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ATENEO CENTRAL BAR OPERATIONS 2007 Taxation Law SUMMER REVIEWER PART I – GENERAL PRINCIPLES TAXATION – power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions SCOPE OF TAXATION TAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme STAGES OF TAXATION: (LAP) 1. Levy 2. Assessment 3. Payment Basic Principles of a Sound Tax System 1. Fiscal Adequacy 2. Theoretical Justice 3. Administrative Feasibility INHERENT LIMITATIONS (SPING) 1) Situs or territoriality of taxation 2) Must be for a Public purpose • Test is whether proceeds will be used for something which is the duty of the State to provide. • Legislature is not required to adopt a policy of “all or none.” • Incidental benefit to individual does not defeat exemption 3) International comity • Property of a foreign State of government may not be taxed by another 4) Non-delegability of the taxing power • Contemplates power to QuickTime™ and a TIFF (Uncompressed) decompressor determine kind, object, extent, are needed to see this picture. amount, coverage, and situs of tax; • Distinguish from power to assess and collect • Exemptions: (a) presidential taxing powers; (b) local governments 5) Exemptions of Government agencies • Taking money from one pocket
to the other Applies only to entities exercising government functions (acta jure imperii)
CONSTITUTIONAL LIMITATIONS A. Direct 1) Due process • Should not be harsh, oppressive, or confiscatory (Substantive) • By authority of valid law (Substantive) • Must be for a public purpose (Substantive) • Imposed within territorial jurisdiction (Substantive) • No arbitrariness in assessment and collection (Procedural) • Right to notice and hearing (Procedural) 2) Equal protection • All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. • Power to tax includes power to classify provided: (a) Based on substantial distinction (b) Apply to present and future conditions (c) Germane to purpose of law (d) Apply equally to all members of the same class 3) Non-impairment clause • Rules (a) When government is party to contract granting exemption Æ cannot be withdrawn without violating nonimpairment clause (b) When exemption generally granted by law Æ withdrawal does not violate (c) When exemption granted under a franchise Æ may be revoked; Consti provides that franchise is subject to amendment, alteration, or repeal by Congress. 4) Must be uniform and equitable
—Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B. Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan—
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
Uniform: all articles or properties of the same class taxed at same rate • Equity: apportionment must be more or less just in the light of taxpayer’s ability to shoulder tax burden Non-imprisonment for non-payment of poll tax • Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides. Congress shall evolve a progressive system of taxation • As resources of the taxpayer becomes higher, his tax rate likewise increases (ex. Income tax) • Constitution does not prohibit regressive taxes; this is a directive upon Congress, not a justiciable right. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments • It is the bill, not the law, that must originate from House; bill may undergo extensive changes in Senate • Rationale: members of House are more sensitive to local needs. Freedom of religion • Activities simply and purely for propagation of faith are exempt (e.g. sale of bibles and religious articles by nonstock, non-profit organization at minimal profit). • Tax is unconstitutional if it operates as a prior restraint on exercise of religion • Income even of religious organizations from any activity conducted for profil or from any of their property, real or personal, regardless of disposition of such income, is taxable Freedom of press/expression QuickTime™ and a TIFF (Uncompressed) decompressor • Tax that a prior restraint areoperates needed to see thisas picture. invalid. • If fee is only for purpose of defraying cost of registration and not for exercise of privilege, no violation. Charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational purposes shall be exempt from taxation • Pertains only to real estate tax. • Test of exemption: actual use of the property, not ownership • Use of word “exclusively” means “primarily” rather than “solely.” • Exemption extends to property incidental to or reasonably necessary for the accomplishment of the purposes mentioned. Tax exemption of all revenues and assets of (a) non-stock, non-profit educational institutions (b) used ACTUALLY, DIRECTLY AND for educational EXCLUSIVELY purposes • Exemption covers income, property, donor’s tax, and customs duties (distinguish from previous which pertains only to property tax) • Revenue must both be (a) derived from an activity in pursuance of educational purpose; and (b) proceeds must be used for the same purpose (ex. hospital adjunct to medical school tax exempt) (ex. Interest income not exempt). • Income exempt provided it is used for maintenance or improvement of institution. • Distinguish from tax treatment of (a) proprietary educational institutions (Preferential Tax); and (b) government educational institutions (exempt, ex. UP) Delegated authority of President to impose tariff rates, import and export quotas, tonnage and wharfage dues • delegated by Congress • through a law • subject to Congressional limits and restrictions • within the framework of national development program Law granting tax exemption (includes amnesties, condonations and refunds) shall be passed with concurrence of Congress majority of all members voting separately • Relative majority (majority of quorum) is sufficient to withdraw exemption. No use of public money or property for religious purposes except if priest is assigned to armed forces, penal institutions, government orphanage or leprosarium Page 2 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 15) Special purpose - special fund for said purpose, balance goes to general funds 16) Veto power of the President - revenue/tariff bill 17) Power of review of the SC 18) Power of Local Government to create their own sources and levy taxes, fees, charges 19) Just share of local government in national revenue which shall be automatically released. 20) Tax exemption of all revenues and assets of (a) proprietary or cooperative educational institutions (b) subject to limitations provided by law 21) Tax exemption of grants, endowments, donations or contributions USED ACTUALLY, DIRECTLY and EXCLUSIVELY for educational purposes
CIR v. CA (298 SCRA 85) Facts: YMCA is a non-stock, non-profit institution, which conducts various programs and activities beneficial to the public pursuant to its religious, educational and charitable objective. In 1980, YMCA earned an income of more than P600K from leasing out a portion of its premises to small shop owners and P47K from parking fees.
Issue: Is the rental income from real property owned by the YMCA subject to income tax? Held: YES, the exemption claimed by YMCA is expressly disallowed by the last paragraph of then §27 of the NIRC. Furthermore, Art. XIV, §4 (3) of the Constitution only exempts YMCA from property taxes NOT income tax. YMCA cannot be considered as an “educational institution” within the purview of the above-cited article. The term “educational institution” under the Education Act of 1982 refers to schools. The school system is synonymous with formal education, which refers to hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through grades or more to higher levels. QuickTime™ and a Nothing in the Articles of Incorporation TIFF (Uncompressed) decompressor or By-Laws of are needed to see this picture. the YMCA suggests that it is an educational institution. Classification of Taxes A. As to subject matter of object 1) personal, poll, capitation tax – (a) fixed amount (b) individuals residing within specified territory
(c) without regard to their property, occupation or business Ex. Community Tax (Cedula) 2) property tax – (a) imposed on property, real or personal (b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax 3) excise, privilege tax - (different from the excise tax in Taxation II) (a) imposed upon performance of an act, the enjoyment of a privilege or the engaging in an occupation, profession or business Ex. Income tax, VAT, estate tax, donor’s tax As to who bears the burden 1) Direct – the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax 2) Indirect – imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties As to determination of amount 1) Specific – tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars 2) Ad Valorem - tax of a fixed proportion of the value of property with respect to which the tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential goods As to purpose 1) General, fiscal or revenue - imposed for the general purpose of supporting the government Ex. Income tax, percentage tax 2) Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives Ex. Protective tariffs or customs duties on imported goods intended to protect local industries As to authority imposing the tax 1) National - imposed by the national government Ex. National internal revenue taxes, custom duties 2) Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 F. As to graduation of rate (Three systems of taxation) 1) Proportional - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax 2) Progressive or graduated - tax rate increases as the tax base or bracket increases Ex. Income tax, estate tax, donor’s tax 3) Regressive - tax rate decreases as the tax base increases 4) Degressive - increase of rate is not proportionate to the increase of tax base •
SITUS OF TAXATION - the place of taxation, the country that has the power to levy and collect the tax.
TAX DISTINGUISHED FROM POLICE POWER TAX Purpose
Amount of exaction
Superiority of contracts
Contracts may be impaired unless (a) government is party to contract granting exemption; or (b) involves franchise Taxes paid form part of the public funds
Transfer of property rights
POLICE POWER (in the form of a FEE) Exercise to promote public welfare through regulation Limited to the cost of regulation, issuance of license, or surveillance Contracts may be impaired
Allows merely the restraint on the exercise of property rights
TAX Raise revenue
EMINENT DOMAIN The taking of property for public use Just compensation
is given the owner of the expropriated property
Only particular property is comprehended
TAX DISTINGUISHED FROM LICENSE FEE
Source Purpose Object
TAX Exercise of Taxing power Raise revenue Persons, property and privilege no limit
LICENSE FEE Emanate from the police power of the State Regulation Right to exercise a privilege only necessary to carry out regulation
Distinction lies in the primary purpose: • License fee if primary purpose is to regulate and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. • Tax if primary purpose, or at least one of the real and substantial purposes is to raise revenue. • If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or businesses.
Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption from fee)
TAX DISTINGUISHED FROM DEBT
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TAX DISTNGUISHED FROM EMINENT DOMAIN
taxes accrue to the general benefit of the citizens of the taxing State Applies to all persons, property and excises that may be subject thereto
Law; legal obligation
Based on contract
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Generally not subject to compensation/setoff
May be the subject of compensation/setoff
Imprisonment is sanction for nonpayment
No imprisonment for non-payment
TAX DISTINGUISHED FROM TOLL
Kind of demand Purpose Amount
GENERAL RULE: Taxes cannot be the subject of compensation or set-off * A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government. Reasons: a) lifeblood theory b) taxes are not contractual obligation (absence of consent of taxpayer) c) taxpayer and government are not mutual debtors and creditors of each other EXCEPTIONS: 1) Both claims already became overdue and demandable as well as fully liquidated Æ there must have already been an act of appropriation by the government (legislative) of funds for payment of the debt. 2) Tax overpayment (BIR’s obligation to refund or set-off arises from time tax was paid) 3) If the case involves local government taxes TAX DISTINGUISHED ASSESSMENT TAX Imposed on Why imposed Purpose
When imposed Basis
SPECIAL ASSESSMENT Only on land
persons, properties, etc. regardless of Public improvement public that benefits the land QuickTime™ and a improvement TIFF (Uncompressed) decompressor picture. Support are of needed to see thisContribution to cost government of public improvement Regular exaction Exceptional as to time and locality Necessity Benefits obtained
TAX Demand of sovereignty support of government no limit – depends on need of the government
TOLL Demand of ownership Collection for the use of property Fair return of the cost of the property or improvement
TAX DISTINGUISHED FROM CUSTOMS DUTY TAX Coverage Object
More comprehensive than customs duty Persons, prop, etc
CUSTOMS DUTY kind of tax goods imported or exported
DOCTRINE OF EQUITABLE RECOUPMENT 1) refund of a tax illegally or erroneously collected or overpaid by a taxpayer 2) such tax refund is barred by prescription 3) tax presently being assessed against a taxpayer 4) may be recouped or set-off against the tax barred by prescription not allowed in Philippines, reason - LIFE BLOOD CONCEPT OF DOUBLE TAXATION Kinds of Double Taxation A. DIRECT DUPLICATE • taxing same person, property or right twice • for the same purpose • by the same taxing authority • within the same jurisdiction or taxing district • within the same taxable period • and they must be of the same kind or character of tax B. INDIRECT DUPLICATE • Exists if any of the elements for Direct taxation is not present • ¾ No constitutional prohibition on double taxation. However, where there is direct duplicate taxation then there may be violation of the constitutional precepts of equal protection and uniformity in taxation.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 TAX TREATY AS A MODE OF ELIMINATING DOUBLE TAXATION: 1) 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 taken into account in determining the rate of tax applicable to the tax payer’s remaining income or capital (ex. Tax Sparing Credit scheme) 2) CREDIT METHOD – the tax paid in the state of source is credited against the tax levied in the state of residence Afisco Insurance Corp v. CA (G.R. No. 112675, Jan. 25, 1999) Petitioners are local non-life insurance corps. Which formed a “pool” in order to enter into a Reinsurance Treaty with a German company. BIR assessed deficiency taxes against the “pool” on the ground that it is considered a partnership taxable as a corp. Petitioners insist that the pool is a mere agent, not acting on its own and therefore, cannot be taxed as a corp., there being no risk undertaken by the pool, no common fund and no control exercised by its board in the management of its fund. Issue (1) : Is the Pool Taxable as a Corp? Held (1): YES. Pursuant to §24 of the NIRC, the pool is included within the definition of “domestic corps.” Which comprises even unregistered partnerships and associations. In this case, the ceding cos. Entered into an association that would handle all business under the Treaty. It has a common fund and an executive board to manage its affairs. Moreover, even if the pool itself did not issue any policies on its own, its work was indispensable to the business of the ceding companies and the German Co, Issue (2): Is there double taxation? Held(2): NO. Double taxation means taxing the same person twice by the same jurisdiction for the same thing. The pool is a taxable entity distinct from the individual corporate entities of the ceding QuickTime™ and a companies. The TIFF tax(Uncompressed) on its decompressor income is obviously are needed to see this picture. different from the tax on the dividends received by the said companies. Power to Tax Involves Power to Destroy [Chief Justice Marshall, McCullough v. Maryland, 4 L.Ed. 579 (1819)] The imposition of a valid tax could not be judicially restrained merely because it would prejudice a
taxpayer’s property. As long as the power to tax does not violate any constitutional or statutory provisions, said power can be a power to destroy. But for all its plenitude, the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the dictum that “the power to tax involves the power to destroy.” The web or unreality spun from Justice Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’ pen, thus: “The power to tax is not the power to destroy while this Court sits.” “So it is in the Philippines.” [Reyes v. Almanzor (1991), citing Sison v. Ancheta (1984); Obillos v. CIR (1985)]. Tax Avoidance (Tax Minimization) – tax saving device that is legally permissible Tax Evasion (Tax Dodging) – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional. CIR vs. The Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004 Facts: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. CIC authorized Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an Toda then amount of not less than P90M. purportedly sold the property for P100 M to Rafael Altonaga, who, in turn, sold the same property on the same day to RMI for P200M. These 2 transactions were evidenced by Deeds of Absolute Sale. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10M. CIC filed its corporate annual ITR for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. Toda sold all his shares. He died 3 yrs. later. The BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22, representing the tax, surcharge, & interest on the Page 6 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 particular accused and not the character of the acts charged in the information
PART II – THE NATIONAL INTERNAL REVENUE CODE OF 1997 TITLE I. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE (BIR)
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 2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3) to give tax evaders, who wish to relent & are willing to reform a chance to do so RULES ON TAX AMNESTY 1) Tax amnesty (a) like tax exemption, never favored nor presumed (b) construed strictly against the taxpayer (must show complete compliance with the law) 2) Government not estopped from questioning the tax liability even if amnesty tax payments were already received QuickTime™ and a TIFF (Uncompressed) decompressor Reason: Erroneous application and are needed to see this picture. 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 3) Defense of Tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a
POWERS AND DUTIES OF THE BIR (ACEEGA) 1) Assessment and Collection of national internal revenue: (a) taxes (b) fees (c) charges 2) Enforcement of all (a) forfeitures (b) fines and (c) penalties connected therewith 3) Execution of all judgments decided in BIR’s favor by (a) the Court of Tax Appeals (CTA) and (b) the ordinary courts 4) Give effect to and Administer the supervisory and police powers conferred to it by NIRC or by other laws. (Sec. 2) Officials of the BIR 1) one chief - Commissioner of Internal Revenue (Commissioner) 2) four assistant chiefs - Deputy Commissioners (Sec. 3) *E.O. 430 (July 28, 1997) designates each of the 4 Deputy Commissioners to head the following functional groups: (a) Operations group (b) Legal Enforcement Group (c) Information Systems Group (d) Resource Management Group Powers of the Commissioner A. Power to interpret tax law and decide tax cases (Sec 4) 1) Interpret provisions of NIRC and other tax laws subject to review by the Secretary of Finance 2) Decide: (a) disputed assessments (b) refunds of internal revenue taxes, fees and charges (c) penalties imposed in relation thereto (d) other matters arising from NIRC or other Page 8 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 laws or portions thereof administered by the BIR subject to the exclusive appellate jurisdiction of the CTA B.
Power to obtain information, summon, examine and take testimony of persons (Sec. 5) 1) For the Commissioner to ascertain: (a) correctness of any return or in making a return where none has been made (b) liability of any person for any internal revenue tax or in correcting such liability (c) tax compliance The Commissioner is authorized: 2) to Examine any relevant Book, paper, record or other data 3) to Obtain any Information (costs, volume of production, receipts, sales, gross income, etc), on a regular basis from: (a) any person other than the person under investigation or (b) any office or officer of the national/local government, government agencies and instrumentalities (Bangko Sentral, GOCCs) 4) To Summon (a) the person liable for tax or required to file a return or (b) any officer or employee of such person or (c) any person having in his possession/custody/ care 1. the books of accounts 2. accounting records of entries relating to the business of the person liable for tax or any other person
5) to Produce such books, papers, records and other data and to give testimony 6) to take the Testimony of the person concerned, under oath as may be relevant to the inquiry 7) To cause revenue officers and employees to make a Canvass of any revenue district or region QuickTime™ a nothing in Section 5 shallandbe construed as TIFF (Uncompressed) decompressor are needed to see this picture. granting the Commissioner the authority to inquire into bank deposits other than as provided for under Sec. 6 (F) of the Code (authority to inquire into bank deposits). Power to make assessments, prescribe additional requirements for tax administration and enforcement (Sec. 6) 1) Examination of returns and determination of
tax due (a) After a return has been filed the Commissioner or his representative may authorize i. the Examination of any taxpayer; and ii. the Assessment of the correct amount of tax; (b) Failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer; Any tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his representative. Any return, statement or declaration filed in any authorized office shall not be withdrawn; but within THREE YEARS from date of filing, the same may be modified, changed or amended; provided that no notice for audit or investigation of such return, has in the meantime, been actually served upon the taxpayer. 2) Failure to submit required returns and other documents If a person (a) fails to file a required return or report at the time prescribed or (b) Willfully or otherwise files a false or fraudulent return, The Commissioner shall Make or Amend the return from (a) his own knowledge or (b) from such information as he can obtain through testimony or otherwise which shall be prima facie correct and sufficient for all legal purposes 3) Inventory-taking, Surveillance, Presumptive Gross Sales (a) Commissioner may, at any time during the taxable year 1. order the Inventory taking of goods of any taxpayer; or 2. may place the business operations of any person (natural/juridical) under Observation or Surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for tax purposes. The findings may be used as basis for assessing the taxes and shall be deemed prima facie correct. Page 9 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (b) Commissioner may prescribe a Minimum amount of gross receipts, sales and taxable base (taking into account the sales and income of other persons engaged in similar business) : 1. When a person has failed to issue receipts as required by Sec. 113 (Invoice requirements for VATregistered persons) and Sec. 237 (Issuance of Receipts or Commercial Invoices); or 2. When the books of accounts or records do not correctly reflect the declarations made or required to be made in a return, such minimum amount shall be prima facie correct 4) Terminate taxable period Commissioner shall declare the tax period of a taxpayer terminated and send notice to the taxpayer of such decision with a request for immediate payment of the tax, when it has come to the knowledge of the Commissioner: (RIRHO) (a) that a taxpayer is Retiring from business subject to tax or (b) is Intending to leave the Philippines or (c) to Remove his property therefrom or (d) to Hide or conceal his property or (e) is performing any act tending to Obstruct the proceedings for the collection of tax 5) Prescribe Real Property Values The Commissioner is authorized to: (a) divide the Philippines into different zones or areas and (b) determine the fair market value of real properties located in each zone or area For tax purposes, the value of the property shall be whichever is higher of: (a) Fair market value as determined by the Commissioner; or (b) Fair market value as shown in the schedule of values of the provincial and city assessors. QuickTime™ and a TIFF (Uncompressed) decompressor
are needed to see this picture.Deposit 6) Authority to Inquire into Bank Notwithstanding R.A. 1405 (Bank Secrecy Law) the Commissioner is authorized to inquire into the Bank deposits of: (a) a decedent to determine his gross estate (b) a taxpayer who has filed an application to compromise payment of tax liability by reason of financial incapacity
The taxpayer’s application for compromise shall not be considered unless he waives in writing his privilege under RA 1405 and other general or special laws. Such waiver shall authorize the Commissioner to inquire into his bank deposits. 7) Authority to Register tax agents (a) The Commissioner shall Accredit and Register, individuals and general professional partnerships and their rep. who prepare and file tax returns and other papers or who appear before the BIR (b) The Commissioner shall create national and regional accreditation boards Those who are denied accreditation may appeal the same to the Sec. of Finance who shall rule on the appeal within 60 days from receipt of such appeal. Failure of the Sec. of Finance to rule on the appeal within the said period shall be deemed as approval for accreditation. 8) Authority to Prescribe Additional RequirementsThe Commissioner may prescribe the manner of compliance with any documentary or procedural requirement for the submission or preparation of financial statements accompanying tax returns. D. Authority to delegate power (Sec. 7) The Commissioner may delegate the powers vested in him to subordinate officials with rank equivalent to Division Chief or higher, subject to limitations/restrictions imposed under the rules and regulations EXCEPT, (the following powers shall NOT be delegated): (RIR CoA A) 1) power to Recommend the promulgation of rules and regulations by the Sec. of Finance 2) power to Issue rulings of first impression or to Reverse, revoke, modify any existing rule of the BIR 3) power to Compromise or Abate any tax liability EXCEPT, the regional evaluation board may compromise: (a) assessments issued by regional offices involving deficiency taxes of P500,000 or less; and (b) minor criminal violations as may be Page 10 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 determined by the rules
Regional Evaluation Board is composed of: i. Regional Director as Chairman ii. Asst. Regional Director iii. Heads of the Legal, Assessment and Collection Div. iv. Revenue District Officer having jurisdiction over the taxpayer 4) power to Assign or reassign internal revenue officers to establishments where articles subject to excise tax are kept
E. Assignment of Internal Revenue Officers (Secs. 16 &17) The Commissioner may assign/ reassign internal revenue officers: 1) involved in excise tax functions as often as the exigencies of revenue service may require; provided that he shall in no case stay in his assignment for more than 2 years (Sec. 16) 2) without change in rank and salary, to other or special duties connected with the enforcement and administration of internal revenue laws as the exigencies of the service may require; provided that officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than 3 years; assignment of officers and employees to special duties shall not exceed 1 year (Sec. 17) F. Internal Revenue Districts (Sec. 9) The Commissioner, with approval of the Sec. of Finance, shall divide the Philippines into such number of revenue districts for administrative purposes. Each district shall be under the supervision of a Revenue District Officer. Duties of the Commissioner: (PASO) 1) To Prescribe, provide and distribute to the proper QuickTime™ and a internal revenue officials the requisite licenses, TIFF (Uncompressed) decompressor neededother to see this picture. stamps, labels, areall forms, certificates, bonds, records, invoices, books, receipts, instruments and appliances used in administering laws falling within the jurisdiction of BIR 2) To Acknowledge payment of any tax under this Code expressing a) the amount paid and b) the particular account for which payment was made (Sec. 8)
3) To Submit reports to the appropriate committee of Congress upon its request and in aid of legislation, which information or report shall include, but not be limited to: (a) industry audits (b) collection performance data (c) status reports in criminal actions initiated against persons (d) taxpayer’s returns provided, any return or information which can be associated with or identifies, directly or indirectly a particular taxpayer, shall be furnished to the appropriate committee of Congress only when sitting in Executive Session, unless the taxpayer consents in writing to such disclosure 4) Submit reports to the Oversight Committee through the Chairman of the Committee on Ways and Means of the Senate and House of Representatives, on the exercise of his powers of abatement and compromise of taxes (Sec. 204) every 6 months of each calendar year. (Sec. 20) NATIONAL INTERNAL REVENUE TAXES: (Sec. 21) (I VEE DOO) 1) Income tax 2) Estate and Donor’s tax 3) Value-Added tax 4) Other percentage tax 5) Excise tax 6) Documentary stamp tax 7) Such Other taxes as are or hereafter may be imposed and collected by the BIR
TITLE II. TAX ON INCOME DEFINITION OF TERMS 1) Person – an individual, a trust, estate or corp. 2) Corporation – include partnerships (distinguish between ordinary and general professional partnership) 3) General professional partnership – partnerships formed for the sole purpose of exercising their common profession, no part of its income being derived from engaging in any trade or business 4) Shares of stock – includes shares of stock of a corp., warrants & options to purchase shares of stock, as well as units of participation in a partnership (except gen. professional partnership), joint stock companies, joint accounts, joint ventures taxable as corp., associations & recreation or amusement clubs & mutual fund certificates Page 11 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 5) Taxpayer – any person subject to tax 6) Taxable Year – can either be calendar year (Jan 1 to Dec 31), or the fiscal year 7) Fiscal Year – an accounting period of 12 months ending on the last day of any month other than December (ex. Feb 1 to Jan 31) 8) Paid or incurred (cash method) or Paid or accrued (accrual method) – payment actually made or if not paid, actually liable for the expense TAXABLE INCOME REQUISITES FOR INCOME TO BE TAXABLE: 1) There must be a gain or addition to net worth 2) The gain must be realized or received, actually or constructively; recipient must have complete dominion 3) The gain must not be excluded by law or treaty from taxation
Not recognized as income - when funds were merely entrusted/held money in trust (with obligation to return) to taxpayer because taxpayer acquires no control and does not receive economic benefit from it. Proceeds of embezzlement/swindling are income because embezzler/swindler already has complete dominion over them and can use such for his economic benefit. Increase in the value of property is not recognized as income; this only constitutes an unrealized increase which becomes taxable income only upon disposition and realization of gains. Same situation for stocks and stock dividends. Deposit with no interest does not produce income for the depositary; there is no flow of wealth. In a debt/loan situation it is important to determine whether there was an original intention to pay/consensual recognition of an obligation to repay. • If yes, then the liability that QuickTime™ and a TIFF (Uncompressed) decompressor results just offsets the increase in are needed to see this picture. assets of the taxpayer borrower; therefore, no increase in net worth and no income derived from the debt/loan. • If no (as in the case of a swindler/estafa), the proceeds will be considered as income and therefore taxable in the hands of the borrower swindler.
Income can be realized actually and constructively. • Assignment of Income Doctrine – Ex: A is entitled to his salary of P10m but assigns it to B for unknown reasons. In this case, both A and B realize income. A constructively received income (because he was able to assign thus has complete control/dominion over it) and B actually received it. The income is taxable in the hands of both A and B. • Doctrine of Constructive Receipt – Ex: A was informed that his check dated December 16 is already available and he can get it anytime. A did not get the check until January 30. In this case, A constructively received income in December and is taxable in that taxable period. • Not recognized as income if proceeds are merely a return of capital. Ex. Creditor lends debtor x amount. Debtor repays x amount plus y interest. Creditor does not have income on x amount as this is merely return on capital; he has income only with respect to the amount of y interest. COMPUTATION OF TAXABLE INCOME 1) Taxpayer earning purely compensatory income Gross Compensation less : Personal Exemption premium payments on health and/or hospital insurance amounting to P2,400 per year equals: Taxable income 2) Taxpayer doing business, whether individual or corporation (domestic or FC doing business) Gross Revenue/Sales less: Cost of Sales equals: Gross Income less : Allowable Deductions equals: Taxable Income ¾ for individuals, an additional deduction for personal exemptions is allowed Situs of Taxation is the place or authority that has the right to impose and collect taxes (CIR v. Marubeni Corp). 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. SOURCES OF INCOME Page 12 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Taxpayer ITEM Interest Compensation for personal services Rent and royalty Gain from sale of real property Gain from sale of personal property Gain from sale of shares of stock of domestic corporation Dividend income
SOURCE Residence of the debtor Place of performance Location of property Location of property Place of sale Philippine source
(a) From a domestic corp. – deemed income from within Phil. (b) From a foreign corp. – deemed income from without provided more than 50% of the corp.’s worldwide income is not derived from Phil. sources
Allocation of Unallocated Deductions (partly Phil. partly foreign) GI, Philippines GI, Worldwide GI, Outside Phil GI, Worldwide
Taxable Income Taxable Income Taxable Income
Taxable on income Within and without the Philippines Within the Philippines Within the Philippines Within the Philippines
Within the Philippines
Within or/and without the Philippines (depending on classification of individual partner) Same basis as an individual (depending on classification of decedent, if estate, trustor, if trust) Within and Without the Philippines Within the Philippines Within the Philippines
Resident Alien Nonresident Alien engaged in trade or business Nonresident Alien not engaged in trade or business General Professional Partnership
Income from sale of personal property derived from sources partly within and partly without the Phils.
Gain from sale of personal property produced in whole or in part in one country and sold in another country, where one of the countries is the Philippines is income derived from sources partly within and partly outside the Philippines. Gains from the purchase of personal property within and sold without the Philippines or the purchase of personal property without and and itsa sale within the QuickTime™ (Uncompressed) decompressor Philippines shall beTIFFare treated asthisderived entirely from needed to see picture. sources within the country in which it was sold.
GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHILIPPINES
*Taxable Income = Gross income (less) Deductions (less) Personal and additional exemptions *Gross Income = all income derived from whatever source TYPES OF INCOME TAXATION UNDER THE NIRC 1) Net Income Tax/Taxable Income (GI – Deductions – Exemptions) 2) Gross Income Tax (All income from whatever source) 3) Final Income Tax (On passive income and capital Page 13 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 gains) 4) Fringe Benefits Tax (amount of benefits to Managerial and Supervisory Employee paid by Employer; Ee is taxed but burden is on Er) 5) Capital Gains Tax (Real property and stocks not traded in stock market) 6) Optional Corporate Income Tax 7) Minimum Corporate Income Tax (2% of GI) 8) Improperly Accumulated Earnings Tax 9) Preferential Rates (for special corporations) 10) Branch Profit Remittance Tax
TYPES OF TAXPAYERS A. Individuals Kinds of Individuals 1) Resident Citizen 2) Nonresident Citizen = citizen of the Philippines who: (a) Establishes the fact of his physical presence abroad with a definite intention to reside therein (b) Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis (c) Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i.e. not less than 183 days) during the taxable year (d) Previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines 3) Resident Alien 4) Nonresident Alien a) Those engaged in trade or business in the Philippines who come and stay in the Philippines for an aggregate period of more than 180 days during any calendar year b) Those not engaged in trade or business in the Philippines, which include nonresident aliens whose stay in the and aor less Philippines is QuickTime™ 180 days TIFF (Uncompressed) decompressor are needed to see this c) Aliens employed bypicture. regional or area headquarters and regional operating headquarters of multinational companies in the Philippines d) Aliens employed by offshore banking units e) Aliens employed by petroleum contractors and subcontractors
TYPES OF INCOME 1) General (part of gross income, subject to 532%) a) Compensation Income b) Income from Business c) Income from Exercise of Profession 2) Special Types of Income (not part of gross income, subject to final tax) a) Interests, royalties, prizes and other winnings subject to final tax (Passive Income) b) Cash & property dividends (does not include stock dividends; these are realized only upon their subsequent sale) (Passive Income) c) Capital gains from sale of real property d) Capital gains from sales of shares of stock not listed in the stock exchange e) Capital gains from sale of shares of stock listed in stock exchange (subject to percentage tax B. Estates and Trusts Estate: property, rights and obligations of a person which are not extinguished by his death and those that accrues thereto; taxed in the same way as an individual provided it is irrevocable and earns income; what is taxed is not the property that constitutes the trust (this was already subject to donor’s tax) but the income of such property. Trust: arrangement created by agreement under which title to property is passed to another for conservation or investment with the income and the corpus/principal distributed in accordance with the directions of the creator; to be taxable as a separate entity, grantor must have absolutely and irrevocably given up control and benefit over the trust. C. Corporation A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint accounts, associations, and insurance companies • But does not include, for the purpose of imposing ordinary 35% corporate income tax: o general professional partnerships o joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with Page 14 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 the govt.
B. Optional Gross Income Taxation
General Types: 1) Domestic Corporation is created or organized in the Philippines or under its laws 2) Foreign Corporation is organized and existing under the laws of a foreign country (a) Resident foreign corporation – foreign corp. engaged in trade or business within the Philippines (b) Nonresident foreign corporation – foreign corp. not engaged in trade or business within the Philippines D. Partnerships Kinds of Partnerships 1) General Professional Partnerships • Established solely for purpose of exercising common profession and not part of income derived from engaging in trade or business. • As an entity, it is not subject to income tax. Partners are liable for income tax on their distributive share (computed by dividing net income of GPP). Each partner shall report his distributive share as part of his gross income. 2) Taxable/Business/Ordinary Partnership • All other partnerships no matter how created or organized. • Includes unregistered joint ventures and business partnerships. • Taxable as an entity Æ ordinary corporate income tax. • Joint ventures are not taxable as corporations when its purpose if a) undertaking construction projects; b) engaged in petroleum, coal and other energy operation under a service contract with the government. • Partners are considered stockholders; therefore, their distributive share is taxed as dividends. TAX ON CORPORATIONS I. DOMESTIC CORPORATIONS A. In general
QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
On taxable income from all sources within and without the Philippines
Effective Jan. 1, 2000: the President (upon recommendation of the Sec of Finance) may allow corporation an option to be taxed at 15% of gross income after the ff. conditions are satisfied: Tax effort ratio Ratio of IT collection to total tax revenue VAT tax effort Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP Ratio of Cost of Sales to Gross Sales from all sources
20% of GNP 40% 4% of GNP 0.9%
Does not exceed 55%
The election of the option shall be irrevocable for 3 consecutive taxable years during which the corp. is qualified under the scheme ¾
Gross Income =
Gross Sales ( - ) Sales returns, discounts and allowances ( - ) Cost of goods sold
Cost of Goods Sold Trading and Merchandising Concern • Invoice cost plus import duties and freight in transporting goods to the place where actually sold, including insurance while in transit Manufacturing concern • Cost of production of finished goods (raw materials, direct labor and manufacturing overhead, freight cost, insurance premiums, and other costs to bring the raw materials to the factory) If taxpayer is engaged in sale of service: ¾ Gross Income = Gross receipts ( - ) Sales returns, allowances and discounts C. Special Types of Domestic Corporations Proprietary educational institutions and hospital which are
On related trade, business or activity; 35% (2006) if total gross income from
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 nonprofit
GOCC, Agencies and Intrumentalities, including PAGCOR
32% (20002005) 35% (2006)
GSIS/ SSS / PHIC / PCSO Depository Banks
unrelated trade, business, or activity exceed 50% of total income Same tax rate upon their taxable income in a similar business, industry, or activity
On interest income from foreign currency transactions including interest income from foreign loans
Proprietary educational institution – any private school maintained & administered by private individuals or groups with an issued permit to operate from DECS, or CHED or TESDA Taxable at 10% on taxable income, except on certain passive income (which are subject to final tax) Predominance Test: if GI from unrelated trade/business/other activity > 50% of the total GI from all sources, ENTIRE taxable income shall be subject to the REGULAR corporate tax rate (35% Effective 2006) Distinguish from non-profit non-stock educational institutions which are exempt from tax on revenues and assets Actually, Directly and Exclusively used for educational purposes (See above for discussion).
GOCCs QuickTime™ and a General Rule:TIFFall corporations, (Uncompressed) decompressor agencies, or are needed to see this picture. instrumentalities owned or controlled by the govt. are taxable.
Exceptions: 1) GSIS 2) SSS 3) PHIC 4) PCSO
D. Rule for Corporations Exempt from Taxation General Rule: those enumerated under section 30 are exempt. Exception: exempted corporations are subject to income tax on their income from any of their properties, real or personal, or from any activities conducted for profit regardless of the disposition made of such income. • Ex. Non-stock, non-profit religious organization is exempt from 35% ordinary income tax on corporations (by virtue of section 30 which uses “as such”) and from all property tax (by virtue of Constitution, provided ADE use for its religious purpose). However, if it derives income from its property or conducts an activity that is for profit (even if the proceeds will be used for the religious purpose), the proceeds will be taxable. • Ex. For educational institutions, the proceeds, to be exempt, must be both a) realized from educational activities and b) used for educational activities.
E. Minimum Corporate Income Tax (MCIT) 1. MCIT Rate = 2% of gross income (GI) When to begin/apply MCIT? Beginning on the th 4 taxable year immediately following the year in which such corporation commenced its business operation (Commencement of Business Operation: Upon Issuance of BIR Certificate of Registration) Imposed when on the 4th taxable year, 2% of the corporations GI is greater than 35% of its TI. Example: for 2006 calendar year GI = P500,000 2% of GI = P10,000 TI = P27,000 35% of TI = P9,450 2006 IT = P10,000 Rationale: This is designed to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income (Ex. Over statement of depreciation expense) 2. Carry Forward of Excess Minimum Tax Page 16 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 ( - ) Sales returns, discounts and allowances ( - ) Cost of Services
Excess of MCIT over the normal income tax shall be carried forward & credited against normal income tax for the 3 succeeding years Example: (proceeding from above example) Situation A: If regular income tax (35% of taxable income) is greater than MCIT (2% of GI) Æ Pay Regular Income Tax For 2007 calendar year: GI = P500,000 TI = P50,000
2% of GI = P10,000 35% of TI = P17,500
Income Tax payable for 2007 = 17,500 (Regular Income Tax) – 550 (MCIT Carry Forward from 2006: 10,000-9450) = 16,950 NOTE: You can deduct MCIT Carry Forward only if Regular Income Tax is greater than MCITY Situation B: If regular income tax is less than MCIT Æ Pay MCIT For 2007 calendar year: GI = P500,000 TI = P20,000
2% of GI = P10,000 35% of TI = P7,000
Income Tax payable for 2007 = 10,000 NOTE: MCIT carry forward as of 2007 is already 3,550 (550 from 2006 and 3,000 from 2007). So if in 2008, Regular Income Tax is already greater than MCIT, you may deduct 3,550 from payable Regular Income Tax. 3. Relief from MCIT MCIT may be suspended by the Sec of Finance when corporation’s losses are due to: (a) prolonged labor dispute (b) force majeure (c) legitimate business reverses QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
4. Gross Income (for purposes of applying MCIT) Gross Income = Gross Sales ( - ) Sales returns, discounts & allowances ( - ) Cost of Goods sold If taxpayer is engaged in sale of service: Gross Income = Gross Receipts
*means all direct costs and expenses necessarily incurred to provide the services required by the customers including: a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service; b) costs of facilities directly utilized in providing the service such as depreciation or rental of equipment used and costs of supplies II. RESIDENT FOREIGN CORPORATION A. In General (the rest is the same as domestic corp.) On taxable income from all the sources within Philippines.
B. MCIT - same as domestic corp. C. Special types of resident foreign corporations: International Air 2.5% On Gross Philippine carriers Billings (see case of Air Canada vs. CIR infra) International 2.5% On Gross Philippine Shipping Billings Offshore 10% Any interest income banking units 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 Offshore Exempt Income derived by banking units offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including Page 17 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units. Regional/Area Headquarters Regional Operating Headquarters of Multinational companies
On taxable income
Gross Philippine Billings •
• • • • •
For international air carriers, refers to 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 Provided, tickets revalidated, exchanged and/or indorsed to another international airline form part of the GPB if the passenger boards a plane in a port or point in the Philippines o If the ticket is indorsed to another airline, the GPB will be charged to the transferee/indorsee Provided, for a flight which orginates in the Philippines but transshipment (transfer) of passenger takes place at any port outside the Philippine 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 the GPB. o Note: Transfer of airline company, not transfer of aircraft GPB rule in the NIRC is a departure from the old rule which emphasized where tickets were bought. Now we adopt the originating rule meaning to form part of GPB, passenger/cargo must QuickTime™ and a TIFF (Uncompressed) decompressor originate from the Philippines are needed to see this picture. Does not apply to domestic corporations (Ex. PAL) Carrier must be an alien resident corporation; if its not, then it will be subject to 35% tax on GI as non-resident alien corporation. Does not apply to offline carriers o On line carriers: those with landing rights in the Philippines
Off line carriers: those without landing rights but may nevertheless be selling tickets in the Phil Æ subject to tax treatment of ordinary resident foreign corporation What’s controlling is the amount stated in the ticket and not the actual purchase value.
Air Canada vs. CIR, CTA Case No. 6572, Dec. 22, 2004 It is evident that the definition of ‘Gross Philippine Billings’ under Section 28(A)(3)(a) of the 1997 Tax Code covers the gross revenue derived from the carriage of persons, excess baggage, cargo and mail ‘originating from the Philippines in a continuous and uninterrupted flight’ irrespective of the place or sale or issue and the place of payment of the ticket or passage document. ‘To originate’ would mean ‘to cause the beginning of; to start (a person or thing) on a course or journey; to begin, start’. In other words, the flights carrying the passengers must have originated or started from the Philippines. Verily, petitioner, being an off-line international carrier, as authorized to operate by the CAB and having no flights originating from the Philippines in a continuous and uninterrupted flight, cannot be taxed pursuant to Section 28(A)(3)(a) of the 1997 Tax Code, that is, based on their Gross Philippine Billings.” However, although petitioner Air Canada is not liable to pay the tax as an international air carrier (2.5% on gross Phil. Billings), it is still liable to pay income tax as a resident foreign corporation. Under Section 22 of the 1997 Tax Code, the term ‘resident foreign corporation’ applies to a foreign corporation engaged in trade or business within the Philippines, while the term ‘non-resident foreign corporation’ applies to a foreign corporation not engaged in trade or business within the Philippines. However, with regard to the term ‘doing’ or ‘engaged in’ business, there is no fixed or specific criterion as what constitutes ‘doing’ or ‘engaging’ in business. In the case of The Mentholatum Co., Inc., et al. vs. Mangiliman, et al., 72 PHIL 524, the Honorable Supreme Court had thoroughly and clearly explained the term in this way: “…There is no specific criterion as to what constitutes ‘doing’ or ‘engaging in’ or ‘transacting’ business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization.” Page 18 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 “In order that a foreign corporation may be regarded as doing business, 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. In other words, a foreign airline company selling tickets in the Philippines through their local agents, whether liaison offices, agencies or branches, as in the case at bar, shall be considered as resident foreign corporation engaged in trade or business in that country for such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business organization.”
reducing their tax liability in the Philippines and in their residence countries. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil. This shall form part of NRFC’s income therefore taxable also in Brazil. The dividend received shall only be taxed at 15% in the Phils (instead of 35%) if Brazil will reduce/credit at least 20% of the tax imposed in the Phils. from its tax imposed in Brazil. [See Section 28(5)(b)] If Brazil will credit/reduce less than 20% or will not credit any amount, then the Phils will tax the dividend at 35% (ordinary income tax). Phils. cannot give more than 15% tax credit because the law only allows such.
Branch Profit Remittance Tax • •
BPRT shall be imposed on any profit remitted by a branch to its head office. Distinguish between a branch and a subsidiary o If branch, subject to BPRT o If subsidiary Æ amounts received by non-resident foreign corporation would be treated as dividends Æ it becomes part of its Gross Income from within taxable at 35% Branch will first be subjected to ordinary corporate tax as a resident foreign corporation (35%). Afterwards, the profits for remittance shall then be subject to 15% BPRT. (Because branch assumes personality of an RFC and is therefore taxable as such) Any remittance, so long as you can trace it from a branch to the foreign parent corporation subject to BPRT o Ex. X foreign corp. has both regional headquarters and branch in Philippines. Instead of remitting straight to X, branch pays amount to regional headquarters supposedly for administrative support services Æ The amount paid for the services will still be subject to BPRT because the tax is imposed on “any form QuickTime™ and a TIFF (Uncompressed) decompressor of remittance, direct or indirect.” are needed to see this picture.
TAX SPARING CREDIT • Tax reduced by the Philippines should be fully applied or credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of its domicile. This serves as an incentive by
III. NONRESIDENT FOREIGN CORPORATION A. In General Gross Income from all sources within the Philippines (except Capital Gains on sale of domestic shares subject to final tax) ¾
Gross Income includes interest, dividends, rents, royalties, salaries, premiums (except reinsurance prem.), annuities, emoluments or other fixed/determinable annual, periodic/casual gains, Capital Gains (not subject to FT)
NON-RESIDENT FOREIGN CORPORATION Cinematographic 25% On gross income Film owner, lessor or distributor Owner or lessors 4.5% On gross income of vessel charted by Philippine nationals Owner or lessors 7.5% On gross income of aircraft, machineries and other equipment
INCOME TAX RATES I. INDIVIDUALS
A. In general Page 19 of 145
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Graduated rates of 5 to 32%. o
B. Passive Income – Please see exhibit Capital Gains from Sale of Real Property • Final tax on gross selling price or current fair market value, whichever is higher. • Imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, including pacto de retro sales and other forms of conditional sales. • Law presumes a gain, hence, even if the sale was at a loss (bought for 2M, sold for 1M), CGT will still be imposed on entire proceeds of the disposition; law does not talk about the net gain, it only considers gross selling price/FMV whichever is higher. • Refers to real property held as capital asset (not used for business/investment) as opposed to ordinary asset (used in ordinary course of business). • Special Rule for disposition to government o Taxpayer has option of treating the proceeds as (a) taxable income (5-32% on net gain) or as capital gains (6% final tax on FMV/gross selling price). o If second option is chosen: 6% final tax shall be based on actual consideration and not FMV since the former is usually lower than FMV (BIR Ruling). o If the disposition took nature of expropriation (no meeting of the minds, not voluntary), transaction is not subject to CGT. Net gain (if any) will be treated as part of GI. Includes disposition by judicial order and other forms of forced disposition. • Rule for Exchange o FMV of the property exchanged/given up shall be basis of CGT. (Ex. A exchanges property worth 1M for B’s property worth 2M Æ CGT on A will be based on 1M, CGT on B will be based on 2M) • Exception on Principal Residence QuickTime™ and a (Uncompressed) decompressor o Gains TIFF presumed to have been realized are needed to see this picture. from sale or disposition of principal residence, the proceeds of which is fully utilized in acquiring new principal residence within 18 months from disposition shall be exempt from CGT. o Can be availed only once every 10 years. o If the new principal residence is cheaper than old (meaning there is no full
utilization of the proceeds), the difference will be subject to CGT. Exemption does not include exchange of principal residence for a new principal residence Æ subject to rules on exchange above.
C. Special Tax Rates for Aliens – Please see exhibit II. CORPORATIONS A. In general 2006-2008 – 35% 2009-onwards – 30% B. Passive Income and other income – Please see exhibit C. Tax rate for Resident Foreign Corporation – Please see exhibit D. Tax rate for special types of Resident Foreign Corporation – Please see exhibit
IMPROPERLY ACCUMULATED EARNINGS TAX (“IAET”) (Sec. 29, as implemented by Rev. Reg. 2-2001 which prescribes rules governing the imposition of IAET) A. Rule There is imposed for each taxable year, in addition to other taxes, a tax equal to 10% of the improperly accumulated taxable income of domestic and closely-held corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the 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 (Ex. Holding company). B. Rationale If the earnings and profits were distributed, the shareholders would then be liable for income tax; if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. It is a tax in the nature of a penalty to the corporation for the improper accumulation of its earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends Page 20 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 tax on the earnings distributed to them. C. Exception The use of undistributed earnings and profits for the reasonable needs of the business would not generally make the accumulated or undistributed earnings subject to the tax. What is meant by “reasonable needs of the business” is determined by the Immediacy Test. ¾
Immediacy Test – It states that the “reasonable needs of the business” are the 1) immediate needs of the business; and 2) reasonably anticipated needs (Ex. Expansion) How to prove the “reasonable needs of the business”: The corporation should prove that there is 1) an immediate need for the accumulation of the earnings and profits; or 2) a direct correlation of anticipated needs to such accumulation of profits.
D. Composition: The following constitute accumulation of earnings for the reasonable needs of the business: (ILL ABE) 1) 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; 2) Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; 3) Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; 4) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; 5) Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal QuickTime™ and a prohibition TIFF against its distribution; (Uncompressed) decompressor are needed see this picture. 6) In the case of tosubsidiaries 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. E. Covered Corporations: Only domestic and closely-held corporations are liable for IAET.
1. Closely-held corporations are those: a) at least 50% in value of the outstanding capital stock; or b) 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 aforesaid definition are, therefore, publicly-held corporations. F. Exempt Corporations: The IAET shall not apply to the following corporations: (BIG-PEN-T) 1) Banks and other non-bank financial intermediaries; 2) Insurance companies; 3) Publicly-held corporations; 4) Taxable partnerships; 5) General professional partnerships; 6) Non- taxable joint ventures; and 7) Enterprises that are registered: (a) with the Philippine Economic Zone Authority (PEZA) under R.A. 7916; (b) pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227; and (c) 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.
G. Period for Payment of Dividend/IAET: The dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter. H. Determination of Purpose to Avoid Income Tax 1) The fact that a 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 ¾ A “holding or investment company” is a corporation having practically no activities except holding property, and collecting the income therefrom or investing the same; and 2) where the earnings or profits of a corporation are permitted to accumulate beyond the Page 21 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 reasonable needs of the business. I.
Prima facie instances of accumulation of profits beyond the reasonable needs of a business and indicative of purpose to avoid income tax upon shareholders 1) Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; 2) Investment in bonds and other long-term securities; and 3) Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business. The controlling intention of the taxpayer is that which is manifested at the time of accumulation. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem or the discussion of possible and alternative solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation is essential.
Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20, 2000 Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for every unit of current liability, hence the socalled "2 to 1" rule. A Debt-to-Equity ratio (Current Assets over Current Liabilites) of 2:1 is indicative of the liquidity of a corporation, and further accumulation would expose it to the IAET.
I. GROSS INCOME All income derived from whatever source, including (but not limited to the following items) (GRIP CARD GPP) 1) Gross income derived from the conduct of trade or business or the exercise of a profession 2) Rent Income 3) Interest Income 4) Prizes & winnings QuickTime™ and a for (Uncompressed) services in whatever form paid, 5) Compensation TIFF decompressor needed to see this picture. including, but notarelimited to fees, salaries, wages, commissions & similar items 6) Annuities 7) Royalties 8) Dividend Income 9) Gains derived from dealings in property 10) Pensions 11) Partner’s distributive share from the net income of the GPP (distributive share from ordinary
partnerships is taxable as dividends; in this case, the ordinary partnership has already been subject to ordinary corporate income tax) ¾ All income from whatever source derived Recovery of damages (compensation for Not injury; from tortious acts) taxable Recovery of items previously deducted Taxable from gross income (return of capital) Forgiveness of indebtedness (if effect of Not entire transaction is a reduction of Taxable purchase price of property acquired in prior year) Income derived form illegal business Taxable (gain) Recovery of lost earnings Taxable BIR Ruling #017-2003 The transfer of land made by a person to another in payment of services rendered in the form of attorneys fees shall be considered as part of the gross income of the latter valued at either the fair market value or the zonal valuation, whichever is higher, in the taxable year received. II. EXCLUSIONS FROM GROSS INCOME (GIRL CRM) 1) Gifts, Bequests & devises • But, income from such property shall be included in GI • Must be characterized by disinterested generosity and pure liberality • Difficult to establish gift situations if there is an Er-Ee relationship (A bonus/assistance as recognition of service rendered is not exempt) • If given under a) constraining force of any moral or legal duty or b) from the incentive of c) an anticipated benefit of an economic nature or where it is a return for services rendered, proceeds cannot qualify as a gift. • Most critical consideration is the giver’s intention or motive. • Can be a gift if given on account of filial relationship. 2) Income Exempt under Treaty • To the extent required by any treaty obligation binding upon the Phil govt. 3) Amount Received by Insured as Return of Premium • Under life insurance, endowment, or annuity contracts, received either during the term or at the maturity of the terms or upon surrender Page 22 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 of the contract 4) Life Insurance • Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured • If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the GI • Insured must die to avail of total exemption. If he survives, there/s only partial exemption Æ to the extent that the proceeds constitute return of capital (total amount of premiums paid). 5) Compensation for Injuries or Sickness • Received through Accident/Health Insurance or Workmen’s Compensation Act, as compensation for personal injuries/sickness + amount of damages received on account of such injuries/sickness • Damages will be exempt only if they arise together with personal injury; however, if damages only amount to return of capital, it is exempt (Ex. Damages from car accident exempt only if claim includes compensation for personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount of the actual damage Æ return of capital) • Must be physical injury, not injury to rights. 6) Retirement Benefits, Pensions, Gratuities • Forms a) RA 7641 or Reasonable Private Benefit Plan o See below for rules b) Amount received as a consequence of separation for any cause beyond control (death, sickness or other physical disability) o Sickness must be job threatening Æ must render taxpayer incapable of working (Ex. Does not include STD) o Benefits from separation due to retrenchment come under exemption (no choice/option; but if the Ee avails of an optional QuickTime™ and a TIFF (Uncompressed) decompressor early retirement plan, he cannot are needed to see this picture. reason that he was separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits on this ground Æ but he can claim under other grounds such as RPBP or RA 7641. c) Benefits received from a foreign government by resident of non
resident citizens or aliens who reside permanently in the Philippines d) Veterans benefits e) Benefits under SSS f) Benefits received from GSIS •
2 Options under paragraph (a), Section 32(B)(6) g) RA 7641 o Conditions: (i) at least 60 years old; (ii) 5 years of service at time of retirement o Availed if there is no reasonable private benefit plan (benefits under this option is less) o Limted exemption: ½ month salary for every year of service. In RPBP, all is excludable. h) Reasonable Private Benefit Plan o Conditions: (i) at least 50 yrs old; (ii) in the service of same employer for at least 10 years at time of retirement o Must be approved by BIR o A pension, gratuity, stock bonus or profit-sharing plan maintained by an ER for the benefit of some or all of his officials/employees, wherein contributions are made by such ER for the officials/employees, or both, for the purpose of distributing to such officials & employees the earnings & principal of the fund thus accumulated; & provided in the plan that no part of the income shall be used for/be diverted to any purpose other than for the exclusive benefit of the said officials & employees Service must be continuous. You can “avail of the benefits only once” (once you’ve availed of RPBP, you cannot avail of another RPBP); but you can avail of exemption under another ground o Ex. A government employee can claim exemption for retirement benefits received from the GSIS even after availing of RPBPÆ taxpayer can claim RPBP after qualifying as a private employee then under GSIS proceeds exemption after qualifying as a government employee o Ex. Employee can claim exemption under RPBP then later claim on the ground that the amount he received is a consequence of his separation in a subsequent job for any cause beyond his control Page 23 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
Terminal Leave Pay: amount paid for the commutation of leave credits o Excludable only for government employees (this exemption does not find support in NIRC but is backed by SC decision and BIR Ruling #143-98)
7) Miscellaneous Items (a) income derived by foreign government (from investments in Philippines in loans, stocks, bonds or other domestic securities) • Refers only to passive income. If the foreign government engages in trade, income is taxable. (b) income derived by govt./its political subdivisions (from public utility or exercise essential governmental function) • Key: Income should accrue to government; if the income is retained by the public utility, it is not exempt Æ look at charter of political subdivision/GOCC to determine whether its income accrues to the government or not. (c) prizes, awards in sports competition sanctioned by national sports associations whether held in Philippines or abroad • Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does not qualify for exemption) (d) prizes & awards ¾ in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if: ¾ recipient was selected without any action on his part ¾ recipient not required to render substantial future services as a condition of receiving the prize/award Example: Nobel prize award • Construed strictly, take note of 7 categories. It does not include athletic achievement. • Contemplates a rational selection process; cannot just be randomly selected. QuickTime™ and a th TIFF (Uncompressed) month pay & decompressor other benefits (i.e. (e) 13 are needed to see this picture. productivity incentives & Christmas bonus) ¾ Total exclusion shall not > P30,000 (f) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of individuals (g) Gains form the sale of bonds, debentures or other certificates of indebtedness with a maturity of more than 5 years (h) Gains from redemption of shares in mutual fund
BIR Ruling #125-98 The phrase “shall not have availed of the privilege under a retirement benefit plan of the same or another ER” found in Sec. 32 (B) (6) (a) of the Tax Code means that the retiring official or EE must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan. BIR Ruling #143-98 The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase “for any cause beyond the control of the said official or EE” found in Sec. 32(B) of the CTRP.
SPECIAL TREATMENT OF FRINGE BENEFIT A. Fringe Benefit Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) such as, but not limited to the ff: 1) housing 2) expense account 3) vehicle of any kind 4) household personnel (such as maid, driver & others) 5) interest on loan at less than market rate to the extent of the difference between the market rate & actual rate granted 6) membership fees, dues & other expenses borne by the employer for the employee in social & athletic clubs or other similar organizations 7) expenses for foreign travel 8) holiday & vacation expenses 9) educational assistance to the employee or his dependents 10) life or health insurance & other non-life insurance premiums or similar amounts in excess of what the law allows B. Nature of FBT Final tax imposed on the grossed-up monetary value of fringe benefit furnished/granted to the EE by the ER, whether an individual or corp. (payable by the employer) Effective 1/1/98 34% Page 24 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1/1/99 1/1/00
CONVENIENCE OF THE EMPLOYER RULE • When a fringe benefit is given solely for the convenience of the employer, the fringe benefit is exempt from FBT because the employee does not recognize income from the benefit. • Ex. Expenditure on housing of engineer within factory premises is not subject to FBT • General Rule: If housing is located outside, it is subject to FBT. • Exception: If the nature of the Er’s business is hazardous to health of Ee, housing can be located outside the factory without being subject to FBT. • Ex. If employee is given housing allowance in cash, this will constitute compensation of the employee (income from whatever source). However, if it qualifies as a Fringe Benefit, then it will be subject to FBT and the burden is shifted to Er (Tax on Ee, Burden on Er)
Fringe benefit is an income of the employee subject to Fringe Benefit Tax but is payable by the Employer. Er can deduct FBT from its taxable income. Fringe benefits are only for corporate officers/management. For rank and file, it is called an allowance. Allowances (benefits to rank and file) are not subject to FBT. C. Fringe Benefits not subject to FBT (a) FB authorized & exempted from tax under special laws (b) Contributions of ER for the benefit of the employee to retirement, insurance & hospitalizations benefit plan (c) Benefits given to the rank & file employees, whether granted under a CBA or not (d) De minimis benefits De Minimis benefits a) Monetized unused vacation leave credits of private employees not exceeding 10 days during the year and monetized value of leave credits paid to government officials and employees b) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month c) Rice subsidy of P1,000 or 1 sack of 50 kg rice amounting to not more than P1,000 d) Uniform and clothing allowance not exceeding P3,000 per year e) Actual yearly medical benefits not exceeding P10,000 f) Laundry allowance of P300 per month g) Employee achievement awards, for length of service or safety achievement in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly QuickTime™ and a paid employees TIFF (Uncompressed) decompressor needed to see this picture. h) Christmas are and major anniversary celebrations not exceeding P5,000 per employee per annum i) Flowers, fruits, books or similar items given to employees under special circumstances on account of illness, marriage, birth of a baby, etc j) Daily meal allowance of overtime work not exceeding 25% of basic minimum wage
III. DEDUCTION FROM GROSS INCOME • • •
• • •
Defined as: Items or amounts which the law allow to be deducted from gross income in order to arrive at the taxable income. The basic principle governing deductions from gross income apply to all taxpayers. Because deductions are strictly construed against the taxpayer, one seeking a deduction must point to some specific provisions of the statute in which that deduction is authorized & must be able to prove that he is entitled to the deduction which the law allows. Adequate records should be kept to support the deductions. The deduction claimed must have been subjected to withholding tax, if required. 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 be STRICTLY construed. He must be able to prove that he is entitled to the deduction authorized or allowed. (Atlas Consolidated Mining & Dev’t. Corp. vs. CIR, January 12, 1981)
WHO MAY AVAIL OF THE DEDUCTIONS? 1) Individuals Page 25 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (a) citizen (b) resident alien (c) non-resident alien doing business in the Philippines (d) member of GPP 2) Corporations (a) domestic corp. (b) resident foreign corp. (c) proprietary educational institutions & hospitals (d) GOCCs WHO CANNOT AVAIL OF DEDUCTIONS FROM GROSS INCOME: 1. Citizens and resident aliens whose income is purely compensation income (except for premium payments on health and/or hospitalization insurance); 2. Non-resident aliens not engaged in trade or business in the Philippines; and 3. Non-resident foreign corporation THE FOLLOWING ARE THE ALLOWABLE DEDUCTIONS FROM GROSS INCOME BASED ON CLASSES OF TAXPAYER: 1. Individuals with gross income from employeeemployer relationship only (gross income only): o Premium payments on health and/or hospital insurance (if requisites are complied with) o Personal exemptions and additional exemptions 2. Individuals with gross income from business or practice of profession: o Optional Standard Deduction (OSD) OR Itemized deductions o Optional Standard Deductions – 10% of the gross income. May be availed only by individuals (except nonresident aliens) who are not purely compensation income earners. This is in lieu of the itemized deductions. o Premium payments on health and/or hospital insurance (if requisites are complied with) o Personal and additional exemptions 3. Corporations QuickTime™ and a o Itemized Deductions TIFF (Uncompressed) decompressor are needed to see this picture.
4. Estates and Trusts Section 62 of the NIRC ITEMIZED DEDUCTIONS/ ALLOWABLE DEDUCTIONS SEC. 34 (BELT DID CRP) 1) Bad Debts 2) Expenses 3) Losses
4) 5) 6) 7) 8) 9) 10)
Taxes Depreciation Interest Depletion of oil & gas wells & mines Charitable & other contributions Research & Development Pension trusts
1. EXPENSES (SEC 34A) 1) Ordinary & necessary trade, business or professional expenses only REQUISITIES FOR DEDUCTIBILITY: a. Must be ordinary AND necessary (both must be complied with) b. Must be paid or incurred during the taxable year c. Must be paid or incurred in carrying on or which are directly attributable to, the development, management, operation and or conduct of the trade, business or exercise of a profession, including reasonable allowance for: 1. salaries, wages & other forms of compensation for personal services actually rendered (including grossedup monetary value of FB); but the final tax should have been paid 2. travel expenses in pursuit of trade, business/ profession 3. rentals &/or other payments as lessee, user or possessor 4. entertainment, amusement & recreation expenses directly connected to the devt., mgt. & operation & conduct of trade, business/ profession > The Regulations impose a limit of 0.50% of net sales (gross sales less sales returns/allowances & sales discounts) for taxpayers engaged in sale of goods or properties; or 1% of net revenue (gross revenue less discounts) for those engaged in sale of services, including exercise of profession and use or lease of properties. (RR No. 10-02) EXPENSES TO BE DEDUCTIBLE: - Amount must be reasonable. - Amount must be substantiated. - It is not contrary to law, public policy or morals. - Tax required to be withheld must have been paid to the BIR 2) Substantiation
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 evidence (i.e. official receipts, financial statements or other adequate records) to substantiate: (a) amt. of expense deducted (b) direct connection/relation of the expense to the development, management operation &/or conduct of the trade, business or profession of the taxpayer 3) Bribes, Kickbacks & Other Similar Payments: not deductible ¾ ¾
Ordinary expense – normal or usual in relation to the taxpayer’s business and the surrounding circumstance. 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. While illegal income will form part of the 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. 34A1c). Business expense – expenditure related to the business that is deductible in the year incurred, in the same taxable year. Capital expense – expenditure that improves or adds to the value of your property or equipment. Not immediately deductible. It is deductible over time, such as in the form of depreciation. Expenses allowable to private educational institutions: In addition to the expenses allowable as deductions, a private educational institution has the option to elect either: (a) to deduct as expense those otherwise considered as capital outlays of depreciable assets for the expansion of school facilities (b) to capitalize asset & deduct allowance for depreciation
2. INTEREST Requisites for deductibility, as implemented QuickTime™ and a by Rev. Reg. 13-2000 TIFF (Uncompressed) decompressor are needed to see this picture. (a) there must be an indebtedness (b) there should be an interest expense paid or incurred upon such indebtedness (c) indebtedness must be that of the taxpayer (d) indebtedness must be connected with the taxpayer’s trade, business or exercise of profession (e) interest expense must have been paid or
incurred during the taxable year (f) interest must have been stipulated in writing (g) interest must be legally due (h) interest payment arrangement must not be between related taxpayers (i) interest must not be incurred to finance petroleum operations (j) in case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure (k) the interest id not expressly disallowed by law to be deducted from gross income of the taxpayer. GENERAL RULE ON DEDUCTION - The 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 ON DEDUCTION Interest expense shall be reduced by an amt. equal to the ff. % of interest income subjected to FT: 1/1/00 38% 1/1/06 42% (RA9337) 1/1/09 33%
Example: Year 2006 Int. exp. = P2,000 Int. income subjected to FT = P1,500 Deduct as int. exp.: P2,000 - (P1,500 x 42%) = P1,370 The objective of the limitation is to discourage tax arbitrage on back to back loans, the proceeds of which are invested in income earning interest that is subject to 20% final tax. 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.
DEDUCTIBLE INTEREST EXPENSE: Page 27 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1. 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. 2. Interest paid by a corporation on scrip dividends. 3. Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was withheld. 4. 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 (a) interest paid in advance through discount or otherwise(in case of cash basis taxpayer) ¾ allowed as deduction in the year the debt is paid ¾ if indebtedness is payable in periodic amortizations, int. is deducted in proportion of the amt. of the principal paid. (b) payments made: 1. between members of a family (include only brothers & sisters, spouse, ancestors, & lineal descendants) 2. between an individual & a corp. more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) 3. between 2 corps. more than 50% in value of outstanding stock owned by same individual, if either one is a personal holding co. or a foreign holding co. during the taxable yr. preceding the date of sale/exchange QuickTime™ 4. between grantorand&a fiduciary of any TIFF (Uncompressed) decompressor trust are needed to see this picture. 5. between Fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust 6. between Fiduciary & a beneficiary of a trust 7. indebtedness is incurred by a service contractor to finance petroleum corp. 8. interest on preferred stock which in
reality is dividend 9. interest on unpaid salaries and bonuses 10. interest calculated for cost keeping on account of capital or surplus invested in business which does not represent charges arising under interest-bearing obligation 11. interest paid when there is no stipulation for the payment thereof OPTIONAL EXPENSE
- at the option of taxpayer, interest incurred to acquire property used in trade or business may be allowed as: (a) as expense (deduction) (b) as capital expenditure 3. TAXES -the term “taxes” refers to national and local taxes, and means TAXES PROPER, hence, no deductions are allowed for: o a. Interests o b. surcharges o c. penalties or fines incident to delinquency (sec. 80, Rev. Reg. 2) DEDUCTIBLE TAXES - All taxes, national, or local, paid or incurred during the taxable year in connection with the taxpayer’s profession, trade or business, are deductible from gross income. REQUISITES FOR DEDUCTIBILITY: a. it must be paid or incurred within the taxable year b. it must be paid or incurred in connection with the taxpayer’s trade, profession or business c. it must be imposed directly on the taxpayer d. it must not be specifically excluded by law from being deducted from the taxpayer’s gross income NON-DEDUCTIBLE TAXES (a) Philippine income tax (but FBT can be deducted from gross income RR 8-98)) (b) income tax imposed by authority of any foreign country (except when the taxpayer signifies his desire to avail of the tax credit for taxes of foreign countries) (c) estate & donor’s taxes (d) taxes assessed against local benefits of Page 28 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 a kind tending to increase the value of the property assessed (e) final taxes, being in the nature of income tax (f) special assessments ¾
Taxes, when refunded or credited, shall be included as part of GI in the year of receipt to the extent of income tax benefit of said deduction. (Tax Benefit Rule) 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 the rule that only such persons on whom the tax is imposed by law can claim deduction thereof: a. 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. b. 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.
LIMITATIONS ON DEDUCTIONS In case of a nonresident alien individual engaged in trade/business in the Philippines, taxes to be deducted shall be allowed only if & to the extent that they are connected with income from sources w/in the Philippines Tax Credit: a 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? 1. Citizen 2. Domestic Corp QuickTime™ 3. Member of GPP and a TIFF (Uncompressed) decompressor are needed toof seean this picture. 4. Beneficiary estate or trust WHO CANNOT CLAIM? 1. Alien individual (except resident aliens deriving income from within & without the Phils., if there is reciprocity) 2. Foreign Corp.
Limitation of Credit (Substantiation Requirements) -The tax credit shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: a. The total amount of the income derived from sources without the Philippines; b. The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and c. All other information necessary for the verification and computation of such credits. What amount may be taken as tax credit: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but NOT TO EXCEED THE FOLLOWING LIMITS: Per Country Limitation – Amount of credit to tax paid/incurred to any country shall not exceed same proportion of the tax against which such credit is taken
Income from outside the Phils (per country) Divided by Phil. Income Subtotal Multiplied by: TOTAL income from ALL sources Limitation per country Global Limitation – Total amount of credit shall not exceed same proportion of tax which such credit is taken Total income from OUTSIDE the Phils. Divided by total income from ALL sources Subtotal Multiplied by Philippine Income Global Limitation 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. Page 29 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 DIFFERENCES: Deduction: included in the gross income but later deducted. Exclusion: not included in the computation of gross income. Refers to income received or earned but is not taxable as income because of exemption by virtue of a law or treaty. Tax Credit: paid beforehand and is deducted from the tax liability of the taxpayer. Example: Particulars
Country A Country B Philsource income Total NI – all
Net Income P50,000 40,000 110,000
Actual Foreign Tax Paid in Philippine Peso P18,000 P11,000
Phil Income Tax due at 32%
(d) incurred in trade, business or profession OR property connected w/ trade, business or profession lost through fires, storm, shipwreck, or other casualties OR from robbery, theft or embezzlement (e) evidenced by a completed transaction (f) not claimed as a deduction for estate tax purposes (g) notice of loss must be filed with the BIR within 45 days from the date of discovery of the casualty or robbery, theft or embezzlement •
A. PER COUNTRY LIMITATION Country A : [(50,000/200,000 x 64,000)] = 16,000 Country B : [(40,000/200,000 x 64,000)] = 12,800 ** maximum tax credit limit B. GLOBAL LIMITATION [(90,000/200,000 x 64,000)] P28,800
Computation of Allowable tax credit Tax Due on P200,000 P64,000 at 32% Less: Allowable Foreign Tax Credit Country A P16,000 Country B 11,000 27,000 Tax Still Due P37,000 ** Cannot exceed maximum tax credit limit NOTE: For limitation A, Country A, 16K is lower than the actual; Country B, 11K (actual) is the lower amount; get the total of all per country amounts. For limitation B, 28.8K is lower than the total of the actual amount. Comparing the total of limitation A vs. B, the former is the lower amount so that is the allowable tax QuickTime™ and a credit. TIFF (Uncompressed) decompressor are needed to see this picture.
4. LOSSES Requisites for deductibility of ordinary loss (a) loss must be of the taxpayer (b) actually sustained during the taxable year (c) not compensated for by insurance or other forms of indemnity
No loss shall be allowed as a deduction for income tax purposes if such loss has been claimed as a deduction for estate tax purposes. The taxpayer’s 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 CA, January 30, 1964).
Category and Types of Losses 1. Ordinary Losses a. incurred in trade or business, or practice of profession NET OPERATING LOSS CARRY-OVER (NOLCO) - Refers to the excess of allowable deductions over gross income of the business for any taxable year, which has not been previously offset as deduction from gross income. 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 which 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 < 75% in nominal value of outstanding issued shares is held by same persons b. not < 75% of paid up capital of corp. is held by same persons (a) Net operating loss of a business shall be carried over as deduction from GI for the next 3 consecutive taxable yrs. immediately ff. the yr. of such loss - the 3 year period shall continue to run notwithstanding that the corporation paid its taxes under Page 30 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 MCIT, or that the individual availed of the 10% Optional Standard Deduction (b) Net Operating Loss = excess allowable deduction over the GI
(c) For mines other than oil & gas wells, if loss incurred in any of the 1st 10 yrs. of operation, carry-over for the next 5 yrs. b. 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. 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. Special Types of Losses (a) Capital Losses – deductions allowed only to the extent of the gains from such sales or exchanges of capital assets (does not apply to banks and trust companies) a. losses from sale or exchange of capital assets b. losses resulting from securities becoming worthless and which are capital assets c. losses from short sales of property d. losses due to failure to exercise privilege or option to buy or sell property (b) Losses from wash sales of stock or securities QuickTime™and and a after the date of ¾ 30 TIFF days before (Uncompressed) decompressor are needed to seetaxpayer this picture. the sale, the has acquired or has entered into a contract or option so as to acquire, substantially identical stock/securities ¾ General rule: not deductible unless claim is made by a dealer in stock/securities & made in ordinary course of business (c) Wagering Losses - allowed only to the
extent of the gains from such losses (d) Abandonment Losses ¾ In case of abandoned petroleum operations, accumulated expenditures incurred prior to 1/1/79 allowed as deduction only from income derived from same contract area; notice of abandonment shall be filed with Commissioner ¾ In case of abandoned producing well, unamortized cost & undepreciated costs of equipment directly used, allowed as deduction in the yr. of abandonment (e) Losses from Illegal Transactions - not deductible (f) Losses due to voluntary removal of building incident to renewal or replacements – deductible expense from gross income (g) 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) (h) Losses from sales or exchanges of property between related taxpayers – Not deductible as provided under Section 36 of the NIRC but the gains are taxable (i) Losses of Farmers – deductible if incurred in the operation of farm business (j) Loss in shrinkage in value of stock – if the stocks of the corporation become worthless, the cost or other basis may be deducted by the owner in the taxable year in which the stocks 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 5. BAD DEBTS - debts due to the taxpayer actually ascertained to be worthless and charged off during the year. “Actually ascertained to be worthless”Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness must depend upon the Page 31 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 particular facts and circumstances of the case. It must be uncollectible even in the future. (Collector v. Goodrich International Rubber Co., 21 SCRA 1336)
REQUISITES FOR DEDUCTIBILITY: 1..Existing indebtedness due to the taxpayer which must be valid and legally demandable, 2. Connected with the taxpayer’s trade, business or practice of profession, 3. Must not be sustained in a transaction entered into between related parties, 4. Actually ascertained to be worthless and uncollectible as of the end of the taxable year, and 5. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year. ¾
Recovery of bad debts previously allowed as deduction in the preceding yrs. shall be included as part of gross income in the yr. of recovery to the extent of the income tax benefit of such deduction (Tax Benefit Rule) Ascertainment of Worthlessness: Proof of two facts: a. taxpayer did in fact ascertain the debt to be worthless in the year for which the deduction was sought; b. that in so doing, he acted in good faith (Collector Vs. Goodrich, December 22, 1967) ¾ depends upon the facts and the circumstances of the case ¾ good faith does not require that the taxpayer be an incorrigible optimist but on the other hand, he may not be unduly pessimistic
absolute owner of the property & allowed to life tenant (b) In case of property held in trust, deduction apportioned between the income beneficiaries & trustees REQUISITES FOR DEDUCTIBILITY: a. The allowance for depreciation must be reasonable. b. It must be for property used for employment in trade or business or out of its not being used temporarily during the year. c. The allowance must be charged off. d. Schedule on the allowance must be attached to the return. 1) Methods of Depreciation (a) straight-line method = cost - salvage value estimated life example: cost=15,000; SV=5000; est. life=5 years = 2,000 15,000 - 5,000 5 years (b) declining balance method
cost - accumulated depreciation estimated life example: rate 200% year 1 -- 15,000 - 0 5
x 200% = 6,000
year 2 -- 15,000 - 6000 x 200% 5
(c) sum of years digits method 6. DEPRECIATION - gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. - also applies to amortization of intangible assets, theTIFF use ofQuickTime™ which and in atrade or business (Uncompressed) decompressor are needed to see this picture. is of limited duration. A reasonable allowance for the exhaustion, wear & tear of property used in the trade or business; to cause plant elements or the plant as a whole to suffer diminution in value (a) In case of property held by one person for life w/ remainder to another person, deduction is computed as if the life tenant were the
nth period x (cost - salvage value) sum of the years digits example: SYD: 5+4+3+2+1 = 15
year 1 -- 5/15 x (15,000 - 5,000) = 3,333.33 year 2 - 4/15 x (15,000 - 5,000) = 2,666,67 2) Special Types of Depreciation (a) Petroleum operations i. Depreciation of all properties directly related to production of petroleum shall be allowed under straight-line or declining-balance (DB) method ii. May shift from DB method to SL Page 32 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 method iii. Useful life: 10 yrs. or shorter life as may be permitted by Commissioner iv. Useful life of prop. not used directly: 5 yrs. under straight-line method (b) Mining operations i. depreciation on all properties in mining operations other than petroleum operations at the normal rate if expected life is 10 yrs or less. ii. if expected life is > 10 yrs., depreciate over any no. of yrs. bet. 5 yrs. & the expected life ¾
Depreciation deductible by non-resident aliens engaged in trade/business or non-resident corporation only when such property is located in the Philippines
The BIR 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.
7. DEPLETION OF OIL & GAS WELLS & MINES The reduction of cost or value of natural resources such as oil & gas wells, & mines as the resources are converted into inventories. ¾
No further allowance is granted if the allowance for depletion = the capital invested (1) Intangible exploration & development drilling costs: a) deduct in the yr. incurred if incurred for non-producing wells & mines b) deduct in full OR capitalize & amortize of incurred for producing wells & mines in same contract area (2) Intangible costs in petroleum operations: no salvage value & incidental to & necessary for dwelling of wells & and a the production of preparation ofQuickTime™ wells for TIFF (Uncompressed) decompressor are needed to see this picture. petroleum (3) Election to deduct exploration & development expenditures for mining corps. (a) deduct as cost (b) deduct as adjusted basis provided, total amt. deductible shall not exceed 25% of NI
actual exploration & development expenditures net of 25% of NI shall be carried forward to succeeding yrs. until fully deducted ¾ exploration expenditures = pd/incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore/other mineral & pd/incurred before the beginning of the development stage of the mine/deposit ¾ development expenditures = paid/incurred during development stage of the mine or other natural deposits (4) Depletion of Oil and Gas wells and mines deductible by a non-resident alien or foreign corporation only in respect of oil and gas wells or mines located in the Phils. ¾
8. CHARITABLE & OTHER CONTRIBUTIONS (a) Contributions subject to limitations i. Contributions or gifts actually paid or made w/in the taxable yr.: ii. to or for the use of the govt. or its agencies or any political subdivision, exclusively for public purpose iii. or, to accredited domestic corps./associations organized & operated exclusively for: (1) religious (2) charitable (3) scientific (4) youth & sports development (5) cultural or educational purposes (6) for the rehabilitation of veterans (7) to social welfare institutions (8) to NGOs iv. no part of NI inures to the benefit of any private stockholder or individual ¾ for individual: not > 10% of taxable income before deducting the charitable contributions ¾ for corporation: not > 5 % of taxable income before deducting the charitable contributions (b) Contributions deductible in full i. Donations to the govt. – to finance, to provide for, or to be used in undertaking priority activities in education, health, youth & sports development, human settlements, science & culture & in economic development Page 33 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
according to National Priority Plan determined by NEDA ¾ If not in accordance w/ annual priority plan, donation is subject to limitations in (1) above ii. Donations to certain foreign institutions or international organizations - in pursuance or compliance with agreements, treaties, or commitments entered into by Phil. govt. & foreign institutions/international organizations iii. Donations to accredited NGOs ¾ Organized & operated exclusively for scientific, educational, character-building & youth & sports development, health, social welfare, cultural or charitable purposes or combination thereof (no part of NI inures to the benefit of any private individual) ¾ W/in 15th of the 3rd month after the close of the taxable yr., makes utilization directly for the active conduct of activities constituting the purpose/function of the org., unless pd. is extended ¾ Administrative expense should not be > 30% of total expenses Upon dissolution, assets would be distributed to another nonprofit domestic corp. organized for similar purpose or to the state for public purpose or to another org. to be used in same purpose as the dissolved corp.
REQUISITES FOR DEDUCTIBILITY: a. the contribution or gift must be actually paid. b. it must be given to the organizations specified in the code. c. the net income of the institution must not inure to the benefit of any private stockholder or individual. (c) VALUATION of property donated other than money: acquisition cost 9. RESEARCH AND DEVELOPMENT Paid or incurred by a taxpayer during the taxable QuickTime™ a yr. in connection w/ his and trade, business or TIFF (Uncompressed) decompressor are needed& to see this picture. profession as ordinary necessary expenses w/c are not chargeable to capital account; allowed as deduction during the taxable yr. when pd./incurred REQUISITES FOR DEDUCTIBILITY AS EXPENSE: a. paid or incurred during the taxable year b. ordinary and necessary expenses in
connection with trade business or profession c. not chargeable to capital account Requisites for amortization of certain R&D expenditures (treated as deferred expenses): (1) paid/incurred by the taxpayer in connection w/ his trade/business (2) not treated as expense (3) chargeable to capital acct. but not chargeable to property of a character w/c is subject to depreciation/depletion (4) amortized over a period of not < 60 months as may be elected by the taxpayer LIMITATIONS ON DEDUCTIONS – not applicable to, EXCLUSIONS: (1) Any expenditure for the acquisition or improvement of land, or for the important of prop. to be used in connection w/ R&D of a character subject to depreciation & depletion (2) Any expenditure paid/ incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas (exploration exp.) 10. PENSION TRUSTS (past service cost) 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. Established or maintained by employer to provide for the payment of reasonable pensions to his employees. • Normal Cost – the contributions during the taxable year to cover the pension liability accruing during the taxable year. Allowed as a deduction under Sec. 34(A)(1) as “expenses in general”. • Past Service Cost – amount in excess of the above contribution (covering pension liability pertaining to old employees which accrued during the years previous to the establishment of the pension trust); allowed as deduction only if: (a) such amount not been allowed as a deduction (b) apportioned in equal parts over 10 consecutive years beginning w/ the yr. in w/c the transfer/payment is made (Sec. 34[J]) REQUISITES FOR DEDUCTIBILITY: a. The employer must have established a Page 34 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
b. c. d.
pension or retirement plan to provide for the payment of reasonable pensions to his employees; The pension plan is reasonable and actuarially sound; It must be funded by the employer; 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 of payment is made.
Summary rules on Retirement Benefits Plan/ Pension Trust 1. EXEMPT FROM INCOME TAX – employees’ trust under Sec. 60(B) 2. EXCLUSION FROM GROSS INCOME – amount received by the employee from the fund upon compliance of certain conditions under Sec. 32(B)(6) 3. DEDUCTION FROM GROSS INCOME – a. amounts contributed by the employer during the taxable year into the pension plan to cover the pension liability accruing during the year – considered as ordinary and necessary expenses under Sec. 34(A)(1). b. 1/10 of the reasonable amount paid by the employer to cover pension liability applicable to the years prior to the taxable year, or so paid to place the trust in a sound financial basis – deductible under Sec. 34 (J).
11. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCEan 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: QuickTime™ and a a. Insurance must have actually been TIFF (Uncompressed) decompressor taken; are needed to see this picture. b. The amount of premium deductible from gross income does not exceed P2400 per family or P200 per month during the taxable year; c. That said family had a gross income of not more than P250,000 for the taxable year; d. In case of married individuals, only the
spouse claiming additional exemption shall be entitled to this deduction. Who may Avail of this deduction: 1. Individual taxpayers earning purely compensation income during the year. 2. Individual taxpayers earning business income or in practice of his profession whether availing of itemized or optional standard deductions during the year. 12. OPTIONAL STANDARD DEDUCTION (OSD) a. Applicable to any individual, except a nonresident alien b. Taxpayer may elect to pay a standard deduction in an amount not exceeding 10% of GI a. Such election should be signified in his return & shall be irrevocable for the taxable year for which the return was made Individual is not required to submit his financial statements
A. ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY OF CERTAIN PAYMENTS tax required to be deducted/withheld has been paid to BIR B. NON-DEDUCTIBLE ITEMS Specific Items Under Section 36: 1. Personal, living or family expenses 2. Amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate (not applicable to intangible drilling & development costs incurred in petroleum operation) 3. Amounts expended in restoring property or in making good the exhaustion thereof for w/c an allowance is or has been made 4. Premiums on life insurance policy when the taxpayer is directly/indirectly a beneficiary under such policy 5. No deduction shall be allowed in Losses from Sales or Exchanges of Property directly/indirectly: a) between members of a family (include only brothers & sisters, spouse, ancestors, & lineal descendants) b) between an individual & a corp. more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation) c) between 2 corps. more than 50% in value of outstanding stock owned by same individual, Page 35 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 if either one is a personal holding co. or a foreign holding co. during the taxable yr. preceding the date of sale/exchange d) between grantor & fiduciary of any trust e) between Fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust f) between Fiduciary & a beneficiary of a trust A person is said to be “financially interested” in the taxpayer’s business if he is a stockholder thereof or he is to receive as his compensation a share of the profits of the business.
C. PERSONAL EXEMPTION AND STANDARD DEDUCTION (OSD)
Personal Exemption Single Married Individual (or judicially declared as legally separated without any dependent) Head of Family (unmarried or legally separated with qualified dependent/s) Each married individual
Each dependent (not exceeding 4) 8,000 ¾
Head of Family
1) an unmarried/legally separated man/woman with (a) One or both parent (b) One or more brothers or sister (c) One or more legitimate, recognized natural/legally adopted children 2) Who are living with & dependent upon him for their chief support 3) Where such brothers/sisters/children are: (a) Not more than 21 years old (b) Unmarried, and (c) Not gainfully employed QuickTime™ and such a (d) Or,TIFF (Uncompressed) where children, decompressor are needed to see thisregardless picture. brothers/sister, of age, are incapable of self support because of mental or physical defect • An illegitimate child is within the meaning of a “recognized natural child.” • Under the provision on additional exemption for dependents, illegitimate children are specifically included under the
term “dependents.” • A senior citizen, whether relative or not, lliving with the taxpayer or not, can be classified as a dependent to make a taxpayer a head of a family not exceeding 4 (RA 7432) • In case of married individuals, where only 1 of the spouses is deriving gross income, only such spouse shall be allowed additional exemption. • Chief support means more than one half of the requirements for support. • Parents, brothers, and sisters, who are qualified dependents may entitle the taxpayer to the personal exemption of P25,000 as head of the family but not to the additional exemption of P8,000. • Note: • Personal and additional exemptions are available only to business income and compensation income earners. > Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions subject to reciprocity: 1. country from which he is a citizen has an income tax law; and 2. the income tax law of his country allows personal exemption to citizens of the Philippines not residing therein but deriving income therefrom and not to exceed the amount allowed in NIRC. 3. the personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is LOWER. ADDITIONAL EXEMPTION P8,000 for EACH of the qualified dependent children not exceeding 4 in number. Qualified dependent children – legitimate, recognized natural, illegitimate and legally adopted The proper claimant of the additional exemption would be the husband, being the head of the family except under the following cases: 1. husband is unemployed 2. husband is working abroad like an OFW or a seaman 3. husband explicitly waived his right of the exemption in favor of his wife in the withholding exemption certificate. Senior Citizen is: 1. any resident citizen of the PHilippines Page 36 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2. at least sixty 60 years old, including those who have retired from both government offices and private enterprises, and 3. has an income of not more than sixty thousand pesos per annum subject to the review of the National Economic Development Authority(NEDA) every three years. ¾
NRAETB may deduct personal exemption (but NOT additional exemption), but only to the extent allowed by his country to Filipinos not residing therein, and shall not exceed the aforementioned amounts. NRANETB cannot claim any personal or additional exemption. a. Dependent = legitimate/illegitimate/legally adopted child chiefly dependent upon & living with the taxpayer if such dependent is not > 21 years old, unmarried & not gainfully employed OR if such dependent regardless of age is incapable of self-support because of mental/physical defect i. For married individuals, claimed by only 1 of the spouses ii. For legally separated spouses, claimed only by the spouse who has custody of the children; may be claimed by both as long as they have custody of the children but total amount claimed by both shall not exceed the maximum allowed b. Change of Status i. The death of the taxpayer during the taxable year shall not affect the amount of personal and additional exemptions his estate can claim, as if he died at the end of such year ii. If the taxpayer got married or should have additional dependent (child born within the year) during the taxable year, he may claim the corresponding personal exemptions in full for such year iii. If the spouse should die or any of the dependents become twenty one years of QuickTime™ and a age, or become decompressor gainfully employed TIFF (Uncompressed) are needed to see this picture. during the taxable year, the taxpayer may still claim the same exemptions as if he/she died, or became twenty one years old or became gainfully employed at the close of such year.
NOTE: Individuals not entitled to personal and additional exemptions:
d. Non-resident alien NOT engaged in trade or business e. Alien individual employed by Regional or Area Headquarters of Multinational Companies f. Alien Individual employed by Offshore Banking Units g. Alien Individual employed by Pertroleum Service Contractor and Subcontractor Deduction for Estate or Trust - P20,000 F. SPECIAL RULES COMPANIES
1. Income & Deductions of Insurance Companies a. Special deductions: net additions required by law to reserve funds & the sums other than dividends paid w/in the yr. on policy & annuity contracts; released reserve treated as income for the yr. of release b. Mutual Insurance Companies ¾ Shall not report as income premium deposits returned to policyholder ¾ Report income received from all other sources plus such portion of premium deposits retained by the companies for purposes other than payment of losses & expenses & reinsurance reserves c. Mutual Marine Insurance Companies ¾ Include in gross income, gross premiums collected & received by them less amounts paid for reinsurance; include as deductions amounts repaid to policyholders on account of premiums previously paid by them & interest paid upon those amounts between the ascertainment & payment thereof d. Assessment Insurance Companies ¾ Deduct from gross income the actual deposit of sums w/ the officers of the Phil. governmentt as additions to guarantee or reserve funds G. CAPITAL GAINS & LOSSES 1. Definitions - No definition in the Code for capital assets. Only Ordinary assets are defined a. ORDINARY ASSETS: (a) stock in trade of taxpayer (b) property which would properly be Page 37 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 included in an inventory of the taxpayer, if on hand (c) merchandise inventory (d) depreciable assets used in the trade/business (e) real property used in trade/business b. CAPITAL ASSETS – property held by the taxpayer (whether or not connected with his trade or business) Hence, capital assets are property of a taxpayer other than ordinary assets. c. NET CAPITAL GAIN – gains > loss from sales/ exchanges of capital assets d. NET CAPITAL LOSS – loss > gains from sales/ exchanges of capital assets 2. Percentage taken into account Taxpayer other than a corporation (Individuals, estates and trusts) - 100% if the capital asset is held for more than 12 months - 50% if the capital asset is held for less than 12 months Note: GR: for purposes of computing capital loss and capital gain, the actual holding period is taken into account. Exception: If securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. 3. Limitation on Capital Loss ¾ Allowed only to the extent of the gains from such sales or exchanges, hence, the net capital loss is not deductible. Example: Gains P 5,000 Losses 15,000 QuickTime™ and a NCL P10,000 TIFF (Uncompressed) decompressor neededP5,000 to see this picture. In this case, are only can be claimed as deduction (to the extent of the gain) Exception: Losses from such sale incurred by a domestic bank/trust co. substantial part of business is receipt of deposits, sell any bond, debenture, note or certificate or other evidence of indebtedness issued by any corp, w/ int. coupons or in registered
form (including one issued by government or political subdivision)
4. Net Capital Loss Carry-over a. Corporations cannot carry over a net capital loss b. If net capital loss is sustained in any taxable yr., such loss is treated in the succeeding taxable yr. as a loss from the sale/exchange of a capital asset held for not more than 12 mos. (100% deduction) c. Such net capital loss that should be carried over should not exceed the net income for the year Incurred (prior year’s net income) d. Example: NI in 1996 = P6,000 NCL in 1996 = 10,000 • treated as a loss in 1997(100%) = P6,000 only since it should not exceed the net income of the taxable yr. w/c the loss was incurred • Net income should be understood as TAXABLE income according E.O. 37 5. Retirement of Bonds, Debentures, Notes or Certificates or other evidences of indebtedness ¾ Tax Base: Amount received by the holder for such transaction ¾ These transactions result in capital gain or loss although there is no sale of capital assets 6. Gain or Loss from Short Sales of Property a. Considered as gains & losses from sales/exchanges of capital assets b. Gains & Losses attributable to failure to exercise privileges or options to buy or sell property = capital gains/losses Note: Short sale is a transaction in which the seller sells securities which he does not own and, therefore, cannot himself supply the securities for delivery, in expectation of the decline in their price. Option to buy or sell property: Example: Suppose X Inc. owns real property worth Php 10 M. Y gives X Inc. Php 2M as option money for a 2-year option period. Before the 2 year period ends, Y exercised the option and bought the property. What will the tax treatment? It will be subject to 6% capital gains tax under Section 27 (D) (5). Section 39 (F) or the provision on the failure to exercise privilege will not apply. Suppose the same situation above but Y fails to Page 38 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 exercise his option. What will be the tax treatment? In that case, the option money will be a capital gain for X and a capital loss for Y.
other property received liability assumed by the transferee
Note: the property subject of option need not be a capital asset. The law does not say if it should be an ordinary or capital asset. It only says “attributable to a property.”
H. DETERMINATION OF AMOUNT RECOGNITION OF GAIN OR LOSS
1. Computation of Gain or Loss a. GAIN = amt. realized > basis/adjusted basis for determining gain (in other words, selling price or proceeds > cost) b. LOSS = basis/adjusted basis for determining loss > amt. realized (cost > selling price/proceeds) c. AMOUNT REALIZED = money received + fair market value of the property (other than money, if any) received Mode of Acquisition Purchase Inheritance
Acquired for less than adequate consideration if property acquired where G/L is not recognized
Basis for determining gain/loss from sale/disposition of property cost of property acquired on/after 3/1/1913 fair market value as of the date of acquisition (at the time of death) the cost to the donor or to the previous owner who did not acquire it by gift; BUT, if such basis > FMV at the time of the gift, the basis shall be such FMV for the purpose of determining the loss amount paid by the transferee
Same as the basis of property, stock/securities exchanged (1) increased by: • dividends • amt. of any gain recognized by the exchange (2) decreased by: • money received • fair market value of the
QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
2. Exchange of property a. GENERAL RULE: the entire amount of the gain or loss shall be recognized upon the sale or exchange of property b. EXCEPTION: no gain or loss is recognized (tax-free exchanges) (1) If in pursuance to a plan of merger or consolidation (a) a corporation exchanges property solely for stocks in a corp. (both parties to merger/consolidation) (b) shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are parties to the merger/consolidation) (c) security holder of a corp. exchanges his securities in such corp. solely for stock or securities in another corp. (both corps. are parties to the merger/consolidation) (2) If property is transferred to a corp. by a person in exchange for stock/unit of participation in such corp. of w/c as a result of such exchange such person, alone/together w/ others, not exceeding 4 persons, gains control of said corp. (stocks issued for services shall not be considered as issued in return for property) o Control is ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. BASIS: same as the basis of property, stock/securities exchanged (a) decreased by: • money received • fair market value of the other property received (b) increased by: • amount treated as dividend • amount of any gain recognized by the exchange Page 39 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 ¾ property received as ‘boot’ shall have the FMV as basis ¾ if part of the consideration to the transferor, the transferee of property assumes a liability of the transferor/acquires from the latter property subject to a liability, such assumption shall be treated as money received by the transferor on the exchange ¾ if transferor receives several kinds of stock/securities, Commissioner is authorized to allocate the basis among the several classes of stocks/securities ¾ basis of the prop. transferred in the hands of the transferee: same as would be in the hands of the transferor increased by the amt. of the gain recognized to the transferor on the transfer Note: - Transferor’s basis is Section 40 (C) (5) (a) while transferee’s basis is Section 40 (C) (5) (b). - Boot is any cash or property given in addition to the shares of stock received by a transferor in a tax-free exchange. - When there is no boot, the basis is the transferor’s property given up because the rules provided that the basis would be the same basis as the property given up by the transferor. In this kind of transaction, the rule is always the transferor’s basis. - When there is boot, the basis is the same as transferor’s basis minus boot increased by the recognized gain.
income within, if : > 50% of the Gross Income of such foreign corp. for the 3yr. period ending w/ the close of the taxable yr. prior to the declaration of dividends (or for such part of such period as the corporation has been in existence) was derived from sources w/in the Philippines Extent: Phil Gross Income x Dividend =Income Total Gross Income within
Services (Compensation for labor/personal services) Rentals Royalties
IV. SOURCES OF INCOME * The need to identify the situs of the income arises only when the taxable entity is merely taxed on income within. Hence, when the taxable entity is an QuickTime™ and a individual resident TIFF citizen or a domestic corporation, (Uncompressed) decompressor are needed to see this picture. the situs becomes irrelevant since they are taxed on worldwide income. A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES Income Interests
Test of Source of Income Residence of Debtor
a) from domestic corp.– income within b) from foreign corp.
Gain on sale of Real property Gain on sale of Personal Property other than shares of stock in a domestic corporation purchased in one country and sold in another
Income without, if < 50% of the Gross Income of such foreign corp. for the 3yr. period ending w/ the close of the taxable yr. prior to the declaration of dividends was derived from sources w/in the Philippines. Therefore, nothing of such dividends forms part of income within Place of performance of service
Location of the property/interest in such property Place of use or location of intangibles (such as patents, trademarks, etc.) giving rise to royalties Location of property Place of Sale
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Gain on sale of shares of stock in a domestic corporation
Philippines regardless of where sold
ROYALTIES (from property or use of property located in Philippines), includes: (a) use of/the right/privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right (b) use of/the right to use in the Philippines any industrial, commercial or scientific equipment (c) supply of scientific, technical, industrial or commercial knowledge or information (d) supply of any assistance that is ancillary & subsidiary to, & is furnished as a means of enabling the application or enjoyment of, any such property/right in (a) above, such equipment in (b) above or knowledge/info in (c) above (e) supply of services by a nonresident person/his employees in connection with the use of prop./rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person (f) technical advice, assistance or services rendered in connection with technical mgt./admin. Of any scientific, industrial or commercial undertaking, venture, project or scheme (g) the use of or the right to use: i. motion picture films ii. films or video tapes for use in connection with TV iii. tapes for use in connection with radio broadcasting Taxable Income from Sources Within the Phils. 1. General Rule Gross Income [GI] (within the Philippines) ( - ) Deductions (attributable to GI within) = Taxable Income •
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TIFF (Uncompressed) by “attributable” is meant decompressor that the expense can are needed to see this picture. be identified as the expense that generated the income. For instance, if ABC Corp. manufactures clothes and sells it in the Phils., and sells shoes in the US. The cost of manufacturing the clothes are attributable to the income generated from selling the clothes. Since the income from the sale of clothes is income within, then the expense for manufacturing them must be deducted from
gross income within. However, the cost of selling the shoes may not be deducted from income within since it is not attributable to income within. Rather, it is specifically attributable to income without. 2. Deductions: expenses, losses & other deductions properly allocated thereto & a ratable part of expenses, interests, losses & other deductions effectively connected w/ the business/trade conducted exclusively w/in the Philippines which cannot definitely be allocated to some items or class of gross income ¾ Such deductions shall be allowed only if fully substantiated by all info necessary for its calculation 3. EXCEPTION: no deduction for interest paid/incurred abroad shall be allowed unless • Indebtedness was actually incurred • Indebtedness must be that of the taxpayer • Interest must be legally due and stipulated in writing • Interest must be paid or incurred during the taxable year • Indebtedness must be in connection w/ the conduct or operation of trade/business in the Philippines B. GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES 1) Interests (other than those derived from sources within the Philippines) 2) Dividends (other than those derived from sources within the Philippines) 3) Compensation for labor or personal services performed w/o the Philippines 4) Rentals or royalties from property located w/o the Philippines or from any interest in such property including rentals/royalties for the use of or for the privilege of using w/o the Philippines, patents, copyrights, secret processes & formulas, goodwill, trademarks, trade brands, franchises & other like properties 5) Gains, profits & income from the sale of real property located w/o the Philippines Tip: The foregoing enumeration is merely the reverse of the enumeration of gross income from sources within the Philippines. Hence, so long as you know which income are considered as income within, all else are income without. Taxable
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Income Deductions without --------------- x Unallocated = from -----------expense Worldwide income Income without Philippines 1. General Rule Gross Income (without the Philippines) ( - ) Deductions (attributable to GI without) = Taxable Income 2. Deductions: expenses, losses & other deductions properly apportioned/allocated thereto & a ratable part of expenses, interests, losses & other deductions w/c cannot definitely be allocated to some items or class of gross income C. INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES. These are: 1. Income from services rendered partly within and partly without; 2. Income from sale of personal property produced (in whole or in part) within and sold without the Philippines; and 3. Income from sale of personal property produced (in whole or in part) without and sold within the Philippines. Personal Property Income Produced here and sold party within, without without Produced here and sold Income within here Produced abroad and Income partly sold here partly without Purchased without and Income within sold within Purchased within and Income without sold without Purchased within and Income wiithin sold within QuickTime™ and a (Uncompressed) decompressor Taxpayer sells it TIFF abroad are needed toIncome see this picture. partly through a sales office partly without
As for unallocated expenses, meaning those which are not entirely attributable to either income within or without, such expenses shall be allocated using the following formula:
Income within -------------------------Worldwide Income
from income within
A. ACCOUNTING PERIODS 1. General Rule (Sec. 43): Taxable income is computed upon the basis of taxpayer’s annual accounting period (fiscal or calendar year) in accordance with the method of accounting employed 2. If no method of accounting employed or method does not clearly reflect the income, computation shall be made in accordance w/ such method as the opinion of the Commissioner clearly reflects the income. 3. taxable income is computed based on calendar year if: (a) accounting period is other than a fiscal year (b) taxpayer has no accounting period (c) taxpayer does not keep books (d) taxpayer is an individual 4. fiscal year: accounting period of 12 months ending on the last day of any month other than December 5. calendar year: accounting period from January 1 to December 31 B. PERIODS IN WHICH ITEMS OF GROSS INCOME INCLUDED (Sec. 44) 1. Amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, any such amounts are to be properly accounted for in a different period under methods of accounting permitted 2. In case of death of taxpayer include for the taxable year in which falls the date of his death, all amounts which accrued up to the date of his death, if not otherwise properly includible in respect of such period or a prior period C. PERIOD FOR WHICH DEDUCTION CREDITS TAKEN (Sec. 45) Page 42 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1. Deductions provided in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed, unless, in order to reflect the income, deductions should be taken as of a different period. 2. In case of death of taxpayer: deductions allowed for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period
lease payments are made on a yearly basis and are due every January 5. A leased out the space to X on January 1, 2004. However, X will only pay rent for one year on January 5, 2005. For the year 2004, A should recognize income of P1M as of December 31, even if he will receive payment only on January 5 because the he is considered to have earned the P1M already for allowing X to actually use the space for the year 2004. F. ACCOUNTING FOR LONG-TERM CONTRACTS 1. Long-term contracts: building, installation or construction contracts covering a period in excess of 1 yr 2. 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 3. 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 the contract 4. Deductions from 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. 5. Amended return may be permitted/required by the Commissioner: if upon completion of contract, taxable income has not been clearly reflected for any year(s)
D. CHANGE OF ACCOUNTING PERIOD (Sec. 46) 1. Kinds of changes: (a) from fiscal year to calendar year (b) from calendar year to fiscal year (c) from one fiscal year to another fiscal year 2. effect of change: net income shall, with the approval of the Commissioner, be computed on the basis of the new accounting period, subject to Sec. 47 on Final or Adjustment Returns for a Period of Less Than 12 Months (as discussed below) E. METHODS OF ACCOUNTING 1. CASH METHOD - recognition of income and expense dependent on inflow or outflow of cash (meaning, you recognize the income when you actually receive the cash payment for the sale, and you recognize the expense when you actually pay cash for the expense) 2. 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 QuickTime™ and a TIFF (Uncompressed) decompressor
are needed to see this picture. Examples: (a) interest or rent income earned but not yet received (b) rent exp. accrued but not yet paid (c) wages/salaries due but remaining unpaid
Illustration: A leases an office space at P1M per year and
This provision takes into account that certain businesses, like construction, takes more than a year for a project to be completed. As such, it is not practical (from the point of view of the government) to wait until the project is finished before the income arising therefrom is actually reported and taxed. Hence, income is spread over the years where the construction is in progress, and the allocation is made on the basis of percentage of completion.
Illustration: ABC Corp. entered into a contract with X whereby the former agreed construct a condominium for the latter to be completed in 5 years for a fee of P10M. For the first year of construction, ABC Corp was able to construct 30% of the condominium. It will therefore Page 43 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 declare a gross income of P3M computed as follows:
initial payments: payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made
P 10 M x 30% P 3M 3.
INSTALLMENT BASIS 1. SALES OF DEALERS IN PERSONAL PROPERTY • Under Rules and Regulations (R&R) prescribed by the Sec. 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 contract price.
1) individual who sells of disposes of real property, considered as capital asset & is otherwise qualified to report the gain under (2) above may pay the capital gains tax in installments under R&R to be promulgated by the Sec. of Finance, upon recommendation of the Commissioner 2) capital asset: property held by the taxpayer (whether or not connected with his trade or business) but does not include: (a) stock in trade of taxpayer (b) property which would properly included in inventory, if on hand (c) merchandise inventory (d) depreciable assets used in the trade/business (e) real property used in trade/business
Example: Sale in 1997 payable in 2 equal annual installments. How to compute for income: Contract Price/ Installments Receivable Cost (GP)
P100,000 75,000 P 25,000
* installments payable in 2 equal annual installments GP/Contract Price ratio = 25T/100T = 25% Collections in 1997 = P50T Income for 1997 = P50T x 25% = P12,500 2. SALES OF REALTY AND CASUAL SALES OF PERSONALTY 1) in cases of: (a) casual sale or other casual disposition of personal property QuickTime™ and a (other than inventory on hand of the TIFF (Uncompressed) decompressor are needed to see this picture. taxpayer at the close of the taxable year) for a price > P1,000, or (b) sale or other disposition of real property, if in either case the initial payments do not exceed 25% of the selling price 2) how may income be returned: same as in sales of dealer in personal property above
SALES OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET BY INDIVIDUALS
CHANGE FROM INSTALLMENT BASIS
1) taxpayer must be entitled to benefits under 1 (sales of dealers in personal property) 2) in computing income for the year of change or 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 G. ALLOCATION OF INCOME AND DEDUCTIONS 1) Applicable to: cases of 2 or more organizations, trades or businesses (w/n incorporated & w/n organized in the Philippines) owned or controlled directly/indirectly by the same interest 2) Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in Page 44 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business
RETURNS 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. • I. INDIVIDUAL RETURN A. WHO ARE REQUIRED TO FILE AN ITR: I. Individual 1) Filipino citizen residing in the Philippines 2) Filipino citizen residing outside the Philippines, on his income from sources within the Philippines 3) Alien residing in the Philippines, on income derived from sources within the Philippines 4) Nonresident alien engaged in trade or business or in the exercise of profession in the Philippines 5) An individual (citizen/alien) engaged in business or practice of a profession within the Philippines regardless of the amount of gross income 6) Individual deriving compensation income concurrently at any time during the taxable year 7) Individual whose pure compensation income derived from sources within the Philippines exceeds P60,000. II. Taxable Estate and Trust III. General Professional Partnership IV. Corporation 1. Not exempt from Income tax 2. Exempt from income tax under Section 30 of the NIRC but has not shown proof of exemption. B. WHO ARE NOT REQUIRED TO FILE AN QuickTime™ and a ITR: (but TIFFmay be required to file an (Uncompressed) decompressor are needed topursuant see this picture. to Rules and information return Regulations prescribed by the Sec. of Finance, upon recommendation of the Commissioner) • An individual whose gross income does not exceed his total personal and additional exemptions • An individual whose compensation income derived from one employer does not exceed
• • • • • •
P 60,000 and the income tax on which has been correctly withheld An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident aliens not engaged in trade or business) Those who are qualified under “substituted filing”. However, substituted filing applies only if all of the following requirements are present the employee received purely compensation income (regardless of amount) during the taxable year the employee received the income from only one employer in the Philippines 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 3 conditions stated above the employer files the annual information return (BIR Form No. 1604-CF) the employer issues BIR Form No. 2316 (Oct 2002 ENCS version ) to each employee.
SUBSTITUTED FILING - is when the employer’s annual return may be considered as he “substitute” Income Tax Return of employee inasmuch as the information provided in his income tax return would exactly be the same information contained in the employer’s annual return. SUBSTITUTED FILING OF INCOME TAX RETURNS BY EMPLOYEES RECEIVING PURELY COMPENSATION INCOME, REQUISITES: 1. The employee receives purely compensation income (regardless of amount) during the taxable year. 2. The employee receives the income only from one employer during the taxable year. 3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer. 4. The employee’s spouse also complies with all 3 conditions stated above. 5. The employer files the annual information return. 6. The employer issues BIR form 2316
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED FILING: 1. Individuals deriving compensation from two or more employers concurrently or successively during the taxable year. 2. 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 not been withheld correctly 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 non-withholding of tax on said income. 4. Individuals deriving other non-business, nonprofession-related income in addition to compensation income not otherwise subject to final tax. 5. 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. 6. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other nonbusiness, non-profession-related income. Non-filing of ITR, for employees who are qualified for the substituted filing shall be OPTIONAL for the taxable year 2001, the returns fro which shall be filed on or before April 15, 2002. Thereafter, substituted filing where applicable shall be MANDATORY. 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 1604CF may be considered his substituted return, in lieu of BIR Form No 1700, which the employee no longer filed. 2. 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 1604-CF. 3. It serves as a proof of financial capacity in case the employee decides to apply for a bank loan QuickTime™ and a or credit car, or for TIFF any other purpose, as if he had in (Uncompressed) decompressor needed to see this picture. fact filed a BIR Form are 1700. Individuals required to file an 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.
C. WHERE TO FILE • Except in cases where the Commissioner otherwise permits: 1) Authorized agent bank 2) Revenue District Officer 3) Collection Agent 4) Duly authorized Treasurer of the city/municipality in w/c such person has his legal residence/principal place of business in the Philippines, or 5) Office of Commissioner, if there be no legal residence/ place of business in the Philippines D. WHEN TO FILE: 1) for any individual (compensation, business, professional income) • on or before April 15 of each year covering income for preceding taxable year • example: individual’s income from Jan. to Dec. 1997, shall be filed on or before April 15, 1998 2) individual subject to capital gains tax (a) sale/exchange of shares of stock not traded thru a local stock exchange: • within 30 days after each transaction (b) sale/disposition of real property • within 30 days following each sale or other disposition HUSBAND AND WIFE • File 1 return for the taxable yr., if ff. requisites complied : 1) Married individuals (citizens, resident or nonresident aliens) 2) Do not derive income purely from compensation • If impracticable to file 1 return: each spouse may file a separate return but the returns shall be consolidated by the Bureau for purposes of verification for the taxable yr. UNMARRIED MINOR • Income of unmarried minors derived from property received by the living parent shall be included in the return of the parent, except: 1) when donor’s tax has been pd. on such property, or 2) when transfer of such property is exempt from donor’s tax
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 PERSONS UNDER DISABILITY • If unable to make a return, return may be made by: 1) duly authorized agent or representative 2) guardian, or 3) other person charged w/ the care of his person/property • principal & his rep. or guardian assumes responsibility of making the return & incurs penalty for erroneous, false/fraudulent returns • an individual’s name signed in the return is prima facie evidence for all purposes that the return was actually signed by such individual II. CORPORATION RETURNS A. WHO IS REQUIRED TO FILE AN ITR: • Every corporation subject to tax, except foreign corp. not engaged in trade/business in the Philippines. • REQUIREMENTS: File in duplicate a true & accurate quarterly income tax return & final/adjustment return • Taxable year: fiscal or calendar (corp. shall not change accounting period w/o prior approval by the Commissioner) B. RETURN OF CORPORATION CONTEMPLATING DISSOLUTION/ REORGANIZATION • Which corporation? Every corporation, including a corporation w/c has been notified of possible involuntary dissolution by the SEC, or for its reorganization • within 30 days after the adoption by the corp. of a resolution/plan for its dissolution or for the liquidation of the whole/any part of its capital stock: 1) render a correct return 2) verified under oath 3) set forth the terms of such resolution/plan & such other information as the Sec. of Finance, upon recommendation of the QuickTime™ and a TIFF (Uncompressed) decompressor Commissioner, shall, by Rules and are needed to see this picture. Regulations, prescribe • prior to issuance by the SEC of Certificate of Dissolution/Reorganization: dissolving/reorganizing corporation shall secure a certificate of tax clearance from BIR to be submitted to the SEC BPI vs. CIR, GR No. 38504, April 14, 2000
It was held that the 30-day period is counted from the approval of the SEC of the corporation’s adopted authority to dissolve. C. RETURN ON CAPITAL GAINS REALIZED FROM SALE OF SHARES OF STOCK NOT TRADED IN PSE • File a return within 30 days after each transaction • AND, a final consolidated return of all transactions must be filed on or before 15th day of the fourth month following the close of the taxable yr. D. EXTENSION OF TIME TO FILE RETURNS • Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final & adjustment returns in case of corps.) This is exceptional and in case of calamity only based on precedents. E. RETURNS OF GENERAL PROFESSIONAL PARTNERSHIPS • each GPP shall file in duplicate, a return of its income (except items under exclusions from gross income) • set forth: 1) items of gross income & of deductions allowed 2) names of partners 3) TIN 4) Share of each partner F. PAYMENT OF TAX 1) IN GENERAL: Who shall pay? (a) Total amount of tax shall be paid • by the person subject thereto • at the time the return is filed (b) For tramp vessels: • Filed & paid before departure by: the shipping agents &/ or the husbanding agents; in their absence, captains • failure to do so: Bureau of Customs is authorized to hold the vessel & prevent departure until proof of payment of tax is presented or a sufficient bond is filed to answer for the tax due 2) INSTALLMENT PAYMENT (for individuals only) • If tax due > P2,000, the taxpayer, other than a corp., may elect to pay in 2 equal installments: Page 47 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (a) (b) (c)
1st inst. pd. at the time the return is filed 2nd inst. paid on/before July 15 ff. the close of calendar yr. If any inst. is not pd. on fixed date, whole amount of the tax unpaid becomes due & payable + delinquency penalties
3) PAYMENT OF CAPITAL GAINS TAX • Paid on the date the return is filed • No payment is required if the seller submits proof of his intention to avail of exemption provided by law • In case of failure to qualify for exemption, the tax due shall immediately become due & payable + penalties • If tax has been paid, and seller submits proof of intent w/in 6 mos. From the registration of the document transferring real property, he shall be entitled to a refund upon verification of his compliance with requirements for such exemption • If taxpayer elects to report gain by installments, tax due shall be paid w/in 30 days from such receipt of payments • No registration of document transferring real prop. Unless Commissioner/duly authorized representative certified that such transfer has been reported & tax due has been paid 4) ASSESSMENT & PAYT. OF DEFICIENCY TAX • After return is filed, Commissioner shall examine & assess the correct amt. of tax • Any deficiency shall be paid upon notice & demand of Commissioner • Deficiency means: a. tax imposed > amount shown by QuickTime™ and a (Uncompressed) decompressor theTIFF taxpayer upon his return are needed to see this picture. • amount shown in the return shall be increased by amount previously assessed as a deficiency & decreased by amounts previously abated, credited, returned/ otherwise repaid b. if:
1. no amt. is shown upon the return as the tax, or 2. no return is made, then: • the amt. by w/c tax exceeds the amts. previously assessed as a deficiency; but such amounts previously assessed/collected w/o assessment shall first be decreased by the amts. previously abated, credited, returned or otherwise repaid in respect of such tax • Withholding of Creditable Tax at Source: Sec. of Finance may require the w/holding of a tax by payor-corp., on income payable to natural/juridical persons, residing in the Philippines, at rate of not more than 1% but not more than 32%, which shall be credited against the income tax liability for the taxable year •
Most favored nation clause – Royalty income paid by a domestic corporation to a non-resident foreign corporation which is a resident of a Contracting State with which the Philippines has an effective tax treaty is generally subject to 15% final withholding tax, but the rate may be reduced to 10% for certain royalty payments or under the most-favored-nation-clause of the tax treaty, such as the Philippines-US Tax Treaty. → The purpose of the clause in a tax treaty is to grant to the other Contracting State a tax treatment that is no less favorable than that which is granted to the “most favored” among other countries. → It means 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.
ESTATES AND TRUSTS SEPARATE TAXABLE ENTITIES Sec. 60 (A): 1. Estates of deceased persons under administration or settlement; 2. Trusts where the income is to be accumulated or held for future distribution by the fiduciary; 3. Trusts where the income may be either accumulated or distributed at the discretion of the fiduciary, and 4. Trusts where the income which is to be distributed Page 48 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 currently by the fiduciary or is collected by a guardian of an infant to be held or distributed as the court may direct. REQUISITIES FOR THE TAXABILITY OF TRUST: 1. it should be an irrevocable trust; 2. tax must be imposed on the income of the trust, and 3. the trust retains the income REVOCABLE TRUST A revocable trust is one where, under the trust treatment, the power to revest in the grantor title to the property transferred to the trust or any part of the corpus of such trust is vested: a. in the grantor, either alone or in conjunction with any person not having substantial adverse interest in the disposition of such part of the corpus, or the income therefore; or b. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom - in short, it is a trust where the title can revest back to the grantor anytime - not taxable as an entity because the income forms part of the income of the grantor NOTE: ¾ An estate is taxable as a separate entity when it is already subject to a judicial proceeding ¾ A trust is taxable as a separate entity if the trust is irrevocable. This is because the grantor has absolutely given up the corpus and any incidents thereto. In this case, the grantor has no control over the corpus of the trust. The benefits of the trust will not to go the grantor. The grantor has transferred the income earning property to a beneficiary. He has absolutely given up the incidents of it. If there is a condition that provides that a portion shall be reserved for the grantor’s medical expenses (for example), this condition does not convert the irrevocable trust to a revocable trust. But that portion is QuickTime™ a taxable income of the and grantor. If it is a TIFF (Uncompressed) decompressor are needed to see this whole picture. revocable trust, then the income or he property is taxable on the part of the grantor. ¾ An irrevocable trust is where the grantor has unconditionally parted with all the incidents of ownership. ¾ If the transfer is revocable, the entire income shall be taxable in the hands of the grantor. Income
Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interest, and income accumulated or held for future distribution under the terms of the will or trust Income to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct Income received by estates of deceased persons during the period of administration or settlement of estates
Incom which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated
Revocable trusts Income for the benefit of the grantor
Estate or Trust
Fiduciary or Beneficiary, depending upon the amounts which are property paid or credited Fiduciary or beneficiary, depending upon the amounts which are property paid or credited Grantor Grantor
IMPOSITION OF TAX A. Application of tax: 1) Applies to income of estates or of any kind of property held in trust, including: (a) income accumulated in trust: 1. for the benefit of unborn/ unascertained person(s) w/ contingent interests 2. held for future distribution under the terms of the will or trust (b) income: 1. to be distributed currently by the fiduciary to the beneficiaries 2. collected by a guardian of an infant to be held or distributed as the court may direct (c) income received by estates of deceased persons during the period of administration or settlement of the estate (d) income which, in the discretion of the fiduciary, may be either distributed to beneficiaries or accumulated
Liable for Tax Page 49 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2) Exception: Employee’s trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of all or some of his employees: (a) if contributions are made to the trust by the employer/employees, or both for the purpose of distributing to such employees the earnings + principal of the fund accumulated by the trust in accordance w/ such plan (b) if under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities w/ respect to employees under the trust, for any part of income to be used for/diverted to, purposes other than for the exclusive benefit of his employees (any amount distributed to employees shall be taxable in the yr. so distributed) B. Consolidation of Income of 2/more trusts: 1) Requisites: (a) 2/more trusts exist (b) creator of the trust in each instance is the same person (c) beneficiary in each instance is the same 2) tax computed on such consolidated income 3) proportion of each tax be assessed & collected from each trustee
C. Taxable Income 1) Computed in same manner & on the same basis as in the case of an ‘individual’, EXCEPT: (a) deduction allowed: amount of income of the estate/trust for the taxable yr. w/c is to be distributed currently by the fiduciary to the beneficiaries & the amt. of the income collected by a guardian of an infant w/c is to be held./distributed as the court may direct 1. amt. allowed as deduction is included as TI of the beneficiaries, whether distributed or not 2. amt. allowed as deduction under QuickTime™ and a TIFF (Uncompressed) decompressor this subsection will not be allowed are needed to see this picture. as deduction under (b) hereof (b) additional deduction: amt. of the income of the estate/trust for its taxable yr., properly paid/credited during such yr. to any legatee, heir or beneficiary applies to cases of : 1. income received by estates of deceased person during the
period of administration or settlement of the estate 2. income w/c, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated 3. amt. deducted is included in TI of the legatee, heir or beneficiary 2) for trust administered in a foreign country: deductions in a) and b) not allowed provided, the amt. of income included in the return of said trust shall not be included in computing the income of the beneficiaries D. Exemption Allowed to Estates and Trusts: P20,000 E. Revocable Trusts 1) Requisites: the power to re-vest in the grantor title to any part of the corpus of the trust is vested(a) in the grantor either alone/ in conjunction w/ any person not having a substantial adverse interest in the disposition of such part of the corpus/income therefrom (b) in any person not having a substantial adverse interest in the disposition of such part of the corpus/income therefrom 2) effect: the income of such trust shall be included in computing the taxable income of the grantor F. Income for Benefit of Grantor 1) Requisites: where any part of the income of a trust is, or in the discretion of the grantor/any person not having a substantial adverse interest in the disposition of such part of the income (a) may be held/accumulated for future distribution to the grantor (b) may be distributed to the grantor (c) may be applied to the payment of premiums upon policies of insurance on the life of the grantor 2) Effect: such part of the income be included in computing the taxable income of the grantor G. Fiduciary Returns 1) Who shall make the return? (a) Guardians (b) Trustees (c) Executors (d) Administrators Page 50 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (e) Receivers (f) Conservators (g) All persons/corp. 2) File, in duplicate, a return of the income of the person, trust, or estate for whom or which they act in case such person, trust, or estate has a gross income = P20,000 or over during the taxable yr. OTHER INCOME TAX REQUIREMENTS A. RETURN OF INFORMATION OF BROKERS • Brokers(individual/corp./gen. pawnshop) shall render a correct return duly verified under oath, showing names of customers for whom such person, corp. or duly registered gen. copartnership. has transacted any business, w/ such details as to the profits, losses or other info B. RETURN OF FOREIGN CORPORATIONS 1) Any attorney, accountant, fiduciary, bank, trust co., financial institution or other person, who aids, assists, counsels or advises in, or w/ respect to, the formation, organization or reorganization of any foreign corp., shall file a return w/in 30 days 2) Such return shall be in the form prescribe & set forth under oath, to the full extent of the info w/in the possession or knowledge or under the control of the person required to file the return C. DISPOSITION OF IT RETURNS, PUBLICATION OF LISTS OF TAXPAYERS & FILERS 1) After the assessment, the returns, w/ the corrections made by the Commissioner, shall be filed in the Office of the Commissioner & shall constitute public records & be open to inspection as such upon order of the Pres. 2) Commissioner may cause, each yr., to publish the lists containing the names & addresses of such persons who have filed IT returns D. SUIT TO RECOVER BASED ON FALSE/FRAUDULENT RETURNS QuickTime™ 1) If tax is collected under and ana assessment that TIFF (Uncompressed) decompressor needed to see this picture. the list, arestatement or return is false/fraudulently made, it cannot be recovered by any suit unless it is proved that the said list, statement or return was not false nor fraudulent & did not contain any understatement or undervaluation 2) Not applicable to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells & mines
E. DISTRIBUTION OF DIVIDENDS/ASSETS BY CORPS. • Dividends = any distribution made by a corp. to its SH out of its earnings or profits & payable to its SH, whether in money or in other property 1. Gain/loss sustained by SH for any liquidating dividends received is a taxable income or a deductible loss (as the case may be) 2. Stock Dividends representing the transfer of surplus to capital account shall not be subject to tax. 3. Amt. distributed in redemption or cancellation of stock is taxable income to the extent that it represents a distribution of earnings/profits 4. Net income of a partnership after deducting the corporate income tax shall be deemed to have been actually or constructively received by the partners in the same taxable yr. & shall be taxed to them in their individual capacity, whether actually distributed or not
DECLARATION INDIVIDUALS A. In general:
Filing of declaration of estimated income for current taxable yr.: INDIVIDUAL receiving: Income from On/before self-employment (as sole source) or April 15 of Combined w/ salaries, wages & same taxable other fixed/ determinable income yr. NONRESIDENT CITIZEN for: Not required Income from w/in the Philippines; to file NONRESIDENT ALIEN not engaged in trade/business in the Philippines. B. RETURN & PAYMENT OF ESTIMATED INCOME TAX BY INDIVIDUALS 1) Paid in 4 installments 2) 1st installment: paid at the time of declaration 3) 2nd & 3rd installment: paid on Aug. 15 & Nov. 15 of current yr. 4) 4th installment: paid on/before Apr. 15 of the ff. calendar yr. when final adjusted income tax is due to be filed •
Estimated Tax means the amt. which the individual declared as income tax in his final adjusted & annual income tax return for the preceding taxable yr. minus the sum of the Page 51 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
credits allowed against the said tax If during the current taxable yr., the taxpayer reasonably expects to pay a bigger IT, he shall file an amended declaration during any interval of installment payment dates
C. DECLARATION OF QUARTERLY INCOME TAX 1) Every corp. shall file in duplicate a quarterly summary declaration of its GI and deductions on a cumulative basis for the preceding quarter(s) upon w/c the IT shall be levied, collected & paid 2) The tax shall be decreased by the amt. of tax previously pd./ assessed during the preceding quarters & shall be paid not less than 60 days from the close of each of the first 3 quarters of the taxable yr., whether calendar/fiscal yr. D. FINAL ADJUSTMENT RETURN 1) Every corp. liable to tax shall file a final adjustment return covering the total taxable income for the preceding calendar/fiscal yr. 2) If sum of the quarterly tax payments is not equal to the total tax due on the entire taxable income of that yr., the corp. shall either: (a) pay the balance of tax still due (b) carry-over the excess credit (c) be credited or refunded w/ the excess amt. paid, as the case may be Example: 1997 Cumulative Taxable Income Q1: P300,000; Q2: P 1,000,000; (sum of TI of Q1 & Q2); Q3:P 2,000,000 Q4: P 2,500,000 (final adjustment return)
Tax @35%: 105,000 350,000 700,000
Payable (each Q) 105,000 245,000 350,000
E. PLACE & TIME OF FILING & PAYMENT OF QUARTERLY CORPORATE INCOME TAX QuickTime™ and a 1) The quarterly income tax declaration & the TIFF (Uncompressed) decompressor are needed to see this picture. final adjustment return shall be filed with: (a) authorized agent banks (b) Revenue District Officer (c) Collection Agent (d) Duly authorized Treasurer 2) Where? (a) of the city/municipality having jurisdiction over the location of the principal office of
the corp. filing the return (b) or place where its main books of accounts & other data from w/c the return is prepared are kept 3) Time of Filing of IT Return Corp. quarterly declaration Final adjustment return
W/in 60 days ff. the close of the first 3 quarters of the taxable yr. On/before the 15th day of April (calendar yr.) On/before the 15th day of the 4th mo. after the close of the taxable yr. (fiscal yr.)
4) Time of Payment of IT: Income tax is paid at the time of the filing of the declaration or return WITHHOLDING TAX ON WAGES A. DEFINITIONS. 1) Wages means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, (a) shall not include remuneration paid for: 1. agricultural labor paid entirely in products of the farm where the labor is performed 2. domestic service in a private home 3. casual labor not in the course of the employer’s trade or business 4. services by a citizen or resident of the Philippines for a foreign government or an international organization (b) if remuneration paid by an employer to an employee for services performed during ½ or more of any payroll period of not more than 31 consecutive days constitutes wages, then all remuneration pd. by such employer to such employee for such period shall be deemed to be wages 2) Payroll period means a period for which payment of wages is ordinarily made to the employee by his employer; miscellaneous payroll period means a payroll period other than a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period 3) Employee refers to any individual who is the recipient of wages & includes an officer, employee or elected official of the Philippine Page 52 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Government; includes an officer of a corp. 4) Employer (a) the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person (b) the person having control of the payment of such wages (c) person paying wages on behalf of a nonresident alien individual, foreign partnership/corp.
Every employer must withhold from compensation paid, an amount computed in accordance with the regulations. Exception: Where such compensation income of an individual: 1. Does not exceed the statutory minimum wages; or 2. Five thousand pesos (5,000) monthly (60,000 a year) - whichever is higher
B. LIABILITY FOR TAX 1) EMPLOYER: (a) liable for withholding & remittance of the correct amt. of tax (b) if failed to withhold & remit, employer is liable for the tax + penalties & additions to the tax
Elements of Withholding on Compensation: 1. There must be an employer-employee relationship 2. There must be payment of compensation or wages for services rendered 3. There must be a payroll period Compensation Exempted: 1. Remunerations received as an incident of employment 2. Remunerations paid for agriculture labor 3. Remunerations paid for domestic services 4. Remunerations for casual not in the course of an employer’s trade or business 5. Compensation for services of a citizen, resident of the Philippines, for a foreign government or an international organization 6. Damages 7. Life insurance 8. An amount received by the insured as return of premium 9. Compensation for injuries and sickness 10. Income exempt under treaty th 11. 13 month pay and other benefits 12. GSIS, SSS, Philhealth and other contributions
2) EMPLOYEE: (a) If fails to file withholding exemption cert. or supplies inaccurate/false info, the tax shall be collected from him + penalties or additions to the tax (b) Excess taxes w/held by the employer shall not be refunded if due to: 1. failure or refusal to file the w/holding exemption certificate 2. false & inaccurate information C. STATEMENTS & RETURNS 1) Requirements (a) employer shall furnish EE on/before Jan. 31 of the succeeding yr. or on the same day of last payment made (if employment is terminated), a written statement confirming the wages paid by the employer to employee 1. Annual Information Returns (b) employer shall submit an annual information return to the Commissioner containing: 1. a list of employees 2. total amt. of compensation income of each EE QuickTime™ and w/held a 3. totalTIFFamt. of taxes during the (Uncompressed) decompressor yr. are needed to see this picture. 4. With copies of statement referred to in (A) above 2) Extension of Time • Commissioner may grant the ER a reasonable extension of time to furnish & submit the statements & returns required Withholding Tax on Compensation:
Tax Free Covenant Bonds 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: 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. ¾
Obligor shall deduct and withhold a tax = 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 Page 53 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 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.
Income of Recipient 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)
TITLE III. ESTATE TAX AND DONOR’S TAX CHAPTER I- ESTATE TAX Nature and Definition An EXCISE TAX on the rights 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 A tax imposed upon the privilege to transmit property at the time of death; the tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon
ESTATE TAX FORMULA
A. GROSS ESTATE includes (Sec. 85) Non-Resident Alien Decedent
Only properties situated in the Philippines provided that, with respect to the intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Sec 104 of the NIRC
ITEMS OF GROSS ESTATE: (DT RALIC) 1) Decedent's Interest 2) Transfer in Contemplation of Death 3) Revocable Transfer 4) Property Passing Under General Power of Appointment 5) Proceeds of Life Insurance 6) Prior Interests 7) Transfers for Insufficient Consideration DECEDENT’S INTEREST • To the extent of the interest in property of the decedent at the time of his death Transfer in Contemplation of Death •
TRANSFER IN CONTEMPLATION OF DEATH, Transfers impelled by the thought of an impending death (i.e., the motivating factor or controlling motive is the thought of death), without regard of the state of health of the transferor •
Gross Estate (Sec. 85) Less: (1) Deduction (Sec. 86) (2) Net share of the surviving spouse in the CP ---------------------------------------------------------------------Net Taxable Estate X Tax rate (Sec. 84) ----------------------------------------------------------------------Estate Tax due QuickTime™ and aor 110 [B] Less: Tax Credit (if TIFF any) Sec. 86 [E] (Uncompressed) decompressor are needed to see this picture. ---------------------------------------------------------------------Estate Tax Due, if any
Residents and Nonresident citizen, resident alien decedent
All properties, real or personal, tangible or intangible, wherever situated
Transfers deemed in contemplation of death: transfers involving retention or reservation of certain rights. Transfers made before the decedent’s death wherein decedent retained: a. the possession or enjoyment of, or the right to the income of the property; b. the right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or its income EXCEPT bona fide sales for an adequate and full consideration in money or money’s worth
REVOCABLE TRANSFER A transfer whereby the terms of enjoyment of Page 54 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 the property may be altered, amended, revoked or terminated by the decedent alone or in conjunction with any other person, or where any such power is relinquished in the contemplation of the decedent’s death. It is enough that the decedent had the power to alter, amend or revoke though he did not exercise such power EXCEPT bona fide sales for an adequate and full consideration in money or money’s worth Property Passing Under General Power of Appointment What is a GENERAL POWER OF APPOINTMENT? The power to designate, without restrictions, the persons who shall receive, succeed to, possess or enjoy the property or its income received from the estate of a prior decedent •
How is a general power of appointment exercised? The GPA is exercised by: a) will b) deed executed in contemplation of death c) deed under which he has retained for his life or for any period which does not in fact end before his death → 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 persons who shall possess or enjoy the property or the income therefrom EXCEPT bona fide sales for an adequate and full consideration in money QuickTime™ and a or money’s worth TIFF (Uncompressed) decompressor are needed to see this picture.
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.
Proceeds of Life Insurance PROCEEDS FROM LIFE INSURANCE FORM PART OF THE GROSS ESTATE ONLY WHEN: o the beneficiary is the estate, executor or administrator, whether the designation is revocable or irrevocable o the beneficiary is other than the estate, executor or administrator AND the designation is revocable TRANSFERS FOR INSUFFICIENT CONSIDERATION Amount includible in the gross estate is the excess of the FMV at the time of death over the value of consideration received Exclusions from the Gross Estate •
• • •
ACQUISITIONS AND TRANSFERS EXPRESSLY DECLARED AS EXEMPT: o Merger of the usufruct in the owner of the naked title o Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to the fiduciary o Transmission from the first heirs, legatees or donees in favor of another beneficiary in accordance with the desire of the testator o All bequests, devises, legacies, or transfers to social welfare, cultural or charitable institutions → Provided, not more than 30% of the value given is used for administrative purposes Proceeds from life insurance where the beneficiary is other than estate, executor or administrator AND the designation is irrevocable SSS death benefits Properties held in trust by the decedent Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veterans Administration Separate or exclusive properties of the surviving spouse Page 55 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Valuation 1. Real Property • •
FMV as determined by the Commissioner OR the FMV shown in schedule of values fixed by the assessors, whichever is HIGHER No zonal value: use the FMV in the latest tax declaration.
2. Shares of Stock •
Listed shares: average of the highest and lowest quotation at date of death (or the date nearest to the date of death, if no quotation is available at the time of death) Unlisted Shares – • Common stocks: use BOOK VALUE • Preferred stocks: use PAR VALUE
FORM PART OF THE GROSS ESTATE IF: • The decedent at that time of his death was a citizen and resident of a foreign country which at the time of his death 1. did not impose a transfer tax or death tax of any character 2. in respect of the intangible personal property of citizens of the Philippines not residing in that foreign country; or • The law of the foreign country of which the decedent was a citizen and resident a the time of his death: 1. allow a similar exemptions from transfer taxes or death taxes of every character 2. in respect of the intangible personal property owned by citizens of the Philippines not residing in that foreign country.
3. Personal Property •
Valued at FMV
Special Rules on Intangible Properties •
INTANGIBLE PERSONAL PROPERTIES WITH SITUS IN THE PHILIPPINES (SECTION 104) 1. Franchise which must be exercised in the Philippines. 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws, 3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines, 4. Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds have acquired a business situs in the Philippines, QuickTime™ and a TIFF (Uncompressed) 5. Shares, rights decompressor in any partnership are needed to see this picture. business or industry established in the Phil. RECIPROCITY CLAUSE ON INTANGIBLE PERSONAL PROPERTY OF A DECEDENT WHO IS NON-RESIDENT ALIEN, WITH A SITUS IN THE PHILIPPINES (SECTION 104). THE INTANGIBLES SHALL NOT
B. DEDUCTIONS FOR ESTATE OF A CITIZEN OR A RESIDENT (Revenue Regulations 2-2003 and Sec. 86): 1) Expenses, Losses, Indebtedness, and Taxes: (a) actual funeral expenses or five percent (5%) of the gross estate whichever is lower (not exceeding P200,000) (b) judicial expenses of the testamentary or intestate proceedings (c) claims against the estate (d) claims against insolvent persons included in the gross estate (e) unpaid mortgages or indebtedness upon property (f) unpaid taxes (g) losses incurred during the settlement of the estate 2) Transfers for Public Use-to the government of the Republic of the Philippines or any political subdivision thereof, exclusively for public purposes 3) Vanishing deductions 4) Family Home 5) Standard Deduction -- P1,000,000 6) Medical Expenses Page 56 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 7) Amount Received by Heirs under RA 4917
B. Judicial Expenses
8) Net Share of the surviving spouse in the Conjugal Property
(1) ORDINARY DEDUCTIONS
What are JUDICIAL EXPENSES for estate taxation? o
A. Funeral expenses FUNERAL EXPENSES are costs which are actually incurred in connection with the interment or burial of the deceased. •
EXAMPLES OF NON-DEDUCTIBLE FUNERAL EXPENSES: a) Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. b) Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible. QuickTime™ and a
Judicial Expenses should be supported by a sworn statement of account issued and signed by the creditor.
EXAMPLES OF JUDICIAL EXPENSES
EXAMPLES OF FUNERAL EXPENSES: a) The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial; b) Expenses for the deceased’s wake, including food and drinks; c) Publication charges for death notices; d) Telecommunication expenses incurred in informing relatives of the deceased; e) Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible; f) Interment and/or cremation fees and charges; and g) All other expenses incurred for the performance of the rites and ceremonies incident to interment.
TIFF (Uncompressed) decompressor are needed to see this picture.
(1) (2) (3) (4) (5) (6) (7)
Fees of executor or administrator Attorney’s fees Court fees; Accountant’s fee; Appraiser’s fee; Clerk hire; Cost of preserving and distributing the estate; (8) Brokerage fees for selling property of the estate. CIR v. CA 328 SCRA 666 • Expenses incurred in the extrajudicial settlement of the estate must be necessary costs toward the settlement of the case • Attorney’s fees to be deductible should essential to the collection of assets, payment of debts or the distribution of the estate C. Claims against the Estate 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. •
SOURCES OF CLAIMS ESTATE: 1) Contract; 2) Tort; or 3) Operation of Law
REQUISITES FOR DEDUCTIBILITY:
Substantiation Requirements: o
The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred (RR 2-2003)
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.
a) A personal obligation of the deceased existing a the time of his death except Page 57 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses which are classified under a different category of deductions, b) Contracted in good faith and for adequate and full consideration in money or money's worth, c) Must be a debt or claim which is valid in law and enforceable in court, d) Must not have been condoned by the creditors or the action must not have prescribed. e) Duly substantiated •
Substantiation in case of Loans or other Similar Indebtedness: a) notarized at the time incurred, except loans from financial institutions where notarization not part of business practice or policy b) A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent
D. Claims against Insolvent Persons •
Condition for deductibility: The value of decedent’s interest in the claim is included in the gross estate and the incapacity of the debtors to pay their obligation is proven.
E. Unpaid Mortgage •
CONDITIONS FOR DEDUCTIBILITY: o
The value of the decedent’s interest over the property encumbered is included as part of the gross estate undiminished by the amount of mortgage The deduction shall be limited to the extent that the mortgage was contracted bona fide and for an adequate consideration
QuickTime™ and a Other Rules in TIFF Respect to Unpaid Mortgage (Uncompressed) decompressor are needed to see this picture.
Determine the recipient or beneficiary of the loan which must be verified; If merely an accommodation made by decedent, then balance of loan considered as receivable and part of GE If there is a legal impediment to recognize the same as receivable of the estate, the unpaid obligation shall not be
allowed as a deduction from the GE F. Taxes • What taxes are deductible? Income taxes, real estate or property taxes due at the time of death which were unpaid as of the time of death •
TAXES NOT DEDUCTIBLE: 1. estate taxes 2. income tax on income received after death 3. property taxes not accrued before death
G. Losses 1. REQUISITES FOR DEDUCTIBILITY: 1. Losses should arise from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement; 2. Losses should not be compensated by insurance or otherwise; 3. Losses should not be claimed as deduction in the income tax return of the taxable estate; 4. The losses should occur during the settlement of the estate; AND that 5. The losses should occur before the last day for the payment of the estate tax (last day to pay 6 months after the decedent’s death) (2) TRANSFER FOR PUBLIC USE 2. REQUISITES FOR DEDUCTIBILITY: 1) the disposition is in the last will and testament 2) to take effect after death 3) in favor of the government of the Philippines or any political subdivision thereof 4) exclusive for public purpose 5) the value of property given is included in the gross estate 3. The transfer also contemplates bequests, devices, or transfers to social welfare, cultural and charitable institutions (3) VANISHING Previously Taxed) •
Nature and Purpose
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 VANISHING DEDUCTIONS are deductions allowed for properties which were already subjected to transfer taxes (e.g., estate and donor’s tax). The purpose is to minimize the effect of double taxation within a short period of time since the same property will be again subjected to tax in the form of estate tax.
REQUISITES FOR DEDUCTIBILITY: 1. Present decedent acquired the property by inheritance or donation within 5 yrs prior to his death 2. The property must have formed part of the GE of previous decedent or the taxable gift of the donor 3. Estate tax on the prior estate or the donor’s tax must have been paid 4. It must be the same property received from previous decedent or donor 5. Estate of previous decedent or donor have not previously availed of vanishing deduction 6. The property must be located in the Philippines
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; 2) The total value of the family home must be included as part of the gross estate of the decedent; and 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 1 Million. •
(4) FAMILY HOME It is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside as certified by 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. o
Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, etc. QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
The family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return.
CONDITIONS FOR THE ALLOWANCE OF FAMILY HOME AS DEDUCTION FROM THE GROSS ESTATE-
Note that: o The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse, depending upon the classification of the property (family home), and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property. o
For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one family home.
(5) STANDARD DEDUCTIONS •
A deduction in the amount of One million pesos (1,000,000) shall be allowed as an additional deductions without need of substantiation
Full amount shall be allowed as deduction for the benefit of the decedent
(6) MEDICAL EXPENSES •
REQUISITES FOR DEDUCTIBILITY: o Medical cost incurred within the one year prior to the death of the decedent o Up to a maximum amount of 500,000, whichever is lower o Any excess over 500,000 cannot be deductible as claims against the estate o It must be duly substantiated with official receipts for services rendered Page 59 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 o
Any amount incurred within one year from death in excess of P500,000 CANNOT be claimed as a deduction under “claims against estate.”
unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines.
(7) Amount Received by Heirs under RA 4917 o
Amount received by the heirs from the decedent’s employer as a consequence of death of the decedent employee in accordance with RA4917 Provided, such amount is included in the gross estate of the decedent.
(8) Net Share of the surviving spouse in the Conjugal 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. SPECIAL RULES FOR NONRESIDENT ALIENS (for property situated in the Philippines) ALLOWABLE DEDUCTIONS: A. Expenses, Losses, Indebtedness and Taxes • Only the proportion of the total expenses, losses indebtedness and taxes which the value of such part bears to the value of his entire GE wherever situated: Estate situated in the Phils Total estate everywhere
X expenses, losses = allowable indebtedness,taxes deduction
B. Property Previously Taxed (vanishing deductions in the properties in the Philippines) C. Transfers for Public Use OTHER CONSIDERATIONS • •
QuickTime™ and a Net ShareTIFF of(Uncompressed) the surviving spouse in the decompressor are needed to see this picture. from the net Conjugal Property-deducted estate of the decedent To be allowed deductions for a non-resident alien, executor/administrator/ any heir must include in the return to be filed, the value of the gross estate not situated in the Philippines No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines,
ESTATE TAX CREDIT ESTATE TAX CREDIT is a remedy against international double taxation to minimize the onerous effect of taxing the same property twice •
Who may avail of tax credits? o
Only the estate of a citizen or resident alien at the time of the death can claim tax credit for any estate taxes paid to a foreign country
What amount of tax credit may be claimed? Formulas: Limitation A: For estate taxes paid to one foreign country Allowable Final Tax Credit = The lower amount between: a. Tax actually paid to the foreign country, and b. the amount derived from this formula: Net gifts, foreign country x Phil. estate tax Net gifts, world
For estate taxes paid to 2 or more foreign countries the lower amount between limitation A and limitation B. a. Limitation A (per country): - the lower amount between the actual foreign taxes paid to each country and the amount derived from the forumula below: Net gifts, foreign country x Phils. estate tax Net gifts, world
b. Limitation B (by total): - the lower amount between the sum of the actual taxes paid to ALL foreign countries and the answer to the formula below: Net gifts, foreign country x Phils. estate tax Net gifts, world
EXEMPTION FROM ESTATE TAX (Sec. 84 and Page 60 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 87):
The person primarily liable is the estate itself, through the executor and administrator. When there are 2 or more executors or administrators, all of them are severally liable for the payment of tax.
The heir or beneficiary has a subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the net estate. The extent of his liability shall not, however, exceed the value of his share in the inheritance.
1) First P200,000.00 value of the net estate 2) Merger of usufruct in the owner of the naked title Example A died leaving a fishpond; naked title to B, his son, and usufruct to C, another son, for life. C died a year later. The fishpond will be included in the gross estate of A, being the owner. Upon the death of C, the usufruct will be merged into the owner of the naked title B who shall become the absolute owner thereof. The transfer from C to B is exempt from estate tax. 3) Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary • •
The substitution must not go beyond one degree from the heir originally instituted The fiduciary or first heir must be both living at the time of the testator’s death Example A dies and leaves in his will a lot to his brother B who is entrusted with the obligation to transfer the lot to C, a son of A when A reaches legal age. B is the fiduciary heir and C is the fideicommissary. The transfer from A to B is subject to estate tax. But the transmission or delivery to C upon reaching legal age shall be exempt from estate tax.
(2) Procedures 1) Filing of Notice of death (a) Who files: the executor, administrator or any of the legal heirs, (b) When to file: within 2 months after the decedent's death, or within a like period after qualifying as such executor or administrator (c) To whom filed: Commissioner. 2) Filing of Estate Tax Returns • When to file: within six (6) months from the decedent's death; except, the Commissioner, in meritorious cases, grants a reasonable extension not exceeding 30 days for filing the return •
4) Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor 5) Bequests, devises, legacies or transfers to • social welfare, cultural and charitable institutions, and a • no partTIFF of(Uncompressed) theQuickTime™ net income of which inures decompressor are needed to see this picture. to the benefit of any individual: • Provided not more than 30% of the transfers shall be used by such institutions for administration purposes J. COMPLIANCE REQUIREMENTS (1) Persons liable to pay estate tax
Mandatory filing of estate tax returns in all cases of: o transfers subject to the tax imposed herein o transfers though exempt from tax, where the gross value of the estate exceeds P200,000 o regardless of the gross value, the estate consists of registered or registrable property for which a clearance from the Bureau of Internal Revenue is required for the transfer of ownership in the name of the transferee Where to file: o Authorized agent bank o Revenue district officer o Duly authorized city or municipal treasurer of the place of decedent’s domicile o If there is no legal residence in the country, with the Commissioner Page 61 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 CHAPTER II- DONOR'S TAX 3) Payment of Tax: Time of Payment (a) General Rule: at the time the return is filed by the executor, administrator or the heirs but before delivery of the distributive share in the inheritance to any heir or beneficiary.
Definition and Subject
(b) Exception: when the Commissioner finds that payment on due date would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax: 1. not to exceed 5 years, in case the estate is settled through the courts; or 2. 2 years in case the estate is settled extrajudicially In which case it shall be paid on or before expiration of the extension and running of the Statute of Limitations for assessment shall be suspended for the period of any such extension.
In case of installment payments, the clearance shall be released only with respect to the property the corresponding tax has been paid.
The subject of donor’s tax is the gift or donation. Article 725 of the Civil Code defines a gift or donation as “an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.” Thus, the following are the REQUISITES OF VALID GIFT OR DONATION SUBJECT TO DONOR’S TAX: 1. Capacity of the donor 2. Intent to donate 3. Delivery of the subject gift, whether actual or constructive 4. Acceptance by the donee TWO
1. Donation inter vivos: a donation made between living persons; perfection is at the moment when the donor knows of the acceptance of the donee (exception: donations of immovable 1 properties); subject to donor’s tax
(c) Restrictions as to Extension of Time to Pay: o no extension shall be allowed when taxes are assessed by reason of : 1) negligence, 2) intentional disregard of rules and regulations, 3) fraud on the part of the taxpayer
A tax on the privilege of transmitting one’s property or property rights to another or others without adequate and full valuable consideration.
THERE ARE DONATIONS:
The Commissioner may require a bond not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary when an extension for payment is granted.
4) Distribution of Estate • Upon payment, the administrator shall deliver the distributive share in the inheritance to any heir or beneficiary. The estate tax clearance issued by the Commissioner or the Revenue District Officer having jurisdiction over the estate QuickTime™ and a to distribute the will serveTIFFas(Uncompressed) the authority decompressor are needed to see this picture. remaining/distributable properties/share in the inheritance to the heir or beneficiary.
2. Donation mortis causa: a donation which takes effect upon the death of the donor; subject to estate tax The law in force at the time of the perfection or completion of the donation shall govern the imposition of the donor’s tax. ( Sec 11 RR 2-2003 ) Note: Any contribution in cash or in kind to any candidate, political party, or coalition of 1
Must be 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 it 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. Page 62 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 parties for campaign purposes shall be governed by the Election Code as amended. (Sec 99 C of the NIRC).
the final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s 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 a gift, and shall be included in computing the amount of gifts made during the calendar year. Real property considered capital assets under the Tax Code are exempted from this rule (Sec. 100 in relation to Sec. 24 (D) NIRC).
PROPERTIES INCLUDED: 1. citizens or residents of the Philippines – all properties located not only within the Philippines but also in foreign countries 2. non-resident alien – all real and tangible properties within the Philippines, and intangible personal property, unless there is reciprocity, in which case it is not taxable. - See reciprocity rules in the estate taxes for intangible properties (Section 104 NIRC) Applicability of Laws Governing the Imposition of Donor’s Tax The donor’s tax applies to a completed gift. The transfer is perfected from the moment the donors knows of the acceptance by the donee; it is completed by the delivery, either actual or constructively, of the donated property to the donee. The law in force at the time of the perfection/completion of the donation shall govern the imposition of donor’s tax based on the FMV of the property. •
A GIFT THAT IS INCOMPLETE BECAUSE OF RESERVED POWERS, BECOMES COMPLETE WHEN EITHER: • the donor renounces the power; or • his right to exercise ceased because of the happening of some event or contingency or the fulfillment of some condition, other than the death of the donor. A. Gross Gifts • Gifts may be real or personal properties. Personal properties may be tangible, intangible or mixed. •
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ITEMS DEEMED GIFTS OR DONATIONS: o Where property, other than a real 2 property that has been subjected to
Note that in the case of real properties considered as capital assets, the difference between the FMV and the actual value received in transfers for less than the adequate or full consideration shall not be
Debt condoned or remitted
Transfers made in trust for another person
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; whereas, a 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 specifically and tax, unless categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. (Sec. 11, Rev. Reg. 2-2003) See Estate of Fidel Reyes, CTA Case No. 6747, Jan. 16, 2006 where the repudiation by the heirs of an inheritance was held not to be a donation.
subject to donor’s tax. The rationale is that under Section 24 (d), the FMV itself, if higher than the gross selling price, is the base for the computation of capital gains tax. In essence, what the seller avoids in the payment of donor’s tax, it pays for the capital gains tax. Page 63 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
2) Relative by consanguinity in the collateral line within the 4th degree of relationship
Valuation: o Personal property: FMV at the time of donation o
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.
Real Property: FMV as determined by the Commissioner or the FMV in the latest schedule of values of the provincial or city assessor, whichever is HIGHER
OBJECT OF TAXATION: The donor’s tax shall be imposed to the transfer of property by gift, whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. The computation of donor’s tax is on a cumulative basis over a period of one calendar year.
2. Donee is NOT a Stranger to the Donor • Rate: Graduated Rates
B. Computation of Tax st 1. On the 1 donation of the year
D. Gross Gift Less: deductions/exemptions Net gift X tax rate Donor’s tax
xx xx___ xx xx___ xx
=========== 2. On subsequent donation during the year Gross Gift Less: deductions/exemptions Net gift Add: prior net gift Aggregate net gifts X tax rate Donor’s tax on aggregate gift Less: prior donor’s tax paid Donor’s tax on this date
xx xx___ xx xx___ xx xx___ xx xx___ xx
C. Rates of Tax
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1. Donee is a Stranger to the Donor • Rate: 30% • Who is a stranger: A STRANGER IS A PERSON WHO IS NOT A: 1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant
EXEMPTION FROM GIFT TAX (SEC. 101) Exemptions are not to be treated as exclusions from the gross gifts of the donor. They partake the nature of deductions and are, therefore, deductible from gross gifts in order to arrive at the taxable net gifts. 1) Made by a Resident (a) Dowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first P10,000 Note: Both parents may make dowries and gifts made on account of marriage. Each parent shall be entitled to the exemption above. This has the effect of splitting the value of the gift into half for both spouses so each spouse can claim the exemption. However, both spouses must file separate returns because the husband and wife are considered as distinct entities for purposes of donor’s tax. (Sec. 12 RR-2-2003) However, where there is failure to prove that the donation was actually made by both spouses, the donation is taxable as an exclusive act of the husband, without prejudice to the right of the wife to question the validity of the donation Page 64 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 without her consent pursuant to the provisions of the Civl Code and the Family Code. (b) Gifts made to 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 (c) Gifts in favor of an non profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non-government organization, trust or philanthropic organization or research institution or organization; provided, not more than 30% shall be used by such donee for administration purposes. WHAT IS A NON-PROFIT EDUCATIONAL AND/OR CHARITABLE CORPORATION? It is one which is incorporated as a non-stock entity paying no dividends, governed by trustees who received no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation (d) Encumbrances on the property donated if assumed by the donee in the deed of donation (e) Donations made to entities as exempted under special laws. (f) Donations to persons not strangers of not more than P100,000 per year (Sec. 99[A]) In order to be exempt from donor’s tax and to claim full deduction of the donation given to qualified donee institutions duly accredited by the Philippine Council for NGO Certification, Inc.(PCNC), the donor engaged in business shall give a notice of donation QuickTime™ and a (Uncompressed) on every donationTIFFare worth at decompressor least Fifty Thousand needed to see this picture. Pesos (P50,000) to the Revenue District Office(RDO) which has jurisdiction over his place of business within thirty (30) days after receipt of the qualified donee institution’s duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than thirty percent (30%) of the said donation/gifts for the taxable year shall be used by such accredited non-stock, non-
profit corporation/NGO institution (qualified-donee institution) for administration purposes pursuant to the provisions of Section 101(A)(3)and (B)(2) of the Code (RR 2-2003). Abello vs. CIR, GR No. 120721, Feb. 23, 2005 Facts: During the 1987 national elections, petitioners, who are partners in the ACCRA law firm, contributed P882,661.31 each to the campaign funds of Senator Edgardo Angara, then running for the Senate. The BIR assessed each of the petitioners for their contributions. Petitioners questioned the assessment, claiming that political or electoral contributions are not considered gifts under the NIRC, and that, therefore, they are not liable for donor’s tax. The claim for exemption was denied by the Commissioner. On appeal, the CTA ordered the Commissioner to desist from collecting donor’s taxes from the petitioners. The CA reversed and set aside the CTA decision, ordering the petitioners to pay donor’s tax, reasoning as follows: The NIRC, as amended, provides: Sec. 91. Imposition of Tax. a) There shall be levied, assessed, collected, and paid upon the transfer by any person, resident, or non-resident, of the property by gift, a tax, computed as provided in Section 92. b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Pursuant to the above-quoted provisions of law, the transfer of property by gift, whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible, is subject to donor’s or gift tax. A gift is generally defined as a voluntary transfer of property by one to another without any consideration or compensation therefore. In the instant case, the contributions are voluntary transfers of property in the form of money from private respondents to Sen. Angara, without considerations therefor. Hence, they squarely fall under the definition of donation or gift. As correctly pointed out by the Solicitor General: The fact that the contributions were given to be used as campaign funds of Sen. Angara does not affect the character of the fund transfers as donation or gift. There was thereby no retention of control over the disposition of the contributions. There was simply an indication of the purpose for which they were to be used. For as long as the contributions Page 65 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 were used for the purpose for which they were intended, Sen. Angara had complete and absolute power to dispose of the contributions. He was fully entitled to the economic benefits of the contributions. Issue1: What is the definition of a transfer of property by gift? Held1: The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code, states: “In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code.” Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said Code defines donation as: “. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.” Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus donandi. The present case falls squarely within the definition of a donation. Petitioners each gave P882,661.31 to the campaign funds of Senator Angara, without any material consideration. All three elements of a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each. Senator Angara’s patrimony correspondingly increased by P3,530,645.24. There was intent to do an act of liberality or animus donandi was present since each of the petitioners gave their contributions without any consideration. Issue2: Since animus donandi or the intention to do an act of liberality is an essential element of a donation, petitioners argue that it is important to look into the intention of the giver to determine if a political contribution is a gift. Held2: Untenable. First of all, donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. The Court QuickTime™ and a purpose of the was not convincedTIFFthat since the (Uncompressed) decompressor are needed to seeathis picture. contribution was to help elect candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent. an
Issue3: Petitioners maintain that the definition of “electoral contribution” under the Omnibus
Election Code is essential to appreciate how a political contribution differs from a taxable gift. Section 94(a) of the said Code defines electoral contribution as follows: “The term ‘contribution’ includes a gift, donation, subscription, loan, advance or deposit of money or anything of value, or a contract, promise or agreement to contribute, whether or not legally enforceable, made for the purpose of influencing the results of the elections but shall not include services rendered without compensation by individuals volunteering a portion or all of their time in behalf of a candidate or political party. It shall also include the use of facilities voluntarily donated by other persons, the money value of which can be assessed based on the rates prevailing in the area.” Since the purpose of an electoral contribution is to influence the results of the election, petitioners again claim that donative intent is not present. Held3: Petitioners attempt to place the barrier of mutual exclusivity between donative intent and the purpose of political contributions. The Court reiterated that donative intent is not negated by the presence of other intentions, motives or purposes which do not contradict donative intent. Petitioners would distinguish a gift from a political donation by saying that the consideration for a gift is the liberality of the donor, while the consideration for a political contribution is the desire of the giver to influence the result of an election by supporting candidates who, in the perception of the giver, would influence the shaping of government policies that would promote the general welfare and economic well-being of the electorate, including the giver himself. Petitioners’ attempt is strained. The fact that petitioners will somehow in the future benefit from the election of the candidate to whom they contribute, in no way amounts to a valuable material consideration so as to remove political contributions from the purview of a donation. Senator Angara was under no obligation to benefit the petitioners. The proper performance of his duties as a legislator is his obligation as an elected public servant of the Filipino people and not a consideration for the political contributions he received. In fact, as a public servant, he may even be called to enact laws that are contrary to the interests of his benefactors, for the benefit of the greater good. In fine, the purpose for which the sums of money were given, which was to fund the campaign of Senator Angara in his bid for a senatorial seat, cannot be considered as a material consideration so as to negate a donation. 2) Made by a Nonresident Alien Page 66 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (a) Gifts made to 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 (b) Gifts in favor of an non profit educational and/or charitable, religious, cultural or social welfare corporation, institution accredited non-government organization, trust or philanthropic organization or research institution or organization; provided, not more than 30% shall be used by such donee for administration purposes
b. the amount derived from this formula: Net gifts, foreign countryx Phil. donor’s tax Net gifts, world
E. Net Gift •
The net economic benefit 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 liability, then the net gift is measured by deducting from the fair market value of the property the amount of mortgage assumed.
F. Donor’s Tax Credit A situation may arise when the property given as a gift is located in a foreign country and the donor may be subject to donor’s tax twice on the same property – by the Philippine government and by the foreign government where the property is situated.
Who are entitled to claim credits: only resident or citizen donors (resident citizens, non-resident citizens, and resident aliens)
Limitations on Tax Credit: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net gifts situated within such country taxable QuickTime™ and a under the TIFF NIRC bears to his entire net gift; (Uncompressed) decompressor are needed to see this picture. and
The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net gift situated outside the Philippines taxable under the NIRC bears to his entire net gift.
Formulas: Limitation A: For donor’s taxes paid to one foreign country Allowable Final Tax Credit = The lower amount between: a. Tax actually paid to the foreign country, and
For donor’s taxes paid to 2 or more foreign countries the lower amount between limitation a and limitation b. a. Limitation A (per country): - the lower amount between the actual foreign taxes paid to each country and the amount derived from the forumula below: Net gifts, foreign country x Phils. donor’s tax Net gifts, world
b. Limitation B (by total): - the lower amount between the sum of the actual taxes paid to ALL foreign countries and the answer to the formula below: Net gifts, foreign country x Phils. donor’s tax Net gifts, world
G. Special Rules on Husband and Wife •
Husband and wife are considered as separate and distinct taxpayer’s for purposes of the donor’s tax.
However, 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 donor’s tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines.
H. Compliance Requirements (Sec. 103) 1) Who are liable to file donor’s tax return? • Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property Page 67 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.
2) When to file donor’s tax • The donor’s tax return shall be filed within 30 days after the date the gift is made 3) When to pay the tax • Pay at the time of filing (pay-as-you-file system) TITLE VIII – REMEDIES PART I. REMEDIES GOVERNMENT
No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee , or charge imposed by the NIRC (Sec. 218) • Justification: lifeblood theory EXCEPTION: Injunction may be issued by the CTA in aid of its appellate jurisdiction under Sec. 11 of RA QuickTime™ and a TIFF (Uncompressed) decompressor 1125, as amended by RA 9282 (…when in the are needed to see this picture. opinion of the Court the collection … may jeopardize the interest of the Government and/or the taxpayer, the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.) Prescription
The following are covered by the general rule (Sec. 203): • false return-filed with no intent to evade tax • fraudulent return-filed with intent to evade tax
In General 1. Compromise (Sec. 204) 2. Distraint - actual and constructive (Sec. 205208) 3. Levy (Sec. 207b) 4. Tax lien (Sec. 219) 5. Civil Action (Sec. 221) 6. Criminal Action (Sec. 221-222) 7. Forfeiture of Property (Sec. 224-225) 8. Suspension of business operations in violations of VAT (Sec. 115) 9. Enforcement of administrative fine the remedies of disraint 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.
Prescriptive Periods 1) Assessment of Tax Liability 3 years from the following, whichever comes later (Sec. 203): 1. the last day prescribed by law for filing the return (when filed on or before such date), or 2. the day when the return was actually filed (when filed after the last day prescribed). 10 years after the discovery of the falsity, fraud or omission in case of: 1. false or fraudulent return with intent to evade tax, or 2. failure to file a return (Sec. 222 a)
within the period agreed upon, when both the Commissioner and the taxpayer have agreed in writing, before the expiration of the period in Sec. 203 for the assessment of tax, to an assessment after such time. Such period agreed upon may be extended by written agreement before the expiration of such agreed upon period. (Sec.222 b) •
SUSPENSION OF PRESCRIPTIVE PERIODS: (Sec. 223) 1) Periods suspended: (a) periods for assessment in Sec. 203 and 222 (b) beginning of distraint or levy (c) proceeding in court for collection 2) Grounds for suspension of prescriptive periods: [ PLORP ] a) Commissioner is Prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for 60 days thereafter b) Taxpayer requests for Reinvestigation which is granted c) Taxpayer cannot be Located in the address given in the return filed, except if the taxpayer Page 68 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 informs the Commissioner of a change in address the prescriptive period will not be suspended d) When the warrant is duly served upon the taxpayer and no Property could be located e) When the taxpayer is Out of the Phils.
2. The financial position of the taxpayer demonstrates a clear Inability to pay the assessed tax. (Sec. 204 A) in such case, the taxpayer should waive the confidentiality privilege on bank deposits under RA 1405 (Sec 6 (F)(2) NIRC). The corporation ceased operation or is already dissolved; The taxpayer is suffering from earning deficit resulting to an impairment in the original capital by at least 50% The taxpayer is suffering from a net worth deficit computed by deducting total liabilities form total assets, taken from the latest audited financial statements The taxpayer is a compensation earner with no other sources of income and the family’s gross monthly compensation does not exceed (P 10,500/month if single; P 21,000/month if married) and that it appears that the taxpayer possesses no other leviable/distrainable assets, other than his family home; The taxpayer has been granted by the SEC or by any competent tribunals a moratorium or suspension of payments to creditors or otherwise declared bankrupt or insolvent (Sec 3, RR 7-2001).
A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced. (Art. 2028, New Civil Code)
REQUISITES: o The taxpayer have a tax liability o There must be an offer (by the taxpayer of an amount to be paid by the taxpayer) o There must be an acceptance (by the Commissioner or the taxpayer as the case may be) of the offer in the settlement of the original claim
When may taxes be compromised? 1. A reasonable doubt as to the validity of the claim against the taxpayer exists: The delinquent account or disputed assessment is one resulting from a jeopardy assessment 3; or 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 QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial trial in light of the RO’s belief that assessment and collection of tax will be jeopardized by the delay caused by the taxpayer’s failure to 1) comply with audit and investigation requirements and 2) substantiate any or all claims, deductions or credits in his return.
In general, the taxpayer's criminal liability arising from his violation of the pertinent provision of the Code may be settled extrajudicially instead of the BIR instituting against the taxpayer a criminal action in Court.
A compromise in extra-judicial settlement of the taxpayer's criminal liability for his violation is consensual in character, hence, may not be imposed on the taxpayer without his consent. Hence, the BIR may only suggest settlement of the taxpayer's liability through a compromise. (RR 012-99)
CASES NOT SUBJECT TO COMPROMISE: 1. Withholding tax cases 2. Criminal tax fraud cases 3. criminal violations already filed in court 4. Delinquent accounts with duly approved Page 69 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 schedule of installment payments 5. 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 6. Cases which become final and executory after final judgment of a court (Sec 2 RR 7-2001). •
P1,000,000 or b) where the settlement offered is less than the prescribed minimum rates o
Power to Compromise o Who has the Power to Compromise? The Commissioner of Internal Revenue with respect to criminal and civil cases arising from violations of the tax code (Sec 7c and 204). The power to compromise is vested in the CIR. The NIRC allows the Commissioner of Internal Revenue to compromise the civil as well as criminal cases arising thereunder. No similar provision exists, vis-a-vis the Collector or Commissioner of Customs, in regard to violations of the Tariff and Customs Code. (People vs. Desiderio L-20805, November 29, 1965).
If an offer of compromise is rejected by the taxpayer, the compromise penalty cannot be enforced thru an action in court or by distraint and levy. The CIR should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only way to enforce a penalty. (Commissioner vs. Abad, L-19627, June 27, 1968).
LIMITATIONS FOR COMPROMISE OF TAX LIABILITY: (Sec. 204A) QuickTime™ and a 1. Minimum compromise rate: TIFF (Uncompressed) decompressor are needed to see this picture. a) In case of financial incapacity, 10% of basic assessed tax b) In other cases, 40% of basic assessed tax 2. Compromise subject to approval of Evaluation Board (composed of Commissioner and 4 Deputy Commissioners): a) when basic tax involved exceeds
Extent of the Commissioner’s Discretion to Compromise Criminal Violations 1. Before the complaint is filed with the prosecutor’s office: the CIR has full discretion to compromise except those involving fraud 2. After the complaint is filled with the prosecutor’s office but before the information is filed with the court: the CIR can still compromise provided the prosecutor must give consent 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, April 20, 1961)
This is more so when the court has rendered a final judgment. As a mere agent of the Government, the Commissioner is not authorized to accept anything less than what is adjucated in favor of the government by virtue of such final judgment, the government has already acquired a vested rights.
Nature of a Compromise in Extrajudicial Settlement of the Taxpayer’s Criminal Liability for his Violation It is consensual in character, hence; may not be imposed on the taxpayer without his consent. 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 with the schedule of compromise penalties provided under the relevant BIR regulations or orders.
Remedy in Case the Taxpayer Refuses or Fails to Abide the Tax Compromise 1. Enforce the Compromise If it is a judicial compromise, it can be enforced by mere execution. A Page 70 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 judicial compromise is one where a decision based on the compromise agreement is rendered by the court on request of the parties Any other compromise is extrajudicial and like any other contract can only be enforced by court action 2. Regard it as rescinded and insist upon original demand (Art 2041, Civil Code) •
Other Consideration on Compromise Agreements o Compromise Penalty It is the amount of money which the taxpayer pays to compromise tax violations. This is paid in lieu of criminal prosecution. A taxpayer cannot be compelled to pay a compromise penalty if he does not want to pay, in which case the CIR must institute a criminal action.
When may taxes be abated or cancelled? [ UJ ] 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 (Sec. 204 B)
Abatement vs. Compromise In Abatement, there’s a cancellation of the entire tax liability, while compromise involves a mere reduction of the tax. Abatement • THE COMMISSIONER MAY ABATE OR CANCEL A TAX LIABILITY WHEN: 1. the tax or any portion thereof appears to be unjustly or excessively assessed (Sec 204 (b)) o when the filing of the return/payment is made at the wrong venue o whenQuickTime™ the taxpayer’s mistake in and a TIFF (Uncompressed)of decompressor payment his tax is due to are needed to see this picture. erroneous written official advice of a revenue officer o when the taxpayer fails to file the return and pay the tax on time due to substantial losses from prolonged labor dispute, force majure, legitimate business reverses, provided, the
abatement shall only cover the surcharges and the compromise penalty and not the interest imposed under Sec. 249 o 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 o when the taxpayer fails to file the return and pay the correct tax on time due to circumstances beyond his control, provided, the abatement shall cover only the surcharges and the compromise penalty and not the interest imposed under Sec 249 o late payment of the tax under meritorious circumstances (Sec. 2, RR 13-2001) the admission and collection costs involved do not justify the collection of the amount due (Sec 204 (b) Abatement of penalties on assessment confirmed by the lower court but appealed by the taxpayer 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 taxpayer is still contesting reduced assessment such other circumstances which the Commissioner may deem analogous to the enumerations above (Sec. 3, RR 13-2001)
Distraint (Only For Personal Property) O
Definition and Nature It is the seizure by the government of personal property, tangible or intangible to enforce the payment of taxes on the goods, chattels or effects of the taxpayer including other personal property of whatever character. The property may be offered in a public sale if taxes are not voluntarily paid. It is a summary remedy.
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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.
Types of Distraint A. Actual Distraint There is taking of possession of the personal property from the taxpayer by the government. Physical transfer of possession is not always required. This is true in case of intangible property such as stocks and credits. • Resorted to only when the taxpayer becomes delinquent. • There is actual seizure of the property of the delinquent taxpayer. • Resorted to when there is actual delinquency in tax payment. B. Constructive Distraint • There may be no actual delinquency. • Taxpayer is prohibited from disposing of the property and must preserve the same ACTUAL DISTRAINT Made only on the property of a delinquent taxpayer there is taking or possession Effected by leaving a list of distrained property or by service of a warrant of distraint or garnishment an immediate step for collection of taxes
CONSTRUCTIVE DISTRAINT made on the property of any taxpayer, whether delinquent or not the taxpayer is merely prohibited from disposing of his property Effected by requiring the taxpayer to sign a receipt of the property or by the revenue officer preparing and leaving a list of such property not necessarily an immediate step for collection QuickTime™ and aof taxes
TIFF (Uncompressed) decompressor are needed to see this picture.
Are summary remedies for the collection of taxes Refer only to personal property Cannot be availed of where the amount of the tax involved is not more than P 100
REMEDY OF DISTRAINT: The taxpayer must be delinquent (except in constructive distraint) in the payment of taxes There must be a subsequent demand for its payment The taxpayer must have failed to pay the tax at the time required; and The period within which to assess or collect the tax has not yet prescribed. Distraint of Personal Property (Actual Distraint) WHO MAY EFFECT DISTRAINT Commissioner or his duly authorized representative Revenue District Officer (Sec. 207(a))
AMOUNT INVOLVED In excess P1,000,000 P1,000,000 less
PROPERTY SEIZED OR DISTRAINED: a) goods, chattels, effects and other personal property b) including stocks and other securities, debts, credits, bank accounts, interests in and rights to personal property PROCEDURE FOR THE ACTUAL DISTRAINT OR GARNISHMENT 1) Report on the Distraint (Commencement of distraint proceedings) a) by the distraining officer 1. submitted within 10 days from receipt of the warrant 2. submitted to the Revenue District Officer and to the Revenue Regional Director b) by the Revenue Regional Director - a consolidated report, as may be required by the Commissioner The order of Distraint may be lifted by the Commissioner or his representative (Sec. 207 A) 2) Service of Warrant of Distraint Procedure with respect to: (a) Goods, effects, chattels and other personal property 1. a copy of an account of the property distrained, signed by the officer, shall be left either with the owner or the person from whom the property was taken or at the dwelling or place of business of such person and with someone of suitable age and discretion 2. together with a statement of the sum demanded Page 72 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 3. and also a note of the time and place of sale (b) Stocks and other Securities 1. serving a copy of the warrant upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the issuing corporation, company, association (c) Debts and Credits 1. leaving a copy of the warrant with the person owing the debts or having in his possession such credits or his agent the warrant shall be sufficient authority to the person served to pay to the Commissioner the amount of such debts or credits (d) Bank accounts (garnishment) 1. serve a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank 2. bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient (Sec.208) 3)
Posting of Notice (Sec. 209) Notice specifying the time and place of sale and the articles distrained. The posting shall be made in not less than 2 public places in the city or municipality where the distraint is made. One of the places for posting of such notice is the Office of the Mayor of such city or municipality.
Sale of Property Distrained
CONSTRUCTIVE DISTRAINT 1) When may this occur? [ HORRID ] (Sec. 206) a) taxpayer is Delinquent b) taxpayer is Retiring from any business subject to tax c) taxpayer is Intending to leave the Phil. or to Remove his property therefrom d) taxpayer Hides or conceals his property e) taxpayer performs any act tending to QuickTime™ and proceedings fora collection of any Obstruct the TIFF (Uncompressed) decompressor are needed to see this picture. tax due 2) Procedure (a) Require the taxpayer or any person having possession/control of the property to 1. sign a receipt covering property distrained; and 2. obligate himself to preserve the same intact and unaltered; and
3. not to dispose of the property in any manner, without the express authority of the Commissioner. (b) Where taxpayer or person in possession refuses to sign: distraining officer shall prepare a list of the property distrained in the presence of 2 witnesses leave a copy in the premises where the property is located = after which the said property shall be deemed to have been placed under constructive distraint (Sec. 206) Note: - Constructive distraint is an additional remedy because the government can resort to it while the remedy of actual distraint is not yet available, meaning the assessment process is still to be done. LEVY (ONLY ON REAL PROPERTY) The seizure of real property of the taxpayer and interests or rights to such property for the satisfaction of taxes due from the delinquent taxpayer to enforce the payment thereof. The property may be offered in a public sale, if after seizure, the taxes are not voluntarily paid. When may Levy be effected? It is effected by issuing a warrant of levy and giving a written notice to the taxpayer and the Register of Deeds, after which the real property shall be sold at a public sale to satisfy the tax obligation of the taxpayer. When exercised: before, simultaneously or after the distraint of personal property belonging to the taxpayer Procedure of Levy on Real Property Prepare Certificate of Levy (a) Internal revenue officer shall prepare a duly authenticated certificate showing: the name of taxpayer amounts of tax and penalty due (b) Enforceable as a legal execution throughout the Philippines (c) officer shall write upon the certificate a description of the property upon which levy is made written notice of levy shall be mailed or served upon 1. the delinquent taxpayer, or if he is absent from the Philippines, to his Page 73 of 145
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agent or manager if the business in respect to which the liability arose, or if there be no agent, to the occupant of the property. 2. the Register of Deeds where the property is located (Sec. 207[B]) Advertisement of the time and place of sale, which shall contain a) The amount of tax and penalties due b) Name of the taxpayer c) 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 effected by: a) posting a notice at the main entrance of the municipal building or the city hall and in public and conspicuous place in the barrio or district where the property is located b) by publication once a week for 3 consecutive weeks in newspaper of general circulation in the municipality or city where the property is located (Sec. 213) Sale Awarded to the highest bidder In case the proceeds of the sale exceeds the claim and costs of sale, the excess shall be turned over to the owner of the property. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties, and interests.
Within 1 year from the date of sale, the property may be redeemed by the delinquent taxpayer or anyone from him, upon the 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) The taxpayer-owner shall not be deprived of possession of said property and shall be entitled to rents and other income until the expiration of the period for redemption.
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 (Sec. 215) 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. (Sec 217) Otherwise, a clever taxpayer who is also 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.
DISTRAINT VS. LEVY DISTRAINT refers to personal property forfeiture of the property in favor of the government is not provided
LEVY involves real property
Forfeiture authorized if (§ 215): There is no bidder or If the highest bid is insufficient to pay the taxes, penalties and costs There is no right of There is a right of redemption on the redemption in case of QuickTime™ and a personal property TIFF (Uncompressed) realdecompressor property levied upon are needed to see this picture. and sold or forfeited to the government Both: summary remedies for collection cannot be availed of where amount involved do not exceed P100 Redemption of Property Sold
TAX LIEN It is a legal claim or charge on property, either real or personal, established by law as a security in default of the payment of taxes (51 AmJur 881). Generally, it attaches to the property irrespective of ownership or transfer thereof. o
Nature- a lien in favor of the Government of the Philippines when a person liable to pay a tax neglects or refuses to do so upon demand Duration- lien exists from the time assessment is made by the Commissioner until paid, with interests, penalties and costs that may accrue in addition thereto Extent- upon all property and rights to property belonging to the taxpayer Effectivity against third persons- only when notice of such lien is filed by the Commissioner in the Register of Deeds in the province/city where the property is situated (Sec. 219) Superior
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property Attaches not only from the time the warrant was served BUT from the time tax was due and demandable (from the time when the assessment was made [Sec. 219]).
LIEN Directed against the property subject to the tax Regardless of the owner of the property
DISTRAINT Need not be directed against the property subject to tax Property seized must be owned by the taxpayer
CIVIL ACTIONS For tax remedy purposes, these are actions instituted by the government to collect internal revenue taxes. It includes filing by the government with the probate court claims against the deceased taxpayer. Resorted to when the tax liability becomes final and unappealable, or when the decision of the Commissioner becomes final or executory. When: • A tax is assessed and the assessment becomes final and unappealable because the taxpayer fails to file an administrative protest with the BIR within 30 days from the receipt of the assessment. • When an administrative protest filed by the taxpayer against the assessment is o denied, in whole and in part or o Is not acted upon within 180 days from submission of the documents, and o The taxpayer adversely affected by the decision or inaction fails to file an appeal with the CTA within 30 days from receipt of said decision or from the lapse of the 180 day period. 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 2) RTC, Mun. TC,QuickTime™ Metroand aTC- where the TIFF (Uncompressed) decompressor principal amount of taxes and fees, exclusive are needed to see this picture. of charges and penalties claimed is less than P1,000,000.00 (Sec 7[c], RA 9282) The approval of the CIR is essential in civil cases (Sec. 220). However under Sec. 7 of NIRC, the Commissioner may delegate such power to a Regional Director. Defenses which are Precluded by Final and
Executory Assessment Invalidity or illegality of the assessment and Prescription of the government’s right to assess CRIMINAL ACTIONS The judgment in the criminal cases 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) Resorted not only for the collection of the taxes but also for the enforcement of statutory penalties of all sorts. Where to file 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 P1,000,000.00 and above. 2) RTC, Mun. TC, Metro TC- 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 fess exclusive of charges and penalties claimed is less than P1,000,000.00 or where there is no specified amount claimed (Sec 7[b], RA 9282) Acquittal of the taxpayer in criminal case does not exonerate him from liability to pay Taxes Under the Penal Code the civil liability is incurred by reason of the offender's criminal act. Stated differently, the criminal liability gives birth to the civil obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation under the income tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the criminal infractor of the income tax law. (Republic vs. Patanao). While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. (Ungab vs. Cusi L41919-24, 30 May 1980, 97 SCRA 877) Page 75 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Effect of Subsequent Satisfaction of Civil Liability The subsequent satisfaction of civil liability by payment or prescription does not extinguish the taxpayer’s criminal liability. 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) 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 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. An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfuly filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. (Ungab v. Cusi, L-41919-24, 30 May 1980, 97 SCRA 877) See also CIR vs. Pascor Realty, GR No. 128315, June 29, 1999, which reached the same conclusion as in Ungab. HOWEVER, in the case of CIR vs. CA, CTA, & Fortune Tobacco (GR No. 119761, Aug. 29, 1996), the CIR held a contrary position CIVIL AND CRIMINAL ACTIONS: 1. Must be brought in the name of the Government QuickTime™ and a of the Philippines TIFF (Uncompressed) decompressor are needed to see this 2. Conducted by legal officers ofpicture. the BIR 3. In case of actions for recovery of taxes or enforcement of a fine, penalty or forfeiture, must be filed with the approval of the Commissioner (Sec. 220)
Divestiture of property without compensation, in consequence of a default or offense.
forfeited property shall not be destroyed until at least 20 days from seizure
ENFORCEMENT OF REMEDY OF FORFEITURE: Personal Property Seizure and sale or destruction of specific forfeited property Real Property Judgment of condemnation and sale Distille spirits, liquors, Upon forfeiture, may be cigars, cigarettes destroyed by order of the manufactured, products CIR where the sale may of tobacco and apparatus be injurious to public used for their production health or prejudicial to law enforcement Other articles subject to Upon forfeiture may be excise tax which have sold or destroyed at the been manufactured or discretion of the CIR. removed in violation of Forfeited property shall the Code, dies for not be destroyed until at printing or making fake least 20 days from revenue stamps and seizure labels
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 sale goes to the coffers of the government. The provisions in the Code which entitles the taxpayer to the balance of the proceeds in excess of the tax liability is entirely inapplicable to forfeited property. It relates solely to the sale of property distrained to pay taxes of delinquents and the disposition of the proceeds thereof. (US v. Surla, 20 Phil 163). There is a great difference between a seizure under forfeiture and a seizure to enforce a tax lien. In the former all the proceeds derived from the sale of the thing forfeited are turned over to the Collector of Internal Revenue; in the latter the residue of such proceeds over and above what is required to pay the tax sought to be realized, including expenses, is returned to the owner of the property. (Bank of Phil. Island v. Trinidad, 42 Phil 220).
FORFEITURE: (SEC. 224-225) ASSESSMENT AND COLLECTION Page 76 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Letter of Authority The letter of authority is an official document that empowers a Revenue Officer to examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order to determine the taxpayer’s correct internal revenue tax liabilities -
WHO ISSUES LOA: o CIR – for those units reporting directly under him o Regional Directors – for taxpayers covered by his particular region. If the CIR has already issued an LA to investigate a particular taxpayer, the Regional Director shall desist from issuing another LA for the same taxpayer. WHERE NO LETTER OF AUTHORITY NEEDED: - Cases involving civil/criminal tax fraud which fall under the jurisdiction of the tax fraud division of the enforcement services, and - policy cases under audit by the special teams in national offices
PRE-ASSESSMENT STAGE STEP 1: Notice of Informal Conference - 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 tax assessments, this recommendation is communicated by the Bureau to the taxpayer concerned during an informal conference called for this purpose, the taxpayer shall have 15 days from receipt of the notice of informal conference to explain his side. STEP 2: Informal Conference QuickTime™ and a (Uncompressed) MATTERS TIFF TAKEN UP: decompressor are needed to see this picture. 1. Discussion on the merits of the assessment 2. Attempt of taxpayer to convince the examiner to conduct a re-investigation and or re-examination 3. Evaluate if the submission of the waiver of the SOL is necessary – evaluation may extend beyond 3 years
4. Taxpayer to advise the examiner if position paper JEOPARDY ASSESSMENT: a tax assessment made by an authorized revenue officer without the benefit of a complete or partial audit if the officer believes that the assessment and collection will be jeopardized by the delay caused by the taxpayer’s failure to: a. comply with audit and investigation requirements to present his books of accounts and or pertinent records b. substantiate all or any of the deductions, exemptions or credits claimed in his return. it is usually when statutory prescriptive periods for the assessment or collection of taxes are about to lapse due to taxpayer’s fault.
STEP 3: Issuance of Pre-Assessment Notice (PAN) - 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. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment is void. - If the taxpayer disagrees with the findings in the PAN, he has 15 days to file a written reply contesting the proposed assessment. WHEN PAN NO LONGER REQUIRED: a. mathematical errors b. discrepancy has been determined between tax withheld and amount actually remitted by the withholding agent c. 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 d. when the excise tax due has not been paid, or e. when an article locally purchased or imported by an exempt person Page 77 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 has been sold, traded, or transferred to a non-exempt person BURDEN OF PROOF: - 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 it (Cagayan Robina Sugar Milling V. CA) Reasons: > lifeblood theory > presumption of regularity in the performance of public functions Note: assessments by the BIR must have on its face the law and facts upon which the presumption is made. FORMAL ASSESSMENT STAGE Notice of Assessment is a formal letter of demand where a declaration of deficiency taxes is 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. This is commonly known as the Final Assessment Notice. An assessment contains not only a computation of under declaration of taxable sales, receipts or income, OR a substantial overstatement of deductions - Failure to report sales, receipts, or income in an amount exceeding 30% of that declared per return, and a claim of deductions exceeding 30% of actual deductions constitute substantial under declaration or over declaration. - The state cannot be estopped by the QuickTime™ and a TIFF agents (Uncompressed) decompressor neglect of its and officers. The rule of are needed to see this picture. estoppel cannot be invoked by the taxpayer in order to preclude the collection of taxes that is rightfully due the government. What Constitutes an Assessment? There is no form for an assessment, it can be written anywhere as long as it is signed by
the BIR. Any notice sent to the taxpayer demanding the tax liability is an assessment. GENERAL RULE: Taxes are self-assessing and do not require the issuance of an assessment notice in order to establish the tax liability of a taxpayer. Exceptions: 1. Tax period of a taxpayer is terminated (sec. 6d, NIRC) 2. Deficiency tax liability arisinf from a tax audit conducted by a BIR (sec 56b, NIRC) 3. Tax lien (sec. 219, NIRC) 4. Dissolving Corporation (sec. 52c, NIRC) Requisites of a valid assessment: 1. in writing 2. must state the facts and law upon which it is based (Sec. 228) Assessments Prima facie correct Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L81446 August 18, 1988.) Assessment Discretionary on the part of Commissioner Since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws, which is the primary responsibility of the executive branch of the government, mandamus may not lie against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be tantamount to a usurpation of executive functions. (Meralco Securities vs. Savellano, L-36181 and L-36748, Oct. 23, 1992).
Void vs. Illegal Assessment An assessment is illegal and void when the assessor has no power to act at all. It is erroneous when the assessor has the power but errs in the exercise of that power. It is settled in our jurisdiction that where an assessment is illegal and void, the remedy of a taxpayer, who has already paid the realty tax under protest, is to sue for refund in the competent court. On the other hand, where the assessment is merely erroneous, his recourse is to file an appeal in the Provincial Board of Assessment Appeals within 60 days from receipt of the assessment. (GR L-24213 March 13, 1968)
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PRESCRIPTIVE PERIODS FOR THE ASSESSMENT AND COLLECTION OF TAXES Rationale The periods are designated to secure the taxpayers against unreasonable investigation after the lapse of the period prescribed. They are also beneficial to the government because tax officers will be obligated to act promptly.
Rules on Prescription When the tax law itself is silent on prescription, the tax is imprescriptible When no return is required, tax is imprescriptible N.B. Remedy of taxpayer is to file a return Defense of prescription is waivable
No Fraud in the following cases: ¾ mere understatement in the tax return will not necessarily imply fraud (Jalandoni V. Republic) ¾ Sale of real property for less than FMV is not necessarily a false return ( CIR v.Ayala Securities) ¾ Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the trial court (CIR v. Ayala Securities) ¾ Farud is never imputed and the courts never sustain findings of fraud upon circumstances that only create suspicion ( CIR v. Javier) ¾ Mistakes of revenue officers on three different occasions remove element of fraud ( Aznar V. CTA and Collector)
Prescriptive Period for the Assessment of Taxes a) General Rule: 3 years after the date the return is due or filed, whichever is later (Sec 203) b) Exceptions: failure to file return: 10 years from date of discovery of the omission to file the return (Sec 222A) False or fraudulent return with intention to evade the tax: 10 years from the date of the discovery of the falsity or fraud (Sec 222A) Nothing in Sec 222A shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree Fraud must be alleged and proved as a fact. It must be the product of a deliberate intent to evade taxes. It may be established by the: 1. intentional and substantial understatement of the tax liability by the taxpayer (substantial underdeclaration of income; >30% of that declared [Sec. 248]) 2. intentional and substantial QuickTime™ and overstatement of a deductions of TIFF (Uncompressed) decompressor are needed to see this picture. of exemptions (>30% the actual deductions [Sec. 248]) 3. recurrence of the above circumstances Falsity constitutes a deviation from the truth due to mistake, carelessness or ignorance. There is fraud in the following cases:
Fraud must be the product of a deliberate intent to evade taxes (Jalandoni V. Republic) Simple statement that return filed was not fraudulent does not disprove existence of fraud (Tayengco V. Collector) Substantial underdeclarations of income for six consecutive years demonstrate fraudulence of returns (Perez V. CTA) Presence of fictitious expenses, with no evidence presented, proves existence of fraud (Tan Guan V. CIR)
Agreement in writing to the extension of the period to assess between the CIR and the taxpayer before the expiration of the 3 year period. The extension 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)) Written waiver or renunciation of the original 3 years limitation, signed by the taxpayer.
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
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 sending of the notice must clearly be proven. (Basilan Estate v. CIR, 21 SCRA 17). Amendment of Return If the amended return is substantially different from the original return, the prescriptive period shall be counted from the filing of the amended return. But the said period shall run from the filing of the original return, if the same is sufficiently complete to enable the CIR to make proper assessment ( CIR v. Phoenix Assurance Co.) Within 3 years from the date of such filing, the same may be modified, changed or amended, provided that no notice for audit or investigation of such return, statement, or declaration has in the meantime been actually served upon the taxpayer. Effect of filing a wrong return: the 10 year prescriptive period for cases where returns are not filed applies. Prescriptive Period for the Collection of Taxes • 5 years – from assessment or within period for collection agreed upon in writing before expiration of the 5 year period (Sec 222) • 10 years – after discovery in case of false or fraudulent return with intent to evade or failure to file return, without need for an assessment (Sec 222) Prescriptive Period where the Government’s Action is on a Bond which the Taxpayer Executes in order to Secure the Payment of his Tax Obligation • 10 years under Art. 1144(1) of the Civil Code and not 3 years under the NIRC. In this case the taxpayers failed to pay the installments due despite demand. Hence, the Government sued on the bond which is a separate and distinct obligation of the parties thereto. The action is for the enforcement of a contractual obligation. (Republic v. Araneta, GR No. L-14142, May 30, 1961) Grounds for Suspension of the Running of the QuickTime™ and a Statute of Limitation TIFF (Uncompressed) decompressor are needed to see this picture. 1. when the CIR is prohibited from making the assessment or beginning the distraint or levy or a proceeding in court, and for 60 days thereafter 2. when the taxpayer requests for a reconsideration which is granted by the CIR 3. 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
4. when the warrant of distraint or levy is duly served and no property is located 5. when the taxpayer is out of the Philippines (Sec. 223) A Tax Return is Considered Filed for Purposes of Starting the Running of the Period of Limitation • The return is valid- it has complied substantially with the requirements of the law • 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. Prescriptive Period for the Violation of Any Provision of the Tax Code (Sec. 281) should be filed 5 years from the (1) day of the commission of the violation of the law, and if the same shall be not known, from the (2) discovery thereof and the institution of the judicial proceedings for its investigation and punishment (Lim v. CA 190 SCRA 616) 1. Charge is failure or refusal to pay deficiency income-committed only after the finality of the assessment coupled with the taxpayer’s willful refusal to pay the taxes within the allotted period 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 proceedings for the investigation and punishment of the tax offense before the 5 year prescriptive period begins to run. WHEN TAX DEEMED COLLECTED: 1. By summary remedies – when the Government avails of the summary method of distraint and levy procedure 2. By judicial remedies – by filing a complaint through the proper court Note: if the decision of the CIR on protested assessment is appealed to the CTA, the collection of tax is considered begun when the Government filed its answer to the taxpayer’s petition for review. (Fernandez Hermanos v. CIR) INFORMER’S REWARD -Persons instrumental in the discovery of violations of the NIRC and in the discovery and seizure of smuggled goods REQUISITES TO QUALIFY FOR THE REWARD: Page 80 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1. Person is not an internal revenue official or employee, public official, or employee or relative within the 6th degree of consanguinity 2. Voluntarily gives definite and sworn information: a. not yet in the possession of the BIR b. leading to discovery of frauds c. resulting in the discovery of revenue, surcharges and fees, and/or, conviction of the guilty party d. not refer to a case already pending or previously investigated or examined by the CIR or his agents or the SOF or his agents Amount of Reward - 10% of the revenues, surcharges or fees recovered and/or fine/penalty imposed, or P1,000,000, whichever is LOWER. - the cash rewards shall be subject to income tax at the rate of 1-% Note: ¾
Status offering rewards must be liberally construed in favor of informers and with regard to the purpose for which they are intended, with mere technicality yielding to the substantive purpose of the law Same amount shall be given if the offerender offered to compromise and such offer has been accepted and collected by the CIR If no revenue, surcharge, or fees be actually collected, such person is not entitled to a reward For discovery and seizure of SMUGGLED GOODS -> the cash reward is 10% of the FMV of the smuggled and confiscated goods, or P1,000,000, whichever is lower.
PART II. REMEDIES AVAILABLE TAXPAYER General Remedies
1. Administrative QuickTime™ and a A. Before payment TIFF of taxes (Uncompressed) decompressor are needed to see this picture. a) protest of assessment • Filing a petition for reconsideration or reinvestigation within 30 days from receipt of assessment. • Within 60 days from filing, all relevant documents should be filed, otherwise assessment becomes FINAL and cannot be appealed (Sec 228) Submission of documents within the 60 days
period is optional to the taxpayer. The relevant supporting documents mentioned in the law refers to such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the 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 v. CTA, Case No. 5696, Aug. 16, 2001) A protest is 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 of administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuations of the CIR. This is equivalent to a pleading. b) Entering into a compromise (Sec. 204)
CHARACTERISTICS OF A VALID PROTEST: 1. It is made in writing, and addressed to the Commissioner of Internal Revenue 2. It contains information as specified in RR12-85 3. It states the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void and without force and effect. 4. It is filed within the period prescribed by law. B. After payment of taxes a) Claim for refund or tax credit • Within 2 years from the date of payment regardless of any supervening cause (Sec. 228) 2. Judicial Relief A. Civil Action a) Appeal to the CTA • within 30 days from receipt of the decision on the protest or from the lapse of the 180 days inaction of the Commissioner (Sec. 228) • Within the 30 day period to appeal, the taxpayer mat file several motions for reconsideration with the Commissioner instead of at once filing his petition for review before the CTA. The subsequent motion for reconsideration tolls the running of the prescriptive period. The prescriptive period begins to run again when the taxpayer receives the letter denying its request/motion for recon. He then only has the remainder of the Page 81 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 original 30-day period to appeal to the CTA. (Surigao Electric Co. vs. CA, 1974) • A division of the CTA shall hear the appeal. (sec. 11, RA 1125) b) 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) c) Action for damages • against a revenue officer by reason of any act done in the performance of official duty (Sec 227) 3. Criminal Action a) Against erring BIR officials and employees b) Injunction • When the CTA in its opinion the collection by the BIR may jeopardize the taxpayer. Court may require deposit of an amount or surety bond for not more than double the amount with the enactment of RA 9282, the CTA has now jurisdiction over criminal cases Denial of Protest: 1. Direct Denial The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void and without force and effect, in which case the same shall not be considered a decision a disputed assessment and (b) that the same is his final decision. (sec. 3.1.5, RR 12-99) 2. Indirect Denial a. Commissioner did not rule on the taxpayer’s MR of the assessment – it was only when respondent received summons on the civil action for the collection of deficiency income tax that the period to appeal commenced to run. (CIR vs. Union Shipping Corp.) QuickTime™ and a b. Referral by the Commissioner of request for TIFF (Uncompressed) decompressor are needed to see this picture. reinvestigation to the Solicitor General (Republic vs. Lim Tian Teng Sons) c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayer’s continued refusal to execute waiver (CIR vs. Ayala Securities Corp.) d. Preliminary collection letter may serve as assessment notice (United Int’l Pictures vs. CIR) Acts of BIR Commissioner Considered as Denial
of Protest which serves as a Basis for Appeal to CTA filing by the BIR of a civil suit for collection of the deficiency tax (CIR v. Union Shipping Corp. 185 SCRA 547) indication to the taxpayer by the Commissioner in clear and unequivocal language of his final denial. (CIR v. Union Shipping Corp) BIR demand letter reiterating his previous demand to pay, sent to taxpayer after his protest of the assessment (Surigao Electric Co. Inc. v. CTA, 57 SCRA 523) The actual issuance of a warrant of distraint and levy in certain cases cannot be considered as final decision on a disputed settlement (CIR v. Union Shipping Corp) Protest of Assessment: 1. File a request for reinvestigation or reconsideration within 30 days from receipt of the assessment • request for reinvestigation• a plea for re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. Involves a question of fact or law or both. • request for reconsideration• a plea for re-evaluation of the assessment on the basis of existing records without need of additional evidence. Involves a question of fact or law or both. (Revenue Regulation No. 12-85) 2. Within 60 days from filing of protest, all relevant supporting documents should have been submitted, otherwise, the assessment shall become FINAL (cannot be appealed). (Sec. 228) Appeal of Protest to the CTA (Judicial Relief): (Sec. 228) 1. Grounds: a) if the protest is denied in whole or in part or b) is not acted upon within 180 days from submission of documents 2. Appellate Court: Court of Tax Appeals 3. Period to appeal: a) within 30 days from receipt of decision denying the protest or b) 30 days from the lapse of 180 day period 4. Effect of failure to appeal: the decision shall be final, executory and demandable (NOTE: See Lascona doctrine which gives the taxpayer the Page 82 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 option either to appeal to the CTA or to await the decision of the CIR.) If taxpayer is not satisfied with the CTA Division’s ruling, 1. He may first file a motion for recon before the same division of the CTA within 15 days from notice thereof. (sec. 11, RA1125) 2. Then, a party adversely affected by a resolution of a division of the CTA on a motion for recon may file a petition for review with the CTA en banc. (sec. 18, RA 1125) If the taxpayer is not satisfied with the decision of the CTA en banc, a party adversely affected may file with the SC a verified petition for review on certiorari pursuant to Rule 45 of the Rules of Court. (sec. 19, RA 1125) REGLEMENTARY PERIODS IN INCOME TAX IMPOSED BY LAW UPON THE TAXPAYER (Pursuant to RR 12-99, Sec 228 and Rules of Court)
Appeal to the SC within 15 days from the receipt of the CTA en banc decision
FILING OF CLAIM FOR TAX REFUND OR TAX CREDIT Parties Entitled to Refund GR: The person entitled to ask for a refund is the taxpayer who paid the same Exceptions: Case
Where tax has been shifted
BIR makes a tax assessment If taxpayer is not satisfied with the assessment file a protest within 30 days from the 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 the receipt of the decision of the CIRs duly authorized representative
Appeal to the Division of CTA within 30 days from the receipt of the final decision of CIR or his duly authorized representative (taxpayer has the option to appeal straight to CTA upon receipt of the decision of CIR [Lascona doctrine]) QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
If the CIR or his rep fails to act on the protest within 180 days from date of submission by taxpayer, the latter may appeal within 30 days from
Appeal to the CTA en banc from receipt of the decision of CTA division (after denial by CTA division of motion for reconsideration)
Where payer is not the taxpayer (e.g. theater owners who paid illegal municipal taxes billed to and collected from theater goers) Where payer is withholding agent
Who is entitled to ask for refund The taxpayer (even if tax has been actually shifted by the taxpayer to his customers as in sales tax and even if the tax has been billed as a separate item in the invoice) (CIR vs. American Rubber) Theater goers are not entitled to claim refund of such taxes (Medina vs. City of Baguio)
Withholding agent (CIR vs. Procter & Gamble)
"Taxpayer" is any person subject to tax imposed by this title (income tax). The withholding agent is
Because the sales tax is imposed directly on the seller as an occupation tax for selling Once recovered, the seller must hold the refunded taxes in trust for the individual purchasers who advanced payment thereof and whose name must appear on his records
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 directly and independently liable for the correct amount of tax that should be withheld, and of deficiency assessments, surcharges and penalties Where donor's tax was assumed by donee
Donee is the proper party to claim refund of the donor's tax (even if the tax was advanced by the donor)
What is the nature of as a claim for refund? It partakes of the nature of an exemption and is strictly construed against the claimant. He burden of proof is on the taxpayer claiming the refund that he is entitled to the same (CIR v. Tokyo). When are there erroneously paid, or illegally assessed or collected taxes? Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally collected when payments are made under duress. When may taxes be refunded or credited? 1. Grounds for Tax refunded or credited: [EPWroSUn] a) Taxes erroneously or illegally received b) Penalties imposed without authority c) Any sum alleged to have been excessively or in any manner wrongfully collected d) Refund the value of internal revenue stamps when returned in good condition by the purchaser e) Redeem or change unused stamps rendered unfit for use and refund their value upon proof of destruction, in the QuickTime™ and a TIFF (Uncompressed) decompressor discretion of the Commissioner are needed to see this picture. 2. Procedure for credit/refund a) taxpayer files in writing with the Commissioner a claim for credit or refund b) filed within 2 yrs after the payment of the tax or penalty no suit or proceeding shall begun after the expiration of the said 2 yrs regardless of any supervening cause
that may arise after the payment c) a return filed showing an overpayment shall be considered a written claim for credit or refund 3. Suit or proceeding for refund a) a claim for refund or credit has been filed with the Commissioner b) the suit may be maintained whether or not such tax/penalty/sum has been paid under protest c) in any case, suit must be filed within 2 yrs. from date of payment of the tax/penalty regardless of any supervening cause that may arise after payment d) the Commissioner may, even without a written claim, refund or credit a tax, e) where on the face of the return upon which payment was made, payment appears to be erroneous. (Sec. 204 C, 229) 4. Tax Credit Certificate a) may be applied against any internal revenue tax, EXCEPT withholding taxes b) original copy is surrendered to the revenue officer c) no tax refund will be given resulting from availment of incentives granted by law where no actual payment was made (Sec. 204 C) 5. Forfeiture of cash refund/tax credit a) Forfeiture of refund in favor of the government when a refund check or warrant remains unclaimed or uncashed within 5 yrs. from date of mailing or delivery b) Forfeiture of Tax Credit-a tax credit certificate which remains unutilized after 5 yrs. from date of issue, shall be invalid, UNLESS revalidated. (Sec. 230) Commencement of 2-year period under Sec. 204(3) and 229 Case
If the tax sought to be refunded is illegally or erroneously collected If the tax is paid in installment or only in part
2-year period starts from From date tax was paid (CIR v Victorias Milling) From date of the last or final Page 84 of 145
There is no payment until the whole/entire
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
If the taxpayer merely made a deposit
If tax has been withheld from source (through the withholding tax system)
installment or payment (CIR vs. Prieto; CIR v Palanca; CIR v. TMX Sales) From conversion of the deposit to payment (Union Garment v Coll)
tax liability fully paid
Merely making a deposit is not equivalent to payment until the amount is actually applied to the specific purpose for which it was deposited A taxpayer who contributes to the withholding tax system performs and extinguishes his tax obligation for the year concerned. In other words, he is paying his tax liabilities for that year.
From date it falls due at the end of the taxable year (Gibbs vs CIR) He is deemed to have paid his tax liability when the same falls due at the end of the taxable year (Aguilar vs. CA) At the It is only then earliest, on that the the date of corporation can the filing of ascertain the adjusted whether it final return made profits or (ACCPA incurred losses Investment in its business vs. CA) operations The 2-yr period provided in Sec QuickTime™ 229 and a TIFF (Uncompressed) decompressor should are needed to see thisbe picture. computed from the time of filing of the Adjusted Return or Annual ITR and final payment of
If tax was not erroneously or illegally paid but the taxpayer became entitled to refund because of supervening circumstances
income tax (CIR vs. TMX Sales) From the date the taxpayer becomes entitled to refund and not from the date of payment (CIR vs. Don Pedro Central Azucarera)
Before the right to refund or credit arises, there is absolutely no basis to file a claim with the CIR or commence a suit in court
Payment Under Protest is NOT Necessary under NIRC A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress (Sec. 229) Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC), however, under protest is necessary to claim for (a) real property taxes (Sec. 252 LGC) (b) custom duties (Sec 2308 TCC) Suspension of the 2 yr Prescriptive Period 1) there is a pending litigation between the gov’t & the taxpayer 2) 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. v. Collector, May 28, 1858) 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. (CIR v. Sweeney, 106 Phil 59) Exception 1) When the CIR acted with patent arbitrariness. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. (CIR v. Victoria Milling, L-19667, Nov. 29, 1966) 2) Under Sec. 79 (c)(2) with respect to income taxes withheld on the wages of the EEs
In case of the CIRs final denial of the claim for refund, the 30 days period to appeal with the CTA must be within the 2 yr preemptory Page 85 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 period for instituting a judicial action TITLE IX. COMPLIANCE REQUIREMENTS Examination and inspection of all books and records shall be made only once in a taxable year, EXCEPT: 1. Fraud, irregularity or mistakes, as determined by the Commissioner 2. The taxpayer requests reinvestigation. 3. Verification of compliance with withholding tax laws and regulations 4. Verification of capital gains tax liabilities 5. In the exercise of the Commissioner’s power to issue an access letter. (sec. 235) Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer: Within ten days from date of employment, or On or before the commencement of business, or Before payment of any tax due, or Upon filing of a return, statement or declaration as required under the Code (sec. 236) Non-Retroactivity of Rulings (Sec. 246, NIRC) Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: (a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; (b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith. TITLE X. STATUTORY OFFENSES & PENALTIES QuickTime™ and a TIFF (Uncompressed) decompressor
are needed to see this picture. CHAPTER I- ADDITIONS TO THE TAX (Sec. 247-252)
Definitions • Increments to the basic tax incident due to the taxpayer’s non-compliance with certain legal requirements. • Surcharge, defined. A surcharge is a civil penalty imposed by law as an addition to the
main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayer’s fraud. A surcharge added to the main tax is subject to interest. General Provisions 1)The additions to the tax or deficiency tax apply to all taxes, fees and charges imposed in this Code. 2)The amount so added to the tax shall be collected at the same time, in the same manner and as part of the tax. 3)If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled corporation, the employee responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax. 4)The term ‘person’, includes an officer or employee of a corporation who as such officer, employee or member is under a duty to perform the act in respect of which the violation occurs. Additions to Tax 1. Civil Penalties (Sec. 248) A) Penalty: 25% of the amount due, in addition to the tax required to be paid. • In case of the following: RIDT (lets get RID of Tax) a) Failure to file any Return and pay the tax on the date prescribed; or b) Filing a return with an Internal revenue officer other than those with whom the return is required to be filed, unless otherwise authorized by the Commissioner; or c) Failure to pay the Deficiency tax within the time prescribed for its payment in the notice of assessment; or d) Failure to pay on or before the date prescribed for its payment: 1. the full or part of the amount of Tax shown on any return required to be filed; 2. the full amount of tax due for which no return is required to be filed. B) Penalty: 50% of the tax or of the deficiency tax, in case any payment has been made on the Page 86 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 basis of a return before the discovery of the falsity or fraud. • In case of: [ FiFa ] a)Willful neglect to File the return within the period prescribed; or b)False or fraudulent return is willfully made, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. • Prima facie evidence of a false or fraudulent return as determined by the Commissioner pursuant to the rules and regulations promulgated by the Sec. of Finance: 1. substantial under declaration of taxable sales, receipts or income - failure to report sales, receipts or income in an amount exceeding 30% of that declared per return 2. substantial overstatement of deductions - claim of deductions in an amount exceeding 30% of actual deductions 2. Interest (Sec. 249) A) There shall be assessed and collected an Interest at 20% per annum on any unpaid amount of tax B) OR higher rate prescribed by rules and regulations from the date prescribed for payment until the amount is fully paid. C) FROM the date prescribed for its payment until the full payment. (a) Deficiency Interest in the tax due (b) Delinquency Interest. - In case of failure to pay: 1. tax due on any return required to be filed, or 2. tax due for which no return is required, or 3. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner. QuickTime™ and a D) Interest shall part of the tax. TIFFform (Uncompressed) decompressor are needed to see this picture.
Bureau of Internal Revenue Ruling #019-2003 • Pursuant to Section 249 of the 1997 Tax Code, the imposition of interest on delinquency is mandatory. (Jamora vs. Meer, 74 Phil. 22) The imposition of interest is but a just compensation to the state for the delay in the payment of the tax, and for the concomitant use by the taxpayer
of funds that rightfully government's hands
Interest on Extended Payment. 1) any person who is qualified and elects to pay the tax on installment but fails to pay the tax, or any installment, or any part on or before the date prescribed; or 2) where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, 3) from the date of notice and demand until it is paid. 3. Failure to File Certain Information Returns (Sec. 250) A) Penalty: P 1,000 for each failure B) The aggregate amount for all such failure shall not exceed P 25,000 during a calendar year C) Upon notice and demand by the Commissioner D) Unless it is shown that such failure is due to reasonable cause and not to willful neglect. In the case of each failure to file: 1) information return; 2) statement or list; 3) keep any record; 4) supply any information E) required by this Code or by the Commissioner on the date prescribed thereof.
4. Failure of a Withholding Agent to Collect and Remit Tax (Sec. 251) A) Penalty: Amount of the tax not withheld, or not accounted for and remitted plus other penalties. B) Liable only upon conviction • In case of the following: 1. Any person required to withhold, account for, and remit any tax; or 2. Who willfully fails to withhold such tax, or account for and remit such tax; or 3. Aids or abets in any manner to evade any such tax or the payment thereof, 5. Failure of a Withholding Agent to Refund Excess Withholding Tax. (Sec.252) Penalty: Amount of refund which was not Page 87 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return plus other penalties in case any employer/withholding agent fails or refuses to refund excess withholding tax. CHAPTER II- CRIMES, OTHER OFFENSES AND FORFEITURES
1. Willful attempt to evade or defeat tax. 2. Failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation. 3. Penal liability of corporation. 4. Penal liability for making false entries, records, or reports, or using falsified or fake accountable forms. 5. Unlawful pursuit of business. 6. Illegal collection of foreign payments. 7. Unlawful possession of cigarette paper in bobbins or rolls, etc. 8. Unlawful use of denatured alcohol. 9. Shipment or removal of liquor or tobacco products under false name or brand or as an imitation of any existing or otherwise known product name or brand. 10. Unlawful possession or removal of articles subject to excise tax without payment of the tax. 11. Failure or refusal to issue receipts or sales or commercial invoices, violations related to the printing of such receipts or invoices and other violations. 12. Offenses relating to stamps. 13. Failure to obey summons. 14. Declarations under penalties of perjury.
A. General Provisions (Sec. 253) 1. Any person convicted of a crime under this Code is liable for the payment of the tax and is subject to the penalties imposed herein. 2. Payment of the tax due after apprehension is not a valid defense in any prosecution for violation of any provision of this Code or in any action for the forfeiture of untaxed articles. 3. A person is liable in the same manner as the principal when he: a) willfully aids or abets in the commission of a crime penalized herein or b) causes the commission of any such offense by another. 4. If the offender is not a citizen of the Philippines: a) he shall serve the sentence; and b) Deported immediately after serving the sentence without further proceedings for deportation. 5. If he is a public officer or employee: a) the maximum penalty prescribed for the offense shall be imposed; and b) he shall be dismissed from the public service and perpetually disqualified from holding any public office, to vote and to participate in any election. 6. If the offender is a Certified Public Accountant, his certificate as a Certified Public Accountant shall, upon conviction, be automatically revoked or cancelled. 7. In the case of associations, partnerships or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge, QuickTime™ and afor the violation. and employees responsible TIFF (Uncompressed) decompressor to see this picture. 8. The fines to are beneeded imposed for any violation of the provisions of this Code shall: a) not be lower than the fines imposed herein or b) twice the amount of taxes, interests and surcharges due from the taxpayer, whichever is higher.
Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. (Sec. 264)
Crime 1: Willful Omission of Filing and Payment
D. Other crimes and offenses 1. Misdeclaration or misrepresentation of manufacturers subject to excise tax. 2. Forfeiture of property used in unlicensed business or dies used for printing false stamps, etc. 3. Forfeiture of goods illegally stored or removed. Attempt to Evade or Defeat Tax. (Sec. 254) • Penalty, upon conviction: Fine - P30,000 or 100,000; and Imprisonment - 2 to 4 years; Plus other penalties • Who is liable: Any person who willfully attempts in any manner to evade or defeat any tax or the payment thereof. • The conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Obligations • Penalty, upon conviction: o Fine - P10,000 or more; and o Imprisonment - 1 to 10 years; o Plus other penalties • Person liable: Any person required: 1. to pay any tax, 2. make a return, 3. keep any record, or 4. supply correct and accurate information, • Nature of Offense: Willful failure to 1. pay tax, 2. make a return, 3. keep the record, 4. supply such correct and accurate information, 5. withhold or remit taxes withheld, 6. refund taxes withheld on compensation, at the time or times required. Crime 2: Withdrawal of Returns Filed • Penalty, upon conviction: o Fine - P10,000 - 20,000; and o Imprisonment - 1 to 3 years; o Plus other penalties Person liable: Any person who: o attempts to make it appear for any reason that he or another has in fact filed a return or statement, or o actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of an internal revenue office wherein the same was actually filed. Penal Liability of Corporations (Sec 256) •
Penalty, upon conviction: Fine - P50,000 100,000 o In addition to the penalties imposed upon the responsible corporate officers, partners, or QuickTime™ and a employees. TIFF (Uncompressed) decompressor are needed to see this picture. Who is liable: Any of the following liable for any of the acts or omissions penalized under this Code. 1. corporation, 2. association or 3. general co-partnerships
Penal Liability for Making False Entries. Records or Reports, or Using Falsified or Fake
Accountable Forms (Sec. 257) • Penalty, upon conviction for each act or omission: • Fine - P50,000 - 100,000; and • Imprisonment - 2 to 6 years; • Special Penalties 1) If Offender is a Certified Public Accountant, his certificate shall be automatically revoked or cancelled upon conviction. 2) In the case of foreigners, conviction under this Code shall result in his immediate deportation after serving sentence, without further proceedings for deportation. • Who is liable: • Any financial officer or • Independent Certified Public Accountant engaged to examine and audit books of accounts of taxpayers under Sec.232 (A) • Any person under his direction. •
Offense: FVC 1) Willfully Falsifies any report or statement bearing on any examination or audit 2) Renders a report, including exhibits, statements, schedules or other forms of accountancy work which has not been Verified by him personally or under his supervision or by a member of his firm or by a member of his staff in accordance with sound auditing practices, or 3) Certifies financial statements of a business enterprise containing an essential misstatement of facts or omission in respect of the transactions, taxable income, deduction and exemption of his client; or
E. Prescription of Actions • All violations of any provision of the Code shall prescribe after five (5) years CHAPTER III – OTHER PENAL PROVISIONS Page 89 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal Revenue Code and in Discovery and Seizure of Smuggled Goods (Sec. 282) 1. Amount of Reward • For Violations of Internal Revenue Code o 10% of the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected or P1M per case, whichever is lower. Note that where the offender has offered to compromise and his offer has been accepted, the same amount of reward shall be given to the informer. o
PART III - LOCAL GOVERNMENT CODE OF 1991 (RA 7160-Effectivity: January 1, 1992)
No revenue, surcharges or fees actually recovered or collected: NO REWARD
For Discovery and Seizure of Smuggled Goods o 10% of the FMV of the smuggled and confiscated goods or P1M per case, whichever is lower.
• The cash rewards of informers subject to income tax, collected as a final withholding tax, at the rate of 10%.
2. Persons Entitled to Reward •
For Violations of Internal Revenue Code o Any person, except an internal revenue official or employee, or his relative within the sixth degree of consanguinity.
For Discovery and Seizure of Smuggled Goods o Persons instrumental in the discovery and seizure of QuickTime™ and a smuggled EXCEPT: TIFF (Uncompressed)goods decompressor are needed to see this picture. all public officials, whether incumbent or retired, who acquired information in the course of the performance of their duties during their incumbency
A person is instrumental in the discovery and in collection or seizure when he voluntarily gives definite and sworn 4 information : o not yet in the possession of the Bureau of Internal Revenue, o leading to the discovery of frauds upon the internal revenue laws and violations of any of the provisions thereof, o thereby resulting in the recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any fine or penalty.
Book II Local Taxation and Fiscal Matters Title I LOCAL GOVERNMENT TAXATION CHAPTER 1 - GENERAL PROVISIONS Sources of Revenues: 1. Internal Revenue Allotment (IRA) National internal revenue collected and not applied as hereinabove provided or otherwise specially disposed of by law shall accrue to the National Treasury and shall be available for the general purposes of the Government, with the exception of the amounts set apart by way of allotment as provided for under Republic Act No. 7160, otherwise known as the Local Government Code of 1991. (Sec. 283, NIRC) Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows… (c) On the third year and thereafter, 40%... (Sec. 284, RA 7160)
Information shall not refer to a case already pending or previously investigated or examined by the Commissioner or any of his deputies, agents or examiners or the Secretary of Finance or any of his deputies or agents.
3. When is a Person Instrumental Page 90 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2. 50% share in collections for the ff: (2nd par., Sec. 283, NIRC) a) VAT on sale of goods or properties under Sec. 106, NIRC b) VAT on sale of services and use or lease or properties under Sec. 108, NIRC c) Percentage taxes under Sec. 116, NIRC I. Power to Create Sources of Revenue EACH LOCAL GOVERNMENT UNIT HAS THE POWER TO: 1. create its own sources of revenue and 2. levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. (Sec. 129) Such taxes, fees, and charges shall accrue exclusively to the local government units. (NOTE: As distinguished from internal revenue taxes which do not accrue exclusively to the national government but are shared to the local governments in the form of internal revenue allotments. See Title XI, NIRC of 1997) II. Nature of the Taxing Power of Local Government Units (LGUs) 1. not inherent 2. exercised only if delegated to them by law or Constitution 3. not absolute subject to limitations provided for by law III. Fundamental Principles The fundamental principles governing the exercise of the taxing and other revenue-raising powers of LGUs are [ U(EPuJul)LIP ]: (a) Taxation shall be Uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall (EPuJuL): 1) be Equitable and based as far as practicable on the taxpayer's ability to QuickTime™ and a decompressor pay; TIFFare(Uncompressed) needed to see this picture. 2) be levied and collected only for Public purposes; 3) not be unJust, excessive, oppressive, or confiscatory; 4) not be contrary to Law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and
other impositions shall in no case be Left to any private person; (d) The revenue collected shall Inure solely to the benefit of the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, (e) Each local government unit shall, as far as practicable, evolve a Progressive system of taxation. (Sec. 130) IV. Local Taxing Authority The power to impose a tax, fee or charge or to generate revenue is exercised by the Sanggunian of the LGU concerned through an appropriate ordinance. (Sec. 132) The local chief executive may veto any ordinance of the sangguniang panlalawigan, panlungsod or bayan on the ground that it is ultra vires or prejudicial to the public welfare, stating his reasons therefore in writing. The local chief executive, except punong barangay, may veto any particular item of an appropriations ordinance. (sec. 132 LGC) He may only veto an ordinance or resolution only once. The sanggunian may override his veto by twothirds vote of all its members, thereby making the ordinance effective even without the approval of the local chief executive concerned. V. Power to Prescribe Penalties for Tax Violations and Limitations Thereon 1. The Sanggunian is authorized to prescribe fines or other penalties for violations of tax ordinances a. in no case shall fines be less than P1,000 nor more than P5,000 b. nor shall the imprisonment be less than one month nor more than six months 2. Such fine or other penalty shall be imposed at the discretion of the court. 3. The Sanggunian Barangay may prescribe a fine of not less than P100 nor more than P1000. Power to Adjust Local Tax Rate (Sec. 191 LGC) - LGUs are authorized to adjust the tax rates as prescribed herein not oftener than once every 5 years, and in no case shall such adjustment exceed 10% of the rates fixed under the LGC. Power to Grant Local Exemptions (Sec. 192 LGC) - LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary. Page 91 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Tax Exemptions existing before the Effectivity of the LGC: Unless otherwise provided by the LGC, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including GOCCs are hereby withdrawn upon the effectivity of the LGC except the ff: 1. local water districts, 2. cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and 3. educational institutions. Tax Exemptions not applicable to Regulatory Fees 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, Tax Incentives and Tax Reliefs (Art. 282 [B], Rules and Regulations Implementing the 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 or agricultural or agri-based products. b. The grant shall be through an ordinance. c. Any exemption or relief granted to a type or kind of business shall apply to all business similarly situated. d. The same shall take effect only during the next calendar year for a period not exceeding 12 months as may be provided by the ordinance. e. In the case of shared revenue, the exemption or relief shall only extend to the LGU granting such exemption or relief. QuickTime™ and a TIFF (Uncompressed) decompressor
needed to see this picture. 2. On the grant of taxareincentives a. The same shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions therefore. b. The grant shall be for a definite period of not exceeding 1 calendar year. c. The grant shall be by ordinance passed st prior to the 1 day of January of any year.
d. Any grant to a type or kind of business shall apply to all businesses similarly situated. Levying of Local Taxes (Local Tax Ordinance) REQUISITES: 1. the procedure applicable to local gov’t ordinances in general should be observed. (Sec. 187, LGC) 2. Procedural details (Secs. 54, 55, and 59 LGC): a. necessity of quorum b. submission for approval by the local chief executive c. the matter of veto and overriding the same d. the publication and affectivity 3. Public hearings are required before any local tax ordinance is enacted (Sec. 187, LGC) Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In absence of such newspaper in the province, city or municipality, then the ordinance may be posted in at least two conspicuous and publicly accessible places (Sec. 189 LGC) Residual Taxing Powers of the LGU (Sec. 186 LGC) To levy taxes, fees or charges on any base or subject NOT a. specifically enumerated in LGC b. taxed under the provisions of the NIRC, as amended c. other applicable laws. Conditions: a. That the taxes, fees or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy. b. The ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose. Limitations of the Residual Power 1. Constitutional limitations on taxing power 2. Common limitations prescribed in Sec. 133 of LGC 3. Fundamental principles governing the exercise of the taxing power of the LGUs prescribed under Sec. 130 of the LGC 4. The ordinance levying such residual taxes shall not be enacted without any prior public hearing conducted for the purpose and 5. The principle of preemption.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Principle of Preemption or Exclusion Where the national gov’t elects to tax a particular area, it impliedly withholds from the local gov’t the delegated power to tax the same field. This doctrine principally rests on the intention of Congress.
Excluded impositions pursuant to the doctrine of preemption) 1. Taxes which are levied under the NIRC, unless otherwise provided by LGC of 1991; 2. Taxes, fees, etc. which are imposed under the TCC; 3. Taxes, fees, etc. the imposition of which contravenes existing gov’tal policies or which violates the fundamental principles of taxation; 4. Taxes, fees and other charges imposed under special law. Local Tax Ordinance: Requirements 1. Satisfy the requirements of procedural and substantive due process; 2. Public hearing is required with quorum, voting and approval and/or veto requirements complied with; 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. VI. COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS LGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ] or CADET-VIBE-LIBERTE' (a) Income tax, except on banks and other financial institutions; (NOTE: Since income tax is already imposed by the National Government under NIRC, LGUs cannot impose the same even on banks and other financial institutions. The exception is referring to the percentage tax on banks’ specified income.) QuickTime™ and a tax; (b) Documentary stamp TIFF (Uncompressed) decompressor are needed togifts, see this picture. legacies and other (c) Estate Tax, inheritance, acquisitions mortis causa, except as otherwise provided; (d) Customs duties, registration fees of vessel 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;
(e) Taxes, fees, and 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, (f) Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of 6 and 4 years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided; (j) 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; (k) Taxes on premiums paid by way of Reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of Licenses or permits for the driving thereof, except tricycles; (m) Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. 6810 and R.A. 6938 (Cooperative Code of the Philippines); and (o) Taxes, fees or charges of any kind on the National Government, its agencies and Instrumentalities, and local government units. Classification of Common Limitations 1. Taxes which are levied under the NIRC unless otherwise provided by the LGC *a, b, c, h, I, j 2. Taxes, fees, etc. which are imposed under the TCC *d 3. Taxes, fees and charges where the imposition of which contravenes existing gov’tal policies or which are violative of the fundamental principles of taxation *e, f, g, k, m, n, s 4. Taxes, fees and charges imposed under special laws. *l Provinces (see chart) Page 93 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Provinces (refers to Local Govt. Provisions on Tax)
QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 SPECIFIC PROVISION ON THE TAXING AND OTHER REVENUE RAISING POWERS OF THE LGU A. PROVINCES Type of Tax Tax on Transfer of Real Property Ownership. The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property. Tax on Business of Printing and Publication. The province may impose a tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise. Tax on Sand, Gravel and Other Quarry Resources. The province may levy and collect taxes on ordinary stones, sand, gravel, earth, and other quarry resources extracted QuickTime™ andof a from public lands orTIFFfrom the beds (Uncompressed) decompressor are needed to see this picture. seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. Professional Tax. The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession
Rate Not more than 50% of the 1% of the total consideration or of the fair market value, whichever is higher
Exceptions Sale, transfer or other disposition of real property pursuant to R.A. No. 6657 (CARL).
Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year.
Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment. School texts or references, prescribed by the DECS shall be exempt from the tax.
Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, within its territorial jurisdiction. Not more than 10% of fair market value in the locality
Newly started business, the tax shall not exceed 1/20 of 1% of the capital investment.
At such amount and reasonable classification as the sangguniang
Professionals exclusively employed in the government shall be exempt from the payment
Notes It shall be the duty of the seller, donor, transferor or administrator to pay the tax imposed within 60 days from the date of the execution of the deed or from the date of the decedent's death.
The permit to extract resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the sangguniang panlalawigan. Proceeds distributed as follows: Province -30% Component City or Municipality where the quarry resources are extracted - 30% Barangay where the quarry resources are extracted - 40%. To be paid to the province where he/she practices his/her profession or where he/she maintains principal office in case the practice is in several places
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 requiring government examination. To be paid on or before the 31st day of January. Any person first beginning to practice a profession after the month of January must, however, pay the full tax before engaging therein. Amusement Tax. The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement
panlalawigan may determine but shall in no case exceed P300.00.
of this tax.
Provided, After payment he/she shall be entitled to practice his/her profession in any part of the Phils. w/out being subjected to any other national or local tax, license, or fee for the practice of the profession.
Not more than 30% of the gross receipts from admission fees.
The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt.
Sangguniang panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. In case of fraud or failure to pay, the sangguniang panlalawigan may impose surcharges, interest and penalties. The proceeds from the amusement tax shall be shared equally by the province and the municipality where such amusement places are located.
Annual Fixed Tax For Every Delivery Amount not exceeding Truck or Van of Manufacturers or P500.00. Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. The province may levy an annual fixed tax for every truck or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery of distilled spirits, soft drinks, cigars and cigarettes, and other products as may be determined by the sanggunian, to sales outlets, or consumers, whether directly QuickTime™ andor a TIFF (Uncompressed) decompressor indirectly, within the province. are needed to see this picture.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 schedule of graduated tax rates but in no case shall exceed the rates prescribed in the LGC.
B. MUNICIPALITIES SCOPE: Municipalities may levy taxes, fees and charges not otherwise levied by provinces. (sec. 142, LGC) Tax on Business The municipality may impose taxes on the following: 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 or nature. b. On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature. c. On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of the following essential commodities (where the rate prescribed is only ½ of the regular rate [Sec. 143 par. c, LGC]) (RW CLAPS C): 1. Rice and corn; 2. Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; 3. Cooking oil and cooking gas;
d. e. f. g. h.
4. Laundry soap, detergents, and 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. On retailers On contractors and other independent contractors On banks and other financial institutions, On peddlers engaged in the sale of any merchandise or article of commerce On any business, which the sanggunian QuickTime™ and a concerned may deem proper to tax. For TIFF (Uncompressed) decompressor are needed to seeexcise, this picture. value-added or businesses subject to the percentage tax, the tax rate shall not exceed 2% of gross sales of the preceding calendar year. •
Rates of Tax within the Metropolitan Manila Area shall not exceed by 50% the maximum rates prescribed for a-h. (Sec. 144)
The sanggunian concerned may prescribe a
The tax is payable for every separate or distinct establishment or place where business is conducted. (Sec. 146)
The municipality may impose and collect such reasonable fees and charges on business and occupation except professional taxes reserved for provinces. (Sec 147)
SPECIFIC: • Municipalities may im pose such reasonable rates for the sealing and licensing of weights and measures as shall be prescribed by the sangguniang bayan. •
Municipalities shall have the exclusive authority to grant fishery privileges in the municipal waters. The sanggunian may: a) Grant fishery privileges to erect fish corrals, oysters, or other aquatic beds or bangus fry areas 1. Duly registered organizations and cooperatives of marginal fishermen shall have the preferential right; 2. The sanggunian may require a public bidding pursuant to an ordinance for the grant of such privilege; 3. Absent of such orgs. and coops or their failure to exercise their preferential right, other parties may participate in the public bidding b) Grant the privilege to gather, take or catch bangus fry, prawn fry or fry of other species and fish from the municipal waters by nets or other fishing gears to marginal fishermen free of rental or fee c) Issue licenses for the operation of fishing vessels of three (3) tons or less. (Sec. 149)
Payment of Business Taxes: a. It shall be payable for every separate or distinct establishment or place where the 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. b. The tax on a business must be paid by the person conducting the same. Page 97 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 c.
In cases where a person conducts or operates 2 or more of the businesses mentioned in Section 143 of LGC a. 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. b. Which are subject to different rates of tax, the gross sales or receipts of each business shall be separately reported for the purpose of computing the tax due from each business.
VII. Situs of Local Taxation Situs According to the 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 place is perfected. (Allied Thread Co., Inc. v. City Mayor of Manila, L-40296) Sales Tax – it is the place of the 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. v. Municipality of Sipocot, Camarines Sur, 105 Phil 1263) SITUS ACCORDING TO SECTION 150, LGC
municipality where the principal office is located; and •
70% of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.
Rule 4: Where the plantation located at a place other than the place where the factory is located, the above mentioned 70% shall be divided 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. Rule 5: Where there are 2 or more factories, project offices, plants, or plantations located in different localities, the above mentioned 70% shall be prorated among the localities where the factories, project offices, plants, and plantations are located in proportion to their respective volumes of production during the period for which the tax is due. (Sec. 150) NOTE: In case of manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, these rules shall apply except that the factory or plant and warehouse of the contractor utilized for the production and storage of the manufacturers’ products shall be considered as the factory or plant and warehouse of the manufacturer. (IRR)
Rule 1: For purposes of collection of the taxes under Section 143 (tax on business), businesses maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located.
The city or municipality where the port of loading is located shall not levy and collect reasonable fees unless the exporter maintains in said city or municipality its principal office, a branch, sales office, or warehouse, factory, plant or plantation in which case, the rule on the matter shall apply accordingly. (IRR)
Rule 2: In case there is no branch or sales outlet in the city or municipality where the sale is made, the and a sale shall be recorded in QuickTime™ the principal office and the TIFF (Uncompressed) decompressor are needed picture. to such city or taxes due shall accrue andto see bethispaid municipality.
Rule 3: The following sales allocation for sales recorded in the principal office of businesses with factories, project offices, plants, and plantations: •
30% of all sales recorded in the principal office shall be taxable by the city or
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. (Sec. 151)
IRR: The cities may levy and collect a percentage Page 98 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 tax on ANY business not otherwise specified in the LGC or the IRR, at rates not exceeding 3% of the gross sales or recipts of the preceding calendar year.
of the tolls, and thereafter the said facility shall be free and open for public use. IX. Community Tax
D. BARANGAYS Scope of Taxing Powers. - The barangays may levy the following taxes and charges, which shall exclusively accrue to them: [ TOBS ] (a) Taxes - On stores or retailers with fixed business establishments with gross sales of receipts of the preceding calendar year of P50,000.00 or less for cities and P30,000.00 or less, in the case of municipalities, rate = not exceeding 1% on gross sales or receipts. (b) Service Fees or Charges for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities such as palay, copra, or tobacco dryers. (c) Barangay Clearance. - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted. (d) Other fees and Charges. - The barangay may levy reasonable fees and charges: (CRB) 1. On commercial breeding of fighting Cocks and cockpits; 2. On places of Recreation which charge admission fees; and 3. On Billboards, signboards, neon signs, and outdoor ads. (Sec. 152) VIII. COMMON REVENUE-RAISING POWERS OF LGUS (Secs. 153-155) [ SPT ] a. Service Fees and Charges for services rendered b. Pubic Utility Charges for the operation of public utilities owned, operated and maintained by LGUs within their jurisdiction. c. Toll Fees or Charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU concerned. QuickTime™ and a Exceptions: TIFF (Uncompressed) decompressor are needed to see thismen picture. of the AFP and 1. officers and enlisted PNP on mission, 2. post office personnel delivering mail, 3. physically-handicapped, and disabled citizens who are sixty-five (65) years or older. When public safety and welfare so requires, the sanggunian concerned may discontinue the collection
Cities or municipalities may levy a community tax (Sec. 156)
A. Individuals Liable to Community Tax - [ IER ] a. Inhabitant of the Philippines b. Eighteen years of age or over c. Regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of P1,000.00 or more, or who is required by law to file an income tax return Rate = P5.00 and an annual additional tax of P1.00 for every P1,000.00 of income regardless of whether from business, exercise of profession or from property which in no case shall exceed P5,000.00. ¾
In the case of husband and wife, the tax imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. (Sec. 157)
B. Juridical Personalities (Sec. 158) Corporations, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines are also liable to pay an annual community tax. Rate = P500.00 and an annual additional tax, which shall not exceed P10,000.00 in accordance with the following schedule: a. For every P5,000.00 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax - P2.00; and b. For every P5,000.00 of gross receipts 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. C. Those exempt from the community tax are: 1. Diplomatic and consular representatives; and 2. Transient visitors when their stay does not exceed 3 months. Page 99 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 D. Place and time of Payment Place of Payment - place of residence of the individual, or in the place where the principal office of the juridical entity is located. (Sec. 160)
Time for Payment - accrues on the 1st day of Jan. of each year which shall be paid not later than the last day of Feb. of each year
Penalties for Delinquency. - An interest of 24% per annum from the due date until it is paid shall be added on the amount due.
A community tax certificate may also be issued to any person or corporation not subject to the community tax upon payment of P1.00. (Sec. 162)
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. PROVINCE OF BULACAN vs. CA (299 SCRA 442) Facts: The Province passed an Ordinance imposing a 10% tax on the value of stones, sand and other quarry resources from public lands. The Provincial Treasurer levied upon Republic Cement P2.5M for its extraction of resources from private land. Issue: Does the province have authority to levy the tax? Held: NO. Although §186 of the LGC authorizes municipal corps. to levy taxes other than those specifically enumerated therein, the subject ordinance was quite specific about the fact that the QuickTime™ and a taxable articles TIFF must comedecompressor from public land. (Uncompressed) are needed to see this picture. Moreover, a province may not levy excise taxes on articles already taxed by the NIRC. The current Tax Code already imposes a tax on ALL quarry resources, regardless of origin, hence, the Province may no longer impose any additional amounts from Republic Cement. Presentation of Community Tax Certificate on Certain Occasions: (Sec. 163, LGC)
A. Individual 1. When an individual subject to the comm. tax acknowledges any document before a notary public; 2. Takes the oath of office upon election or appointment to any position in the government service; 3. Receives any license, certificate or permit from any public authority; 4. Pays any tax or fee; 5. Receives any money from any public fund; 6. Transacts other official business; or 7. Receives any salary or wage from any person or corporation. The presentation of the CTC shall not be required in connection with the registration of a voter. B. Corporation 1. receives any license, certificate or permit from any public authority; 2. pays any tax or fee; 3. receives any money from any public fund; or 4. transacts other official business. The city or municipal treasurer deputizes the barangay treasurer to collect the community tax in their respective jurisdictions. (Sec. 164, LGC) The proceeds of the comm. tax is 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 comm. tax collected through the barangay treasurers shall be apportioned as follows: ¾ 50% accrues to the general fund of the city or municipality concerned; and ¾ 50% accrues to the barangay where the tax is collected. CHAPTER 3 - COLLECTION OF TAXES Taxable Period – The tax period of ALL local taxes, fees and charges shall be the calendar year, unless otherwise provided in the Code. Accrual of Tax – ALL local taxes, fees, and charges accrue on first day of January of each hear, unless otherwise provided in the Code. Time of Payment – ALL local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the Page 100 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 case may be, unless otherwise provided in the Code. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges – The sanggunian may impose a surcharge not exceeding twenty five percent (25%) per month of the unpaid taxes, fees or charges not paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges, until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed thirty six (36) months.
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
Interest on other unpaid revenues – On any other source of revenue, LGUs are authorized to imposed an interest of a maximum of 2% per month, maximum of 36 months, on the amount unpaid.
disposition of the proceeds of the sale by application of such proceeds to the delinquency and expenses of sale
Manner of Payment – Such taxes, fees or charges may be paid in quarterly installments.
return of balance to the owner
COLLECTION OF LOCAL REVENUES BY THE TREASURER (sec. 170, LGC) All local taxes, fees and charges shall be collected by the provincisl, 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 premiums thereon in addition to the premiums of the bond that may be required under the Code.
NOTE: Where the proceeds of the sale are insufficient to satisfy the claim, other properties may be distrained. ii. Levy delinquency levy of real property before, simultaneous or after distraint of personal property belonging to delinquent taxpayer
LOCAL TAX REMEDIES UNDER THE LGC TAX REMEDIES OF THE LGUs CIVIL REMEDIES OF THE LGU TO EFFECT COLLECTION OF TAXES 1. Local Government’s 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. QuickTime™ and a 2. Civil Remedies TIFF (Uncompressed) decompressor are needed to see this picture. a. by administrative action through distraint of personal property and by levy upon real property
local treasurer shall prepare a duly authenticated certificate showing the name of taxpayer and amount of tax, fee and penalty due to him NOTE: Levy shall be effected by writing upon said certificate the description of the property upon which levy is made. b. by judicial action Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned. 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 RTC in the exercise of its appellate or original jurisdiction.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 b. Regular judicial courts are not prohibited from enjoining the collection of local taxes, subject to Rule 58 (preliminary injunction) of the Rules of Court. 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 Court. (Valley Trading Co. vs. CFI of Isabela, 1989) PRESCRIPTIVE PERIODS OF ASSESSMENT 1. Local taxes, fees or charges – five (5) years from the date they became due (sec. 194, LGC) 2. When there is fraud or intent to evade the payment of taxes, fees or charges – ten (10) years from discovery of fraud or intent to evade payment (sec. 194, LGC) PRESCRIPTIVE PERIOD OF COLLECTION Local taxes, fees or charges may be collected within five 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. The treasurer is legally prevented from the assessment or collection of the tax; b. 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 c. The taxpayer is out of the country or otherwise cannot be located. (sec. 194, LGC) TAX REMEDIES OF THE TAXPAYER REMEDIES OF THE TAXPAYER IN LOCAL TAXATION A. ADMINISTRATIVE QuickTime™ and a Before assessmentTIFF (Uncompressed) decompressor are needed to see this picture. 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 (sec. 187, LGC) Such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of tax.
b. Declaratory relief whenever applicable
After Assessment a. Protest – within 60 days from receipt of assessment (sec. 195, LGC). Payment under protest is not necessary. b. Payment & subsequent refund or tax credit – within 2 years from payment of taxto local treasurer (sec. 196, LGC). It is to be noted that, unlike in internal revenue taxes, the supervening cause applies in local taxation because th period for the filing of the claims for refund or credit of local taxes is counted not necessarily from the date of payment but from the date of taxpayer is entitled to a tax credit. c. Right of redemption – 1 year from the date of sale or from the date of forfeiture (sec. 179, LGC) B. JUDICIAL 1. Court action - within 30 days after receipt of decision or lapse of 60 days of Secretary of Justice’s 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 two year period is about to lapse (sec. 195, LGC) - if remedies available does not provide plain, speedy and adequate remedy. 2. Action for Declaratory Relief 3. Injunction – if irreparable damage would be caused to the taxpayer and no adequate remedy is available.
PART IV - REAL PROPERTY TAXATION (LGC of 1991) Definition: 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. Under the LGC, it covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and other structures and improvements on it, including machineries. (Subject to the definition given by Art. 415 of the Civil Code) Improvement – valuable addition made to a property or amelioration in its condition amounting to more Page 102 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 than a mere replacement of parts involving capital expenditures and labor. I. CHARACTERISTIC OF REAL PROPERTY TAX: [LIPAD] 1. Direct tax on the ownership of real property 2. Ad Valorem tax. The value is based on the tax base 3. Proportion - the tax is calculated on the basis of a certain percentage of the value assessed 4. Indivisible single obligation 5. Local Tax II. PROPERTIES LIABLE UNDER REAL PROPERTY TAX According to the Local Government Code, Real Property liable for Real Prop tax are: 1. Land, 2. Buildings 3. Machinery and 4. Other improvements not otherwise exempted under said code (Sec 232, LGC) Note: Although the term real property has not been expressly defined in the LGC, early decisions of the Supreme Court in Mindanao Bus Co. v City Assessor of Cagayan de Oro, 6 SCRA `97; Board of Assessment Appeals v Meralco, 119 PHIL 328; Manila Electric Co. v Board of Assessment Appeals, 10 SCRA 68) seem to suggest that Art 415 of the Civil Code could also be controlling. Real property includes machinery as defined by the LGC. Machinery – embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, selfpowered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity QuickTime™ and which by their very and a TIFF (Uncompressed) decompressor nature and purpose are designed for, or are needed to see this picture. necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes. (Sec. 199 [o], LGC) Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons),
microcomputers, facsimile machines, telex machine, cash dispensers, furnitures and fixtures, freezers, refrigerators, display cases or racks, fruit juice or beverage automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery. (Sec. 290 [o], IRR of RA 7160) III. CLASSIFICATION OF LAND for purposes of assessment - Sec 218 (a) [CARMITS] 1. Commercial 2. Agricultural 3. Residential 4. Mineral 5. Industrial 6. Timberland 7. Special ¾ Classification of lands made by respective sanggunian in accordance with zoning ordinances and ¾ It is based on actual use. IV. SPECIAL CLASSES OF REAL PROPERTY (Sec 216, LGC) [HCS LG] 1. HOSPITALS 2. CULTURAL and SCIENTIFIC purposes 3. owned and used by LOCAL WATER DISTRICTS 4. GOCCs rendering essential public services in the supply and distribution of water and/or generation or transmission of electric power. V. PROPERTIES EXEMPT from real property tax (Sec. 234) [CWERC] 1. Owned by the REPUBLIC of the PHILS or its political subdivisions except: when beneficial use has been granted to a taxable person institutions, churches, 2. Charitable parsonages, convents thereto, mosques, non-profit or religious cemeteries, buildings and improvements actually directly and exclusively used for religious, charitable or educational purposes. 3. Machinery and Equipment actually, directly, and exclusively used by local Water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power 4. Real property owned by duly registered Cooperatives under RA 6938 5. Machinery & equipment for pollution control and Environment protection Page 103 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Exemptions previously granted, (not falling within the above enumeration) are withdrawn. c. ¾ ¾
Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem tax on idle lands. LGUs (within and outside MM) may also grant condonation which actually partake of exemption.
Proof of Tax Exemption: Every person by or for whom real property is declared who shall claim the exemption shall file 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.) Actual Use of Property as Basis for Assessment (Sec. 217, LGC) Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. Unpaid realty taxes attach to the property and is 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 RPT 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 v. City of Manila, GR No. 90639, Feb 21, 1990)
VI. FUNDAMENTAL PRINCIPLES IN Assessment of REAL PROPERTY TAXES (Sec. 198) [CUANE] 1. CURRENT and fair market value is the basis of appraisal 2. UNIFORMITY in classification in each local gov’t unit should be observed 3. ACTUAL USE of the property should be the basis of classification 4. appraisal, assessment, levy and collection should NOT BE LET to any private person. 5. EQUITABLE appraisal and assessment QuickTime™ and a TIFF (Uncompressed) decompressor
are needed to see this picture. Types of Real Property Tax: 1. Basic real property tax 2. Special levies: a. Special Education Fund (SEF) – 1% additional real estate tax to finance the SEF (Sec. 236, LGC) – within MM area only b. Additional Ad Valorem on the Lands – not exceeding 5% of the assessed
value of the property (Sec. 236, LGC) For Public Works – on lands specially benefited by public works, projects or improvements funded by the LGU ¾ May be imposed even by municipalities outside MM provided: ¾ 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 have been donated to the local government unit concerned for the construction of said projects. (Sec. 240, LGC)
What Are Considered as Idle Lands: (Sec. 237, LGC) 1. Agricultural lands – More than 1 hectare if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. Not Idle Lands: ¾ Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare ¾ Lands actually used for grazing purposes shall likewise not be considered idle lands 2. Non-Agricultural Lands – More than 1,000 sq. m. in area if more than ½ of which remain uncultivated 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. force majeure 2. civil disturbance 3. natural calamity 4. or any cause which physically or legally prevents the owner of the property or person having legal interest therein from improving the land WHO ADMINISTER REAL PROPERTY TAX 1. Provinces 2. Cities 3. Municipalities within Metropolitan Manila Page 104 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 STEP 1 - DECLARATION OF REAL PROPERTY 1. Declared by Owner or Administrator (Sec 202203)
STEP 2: LISTING OF REAL PROPERTY IN THE ASSESSMENTROLLS (Sec 205, 207) ¾
Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU o Undivided real property – in the name of the estate or heirs or devisees o Corporation, partnership and association – same as individuals o Owned by the Republic of the Philippines, its instrumentalities, political subdivisions, beneficial use is transferred to a taxable person – in the name of the possessor
All declarations shall be kept and filed under a uniform classification system to be established by the provincial, city or municipal assessor.
When: once every 3 years during the period from January 1 to June 30 What: file a sworn declaration with the assessor with description of the property ¾ IF newly acquired property a. files with assessor within 60 DAYS from date of transfer a b. SWORN statement containing FMV and description of property ¾ IF improvement on real property a. file w/in 60 DAYS upon completion or occupation (whichever is earlier) b. SWORN statement containing FMV and description of property 2. Declared by Provincial / City / Municipal Assessor (Sec 204) WHEN only when the person under Sec 202 refuses or fails to make the Declaration within the prescribed time No oath by assessor is required •
NOTE: IF FILING FOR EXEMPTION (Sec 206) WHAT person claiming exemptions must file with assessor sufficient documentary evidence to support claim WHEN within 30 days from the date of DECLARATION of property • • •
IF required evidence is not submitted within 30 days, the property will be listed as taxable in the roll IF proven to be tax-exempt, property will be dropped from the roll
NOTE: IF PROPERTY DECLARED FOR THE FIRST TIMEQuickTime™ (Sec. 222) and a TIFF (Uncompressed) decompressor If declared for 1st time, real property shall be are needed to see this picture. assessed for back taxes a) for not more than 10 yrs prior to the date of initial assessment b) taxes shall be computed on the basis of applicable schedule of values in force during the corresponding periods
STEP 3: APPRAISAL AND VALUATION OF REAL PROPERTY (Sec 212-214, 224-225) How to determine Fair Market Value: FOR LAND 1. 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) 2. Assessor prepares a schedule of FMV for different classes of properties 3. Sanggunian enacts an ordinance 4. 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 places therein (sec.212, LGC) FOR MACHINERY 1. For Brand New machinery : FMV is acquisition cost 2. In all other cases: FMV = Remaining eco. life X Replacement cost Estimated eco. life STEP 4: DETERMINE ASSESSED VALUE (Sec 218) Page 105 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Procedure 1. take the schedule of FMV 2. Assessed value = FMV X Assessment level 3. Tax = Assessed value X Tax rate
STEP 5: PAYMENT AND COLLECTION OF TAX WHEN January 1 of every year (Sec 246) tax shall constitute as superior lien (Sec 246) HOW a. basic real prop tax in 4 equal installments (Mar 31,Jun 30,Sep 30, Dec 31) b. special levy - governed by ordinance • NOTE: INTEREST for LATE PAYMENT - two percent (2%) each month on unpaid amt. until the delinquent amt is paid. - provided in no case shall the total interest exceed thirty-six (36) months
3. the owner of the prop is out of the country or cannot be located
REMEDIES IN REAL PROPERTY TAXATION Tax Remedies of the Local Government to Effect Collection of Taxes A. 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. 2. 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)
NOTE: FOR ADVANCE and PROMPT PAYMENT a) advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC) b) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR)
Advertise Sale or Auction (within 30 days after service of warrant) by posting and publication Sale
Collection of Tax (Sec.247, LGC) The collection of the real property tax with interest thereon and related expenses and the enforcement if the remedies provided by the LGC or any applicable laws shall be the responsibility of the city or municipal treasurer concerned.
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)
The city or municipal treasurer my deputize the barangay treasurer to collect all taxes on real property located in the barangay provided the barangay treasurer is properly bonded.
Redemption (within 1 year from date of sale)
WHO COLLECTS The provincial, city, municipal or barangay treasurer
PERIOD WITHIN WHICH TO COLLECT (Sec 270): QuickTime™ and a (Uncompressed) decompressor within five (5) yrsTIFF from the date they become due are needed to see this picture. within ten (10) yrs. from discovery of fraud, in case there is fraud or intent to evade Period of prescription shall be SUSPENDED when: (Sec 270, LGC) 1. local treasurer is legally prevented to collect tax 2. the owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect
Issuance of Final Deed to Purchaser (upon the delinquent taxpayer’s failure to redeem) ¾
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.
3. Distraint (Sec. 254, LGC) - with notice of delinquency posted and published. Personal property may be distrained to effect payment.
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 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 for an amount insufficient to pay the RPT and other costs. B. Judicial Civil Action (Sec. 266, 270, LGC) – filed by the local treasurer within 5 or 10 years as provided in Sec. 270 of the LGC.
or inaction of the treasurer after the lapse of 60 days) Appeal with the CBAA (w/in 30 days from receipt of adverse decision by LBAA) Appeal to CTA (within 30 days from receipt of adverse decision rendered by CBAA)
Prescriptive Periods for the Collection of RPT 1. Basic RPT and any other tax levied under the title on RPT – five years from the date they became due. (Sec. 270, LGC) 2. When there is fraud or intent to evade the payment of taxes – ten years from discovery of the fraud or intent to evade payment. GROUNDS FOR THE SUSPENSION OF THE RUNNING OF THE PRESCRIPTIVE PERIODS: 1. The treasurer is legally prevented from the assessment or collection of the tax; 2. The taxpayer requests for a reinvestigation expiration of the executes a waiver in writing before the expiration of the period within which to assess or collect; and 3. The taxpayer is out of the country or otherwise cannot be located (Sec.270, LGC)
Tax Remedies of the Taxpayer A. Administrative 1. Protest Pay the Tax under Protest File Written Protest with Local Treasurer (within 30 days from payment of tax) QuickTime™ and a Treasurer Decides TIFF (Uncompressed) decompressor are needed see this picture. (within 60 days fromtoreceipt of protest)
Apply for Tax Refund Appeal with the LBAA or Tax Credit (in case of denial of protest
2. 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 2 years from the date the taxpayer is entitled to such reduction or adjustment. b. Provincial or city treasurer should decide the claim within 60 days from receipt of the claim. c. In case of denial of refund or credit, appeal to LBAA within 30 days as in protest case. 3. Redemption of Real Property (Sec. 261, LGC) a. Within 1 year from the date of 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 the ff: a. Amount of delinquent tax b. Interest thereon c. Expenses of sale from date of delinquency to date of the sale d. Interest of not more than 2% per month on the purchase price from date of sale to date of redemption b. A certificate of redemption shall be issued, and the certificate of sale issued to the purchaser shall be invalidated. Remedy against the Assessment/Appeal 1st: within 60 days from notice of assessment of provincial, city or municipal assessor to LBAA (Sec. 226, LGC) within 30 days from receipt of decision of 2nd: LBAA to CBAA (sec. 230, LGC) within 30 days from receipt of decision of 3rd: CBAA to CTA en banc
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 4th:
within 15 days from receipt of decision of CTA en banc to SC.
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 of Assessment Appeals (LBAA should decide within 120 days from receipt of petition) Within 30 days from receipt of decision from LBAA, dissatisfied party may appeal to CBAA Central Board of Assessment Appeals Party adversely affected by LBAA’s decision may appeal with CTA within 30 days from receipt of decision. CTA (En BANC) Within 15 days
Supreme Court Condonation Real Property Taxes 1. By Sanggunian
1. Court Action – appeal of CBAA’s decision to CTA en banc; 2. Suit assailing validity of tax; 3. Recovery of refund of taxes paid (Sec. 64, PD 464) 4. Suit to declare invalidity of tax due to irregularity in assessment and collection; 5. Suit assailing the validity of tax sale (Sec. 83, PD 464 and Sec. 267, LGC)
VALUE-ADDED TAX Nature and Characteristics • Value added is the value that a producer adds to his raw materials or purchases (other than labor) before selling the new or improved product or service • VAT is an indirect tax levied on goods and services; not on persons, and ultimately paid by consumers in the form of higher prices • VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. • Seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. • In the case of importation, the importer is the one liable for the VAT • Apply to existing contracts of sale or lease of goods, properties or services at the time of effectivity of RA No. 7716 (9337).
RPT may be condoned wholly or partially in a given LGU when: a. There is general failure of crops; b. There is substantial decrease in the price of agricultural or agri-based QuickTime™ and a products; or TIFF (Uncompressed) decompressor areis needed to see this picture. c. There calamity.
Person refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association
2. By the President of the Philippines ¾ When public interest so requires
VAT-registered person refers to any person who is registered as a VAT taxpayer under Sec. 236 of the Tax Code. His status shall continue until the cancellation of such registration.
Taxable person refers to any person liable for payment of VAT, whether registered or registrable in accordance with Sec. 236 of the Tax Code
Taxable sale refers to the sale, barter, exchange and/or lease of goods or properties, including Page 108 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 transactions deemed sale and the performance of service for a consideration, whether in cash or in kind Definition of “in the course of trade or business” (Rule of Regularity) o The regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization or government entity o Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular Incidental to the principal business o Something necessary, appertaining to, or depending upon another which is termed the principal, something incident to the main purpose. Exceptions to the rule of regularity 1. Any business where the gross sales or receipt do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business 2. Services rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.
Section 105. Persons liable 1. Any person who, in the course of trade or business o Sells, barters, or exchanges goods or properties (seller or transferor) o Leases goods or properties (lessor) o Renders services (service provider) 2. imports goods (importer)
QuickTime™ CIR v.Magsaysay TIFF Lines, Inc. et and al aGr. No. 146984 (Uncompressed) decompressor are needed to see this picture. (2006)
FACTS: Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation(NMC). The NDC sold in one lot its NMC shares and five of its ships.
ISSUE: Whether or not the sale of the five vessels is subject to VAT? HELD: The court ruled that the sale was not in the ordinary course of the trade or business of NDC and is sufficient to declare the sale as outside the coverage of VAT. DOCTRINE: Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.
Sec 106. VAT on Sale of Goods or Properties • Goods: all tangible and intangible objects which are capable of pecuniary estimation. • Includes: o Real properties held primarily for sale to customers or held for lease in the ordinary course of business o the right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right o the right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment o the right or the privilege to use motion picture films, film tapes and disc o radio, television, satellite transmission and cable television time
Gross Selling Price: the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, of such goods or properties shall form part of the gross selling price. Zero-rated transactions 1. Export sales • The sale and actual shipment of goods from the Philippines to a foreign country Page 109 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
• • •
i. Irrespective of any shipping arrangement ii. Paid for in acceptable foreign currency or its equivalent in goods or services iii. Accounted for in accordance with the rules and regulations of the BSP Sale of raw materials or packaging materials by a VAT-registered entity to a nonresident buyer i. for delivery to a resident local export-oriented enterprise ii. Used in the manufacturing, processing, packing, repacking in the Philippines of the said buyer’s goods iii. Paid for in acceptable foreign currency iv. Accounted for in accordance with the rules and regulations of the BSP Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production Sale of gold to the BSP Those considered export sales under the Omnibus Investment Code of 1987 The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations i. 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 ports in the Philippines
Export sales • Zero-rated if made by VAT-registered persons • Exempt sales if made by person not VATQuickTime™ and a decompressor registered TIFFare(Uncompressed) needed to see this picture. • Origin Principle: only national taxpayers would be exposed to the tax, without distinguishing between transactions “consumed” locally or abroad. Export taxable, imports exempt. Situs: country of production • Destination Principle: VAT is imposed in the country in which the products or services are actually consumed or used. Exports
exempt, imports taxable. Situs: country of consumption Cross boarder doctrine: No VAT shall be imposed to form part of the cost of goods sold destined for consumption outside of the territorial boarder of the taxing authority. Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following the destination principle being adhered to by our VAT system
• CIR v. American Express International, Inc. GR. No. 152609 (2006) The Supreme Court voided the Cross boarder doctrine. The court mentioned that the law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State necessarily has to have “a substantial connection” to it, in order to enforce a zero rate. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used. Sales to export-oriented enterprise • Seller complies with other requirements like registration with the BOI and the PEZA • The entirety of the sales to such enterprise that is to be zero-rated, not only a proportion to the actual exports made by such enterprise Omnibus Investment Code: following sales, without actual exportation are considered constructively exported: • Sales to bonded manufacturing warehouses of export-oriented manufacturers • Sales to registered PEZA enterprises • Sales to registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products • Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assemble, or repacked products, whether paid for in foreign currency or not RMO No. 9-2000 • Sales of goods, properties, or services made by a VAT-registered supplier to a BOI-
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 registered exported shall be accorded automatic zero-rating RMC No. 74-99 • Sales made by a VAT-registered supplier to a PEZA-registered enterprise is subject to zero-percent VAT. • However, if the VAT registration of the PEZAregistered enterprise is an erroneous registration, it is not entitled to input taxes on its purchases from its supplier 2. Foreign Currency Denominated Sale (Internal Exports) • Sale to a nonresident of goods, except those mentioned in Section 149(automobiles) and 150 (non-essential goods), • Assembled or manufactured in the Philippines • For delivery to a resident in the Philippines • Paid for in acceptable foreign currency • Accounted for in accordance with the rules and regulations of the BSP • Sale 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 paid for in convertible foreign currency, and accounted for in accordance with the rules and regulations of the BSP shall be considered export sales 3. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory • Refer to exemptions granted under special laws or treaties which are extended not only to the grantee but also to its supplier of goods • Effectively zero-rated sale of goods and properties: refer to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or QuickTime™ and a TIFF (Uncompressed) decompressor international agreement are needed to see this picture. • Transactions which, although not involving actual export, are considered as constructive export shall be entitled to the benefit of zerorating Transactions deemed sale 1. Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business. • Transfer of goods or properties not in the course of business can take place when VAT-registered person withdraws goods from his business for personal use 2. Distribution or transfer to: i. Shareholders or investors share in the profits of VAT-registered person • Property dividends which constitute stocks in trade or property primarily held for sale or lease declared out of RE on or after Jan.1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable. ii. Creditors in payment of debt or obligation 3. Consignment 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 4. Retirement from or cessation of business with respect to inventories of taxable goods existing as of such retirement or cessation • Change of ownership of the business (when a single proprietorship incorporates or the proprietor of a single proprietorship sells his entire business • Dissolution of a partnership and creation of a new partnership which takes over the business Not subject to output VAT 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. 2. Change in the trade or corporate name of the business 3. Merger or consolidation of corporations. Changes in or Cessation of Status of a VAT registered Person 1. subject to output VAT a. change of business activity from VAT taxable status to VAT-exempt status
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 b. approval of a request for cancellation of registration due to reversion to exempt status c. approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec 109 (2) of the Tax Code d. approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipt exceeding P1,500,000 but who failed to exceed this amount during the first 12 months of operations 2. not subject to output VAT a. change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders b. change in the trade or corporate name of the business c. merger or consolidation of corporations Allowable deductions from gross selling price a) discounts determined and granted at the time of sale (expressly indicated in the invoice) b) sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales Sale of Real Properties o sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT o real estate dealer shall be subject to VAT on the installment payments, including penalties and interest (real properties on the installment plan) o sale of residential lot exceeding P1,500,000, residential house and lot or other residential dwellings exceeding P2,500,000, where the instrument of sale was executed on or after and a to VAT (house July 1, 2005, shallQuickTime™ be subject TIFF (Uncompressed) decompressor are needed to see thisnot picture. and lot is taxable though in the ordinary course of business) o installment sale of residential house and lot or other residential dwellings exceeding P1,000,000 where the instrument was executed prior to July 1, 2005, shall be subject to VAT o sale of real property on installment plan: sale of real property by a real-estate dealer,
the initial payments of which in the year of sale do not exceed 25% of the gross selling price. In the case of sale on the deferredpayment basis, the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale (sale of real property where the initial payment exceeds 25% of the gross selling price. Initial payments: covers any down payment made and includes all payments actually or constructively received during the year of sale Real estate dealer: includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary
SEC. 107 VAT ON IMPORTATION OF GOODS VAT is imposed on goods brought into the Philippines, whether for use in business or not Tax base = total value used by BOC in determining tariff and customs duties + custom duties + excise tax + other charges (postage, commission, and similar charges, prior to the release of the goods from customs custody If the valuation used is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost = invoice amount + customs duties + freight + insurance + other charges (excise tax shall form part of the tax base) the said tax shall be paid by the importer prior to the release of such goods from customs custody. Importer: refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business. Includes non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies Sale, transfer, or exchange of imported goods by tax-exempt persons: In the case of goods imported by VAT-exempt persons, entities or agencies which are subsequently sold, transferred or exchange in the Philippines to non-exempt persons or entities, the latter shall be considered the Page 112 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 importers thereof and shall be liable for VAT due on such importation. Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted SEC 108. VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES 1. Sale or exchange of service, as well as the use or lease of properties shall be subject to 12% VAT 2. Sale or Exchange of Service: the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in cash or in kind i. Construction and service contract ii. Stock, real estate, commercial, customs and immigration brokers iii. Lessors of property, whether personal or real iv. Persons engaged in warehouse services v. Lessors or distributors of cinematographic film vi. Persons engaged in milling, processing, manufacturing, or repacking goods for others vii. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and movie houses viii. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers ix. Dealers in securities x. Lending investor xi. Transportation contractors on their transport of goods or cargoes, QuickTime™ a including personsandwho transport TIFF (Uncompressed) decompressor are or needed to see this picture. goods cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes xii. Common carriers by air and sea relative to their transport of passenger, goods, or cargoes from one place in the Philippines to another place in the Philippines
Sales of electricity by generation, transmission, and/or distribution companies xiv. Franchise grantees of electric utilities, telephone and telegraph, radio and/or broadcasting television and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipt of the preceding year do not exceed P10,000,000 and franchise grantees of gas and water utilities xv. Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies xvi. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties 3. Sale or exchange of service shall also include: i. Lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand, or other like property or right ii. The lease or the use of, or the right to use any industrial, commercial or scientific equipment iii. The supply of scientific, technical, industrial or commercial knowledge or information iv. The supply of any assistance that is ancillary and subsidiary to and furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (b) hereof or any such knowledge or information as is mentioned in subparagraph (c) hereof v. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased from such nonresident person vi. The supply of technical advise, assistance or services rendered in connection with technical management or administration of any Page 113 of 145
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scientific, industrial or commercial undertaking, venture, project or scheme vii. The lease of motion picture films, film tapes, and discs viii. The lease or use of, or the right to use, radio, television, satellite transmission and cable television time Lessors of property – all forms of property for lease, whether real or personal, are liable to VAT real estate lessor: includes any person engaged in the business of leasing or subleasing real property i. regardless of the place where the contract of lease or licensing agreements was executed if the property leased or used is located in the Philippines ii. VAT on rental and/or royalties payable to non-resident foreign corp or owners for the sale of services and use or lease of properties in the Philippines shall be based upon on the contract price agreed upon by the licensor and the licensee non –resident lessor/owner: any person, natural or juridical, an alien, or a citizen who establishes to the satisfaction of the CIR the fact of physical presence abroad with definite intention to reside therein, and who owns/leases properties, real or personal, whether tangible or intangible, located in the Philippines Advance payment: i. A loan to the lessor from the lessee, or ii. An option money for the property, or iii. A security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or iv. Pre-paid rental • If the advance payment is for the faithful performance of certain obligations of the QuickTime™ and to a VAT lessee,TIFF it is not subject (Uncompressed) decompressor are needed to see this picture. • A security deposit that is applied to rental shall be subject to VAT at the time of its application • If the advance payment constitutes a prepaid rental, then such payment is taxable to the lessor in the month when received, irrespective of the accounting method employed by the lessor
8. warehousing service: rendering personal service of a warehouseman such as i. engaging in the business of receiving and storing goods for compensation ii. receiving goods and merchandise to be stored in his warehouse for hire; or iii. keeping and storing goods for others, as a business and for use 9. miller: a person engaged in milling for others (except palay into rice and corn into corn grits, and sugarcane into raw sugar) is subject to VAT on sale of services. • Cash: VAT shall be based on his gross receipts for the month or quarter • Receives a share of the milled products instead of cash: VAT shall be based on the actual market value of his share • Sale by the owner or miller of his share of the milled product (except rice, corn grits and raw sugar) shall be subject to VAT) 10. all receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on domestic carriers and keepers of garages shall be subject to VAT 11. common carries: refers to persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water or air for compensation, offering services to the public and shall include transportation contractors 12. common carriers by land with respect to their gross receipts from the transport of passengers including operators of taxicabs, utility cars for rent or hire driven by the lessees, and tourist buses used for the transport of passengers shall be subject to percentage tax 13. domestic common carriers by air and sea are subject to 12% VAT on their gross receipts from their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines 14. sale of electricity by generation, transmission, and distribution companies shall be subject to 12% vat on their gross receipts (sale of power or fuel generated through renewable sources of energy such as biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and Page 114 of 145
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hydrogen fuels shall be subject to 0% VAT) generation companies: refers to persons or entities authorized by the ERC to operate facilities used in the generation of electricity. Gross receipts (sale of electricity): i. Total amount charged by generation companies for the sale of electricity and related ancillary services; and/or ii. Total amount charged by transmission companies for transmission of electricity and related ancillary services; and/or, iii. Total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity and related electric services. The universal charged passed on and collected by distribution companies and electric cooperatives shall be excluded from the computation of the GR dealers in securities and lending investors: subject to VAT on the basis of their gross receipts. For dealer in securities, the term gross receipts means gross selling price less cost of the securities sold service of franchise grantees of telephone and telegraph, radio and/or television broadcasting, toll road operations and all other franchise grantees, except gas and water utilities, shall be subject to VAT • radio and/or television broadcasting: annual gross receipt of the preceding year do not exceed P10,000,000 shall not be subject to VAT but 3% percentage tax. • Gas and water utilities: subject to 2% franchise tax on their gross receipts • Telephone and telegraph: subject to VAT on their gross receipts derived from their telephone, telegraph, telewriter exchange, wireless and other communication equipment services • Amounts received for overseas QuickTime™ and a dispatch, message, or conversion TIFF (Uncompressed) decompressor are needed to see this picture. originating from the Philippines are subject to percentage tax and hence exempt from VAT non-life insurance companies: including surety, fidelity, indemnity and bonding companies are subject to VAT • not liable to premium tax under Sec. 23 (percentage tax) of the Tax Code
gross receipts: total premiums collected, whether paid in money, notes, credits or any substitute for money • non-life reinsurance premiums are subject to VAT • insurance and reinsurance commissions, whether life or non-life, are subject to VAT • Vat due from the foreign reinsurance company is to be withheld by the local insurance company and to be remitted to the BIR 20. pre-need companies: the compensation for their services is the premiums or payments received from the plan holders 21. health maintenance organizations (HMO) • gross receipts: total amount of money or its equivalent representing the service fee actually or constructively received during the taxable period for the services performed or to be performed , excluding VAT Gross Receipts: 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 deposits 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. • Deposit in banks which are made available to the seller of service without restrictios • Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered • Transfer of amounts retained by the payor to the account of the contractor Zero-rated sales of service The following services performed in the Philippines by a VAT-registered person shall be subject to 0% VAT rate: 1. processing, manufacturing, or repacking goods for other persons doing business outside the Philippines,
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a. which goods are subsequently exported b. where the services are paid for in acceptable foreign currency c. accounted for in accordance with the rules and regulations of the BSP services other than processing, manufacturing, or repacking a. rendered to a person engaged 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 [CIR v. Busmeirter, et al, GR No. 153205 (2007) require performance of services to nonresident to qualify as zero-rated.] b. The consideration of which is paid for in acceptable foreign currency c. accounted for in accordance with the rules and regulations of the BSP services rendered to persons or entities whose exemptions under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent rate services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof • 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 (subject to 12% VAT) 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. QuickTime™ and a • Gross receipts of international air carriers TIFF (Uncompressed) decompressor are needed to see this picture. doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to percentage tax 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. • Zero rating shall apply strictly to the sale of 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 Effectively Zero-Rated Sale of Services: refer to the local sale of services by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement (limited to 3, 4, 5) • Concerned taxpayer must seek prior approval or prior confirmation from the appropriate offices to the BIR so that a transaction is qualified for effectively zero-rating • Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt SEC 109. VAT EXEMPT TRANSACTIONS • Refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT and the seller is not allowed any tax credit of VAT on purchases 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 foods for human consumption; and breeding stock and genetic materials thereof • Livestock: cows, bulls and calves, pigs, sheep, goats and rabbits • Poultry: fowls, ducks, geese and turkey • Does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets • Marine food products: fish and crustaceans, such as but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams • Meat, fruit, vegetables and other agricultural and marine food products are considered in their original state even if hey undergone the simple process of preparation or preservation for the market : freezing, drying, salting, broiling, roasting, smoking or stripping, shrink wrappings in plastic, vacuum packing, Page 116 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 tetra-pack, and other similar packaging methods • Polished and/or husked rice, corn grits and raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural product in their original state • Sugar whose content of sucrose by weight, in the dry state : parameter reading of 99.5 and above are presumed to be refined sugar • Cane sugar produced from the following shall be presumed to be refined sugar: o Product of a refining process o Products of sugar refinery o Product of a production line of a sugar mill accredited by the BIR to be producing and/or capable of producing sugar with polarmeter reading of 99.5 • Bagasse is not included in the exemption provided for under this section 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 specialty feeds for race horses, fighting cocks, aquarium fishes, zoo animals and other animals generally considered as pets) 3. importation of personal and household effects • belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines • such goods are exempt fro customs duties 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 and other goods for use in the manufacture and merchandise of any QuickTime™ and a TIFF (Uncompressed) decompressor kind in commercial quantity) are needed to see this picture. • 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
5. 6. 7.
Upon the production of evidence satisfactory to the CIR that such persons are actually coming to settle in the Philippines • The change of residence is bonafide services subject to percentage tax services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar into raw sugar medical, dental, hospital and veterinary services, except those rendered by professionals • laboratory services are exempted • if the hospital or clinic operates a pharmacy or drug store, the sale of drugs and merchandise is subject to VAT Educational services rendered by private educational institutions duly accredited by the DepED, CHED and TESDA and those rendered by government educational institutions • Does not include seminars, inservice training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or TESDA Services rendered by individuals pursuant to an employer-employee relationship Services rendered by regional or area HQ established in the RP by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the RP Transactions which are exempt under international agreements to which the RP is a signatory sales by agricultural cooperatives duly registered and in good standing with the CDA to their members, as well as sale for 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 Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the CDA Page 117 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with the CDA • Share capital contribution of each member does not exceed 15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members • Importation 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 VATregistered 16. The following sales of real properties are exempt from VAT: • Not primarily held for sale to customers or held for lease in the ordinary course of trade or business • Sale of real properties utilized for low-cost housing • A subdivision or a condominium registered and licensed by the HLURB • Undertaken by the gov’t or private developers • Unit selling price ceiling: P750,000 • Utilized for socialized housing • Price ceiling per unit: P225,000 • Residential lot valued at 1.5M and below, or house and lot and other residential dwellings valued at 2.5M and below • Instrument must be executed on or after July 1, 2005 • If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed 1.5M 17. Lease of residential units • Monthly RENTAL: QuickTime™not and aexceeding TIFF (Uncompressed) decompressor P10,000are needed to see this picture. • If the aggregate of such rentals of the lessor during the year do not exceed 1.5M,: exempt from VAT but subject to 3% percentage tax • GR from rentals exceeding 10T per month per unit shall be subject to VAT if the aggregate annual GR from said units only (not including the GR from
units leased for not more than 10T) exceeds 1.5M. Otherwise, subject to 3% percentage tax 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 • 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 • Limited to 150 tons and above, including engine and spare parts of said vessels • Comply with the age limit requirement, at the time of acquisition counted from the date of he vessel’s original commissioning o Passenger/cargo vessel: 15 years old o Tankers: 10 years old o High-speed passenger crafts: 5 years old •
Exemption shall be subject to the provisions of “The Domestic Shipping Development Act” 20. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations • Shall be used exclusively or shall pertain to the transport of goods and/or passengers from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines 21. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries subject to percentage tax such as money changers and pawnshops 22. Sale or lease of goods or properties or the performance of services other than the transaction mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed 1.5M. • For purposes of the threshold of 1.5M, the husband and wife shall be considered separate taxpayer. • The aggregation rule for each taxpayer shall apply
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 A VAT-registered person may, elect that that the exemption shall not apply to his sales of goods or services or properties which is irrevocable for a period of 3 years. Credits for Input Tax Input Tax • The VAT due on or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of trade or business • Include the transitional and the presumptive input tax • Includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input taxes which cannot be directly attributed to either the taxable or exempt activity • Evidenced by a VAT invoice or official receipt issued by a VAT-registered person 1. Purchase or impartation of goods a) For sale ; or b) For conversion into or intended to form part of a finished product for sale, including packaging materials; or c) For use as supplies I the course of business; or d) For use as raw materials supplied in the sale of services; or e) For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code 2. Purchase of real properties for which a VAT has actually been paid 3. Purchases of services in which a Vat has actually been paid; 4. Transactions deemed sale 5. Transitional input tax 6. Presumptive input tax 7. Transitional input tax credits allowed under the transitory and other provisions of these Regulations QuickTime™ and a Persons who Can TIFF Avail of thedecompressor Input Tax Credit (Uncompressed) are needed to see this picture. 1. to the importer upon payment of VAT prior to the release of goods from customs custody 2. To the purchaser of the domestic goods or properties upon consummation of the sale; or 3. To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee
Claim for Input Tax on Depreciable Goods
Requisites: • A VAT-registered person purchases or imports capital goods (which are depreciable goods for income tax purposes) • Aggregate acquisition cost of which (exclusive of VAT) in a calendar month exceed 1M Manner of claiming input tax 1. estimated useful life of a capital good is 5 years or more: a. input tax spread evenly over a period of 60 months b. commenced in the calendar month when the capital good is acquired 2. estimated useful life is less than 5 years: a. input tax spread evenly on monthly basis by the actual number of months comprising the estimated useful life of the capital good b. commenced in the calendar month when the capital good is acquired Aggregate acquisition cost does not exceed 1M: total input taxes will be allowable as credit against output tax in the month of acquisition Aggregate acquisition cost of a depreciable asset in any calendar month: refers to the total price agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. If the depreciable capital good is sold/transferred within the period of 5 years or prior to the exhaustion of the amortizable input tax thereon: entire unamortized input tax on the capital goods sold, can be claimed as input tax credit during the month or quarter when the sale or transfer was made but subject to limitation Apportionment of Input Tax on Mixed Transactions A vat-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: • all the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit o input taxes which are directly attributable to Vat taxable sales of goods and services from the Government or any of its political subdivisions, instrumentalities or agencies, including GOCC shall not be credited against output taxes Page 119 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 •
arising from sales to non-government entities if any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions o only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of CGS for persons engaged in both zero-rated sales and non-zero rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated sale and non-zero-rated sale
Determination of Input Tax Credit during a taxable month or quarter All creditable input taxes during the month or quarter + any amount of input taxes carried-over from preceding month/qtr - (claim for VAT refund or tax credit certificate) - (other adjustments – purchase returns or allowances) - (input tax attributable to exempt sales) - (input tax attributable to sales subject to final VAT withholding) Input Tax Credit Determination of the Output Tax and VAT payable and Computation of VAT Payable or Excess Tax Credit Computation of output tax 1. Goods or properties: Gross selling price x VAT rate 2. Sellers of service: Gross receipts x VAT rate VAT payable computation: Output Tax - Input Tax Vat payable QuickTime™ and a TIFF (Uncompressed) decompressor
are needed to see this picture. VAT Payable (Excess Output) or Excess Input Tax If at the end of any taxable quarter the output tax > the input tax: the excess shall be paid by the VATregistered person Ex. Output tax 100 Input tax (80) VAT Payable 20
A. Transitional Input Tax Credits on Beginning Inventories (2%) o Taxpayers who became VAT-registered persons upon exceeding the minimum turnover of 1.5M in any 12-month period o Voluntarily register even if their turnover does not exceed 1.5M (except franchise grantees of radio and television broadcasting whose threshold is 10M. Entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration 1. goods purchase for resale in their present condition; 2. Materials purchased for further processing, but which have not yet undergone processing; 3. goods which have been manufactured by the taxpayer; 4. goods in process for sale; 5. goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person TIT = 2% of the value of the beginning inventory on hand or actual VAT paid on such goods, materials and supplies, whichever is higher o such amount shall be creditable against the output tax of VAT-registered person o value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% TIT, excluding goods that are exempt from VAT
B. Presumptive Input Tax Credits (4%) Covered: Persons or firms engaged in the processing of sardines, mackerel, and milk and in the manufacturing refined sugar, cooking oil and packed noodle-based instant meals Rate: 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production Creditable: against the output tax Processing: pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition Claims for Refund/Tax Credit Certificate of Input Tax 1. Zero-rated and Effectively Zero-rated Sales of goods, Properties or services
Transitional/Presumptive Input Tax Credits Page 120 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Vat-registered person may apply for the issuance of a TCC/refund of input tax attributable to such sales o Input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax o Application should be filed within 2 years after the close of the taxable quarter when such sales were made o In case of zero-rated sales: the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the BSP rules and regulations o Taxpayer is engaged in both zerorated or effectively zero-rated sales and in taxable or exempt transactions and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions: only the proportionate share of input taxes allocated to zerorated or effectively zero-rated sales can be claimed for refund or issuance of a TCC o A person engaged in the transport of passenger and cargo by air or sea vessels from the Philippines to a foreign country: input taxes shall be allocated ratably between his zero-rated sales and non-zero-rated sales. 2. Cancellation of VAT registration Why: due to retirement from or cessation of business, or due to changes in or cessation of status under Sec 106(c) of the TAX Code When: within 2 years from the date of cancellation What: apply for the issuance of a TCC for any unused input tax which he may use in payment of his other internal revenue taxes However: shall only be entitled to a refund if he has no internal revenue tax liabilities against which the TCC may be utilized 3. Where to file the claim for refund/TCC o Filed with the appropriate BIR office (LTS or RDO) having jurisdiction over the and a principal placeQuickTime™ of business of the TIFF (Uncompressed) decompressor taxpayer are needed to see this picture. o Direct exporters: may file their claim for TCC with the One Stop Shop Center of the DOF o Filing of the claim with one office shall preclude the filing of the same claim with another office 4. Period within which refund or TCC of input taxes shall be made o
CIR shall grant a TCC/refund for creditable input taxes within 120 days from the date of submission of complete documents in support of the application • Taxpayer may appeal to the CTA within 30 days from receipt of said denial • If no action on the claim for refund has been taken by the CIR after the 120 day period from the date of submission of the application with complete documents, the taxpayer ,may appeal to the CTA within 30 days from the laps of the 120-day period 5. Manner of giving refund • Refund shall be made upon warrants drawn by the CIR or by his duly authorized representative without the necessity of being countersigned by the Chairman of COA • Refunds under this paragraph shall be subject to post audit by the COA COURT OF TAX APPEALS What is the new law governing the CTA? • RA 9282, an act expanding the jurisdiction of the CTA, and elevating it to the level of the Court of Appeals What is the composition of the CTA and how may the CTA rule? • CTA shall consist of a Presiding Justice and five (5) Associate Justice • They may rule as follows: 1. En banc 2. Sitting in 2 divisions, each division with 3 justices each What is the quorum? • The affirmative votes of 4 Justices for sessions En Banc and 2 Justices for sessions of a Division shall be necessary for he rendition of a decision or resolution • When the required quorum cannot be constituted, the Presiding Justice shall designate any Justice of other Divisions of the court to sit temporarily therein What is the APPELLATE JURISDICTION OF THE CTA? • The CTA shall exercise exclusive appellate jurisdiction to review by appeal: 1. Decisions of CIR 2. Inaction of CIR
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 3. Decisions of RTC on local tax cases 4. Decisions of Commissioner of Customs 5. Decisions of CBAA (on exercise of appellate jurisdiction over RPT tax cases decided by LBAA) 6. Decisions of DOF on customs cases elevated to him on automatic review due to adverse decision versus the government 7. Decisions of DTI (on nonagricultural products) and Department of Agriculture (on agricultural products) involving dumping and countervailing duties Does the CTA have jurisdiction over criminal cases? • Yes, the CTA have jurisdiction over the following cases involving criminal offenses: 1. ORIGINAL - FOR CRIMINAL ACTS UNDER NIRC AND CUSTOMS CODE 1M OR ABOVE • Over appeals from the decision of RTC in tax cases 1. Over petitions for review of the decision of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the MTC Does the CTA have jurisdiction over tax collection cases? • Yes, the CTA have jurisdiction over the following cases involving tax collection: 1. ORIGINAL – 1M OR ABOVE • Exclusive appellate jurisdiction in tax collection cases: 1. Over appeals from Decision of RTC in tax collection cases 2. Over petitions for review of the decision of the RTC in the exercise of their appellate jurisdiction over tax collection cases originally decided by the MTC QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
What is the Procedure? 1. Appeal within 30 days from receipt of decision or period of inaction of CIR, COC, Secretary of Finance, Secretary of Trade and Industry or Secretary of Agriculture, or the CBAA or the RTC: a. Generally, appeal will be to a Division
b. Except: appeal by filing a petition for review to En Banc in case of decisions of CBAA or RTC in the exercise of its appellate jurisdiction 2. In case the decision of the Division is adverse: a. File MR with same Division within 15 days from notice thereof 3. In case resolution of Division on the MR or new trial is still adverse: a. File petition for review with CTA En Banc 4. IN case the decision of the CTA En Banc is adverse, file a review on certiorari with the SC pursuant to Rule 45 of Rules of Court Where can you appeal a decision of a local assessment board? • To the Central Board of Assessment Appeals (CBAA) and not yet to the CTA. • It is only after the CBAA has ruled that an appeal may be made to the CTA • In which case, the appeal shall be by petition for review to the CTA En Banc What is the rule on suspension of collection? • General Rule: no injunction to restrain collection of taxes • Exception: Under Section 9 of RA 9282, suspension is allowed when the following conditions concur: o It is an appeal to the CTA from a decision of CIR, COC or the RTC, provincial, municipal treasurer, or the Secretary of Finance, Secretary of Trade and Industry or Secretary of Agriculture, as the case may be; and o In the opinion of the Court, the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or taxpayer In case of suspension, what is the taxpayer required to do? • The taxpayer will be required to either deposit the amount claimed or file a surety bond for not more than double the amount with the Court.
PART VI - TARIFF AND CUSTOMS CODE DEFINITIONS Page 122 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1. 2.
TARRIF: Custom duties, toll or tribute payable upon merchandise to gov’t. CUSTOMS DUTIES: Tax assessed upon merchandise from or exported to a foreign country (Garcia v. Executive Sec., 211 SCRA 227 ) FLEXIBLE TARIFF: Import duties which are modified by the President upon investigation by the Tariff Commission and recommendation of the NEDA in the interest of national economy, general welfare and national security.
Dumping Duty Imposing Authority Special Committee on AntiDumping (compose d of Sec. of Finance as Chairman; Members: the Sec. of DTI and either the Sec. of Agriculture if article in question is agri. Product or the Sec. of Labor if non-agri.)
Countervailing Duty Sec. of finance
Marking Duty Commissi oner of Customs
Discriminato ry Duty President of the Philippines
FLEXIBLE TARIFF CLAUSE The President may fix tariff rates import and export quotas, etc. under TCC (See Sec. 28, Art. VI, Constitution and Sec 401, TCC) QuickTime™ and a 1. To increase, reduce decompressor or remove existing TIFF (Uncompressed) are needed to see this picture. 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 of import duty be higher than a maximum of 100% ad valorem.
2. To establish import quota or to ban imports of any commodity, as may be necessary and 3. To impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary. LIMITATIONS IMPOSED REGARDING THE FLEXIBLE TARIFF CLAUSE 1. Conduct by the Tariff Commission of an investigation in public hearing. • The Commission shall also hear the views and recommendations of any gov’t office agency or instrumentality concerned. • The NEDA thereafter submits its recommendation to the President. 2. 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, TCC) OTHER TYPES OF FEES CHARGED BY THE BOC 1. Arrastre charge 2. Wharfage due- counterpart of license, charged not for the use of any wharf but for a special fund- Port Works Fund 3. Berthing fee 4. Harbor fee 5. Tonnage due Meaning and Scope of the Tariff and Customs Laws • Includes not only the provisions of the Tariff and Customs Code (TCC) and regulations pursuant thereto, but all other laws and regulations which are subject to the Bureau of Customs (BOC) or otherwise within its jurisdiction. • As to its scope: tariff and custom laws extend not only to the provisions of the TCC but to all other laws as well, the enforcement of which is entrusted to BOC. BUREAU OF CUSTOMS FUNCTIONS: 1. Assessment and collection of the lawful revenues from imported articles and all other dues, fees, charges, fines and penalties accruing under the Page 123 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 tariff and customs laws. 2. Prevention and suppression of smuggling and other frauds upon the customs. 3. Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce. 4. Enforcement of tariff and customs laws, rules and regulations relating to the tariff and customs administration. 5. Supervision and control over the handling of foreign mails arriving in the Phils. For the purpose of the collection of the lawful duty on dutiable articles thus imported and prevention of smuggling through the medium of such mails 6. Supervision and control 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. 7. Exercise exclusive jurisdiction over seizure and forfeiture cases under the tariff and customs laws. (Sec. 602) JURISDICTION OF COLLECTOR OF CUSTOMS OVER IMPORTATION OF ARTICLES 1. Cause all articles for importation to be entered in the customhouse 2. Cause all such articles to be appraised and classified 3. Assess and collect the duties, taxes and other charges thereon 4. Hold possession of all imported articles until the duties, taxes and other charges are paid thereon (Sec 1206) TERRITORIAL JURISIDICTION OF THE BOC 1. All the seas within the jurisdiction of the Phils. 2. All coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable or not from the sea (1st par., Sec. 603) APPLICATION OF THE TCC Only after importation has begun but before importation is terminated QuickTime™ and a DURATION OF IMPORTATION: TIFF (Uncompressed) decompressor are needed to see this picture. BEGINNING When the conveying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unload therein TERMINATION Upon payment of the duties, taxes, and other charges due upon the articles, or secured to be paid at the port of entry and legal permit for withdrawal shall have been granted
In case the articles are free of duties, taxes and other charges until they have legally left the jurisdiction of customs (Sec. 1202)
Intention to Unload • Even if not yet unloaded, and there is unmanifested cargo forfeiture may take place because importation has already begun. GOODS PROHIBITED FROM BEING IMPORTED 1. Absolutely prohibited a. Weapons of war b. Immoral/obscene or insidious articles c. Articles for treason d. Prohibited drugs/narcotics e. Gambling paraphernalia/devices f. Those prohibited under Special Laws (Sec 102 TCC) 2. Qualifiedly prohibited o Where such conditions as to warrants a lawful importation do not exist, the legal effects of the importation of qualifiedly prohibited articles are the same as those absolutely prohibited articles. (Auyong Hian v. CTA, 59 SCRA 110) Conditionally-free from tariff and customs duties • Certain imported articles are exempt from import taxes upon compliance with certain requirements. These are 1. Those provided for in Sec. 105 of the TCC; 2. Those granted to government agencies, GOCC with agreements with foreign countries; 3. Those given to international institutions entitled to exemption by agreement or special law; and 4. Those that may be granted by the President upon Neda’s recommendation. • Exempt articles under Sec. 105 • Article Conditions Animals and plants • For scientific, experimental, propagation, botanical, breeding, zoological and national defense purposes Aquatic products o caught or gathered by vessels of Philippine registry o Not have landed in foreign Page 124 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
Equipment used for the salvage of vessels or aircraft not available locally Costs of repair made in foreign country of Phil vessels or aircraft
Articles brought into the Philippines for repair, processing, or reconditioning Trophies, prizes ( medals, badges, cups) Those received as honorary distinction Samples in such quantity and of such dimensions or constructions as to render them unsaleable or of no appreciable commercial value,
territory, or if landed, solely for transshipment o Bond= 1 ½ x of ascertained duties, taxes and charges o Must be exported within 6 months o Phil must not have adequate facilities to make repair o Vessel was compelled by weather or casualty to go to a foreign port of repair o Excludes value of article used for repair o to be re-exported upon completion of the repair, processing or reconditioning o Bond = 1 ½ x of ascertained duties, taxes and charges
o models not adopted for practical use, and o samples not for sale o marked sample sale punishable by law o for purpose of introducing new product o imported by person duly registered and identified to be engaged in that trade o Importations authorized by Sec of Finance Personal and o formally declared and household effects listed before departure of returning Phil and identified under residents oath before the Collector of Customs when exported from the Phil by such returning residents upon their departure therefrom or QuickTime™ and a during their stay abroad TIFF (Uncompressed) decompressor are needed to see this picture. o personal and household effects including wearing apparel, articles of personal adornment (except luxury items) toilet articles, instruments related to one’s profession and
Wearing apparel, articles of personal adornment, toilet articles, portable tools and instruments, theatrical costumes and similar personal effects
analogous personal or household effects, excluding vehicles, watercraft, aircraft and animals, purchased in foreign countries by residents of the Philippines which were necessary, appropriate and normally used for their comfort and convenience during their stay abroad, accompanying them on their return or arriving within a reasonable time which, barring unforeseen and fortuitous events, in no case shall exceed 60 days after the owner’s return, subject however to the following provisions: 1. That the personal and household effects shall neither be in commercial quantities nor intended for barter, sale or hire and that the total dutiable value of which shall not exceed P10,000 2. That the returning resident has not previously availed of the privilege under this section within 365 days prior to his arrival 3. That a 50% ad valorem duty across the board shall be levied and collected on the personal and household effects in excess of P10,000 • arriving within a reasonable time, before or after the owners, • in use of and necessary and appropriate for the wear or use of such persons according to their profession or position • for the immediate
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 accompanying travelers or tourists in their baggage Personal and household effects, vehicles of foreign consultants and experts hired or rendering service to gov’t, including staff and families
Professional instruments, tools of trade, wearing apparel, domestic animals, personal and household effects belonging to persons coming to settle in the Phil and OFW
Articles used exclusively for public entertainment; display in public expos; exhibition or competition for prizes; devices for projecting picture Brought by foreign film producers for making or recording motion pictures on location in Phil.
• • •
• • • •
purposes of their journey and their present comfort and convenient. Accompany them or arrive at a reasonable time In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Collector may require: written commitment or bond In quantities and kind necessary and suitable to the profession, rank or position For their own use, NOT for sale, barter, hire Change of residence is bona fide Privilege of free entry was never granted to them before or qualifies under LOI 105, 163, 210 Must file bond Exported within 6 months Not exhibited for profit Otherwise, confiscation +penalty
Must file a bond Exported within 6 months (unless extended by the Collector for another 6 months) • Principal actors are Photographic and QuickTime™ and a Filipinos decompressor cinematographic TIFFare(Uncompressed) needed this picture. • to see Affidavit by importer films, that the exposed films undeveloped, are same films exposed outside previously exported Phil by resident Filipinos or Phil. producing companies Importations used Reciprocity: such foreign
by foreign embassies, legations, agencies of foreign gov’t Articles for personal or family use of members and attaches of foreign embassies, legations, consular officers and other reps of foreign gov’t Articles donated to or for account of relief organization Containers, holders and similar receptacles Supplies of vessel or aircraft
Articles and salvage after 2 years from filing protest Coffins or urns containing human remains, bones ashes. Personal and household effects of deceased except vehicles Economic, technical, vocational, scientific, philosophical, historical, and cultural books and publications Phil articles previously exported and returned without increasing value or improved condition. Foreign articles
country must grant same privilege to Phil. agencies Such privileges must be accorded in a special agreement between Phil and the foreign country Privilege may be granted only upon specific instructions of Sec. of Finance which will be given only upon request of the DFA • Org not for profit • For free distribution to the needy • Except those that are reusable for shipment or transportation of goods • For use or consumption of passengers on board • Any surplus or excess shall be dutiable • Vessels must have been wrecked or abandoned in Phil waters • Not exceed P10,000
Note that if a drawback or bounty was allowed to any Phil article under this subsection, upon re-importation article shall be subject to duty equal to the bounty or drawback
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 previously exported when returned after having been exported and loaned for use temporarily abroad solely for exhibition Foreign container used in packing exported Phil products Articles and supplies imported by and for use of scheduled airlines operating under congressional franchise Machineries, equipments, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, transpo and communications facilities imported by and used by new mines and old mines
exported from Phil for repair and subsequently reimported Trailer chassis imported by shipping companies for handling containerized cargo
Cost of repair made on article shall pay 30% ad valorem
Bond (1 ½ x) to cover 1 year Must be properly identified and registered with the LTO Subject to customs supervision fee Deposited in Customs zone when not in use Upon expiration of period (1 year or as extended by Commissioner) duties and taxes shall be paid Car must have been purchased or ordered before the mission or consulate received his order of recall The value of personal and household effects shall not exceed 30% of his total salary.
• • •
Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations Such articles are not available locally in reasonable quantity, quality and price Necessary or incidental to proper operations Used in their agri and industrial operations
Aircrafts imported by agro industrial companies, spare parts and accessories Spare parts of • Brought to Phil as QuickTime™ and a vessels or aircraftsTIFF (Uncompressed) replacement or for decompressor are needed to see this picture. of foreign registry emergency repair engaged in foreign • Spare parts utilized to trade secure safety, seaworthiness, or airworthiness, enable it to continue voyage or flight Articles for easy • Cannot be repaired identification locally
Personal and household effects (including one car) officer or employee of DFA, attaché, staff assigned to Phil diplomatic mission abroad, personnel of Reparations Missions in Tokyo, AFP military personnel in SEATO, AFP military personnel accorded diplomatic rank on duty abroad
= returning from regular assignment, reassignment, dies, resigns or retires Free from tariff and customs duties • Imported goods must be entered in the customhouse at their port of entry otherwise they shall be considered as contraband and the importer shall be liable for smuggling (sec 1201) • Port of entry means a domestic port open to both foreign and coastwise trade including “airport of entry”. (Sec. 3514) • All articles when imported from any country into the Philippines shall be subject to duty upon Page 127 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 each importation, even though previously exported from the Phils. except as otherwise specifically provided for in the TCC or other laws. (sec 1201) LIABILITY FOR CUSTOMS DUTIES General Rule: No exemptions from customs duties The provisions of general and special laws, including those granting franchises, to the contrary notwithstanding, there shall be no exemptions whatsoever from the payment of customs duties (Sec. 105, last par.) EXCEPTIONS: 1. If provided under the TCC (e.g. conditionallyfree importation) 2. Exemptions granted to GOCCs with existing contracts, commitments, agreements or obligations with foreign countries 3. Exemptions of international institutions, associations or organizations pursuant to agreements and special laws 4. Exemptions granted by the President of the Phils. Upon recommendation of NEDA in the interest of national economic development. (Sec. 1205) LIABILITY OF IMPORTER FOR CUSTOMS DUTIES 1. A personal debt due from the importer which can be discharged only by payment in full of all duties and taxes 2. a lien upon imported articles which may be enforced while they are in custody or subject to the control of the government (sec 1204) EXTENT OF IMPORTER’S LIABILITY limited to the value of the imported merchandise. In case of forfeiture of the seized materials, the maximum civil penalty is the forfeiture itself. (Mendoza v. David, 1 SCRA 791) PREFERENCE ON THE OWNER OF IMPORTED ARTICLES FOR CUSTOMS PURPOSES All articles imported into the Philippines shall be held to be the property of: • the person to QuickTime™ whomand athe property is decompressor consigned TIFFare(Uncompressed) needed to see this picture. • the holder of the bill of lading duly endorsed by the consignee therein named • the consignee if consigned to order by the consignor • the underwriters of the abandoned articles saved from a wreck at sea, along the coast or in any area in the Phils.
DUTIABLE IMPORTATION Articles although previously exported from the Philippines, become dutiable from the entry of the vessel or aircraft into the Philippine jurisdiction until the payment of duties, taxes, and other charges and the issuance of the permit for the withdrawal of said goods from the custom houses. BASIS OF DUTIABLE VALUE (Sec. 201 TCC, as amended by RA 9135)
Sec. 201. 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, adjusted by adding: 1. The following to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods: • Commissions and brokerage fess (except buying commissions); • Cost of containers; • Cost of containers; • The cost of packing, whether for labor or materials; • The value, apportioned as appropriate, of the following goods and services: materials, components, parts and similar items incorporated in the imported goods; tools; dies; moulds and similar items used in the production of imported goods; materials consumed in the production of the imported goods; and engineering, development, artwork, design work and plans and sketches undertaken elsewhere than in the Philippines and necessary for the production of imported goods, where such goods and services are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods; • The amount of royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods to the buyer; 2. The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller; Page 128 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 3. The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines; 4. Loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and 5. The cost of insurance.
• All additions to the price actually paid or payable shall be made only on the basis of objective and quantifiable data. No additions shall be made to the price actually paid or payable in determining the customs value except as provided in this Section: Provided, That Method One shall not be used in determining the dutiable value of imported goods if: a) There are restrictions as to the disposition or use of the goods by the buyer other than restrictions which:€ • Are imposed or required by law or by Philippine authorities; • Limit the geographical area in which the goods may be resold; or • Do not substantially affect the value of the goods. b) The sale or price is subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued; c) Part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions hereof; or d) The buyer and the seller are related to one another, and such relationship influenced the price of the goods. Such persons shall be deemed related if: • They are officers or directors of one another’s businesses; • They are legally recognized partners in business; QuickTime™ and a TIFFemployer-employee (Uncompressed) decompressor • There exists an relationship are needed to see this picture. between them; • Any person directly or indirectly owns, controls or holds five percent (5%) or more of the outstanding voting stock or shares of both seller and buyer; • One of them directly or indirectly controls the other;
Both of them are directly or indirectly controlled by a DRAWBACK: It is a device resorted to for third enabling a commodity affected by taxes to be pers exported and sold in foreign markets upon the on; same terms as if it had not been taxed at all. (Uy Tog Chiaco Sons vs. Collector of Customs, 24 Phil ethe 562) r they directly or indirectly control a third person; or They are members of the same family, including those related by affinity or consanguinity up to the fourth civil degree.
Persons who are associated in business with one another in that one is the sole agent, sole distributor or sole concessionaire, however described, of the other shall be deemed to be related for the purposes of this Act if they fall within any of the eight (8) cases above. (B) Method Two. – Transaction Value of Identical Goods. – Where the dutiable value cannot be determined under method one, 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" shall mean 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. (C) Method Three. – Transaction Value of Similar 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" shall mean 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. If the dutiable value still cannot be determined through the successive application of the two immediately preceding methods, the dutiable value shall be determined under method four or, when the dutiable value still cannot be determined under that method, under method five, except that, at the request of the importer, the order of application of methods four and five shall be reversed: Provided, however, That if the Commissioner of Customs Page 129 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 deems that he will experience real difficulties in determining the dutiable value using method five, the Commissioner of Customs may refuse such a request in which event the dutiable value shall be determined under method four, if it can be so determined. xxx
CONDITIONS FOR GRANT OF DRAWBACK 1. Imported material was actually used in the production of article to be exported. 2. Refund or credit shall not exceed 100% of duties paid on the imported material 3. No determination by NEDA of the requirement for certification on nonavailability of locally produced or manufactured competitive substitutes for the imported material (no local substitute for the materials) 4. Exportation must be made within 1 year after importation of material and claim for refund or credit must be made within 6 months from exportation 5. When 2 or more result from the used of same imported material, apportionment shall be made. o Every application for drawback must pay P500 filing, processing, and supervision fees o Claims shall be paid by BoC within 60 days after receipt of properly accomplished claims
IMPORT ENTRY: 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 It must be accomplished at the entry. moment the last cargo is disembarked from the vessel. TRANSACTION VALUE UNDER RA 8181 QuickTime™ and a It is the invoice value of the goods plus freight, TIFF (Uncompressed) decompressor are needed to see this picture. insurance, costs, expenses. The Dutiable value of an imported article shall be the transaction price, which shall be the price actually paid or payable for the goods when sold for export to the Phil., adjusted by adding the ff to the extent that they are incurred by the buyer but not included in the price paid: o Commissions and brokerage fees, costs of containers, costs of packing
Value of materials, components, parts and item incorporated in the importer good o Royalties and license fees that buyer paid o Any part of the proceeds of a subsequent resale, disposal or use of good that accrues to the seller; o Transportation cost from port of export to port of entry in Phil o Loading, unloading and handling charges(arrastre) o insurance This replaces the Home Consumption Value as basis of valuation of goods. o
CLASSIFICATION OF CUSTOMS DUTIES 1. Regular duties –those which are imposed ordinarily as a matter of course without order from the higher authorities and collected merely as a source of revenue a. Ad Valorem Duty – this is a duty based on the value of the imported article b. Specific Duty- this is duty based on the dutiable weight of goods (either the gross weight, legal weight or the net weight) 2. Special duties- those which are imposed and collected in addition to ordinary duties usually to protect local industries against foreign competition: a. Dumping Duty b. Countervailing duty c. Marking duty d. Discriminatory duty NATURE AND PURPOSE OF SPECIAL CUSTOMS DUTIES 1. These are additional import duties imposed on specific kinds of imported articles under certain conditions 2. These are imposed for the protection of consumers and manufacturers as well as Phil. Products from undue competition posed by foreign made products. o These cannot be imposed without regular duties because the law says that it is to be “in addition to such”. SPECIAL DUTIES are: DUTIES
Imposed on foreign articles: a. Being
AMOUNT /RATE Difference between the actual price and the
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IMPOSING Authority Special Committee on Antidumping
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
Counterv ailing Duty
Discrimin atory Duty
importe d into, sold or is likely to be sold in the Phils. At a price less than its normal value
normal value of the article (extent of the underpricing )
The importation or sale of which might injure an industry producing like goods in the Phils. Imposed Equivalent upon to the foreign bounty, goods subsidy or enjoying subvention subsidy thus allowing them to sell at lower prices to the detriment of local products similarly situated Imposed 5% ad upon those valorem of not articles properly marked as to the place QuickTime™ and a of origin TIFFof (Uncompressed) decompressor are needed to see this picture. the goods Imposed upon goods coming from countries that discriminat
(Sec. of Financechairman; members: Sec of DTI, Sec. of Agriculture/ Sec of Labor)
Sec of Finance
Comm of Custom
Pres. Of the Phil.
e against Philippine products FLEXIBLE TARIFF CLAUSE Sec. 28, ART VI of the 1987 Constitution and Sec. 401, TCC. The President may fix tariff rates, import and export quotas, etc. under TCC 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 be higher than a maximum of 100% as valorem 2. To establish import quota or to ban imports of any commodity, as may be necessary 3. To impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary LIMITATION IMPOSED REGARDING FLEXIBLE TARIFF CLAUSE
1. Conduct by the Tariff Commission of an investigation in a public hearing The Commissioner shall also hear the views and recommendations of any government office, agency or instrumentality concerned The NEDA thereafter shall submits its recommendation to the President 2. 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 country for the most recent representative period shall be used as bases. (Sec 401 TCC) REQUIREMENT TO KEEP RECORDS (Sec. 3514 TCC, as amended by RA 9135) All importers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period three (3) years from the date of importation, all the records of their importations and/or books of accounts, business and computer systems and all customs commercial data Page 131 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 including payment records relevant for the verification of the accuracy of the transaction value declared by the importers/customs brokers on the import entry. All brokers are required to keep at their principal place of business, in the manner prescribed by regulations to be issued by the Commissioner of Customs and for a period of three (3) years from the date of importation copies of the above mentioned records covering transactions that they handle. THE TARIFF COMMISSION FUNCTION OF THE TARIFF COMMISSIONS I. Investigative Powers 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. b) The relations between the rates of duty on raw materials and the finished or partly finished products. c) The effects of ad valorem and specific duties and of compound specific and ad valorem duties. d) All questions relative to the arrangement of schedules and classification of articles in the several schedules in the tariff law. e) The tariff relations between the Philippines and other foreign countries’ commercial treaties, preferential provisions, economic alliances, the effect of export bounties and preferential transportation rates. f) The volume of importations compared with domestic production and consumption; and g) 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. (Sec. 506, TCC) II. Administrative Assistance to the President and Congress (Sec. 506, TCC) Tax Remedies Under the Tariff and Customs Code (TCC) QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
REMEDIES OF THE GOVERNMENT TO EFFECT COLLECTION OF TAXES I. Administrative/Extrajudicial 1. Tax Lien (Sec. 1508, TCC) • Attaches on the goods, regardless of ownership, while still in the custody or control of the Gov’t.
Availed of when the importation is neither prohibited nor improperly made. 2. Administrative Fines and Forfeitures • Applied when the importation in unlawful; • And it may be exercised even where the articles are not or no longer in Custom’s custody unless the importation is merely attempted in which case it may be effected only while the goods are still within the Custom’s jurisdiction or in the hands of a person who is aware thereof (Sec. 2531 & 2530 TCC) • Under Sec. 2530 (a) of the TCC, 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 operations is sufficient for it to be deemed to have been used in smuggling (Llamado v. Comm. Of Customs, 122 SCRA 118) 3. Reduction of customs duties/compromise: • Subject to approval of Sec. of finance (Sec. 709, 2316 TCC) 4. Seizure, Search, Arrest (Sec. 2205, 2210, 2211 TCC) II. Judicial • this remedy is normally availed of when the tax lien is lost by the release of the goods 1. Civil action (Sec. 1204 TCC) 2. Criminal action REMEDIES OF THE TAXPAYER I. Administrative 1. Protest • Any importer or interested party 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 (Sec. 2308, 2210 TCC) 2. Refund • 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 Page 132 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Philippines, articles lost or destroyed after such arrival, dead or injured animals, and for manifest clerical errors and • Drawback cases where the goods are reexported. (Sec. 1701-1708 TCC) 3. Settlement of any seizure by payment of fine or redemption • 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 TCC) 4. Appeal • Within 15 days to Commissioner after notification by collector of his decision (Sec. 2313 TCC) II. Judicial 1. Appeal • Within 30 days from receipt of decision of the Commissioner or Secretary of Finance to the division of the CTA (Sec. 2403 TCC, Sec. 7 RA 1125, as amended by Sec. 9 RA 9282) • Since Sec. 11 of RA 1125, as amended by Sec. 9 RA 9282 empowers the tax court to issue injunctions, it would appear than an importer may appeal without first paying the duties, such as in seizure but not in protest cases. 2. Action to question the legality of seizure 3. Abandonment (Sec. 1801 TCC) i. expressly (Sec. 1801 TCC) ii. impliedly • 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 BOC QuickTime™ and a (Uncompressed) decompressor 1. Customs protestTIFF cases are needed to see this picture. 2. Customs seizure and forfeiture cases A. Customs Protest Cases Definition: These are cases which are solely with liability for customs duties, fees, and other charges. NOTE: Before filing a protest there must first be a payment under protest. 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.
When Customs Protest NOT Required • When 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 reported and a duty drawback is claimed. REQUIREMENTS FOR MAKING A PROTEST 1. Must be in writing 2. Must point out the particular decision or ruling of the Collector of Customs to which to which exception is taken or objection made; 3. Must state the grounds relied upon for relief; 4. Must be limited to the subject matter of a single adjustment; 5. Must be filed when the amount claimed is paid or within 15 days after the payment; 6. Protestant must furnish samples of goods under protest when required. PROCEDURE ON CUSTOMS PROTEST CASES 1. The Collector acting within his jurisdiction shall cause the imported goods to be entered at the customhouse. 2. The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party liable does not pay the same. 3. The party adversely affected may file a written protest on his foregoing liability with the Collector within 15 days after the liquidated amount (the payment under protest rule applies) 4. 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 Appeal with CTA division within 30 days from notice Appeal with the CTA en
IF DECISION IS ADVERSE TO THE GOVERNMENT Automatic review by Commissioner Automatic review by Sec. of Finance If decision of
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 banc
Commissioner or Sec. is adverse to the protestant, he may appeal to the CTA and SC under the same procedure on the left.
Appeal by certiorari to the SC within 15 days from notice B. 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 actions are 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. (Comm. Of Customs v. Manila Starr Ferry, Inc., 227 SCRA 317) Smuggling A. An act of any person who shall: • Fraudulently import any article contrary to law, or • Assist in so doing, or • Receive, conceal, buy, sell, facilitate or transport such article knowing its illegal importation (sec. 3601 TCC) • Export contrary to law (Sec. 3514 TCC) B. The Philippines is divided into various ports of entry - entry other than port of entry will be SMUGGLING. Port of Entry: A domestic port open to both foreign and coastwise trade including “airport of entry”. (Sec. 3514 TCC) •
ALL articles imported into the Philippines QuickTime™ and a whether subject to duty or not shall be TIFF (Uncompressed) decompressor are needed to see this picture. entered through a customs house at a port of entry.
ENTRY in Customs law means • The documents filed at the Customs house • The submission and acceptance of the documents
The procedure of passing goods through the customs house (Rodriguez v. CA, Set. 18, 1995)
Evidence for Conviction in Smuggling Cases • Mere possession of the article in question UNLESS the defendant could explain that his possession is lawful to the satisfaction of the court (Sec. 3601 TCC). • Payment of the tax due after apprehension is not a valid defense (Rodriguez v. CA, 248 SCRA 288) Things Subject to Confiscation in Smuggling Cases • Anything that was used for smuggling is subject to confiscation, like the vessel, plane, etc. (Llamado v. Comm. of Customs, 1983). Exception: Common carriers that are not privately chartered cannot be confiscated. Contraband: Articles of prohibited importations or exportations. (Sec. 3514 TCC)
Right of Customs Officers to Effect Seizure & Arrest • 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. • May exercise such powers only in conformity with the laws and provisions of the TCC (Sec. 2205) Common Carriers, Forfeiture • Common carriers are generally not subject to forfeiture although if the owner has knowledge of its use in smuggling and was a consenting party, it may also 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 carrier is not a defense to forfeiture. 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 Page 134 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 the means of conveyance used as aforesaid has no knowledge of or participation in the unlawful act: Provided, however, that a prima facie presumption shall exist against the vessel, vehicle or aircraft under any of the following circumstances: 1. If the conveyance has been used for smuggling at least twice before; 2. If the owner is not in the business for which the conveyance is generally used; and 3. If the owner is financially not in the position to own such conveyance. DOCTRINE OF HOT PURSUIT Requisites 1. Over Vessels a. An act is done in Phil. Waters which constitutes a violation of the tariff and custom laws. b. A pursuit of such vessel began within the jurisdictional waters which 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 Phils c. With jurisdiction over them at any place therein for the enforcement of nd the law. (2 par. Sec. 603 TCC) RTC v. 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 petitions for certiorari, prohibition or mandamus filed with the RTC will lie because these are in reality attempt to review the QuickTime™ and a Commissioner’s actuations. Neither replevin TIFF (Uncompressed) decompressor are needed to see this picture. filed with the RTC will issue. • Rationale: Doctrine of Primary Jurisdiction. Even if a Customs seizure is illegal, exclusive jurisdiction (to the exclusion of regular courts) still belongs to the Bureau of Customs. (Jao v. CA, Oct. 6, 1995) Goods in Customs Custody Beyond Reach of Attachment
Goods in the customs custody pending payments 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 v. Berdiago, 73 SCRA 553)
Persons Having Police Authority To Enforce The Tariff and Customs Laws and Effect Searches, Seizures and Arrests 1. Officials of the BOC, district collectors, police officers, agents, inspectors and guests of the BOC; 2. Officers of the Phil. Navy and other members of the AFP and national law enforcement agencies when authorized by the Comm. Of Customs; 3. Officials of the BIR on all cases falling within the regular performances of their duties, when the payment of internal taxes are involved 4. Officers generally empowered by law to effect arrests and execute processes of courts, when acting under the direction of the Collector. (Sec. 2203 TCC) Administrative and Judicial Procedures Relative to Customs Seizures and Forfeitures 1. Determination of probable cause and issuance of warrant. 2. Actual seizure of the articles. 3. Listing of description, appraisal and classification of seized property. 4. Report of seizure to Comm. Of Customs and the Chairman, Comm. On Audit. 5. Issuance by the Collector of warrant of detention. 6. Notification to owner or importer. 7. Formal hearing. 8. District collector renders his decisions. If decision is not favorable to the aggrieved owner or importer Appeal by aggrieved owner or importer
If decision is favorable to government Automatic Comm.
not the by
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 Page 135 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2. That such declaration, affidavit, invoice, letter or paper is false. (Farolan, Jr. v. CTA, 217 SCRA 298)
Places Where Searches and Seizures May Be Conducted • Enclosures • dwelling house (there must be search warrant issued by a judge) • vessels or aircrafts and persons or articles conveyed therein • vehicles, beasts or persons • persons arriving from foreign countries Burden of Proof in Seizure or Forfeiture • claimant (Sec. 2535 TCC) Requirements for Manifest • A manifest in coastwise trade for cargo and passengers transported from one place or port in the Phils. to another is required when one or both of such places is a port of entry. (Sec. 906 TCC) Manifests are also required of vessels from a foreign port. (Sec. 1005 TCC) Query: Is Manifest Required Only for Imported Goods? No. Articles subject to seizure do not have to be imported goods. Manifests are also required of articles found on vessels or aircrafts engaged in coastwise trade (Rigor v. Robles, 117 SCRA 780) 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 is unmanifested and that there was no showing that payment of duties thereon had been made for it to be subject to forfeiture.
Criminal proceedings are actions in personam while seizure or forfeiture proceedings are actions in rem. Customs compromise does not extinguish criminal liability (Pp. v. Desiderio, Nov. 26, 1965)
At any time prior to the sale, the delinquent importer may settle his obligations with the Bureau of Customs in which case the aforementioned articles may be delivered upon payment of the corresponding duties and taxes and compliance with all other legal requirements. (Sec. 1508 TCC) Abatement • The reduction or non-imposition of customs duties on certain imported materials as a result of; o Damage incurred during voyage; o Deficiency in contents package; o Loss or destruction of articles after arrival; o Death or injury of animals. Fraudulent Practices Considered As Criminal Offences Against Customs Revenue Laws • Unlawful importation; • Entry of imported or exported article by means of any false or fraudulent practices, invoice, declaration, affidavit or other documents; • Entry of goods at less than their true weights or measures or upon a classification as to quality or value; • Payment of less than the amount due.
Settlement of Forfeiture Cases General Rule: Settlement of cases by payment of fine or redemption of forfeited property is allowed. Exceptions: 1. The importation isQuickTime™ absolutely prohibited or and a TIFF (Uncompressed) decompressor to the person 2. The surrender of the property are needed to see this picture. offering to redeem would be contrary to law, or 3. Where there is fraud (Sec. 2307 TCC) Acquittal in Criminal Charge Not Res Judicata in Seizure or Forfeiture Proceedings Reasons:
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 PROCEDURE TO PROTEST CUSTOM COLLECTORS ASSESSMENT Articles enter customs house
Articles appraised, classified and assessed
Taxpayer agrees with assessment
Taxpayer disagrees with assessment
Pays duties, taxes, etc.
Files written protest with ruling of Collector (Sec. 2303, TCC) Within 15 days from receipt of assessment No protest considered unless amount due is paid
Collector schedules hearing of protest w/in 15 days from receipt of protest
Collector renders decision w/in 30 days from termination of hearing
Automatic appeal to Customs Commissioner (Sec. 2313, TCC)
Appeal to Customs Commissioner w/in 15 days from notice (Sec. 2313, TCC)
Commissioner of Customs fails to render decision w/in 30 days
Protest Denied Protest Affirmed
Automatic appeal to Sec. of Finance reports elevated w/in 5 days from promulgation or after lapse of 30 days if no decision
QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Assessment final
Automatic appeal to Sec. of Finance
Assessment final If unfavorable, appeal to CTA w/in 30 days from receipt of decision (Sec. 7, RA 1125)
CTA decides w/in 30 days
Appeal to SC w/in 15 days from notice (Rule 43, ROC)
No appeal assessment final
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007
EXHIBITS TAX ON INDIVIDUALS Type of Income
Tax Rate For Resident Citizen
Rate For NonResident Citizen (Incl. OCW)
Tax Rate For Resident Alien
Non-Resident Alien engaged in trade / business
Interest from any currency bank deposit & yield or any other monetary benefit from deposit substitutes & from trust funds & similar arrangements Royalties (except on books & other literary works & musical compositions) Prizes > P10,000 Other winnings except PCSO & Lotto Royalties on books & other literary works & musical compositions Prizes < P10,000
20% Final Tax
20% Final Tax
20% Final Tax
20% Final Tax
Non-Resident Alien NOT engaged in trade / business 25% Final tax
Final Tax of 10%
Final Tax of 10%
Final Tax of 10%
Final Tax of 10%
25% Final tax
25% Final tax
Exempt 7.5% Final Tax
25% Final tax Exempt
Exempt from tax
Exempt from tax
Exempt from tax
25% Final tax
Winnings from PCSO & Lotto exempt Interest Income received by an 7.5% Final Tax individual (except a nonresident individual) from a depositary bank under the expanded foreign QuickTime™ and a currency deposit system TIFF (Uncompressed) decompressor are needed to see this picture. Interest income from long term Exempt from tax deposit or investment in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts & other investments evidenced by certification in such form prescribed by the BSP
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Type of Income
Tax Rate For Resident Citizen
Rate For NonResident Citizen (Incl. OCW)
Tax Rate For Resident Alien
Non-Resident Alien engaged in trade / business
Pre-termination of such certificate before the 5th year (i.e. 4 years to less than 5 years) 3 years to less than 4 years less than 3 years Cash and/or Property Dividends from a domestic corp. or from a joint stock co., insurance or mutual fund companies & regional operating headquarters of multinational companies; Share of an individual in the distributable net income after tax of a partnership (except GPP); Share of an individual in the net income after tax of an assn., a joint account or a joint venture or consortium taxable as a corp. of w/c he is a member/co-venturer Capital gains from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange
5% Final tax on the entire income
5% Final tax on the entire income
5% Final tax on the entire income
5% Final tax on the entire income
12% 20% 10% Final Tax
12% 20% 10% Final Tax
12% 20% 10% Final Tax
12% 20% 20% Final Tax
N/A N/A 25% Final tax
5% Final tax on net capital gains realized during the taxable yr:
5% Final tax on net capital gains realized during the taxable yr:
5% Final tax on net capital gains realized during the taxable yr:
5% Final tax on net capital gains realized during the taxable yr:
5% Final tax on net capital gains realized during the taxable yr:
6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
6% Final Tax on the gross selling price or current fair market value or zonal value whichever is higher
For the first P100,000 On any amount in excess of 10% QuickTime™ and a P100,000 TIFF (Uncompressed) decompressor are needed to see this picture. Capital gains from sale, exchange 6% Final Tax on or other disposition of real property the gross selling located in Philippines, classified as price or current capital assets, including pacto de fair market value retro sales & other forms of or zonal value conditional sales whichever is higher
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Non-Resident Alien NOT engaged in trade / business N/A
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Type of Income
Tax Rate For Resident Citizen
Rate For NonResident Citizen (Incl. OCW)
Tax Rate For Resident Alien
Non-Resident Alien engaged in trade / business
Non-Resident Alien NOT engaged in trade / business
CG from sale/disposition of principal residence by natural persons, the proceeds of which is fully utilized in Exempt from CG Exempt from CG Exempt from CG Exempt from CG Exempt from CG tax tax tax tax acquiring/constructing a new tax principal residence w/in 18 mos. from date of sale, provided historical cost/adjusted basis of sold prop be carried to the new principal residence built/acquired Commissioner. Duly notified w/in 30 days from sale Tax exemption can only be availed once every 10 years If no full utilization of proceeds of sale, such portion shall be subject to CG tax **a nonresident alien engaged in trade or business is an individual who shall come to the Philippines & stay therein for an aggregate period of more than 180 days during any calendar year
TAX ON CORPORATIONS Type of Income Interest on currency bank deposits & yield or any other monetary benefit form deposit substitutes & from trust funds QuickTime™ and a & similar arrangement TIFF (Uncompressed) decompressor are needed see this picture. Royalties (similar within theto Philippines) Interest income from a depositary bank under the expanded foreign currency deposit system (EFCDS) CG from sale, barter, exchange or other disposition of shares of stock (of domestic corp.) not traded in the stock exchange For the first P100,000 On any amount in excess of P100,000
Domestic Corp 20% Final Tax
Resident Foreign Corp 20% Final Tax
Non-Resident Foreign 32%/35% Income Tax
7.5% Final Tax
7.5% Final Tax
Exempt from tax
5% Final tax on net capital gains realized during the taxable yr: 10%
5% Final tax on net capital gains realized during the taxable yr: 10%
5% Final tax on net cap.l gains realized during the taxable yr: 10%
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Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Income derived by depositary bank under the EFCDS from foreign currency transactions with non-residents, offshore banking unites in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with FCDS units & other depositary banks under the EFCDS Interest income form foreign currency loans granted by such depository banks under said EFCDS to RESIDENTS Inter-corporate dividends (from a domestic corp.)
CG from sale, exchange or other disposition of lands and/or buildings which are not used in the business of a corp. & are treated as capital assets
Exempt from Final tax – Part of gross income subject to 32/%35% corp. income tax (RA 9294)
Exempt from Final tax – Part of gross income subject to 32%/35% corp. income tax (RA 9294)
10% Final Tax
10% Final Tax
Exempt form tax
Exempt form tax
6% Final tax on gross selling price or FMV or zonal value, whichever is higher
32%/35% income tax
15% Final Tax * subject to the rule on tax credit for tax actually paid and tax deemed paid. Otherwise, subject to regular income tax rate of 32%/35% 32%/35% income tax
Type of Corporate Taxpayer International Air Carrier Gross Phil. Billings = amount of gross revenue derived from carriage of persons, excess baggage, cargo & mail originating form the Philippines in a continuous & uninterrupted flight, irrespective of the place of sale/issue & the place of payment of the ticket or passage document; Includes tickets revalidated, exchanges &/or indorsed to another int’l airline if the passenger boards a plane in a port/point in the Philippines. 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 QuickTime™ and a shall form part of the TIFFGPB (Uncompressed) decompressor
Tax Rate 2 ½% on Gross Phil Billings
are needed to see this picture.
International Shipping Gross Phil Billings = gross revenue whether for passenger, cargo or mail originating from the Philippines. up to final destination, regardless of the place of sale/ payments of passage of freight documents Offshore Banking Units
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Final Tax of 10% on gross income from transactions with residents
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Branch Profits remitted (connected with the conduct of its trade/business in the Philippines.) = based on the total profits applied/earmarked for remittance without any deduction for the tax component thereof (except those registered with the PEZA) Regional/Area Headquarters of Multinational Cos. = do not earn/derive income from the Philippines. & w/c act as supervisory, communication & coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Region & other foreign markets Regional Operating Headquarters of Multinational Companies = engaged in any of the following services: a. General Administration & planning b. Business planning & coordination c. Sourcing & procurement of raw materials & components d. Corporate finance advisory services e. Marketing control & sales promotion f. Training & personnel mgt. g. Logistic services h. Research & development i. Services & product development j. Technical support & maintenance k. Data processing & communication l. Business development Type of Taxpayer Nonresident cinematographic film owner, lessor or distributor (NOTE: Even to individuals) Nonresident owner or lessor of vessels chartered by the Phil. Nationals Nonresident owner or lessor of aircraft, machineries & other equipment Type of Income
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Gross Income = Salaries, Wages, Annuities, Compensation, Remuneration, Other Emoluments (i.e. honoraria & allowances) received from such cos. Provided, same tax
15% on branch profits remittance
Exempt from tax
10% of taxable income
Tax Rate 25% of gross income 4.5% of gross rentals, lease or charter fees 7.5% of gross rentals or fees
Tax Rate For Alien Individual Employed By Regional Or Area Offshore Banking Units Headquarters & Regional Operating Headquarters of Multinational Cos. 15% of gross income 15% of gross income
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Petroleum Contractor Subcontractor
15% of gross income
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 treatment shall apply to Filipinos abroad employed & occupying same positions in these companies ** Multinational company = a foreign firm/entity engaged in international trade with affiliates/subsidiaries/branch offices in the Asia Pacific Region & other foreign markets
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ATENEO CENTRAL BAR OPERATIONS 2007 Taxation Law SUMMER REVIEWER
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—Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B. Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan—