for which shall be filed on or before April 15, 2002. Thereafter, substituted filing where applicable shall be MANDATORY (Sec 5 R.R. No. 3-2002). Requirement of Banks for Submission of an ITR for Loan or Credit Card Applications: Banks may require the submission of BIR Form No. 1700 (for employees not entitled to substituted filing of ITR). However, for employees entitled to substituted filing of ITR, the submission of the Joint Certification will suffice. Joint Certification - It is a sworn statement made by the employer and employee, which serve the following purposes: 1. It contains the employee's consent that BIR Form No. 1604CF may be considered his substituted return, in lieu of BIR Form No. 1700, which the employee no longer filed. It contains the employer's certification that he has reported the employee's income to the BIR and that he has remitted the taxes on the employee's income, as indicated in BIR Form No. 1604-CF. It serves as proof of financial capacity in case the employee decides to apply for a bank loan or a credit card, or for any other purpose, as if he had in fact filed a BIR Form No. 1700.
2. 3.
4. 5. 6.
Individuals Not Qualified For Substituted Filing (Still Required To File): 1. Individuals deriving compensation from two or more employers concurrently or successively during the taxable year; Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has
2.

TIME AND PLACE OF FILING INDIVIDUALS 1. Legal residence authorized agent bank; Revenue District Officer; Collection agent or duly authorized treasurer; 2. Principal place of business; or 3. Office of the Commissioner CORPORATION Non-large taxpayer authorized agent banks within its RDO where enrolled Large taxpayers Electronic Filing and Payment System (EFPS).
97 2008 CENTRALIZED BAR OPERATIONS of twenty (20) percent interest per annum from the original due date. ELECTRONIC FILING AND PAYMENT SYSTEM (EFPS) Large taxpayers shall e-file their final adjustment income tax returns for the calendar/ fiscal year and
Where to file
Large taxpayers shall e-pay their taxes on or before the 15th day of the fourth month following the close of the taxable year. The taxpayer must be enrolled in the EFPS Electronic signatures of the taxfiler shall be affixed in the return The taxpayer that will e-pay shall enroll with any authorized agent bank where he intends to pay Who is a large taxpayer? (As amended by R.R. 10-2007)
When to File Purely Compensation Annual Income Tax - substituted filing of Returns (BIR Form 1702 ) tax on or before the 15th day of the 4th month Purely trade business following the close of or professional the taxable year income Annual Return Quarterly Income Tax - April 15 Returns (BIR Form Quarterly Return 1702Q) Q1 April 15 within 60 days after Q2 August 15 the end of each first Q3 November 15 three quarters Capital Gains Tax Shares of Stock 1. Within 30 days after each transaction. 2. On or before April 15 for final and consolidated return. Real Property Within 30 days following each sale or disposition Capital Gains Tax Shares of Stock 1. Within 30 days after each transaction. 2. On or before April 15 for final and consolidated return. Real Property Within 30 days following each sale or disposition
A taxpayer who satisfies any of the following criteria
Value Added Tax Business establishment with VAT paid or payable of at least One hundred thousand pesos (P100,000) for any quarter of the preceding taxable year. Excise Tax Business establishment with the excise tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year. C o r p o r a t e I n c o m e Ta x B u s i n e s s establishment with the annual income tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year. Withholding Tax Business establishment with a withholding tax payment or remittance of at least One million pesos (P1,000,000). corporations with paid-up capital stock of Ten Million Pesos (P10,000,000.00) and above; Corporations with complete computerized system; and All government bidders pursuant to Executive Order No. 398 as implemented by R.R. 3-2005. It should be emphasized, however, that non-stock non-profit corporations are excluded from the coverage of this regulations.
MANNER OF PAYMENT GENERAL RULE: By pay-as-you-file-system, the income tax shown on the return should be paid at the time the return is filed. EXCEPTION: Individuals may in two equal installments if the income tax due on the annual return exceeds Two thousand pesos (P2,000). First Installment At the time the return is filed Second Installment On or before July 15, following the close of the calendar year.
Any creditable withholding tax shall be credited against the tax due, or the first installment of the tax, if the taxpayer desires to pay on installment.
REPORTORIAL REQUIREMENTS (R.R. No. 21-2002) Financial statements shall be composed of the balance sheet, income statement, statement of retained earnings, statement in changes in financial position, and schedules attached to the aforementioned statements. Submission of the mentioned statements is mandatory even if there is no income, retained earnings, etc.
Extension of Time to File Return: The Commissioner may on meritorious cases grant a reasonable extension of time for filing income tax return and may subject the imposition
98 Income Taxation All financial statements filed with accompanying auditors certificate shall show the comparative figures of the current year and the previous year. Thus, financial statements with no required auditors certificate need not be presented in comparative format. The independent CPA who audited the records and certified the FS of taxpayer, equally as taxpayer, has the responsibility to maintain and preserve copies of audited and certified Financial Statements for a period of 3 years from due date of filing the annual ITR or the actual date of filing, whichever comes later.
Taxpayers are hereby mandated to maintain books and records that would reflect the reconciling items between Financial Statements figures and/or data with those reflected/presented in the filed Income Tax Return (ITR). The recording and presentation of the reconciling items in such books and records shall be done in such a manner that would facilitate the understanding by the examiners/auditors of the Bureau of Internal Revenue tasked to undertake audit/investigation functions, providing in sufficient detail the computation of the differences and the reasons therefore aimed at bringing into agreement the International Financial Reporting Standards (IFRS) and ITR figures (RR No. 8-2007).
Return of Corporations Contemplating Dissolution/ Reorganization

Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. DEADLINES FOR FILING AND PAYMENT Remittance Of Final Income Taxes Withheld On Fringe Benefits Paid To Employees Other Than Rank And File. Filing Via EFPS On or before the fifteenth (15th) day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient. Manual Filing On or before the tenth (10th) day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient. Monthly Remittance of Taxes Withheld on Compensation Filing via EFPS Group A - Fifteen (15) days following end of the month Group B - Fourteen (14) days following end of the month Group C - Thirteen (13) days following end of the month Group D - Twelve (12) days following end of the month Group E - Eleven (11) days following end of the month Except for taxes withheld for the month of December which shall be filed on or before January 20th of the succeeding year Manual Filing On or before the tenth (10th) day of the month following the month the withholding was made, except for taxes withheld for the month of December which shall be filed on or before January 15 of the succeeding year Monthly Remittance of Income Taxes Withheld (Expanded) [Except for Transactions Involving Onerous Transfer of Real Property Classified as Ordinary Asset] Filing via EFPS Group A - Fifteen (15) days following end of the month Group B - Fourteen (14) days following end of the month Group C - Thirteen (13) days following end of the month Group D - Twelve (12) days following end of the month Group E - Eleven (11) days following end of the month

Except for taxes withheld for the month of December which shall be filed on or before January 20th of the succeeding year Manual Filing On or before the tenth (10th) day of the month following the month the withholding was made, except for taxes withheld for the month of December which shall be filed on or before January 15 of the succeeding year Monthly Remittance of Final Income Taxes Withheld On or before the tenth (10th) day of the month following the month the withholding was made, except for taxes withheld for the month of December which shall be filed on or before January 15 of the succeeding year Monthly Remittance Of Final Income Taxes Withheld On Interest Paid And Yield On Deposit Substitutes Trust, Etc. Filing via EFPS Group A - Fifteen (15) days following end of the month Group B - Fourteen (14) days following end of the month Group C - Thirteen (13) days following end of the month
99 2008 CENTRALIZED BAR OPERATIONS Group D - Twelve (12) days following end of the month Group E - Eleven (11) days following end of the month Except for taxes withheld for the month of December which shall be filed on or before January 15 of the succeeding year Manual Filing On or before the tenth (10th) day of the month following the month the withholding was made, except for taxes withheld for the month of December which shall be filed on or before January 15 of the succeeding year Annual Information on Income Taxes Withheld On Compensation and Final Withholding Taxes On or before January 31 of the year following the calendar year in which the compensation payment and other income payments subjected to final withholding taxes were paid or accrued. Annual Information on Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt From Withholding Tax On or before March 1 of the year following the calendar year in which the income payments subjected to expanded withholding taxes or exempt from withholding tax were paid.
Annexes to Income Tax

Annexes to Income Tax
Republic Act No. 9257
Expanded Senior Citizens Act of 2003 (With R.R. No. 4-2006, December 2, 2005; R.R. No. 1-2007, December 4, 2006)
Who is a senior citizen or elderly? any resident citizen of the Philippines at least sixty (60) years old 1. taxable year from all sources as defined in Section 31 of the Tax Code. Availment of Income Tax Exemption He must be qualified as such by the Commissioner or RDO of the place of his residence File an Annual Information Return indicating that his annual taxable income does not exceed the poverty level as determined by the NEDA. If qualified, his name shall be recorded by the RDO in MASTER LIST OF TAX EXEMPT SENIOR CITIZENS.
Is a senior citizen required to pay income tax? A senior citizen is exempted from the payment of individual income taxes; Provided, that their annual taxable income does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for that year Annual Taxable Income of a resident senior citizen shall refer to the annual gross compensation, business and other income received by a resident senior citizen during each
2.
3.
NOTE: A senior citizen who is a compensation income earner subject to a withholding tax and
100 Income Taxation whose annual taxable income exceeds the poverty level is also entitled to substituted filing under R.R. No. 2-98 as amended. TAX LIABILITIES 1. 2. 3. 4. 5. 6. Income Tax if the annual taxable income exceeds the poverty level. Final tax on passive income (same rules with resident citizens). Capital gains tax same rules with resident citizens). VAT Self-employed, or engaged in business, or practice of profession Gross annual sales or receipts exceeds P1, 500,000 or the adjusted amount under section 109 (1) V of the Tax code. 3% Percentage tax if not subject to VAT. Donors Tax Estate Tax e. c. b. Requisites: a.
Only portion of gross sales exclusively used, consumed or enjoyed by the senior citizen shall be eligible for the deductible sales discounts. Gross selling price and sales discount must be separately indicated in the official receipt or sales invoice issued by the establishment for the sale of goods or services to the senior citizen Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes. The discount can only be allowed as deduction from gross income for same taxable year that the discount is granted. The business establishment giving the sales discounts to qualified senior citizen is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, OSCA ID, gross sales/receipts, sales discounts granted, dates of transactions and invoice number for every sale transaction to senior citizen. Only selected establishments mentioned in R.R. No. 4-2006 may claim the said discount granted as deduction from gross income.
d.
7. 8. 9.
10. Excise Tax on certain goods 11. Documentary stamp tax Availment of the Head of the Family Status by Benefactors Who is a Benefactor? Any person whether related to the senior citizens or not who takes care of him/her as a dependent; Requisites: 1. The senior citizen whose annual taxable income does not exceed the poverty level must be dependent upon the benefactor for his chief support. Registered by the benefactor as his dependent and himself/herself as benefactor. Benefactor entitled only to P25,000 basic personal exemptions. In the ITR, the benefactor must indicate the name, birthday and OSCA ID Number of the senior citizen. 5. f.
Establishments which can claim the discounts granted as deductions 1. 2. 3. 4. Hotels and similar lodging establishments. Restaurants Recreation centers Theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement. Drug stores, hospital pharmacies, medical and optical clinics and similar establishments dispensing medicines. Medical and dental services in private facilities. Domestic air and sea transportation companies. Public land transportation utilities. Funeral parlors and similar establishments.
2. 3. 4.
How is a senior citizen treated under the tax law? The senior citizen shall be treated as dependents provided for in the National Internal Revenue Code, as amended, and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. Is the discount granted by establishments to senior citizens deductible? YES. The establishment may claim the discounts granted as tax deduction based on the net cost of the goods sold or services rendered;
6. 7. 8. 9.
Are the salaries and wages paid to senior citizen-employees deductible? YES. Private entities that will employ senior citizens as employees upon effectivity of this Act shall be entitled to an additional deduction from their gross income, equivalent to fifteen percent (15%) of the total amount paid as salaries and

wages to senior citizens subject to the provision of Section 34 of the National Internal Revenue Code, as amended: Conditions 1. 2. That such employment shall continue for a period of at least six (6) months The annual income of a senior citizen does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for that year. In addition, expenses otherwise deductible may be allowed as a deduction only if the tax required to be deducted and withheld therefrom has been paid to the BIR.
REALTY TAX HOLIDAY Individuals or non-government institutions establishing homes, residential communities or retirement villages solely for the senior citizens shall be accorded the following: 1. 2. Realty tax holiday for the first five (5) years starting from the first year of operation; Priority in the building and/or maintenance of the provincial or municipal roads leading to the aforesaid home, residential community or retirement village.
3.
Republic Act No. 9480

An Act Enhancing The Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by The National Government for Taxable Year 2005 and Prior Years (With Department Order No. 29-07; RMC No. 55-2007, August 8, 2007; RMC No. 69-2007, November 5, 2007;RMC No. 90-2007, December 3, 2007; RMC No. 19-2008, February 22, 2008)
COVERAGE Taxes Covered All national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005. 1. 2. 3. 4. 5. 6. 7. 8. income tax estate tax donors tax capital gains tax value added tax other percentage taxes excise taxes documentary stamp taxes 2. 3. 4. Estates and trusts; Corporations; Cooperatives and tax exempt entities that have become taxable as of December 31, 2005; and Other juridical entities including partnerships.
5.
NOTE: An individual taxpayer in his/her own capacity shall be treated as a different taxpayer when he acts as administrator/executor of the estate of a deceased taxpayer. To Whom NOT Available 1. 2. Withholding agents with respect to their withholding tax liabilities; Those with pending cases a) b) c) d) 3. Under the jurisdiction of the PCGG Involving violations of the Anti-Graft and Corrupt Practices Act Involving violations of the Anti-Money Laundering Law For tax evasion and other criminal offenses under the NIRC and/or the RPC
NOTE: In case of donors tax and capital gains tax, only cases that have underdeclarations/ undervaluations and were already issued with Certificate Authorizing Registration (CAR) by the BIR are covered. Taxes NOT Covered 1. 2. Withholding taxes and Taxes passed-on and already collected from the customers for remittance to the BIR To Whom Available 1. Individuals, whether resident or nonresident citizens, or resident or nonresident aliens;
Issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers who have failed to observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday Incentives and other incentives).
102 Income Taxation 4. Cases involving issues ruled with finality by the Supreme Court prior to the effectivity of R.A. No. 9480 (e.g. DST on Special Savings Account) Taxes passed-on and collected from customers for remittance to the BIR. Delinquent Accounts/Accounts Receivable considered as assets of the BIR/Government, including self-assessed tax.
5. 6.
executor or administrator of the estate of a deceased taxpayer who would also like to avail of the tax amnesty, shall file two (2) separate amnesty tax returns, one for himself as a taxpayer and the other in his capacity as executor or administrator of the estate of the decedent with respect to the revenue and other income earned or received by the estate. When and Where to File and Pay When: The return, SALN and the payment of the amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting from the effectivity of the IRR. Note: Under RMC 29-2008 and Department Order No. 11-08, it is clarified that the last day of availing benefits under R.A. No. 9480, otherwise known as Tax Amnesty Act of 2007, shall be 6 months from November 7, 2007 or on May 5, 2008. Effectivity of DOF Department Order 29-07 commenced on November 7, 2007. Where: Residents Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be. Non-residents Commissioner of the BIR, or with any RDO. Duties of the Revenue District Officer 1. The Revenue District Officer shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence thereof, the collection agent or municipal treasurer concerned, to accept the amnesty tax payment. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, Statement of Assets, Liabilities and Networth, or such other documents submitted by the taxpayer. Full Compliance The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be submitted to the RDO, which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the provisions of R.A. No. 9480. Tax Amnesty Rates 1. Tax amnesty rate of five percent (5%) based on: NETWORTH as of December 31, 2005, as declared in the SALN as of the said
Are cases subject of criminal complaint filed with the DOJ still covered by the Tax Amnesty? YES, except cases filed under the RUN AFTER TAX EVADER (RATE) Program of the BIR and other cases involving tax evasion initiated and instituted with the approval of the Commissioner of Internal Revenue or his authorized representatives, pursuant to Section 220 of the National Internal Revenue Code of 1997, as amended. In case of estate under administration, who is the person liable to avail of the tax amnesty? In case of estate under administration, the one that should avail of the tax amnesty for the estate is the administrator/executor of the estate, in representation of the estate. In case of estate not under administration, who is the person liable to avail of the tax amnesty? In case of estate not under administration, the persons liable to avail of the tax amnesty shall be the estate and the heirs. AVAILMENT AND PAYMENT OF AMNESTY How to Avail Tax Amnesty
Accomplish three (3) copies of the required forms and submit the same to the BIR Proceed to the Authorized Agent Bank (AAB) and pay the Amnesty Tax using the Payment Form (BIR Form NO. 0617). File the Tax Amnesty Return, Notice of Availment and SALN with either the AAB or RDO
2.
Forms to be submitted are: Notice of Availment of Tax Amnesty Statement of Assets, Liabilities and Networth (SALN) Tax Amnesty Return (BIR Form No. 2116) Payment Form (BIR Form No. 0617)
Forms may be photocopied. Two (2) copies shall be filed with the BIR, one (1) copy shall remain with the taxpayer. NOTE: An individual taxpayer, seeking to avail of the tax amnesty and who at the same time is an

period by qualified taxpayers who have no previously filed statements of assets and liabilities/balance sheet as of December 31, 2005, RESULTING INCREASE IN NETWORTH by amending such previously filed statements to include undeclared assets and/or liabilities by qualified taxpayers who have filed with BIRs authorized agents their SALN/balance sheet together with their income tax returns for taxable year 2005. TOTAL DECLARED NETWORTH as of December 31, 2005 by taxpayers who have previously filed their SALN as of December 31, 2005 and have no additional assets to declare, but still wish to avail of the tax amnesty OR 2. The absolute minimum amnesty payment, whichever is higher, in accordance with the following schedule: ENTITIES INDIVIDUALS Citizens, resident or nonresident aliens, Trusts and Estates Subscribed capital of above P50 Million 5% or P50,000.00 whichever is higher 2. RATES
103 2008 CENTRALIZED BAR OPERATIONS For taxpayers who had been filing their correct networth and have no additional asset to declare further, but would like to participate in the amnesty program, will they be allowed to do so? In cases where the taxpayer decides to avail but does not declare additional assets or decides that he/it should not make any amendments of his/its networth as December 31, 2005, he/it can avail of the amnesty program by paying five percent (5%) of the total declared networth as of Balance Sheet date in 2005 or the prescribed minimum absolute amount, whichever is higher. STATEMENT OF ASSETS, LIABILITIES AND NETWORTH What to Declare in the SALN 1. Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business Property other than the money shall be valued at the cost at which the property was acquired Foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN;
CORPORATIONS 5% or P500,000.00 whichever is higher
All existing liabilities which are legitimate and enforceable, secured and unsecured, whether or not incurred in trade or business; and The networth of the taxpayer, which shall be the difference between the total assets and total liabilities. Presumption of Correctness of the SALN
Subscribed capital 5% or P250,000.00 of above P20 Million up whichever is higher to P50 Million Subscribed capital of 5% or P100,000.00 P5 Million to P20 Million whichever is higher With subscribed capital 5% of P25,000.00 of below P5 Million whichever is higher OTHERS Other juridical entities 5% or P50,000.00 including, but not limited whichever is higher to, cooperatives and foundations, that have become taxable as of December 31, 2005 Taxpayers who filed their balance sheet/ SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this act shall amend such previously filed statements by including still undeclared assets and/or liabilities 5% based on resulting increase in networth or the minimum absolute amounts of amnesty tax prescribed above, whichever is higher.
3.
The SALN as of December 31, 2005 shall be considered as true and correct. Exceptions: 1. Where the amount of declared networth is understated to the extent of thirty percent (30%) or more as may be established in proceedings within one (1)-year following the date of filing of the Tax Amnesty Return and the SALN, by, or at the instance of parties other than the BIR or its agents. When findings of or admission in congressional hearings or proceedings in administrative agencies of the government, and in courts, prove that there is at least thirty percent (30%) underdeclaration.
2.
In lieu of the SALN, can taxpayers be allowed to file a Balance Sheet for purposes of tax amnesty availment? While the Balance Sheet may be equivalent to the SALN, the regulations have prescribed a specific SALN format to be filled-up and submitted for purposes of availment. Thus, in the availment of
104 Income Taxation the tax amnesty, the Balance Sheet should be converted to the SALN format as provided by the BIR in the SALN form. May husband and wife be allowed to submit only one SALN? Would they be separately liable for the minimum amount of amnesty tax if they avail of the amnesty? No. They have to submit two separate SALNs reflecting their exclusive properties and liabilities as well as their respective shares in the conjugal properties and liabilities. Will individuals engaged two SALNs - one strictly assets/liabilities/networth non-business related networth? in business submit for business-related and another one for assets/liabilities/ 2.
The taxpayers Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired or look into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. Immunities and Privileges NOT available Where the person failed to file a SALN and the Tax Amnesty Return, or Where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more.
3.
An individual taxpayer/availer shall submit only one SALN or Balance Sheet presenting the assets and liabilities and networth into two major groups which are those that are classified as businessrelated and those that are non-business related. In the case of a representative office in the Philippines of a foreign corporation which is only required to file audited statements of receipts and disbursements, what would be the content of the SALN to be filed? The resident foreign corporation shall report assets and liabilities and networth related to the business in the Philippines and the amnesty tax shall be the 5% of the total declared Philippine networth or 5% of the resulting increase in Philippine networth, whichever is applicable, or the minimum absolute amount, whichever is higher. What would be used as basis in determining the minimum amnesty payment of a local branch of a foreign corporation where the subscribed capital stock is not determinable for this purpose? The basis of the 5% shall be the networth or increase in networth of the branch located in the Philippines, whichever is applicable, and the amnesty tax payable is whichever is higher between the resulting product therefrom and the minimum absolute amount prescribed by the Tax Amnesty Law where the subscribed capital refers to the assigned capital in the Philippine Branch lodged in the account Due to Head Office. IMMUNITIES AND PRIVILEGES 1. The taxpayer shall be immune from the payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 3. a) b)
OFFENSES AND PENALTIES Penalties 1. Any person who, having filed a statement or Tax Amnesty Return under this Act, willfully understates his networth to the extent of thirty percent (30%) or more shall, upon conviction, be subject to the penalties of perjury under the Revised Penal Code. The willful failure to declare any property in the statement and/or in the Tax Amnesty Return shall be deemed a prima facie evidence of fraud and shall constitute a ground upon which attachment of such property may be issued in favor of the BIR to answer for the satisfaction of any judgment that may be acquired against the declarant. In addition to the penalties provided in paragraphs (1) and (2) above, immediate tax fraud investigation shall be conducted to collect all taxes due, including increments, and to criminally prosecute those found to have willfully evaded lawful taxes due. In the case of associations, partnerships, or corporations, the penalty shall be imposed on the partner, president, general manager,
2.
4.

branch manager, treasurer, officer-in-charge and employees responsible for the violation. 5. Any person who makes an unlawful divulgence of the Tax Amnesty Return or the SALN shall be penalized by a fine of not less than Fifty thousand pesos (P50,000.00) and imprisonment of not less than six years but not more than ten (10) years. If the offender is an officer or employee of the BIR or any government entity, he/she shall likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote and to participate in any public election. 2.
105 2008 CENTRALIZED BAR OPERATIONS Gen. Rule: It shall be unlawful for any person having knowledge of the Tax Amnesty Return and SALN filed pursuant hereto, to disclose any information relative to such declaration and statement, and any violation hereof shall subject the offender to the penalties under this Act: Exceptions: 1. The Commissioner of Internal Revenue may disclose the content of the Tax Amnesty Return and SALN upon the request of Congress pursuant to and in accordance with: In aid of legislation [Sec.20 (A), NIRC]. Congressional Oversight Committee (Sec. 290, NIRC)
6.
Unlawful Divulgence of Tax Amnesty Return and Statement of Assets, Liabilities and Networth
Publication of list of taxpayers and filers by the Commissioner.
Tax Rates for Individuals

GENERAL CATEGORIES SOURCES OF INCOME NATURE OF INCOME Compensation, Business, Trade, Profession (including casual gains, profits, income, and capital gains, prizes of P10,000 or less). Does not include those income subject to final tax and/or special tax treatment Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements, Royalties (other than from books, literary works and musical compositions) Prizes (except amounting to P10,000 or less) and other winnings Royalties on books, as well as other literary works and musical composition Interest income from depository bank under the expanded foreign currency deposit system (FCDS) CITIZENS RESIDENTS WITHIN and WITHOUT THE PHILS. NON-RESIDENTS WITHIN THE PHILIPPINES RESIDENTS ALIENS NRAEBT NRANEBT WITHIN THE PHILIPPINES
WITHIN THE WITHIN PHILS. THE PHILS
TAXABLE BASE/ TAX RATE Taxable Income (Gross Income less Allowable Deductions) 5% - 34% (1998) - 33% (1999) - 32% (2000 onwards) (Normal Tax Rate) Gross Income (Entire income, no deductions) (All sources within the Phil.) 25%
Gross Income (within) 20% Final Withholding Tax (FWT)
Gross Income (within) 10% FWT Gross income (within) 7.5% FWT (Exchange Rate to be used shall be the opening rate on remittance day) Any income from transaction with depositary banks under the expanded FCDS or OBU Exempt [Sec. 27(D)(3)] [Sec. 28(A)(4)] Gross Income (within) 7.5% FWT Any income from transactions with depository bank under the expanded FCDS or ODU Exempt [Sec.(27)D(3)] [Sec. 28(A)(4)]
106 Income Taxation

GENERAL CATEGORIES Interest income from longterm deposit or deposit in the form of savings, common or individual trust funds, deposit substitute investment management accounts in denomination of P10, 000 or as prescribed by the BSP. CASH AND/OR PROPERTY
DIVIDENDS ACTUALLY OR CONSTRUCTIVELY RECEIVED
CITIZENS RESIDENTS NON-RESIDENTS RESIDENTS - Exempt Interest on long term deposit
ALIENS NRAEBT NRANEBT
In case of Pretermination: Number of years lapsed before pretermination: Holding Period 4 yrs. to less than 5 yrs. - 5% 3 yrs. to less than 4 yrs. - 12% Less than 3 yrs. - 20%
from a domestic corp.; from a joint stock company, insurance or mutual fund companies; on the share of an individual in the distributable net income after tax of a taxable partnership; or On the share on the net income after tax of an association, joint account, or a joint venture or consortium taxable as a corporation. Capital gains on sale of shares of stock not traded in a domestic stock exchange Capital gains on shares of stocks of Foreign Corporation with principal place of business outside Philippines
Gross income (within) Final Withholding Tax 6% 8% 10% -
Year 1998 1999 2000 onwards
(Tax on dividends shall apply on income earned on or after Jan. 1, 1998. Sec. 73(c) provides that dividends distributed are deemed made from most recently accumulated profits)
Gross Income (within) 20% FWT
Gross Income (Entire income, no deductions) (All sources within the Phil.) 25%
Net capital gains (within) Not over P100,000 5% Final Tax Amount in Excess of P100,000 10% Final Tax Taxable on the normal tax rate
Not taxable
Not taxable
Dividends from Foreign Corporation
Taxable, provided the following requisites are present: (1) More than 50% of the Gross Income of the foreign corporation was derived from sources within the Philippines; (2) The coverage for the determination of the income was for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence). Taxable only in the amount which bears the ratio to the dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to gross income from all sources.
Capital gains from sale or other disposition of real property located in the Philippines
1. 2. 3.
6% Final Tax on the Gross Selling Price or FMV whichever is higher If sold to the government or any of its political subdivision or agencies or to GOCC, 6% Final Tax or Normal Tax Rate, at the option of taxpayer. If proceeds is from disposition of principal residence and is fully utilized in acquiring or constructing a new principal residence within 18 months from the date of disposition, (date of notarization) the capital gain is exempt from the capital gains tax subject to the following conditions. a. Historical cost or adjusted basis of property sold is carried over to the new principal residence; b. The commissioner is notified within 30 days from the date of disposition of the taxpayers intention to avail of the tax exemption; c. Tax exemption can only be availed of once every 10 years; and d. Unutilized portions of the proceeds are subject to capital gains tax to be computed proportionately. The tax on the unutilized portion shall be paid within 30 days after the expiration of the 18-month period.
Note: Aliens are not allowed to own real property subject to exceptions ( see income tax topic as discussed ) Cinematographic film and similar works Individual Normal Tax Rate shall apply Gross Income (within) 25% Gross Income (within) 25%

GENERAL CATEGORIES Proprietary educational institution/ Hospital Fringe Benefit CITIZENS RESIDENTS NON-RESIDENTS

ALIENS RESIDENTS NRAEBT NRANEBT N.A.
Individual Normal Tax Rate shall apply
Grossed up monetary value of In the case of aliens, the tax rates to be fringe benefit furnished or granted to applied on fringe benefit shall be as follows: the employee (except rank and file) 1. NRANEBT 25% 2. Aliens employed by regional HO 15 % Tax Rate Grossed Up 3. Aliens employed by OBU 15% Divisor Year 34% FWT 66% 1998 4. Aliens employed by Petroleum Service 33% FWT 67% 1999 5. Contractors and Subcontractors 32% FWT 68% 2000 NOTE: onwards Gross up divisor is the difference between 100% and the applicable rates. In general, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty days during any calendar year shall be deemed as non-resident alien doing business in the Philippines. Exceptions are the following: (a) Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies; (b) Alien Individuals Employed by Offshore Banking Units; and (c) Alien Individuals employed by Petroleum Service Contractor and Subcontractor.
Tax Rates for Corporations

FOREIGN CORPORATIONS GENERAL CATEGORIES DOMESTIC CORPORATIONS RESIDENT FOREIGN CORPORATIONS (Existing under the laws of the foreign country, engaged in trade or business within the Philippines) WITHIN THE PHILS. TAXABLE BASE/RATE TAX INCOME 35% (Normal Domestic Rate) 34% - 1998 33% - 1999 32% - 2000- July 1, 2005 { 35%- November 1, 2005 - Dec 31, 2008 { 30%- January 1, 2009 onwards A. Transition Period 1. For Corporations adopting the fiscal year accounting period, income and expenses shall be deemed to have been earned and spent equally for each month of the period. 2. Taxable Income x No. of Mos. Covered x Tax 12 Mos. by the tax rate rate B. Government or its Political Subdivision Income derived from any public utility or from the exercise of any essential government function accruing to the Government of the Phil. or to any political subdivision thereof is excluded from gross income [Sec. 32(B)(7)(b)] TAXABLE INCOME Same as Normal Domestic Rate GROSS INCOME Same as Normal Domestic Rate NON-RESIDENT CORPORATIONS (Not engaged in trade or business in the Philippines)
In general, including GOCCs, agencies or instrumentalities (EXCEPT GSIS, SSS, PHIC, AND PCSO) engaged in a similar business, industry or activity. PAGCOR is no longer exempt (R.A. 9337).
SOURCES OF INCOME NATURE OF INCOME
ALL SOURCES
WITHIN THE PHILS.
In General
108 Income Taxation
FOREIGN CORPORATIONS GENERAL CATEGORIES RESIDENT DOMESTIC CORPORATIONS FOREIGN CORPORATIO NS GROSS INCOME - 15% NON-RESIDENT CORPORATIONS N.A. Interest Income on foreign loans contracted on or after Aug. 1, 1986 (20% FWT) Any income from transaction with depository banks under FCDS shall be exempt from income tax
Optional Corporate Tax Interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements royalties
Gross Income ( within ) 20% FWT
Income derived under the expanded FCDS
1. Gross interest income derived by a domestic corporation and a resident foreign corporation from a depositary bank 7.5% FWT. 2. Income derived by a depository bank from foreign currency transactions with local commercial banks including branches of foreign banks, other depositary banks, and residents 10% Final Tax. Dividends Dividends received by a received from a domestic corporation from domestic another domestic corporation corporation not shall not be subject to tax. subject to tax. Net Capital Gain Not over P100,000 5% Excess of P100,000 10%
Inter-corporate dividends and income from a taxable partnership
Dividend received from a domestic corp. 15% FWT, Provided foreign law allows taxpayer clause, otherwise it will be subject to the normal domestic rate
Capital Gains from the sale of shares of stocks not traded in the local stock exchange. Capital Gains Realized from the Disposition of Land and/or Buildings Minimum Corporate Income Tax (MCIT) Please refer to Table C
Gross Selling Price or FMV whatever is higher 6% Final Tax Gross Income 2% MCIT N.A. N.A.
Improperly Accumulated Earnings Improperly Accumulated Taxable (IAE) Tax. Please refer to Table C Income 10% tax (in addition to other income taxes)
Comparative Table on MCIT, IAET and NOLCO

TYPE OF TAX/ DEDUCTIONS MINIMUM CORPORATE INCOME TAX (MCIT) IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) A tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. (added to other taxes imposed upon the corporation) Net Operating Loss CarryOver NOLCO shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss; Provided however, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction; Provided further, that NOLCO shall not be allowed as a deduction if there has been a substantial change in the ownership of the business or enterprise, such that: 25% or more change is substantial; 24% or less non-substantial.
Imposed upon any domestic corporation beginning the fourth taxable year immediately following the taxable year in which the corporation commenced its business registration. Imposed whenever such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income tax due from such Characteristics corporation (in lieu or corporate income tax) MCIT shall apply on operations covered by the regular income tax system The computation and the payment of MCIT shall likewise apply at the time of filing the quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as amended. (R.R. No. 12-2007)
TYPE OF IMPROPERLY MINIMUM CORPORATE INCOME TAX/ ACCUMULATED Net Operating Loss Carry-Over TAX (MCIT) DEDUCTIONS EARNINGS TAX (IAET) 2% of the Gross Income TAXABLE INCOME Additions: Gross Income means gross sales Income exempt from Tax less sales returns, discounts and Income excluded from allowances and cost of goods Gross Income sold. Income subject to final Gross sales shall include only Tax sales contributory to income Amount of NOLCO taxable. deducted Deductions: Cost of Goods Sold shall include Income tax paid/payable all business expenses directly for the taxable year incurred to produce the Dividends actually or merchandise to bring them to their constructively paid/issued present location and use. from the applicable years Cost of Goods Manufactured taxable income means all costs of production of Amount reserved for the finished goods, such as raw reasonable needs of the materials used direct labor and business manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. Cost of services means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including: a. salaries and employee benefits of personnel, consultants and specialists directly rendering the service; and b. the cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies; Provided however, that cost of services shall not include interest expense except in the case of banks and other financial institutions. Domestic Corporations Resident Foreign Corporation subject to normal incorporate income tax Net operating loss of the business or enterprise which had not been previously offset as deduction from Gross Income
Tax Base
Domestic Corporations Those subject to normal Income as defined under the Tax Tax Code classified as closely-held corporations. Closely-held corporations are those corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Domestic Corporations not falling under the definition are publiclyheld corporations.
Applicability
110 Income Taxation
TYPE OF IMPROPERLY MINIMUM CORPORATE INCOME TAX/ ACCUMULATED Net Operating Loss Carry-Over TAX (MCIT) DEDUCTIONS EARNINGS TAX (IAET) MCIT shall not be imposed upon the following: Domestic Corporations 1. Domestic Corporations operating as proprietary educational institutions subject to 10% on their taxable income; 2. Domestic Corporations engaged in Hospital Operations which are non profit subject to 10% on their taxable income 3. FCDUs subject to final income tax of 10% 4. Firms under special income tax regime (PEZA and BCDA registered entities) Resident Foreign Corporations 1. Resident Foreign Corporations engaged in business as international carrier 2. OBUs 3. Resident Foreign Corporations engaged in business as regional operating headquarters 4. Firms under special income tax regime Not applicable to: Banks and other nonbank financial intermediaries Insurance Companies Publicly-held Corporations Taxable Partnerships General Professional Partnerships Non-taxable joint ventures Enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local. Taxpayers not entitled to deduct NOLCO: OBU and FCDU BOIregistered enterprise enjoying income tax holiday. The accumulated net operating losses incurred or sustained during the period of the Income Tax Holiday shall not qualify for purposes of NOLCO. PEZA registered entities Enterprise registered under the Bases Conversion and Development Act of 1992 Foreign Corporations engaged in international shipping or air carriage business in the Philippines In general, any person, natural or juridical, enjoying exemption from income tax with respect to its operation during the period for which the exemption is applicable. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of NOLCO.
Exceptions
Summary of Rules for Exempt Corporations

EXEMPTION FROM INCOME TAX
KINDS OF INSTITUTIONS Government Agencies SOURCE OF INCOME Income from performance of government functions Income from other sources Income from tuition fee Income from other sources Income from tuition fee Income from other sources Income from tuition fee Income from other sources EXEMPTED? Exempted Taxable LEGAL BASIS Sec 32 (B) (7) (b) NIRC - Income derived from any public utility or from the exercise of any essential governmental function is exempt from tax. Sec. 30 NIRC (last paragraph) - all income realized from activities conducted for profit is subject to income tax. Sec 30 NIRC - Income received from tuition fee is excluded being income received as such. However, under the last paragraph all income realized from activities conducted for profit is subject to income tax.
EDUCATIONAL INSTITUTIONS Government Educational Institution Non-stock, non-profit Educational Institution Proprietary Educational Institution Exempted Taxable Exempted
Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and assets ADE used for educational purposes shall be Non-Taxable exempt from payment of taxes and duties. Taxable Taxable Sec. 27(B), NIRC - If the income from an unrelated trade or activity exceeds 50% of the total gross income, it will be treated as an ordinary domestic corporation, subject to 35% income tax. Otherwise, a 10% tax shall be imposed. Sec. 30(E), NIRC exempts such institution from income tax with respect to income realized as such. However, under the last paragraph, all income realized from activities conducted for profit is subject to income tax.
RELIGIOUS AND CHARITABLE INSTITUTIONS Charitable Institutions Income received as a charitable institution Income from other sources Exempted Taxable

KINDS OF INSTITUTIONS SOURCE OF INCOME Income received as a religious institution Income from other sources EXEMPTED?

LEGAL BASIS
RELIGIOUS AND CHARITABLE INSTITUTIONS Religious Institutions Exempted Taxable Sec. 30(E), NIRC exempts such institution from income tax with respect to income realized as such. However, under the last paragraph, all income realized from activities conducted for profit is subject to income tax.
NOTE: Even if the income from other sources is used to improve the facilities of these institutions, the income realized from such sources is still taxable since the last paragraph of Sec. 30, NIRC provides that such income, regardless of the disposition made of such income, shall be subject to tax. TAX EFFECTS ON DONATIONS From donees point of view:
KIND OF IS IT SUBJECT TO INCOME INSTITUTION TAX? Sec. 32(B) (3), NIRC Such Government donation is exempted from Agencies gross income and is not subject to taxation. Sec. 32(B) (3), NIRC Such Government donation is exempted from Educational gross income and is not Institutions subject to taxation. Non-stock, non-profit Educational Institutions Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and assets ADE used for educational purposes shall be exempt from payment of taxes and duties. Sec. 27(B), NIRC - If the income from an unrelated trade or activity exceeds 50% of the total gross income, it will be treated as an ordinary domestic corporation, subject to 35% income tax. Otherwise, a 10% tax shall be imposed. Sec. 32(B) (3), NIRC Such donation is exempted from gross income and is not subject to taxation. Sec. 32(B) (3), NIRC Such donation is exempted from gross income and is not subject to taxation. IS IT SUBJECT TO DONORS TAX? Sec. 101 (A) (2), NIRC exempts such gift from payment of donors tax. EDUCATIONAL INSTITUTIONS Sec. 101(A) (2), NIRC exempts such gift from payment of donors tax. Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and assets ADE used for educational purposes shall be exempt from payment of taxes and duties. Sec. 101(A)(3), NIRC exempts such gift from payment of donors tax Provided that, not more than 30% shall be used for administration purposes. Sec. 86 (A)(3), NIRC - all transfers to or for the use of the government for exclusively public purposes are exempt from such tax Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and assets ADE used for educational purposes shall be exempt from payment of taxes and duties. Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and assets ADE used for educational purposes shall be exempt from payment of taxes and duties. IS IT SUBJECT TO ESTATE TAX? Sec. 86 (A) (3), NIRC - all transfers to or for the use of the government for exclusively public purposes are exempt from such tax.
Proprietary Educational Institutions
RELIGIOUS AND CHARITABLE INSTITUTIONS Charitable Institutions Sec. 101(A) (2), NIRC exempts such gift from payment of donors tax. Sec. 101(A) (2), NIRC exempts such gift from payment of donors tax. Sec. 87(B), NIRC - the donation will not be subject to tax; Provided that not more than 30% of the same shall be used for administration purposes Sec. 87(B), NIRC - the donation will not be subject to tax provided that not more than 30% of the same shall be used for administration purposes
Religious Institutions
From donors point of view

KINDS OF INSTITUTIONS CAN THE DONOR DEDUCT THE DONATION FROM HIS TAXABLE INCOME? It depends. If donor is engaged in trade or If donor is compensation income earner business
There can be no deduction. There are only 3 kinds of allowable deductions for compensation Sec 34(H)(2)(a) NIRC - amount of Government Agencies income earners* and a donation is not included donation may be deducted entirely among such deductions.
112 Income Taxation
CAN THE DONOR DEDUCT THE DONATION FROM HIS TAXABLE INCOME? It depends. If donor is engaged in trade or If donor is compensation income earner business EDUCATIONAL INSTITUTIONS Government Sec 34(H)(2)(a) NIRC - amount of Educational InstitutionThere can be no deduction. There are only 3 donation may be deducted entirely Non-stock, non-profit kinds of allowable deductions for compensation Sec 34(H) (1) NIRC - a portion of the Educational Institution income earners# and a donation is not included amount of donation may be deducted among such deductions. (5% if donor is a corporation; 10% if Proprietary donor is an individual) Educational Institution RELIGIOUS AND CHARITABLE INSTITUTIONS There can be no deduction. There are only 3 Sec 34(H) (1) NIRC - a portion of the Charitable Institution kinds of allowable deductions for amount of donation may be deducted (5% compensation income earners* and a donation if donor is a corporation; 10% if donor is an Religious Institution is not included among such deductions. individual. KINDS OF INSTITUTIONS
# Allowable deductions for compensation income earners:

1. 2. 3.
personal exemptions additional exemptions premiums on health or hospitalization insurance EXEMPTION FROM REAL ESTATE TAX KINDS OF INSTITUTIONS EXEMP TED? Yes LEGAL BASIS FOR EXEMPTION LGC - all lands, buildings and improvements ACTUALLY DIRECTLY and EXCLUSIVELY (ADE) used for educational purposes are exempted from RET EDUCATIONAL INSTITUTIONS LGC - all lands, buildings and improvements ADE used for educational purposes are exempted from RET Art. XIV, Sec. 4(3), 1987 Constitution - revenues and assets ADE used for educational purposes shall be exempt from taxes and duties LGC - lands, buildings and improvements ADE used for educational purposes are exempted from taxes RELIGIOUS AND CHARITABLE INSTITUTIONS Art. VI, Sec. 28(3), 1987 Constitution - lands, buildings and improvements ADE used for religious purposes are exempt from payment of RET Art. VI, Sec. 28(3), 1987 Constitution - lands, buildings and improvements ADE used for charitable purposes are exempt from payment of RET
Government Agencies
Government Educational Institutions Non-stock Non-profit Educational Institutions Proprietary Educational Institutions
Yes Yes Yes
Charitable Institutions
Yes
Religious Institutions
Yes
Preferential Tax Treatment on Certain Individuals

GENERAL CATEGORIES SOURCE OF INCOME CITIZENS RESIDENTS ALL SOURCES NON-RESIDENTS WITHIN THE PHILS RESIDENTS WITHIN THE PHILS ALIENS NRAEBT WITHIN THE PHILS NRANEBT WITHIN THE PHILS
15% Final Withholding Income Tax (FWIT)
A tax rate of 15% is imposed on gross income (salaries, wages, etc.) received by every Filipino employee occupying the same position as an alien employed by any of the following: a.Multinational company which is foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia Pacific Region & other foreign markets as follows: i. Regional or Area Headquarters ii. Regional Operating Headquarters (Sec. 25 [c]) b.Offshore Banking Units (Sec. 25 [d]) c. Foreign petroleum service contractor or subcontractor (Sec.25 [e]).
A TAX RATE OF 15% IS IMPOSED ON GROSS INCOME (SALARIES, WAGES, ANNUITIES, COMPENSATION, REMUNERATION, OTHER
EMOLUMENTS SUCH AS HONORARIA AND ALLOWANCES) OF ALIEN INDIVIDUAL EMPLOYED BY:
a. Regional or Area Headquarters (Sec.25 [c]) b. Regional Operating Headquarters (Sec.25 [c]) c. Offshore Banking Units (OBUs) established in the Philippines (Sec. 25 [d]) d. Foreign petroleum service contractor or subcontractor engaged in Petroleum Operations in the Philippines (Sec. 25 [e])
1.Regardless of the period of stay in the Philippines, foreign source (compensation income) is not taxable if received by any of the following non-resident citizen. Foreign a. Immigrant (Sec.22 [E,2]) Source b. Foreign-based employee on a permanent basis Compensation (Sec. 22 [E,2]) . Income not c. Overseas Contract Worker, including overseas seaman (Sec. 23 [c]) subject to income tax 2.A Filipino employed as Philippine Embassy/ Consultant service personnel of the Philippine Embassy/Consulate is not to be treated as a non-resident citizen, hence, his income is taxable.
NOT TAXABLE
Preferential Tax Treatment on Certain Corporations (Special Corporations)#

DOMESTIC CORPORATION 1. 2. Educational Institution Hospital FOREIGN CORPORATIONS RESIDENT FOREIGN CORPORATION NON-RESIDENT FOREIGN CORP.
1.A NON-STOCK, NON-PROFIT 1.INTERNATIONAL CARRIER within the 1.CINEMATOGRAPHIC EDUCATIONAL INSTITUTION is EXEMPT Philippines 2.5% of Gross Phil. Billings FILM OWNER, from Income Tax on its Revenue as (Sec. 28 [3a]) LESSOR OR educational institution and from the 2.OFFSHORE BANKING UNIT (OBU) DISTRIBUTOR operation of ancillary activities located Income derived by OBU from foreign 25% of gross within the school premises, such as: currency transaction with local income within the a.Cafeteria/canteen commercial bankers, including branches Phil. b.Dormitories of foreign bank, including any interest 2.OWNER OR LESSOR c. Bookstores income derived from foreign currency OF SEA VESSEL d.School Bus loans granted to residents. CHARTERED BY e.Hospitals Final Tax 10% of amount of interest PHILIPPINE f. Pharmacies or Drugstores and from income NATIONALS 4.5% # with respect to income derived by banks deposits subject to certain of gross rental, condition (1987 Constitution). OBU from certain foreign currency lease or charter transactions EXEMPT fees
114 Income Taxation DOMESTIC CORPORATION 1. 2. Educational Institution Hospital
FOREIGN CORPORATIONS RESIDENT FOREIGN CORPORATION NON-RESIDENT FOREIGN CORP.
2.PROPRIETARY/ PROFIT ORIENTED EDUCATIONAL INSTITUTION, AND NON-STOCK, NON-PROFIT - If gross income from unrelated trade business or other activity does not exceed 50% of the total gross income derived from all sources b. Regular Domestic Rate - If gross income from unrelated trade business or other activity exceeds 50% of the total gross income derived from all sources (Sec. 27 [b]). 3.Regardless of the proportion explained in item No. 2(a) and (b) a profit oriented hospital will be treated as an ordinary domestic corporation, hence subject to the Normal Domestic Rate.
HOSPITAL a. 10% OF THE TAXABLE INCOME
3.BRANCHES (Except those 3.OWNER OR registered with PEZA). Any profit LESSOR OF remitted to the head office (total AIRCRAFT, profit applied or earmarked for MACHINERIES AND remittance without any deduction OTHER for the tax component thereof). EQUIPMENT 15% - FWT 7.5% of gross 4.REGIONAL OR AREA rentals or fees HEADQUARTERS not subject to within the Phil. Income Tax 5.REGIONAL OPERATING HEADQUARTERS 10% of the taxable income (within)
# There is no Minimum Corporate Income Tax (MCIT) imposable for these Special Corporations
Comparative Table of Income Tax Provisions Between The NIRC and RA 9337
1997 NIRC (Old Rules) Section 27(A), NIRC: 1998 34% 1999 33% 2000 32% Section 27(C), NIRC: As a rule: All corporations, agencies or instrumentalities owned or controlled by the Government are subject to income tax. Except: GSIS, SSS, PHIC, PCSO, and PAGCOR Section 28(A)(1), NIRC: 1998 34% 1999 33% 2000 32% Section 28(b)(1), NIRC: 1998 34% 1999 33% 2000 32% R.A. 9337 and Consolidated Revenue Regulations (New Rules and Amendments) 1. Income Tax Rates on Domestic Corporations Section 1(A), R.A. 9337: November 1, 2005 December 31, 2008 35% January 1, 2009 onwards 30% NOTE: Taxable income within and without the Philippines Section 1(a), R.A. 9337: As a rule: All corporations, agencies or instrumentalities owned or controlled by the Government are subject to income tax Except: GSIS, SSS, PHIC, and PCSO NOTE: PAGCOR is now subject to income tax Section 2, R.A. 9337: November 1, 2005 December 31, 2008 35% January 1, 2009 onwards 30% NOTE: Taxable income within the Philippines Section 2, R.A. 9337: November 1, 2005 December 31, 2008 35% January 1, 2009 onwards 30% NOTE: Taxable income within the Philippines
2. Government-Owned and Controlled Corporations, Agencies or Instrumentalities
3. Income Tax Rates on Resident Foreign Corporations
4. Income Tax Rates on Non-resident Foreign Corporations

1997 NIRC (Old Rules) Section 28 (5)(b), NIRC: A final withholding tax at the rate of 15% is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid provided in Section 57 (a) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% for 1997, 19% for 1998, 18% for 1999, 17% thereafter, which represents the difference between the regular income tax of 35% in 1997, 34% in 1998, 33% in 1999, and 32% thereafter on corporations and the 15% tax on dividends as provided in this subparagraph.
115 2008 CENTRALIZED BAR OPERATIONS R.A. 9337 and Consolidated Revenue Regulations (New Rules and Amendments) Section 2, R.A. 9337: A final withholding tax at the rate of 15% is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid provided in Section 57 (a) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular income tax of 35% and the 15% tax on dividends as provided in this subparagraph. PROVIDED, that effective January 1, 2009, the credit against the tax due shall be equivalent to 15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends. Effect on the Tax Sparing Rule: 17% was increased to 20% for the application of 15% tax sparing rule (i.e. 35% less 20%) Starting January 1, 2009 it will be 15% (i.e. 30% less 15%) Applicable to intercorporate dividends payable TO nonresident foreign corporations. Section 3, R.A. 9337: The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business shall be allowed as deduction from gross income, PROVIDED, however, that the taxpayers otherwise allowable deduction for interest expense shall be reduced by 42% of the interest income subjected to final tax; PROVIDED, that effective January 1, 2009, the percentage shall be 33%. Effect on Allowable Interest Expense: Interest expense deductible shall be reduced by 42% of the interest income subjected to final tax. Starting January 1, 2009, it will be 33%.
5. Income Tax on Certain Income Received by Non-resident Foreign Corporations
6. Deductions from Gross Income Section 34(b)(1), NIRC: The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business shall be allowed as deduction from gross income, PROVIDED, however, that the taxpayers otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subject to final tax: 41% beginning January 1, 1998 39% beginning January 1, 1999 38% beginning January 1, 2000
116 Transfer Taxes
TAXATION LAW TRANSFER TAXES

TRANSFER TAXES
Estate Taxes
Estate Taxes
DEFINITION: an excise tax on the right of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death. The transfer of the net estate of every decedent whether resident or non-resident of the Philippines is subject to the estate tax (RR 2-2003) ESTATE TAX FORMULA Gross Estate (Sec. 85) Less: (1) Deductions (Sec. 86) (2) Net share of the SS in the CPP Net Taxable Estate x Tax rate (Sec. 84) Estate Tax due Less: Tax Credit [if any] (Sec. 86[E] or 110[B] Estate Tax Due, if any ESTATE TAX RATE The entire value of the net estate is divided into brackets and each rate is imposed on the corresponding bracket. The application of rates prescribed below shall apply to estate taxes falling
due or have accrued beginning January 1, 1998, effectivity date of RA 8424, otherwise known as the Tax Reform Act of 1997. Table showing the tax on each bracket and cumulative total tax for the entire net estate.
OVER TAX OF THE BUT NOT SHALL PLUS EXCESS OVER BE OVER P200,000 EXEMPT P200,000 500000 2000000 10,000,000 and over 500000 2000000 P15,000 5000000 135000 465000 1215000 5% P200,000 8% 11% 15% 500000 2000000 5000000
5000000 10000000
20% 10000000
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:
Gross Estate
The gross estate consists of the following: a. Properties Physically in the Estate These properties may refer to those real estate or real property such as land and buildings, tangible personal properties and other intangible personal properties. b. Properties Not Physically in the Estate These are properties which at the time of the decedents death are not physically in the estate because they were transferred by the decedent during his lifetime. The following shall be included in the computation of gross estate if transferred under circumstances qualifying as: a. b. c. Transfers in contemplation of death Revocable transfers Transfer under general power of appointment 5. 4. 3. Shares, obligations or bonds issued by any foreign corporation eighty-five per centum (85%) of the business of which is located in the Philippines; Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds have acquired a business situs in the Philippines; and Shares or rights in any partnership, business or industry established in the Philippines.
EXCEPTIONS: Reciprocity Clause under Sec. 104 of the NIRC: 1. If the decedent at the time of his death was a citizen and resident of a foreign country, who at the time of his death: a. b. did not impose a transfer tax or death tax of any character; In respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or
DECEDENTS GROSS ESTATE INCLUDES (Sec. 85) RESIDENT and NON-RESIDENT NON-RESIDENT ALIEN CITIZEN, RESIDENT DECEDENT ALIEN DECEDENT All properties, real or personal, tangible or intangible, wherever situated. Only properties situated in the Philippines provided that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC.
TAX
2.
If the laws of the foreign country of which the decedent was a citizen and resident at the time of his death: a. b. allow a similar exemption from transfer taxes or death taxes of every character; In respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. VALUATION OF THE GROSS ESTATE
The properties comprising the gross estate shall be valued based on their fair market value at the time of death.
PROPERTY 1)Real Property VALUATION WHICHEVER IS HIGHER of fair market value: a) as determined by the Commissioner; or b) as shown in the schedule of values fixed by the provincial and city assessors (zonal valuation)
THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE The statute in force at the time of death of the decedent shall govern estate taxation. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death (R.R. 2-2003). INTANGIBLE PERSONAL PROPERTIES WITH SITUS IN THE PHILIPPINES (Sec. 104) 1. 2. Franchise which must be exercised in the Philippines; Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws;
2)Shares of Stock
- book value - par value - Arithmetic mean between the Unlisted/ highest and lowest quotation at a Not Traded date nearest the valuation date Common (date of death), if none is shares available on the date of death Preferred itself. shares Listed/ Traded
118 Transfer Taxes

PROPERTY 3)Right to usufruct, use or habitation, as well as that of annuity 4)Personal property VALUATION - the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner shall be taken into account. - Whether tangible or intangible, appraised at FMV. Sentimental value is practically disregarded. Note: If recently acquired by decedent, purchase price may indicate FAIR MARKET VALUE
Valuation Rules of Properties Not Physically in The Estate

1. If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or moneys worth Illustration: Case 1 Case 2 Case 3 A B C Fair market value at the time of transfer Consideration received Fair market value at the time of death The value to include in the gross estate NOTE: Compare (a) and (b) to determine the ADEQUACY of the consideration (b) and (c) to determine the VALUE to include in the gross estate 50000 50000 50000 30000 50000 0
2.
NO VALUE
If the consideration received on the transfer was less than adequate and full
EXCESS of the FMV of the property at the time of decedents death over CONSIDERATION received
100000 100000 100000 none 70000 100000
3.
If there was no consideration received (Donation Mortis Causa)
FMV of the property at the time of decedents death
Inclusions in the Gross Estate (GRID-LIP)(Sec. 85)

1. TRANSFER UNDER GENERAL POWER OF APPOINTMENT Power of appointment - is the right to designate the person or persons who shall enjoy and possess certain property from the estate of a prior decedent. Classification: a. GENERAL - when it authorizes the donee (decedent) to appoint any person he pleases including himself, thus having full dominion over the property as though he owned it. SPECIAL - when the donee (decedent) can appoint only among a restricted or designated class of persons other than himself. NOTE: The extent or degree of control which the decedent has over a property determines the character of the power of appointment. The general power of appointment may be exercised by the decedent: 1. 2. 3. by will; by deed executed in contemplation of his death; or by deed under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death: a. the possession or enjoyment of, or the right to the income from the property; or
b.

b. The right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. b.
119 2008 CENTRALIZED BAR OPERATIONS A transfer, by which the decedent retained for his life, or for any period, which does not in fact end before his death: 1. the possession or enjoyment of, or the right to the income from the property, or The right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom.
Exception: bona fide sale for an adequate and full consideration in money or moneys worth. 2. REVOCABLE TRANSFER 2.
A revocable transfer is a transfer by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by: a. b. decedent alone; by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power, to alter, amend, revoke or terminate; or where any such power is relinquished in contemplation of the decedents death other than a bona fide sale for an adequate and full consideration in money or moneys worth.
Presence of any of these indicators will determine if the transfer is in contemplation of death: (1) health condition and age of transferor; (2) to whom the transfer was made; and (3) period of time between the time of transfer and time of death. Exception: bona fide sale for an adequate and full consideration in money or moneys worth. 4. PROCEEDS OF LIFE INSURANCE Proceeds of life insurance taken by the decedent on his own life shall be included in the gross estate if the beneficiary is: a. the estate of the decedent, his executor or administrator (regardless of whether the designation is revocable or irrevocable); or A third person other than the estate, executor or administrator where the designation of the beneficiary is revocable.
c.
The power to alter, amend, or revoke shall be considered to exist on the date of the decedents death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedents death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.
b.
Under the Insurance Code, a designation of a beneficiary is revocable, unless stated expressly as irrevocable. 5. T R A N S F E R S F O R I N S U F F I C I E N T CONSIDERATION Transfers for insufficient consideration refer to transfers, trusts, interests, rights or powers (denominated as transfer in contemplation of death, revocable transfer and property passing under general power of appointment) made, created, exercised or relinquished for a consideration in money or moneys worth, but is not a bona fide sale for an adequate and full consideration in money or moneys worth. The value to be included in the gross estate is the excess of the fair market value of the property at the time of the decedents death over the consideration received. This is applicable in cases of: transfers in contemplation of death, revocable transfers and transfers under general power of appointment,
NOTE: It is enough that the decedent had the power to alter, amend or revoke even though he did not exercise such power. Exception: bona fide sale for an adequate and full consideration in money or moneys worth. 3. TRANSFER IN CONTEMPLATION OF DEATH a. A transfer motivated by the thought of impending death although death may not be imminent; or
made for a consideration, but is not a bona fide sale for an adequate and full consideration in money or moneys worth. Exception: bona fide sale for an adequate and full consideration in money or moneys worth.
120 Transfer Taxes 6. PRIOR INTERESTS All transfers, trusts, estates, interests, rights, powers and relinquishment of powers made, created, arising, existing, exercised or relinquished before or after the effectivity of the NIRC. PROPERTY RELATIONS BETWEEN HUSBAND AND WIFE The property relations between the spouses shall be governed by contract (marriage settlement) executed before the marriage. In the absence of such contract, or if the contract is void: a. On marriages contracted before August 3, 1988, the system of conjugal partnership of gains shall govern; On marriages contracted on or after August 3, 1988 (effectivity of the Family Code of the Philippines), the system of absolute community of property shall govern. 3.
The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the will of the predecessor; and All bequests, devices, legacies or transfers to social welfare, cultural and charitable institutions provided that: a. b. no part of the net income of which inures to the benefit of any individual and no more than 30% of the said bequests, legacies, or transfers shall be used by such institutions for administration purposes
4.
The following shall not be taxed (examples under special laws): (a) Amounts received for war damages; (b) Amounts received from the US Veterans Administration; (c) Benefits received from the GSIS and SSS (d) Retirement benefits of employees of private firms; and (e) Intangible personal property of a non-resident decedent, not a citizen of the Philippines, as provided in the reciprocity clause of the estate tax law.
b.
EXEMPT TRANSMISSIONS (Sec. 87) 1. 2. The merger of usufruct in the owner of the naked title; Fideicommissary substitution;
Deductions On Gross Estate Applicable To Resident Aliens And Citizens (R.R. No. 2-2003)
The following are deductible from the gross estate of citizens and resident aliens: (VET FAST ME RASH) 1. 2. 3. 4. 5. 6. 7. 8. Vanishing deduction; Expenses, losses, indebtedness, taxes, etc. (ordinary deductions) ; Transfer for public use; Family home; Standard deduction equivalent to one million pesos (P1,000,000); Medical expenses; Amounts received by heirs under RA 4917 (Retirement Benefits); and Net share of the surviving spouse in the conjugal or community property. a. ORDINARY DEDUCTIONS FUNERAL EXPENSES The amount deductible is the lowest among the following: 1. 2. 3. 1. actual funeral expenses; 5% of the gross estate; or P200,000. Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used in the occasion of the burial; Expenses of the wake preceding the burial including food and drinks; Publication charges for death notices; Telecommunication expenses in informing relatives of the deceased; Cost of burial plot, tombstone monument or mausoleum but not their upkeep. In case deceased owns a family estate or
1.
It includes the following:
2. 3. 4. 5.

several burial lots, only the value corresponding to the plot where he is buried is deductible; 6. 7. Interment fees and charges; and All other expenses incurred for the performance of the ritual and ceremonies incident to the interment.
121 2008 CENTRALIZED BAR OPERATIONS I. brokerage fees for selling property of the estate ATTORNEYS FEES DEDUCTIBLE Attorneys fees in order to be deductible from gross estate must be essential to the collection of assets, payment of debts, or distribution of the property to the person entitled to it. The services for which the fees are charged must relate to the proper settlement of the estate. (CIR vs. Court of Appeals G.R. No. 123206, March 22, 2000) c. CLAIMS AGAINST THE ESTATE The word "claims" is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Claims against the estate or indebtedness in respect of property may arise out of: 1. 2. 3. 1. Contract; Tort; or Operation of Law. The liability represents a personal obligation of the deceased existing at the time of his death, except unpaid obligations incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of interment) and unpaid medical expenses which are classified under a different category of deductions; The liability was contracted in good faith and for adequate and full consideration in money or money's worth; The claim must be a debt or claim which is valid in law and enforceable in court; and The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.
Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible. Amount of funeral expenses must be reasonable. Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased. The expenses must be duly supported with receipts or invoices or other evidence to show that they were actually incurred. NOTE: When some items are covered by a memorial plan, the value of the memorial plan must be included in the GROSS ESTATE before computing for the allowable deduction for funeral expense b. JUDICIAL EXPENSES OF THE TESTAMENTARY OR INTESTATE PROCEEDINGS Expenses allowed as deduction under this category are those incurred in the: 1. 2. 3. 4. inventory-taking of assets comprising the gross estate, administration, payment of debts of the estate; and distribution of the estate among the heirs.
Requisites:
2.
In short, these deductible items are expenses incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. Any unpaid amount for costs and expenses claimed under judicial expenses should be supported by sworn statement of account issued and signed by creditor. Judicial expenses may include: A. fees of executor or administrator B. attorneys fees C. court fees D. accountant fees E. appraisers fees F. clerk hire G. costs of preserving and distributing the estate H. costs of storing or maintaining property of the estate and
3.
4.
NOTE: If claim arose out of a debt instrument: a. b. debt instrument must be NOTARIZED if contracted within 3 years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan
SUBSTANTIATION OF CLAIMS All unpaid obligations and liabilities of the decedent at the time of his death (except unpaid funeral or medical expenses which are deductible under a different category) are allowed as deductions from gross estate
122 Transfer Taxes provided the following requirements/ documents are complied with/submitted: 1. SIMPLE LOANS (including advances) a. The debt instrument must be duly notarized at the time the indebtedness was incurred except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender. Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death Proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as latest audited balance sheet with detailed schedule of its receivable showing unpaid balance of the decedent-debtor. Statement under oath executed by administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted with three (3) years prior to the death of the decedent. e. 2.
The incapacity of the debtors to pay their obligation is proven. Example: X owes Y (decedent) P100, 000. Y died without X paying the debt. The estate of Y will include the credit of X. In the event of subsequent payment by X after the estate tax has already been paid, there is no effect on the amount of estate tax but the payment shall be treated as income of the estate. In income taxation, bad debts previously written off but subsequently collected are considered gross income under the Tax Benefit Rule.
b.
c.
UNPAID MORTGAGE Requisites: 1. Value of decedents interest in the property mortgaged, undiminished by such mortgaged or indebtedness is included in the value of the gross estate but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax When founded upon a promise or agreement, the unpaid mortgage or indebtedness must have been contracted bona fide and for an adequate and full consideration in money or moneys worth. In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/ mortgage payable shall not be allowed as a deduction from the gross estate. In all instances, the mortgaged property, to the extent of the decedent's interest therein, should always form part of the gross taxable estate.
d.
2.
2.
NPAID OBLIGATIONS arose from purchase of goods or services a. Pertinent documents evidencing the purchase of goods or services, such as sales invoices/delivery receipts, or contract for the services agreed to be rendered, as duly acknowledged, executed and signed by decedent debtor and creditor and statement of account given by the creditor as duly received by the decedent debtor. Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. Certified true copy of the latest audited balance sheet of creditor with a detailed schedule of its receivable showing the unpaid balance of the d e c e d e n t - d e b t o r. M o r e o v e r, a certified true copy of the updated latest subsidiary ledger/records of the debt of the debtor-decedent should likewise be submitted.
b.
c.
f.
TAXES Taxes which have accrued as of or before the death of the decedent which were unpaid as of the time of death. The following are not deductible: 1. 2. 3. income tax on income received after death; property taxes not accrued before death; and estate tax.
d. CLAIMS AGAINST INSOLVENT PERSONS Requisites: 1. The amount thereof has been initially included as part of his gross estate (for otherwise they would constitute double deductions if they were to be deducted); and

NOTE: For estate tax purposes: the unpaid taxes must have accrued before the death of the decedent regardless of whether or not it was incurred in connection with trade or business. In case of refund of the estate tax paid, the amount shall be considered as income of the estate. g. LOSSES Requisites: 1. It should arise from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement; Not compensated by insurance or otherwise; Not claimed as deduction in an income tax return of the taxable estate; Occurring during the settlement of the estate; and Occurring before the last day for the payment of the estate tax (last day to pay: six months after the decedents death). 6. 4. 5.
123 2008 CENTRALIZED BAR OPERATIONS Requisites: 1. The present decedent died within 5 years from receipt of the property from a prior decedent or donor; The property must be located in the Philippines; The property formed part of the taxable estate of the prior decedent, or of the taxable gift of the donor; The estate tax or donors tax on the gift must have been finally determined and paid; The property must be identified as the one received from the prior decedent, or something acquired in exchange therefore; and No vanishing deduction on the property was allowable to the estate of the prior decedent.
2. 3.
2. 3. 4. 5.
Steps in the computation of vanishing deduction: a. Determine the basis of the vanishing deduction: 1. Initial value value of the property in the prior estate (or value used for donors tax purposes) OR value of such property in the present estate, WHICHEVER IS LOWER
NOTE: Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or estate tax purposes.
TRANSFER FOR PUBLIC USE Requisites: 1. 2. 3. 4. The disposition is in a last will and testament; To take effect after death; In favor of the government of the Phiippines or any political subdivision thereof; and For exclusive public purpose.
2.
NOTE: Where the property referred to consists of two or more items, the aggregate of such item by item lower of two values shall be the initial basis 2. Value in no. 1 shall be reduced by any payment made by the present decedent on any mortgage or lien on the property, where such mortgage or lien was a deduction from the gross estate of the prior decedent, or gift of the donor 3. The value as reduced in (2) shall be further reduced by an amount equal to: Value as reduced in no. 2 Gross Estate x ELIT *
NOTE: This should also include bequests, devices, or transfers to social welfare, cultural and charitable institutions.
VANISHING DEDUCTION DEFINITION: The deduction allowed from the gross estate for properties that were subject to donors or estate taxes. It is called vanishing deduction, because the deduction allowed diminishes over a period of 5 years. PURPOSE: To lessen the harsh effects of double taxation in the broad sense considering that the property has been previously subjected to estate tax when the prior decedent died.
3.
* expenses, losses, indebtedness, etc. and transfers for public use not including family home, standard deduction, medical expenses and amounts received under R.A. No. 4917. b. On the computed basis of vanishing deduction in (a), apply the applicable rate as follows: The rate of deduction depends on the period from the date of transfer to the death of the decedent, as follows: PERIOD Within 1 year DEDUCTION 100%
124 Transfer Taxes PERIOD More than 1 year but not more than 2 years More than 2 years not more than 3 years More than 3 years not more than 4 years More than 4 years but not more than 5 years DEDUCTION 80% 60% 40% 20% 3.
Allowable deduction must be in an amount equivalent to:
the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent's interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding P1,000,000
TREATMENT IF IN THE DETERMINATION OF ESTATE TAX, A MORTGAGE OR OTHER LIEN WAS ALLOWED Where a deduction was allowed of any mortgage or other lien in determining the donors tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedents death, then the deduction allowable shall be reduced by the amount so paid. DEDUCTION FROM VANISHING DEDUCTION The vanishing deduction shall be reduced by an amount which bears the same ratio to the amounts of expenses, losses, indebtedness and taxes, transfers for public use as the amount of property previously taxed bears to the value of the decedents estate.
STANDARD DEDUCTION A deduction in the amount of One Million Pesos (P1,000,000) shall be allowed as an additional deduction without need of substantiation. The full amount of P1,000,000 shall be allowed as deduction for the benefit of the decedent. STANDARD DEDUCTION Sec. 86 (A)(5) Deduction in addition to the other deductions Amount of deduction: P1,000,000 Available to resident citizens, non-resident citizens and resident aliens OPTIONAL STANDARD DEDUCTION Sec. 34 (L) Deduction in lieu of itemized deductions Amount of deduction: 10% of gross income Applies to all individual taxpayers except non-resident aliens
5.
FAMILY HOME FAMILY HOME It is a dwelling house, including the land on which it is situated, where the husband and wife, or head of family and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein (Article 152 and 153 of Family Code). Conditions: 1. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated; The total value of the family home must be included as part of the gross estate of the decedent; and
4.
MEDICAL EXPENSES Any amount of medical expenses incurred within one year from death in excess of Five Hundred Thousand Pesos (P500,000) shall no longer be allowed as a deduction. Neither can any unpaid amount thereof in excess of the P500,000 threshold nor any unpaid amount for medical expenses incurred prior to the one-year period from date of death be allowed to be deducted from the gross estate as claim against the estate. Examples: cost of medicines, hospital bills, doctors fees, etc incurred, whether paid or unpaid within 1 year before the death of the decedent shall be allowed as long as properly substantiated.
6.
2.
NOTE: It should be duly substantiated with receipts for services rendered by decedents attending physicians, invoices, statements of account duly certified by the hospital and such other documents in support thereof and provided,

further, that the total amount thereof, whether paid or unpaid, does not exceed P500,000.00
AMOUNTS RECEIVED BY HEIRS UNDER REPUBLIC ACT NO. 4917 Any amount received by the heirs from the decedent's employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917 is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross estate of the decedent. R.A. No. 4917 contemplates retirement benefits of employees in the private sector. Requisites: 1. 2. Employee is at least 50 years old at the time of retirement; Employee has rendered at least 10 years of continuous service in favor of the same employer; Such benefit is availed only once; Retirement plan is duly approved by the BIR; and The fund shall not be used by the employer for any purpose other than for the benefit of the employees.
7.
NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL PARTNERSHIP OR COMMUNITY PROPERTY After deducting the allowable deductions (only the ordinary deductions) appertaining to the conjugal or community properties included in the gross estate, the share of the surviving spouse must be removed to ensure that only the decedent's interest in the estate is taxed. CAPITAL OF SURVIVING SPOUSE OF DECEDENT
TREATED FOR ESTATE TAX
8.
The capital of surviving spouse of a decedent shall not be deemed part of his or her gross estate. INCOME TAX ESTATE TAX
Claim for Deductions Full deduction as long No distinction as taxpayer is engaged in trade/business Purpose of Transfer No specific purpose required Exclusively for public purpose
3. 4. 5.
Deductions FROM Gross Estate Applicable To NonResident Aliens

The following are deductible from the gross estate of non-resident aliens: 1. Expenses, losses, indebtedness and taxes (ELIT) (ordinary deductions) Formula: Tax Credit = Phil. Gross Limit Estate X World ELIT World Gross Estate 2. 3. 4. Transfer for public use Vanishing deduction on property in the Philippines. Conjugal share of the surviving spouse RC NRC RA SUMMARY RULES ON DEDUCTIONS FROM GROSS ESTATE: FE RC NRC RA JE CAE CAIP UM UT CL
NRA In proportion to the value of the estate located in the Philippines as against the total estate SD FH ME RA TPU CS of 4917 SS VD
NRA In prop. Where: Applicable/Allowed Not Applicable/Not Allowed FE Funeral Expenses JE Judicial Expenses
126 Transfer Taxes CAE CAIP UM UT CL SD FH ME TPU VD Claims against the Estate Claims against Insolvent Persons Unpaid Mortgage Unpaid Taxes Casualty Loss Standard Deduction Family Home Medical Expenses Transfers for Public Use Vanishing Deduction CS of SS
Conjugal Share of Surviving Spouse
NOTE: Non-resident aliens cannot deduct the following from the gross estate: Standard deductions Family home Medical expenses Retirement benefits
Estate Tax Credit

A tax credit is granted for estate taxes paid to a foreign country on the estate of citizens and resident aliens subject to the following limitations: Purpose: To provide a relief from too onerous a taxation of the taxable estate outside the Philippines 1. One foreign country only The tax credit is whichever is lower between: 1. 2. Estate tax actually paid to the foreign country Tax Credit Limit = NTE, foreign country NTE, world X Phil. estate tax 2. More than one foreign country The credit shall be that which is the lower amount between Limit A and Limit B. Limit A. Whichever is lower between:
Estate tax paid to a foreign country Tax Credit Limit = NTE, foreign country NTE, world X Phil. estate tax
Limit B. whichever is lower between:
Total of estate taxes paid to all foreign countries Tax Credit Limit = NTE outside Phil. X Phil. estate tax NTE, world
(NTE - Net Taxable Estate)
Settlement of The Estate Tax

A.
FILING NOTICE OF DEATH TO BE FILED In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the e s t a t e e x c e e d s P 2 0 , 0 0 0 , t h e e x e c u t o r, administrator or any of the legal heirs, within two months after the decedents death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner (Sec. 89). REPORTORIAL REQUIREMENTS A. In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds P20,000 Executor, administrator, or any legal heirs, as the case may be, within 2 months after decedents death, or within a like period after qualifying as such executor or administrator, shall GIVE WRITTEN NOTICE THEREOF TO COMMISSIONER (Section 89 NIRC). B. In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds P200,000, or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock, or other similar property for which clearance from BIR is required as a condition precedent to such transfer of ownership Executor or administrator or any of legal heirs, as the case may be shall file A RETURN UNDER OATH IN DUPLICATE (Section 90 NIRC).
AN ESTATE TAX RETURN IS REQUIRED TO BE FILED
1. when the estate is subject to estate tax; or 2. when the estate is not subject to estate tax
but the gross estate exceeds P200,000; or
3. regardless of the amount of the gross estate,

where the gross estate consists of registered or registrable property such as motor vehicle or shares of stock or other similar property for which clearance from the BIR is required as a condition precedent for the transfer of

ownership thereof in the name of the transferee. CONTENTS OF ESTATE TAX RETURN The following shall be set forth in the return: 1.
127 2008 CENTRALIZED BAR OPERATIONS years if there is an extrajudicial settlement of the estate. CONDITIONS FOR THE GRANT OF EXTENSION The taxpayer is not guilty of negligence, intentional disregard of the rules and regulations, and fraud. The executor or administrator or the beneficiary may be required to furnish a bond in such amount not exceeding double the amount of tax and with such sureties as the Commissioner deems necessary.
a. The value of the gross estate of the decedent

at the time of his death, or in case of nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;
2.
b. The deductions allowed from gross estate in

determining the estate
c. Such part of information as may at the time is

ascertainable and such supplemental data as may be necessary to establish the correct taxes. TIME FOR FILING THE ESTATE TAX RETURN The estate tax return shall be filed within six (6) months after the death of the decedent. E x t e n s i o n : T h e C o m m i s s i o n e r m a y, i n meritorious cases, grant an extension of not exceeding thirty (30) days for the filing of the estate tax return. WHEN THE GROSS ESTATE EXCEEDS P2, 000,000, THE ESTATE TAX RETURN SHALL BE ACCOMPANIED BY A STATEMENT WHICH IS CERTIFIED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT STATING
NOTE: In case the available cash is not sufficient to pay its total estate tax liability, the estate may be allowed to pay tax by installment (Sec. 9F, R.R. No. 2-2003). The estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/ computed tax on which has been paid. Therefore, there may be many clearances as there are many properties released. LIABILITY FOR PAYMENT The estate tax shall be paid by the executor or administrator before delivery of the distributive share in the inheritance to any heir or beneficiary. It is the primary obligation of the executor or administrator to pay the estate tax due but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate [Sec. 9 (G), R.R. No. 2-2003]. If there are two or more executors or administrators, all of them shall be severally liable for the payment of the tax. The estate tax clearance will serve as authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary. If there is no executor or administrator appointed, qualified and acting within the Philippines, then any person in actual, or constructive possession of any property of the decedent. An heir is liable for the assessment as an heir and as holder-transferee of property belonging to the estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance (CIR vs. Pineda G.R. No. L-22734, September 15, 1967). No judge shall authorize the distribution of the estate unless a certification from the Commissioner that the tax has been paid is shown (Sec. 94). Register of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax actually due thereon had been paid is shown, and they shall immediately notify the Commissioner, Regional
1. the itemized assets of the decedent with its

corresponding gross value at the time of his death, or in the case of a non-resident, not citizen of the Philippines, that part of his gross estate situated in the Philippines;
2. the itemized deductions from the gross estate; 3. The amount of tax due, whether paid or still
due and outstanding.
PAYMENT PAYMENT OF THE ESTATE TAX DUE The estate tax due shall be paid at the time when the estate tax return is filed (Pay as you file system) When the Commissioner finds that the payment of the estate tax on the due date would impose undue hardships upon the estate or any heir: a. the payment of the estate tax may be extended for a period not to exceed five (5) years if there is a judicial settlement of the estate; or The payment of the estate tax may be extended for a period not to exceed two (2)
B.
b.
128 Transfer Taxes Director, Revenue District Officer or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the non-payment of tax discovered by them (Section 95 NIRC). Any lawyer, notary public, or any government officer, who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the estate tax (Section 95 NIRC). A debtor of the deceased shall not pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the estate tax imposed by NIRC has been paid is shown, but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased (Section 95 NIRC). If after payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid (Section 96 NIRC). No shares or other forms of securities shall be transferred in the books of any corporation, partnership, business or industry organized in the Philippines, unless a similar certification by the Commissioner is shown (Sec. 97). When a bank has knowledge of the death of a person who maintained a joint account, it shall not allow any withdrawal by the surviving depositor without the above certification (Sec. 97). Provided: that the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding twenty thousand pesos (P20, 000) without the said certification. There is nothing in the Tax Code and in the pertinent remedial law provisions that imply the necessity of the probate court or estate settlement of courts approval of the States claim for estate taxes before the same can be enforced and collected by the BIR. On the contrary, under Section 94, it is the probate or settlement court which is bidden not to authorize the delivery of the distributive share to any interested party without a certification from the CIR showing the payment of the estate tax (Marcos II vs. Court of Appeals, G.R. No. 120880, June 5, 1997).
STATUTE OF NON-CLAIMS DOES NOT BAR CLAIMS OF GOVERNMENT Section 5, Rule 86 of the Rules of Court, the statute of non-claims does not bar government for unpaid taxes, still within the period of limitation prescribed in the NIRC (Vera vs. Fernandez, G.R. No. L-31364, March 30, 1979). COLLECTION OF TAX FROM THE HEIRS An estate or inheritance tax, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent (Palanca vs. Commissioner of Internal Revenue, G.R. No. 16661, January 31, 1962). The Government has two ways of collecting taxes due from the estate. a. By going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received, or Pursuant to the lien created by Section 219 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate (CIR vs. Pineda, G.R. No. L 22734, September 15, 1967).
b.
PLACE OF FILING OF ESTATE TAX RETURN AND PAYMENT a. In case of resident decedent, the administrator shall register the estate of the decedent and secure a new TIN therefore from the Revenue District Office (RDO) where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with the Accredited Agent Bank, Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality where the decedent was domiciled at the time of his death, whichever is applicable, following prevailing collection rules and procedures. b. In case of non-resident decedent, whether non-resident citizen or non-resident alien, with executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO where such executor or administrator is registered. If not registered, filed with and the TIN of estate shall be secured from the RDO having jurisdiction over the executor or administrators legal residence. c. In case of non-resident decedent having no executor or administrator in the Philippines, the
C.

estate tax return shall be filed with and TIN for the estate shall be secured from the Office of the Commissioner.
129 2008 CENTRALIZED BAR OPERATIONS Note: The Commissioner may continue to exercise his power to allow a different venue/place in filing of tax returns.
Donors Taxes
Donors Taxes
DEFINITION: A tax on the privilege of transmitting ones property or property rights to another or others without adequate and full valuable consideration.
DONORS TAX
ESTATE TAX
Tax on privilege to Tax on privilege to transfer property during transfer property upon ones lifetime ones death Generally imposed on Donations Inter Vivos Generally imposed on Donations Mortis Causa
Coverage Of The Tax (Sec. 104)

RESIDENT & NON-RESIDENT CITIZEN, RESIDENT ALIEN DONOR All properties, real or personal, tangible or intangible, wherever situated. NON-RESIDENT ALIEN DONOR Only properties situated in the Philippines provided that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC. LAW THAT GOVERNS THE IMPOSITION OF DONORS TAX The law in force at the time of the completion of donation shall govern the imposition of donors tax (R.R. 2-2003) . When Donors Tax Applies The donors tax shall not apply unless and until there is a completed gift. The transfer is perfected from the moment the donor knows of the acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the donee. When Incomplete Gift Becomes Complete A gift that is incomplete because of reserved powers becomes complete when either: 1. 2. the donor renounces the power; or his right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfillment of some condition, other than because of the donor's death.
Requisites: 1. 2. 3. 4. Capacity of the donor; Donative intent (intention to donate); Delivery, whether actual or constructive, of the subject gift; Acceptance by the donee.
DONATIVE INTENT Donative Intent is a creature of mind. It cannot be perceived except by the material and tangible acts that manifests its presence. Hence, it is presumed to exist when one gives a part of ones patrimony to another without consideration. It is not negated when the person donating has other intentions, motives, or purposes that do not contradict donative intent (Abello, Concepcion, Regala and Cruz vs. CIR G.R. No. 120721).
Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor's tax. General renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor's tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in
130 Transfer Taxes the hereditary estate (Sec. 11, R.R. No. 2-2003). DONATION OF IMMOVABLE PROPERTY TO BE VALID In order for a donation of an immovable property to be valid, it must be made in a public document specifying therein the property donated, The acceptance may be made in the same Deed of Donation or in a separate public document, but shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments (R.R. 2-2003). Notes: 1. Where property, other than a real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or moneys worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed gift, and shall be included in computing the amount of gifts made during the calendar year. Net gifts mean the net economic benefits from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liabilities, then the net gift is measured by deducting from the fair market value of the property the amount of mortgage assumed. TAX RATES A. If the donee is a stranger, the rate of tax shall be 30% of the net gifts. NET GIFT The net economic benefit from the transfer that accrues to the donee. STRANGER - a person who is not a brother, sister, spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral line within the 4th civil degree. A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, donation to him shall not be considered as donation made to stranger. Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger.
B. If the donee is not a stranger- 2% to 15%, the donors tax shall be computed based on the tax table as indicated below. Over But not Tax Plus over shall be 100000 100000 200000 200000 500000 500000 1M 3M 5M 10M 1M 3M 5M 10M Exempt 0 2500 14000 44000 2% 4% 6% 8% 100000 200000 500000 1M 3M 5M 10M Of the excess over
204000 10% 404000 12% 1.04M 15%
FORMULA (ON A CUMULATIVE BASIS OVER A PERIOD OF ONE CALENDAR YEAR): 1.

ON THE 1ST DONATION OF THE YEAR
GROSS GIFTS LESS: DEDUCTIONS FROM GROSS GIFTS

NET GIFTS X TAX RATE DONORS TAX ON THE NET GIFTS
XXX XXX XXX
%
XXX
2. ON DONATION
THE YEAR
OF A SUBSEQUENT DATE DURING XXX XXX XXX XXX XXX
2.
GROSS GIFTS MADE ON THIS DATE LESS: DEDUCTIONS FROM GROSS GIFTS
NET GIFTS ADD: ALL PRIOR NET GIFTS WITHIN THE YEAR AGGREGATE NET GIFTS X TAX RATE DONORS TAX ON AGGREGATE NET GIFTS LESS: DONORS TAX ON ALL PRIOR NET GIFTS DONORS TAX ON THE NET GIFTS ON THIS DATE
%
XXX
XXX XXX
NOTES: If what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donors tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provision of the Civil Code of the Philippines and Family Code of the Philippines (R.R. 2-2003). Husband and wife are considered separate and distinct taxpayers for purposes of donors tax. VALUATION OF GIFTS OF PROPERTY The fair market value of the property given at the time of the gift shall be the value of the gift. INTANGIBLE PERSONAL PROPERTIES WITH A SITUS IN THE PHIL. AND INSTANCES WHEN TRANSFER OF
INTANGIBLE PERSONAL PROPERTY OWNED BY A CITIZEN AND RESIDENT OF A FOREIGN COUNTRY IS NOT

SUBJECT TO DONORS TAX (SAME AS IN ESTATE TAX SUBJECT TO THE RECIPROCITY RULE) (Sec. 104)
131 2008 CENTRALIZED BAR OPERATIONS electoral campaign falls squarely within the definition of donation and therefore taxable. Congress approved RA 7166 on November 25, 1991, providing in Section 13 thereof, that political/electoral contributions, duly reported to the Commission on Elections, are not subject to payment of any gift tax. DONATION MADE BY CORPORATION TO A DECEASED OFFICER OUT OF GRATITUDE FOR PAST SERVICES A donation made by a corporation to the heirs of the deceased officer out of gratitude for his past services is subject to the donees gift tax, Past services, rendered without relying on a coetaneous promise, express or implied, that such services would be paid for in the future, do not constitute cause or consideration that would make a conveyance of property anything else but a gift or donation. MERGER AND TRANSFER TO MEMBER BENEFICIARIES- NO DONATIVE INTENT A merger between parent company and its wholly owned subsidiary where no shares are to be issued is not subject to donors tax because there is no intention to donate on the part of any of the parties. There can be no donative intent on the part of the transferor in a transfer of properties to the member beneficiaries, considering that a person or entity cannot donate properties the ownership of which belongs to themselves. Thus, a transfer from one subsidiary to another pursuant to a worldwide reorganization of a group of companies is not subject to donors tax. Donations under Adopt-A-School Program donors tax exempt Donations under the Adopt-a-School program as provided in the Adopt-a-School Act of 1998 (R.A. 8525) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization donors tax exempt To be exempt it is required that not more than 30% of said gifts shall be used by such donee for administration purposes. A
NON-PROFIT EDUCATIONAL AND/OR CHARITABLE CORPORATION , INSTITUTION , ACCREDITED NON G O V E R N M E N T O R G A N I Z AT I O N , T R U S T O R P H I L A N T R O P H I C O R G A N I Z AT I O N , R E S E A R C H INSTITUTION OR ORGANIZATION IS ONE:
DONATIONS EXEMPT FROM PAYMENT OF DONORS TAX 1. Gifts made by a resident: a. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, illegitimate or adopted children to the extent of the first P10,000; Requisites: a. made on account of marriage b. made before the celebration of marriage or within one year thereafter c. made by the parents to each of their legitimate, recognized natural, or adopted children d. to the extent of the first ten thousand pesos (P10,000.00) b. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said government; and Gifts in favor of educational, charitable, religious, cultural or social welfare corporation, institutions, foundations, trust or philanthropic organization, research institution or organization, accredited non-government organization (NGO). Provided, that not more than 30% of said gifts shall be used by such donee for administration purposes.
c.
2.
Gifts made by a non-resident not a citizen of the Phil.: a. b. same as (b) above; and Same as (c) above except accredited non-government organization (NGO).
CONTRIBUTIONS FOR ELECTION CAMPAIGN
Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code as amended. The application of the rates as provided above is imposed on donations made beginning January 1, 1998 (Section 99, NIRC of 1997, R.R. 2-2003). Donation having the following elements: a. reduction of patrimony of the donor; b. increase in patrimony of the donee; c. the intent to do an act of liberality or animus donandi. Contributions for
1. 2.
incorporated as a non-stock entity; pays no dividends;
132 Transfer Taxes 3. 4. governed by trustees who receive no compensation; and devotes all its income whether students fees or gifts, donations, subsidies or other forms of philanthropy to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. 2.
taxable under NIRC bears to his entire net gift; and The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedents net gift situated outside the Philippines taxable under the NIRC bears to his entire net gift.
TAX CREDIT FOR DONORS TAXES PAID TO A FOREIGN COUNTRY 1. 2. Donor was a Filipino citizen or resident alien at the time of foreign donation Donor s taxes of any character and description are imposed and paid by the authority of a foreign country.
FORMULA OF TAX CREDIT LIMITS 1. for donors taxes paid to one foreign country Net Gift situated In a foreign country x Philippine Donors Tax Entire net gift (PDT) = Tax credit Limit for donors taxes paid to two or more foreign country Net Gift outside the Philippines x PDT Entire net gift = Tax credit limit The allowable tax credit is the lower amount between the tax credit limit under (a) and (b)
LIMITATION ON TAX CREDIT 1. The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedents net gifts situated within such country
Return, Filing, and Payment

An individual who makes any transfer by gift, except those which are exempt form donors tax shall, for purpose of the said tax, make a return under oath in duplicate. Contents of the Return: Any person making a donation (whether direct or indirect) unless the donation is specifically exempt under the Code or other special laws is required, or every donation, to accomplish under oath a donors tax return in duplicate which shall set forth: 1. Each gift made during the calendar year which is to be included in computing net gifts; 2. The deductions claimed and allowable 3. Any previous net gifts made during the same calendar year 4. The name of the donee 5. Relationship of the donor to the donee; 6. Such further information as the Commissioner may require (Section 103 NIRC, RR 2-2003) TIME FOR FILING OF RETURN AND PAYMENT OF THE DONORS TAX The donors tax return is filed and the donors tax due is paid within thirty (30) days after the date the gift is made (Pay as you file system). PLACE OF FILING AND PAYMENT Unless the Commissioner otherwise permits, the return shall be filed and tax paid to an authorized agent bank, revenue district officer, revenue collection officer or duly authorized treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of transfer, or directly with the Office of the Commissioner. For this purpose, the term Office of the Commissioner shall refer to the Revenue District office (RDO) having jurisdiction over the BIR national office Building (R.R. 2-2003). NOTE: The filing of a notice of donation is not required, unlike in estate tax where notice of death is required.
END OF TRANSFER TAXES
TAXATION LAW VALUE-ADDED TAX

(Title IV of NIRC, as amended by RA 9337, and other implementing rules and regulations
VALUE-ADDED TAX
NATURE AND CHARACTERISTICS OF VAT VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties or services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA 9337. However, in the case of importation, the importer is the one liable for the VAT (R.R. No. 16-2005 Sec. 4.102-2). TRANSACTIONS COVERED BY VAT (CESI) 1. 2. 3. 4. Sale of Commodities or Goods (in the course of trade or business only) Exportation (in the course of trade or business only) Sale of Services (in the course of trade or business only) Importation (whether or not in the course of trade or business) PERSONS LIABLE FOR VAT Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 106 to 108
of the National Internal Revenue Code, as amended by R.A. 9337. However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of trade or business, shall be liable to VAT imposed in Section 107 of the Tax Code (R.R. No. 16-2005 Sec. 4.105-1). Definition of terms (R.R. No. 16-2005): Person refers to any individual, trust, partnership, corporation, joint venture, cooperative or association. Taxable person refers to any person liable for the payment of VAT, whether registered or registrable in accordance with Section 236, Tax Code. VAT-registered person refers to any person who is registered as a VAT taxpayer under Section 236 of the Tax Code. His status as a VATregistered person shall continue until the cancellation of such registration. Taxable Sale refers to the sale, barter, exchange and/or lease of goods or properties including transactions deemed sale and the performance of service for a consideration whether in cash or in kind, all of which are subject to tax under Sections 106 and 108, Tax Code. IN THE COURSE OF TRADE OR BUSINESS The regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of
The VAT is an indirect tax.
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:
134 Value-Added Tax whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Therefore, if the disposition of goods or services is NOT in the course of trade or business, then it is not subject to VAT; except with respect to importation. T h e r u l e o f r e g u l a r i t y, t o t h e c o n t r a r y notwithstanding, services as defined in the Tax Code, rendered in the Philippines by non-resident foreign persons shall be considered as being in the course of trade or business. Importation is subject to VAT regardless of whether or not it is in the course of trade or business The reason for the rule is to protect our local or domestic goods or articles and to regulate the entry or introduction of foreign articles to our local market. Regulation is one of the purposes of taxation. The following transactions, however, are deemed sales pursuant to Section 106 (B) of the Tax Code: (TDCR) a. Transfer, use, consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business (i.e. when a VAT-registered person withdraws goods from his business for his personal use); Distribution or transfer to: 1. 2. c. Shareholders or investors as share in the profits of VAT-registered person; and Creditors in payment of debt or obligation.
Change or Cessation of Status as VATregistered Person The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-intrade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation. (2) Change in the trade or corporate name of the business; (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation. VAT-EXEMPT TRANSACTIONS These refer to the sale of goods or properties and/ or services and the use or lease of properties that is NOT subject to output tax and the seller is NOT allowed any tax credit of input tax on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because said transaction is not subject to VAT (R.R. No. 16-2005 Sec. 4.109-1). Section 109, NIRC, as amended by Republic Act 9337 provides for the following exempt transactions: 1. Sale or importation of agricultural and marine food products in their original state; livestock and poultry of a kind generally used as, or yielding or producing food for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple process of preparation or preservation for the market such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/ or husked rice, corn grits, raw cane sugar and molasses and ordinary salt shall be considered in their original state; 2. Sale or importation of fertilizers; seeds, seedlings, and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specially made feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); Importation of personal and household effects belonging to residents of the Philippines
b.
Consignments of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to transactions deemed sale: 1. Change of ownership of the business. There is a change in the ownership of the business when a single proprietorship incorporates, or the proprietor of a single proprietorship sells his entire business; and Dissolution of a partnership and creation of a new partnership which takes over the business. 3.
d.
2.

returning from abroad and non-resident citizen coming to resettle in the Philippines: PROVIDED, that such goods are exempt from customs duty under the Tariff and Customs Code of the Philippines; 4. Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects ( except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons or arriving within 90 days before or after their arrival upon the production of evidence satisfactory to the Commissioner of Internal Revenue that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; Services subject to the percentage taxes under Title V of the NIRC; Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; Medical, dental, hospital and veterinary services except those rendered by professionals. Laboratory services are exempted. If the hospital operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. 8. Educational services rendered by private educational institutions duly accredited by the DepED, CHED and TESDA; Services rendered by individuals pursuant to an employer-employee relationship;
135 2008 CENTRALIZED BAR OPERATIONS processing of their produce; Sale by agricultural cooperatives to nonmembers can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT; It is to be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Subsection (a) hereof (Sec. 14, R.R. 04-2007) 13. Gross receipts from lending activities of credit or multi-purpose cooperatives duly registered with the CDA; 14. Sales by non-agricultural, non-electrical and non-credit cooperatives duly registered with the CDA: Provided, that the share capital contribution of each member does not exceed P15, 000 and regardless of the aggregate capital and net surplus ratably distributed among the members. Importation by these cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. 15. Export sales by persons who are not VAT registered; 16. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; or real property utilized for low-cost housing and socialized housing as defined by R.A. No. 7279 (Urban Development and Housing Act of 1992) and other related laws, residential lot valued at P1.5 million and below and house and lot and other residential dwellings valued at P2.5 million and below; However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayers main business (Sec. 14, R.R. 04-2007). 17. Lease of residential unit with a monthly rental not exceeding P10,000; 18. Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; 19. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;
5. 6.
7.
9.
10. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as s u p e r v i s o r y, c o m m u n i c a t i o n s a n d coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; 11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws except those under Presidential Decree No. 529; 12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or
136 Value-Added Tax 20. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; 21. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and 22. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1, 500,000. 23. Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for
shipping transport operations; provided, that the exemption shall be subject to the provisions of Section 4 of Republic Act. No. 9295, otherwise known as The Domestic Shipping Development Act of 2004 (Sec. 14, 04-2007); 24. Importation of capital equipment, machinery, spare parts, lifesaving and navigational equipment, steel plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act. No. 9295, otherwise known as The Domestic Shipping Development Act of 2004 (Sec. 14, 04-2007)
ValueAdded Tax on Goods or Properties

MEANING OF GOODS OR PROPERTIES The term goods or properties refer to all intangible and tangible objects which are capable of pecuniary estimation and shall include, among others: (RPEMT) 1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; The right or privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand, or other like property or right; The right or privilege to use in the Philippines of any industrial, commercial, or scientific equipment; The right or privilege to use motion pictures films, tapes, and discs; Radio, television, satellite transmission and cable transmission time. RATE AND BASE OF TAX There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a valueadded tax equivalent to 12% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor The effectivity date of the increase in VAT rate is February 1, 2006. GROSS SELLING PRICE (GSP) Means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange of the goods or properties, excluding EXPORT SALES 1. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that VAT. The excise tax, if any, on such goods or properties shall form part of the GSP. In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the fair market value, whichever is higher. If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT (Sec. 14, RR 04-2007). Note: Sales discounts and sales returns and allowances are allowable deductions from the Gross Selling Price. Zero-Rated Sales of Goods or Properties: a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate (RR 16-2005 Sec. 4.106-5): (FEST) 1. 2. 3. Foreign Currency Denominated Sale; Export Sales; Sale to persons or entities which is VAT exempt under special laws or international agreements to which the Philippines is a signatory; and Transactions subject to zero-rated (0%) as provided in Section 108(B) of NIRC, as amended by RA 9337.
2.
3.
4. 5.
4.

may be agreed upon which may influence or determine the transfer or ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted with the rules and regulations of the BSP. 2. The sale of raw materials or packaging materials to non-resident buyer for delivery to resident local export-oriented enterprise to be used in manufacturing, processing, packaging, or repacking in the Philippines of the said buyers goods, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of BSP. Sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 70% of total annual production. Sale of gold to the BSP. Those considered export sales under EO No. 226 (Omnibus Investment Code of 1987) and other special laws. CONSIDERED EXPORT SALES UNDER E.O. 226 Shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer to another export producer, or to an export trader that subsequently exports the same; PROVIDED, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; PROVIDED FURTHER, that without actual exportation the following shall be considered C O N S T R U C T I V E LY E X P O R T E D f o r purposes of these provisions: (BERD) a. sales to bonded manufacturing warehouses of export-oriented manufacturers; sales to export processing zones; sales to r egistered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the board in consultation with the BIR and Bureau Of Customs; sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not.
137 2008 CENTRALIZED BAR OPERATIONS or international air transport operations; Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any other port in the Philippines; Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion shall be subject to 10% VAT. FOREIGN CURRENCY DENOMINATED SALE Means the sale to non-resident of goods, except those mentioned in Section 149 and 150 of the NIRC, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency and accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales (R.R. No. 16-2005). SALE TO PERSONS OR ENTITIES DEEMED TAX EXEMPT UNDER SPECIAL LAW OR INTERNATIONAL AGREEMENT Sales of goods or property to persons or entities who are tax-exempt under special laws or international agreements to which the Philippines is a signatory, such as, Asian Development Bank (ADB) and International Rice Research Institute (IRRI) shall be effectively subject to zero-rate. PEZA REGISTERED ENTERPRISE GIVEN THE OPTION PEZA registered enterprise is given the option to choose between two fiscal incentives (a) 5% preferential tax rate on its gross income under the said law or (b)income tax holiday provided under E.O. 226 or Omnibus Investment Code of 1987, as amended. While an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in laws as foreign soil. Sales by supplies outside the borders of the ecozone to this separate customs territory are deemed exports and treated as export sales (CIR vs. Seksui Jushi Phils, Inc. 496 SCRA 206). EFFECTIVELY ZERO-RATED SALE OF GOODS OR PROPERTIES Refer to the local sale of services by a VATregistered person to a person or entity who was granted indirect tax exemption under special laws or international agreement.
3.
4. 5.
b. c.
d.
6.
Sale of goods, supplies, equipment and fuel to persons engaged in international shipping
138 Value-Added Tax
Value-Added Tax on Sale of Services

MEANING OF SALE OR EXCHANGE OF SERVICES Means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash (R.R. No. 16-2005 Sec. 4.108-1). GROSS RECEIPTS (R.R. No. 16-2005, Sec. 4.108-4) Refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposit applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT. Constructive receipt occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. The following are examples of constructive receipts: 1. 2. Deposit in banks which are made available to the seller of services without restrictions; Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and Transfer of amounts retained by the payor to the account of the contractor. RATE AND BASE OF TAX There shall be levied, assessed and collected, a value added tax equivalent to 12% of the gross receipts derived from the sale or exchange of services, including the use or lease of properties. The effectivity date of the increase in VAT rate is February 1, 2006. Zero-Rated Transactions or Services A zerorated transaction is a taxable transaction for VAT purposes, which shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund. The following services by VAT-registered persons shall be subject to zero percent (0%) rate: 1. Processing, manufacturing or repacking of goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted 7. 5. 3. outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate; Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods, or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to 10% VAT under Sec 108 of the Tax Code; Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production; Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to percentage tax of 3% based on their gross receipts as provided for in Sec 118 of the Tax Code but shall not to be liable to VAT; and Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; provided, however, that zero-rating shall apply strictly to the sale of the power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.
4.
6.
3.
Effectively Zero-Rated Sale of Services Refer to the local sale of services by a VATregistered person to a person or entity who was granted indirect tax exemption under special laws or international agreement.
2.
Value-Added Tax on Legal Services * R.A. 9337 Expanded Value-Added Tax

ARE LAWYERS LIABLE FOR VAT? YES. RA 9337 clearly provided that sale of legal services by a lawyer or a law firm shall be subject to VAT effective November 1, 2005. There was an elimination of the exemption from VAT of legal services, deleting the old Section 109 (BB) of RA 9238. Practice of law is a privilege burdened with conditions. Congress has expressed in clear terms that all professionals should be subject to VAT and practice of law cannot be exempted from said tax on the ground that it is not considered as a business. An individual can practice his law profession either personally or through general professional partnership. A lawyer who practices his profession may be subject to or exempt from VAT. A lawyer practicing his profession is subject to VAT if: a. There is no employer-employee relationship between him and the person to whom he provides the legal service; and His gross receipts for the next 12 months exceed P1.5 million. 3. in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted with the rules and regulations of the BSP; Payment of professional fee must be in acceptable foreign currency and accounted for in accordance with BSP rules. 2. Legal services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate; and (Payment of professional fee in foreign currency is not required.) Legal services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof. (Payment of professional fee in foreign currency is not required.) EFFECTIVELY ZERO-RATING One of the conditions for zero-rating is that the VAT receipt issued by the lawyer must prominently show the words Zero-Rated Sales so that the buyer thereof will not utilize any input tax assumed to have been passed on to him. With respect to legal services rendered to persons engaged in international shipping or international air transport operations, they are subject to VAT at zero percent. The VAT receipt to be issued by the lawyer must also show the words Zero-rated Sales.
b.
Otherwise, he is exempt from VAT. RATE AND BASE OF TAX There shall be levied, assessed and collected, a value added tax equivalent to 12% of the gross receipts derived from the sale or exchange of services, including the use or lease of properties. The effectivity date of the increase in VAT rate is February 1, 2006. Zero percent (0%) tax rate shall apply to the following: 1. Legal services rendered to a person engaged
Value-Added Tax on Importations

VAT ON IMPORTATION OF GOODS VAT is imposed on goods brought into the Philippines, whether for use in business or not. The tax shall be based on the total value used by the BOC in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges, such as postage, commission and similar charges, prior to the release of the goods from customs custody. WHO PAYS THE VAT ON IMPORTATION OF GOODS AND WHEN? It is the
IMPORTER who pays RELEASE of such goods from
the VAT PRIOR TO THE the customhouse.
Importer refers to any person who brings goods into the Philippines, whether or not made in the course of trade or business. It includes nonexempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies.
140 Value-Added Tax WHAT IS THE TAX BASE? The imported goods shall be subject to 12% VAT rate: 1. Based on total value used by the BOC in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges such tax to be paid by the importer prior to the release of such goods from customs custody (Section 5, R.A. 9337). In case of valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges and also excise tax, if any. Same rule applies to technical importation of goods sold by a person located in a Special
Economic Zone to a customer located in a customs territory (R.R. No. 16-2005 Sec. 4.107-1). TRANSFER OF GOODS BY TAX-EXEMPT PERSON When a person who was exempt from VAT on his importation subsequently sells, transfers, or exchanges in the Philippines such imported article to a non-exempt person or entity, the purchaser, transferee or assignee shall be required to pay the VAT. VAT ON IMPORTATION AS INPUT TAX A seller of goods or services who imports goods, materials, supplies or depreciable assets can claim the VAT paid on importations as input taxes creditable against the output taxes on his sales.
2.
Tax Credit and Refund

WHO CAN AVAIL OF THE INPUT TAX CREDIT? The input tax credit on importation of goods or local purchases of goods, properties or services by a VAT registered person shall be creditable: a. b. c. To the importer upon payment of VAT prior to the release of goods from customs custody; To the purchaser of the domestic goods or properties upon consummation of the sale; or To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee (R.R. No. 16-2005, Sec. 4.110-2). with Section 111 of the NIRC (Sec.110 1997 NIRC as amended). The following input taxes when evidenced by VAT invoice or official receipt issued by a VATregistered person shall be creditable against the output tax: 1. VAT paid in the course of trade or business on the purchase or importation: a. b. For sale; For conversion into or intended to form part of the finished product for sale, including packaging materials; For use as supplies in the course of business; or For use in the course of trade or business for which deduction for depreciation or amortization is allowed for income tax purposes (capital goods)
c. TAX FORMULA Output Tax Less: Input Tax Value-Added Tax Payable If the amount of input tax is greater than the amount of output tax, the resulting amount is treated as Tax Credit or Refund. "OUTPUT TAX" means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of the NIRC (Sec.110 1997 NIRC as amended). "INPUT TAX" means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VATregistered person. It shall also include the transitional input tax determined in accordance 2. 3. 4. 5. 6. 7. d.
VAT paid on the purchase of real property; VAT paid on the purchase of services; Transactions deemed sale; Transitional Input tax; Presumptive Input tax; and Transitional input tax credits allowed under the transitory and other provisions of these regulations (R.R. No. 16-2005, Sec.4.110-1).
HOW IS INPUT TAX CREDITABLE DURING THE TAXABLE MONTH OR QUARTER DETERMINED? (R.R. No. 16-2005, Sec. 4.110-5) Adding all creditable input taxes during the month or quarter plus any amount of input tax carriedover from the preceding month or quarter, reduced by the amount of claim for VAT refund or

tax credit certificate (whether filed with BIR, with Department of Finance, Board of Investments or the BOC) and other adjustments, such as purchase returns or allowances, input tax attributable to exempt ales and input tax attributable to sales subject to final VAT withholding. DETERMINATION OF OUTPUT TAX AND VAT PAYABLE AND THE COMPUTATION OF VAT PAYABLE OR EXCESS TAX CREDITS (R.R. No. 16-2005, Sec. 4110-6) 1. Output tax a. Output tax is determined by multiplying the gross selling price or gross receipts by the VAT rate. Where the basis for computing output tax is either the gross selling price or gross receipts, but the amount of VAT is erroneously billed in the invoice, the total invoice amount is presumed to be comprising of gross selling price/gross receipts plus the correct VAT. Hence, the output tax is determined by multiplying the total invoice amount by fraction using rate of VAT as numerator and 100% plus VAT rate as denominator. The input tax that can be claimed by the buyer shall be the corrected amount of VAT. Output tax less input tax to arrive at VAT payable on a monthly VAT declaration and the quarterly VAT returns, subject to limitations prescribed by the regulations.
141 2008 CENTRALIZED BAR OPERATIONS WITHHOLDING OF CREDITABLE INPUT TAX In the case of VAT on Government Purchases: a. b. c. Sale of goods and services to government is subject to 10% VAT Government deducts and withholds a final VAT of 5% For payments to lease or use of properties or property rights owned by non-residents; services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents; other services rendered in the Philippines by nonresidents- withholding is 10% If actual input VAT exceeds 5% of gross payments, the excess may form part of the sellers cost; and If actual input VAT is less than 5% of gross payments, the difference must be treated as income of the seller.
b.
C L A I M S F O R R E F U N D / TA X C R E D I T CERTIFICATE OF INPUT TAX 1. Zero-rated and Effectively Zero-rated sales of goods, properties or services a. Input tax that may be subject to claim shall exclude the portion of input tax that has been applied to output tax. The application should be filed within 2 years after the close of the taxable quarter when such sales were made. In case of zero-rated sales, payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with BSP rules and regulations. If both zero-rated or effectively zero-rated and taxable or exempt and the amount of creditable input tax due cannot be directly and entirely attributed to any one of the transactions, ONLY PROPORTIONATE share of input taxes allocated to zerorated or effectively zero-rated sales can be claimed for refund or issuance of tax credit certificate. If engaged in transport of passenger and cargo by air or sea vessels from Philippines to a foreign country, input taxes allocated RATABLY BETWEEN ZERO-RATED AND NON-ZERO RATED sale (subject to regular rate, final withholding VAT and Vat-exempt sales).
c.
2.
VAT payable b.
c.
VAT PAYABLE IN EXCESS OUTPUT OR EXCESS INPUT TAX 1. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person (R.R. No. 16-2005, Sec. 4.110-7). If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules (R.R.No. 16-2005, Sec 4.110-7 as amended by R.R. No. 2-2007, Sec. 2). d.
2.
e.
* The amendment was pursuant to RA 9361 amending Sec 110(B) NIRC removing the 70% cap.
2.
Sec. 10, R.A. 9337 Capital goods provision as provided in Section 112 (B), NIRC has been withdrawn
Option to apply for refund/tax credit certificate of capital goods has been withdrawn.
142 Value-Added Tax 3. Cancellation of Registration
Cancelled registration due to retirement from or cessation of business, or due to changes in or cessation of status, a VAT registered person may, within 2 years from date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes; Provided, however, that he shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.
certificate/refund of input taxes shall be made Commissioner of Internal Revenue shall grant the claim within 120 days from date of submission of complete documents in support of the application filed. In case of full or partial denial of the claim, taxpayer may appeal to the Court of Tax Appeals within 30 days from receipt of said denial, otherwise decision shall become final. However, if no action on the claim after the 120day period from date of submission of application with complete documents, taxpayer may appeal to CTA within 30 days from lapse of the 120 day period Refunds shall be made upon warrants drawn by the CIR or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on Audit (COA), the provision of the Revised Administrative Code notwithstanding; Provided, that refunds shall be subject to post audit by the COA (R.R. No. 16-2005, Sec. 4.112-1).
4.
Where to file the claim for refund/tax credit certificate
It shall be filed with the appropriate BIR office (Large Taxpayers Service [LTS] or Revenue District Office [RDO]) having jurisdiction over the principal place of business of the taxpayer; Provided, however, that direct exporters may also file their claim for tax credit certificate with the One Stop Shop Center of the Department of Finance; Provided, finally, that the filing of the claim with one office shall preclude the filing of the same claim with another office.
6.
Manner of giving refund
5.
Period within which refund or tax credit
Filing of Return and Payment of VAT

WHO FILES VAT RETURN? Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales or receipts within 25 days following the close of the taxable quarter. Taxable year shall mean the quarter that is synchronized to the income tax quarter of the taxpayer (i.e. calendar or fiscal year). WHEN TO FILE VAT RETURN? Deadline Monthly VAT Return (BIR 2550M) Manual Filing Not later than the 20th day following the end of each month Filing Through eFPS Group A - within twenty five (25) days following the end of the month Group B - within twenty four (24) days following the end of the month Group C - within twenty three (23) days following the end of the month Group D - within twenty two (22) days following the end of the month Group D - within twenty one (21) days following the end of the month c. b. Deadline Quarterly VAT Returns (BIR 2550Q) Within twenty five (25) days following the close of taxable quarter of the taxpayer (for manual filing). Within thirty (30) days following the close of taxable quarter of the taxpayer (for taxpayers under the jurisdiction of the LTS and for filing through eFPS) WHERE TO FILE AND PAY? The monthly VAT declaration and quarterly return shall be filed with, and VAT due thereon paid to: a. An Authorized Agent Bank (AAB) under the jurisdiction of the Revenue District Office/BIR Office where the taxpayer (head office of the business establishment) is required to be registered. In cases where AAB are no duly accredited agent banks within the municipality or city, to the RDO, Collection Agent or duly authorized Treasurer of the Municipality or City where such taxpayer (head office of the business establishment) is required to be registered; The quarterly VAT return and the monthly VAT declaration, where no payment is involved, shall be filed with the RDO/LTDO/ Large Taxpayers Assistance Division (LTAD), Collection Agent, duly authorized Municipal/

City Treasurer of Municipality/City where the taxpayer (head office of the business establishment) is registered or required to be registered. d. e. Taxpayers filing via EFPS shall comply with the provisions of the EFPS Regulations; Only one consolidated quarterly VAT return or monthly VAT declaration covering the results of operation of the head office as well as the branches of all lines of business subject to VAT shall be filed by the taxpayer, for every return period, with the BIR office where said taxpayer is required to be registered (R.R. No. 16-2005, Sec. 4.114-1) Every person or entity who in the course of his trade or business, sells or leases goods, properties and services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed One Million Five Hundred Thousand Pesos (P 1,500,000.00) for any twelve month period A person required to register as VAT taxpayer but failed to register A person who imports goods Professional practitioners Professional Practitioners (PPs) are formerly classified as non-VAT taxpayers and were exempt from the Value-Added Tax and Percentage taxes under Section 109 of the National Internal Revenue Code (hereinafter referred to as the Code), until December 31, 2002. Prior to this date, they were subject only to Income Tax under Section 24 of the Code. Effective January 1, 2003, however, by virtue of Republic Act Nos. 7716 and 9010, which were implemented by Revenue Regulation Nos. 1-2003 and 3-2003, services of PPs are also subject to either VAT or 3% Percentage Tax. Pursuant to Revenue Regulations No. 16-2005, services of Professional Practitioners are subject to VAT if gross professional fees exceed P1,500,000.00 for a 12-month period and subject to 3% Percentage Tax if gross professional fees total P1,500,000.00 and below for a 12-month period. "Professional Practitioners" include the following:
143 2008 CENTRALIZED BAR OPERATIONS office) is registered or whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due thereon within 25 days from the end of the month when the business ceases to operate or when VAT registration has been officially cancelled; Provided, however, that subsequent monthly declarations/quarterly returns are still required to be filed if the results of the winding up of the affairs/business of the taxpayer reveals taxable transactions (R.R. No. 16-2005, Sec. 4.114-1[C]). TAX ON PERSONS EXEMPT FROM VAT If exempt under Sec. 109(1)(V) NIRC from payment of VAT and NOT VAT-registered, taxpayers shall pay a tax equivalent to 3% of his gross monthly sales or receipts; except cooperatives who are exempt from the 3% gross receipts tax herein imposed. REGISTRATION 1. MANDATORY Any person who, in the course of trade or business, sells, barters, or exchanges goods or properties or engages in the sale or exchange of services shall be liable to register if: a. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109 (1) (A) to (U) of the Tax Code, have exceeded P1,500,000.00; or There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, will exceed P1,500,000.00.
Who Are Required To File VAT Returns
b.
2.
OPTIONAL Any person who is VAT-exempt may elect to be VAT-registered by registering with the RDO that has jurisdiction over the head office of that person, and pay the annual registration fee of P 500.00 for every separate and distinct establishment. Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Sec. 109(1) of the Tax Code, as amended. Any person who elects to registeroptional registrationshall not be allowed to cancel his registration for the next 3 years EXCEPT franchise grantees of radio and/or television broadcasting who registered optionally which their VAT-registration shall be irrevocable.
Certified Public Accountants Insurance Agents (Life & Non-life) Other Professional Practitioners required to pass the government examination Others
Short Period Return Any person who retires from business with due notice to the BIR office where the taxpayer (head
144 Value-Added Tax CANCELLATION OF VALUE-ADDED TAX REGISTRATION General Rule : The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered, an application for registration information update in a form prescribed therefor; A VAT-registered person may cancel his registration for VAT if: (a) He makes written application and can demonstrate to the Commissioner's
satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) TO (U), will not exceed One million five hundred thousand pesos (P1,500,000); or (b) He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months. The cancellation of registration will be effective from the first day of the following month (Sec. 236 (F), NIRC as amended).
(Amendments to Value-Added Tax)

Amendments to Value-Added Tax (Annex)
Annexes
Revenue Regulations No. 02-2007

tax, the excess input tax shall be carried over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zerorated sales by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules.
VAT PAYABLE. - Sec. 4.110-7 of RR No. 16-2005 is hereby amended to read as follows: SEC. 4.110-7. VAT Payable (Excess Output) or Excess Input Tax. Xxx xxx xxx. (b) If the input tax inclusive of input tax carried over from the previous quarter exceeds the output

SALE OF REAL PROPERTIES Sale of real property on installment plan means sale of real property by a real estate dealer, the initial payments of which in the year of sale do not exceed twenty-five (25%) of the gross selling price. Sale of real property by a real estate dealer on a deferred payment basis not on the installment plan means sale of real property, the initial payments of which in the year of sale exceed twenty-five percent (25%) of the gross selling price. Initial payments means payment or payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year when the sale or disposition of the real property was made. It covers any down payment made and includes all payments actually or constructively received during the year of sale, the aggregate of which determines the limit set by law. NOTE: Initial payments do not include the amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller, in which case the excess shall be considered part of the initial payments. Also excluded from the initial payments are notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale. GROSS SELLING PRICE In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the fair market value whichever is higher. If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT.

If the sale of real property is on installment plan where the zonal value/fair market value is higher than the consideration/selling price, exclusive of the VAT, the VAT shall be based on the ratio of actual collection of the consideration, exclusive of the VAT, against the agreed consideration, exclusive of the VAT, appearing in the Contract to Sell/Contract of Sale applied to the zonal value/ fair market value of the property at the time of the execution of the Contract to Sell/Contract of Sale at the inception of the contract. Thus, since the output VAT is based on the market value of the property which is higher than the consideration/ selling price in the sales document, exclusive of the VAT, the input VAT that can be claimed by the buyer shall be the separately-billed output VAT in the sales document issued by the seller. Therefore, the output VAT which is based on the market value must be billed separately by the seller in the sales document with specific mention that the VAT billed separately is based on the market value of the property. VAT-EXEMPT TRANSACTIONS 1. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority (CDA) to their members, as well as sale of their produce, whether in its original state or processed form, to non-members, their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. Sale by agricultural cooperatives to nonmembers can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT; It is to be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Subsection (a) hereof. The following sales of real properties are exempt from VAT, namely: Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayers main business. 2. Importation of life-saving equipment, safety and rescue equipment and communication
145 2008 CENTRALIZED BAR OPERATIONS and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for shipping transport operations; Provided, that the exemption shall be subject to the provisions of Section 4 of Republic Act. No. 9295, otherwise known as The Domestic Shipping Development Act of 2004; 3. Importation of capital equipment, machinery, spare parts, lifesaving and navigational equipment, steel plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act. No. 9295, otherwise known as The Domestic Shipping Development Act of 2004;
INPUT TAX ON MIXED TRANSACTIONS Claims for VAT refund/Tax Credit Certificate (TCC) with the Bureau of Internal Revenue, Board of Investment, and One-Stop-Shop and Duty Drawback Center of the Dept. of Finance should be deducted from the Allowable input tax that is attributable to zero-rated sales. ISSUANCE OF TAX CREDIT CERTIFICATES FOR UNUTILIZED ADVANCE VAT PAYMENTS. Sec. 8.229-1 is hereby added to the provisions of RR 16-2005, to read as follows: SEC. 8.229-1. Issuance of Tax Credit Certificate for Unutilized Advance VAT Payments. The advance payments made by the seller/owner of refined sugar and importer/miller of wheat/flour shall be allowed as credit against their output tax on the actual gross selling price of refined sugar/ flour. However, advance payments which remains unutilized at the end of taxpayers taxable year where the advance payment was made, which is tantamount to excess payment, may, at the option of the owner/seller/taxpayer or importer/miller/ taxpayer, be available for the issuance of TCC upon application duly filed with the BIR by the seller/owner or importer/miller within two (2) years from the date of filing of the 4th quarter VAT return of the year such advance payments were made, or if filed out of time, from the last day prescribed by law for filing the return. Advance VAT payments which have been the subject of an application for the issuance of TCC shall not be allowed as carry-over nor credited against the output tax of the succeeding quarter/ year. Advanced VAT payments which remained unutilized for more than one (1) year prior to the
146 Value-Added Tax effectivity of these regulations may, at the option of the seller/owner of the refined sugar or importer/miller of wheat/flour, be the subject of application for TCC to be filed within two (2) years from the date of filing of the last quarterly VAT return where the unutilized advance VAT payments appeared, or if filed out of time, from the last day prescribed by law for filing the return.
Issuance of TCC shall be limited to the unutilized advance VAT payment and shall not include excess input tax. Issuance of TCC for input tax attributable to zero-rated sales shall be covered by a separate application for TCC following applicable rules.

REVENUE REGULATIONS NO. 11-2007 issued on August 28, 2007 suspends until further notice the implementation of Revenue Regulations (RR) No. 6-2007 entitled Consolidated Regulations on Advance Value-Added Tax on the Sale of Refined Sugar, Amending and/or Revoking All Revenue Issuances Issued to this Effect, and for Other Related Purposes. The suspension aims to give time to both the Bureau of Internal Revenue and the sugar industry to thresh out unclear provisions in RR No. 6-2007, and to introduce improved version of the Regulations to properly address the problems of the sugar industry and collectthe correct taxes due from them.

Prescribing the Rules on the Advance Payment of Value Added Tax/Percentage Tax on the Transport of Naturally Grown and Planted Timber Products The VAT on the transport of naturally grown and planted timber products shall be paid in advance by the owner/seller to the Bureau of Internal Revenue (BIR) through the Authorized Agent Banks (AABs), or to the Revenue Collection Officers (RCOs) or deputized City or Municipal Treasurers, in places where there are no AABs, before transporting them from place of production or concession. Owners/sellers of naturally grown and planted timber products, whether natural or juridical, who are holders of the following permits issued by, or agreements entered into with, the Department of Environment and Natural Resources (DENR), are liable to pay the advance VAT on naturally grown and planted timber products harvested prior to its transport for purposes of consummating a sale : a. Timber License Agreements b. Industrial Forest Management Agreements c. Tree Farm Lease Agreements d. Agro- Forestry Farm Lease Agreements e. Private Forest Development Agreements f. Socialized Industrial Forest Management Program g. Community- Based Forest Management Program h. Timber Cutting/ Salvage & Related Permits Naturally grown and planted timber products harvested from industrial tree plantations and in private lands covered by existing land titles and approved land applications are also subject to advance VAT. The owner/concessionaire/seller of the naturally grown or private timber products shall not allow any transport of said timber products from the cutting area without the advance payment of the VAT. Absence of proof of payment of advance VAT will authorize the agents of DENR and BIR to hold in abeyance transport/sale of naturally grown and planted timber products. In addition to the input tax credits allowed under section 110 of the code, the amount of advance VAT payments made by sellers/owners of naturally grown and planted timber products shall be allowed as credits against their output VAT on the actual gross selling price of the timber products. In the case of advance 3% percentage tax, the advance payment shall be credited to the monthly/ quarterly percentage tax return. The certificate of advance payment of the VAT or percentage tax issued shall be attached to the monthly VAT declaration/quarterly vat return or percentage tax return to support the claim for credit of advance VAT or percentage tax payment.
END OF VALUE-ADDED TAX
TARIFFS AND CUSTOMS CODE OF THE PHILIPPINES

TARIFF AND CUSTOMS CODE
TAXATION LAW
Definitions
TARIFF customs duties, toll or tribute payable upon merchandise to the Government. This means a book of rates; a table or catalogue drawn usually in alphabetical order containing the names of several kinds of merchandise with the duties to be paid for the same as settled by authority or agreed upon between several states that hold commerce together (Matic, Taxation in the Phil). CUSTOM DUTIES Tax assessed upon merchandise from or exported to a foreign country (Garcia vs. Executive Sec., G.R. No. 101273, July 3, 1992). These are duties which are charged upon commodities on their being imported into or exported out of a country (1 Cooley 73). ARTICLES- when used with reference to importation, includes goods, wares and in general anything that may be made subject to importation or exportation (Sec. 3514, TCC). NOTE: Customs and tariffs are synonymous with one another. They both refer to the taxes imposed on imported or exported wares, articles, or merchandise. IMPORTED ARTICLES SUBJECT TO DUTY All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though
previously exported from the Philippines (Sec. 100, TCCP). Exceptions: 1. 2. Exemptions under the TCCP; Exemptions granted to government agencies, instrumentalities or GOCCs with existing contracts, commitments, agreements, or obligations with foreign countries; Exemptions of international organizations pursuant to agreements or special laws; and Exemptions granted by the Pres. of the Phil. upon recommendation of NEDA (Sec. 105, TCCP). LIABILITY OF IMPORTATIONS WITHIN THE SUBIC SPECIAL ECONOMIC ZONE Importations of registered businesses and enterprises within the Subic Special Economic Zone in EXCESS of their registered business or authorized business activity consisting of raw materials, capital goods and equipment shall be deemed brought into and sold within the customs territory, and therefore subject to the payment of taxes and customs duties in accordance with existing customs and tax laws (Sec 1. E.O. 660, RMC No. 20-2008). LIABILITY OF IMPORTER FOR CUSTOM DUTIES A PERSONAL DEBT which can be discharged only by payment in full thereof;
3. 4.
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:
148 Tariffs and Customs Code of The Philippines A LIEN upon the imported articles while they are in custody or subject to the control of the government. (Sec. 1204, TCCP). EXTENT OF IMPORTERS LIABILITY The liability of an importer is limited to the value of the imported merchandise. In case of forfeiture of the seized material, the maximum civil penalty is the forfeiture itself (Mendoza vs. David, GR No. L-9452, March 27, 1961). OTHER TYPES OF FEES CHARGED BY THE BUREAU OF CUSTOMS Arrastre charge Wharfage due counterpart of license, charged not for the use of any wharf but for a special fund known as the Port Works Fund.
Berthing fee Harbor fee Tonnage due MEANING AND SCOPE OF THE TARIFF AND CUSTOMS LAWS
Include not only the provisions of the Tariff and Customs Code of the Philippines (TCCP) and regulations pursuant thereto, but all other laws and regulations that are subject to the Bureau of Customs (BOC) or otherwise within its jurisdiction. As to its scope, therefore, tariff and customs laws extend not only to the provisions of the TCCP but to all other laws as well, the enforcement of which is entrusted to the BOC.
The Bureau of Customs

Chief Officials Of The Bureau Of Customs: One Chief or Commissioner of Customs Four Assistant Chiefs or Deputy Commissioner of Customs each one to head: (a) Customs Revenue Collection Monitoring Group; (b) Customs Assessment and Operations Coordinating Group; (c) Intelligence and Enforcement Group; and (d) Internal Administration Group. Functions of the Bureau of Customs: 1. Assessment and collection of revenues from imported articles and all other impositions under the tariff and customs laws; Control smuggling and related frauds; Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce; Enforcement of TCCP and related laws; Supervision and control over the handling of foreign mails arriving in the Philippines; Supervise and control all import and export cargoes for the protection of government revenue; and Exclusive original jurisdiction over seizure and forfeiture cases under the tariff and customs laws. 2. 4. Hold possession of all imported articles until the duties, taxes and other charges are paid thereon (Sec. 1206, TCCP).
Exclusive Jurisdiction of the Collector of Customs cannot be interfered with by regular courts even upon the allegation of ownership (Commissioner of Customs vs. Court of Appeals, 481 SCRA 109). Territorial Jurisdiction of the BOC: The BOC shall have the right of supervision and police authority over: 1. All seas within the jurisdiction of the Philippines; and All coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable or not from the sea (1st par, Sec. 603, TCCP).
2. 3.
Jurisdiction Over Premises Used For Customs Purposes: The BOC shall have exclusive (a) Control, (b) Direction and (c) Management of: 1. 2. 3. 4. 5. Customhouses; Warehouses; Offices; Wharves; and Other premises in the respective ports of entry.
4. 5. 6.
7.
Jurisdiction of Collector of Customs Over Importation of Articles: 1. 2. 3. Cause all articles for importation to be entered in the customhouse; Cause all such articles to be appraised and classified; Assess and collect the duties, taxes and other charges thereon; and
Note: In all cases, the jurisdiction over premises used for customs purposes is without prejudice to the general police powers of the city or municipality and the Philippine Coast Guard in the exercise of its functions (Sec. 604, TCCP).

DOCTRINE OF HOT PURSUIT Requisites: 1. Over Vessels a. An act is done in Phil. waters which constitutes a violation of the tariff and customs laws; and A pursuit of such vessel began within the jurisdictional waters which
149 2008 CENTRALIZED BAR OPERATIONS DOCTRINE OF PRIMARY JURISDICTION: REGIONAL TRIAL COURTS (RTC) VS. BUREAU OF CUSTOMS (BOC) The RTCs do not have jurisdiction over seizure and forfeiture proceedings conducted by the BOC and to interfere with these proceedings. The Collector of Customs has exclusive jurisdiction over all questions touching on the seizure and forfeiture of dutiable goods. No petition for certiorari, prohibition or mandamus filed with the RTC will lie because these are in reality attempts to review the Commissioner's actuations. Neither replevin filed with the RTC will issue. Rationale: Doctrine of Primary Jurisdiction
b.
(i) may continue beyond the maritime

zone, and
(ii) the vessel may be seized on the high

seas. 2. Over Imported Articles
a. There is a violation of the tariff and

customs laws;
b. As a consequence they may be pursued

in the Phil.; and
Even if a customs seizure is illegal, exclusive jurisdiction (to the exclusion of regular courts) still belongs to the Bureau of Customs (Jao v. Court of Appeals, G.R. No. 104604, October 6, 1995).
c.
With jurisdiction over them at any place therein for the enforcement of the law (2nd par. Sec. 603, TCCP).
Customs Duties
WHEN TARIFF AND CUSTOMS APPLY Only after importation has begun but before importation is terminated. Importation begins: When the carrying vessel or aircraft enters the jurisdiction of the Phil. with intention to unload therein. Upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid; Legal permit for withdrawal shall have been granted; or In case the articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs (Sec. 1202, TCCP) INTENTION TO UNLOAD Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place because importation has already begun. OWNER OF IMPORTED ARTICLES Imported articles into the Philippines shall be held to be the property of the person to whom the same are consigned:
4. Salvors of articles saved from a wreck at sea,

along a coast or in any area of the Phils (Sec. 1203, TCCP). DISPOSITION OF IMPORTED ARTICLES REMAINING ON VESSEL AFTER TIME FOR UNLOADING 1. 2. After the expiration of the said period for discharge; and Not reported for transshipment to another port, may be: a. b. Unladen by the customs authorities; and Stored at the vessels expense.
Importation is deemed terminated: 1.
2. 3.
Unless prevented by causes beyond the vessels control, such as: 1. 2. 3. 4. 5. 6. port congestion; strikes; riots or civil commotions; failure of vessels gear; bad weather; and similar causes
1. The holder of a bill of lading duly endorsed by

the consignee therein named;
Note: Articles so stored shall be entered within 30 days, which shall not be extendible from the date of posting of the notice to claim in conspicuous places in the BOC. If not entered or not claimed, it shall be disposed of in accordance with the provisions of TCCP (Sec. 1210, TCCP).
2. Consigned to order by the consignor; 3. Underwriters of abandoned articles; and
150 Tariffs and Customs Code of The Philippines ARTICLES UNDER TCCP 1. Prohibited from being imported (Prohibited importation) a. Absolutely prohibited such as: weapons of war; gambling devices; narcotics or prohibited drugs; immoral, obscene or insidious articles; and those prohibited under special laws (Sec. 102, TCCP). Qualifiedly prohibited Where such conditions as to warrant a lawful importation do not exist, the legal effects of the importation of qualifiedly prohibited articles are the same as those of absolutely prohibited articles (Auyong Hian vs. CTA, G.R. No. L-28782, September 12, 1974). 2. Conditionallyfree from tariff and customs duties (conditionallyfree importation) 3.
(e) Personal and household effects of members of Philippine diplomatic missions including civil or military attachs. Free from TC duties (duty-free) Imported goods must be entered in a customhouse at their port of entry otherwise they shall be considered as contraband and the importer is liable for smuggling (See Sec. 101, TCCP). All articles when imported from any country into the Philippines shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in the TCCP or other laws. DRAWBACK A device resorted to for enabling a commodity affected by taxes to be exported and sold in foreign markets upon the same terms as if it had not been taxed at all (Uy Chaco Sons vs. Collector of Customs, GR No. 7618, March 27, 1913). IMPORT ENTRY (Sec. 1302,TCCP, as amended by R.A. No. 9135) It is a declaration to the BOC showing particulars of the imported article that will enable the customs authorities to determine the correct duties. An importer is required to file an import entry. It must be accomplished from disembarking of last cargo from vessel. (1) INFORMAL ENTRYa. All imported articles, except importations admitted free of duty under Subsection "k", 105 of this Code, shall be subject to a formal or informal entry. Articles of a commercial nature intended for sale, barter or hire, the dutiable value of which is Two thousand pesos (P2,000.00) or less, and personal and household effects or articles, not in c o m m e r c i a l q u a n t i t y, i m p o r t e d i n passenger's baggage, mail or otherwise, for personal use.
b.
Those provided in Sec. 105, TCCP; Those granted to government agencies, GOCCs with agreements with foreign countries; Those given to international institutions entitled to exemption by agreement or special laws; and Those that may be granted by the President upon NEDAs recommendation. Returning residents for purposes of conditionally free importation of personal and household effects: (a) Nationals (Filipino) (b) Who have stayed in the foreign country (c) For a period of at least six (6) months.
Kinds of conditionally free importations of personal and household effects of returning residents: (a) Personal and household effects, including luxury items brought out of the Philippines and returned; (b) Personal and household effects, except luxury items purchased abroad and imported to the Philippines; (c) T h e p u r c h a s e a b r o a d o f consumables, livelihood tools personal and household effects by Overseas Filipino Workers (OCW) and Balikbayans; (d) T h e p u r c h a s e a b r o a d o f consummables, livelihood tools personal and household effects by Overseas Filipino Workers (OCW) and Balikbayans at Philippine duty free shops; and
b.
(2) FORMAL ENTRYThe Commissioner may, upon instruction of the Secretary of Finance, for the protection of domestic industry or of the revenue, require a formal entry, regardless of value, whatever be the purpose and nature of the importation. A formal entry may be for immediate consumption, or under irrevocable domestic letter of credit, bank guarantee or bond PERSONS AUTHORIZED TO MAKE IMPORT ENTRY (Sec 1301, TCCP, as amended by R.A.7651) a) by the importer, being the holder of the bill of lading

b) by a duly licensed customs broker acting under authority from a holder of the bill or by a person duly empowered to act as agent or attorney-in-fact for each holder c) a party other than the importer, provided said importer shall himself be required to declare under oath and under the penalties of falsification or perjury that the declarations and statements contained in the entry are true and correct.
151 2008 CENTRALIZED BAR OPERATIONS imported, in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons not related to the persons from whom they buy such goods, subject to deductions: (1) Either the commissions usually paid or agreed to be paid or the additions usually made for profit and general expenses in connection with sales (2) The usual costs of transport and insurance and associated costs (3) The costs and charges (4) Customs duties and other national taxes Method Five: COMPUTED VALUE - The dutiable value under this method shall be the computed value which shall be the sum of: (1) The cost or the value of materials and fabrication or other processing employed in producing the imported goods; (2) The amount for profit and general expenses equal to that usually reflected in the sale of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the Philippines; (3) The freight, insurance fees and other transportation expenses for the importation of the goods (4) Any assist, if its value is not included under paragraph (1) hereof; and (5) The cost of containers and packing, if their values are not included under paragraph (1) hereof. Method Six: FALLBACK VALUE - If the dutiable value cannot be determined under the preceding methods described above, it shall be determined by using other reasonable means and on the basis of data available in the Philippines. CLASSIFICATION OF CUSTOM DUTIES A. Regular Duties those which are imposed and collected merely as a source of revenue. 1. 2. Ad valorem duty: This is a duty based on the value of the imported article. Specific duty: This is a duty based on the dutiable weight of goods (either the gross weight, legal weight, or net weight). Alternating duties: This is a duty which alternates ad valorem and specific. Compound Duty: This is a duty consisting of ad valorem and specific duties.
BASIS OF DUTIABLE VALUE (Sec 201, TCCP, as amended by R.A. No. 9135) Method One: TRANSACTION VALUE - The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines plus other costs incurred by the buyer but not included in the price. Method Two: TRANSACTION VALUE OF IDENTICAL GOODS - The dutiable value shall be the transaction value of identical goods sold for export to the Philippines and exported at or about the same time as the goods being valued. IDENTICAL GOODS - goods which are the same in all respects, including physical characteristics, quality and reputation. Minor differences in appearances shall not preclude goods otherwise conforming to the definition from being regarded as identical. Method Three: T R A N S A C T I O N VA L U E O F S I M I L A R GOODS Where the dutiable value cannot be determined under the preceding method, the dutiable value shall be the transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the goods being valued. SIMILAR GOODS - goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark shall be among the factors to be considered in determining whether goods are similar. Method Four: DEDUCTIVE VALUE - The dutiable value of the imported goods under this method shall be the deductive value which shall be based on the unit price at which the imported goods or identical or similar imported goods are sold in the Philippines, in the same condition as when
3. 4.
152 Tariffs and Customs Code of The Philippines B. Special duties those which are imposed and collected in addition to the ordinary customs duties usually to protect local industries against foreign competition. 1. 2. 3. 4. Dumping duty Countervailing duty Marking duty Discriminatory duty NATURE OF SPECIAL CUSTOMS DUTIES Special customs duties are additional import duties imposed on specific kinds of imported articles under certain conditions. PURPOSE OF SPECIAL CUSTOMS DUTIES The special customs duties are imposed for the protection of consumers and manufacturers, as well as Phil. products from undue competition posed by foreign-made products. FLEXIBLE TARIFF CLAUSE The President may fix tariff rates, import and export quotas, etc. under TCCP (See Sec. 28, Art. VI, Constitution and Sec. 401, TCCP). 1. To increase, reduce or remove existing protective rates of import duty (including any necessary change in classification). The existing rates may be increased or decreased to any level, on one or several stages but in no case shall the increased rate a.
of import duty be higher than a maximum of one hundred (100%) percent ad valorem. 2. 3. To establish import quota or to ban imports of any commodity, as may be necessary; and To impose an additional duty on all imports not exceeding ten (10%) per cent ad valorem whenever necessary. LIMITATIONS IMPOSED REGARDING THE FLEXIBLE
TARIFF CLAUSE
Conduct by the Tariff Commission of an investigation in a public hearing. The Commission shall also hear the views and recommendations of any government office, agency or instrumentality concerned. The Commission shall submit their findings and recommendations to the NEDA within thirty (30) days after the termination of the public hearings. The NEDA thereafter submits its recommendation to the President.
b. The power of the President to increase or decrease the rates of import duty within the abovementioned limits fixed in the Code shall include the modification in the form of duty. In such a case the corresponding ad valorem or specific equivalents of the duty with respect to the imports from the principal competing foreign country for the most recent representative period shall be used as bases (Sec. 401, TCCP).
SPECIAL DUTIES COMPARED

DUMPING DUTY COUNTERVAILING DUTY AS TO NATURE Imposed upon foreign products with value lower than their fair market value to the detriment of local products. Imposed upon foreign goods enjoying subsidy thus allowing them to sell at lower prices to the detriment of local products similarly situated. AS TO AMOUNT/RATE Difference between the actual price Equivalent to the bounty, subsidy, or 5% ad valorem of and the normal value of the article. subvention. articles. Any amount not exceeding 100% ad valorem of the subject articles. President of the Philippines Imposed upon those not properly marked as to place of origin of the goods. Imposed upon goods coming from countries that discriminate against Philippine products. MARKING DUTY DISCRIMINA-TORY DUTY
AS TO IMPOSING AUTHORITY 1. the Secretary of Trade and Industry in the case of nonagricultural product, commodity or article; or 2. The Secretary of Agriculture in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. The decision on whether or not to impose a definitive anti-dumping duty remains with the prerogative of the Tariff Commission. 1. the Secretary of Trade and Industry in the case of nonagricultural product, commodity or article; or 2. The Secretary of Agriculture in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. The decision on whether or not to impose a definitive countervailing duty remains with the prerogative of the Tariff Commission. Commissioner of Customs
The Tariff Commission (TC)

FUNCTIONS OF THE TARIFF COMMISSION 1. Investigative Powers (Sec. 505, TCCP) a. the administration of and the fiscal and industrial effects of the tariff and customs laws of this country now in force or which may hereafter be enacted; the relations between the rates of duty on raw materials and the finished or partly finished products; the effects of ad valorem and specific duties and of compound specific and ad valorem duties; all questions relative to the arrangement of schedules and classification of articles in the several schedules of the tariff law; the tariff relations between the Philippines and foreign countries, commercial treaties, preferential provisions, economic alliances, the effect of export bounties and preferential transportation rates; the volume of importations, compared with domestic production and consumption; conditions, causes, and effects relating to competition of foreign industries with those of the Philippines, including dumping and cost of production; and In general, to investigate the operation of customs and tariff laws, including their relation to the national revenues, their effect upon the industries and labor of the country and to submit reports of its investigation as provided. 2. Administrative Assistance to the President and Congress (Sec. 506, TCCP) a. ascertain conversion costs and costs of production in the principal growing, producing or manufacturing centers of the Phil; ascertain conversion costs and costs of production in the principal growing, producing or manufacturing centers of foreign countries of articles imported into the Phil.; select and describe representative articles into the Phil. similar to or comparable with those locally produced; ascertain import costs of such representative articles so selected; ascertain the grower's, producers or manufacturers selling prices in the principal growing, producing or manufacturing centers of the Phil; ascertain all other facts which will show t h e d i ff e r e n c e i n o r w h i c h a ff e c t competition between, articles of the Phil. and those imported in the principal markets of the Phil.; ascertain conversion costs and costs of production including effects of tariff modifications or import restrictions on prices in the principal growing, producing or manufacturing centers of the Phil.; Submit annual reports of these to the President; copy furnished to NEDA, BSP, DOF and BOI.
b.
b.
c.
c.
d.
d. e.
e.
f. g.
f.
g.
h.
h.
Tax Remedies Under The Tariff and Customs Code (TCCP)

I.
TAX REMEDIES OF THE GOVERNMENT C. ADMINISTRATIVE 1. Tax Lien (Sec. 1204, TCCP) Attaches on the goods, regardless of ownership, while still in the custody or control of the Government. Availed of when the importation is neither prohibited nor improperly made. Applied when the importation is unlawful. May be exercised even where the articles are not or no longer in Customs custody UNLESS the importation is merely attempted in which case it may be effected only while the goods are still within the Customs jurisdiction or in the hands of a person who is aware thereof (Secs. 2531 and 2530, TCCP). Under Sec. 2530 (a) of the TCCP, in order to warrant forfeiture, it is not necessary that the vessel or aircraft must itself carry the contraband. The complementary if collateral use of the Cessna plane for smuggling operation is sufficient for it to be deemed to have been used in
2.
Administrative Fines and Forfeitures
154 Tariffs and Customs Code of The Philippines smuggling. (Llamado vs. Commissioner of Customs, G.R. No. L-28809, May 16, 1983) 3. Reduction of customs duties / compromise subject to approval of Sec. of Finance (Secs. 709 and 2316 TCCP) Seizure, Search, Arrest (Secs. 2205, 2210 and 2211, TCCP) 4. 3. b.
Drawback cases where the goods are re-exported (Secs. 1701-1708 TCCP).
Settlement of any seizure by payment of fine or redemption
D. JUDICIAL This remedy is normally availed of when the tax lien is lost by the release of the goods. Civil Action (Sec. 1204, TCCP) Criminal Action
But this shall not be allowed in any case where importation is absolutely prohibited, or the release would be contrary to law, or when there is an actual and intentional fraud (Sec. 2307, TCCP). Within 15 days to the Commissioner after notification by Collector of his decision (Sec. 2313, TCCP).
Appeal
B. JUDICIAL
TAX REMEDIES OF THE TAXPAYER A. ADMINISTRATIVE 1. Protest a. Any importer or interested party if dissatisfied with published value within 15 days from date of publication, or within 5 days from the date the importer is entitled to refund if payment is rendered erroneous or illegal by events occurring after the payment. Taxpayer within 15 days from assessment. Payment under protest is necessary (Secs. 2308 and 2210 TCCP). A written claim for refund may be submitted by the importer in abatement cases on missing packages, deficiencies in the contents of packages or shortages before arrival of the goods in the Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors; and
II.
1.
Appeal Within 30 days from receipt of decision of the Commissioner or Secretary of Finance to the division of the CTA (Sec. 2403 TCCP, Sec. 7 of RA 1125, as amended by Sec. 9 of RA 9282). Since Sec.11 of RA 1125 as amended by RA 9282 empowers the Tax Court to issue injunctions, it would appear that an importer may appeal without first paying the duties, such as in seizure, but not in protest cases. Action to question the legality of seizure Abandonment (Sec. 1801 TCCP) a. b. expressly (Sec. 1801 TCCP) impliedly
2. 3.
b.
2.
Refund a.
failure to file an import entry within 30 days from the discharge of goods; or having filed an entry fails to claim within 15 days but it shall not be so effective until so declared by the collector (Sec. 1801, as amended by RA 7651).
Two Kinds of Proceedings in the Bureau of Customs (BOC)

CUSTOMS PROTEST CASES DEFINITION: These are cases which deal solely with liability for customs duties, fees, and other charges. NOTE: Before filing a protest, there must first be a payment under protest.
A.
WHEN CUSTOMS PROTEST APPLICABLE The customs protest is required to be filed only in case the liability of the taxpayer for duties, taxes, fees and other charges is determined and the taxpayer disputes said liability otherwise, the action of the collector shall be final and conclusive against him EXCEPT as to matters collectible for manifest error in: a. invoice entry;

b. c. errors in return of weight; and measure and gauge (Sec. 2309 in relation to Sec. 1707, TCCP) WHEN CUSTOMS PROTEST NOT REQUIRED Where there is no dispute, but the claim for refund arises by reason of the happening of supervening events such as when the raw material imported is utilized in the production of finished products subsequently exported and a duty drawback is claimed. REQUIREMENTS FOR MAKING A PROTEST: 1. 2. Must be in writing; Must point out the particular decision or ruling of the Collector of Customs to which exception is taken or objection made; Must state the grounds relied upon for relief; Must be limited to the subject matter of a single adjustment; Must be filed when the amount claimed is paid or within 15 days after the payment; and Protestant must furnish samples of goods under protest when required (Sec. 2310, TCCP). 2.
155 2008 CENTRALIZED BAR OPERATIONS SMUGGLING 1. An act of any person who shall:
a. b. c.
Fraudulently import any article contrary to law, or Assist in so doing, or Receive, conceal, buy, sell, facilitate, transport, conceal or sell such article knowing its illegal importation (Sec. 3601, TCCP) Export contrary to law (Sec. 3514, TCCP)
d.
The Philippines is divided into various ports of entry entry other than port of entry, will be SMUGGLING. PORT OF ENTRY
3. 4. 5. 6.
A domestic port open to both foreign and coastwise trade including airport of entry (Sec. 3514, TCCP). ALL articles imported into the Philippines whether subject to duty or not shall be entered through a customhouse at a port of entry. Entry: In Customs law means 1. 2. 3. the documents filed at the Customs house ; the submission and acceptance of the documents; or the procedure of passing goods through the customs house (Rodriguez vs. Court of Appeals) GR No. 115218, September 18, 1995)
REASONS FOR THE AUTOMATIC REVIEW OF DECISIONS ADVERSE TO THE GOVERNMENT: 1. 2. To protect the interest of the Government; A favorable decision will not be appealed by the taxpayer and certainly a Collector will not appeal his own decision; and Lifeblood Theory.
3.
CONTRABAND: Articles of prohibited importations or exportations (Sec. 3514, TCCP). EVIDENCE FOR CONVICTION IN SMUGGLING CASES Mere possession of the article in question UNLESS defendant could explain that his possession is lawful to the satisfaction of the court (Sec. 3601, TCCP). Payment of the tax due after apprehension is not a valid defense (Rodriguez vs. Court of Appeals, supra). THINGS SUBJECT TO CONFISCATION IN SMUGGLING CASES Anything that was used for smuggling is subject to confiscation, like the vessel, plane, etc. (Llamado vs. Commissioner of Customs, G.R. No. L-28809, May 16, 1983). Exception: Common carriers that are not privately chartered cannot be confiscated. RIGHT OF CUSTOMS OFFICERS TO EFFECT SEIZURE AND ARREST (Sec. 2205, TCCP)
SEIZURE AND FORFEITURE CASES DEFINITION: These refer to matters involving smuggling. It is administrative and civil in nature and is directed against the res or imported articles and entails a determination of the legality of their importation. These are actions in rem. Thus, it is of no defense that the owner of the vessel sought to be forfeited had no actual knowledge that his property was used illegally. The absence or lack of actual knowledge of such use is a defense personal to the owner himself, which cannot in any way absolve the vessel from the liability of forfeiture (Commissioner of Customs vs. Manila Star Ferry, Inc., G.R. Nos. 31776-78, October 21, 1993).
B.
1. May seize any vessel, aircraft, cargo, article,

animal or other movable property when the same is subject to forfeiture or liable for any time as imposed under tariff and customs laws, rules and regulations.
2. May exercise such powers only in conformity

with the laws and provisions of the TCCP.
156 Tariffs and Customs Code of The Philippines Persons having police authority to enforce the Tariff and Customs Laws and effect searches, seizures and arrests (Sec. 2203, TCCP) 1. officials of the BOC, district collectors, police officers, agents, inspectors, and guests of the BOC; officers of the Phil. Navy and other members of the AFP and national law enforcement agencies when authorized by the Commissioner of Customs; officials of the BIR in all cases falling within the regular performance of their duties, when the payment of internal taxes are involved; Officers generally empowered by law to effect arrests and execute processes of courts, when acting under the direction of the Collector. FORFEITURE OF COMMON CARRIERS 1. Generally, common carriers are not subject to forfeiture. If the owner has knowledge of its use in smuggling and was a consenting party, it may be forfeited. If a motor vehicle is hired to carry smuggled goods but it has no Certificate of Public Convenience (CPC), it is not a common carrier. It is thus subject to forfeiture, and lack of personal knowledge of the owner or the carrier is not a defense to forfeiture.
PLACES WHERE SEARCHES AND SEIZURES MAY BE CONDUCTED (a) (b) (c) (d) (e) Enclosures; Dwelling house (there must be a search warrant issued by a judge); Vessels or aircrafts and persons or articles conveyed therein; Vehicles, beasts and persons; and Persons arriving from foreign countries.
2.
3.
NOTE: Burden of proof in seizure or forfeiture is on the claimant provided that: 1. 2. The PROBABLE CAUSE shall be first shown for the institution of such proceedings; and That seizure and/or forfeiture was made under the circumstances and in the manner described in the TCCP (Sec. 2535, TCCP).
4.
I S M A N I F E S T R E Q U I R E D O N LY F O R IMPORTED GOODS? NO. Articles subject to seizure do not have to be imported goods. Manifests are also required for articles found on vessels or aircraft engaged in coastwise trade (Rigor vs. Rosales, G.R. No. L-33756, October 23, 1982). UNMANIFESTED CARGO IS SUBJECT TO FORFEITURE whether the act of smuggling is established or not under the principle of res ipsa loquitur. It is enough that the cargo was unmanifested and that there was no showing that payment of duties thereon had been made for it to be subject to forfeiture. SETTLEMENT OF FORFEITURE CASES General Rule: Settlement of cases by payment of fine or redemption of forfeited property is allowed. Exceptions: 1. 2. The importation is absolutely prohibited; or The surrender of the property to the person offering to redeem would be contrary to law; or When there is fraud (Sec. 2307, TCCP).
2.
PROPERTIES NOT SUBJECT TO FORFEITURE IN THE ABSENCE OF PRIMA FACIE EVIDENCE The forfeiture of the vehicle, vessel or aircraft shall not be effected if it is established that the owner thereof or his agent in charge of the means of conveyance used as aforesaid GOODS IN CUSTOMS CUSTODY BEYOND REACH OF ATTACHMENT Goods in the customs custody pending payment of customs duties are beyond the reach of attachment. As long as the importation has not been terminated, the imported goods remain under the jurisdiction of the Bureau of Customs (Viduya vs. Berdiago, G.R. No. L-29218, October 29, 1976). REQUIREMENTS FOR CUSTOMS FORFEITURE 1. The wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same persons of any invoice, letter or paper - all touching on the importation or exportation of merchandise; and That such declaration, affidavit, invoice, letter or paper is false (Farolan, Jr. vs. Court of Tax Appeals, G.R. No. 42204, January 21, 1993).
3.
ACQUITTAL IN CRIMINAL CHARGE NOT RES JUDICATA IN SEIZURE OR FORFEITURE PROCEEDINGS Reasons: 1. Criminal proceedings are actions in personam while seizure or forfeiture proceedings are actions in rem. Customs compromise does not extinguish criminal liability (People vs. Desiderio, GR No. L-20805, November 29, 1965).
2.
2.

NOTE: At any time prior to the sale, the delinquent importer may settle his obligations with the Bureau of Customs, in which case the aforesaid articles may be delivered upon payment of the corresponding duties and taxes and compliance with all other legal requirements (Sec. 1508, TCCP) ABATEMENT The reduction or non-imposition of customs duties on certain imported materials as a result of: 1. 2. 3. 4. Damage incurred during voyage; Deficiency in contents packages; Loss or destruction of articles after arrival; Death or injury of animals.
6. Filing any affidavit, certificate or other

document to secure to him or others the payment of any drawback, allowance or refund of duties on the exportation of merchandise greater than that legally due thereon (Sec. 3602, TCCP). FAILURE TO PAY CORRECT DUTIES AND TAXES ON IMPORTED GOODS After being subject to post-entry audit and examination, any person, who is found to have incurred deficiencies in taxes and duties paid for imported goods, shall be penalized according to three (3) degrees of culpability: (a) Negligence where a deficiency results from failure, through an act or acts of omission or commission, to exercise reasonable care and competence to ensure that a statement is correct. (b) Gross Negligence - where a deficiency results from an act or acts of omission or commission done with actual knowledge or wanton disregard for the relevant facts and with indifference to or disregard for obligations under the statue. (c) Fraud When the material false statement or act in connection with the transaction was committed or omitted knowingly, voluntarily and intentionally, as established by clear and convincing evidence (Sec. 3611, TCCP). DOCTRINES RELATED TO TARIFF AND CUSTOMS CODE 1. In Mison vs. Natividad, the Supreme Court has held that the exclusive jurisdiction of the Collector of Customs cannot be interfered with by regular courts even upon the allegation of ownership (Commissioner of Customs vs. Court of Appeals 481 SCRA 109). A person arriving in the Philippines with baggage containing dutiable articles is bound to declare the same in all respects. Adequate reporting of dutiable merchandise being brought into the country is absolutely necessary for the enforcement of customs laws and failure to comply with those requisites is as condemnable as failure to pay customs fees (Jardeleza vs. People 481 SCRA 638). An administrative penalty imposed on the person arriving in the Philippines with undeclared dutiable articles is separate from and independent of criminal liability for smuggling under Section 3601 of the Tariff and Customs Code and for violation of other provisions in the Tariff and Customs Code Section 3601 of the Tariff and Customs Code is a penal provision - It was designed to supplement the existing provisions of the Tariff and Customs Code against the means leading up to smuggling, which might render it
ABANDONMENT An article is deemed abandoned when the owner, importer or consignee: 1. 2. Expressly signifies in writing to the Collector of his intention to abandon; Fails to file an entry within 30 days from the date of discharge of the last package from the vessel or aircraft (not extendible); or Fails to claim his importation within 15 days (not extendible) from the date of posting of the notice to claim such importation (Sec. 1801, TCCP). Deemed to have renounced all interests and property rights (par. 2, Sec. 1801, TCCP); Ipso facto deemed the property of the Government; Disposed of in accordance with the TCCP (par. 1, Sec. 1802, TCCP); Nothing shall mean to relieve the owner from criminal liability which may arise in connection with the importation (par. 2, Sec. 1802, TCCP)
3.
Effects of Abandonment: 1. 2. 3. 4.
2.
FRAUDULENT PRACTICES CONSIDERED AS CRIMINAL OFFENSES AGAINST CUSTOMS REVENUE LAWS
1. Unlawful importation; 2. Entry of imported or exported article by

means of any false or fraudulent practices, invoice, declaration, affidavit, or other documents; 3.
3. Entry of goods at less than their true weights

or measures or upon a classification as to quality or value; 4.
4. Payment of less than the amount due; 5. Filing any false or fraudulent claim for the
payment of drawback or refund of duties upon the exportation of merchandise; or
158 Tariffs and Customs Code of The Philippines beneficial by a substantive and criminal statement separately providing for the punishment of smuggling. Smuggling is committed by any person who (1) fraudulently imports or brings into Philippines any article contrary to law (2) assists in so doing any article contrary to law, or (3) receives, conceals, buys or sells or in any manner facilitates the transportation, concealment or sale of such goods after importation, knowing the same to have imported contrary to law. 5. The phrase contrary to law in Section 3601 qualifies the phrases imports or brings into the Philippines and assists in doing and not the word article The word law includes regulations having the force and effect of law, meaning substantive or legislative type rules as opposed to general statements of policy or rules of agency, organization, procedures or positions. Importation consists of bringing an article into the country from the outside. Importation is complete when taxable, dutiable commodity is brought within the limits of the port of entry. The fraud contemplated by law must be intentional fraud, consisting of deception, willfully and deliberately dared or resorted to in order to give up some right. Fraudulent concealment presupposes a duty to disclose the truth and that disclosure was not made
when opportunity to speak and inform was present. Fraud is not confined with words or positive assertions - It may consist as well of deeds, acts or artifice of a nature calculated to mislead another and thus allow one to obtain undue advantage. 8. The term entry in Customs Law has a triple meaning (a) the documents filed at Customs House (b) the submission and acceptance of those documents; and (c) procedure of passing goods through the Customs house. The Bureau of Customs exercises exclusive jurisdiction over seized and forfeited cars - It is tasked to enforce tariff and supervise and control customs law and all other laws, rules and regulations relating to the tariff and customs administration, and to supervise and control all import and export cargoes, loaded or stored in piers, terminal facilities, including container yards and freight stations, for the protection of government revenues (Asian Terminals vs. Bautista-Ricafort 505 SCRA 748).
9.
6.
7.
10. The forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and not against the owner - It is in the nature of a proceeding in rem, i.e., directed against the res or imported articles and entails a determination of the legality of their importation.
Annexes to Tariff and Customs

Annexes to Tariff and Customs
Procedure In Customs Protest Cases
The Collector acting within his jurisdiction shall cause the imported goods to be entered at the customhouse The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party liable does not pay the same The party adversely affected (the protestant) may file a written protest on his foregoing liability with the Collector within 15 days after paying the liquidated amount (the payment under protest rule applies) Hearing within 15 days from receipt of the duly presented protest. Upon termination of the hearing, the Collector shall decide on the same within 30 days If decision is adverse to the protestant Appeal with the Commissioner within 15 days from notice If decision is adverse to the protestant Appeal with the Court of Tax Appeals Division within 30 days from notice Whether the CTA division grants or denies wholly or partially the protest, file a motion for reconsideration within 15 days from receipt of the decision If decision is adverse to the government Automatic review by the Secretary of Finance If decision is adverse to the government Automatic Review by the Commissioner If decision is adverse to the protestant Appeal with the Court of Tax Appeals Division within 30 days from notice If decision is adverse to the government Automatic review by the Secretary of Finance If decision is adverse to the government, the decision shall be final and executory and is not appealable.
If decision is adverse Whether the CTA division to the government, the grants or denies wholly or decision shall be final partially the protest, file a and executory and is motion for reconsideration not appealable within15 days from receipt of the decision
Whether the MR is granted If decision is adverse Whether the MR is granted If decision is adverse or denied, wholly or partially, to the protestant, or denied, wholly or partially, to the protestant, adverse party shall file an Appeal with the adverse party shall file an Appeal with the Appeal with the CTA en Court of Tax Appeals Appeal with the CTA en Court of Tax Appeals banc within 15 days from Division within 30 banc within15 days from Division within 30 receipt of decision days from notice receipt of decision days from notice Then follow the Then follow the Appeal by certiorari with the procedure given in 4th Appeal by certiorari with the procedure on the left. Supreme Court within 15 column. Supreme Court within 15 days from notice days from notice
160 Tariffs and Customs Code of The Philippines
Administrative and Judicial Procedures Relative to Customs Seizures and Forfeitures

Determination of probable cause and issuance of warrant Actual seizure of the articles Listing of description, appraisal and classification of seized property Report of seizure to the Commissioner of Customs and the Chairman, Commission on Audit Issuance by the Collector of a warrant of detention Notification to owner or importer Formal hearing District Collector renders his decision If decision is adverse to the protestant Appeal with the Commissioner within 15 days from notice If decision is adverse to the protestant Appeal with the Court of Tax Appeals Division within 30 days from notice If decision is adverse to the government If decision is adverse to the government Automatic Review by the Commissioner If decision is adverse to the protestant If decision is adverse to the government
Automatic review by Appeal with the Court of Tax Automatic review by the Secretary of Appeals Division within 30 the Secretary of Finance days from notice Finance
Whether the CTA division If decision is adverse Whether the CTA division If decision is adverse grants or denies wholly or to the government, grants or denies wholly or to the government, partially the protest, file a the decision shall be partially the protest, file a the decision shall be motion for reconsideration final and executory motion for reconsideration final and executory within15 days from receipt of and is not within 15 days from receipt of and is not the decision appealable. the decision appealable. Whether the MR is granted or If decision is adverse denied, wholly or partially, to the protestant, adverse party shall file an Appeal with the Appeal with the CTA en banc Court of Tax within 15 days from receipt of Appeals Division decision within 30 days from notice Appeal by certiorari with the Then follow the SC within 15 days from notice procedure on the left. Whether the MR is granted or If decision is adverse denied, wholly or partially, to the protestant, adverse party shall file an Appeal with the Appeal with the CTA en banc Court of Tax within15 days from receipt of Appeals Division decision within 30 days from notice Appeal by certiorari with the Then follow the SC within 15 days from notice procedure on the left.
END OF VALUE-ADDED TAX
164 Tax Remedies Under The NIRC
TAX REMEDIES UNDER THE NIRC

TAX REMEDIES UNDER THE NIRC
TAXATION LAW Preliminaries
Preliminaries
REMEDY is a method by which a cause of action can be enforced by law or equity. It is a procedure or type of action which may be availed of by the plaintiff as the means to obtain the relief desired (Florenz D. Regalado, Remedial Law Compendium, Vol. 1, p. 20). IMPORTANCE 1. 2. They enhance and support the governments tax collection. They are safeguards of the taxpayers rights against arbitrary action. d. In his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction.
The Commissioner shall submit to the Chairmen of Committee on Ways and Means of both Senate and House of Representatives, every six (6) months, a report on the exercise of his powers as above-mentioned stating the following: a. names and addresses of taxpayers whose cases have been subject to abatement or compromise; amount involved; amount compromised or abated; and reasons for the exercise of power.
Authority of Commissioner under Title VIII, Chapter 1 - Remedies: a. b. c. Compromise the payment of internal revenue tax. Abate or cancel a tax liability. Credit or refund taxes or penalties, refund value of internal revenue stamps when they are returned in good condition by purchaser.
b. c. d.
The report shall be presented to the Oversight Committee in Congress that shall be constituted to determine that said powers were exercised reasonably and the Government is not unduly deprived of revenues.
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:
Assessment of Taxes
Assessment of Taxes
General rule: Taxes are self-assessing and thus, do not require the issuance of an assessment notice in order to establish the tax liability of a taxpayer. Exceptions: (T2D2) 1. 2. 3. 4. Tax period of a taxpayer is Terminated [Sec. 6(D), NIRC] Deficiency tax liability arising from a tax audit conducted by the BIR [Sec. 56(B), NIRC] Tax lien [Sec. 219, NIRC] Dissolving corporation [Sec. 52(c), NIRC] 5. 3. 2. Assessments should not be based on presumptions no matter how logical the presumption might be, must be based on Actual facts (CIR vs. Benipayo, G.R. No. L- 13656, Jan. 31, 1962); Assessment is Discretionary on the part of the Commissioner (Meralco Securities Corp. vs. Savellano, G.R. No. L-36181 and L-36748, Oct. 23, 1992); The authority vested in the Commissioner to assess may be Delegated but the power to make final assessments cannot be delegated (City Lumber, Inc. vs. Domingo, G.R. No. L-18611, June 30, 1964) Assessment must be Directed to the right party (Republic vs. Dela Rama, G.R. No. L-21108, Nov. 29, 1966). BURDEN OF PROOF IN PRE-ASSESSMENT PROCEEDINGS There is a presumption of correctness and good faith on the part of the CIR; thus, the burden lies on the taxpayer. Otherwise, the finding of the CIR will be conclusive and he will assess the taxpayer. The same is true even if the CIR is wrong, if the taxpayer does not controvert (Cagayan Robina Sugar Milling Co. vs. Court of Appeals, G.R. No. 122451, October 12, 2000). Reasons: a. b. lifeblood theory presumption of regularity in the performance of public functions KINDS OF ASSESSMENT (SIDE) 1. 2. SELF- ASSESSMENT one in which the tax is assessed by the taxpayer himself. DEFICIENCY ASSESSMENT made by the tax assessor himself whereby the correct amount of the tax is determined after an examination or investigation is conducted. The liability is determined and assessed for the following reasons: a. amount ascertained exceeds that which is shown as the tax by the taxpayer in his return; no amount of tax is shown in the return; and taxpayer did not file any return at all.
4.
ASSESSMENT a finding by the taxing authority that the taxpayer has not paid the correct taxes. It is also a written notice to a taxpayer to the effect that the amount stated therein is due as a tax and containing a demand for the payment thereof. SIGNIFICANCE OF ASSESSMENT ON THE PART OF THE GOVERNMENT (RSTE) a. In the proper pursuit of judicial and extrajudicial Remedies to enforce taxpayer liabilities and certain matters that relate to it, such as the imposition of surcharges and interests In the application of Statute of limitations In the establishment of Tax liens and In estimating the revenues that may be collected by the government in the coming year (Mamalateo, Victorino. Reviewer on Taxation, 2004).
TAXPAYER
b. c. d.
IMPORTANCE OF ASSESSMENT ON THE PART OF THE a. Assessment informs the taxpayer that he or she has tax liabilities (De Leon, NIRC Annotated, Vol. 2, 2003, p. 422). The issuance of assessment is vital in determining the period within which to protest it (CIR vs. Pascor Realty and Devt. Corporation, GR No. L-128315 June 29, 1999, also cited in De Leon, NIRC Annotated, Vol. 2, 2003, p. 422). PRINCIPLES GOVERNING TAX ASSESSMENTS (PADDD) 1. Assessments are Prima facie presumed correct and made in good faith. All presumptions are in favor of tax assessment (Cagayan Robina Sugar Milling Co. vs. CA, G.R. No. 122451, Oct. 12, 2000);
b.
b. c.
166 Tax Remedies Under The NIRC 3. 4. ILLEGAL AND VOID ASSESSMENT tax assessor has no power to assess at all. ERRONEOUS ASSESSMENT assessor has power to assess but errs in the exercise thereof. 3.
JEOPARDY ASSESSMENT tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the Revenue officers belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the taxpayers failure to: C o m p l y with audit and investigation requirements to present his books of accounts and/or pertinent records, or Substantiate all or any of the deductions, exemptions or credits claimed in his return 1. PRELIMINARY ASSESSMENT OR PAN a pre-assessment, served under any of the following circumstances: a. b. c. Taxpayer fails to file a return where a return is required; He files a return but fails to pay the tax; He files a return, pays the tax but payment is insufficient because certain deductions claimed are disallowed by the BIR. 2. FINAL ASSESSMENT OR FAN declaration of deficiency taxes issued to a taxpayer who fails to respond to a PAN within the prescribed period of time, or whose reply to the PAN was found to be without merit. must be issued within 3 years from the time the return was filed unless a waiver is issued within the 3-year period or there was a failure to file or there is fraud.
officers from government offices/ agencies, corporations, employees, clients, patients, tenants, lessees, vendees and from all other sources with whom the taxpayer had previous transactions or from whom he received any income (Aban, 2001, p.182) authority to conduct inventory taking, surveillance and prescribe gross sales and receipts; If there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for internal revenue purposes
4.
authority to terminate taxable period in the following instances; a. b. taxpayer is retiring from business subject to tax; taxpayer is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property; and taxpayer is performing any act tending to obstruct the proceedings for the collection of taxes.
Assessment may also be:
c.
5. 6.
authority to prescribe real property values; authority to inquire into bank deposit accounts in the following instances; a. b. a decedent to determine his gross estate; and any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapability to pay his tax liability.
7. 8.
authority to accredit and register tax agents; Authority to prescribe additional procedural or documentary requirements.
MEANS EMPLOYED IN THE ASSESSMENT OF TAXES The Commissioner or his duly authorized representative is authorized to use the following powers to make assessment (Sec. 6. NIRC): (TIP2 CABE) 1. 2. examination of return and determination of tax due; use of best evidence obtainable a. when a report or return required to be filed shall not be forthcoming within the time fixed by laws, rules and regulations; When there is a reason to believe that any such report or return is false, incomplete or erroneous; BEST EVIDENCE OBTAINABLE - any data, record, papers, documents, or any evidence gathered by internal revenue
b.
Assessment Process
PROCEDURE IN THE ISSUANCE OF A DEFICIENCY TAX ASSESSMENT (Assessment Process) (R.R. No.12-99) ** NPEFD ** 1. ISSUANCE OF A LETTER OF AUTHORITY (LA) LETTER OF AUTHORITY an official document that empowers a Revenue Officer to examine and scrutinize a taxpayers books of accounts and other accounting records, in order to determine the taxpayers correct internal revenue tax liabilities. WHO MAY ISSUE A LETTER OF AUTHORITY? a. After a return has been filed, the CIR or his duly authorized representative may authorize the examination of the books of any taxpayer and the assessment of the correct amount of tax (Sec. 6, NIRC). The Revenue Regional Director shall approve and sign all LAs for all audit cases within his regional jurisdiction 3. DETERMINATION OF TAXPAYERS LIABILITY FOR
DEFICIENCY TAX
Based on his preliminary findings, the Revenue Officer shall make a report of his investigation stating his findings and determination of the taxpayers liability for tax deficiency.
If the taxpayer is NOT liable , the assessment process ends. If the taxpayer is liable, the Revenue Officer shall state in his report if the taxpayer agrees to his liability to deficiency tax.
4. NOTICE FOR INFORMAL CONFERENCE
b.
It is a written notice informing a taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid
EXCEPT: (a) cases involving civil or criminal tax fraud falling under the jurisdiction of the Tax Fraud Division of the Enforcement Service and ; (b) policy cases under audit by Special Teams in the National Office (RMO 36-99) NOTE: It must be served to the concerned taxpayer within 30 days from its date of issuance; otherwise, it shall become null and void. The taxpayer shall then have the right to refuse the service of this LA unless the LA is revalidated.
If the taxpayer DISAGREES to the report, he shall be informed in writing by the Revenue District Officer or by the Special Investigation Division (in case of the BIR National Office) of the discrepancies for the purpose of Informal Conference. The taxpayer shall have fifteen (15) days from the date of his receipt of the notice for informal conference to explain his side. 5. (A) INFORMAL CONFERENCE If taxpayer responds within 15 days from receipt of said notice, an informal conference will be held.
A tax return filed by a taxpayer may be amended, revised or modified within 3 years from date of such filing; provided, that no notice for audit, or investigation of such return, statement or declaration or letter of authority for investigation has been actually served upon him (Sec. 6, NIRC; R.R. No. 12-99).
Purpose of Informal Conference to afford the taxpayer opportunity to present his case. OR
(B) ENDORSEMENT TO THE ASSESSMENT DIVISION OF THE REVENUE REGIONAL OFFICE TO THE CIR
OR DULY AUTHORIZED REPRESENTATIVE FOR REVIEW AND ISSUANCE OF TAX ASSESSMENT
2. AUDIT / TAX INVESTIGATION A Revenue Officer is allowed only 120 days from the date of receipt of a LA by the taxpayer, to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation, he must then submit a Progress Report to his Head of Office and surrender the LA for revalidation.
If taxpayer fails to respond within 15 days; in which case, he shall be considered in DEFAULT. The endorsement is made by the Revenue District Officer or the Special Investigation Division of the Revenue Regional Office or the Chief of Division in the National Office, as the case may be. NOTE: If after 5(A) OR after 5(B), there exist sufficient basis to assess taxpayer for any deficiency tax, the said Office shall issue to taxpayer, at least by registered mail, a Preliminary Assessment Notice.
168 Tax Remedies Under The NIRC 6. ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE (PAN) Preliminary Assessment Notice (PAN) a communication issued by the Regional Assessment Division, or any other concerned BIR office, informing a taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. It must show in detail the law and the facts, rules and regulations or jurisprudence upon which the proposed assessment is based. NOTE: A. The BIR may opt to issue a PAN once or twice from which the taxpayer shall have 15 days from receipt thereof to file a letter contesting the proposed assessment. These protests are different from the administrative protests of request for reinvestigation/ reconsideration which may only be taken from a Final Assessment Notice or FAN (may refer to the case of Telesat Inc. vs. CIR, CTA case No. 6812, January 2, 2006) B. If the taxpayer fails to respond within 15 days from date of receipt of the PAN, he shall be considered in DEFAULT, in which case, a formal letter of demand and assessment notice shall be caused to be issued by said Office. EXCEPTIONS TO THE INFORMAL CONFERENCE AND THE PRELIMINARY ASSESSMENT NOTICE (MDCEA) GENERAL RULE: Pre-assessment notice is required. EXCEPTIONS: (MDCEA) a) When the finding for any deficiency tax is the result of Mathematical error in the computation of the tax as appearing on the face of the return; When a Discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have Carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; When the Excise tax due on excisable articles has not been paid; or When an Article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
7. Formal Letter of Demand and Assessment Notice
must be issued within 3 years from the time the return was filed UNLESS a waiver is issued within the 3year period or there was a failure to file or there is fraud. Shall inform the taxpayer of the fact of tax deficiency and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course. Shall state the facts, the law, rules and regulations or jurisprudence on which the assessment is based; otherwise, the formal letter of demand and assessment notice shall be void. Shall be sent to the taxpayer by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) name (b) signature (c) designation and authority to act for and in behalf of taxpayer, if acknowledged received by a person other than the taxpayer himself and (d) date of receipt thereof. (R.R. No. 12-99)
b)
c)
d) e)
Tax Remedies of The Taxpayer

Tax Remedies of The Taxpayer
REMEDIES BEFORE PAYMENT (1) ADMINISTRATIVE REMEDIES a. b. a. Protest against Assessment (Sec. 228 of NIRC and R.R. No. 12-99) Enter into a compromise Civil action including appeal to the CTA up to the SC b. c. a. Questioning the constitutionality or validity of tax statutes or regulations Non-retroactivity of rulings (Sec. 246, NIRC) Failure to inform the taxpayer in writing of the legal and factual bases of assessment makes it void (Sec. 228, NIRC) REMEDIES AFTER PAYMENT (1) TAX REFUND (2) TAX CREDIT
(2) JUDICIAL REMEDIES
(3) SUBSTANTIVE REMEDIES
Remedies Before Payment

ADMINISTRATIVE REMEDIES
PROTEST A vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuation of the CIR. This is equivalent to a pleading. The protest may be a: 1. Request for reconsideration a plea for a re evaluation of an assessment on the basis of existing records without need of additional evidence which may involve a question of fact or law or both. Request for reinvestigation a plea for the reinvestigation of the assessment on the basis of the newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of law or fact or both. Request for Reconsideration Involves re-evaluation of assessment based on existing records Request for Reinvestigation Involves presentation of newly-discovered or additional evidence b. c. Addressed to CIR; must be accompanied by a Waiver of the Statute of Limitations in favor of the government:
2.
If the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be prevented from setting up the defense of prescription of the Statute of Limitations on collection when, by his own repeated request or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government (Bank of the Philippine Islands vs. CIR, G.R. No. 139736, Oct 17, 2005).
d.
states the Facts, applicable law, rules and regulations or jurisprudence on which his protest is based; otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted; Contains the following: (NR_PAD_I2SD) (1) Name of the taxpayer and address for the immediate past 3 taxable years; (2) Nature of the Request, specifying the newly discovered evidence he intends to present; (3) Ta x a b l e P e r i o d s c o v e r e d b y t h e assessment;
e.
It does NOT toll the It tolls the Statute of Statute of Limitations Limitations CHARACTERISTICS OF A VALID PROTEST A protest is considered valid if it satisfies the following conditions: (WAWFC) a. in Writing;
170 Tax Remedies Under The NIRC (4) Amount and kind of tax involved and the assessment notice and number; (5) Date of receipt of assessment notice or letter of demand; (6) Itemized statement of the finding to which the taxpayer agrees(if any) as basis for the computation of the tax due, which must be paid immediately upon the filing of the protest; (7) Itemized schedule of the adjustments to which the taxpayer does not agree; (8) Statements of facts or law in support of the protest; and (9) Documentary evidence as it may deem necessary and relevant to support its protest, to be submitted 60 days from the filing thereof. PROCEDURE IN PROTESTING AN ASSESSMENT 1. THE TAXPAYER SHALL FILE HIS PROTEST WITHIN 30 DAYS FROM RECEIPT OF THE FINAL ASSESSMENT.
3. ADMINISTRATIVE DECISION ON A DISPUTED ASSESSMENT PROTEST IS DENIED BY THE COMMISSIONERS AUTHORIZED REPRESENTATIVE taxpayer may elevate the protest to the Commissioner within 30 days from receipt of the decision for a request for reconsideration and that his case is referred to the Bureaus Appellate Division. Otherwise, it becomes final and appeal to the CTA may be taken. NOTE:
The authority to make tax assessments may be delegated to subordinate officers. Said assessment has the same force and effect as that issued by the CIR himself if NOT revised or reviewed by the latter (Oceanic Network Wireless Inc. vs. Commissioner of Internal Revenue, G.R. No. 148380 Dec. 9, 2005). Failure to file a position paper that would embody the grounds for reconsideration may be construed as abandonment of request for reconsideration (Oceanic Wireless Network Inc. vs. CIR, supra).
If the taxpayer protest only to some of the issues raised
taxpayer must pay the deficiency tax/taxes attributable to the undisputed issues inclusive of interests and surcharges before an action may be taken on the disputed issues.
PROTEST IS DENIED IN WHOLE OR IN PART BY THE COMMISSIONER Remedy: Appeal by the taxpayer to the CTA within 30 days from receipt of decision; OTHERWISE, the assessment shall become final, executory and demandable: Provided, however, that if the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the final decision of CIRs duly authorized representative, the latters decision shall NOT be considered final, executory and demandable. FA I L U R E TO A C T U P O N T H E PROTEST BY THE COMMISSIONER O R H I S D U LY A U T H O R I Z E D REPRESENTATIVE WITHIN 180 DAYS
A collection letter shall be issued calling for the payment of the said undisputed deficiency tax. In such case, the prescriptive period for assessment or collection of the tax or taxes attributable to the disputed issues shall be suspended.
2. SUBMISSION OF ALL RELEVANT SUPPORTING DOCUMENTS WITHIN 60 DAYS
The 60 day period is counted from the filing of the protest. Non-submission of the documents renders the assessment final, executory and demandable.
180 days counted from the submission by the taxpayer of the documents in support of the protest. In cases of inaction, the taxpayer has two (2) options: 1. he may appeal to the CTA within 30 days from lapse of the 180 day period provided for under Sec. 228 of the NIRC; or He may wait until the Commissioner decides on his protest before he elevates the case.
SUPPORTING DOCUMENTS "Such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise, taxpayer would always be at the mercy of the BIR which may require production of such documents which taxpayer could not produce" (Standard Chartered Bank vs. CIR, CTA Case No. 5696, August 16, 2001).
2.
These options are mutually exclusive and resort to one bars the application of the other (Rizal Commercial Banking Corporation vs. CIR, G.R. No. 168498. April 24, 2007).
NOTE: Constructive Service of the decision: a. No response is received from the taxpayer within the prescribed period from date of the posting of the mail; The decision is personally served on the taxpayer or his duly authorized representative, who refused to acknowledged receipt thereof; By leaving the decision in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report on the matter which shall form part of the docket of the case.
b.
A formal letter of demand may be considered a decision on a disputed or protested assessment. This is the reason for the rule that the CIR should ALWAYS indicate in clear and unequivocal language what constitutes his final determination of the disputed assessment. On the basis of such statement, the aggrieved taxpayer would be able to determine when his right to appeal to the tax court accrues (Oceanic Wireless Network Inc. vs. CIR, supra).
c.
2.
Civil collection can also be considered as denial of protest of assessment as held in the cases of Yabes vs. Flojo G.R. No. 46954, July 20, 1982 and BIR vs. Union Shipping Corp G.R. No. 66160. May 21, 1990.
FORMS OF DENIAL Direct denial of protest
By an administrative decision on a disputed assessment The decision of the Commissioner or his duly authorized representative shall: a. state the facts, the applicable law, rules and regulations or jurisprudence on which such decision is based otherwise, the decision shall be void, in which case the same shall not be considered a decision on a disputed assessment and that the same is his final decision (Sec. 3.1.5, R.R. No. 12-99)
Commissioner did not rule on the taxpayer s motion for reconsideration of the assessment it was only when respondent received the summons on the civil action for the collection of deficiency income tax that the period to appeal commenced to run (Commissioner vs. Union Shipping Corp.) Preliminary collection letter may serve as assessment notice (United International Pictures vs. Commissioner G.R. No. 110318 Aug. 28, 1996).
3.
b.
Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is tantamount to outright denial of the request for reconsideration (Vicente Hilado vs. CIR. CTA Case 1256. Feb. 25, 1964).
Indirect denial of protest 1. formal and final letter of demand from the BIR to the taxpayer
INSTANCES WHEN ASSESSMENT BECOMES FINAL AND EXECUTORY: 1. 2. Taxpayer fails to respond within 15 days to the Preliminary Assessment Notice. Taxpayer fails to file a valid protest against the final notice of assessment within 30 days from receipt (Dayrit vs. Cruz G.R. No. L-39910, September 26, 1988). NOTE: A final notice or formal NOTICE of assessment is different from a final and executory assessment. The former is an assessment that becomes the subject of a protest. It becomes final and executory if no protest is filed within a period of 30 days from its receipt (R.R. No. 12-99, 3.1.5, par. 4). 3. Taxpayer fails to appeal to CTA from the adverse decision of the Commissioner or his
A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA) (CIR vs. Isabela Cultural Corp. G.R. No. 135210, July 11, 2001).
172 Tax Remedies Under The NIRC representative on the protest within 30 days from receipt thereof. Except if the protest is decided by the Commissioners representative and taxpayer elevates it to the Commissioner, in which case, it is the latters decision that becomes final and executory if not appealed by the taxpayer to the CTA. 4. If upon inaction on the protest by the Commissioner or his representative within 180 days from the submission of the taxpayer of the supporting documents, taxpayer fails to appeal to the CTA within 30 days from the lapse of the 180 day period which is counted from the submission of the required documents. Taxpayer fails to appeal to the Supreme Court from the adverse decision of the CTA within 15 days.
4. By way of special civil action Petition for certiorari, prohibition and mandamus to the Supreme Court in cases of grave abuse of discretion, lack of jurisdiction or excess of jurisdiction. 5. Action to contest forfeiture of chattel, at any time before the sale or destruction thereof, to recover the same, and upon giving proper bond, enjoin the sale; or after the sale and within 6 months, an action to recover the net proceeds realized at the sale (Sec. 231, 1997 NIRC) 6. Action for damages against a revenue officer by reason of any act done in the performance of official duty (Sec. 227, 1997 NIRC) 7. Injunction if collection may jeopardize the interest of the government and/or the taxpayer. RULES GOVERNING INJUNCTION General Rule : Tax collection CANNOT be restrained by court injunction (Sec. 218, NIRC) Justification: Lifeblood Theory Exception: Injunction may be issued by the CTA in aid of its appellate jurisdiction under RA 1125 (as amended by RA 9282). CONDITIONS FOR THE ISSUANCE BY THE COURT OF TAX APPEALS
OF AN INJUNCTION
5.
JUDICIAL REMEDIES
1. Appeal to the Court of Tax Appeals (Division) within 30 days from receipt of decision on the protest or from the lapse of 180 days due to inaction of the Commissioner otherwise it will be final and executory (Sec. 228, 1997 NIRC) NOTE:
If the taxpayer chooses to wait for positive action on part of the Commissioner, then the same could not result in the assessment becoming final, executory and demandable. To adopt the contrary theory will not only sanction inefficiency, but will likewise condone the Bureaus inaction (Lascona vs. CIR, CTA Case No. 5777, Jan. 4, 2000), which was not the intention of the law. Provided, further , that should the taxpayer opt to await the final decision of the CIR on the disputed assessments beyond the 180day period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules (30 days from receipt of the decision) (Revised Rules of CTA, Rule 4, Sec. 3(a)(2) A.M. No. 05-11-07-CTA,Effective December 15, 2005).
If, in its opinion, the same may jeopardize the interest of the government and/or the taxpayer.
In this instance, the court may require the taxpayer either to deposit the amount claimed or file a surety bond for not more than double the amount with the court. E F F E C T O F FA I L U R E TO A P P E A L ASESSMENT TO THE COURT OF TAX APPEALS: 1. 2. The decision or assessment becomes final and executory. The taxpayer is barred in an action for the collection of the tax by the government from re-opening the question already decided; The assessment is considered correct which may be enforced by summary or judicial remedies; In a proceeding for collection of tax by judicial action, the taxpayers defenses are similar to those of the defendant in a case for the enforcement of a judgment by judicial action; and The assessment which has become final and executory cannot be superseded by a new assessment.
3.
2. Appeal to the CTA en banc the party adversely affected by the CTA Divisions decision may file one motion for reconsideration/new trial within 15 days from receipt of the decision. If the MR is denied, file a petition for review with the CTA en banc. 3. Appeal to the Supreme Court within 15 days from the receipt of the decision of the CTA.
4.
5.

REGLEMENTARY PERIOD IN INCOME TAX IMPOSED BY LAW UPON THE TAXPAYER (Pursuant to Rev. Reg. No. 12-99, Sec. 228 of the 1997 NIRC,, and RA No. 1125 as amended by RA No. 9282) BIR makes a tax assessment If taxpayer is not satisfied with the assessment file a protest within 30 days from receipt thereof Submit supporting documents within 60 days from date of the filing of the protest If protest is denied, elevate the matter to the CIR within 30 days from receipt of the decision of the CIRs duly authorized representative officer Appeal to the CTA Division within 30 days from receipt of final decision of CIR or his duly authorized representative (the taxpayer has the option to appeal straight to the CTA upon receipt of the decision of the CIRs duly authorized representative)
173 2008 CENTRALIZED BAR OPERATIONS If the CIR or his duly authorized representative fails to act on the protest within 180 days from date of submission by taxpayer, the latter may appeal within 30 days from lapse of the 180-day period with the CTA Division; OR he may opt to await the final decision of the CIR on the disputed assessments beyond the 180 day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules (Revised Rules of CTA, Rule 4, Sec.3 (a) (2) A.M. No. 05-11-07-CTA, Effective December 15, 2005). The party adversely affected by the CTA Divisions decision may file one motion for reconsideration/ new trial within 15 days from receipt of decision. If the MR is denied file a petition for review with the CTA en banc Appeal to the SC within 15 days from receipt of the CTA en banc decision under Rule 45 of the Rules of Court
Remedies After Payment

FILING FOR A CLAIM OF TAX REFUND OR TAX CREDIT A. B. TAX REFUND actual reimbursement of the tax TAX CREDIT the government issues a tax credit certificate or a tax credit memo covering the amount determined to be reimbursable, can be applied after proper verification against any sum that may be due and collectible from the taxpayer. AUTHORITY OF COMMISSIONER UNDER SECTION 204 (C) NIRC: 1. 2. 3. Credit or refund taxes erroneously or illegally received; Credit or refund penalties imposed without authority; Refund the value of internal revenue stamps when they are returned in good condition by the purchaser; and In his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction.
4.
GROUNDS FOR FILING A CLAIM FOR TAX REFUND OR TAX CREDIT: 1. 2. 3. Tax is collected erroneously or illegally Penalty is collected without authority. Sum collected is excessive or in any manner wrongfully collected. Tax Refund vs. Tax Credit TAX REFUND TAX CREDIT 2.
REQUISITES OF TAX REFUND OR TAX CREDIT: (W2P) 1. Claim must be in Writing; mandatory requirement, necessary because: a) b) It is an opportunity for the Commissioner to correct the errors of his subordinates; To notify the government
The taxpayer asks for The taxpayer asks that restitution of the money the money so paid be paid as tax applied to his existing tax liability Two-year period to file claim with the CIR starts after the payment of the tax or penalty Two-year period starts from the date such credit was allowed (in case credit is wrongly made).
It must be filed with the Commissioner within two (2) years after the payment of the tax or penalty. NOTE: No suit or proceeding shall be instituted after the expiration of the said two (2) years regardless of any supervening cause that may arise after payment.
3.
Show proof of Payment.
Requirement of filing the refund or credit within 2 years is a condition precedent,
174 Tax Remedies Under The NIRC noncompliance bars recovery (Phil. Acetylene Co., Inc. vs. Commissioner, CTA Case No. 1331, Nov. 7, 1965) QUARTERLY INCOME TAXES 1. 2.
Penalty claimed to have been collected without authority; and Sum alleged to have been excessively or in any manner wrongfully collected.
In case of OVERPAID QUARTERLY INCOME TAX FOR CORPORATIONS the 2year period is counted from the date the final adjustment return is filed after the end of the taxable year. NO AUTOMATIC CREDITING of the overpaid income tax against taxes due in the succeeding quarters of the following year for corporations and partnerships taxable as corporations THERE IS AUTOMATIC CREDITING and refund may be claimed in cases of estates, trusts and individuals for excess tax payment against the quarterly income taxes due for the succeeding year .
Until a claim for refund or credit has been filed with the Commissioner; but the suit or proceeding may be maintained whether or not such tax, penalty or sum has been paid under protest or duress. In no case shall the suit or proceeding be filed after the expiration of two (2) years from the date of the payment of the tax or penalty regardless of any supervening cause that may arise after payment. UNDER THE PRESENT LAW, the supervening cause is NOT considered in determining whether or not prescription of the taxpayers right to claim the refund has set in. EVEN WITHOUT A WRITTEN CLAIM, COMMISSIONER MAY REFUND OR CREDIT TAX where on the face of the return upon which payment was made, such payment appears to have been erroneously paid. Nature of Erroneously Paid or Illegally Assessed or Collected Taxes taxpayer pays under a mistake of fact, as when he is not aware of an existing exemption in his favor at the time the payment was made. In the nature of an exemption from taxation, strictly construed against the claimant, failure to discharge such burden is fatal to the claim.
A return filed showing an overpayment shall be considered as a written claim for credit or refund. TAX CREDIT CERTIFICATE one which is validly issued under the provisions of the Code and may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. ANY REQUEST FOR CONVERSION INTO REFUND OF UNUTILIZED TAX CREDITS MAY BE ALLOWED UNDER SEC. 230 subject to the following: 1. Under Section 230 of NIRC- a tax credit certificate issued, which shall remain unutilized AFTER 5 years from the date of issue, shall, unless revalidated, be considered INVALID and shall not be allowed as payment for internal revenue tax liabilities of the taxpayer, and the amount covered by the certificate shall revert to the general fund. The original of the Tax Credit Certificate showing creditable balance is surrendered to the appropriate revenue officer for verification and cancellation; and In no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made.
Right to contest tax before or after payment The taxpayers willingness to pay the tax is no waiver to raise defense against the taxs legality (Commissioner of Internal Revenue vs. Gonzales, G.R. No. L19495, Nov. 24, 1966). COMMENCEMENT OF THE TWO (2) YEAR PERIOD (JURISPRUDENCE) 1. Tax sought to be refunded is illegally or erroneously collected from the date the tax was paid (Commissioner vs. Victorias Milling, G.R. No. L-24108, January 31, 1968). Tax is paid only in installments or only in part from the date the last or final installment or payment because for tax purposes, there is no payment until the whole or entire tax liability is fully paid (Collector vs. Prieto, G.R. No. L-11976, August 29, 1961). Taxpayer merely made a deposit counted from the conversion of the deposit to payment (Union Garment vs. Collector, CTA Case No. 416, November 17, 1958) Merely making a deposit is not equivalent to payment until the amount is actually applied to the specific purpose for which it was deposited.
2.
2.
3.
RECOVERY OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED (Sec. 229): No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been (Scope of claims for refund): (EWE) 1. Erroneously or illegally assessed or collected;
3.

4. Tax has been withheld from source (through the withholding tax system) counted from the date it falls due at the end of the taxable year A taxpayer who contributes to the withholding tax system does not really deposit an amount to the government, but in truth, performs and extinguishes his tax obligation for the year concerned (Gibbs vs. Commissioner, G.R. No. L-17406, November 29, 1965). 5. End of taxable year vs. Date of the filing of the final adjusted return from the date when the final adjusted return was filed. The rationale in computing this period is the fact that it is only then that the corporation can ascertain whether it made profits or incurred losses in its business operations (ACCRA Investments vs. Court of Appeals, G.R. No. 96322, December 20, 1991). 6. Date when quarterly income tax was paid vs. Date when final adjusted return was filed from the date when final adjusted return was filed The filing of the quarterly income tax return (Sec. 68) and payment of quarterly income tax should only be considered mere installments of the annual tax due (Commissioner vs. TMX Sales, G.R. No. 83736, January 15, 1992). 7. Date when the final adjustment return was actually filed (ex. Apr. 2) vs. Last day when the adjustment return could still be filed (ex. Apr. 15) from the date the final adjustment return was actually filed (Commissioner vs. Court of Appeals, G.R. No 117254, January 21, 1999). Tax was not erroneously or illegally paid but the taxpayer became entitled to refund because of supervening circumstances from the date the taxpayer becomes entitled to refund and not from the date of payment (Commissioner vs. Don Pedro Central Azucarera, G.R. No. L-28467, Feb. 28, 1973).
175 2008 CENTRALIZED BAR OPERATIONS EXCEPTION: Taxpayer amends his petition for review alleging therein a new cause of action and the government pleads prescription in his answer to the amended petition for review. PAYMENT UNDER PROTEST IS NOT NECESSARY UNDER NIRC A suit or proceeding for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress (Sec. 229, NIRC). SUSPENSION OF THE TWO-YEAR PRESCRIPTIVE PERIOD 1. 2. There is a pending litigation between the Government and the taxpayer; and CIR in that litigated case agreed to abide by the decision of the SC as to the collection of taxes relative thereto (Panay Electric Co. vs. Collector, G.R. No. L-10574, May 28, 1958).
INTEREST ON TAX REFUNDS General Rule: Government cannot be required to pay interest on taxes refunded to the taxpayer in the absence of a statutory provision clearly or expressly directing or authorizing such payment (Commissioner vs. Sweeney, G.R. No. L-12178, August 29, 1959). Exceptions: 1. When the CIR acted with patent arbitrariness. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (Commissioner vs. Victorias Milling, G.R. No. L-19667, Nov. 29, 1966). Under Sec. 79(c)(2) with respect to income taxes withheld on the wages of the employees.
8.
2.
Forfeiture of Cash Refund/Tax Credit (Sec. 230 NIRC)
1. Forfeiture of refund in favor of the government

when a refund check or warrant remains unclaimed or uncashed within five (5) years from date of mailing or delivery.
NOTE: The claim for refund under the law refers to the: 1. The administrative claim which the taxpayer should file within two years from payment with the BIR; The judicial claim that the taxpayer should commence in the CTA; in case the BIR fails to act on the action for refund, taxpayer must commence action for refund before the CTA within the 2-year period.
2. Forfeiture of Tax Credit a tax credit

certificate which remains unutilized after five (5) years from date of issue, shall be invalid, unless revalidated (Sec. 230, 1997 NIRC). NOTES: As a general rule, payment under protest is not required under the NIRC, except when partial payment of uncontroverted taxes is required under R.R. No. 12-99. The Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.
2.
WHEN IS THERE WAIVER OF THE PRESCRIPTION IN AN ACTION FOR REFUND? If the government failed to plead prescription in a motion to dismiss or as a defense in its answer to the petition for review.
176 Tax Remedies Under The NIRC In case of the CIRs final denial of the claim for refund, the 30-day period to appeal with the CTA must be within the 2-year peremptory period for instituting judicial action.
EQUITABLE RECOUPMENT IN RELATION TO TAX REMEDIES not applicable in our jurisdiction because it puts a premium on the taxpayers neglect to enforce his rights. It allows a taxpayer whose claim for refund has been barred due to prescription (lapse of more than 2 years from date of payment) to recover said tax by setting off the prescribed refund against a tax that may be due and collectible to him. CORPORATE WITHHOLDING AGENTS in the Philippines of non-resident foreign corporations are entitled to claim the refund of excess withholding tax paid on the income of said corporations in the Philippines. REGLEMENTARY PERIODS APPLICABLE TO TAX CREDIT/REFUND The taxpayer must file a claim for refund/credit within 2 years after the payment of tax or penalty In case of inaction by the CIR or his duly authorized representative and the 2 year period is about to expire, the taxpayer should appeal to the CTA division (the appeal must be within the 2year period provided above)
OTHER CONSIDERATIONS AFFECTING TAX REFUNDS: a) b) The 2-year prescriptive period is not applicable to input VAT claims for refund Payment under protest is not necessary in order to obtain refund to internal revenue taxes. The Commissioner may grant refund or tax credits even without a written claim if, on the face of the return upon which payment was made, the payment appears to have been clearly erroneous. The partial payment of tax cannot be a basis for tax refund. The remedy of tax refund cannot be availed of to revive the right to contest the validity of an assessment once the same has been lost not only by failure to appeal but by the lapse of the reglementary period within which appeal could have been taken.
c)
d) e)
Tax Remedies of The Government

Tax Remedies of The Government
TO EFFECT TAX COLLECTION A. A D M I N I S T R A T I V E (CD_L2F2_SI) 1. 2. 3. 4. 5. 6. 7. 8. Compromise [Sec. 204(A)] Distraint (Actual and Constructive) (Secs. 205-208) Levy [Sec. 207(B)] Tax Lien (Sec. 219) Forfeiture of Property (Secs. 224-225) Suspension of business operations in violation of VAT (Sec. 115) Giving of reward to Informers who give information as to tax violations (Sec. 282) Enforcement of Administrative Fines, surcharges and penalties Civil Action (Sec. 221) Criminal Action (Secs. 221 and 222) REMEDIES C. SUBSTANTIVE REMEDIES (WRSP) 1. 2. 3. 4. Imposition of Withholding tax on certain income payments [Sec. 57(B)] Issuance of Revenue regulations by administrative agency (Sec. 245) Failure to obey Summons (Sec 266) Declaration under penalties of Perjury (Sec. 267)
The remedies of distraint and levy as well as collection by civil and criminal actions may, in the discretion of the Commissioner, be pursued singly or independently of each other, or all of them simultaneously. TO CANCEL TAX LIABILITY
B. JUDICIAL REMEDIES (C2) 1. 2.
A. ADMINISTRATIVE REMEDY 1. Abatement [Sec. 204(B)]

WHEN TAX DEEMED COLLECTED a. Through summary remedies - when the Government avails of the summary method of distraint and levy procedure. Through judicial remedies - by filing of complaint through the proper court
177 2008 CENTRALIZED BAR OPERATIONS NOTE: If the decision of the Commissioner on protested assessment is appealed to the CTA, the collection of tax is considered begun when the Government filed its answer to the taxpayers petition for review (Fernandez Hermanos vs. CIR, G.R. No. L-24978, Sept. 30, 1969).
b.
To Effect Tax Collection

A. ADMINISTRATIVE REMEDIES (1)COMPROMISE DEFINITION: A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced (Art. 2028, New Civil Code). REQUISITES: (LOA) 1. 2. The taxpayer must have a tax liability; There must be an offer (by the taxpayer of an amount to be paid by the taxpayer); and There must be an acceptance (by the Commissioner or taxpayer as the case may be) of the offer in the settlement of the original claim. 5. C a s e s w h e r e f i n a l r e p o r t s o f Reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision; 6. C a s e s w h i c h b e c o m e F i n a l a n d executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and 7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer (R.R. No. 3002). OFFICERS AUTHORIZED TO COMPROMISE 1. Commissioner of Internal Revenue
3.
A compromise implies mutual agreement. It cannot be imposed in the absence of a showing that the taxpayer consented thereto. CASES WHICH (DAC3P) 1. 2. 3. 4.
M AY B E C O M P R O M I S E D :
Is authorized to compromise criminal and civil cases arising from violations of the Tax Code [Secs. 7(C) and 204, 1997 NIRC] His power is discretionary and once exercised by him cannot be reviewed or interfered with by the Courts (Koppel, Philippines vs. Commissioner, G.R. No. L-1977, September 21, 1950).
Delinquent accounts; Cases under Administrative Protests; Civil tax cases being disputed before the courts; Collection cases filed in courts; 2.
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud (R.R. No. 30-2002); and 6. Cases covered by P re-assessment notices BUT taxpayer is not agreeable to the findings of the audit office as confirmed by the review office (Sec. 2, Rev. Reg. 7-2001). CASES WHICH MAY (WF CD RFE)
NOT BE COMPROMISED:
The Regional Evaluation Board composed of: (a) the Regional Director as Chairman, (b) Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions, and (c) the Revenue District Officer having jurisdiction over the taxpayer, as members; Is authorized to compromise assessments issued by the regional offices involving basic taxes of P500,000 or less, and minor criminal violations discovered by regional and districts officials.
1. W ithholding tax cases unless the taxpayer invokes provisions of law that cast doubt on his obligation to withhold; 2. Criminal tax Fraud cases; 3. Criminal violations already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments;
COMMISSIONER
M AY C O M P R O M I S E T H E PAYMENT OF ANY INTERNAL REVENUE TAX WHEN (DI) [Sec. 204 (A), NIRC]
1. 2.
There is a reasonable Doubt as to the validity of the assessment; or The financial position of the taxpayer demonstrates clear Inability to pay the assessed tax.
In case of financial incapacity, the taxpayer should waive in writing the confidentiality privilege on bank deposits under RA No. 1405 [Sec. 6 (F) (2), NIRC]. b.
The offer to compromise a delinquent account or disputed assessment on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that, among others: a. The delinquent account or disputed assessment resulted from a Jeopardy assessment. Jeopardy Assessment a tax assessment which was assessed without the benefit of a complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of: (1) The taxpayer s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records; or (2) The taxpayer s failure to substantiate all or any of the deductions, exemptions, or credits claimed in his return. b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions, and there is reason to believe that it is lacking in legal and/or factual basis;. Taxpayers failure to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that assessment is lacking in legal and/ or factual basis; or Taxpayers failure to elevate to the CTA an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that assessment is lacking in legal and/or factual basis.
distributed/ distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall NOT be considered for compromise; The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, Provided, that amounts payable or due to stockholders other than business-related transactions which are properly includible in the regular "accounts payable" are by fiction of law considered as part of capital and not liability, and P r o v i d e d f u r t h e r, t h a t t h e taxpayer has NO sufficient liquid asset to satisfy the tax liability; c. The taxpayer is suffering from a net worth deficit (total liabilities exceed total assets), taken from the latest audited financial statements, Provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; d. The taxpayer is a compensationincome earner with no other source of income and the familys gross monthly compensation does NOT EXCEED P10,500 per month if single; P21,000 per month if married, and that it appears that the taxpayer possesses no other leviable or distrainable assets, other than his family home; The taxpayer has been granted by the SEC or by any competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent (Sec. 3, R.R. No. 07-2001).
c.
e.
d.
MINIMUM COMPROMISE RATES (MCR) OF

ANY TAX LIABILITY
The offer to compromise based on financial incapacity may be accepted upon showing that, among others: a. The corporation ceased operation or is already dissolved, Provided , that tax liabilities corresponding to the Subscription Receivable or Assets
1.
Under Sec. 204 (A), 1997 NIRC a. In case of financial incapacity: MCR = 10% of the basic assessed tax b. Other cases: MCR = 40% of the basic assessed tax

APPROVAL OF THE COMPROMISE 1. BY THE NATIONAL EVALUATION BOARD (NEB) COMPOSED OF THE COMMISSIONER AND FOUR (4) DEPUTY COMMISSIONERS Covers (a) all compromise settlements where the basic tax involved exceed P1,000,000 or (b) for offer of compromise less than the prescribed minimum rates as provided under Section 204 (A) NIRC. Approval must be by a majority of all the members of the NEB (Sec. 6, R.R. No. 30-2002) Covers (a) assessments issued by the Regional Offices involving basic deficiency taxes of P500,000 or less and (b) for minor criminal violations discovered by Regional and District Offices
179 2008 CENTRALIZED BAR OPERATIONS 3. AFTER information is filed with the court: The CIR is NO longer permitted to compromise with or without the consent of the Prosecutor (People vs. Magdaluyo, G.R. No. L-16235, April 20, 1961). This is more so, when the court has rendered a FINAL JUDGMENT. As a mere agent of the Government, the CIR is not authorized to accept anything less than what is adjudicated in favor of the Government. By virtue of such final judgment, the Government has already acquired a vested right.
2.
BY THE REGIONAL EVALUATION BOARD
COMPROMISE PENALTY an amount of money that the taxpayer pays to compromise a tax violation, in lieu of criminal prosecution. NATURE OF COMPROMISE PENALTY: It is neither a tax nor an administrative penalty for tax delinquency, thus a collection suit does not lie. A taxpayer cannot be compelled to pay a compromise penalty. If he does not want to pay, the CIR must institute a criminal action. COMPROMISE Amount paid to settle TPs civil liability for tax assessed COMPROMISE PENALTY Amount paid to compromise a tax violation TP has committed for which he is subject to criminal prosecution Basis: gross sales or receipts during the year or the tax due
N AT U R E O F A C O M P R O M I S E I N EXTRAJUDICIAL SETTLEMENT OF THE TAXPAYERS CRIMINAL LIABILITY FOR HIS VIOLATION 1. It is CONSENSUAL in character. The BIR may only suggest settlement of his tax liability through a compromise. The extra-judicial settlement and the amount of the suggested compromise penalty should CONFORM to the schedule of compromise penalties provided under the relevant BIR regulations or orders. RULES ON COMPROMISE OF CRIMINAL
VIOLATIONS
2.
Basis: basic tax assessed
General Rule: All criminal violations under the NIRC may be compromised. Exceptions: 1. 2. Those already filed in court; and Those involving fraud [Sec. 204 (B), 1997 NIRC].
EXTENT OF THE COMMISSIONERS DISCRETION TO COMPROMISE CRIMINAL VIOLATIONS: 1. BEFORE the complaint is filed with the Prosecutors Office: The CIR has full discretion to compromise EXCEPT those involving fraud. AFTER the complaint is filed with t h e P r o s e c u t o r s O f f i c e B U T BEFORE the information is filed with the court: The CIR can still compromise PROVIDED the prosecutor must give consent.
Minimum Minimum amount amount prescribed: depends on prescribed: the nature of tax depends on the violation and is legal grounds generally NOT less than used by TP P1,000 Both are mutually agreed upon by the parties. Compromise penalties cannot be imposed and collected in the absence of a valid compromise agreement REMEDY IN CASE THE TAXPAYER REFUSES OR
FAILS TO ABIDE THE TAX COMPROMISE
1. Enforce the compromise a. If it is a judicial compromise, it can be enforced by mere execution. JUDICIAL COMPROMISE one where a decision based on the compromise agreement is rendered by the court on request of the parties.
2.
180 Tax Remedies Under The NIRC b. Any other compromise is extrajudicial and like any other contract can only be enforced by court action.
REQUISITES FOR THE EXERCISE OF THE REMEDY OF DISTRAINT (D2P2)
1. The taxpayer must be D elinquent

(except in constructive distraint) in the payment of tax;
2.
Regard it as rescinded and insist upon original demand (Art. 2041, Civil Code).
2. There must be a subsequent Demand

for its payment (assessment);
(2)DISTRAINT D EFINITION : It is the seizure by the government of personal property, tangible or intangible, to enforce the payment of taxes. NATURE OF THE WARRANT OF DISTRAINT/ LEVY It is a summary, extra-judicial or administrative enforcement remedy. The warrant is a summary procedure forcing the taxpayer to pay. The receipt of a warrant may or may not partake the character of a final decision. If it is an indication of a final decision, the taxpayer may appeal to the CTA within 30 days from service of the warrant. TWO TYPES OF DISTRAINT
3. The taxpayer must fail to Pay the tax at

the time required; and
4. The Period within which to assess or

collect the tax has NOT yet prescribed. PERSONS WHO SHALL SEIZE AND DISTRAINT PERSONAL PROPERTY (ACTUAL DISTRAINT) 1. Commissioner or his duly authorized representatives if the amount of delinquent tax is more than P1,000,000 Revenue District Officer (RDO) if the amount of delinquent tax is P1,000,000 or less (Sec. 207(A), 1997 NIRC)
2.
Duties of the officer serving the warrant of distraint: (ASL)
1. Make an Account of the personal

properties distrained;
1. Actual Distraint 2. Constructive Distraint

ACTUAL DISTRAINT Made only on the property of a delinquent taxpayer Involves the taking of possession of his property; physical transfer is not required in case of intangible property such as stocks and credit Effected (1) by leaving a list of distrained property; OR (2) by service of a warrant of distraint or garnishment CONSTRUCTIVE DISTRAINT Made on the property of any taxpayer, whether delinquent or not Involves only a prohibition to dispose of his property
2. Sign the list of personal properties

distrained to which shall be added, a statement of the sum demanded and note of the time and place of sale; and
3. Leave either (a) with the owner or

person from whose possession such personal properties were taken, OR (b) at the dwelling or place of business of such person with someone of suitable age and discretion (Sec. 208, CTRP) A UTHORITY O F T HE C OMMISSIONER T O INQUIRE INTO BANK DEPOSIT ACCOUNTS Notwithstanding any contrary provision of RA 1405, the Commissioner is authorized to inquire into the bank deposits of: a. b. a decedent to determine his gross estate; or a taxpayer who files an application to compromise by reason of financial incapacity to pay his tax liability and waives his right under RA 1405 [Sec. 6 (F), NIRC]
Effected (1) by requiring the taxpayer to sign a receipt of the property; OR (2) by preparing and leaving a list of such property
An immediate step for Not necessarily collection of taxes Both are summary remedies for the collection of taxes. Both refer only to personal property and cannot be availed of where the amount of the tax involved is not more than P100
Distraint includes garnishment of money even in bank deposits because R.A. 1405 (Bank Secrecy Law) covers only divulging of information of deposits. No inquiry is made on garnishment for it only earmarks a portion of the deposits.

GARNISHMENT the taking of personal properties, usually cash or sums of money, owned by a delinquent taxpayer which is in the possession of a third party PROCEDURE FOR THE ACTUAL DISTRAINT OR GARNISHMENT (Secs. 207 209, NIRC) (CS2PS) 1. 2. 3. 4. 5. COMMENCEMENT
PROCEEDINGS OF DISTRAINT
181 2008 CENTRALIZED BAR OPERATIONS d. Debts and credits 1. 2. persons owing or having in his possession the debts; or under his control such credits or upon his agent.
SERVICE OF WARRANT OF DISTRAINT SIGNING OF THE RECEIPT BY TAXPAYER POSTING OF NOTICE SALE OF PROPERTY DISTRAINED I. Commencement of Distraint Proceedings (Sec. 207, NIRC)
NOTE: The warrant of distraint shall be sufficient authority to the person owing the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits.
III. Taxpayer must sign receipt
IV. Posting of Notice (Sec. 209, NIRC) REQUIREMENTS OF NOTICE: 1. 2. Notice shall specify the time and place of sale and the articles distrained; The time of sale shall not be less than 20 days after notice to the owner or possessor of the property AND publication or posting of such notice; and The posting shall be made in not less than two (2) public places in the city or municipality where the distraint is made. One place for posting of such notice is at the Office of the Mayor of such city or municipality in which the property is distrained (Sec. 209, NIRC).
Either by the CIR or his duly authorized representative; or by the RDO
II. Service of Warrant of Distraint (Sec. 208, NIRC) With respect to: a. Personal property 1. upon the owner of the goods, chattels, or other personal property; OR upon the person from whose possession such properties are taken (possessor) OR at the dwelling or place of business of such person with a person of suitable age and discretion upon the taxpayer; AND Upon the president, manager, treasurer or other responsible officer of the corporation, company or association which ISSUED the said stock and securities.
3.
2.
3.
V. Sale of Property Distrained (Sec. 209, NIRC) RULES GOVERNING SALE 1. 2. Sale must be held at the time and place stated in the notice. It may be conducted by the revenue officer (RO) OR through a licensed commodity or stock exchange. If the sale is conducted by Revenue Officer, it must be held at a public auction and the property shall be sold to the highest bidder for CASH. If sale is through a licensed commodity or stock exchange, it must be with the approval of the CIR In case of stocks and other securities, the officer making the sale shall execute a BILL of SALE, which shall be delivered to the buyer and to the corporation, company or association (CCA) which issued the stocks or other securities.
b.
Stocks and other securities 1. 2.
c.
Bank accounts shall be garnished by serving a warrant of distraint 1. 2. upon the taxpayer; AND Upon the president, manager, treasurer, or other responsible officer of the bank.
3.
4.
NOTE: Upon receipt of the warrant of distraint, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the governments claim
5.
182 Tax Remedies Under The NIRC ** Upon receipt of the copy of the bill of sale, an entry of transfer should be made in the CCAs book and a corresponding certificate of stock shall be issued if required. 6. Any RESIDUE over and above what is required to pay the entire claim including expenses shall be RETURNED to the owner of the property sold. * Expenses chargeable upon seizure shall include only those actual expenses of seizure and preservation of the property pending the sale and does not include services of the RO 7. The officer making the sale shall make a written report of the proceedings to the CIR within 2 days after the sale (Sec 211).
PROCEDURE FOR THE CONSTRUCTIVE DISTRAINT OF PERSONAL PROPERTY (Sec. 206, NIRC) I. Taxpayers Obligation to Preserve CIR shall REQUIRE the taxpayer or any person having possession or control of such property: a. b. to SIGN a receipt covering the property distrained and to OBLIGATE himself to:
1. PRESERVE the same intact and

unaltered and
2. NOT to DISPOSE of the same in

any manner whatsoever WITHOUT the express authority of the Commissioner of Internal Revenue.
II. Remedy when taxpayer did NOT sign receipt If the taxpayer or person in possession of the property refuses or fails to sign the receipt referred to, the Revenue Officer effecting the constructive distraint shall: a. b. proceed to PREPARE a list of such property and in the presence of two (2) witnesses LEAVE a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint. PURCHASE BY THE GOVERNMENT AT SALE UPON DISTRAINT (Sec. 212, NIRC) The Commissioner or his deputies may purchase in behalf of the National Government for the amount of taxes, penalties and cost due thereon when the amount bid for the distrained property is:
NOTE: If at any time prior to the consummation of the sale, ALL proper charges are paid to the officer conducting the sale, all the distrained properties shall be restored to the owner (Sec. 210, NIRC). THE TAXPAYERS PROPERTY MAY BE PLACED UNDER CONSTRUCTIVE DISTRAINT WHEN HE:
1. is retiring from any business subject to

tax;
2. is intending to:
a. b. c. leave the Philippines, remove his property therefrom, or hide or conceal his property
3. Is performing any act tending to

obstruct the proceeding for collecting the tax due or which may be due from him (Sec. 206, 1997 NIRC).
Under any of the foregoing instances, the CIR shall: 1. Declare the Taxpayers (TP) tax period terminated at any time; and Shall send TP a notice of such decision together with request for immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid.
1. NOT equal to the amount of tax; or 2. Very much LESS than the actual
market value of the property offered for sale.
2.
Property so purchased may be resold by the CIR or his deputy; the net proceeds shall be remitted to the National Treasury and accounted as internal revenue
Said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed unless paid within the time fixed in the demand made by the CIR [Sec. 6 (D), NIRC].
(3)LEVY DEFINITION: It refers to the act of seizure of real property in order to enforce the payment of taxes. The property may be offered in a public sale, if after seizure, the taxes are not voluntarily paid.

REQUISITES FOR THE EXERCISE OF THE REMEDY OF LEVY Same as in the remedy of distraint. WHEN MAY LEVY BE EFFECTED? Real property may be levied upon before, simultaneously, or after the distraint of personal property belonging to the delinquent taxpayer [Sec. 207(B), 1997 NIRC]; and the remedy by distraint and levy may be repeated if necessary until the full amount, including all expenses, is collected (Sec. 217, 1997 NIRC). PROCEDURE OF LEVY ON REAL PROPERTY (PSAS) 1. 2. 3. 4. Prepare a Certificate of Levy [Sec. 207(b), NIRC] Service of Notice [Sec. 207(b), NIRC] Advertisement of the time and place of sale [Sec. 213, NIRC] Sale of real property [Sec. 213, NIRC] I. Prepare Certificate of Levy PREPARATION
OF A DULY AUTHENTICATED CERTIFICATE CONTAINING: (DNA)
183 2008 CENTRALIZED BAR OPERATIONS III. Advertisement of the Time and Place of Sale The advertisement shall contain: (TP AND) 1. 2. 3. 4. Amount of tax and penalties due Time and Place of sale Name of the taxpayer against whom taxes are levied; and Short Description of the property to be sold.
The advertisement shall be made within 20 days after the levy, and the same shall be for a period of at least 30 days. It shall be effectuated by: (P2) a. Posting a notice at the main entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real property lies; and Publication once a week for 3 weeks in a newspaper of general circulation in the municipality or city where the property is located (Sec. 213, NIRC)
b.
IV. Sale If TP does not pay his taxes, penalties and interest before the day fixed for the sale, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify. AFTER SALE OF REAL / PERSONAL PROPERTY PURSUANT TO LEVY / DISTRAINT (Sec. 213, NIRC) (1) The return issued by the distraining or levying officer of the proceedings shall be entered in the records of the BIR within 5 days after the sale (2) The Revenue Collection Officer shall make out and deliver to the purchaser a certificate from his records showing the proceedings of the sale, description of property sold, name of purchaser and exact amount of all taxes, penalties and interest. (3) In case proceeds of sale EXCEED the claim and cost of sale, the excess shall be turned over to the owner of the property.
(1) Description of the property levied; (2) Name of the taxpayer, and (3) the Amount of tax and penalty due from him. This certificate shall operate with the force of a legal execution throughout the Philippines (Sec. 207(B), 1997 NIRC).
II. Service of Notice Service of written notice to: a. b. c. the proper Register of Deeds; AND the delinquent taxpayer; or if he is absent from the Philippines, to his agent or manager of the business in respect to which the liability arose; or If none, to the occupant of the property (Sec. 207(B), 1997 NIRC).
d.
In case the warrant of levy is NOT issued before or simultaneously with the warrant of distraint AND the personal property of the TP is NOT sufficient to satisfy his tax delinquency, the CIR or his authorized representative shall, within 30 days after the execution of the distraint, PROCEED with the levy on TPs real property [Sec. 207 (B), NIRC]
184 Tax Remedies Under The NIRC DISTRAINT VS. LEVY DISTRAINT Refers to personal property Forfeiture by the government is not provided The taxpayer is not given the right of redemption with respect to distrained personal property. LEVY Refers to real property Forfeiture is authorized The right of redemption is granted in case of real property levied upon and sold, or forfeited to the government.
RESALE OF REAL ESTATE TAKEN FOR TAXES The CIR shall have charge of any real estate obtained by the Government in payment of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim. The CIR may: (1) sell and dispose of the same at a public auction upon giving of not less than 20 days notice; OR (2) dispose of the same at a private sale with the approval of the Secretary of Finance In either case, the proceeds of the sale shall be deposited with the National Treasury and an accounting of the same shall be rendered to COA (Sec. 216, NIRC). FURTHER DISTRAINT AND LEVY The remedy of distraint and levy may be repeated if necessary until the full amount of the tax delinquency due including all expenses is collected from the taxpayer. Otherwise, a clever taxpayer who is able to conceal most of the valuable part of his property would escape payment of his tax liability by sacrificing an insignificant portion of his holdings (Sec. 217, NIRC). (4)TAX LIEN DEFINITION: It is a legal claim or charge on p r o p e r t y, e i t h e r r e a l o r p e r s o n a l , established by law as a security in default of the payment of taxes (51 Am Jur 881). Generally, it attaches to the property irrespective of ownership or transfer thereof. EXTENT AND NATURE The tax, together with interests, penalties, and costs that may accrue in addition thereto is a lien upon all property and rights to property belonging to the taxpayer. The lien shall not be valid against any mortgagee, purchaser, or judgment creditor until notice of such lien shall be filed by the Commissioner of Internal Revenue in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located (Sec. 219, 1997 NIRC). In seizure for the enforcement of a tax lien, the residue, after deducting the tax liability and expenses, will go to the taxpayer (Bank of the Phil. Island vs. Trinidad, G.R. No. 16014, October 4, 1941).
Both are summary remedies for the collection of taxes; and cannot be availed of where the amount of the tax involved is not more than P100 REDEMPTION OF PROPERTY SOLD a. b. c. d. Period within 1 year from the date of sale Who may redeem the delinquent taxpayer or any one for him To whom made to the Revenue District Officer How made upon payment of the taxes, penalties and interest thereon from the date of delinquency to the date of sale, together with interest on purchase price at 15% per annum from the date of sale to the date of redemption. (Sec. 214, NIRC)
The owner shall not be deprived of the possession of said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption.
EFFECTS OF REDEMPTION OF PROPERTY SOLD (1) Such payment shall entitle TP the delivery of the certificate issued to the purchaser and a certificate from RDO that he has redeemed the property. (2) The RDO shall pay the purchaser the amount by which such property has been redeemed and said property shall be free from lien of such taxes and penalties (Sec. 214, NIRC). FORFEITURE TO THE GOVERNMENT If there is no bidder in the public sale or if the amount of the highest bid is insufficient to pay the taxes, penalties and costs, the real property shall be forfeited to the government.

WHEN DOES IT ATTACH? Not only from the service of the warrant of distraint but from the time the tax became due and payable i.e., from the time when the assessment was made by CIR (Sec 219, NIRC). LIEN VS. DISTRAINT LIEN DISTRAINT
185 2008 CENTRALIZED BAR OPERATIONS sale go to the coffers of the government (U.S. vs. Surla, G.R. No. 6536, September 2, 1911). In seizure for the enforcement of a tax lien, the residue, after deducting the tax liability and expenses will go to the taxpayer (Bank of the Phil. Island vs. Trinidad, G.R. No. 16014, October 4, 1941) RULES GOVERNING FORFEITURE (1) If there is no bidder in the public sale or if the amount of the highest bid is insufficient to pay the taxes, penalties and costs, the real property shall be forfeited to the Government. (2) The Register of Deeds shall transfer title of forfeited property to the Government without necessity of a court order. (3) Within 1 year from the date of sale, the property may be redeemed by the delinquent taxpayer or any one for him, upon payment of the taxes, penalties and interest thereon and cost of sale; if NOT redeemed within said period, the forfeiture shall become ABSOLUTE (Sec. 215, NIRC). (6)SUSPENSION OF BUSINESS OPERATIONS The Commissioner or his authorized representative may suspend the business operation and temporarily close the business of a VAT-registered person for understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipts for the taxable quarter. The duration of the temporary closure shall be for a period of not less than 5 days and shall be lifted only upon compliance of whatever requirements imposed by the Commissioner in the collection order (Sec. 115, NIRC). (7)INFORMERS REWARD (Sec. 282, NIRC) A. For violations of the NIRC, a reward of 10% of the revenues, surcharges, or fees recovered and/or fine or penalty imposed and collected or P1M per case, whichever is lower, shall be given to: Any person who voluntarily gives definite and sworn information not yet in the possession of the BIR 1. leading to the discovery of fraud upon the Internal Revenue Laws and/or any violations thereof; or
Directed against Need not be directed the property subject against the property to the tax subject to tax Regardless of the owner of the property Property seized must be owned by the taxpayer
(5)FORFEITURE DEFINITION: divestiture of property without compensation, in consequence of a default or offense. ENFORCEMENT OF THE REMEDY OF
FORFEITURE
a. Seizure and Sale or destruction of

specific forfeited property in case of personal property.
b. Judgment of condemnation and sale

in a legal action or proceeding, civil or criminal, as the case may require, in case of real property.
c. Destruction upon order by the

Commissioner where the sale may be injurious to public health or prejudicial to law enforcement in case of distilled spirits, liquors, cigars, and cigarettes manufactured products of tobacco and apparatus used for their production.
d. Sale or destruction at the discretion of

the CIR in case of other articles subject to excise tax which have been manufactured or removed in violation of the Code, dies for printing or making fake revenue stamps and labels.
Sale of forfeited chattels and removable fixtures shall be effected in the same manner and under the same conditions as the public notice and the time and manner of sale as are prescribed for sales of distrained property.
Forfeited property shall not be destroyed until at least 20 days from seizure (Sec. 225, NIRC) EFFECT OF THE FORFEITURE OF PROPERTY The effect is to transfer the title to the specific thing from the owner to the government. All the proceeds in case of a
186 Tax Remedies Under The NIRC 2. An informer where the offender has offered to compromise the violation of law committed by him and his offer has been accepted and collected by the CIR. This excludes an Internal Revenue Officer/employee or other public official/employee, or his relative within the sixth degree of consanguinity.
Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment (Sec. 248). 2. 50% surcharge
a. In case of willful neglect to

file the return within the period prescribed by the Code It will not apply in case a taxpayer, without notice from the Commissioner, or his duly authorized representative, voluntarily files the said return (only 25% shall be imposed) 50% surcharge shall be imposed in case the taxpayer files the return only after prior notice in writing from the Commissioner or his duly authorized representative (Sec. 4.2, R.R. No. 12-99)
NOTE: This shall not refer to a case already pending or examined by the CIR. B. For the discovery and seizure of smuggled goods a reward of 10% of the FMV of the smuggled and confiscated goods or P1M per case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods. NOTE: This does not apply to all public officials whether incumbent or retired, who acquired the information in the course of performance of their duties during their incumbency. (8)ENFORCEMENT OF SURCHARGES AND INTEREST DEFINITION: increments to the basic tax incident to the taxpayers non-compliance with certain legal requirements. SURCHARGE overcharge or exaction imposed by law as an addition to the main tax required to be paid. A. CIVIL PENALTY / SURCHARGE It shall be imposed in addition to the basic tax required to be paid 1. 25% surcharge a. Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this
b. in case a false or fraudulent return is willfully made Prima Facie evidence substantial underdeclaration (exceeding 30% of that declared) of taxable sales, receipts or income; or or a substantial overstatement (exceeding 30% of actual deductions) of deductions (Sec. 248)
B. INTEREST 20% per annum or such higher rate as may be prescribed by the rules and regulations a. Deficiency interest (Sec. 249[B]) The interest assessed and collected on any unpaid amount of tax
b.
20% interest per annum or such higher rate assessed and collected from the date prescribed for its payment until the full payment thereof. In case of failure to pay: 1. the amount of tax due on any return required to be filed; the amount of tax due for which no return is required to be filed
b.
Delinquency interest (Sec. 249[C])
c.
d.
2.

3. 20% interest per annum or such higher rate prescribed on the unpaid amount in case of failure to pay a deficiency tax or any surcharge or interest thereon

DEFICIENCY TAX Subject to deficiency interest
DELINQUENCY TAX
Subject to delinquency interest and compromise penalty
c.
Interest on Extended Payment (Sec. 249[D])
20% interest per annum or such higher rate as may be prescribed on the tax or deficiency tax or any part unpaid if: a person required to pay tax elects to pay on installment but fails to pay the tax or installment; or the CIR has authorized an extension of time within which to pay a tax, deficiency or part thereof. DEFICIENCY TAX VS. DELINQUENCY TAX
B. JUDICIAL REMEDIES (1)CIVIL ACTION DEFINITION: For tax remedy purposes, these are actions instituted by the government to COLLECT internal revenue taxes including the filing by the government of claims against the deceased taxpayer with the probate court. TWO WAYS TO ENFORCE CIVIL LIABILITY THROUGH CIVIL ACTIONS:
1. By filing a civil case for collection of a

sum of money with proper regular court; or
DEFICIENCY TAX
DELINQUENCY TAX
2. By filing an answer to the petition for

review filed by TP with CTA. WHEN RESORTED TO? 1. When a tax is assessed and the assessment becomes final and unappealable because the taxpayer fails to file an administrative protest with the CIR within 30 days from receipt; or When a protest against assessment is filed and a decision of the CIR was rendered but the said decision b e c o m e s f i n a l , e x e c u t o r y, a n d demandable for failure of the taxpayer to appeal the decision to the CTA within 30 days from receipt of the decision. When the protest is not acted upon within 180 days from submission of documents and the taxpayer failed to appeal with the CTA within 30 days from the lapse of the 180-day period.
Exists when: Exists when: 1. the amount by which 1. the selfthe tax imposed by assessed tax the CIR exceeds the per return amount shown as filed by the the tax by the taxpayer on taxpayer upon his the return; prescribed 2. the amount by which date was not the tax as paid at all or determined by the was only CIR exceeds the partially amounts previously paid assessed (or 2. the collected without deficiency assessment) as a tax assessed deficiency, if no by the BIR amount is shown as became final tax by the taxpayer and upon his return or if executory no return is made by the taxpayer Can be collected through administrative and judicial remedies but has to go through the process of filing the protest against the assessment by the taxpayer and denial of such protest by BIR Filing of an action for collection of a deficiency tax during the pendency of the protest may be the subject of a motion to dismiss Can immediately be collected administratively through the issuance of warrant of distraint and levy and by judicial action Filing of a civil action for the collection of delinquent tax in the ordinary court is a proper remedy.
2.
3.
NOTE: Judicial action may be resorted to even before assessment although impractical, as stated in Sec. 203, 1997 NIRC, and no proceeding in court without assessment for the collection of such taxes shall be instituted after the expiration of such (3-year) period. FORM AND MODE OF PROCEEDING (Sec. 220, NIRC) 1. Civil actions shall be brought in the name of the Government of the Philippines It shall be conducted by legal officers of the BIR.
2.
188 Tax Remedies Under The NIRC 3. No civil or criminal action for the recovery of taxes shall be filed in court without the approval of the Commissioner. The approval of the CIR is essential in civil cases. However, under Sec. 7, 1997 NIRC, the Commissioner may delegate such power to a Regional Director. Further, the approval by the Solicitor General for civil actions for collection of delinquent taxes is required before they are filed. WHERE TO FILE: 1. Court of Tax Appeals where the principal amount of taxes and fees, exclusive of charges and penalties claimed is One million pesos and above. Regional Trial Court, Municipal Trial Court, Metropolitan Trial Court where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than One million pesos (Sec. 7, R.A. No. 9282). JURISDICTION COURTS MTCs, MCTCs, MeTCs outside Metro Manila MTCs, MCTCs, MeTCs within Metro Manila RTCs outside Metro Manila RTCs within Metro Manila AMOUNT OF TAXES CLAIMED Amount does not exceed P300,000 Amount does not exceed P400,000 P300,001 to P999,999 P400,001 to P999,999
(2)CRIMINAL ACTION TWO COMMON CRIMES PUNISHABLE UNDER TAX CODE: a. b. attempt to evade or defeat tax (Sec. 254) failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation (Sec. 255)
The judgment in the criminal case shall not only impose the penalty but shall also order the payment of taxes subject of the criminal case as finally decided by the Commissioner (Sec. 205, NIRC). FORM AND MODE OF PROCEEDING (Sec. 220) Same as Civil Action. WHERE TO FILE:
2.
1. Court of Tax Appeals on criminal

offenses arising from violations of the NIRC or TCC and other laws administered by the BIR and the BOC where the principal amount of taxes and fees exclusive of charges and penalties claimed is One million pesos and above.
2. Regional Trial Court, Municipal Trial

Court, Metropolitan Trial Court on criminal offenses arising from violations of the NIRC or TCC and other laws administered by the BIR and the BOC, where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than One million pesos or where there is no specified amount claimed (Sec. 7, RA No. 9282). JURISDICTION COURTS PENALTY
N OTE : A decision on a request for reinvestigation is NOT a condition precedent to the filing of an action for collection of taxes already assessed. The requirement for CIR to rule on disputed assessments before bringing an action for collection is applicable ONLY in cases where the assessment was actually disputed, adducing reasons in support thereto (Dayrit vs. Cruz, G.R.No. 39910 Sept. 26, 1988). DEFENSES PRECLUDED BY FINAL AND
EXECUTORY ASSESSMENTS
MTCs, MCTCs, Imprisonment of 6 years MeTCs and below RTCs Imprisonment of 6 years and 1 day
IMPORTANT PRINCIPLES ON CRIMINAL ACTIONS 1. EFFECT OF ACQUITTAL OF THE TAXPAYER

IN A CRIMINAL ACTION
a. b.
validity or legality of the assessments; and prescription of the Governments right to assess.
It does NOT necessarily result in the exoneration of said taxpayer from his civil liability to pay taxes. Rationale: The duty to pay tax is imposed by statute prior to and independent of any attempt on the part of the tax payer to evade payment. It is neither a mere consequence of the felonious acts charged nor is it a mere civil liability derived from a crime

(Republic vs. Patanao, GR No. L-14142, May 30, 1961) The civil liability to pay taxes arises not because of felony but upon taxpayers failure to pay taxes. Criminal liability in taxation arises as a result of ones liability to pay taxes. 2. EFFECT OF SUBSEQUENT SATISFACTION OF CIVIL LIABILITY The subsequent satisfaction of civil liability by payment or prescription DOES NOT extinguish the taxpayers criminal liability. 3. NO SUBSIDIARY IMPRISONMENT In case of insolvency on the part of the taxpayer, subsidiary imprisonment CANNOT be imposed as regards the tax which he is sentenced to pay. However, it may be imposed in cases of failure to pay the fine imposed (Sec. 280, 1997 NIRC). 4. CRIMINAL ACTION MAY BE FILED DURING THE PENDENCY OF AN ADMINISTRATIVE PROTEST IN THE BIR It is NOT a requirement for the filing thereof that there be a precise
189 2008 CENTRALIZED BAR OPERATIONS computation and assessment of the tax, since what is involved in the criminal action is not the collection of tax but a criminal prosecution for the violation of the NIRC. Provided, however, that there is a prima facie showing of a willful attempt to evade taxes or failure to file the required return (See Ungab vs. Cusi, GR Nos. L-41919-24, May 30, 1980 in relation to Commissioner vs. Court of Appeals, GR No. 119322, June 4, 1996, CIR vs. Pascor Realty Development Corp., GR No. L-128315, June 29, 1999). Before anyone is prosecuted for willful attempt to evade or defeat any tax, the fact that a tax is due must first be proved. 5. CRIMINAL
ACTION MAY BE FILED DESPITE THE LAPSE OF THE PERIOD TO FILE A CIVIL ACTION FOR COLLECTION OF TAXES
When the civil action arising from tax delinquency has prescribed, the BIR has only 5 years from assessment within which to collect the tax through criminal action in which case, would prescribe after lapse of 5 years from discovery of crime AND institution of proceedings (Sec. 281, NIRC)
To Cancel Tax Liability

A. ADMINISTRATIVE REMEDY (1)ABATEMENT (also see R.R. No. 15-2006 Abatement Program) DEFINITION: It means that the entire tax liability of the taxpayer is cancelled. GROUNDS: (1) the tax or any portion thereof appears to be unjustly or excessively assessed; or (2) The administration and collection costs involved do not justify the collection of the amount due. INSTANCES WHEN THE TAX LIABILITIES, PENALTIES AND/OR INTEREST IMPOSED ON THE TAXPAYER MAY BE ABATED ON THE GROUND THAT THE IMPOSITION THEREOF IS UNJUST OR EXCESSIVE: (WESIBLO) a. b. Filing of the return/payment of tax at the Wrong Venue; TPs mistake in payment of tax is due to Erroneous written official advice of a Revenue Officer; TPs failure to file the return and pay the tax on time is due to Substantial losses from prolonged labor dispute, force majuere, legitimate business g. f. d. reverses such as labor strike for more than 6 months which has caused temporary shutdown of business, natural calamity, public turmoil etc., Provided that the abatement shall cover only the surcharge and the compromise penalty and not the interest imposed under Sec. 249, NIRC; Assessment resulted from TPs noncompliance with the law due to a difficult Interpretation of said law; TPs failure to file the return and pay the correct tax on time due to circumstances Beyond his control; Provided, that abatement shall cover only the surcharge and the compromise penalty but not the interest; Late payment of tax under meritorious circumstances; (ex. Failure to beat bank cut-off time, surcharge erroneously imposed, use of wrong tax form but correct tax amount) Other similar or analogous cases
e.
c.
190 Tax Remedies Under The NIRC INSTANCES WHEN THE TAX LIABILITIES, PENALTIES AND/OR INTEREST IMPOSED ON THE TAXPAYER MAY BE ABATED ON THE GROUND THAT THE TAX ADMINISTRATION AND COLLECTION COSTS ARE MORE THAN THE AMOUNT SOUGHT TO BE COLLECTED: (AWARD) a. Abatement of penalties on assessment confirmed by the lower court but Appealed by TP to a higher court; Abatement of penalties on Withholding tax assessment under meritorious circumstances; Abatement of penalties on Delayed installment payment under meritorious circumstances; Abatement of penalties on assessment reduced after Reinvestigation but TP is still contesting reduced assessment; and Other Analogous instances
COMPROMISE VS. ABATEMENT COMPROMISE ABATEMENT
Involves a Involves the cancellation reduction of the of the entire tax liability of taxpayers a taxpayer liability Officers authorized to compromise: CIR and Regional Evaluation Board Grounds: 1. Reasonable doubt as to validity of assessment; or 2. Financial incapacity of TP Officer authorized to abate or cancel tax, penalties and/or interest: CIR
b.
c.
d.
e.
Grounds: 1. The tax or any portion thereof appears to be unjustly or excessively assessed; or 2. The administration and collection costs involved do not justify the collection of the amount due.
Prescriptive Periods for the Assessment and Collection of Taxes

Prescriptive Periods for the Assessment and Collection of Taxes
RATIONALE OF PRESCRIPTIVE PERIODS Such periods are designated to secure the taxpayers against possible harassment and unreasonable investigation after the lapse of the period prescribed. They are also beneficial to the government because tax officers will be obliged to act promptly (CIR vs. Philippine Global Communications, Inc, G.R. No. 167146, October 31, 2006). RULES ON PRESCRIPTION 1. 2. When the tax law itself is silent on prescription, the tax is imprescriptible; When no return is required, tax is imprescriptible; NOTE: Remedy of taxpayer is to file a return. 3. 4. Defense of prescription is waivable; The law on prescription should be liberally construed in order to afford protection to TP while its exceptions should perforce be strictly construed. 2. PRESCRIPTIVE PERIOD FOR THE ASSESSMENT AND COLLECTION OF TAXES AND VIOLATION OF NIRC 1. ASSESSMENT OF TAXES General Rule: Within three (3) years from due date of filing of return if return is filed on or before due date or three (3) years from date of actual filing if filed beyond due date (Sec. 203, 1997 NIRC). If the return is amended substantially, the period starts from the filing of the amended return (CIR vs. Phoenix Assurance Co., Ltd., G.R. No. L-19127, May 20, 1965). Exceptions: 1. Failure to file a return: ten (10) years from the date of the discovery of the omission to file the return (Sec. 222[A]); False or fraudulent return with intention to evade the tax: ten (10) years from the date of the discovery of the falsity or fraud (Sec. 222 [A]); Agreement in writing to the extension of the period to assess between the CIR and
3.

the taxpayer before the expiration of the 3year period. NB: The extended period agreed upon can further be extended by a subsequent written agreement made before the expiration of the extended period previously agreed upon (Sec. 222[b]). 2. COLLECTION a. b. 5 yrs. from date of assessment (Sec. 222, NIRC) In case of non-filing, false or fraudulent return b. 4.
191 2008 CENTRALIZED BAR OPERATIONS Presence of fictitious expenses, with no evidence presented, proves existence of fraud (Tan Guan vs. Commissioner G.R. No. 23676, Apr. 27, 1967)
However, the courts did not consider the tax returns filed as false or fraudulent with intent to evade payment of tax in the following cases: a. Mere understatement in the tax return will not necessarily imply fraud (Jalandoni vs. Republic G.R. No. 18384, Sept. 20, 1965) Sale of a real property for a price less than its fair market value is not necessarily a false return (Commissioner vs. Ayala Securities G.R. No. 29485, Mar. 31. 1976) Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the trial court (Commissioner vs. Ayala Securities) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances that only create suspicion (Commissioner vs. Javier G.R. No. 78963, July 31,1991) Mistakes of revenue officers on three different occasions remove element of fraud (Aznar vs. CTA and Collector. G.R. No. 20569, Aug. 23, 1974)
If proceeding for collection is made without assessment, 10 years from discovery (Sec. 222, par. (a), NIRC). If the BIR choose to make assessment after discovery of the non-filing, false or fraudulent return, collection must be made within 5 years from date of assessment (Sec. 222, par. (c), NIRC).
c.
d.
c.
Agreed period pursuant to agreement in writing before the expiration of the 5 year period (Sec. 222, NIRC) FRAUDULENT RETURN VS. FALSE RETURN
FRAUDULENT RETURN FALSE RETURN
e.
It must be alleged and proved as a fact. It must be the product It constitutes a deviation of a deliberate intent from the truth due to to evade taxes. mistake, carelessness or ignorance. Established by the a. Intentional and substantial understatement of tax liability by the taxpayer; b. Intentional and substantial overstatement of deductions of exemptions; and/or c. Recurrence of the above circumstances There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake, not culpable in respect of its value would not constitute a false return (Commissioner of Internal Revenue vs. Ayala Hotels, Inc., CA-G.R. SP No. 70025, April 19, 2004).
NOTE: Notice of the assessment is released, mailed or sent to the taxpayer also within the 3 year period. It is not required that the notice be received by the taxpayer within the prescribed period. But the sending of the notice must clearly be proven (Basilan Estate, Inc. vs. Commissioner, GR No. L-22492, September 5, 1967). 3. VIOLATION OF ANY PROVISION OF THE TAX CODE (Sec. 281, 1997 NIRC) a. 5 years from the (a) day of the commission of the violation of the law, and if the same be not known, from the (b) discovery thereof and the institution of the judicial proceedings for its investigation and punishment.
There is fraud in the following decided cases: 1. Fraud must be the product of a deliberate intent to evade taxes (Jalandoni vs. Republic G.R. No. 18384, Sept. 20, 1965) Simple statement that return filed was not fraudulent does not disprove existence of fraud (Tayengco vs. Collector G.R. No. 23766) Substantial underdeclarations of income for six consecutive five years demonstrate fraudulence of return (Perez vs. CTA G.R. No. 30403, July 3, 1969) b.
The running of prescription shall be interrupted when proceedings are instituted against the guilty persons and shall begin to run again if the proceedings are dismissed for reasons not constituting jeopardy. The term of prescription shall not run when the offender is absent from the Philippines. (Sec. 281, NIRC)
2.
Illustrative case (Lim vs. Court of Appeals G.R. Nos. 48134-37, October 18, 1990): (1) charge is failure or refusal to pay deficiency income tax committed only after the finality of the assessment coupled with the taxpayers willful refusal to pay the
3.
192 Tax Remedies Under The NIRC taxes within the allotted period (i.e. cannot be committed upon filing the return). (2) charge is filing of false or fraudulent return with intent to evade the assessment in addition to the fact of discovery, there must be a judicial proceeding for the investigation and punishment of the tax offense before the 5 year prescriptive period begins to run. ASSESSMENT COLLECTION
In this case, the Government proceeds by court action to forfeit a bond. The action is for the enforcement of a contractual obligation (Republic vs. Araneta, G.R. No. L-14142, May 30, 1961). WAIVER OF STATUTE OF LIMITATIONS DEFINITION: an agreement between TP and BIR that a period to issue an assessment and collect taxes due is extended to a date certain (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, Dec. 16 2004). NATURE OF WAIVER It is to a certain extent a derogation of TPs right to security against prolonged and unscrupulous investigations and must be carefully and strictly construed. It is NOT a waiver of the right to invoke the defense of prescription. It is a BILATERAL agreement between TP and BIR (RMC No. 06-05). REQUISITES FOR AGREEMENT WAIVING THE 3-YEAR
PERIOD
Return filed on or before due date or filed beyond due date 3 years from due date or from actual filing, respectively 10 years from discovery of falsity or fraud 10 years from discovery of non-filing 5 years from assessment
Filing of false or fraudulent return 5 years If there is assessment
Non-filing of return 5 years If there is assessment
a. b. c. d.
Entered before the expiration of the 3 year period for assessment of the tax; In writing; Signed by both the taxpayer ; Must specify a definite agreed date between the BIR and the taxpayer within which the taxpayer may assess and collect taxes; and Signed and accepted by the CIR or his duly authorized representative and the date of acceptance must be indicated ( RMC No. 06-05). CHARACTERISTICS OF AN INVALID WAIVER: If it does not specify a definite agreed date between BIR and the TP within which to formally assess and collect; or If signed only by the RDO and not the CIR Waiver is not complete if copies were not furnished the TP (Philippine Journalists, Inc. vs. CIR, supra).
In case there is NO ASSESSMENT In case of false or fraudulent return or nonfiling of return, the BIR may file an ordinary action to collect even without an assessment. The period to collect is 10 years, reckoned from the date of discovery of falsity or fraud or non-filing. Period agreed upon/extension of period If before expiration of the period of assessment of tax as prescribed in Section 203 NIRC, both Commissioner and taxpayer agreed in writing after such timeThe period agreed upon will govern and may be extended by subsequent written agreement made before expiration of period previously agreed upon. Any internal revenue tax, which has been assessed within the period agreed upon as provided for in the assessment (period agreed upon in writing by Commissioner and taxpayer) Collection made within period agreed upon in writing before expiration of 5 year period but may be extended by subsequent written agreements made before expiration of period previously agreed upon.
e.
a.
b. c.
GROUNDS FOR SUSPENSION OF THE RUNNING OF THE STATUTE OF LIMITATIONS (Sec. 223, NIRC) (PRA_PO) a. When the CIR is Prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, AND for sixty (60) days thereafter; When the taxpayer requests for a Reinvestigation which is granted by the CIR; NOTE: The only agreement that can suspend the running of the prescriptive period for collection of taxes is a WRITTEN agreement by TP and CIR before the expiration of the 5-
What is the Prescriptive Period where the Governments action is on a BOND which the taxpayer executes in order to secure the payment of his tax obligation? Ten (10) years under Art. 1144(1) of the Civil Code and not three (3) years under the NIRC.
b.

year period, extending the period of limitation prescribed by law (Mamalateo, Tax Reviewer)
193 2008 CENTRALIZED BAR OPERATIONS the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same. Petitioner can not now claim that the disputed assessment is not yet final as it remained not acted upon by the Commissioner; that it can still await the final decision of the Commissioner and thereafter appeal the same to the Court of Tax Appeals. This legal maneuver cannot be countenanced. After availing the first option, i.e., filing a petition for review which was however filed out of time, petitioner can not successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner's inaction (Fishwealth Canning Corporation vs. Commissioner of Internal Revenue C.T.A. Case No. 7346- C.T.A. EB CASE NO. 223. July 5, 2007). 3. In the normal course, the revenue district officer sends the taxpayer a notice of delinquent taxes, indicating the period covering the amount due including interest, and the reason for the delinquency. If the taxpayer disagrees with or wishes to protest the assessment, it sends a letter to the BIR indicating its protest, stating the reasons therefore, and submitting such proof as may be necessary. That letter is considered as the taxpayer's request for reconsideration of the delinquent assessment. After the request is filed and received by the BIR, the assessment becomes a disputed assessment on which it must render a decision. That decision is appealable to the Court of Tax Appeals for review (Commissioner of Internal Revenue vs. Isabela Cultural Corporation). The purpose of the requirement that the taxpayer shall be informed in writing of the law and facts on which the assessment is made, found in second paragraph of Section 228 of the NIRC of 1997, "is to give the taxpayer the opportunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding the proposed assessment(s)" (Belle Corporation vs. Commissioner of Internal Revenue, C.T.A. CASE No. 5930, April 4, 2002).
Why does a request for reinvestigation and not one for reconsideration toll the running of the Statute of Limitations? The former, which entails reception and evaluation of additional evidence, will take more time than the latter, which will be limited to the evidence already at hand (CIR vs. Philippine Global Communications, G.R. No. 167146, Oct 31, 2006)
c.
When the taxpayer cannot be located in the Address given by him in the return, UNLESS he informs the CIR of any change in his address. When the warrant of distraint or levy is duly served, AND no Property is located; and When the taxpayer is Out of the Philippines (Sec. 223, 1997 NIRC).
d. e.
NOTE: A tax return is considered FILED for purposes of starting the running of the period of limitations if: (VA) 1. The return is valid it has complied substantially with the requirements of the law; and The return is appropriate it is a return for the particular tax required by law. A defective tax return is the same as if no return was filed at all.
2.
DOCTRINES 1. Statutes are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statues, RA 8424 does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or that applying it to pending proceedings would impair vested rights In case of discrepancy between the law as amended and its implementing but old regulation, the former necessarily prevails. Between Section 228 of the Tax Code and the pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the law. Failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any provision in the Tax Code (CIR vs. Reyes, 480 SCRA 382). 2. It is clear that the jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest
4.
194 Tax Remedies Under The NIRC 5. It is clear from the second paragraph of Section 228 NIRC and its rationale that "so long as the parties are notified and were given an opportunity to explain their side, the requirements of due process are satisfactorily complied with." There is substantial compliance with Section 228 when petitioner was given an opportunity to protest the said
assessment upon issuance of the assessment notice. The requirement set forth in Section 228 of the NIRC was, therefore, substantially complied with. Consequently, the assessment notices are valid (United Overseas Bank Philippines vs. Commissioner of Internal Revenue C.T.A. Case No. 6764 -C.T.A. EB CASE NO. 188. January 10, 2007).
Assessment Process
Assessment Process
START Commissioner issues Letter of Authority BIR Audit/Tax Investigation Preliminary Findings Is taxpayer liable for deficiency tax? Yes POST-REPORTING NOTICE/INFORMAL CONFERENCE LETTER Taxpayer responds within 15 days? Yes No
No ASSESSMENT PROCESS ENDS
Informal Conference between taxpayer and BIR
Taxpayer and BIR come to an agreement
ASSESSMENT PROCESS ENDS
Taxpayer and BIR talk to agree

PRE-ASSESSMENT NOTICE (PAN) Taxpayer responds within 15 days? Commissioner receives the position paper of the taxpayer No
Commissioner accepts the explanation
Assessment Process
Commissioner rejects the explanation

FORMAL LETTER OF DEMAND A Taxpayer responds within 30 days? Yes Taxpayer must submit within 60 days all documents necessary for reinvestigation No
Assessment becomes final and executory. Taxpayer must pay the government.
PROTEST: Taxpayer shall file protest request for reinvestigation or reconsideration
Taxpayer fails to submit the documents
ASSESSMENT BECOMES
FINAL AND EXECUTORY
Taxpayer submits the documents
Commissioner resolves the taxpayer assessment based on the documents ASSESSMENT PROCESS ENDS
Favorable to the
Unfavorable to the taxpayer Taxpayer may appeal to the Commissioner within 30 days from receipt of full decision
ISSUANCE OF THE COMMISSIONER FINAL DECISION Appeal to the Court of Tax Appeals if Commissioner denies the protest or fails to act within 180 days from receipt of documents Court of Tax Appeals Appeal to the Supreme Court END
If Commissioner does not act on the protest within 180 days from receipt of the documents
Related Revenue Regulations

(Annex)
Related Revenue Regulations (Annex)
Implementing Section 204(B), in Relation to Section 290 of the Tax Code of 1997, Regarding Abatement or Cancellation of Internal Revenue Tax Liabilities
SECTION 1.
Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated for the purpose of implementing Section 204(B), in relation to Sections 7(c) and 290 of the same Code, regarding the authority of the Commissioner of Internal Revenue (Commissioner) to abate or cancel internal revenue tax liabilities of certain taxpayers based on any of the following grounds, viz: i. ii. The tax or any portion thereof appears to be unjustly or excessively assessed; or The administration and collection costs involved do not justify the collection of the amount due."
SECTION 2.
Instances When The Penalties And/Or Interest Imposed On The Taxpayer May Be Abated Or Cancelled On The Ground That The Imposition Thereof Is Unjust Or Excessive. 2.1 When the filing of the return/payment of the tax is made at the wrong venue; 2.2 When taxpayer's mistake in payment of his tax is due to erroneous written official advice of a revenue officer; 2.3 When taxpayer fails to file the return and pay the tax on time due to substantial losses from prolonged labor dispute, force majeure, legitimate business reverses such as in the following instances, provided, however, that the abatement shall only cover the surcharge and the compromise penalty and not the interest imposed under Section 249 of the Code: 2.3.1 Labor strike for more than six (6) months which has caused the temporary shutdown of business; 2.3.2 Public turmoil; 2.3.3 Natural calamity such as lightning, earthquake, storm, flood and the like;
Disputed assessments pursuant to the provisions of Section 228 of the Code and its implementing rules and regulations, and assessments which are void from the beginning are not covered by these Regulations.
196 Tax Remedies Under The NIRC 2.3.4 Armed conflicts such as war or insurgency; 2.3.5 Substantial losses sustained due to fire, robbery, theft, embezzlement; 2.3.6 Continuous heavy losses incurred by the taxpayer for the last two (2) years; 2 3.7 Liquidity problem of the taxpayer for the last three (3) years; or 2.3.8 Such other instances which the Commissioner may deem analogous to the enumeration above. 2.4 When the assessment is brought about or the result of taxpayer's non-compliance with the law due to a difficult interpretation of said law; 2.5 When taxpayer fails to file the return and pay the correct tax on time due to circumstances beyond his control, provided, however, that abatement shall cover only the surcharge and the compromise penalty and not the interest; 2.6 Late payment of the tax under meritorious circumstances such as those provided hereunder: 2.6.1 One day late filing and remittance due to failure to beat bank cut-off time: 2.6.2 Use of wrong tax form but correct amount of tax was remitted; 2.6.3 Filing an amended return under meritorious circumstances, provided, however, that abatement shall cover only the penalties and not the interest; 2.6.4 Surcharge erroneously imposed; 2.6.5 Late filing of return due to unresolved issue on classification/valuation of real property (for capital gains tax cases, etc.); 2.6.6 Offsetting of taxes of the same kind, i.e., overpayment in one quarter/month is offset against underpayment in another quarter/month; 2.6.7 Automatic offsetting of overpayment of one kind of withholding tax against the underpayment in another kind; 2.6.8 Late remittance of withholding tax on compensation of expatriates for services rendered in the Philippines pending the issuance by the Securities and Exchange Commission of the license to the Philippine branch office or subsidiary, provided, however, that the abatement shall only cover the surcharge and the compromise penalty and not the interest; 2.6.9 Wrong use of Tax Credit Certificate (TCC) where Tax Debit Memo (TDM) was not properly applied for; and
2.6.10 Such other instances which the Commissioner may deem analogous to the enumeration above. 2.7 Other cases similar or synonymous thereto.
SECTION 3.
Instances When The Tax Liabilities, Penalties And/Or Interest Imposed On Taxpayer May Be Abated Or Cancelled On The Ground That The Administration And Collection Costs Are More Than The Amount Sought To Be Collected. When the administrative and collection costs, including cost of litigation, are much more than the amount that may be collected from the taxpayer, the assessment may be reduced through abatement, or entirely cancelled pursuant to Section 204(B) of the Code. The instances that may fall under this category are the following: 3.1 Abatement of penalties on assessment confirmed by lower court but appealed by the taxpayer to a higher court; 3.2 Abatement of penalties on withholding tax assessment under meritorious circumstances; 3.3 Abatement of penalties on delayed installment payment under meritorious circumstances; 3.4 Abatement of penalties on assessment reduced after reinvestigation but taxpayer is still contesting reduced assessment; and 3.5 S u c h o t h e r i n s t a n c e s w h i c h t h e Commissioner may deem analogous to the enumeration above. Note: For items 3.1 to 3.4 above, the abatement of the surcharge and compromise penalty shall be allowed only upon written application by the taxpayer signifying his willingness to pay the basic tax and interest or basic tax only, whichever is applicable under the prevailing circumstance.
SECTION 4.
The Commissioner Has The Sole Authority To Abate Or Cancel Tax, Penalties And/Or Interest. The Commissioner has the sole authority to abate or cancel internal revenue taxes, penalties and/or interest pursuant to Section 204(B), in relation to Section 7(c), both of the Code. This authority is generally applicable to surcharge and compromise penalties only, however, in meritorious instances, the Commissioner may likewise abate the interest as well as basic tax assessed, provided, however, that cases for abatement or cancellation of tax, penalties and/or interest by the Commissioner shall be coursed through the following officials: 4.1 The Deputy Commissioner (Operations Group), who shall constitute a Technical Working Committee (TWC) for the evaluation and review of any application for abatement or cancellation of tax, penalties and/or interest processed by the Revenue District Office

(RDO) as reviewed by the Regional Office (RO), or by the Large Taxpayers' Service's Collection or Audit Division and Large Taxpayers District Office (LTDO) as reviewed by the Large Taxpayers Service (LTS), or by Collection Enforcement Division/Withholding Agent and Monitoring Division as reviewed by the Collection Service, or by the Legal Service, or any other office that has jurisdiction over the case; and 4.2 The Deputy Commissioner (Legal and Inspection Group), who shall evaluate the legal issue involved in the case. The application for abatement or cancellation of tax, penalties and/or interest should state the reasons and causes for such request. Documentary proofs for the underlying reasons and causes aforestated should be appended to the "Application for Abatement or Cancellation of Tax, Penalties and/or Interest. On the other hand, denial of the application for abatement or cancellation of tax, penalties and/or interest should state the reasons therefor.
SECTION 5.
Processing Time. The application for abatement or cancellation of tax, penalties and/or interest should be acted upon by the processing office and reviewing office within five (5) days from receipt by said office. The BIR National Office has thirty (30) days within which to act on the case.
SECTION 6.
Report of the Commissioner to the Congressional Oversight Committee (COC). The Commissioner shall submit to the Congressional Oversight Committee (COC) , through the Chairmen of the Committee on Ways and Means of both the Senate and House of Representatives, every six (6) months of each calendar year, a report on the exercise of his power to abate or cancel tax liabilities, penalties and/or interest imposed on taxpayers. In this regard, all the originating offices which processed the application for abatement or cancellation of tax, penalties and/or interest shall likewise prepare for this activity/process (abatement) all the reports being prepared in the collection of taxes under the compromise power of the Commissioner, unless the Commissioner provides otherwise.

Revenue Regulation Implementing Sections 7(c), 204(A) and 290 of the National Internal Revenue Code of 1997 on Compromise Settlement of Internal Revenue Tax Liabilities Superseding Revenue Regulations Nos. 6-2000 and 7-2001 -and-
Revenue Regulations Implementing Sections 7(c), 204 (A) and 290 of the National Internal Revenue Code of 1997 on Compromise Settlement of Internal Revenue Tax Liabilities Superseding Revenue Regulations Nos. 7-2001 and 30-2002
SECTION 2.
CASES WHICH MAY BE COMPROMISED. e. The following cases may be the subject matter of compromise settlement: (a) Delinquent accounts; (b) Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; (c) Civil tax cases being disputed before the courts; (d) Collection cases filed in courts; (e) Criminal violations, other than those already filed in court or that involving criminal tax fraud. g. The following cases are not subject to compromise:
Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayers obligation to withhold; Criminal tax fraud cases confirmed as such by the Commissioner of Internal
198 Tax Remedies Under The NIRC Revenue or his duly authorized representative;

Criminal violations already filed in court; Delinquent accounts with duly approved schedule of installment payments; Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. d.
alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the National Internal Revenue Code of 1997; or Assessments made based on the Best Evidence Obtainable Rule and there is reason to believe that the same can be disputed by sufficient and competent evidence; The assessment was issued within the prescriptive period for assessment as extended by the taxpayers execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic; and The assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the Bureau, but for which the Supreme Court has not decided upon with finality (pursuant to RR 8-04).
e.
f.
SECTION 3.
BASIS FOR ACCEPTANCE OF COMPROMISE SETTLEMENT. (This section has been amended by RR No. 8-04. The amendment is included in the following enumeration). GROUNDS FOR COMPROMISE: 1. Doubtful validity of the assessment. The offer to compromise a delinquent account or disputed assessment based on this ground may be accepted when it is shown that: a. The delinquent account or disputed assessment is one resulting from a jeopardy assessment. jeopardy assessment - a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayers failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return). b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; The taxpayer failed to file an administrative protest on account of the
g.
h.
i.
2. Financial incapacity. Upon showing that: A. The corporation ceased operation or is already dissolved. Provided that tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be considered for compromise; B. The taxpayer who is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue.
c.

Provided: 1. that amounts payable or due to stockholders other than businessrelated transactions which are properly included in the regular accounts payable are by fiction of law considered as part of capital and not liability; and that the taxpayer has no sufficient liquid asset to satisfy the tax liability;
199 2008 CENTRALIZED BAR OPERATIONS 3. With existing finalized agreement or prospect of future agreement with any party that resulted or could result to an increase in the equity of the taxpayer at the time of the offer for compromise or at a definite future time.
2.
C. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; Networth deficit - computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business related transactions) from total assets (net of prepaid expenses, deferred charges, preoperating expenses, as well as appraisal increases in fixed assets). D. The taxpayer is a compensation income earner a. b. with no other source of income; the familys gross monthly compensation income does not exceed the levels of compensation income provided for under Sec. 4.1.1 of these Regulations; it appears that the taxpayer possesses no other leviable or distrainable assets, other than his family home;
No offer of compromise shall be entertained unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act No. 1405 or under other general or special laws. Presence of circumstances that would place the taxpayer-applicants inability to pay in serious doubt can be a ground to deny the application for compromise based on financial incapacity of the taxpayer to pay the tax.
SECTION 4.
PRESCRIBED MINIMUM PERCENTAGES OF COMPROMISE SETTLEMENT. 1. For cases of financial incapacity 10% for a. taxpayer is 1. an individual whose only source of income is from employment; and whose monthly salary, if single, is P10,500 or less, or if married, whose salary together with his spouse is P21,000 per month, or less; and it appears that the taxpayer possesses no other leviable/ distrainable assets, other than his family home
2.
c.
3.
E. The taxpayer has been declared by any competent tribunal/authority/body/ government agency as bankrupt or insolvent. j. The Commissioner shall not consider any offer for compromise settlement on the ground of financial incapacity of a taxpayer 1. with Tax Credit Certificate (TCC), issued under the National Internal Revenue Code of 1997 or Executive Order No. 226, on hand or in transit; or with pending claim for tax refund or tax credit with the Bureau of Internal Revenue, Department of Finance One-Stop-Shop Tax Credit and Duty Drawback Center (Tax Revenue Group or Investment Incentive Group) and/or the courts; or
b. c.
taxpayer is an individual without any source of income; Where the taxpayer is under any of the following conditions: 1. Zero networth computed in accordance with Sec. 3.2(c) hereof; Negative networth computed in accordance with Sec. 3.2(c) hereof. Already non-operating companies for a period of three (3) years or more as of the date of application for compromise settlement.
2.
3.
2.
20% a. b. Already non-operating companies for a period of less than 3 years; and Dissolved corporations; and
200 Tax Remedies Under The NIRC c. Taxpayer Declared insolvent or bankrupt taxpayer whose Surplus or earnings deficit resulting to impairment in the original capital by at least 50%
40% a.
The Notice of Dissolution submitted to SEC or other similar or equivalent document should likewise be submitted.
2.
For cases of doubtful validity i. A minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. The taxpayer may, nevertheless, request for a compromise rate lower than forty percent (40%): Provided, 1. that he shall be required to submit his request in writing stating therein the reasons, legal and/or factual, why he should be entitled to such lower rate: The same shall be subject to the prior approval by the NEB.
For situation of financial incapacity in condition of bankruptcy or insolvency a copy of the order declaring bankruptcy or insolvency shall be submitted.
ii.
In all cases of offer based on financial incapacity, Waiver of the Secrecy of Bank Deposit under R.A. 1405 and Sworn Statement saying that he has no Tax Credit Certificate (TCC) on hand or in transit or claim for tax refund or TCC under the National Internal Revenue Code of 1997 and Executive Order No. 226 pending in any office shall be submitted.
SECTION 6.
APPROVAL OF OFFER OF COMPROMISE. Except for offers of compromise where the approval is delegated to the REB pursuant to the succeeding paragraph, all compromise settlements within the jurisdiction of the National Office (NO) shall be approved by a majority of all the members of the NEB composed of the Commissioner and the four (4) Deputy Commissioners. All decisions of the NEB, granting the request of the taxpayer or favorable to the taxpayer, shall have the concurrence of the Commissioner. Offers of compromise of assessments subject to the approval of the Regional Evaluation Board: 1. Assessments issued by the Regional Offices involving basic deficiency taxes of Five Hundred Thousand Pesos (P500,000) or less; and Minor criminal violations discovered by the Regional and District Offices.
2.
iii. The prescribed minimum percentages shall likewise apply in compromise settlement of assessments consisting solely of increments, i.e., surcharge, interest, etc., based on the total amount assessed.
SECTION 5.
DOCUMENTARY REQUIREMENTS. If the application for compromise is premised on the financial incapacity of a taxpayer who is a compensation income-earner, applicant shall submit with his application the following: a certification from his employer on his prevailing monthly salary, including allowances; and a sworn statement that he has no other source of income other than from employment.
2.
If the application is premised on the financial incapacity of a person without any source income, the taxpayer applicant shall submit with his application a sworn statement that he derives no income from any source whatever. If the application is premised on the financial incapacity of a taxpayer under the condition of zero or negative networth, a copy of the applicant's latest audited financial statements or audited Account Information Form filed with the BIR shall be submitted with the application.
Provided, however, that if the offer of compromise is less than the prescribed rates set forth in Sec. 4 hereof, the same shall always be subject to the approval of the NEB. The compromise offer may be paid before or after the approval of the offer of compromise by the Board (NEB or REB), at the option of the taxpayer.
For financial incapacity by reason of dissolution: A copy of the applicant's latest audited financial statements or audited Account Information Form filed with the BIR shall be submitted with the application; and

Regulation Providing for the Policies, Guidelines and Procedures in the Implementation of the Expanded One-Time Administrative Abatement of all Penalties/Surcharges and Interest on Delinquent Accounts and Assessments
PURPOSE: 1. To provide an opportunity for taxpayers with delinquent account and assessments and who were previously not covered by the abatement program under RR. No. 15-2006, to settle their existing cases; and To expand the coverage of the Abatement program under RR No. 15-2006. e. f. Enforcement Service (ES) and other offices in the National Office (NO); Assessed cases, whether preliminary or final, disputed or not, as of November 30, 2006; Collection and civil tax cases being disputed before the Department of Justice and the courts (e.g., Municipal Trial Court, Regional Trial Court, Court of Tax Appeal, Court of Appeals and Supreme Court) including decided cases which are not yet final and executory;
2.
SECTION 3.
DEFINITION OF TERMS a. Delinquent accounts
the amount of tax due on or before Nov. 30, 2006 from a taxpayer who failed to pay the same within the time prescribed for its payment, arising from (1) a selfassessed tax or (2) a deficiency assessment issued which has become final and executory. a tax assessment issued or self assessment made on or before Nov. 30, 2006 which has not yet final and executory. refers to any of the following: 1. 2. 3. 4. 5. unpaid tax shown on the return filed; tax due shown on the Assessment Notice and Letter of Demand; unpaid 2nd installment income tax; amount of dishonored check; and Deficiency interest, if the assessment issued was for penalties only (interest and surcharges).
In the abovementioned cases, if the PCGG has an interest and/or there is a need to coordinate with the PCGG, this regulation would not apply.
g.
b.
Assessment, preliminary, disputed or not
Cases with pending request for Compromise Settlement under Revenue Regulations (RR) No. 6-2000, RR No. 7-2001 and RR No. 30-2002 as amended by RR No. 8-2004 and other prior years issuances.
c.
Basic tax assessed
However, request for compromise settlement pursuant to the aforementioned Regulations, where the amount offered is more than 100% of the basic tax which has already been approved shall not be covered by these Regulations;
h.
Cases with pending request for abatement under RR No. 13-2001. However, request for abatement pursuant to the aforementioned RR, which has already been approved shall not be covered by these Regulations; Failure to withhold Withholding Taxes discovered upon audit; Criminal violations, (except those already filed in court, those involving criminal tax fraud, those under the BIR Run After Tax Evaders Program and tax fraud cases which are the results of confidential information, unless allowed to avail by the Commissioner or his representative on meritorious grounds); Letter Notice Cases; Accounts Payable or Due to BIR account duly recorded or acknowledged by the taxpayer in his books of accounts;
i. j.
SECTION 2.
COVERAGE The following cases shall be covered hereof: a. b. c. d. delinquent accounts/accounts receivable cases; income tax 2nd installment cases; dishonored checks cases; cases under administrative protest pending in the Regional Offices (ROs), Revenue District Offices (RDOs), Legal Service (LS), Large Taxpayer Service, Collection Service (CS), k. l.
m. Taxpayers who have been paying their tax liabilities through an approved installment plan subject to the following conditions:
202 Tax Remedies Under The NIRC 1. 2. n. they have paid 100% or more of the basic tax as originally assessed, and they will waive any claim for refund of what they may have already paid;
Government Withholding Agents (e.g. NonGovernmental Agencies, Government-Owned and Controlled Corporations, Local Government Units, etc.) or any delinquent taxpayers who have already remitted 100% of the basic withholding tax and was assessed penalties (surcharge, interest and compromise penalties) for late payment.
Notwithstanding the said provisions, the office which has possession of the docket of the case shall receive and process all applications for abatement of penalties/ surcharge and interest on delinquent accounts and assessed tax cases.
SECTION 6.
MODE OF PAYMENT Upon filing of the application for/acceptance of the offer to avail of the Abatement Program, the amount offered in complete settlement of the delinquent account/assessed tax cases shall be paid. Where to pay: 1. With the AABs located within the jurisdiction of the RDO/LTS/LTDO where the taxpayer is registered. In the absence of AABs, the payment may be made to the Revenue Collection Officer/ Deputized Treasurer of the City/Municipality of the RDO/LTDO that has jurisdiction over the taxpayer. Staggered payments of the amounts payable under the Program may be considered on a case to case basis in accordance with the existing Regulations of the Bureau of Internal Revenue upon approval of the Regional Director for regional cases, and concerned Assistant Commissioner (LTS, Collection, Legal, or Enforcement), for NO cases. Nonetheless, cases pending in courts shall not be withdrawn unless the concerned taxpayer fully pays 100% of the basic tax. If the amount, as abated, is not paid as required, the approved staggered payment is automatically nullified and the delinquent account or assessment shall be reverted to the original assessed amount plus the statutory increments incident to delinquency, which shall be collected thru the summary remedies and/or judicial processes provided for by law.
In this case, the interest assessed shall be considered as the basic tax which should be paid to be able to avail of this Program.
SECTION 4.
WHO MAY AVAIL Any person/taxpayer, natural or juridical where the assessment notice has been released as of Nov. 30, 2006.
2.
It includes taxpayers who have already paid any portion of the increments (surcharge, interest, etc.) on their tax liabilities; provided, they will waive any claim for refund of paid amount in excess of 100% of the basic tax paid. Taxpayers with existing tax cases on which the PCGG has/have an interest.
Who may not avail:
SECTION 5.
PLACE FOR FILING APPLICATION FOR ABATEMENT OF PENALTIES AND INTETREST All Applications shall be filed, accepted and processed with the following offices: a. b. c. Revenue District Office for regional accounts under its jurisdiction; Assessment Division for RO cases with administrative protest; Legal Division for RO cases with judicial protest or for judicial action or with Administrative protest involving legal issues; Collection Service for delinquent accounts under the jurisdiction of the National Office other than LTS cases; Large Taxpayers Service for large taxpayers cases under the jurisdiction of the Large Taxpayers Service; Legal Service for NO cases that are for judicial action or with judicial protest and/or administrative protest involving legal issue; Enforcement Service for tax cases handled by the National Investigation Division of the NO.
d.
SECTION 7.
EFFECTIVITY The Regulations shall remain in force until March 31, 2007 subject to extension by the Commissioner of Internal Revenue on meritorious grounds.
e.
f.
g.

Regulation Allowing for the Abatement of Penalties/Surcharges and Interest on Disputed/Litigated Assessments. Justification: Before an assessment reaches finality, the liability of the taxpayer is not yet certain and, therefore, the imposition of penalties at this stage appears to be unjust and/or makes the assessment excessive. This paves the legal avenue for the abatement thereof because pursuant to Section 204(B) of the Code, as amended, the Commissioner is authorized to abate or cancel tax liability and/or the penalties thereon when the tax or any portion thereof which appears to be unjustly or excessively assessed, or the administration and collection costs involved do not justify the collection of the amount due. c) Withholding tax cases.
SECTION 3.
PLACE FOR FILING APPLICATION FOR ABATEMENT OF PENALTIES AND INTEREST. The application shall consist of the following: a) b) c) Letter request by the taxpayer for abatement of penalties and interest; Accomplished Application for Abatement Form (Annex A); and Pre-assessment Notice (PAN) or Final Assessment Notice (FAN). Revenue District Office (RDO) For Regional Office Cases under the jurisdiction of the concerned district; Concerned Group of the Large Taxpayers Service (LTS) For Large Taxpayers Cases under the jurisdiction of the concerned group of the Large Taxpayers Service.
To be filed with the: a.
SECTION 1.
PURPOSE. To give the taxpayers the opportunity to settle their preliminary or final assessments, disputed/ protested administratively or judicially, by way of application for payment of basic tax and abatement or cancellation of all penalties, including surcharge and interest.
b.
SECTION 2.
COVERAGE. The following cases, with duly issued Assessment Notice as of November 29, 2007, involving taxable year ending December 31, 2005 and prior years, shall be covered hereof: a) Cases under administrative protest pending in the Regional Office, Revenue District Office, Legal Service, Large Taxpayer's Service (LTS), Collection Service, Enforcement Service and other Offices in the National Office; and Civil tax cases being disputed before the Department of Justice and the courts, e.g., MTC, RTC, CTA, CA and SC, including cases with decision which are not yet final and executory. The following cases, however, shall be excluded: a) Cases involving issues decided by the Supreme Court with finality unless the issues involved difficult question of law or issues without established precedent ruling or Supreme Court Decision at the time of the transaction; Cases where the Presidential Commission on Good Government (PCGG) has an interest and/or there is a need to coordinate with the PCGG; and
The abatement docket or record consisting of the Application for Abatement of Penalties and Interest of basic tax shall, thereafter, be forwarded to the appropriate Technical Working Committee (TWC) for its review and evaluation. However, if the case is under judicial protest, a photocopy of the Application for Abatement as well as of the payment form shall be given to the concerned Legal Office for its information/coordination with appropriate collecting office/TWC.
SECTION 4.
TIME FOR PAYMENT OF THE 100% BASIC TAX ASSESSED. The filing of the application and payment of an amount equal to 100% of the Basic tax assessed shall be made not later than February 29, 2008, unless extended by the Commissioner on meritorious grounds. Where to pay: 1. Accredited Agent Bank (AAB) of the RDO/ LTS/Large Taxpayers District Office (LTDO) that has jurisdiction over the taxpayer. In the absence of an AAB, with the Revenue Collection Officer/Deputized Treasurer of the concerned BIR Office that has jurisdiction over the taxpayer.
b)
2.
b)
SECTION 5
APPROVAL OF ABATEMENT.
The Commissioner has the sole authority to abate or cancel internal revenue taxes, penalties and/or interest pursuant to Section 204(B), in relation to Section 7(c), both of the National Internal Revenue Code of 1997. Nonetheless, this program covers just the abatement of penalties and interest. The processing of the cases shall be coursed through the following officials: a. The Deputy Commissioner-Operations Group, for the evaluation and review of any application for abatement of taxpayers under the jurisdiction of the Region; and The Assistant Commissioner/ Concerned Head Revenue Executive Assistant of the LTS, for the evaluation of application for abatement of taxpayers under the jurisdiction of the Large Taxpayers Service.
first have its recommendation approved or disapproved by Management Committee (MANCOM), through a majority vote of all the members, before the same is elevated to the Commissioner for appropriate action.
Upon approval by the Commissioner, the tax case is accordingly terminated through the issuance of a Termination Letter, and Authority to Cancel Assessment (ATCA) pertinent to that portion of the assessment (i.e., the penalties/interest) abated.
SECTION 6.
PROCESSING TIME.
b.
The application for abatement or cancellation of penalties and/or interest should be transmitted by the concerned Offices mentioned in Sec. 3 hereof to the respective TWCs within five (5) days from receipt by said office. The concerned TWC has fifteen (15) days within which to act on the case. Like RR No. 3-2007, this regulation likewise provides for abatement of penalties/ surcharges and interest but ONLY on DISPUTED AND LITIGATED ASSESSMENT. RR. No. 3-2007 governs abatement of penalties/surcharges and interest on delinquent assessments WHETHER DISPUTED OR NOT. RR. No. 15-2007 is the most recent regulation governing abatement of penalties/surcharges and interest.
General rule: The recommendation of the aforementioned Officials, through their respective TWCs, shall be the basis of the approval or disapproval by the Commissioner of the application. Exception: With respect to abatement of penalties and interest on protested/disputed assessments of taxpayers under the Large Taxpayer's Service (LTS), the concerned Officials, through the concerned TWC, shall
END OF TAX REMEDIES UNDER NIRC
TAXATION LAW LOCAL TAXATION

LOCAL TAXATION
Introduction
Introduction
Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments (Sec. 5, Article X, 1987 Philippine Constitution) Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be consistent with the basic policy of local autonomy. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations (by Fr. Joaquin Bernas, Commissioner of the 1986 Constitutional
Basis of Local Power

Commission; The City Government of Quezon City, et al v. Bayan Telecommunications, Inc., GRN 162015, March 6, 2006). Under the present constitutional rule, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers (Manila Electric Company vs. Province of Laguna, et al., G.R. No. 131359, May 5, 1999). Nevertheless, Congress cannot abolish the local governments power to tax as it cannot abrogate what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local governments exercise of the power to tax (Dimaampao, p. 113).
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:
206 Local Taxation
Scope/Aspects of Local Taxation

a. b. Local Government Taxation (Secs. 128-196, Local Government Code) Real Property Taxation (Secs. 197-283, LGC) Local Government Taxation Imposition of license taxes, fees and other impositions, including community tax Real Property Taxation System of levy on real property imposed on a country-wide basis but authorizing, to a limited extent and within certain parameters, local governments to vary the rates of taxation (Vitug, p. 428)
Local Government Taxation

Local Government Taxation
THE LOCAL GOVERNMENT UNIT HAS THE POWER (Sec. 129, LGC): a. b. a. b. c. To create its own sources of revenue and To levy taxes, fees and charges Nature of the Taxing Power Not Inherent; Exercised by delegation of the Constitution or law; Not absolute; subject to limitations as may be imposed by the legislature. c. d. e. Fundamental Principles Governing Local Taxation (Sec. 130, LGC) (P2IE C2U2) a. b. Shall be uniform in each local sub-unit; Shall be equitable and based as much as possible on the taxpayers ability to pay; Levied for public purposes; Shall not be unjust, excessive, oppressive, or confiscatory; Shall not be contrary to law, public policy, national economic policy, or in restraint of trade; Collection of local taxes and other impositions shall not be let to any person; The revenues collected under the Code shall inure solely to the benefit of, and subject to disposition by the LGU levying the tax or other imposition unless otherwise specifically provided therein; and Each LGU shall, as far as practicable, evolve a progressive system of taxation.
NOTE: While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. As explained in Mactan Cebu International Airport Authority: The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. Clearly then, while a new slant on subject of local taxation now prevails in the sense that the former doctrine of local government units delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine on local taxation remains essentially the same (City of Quezon City vs. Bayan Telecommunications, Inc., G.R. No. 162051).
f. g.
h.
Local Taxing Authority (Sec. 132, LGC) Shall be exercised by the Sanggunian of the LGU concerned through an appropriate ordinance LOCAL TAX ORDINANCE (Secs. 187-188, LGC) Requirements: 1. 2. Satisfy the requirements of procedural and substantive due process; Public hearing is required with quorum, voting and approval and/or veto requirements complied with; and

3. Publication of ordinance within 10 days from approval for 3 consecutive days in a newspaper of general circulation and/or posting in at least 2 conspicuous and publicly accessible places.
207 2008 CENTRALIZED BAR OPERATIONS against any unjust and unreasonable exercise of the taxing powers by ensuring that the taxpayers are notified through publication of the existence of the measure, and are therefore able to voice out their views or objections to the said measure (CocaCola Bottlers Phils. Inc. vs. City of Manila, G.R. No. 156252, June 26, 2006). The amending law, having been declared as null and void, in legal contemplation, therefore, does not exist. As held by this Court in the case of People v. Lim, if an order or law sought to be amended is invalid, then it does not legally exist, there should be no occasion or need to amend it (Coca-Cola Bottlers Phils. Inc. vs. City of Manila, supra).
It is clear from [Sec. 188, LGC and Art. 277, IRR] that the requirement of publication is MANDATORY and leaves no choice. The use of the word shall in both provisions is imperative, operating to impose a duty that may be enforced (Soco v. Militante, G.R. No. L-58961 June 28, 1983). It bears emphasis, that, strict observance of the said procedural requirement is the only safeguard
Powers
A. B. C. D. Specific Power of LGU to Impose Taxes Common Revenue-Raising Powers of LGUs Power to Levy Community Tax Powers under Miscellaneous Provisions d. e. f. g. h. distributors, dealers or retailers of essential commodities; On retailers; On contractors and other independent; On banks and other financial institutions; On peddlers engaged in the sale of any merchandise or article of commerce; or On any business, not otherwise specified in the preceding paragraphs, which the Sanggunian concerned may deem proper to tax.
TAXES AND OTHER IMPOSITIONS THAT THE LGU MAY LEVY

PROVINCES (Secs. 134-141, lgc) 1. 2. 3. 4. 5. 6. 7. Tax on Transfer of Real Property Tax on Business of Printing and Publication Franchise Tax Tax on Sand, Gravel and other Quarry Resources extracted from Public Land Professional Tax Amusement Tax Annual Fixed Tax for every Delivery Truck or Va n o f M a n u f a c t u r e r s o r P r o d u c e r s , Wholesalers of, Dealers, or Retailers in, certain products 2.
Municipal non-revenue fees and charges The municipality may impose and collect such reasonable fees and charges on business and occupation except professional taxes reserved for provinces (Sec. 147, LGC). Rates of Tax Within the Metropolitan Manila Area (Sec. 144, LGC)
Not to exceed by 50% the maximum rates prescribed in the preceding Section. Payment of Business Taxes (Sec. 146, LGC) a. It shall be payable for every separate or distinct establishment or place where business subject to the tax is conducted and one line of business does not become exempt by being conducted with some other business for which such tax has been paid. The tax on a business must be paid by the person conducting the same. In cases where a person conducts or operates 2 or more of the businesses mentioned in Section 143 of LGC which are subject to the same rate of tax, the tax shall be computed on the combined total gross sales or receipts of the said 2 or more related businesses. which are subject to different rates of tax, the gross sales or receipts of each
MUNICIPALITIES 1. Municipal Taxes taxes on the businesses of the following (Sec. 143, LGC): a. On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind; On wholesalers, distributors, or dealers in any article of commerce of whatever kind; On exporters, and on manufacturers, millers, producers, wholesalers, b. c.
b. c.
208 Local Taxation business shall be separately reported for the purpose of computing the tax due from each business. CITIES (Sec. 151, lgc) The city may levy the taxes, fees, and charges which the province or municipality may impose. The tax rates that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50% except the rates of professional and amusement taxes.
constructed by the local government unit concerned Exceptions (to # 3): a. Officers and enlisted men of the AFP and PNP; b. Post office personnel delivering mail; and c. Physically handicapped and disabled citizens who are sixtyfive (65) years or older (Sec. 155, LGC). When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use (Section 155, LGC).
BARANGAYS (Sec. 152, lgc) Barangays may levy the following taxes, fees, and charges which shall accrue exclusively to them: a. Taxes On stores or retailers with fixed business establishments with the gross sales or receipts for the preceding calendar year of P50,000 or less (for barangays in the cities) and P30,000 or less (for barangays in municipalities) Rate not exceeding 1% of such gross sales or receipts. Service Fees or Charges For services rendered in connection with the regulation or the use of barangayowned properties or service facilities such as palay, copra or tobacco dryers Barangay Clearance No city or municipality may issue any license or permit fee for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted. Other Fees and Charges The barangay may levy reasonable fees and charges: 1. 2. 3. On commercial breeding of fighting cocks, cockfights and cockpits; On places of recreation which charge admission fees; and On billboards, signboards, neon signs and outdoor advertisements.
COMMUNITY TAX
I. Who are authorized to levy? Cities or municipalities may levy a community tax (Section 156, LGC). A. Individuals Liable (Sec. 157, LGC) a. b. Every inhabitant of the Philippines; Under any of the following circumstances: i. 18 years of age or over, who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year; or Who is engaged in business or occupation; or
b. c.
II. Who are liable?
d.
ii.
e.
iii. Who owns real property with an aggregate assessed value of P1,000 or more; or iv. Who is required by law to file an income tax return B. Juridical Persons (Sec. 158, LGC) Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax. Exempted from paying the Community Tax: a. b. Diplomatic and Consular Representatives; Transient visitors when their stay in the Philippines does not exceed three (3) months (Section 159, LGC)
COMMON REVENUE-RAISING POWERS (Secs. 153-155, LGC)

1. Reasonable fees and charges for services rendered 2. Public utility charges for the operation of public utilities owned, operated and maintained by LGUs within their jurisdiction. 3. Toll fees or charges for the use of any public road, pier or wharf, waterway, bridge, ferry or telecommunication system funded and
III. Tax Rate A. Individuals P5.00 plus P1.00 for every P1, 000.00 income regardless of whether

from business, exercise of profession or from property which in no case shall exceed P5, 000. In case of husband and wife, the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. B. Juridical Persons P500 but not exceeding P10,000 in accordance with the following schedule: 1. For every P5,000 worth of real property owned by it during the preceding year based on the valuation used for the payment of the real property tax P2.00. for every P5,000 of gross receipts or earnings derived by it from its business in the Philippines during the preceding year P2.00. The dividends received by a corporation shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation (Section 158, LGC). IV. Place of Payment: residence of the individual, or in the place where the principal office of the juridical entity is located. V. Time of Payment: accrues on the 1st day of January of each year which shall be paid not later than the last day of February of each year. VI. Penalty for delinquency: an interest of 24% per annum from the due date until it is paid shall be added to the amount due. Community Tax Certificate It is issued to every person or corporation upon payment of the community tax. It may also be issued to any person or corporation NOT subject to the community tax upon payment of P1.00 (Section 162, LGC). The presentation of the community tax certificate shall not be required in connection with the registration of a voter. Presentation of Community Tax Certificate on Certain Occasions (Sec. 163, LGC) A. Individual 1. when an individual subject to the community tax acknowledges any document before a notary public; takes the oath of office upon election or appointment to any position in the government service; 2. 3. 3.
209 2008 CENTRALIZED BAR OPERATIONS receives any license, certificate or permit from any public authority; pays any tax or fee; receives any money from any public fund; transacts other official business; or receives any salary or wage from any person or corporation. receives any license, certificate or permit from any public authority; pays any tax or fee; receives money from public funds; or transacts other official business. The city of municipal treasurer deputizes the barangay treasurer to collect the community tax in their respective jurisdictions (Sec. 164, LGC). The proceeds of the community tax actually and directly collected by the city or municipal treasurer shall accrue entirely to the general fund of the city or municipality concerned. Proceeds of the community tax collected through the barangay treasurers shall be apportioned as follows:
4. 5. 6.
B. Corporation 1. 2. 3. 4.
2.
50% accrues to the general fund of the city or municipality concerned; and 50% accrues to the barangay where the tax is collected.
OTHER POWERS IN THE LGC

Power to Prescribe Penalties for Tax Violations and Limitations Thereon (Sec. 516, LGC) 1. Limited as to the amount of imposable fine as well as the length or period of imprisonment The Sanggunian is authorized to prescribe fines or other penalties for violations of tax ordinances, but: in no case shall fines be less than P1,000 nor more than P5,000 nor shall the imprisonment be less than one (1) month nor more than six (6) months.
Such fine or other penalty shall be imposed at the discretion of the court. The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than P1, 000.00.
2.
Power to Adjust Local Tax Rate (Sec. 197, LGC) Adjustment of the tax rates as prescribed herein should not be oftener than once every five (5) years, and in no case shall such adjustment
210 Local Taxation exceed ten percent (10%) of the rates fixed under the LGC. Power to Grant Local Tax Exemptions (Sec. 192, LGC) Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary. The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU. Tax Exemption Certificate Tax exemptions shall be conferred through the issuance of a non-transferable tax exemption certificate. Guidelines for the Granting of Tax Exemptions, Incentives and Reliefs (Art. 282 [b], IRR of LGC) 1. On the grant of tax exemptions or tax reliefs: a. The same may be granted in cases of natural calamities, civil disturbance, general failure of crops, or adverse economic conditions such as substantial decrease in prices of agricultural or agribased products. The grant shall be through an ordinance. Any exemption or relief granted to a type or kind of business shall apply to all business similarly situated. Shall take effect only during the next calendar year for a period not exceeding 12 months as may be provided in the ordinance. In the case of shared revenues, the exemption or relief shall only extend to the LGU granting such exemption or relief. 4. The same shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions therefor. The grant shall be for a definite period not exceeding 1 calendar year. The grant shall be by ordinance passed prior to the 1st day of January of any year. Any grant to a type or kind of business shall apply to all businesses similarly situated. 5.
corporations are hereby withdrawn upon the effectivity of the LGC except the following: a. b. c. Local water districts Cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and Educational institutions. RESIDUAL TAXING POWER (Sec. 186, LGC) General Rule: LGUs may exercise the power to levy taxes, fees or charges on any base or subject. Exceptions: 1. 2. 3. Specifically enumerated in LGC Taxed under the provisions of the NIRC, as amended, and Other applicable laws
Conditions in the exercise of residual taxing powers: 1. That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy; That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose. Constitutional limitations on taxing power Common limitations on the taxing power of local government units as prescribed in Section 133 of the Local Government Code Fundamental principles governing the exercise of the taxing power by local governments as prescribed under Section 130 of the LGC, particularly the requirement that they must not be unjust, excessive, oppressive, confiscatory, or contrary to declared national policy (Section 186, LGC) The requirement prescribed in Section 186 of the LGC, which directs that the ordinance levying such residual taxes shall not be enacted without any prior public hearing conducted for the purpose The principle of preemption. Principle of Preemption or Exclusionary Doctrine Where the National Government elects to tax a particular area, it impliedly withholds from the local government the delegated power to tax the same field. This doctrine principally rests on the intention of the Congress. Conversely, should the Congress allow municipal corporations to cover fields of taxation it already occupies then the doctrine of preemption will NOT apply (Victorias Milling Co., Inc. vs. Municipality of Victorias Negros Occidental, G.R. No. L-21183, Sept. 27, 1968).
2.
b. c.
Limitations of the Residual Power: 1. 2.
d.
3.
e.
2.
On the grant of tax incentives: a.
b. c. d.
Tax Exemptions Existing Before the Effectivity of the LGC Has Been Abolished (Sec. 193, LGC) Unless otherwise provided by the LGC, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled

Excluded impositions pursuant to the doctrine of preemption: a. b. Taxes which are levied under the NIRC, unless otherwise provided by LGC of 1991; Taxes, fees, etc. which are imposed under the Tariffs and Customs Code; d. c.
211 2008 CENTRALIZED BAR OPERATIONS Taxes, fees, etc., the imposition of which contravenes existing governmental policies or which violates the fundamental principles of taxation; Taxes, fees and other charges imposed under special law.
Common Limitations on Local Taxing Powers (Sec. 133, LGC) (C2T2 DRIVE3 NAP2)
These apply to all LGUs and are actually taxes or impositions which LGC excludes from the taxing power of local governments. Local government units cannot levy: 1. 2. 3. Income tax, except on banks and other financial institutions; Documentary stamp tax; Estate tax, inheritance, gifts, legacies and other acquisitions mortis causa except as otherwise provided Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned; Taxes, fees, charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; Taxes on business enterprises certified by the Board of Investments as pioneer or nonpioneer for a period of 6 and 4 years, respectively, from the date of registration; Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; Percentage or valueadded tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; kinds of licenses or permits for the driving thereof, except tricycle; 13. Taxes, fees or other charges on Philippine products actually exported, except as otherwise provided in the Code; 14. Taxes, fees or charges on Countryside and barangay business enterprises and cooperatives duly registered under R.A. 6810 and R.A. 6938, (Cooperatives Code of the Philippines) ; and 15. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government unit. Classification of Common Limitations: 1. Taxes which are levied under the NIRC unless otherwise provided by the LGC 2. Numbers 1, 2, 3, 8, 9, 10 Taxes, fees, etc. which are imposed under the Tariffs and Customs Code 3. Number 4 Taxes, fees and charges where the imposition of which contravenes existing governmental policies or which are violative of the fundamental principles of taxation
4.
5.
6.
7.
4.
Numbers 5, 6, 7, 11, 13, 14, 15
8.
Taxes, fees, and charges imposed under special laws. Number 12
9.
10. Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in the Code; 11. T axes on premiums paid by way of Reinsurance or retrocession; 12. Taxes, fees or charges for the registration of motor vehicles and for the issuance of all
212 Local Taxation
Situs of Local Taxation

A. According to Cases Excise Tax not dependent on the domicile of the taxpayer, but on the place in which the act is performed or the occupation is engaged in; not upon the location of the office, but the place where the sale is perfected (Allied Thread Co., Inc. vs. City Mayor of Manila, G.R. No.40296 Nov. 21, 1984). S a l e s Ta x i t i s t h e p l a c e o f t h e consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract (Shell Co., Inc. vs. Municipality of Sipocot, Camarines Sur G.R.No.12680 March 20, 1959). B. According to Sec. 150, LGC Branch or sales office a fixed place in the locality which conducts the operation of the business as an extension of the principal office. Principal office the head or the main office of the business; the city or the municipality specifically mentioned in the Articles of Incorporation or official registration papers as being the official address of said principal office shall be considered the situs thereof. 1. When there is a branch or sales outlet c. Municipality or city where the branch or outlet making the sale or transaction is located. Municipality or city of principal office (not in the place of sale)
2.
When there is no branch or sales outlet
3.
If manufacturer, assembler, contractor, producer, or exporter (MACPE) with factory, project office, plant or plantation (FPPP): a. 30% of recorded sales in the principal office: city or municipality where the principal office is located. 70% of recorded sales in the principal office: city or municipality where the FPPP is located. Pro rata if FPPP are located in different municipalities or cities in proportion to their respective volumes of production. If plantation is located in some place other than where the factory is located, the foregoing 70% shall be subdivided as follows: 60% to the city or municipality where the factory is located; and 40% to the city or municipality where the plantation is located.
b.
Collection of Taxes
Tax Period/ Manner of Payment (Sec. 165,LGC) General Rule: Calendar year; May be paid in QUARTERLY installments At the rate not exceeding 2% per Interests on month from the date it is due until it other Unpaid is paid; in no case shall the total Revenues (Sec. interest on the unpaid amount or 169, LGC) portion thereof exceed 36 months.
GR: 1st day of January; New taxes, fees, charges or Accrual of Tax changes in rates thereof 1st day (Sec. 166,LGC) of the quarter next following the effectivity of the ordinance imposing such GR: w/in the 1st 20 days of January or of each subsequent quarter, as the case may be. The period may, for justifiable reason/ cause, be extended w/out surcharges or penalties, but only for a period not exceeding 6 months Surcharge not exceeding 25% of the amount of TFC including surcharges, until such amount is FULLY paid; in no case shall the total interest on the unpaid amount or portion thereof exceed 36 months.
Collection of Local Revenues by the Treasurer (Sec. 170, LGC) All local taxes, fees and charges shall be collected by the provincial, city, municipal or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer or his deputy to collect local taxes, fees or charges. In case a bond is required for the purpose, the provincial, city or municipal government shall pay the premiums thereon in addition to the premiums of the bond that may be required under the Code.
Time of Payment (Sec 167,LGC)
Surcharges & Penalties on Unpaid Taxes, Fees, Charges (TFC) (Sec. 168,LGC)
Local Tax Remedies Under the LGC

TAX REMEDIES OF THE LGUS
CIVIL REMEDIES OF THE LOCAL GOVERNMENT UNITS (LGU) TO EFFECT COLLECTION OF TAXES 1. Local Governments Lien Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by any appropriate administrative or judicial action. Civil Remedies a. By administrative action through distraint of personal property and by levy upon real property i. Distraint Seizure or confiscation of assets in sufficient quantity to satisfy the liability Accounting of distrained goods Publication of the sale of distrained properties Sale Disposition of the proceeds of the sale by application of such proceeds to the delinquency and expenses of sale Return of balance to the owner Note: Where the proceeds of the sale are insufficient to satisfy the claim, other properties may be distrained, in like manner. Note: Unlike the NIRC, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent may have allowed preliminary injunction where local taxes are involved. But it cannot negate the procedural rules and requirements under Rule 58 of the Rules of Courts (Valley Trading Co. vs. CFI of Isabela, GR No. 49529, March 31, 1989). ii. Levy Delinquency Levy of real property before, simultaneous or after distraint of personal property belonging to delinquent taxpayer Local treasurer shall prepare a duly authenticated certificate showing the name of taxpayer and amount of tax, fee and penalty due to him Advertisement for sale or auction of the property levied for 30 days Sale Report of the sale to the Sanggunian Delivery to the purchaser of the certificates of sale Disposition of the proceeds of the sale by application of such proceeds to the delinquency and expenses of sale Return to the taxpayer of any excess in the proceeds of the sale Redemption of the property within 1 year from date of sale After lapse of the 1 year redemption periodexecution of the final deed to the purchaser in case there is failure to redeem Note: Levy shall be effected by writing upon said certificate the description of the property upon which levy is made. Note: The remedies of distraint and levy may be repeated if necessary until the full amount due including all expenses is collected. Properties Exempt from Distraint and Levy (Sec. 185, LGC): 1. tools and implements necessarily used by the delinquent taxpayer in his trade or employment; one (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation; his necessary clothing, and that of all his family; household furniture and utensils for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding P10,000.00; provisions, including crops, actually provided for individual or family use sufficient for four (4) months;
2.
2.
3. 4.
5.
214 Local Taxation 6. 7. the professional libraries of doctors, engineers, lawyers and judges; one fishing boat and net, not exceeding the total value of P10,000.00, by the lawful use of which a fisherman earns his livelihood; and Any material or article forming part of a house or improvement of any real property. b. by judicial action Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned
8.
Jurisdiction of courts over local taxation cases: a. With the amendment brought by RA No. 9282, the Court of Tax Appeals now has appellate jurisdiction over local taxation cases decided by the Regional Trial Court in the exercise of its appellate or original jurisdiction. Regular judicial courts are not prohibited from enjoining the collection of local taxes, subject to Rule 58 (Preliminary Injunction) of the Rules of Court.
If it finds the protest or If not meritorious, in in part, he shall issue whole he shall deny a notice canceling the protest, wholly or wholly or partly, the partly with notice to assessment. the taxpayer. Taxpayer shall have 30 days from receipt of the denial of the protest OR from the lapse of 60 day period prescribed within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. IF NO PROTEST: the assessment shall become final and executory. b. Payment and subsequent refund or tax credit within 2 years from payment of tax to local treasurer (Sec. 196, LGC). It is to be noted that, unlike in internal revenue taxes, the supervening cause applies in local taxation because the period for the filing of claims for refund or credit of local taxes is counted not necessarily from the date of payment but from the date the taxpayer is entitled to a refund or credit. c. Right of redemption 1 year from the date of sale or from the date of forfeiture (Sec. 179, LGC).
b.
TAX REMEDIES OF THE TAXPAYER

ADMINISTRATIVE Before assessment: a. Protest Against a Newly Enacted Ordinance any question on constitutionality or legality of tax ordinance within 30 days from effectivity thereof to Secretary of Justice, who shall render a decision within 60 days from the date of the receipt of the appeal (Sec. 187, LGC). Such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax. Declaratory relief whenever applicable. After assessment: a. Protest IF THERE IS A PROTEST: within 60 days from receipt of notice of assessment file a written protest with the local treasurer (Sec. 195, LGC). Payment under protest is not necessary. Local Treasurer
JUDICIAL 1. Court action

2. 3.
within 30 days after receipt of decision or lapse of 60 days of Secretary of Justices inaction (Sec. 187, LGC) within 30 days from receipt when protest of assessment is denied (Sec. 195, LGC) if no action is taken by the treasurer in refund cases and the twoyear period is about to lapse (Sec. 195, LGC) If remedies available does not provide plain, speedy and adequate remedy.
b.
Action for declaratory relief Injunction if irreparable damage would be caused to the taxpayer and no adequate remedy is available.
Prescriptive Periods for The Assessment and Collection of Local Taxes

PRESCRIPTIVE PERIODS FOR ASSESSMENT
1. Local taxes, fees, or charges five (5) years from the date they became due. (Sec. 194, LGC). When there is fraud or intent to evade the payment of taxes, fees or charges ten (10) years from discovery of the fraud or intent to evade the payment (Sec. 194, LGC).
PRESCRIPTIVE PERIOD OF COLLECTION

Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of such period (Sec. 194, LGC). Grounds for the Suspension of the Running of the Prescriptive Periods a. b. The treasurer is legally prevented from the assessment or collection of the tax; The taxpayer requests for a reinvestigation and executes a waiver in writing before the expiration of the period within which to assess or collect; and The taxpayer is out of the country or otherwise cannot be located (Sec. 194, LGC).
2.
c.
Real Property Taxation

Real Property Taxation
Fundamentals
other structures and improvements on it, including machineries. Note: The taxing power of the LGUs in real property taxation is a delegated power, basis of which is Section 232 of the LGC. Who are authorized to Levy Real Estate Taxes? (Sec. 200, LGC) 1. Provinces 2. Cities 3. Municipalities in Metro Manila Area Extent of their Powers They do not only have the power to levy real estate taxes BUT they may also fix real estate tax rates. It should be noted that the power to fix real estate tax rates does not extend to municipalities, when the only local bodies authorized to fix tax rates were the provincial board in the case of province, and the municipal board or city council in the case of a municipality or city.
REAL PROPERTY TAXATION A direct tax on ownership of lands and buildings or other improvements thereon, payable regardless of whether the property is used or not, although the value may vary in accordance with such factor. The definition describes the real property tax or realty tax or real estate tax as a tax on ownership. HOWEVER, it is worthwhile to note that in one decided case, the SC observed that the policy of taxing real property is on the basis of the ACTUAL USE even if the user is not the owner (Province of Nueva Ecija vs. Imperial Mining Co., Inc., G.R. No. 59463, Nov. 19, 1982). Also, under Section 234(a) of the LGC, even if the real property in question is owned by the Government, the property becomes taxable if the beneficial or actual use thereof is transferred for a consideration or otherwise to a taxable person. Under the LGC, it covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and
216 Local Taxation Note: No public hearing shall be required before the enactment of a local tax ordinance levying the basic real property tax. REAL PROPERTY subject to the definition given by Art. 415 of the Civil Code. For taxation purposes, the term real property may include things that should be generally being regarded as personal property. It is a familiar phenomenon to see things classed as real property for purposes of taxation which on general principle might be considered personal property (Standard Oil Co. of New York vs. Jamarillo G.R.No. 20898) IMPROVEMENT - valuable addition made to a property or amelioration in its condition amounting to more than a mere replacement of parts involving capital expenditures and labor. Characteristics of Real Property Tax
LGU
Rate of Basic Real Property Tax
3. Municipality within not exceeding 2%. (Sec. Metro Manila 233, LGC) Taxing Authority (Sec. 232, LGC) Ad Valorem Tax a levy on real property determined on the basis of a fixed proportion of the value of the property Special Levies A. Special Education Fund (SEF) - 1% additional real estate tax to finance the special education fund (Sec. 236, LGC); B. Additional Ad Valorem on Idle Lands - not exceeding 5% of the assessed value of the property (Sec. 236, LGC)
Within Metropolitan Manila area only
1. Direct tax on the Ownership of real property 2. Ad valorem tax The value is based on the
tax base
C. For Public Works on lands specially benefited by public works, projects or improvements funded by the local government unit
3. Proportionate the tax is calculated on the

basis of a certain percentage of the value assessed
4. Indivisible single obligation 5. Local tax

Fundamental Principles Governing Real Property Taxation (Sec. 198, LGC) 1. 2. Real property shall be appraised at its current and fair market value; Real property shall be classified for assessment purposes on the basis of actual use; Real property shall be assessed on the basis of uniform classification within each LGU; The appraisal, assessment, levy and collection of RP Tax shall not be left to any private person; and The appraisal and assessment of real property shall be equitable. 1.
may be imposed even by municipalities outside Metro Manila provided: Special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith not apply to lands exempt from basic real property tax and the remainder of the land has been donated to the local government unit concerned for the construction of said projects (Sec. 240, LGC).
D. Imposed by Other Laws Socialized Housing Tax (RA 7279, March 24, 1992) LGUs are authorized to impose an additional one-half percent (0.5%) on the assessed value of all lands in urban areas in excess of Fifty-Thousand pesos, except those lands which are exempted from the coverage of RA 7279. What are considered as Idle Lands (Sec. 237, LGC) Agricultural lands More than 1 hectare if more than of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. Not Idle Lands: Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare Lands actually used for grazing purposes shall likewise not be considered idle lands
3. 4.
5.
Types of Real Property Tax 1. Basic Real Property Tax 2. Special Levies BASIC REAL PROPERTY TAX LGU 1. Province 2. City Rate of Basic Real Property Tax not exceeding 1% of assessed value not exceeding 2%

2. Non-Agricultural Lands More than 1,000 sq m. in area if more than of which remain unutilized or unimproved by the owner of the property or person having legal interest therein. IDLE LANDS EXEMPT FROM TAX (Sec. 238, LGC) By reason of: 1. 2. 3. 4. force majeure civil disturbance natural calamity, or Any cause which physically or legally prevents the owner of the property or person having legal interest therein from improving, utilizing or cultivating the same. Classification of Lands for Purposes of Assessment (Sec. 215, LGC) (CAR-MITS) a. b. c. d. e. f. g. Commercial Agricultural Residential Mineral Industrial Timberland Special * Classification of lands is made by the respective Sanggunian in accordance with zoning ordinances; and It is based on actual use. * Special Classes of Real Property (Sec. 216, LGC) Lands, buildings, and improvements, actually, directly, and exclusively used for the following purposes: 1. 2. 3. 4. Hospitals; Cultural and scientific purposes; Owned and used by local water districts; Owned and used by GOCCs rendering essential public services in the supply and distribution of water and/or generation or transmission of electric power. Question of Tax Exemption (Sec. 234, LGC) General Rule: No provision in the LGC which expressly empowers LGUs to exempt real property from taxes Exemptions: a. b. Exemptions from Real Property Tax (Sec. 234, LGC) Other Instances 2. 5. 4. 3. 1.
217 2008 CENTRALIZED BAR OPERATIONS Exemptions from Real Property Tax Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable person; Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes; Note: The tax exemption herein rest on the premise that they are actually, directly and exclusively used by said entities or institutions for their stated purposes and not necessarily because they are owned by religious, charitable or educational institutions All machineries and equipment that are actually, directly and exclusively used by local water utilities and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; All real property owned by duly registered cooperatives as provided under R. A. No. 6938; and Machinery and equipment used for pollution control and environment protection.
2.
Note: Except as herein provided, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or controlled corporations, are hereby withdrawn upon the effectivity of the LGC Other Instances Wherein the LGUs May Grant Exemptions 1. exempt idle lands from the additional 5% tax by reason of force majeure, civil disturbance, natural calamity or any cause or circumstance which physically or legally prevents the owner of the property or person having legal interest therein from improving, utilizing or cultivating the same (Section 238, LGC); in case of a general failure of crops or substantial decrease in the price of agricultural or agri-based products, or calamity in the province, city, or municipality, the Sanggunian concerned, by ordinance passed prior to the first day of January of any year and upon recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes and interest thereon for the succeeding year/s in the city or municipality affected by the calamity (Section 276, LGC). Proof of Tax Exemption Every person by or for whom real property is declared who shall claim the exemption shall file
218 Local Taxation with the provincial, city or municipal assessor within 30 days from date of declaration of real property sufficient documentary evidence in support of such claim (i.e., corporate charters, title of ownership, articles of incorporation, contracts, affidavits, etc) MIAAs Airport Lands and Buildings EXEMPT MIAAs Airport Lands and Buildings are exempt from real estate tax imposed by local government. Portion of that MIAAs leases to private entities are not exempt from real estate tax, by express mandate of the Local Government Code, local governments cannot impose any kind of tax on national government instrumentalities like the MIAA (Manila International Airport Authority vs. Court of Appeals 495 SCRA 591).
Actual Use of Property as Basis for Assessment (Sec. 217, LGC) Real Property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it and whoever uses it. ACTUAL USE refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. Unpaid realty taxes attach to the property and are chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner which was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust (Estate of Lim vs. City of Manila, G.R. No. 90639, Feb. 21, 1990).
Procedure in Administration of Real Property Tax

DECLARATION OF REAL PROPERTY I. Declaration by Owner or Administrator (Sec. 202-203, LGC) WHEN: once every 3 years during the period from January 1 to June 30 commencing with the calendar year 1992 WHAT: file a sworn declaration with the assessor of the (1) true value of their property which shall be the current and fair market value of the property as determined by the declarant whether previously declared or not; (2) taxable or exempt; (3) with description of the property. A. For newly acquired property: WHEN: must file with the assessor within 60 days from date of transfer WHAT: sworn statement containing the fair market value and description of the property. B. For improvement on property: WHEN: must file within 60 days upon completion or occupation (whichever comes earlier) WHAT: sworn statement containing the fair market value and description of the property. II. Declaration by Provincial / City / Municipal Assessor (Sec. 204, LGC) WHEN: only when the person under Sec. 202 of the LGC refuses or fails to make a declaration within the prescribed time. c. d.
STEP 1
If Property is Declared for the First Time (Sec. 222, LGC) If declared for the first time, real property shall be assessed for back taxes for not more than 10 years prior to the date of initial assessment. Taxes shall be computed on the basis of applicable schedule of values in force during the corresponding period.
STEP 2
LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS (Secs. 205, 207, LGC) Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU a. in general it shall be listed, valued and assessed in the name of the owner, administrator, or anyone having legal interest in the property undivided real property in the name of the estate or heirs or devisees Corporation, partnership, and association same as individuals owned by Republic of the Philippines, its instrumentalities, political subdivision, beneficial use is transferred to a taxable person in the name of the possessor
b.
All declarations shall be kept and filed under a uniform classification system to be established by the provincial, city or municipal assessor.
No oath by the assessor is required.

STEP 3
b.
219 2008 CENTRALIZED BAR OPERATIONS Time and Manner of Payment (Sec. 250, LGC): 1. basic real property tax in 4 equal installments (on or before March 31, on or before June 30,on or before September 30, on or before December 30) special levy governed by ordinance two percent (2%) for each month on unpaid amount until the delinquent amount is paid provided in no case shall the total interest exceed thirty-six (36) months Advance payment discount not exceeding 20% of annual tax (Sec. 251, LGC) Prompt payment discount not exceeding 10% of annual tax due (Art. 342, IRR) Collection of Tax (Sec. 247, LGC) The collection of the real property tax with interest thereon and related expenses, and the enforcement of the remedies provided by the LGC or any applicable laws, shall be the responsibility of the city or municipal treasurer concerned. The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay; provided, the barangay treasurer is properly bonded. Periods within which to Collect Real Property Taxes (Sec. 270, LGC)
APPRAISAL AND VALUATION OF REAL PROPERTY (Secs. 212-214, 219, 224-225, LGC) Determination of Fair Market Value (FMV) For land Assessor of the province/city or municipality may summon the owners of the properties to be affected and may take depositions concerning the property, its ownership, amount, nature and value (Sec. 213, LGC) Assessor prepares a schedule of FMV for different classes of properties. The schedule of FMV is published in a newspaper of general circulation in the province, city or municipality concerned or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places therein (Sec. 212, LGC) General revision of property assessment is made (Sec. 219,LGC) Sanggunian enacts a real property tax ordinance. For Brand new machinery: FMV is the acquisition cost FMV = Remaining eco. Life X Replacement * Estimated eco. Life Cost * or Reproduction Cost d. c.
2. 1.
Interest for Late Payment (Sec. 255, LGC)
2.
For Advance and Prompt Payment 1.
2.
For machinery 1.
2. In all other cases:
1.
DETERMINE ASSESSED VALUE (Sec. 218, LGC) Determine Assessed Value/Taxable Value Procedure 1. 2. 3. Take the schedule of FMV Assessed Value = FMV x Assessment level Tax = Assessed value x Tax rate
STEP 4
Basic real property tax and any other tax levied under the title on Real Property Taxation five (5) years from the date they became due (Sec. 270, LGC). When there is fraud or intent to evade the payment of taxes ten (10) years from discovery of the fraud or intent to evade the payment.
2.
Grounds for the Suspension of the Running of the Prescriptive Periods (Sec. 270, LGC) [PRO] 1. 2. The local treasurer is legally prevented from collecting the tax; The owner of the property or the person having legal interest therein requests for a reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and The owner of the property or the person having legal interest therein is out of the country or otherwise cannot be located
Assessed Level the percentage applied to the FMV to determine taxable value of real property 3.
PAYMENT AND COLLECTION OF TAX a. Accrual of Tax: January of every year and such will constitute as a superior lien (Sec. 246, LGC).
STEP 5
220 Local Taxation
Real Property Tax Remedies Under the LGC

A. LGUs Tax Remedies I. II. I. II. Administrative Judicial Administrative Judicial 4. PURCHASE OF PROPERTY BY LOCAL TREASURER FOR WANT OF BIDDER (Sec. 263, LGC) in case there is no bidder for the real property advertised or if the highest bid is for an amount insufficient to pay the real property tax and other costs. Civil Action (Sec. 266, 270 LGC) filed by the local treasurer within 5 or 10 years as provided in Sec. 270 of the LGC
B. Taxpayers Remedies
II. JUDICIAL 1.
TAX REMEDIES OF THE LOCAL GOVERNMENT TO EFFECT COLLECTION OF TAXES

I. ADMINISTRATIVE 1. LIEN (Sec. 257, LGC) superior to all liens, charges or encumbrances and is enforceable by administrative or judicial action. It is extinguished only upon payment of tax and other expenses LEVY (Sec. 258, LGC) Issuance of Warrant by the LGU treasurer (on or before or simultaneously with the institution of civil action for collection of delinquent tax) Advertise Sale or Auction (within 30 days after service of warrant by posting and publication) Sale Report of Sale (within 30 days after sale) Preparation of Certificate of Sale (containing the name of the purchaser, description of the property, amount of delinquent tax and its interests, expenses) Redemption (within 1 year from date of sale) Issuance of Final Deed to Purchaser (upon the delinquent taxpayers failure to redeem) The proceeds of the sale in excess of the delinquent tax, the interest due thereon and the expenses of sale shall be remitted to the owner of real property or person having legal interest. DISTRAINT (Sec. 254, LGC) with notice of delinquency posted and published. Personal property may be distrained for payment.
Note: No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration of such period stated in Sec. 270, LGC. In case of fraud or intent to evade payment of the tax, such action may be instituted for the collection of the same within 10 years from the discovery of such.
2.
TAX REMEDIES OF THE TAXPAYER

I. ADMINISTRATIVE 1. PROTEST (involving questions of fact) Pay the Tax under Protest File Written Protest with Local Treasurer (Within 30 days from payment of tax) Approved Apply for Tax Refund or Tax Credit Denied Appeal with the LBAA in case of denial of protest OR inaction of the treasurer after the lapse of 60 days Appeal with the CBAA within 30 days from receipt of adverse decision by LBAA Appeal to the CTA within 30 days from receipt of adverse decision rendered by CBAA
Treasurer Decides (within 60 days from receipt of protest)
3.

2. PROTEST (involving purely questions of law, e.g. constitutionality or legality of tax ordinance) A taxpayer may question the constitutionality or legality of an ordinance on appeal within 30 days from the effectivity thereof, to the Secretary of Justice (Section 187, LGC). An owner of real property who is not satisfied with the assessment of his property may, within 60 days from notice of assessment, appeal to the Board of Assessment Appeals (Section 226, LGC). 1. CLAIM FOR TAX REFUND OR CREDIT (Sec. 253, LGC) a. The taxpayer may file a written claim for refund or credit with the provincial or city treasurer within two years from the date the taxpayer is entitled to such reduction or adjustment. Provincial or city treasurer should decide the claim within 60 days from receipt of the claim. In case of denial of refund or credit, appeal to LBAA within 30 days as in protest case.
221 2008 CENTRALIZED BAR OPERATIONS 4th within 15 days from receipt of decision of Court of Tax Appeals en banc to the Supreme Court. APPEALS IN REAL PROPERTY TAXATION PROVINCIAL, CITY OR MUNICIPAL ASSESSOR Within 60 days Owner/Person with legal interest must file: 1. Written Petition under Oath 2. With Supporting Documents
LOCAL BOARD ASSESSMENT APPEALS (LBAA should decide within 120 days from receipt of petition) Within 30 days from receipt of decision from LBAA, the dissatisfied party may appeal to CBAA
CENTRAL BOARD OF ASSESSMENT APPEALS Party adversely affected by LBAAa decision may appeal with the CTA within 30 days from receipt of decision.
b.
CTA (EN BANC) Within 15 days
c.
SUPREME COURT CONDONATION OF REAL PROPERTY TAXES 1. By the Sanggunian Real property taxes may be condoned wholly or partially in a given local government unit when: a. b. There is general failure of crops; There is substantial decrease in the price of agricultural or agri-based products; or There is calamity. When public interest so requires.
2.
REDEMPTION OF REAL PROPERTY (Sec. 261, LGC) within 1 yr from the date of the sale, the owner of the delinquent real property, or person having legal interest, or his representative, shall have the right to redeem the property upon payment to the local treasurer of the following: a. b. c. d. amount of delinquent tax interest thereon expenses of sale from date of delinquency to date of the sale interest of not more than 2% per month on the purchase price from date of sale to date of redemption c. 2.
By the President of the Philippines
A certificate of redemption shall be issued, and the certificate of sale issued to the purchaser shall be invalidated. Remedy against the Assessment/ Appeal
II. JUDICIAL 1. 2. 3. Court Action appeal of CBAAs decision to Court of Tax Appeals en banc. Suit assailing validity of tax; recovery or refund of taxes paid (Sec. 64, P.D. 464) Suit to declare invalidity of tax because of irregularity in assessment and collection (Sec. 64, P.D. 464) Suit assailing the validity of tax sale (Sec. 83, P.D. 464) (Sec. 267, LGC)
1 st within 60 days from notice of assessment of provincial, city or municipal assessor to LBAA (Sec. 226, LGC) 2nd within 30 days from receipt of decision of LBAA to CBAA (Sec. 230, LGC) 3rd within 30 days from receipt of decision of CBAA to Court of Tax Appeals en banc
4.
222 Local Taxation
LOCAL TAXATION vs. REAL PROPERTY TAXATION COMPARISON 1. LGUs authorized to exercise 2. Power or Authority to grant tax exemptions 3. Date of Accrual LOCAL TAXATION Provinces, Cities, Municipalities and Barangays Expressly provided (Section 192, LGC) REAL PROPERTY TAXATION Provinces, Cities and Municipalities in Metro Manila Area Gen. Rule: No power to grant tax exemptions Exceptions: (see. Section 234, LGC)
Unless otherwise provided in the LGC, all on the 1st day of January local taxes, fees or charges shall accrue on the 1st day of January of each year; however, new taxes, fees or charges or changes in the rates thereof, shall accrue on the 1st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates (Section 166,LGC) maybe paid in quarterly installments four equal installments 1st on or before the 31st of March 2nd on or before 30th of June 3rd on or before 30th of September 4th on or before 31st of December Exception: special levy Within 5 years from the date they become due within 5 years from the date they become due; within 10 years from the discovery of fraud or intent to evade payment Governments Remedies: 1. Govt.s lien 2. Civil Remedies: - administrative action - judicial action levy purchase by local treasurer collection through judicial action Taxpayers Remedies: 1.protest by means of appeal to the Secretary of Justice 2.protest against the assessment 3.claims for refund or tax credit NOTE: payment under protest is necessary
4. Manner of payment
5. Time of Payment within first 20 days of January or of each subsequent quarter as the case maybe
6. Prescriptive period of assessment 7. Prescriptive period of collection 8. Remedies
within 5 years from the date they become due within 5 years from the date of assessment by administrative or judicial action
Governments Remedies: 1. Govts lien 2. Civil Remedies: - administrative action - judicial action distraint levy collection through judicial action Taxpayers Remedies: 1.protest by means of appeal to the Secretary of Justice 2.protest against the assessment 3.claims for refund or tax credit NOTE: payment under protest is not necessary
Specific Provisions on The Taxing and Other Revenue-Raising Powers of Local Government Units
Specific Provisions on The Taxing and Other Revenue-Raising Powers of Local Government Units
Provinces
Type of Tax
Rate
Exceptions
Other Provisions
Not more than 50% of Sale, transfer or It is the duty of the seller, Tax on transfer of real property ownership (Sec. 1% of the total other disposition of donor, transferor or 135, LGC) consideration; or fair real property administrator to tax the tax market value in case the pursuant to R.A. imposed. Tax on the sale, donation, Payable within sixty (60) days monetary consideration No. 6657 barter or any other mode involved in the transfer is (Comprehensive from the date of execution of of transferring ownership not substantial, Agrarian Reform the deed or date of or title of real property. whichever is higher. Law) decedent's death
Printer's or Publisher's Not exceeding 50% of 1. For newly started Tax (Sec. 136, LGC) 1% of the gross annual business receipts for the TAX RATE = 1/20 of Tax on the business of preceding calendar year. 1% of the capital persons engaged in the investment printing and/or publication 2. School Texts or of books, cards, posters, references leaflets, handbills, prescribed by certificates, receipts, DECS shall be pamphlets, and others of EXEMPT from tax. similar nature. No VAT on sale, importation, printing, publication of books, newspaper, magazine, review or bulletin w/c appears at regular intervals w/ fixed prices w/c is not devoted principally to publication of paid advertisements (Sec. 109 [y], NIRC) Franchise grantees of telephone telegraph, radio, TV and all other (except electric, gas and water utilities) are subject to 10% VAT (Sec. 108 [A], NIRC)
Not exceeding 50% of Franchise Tax (Sec. 137, LGC) 1% of the gross annual receipts for the Notwithstanding any preceding calendar exemption granted by any year based on the law or other special law, incoming receipts, or the province may impose realized within its a tax on business territorial jurisdiction. enjoying a franchise. Not exceeding P500 on Annual Fixed Tax on Delivery Trucks and every truck, van or Vans of Manufacturers, vehicle used in the Wholesalers or, Dealers delivery or distribution of or Retailers in certain merchandise products (Sec. 141, LGC) Tax on Sand, Gravel and Not more than 10% of the Other Quarry Resources fair market value in the (Sec. 138, LGC) locality per cubic meter The province may levy and collect taxes on ordinary stones, sand, gravel, earth and other quarry resources extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks and other public waters within its territorial jurisdiction
For newly started business TAX RATE = 1/20 of 1% of the capital investment
Manufacturers, producers, wholesalers, dealers and retailers subject to this tax is exempt from peddlers tax
Covers distilled spirits, soft drinks, cigars and cigarettes and other products, as may be determined by the Sanggunian Panlalawigan. The permit to extract resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the Sangguniang Panlalawigan. PROCEEDS OF THE TAX DISTRIBUTED AS FOLLOWS: Province 30% Component city of Municipality where 30% where the quarry resources are extracted Barangay where the quarry resources 40% are extracted
224 Local Taxation

Type of Tax Rate Professional Tax (Sec. 139, At such amount and LGC) reasonable classification Annual professional tax on as the Sangguniang Panlalawigan may persons engaged in the determine, but shall in no exercise or practice of a case exceed P300. profession requiring government examination.
Exceptions Other Provisions To be paid on or before the Professionals exclusively employed in 31st of January, in the province the government shall be where he practices his exempt from payment of profession or where he this tax AND individuals/ maintains principal office in corporation employing a case the practice is in several person subject to places. Any person first professional tax shall be beginning to practice a required by that person profession after the month of to pay the professional January must, however, pay tax before employment the full tax before engaging and annually thereafter therein. Amusement Tax (Sec. 140, Not more than 30% of the The holding of operas, Proceeds from the amusement LGC) gross receipts from concerts, dramas, tax shall be shared equally by admission fees recitals, painting and the province and the Tax on proprietors, art exhibitions, flower municipality where such lessees, or operators of shows, musical amusement places are located theaters, cinemas, concert programs, literary and halls, circuses, boxing and oratorical other places of presentations, except amusement. pop, rock or similar concerts, shall be exempt from the payment of amusement tax
Municipalities (Section 143, LGC)

TAX ON BUSINESS Entities/Persons Taxable MUNICIPAL TAXES a. Manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits and wines or manufacturers of any article of commerce of whatever kind or nature (Sec. 143 [a], LGC) a. Wholesalers, distributors or dealers in any article of commerce of whatever kind or nature (Sec. 143 [b], LGC). Tax Rate
This is a graduated annual fixed tax, the rate of which is

based on the taxpayer's gross sales or receipts for the preceding calendar year.
However, when the gross sales or receipts amount to P6,
500,000 or more for the preceding calendar year, the tax ceases to be a fixed tax. A percentage tax of 37.5% of 1% is imposed instead.
a. Also a graduated annual fixed tax, the rate of which is based on the gross sales or receipts for the preceding calendar year. b. Where the gross sales or receipts, however, amount to P2, 000,000 or more, the tax becomes a percentage tax levied at a rate not exceeding 50% of 1%.
a. Exporters and manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of the following essential commodities (Sec. 143 [c], LGC): 1. rice and corn; 2. wheat or cassava flour, meat, dairy pr oduct s, l o c a l l y m a n u f a c t u r e s , processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in the original state or not; 3. cooking oil and cooking gas; 4. l a u n d r y s o a p , d e t e r g e n t s , a n d medicine; 5. agricultural implements, equipment and post-harvest facilities, fertilizers, pesticides and other farm inputs; 6. poultry feeds and other animal feeds; 7. school supplies; and 8. Cement.
At a rate not exceeding onehalf of the rates for sales of articles

mentioned in paragraphs (a), (b) and (d) of Sec. 143 of LGC.

TAX ON BUSINESS Entities/Persons Taxable a. Retailers (Sec. 143 [d], LGC)
Tax Rate The tax on retailers is not a graduated annual fixed tax but an annual percentage tax imposed at the following rates: a. On gross sales or receipts for the preceding calendar year not exceeding P400,000 2%; and b.On sales or receipts exceeding P400, 000 1%.
a. Contractors and other independent contractors (Sec. 143 [e], LGC).
Also a graduated annual fixed tax based on the gross receipts However, when the gross receipts amount to 2,000,000 or
for the preceding calendar year. more, the contractor's tax becomes a percentage tax. The tax rate is 50% of 1%. calendar year derived from interests, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.
a. Banks and other financial institutions (Sec. 143 [f], LGC)
The tax is 50% of 1% on their gross receipts of the preceding
a. Peddlers engaged in the sale of any merchandise or article of commerce.(Sec. 143 [g], LGC). a. On any business not otherwise specified above (Sec. 143 [h], LGC)
At a rate not exceeding fifty pesos (P50) per peddler annually. Provided that on any business subject to excise, valueadded
or percentage tax under the National Internal Revenue Code, the rate of the tax shall not exceed 2% of gross sales or receipts of the preceding calendar year. The Sanggunian concerned may impose a schedule of graduated tax rates but in no case to exceed the rates prescribed in Sec. 143 of LGC.
MUNICIPAL NON REVENUE FEES & CHARGES Municipalities may impose & collect reasonable fees & charges on business & occupation and, except in case of professional tax, (w/c only provinces & cities may levy) on the practice of any profession or calling commensurate w/ the cost of regulation, inspection & licensing before any person may engage in such business/occupation/practice of such profession or calling. (Sec. 147, LGC)
Barangay (Section 152, LGC)

TAX ON BUSINESS Entities/Persons Taxable 1. BARANGAY TAXES On stores or retailers with fixed business establishments. 2. SERVICE FEES OR CHARGES Tax Rate
With the gross sales or receipts for the preceding calendar year of P50,
000 or less (for barangays in the cities) and P30,000 or less (for barangay and municipalities) at a rate not exceeding 1% of such gross sales or receipts.
Such reasonable fees or charges for services rendered in connection Such reasonable fee as the Sanggunian Barangay may impose The barangay may levy reasonable fees and charges
with the regulation or the use of barangay owned properties or service facilities such as palay, copra, or tobacco dryers
3. BARANGAY CLEARANCE 4. OTHER FEES AND CHARGES a. On commercial breeding of fighting cocks, cockfights and cockpits b. On places of recreation which charge admission fees c. On billboards, signboards, neon signs and outdoor advertisements
CITIES
Cities may levy the taxes, fees, and charges which the province or the municipality may impose. There is no
preemption on this score on the part of the provinces and municipalities. (Sec. 151 LGC)
END OF LOCAL TAXATION
226 Court of Tax Appeals
TAXATION LAW COURT OF TAX APPEALS

COURT OF TAX APPEALS
RULES OF COURT APPLY IN TAX CASES Our Rules of Court apply by analogy or in suppletory character and whenever practicable and convenient and shall be liberally construed in order to promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding. After all, the paramount consideration remains the ascertainment of truth [Calamba Steel Center, Inc. (formerly JS Steel Corporation) vs. CIR GR NO. 151857, April 28, 2005].
DISTRIBUTION OF JURISDICTION WITH RESPECT TO INTERNAL REVENUE TAXATION d. DISPUTED ASSESSMENT ISSUES 1. 2. e. 1. 2. 3. Court of Tax Appeals Supreme Court Municipal Trial Court, depending upon the jurisdictional amount Regional Trial Court, depending on the jurisdictional amount Court of Tax Appeals, either as original depending upon amount or appellate jurisdiction Court of Tax Appeals Supreme Court
COLLECTION ISSUES
f.
REFUND ISSUES 1. 2.
Nature and Powers of CTA

NATURE AND WEIGHT The Court of Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. As a matter of principle, the Supreme Court will set aside the conclusion reached by CTA, which is, by the very nature of its function d e d i c a t e d e xcl u si ve l y to th e stu d y a n d consideration of tax problems and has necessarily developed an expertise on the subject unless there has been abuse or grave exercise of authority (CIR vs. Court of Appeals, CTA, and ADMU G.R. No. 115349, April 18, 1997). Because of CTAs expertise, the findings of the CTA will not ordinarily be reviewed absent a showing of gross error or abuse on its part. The findings of fact of the CTA are binding on the Supreme Court, and in the absence of strong reasons for the SC to delve into facts, only questions of law are open for determination (Philippine Refining Company vs., Court of Appeals G.R. No. 118794, May 8, 1996).
EXECUTIVE COMMITTEE
TAXATION LAW
MEMBERS:

A well settled doctrine is that findings of facts of the Court of Tax Appeals are binding on the Supreme Court and absent any strong reasons for the Supreme Court to delve into facts, only questions of law are open for determination. The factual findings of the CTA are binding on the SC and can only be disturbed on appeal if not supported by substantial evidence (CIR vs. Tours Specialist Inc. G.R. No. 66416, Mar. 21, 1990). The language used by the Court of Tax Appeals as to the existence of fraud must be given due weight and force. The finding of facts of the CTA is entitled to the highest respect (Raymundo vs. De Joya G.R. No. L-27733, December 3, 1980). ELEVATION OF RANK Shall be of the same level as the Court of Appeals, possessing all the inherent powers of a Court of Justice (R.A. No. 9282). Under RA no. 9282, CTA has been elevated to a collegiate court. Appeals from its decision (en banc) shall now be made before the Supreme Court. NATURE OF THE CTA 1. Court of special jurisdiction - can act only in matters where it has exclusive original as well as in aid of its appellate jurisdiction. Generally, the Supreme Court is bound by questions of fact as found by the Court of Tax Appeals CTA proceedings shall not be governed strictly by technical rules of evidence (R.A. 1125, Sec. 8). The required procedure is unlike that of the Court of Appeal or the Supreme Court.
227 2008 CENTRALIZED BAR OPERATIONS Collector of Internal Revenue much latitude in the speedy and prompt collection of taxes. The requirement for the Commissioner to rule on disputed assessment before bringing an action for collection is applicable only in cases where the assessment was actually disputed, adducing reasons in support thereto. If the taxpayer did not actually contest the assessments by stating the basis thereof, the Commissioner need not rule on their request. In case of a suit for collection of internal revenue taxes where the assessment has already become final and executory, the action to collect is akin to an action to enforce the judgment relied upon (Dayrit vs. Cruz G.R. No. L-39910, September 26, 1988). POWERS 1. 2. 3. 4. 5. 6. 7. to administer oaths; to receive evidence; to summon witnesses by subpoena; to require production of papers or documents by subpoena duces tecum; to punish contempt; to promulgate rules and regulations for the conduct of its business; to assess damages against appellant if appeal to CTA is found to be frivolous or dilatory; to suspend the collection of the tax pending appeal; to render decisions on cases brought before it; and
2.
8. 9.
3.
4.
10. to issue order authorizing distraint of personal property and levy of real property NB: Power to issue writs of prohibition and injunction is supplementary to its appellate jurisdiction. COMPOSITION AND APPOINTMENT OF MEMBERS Consists of a Presiding Justice and five (5) Associate Justices each of whom shall be appointed by the President upon nomination by the Judicial and Bar council. May sit en banc or in two (2) Divisions, each Division consisting of three (3) Justices. The Presiding Justice and the most Senior Associate Justice shall serve as chairmen of the two respective divisions.
5.
It is required to conduct a mandatory pretrial, formal trial and receive evidence.
Procedure is governed by the Revised Rules of the Court of Tax Appeals (RRCTA) - AM No. 05-11-07-CTA which took effect on December 15, 2005.
I N T E R N A L R E V E N U E M AY P R O C E E D WITHOUT RULING FIRST ON REQUEST FOR RECONSIDERATION Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayers request for reconsideration before he can go to the court for the purpose of collecting the tax assessed. On the contrary, the Tax Code withheld from all courts, except Court of Tax Appeals under the RA No. 1125, as amended, the authority to restrain the collection of any national internal revenue tax, fee, or charge, thereby indicating the legislative policy to allow the
QUORUM Sessions: presence of EN BANC 4 Justices Decision: affirmative vote of 4 Justices
228 Court of Tax Appeals Sessions: presence of DIVISION 2 Justices Decision: affirmative vote of 2 Justices
DISPOSITION OF CASES Cases shall be decided within 30 days after submission thereof for decision Decisions shall be in writing, stating clearly and distinctly the facts and the law on which they are based and signed by the judges who concurred therewith. Publication of decision in the Official Gazette. This requirement however, is merely directory
PROVIDED: when the required quorum cannot be constituted due to any vacancy, disqualification, inhibition, disability, or any other lawful cause, the Presiding Justice shall designate any Justice of other Divisions of the Court to sit temporarily therein. (Sec. 2, R.A. 9282)
Jurisdiction
JURISDICTION OF CTA -DIVISION
I. EXCLUSIVE APPELLATE JURISDICTION TO REVIEW BY APPEAL a. Decisions of the Commissioner of Internal Revenue 1. in cases 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; f. e. Decisions of the Secretary of Finance
On customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2325 of the Tariff and Customs Code;
2.
Decisions of the Secretary of Trade and Industry in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article,
-
b.
Inaction by the Commissioner of Internal Revenue 1. In cases 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, where the NIRC provides a specific period for action, in which case the inaction shall be deemed a denial;
involving dumping and countervailing duties under Secs. 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under R.A. No. 8800, where either party may appeal the decision to impose or not to impose said duties.
II. JURISDICTION OVER CASES INVOLVING CRIMINAL OFFENSES a. Exclusive original jurisdiction over all criminal cases arising from violations of 1. 2. 3. NIRC; Tariff and Customs Code; and, Other laws administered by the BIR or the Bureau of Customs the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than one million pesos (P1,000,000.00) or Where there is no specified amount claimed, jurisdiction is by the regular courts. The jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and
2.
c.
Decisions, orders or resolutions of the RTC
Provided however, where: i.
In local tax cases originally decided or resolved by them in the exercise of their original jurisdiction;
d.
Decisions of the Commissioner of Customs 1. 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 Or other matters arising under the Customs Law or other laws administered by the Bureau of Customs.
ii.
2.

jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action will be recognized (Sec. 7[b][1] R.A. No. 9282). b. Exclusive appellate jurisdiction in criminal offenses (a) Over appeals from the judgments, resolutions or orders of the RTC in their original jurisdiction in criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR or BOC (b) Petitions for review of the judgment, order or resolution of RTC in the exercise of its appellate jurisdiction
229 2008 CENTRALIZED BAR OPERATIONS Division in the exercise of its exclusive appellate jurisdiction. (b) Decisions, resolutions or orders of the RTC in the exercise of its appellate jurisdiction over: (1) Local tax cases (2) Tax collection cases and (3) Cases involving criminal offenses arising from violations of the NIRC, TCCP and other laws administered by the BIR. (c) Decisions, resolutions or orders on motions for reconsideration or new trial of the CTA in Division in the exercise of its exclusive original jurisdiction over (1) tax collection cases and (2) cases involving criminal offenses arising from violations of NIRC, TCCP and other laws. (d) D e c i s i o n s o f t h e C e n t r a l B o a r d o f Assessment Appeals (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 of assessment appeals. PENALTIES IMPOSED IN RELATION THERETO Includes collection of compromise penalties which may form part of the tax courts judgment in case taxpayer express willingness to pay the same. OTHER MATTERS Those controversies which can be considered within the scope of the function of the BIR / BOC under ejusdem generis rule Examples of other matters: 1. 2. 3. action for the nullity of distraint and levy questioning the propriety of the assessment declaration of nullity of waivers of Statute of Limitations executed by the taxpayer, thus invalidating the assessments issued by the BIR decision of the Commissioner of Internal Revenue granting informers reward
Where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is P1,000,000 or where there is no specific amount claimed.
III. JURISDICTION OVER TAX COLLECTION CASES 1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties. Provided, in collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than one million pesos (P1, 000,000.00) shall be tried by the p r o p e r M u n i c i p a l Tr i a l C o u r t , Metropolitan Trial Court, or Regional Trial Court, depending on their respective jurisdiction. 2. Exclusive appellate jurisdiction in tax collection cases Over appeals from the judgments, resolutions or orders of the RTC in tax collection cases originally decided by them, in their respective territorial jurisdiction.
4.
CTAS JURISDICTION MAY BE CHALLENGED AT ANY TIME Jurisdiction can be challenged at any stage of the proceedings and for lack of it, the CTA can dismiss a case ex meru motu (Commissioner of Internal Revenue vs. Villa, GR No. 23988, January 2, 1968). Reason: CTA is a court of special jurisdiction, as such, it can take cognizance only of matters as are clearly within its jurisdiction (Ibid).
JURISDICTION OF CTA - EN BANC

EXCLUSIVE APPELLATE JURISDICTION Over the following cases: (a) Decisions or resolutions on motion for reconsideration or new trial of the CTA in
230 Court of Tax Appeals I N S TA N C E S W H E R E C TA H A S N O JURISDICTION 1. CTA has no power motu propio to review tax cases. An appeal by way of Petition for Review must first be filed before the CTA. Reason: It can resolve cases only in aid of its original or appellate jurisdiction. 2. No jurisdiction over questions of unfair competition involving use of simplified bookkeeping records 3.
Reason: this does not involve any assessment or refund of tax (Ollada vs. Court of Appeals G.R. No 8878 July 24, 1956) CTA has no appellate jurisdiction over a decision rendered by the Philippine Ports Authority Reason: collection of port charges ceased to be an administrative function of the Bureau of Customs.
Appeal
WHEN: PERIOD CTA
WITHIN WHICH TO FILE
APPEAL
TO
Instances when decisions are final: (1) A demand letter for tax deficiency issued and signed by an authorized subordinate officer with the warning that failure to pay would result to issuance of a warrant of distraint and levy without further notice (Oceanic Wireless Network Inc. vs. CIR G.R. No. 148380) (2) A letter of BIR Commissioner reiterating previous demand to pay an assessment (Commissioner vs. Ayala Securities Corp G.R.No. 29485 Mar. 31. 1976) (3) The filing of a judicial action for collection may be treated by the taxpayer as a denial of a protest (Commissioner vs. Union Shipping G.R. No. 66160. May 21, 1990) However, the issuance of a warrant of distraint or levy does not constitute a final action (Commissioner vs. Union Shipping supra)
(a) Within 30 days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action (Sec. 11,R.A. No. 1125) (b) If the protest is denied, taxpayer may appeal within 30 days from date of receipt of decision (Sec. 3.1.5 par. 6, R.R. 12-99) (c) "If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred eighty (180) days from date of submission by the taxpayer of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable" (CIR vs. Lascona Land Co., CA-GR SP No. 58061). SUBJECT OF APPEAL ONLY A FINAL DECISION IS APPEALABLE TO THE COURT OF TAX APPEALS A decision is appealable when it constitutes the final action taken by him or his authorized deputies with respect to the taxpayers liability. Preliminary collection letters, post reporting notices and pre-assessment notices are not appealable, because they are not the final decision of the Commissioner. Rather, it is the action taken by the Commissioner in response to the taxpayers protest on the assessment that would constitute an appealable decision At times there is an exchange of communication between the taxpayer and the Commissioner, and the later states that his action is final, then, period for appeal begins to run. Commissioner must state that his decision is final for period of appeal to run.
Instances where CTA would have jurisdiction even if there is no decision: (1) If the Commissioner of Internal Revenue has not acted in a refund case and the two year prescriptive period is about to expire. Reason: In fairness to the taxpayer so as not to deprive him of his day in court. (2) If the Commissioner of Customs has not rendered a decision on an application for refund of internal revenue taxes and the suit is about to prescribe. Reason: If the taxpayer waits, then his right of action prescribes. WHO MAY APPEAL TO THE CTA a. Any party adversely affected by a decision or ruling or inaction of 1. 2. 3. 4. The Commissioner of Internal Revenue The Commissioner of Customs The Secretary of Finance The Secretary of Trade and Industry

5. 6. 7. b. The Secretary of Agriculture The Central Board of Assessment Appeals The Regional Trial Courts c.
231 2008 CENTRALIZED BAR OPERATIONS Commissioner to enforce the collection of the tax by summary remedies or judicial action c. Taxpayer in a proceeding for collection by judicial action may raise only defenses of absence of jurisdiction, collusion between the parties or fraud.
Stockholders of dissolved corporation Reason: They could be held personally liable for the unpaid deficiency assessments of a dissolved corporation in proportion to their distributive shares in the dissolved corporation (Tan Tiong Bio vs. BIR, G.R. No. L-15778 April 23, 1962). 3.
NON-EXTENDIBLE After the 30-day period, an assessment may no longer be disputed through the simple expedient of paying the protested tax and by subsequently claiming it as a refund within the period of two years from date of payment Reason: He would be doing indirectly what he could not do directly, that is, open an assessment that has become final
c.
Government Reason: The right is available to any party adversely affected by a decision or ruling or inaction (Sec. 11, R.A. No. 1125, as amended by RA 9282).
REQUESTS FOR RECONSIDERATION FAILURE TO FILE ON TIME OF A TAXPAYER CLAIMING FOR REFUND TO RECOVER TAXES PAID UNDER PROTEST ON THE GROUND OF ILLEGALITY OF ASSESSMENT NO LONGER AVAILABLE Where a taxpayer seeking a refund of taxes whose request is denied and whose appeal to the CTA was dismissed for being filed out of time, sues anew to recover such taxes already paid under protest, his action is devoid of merit. For in the same way that the expediency of an appeal from a denial of a request for cancellation of warrant of distraint and levy cannot be utilized to test the legality of an assessment which has become conclusive and binding on the taxpayer, so is a claim for refund not available to revive the right to contest the validity of an assessment which had become final for failure to appeal the same on time (CIR vs. Concepcion G.R. No. L-23912, March 15, 1968). THIRTY (30) DAY PRESCRIPTIVE PERIOD FOR APPEAL WITH THE CTA NATURE OF 30-DAY PERIOD 1. RUNS FROM THE DATE THE TAXPAYER RECEIVES THE APPEALABLE DECISION If the taxpayers request for reconsideration (i.e., the protest is denied or the original assessment is maintained, the appealable decision is the decision denying the request for reconsideration). 2. JURISDICTIONAL Effects of failure of the taxpayer to appeal on time: a. b. a. renders the action final, executory and demandable b. assessment is considered correct and all that is necessary is for the Requests or motions for reconsideration, however, operate to suspend the running of the period to appeal. A pro forma request for reconsideration or one which is directed to the Secretary of Finance does not suspend the period.
MODES OF APPEAL A. By filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules on Civil Procedure
decision, ruling, or inaction of the Commissioner of Internal Revenue, Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Regional Trial Courts this appeal shall be heard by a Division of the CTA Filing of a verified petition for review with the CTA in 7 legible copies deposit of filing fees proof of service to the adverse party certification of non-forum shopping prior filing of motion of new trial or reconsideration 15 day period under Rule 42 does not apply, 30 day period applies
Requirements: 1. 2. 3. 4. 5.
B. By filing a petition for review under a procedure analogous to that provided for under Rule 43 of 1997 Rules on Civil Procedure
decisions or rulings of the Central Board of Assessment Appeals and the
232 Court of Tax Appeals Regional Trial Courts in the exercise of its appellate jurisdiction
one who rendered the assailed decision is wrong but that the taxpayer is right. Proving that the assessment is wrong is not enough
this appeal shall be heard by the CTA en banc Filing of verified petition for review in 7 legible copies with the CTA Proof of service of a copy thereof to the adverse party and on the court or agency a quo Certification of non-forum shopping Filing of a motion for reconsideration or new trial when proper period of appeal is not 15 days under Rule 43 but 30 days a. b.
Requirements: 1. 2.
Reason: The tax court could settle nothing and The way is open for subsequent assessments and appeals. The roots of controversy must be cut (Siy Po vs. Court of Appeals et. al., G.R.No. L-81446 Aug. 18, 1988)
3. 4.
DISTRAINT OF PERSONAL PROPERTY AND LEVY OF REAL PROPERTY IF DECISION IS FAVORABLE TO THE GOVERNMENT Upon the issuance of any ruling, order or decision by the CTA favorable to the national government, the CTA shall issue an order authorizing the BIR, through the Commissioner: 1. to seize and distraint any goods, chattels, or effects and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and/or levy the real property of such persons in sufficient quantity to satisfy the tax or charge together with any increment thereto incident to delinquency.
NEW ISSUES CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL General Rule: New issues cannot be raised for the first time on appeal. Reason: The court which is supposed to review would not review but determine and decide for the first time, a question not raised at the administrative forum (Commissioner of Internal Revenue vs. Wander Philippines, Inc. G.R. No. 68375, Apr. 15, 1988) Exceptions: a. Defense of prescription Reason: This is a statutory right (Visayan Land Transportation vs. Collector CTA Case No. 1119, Sept.30, 1964). b. Errors of administrative officials Reason: State can never be in estoppel and lifeblood theory (Commissioner vs. Procter and Gamble Phils. Mfg. Corp, G.R. No. 66838, April 15, 1988). NOTE: However, this was reversed in Supreme Courts subsequent resolution wherein it was held that in the absence of explicit statutory provisions to the contrary, the Government must follow the same rules of procedure which bind private parties (Commissioner vs. Procter and Gamble, G.R. No. 66838, December 2, 1991, Resolution). BURDEN OF TAXPAYERS ON APPEAL TO CTA It is the burden of taxpayers on appeal to CTA to prove by a full disclosure of data on his possession that: a. b. c. The tax assessment is wrong The tax assessment is merely a presumption and not based on actual facts The correct computation of liability, if any The burden of proof is on the taxpayer contesting the validity or correctness of the assessment to prove not only that the
2.
This remedy shall not be exclusive and shall not preclude the Court from availing of other means under the Rules of Court. REMEDIES OF THE PARTY AFFECTED BY THE DECISIONS OF CTA A. Any party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration or new trial before the same Division within 15 days from notice Any party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial may file a petition for review with the CTA en banc. Any party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules on Civil Procedure. Grounds of a motion for new trial a. Fraud, accident, mistake, or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial and
B.
C.
b.

which, if presented, would probably alter the result (Section 5, Rule 15, RRCTA). Where there is a clear showing of entitlement to refund, the technical rules may be waived so as to allow a new trial even if the requisites or grounds are not met, especially where the failure to present evidence in the first instance was adequately explained (Philippine Phospate Fertilizer Corp. vs. CIR, June 28, 2005). Requisites for motion for new trial based on newly discovered evidence a. b. The evidence was discovered after the trial; Such evidence could not have been discovered and produced at the trial with reasonable diligence; It is material, not merely cumulative, corroborative or impeaching; and It is of such weight that, if admitted, will probably change the judgment (Philippine Phosphate Fertilizer Corp. vs. CIR, June 28, 2005)
233 2008 CENTRALIZED BAR OPERATIONS by Tax Code.
The provision in the Tax Code refers to courts other than the CTA (Blaquera vs. Rodriguez, GR No. L-11295, March 29, 1958). Appeal to the CTA does not automatically suspend collection unless CTA issues suspension order at any stage of the proceedings.
How motion to suspend collection of tax is filed: may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings (Section 3, Rule 10, RRCTA) SIMULTANEOUS FILING OF AN APPLICATION FOR REFUND OR CREDIT AND INSTITUTION OF A CASE BEFORE THE CTA ALLOWED The law fixes the same period of two (2) years for filing a claim for refund with the Commissioner and for filing a case with the CTA. The two-year period for both starts from the date after the payment of the tax or penalty, or from the approval of the application for credit. INTERLOCUTORY ORDER OF CTA NOT APPEALABLE A CTA resolution denying a taxpayers motion to declare a warrant of distraint and levy issued by the Commissioner of Internal Revenue as illegal is interlocutory and not appealable (Juan vs. CIR, G.R. No. 24740 July 30, 1979).
c. d.
No second motion for reconsideration or new trial No party shall be allowed to file a second motion for reconsideration of a decision, final resolution or order or for new trial (Rule 15, RRCTA). TAX COLLECTION NOT SUSPENDED DURING APPEAL General Rule: No appeal taken to the CTA shall suspend the payment, levy or distraint, and/or sale of any property of the taxpayer. Reason: Lifeblood Theory Exception: The CTA is empowered to suspend the collection of internal revenue taxes and custom duties or grant injunction only upon showing: 1. That the collection of the tax may jeopardize the interest of the government and/or the taxpayer That the taxpayer is willing to deposit the amount equal to the taxes assessed or to file a bond amounting to not more than twice the value of the tax being assessed. That the CTA may issue an injunction only in the exercise of its appellate jurisdiction. That the appeal is not frivolous or dilatory Sec. 11 of R.A. No. 1125 as amended by Sec. 9 of R.A. No. 9282 grants CTA power to suspend collection of tax if such collection works to serious prejudice of either taxpayer or government. However, Sec. 218 of the Tax Code provides that no court may grant injunction to restrain collection of any tax, fee or charge imposed
2.
3. 4.
234 Court of Tax Appeals
Taxpayer Bill of Rights

(Annex)
7.
Taxpayer Bill of Rights (Annex)
GENERAL AUDIT PROCEDURES AND DOCUMENTATION 1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayers books of accounts and other accounting records, in order to determine the Taxpayers correct internal revenue tax liabilities. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or twice, in the case of LAs issued by the National Office. Any suspended LA(s) must be attached to the new LA issued (RMO 38-88). 6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.
How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/ investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for preapproval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).
2.
3.
4.
8.
How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayers books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases: a. When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer; When the Taxpayer himself requests a reinvestigation or re-examination of his books of accounts; When there is a need to verify the Taxpayers compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue. When the Taxpayers capital gains tax liabilities must be verified; and When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).
5.
b.
c.
d.
9.
What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:

a. Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).
235 2008 CENTRALIZED BAR OPERATIONS (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment. 14. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayers deficiency tax liability shall be sufficient: a. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or When the excise tax due on excisable articles has not been paid; or When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
b.
10. What is a Notice for Informal Conference? A Notice for Informal Conference is a written notice informing a Taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid. If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency assessments, this recommendation is communicated by the Bureau to the Taxpayer concerned during an informal conference called for this purpose. The Taxpayer shall then have fifteen (15) days from the date of his receipt of the Notice for Informal Conference to explain his side. 11. Within what time period must an assessment be made? An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment. Any assessment issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations. 12. What is "Jeopardy Assessment"? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the ROs belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayers failure to: a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or Substantiate all or any of the deductions, exemptions or credits claimed in his return.
b.
c.
d. e.
15. What is a Notice of Assessment/Formal Letter of Demand? A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course. The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.
b.
13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen
236 Court of Tax Appeals TAXPAYERS OBLIGATIONS AND PRIVILEGES 16. What is required of a taxpayer who is being audited? A Taxpayer who is being audited is obliged to: a. Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of the recipient and the date of receipt. Present within a reasonable period of time, his books of accounts and other related accounting records that may be required by the Revenue Officer; and Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable amount of time from his (Taxpayers) receipt of the Letter of Authority. c. d. e. f. b.
Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation. The taxable periods covered. Assessment number. Date of receipt of assessment notice or letter of demand. Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first. The itemized schedule of the adjustments with which the taxpayer does not agree. A statement of facts and/or law in support of the protest. The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable. It is filed within thirty (30) days from the Taxpayers receipt of the Notice of Assessment and formal Letter of Demand.
b.
c.
g. h.
17. What is the recourse of a Taxpayer who cannot submit the documents being required of him within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of accounts and/or other accounting records, intends to request for more time to present these documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations. 18. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a signed statement whereby the Taxpayer conveys his agreement to extend the period within which the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the defense of prescription for assessments issued after the reglementary period. No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized Bureau official. 19. If a Taxpayer does not agree with the assessment made following an audit, can he protest this Assessment? Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by filing a letter of protest stating in detail his reasons for contesting the assessment. 20. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the following conditions: It is made in writing, and addressed to the Commissioner of Internal Revenue;It contains the information, and complies with the conditions required by Sec. 6 of Revenue Regulations No. 12-85; to wit: a. Name of the taxpayer and address for the immediate past three (3) taxable years.
21. In the event the Commissioners duly authorized representative denies a Taxpayers protest, what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied by the Commissioners duly authorized representative, the Taxpayer may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureaus Appellate Division. The Appellate Division serves as a "Court", where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to support their respective claims. 22. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted? S h o u l d t h e Ta x p a y e r s r e q u e s t f o r reconsideration be denied or his protest is not acted upon within 180 days from submission of documents by the Commissioner, the

Taxpayer has the right to appeal with the Court of Tax Appeals (CTA). Any appeal must be done within thirty (30) days from the date of the Taxpayers receipt of the Commissioners decision denying the request for reconsideration or from the lapse of the 180 day period counted from the submission of the documents (Sec. 228 of the Tax Code, as amended). 23. If the Taxpayer is not satisfied with the CTAs decision, can he appeal the decision to a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of Appeals within fifteen (15) days from the Taxpayers receipt of the CTAs decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this decision with the Supreme Court. 24. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec. 229, NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his right to the refund or tax credit. 25. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this claim, can the Taxpayer elevate his claim to the CTA? Yes, he can, if the two (2) year period stated above is about to end, and the Commissioner has yet to render a decision on the claim (Gibbs v. Collector, L-13453, February 29, 1960). REMEDIES OF THE BUREAU IN THE AUDIT PROCESS AND COLLECTION OF DELINQUENT ACCOUNTS 26. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayers receipt of the second written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum. 27. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces Tecum? If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces Tecum, the Bureau may: a. File a criminal case against the Taxpayer for violation of Section 5 as it relates to b.
237 2008 CENTRALIZED BAR OPERATIONS Sections 14 and 266, of the NIRC, as amended; and/or Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of Court.
28. What alternatives are open to Government for the collection of delinquent accounts? Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts: a. b. c. d. Distraint of personal property; Levy of real property belonging to the Taxpayer; Civil Action; and Criminal Action.
29. What is "Distraint of Personal Property"? Distraint of personal property involves the seizure by the Government of personal property - tangible or intangible - to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily. 30. What is "Levy of Real Property"? Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy. 31. In what time period must collection be made? Any internal revenue tax, which has been assessed within the period prescribed shall be collected within three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from assessment of the tax or from the last waiver.

2008 CENTRALIZED BAR OPERATIONS
BIBLIOGRAPHY
Aban, Benjamin. Basic Law on Taxation. Aralar, Reynaldo B. Real Property Tax Law and Jurisprudence. National Bookstore, 2007. De Leon, Hector S. and De Leon, Jr. Hector M. The National Internal Revenue Code Annotated, Volume 1. Rex Printing Company, Inc., 2003. De Leon, Hector S. and De Leon, Jr. Hector M. The National Internal Revenue Code Annotated, Volume 2. Rex Printing Company, Inc., 2003. Dimaampao, Japar B. Basic Approach to Income Taxation. Rex Printing Company, Inc., 2004. Dimaampao, Japar B. Tax Principles and Remedies. Rex Printing Company, Inc., 2004. Dizon, Efren Vincent M. Q & A in Taxation., 2006. Domondon, Abelardo T. Bar Reviewer in Taxation, Volume I. GIC Enterprises and Co., Inc., 2003. Domondon, Abelardo T. Bar Reviewer in Taxation, Volume II. GIC Enterprises and Co., Inc., 2003. Mamalateo, Victorino C. Reviewer on Taxation. Rex Printing Company, Inc., 2004. Mamalateo, Victorino C. Value Added Tax on Legal Services. San Beda Law Journal 2005-2006. Sababan, Francis J. and Bundac, Lydia A. Taxation Law Reviewer. GB Research and Information Center, 2000. Vitug, Jose C. and Acosta, Ernesto D. Tax Law and Jurisprudence. Rex Printing Company, Inc., 2000.
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TABLE OF CONTENTS

GENERAL PRINCIPLES INCOME TAXATION TRANSFER TAXES

Annexes to Income Tax............................................................................................................................. 99

133 147 164 205 226

Amendments to Value-Added Tax (Annex)........................................................................................... 144

Annexes to Tariff and Customs .............................................................................................................. 159

Related Revenue Regulations (Annex)...................................................................................................... 195

Taxpayer Bill of Rights (Annex)............................................................................................................ 234

San Beda College of Law

1 2008 CENTRALIZED BAR OPERATIONS

TAXATION LAW GENERAL PRINCIPLES

Nature of the Taxing Power (ILL)

MEMORY AID IN TAXATION LAW

San Beda College of Law

3 2008 CENTRALIZED BAR OPERATIONS

Purposes and Objectives of Taxation

Non-impairment of Contracts Contracts may be impaired

Transfer of Property Rights Transfer is effected in favor of the State

2. Enforcement or tax administration (tax

Basic Principles of A Sound Tax System /Canons of Taxation (FAT)

MEMORY AID IN TAXATION LAW

As to who bears the burden: a.

San Beda College of Law

5 2008 CENTRALIZED BAR OPERATIONS

MEMORY AID IN TAXATION LAW

San Beda College of Law

MEMORY AID IN TAXATION LAW

San Beda College of Law

1. DUE PROCESS OF LAW (Art. III, Sec. 1, 1987

10 General Principles 3) No arbitrariness or oppression in a) b) 1) assessment collection

MEMORY AID IN TAXATION LAW

4. PROGRESSIVE SYSTEM OF TAXATION

Notice and hearing as to

2. EQUAL PROTECTION (Art. III, Sec.1, 1987

5. NON-IMPAIRMENT CLAUSE (Art. III, Sec. 10,

3. UNIFORMITY AND EQUITABILITY (Art. VI,

San Beda College of Law

11 2008 CENTRALIZED BAR OPERATIONS

10. TAXATION AND FREEDOM OF THE PRESS

11. TAXATION AND FREEDOM OF RELIGION

7. BILLS TO ORIGINATE FROM THE HOUSE

8. VETO POWER OF THE PRESIDENT (Art. VI,

9. PRESIDENTS POWER TO TAX (Art. VI, Sec.

MEMORY AID IN TAXATION LAW

14. APPROPRIATION OF PUBLIC MONEY (Art.

15. VOTING REQUIREMENT ON GRANT OF

16. MUNICIPAL TAXATION (Art. X, Sec. 5, 1987

San Beda College of Law

17. NONIMPAIRMENT OF THE SUPREME

20. CONSTITUTIONAL REQUIREMENT ON

18. SPECIAL FUND (Art. VI, Sec. 29 [3], 1987

21. PROVISIONS REGARDING ALLOTMENTS

19. NECESSITY OF AN APPROPRIATION

MEMORY AID IN TAXATION LAW

San Beda College of Law

15 2008 CENTRALIZED BAR OPERATIONS

Forms of Escape From Taxation

MEMORY AID IN TAXATION LAW

San Beda College of Law

MEMORY AID IN TAXATION LAW

San Beda College of Law

MEMORY AID IN TAXATION LAW

Agencies Involved in Tax Administration and Enforcement

San Beda College of Law