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TABLE OF CONTENTS J. SCOPE AND LIMITATION OF TAXATION. 16 J.1. INHERENT LIMITATIONS .................. 16 J.2. CONSTITUTIONAL LIMITATIONS .....20 K. REQUISITES OF A VALID TAX ................ 27 L. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS .............................. 28 L.1. TARIFF .............................................. 28 L.2. TOLL................................................. 28 L.3. LICENSE FEE .................................... 28 L.4. SPECIAL ASSESSMENT ................... 29 L.5. DEBT ................................................ 30 L.6. PENALTY.......................................... 30 M. KINDS OF TAXES ................................... 30 M.1. AS TO OBJECT ................................. 30 M.2. AS TO BURDEN OR INCIDENCE ......31 M.3. AS TO TAX RATES ............................31 M.4. AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) ................................ 31 M.5. AS TO GRADUATION ...................... 32 A. INCOME TAX SYSTEMS .......................... 33 A.1. GLOBAL TAX SYSTEM ...................... 33 A.2. SCHEDULAR TAX SYSTEM .............. 33 A.3. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM ........................................... 33 B. FEATURES OF THE PHILIPPINE INCOME TAX LAW ..................................................... 33 C. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX............................................... 34 C.1. CITIZENSHIP OR NATIONALITY PRINCIPLE .............................................. 34 C.2. RESIDENCE PRINCIPLE ................... 34 C.3. SOURCE OF INCOME PRINCIPLE .... 34 D. TYPES OF PHILIPPINE INCOME TAX...... 34 E.1. INSTANCES WHEREBY SHORT ACCOUNTING PERIOD ARISES .............. 34 E.2. WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING TAXABLE INCOME: ................................................................ 35 F. KINDS OF TAXPAYERS ........................... 35 F.1. DEFINITION OF EACH KIND OF TAXPAYER .............................................. 35 F.2. INDIVIDUAL TAXPAYERS ................ 36 F.3. CORPORATIONS .............................. 36 F.4. PARTNERSHIP ................................. 37 F.5. ESTATES AND TRUSTS ................... 37
TAXATION LAW 1 I. GENERAL PRINCIPLES OF TAXATION ...........1 A. DEFINITION AND CONCEPT OF TAXATION .....................................................1 A.1. TAXATION ...........................................1 A.2. TAXES .................................................1 B. UNDERLYING THEORY AND BASIS OF TAXATION .....................................................1 C. NATURE OF THE POWER OF TAXATION ..1 C.1. SCOPE OF TAXATION......................... 2 C.2. EXTENT OF THE LEGISLATIVE POWER TO TAX ........................................ 2 D. ESSENTIAL CHARACTERISTICS OF TAX .................................................................. 3 E. POWER OF TAXATION COMPARED WITH OTHER POWERS .......................................... 4 F. PURPOSE OF TAXATION .......................... 5 F.1. REVENUE-RAISING ............................ 5 F.2. NON-REVENUE/SPECIAL OR REGULATORY ........................................... 5 G. PRINCIPLES OF SOUND TAX SYSTEM..... 6 G.1. FISCAL ADEQUACY ............................ 6 G.2. ADMINISTRATIVE FEASIBILITY ......... 6 G.3. THEORETICAL JUSTICE OR EQUALITY .................................................................. 6 H. THEORY AND BASIS OF TAXATION ......... 6 H.1. LIFEBLOOD THEORY ......................... 6 H.2. NECESSITY THEORY ......................... 6 H.3. BENEFITS-PROTECTION THEORY (SYMBIOTIC RELATIONSHIP) ................... 6 H.4. JURISDICTION OVER SUBJECT AND OBJECTS ................................................... 7 I. DOCTRINES IN TAXATION ........................ 7 I.1. PROSPECTIVITY OF TAX LAWS ........... 7 I.2. NON-RETROACTIVITY OF RULINGS (SEC. 246) ................................................. 7 I.3. IMPRESCRIPTIBILITY .......................... 7 I.4. DOUBLE TAXATION ............................ 8 I.5. ESCAPE FROM TAXATION .................. 9 I.6. EXEMPTION FROM TAXATION ......... 10 I.7. COMPENSATION AND SET-OFF ........12 I.8. COMPROMISE ...................................12 I.9. TAX AMNESTY ...................................12 I.10. CONSTRUCTION AND INTERPRETATION OF: ............................. 13 i
TABLE OF CONTENTS F.6. CO-OWNERSHIP.............................. 37 G. INCOME TAXATION................................ 37 G.1. DEFINITION ...................................... 37 G.2. NATURE .......................................... 37 G.3. GENERAL PRINCIPLES .................... 38 H. INCOME.................................................. 38 H.1. DEFINITION ...................................... 38 H.2. NATURE .......................................... 38 I. GROSS INCOME ...................................... 43 I.1. DEFINITION ....................................... 43 I.2. CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED .............. 43 I.3. GROSS INCOME VIS-À-VIS NET INCOME VIS-À-VIS TAXABLE INCOME ...44 I.4. CLASSIFICATION OF INCOME AS TO SOURCE ..................................................44 I.5. SOURCES OF INCOME SUBJECT TO TAX .........................................................44 SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND WITHOUT ................... 66 SITUS OF INCOME TAXATION ................68 EXCLUSIONS FROM GROSS INCOME ........68 (A) EXCLUSIONS UNDER THE CONSTITUTION ...................................... 69 (B) EXCLUSIONS UNDER THE TAX CODE (SEC. 32, NIRC) ....................................... 69 (C) UNDER SPECIAL LAWS ..................... 72 DEDUCTIONS FROM GROSS INCOME ....... 73 ITEMIZED DEDUCTIONS ........................ 74 EXPENSES .............................................. 74 INTEREST ............................................... 78 TAXES .................................................... 80 LOSSES ................................................... 82 BAD DEBTS.............................................84 DEPRECIATION ......................................85 CHARITABLE AND OTHER CONTRIBUTIONS....................................86 CONTRIBUTIONS TO PENSION TRUSTS 87 DEDUCTIONS UNDER SPECIAL LAWS ... 87 OPTIONAL STANDARD DEDUCTION .....88 EXEMPT CORPORATIONS ...................... 91 TAXATION OF RESIDENT CITIZENS, NONRESIDENT CITIZENS AND RESIDENT ALIENS .................................................................... 93 TAXATION ON COMPENSATION INCOME . 95
TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION ..........................................98 TAXATION OF PASSIVE INCOME............98 TAXATION OF CAPITAL GAINS.............. 101 TAXATION OF NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS ........ 105 GENERAL RULES.................................. 105 CASH AND/OR PROPERTY DIVIDENDS .............................................................. 105 CAPITAL GAINS .................................... 106 NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS .............................. 106 INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX............................................. 107 SENIOR CITIZENS ................................. 107 MINIMUM WAGE EARNERS ................. 107 EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS (SEC. 32(B)) .................................................... 107 TAXATION OF DOMESTIC CORPORATIONS .................................................................. 107 TAX PAYABLE ....................................... 107 REGULAR TAX ...................................... 107 MINIMUM CORPORATE INCOME TAX (MCIT) ................................................... 108 CORPORATIONS EXEMPT FROM THE MCIT: (BIPTENG) .................................... 112 ALLOWABLE DEDUCTIONS ...................... 112 ITEMIZED DEDUCTIONS........................ 112 TAXATION OF PASSIVE INCOME .............. 112 PASSIVE INCOME SUBJECT TO TAX...... 112 PASSIVE INCOME NOT SUBJECT TO TAX ............................................................... 113 TAXATION OF CAPITAL GAINS ................. 114 INCOME FROM SALE OF SHARES OF STOCK.................................................... 114 INCOME FROM THE SALE OF REAL PROPERTY SITUATED IN THE PHILIPPINES .......................................... 114 TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS................................................ 114
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TABLE OF CONTENTS TAX ON GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES OR INSTRUMENTALITIES ......................... 114 FOR GOCCS: .......................................... 114 FOR INSTRUMENTALITIES AND AGENCIES OF GOVERNMENT: .............. 115 TAXATION OF RESIDENT FOREIGN CORPORATIONS ....................................... 115 GENERAL RULE ..................................... 115 WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN THE PHILIPPINES .... 116 MINIMUM CORPORATE INCOME TAX .. 116 TAX ON CERTAIN INCOME ........................ 116 TAXATION OF NON-RESIDENT FOREIGN CORPORATIONS ....................................... 118 GENERAL RULE ..................................... 118 TAX ON CERTAIN INCOME .................... 118 IMPROPERLY ACCUMULATED EARNINGS OF CORPORATIONS .............................. 121 TAX EXEMPT CORPORATIONS .................123 TAXATION OF PARTNERSHIPS .................123 CLASSIFICATION OF PARTNERSHIPS FOR TAX PURPOSES .....................................123 TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS ................................... 125 WITHHOLDING TAX.................................. 126 CONCEPT .............................................. 126 KINDS .................................................... 127 WITHHOLDING OF VAT ........................ 128 FILING OF RETURN AND PAYMENT OF TAXES WITHHELD ................................ 128 FINAL WITHHOLDING TAX AT SOURCE129 CREDITABLE WITHHOLDING TAX ......... 131 TIMING OF WITHHOLDING ....................135
F.1. CONCEPT OF RESIDENCE .............. 139 F.2. RULE OF RECIPROCITY ................. 139 G. GROSS ESTATE VIS-À-VIS NET ESTATE .................................................................. 140 H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION) . 140 J. ITEMS TO BE INCLUDED IN GROSS ESTATE ..................................................... 142 ITEMS TO BE INCLUDED IN THE GROSS ESTATE ..................................................... 142 K. DEDUCTIONS FROM ESTATE .............. 145 K.1 ORDINARY DEDUCTIONS ............... 145 1.A. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES, ETC. (ELIT) ................................................ 145 1. B. PROPERTY PREVIOUSLY TAXED/PPT (SEC. 86(A)(2)) ............. 150 ALSO CALLED AS VANISHING DEDUCTIONS ................................... 150 1. C. TRANSFERS FOR PUBLIC PURPOSE (SEC. 86(A)(3)) ................. 151 1.D. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917 ................................ 151 L. EXCLUSIONS FROM ESTATE................ 153 M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY.............................. 155 N. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS .............................. 157 O. FILING OF NOTICE OF DEATH .............. 157 P. ESTATE TAX RETURN ........................... 157 II. DONOR’S TAX .......................................... 160 A. BASIC PRINCIPLES............................... 160 B. DEFINITION .......................................... 160 C. NATURE ................................................ 161 D. PURPOSE OR OBJECT .......................... 161 E. REQUISITES OF VALID DONATION ....... 161 F. TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION .................. 161 G. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION ................... 162 H. CLASSIFICATION OF DONOR .............. 162 I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT) ......................................................... 163
TAXATION LAW 2 I. ESTATE TAX ............................................... 137 A. BASIC PRINCIPLES................................ 137 B. DEFINITION .......................................... 137 C. NATURE ................................................ 137 D. PURPOSE OR OBJECT .......................... 137 E. TIME AND TRANSFER OF PROPERTIES .................................................................. 138 F. CLASSIFICATION OF DECEDENT ..........139 iii
TABLE OF CONTENTS J. VALUATION OF GIFTS MADE IN PROPERTY ............................................... 164 K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY ......................... 165 L. EXEMPTIONS OF GIFTS FROM DONOR’S TAX ........................................................... 166 M. PERSON LIABLE .................................. 166 N. TAX BASIS ............................................. 167 SUMMARY OF TRANSFER TAXES............ 169 III. VALUE-ADDED TAX (VAT) ........................ 174 A. CONCEPT .............................................. 174 B. CONSTITUTIONALITY OF VAT............... 174 C. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE TRANSACTION .................. 174 D. IMPACT OF TAX V. INCIDENT OF TAX .. 176 E. TAX CREDIT METHOD ........................... 176 F. DESTINATION PRINCIPLE ..................... 177 G. PERSONS LIABLE ................................. 177 G. VAT ON SALE OF GOODS OR PROPERTIES ............................................. 178 I. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERORATED SALES OF GOODS OR PROPERTIES ................................................................... 181 J. TRANSACTIONS DEEMED SALE (SEC. 106 (B) ............................................................. 184 K. CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON (SEC 106 C) .. 185 L. VAT ON IMPORTATION OF GOODS ..... 186 M. VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES ........................... 186 N. ZERO-RATED SALE OF SERVICES....... 189 O. VAT EXEMPT TRANSACTIONS ............ 190 P. INPUT TAX AND OUTPUT TAX, DEFINED .................................................................. 195 Q. SOURCES OF INPUT TAX..................... 195 R. PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT .............................................. 196 S. DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS .................................................... 197 S.1. DETERMINATION OF OUTPUT TAX 197 S.2. DETERMINATION OF INPUT TAX CREDITABLE .......................................... 197
S.3. ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS ........................197 S.4. DETERMINATION OF THE OUTPUT TAX AND VAT PAYABLE AND COMPUTATION OF VAT PAYABLE OR EXCESS TAX CREDITS ........................... 197 T. SUBSTANTIATION OF INPUT TAX CREDITS ................................................... 198 U. REFUND OR TAX CREDIT OF EXCESS INPUT TAX (CF REFUND OF ERRONEOUSLY PAID TAXES) .............................................203 V. INVOICING REQUIREMENTS ............... 204 W. FILING OF RETURN AND PAYMENT .. 206 X. WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT .................................... 207 IV. TAX REMEDIES UNDER THE NIRC.......... 221 A. TAXPAYER’S REMEDIES ...................... 221 A. GOVERNMENT REMEDIES .............. 234 V. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE .............. 236 POWERS OF THE COMMISSIONER .......... 236 ORGANIZATION AND FUNCTION OF THE BIR ............................................................ 238 VI. TAX REMEDIES UNDER THE NIRC......... 240 VI. ORGANIZATION AND FUNCTION OF THE BIR ................................................................ 272 VIII. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED .................................................... 276 C. TAXING POWERS OF MUNICIPALITIES 282 C.1. TAX ON VARIOUS TYPES OF BUSINESSES.........................................282 C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON MUNICIPALITIES WITHIN METRO MANILA ...................................284 C.3. TAX ON RETIREMENT ON BUSINESS ..............................................................284 C.4 RULES ON PAYMENT OF BUSINESS TAX .......................................................284 C.5. FEES AND CHARGES FOR REGULATION & LICENSING .................284 C.6. SITUS OF TAX COLLECTED ...........285 D. TAXING POWERS OF BARANGAYS .....286 E. COMMON REVENUE RAISING POWERS ..................................................................286 F. COMMUNITY TAX ................................. 287 iv
TABLE OF CONTENTS COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS ...................................288 COLLECTION OF BUSINESS TAX .............289 TAX PERIOD AND MANNER OF PAYMENT ..............................................................289 ACCRUAL OF TAX .................................289 TIME OF PAYMENT ...............................289 PENALTIES ON UNPAID TAXES, FEES OR CHARGES .............................................289 AUTHORITY OF TREASURER IN COLLECTION AND INSPECTION OF BOOKS ..................................................289 TAXPAYER’S REMEDIES ..........................289 PERIODS OF ASSESSMENT AND COLLECTION OF LOCAL TAXES, FEES OR CHARGES .............................................289 PROTEST OF ASSESSMENT ................ 290 CLAIM FOR REFUND OF TAX CREDIT FOR ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR CHARGE .... 290 CIVIL REMEDIES BY THE LGU FOR COLLECTION OF REVENUES .................. 290 LOCAL GOVERNMENT’S LIEN FOR DELINQUENT TAXES, FEES OR CHARGES ............................................................. 290 CIVIL REMEDIES, IN GENERAL ............ 290 PROCEDURE FOR ADMINISTRATIVE ACTION ................................................ 290 PROCEDURE FOR JUDICIAL ACTION ... 291 B. REAL PROPERTY TAXATION ............... 291 A. FUNDAMENTAL PRINCIPLES (CAPUE) .............................................................. 291 B. NATURE OF REAL PROPERTY TAX .. 291 C. IMPOSITION OF REAL PROPERTY TAX .............................................................. 292 C.1. COVERAGE ..................................... 292 FOR A PROVINCE, OR A CITY OR MUNICIPALITY WITHIN METRO MANILA .............................................................. 292 SPECIAL LEVY ON IDLE LANDS............ 292 SPECIAL LEVY FOR PUBLIC WORKS .... 292 SPECIAL EDUCATION FUND (SEF) ....... 292 C.2. EXEMPT FROM REAL PROPERTY TAX .............................................................. 292
D. APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX .......................... 293 D.1. DECLARATION OF REAL PROPERTY .............................................................. 293 D.2. LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS ...........................294 D.3. APPRAISAL AND VALUATION OF REAL PROPERTY ..................................294 D.4. ASSESSMENT OF REAL PROPERTY ..............................................................295 I. ASSESSMENT LEVELS .......................295 II. GENERAL REVISIONS OF ASSESSMENTS AND PROPERTY CLASSIFICATION ..................................295 III. DATE OF EFFECTIVITY OF ASSESSMENT OR REASSESSMENT .....295 IV. ASSESSMENT OF PROPERTY SUBJECT TO BACK TAXES....................................296 V. NOTIFICATION OF NEW OR REVISED ASSESSMENT .......................................296 E. COLLECTION OF REAL PROPERTY TAX ..............................................................296 E.1. SPECIAL RULES ON PAYMENT ......296 I. PAYMENT OF REAL PROPERTY TAX IN INSTALLMENTS ....................................296 II. INTERESTS ON UNPAID REAL PROPERTY TAX .................................... 297 III. CONDONATION OF REAL PROPERTY TAX ....................................................... 297 E.2. REMEDIES OF LGUS FOR COLLECTION OF REAL PROPERTY TAX .............................................................. 297 I. ADMINISTRATIVE .............................. 297 II. JUDICIAL ........................................... 297 F. TAXPAYER’S REMEDIES ................... 297 F.1. ADMINISTRATIVE ...........................298 F.2. JUDICIAL ........................................298 IX. TARIFF AND CUSTOMS CODE OF 1978, AS AMENDED .................................................... 303 A. TARIFF AND DUTIES, DEFINED ........... 303 B. GENERAL RULE: ALL IMPORTED ARTICLES ARE SUBJECT TO DUTY .......... 303 IMPORTATION BY THE GOVERNMENT TAXABLE............................................... 303 C. PURPOSE FOR IMPOSITION ................ 303 v
TABLE OF CONTENTS D. FLEXIBLE TARIFF CLAUSE ................... 303 E. REQUIREMENTS OF IMPORTATION ....304 E.1. BEGINNING AND ENDING OF IMPORTATION ......................................304 E.2. OBLIGATIONS OF IMPORTER .......304 I. CARGO MANIFEST.............................304 II. IMPORT ENTRY.................................305 III. DECLARATION OF CORRECT WEIGHT OR VALUE .............................................306 IV. LIABILITY FOR PAYMENT OF DUTIES ..............................................................306 V. LIQUIDATION OF DUTIES .................306 VI. KEEPING OF RECORDS ................... 307 F. IMPORTATION IN VIOLATION OF TCC 308 F.1. SMUGGLING .................................. 308 F.2. OTHER FRAUDULENT PRACTICES ............................................................. 308 G. CLASSIFICATION OF GOODS ...............309 G.1. TAXABLE IMPORTATION ...............309 G.2. PROHIBITED IMPORTATION .........309 G.3. CONDITIONALLY-FREE IMPORTATION ...................................... 310 H. CLASSIFICATION OF DUTIES ................316 H.1. ORDINARY/REGULAR DUTIES.......316 I. AD VALOREM; METHODS OF VALUATION ...........................................316 II. SPECIFIC ............................................319 H.2. SPECIAL DUTIES ............................319 I. REMEDIES ..............................................319 I.1. GOVERNMENT .................................319 I. ADMINISTRATIVE/EXTRAJUDICIAL ...319 II. JUDICIAL ............................................321 I.2. TAXPAYER .......................................321 I. PROTEST ............................................321 II. ABANDONMENT ................................ 321 III. ABATEMENT AND REFUND ............ 322 X. JUDICIAL REMEDIES ................................ 328 A. JURISDICTION OF THE COURT OF TAX APPEALS .................................................. 328 A.1. CIVIL TAX CASES ............................ 328 I. EXCLUSIVE ORIGINAL JURISDICTION .............................................................. 328 II. EXCLUSIVE APPELLATE JURISDICTION .............................................................. 328 CTA DIVISION ....................................... 328
CTA EN BANC ....................................... 328 A.2. CRIMINAL CASES .......................... 329 I. EXCLUSIVE ORIGINAL JURISDICTION .............................................................. 329 II. EXCLUSIVE APPELLATE JURISDICTION IN CRIMINAL CASES ............................. 329 CTA DIVISION ....................................... 329 CTA EN BANC ....................................... 329 B. JUDICIAL PROCEDURES ...................... 329 B.1. JUDICIAL ACTION FOR COLLECTION OF TAXES.............................................. 329 I. INTERNAL REVENUE TAXES ............. 329 II. LOCAL TAXES ................................... 330 B.2. CIVIL CASES................................... 330 I. WHO MAY APPEAL, MODE OF APPEAL, EFFECT OF APPEAL .............................. 330 SUSPENSION OF COLLECTION OF TAX .............................................................. 330 TAKING OF EVIDENCE ........................... 331 MOTION FOR RECONSIDERATION OR NEW TRIAL ............................................ 331 II. APPEAL TO THE CTA, EN BANC ....... 332 III. PETITION FOR REVIEW ON CERTIORARI TO THE SUPREME COURT .............................................................. 332 B.3. CRIMINAL CASES .......................... 333 I. INSTITUTION AND PROSECUTION OF CRIMINAL ACTIONS ............................. 333 INSTITUTION OF CRIMINAL ACTION ... 333 PROSECUTION OF CRIMINAL ACTION 333 INSTITUTION ON CIVIL ACTION IN CRIMINAL ACTION ............................... 333 II. APPEAL AND PERIOD TO APPEAL CRIMINAL CASES ................................. 333 III. PETITION FOR REVIEW ON CERTIORARI TO THE SUPREME COURT .............................................................. 334 C. TAXPAYER’S SUIT IMPUGNING THE VALIDITY OF TAX MEASURES OR ACTS OF TAXING AUTHORITIES ............................. 334 C.1. TAXPAYER’S SUIT, DEFINED ......... 334 C.2. DISTINGUISHED FROM CITIZEN’S SUIT ...................................................... 334
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TABLE OF CONTENTS C.3. REQUISITES FOR CHALLENGING THE CONSTITUTIONALITY OF A TAX MEASURE OR ACT OF TAXING AUTHORITY .......... 334 I. CONCEPT OF LOCUS STANDI AS APPLIED IN TAXATION ......................... 334 II. DOCTRINE OF TRANSCENDENTAL IMPORTANCE ....................................... 335 III. RIPENESS FOR JUDICIAL DETERMINATION ................................. 336
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I. General Principles of Taxation
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B. UNDERLYING THEORY AND BASIS OF TAXATION The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute.
A. DEFINITION AND CONCEPT OF TAXATION A.1. TAXATION (a) is a mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate objectives. (b) a mode of raising revenue for public purpose; the exercise of sovereign power to raise revenue for the expense of the government; (c) the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens, (see 51 Am. Jur. 341; 1 Cooley 72-93.) (d) as a power, it refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.
The basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants. The State receives taxes that it may be enabled to carry its mandates into effect and perform the functions of government and the citizen pays the portion of taxes demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society, (see 51 Am. Jur. 42-43.) This is the so-called benefitsreceived principle.
C. NATURE OF THE POWER OF TAXATION (1) Inherent in sovereignty- The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide (Phil. Guaranty Co., Inc. v. Commissioner, G.R. No. L-22074 April 30, 1965). It is essential to the existence of every government. It exists apart from constitutions and without being expressly conferred by the people (71 Am.Jur.2d 397398). Constitutional provisions relating to the power of taxation do not operate as grants of the power to the government.
A.2. TAXES (a) are enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs. (b) The enforced proportional and pecuniary contributions from persons and property levied by the law-making body of the state having jurisdiction over the subject of the burden for the support of the government and public needs.
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They merely constitute limitations upon a power which would otherwise be practically without limit. (1 Cooley 150). While the power to tax is not expressly provided for in our Constitution, its existence is recognized by the provisions relating to taxation (infra).
businesses, transactions, rights, or privileges. A state is free to select the subject of taxation and it has been repeatedly held that that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation so long as such exemption is reasonable and not arbitrary. (see Lutz vs. Araneta, 98 Phil. 148; Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984])
(2) Essentially a legislative function- The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government (1 Cooley 160-161). Hence, only Congress, our national legislative body, can impose taxes. The levy of a tax, however, may also be made by a local legislative body subject to such limitations as may be provided by law.
Thus, the power to tax carries with it the power to grant exemption therefrom. (2) The purpose or object of the tax so long as it is a public purpose—The legislative body’s determination, however, on the question of what is a public purpose is not conclusive. The courts can inquire into whether the purpose is really public or private.
(3) Subject to constitutional and inherent limitations - These limitations are those provided in the fundamental law or implied therefrom, while the rest spring from the nature of the taxing power itself although they may or may not be provided in the Constitution.
In the final analysis, therefore, the decision on the question is not a legislative but a judicial function. But once it is settled that the purpose is public, the courts can make no other inquiry into the objective of the legislature in imposing a tax (see Pascual vs. Sec. of Public Works, 110 Phil. 331 [1961]), or the wisdom, advisability, or expediency of the tax. (Blunt vs. U.S., 255 Fed. 322.)
C.1. SCOPE OF TAXATION Subject to constitutional and inherent restrictions, the power of taxation is regarded as supreme, unlimited and comprehensive. The principal check on its abuse rests only on the responsibility of the members of the legislature to their constituents.
C.2. EXTENT OF POWER TO TAX
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Judicial action is limited only to a review where it involves: (a) The determination of the validity of the tax in relation to constitutional precepts or provisions. Thus, a tax may be declared invalid because it violates the constitutional requirement of uniformity and equity in taxation; or (b) The determination in an appropriate case of the application of a tax law. (see1 Cooley 165.) Thus, a court may decide that a tax has been illegally collected where the taxpayer is entitled to tax exemption or his liability has already
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Subject to constitutional and inherent restrictions, the legislature has discretion to determine the incidence of the power to tax. (1) The subjects or objects to be taxed— refer to the coverage and the kind or nature of the tax. They may be persons, whether natural or juridical; property, whether real or personal, tangible or intangible; 2
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(3) The amount or rate of the tax.- As a general rule, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the election of new representatives. (see1 Cooley 178-181.)
D. ESSENTIAL CHARACTERISTICS OF TAX (1) It is an enforced contribution for its
According to Chief Justice John Marshall, "the power to tax involves the power to destroy." (McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579.) To say, however, that the power to tax is the power to destroy is to describe not the purposes for which the taxing power may be used but the extent to which it may be employed in order to raise revenues. (see1 Cooley 178.) Thus, even if a tax should destroy a business, such fact alone could not invalidate the tax. (84 C.J.S. 46.)
imposition is in no way dependent upon the will or assent of the person taxed. (2) It is generally payable in the form of money, although the law may provide payment in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended); (3) It is proportionate in character or islaid by some rule of apportionment which is usually based on ability to pay; (4) It is levied on persons, property, rights, acts,
privileges, or transactions. (5) It is levied by the State which has jurisdiction or control over the subject to be taxed. (6) It is levied by the law-making body of the
Incidentally, our Constitution mandates that "the rule of taxation shall be uniform and equitable." In a case, our Supreme Court said: "The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the 'hen that lays the golden eggs.' And in order to maintain the general public's trust and confidence in the government, this power must be used justly and not treacherously." (Roxas v. Court of Tax
State. The power to tax is a legislative power but is also granted to local governments, subject to such guidelines and limitations as law may provided (Sec. 5, Art. X, Constitution); and; (7) It is levied for public purpose. Revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. (Gaston v.
Republic Planters Bank, 158 SCRA 626, March 15, 1988). The “public purpose or purposes” of the imposition is implied in the levy of tax. (see Mendoza v. Municipality, 94 Phil. 1047[1954]), A tax levied for a private purpose constitutes a taking of property without due process of law. It is also an important characteristic of most taxes that they are commonly required to be paid at regular periods or intervals (see 1 Cooley 64) every year.
Appeals, 23 SCRA276, App120, 1968; Philex Mining Corp. vs. Comm. of Internal Revenue, 97 SCAD 777,294 SCRA 687, Aug. 28, 1998.) (4) The manner, means, and agencies of collection of the tax. - These refer to the administration of the tax or the 3
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TAXATION LAW
E. POWER OF TAXATION COMPARED WITH OTHER POWERS 1. As to concept
2. As to scope
3. As to authority
4. As to purpose
Taxation
Police Power
Eminent Domain
Power to enforce contribution to raise government funds Plenary, comprehensive and supreme
Power to make and implement laws for the general welfare Broader in application. General power to make and implement laws. Exercised only by government or its political subdivisions Property is taken or destroyed to promote general welfare Can be expressly delegated to the local government units by the law making body Operates on a community or a class of individual
Power to take private property for public use with just compensation Merely a power to take private property for public use May be granted to public service or public utility companies Private property is taken for public use
Exercised only by government or its political subdivisions Money is taken to support the government
5. As to necessity The power to make tax of delegation laws cannot be delegated
6. As to person Operates on a community affected or a class of individual 7. As to benefits
Continuous protection and organized society 8. As to amount Generally no limit of imposition 9. As importance
10. As relationship Constitution
11. As limitation
to Inseparable for the existence of a nation – it supports police power and eminent domain to Subject to Constitutional to and Inherent limitations. Inferior to nonimpairment clause.
to Constraints by Constitutional and Inherent limitations
Can be expressly delegated to the local government units by the law making body Operates on the particular private property of an individual Healthy economic Market value of the standard of society property expropriated Cost of regulation, No imposition license and other necessary expenses Protection, safety and Common necessities and welfare of society interest of the community transcend individual rights in property Relatively free from Superior to and may Constitutional override Constitutional limitations. impairment provision Superior to non- because the welfare of impairment clause. the State is superior to any private contract Limited by the demand Bounded by public for public interest and purpose and just due process compensation
[Valencia and Roxas, Income Taxation 6th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]
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educational activities (see RA. No. 5447) or to improve the efficiency of local police forces in the maintenance of peace and order through grant of subsidy (see RA.No. 6141). (7) Be an implement of the police power to promote the general welfare.
F. PURPOSE OF TAXATION F.1. REVENUE-RAISING Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection it its citizens. Fees may be properly regarded as taxes even though they also serve as an instrument of regulation... If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. [PAL v. Edu, G.R. No. L41383 August 15, 1988
F.2. NON-REVENUE/SPECIAL REGULATORY
TAXATION LAW
In Lutz v. Araneta, 78 Phil 148, it has been held that the Sugar Adjustment Act is an act enacted primarily under the police power and designed to obtain a readjustment of the benefits derived by people interested in the sugar industry as well as to rehabilitate and stabilize the industry which constitutes one of the great sources of the country's wealth and, therefore, affects a great portion of the population of the country.
OR
Taxation is often employed as a device for regulation by means of which certain effects or conditions envisioned by governments may be achieved. These regulatory purposes are also known as Sumptuary. Thus, taxation can: (1) Strengthen anemic enterprises or provide incentive to greater production through grant of tax exemptions or the creation of conditions conducive to their growth. (2) Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by providing tax incentives on imported goods. (3) Be a bargaining tool by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country. (4) Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business. (5) Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and income taxes, their payers being the recipients of unearned wealth or mostly in the higher income brackets. (6) Taxes may be levied to promote science and invention (see RA. No. 5448) or to finance
Taxes may be levied with a regulatory purpose to provide means for rehabilitation and stabilization of a threatened industry which is imbued with public interest as to be within the police power of the State. [Caltex v. COA, G.R. No. 92585 May 8, 1992] As long as a tax is for a public purpose, its validity is not affected by collateral purposes or motives of the legislature in imposing the levy, or by the fact that it has a regulatory effect (51 Am. Jur. 381-382.) or it discourages or even definitely deters the activities taxed. The principle applies even though the revenue obtained from the tax appears very negligible or the revenue purpose is only secondary. (see
United States vs. Sanchez, 340 U.S. 42; Tio vs. Videogram Regulatory Board, 151 SCRA 208 [1987])
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government would be paralyzed for lack of the motive power to activate and operate it [CIR v. Algue, G.R. No. L-28896, February 17, 1988].
G. PRINCIPLES OF SOUND TAX SYSTEM G.1. FISCAL ADEQUACY
H.2. NECESSITY THEORY
The sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures.
The power of taxation proceeds upon theory that the existence of government is a necessity; that is cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute.
G.2. ADMINISTRATIVE FEASIBILITY
The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. [Sison v. Ancheta, G.R. No. L59431, July 25, 1984]
Tax laws should be capable of convenient, just and effective administration. Each tax should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity.
G.3. THEORETICAL EQUALITY
JUSTICE
TAXATION LAW
The obligation to pay taxes rests upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out [Lorenzo v. Posadas, G.R. No. L-43082, June 18, 1937].
OR
The tax burden should be in proportion to the taxpayer’s ability to pay. This is the socalled ability to pay principle. Taxation should be uniform as well as equitable
H.3. BENEFITS-PROTECTION THEORY (SYMBIOTIC RELATIONSHIP)
Note: The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated. (De Leon)
This principle serves as the basis of taxation and is founded on the reciprocal duties of protection and support between the State and its inhabitants. Despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an
H. THEORY AND BASIS OF TAXATION H.1. LIFEBLOOD THEORY Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. [CIR v. Pineda] Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance... It is said that taxes are what we pay for civilized society. Without taxes, the 6
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TAXATION LAW
I.2. NON-RETROACTIVITY OF RULINGS (SEC. 246)
arbitrary method of exaction by those in the seat of power. [CIR v. Algue]
General rule: Any revocation, modification or reversal of rules and regulations promulgated in accordance with Sections 244 and 245 of the Tax Code and rulings or circulars promulgated by the CIR, that is prejudicial to the taxpayer, shall NOT be given retroactive effect.
H.4. JURISDICTION OVER SUBJECT AND OBJECTS The limited powers of sovereignty are confined to objects within the respective spheres of governmental control. These objects are the proper subjects or objects of taxation and none else.
Exceptions: (1) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by BIR; (2) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; OR (3) Where the taxpayer acted in bad faith. (Sec. 246, NIRC)
I. DOCTRINES IN TAXATION I.1. PROSPECTIVITY OF TAX LAWS General rule: Tax laws are prospective in operation. Reason: Nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction. Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent.(e.g increase taxes on income already earned) when retroactive application would be so harsh and oppressive (Republic v. Fernandez, G.R. No. L-9141. September 25, 1956).
I.3. IMPRESCRIPTIBILITY Unless otherwise provided by the tax itself, taxes are imprescriptible. (CIR v. Ayala Securities Corporation)
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided (citing Art. 4 of the Civil Code).[Hydro Resources v.CA]
The law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Commissioner v. C.A., G.R.No. 104171 (1999)]
The language of the statute must clearly demand or press that it shall have a retroactive effect.[Lorenzo v.Posadas]
i. Prescriptions found in statutes (1) National Internal Revenue Code- statute of limitations (see Section 203 and 222) in the assessment and collection of taxes therein imposed.
Exception to the exception: Collection of interest in tax cases is not penal in nature; it is but a just compensation to the State. The constitutional prohibition against ex post facto laws is not applicable to the collection of interest on back taxes. [Central Azucarera v.CTA]
(2) Tariff and Customs Code- does not express any general statute of limitation; it provides, however, that “when articles have been entered and passed free of duty or final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlements of 7
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duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest or compliance audit pursuant to the provisions of this Code, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative.” (Sec. 1603)
TAXATION LAW
Double taxation, standing alone and not being forbidden by our fundamental law, is not a valid defense against the legality of a tax measure (Pepsi Cola v. Mun. of Tanauan, G.R. No. L-31156 February 27, 1976). But from it might emanate such defenses against taxation as oppressiveness and inequality of the tax.
iii. Constitutionality of double taxation (3) Local
Government
Code-
prescribes prescriptive periods for the assessment (5 years) and collection (5 years) of taxes. (see Sections 194 and 270, Rep. Act No. 7160).
There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated.[Villanueva
I.4. DOUBLE TAXATION
v. City of Iloilo, G.R. No. L-26521, December 28, 1968]
Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it should be taxed but once, for the same purpose and with the same kind of character of tax.
If the tax law follows the constitutional rule on uniformity, there can be no valid objection to taxing the same income, business or property twice.[China Banking Corp. v. CA, G.R. No. 146749 (2003)]
i. Strict sense (Direct Duplicate Taxation) (1) the same property must be taxed twice
Double taxation in its narrow sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so. (De Leon, citing 26 R.C.L 264-265).Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee. (De Leon, citing 84 C.J.S.138).
when it should be taxed once; (2) both taxes must be imposed on the same
property or subject matter; (3) for the same purpose; (4) by the same State, Government, or taxing
authority; (5) within the same territory, jurisdiction or taxing district; (6) during the same taxing period; and (7) of the same kind or character of tax.
ii. Broad Taxation)
sense
(Indirect
iv. Modes of eliminating double taxation (1) Allowing reciprocal exemption either by law or by treaty; (2) Allowance of tax credit for foreign taxes paid (3) Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax (4) Reduction of Philippine tax rate.
Duplicate
There is double taxation in the broad sense or there is indirect duplicate taxation if any of the elements for direct duplicate taxation is absent. It extends to all cases in which there is a burden of two or more pecuniary impositions. For example, a tax upon the same property imposed by two different states.
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TAXATION LAW
I.5. ESCAPE FROM TAXATION
Incidence of taxation is that point on which the
i. Shifting of tax burden
tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another.
Shifting - the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. What is transferred is not the payment of the tax but the burden of the tax.
Relationship between Impact, Shifting, and Incidence of a Tax The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the setting or coming to rest of the tax. (e.g impact in a sales tax is on the seller who shifts the burden to the customer who finally bears the incidence of the tax)
All indirect taxes may be shifted; direct taxes cannot be shifted. Ways of shifting the tax burden (1) Forward shifting - When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. Example: VAT, percentage tax
Tax avoidance (Tax Minimization) The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is politely called “tax minimization” and is not punishable by law.
(2) Backward shifting - When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production. Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, and finally to the manufacturer or producer.
Example: A person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year.
ii. Transformation
(3) Onward shifting - When the tax is shifted two or more times either forward or backward.
Transformation – method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production.
Taxes that can be shifted (1) Value-added Tax (2) Percentage Tax (3) Excise Tax Meaning of impact and incidence of taxation Impact of taxation is the point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer, the subject of tax, is the person who must pay the tax to the government.
iii. Tax evasion (Tax Dodging) Tax Evasion - is the use by the taxpayer of illegal or fraudulent means to defeat or lessen
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TAXATION LAW
the payment of a tax. It is also known as “tax dodging.” It is punishable by law.
subjected. It is strictly construed against the taxpayer.
Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received.
Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must at least be within its purview by clear legislative intent.
Elements of Tax Evasion (1) The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such is due. (2) An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not accidental.” (3) A course of action (or failure of action) which is unlawful.
ii. Nature of tax exemption (1) Mere personal privilege-
cannot be assigned or transferred without the consent of the Legislature. The legislative consent to the transfer may be given either in the original act granting the exemption or in a subsequent law (2) General rule: revocable by the government. Exception: if founded on a contract which is protected from impairment. But the contract must contain the essential elements of other contracts. An exemption provided for in a franchise, however, may be repealed or amended pursuant to the Constitution (see Sec. 11, Art. XII). A legislative franchise is in the nature of a contract. (3) Implies a waiver on the part of the government of its right to collect taxes due to it, and, in this sense, is prejudicial thereto. Hence, it exists only by virtue of an express grant and must be strictly construed. (4) Not necessarily discriminatory, provided it has reasonable foundation or rational basis. Where, however, no valid distinction exists, the exemption may be challenged as violative of the equal protection guarantee or the uniformity rule.
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus: (1) The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes. (Republic v. Gonzales, 13 SCRA 633 [1965]). (2) The substantial underdeclaration of income in the income tax returns of the taxpayer for four (4) consecutive years coupled with his intentional overstatement of deductions justifies the finding of fraud. (Perez v. CTA and Collector, 103 Phil. 1167 [1958]).
I.6. EXEMPTION FROM TAXATION i. Meaning of exemption from taxation The grant of immunity to particular persons or corporations or to person or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are 10
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iii. Principles of Tax Exemption
TAXATION LAW government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity.
(1) They are not presumed [Floro Cement v. Gorospe] (2) When granted, they are strictly construed against the taxpayer [Luzon Stevedoring Co. v. CTA] (3) They are higly disfavoured and may almost be said “to be directly contrary to the intention of tax laws.” [Manila Electric Company v. Vera] [Valencia and Roxas]
These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. (Manila Electric
Company v. Province of Laguna, G.R.No. 131359, May 5, 1999)
iv. Kinds of tax exemption
v. Rationale of Tax Exemption
(1) Express or Affirmative - either entirely or in part, may be made by provisions of the Constitution, statutes, treaties, ordinances, franchises, or contracts.
Such exemption will benefit the body of the people and not particular individuals or private interest and that the public benefit is sufficient to offset the monetary loss entailed in the grant of the exemption.
(2) Implied or Exemption by Omission - when a tax is levied on certain classes without mentioning the other classes. Every tax statute, in a very real sense, makes exemptions since all those not mentioned are deemed exempted. The omission may be either accidental or intentional.
vi. Grounds for Tax Exemption (1) It may be based on contract. (2) It may be based on some ground of public
policy. (3) It may be created in a treaty on grounds of reciprocity or to lessen the rigors of
international or multiple taxation.
Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation is the exception.
But equity is NOT a ground for tax exemption. Exemption from tax is allowable only if there is a clear provision. While equity cannot be used as a basis or justification for tax exemption, a law may validly authorize the condonation of taxes on equitable considerations.
(3) Contractual - The legislature of a State may, in the absence of special restrictions in its constitution, make a valid contract with a corporation in respect to taxation, and that such contract can be enforced against the State at the instance of the corporation [CasanovasHord, G.R. No. 3473, March 22, 1907]. In the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, this includes those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the
vii. Revocation of Tax Exemption General Rule: revocable by the government. Exception: Contractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby violating the nonimpairment clause of the Constitution.
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I.7. COMPENSATION AND SET-OFF
TAXATION LAW
(3) There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in settlement of the original claim. (c) Generally, compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authorized to do so. (1) In the National Internal Revenue Code, the Commissioner of Internal Revenue is expressly authorized to enter, under certain conditions, into a compromise of both the civil and criminal liabilities of the taxpayer (Sec. 204, NIRC). (2) The power to compromise in respect of customs duties is, at best, limited to cases where potestive authority is specifically granted such as in the remission of duties by the Collector of Customs (Sec. 709, Tariff and Customs Code) and cases involving imposition of fines, surcharges and forfeitures which may be compromised by the Commissioner subject to the approval of the Secretary of Finance (Sec. 2316, Tariff and Customs Code). (3) No provisions exist under the Local Government Code, while the tax (not criminal) liability is not prohibited from being compromised (see Arts. 2034 and 2035, Civil Code); there is no specific authority, however, given to any public official to execute the compromise so as to render it effective. (Vitug, p. 48)
General rule: Internal revenue taxes cannot be the subject of set-off or compensation (Republic v. Mambulao Lumber, G.R. No. L17725, February 28, 1962). Reasons: (1) This would adversely affect the government revenue system (Philex Mining v. CA G.R. No. 125704. August 28, 1998). (2) Government and the taxpayer are not creditors and debtors of each other. The payment of taxes is not a contractual obligation but arises out of a duty to pay. [Republic v. Mambulao Lumber (1962)] Exception: If the claims against the government have been recognized and an amount has already been appropriated for that purpose. Where both claims have already become due and demandable as well as fully liquidated, compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290 of the NCC, and both debts are extinguished to the concurrent amount.[Domingo v. Garlitos, G.R. No. L18994, June 29, 1963] Doctrine of Equitable Recoupment- a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. The doctrine FINDS NO application in this jurisdiction.
I.8. COMPROMISE (a) A contract whereby the parties, by making reciprocal concessions avoid litigation or put an end to one already commenced. (Art. 2028, Civil Code). It involves a reduction of the taxpayer’s liability. (b) Requisites of a tax compromise: (1) The taxpayer must have a tax liability. (2) There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by the taxpayer.
I.9. TAX AMNESTY i. Definition A tax amnesty partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do 12
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so and become a part of the new society with a clean slate.[Republic v. IAC (1991)]
TAXATION LAW
No person or property is subject to taxation unless within the terms or plain import of a taxing statute. (see72 Am.Jur. 2d 44).
A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. (CIR v. Marubeni Corp.,372 SCRA 576 [2001]).
Taxes, being burdens, they are not to be presumed beyond what the statute expressly and clearly declares. (Coll. v. La Tondena, 5 SCRA 665 [1962]). Thus, a tax payable by “individuals” does not apply to “corporations.” Tax statutes offering rewards are liberally construed in favor of informers. (Penid v. Virata, 121 SCRA 166 [1983]).
Exceptions: (1) The rule of strict construction as against the government is not applicable where the language of the statute is plain and there is no doubt as to the legislative intent. (see 51 Am.Jur.368). In such case, the words employed are to be given their ordinary meaning. Ex. Word “individual” was changed by the law to “person”. This clearly indicates that the tax applies to both natural and juridical persons, unless otherwise expressly provided. (2) The rule does not apply where the taxpayer claims exemption from the tax.
ii. Distinguished from tax exemption Tax amnesty is immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies to past tax periods, hence of retroactive application.(People v. Castañeda, G.R. No. L-46881, September 15, 1988). Tax exemption is an immunity from all civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. (Greenfield v. Meer, 77 Phil. 394 [1946]). It is generally prospective in application.(Dimaampao, 2005, p. 111)
Tax statutes are to receive a reasonable construction or interpretation with a view to carrying out their purpose and intent. They should not be construed as to permit the taxpayer easily to evade the payment of tax. (Carbon Steel Co. v. Lewellyn, 251 U.S. 201). Thus, the good faith of the taxpayer is not a sufficient justification for exemption from the payment of surcharges imposed by the law for failing to pay tax within the period required by law.
I.10. CONSTRUCTION AND INTERPRETATION OF: i. Tax laws General Rule: Tax laws are construed strictly against the government and liberally in favor of the taxpayer. (Manila Railroad Co. v. Coll. of Customs, 52 Phil. 950 [1929]).
ii. Tax exemption and exclusion Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal 13
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provisions. [NPC v. Albay, G.R. No. 87479, June 4, 1990]
TAXATION LAW (Comm. V. Arnoldus Carpentry Shop, Inc., 159 SCRA 19 [1988]).
iii. Tax rules and regulations
General Rule: In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. (Republic Flour Mills v. Comm. & CTA, 31 SCRA 520 [1970]).
The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC. (Sec. 244)
(a) NPC v. Albay: Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. (b) Floro Cement v. Gorospe: Claims for an exemption must be able to point out some provision of law creating the right, and
It is an elementary rule in administrative law that administrative regulations and policies enacted by administrative bodies to interpret the law which they are entrusted to enforce have the force of law and entitled to great respect. They have in their favor a presumption of legality [Gonzales v. Land Bank, 183 SCRA
cannot be allowed to exist upon a mere vague implication or inference. (c) CIR v. CA: Refunds are in the nature of
520(1990)]
exemption, and must be construed strictly against the grantee/taxpayer.
Requisites for validity and effectivity of regulations (1) Reasonable (2) Within the authority conferred (3) Not contrary to law and the Constitution (Art. 7, Civil Code) (4) Must be published
(d) Comm. V. Kiener Co. Ltd. (65 SCRA 142 [1975]): Taxation is the rule and exemption the exception, and therefore, he who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.”
There are two kinds of administrative issuances: the legislative rules and the interpretative rules. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law, which the administrative agency is in charge of enforcing. An administrative rule should be published if it substantially adds to or increases the burden of those governed. When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely
Exceptions: (a) When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption; and (b) When the exemption is in favor of the government itself or its agencies, or of religious, charitable, and educational institutions because the general rule is that they are exempt from tax. (c) When the exemption is granted under special circumstances to special classes of persons. (d) If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply. 14
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providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. (Commissioner v. Court of Appeals, G.R.No. 119761 [1996]).
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and original jurisdiction of the Commissioner of Internal Revenue subject to review by the Secretary of Finance (Sec. 4, par.1, NIRC). Revenue regulations are the formal interpretation of the provisions of the NIRC and other laws by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue. The Commissioner has the sole authority to issue rulings but he also has the power to delegate said authority to his subordinates. He cannot, however, delegate to any of his subordinate officials the power to issue rulings of first impression (i.e., question involved is new and important) or to reverse, revoke or modify any existing ruling of the BIR (Sec. 7[B], NIRC).
Rep. of the Philippines v. Pilipinas Shell Petroleum Corporation, G.R. No. 173918, April 8, 2008. Tax regulations (issued by the CIR/DOF Secretary) whose purpose is to enforce or implement existing law must (a) be published in a newspaper of general circulation (see Art. 2 of the Civil Code), AND (b) filed with UP Law Center ONAR (per Chapter 2, Book VII of the Admin Code of 1987 (EO 292) before they can become effective.
v. Decisions of the Supreme Court and Court of Tax Appeals Decisions of the Supreme Court applying or interpreting existing tax laws are binding on all subordinate courts and have the force and effect of law. As provided for in Article 8 of the Civil Code, they “form part of the law of the land”. They constitute evidence of what the law means. (People v. Licera, 65 SCRA 270 [1975]).
Such rules once established and found to be in consonance with the general purposes and objects of the law have the force and effect of law, and so they must be applied and enforced. (De Guzman v. Lontok, 68 Phil. 495 [1939]). They are, therefore, just as binding as if the regulations had been written in the law itself. NOTE: Administrative rules and regulations must always be in harmony with the provisions of the law. In case of conflict with the law or the Constitution, the administrative rules and regulations are null and void. As a matter of policy, however, courts will declare a regulation or provision thereof invalid only when the conflict with the law is clear and unequivocal.
The same is also true with respect to decisions of the Court of Tax Appeals. However, by the nature of its jurisdiction, the decisions of this court are still appealable to the Supreme Court by a petition for review on certiorari.
vi. Penal provisions of tax laws Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the language of a rule, however beneficent its intention, beyond the fair and ordinary meaning of its language.
iv. Administrative interpretations and opinions The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive 15
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A penal statute should be construed strictly against the State and in favor of the accused. The reason for this principle is the tenderness of the law for the rights of individuals and the object is to establish a certain rule by conformity to which mankind would be safe, and the discretion of the court limited.(People v. Purisima, 86 SCRA 524 [1978]).
although each advantage to individuals might incidentally serve the public. [Pascual v. Secretary of Public Works (1960)] The protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. [Lutz v Araneta (1955)]
vii. Non-retroactive application of tax laws to taxpayers
The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. [Tio v. Videogram (1987)]
General rule: Tax laws are prospective in operation. The reason is that the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction which the law seeks to tax was completed.
Tests in Determining Public Purpose: (1) Duty Test - Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide. (2) Promotion of General Welfare Test Whether the proceeds of the tax will directly promote the welfare of the community in equal measure. (3) Character of the Direct Object of the Expenditure – it is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the public or to the State, which results from the promotion of private enterprises or business, does not justify their aid with public money. [Pascual v. Sec.
Exception: Tax laws may be applied retroactively provided it is expressly declared or
clearly the legislative intent. (Lorenzo v. Posadas, 64 Phil. 353 [1937]). Exception to the exception: a tax law should not be given retroactive application when it would be so harsh and oppressive for in such case, the constitutional limitation of due process would be violated (Republic v. Fernandez,[1956]).
J. SCOPE TAXATION
AND
LIMITATION
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OF
J.1. INHERENT LIMITATIONS i. Public Purpose The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objects of government or directly to promote the welfare of the community.
of Public Works, G.R. No. L-10405, December 29, 1960]
Test: whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, 16
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ii. Inherently Legislative
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Exceptions (1) Delegation to local governments - This exception is in line with the general principle that the power to create municipal corporations for purposes of local selfgovernment carries with it, by necessary implication, the power to confer the power to tax on such local governments. (1 Cooley 190). This is logical for after all, municipal corporations are merely instrumentalities of the state for the better administration of the government in respect to matters of local concern. (Pepsi-Cola Bottling Co. of the Phil.
Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as – (1) The delegation shall not contravene any constitutional provision or the inherent limitations of taxation; (2) The delegation is effected either by the Constitution or by validly enacted legislative measures or statute; and (3) The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. [Vitug
Inc. v. Mun. of Tanauan, 69 SCRA 460 [1976]). Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art X, Sec 5, 1987 Constitution]
and Acosta] General Rule: Delegata potestas non potest delegari. The power to tax is exclusively vested in the legislative body and it may not be redelegated. Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional law is that the power conferred upon the legislature to make laws cannot be delegated by that department to any other body or authority. Where the sovereign power of the state has located the authority, there it must remain; and by the constitutional agency alone the laws must be made until the Constitution itself is charged.” [People v. Vera, G.R. No. L-45685, November 16, 1937]
(2) Delegation to the President (a) to enter into Executive agreements, and (b) to ratify treaties which grant tax exemption subject to Senate concurrence. The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. [Art. 6, Sec. 28 (2), 1987 Consti]
Legislature has the power to determine the: (1) nature (kind), (2) object (purpose), (3) extent (rate), (4) coverage (subjects) and (5) situs (place) of taxation.
(3) Delegation to administrative agencies Limited to the administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the Act. (a) There are certain aspects of the taxing process that are not legislative and they 17
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may, therefore, be vested in an administrative body. The powers which are not legislative include: (1) the power to value property for purposes of taxation pursuant to fixed rules; (2) the power to assess and collect the taxes; and (3) the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details. (b) The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative power to tax is involved. (c) The powers which cannot be delegated include the determination of the subjects to be taxed, the purpose of the tax, the amount or rate of the tax, the manner, means, and agencies of collection, and the prescribing of the necessary rules with respect thereto.
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of state is no longer subject to its taxing powers. The fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed where there is between him and the taxing state, a privity of the relationship justifying the levy. Thus, the citizen’s income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this case, the basis of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his government.
iv. Situs of Taxation Situs of taxation literally means the place of taxation. The basic rule is that the state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs.
iii. Territorial Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed. (51 Am.Jur. 87-88).
Factors that Determine Situs: (1) Nature of the tax; (2) Subject matter of the tax (person, property, act or activity); (3) Possible protection and benefit that may accrue both to the government and the taxpayer; (4) Citizenship of the taxpayer; (5) Residence of the taxpayer; (6) Source of income.
Reasons: (1) Tax laws (and this is true of all laws) do not operate beyond a country’s territorial limits. (2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be a compensation. Note: Where privity of relationship exists. - It does not mean, however, that a person outside
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1. Income Tax
Taxpayer Citizenship Filipino Filipino Alien Alien
Source of Income
Residency Resident Non-Resident Resident Non-Resident
Within Phils. Taxable Taxable Taxable Taxable
2. Property Tax
Kind of Property Real property Tangible Personal property Tangible Personal property Intangible personal property (e.g., credits, bills receivables, bank deposits, bonds, promissory notes, mortgage loans, judgments and corporate stocks)
Without Phils. Taxable Non-Taxable Non-Taxable Non-Taxable
3. Excise Tax
Situs
Kind of Excise Tax
Where it is located (lex rei sitae) Where property is physically located although the owner resides in another jurisdiction. Gen Rule: Domicile of the owner. Mobilia
Income
Donor’s Tax
Estate
sequuntur personam (movables follow the person)
Situs Source of the income, nationality or residence of taxpayer (Sec. 23, NIRC) Location of property; nationality or residence of taxpayer Location of property; nationality or residence of taxpayer
4. Business Tax
Kind of Business Tax Exceptions:
Situs
VAT
Where transaction is made Sale of Real Property Where the real property is located Sale of Personal Where the personal Property property was sold
(1) When property has acquired a business situs in another jurisdiction; or (2) When the law provides for the situs of the subject of tax (e.g., Sec 104, NIRC)
v. International Comity Comity - respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state or government may not be the subject of taxation by another state. Reasons: (1) In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among states under international law). One state 19
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impeded. (1 Cooley 263). (3) The practical effect of an exemption running to the benefit of the government is merely to reduce the amount of money that has to be handled by the government in the course of its operations: For these reasons, provisions granting exemptions to government agencies may be construed liberally in favor of non-tax liability of such agencies. (Maceda v. Macaraig, Jr., 197 SCRA 771 [1991]).
cannot exercise its sovereign powers over another.) (2) In international law, a foreign government may not be sued without its consent→ useless to impose a tax which could not be collected. (3) Usage among states that when a foreign sovereign enters the territorial jurisdiction of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the other. (4) Rule in international law that a foreign government may not be sued without its consent so that it is useless to assess the tax anyway since it cannot be collected.
vi. Exemption of Government Entities, Agencies, and Instrumentalities
Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. (Mactan Cebu Airport v Marcos, G.R. No. 120082 September 11, 1996) There is no constitutional prohibition against the government taxing itself. (Coll. v.
If the taxing authority is the National Government: General Rule: Agencies and instrumentalities of the government are exempt from tax.
If the taxing authority is the local government unit: RA 7160 expressly prohibits LGUs from
Bisaya Land Transportation, 105 Phil. 338 [1959]).
levying tax on the National Government, its agencies and instrumentalities and other LGUs. [Local Government Code, Sec. 133 (o)]
Note: Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers. With respect to government-owned or controlled corporations performing proprietary (not governmental) functions, they are generally subject to tax in the absence of tax exemption provisions in their charters or the law creating them.
J.2. CONSTITUTIONAL LIMITATIONS i. Provisions Directly Affecting Taxation 1. Prohibition against imprisonment for nonpayment of poll tax Art III, Sec 20, 1987 Constitution- No person shall be imprisoned for debt or non-payment of a poll tax.
Reasons for the exemption: (1) To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over for itself. (2) This immunity also rests upon fundamental principles of government, being necessary in order that the functions of government shall not be unduly
2. Uniformity and equality of taxation Art VI, Sec 28(1), 1987 Constitution- The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation. (1) Uniformity- All taxable articles or properties of the same class shall be taxed at the same 20
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rate. (City of Baguio v. de Leon, 25 SCRA 938). (1) Uniformity of operation throughout tax unit - The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. This means, for example, that a tax for a national purpose must be uniform and equal throughout the country and a tax for a province, city, municipality, or barangay must be uniform and equal throughout the province, city, municipality or barangay. (2) Equality in burden – Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning. The reason is simple enough. If legislation imposes a single tax upon all persons, properties, or transactions, an inequality would obviously result considering that not all persons, properties, and transactions are identical or similarly situated. Neither does uniformity demand that taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive. (2) Equity – 1) Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable. “Equitable” means fair, just, reasonable and proportionate to the taxpayer’s ability to pay. Taxation may be uniform but inequitable where the amount of the tax imposed is excessive or unreasonable. (2) The constitutional requirement of equity in taxation also implies an approach which employees a reasonable classification of the entities or individuals who are to be affected by a tax. Where the “tax differentiation is not based on material or substantial differences,” the guarantee of equal protection of the laws and the uniformity rule will likewise be infringed.
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Taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. – Classification to be valid, must, be reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) the classification applies equally to all those who belong to the same class. (Pepsi-Cola v. Butuan City, 24 SCRA 789) The progressive system of taxation would place stress on direct rather than indirect taxes, on non-essentiality rather than essentiality to the taxpayer of the object of taxation, or on the taxpayer’s ability to pay. Example is that individual income tax system that imposes rates progressing upwards as the tax base (taxpayer’s taxable income) increases. A progressive tax, however, must not be confused with a progressive system of taxation. While equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refer to the proper relative treatment for tax purposes of persons in unlike circumstances. 3. Grant by Congress of authority to the President to impose tariff rates Delegation of Tariff powers to the President under the flexible tariff clause [Art VI, Sec 28(2), 1987 Constitution], which authorizes the President to modify import duties. (Sec. 401, Tariff and Customs Code)
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4. Prohibition against taxation of religious, charitable entities, and educational entities Art VI, Sec 28(3), 1987 Constitution: (e) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, (f) actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (g) The tax exemption under this constitutional provision covers property taxes only and not other taxes (Lladoc v. Commissioner, 14 SCRA 292 [1965]).
(3) reasonably necessary for the accomplishment of said purposes such as in the case of hospitals, a school for training nurses, a nurses’ home, property to provide housing facilities for interns, resident doctors and other members of the hospital staff, and recreational facilities for student nurses, interns and residents, such as athletic fields. [Abra Valley College v. Aquino]
In general, special assessments are not covered by the exemption because by nature they are not classified as taxes. [Apostolic Prefect v. City Treasurer of Baguio]
TEST: whether an enterprise is charitable or not: whether it exists to carry out a purpose recognized in law as charitable or whether it is maintained for gain, profit, or private advantage.
To be entitled to the exemption, the petitioner must prove that: (1) it is a charitable institution (2) its real properties are actually, directly and exclusively used for charitable purposes.
A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.
Revenue or income from trade, business or other activity, the conduct of which is not related to the exercise or performance of religious, educational and charitable purposes or functions shall be subject to internal revenue taxes when the same is not actually, directly or exclusively used for the intended purposes. (BIR Ruling 046-2000)
Test of Exemption Nature of Use
Scope of Exemption
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“Exclusive" - possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; "Exclusively" - "in a manner to exclude; as enjoying a privilege exclusively.”
Use of the property, and not the ownership Actual, direct and exclusive use for religious, charitable or educational purposes. Real property taxes on facilities which are (1) actual, (2) incidental to, or
If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing 22
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violence to the Constitutions and the law. Solely is synonymous with exclusively. [Lung
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This provision covers only non-stock, non-profit educational institutions
Center of the Philippines v. Quezon City (2004)]
The exemption covers income, property, and donor’s taxes, custom duties, and other taxes imposed by either or both the national government or political subdivisions on all revenues, assets, property or donations, used actually, directly and exclusively for educational purposes. (In the case of religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax.)
Note: Lung Center did not necessarily overturn the case of Abra Valley College v. Aquino (1988). Lung Center just provided a stricter interpretation. In Abra Valley, the court held: The primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. Under the 1935 Constitution, the trial court correctly held that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes (incidental to its educational purpose), but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.
The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise. Similar tax exemptions may be extended to proprietary (for profit) educational institutions by law subject to such limitations as it may provide, including restrictions on dividends and provisions for reinvestment. The restrictions are designed to insure that the tax-exemption benefits are used for educational purposes.
5. Prohibition against taxation of non-stock, non-profit educational institutions
Lands, buildings, and improvements actually, directly and exclusively used for educational purposes are exempt from property tax (Sec. 28[3], Art. VI, 1987 Constitution), whether the educational institution is proprietary or nonprofit.
Art XIV, Sec 4, 1987 Constitution
(3) All revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Art. VI, sec. 28, par. 3
Art. XIV, sec. 4, par. 3
Charitable institutions, Non-stock, nonchurches and profit educational parsonages or institutions. convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements,
Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax.
actually, directly, and exclusively used for religious, charitable, or 23
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(2) The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area. (Sec. 277, LGC)
Income, property, and donor’s taxes and custom duties.
6. Majority vote of Congress for grant of tax exemption Art VI, Sec 28, 1987 Constitution. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.
7. Prohibition on use of tax levied for special purpose All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government (see Gaston v. Republic Planters Bank, 158 SCRA 626).
Basis: The inherent power of the state to impose taxes carries with it the power to grant tax exemptions. Exemptions may be created by: (1) The Constitution or (2) Statute subject to constitutional limitations
8. President’s veto power on appropriation, revenue, tariff bills Art VI, Sec 27(2), 1987 Constitution. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or times to which he does not object.
Vote required for the grant of exemption: Absolute majority of the members of Congress (at least ½ + 1 of ALL the members voting separately) Vote required for withdrawal of such grant of exemption: Relative majority is sufficient (majority of the quorum). The provision guaranteeing equal protection of the laws and that mandating the rule of taxation shall be uniform and equitable likewise limit, although not expressly, the legislative power to grant tax exemption.
9. Non-impairment of jurisdiction of the Supreme Court Art VIII, Sec 2, 1987 Constitution. The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof.
Grants in the nature of tax exemptions: (1) Tax amnesties (2) Tax condonations (3) Tax refunds
Art VIII, Sec 5(2(b)), 1987 Constitution. The Supreme Court shall have the following powers: (2) Review, revise, modify or affirm on appeal or certiorari, as the laws or the Rules of Court may provide, final judgments and orders of lower courts in (b) all cases involving the legality of any tax, impost, assessment or toll or any
Note: (1) Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. (Sec. 192, LGC) 24
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12. Exemption from real property taxes
penalty imposed in relation thereto.
Art Vi, Sec 28(3), 1987 Constitution Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
San Miguel Corp v. Avelino (G.R. No. L-39699 March 14, 1979): Even the legislative body cannot deprive the SC of its appellate jurisdiction over all cases coming from inferior courts where the constitutionality or validity of an ordinance or the legality of any tax, impost, assessment, or toll is in question.
Art VI, Sec 30, 1987 Constitution. No law shall
13. No appropriation or use of public money for religious purposes
be passed increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence.
Art Vi, Sec 29, 1987 Constitution
(1) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. (2) No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government
Scope of Judicial Review in taxation: limited only to the interpretation and application of tax laws. Its power does not include inquiry into the policy of legislation. Neither can it legitimately question or refuse to sanction the provisions of any law consistent with the Constitution. (Bisaya Land Transportation Co v. Collector, May 29, 1959) 10. Grant of power to the local government units to create its own sources of revenue LGUs have power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art X, Sec 5, 1987 Constitution]
ii. Provisions Indirectly Affecting Taxation
11. Flexible tariff clause Delegation of Tariff powers to the President under the flexible tariff clause [Art VI, Sec 28(2), 1987 Constitution]
1. Due process
Art III, Sec 1, 1987 Constitution. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.
Flexible tariff clause: the authority given to the President, upon the recommendation of NEDA, to adjust the tariff rates under Sec. 401 of the Code in the interest of national economy, general welfare and/or national security.
(1) Substantive Due Process – An act is done under the authority of a valid law or the Constitution itself.
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(2) Procedural Due Process – An act is done after compliance with fair and reasonable methods or procedure prescribed by law.
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The doctrine does not require that persons or properties different in fact be treated in laws as though they were the same. Indeed, to treat them the same or alike may offend the Constitution. What the Constitution prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient “if all of the same class are subject to the same rate and the tax is administered impartially upon them.” (1 Cooley 608).
Due Process in Taxation requirements: (1) public purpose (2) imposed within taxing authority’s territorial jurisdiction (3) assessment or collection is not arbitrary or oppressive The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to the confiscation of property. (Sison v. Ancheta, 130 SCRA 654 [1984]))
The equal protection clause is subject to reasonable classification. Classification is valid as long as: (1) Classification rests on substantial distinctions which make real differences, (2) Classification is germane to achieve the legislative purpose, (3) The law applies, all things being equal, to both present and future conditions, and (4) The classification applies equally well to all those belonging to the same class.
Instances of violations of the due process clause: (1) If the tax amounts to confiscation of property; (2) If the subject of confiscation is outside the jurisdiction of the taxing authority; (3) If the tax is imposed for a purpose other than a public purpose; (4) If the law which is applied retroactively imposes just and oppressive taxes. (5) If the law violates the inherent limitations on taxation.
3. Religious freedom
Art III, Sec 5, 1987 Constitution. No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. (Non-establishment clause) The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. (Free
2. Equal protection
Art III, Sec 1, 1987 Constitution. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.
exercise clause) No religious test shall be required for the exercise of civil and political rights.
All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. (1 Cooley 824-825; See Sison v. Ancheta,1984]).
The free exercise clause is the basis of tax exemptions. The imposition of license fees on the distribution and sale of bibles and other religious literature by a non-stock, non-profit missionary organization not for purposes of 26
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profit amounts to a condition or permit for the exercise of their right, thus violating the constitutional guarantee of the free exercise and enjoyment of religious profession and worship which carries with it the right to disseminate religious beliefs and information. [American Bible Society v. City of Manila, L9637 April 30, 1957]It is actually in the nature of a condition or permit for the exercise of the right. This is different from a tax in the income of one who engages in religious activities or a tax on property used or employed in connection with those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax for the privilege of delivering a sermon. (American Bible Society v. City of Manila)
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and how taxes are to be implemented (the manner of imposing and collecting tax). It also involves the granting of tax exemptions, tax amnesties or tax condonation. (2) ASSESSMENT AND COLLECTION – This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue or Bureau of Customs. (3) PAYMENT – this process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government. Payment of tax also includes the options, schemes or remedies as may be legally open or available to the taxpayer. (4) REFUND – A claim for refund must first be filed with the Commissioner of Internal Revenue. A suit or proceeding may be filed within two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. The Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return, such payment appears clearly to have been erroneously paid. [Sec. 229, NIRC]
The Constitution, however, does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organization. (Tolentino v. Secretary of Finance, 235 SCRA 630 [1994]) 4. Non-impairment of obligations of contracts Art III, Sec 10, 1987 Constitution. No law impairing the obligation of contracts shall be passed.
K. REQUISITES OF A VALID TAX
The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. [Tolentino v. Secretary of Finance (1994)]
(1) For a public purpose (2) Rule of taxation should be uniform (3) The person or property taxed is within the jurisdiction of the taxing authority (4) Assessment and collection is in consonance with the due process clause (5) The tax must not infringe on the inherent and constitutional limitations of the power of taxation
STAGES OR PROCESS OF TAXATION The exercise of taxation involves three stages, namely: (1) LEVY OR IMPOSITION– This process involves the passage of tax laws or ordinances through the legislature. The tax laws to be passed shall determine those to be taxed (person, property or rights), how much is to be collected (the rate and the base of tax), 27
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L. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS
L.3. LICENSE FEE Taxes
L.1. TARIFF
Imposed under the taxing power of the state for purposes of revenue. Forced contributions for the purpose of maintaining government functions. Generally, unlimited as to amount
Taxes
Tariff
All embracing term to A kind of tax imposed include various kinds on articles which are of enforced traded internationally contributions upon persons for the attainment of public purposes
L.2. TOLL Taxes
Imposed on persons, property and to exercise a privilege. Failure to pay does not necessarily make the act or business illegal.
Toll
Paid for the support of the government Demand of sovereignty Generally, no limit on the amount collected as long as it is not excessive, unreasonable or confiscatory Imposed only by the government
Paid for the use of another’s property. Demand of proprietorship Amount paid depends upon the cost of construction or maintenance of the public improvement used. Imposed by the government or by private individuals or entities. A toll is a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature. (1 Cooley 77.) The view has been expressed, however, that the taking of tolls is only another method of taxing the public for the cost of the construction and repair of the improvement for the use of which the toll is charged. (71 Am. Jur. 2d 351.)
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License and Regulatory Fee Levied under the police power of the state. Exacted primarily to regulate certain businesses or occupations. Should not unreasonably exceed the expenses of issuing the license and of supervision. Imposed only on the right to exercise a privilege Failure to pay makes the act or business illegal.
Penalty for nonpayment: surcharges or imprisonment (except poll tax). License or permit fee is a charge imposed under the police power for purposes of regulation. License is in the nature of a special privilege, of a permission or authority to do what is within its terms. It makes lawful an act which would otherwise be unlawful. A license granted by the State is always revocable. (Gonzalo Sy
Trading vs. Central Bank of the Phil., 70 SCRA 570 [1976])
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Importance of the distinctions (1) It is necessary to determine whether a particular imposition is a tax or a license fee because some limitations apply only to one and not to the other, and for the reason that exemption from taxes may not include exemption from license fee. (2) The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. The amount of tax bears no relation at all to the probable cost of regulating the activity, occupation, or property being taxed. (see
TAXATION LAW taking into account not only the costs of direct regulation but also its incidental consequences as well.
Note: Taxes may also be imposed for regulatory purposes. It is called regulatory tax. Fees may be properly regarded as taxes even though they also served as an instrument of regulation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.[PAL v. Edu (1988)]
Progressive Development Corp. vs. Quezon City, 172 SCRA 629 [1989])
L.4. SPECIAL ASSESSMENT
(3) An exaction, however, may be considered both a tax and a license fee. This is true in the case of car registration fees which may be regarded as taxes even as they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue, is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. (Phil. Airlines, Inc. vs. Edu, 164 SCRA 320 [1988]) (4) But a tax may have only a regulatory purpose. The general rule, however, is that the imposition is a tax if its primary purpose is to generate revenue, and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. (see Progressive
Taxes Levied not only on land. Imposed regardless of public improvements Contribution of a taxpayer for the support of the government. It has general application both as to time and place.
Special Assessment Levied only on land. Imposed because of an increase in value of land benefited by public improvement. Contribution of a person for the construction of a public improvement Exceptional both as to time and locality.
A special assessment is not a personal liability of the person assessed, i.e., his liability is limited only to the land involved. It is based wholly on benefits (not necessity).
Development Corp. vs. Quezon City) Progressive Development Corp v. QC (1989): To be considered a license fee (PRIMARY PURPOSE TEST): (1) imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; (2) imposition must bear a reasonable relation to the probable expenses of regulation,
A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding that the statute calls it a tax. The rule is that an exemption from taxation does not include exemption from special assessment. But the power to tax carries with it the power to levy a special assessment. 29
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L.6. PENALTY Note: The term "special levy" is the name used in the present Local Government Code (RA. No. 7160). A province, city, or municipality, or the
Taxes
National Government, may impose a special levy on lands especially benefited by public works or improvements financed by it (see Sec. 240, RA 7160).
Violation of tax laws Any sanction imposed may give rise to as a punishment for imposition of penalty. violation of law or acts deemed injurious Generally intended to Designed to regulate raise revenue conduct May be imposed only May be imposed by by the government the government or private individuals or entities Cannot be a subject Can be a subject of of set off or set off or compensation compensation (see Art. 1279, Civil Code)
L.5. DEBT Taxes
Penalty
Debt
Based on laws
Generally based on contract, express or implied. Generally cannot be Assignable assigned Generally paid in May be paid in kind. money Cannot be a subject Can be a subject of of set off or set off or compensation compensation (see Art. 1279, Civil Code) A person cannot be Imprisonment is a imprisoned for non- sanction for nonpayment of debt payment of tax, (except when it arises except poll tax. from a crime), Governed by the Governed by the special prescriptive ordinary periods of periods provided for prescription. in the NIRC. Does not draw Draws interest when interest except only it is so stipulated or when delinquent where there is default. Imposed only by Can be imposed by public authority private individual
M. KINDS OF TAXES M.1. AS TO OBJECT (1) Personal, Poll or Capitation Tax – tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged (e.g. community (formerly residence) tax). Taxes of a specified amount imposed upon each person performing a certain act or engaging in a certain business or profession are not, however, poll taxes. (71 Am.Jur.2d 357). (2) Property Tax – tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment (e.g., real estate tax). The obligation to pay the tax is absolute and unavoidable and is not based upon the voluntary action of the person assessed. (3) Privilege/Excise Tax – any tax which does not fall within the classification of a poll tax or a property tax. Thus, it is said that an excise tax is a charge imposed upon the
A tax is not a debt in the ordinary sense of the word.
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performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession, or business. The obligation to pay the tax is based on the voluntary action of the person taxed in performing the act or engaging in the activity which is subject to the excise. The term “excise tax” is synonymous with “privilege tax” and the two are often used interchangeably (e.g., income tax, value added tax, estate tax, donor’s tax).
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(2) Ad Valorem Tax – a tax of a fixed proportion of the value of the property with respect to which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. The phrase “ad valorem” means literally, “according to value.” (e.g. real estate tax, excise tax on automobiles, non-essential goods such as jewelry and perfumes, customs duties (except on cinematographic films)). (3) Mixed
M.2. AS TO BURDEN OR INCIDENCE (1) Direct Taxes – taxes which are demanded from persons who also shoulder them; taxes for which the taxpayer is directly or primarily liable, or which he cannot shift to another (eg. Income tax, estate tax, donor’s tax, community tax) (2) Indirect Taxes – taxes which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer; taxes levied upon transactions or activities before the articles subject matter thereof, reach the consumers who ultimately pay for them not as taxes but as part of the purchase price. Thus, the person who absorbs or bears the burden of the tax is other than the one on whom it is imposed and required by law to pay the tax. Practically all business taxes are indirect (e.g., VAT, percentage tax; excise taxes on specified goods; customs duties).
AS TO PURPOSES
(1) General or Fiscal Tax –levied for the general or ordinary purposes of the Government, i.e., to raise revenue for governmental needs (e.g. income tax, value added tax, and almost all taxes). (2) Special/Regulatory/ Sumptuary Tax –levied for special purposes i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g. protective tariffs or customs duties on imported goods to enable similar products manufactured locally to compete with such imports in the domestic market). Tariff duties intended mainly as a source of revenue are relatively low so as not to discourage imports.
M.4. AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) (1) National – taxes imposed by the national government (e.g. national internal revenue taxes, customs duties, and national taxes imposed by laws). (2) Municipal or Local – taxes imposed by local governments (e.g. business taxes that may be imposed under the Local Government Code; professional tax).
M.3. AS TO TAX RATES (1) Specific Tax – a tax of a fixed amount imposed by the head or number or by some other standard of weight or measurement. It requires no assessment (valuation) other than the listing or classification of the objects to be taxed (e.g., taxes on distilled spirits, wines, and fermented liquors; cigars and cigarettes) 31
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II. National Internal Revenue Code of 1997 as amended (NIRC)
M.5. AS TO GRADUATION (1) Proportionate – The rate of tax is based on a fixed percentage of the amount of the property, receipts or other basis to be taxed. Example: real estate tax, value added tax, and other percentage taxes. (2) Progressive – The rate of tax increases as the tax base or bracket increases. Example: income tax, estate tax, donor’s tax. (3) Digressive – A fixed rate is imposed on a certain amount and diminishes gradually on sums below it. The tax rate in this case is arbitrary because the increase in tax rate is not proportionate to the increase of tax base. (4) Regressive – The rate of tax decreases as the tax base or bracket increases. There is no regressive tax in the Philippines.
Income Taxation Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the person’s income, emoluments, profits and the like (Fisher v. Trinidad, 43 Phil. 981). It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. Income tax is generally classified as an excise
tax. It is not levied upon persons, property, funds or profits but upon the right of a person
Regressive/Progressive system of taxation A regressive tax must not be confused with the
to receive income or profits.
regressive system of taxation.
In the Philippines, income tax is imposed on the net income of citizens, resident aliens, domestic corporations, and nonresident aliens and foreign corporations engaged in trade or business within the Philippines (Sec. 24 (A), Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC). It is also imposed on the gross income of nonresident aliens and foreign corporationsnot doing business in the Philippines (Sec. 25 (B), (C), (D), Sec. 28 (B), NIRC). It is further imposed as a final tax on certain passive income (interests, royalties, prizes, and other winnings), cash and property dividends, capital gains from the sale of domestic shares of stock and real property classified as capital assets located in the Philippines (Sec. 24 (B), Sec. 25 (A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC).
In a society where the majority of the people have low incomes, regressive taxation system exists when there are more indirect taxes imposed than direct taxes. Since the lowincome sector of the population as a whole buys more consumption goods on which the indirect taxes are collected, the burden of indirect taxes rests more on them than on the more affluent groups. There should be no objection if indirect taxes are raised on luxury items consumed mainly by the higher income groups and reduced on basic commodities consumed by the lower income segments of society. Studies reveal that the progressive elements of the income and other direct taxes have not sufficiently offset the regressive effects of the indirect taxes as a whole.
Income Tax Law aims to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which places the burden of on those best able to pay
A progressive tax is, therefore, also different from a progressive system of taxation. 32
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(Madrigal v. Rafferty & Concepcion, G.R. No. L12287 August 7, 1918).
B. FEATURES OF THE PHILIPPINE INCOME TAX LAW
A. INCOME TAX SYSTEMS
Direct Tax The tax burden is borne by the income recipient upon whom the tax is imposed.
A.1. GLOBAL TAX SYSTEM Under a global tax system, it did not matter whether the income received by the taxpayer is classified as compensation income, business or professional income, passive investment income, capital gain, or other income. All items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base.
Progressive The tax rate increases as the tax base increases. It is founded on the ability to pay principle and is consistent with Sec. 28, Art. VI, 1987 Constitution. Comprehensive The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle, and the source principle. Any of the three principles is enough to justify the imposition of income tax on the income of a resident citizen and a domestic corporation that are taxed on a worldwide income.
A.2. SCHEDULAR TAX SYSTEM Different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification of the taxable income and the basis could be gross income or net income.Separate income tax returns (or other types of return applicable) are filed by the recipient of income for the particular types of income received.
A.3. SEMI-SCHEDULAR GLOBAL TAX SYSTEM
OR
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Semi-Schedular or Semi-Global Tax System The Philippines follows the semi-schedular or semi-global system of income taxation, although certain passive investment incomes and capital gains from sale of capital assets (namely: (a) shares of stock of domestic corporations, and (b) real property) are subject to final taxes at preferential tax rates.
SEMI-
All compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates or normal corporate income tax. With respect to such income the computation is global. For those other income not mentioned above, they remain subject to different sets of tax rates and covered by different returns.
National Tax It is imposed and collected by the National Government throughout the country. Excise Tax It is imposed on the right or privilege of a person to receive or earn income. It is not a personal tax or a property tax.
Note: The Philippines, under EO 37 (1986) and RA 8424 (1998), follows a semi-schedular and semi-global tax system. 33
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C. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX C.1. CITIZENSHIP PRINCIPLE
OR
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D. TYPES OF PHILIPPINE INCOME TAX (1) Graduated income tax on individuals (2) Normal corporate income tax on corporations (3) Minimum corporate income tax on corporations (4) Special income tax on certain corporations (5) Capital gains tax on sale or exchange of shares of stock of a domestic corp. classified as capital assets (6) Capital gains tax on sale or exchange of real property classified as capital asset (7) Final withholding tax on certain passive investment income paid to residents (8) Final withholding tax on income payments made to non-residents (9) Fringe benefits tax on fringe benefits of supervisory or managerial employees (10) Branch profit remittance tax (11) Tax on improperly accumulated earnings of corporations
NATIONALITY
A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines; or (b) only on his income from sources within the Philippines, if he qualifies as a nonresident citizen.
C.2. RESIDENCE PRINCIPLE A resident alien is liable to pay Philippine income tax on his income from sources within the Philippines but is exempt from tax on his income from sources outside the Philippines.
C.3. SOURCE OF INCOME PRINCIPLE An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines, such as dividend interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.
E. TAXABLE PERIOD The accounting periods used in determining the taxable income of taxpayers are: (a) Calendar Year - Accounting period of 12 months ending on the last day of December (b) Fiscal Year - Accounting period of 12 months ending on the last day of any month other than December (Sec. 22(Q), NIRC). (c) Short Period- Accounting period which starts after the first month of the tax year or ends before the last month of the tax year (less than 12 months).
The income tax law adopts the most comprehensive tax situs of nationality and residence of the taxpayer and of the generally accepted and internationally recognized income tax base. (Tan v. De Rosario, G.R. No. 109289 October 3, 1994) Resident citizens and domestic corporations are subjected to income tax liability on their income from all sources within and without the Philippines. The law adopts the source rule with respect to income received by taxpayers, other than resident citizens and domestic corporations.
E.1. INSTANCES WHEREBY ACCOUNTING PERIOD ARISES
SHORT
(a) When a corporation is newly organized. (b) When a corporation is dissolved. (c) When a corporation changes accounting period. (d) When the taxpayer dies.
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"Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under Title II (Tax on Income).
F. KINDS OF TAXPAYERS F.1. DEFINITION OF EACH KIND OF TAXPAYER Taxpayer - any person subject to tax imposed by Title II of the Tax Code (Sec. 22(N), NIRC).
Taxable year includes, in the case of return made for a fractional part of a year under the provisions of Title II, the period for which such return is made (Sec. 22 (P), NIRC).
Person- means an individual, a trust, estate or corporation (Sec. 22(A), NIRC).
E.2. WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING TAXABLE INCOME:
For income tax purposes, taxpayers are classified generally as follows: (1) Individuals; (2) Corporations; (3) Partnerships; and (4) Estates and Trusts.
(a) If the taxpayer's annual accounting period is other than a fiscal year; or (b) If the taxpayer has no annual accounting period; or (c) If the taxpayer does not keep books of accounts; or (d) If the taxpayer is an individual (Sec. 43, NIRC).
Primary Classification
Sub-Classification(s) Residents citizens Non-resident citizens Residents Engaged in Trade or Business in the Philippines Non-residents Not Engaged in Trade or Business in the Philippines
Citizens of the Philippines
Individuals
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Aliens
Special Classes of Individuals
Minimum Wage Earner
Domestic Corporations
Corporations
Foreign Corporations
Estates and Trusts Partnerships
General Business Partnership General Professional Partnership
Co-ownerships
35
Resident Corporations Non-resident Corporations
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F.2. INDIVIDUAL TAXPAYERS Exception: Definite Intention but such cannot be promptly accomplished; If his purpose is of
i. Citizens
such nature that an extended stay may be necessary for its accomplishment, and thus the alien makes his home temporarily in the Philippines, then he becomes a resident.
(1) Resident Citizens (RC) (2) Non-resident Citizens (NRC) (a) Citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (b) Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (c) Citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year (183 DAYS). (d) Citizen previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines Treated as NRC with respect to his income derived from sources abroad until the date of his arrival in the Philippines
(2) Non-resident Alien Engaged in trade or business within the Philippines - If the aggregate period of his stay in the Philippines is more than 180 days during any calendar year. Not engaged in trade or business within the Philippines - If the aggregate period of his stay in the Philippines does not exceed 180 days.
iii. Special class of individual employees Minimum Wage Earner (a) A worker in the private sector paid the statutory minimum wage; (b) An employee in the public sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned.
ii. Aliens
F.3. CORPORATIONS Includes all types of corporations, partnerships
(1) Resident Alien An alien actually present in the Philippines who is not a mere transient or sojourner is a resident for income tax purposes.
(no matter how created or organized), joint stock companies, joint accounts, associations, or insurance companies, whether or not registered with the SEC.
No/Indefinite Intention = RESIDENT: If he lives in the Philippines and has no definite intention as to his stay, he is a resident. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.
Excludes general professional partnerships (GPP), joint venture or consortium formed for the purpose of undertaking construction projects, joint venture or consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government.
Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient.
(1) Domestic corporations – A corporation created and organized under its laws (the 36
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F.4. PARTNERSHIP
law of incorporation test).
The Tax Code mandates that every other type of business partnership is subject to income tax in the same manner and at the same rate as an ordinary corporation.
(2) Foreign corporations – A corporation which is not domestic. (a) Resident foreign corporations – Foreign corporation engaged in trade or business within the Philippines.
General Professional Partnerships (GPP) A general professional partnership is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
Doing business – The term implies a 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. (RA 7042, Foreign Investments Act)
Not considered as a taxable entity for income tax purposes. The partners themselves are liable, not the partnership, are liable for the payment of income tax in their individual capacities.
F.5. ESTATES AND TRUSTS
In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character (CIR v. BOAC)
Taxable estates and trusts are taxed in the same manner and on the same basis as an individual.
F.6. CO-OWNERSHIP For income tax purposes, the co-owners in a co-ownership report their share of the income from the property owned in common by them in their individual tax returns for the year and the co-ownership is not considered as a separate taxable entity or a corporation.
(b) Non-resident foreign corporations – Foreign corporation not engaged in trade or business within the Philippines (3) Joint venture and consortium – Essential factors of a joint venture or consortium: (a) Each party must make a contribution, not necessarily of capital but by way of services, skill, knowledge, material or money; (b) Profits must be shared among the parties; (c) There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; (d) There is a single business transaction.
G. INCOME TAXATION G.1. DEFINITION Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the person’s income, emoluments, profits and the like (Fisher v. Trinidad).
G.2. NATURE Income tax is generally classified as an excise
tax. It is not levied upon persons, property, 37
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funds or profits but upon the right of a person
H. INCOME
to receive income or profits.
H.1. DEFINITION
G.3. GENERAL PRINCIPLES
(a) Income means all wealth which flows to the taxpayer other than a mere return of capital. It includes gain derived from the sale or other disposition of capital assets. Income is a gain derived from labor or capital, or both labor and capital; and includes the gain derived from the sale or exchange of capital assets. (b) Conwi v. CTA [G.R. No. 48532 August 31, 1992]: It is an amount of money coming to a person within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified. It means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor. (c) Income may be received in the form of cash, property, service, or a combination of the three.
(a) A resident citizen of the Philippines is taxable on all income derived from sources within and without the Philippines; (b) A nonresident citizen is taxable only on income derived from sources within the Philippines; (c) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman shall be treated as an overseas contract worker if he is a: (1) citizen of the Philippines; and (2) receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
H.2. NATURE Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as their disposition. (James v. US, 366 US 213)
(d) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (e) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (f) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23) Taxpayer Resident Citizen Non-resident Citizen and OCW Resident and Non-resident Alien Domestic Corporation Foreign Corporation
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i. When Income is Taxable Existence of taxable income (1) There is INCOME, gain or profit (2) RECEIVED or REALIZED during the taxable year (3) NOT EXEMPT from income tax
Within Without X
X
X
(a) Madrigal vs. Rafferty (1918): "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." 38
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(b) A mere increase in the value of property is
(b) Matured interest coupons not yet collected by the taxpayer (c) Dividends applied by the corporation against the indebtedness of a stockholder (d) Share in the profit of a partner in a general professional partnership, although not yet distributed, is regarded as constructively received; or (e) Intended payment deposited in court (consignation).
not income, but merely unrealized increase in capital. (1 Mertens, Sec. 5.06)The increase in the value of property is also known as appraisal surplus or revaluation increment.
ii. When is there INCOME? When there is a FLOW of wealth other than mere return of capital during the taxable period.
The doctrine of constructive receipt is designed to prevent the taxpayer using the cash basis from deferring or postponing the actual receipt of taxable income. Without the rule, the taxpayer can conveniently select the year in which he will report the income. (Dimaampao)
Income v. Capital (Madrigal v. Rafferty) Income
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Capital
Denotes a flow of Fund or property wealth during a existing at one definite period of distinct point in time. time. Service of wealth Wealth itself Subject to tax Return of capital is not subject to tax Fruit Tree
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability [CIR v. Isabela Cultural Corporation].
iii. Realization of Income Tests of Realization Actual vis-à-vis Constructive receipt (1) Actual receipt – Income is actually reduced to possession. The realization of gain may take the form of actual receipt of cash. (2) Constructive receipt– An income is considered constructively received when it is credited to the account of, or segregated in favour of a person. The person may withdraw the said account credited in his favor anytime without any substantial
The “As If” Theory of Constructive Income is designed to prevent a cash basis taxpayer to delay reporting of income. It also resumes the existence of income on transactions supposedly not subject to tax. [Valencia and Roxas]
limitations or conditions upon which payment or enjoyment is to be made or exercised. Examples of constructive receipt of income are: (a) Interest credited on savings bank deposit 39
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iv. Recognition of Income
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Installment method vis-à-vis Deferred method vis-à-vis Percentage of completion method (in long- term contracts)
Methods of accounting in reporting income and expenses
Installment Method is a special method of accounting whereby income on installment sales of property during the year is allowed to be reported in installments in proportion to the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price (Sec. 49, NIRC).
Cash method vis-à-vis Accrual method–Cash method generally reports income upon cash collection and reports expenses upon payment. If earned from rendering of services, income is to be reported in the year when collected, whether earned or unearned. (Sec. 108, NIRC). Accrual method generally reports income when earned and reports expense when incurred. If earned from sale of goods, income is to be reported in the year of sale, irrespective of collection. (Sec. 106, NIRC).
Income may be reported on the installment basis in the following cases:
Sales of personal property by a dealer A dealer who regularly sells or otherwise disposes of personal property on the installment plan
Income realized pertains to the accrual basis of accounting, when recognition of income in the books is when it is realized and expenses are recognized when incurred. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income
Sales of real property (inventory) and casual sales of personalty (1) casual sale or other casual disposition of personal property (not of a kind which would be includible in the inventory of the taxpayer if on hand at the close of the taxable year) where the selling price > P1,000 and the initial payments do not exceed 25% of the selling price, or (2) sale or other disposition of real property (inventory), if the initial payments do not exceed 25% of the selling price. Note: This sale is subject to creditable withholding tax and normal tax which is 30% for corporate taxpayer or 5% to 32% for individual taxpayer.
Examples: (1) Interest or rent income earned but not yet received (2) Rent expense accrued but not yet paid (3) Wages due to workers but remaining unpaid Generally, trade and manufacturing businesses use accrual method while servicing businesses use cash method. If the service business opted to report on accrual basis, such method can only be applied when it comes to reporting of expense. To prevent tax evasion, individual taxpayers whose business consists of the sale of inventories cannot use cash method. [Valencia and Roxas]
Sales of real property considered as capital asset by individuals An Individual who sells or disposes of real property, considered as capital asset, if initial payments do not exceed 25% of the selling price, may pay the capital gains tax in installments (Sec. 49(C), NIRC). Note: This 40
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sale is subject to a capital gains tax of 6% based on the selling price or zonal value, whichever is higher. Note: Initial payments are the total payments received in cash or property (other than evidences of indebtedness such as promissory notes, mortgages given) by the seller upon or before the execution of the instrument of sale during the taxable year of the disposition of the real property. Considered as initial payments are the downpayment and all other payments received by the seller during the year of sale, including excess mortgage assumed by the buyer over the basis or cost of the property sold. It contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the first year, the income may not be returned on the installment basis.
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(a) If the initial payments exceed 25% of the selling price, the gain realized may be reported on a deferred payment method. (b) The taxable gain or income returnable during the year of sale is the difference between the selling or contract price and the cost of the property, even though the entire purchase price has not been actually received in the year of sale. (c) The obligations of the purchaser received by the vendor are to be considered as equivalent of cash.
Personal Property
Real Property
Dealer Dealer in personal property who regularly sells in installment plan: Installment method
Selling price is the total amount or price of the sale including the cash or property received and all notes of the buyer or mortgages assumed by him.
Contract price is the amount which the
*held as ordinary assetregardless of
Installment method; Provided, initial payments do not exceed 25% of selling price If exceeds 25%-Deferred payment method
amount of percentage of initial payments
*held as inventory
Casual Sale
purchaser contracts to pay the seller in cash. It includes the excess of the mortgages assumed over the cost or other basis of the property sold.
Installment method; Provided: (1) Selling price exceeds php1,000 (2) Initial payments do not exceed 25% of selling price If either of 2 or both conditions not met— Deferred payment method
Change from accrual to installment basis A taxpayer entitled to the benefits of a dealer in personal property may elect for any taxable year to report his taxable income on the installment basis. In computing his 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. [see Sec. 49(D), NIRC].
*personal property not considered inventory
Sale by Individuals Installment method; Provided, initial payments do not
Deferred Payment
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TAXATION LAW dividends are not income subject to income tax on the part of the stockholder when he merely holds more shares representing the same equity interest in the corporation that declared stock dividends (Fisher v Trinidad).
exceed 25% of selling price *held as capital asset
Percentage of completion (in long-term contracts) Income from long-term construction contracts refers to the earnings derived from construction of a building, installation or other construction contract usually covering a period in excess of one year. When income is derived from long-term construction contracts, it is generally reported on the basis of percentage of completion made every year that will be evidence by the certificates of engineers or architects. The reportable income is calculated by deducting from the contract price the actual cost of construction.
(2) Claim of right doctrine (or Doctrine of Ownership, command, or control) – a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain. To collect a tax would give the government an unjustified preference as to the part of the money that rightfully and completely belongs to the victim. The embezzler’s title is void.
In recognizing realized revenue for long-term construction contracts, accountants usually follow two methods:
(3) Economic benefit test, Doctrine of Proprietary Interest – any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right).
(a) Completed contract method – requires recognition of revenue only when the contract is finally completed; and (b) Percentage of completion method – requires recognition of income based on the progress of work. Long-term contracts are no longer allowed to be reported based on the completed contract method basis beginning January 1, 1998 pursuant to RA 8424; hence, all longterm contracts must be reported using the percentage of completion method.
(4) Severance Test - Under the doctrine of severance test of income, in order that income may exist, is necessary that there be a separation from capital of something of exchangeable value. The income required a realization of gain.
Tests in determining whether income is earned for tax purposes (1) Realization test – no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income (Eisner v Macomber). Thus, stock
(5) All Events Test Under the accrual method of accounting, expenses are deductible in the taxable year in which: (1) all events have occurred which determine the liability; and (2) the 42
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amount of liability can be determined with reasonable accuracy.
“All events test” requires: (a) Fixing a right to income or liability to pay; and (b) The availability of reasonably accurate determination of such income or liability.
All of the above tests are followed in the Philippines for purposes of determining whether income is received by the taxpayer or not during the year (Mamalateo).
It excludes unless it is exempt from income tax under the Constitution, tax treaty, or statute or it is subject to final withholding income tax in accordance with the semiglobal or semi-schedular tax system adopted by the Philippines.
I.1. DEFINITION Gross Income means the pertinent items of income referred to in Section 32(A) of the Tax Code. It includes all income derived from whatever source (unless exempt from tax by law), including, but not limited to, the following items: (1) Gross income derived from the conduct of
It is the difference between gross sales/revenue and the cost of goods sold/services. The definition of gross income is broad and comprehensive to include proceeds from sales of transport documents. (Mamalateo)
Trade or business or the exercise of a profession Rents Interests Prizes and winnings Compensation for services in whatever
I.2. CONCEPT OF INCOME WHATEVER SOURCE DERIVED
form paid, including, but not limited to fees, salaries, wages, commissions, and similar items
FROM
“Income derived from whatever source” means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources (i.e. gambling, extortion, smuggling, etc.)
(6) Annuities (7) Royalties (8) Dividends (9) Gains derived from dealings in property (10) Pensions (11) Partner’s distributive share from the net income of the general professional partnership (GPP) [Sec 32A, NIRC]
The term “gross income” whenever used without qualification, is comprehensive, as defined above, and is different from the limited meaning of gross income for purposes of minimum corporate income tax or the gross income tax of corporations. Gross income includes gross profit from ordinary business and other income not subject to passive income tax or final withholding tax. Gross income means income, gain, or profit subject to income tax. It includes the compensation for personal services, business income, profits, and income derived from any source whatever (whether legal or illegal)
I. GROSS INCOME
(2) (3) (4) (5)
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The list here is NOT exclusive 43
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TAXATION LAW
foreign corporation; rental and royalties from property located outside the Philippines; and gains, profits and income from sale of real property as well as from personal property located outside the Philippines. As a rule, incomes earned with the Philippines are taxable. (3) Derived from sources partly within or partly without the Philippines. Examples: gains, profits and income from transportation or other services rendered partly within and partly outside, and dividend received by a resident citizen from a resident foreign corporation. (Sec. 43(E), NIRC). In general, when an income is earned partly from within and partly from without, only income within is taxable in the Philippines, except if the taxpayer is a resident citizen or a domestic corporation. A Filipino citizen or a domestic corporation whose income is derived from within and without the Philippines is generally subject to tax.
I.3. GROSS INCOME VIS-À-VIS NET INCOME VIS-À-VIS TAXABLE INCOME (a) Gross income – means income, gain or profit subject to tax. (b) Net income – means gross income less statutory deductions and/or exemptions (Sec. 31, NIRC) (c) Taxable income – means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws (Sec. 31, NIRC). It is synonymous to the term “net income” [Valencia and Roxas]
I.4. CLASSIFICATION OF INCOME AS TO SOURCE Source is ascribed to the place wherein the income is earned. It is governed by the situs of taxation. This classification of income is necessary to determine whether such income is subject to tax or not. Income may be: (1) Derived entirely from sources within the Philippines [Sec. 42A, NIRC]. Examples: compensation for labor or service derived from Philippine sources; interest on bonds, notes, deposits and the like earned in the Philippines; dividends declared by domestic corporations; rentals and royalties from property located within the Philippines; and gains, profits and income from sale of real property as well as from personal property in the Philippines. As a rule, incomes earned within the Philippines are taxable. (2) Derived entirely from sources without the Philippines [Sec. 42C, NIRC]. Examples: compensation for labor or service rendered by overseas contract workers; interest on bonds, notes, deposits and the like earned abroad; dividends declared by nonresident
I.5. SOURCES OF INCOME SUBJECT TO TAX i. Compensation Income Income arising from an employer-employee (ER-EE) relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash [Sec. 78(A)], unless specifically excluded by the Tax Code. It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances (e.g., transportation, representation, entertainment), commissions, fees (including directors’ fees, if the director is, at the same time, an employee of the payor-corporation), tips, taxable bonuses, fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of the Tax Code, and taxable pensions and retirement pay (e.g. retirement 44
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benefits earned without meeting the conditions for exemption thereof, such as retirement of less than 50 years of age.)
TAXATION LAW
therein is not exempted. Services of the household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial officer or establishments is considered as compensation. Remuneration paid for services performed as a private secretary, even if they are performed in the employer’s home is considered as compensation.
General Rule: every form of compensation income is taxable regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received. The basis upon which remuneration is paid is immaterial. It may be paid on the basis of piece of work, percentage of profits, hourly, weekly, monthly, or annually. Exception: The term wages does NOT include remuneration paid: (a) For agricultural labor paid entirely in products of the farm where the labor is performed, or (b) For domestic service in a private home, or (c) For casual labor not in the course of the employer's trade or business, or (d) For services by a citizen or resident of the
The term “casual labor” includes labor which is occasional, incidental or regular. “Not in the course of the employer’s trade or business” includes labor that does not promote or advance the trade or business of the employer. The term “remuneration paid for services performed as an employee of a foreign government or an international organization” includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a nondiplomatic representative of such government.
Philippines for a foreign government or an int’l organization. [Sec. 78(A)] Note: The term “agricultural labor” does not include services performed in connection with forestry, lumbering or landscaping. The term “remuneration for domestic services” refers to remuneration paid for services of a household nature performed by an employee in or about the private home of the person whom he is employed. The services of household personnel furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Tax Code. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed
Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay, earned by MINIMUM WAGE EARNERS (MWE) who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]. Provided, however, that an employee shall not enjoy the privilege of being a MWE and, therefore, his/her entire earning are not exempt from income tax and, consequently, from withholding tax if he receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the 45
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allowable statutory amount of P30,000, taxable allowance, and other taxable income other than the statutory minimum wage (SMW), holiday pay, overtime pay, hazard pay and night shift differential pay.
TAXATION LAW entertainment, medical services, or so called “courtesy” discounts on purchases), otherwise known as “de minimis benefits” furnished or offered by an employer to his employees generally, are NOT considered as compensation subject to income tax and therefore withholding tax if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees.
MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their income earned during the taxable year.
Convenience of the Employer Rule Allowances in kind furnished to the employee for and as necessary incident to the performance of his duties are not taxable [Valencia and Roxas].
This rule, notwithstanding, the SMW, Holiday Pay, overtime pay, night differential pay and hazard pay shall still exempt from withholding tax. Forms of compensation and how they are assessed (1) Cash – If compensation is paid in cash, the full amount received is the measure of the income subject to tax. (2) Medium other than money – If services are paid for in a medium other than money (e.g. shares of stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is the amount to be included as compensation subject to tax. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received. (3) Living quarters or meals General Rule: The value to the employee of the living quarters and meals given by the employer shall be added to his compensation subject to withholding. Exception: If living quarters/meals are furnished to an employee for the convenience of the employer the value needed NOT be included as part of compensation income. (4) Facilities and privileges of a relatively small value - Facilities and privileges (such an
If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation (Henderson v. Collector) The amount of “de minimis” benefits confirming to the ceiling prescribed shall not be considered in determining the P30,000 ceiling of “other benefits” excluded from gross income under Section 32 (b)(7)(e) of the Tax Code, Provided, that the excess of the ‘de minimis’ benefits over their respective ceilings prescribed by these regulations shall be considered as part of “other benefits” and the employee receiving it will be subject to tax only on the excess over the P30,000 ceiling, Provided, further, that MWEs receiving, ‘other benefits’ exceeding the P30,000 limit shall be taxable on the excess benefits, as well as on his salaries, wages, and allowances, just like an employee receiving compensation income beyond the SMW. Any amount given by the employer as benefits to its employees, whether classified as “de minimis” benefits or fringe 46
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benefits, shall constitute as deductible expense upon such employer. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the BIR.
TAXATION LAW
COMPENSATION subject to withholding tax, provided the following conditions are satisfied: (a) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the employer’s trade, business or profession; and (b) The employee is required to account or liquidate for the foregoing expenses.
Classification of Gross Compensation Income Basic salary or wage (a) Salary – earnings received periodically for a regular work other than manual labor. Example: monthly salary of an employee (b) Wages – earnings received usually according to specified intervals of work, as by the hour, day, or week. Example: a carpenter’s wage.
The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code.
Backwages are subject to income tax and withholding tax on wages [BIR Ruling No. DA073-2008]
Note: Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are precomputed on a daily basis and are paid to an employee while he is on an assignment or duty are NOT subject to withholding tax on wages and substantiation requirements.
Honoraria – payments given in recognition for services performed for which the established practice discourages charging a fixed fee. Example: honorarium of a guest lecturer Fixed or variable allowances i.e. Transportation, Representation, and other allowances such as Cost of Living Allowances (COLA)
Commission – usually a percentage of total sales or on certain quota of sales volume attained as part of incentive such as sales commission.
General Rule: Fixed or variable transportation, representation or other allowances that are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office is COMPENSATION subject to withholding tax. (Rev. Regs. 2-98)
Fees – received by an employee for the services rendered to the employer including a director’s fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the performance of their official duty over and above their regular salaries.
Exception: Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are NOT
Tips and Gratuities – those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but 47
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not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1]
TAXATION LAW
(a) Connotes involuntariness on the part of the official or employee (b) The separation from the service of the official or employee must not be asked for or initiated by him. (c) The separation was not of his own making. (d) Such fact shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. (e) Amounts received by reason of involuntary separation remain EXEMPT from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. (f) Any payment made by an employer to an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment.
Hazard or Emergency Pay – additional payment received due to the workers’ exposure to danger or harm while working. It is normally added to the basic salary together with the overtime pay and night differential to arrive at gross salary. Retirement Pay – a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b] In general, retirement pay is taxable except in the following instances: (1) SSS or GSIS retirement pays. (2) Retirement pay (R.A. 7641) due to old age provided the following requirements are met: (a) The retirement program is approved by the BIR Commissioner; (b) It must be a reasonable benefit plan. (Its implementation must be fair and equitable for the benefit of all employees) (c) The retiree should have been employed for 10 years in the said company; (d) The retiree should have been 50 years old or above at the time of retirement; and (e) It should have been availed of for the first time.
Pension – a stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss, or injury. Pension is taxable unless the law states otherwise, OR unless the BIR approves the pension plan of a private company. Vacation and sick leave – rules in determining whether money received for vacation and sick leave is taxable or not: (a) If paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work, it constitutes TAXABLE compensation income. [RR 6-82, 2d] (b) Monetized value of unutilized VACATION leave credits of ten (10) days or less which were paid to private employees during the year, and the monetized value of vacation and sick leave credits paid to government
Separation pay – taxable if VOLUNTARILY availed of. It shall not be taxable if involuntary i.e. death, sickness, disability, reorganization/merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee. “For any cause beyond the control.” – 48
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officials and employees are NOT subject to income tax and to the withholding tax. These are ‘de minimis’ benefits.’ [RR no. 52011, Sec 2.78.1(A)(7)] Note: monetization of sick leave credits of private employees even if not exceeding 10 days is not exempt from income tax and withholding tax on wages. (c) Terminal leave or money value of accumulated vacation and sick leave benefits received by heir upon death of employee is not taxable.
TAXATION LAW
Other forms of compensation – other forms received due to services rendered are compensation paid in kind, e.g., insurance premium paid by the employer for insurance coverage where the heirs of the employee are the beneficiaries is the employee’s income. Note: Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee’s compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (This also applies to deductions not required by law.)
Thirteenth month pay and other benefits - Not taxable if the total amount received is P30,000 or less. Any amount exceeding P30,000 is taxable. [Sec. 32 (7)e, NIRC] Fringe Benefits and De Minimis Fringe Benefits – any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries of an individual employee [Sec. 33, NIRC] De Minimis – privileges of relatively small value as given by the employer to his employees. Fringe Benefits and De Minimis are not considered compensation subject to income tax and withholding tax.
Withholding Tax on Compensation Income The income recipient (i.e., EE) is the person liable to pay the tax on income, yet to improve the collection of compensation income of EEs, the State requires the ER to withhold the tax upon payment of the compensation income.
ii. Fringe Benefits Special treatment of fringe benefits Persons liable: The Employer (as a withholding agent), whether individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities, is
Overtime Pay – premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. It constitutes compensation.
liable to remit the fringe benefit tax to the BIR once fringe benefit is given to a managerial or supervisory employee.
Profit Sharing – the proportionate share in the profits of the business received by the employee in addition to his wages. Awards for special services – awards for past services or suggestions to employers resulting in the prevention of theft or robbery, etc. are also compensations.
The fringe benefit tax (FBT) is a final tax on the employee’s income to be withheld by the employer. The withholding and remittance of FBT shall be made on a calendar quarterly basis.
Beneficial Payments – such as where employer pays the income tax owed by an employee are additional compensation income.
Managerial employee: one who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, 49
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transfer, suspend, lay-off, recall, discharge, assign or discipline employees.
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(10) Life or health insurance and other nonlife insurance premiums or similar amounts on excess of what the law allows.[Sec. 33(B)]
Supervisory employees: those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
Tax Rate and Tax Base (a) Tax base is based on the grossed-up monetary value (GMV) of fringe benefits. (b) Rate is generally 32% (c) GMV represents: (a) the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property that has been received; and (b) the amount of fringe benefit tax due from the employee which has been withheld and paid by the employer for and in behalf of his employee..
All employees not falling within any of the above definitions are considered rank-and-file employees. Fringe benefit tax is imposed on fringe benefits received by supervisory and managerial employees. The fringe benefits of rank and file employees are treated as part of compensation income subject to income tax and withholding tax on compensation.
How GMV is determined GMV is determined by dividing the actual monetary value of the fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit tax, therefore, is P470.59 [P1470.59 x 32%].
Definition Fringe benefit means any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employees) such as, but not limited to the following: (1) Housing (2) Expense Account (3) Vehicle of any kind (4) Household personnel, such as maid, driver and others (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations (7) Expenses for foreign travel (8) Holiday and vacation expenses (9) Educational assistance to the employee or his dependents; and
Special Cases: (a) For fringe benefits received by non-resident alien not engaged in trade of business in the Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%]. (b) For fringe benefits received by alien individuals and Filipino citizens employed by regional or area headquarters, regional operating headquarters, offshore banking units (OBUs), or foreign service contractor or by a foreign subcontractor engaged in petroleum operations in the Philippines, or by any of their Filipino individual employees who are employed and occupying the same positions as those occupied by the alien 50
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employees, the tax rate is 15% of the GMV. The GMV is determined by dividing the actual monetary value of the fringe benefit by 85% [100% - 15%]. (c) What is the tax implication if the employer gives ‘fringe benefits’ to rank-and-file employees? Fringe benefits given to a rankand-file employee are treated as part of his
TAXATION LAW
The exemption of any FB from the FBT shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law. Thus, if the FB is exempted from the FBT, the same may, however, still form of the employee’s gross compensation income which is subject to income tax; hence, likewise subject to withholding tax on compensation income payment.
compensation income subject to normal tax rate and withholding tax on compensation income, except de minimis benefits and benefits provided for the convenience of the employer.
De minimis benefits (exempt from income tax as well as withholding tax on compensation income of both managerial and rank and file EEs) [Revenue Regulation No. 5-2011]:
Payor of Fringe Benefit Tax (FBT): The employer withholds and pays the FBT but the law allows
him to deduct such tax from his gross income.
(a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; (b) Monetized value of vacation and sick leave credits paid to government officials and employees; (c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; (d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500; (e) Uniform and Clothing allowance not exceeding P5,000 per annum (RR 8-2012) (f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; (g) Laundry allowance not exceeding P300 per month; (h) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the
Taxable and non-taxable fringe benefits Fringe Benefits NOT subject to Tax (1) Fringe benefits not considered as gross income – (a) if it is required or necessary to the business of employer (b) if it is for the convenience or advantage of employer (2) Fringe Benefit that is not taxable under Sec. 32 (B) – Exclusions from Gross Income (3) Fringe benefits not subject to Fringe Benefit Tax: (a) Fringe Benefits which are authorized and exempted from income tax under the Code or under special laws; (b) Contributions of the employer for the benefit of the employee for retirement, insurance and hospitalization benefit plans; (c) Benefits given to the rank-and-file employees, whether granted under a collective bargaining agreement or not; and (d) Fringe benefits granted for the convenience of the employer; (e) De minimis benefits
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employee under an established written plan which does not discriminate in favor of highly paid employees; (i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; and (j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twentyfive percent (25%) of the basic minimum wage on a per region basis;
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ZV = Zonal Value = value of the land or improvement, as declared in the Real Property Declaration Form FMV = Fair Market Value = FMV as determined by the Commissioner of Internal Revenue Non-taxable housing fringe benefit: (1) Housing privilege of the Armed Forces of the Philippines (AFP) officials – i.e, those of the Philippine Army, Philippine Navy, or Philippine Air Force (2) A housing unit, which is situated inside of adjacent to the premises of a business or factory maximum of 50 meters from perimeter of the business premises (3) Temporary housing for an employee who stays in housing unit for three months or less
All other benefits given by employers which are not included in the above enumeration shall NOT be considered as "de minimis" benefits and hence, shall be subject to withholding tax on compensation (rank and file employees) and FBT (managerial/supervisory employees).
Housing
Housing Privilege (1) LEASE of residential property for the residential use of employees
(2) Assignment of residential property owned by employer for use of employees (3) Purchase of residential property in installment basis for the use of the employee (4) Purchase of residential property and ownership is transferred in the name of the employee
Fringe Benefit Tax Base (Monetary Value)
Motor Vehicle
MV= 50% of lease payments
(1) Purchased in the name of the employee (2) Cash given to employee to purchase in his own name (3) Purchase on installment, in the name of employee (4) Employee shoulders part of the purchase price, ownership in the name of employee (5) Employer owns and maintains a fleet of motor vehicles for use of the business and of employees (6) Employer leases and maintains a fleet for the use of the business and of employees
Motor Vehicle
where MV = monetary value of the FB MV= [5% (FMV or ZV, whichever is higher) x 50%] MV= 5% x acquisition cost exclusive of interest x 50% MV= FMV or ZV, whichever is higher
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Fringe Benefit Tax Base MV= acquisition cost MV= cash received by employee MV= acquisition cost exclusive of interest MV= amount shouldered by employer MV= (AC/5) x 50%
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Professional Income Refers to fees received by a professional from the practice of his profession, provided that there is NO employer-employee relationship between him and his clients.
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Taxable Net Income
Income from Business (a) Any income derived from doing business (b) Doing business: The term implies a 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, the purpose and object of its organization.
=
Ordinary Net Income
Ordinary Asset
Net Capital Gains (other than those subject to final CGT)
+
Capital Asset
Gain from sale, exchange or other disposition Ordinary Gain (part of Gross Income)
Capital Gain
Loss from sale, exchange, or other disposition Ordinary Loss (part of Allowable Deductions from Gross Income)
Capital Loss
Excess of Gains over Losses
Income from Dealings in Property Dealings in property such as sales or exchanges may result in gain or loss. The kind of property involved (i.e., whether the property is a capital asset or an ordinary asset)
Part of Gross Income
Net Capital Gain
Excess of Losses over Gains Part of Allowable Deductions from Gross Income
determines the tax implication and income tax treatment, as follows:
Net Capital Loss
Types of Properties Capital v. Ordinary Asset
Ordinary Assets
Capital Assets
(1)Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. (2) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. (3) Property used in the trade or business of a character which is subject to the allowance for depreciation, or (4) Real property used in the trade or business of the taxpayer, including property held for rent.
Property held by the taxpayer, whether or not connected with his trade or business which is not an ordinary asset. Generally, they include: (1) stocks and securities held by taxpayers other than dealers in securities (2) real property not used in trade or business, such as residential house and lot, idle or vacant land or building (3)investment property, such as interest in a partnership, stock investment (4)Personal or non-business properties, such as family car, home appliances, jewelry.
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Types of Gains from dealings in property (1) Ordinary income vis-à-vis Capital gain. – If the asset involved is classified as ordinary, the entire amount of the gain from the transaction shall be included in the computation of gross income [Sec 32(A)], and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See Allowable Deductions from Gross Income - Losses)
TAXATION LAW
(2) Net ordinary loss is deductible from ordinary gain. (3) Capital losses are deductible only to the extent of the capital gain. (4) There is a net capital loss carry-over on the net capital asset’s loss in a taxable year which may be deducted as a short-term capital loss from the net capital gain of the subsequent taxable year; provided that the following conditions shall be observed: (5) The taxpayer is other than a corporation; (6) The amount of loss does not exceed the income before exemptions at the year when the loss was sustained; and (7) The holding period should not exceed 12 months. (Valencia)
If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income. (See Capital Gains and Losses). These rules do not apply to: (a) real property with a capital gains tax (final tax), or (2) shares of stock of a domestic corporation with a capital gains tax (final tax). Also, sale of shares of stock of a domestic corporation, held as capital assets, through the stock exchange by either individual or corporate taxpayers, is subject to ½ of 1% percentage tax based on gross selling price.
When a capital gain or capital loss is sustained by a corporation, the following rules shall be observed: (1) There is no holding period; hence, there is no net capital loss carry-over. (2) Capital gains and losses are recognized to the extent of their full amount. (3) Capital losses are deductible only to the extent of capital gains. (4) Net capital losses are not deductible from ordinary gain or income but ordinary losses are deductible from net capital gains.
The following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (a) If the taxpayer is an individual – 100% if the capital asset has been held for not more than 12 months; and 50% of the capital asset has been held for more than 12 months (b) If the taxpayer is a corporation – 100%, regardless of the holding period of the capital asset (Sec. 39(B), NIRC)
Note: For sale, barter, exchange or other forms of disposition of shares of stock subject to the 5%/10% capital gains tax on the net capital gain during the taxable year, the capital losses realized from this type of transaction during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carryover will not apply, notwithstanding the provisions of Section 39 of the Tax Code as amended. (RR 6-2008, c.4)
The tax rules for the gains or losses from sales or exchanges of capital assets over ordinary assets are as follows: (1) Net capital gain is added to ordinary gain but net capital loss is not deductible from ordinary gain. 54
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(2) Actual gain vis-à-vis Presumed gain Presumed Gain: In the sale of real property located in the Philippines, classified as capital asset, the tax base is the gross selling price or fair market value, whichever is higher. The law presumes that the seller makes a gain from such sale. Thus, whether or not the seller makes a profit from the sale of real property, he has to pay 6% capital gains tax. In fact, her has to pay the tax, even if he incurs an actual loss from the sale thereof. (Note, however, that where an individual sells his real property classified as a capital asset to the government, he has the option whether to be taxed at the graduated income tax rates or at 6% capital gains tax.)
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(3) Long term capital gain vis-à-vis Short term capital gain Long-term capital gain: Capital asset is held for more than twelve months before it is sold. Only 50% of the gain is recognized. Short-term capital Gain: Capital asset is held for less than 12 months. 100% of the gain is subject to tax. (4) Net Capital Gain vis-à-vis Net Capital Loss Net Capital Gain is the excess of the gains over the losses on sales or exchange of capital assets during the taxable year. Net Capital Loss means the excess of the losses over the gains on sales or exchanges of capital assets during the taxable year. [Sec. 39A,
Actual Gain: The tax base in the sale of real property classified as an ordinary asset is the actual gain. If the seller incurs a loss from the sale, such loss may be deducted from his gross income during the taxable year. The ordinary gain shall be added to the operating income and the net taxable income shall be subject to the graduated rates from 5% to 32% (if an individual) or to 30% corporate tax or to 2% MCIT (if a corporation).
NIRC] (5) Computation of the amount of Gain or Loss For income tax purposes the following rules should be observed regarding the cost and expenses of the capital assets: (1) the costs and expenses of the acquisition are to be capitalized, and (2) the expenses of disposition are to be treated as reduction from the selling price. (Valencia)
Computation of the amount of gain or loss Amount realized from sale or other disposition of property Less: Basis or Adjusted Basis NET GAIN (LOSS)
(1) Cost or basis of the property sold: In computing the gain or loss from the sale or other disposition of property, the BASIS shall be as follows: (a) Property acquired by purchase – its acquisition cost, i.e., the purchase price plus expenses of acquisition. (b) Property which should be included in the inventory – its latest inventory value [RR-2 sec 136] (c) Property acquired by devise, bequest or inheritance – its fair market price or value as of the date of acquisition (inheritance)
Note: Amount realized from sale or other disposition of property = sum of money received + fair market value of the property (other than money) received Note: When a taxpayer sells a real or personal property, he should deduct its cost from its selling price to measure the gain or loss from the sales transaction (Sec. 40, NIRC).
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(d) Property acquired by gift or donation – the basis is the same as it would be in the hands of the donor or at the last preceding owner by whom it was not acquired by gift, or the fair market value at the time the gift was made, whichever is lower (e) Property acquired for less than an adequate consideration in money’s worth – the amount paid by the transferee for the property
(a) An individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property.
(2) Cost or basis of the property exchanged in corporate reorganizations: Sales or exchanges resulting in non-recognition of gains or losses:
As to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation.
The gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and the fair market value of such other property received.
Exchange Solely in Kind (1) If in pursuance of a plan of merger or consolidation, exchanges: (a) Between the corporations which are parties to the merger or consolidation (property solely for stocks); (b) Between a stockholder of a corporation party to a merger or consolidation and the other corporation, which is a party to the merger or consolidation (stock in a corporation solely for the stock of another corporation); (c) Between a security holder of a corporation party to a merger or consolidation and the other corporation, which is a party to the merger or consolidation (securities solely for securities) (2) Transfer to a controlled corporation – a person transfers his property to a corporation in exchange for stocks in such a corporation, resulting in acquisition of corporate control by said person, alone or together with others not exceeding four (4).
The remainder, if any, of the gain recognized shall be treated as a capital gain (Sec. 40 (C) (3) (a), NIRC). (b) The transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized.
Exchange Not Solely in Kind -Gain, but not the loss, shall be recognized if, in connection with an exchange described in the above exceptions:
The gain shall be recognized in an amount not in excess of the sum of such money and the fair market value of such
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other property so received, which is not distributed (Sec. 40 (C) (3) (b), NIRC).
TAXATION LAW
as money received by the transferor on the exchange (c) If the transferor receives several kinds of stocks or securities, the Commissioner is authorized to allocate the basis among the several classes of stocks or securities received.
If an individual, stockholder, security holder or corporation receives on the exchange not only stock or securities but also money and/ or property (boot), the gain but not the loss shall be recognized, in an amount not exceeding the sum of the money and fair market value of the property received.
SUBSTITUTED BASIS OF PROPERTY TRANSFERRED: The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer [Sec. 40 (C)(5), NIRC].
If the money or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the stockholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation.
Recognition of gain or loss in exchange of property: General rule: Upon the sale or exchange of property, the ENTIRE amount of the gain or loss shall be recognized.
The remainder, if any, of the gain recognized shall be treated as a capital gain. SUBSTITUTED BASIS OF STOCK OR SECURITIES RECEIVED BY TRANSFEROR UPON THE EXCHANGE: Original basis (cost) of the property, stock or securities exchanged/transferred LESS: (a) Money received, if any; and (b) FMV of the other property received. Balance ADD: (a) The amount treated as dividend of the shareholder; and (b) The amount of any gain that was recognized on the exchange. Basis (Cost) of the stock received
Exceptions: No gain or loss shall be recognized: (1) If in pursuance of a plan of merger or consolidation: (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; (b) A shareholder exchanges stock in a corporation, which is a party to a merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. (2) If property is transferred to a corporation by a person in exchange for stock or unit of
Notes: (a) The property received as “boot” shall have as basis its FMV (b) If as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of liability), shall be treated 57
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participation in such a corporation, of which as a result of such exchange, said person, alone or together with others not exceeding 4 persons, gains control of the corporation. - Stocks issued for services shall not be considered as issued in property.
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(e) Control: ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote (Sec. 40(C)(6)(c), NIRC). (6) Income tax treatment of capital loss
Meaning of merger, consolidation, control, securities (a) Merger and consolidation for tax purposes shall mean (1) The ordinary merger or consolidation; or (2) The acquisition by one corporation of all or substantially all the properties of another corporation solely for stock (Sec. 40(C )(6)(b), NIRC). (b) Requirements to establish merger or consolidation (1) Must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation (2) In determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit (3) The property transferred must constitute a substantial portion of the property of the transferor (Sec. 40(C)(6)(b), NIRC). Note: In determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor (Sec. 40(C)(b), NIRC). (c) “Substantially All”: the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation, which has the element of permanence and not merely momentary holding. (d) Securities: bonds and debentures but not "notes" of whatever class or duration (Sec. 40(C)(6)(a), NIRC)
(a) Capital loss limitation rule (applicable to both corporations and individuals) General Rule: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges (Sec. 39(C), NIRC). EXCEPTION for Banks and Trust Companies: If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof) with interest coupons or in registered form, any
loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses (Sec. 39(C), NIRC). (b) Net loss carry-over rule (applicable only to individuals) If an individual sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for the year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months (Sec. 39(D), NIRC).
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(7) Dealings in real property situated in the Philippines
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Shares listed and traded through the stock exchange other than sale by a dealer in securities: (1) ½ of 1% of the gross selling price of the stock or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor’s broker. (2) Note: In the nature of percentage tax and not income tax; exempt from income tax per
Persons Liable and Transactions Affected (a) Individual taxpayers, estates and trusts (1) Sale or exchange or other disposition of real property considered as capital assets. (2) Includes "pacto de retro sale" and other conditional sale. (b) Domestic Corporation Sale or exchange or disposition of lands and/or building which are not actually used in business and are treated as capital asset.
Section 127 (d): “Any gain derived from the sale, barter, exchange or other disposition of share of stock under this section shall be exempt from taxes imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax.” (3) Note: Percentage tax under Sec. 127 is NOT DEDUCTIBLE for income tax purposes.
Rate and Basis of Tax A final withholding tax of 6% is based on the gross selling price or fair market value or zonal value whichever is higher.
Note: Gain or loss is immaterial, there being a conclusive presumption of gain. (8) Dealings in shares of stock of Philippine corporations
Shares not listed and traded through the stock exchange Net capital gains derived during the taxable year from sale, exchange, or transfer shall be taxed as follows (on a per transaction basis):
Persons Liable to the Tax: (a) Individual taxpayer, whether citizen or alien; (b) Corporate taxpayer, whether domestic or foreign; and (c) Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds and pension funds, among others. Persons not liable: (a) Dealers in securities (b) Investor in shares of stock in a mutual fund company (c) All other persons who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.
Amount of Capital Gain
Tax Rate
Not over P 100,000 On any amount in excess of P 100,000
- 5% - 10%
(9) Sale of principal residence Principal residence: the family home of the individual taxpayer (RR 14-2000) Disposition of principal residence (capital asset) is exempt from Capital Gains Tax, provided: (a) Sale or disposition of the old principal residence; 59
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(b) By natural persons - citizens or aliens provided that they are residents taxable under Sec. 24 of the Code (does not include an estate or a trust); (c) The proceeds of which is fully utilized in (a) acquiring or (b) constructing a new principal residence within eighteen (18) months from date of sale or disposition; (d) Notify the Commissioner within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail the tax exemption; (e) Can only be availed of onlyonce every ten (10) years; (f) The historical cost or adjusted basis of his old principal residence shall be carried over to the cost basis of his new principal residence (g) If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax. (h) Portion of presumed gains subject to CGT: (Unutilized/GSP) x (higher of GSP or FMV)
TAXATION LAW
In general, dividends are included in the gross income of the stockholder, unless they are exempt from tax or subject to final ax at preferential rate under the Tax Code. 1. Cash dividend Dividends are included in the gross income of the stockholder, unless they are exempt from tax or subject to tax at preferential rate under the NIRC. Cash dividend is the most common form of dividend, valued at the amount of money received by the stockholder. Cash dividend and property dividend are subject to income tax. 2. Stock dividend Stock dividend is generally exempt from income tax, EXCEPT: (a) If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (Sec. 73(B), NIRC); or (b) Where there is an option that some stockholders could take cash or property dividends instead of stock dividends; some stockholders exercised the option to take cash of property dividends; and the exercise of option resulted in a change of the stockholders’ proportionate share in the outstanding share of the corporation.
Passive Investment Income Under Sec 24(B), a final tax is imposed upon gross passive income of citizen and resident aliens. An income is considered passive if the taxpayer merely waits for it to be realized. (a) Interest Income An earning derived from depositing or lending of money, goods or credits [Valencia and Roxas] e.g., interest income from government securities such as Treasury Bills. Unless exempted by law, interest income received by the taxpayer, whether or not usurious, is subject to income tax. (b) Dividend Income A form of earnings derived from the distribution made by a corporation out of its earnings or profits and payable to its stockholders, whether in money or in property. 60
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3. Property dividend Dividends are included in the gross income of the stockholder, unless they are exempt from tax or subject to tax at preferential rate under the NIRC. Cash dividend and
TAXATION LAW dividend income, but rather is treated in effect, as a sale of shares of stock resulting in capital gain or loss. The difference between the cost or other basis of the stock and the amount received in liquidation of the stock is a capital gain or a capital loss. Where property is distributed in liquidation, the amount received is the FMV of such property. The income is subject to ordinary income tax rates and NOT to the FWT on dividends.
property dividend are subject to income tax. 4. Liquidating dividend Represents distribution of all the property or assets of a corporation in complete liquidation or dissolution. It is strictly not
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(c) Royalty Income Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain derived therefrom is considered as an active business income subject to the normal corporate tax.
TAXATION LAW (3) If the advance payment is, in fact, a pre-paid rental, received by the lessor under a claim of right and without restriction as to its use, then such payment is income to the lessor. (4) Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor.
Where a person pays royalty to another for the use of its intellectual property, such royalty is generally a passive income of the owner thereof subject to withholding tax.
(1) Lease of personal property Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows:
(d) Rental Income Refers to earnings derived from leasing real estate as well as personal property. Aside from the regular amount of payment for using the property, it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans, insurance premiums, etc.) [RR 19-86]
Vessel Aircraft, machineries and other Equipment Other assets
Rent income may be in the following forms: (a) Cash, at the stipulated price (b) Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract of lease, e.g., real estate tax on the property leased assumed by the lessee (c) Advance payment (1) If the advance payment is actually a loan to the lessor, or an option money for the property, or a security deposit for the faithful performance of certain obligations of the lessee, such advance payment is not income to the lessor. (2) However, a security deposit that is applied to rental is taxable income to the lessor.
NonResident Corporation
NonResident Alien
4.5% 7.5%
25% 25%
30%
25%
(2) Lease of real property
Lessor
Tax Rate
Citizen Resident Alien Non-resident alien engaged in trade or business in the Philippines Non-resident alien not engaged in trade or business in the Philippines
Net taxable income shall be subject to the graduated income tax rates
Rental income from real property located in the Philippines shall be subject to 25% final withholding tax unless a lower rate is imposed pursuant to an effective tax treaty Domestic Corporation Net taxable income Resident Foreign shall be subject to 62
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Lessor
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Tax Rate
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the amount already reported as income on account of the erection of such building or improvement. No appreciation in value due to causes other than the premature termination of lease shall be included (Sec. 49, Rev. Reg. No. 2).
Corporation
30% corporate income tax or its gross income will be subject to 2% MCIT Non-resident Foreign Gross rental income Corporation from real property located in the Philippines shall be subject to 30% corporate income tax, such tax to be withheld and remitted by the lessee in the Philippines
If the building or other leasehold improvement is destroyed before the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place, the amount previously reported as income because of the erection of the improvement, less any salvage value, to the extent that such loss was not compensated by insurance (Sec. 49, Rev. Reg. No. 2),
(3) Tax treatment of: (b) VAT added to rental/paid by the lessee (a) Leasehold improvements by lessee Rent Income from leasehold improvements: i. Outright method- lessor shall report as income FMV of the buildings or improvements subject to the lease in the year of completion. ii. Spread-out method- lessor shall spread over the remaining term of the lease the estimated depreciated (book) value of such buildings or improvements at the termination of the lease, and reports as income for each remaining term of the lease an aliquot part thereof. estimated BV at the end of the lease contract/ remaining lease term = Income per year
If the lessee is VAT-registered, treat VAT paid as input VAT; If the lessee is not VAT-registered OR not liable to VAT, treat VAT paid as additional rent expense deductible from gross income. (c) Advance Rental/ Long Term Lease Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor.
iii. Annuities, Proceeds from life insurance or other types of insurance Annuities are installment payments received for life insurance sold by insurance companies.
If for any reason than a bona fide purchase from the lessee by the lessor, the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed, lessor receives additional income for the year which the lease is so terminated to the extent of the value of such buildings or improvements when he became entitled to such possession exceeds
The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income. [Art. 2021, New Civil Code]
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The annuity payments represent a part that is taxable and not taxable. If part of annuity payment represents interest, then it is a taxable income. If the annuity is a return of premium, it is not taxable.
vi. Income from any source whatever Inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources
iv. Prizes and awards A prize is a reward for a contest or a competition. It represents remuneration for an effort reflecting one’s superiority.
Forgiveness of indebtedness The cancellation or forgiveness of indebtedness may have any of three possible consequences: (a) It may amount to payment of income. If, for example, an individual performs services to or for a creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by the debtor as compensation for personal services. (b) It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be included in the latter’s report of income. (c) It may amount to a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend.
Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor. The EXCEPTIONS are as follows: (1) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are EXCLUSIONS from gross income if: (a) The recipient was selected without any action on his part to enter a contest or proceedings; and (b) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (2) Prizes and awards granted to athletes in local and international sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be EXEMPT from income tax.
v. Pensions, retirement separation pay
benefit,
TAXATION LAW
Tax Benefit Rule This is a general principle in taxation which states that is a taxpayer deducted an item on his income tax return and enjoyed a tax benefit (reduced his income tax) thereby, and in a subsequent year recovers all or part of that item, he will recognize gross income in the year the deducted item is recovered. The rule has both an inclusionary and an exclusionary component, i.e., the recovery is included in the taxpayer’s gross income to the extent that the taxpayer obtained a tax benefit from the prior
or
(1) Paid for past employment services rendered. (2) A stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury. It is generally taxable unless the law states otherwise. [VALENCIA, Income Taxation 5th ed. (200/’’9)] 64
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year’s deduction, and the recovery is excluded to the extent that the prior year’s deduction did not provide a tax benefit.
TAXATION LAW
Recovery of accounts previously written-off Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the
extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior year
resulted in lesser income and hence tax savings for the company. (Sec. 4, RR 5-99) Illustration:
Case A
Case B
Case C
500,000 (200,000)
400,000 (480,000)
500,000 (495,000)
300,000
(60,000)
5,000
(2,000)
(2,000)
(6,000)
298,000
(62,000)
(1,000)
Recovery of Amounts Written Off 2,000
2,000
6,000
Taxable Income on the Recovery
-
Year 1 Gross Income Less: Allowable Deductions (before write-off of Uncollectible Accounts/Debts) Taxable Income (Net Loss) before write-off Deduction for Accounts Receivable written off Taxable Income (Net Loss) after write-off
Year 2
2,000
5,000
In Case A, the entire amount recovered (P2,000) is included in the computation of gross income in Year 2 because the taxpayer benefited by the same extent. Prior to the write-off, the taxable income was P300,000; after the write-off, the taxable income was reduced to P298,000.
In Case C, only P5,000 of the P6,000 recovered would be recognized as gross income in Year 2. It was only to this extent that the taxpayer benefited from the write-off. The taxpayer did not benefit from the extra P1,000 because at this point, the P1,000 was already a net loss.
In Case B, none of the P2,000 recovered would be recognized as gross income in Year 2. Note
Receipt of tax refunds or credit General rule: A refund of a tax related to the business or the practice of profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the extent of the
that even without the write-off, the taxpayer would not have paid any income tax anyway. The “taxable income” before the write-off was actually a net loss. 65
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TAXATION LAW
income tax benefit of said deduction (i.e., the tax benefit rule applies).
Ultimately, the situs of interest income is the residence of the debtor.
Exceptions: However, the following tax refunds are not to be included in the computation of gross income: (1) Philippine income tax, except the fringe benefit tax (2) Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred. (3) Estate and donor’s taxes (4) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) (5) Value Added Tax (6) Fines and penalties due to late payment of tax (7) Final taxes (8) Capital Gains Tax
Dividends Dividends received: (1) from a domestic corporation; and (2) from a foreign corporation, UNLESS less than 50% of its gross income for the previous 3-year period was derived from sources within the Philippines [in which case it will be treated as income partly from within and partly from without]. The income which is considered as derived from within the Philippines is obtained by using the following formula: Philippine Gross Income* x Dividend = Income Within Worldwide Gross Income* NOTE: * of the corporation giving the dividend As a rule, the situs of dividend income is the residence of the corporation declaring the dividend.
Note: The enumeration of tax refunds that are not taxable (income) is derived from an enumeration of tax payments that are not deductible from gross income.
Services Compensation for labor or personal services performed in the Philippines: As a rule, the situs of compensation is the place of performance of the services.
If a tax is not an allowable deduction from gross income when paid (no reduction of taxable income, hence no tax benefit), the refund is not taxable.
SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND WITHOUT
Rentals and Royalties From property located in the Philippines or from any interest in such property, including rentals or royalties for – (1) The use of or the right or 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; (2) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
The following items of gross income shall be treated as gross income from sources WITHIN the Philippines: Interests Derived from sources within the Philippines, and interests on bonds, notes or other interestbearing obligation of residents. 66
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(3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in (a), any such equipment as is mentioned in (b) or any such knowledge or information as is mentioned in (c); (5) 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; (6) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (7) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting.
Place of PURCHASE Philippines
TAXATION LAW Place of SALE Abroad
Treatment**
Income from Without Abroad Philippines Income from Within ** in other words, the situs of the income from the sale of personal property is the place of sale. Exceptions: (1) Gain from the sale of shares of stock in a domestic corporation Treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. (2) Gains from the sale of (manufactured) personal property: (a) produced (in whole or in part) by the taxpayer within and sold without the Philippines, or (b) produced (in whole or in part) by the taxpayer without and sold within the Philippines Treated as derived partly from sources within and partly from sources without the Philippines.
As a rule, the situs of rental income is the place where the property is located. The situs of royalty income is where the rights are exercised.
Sale Of Real Property As a rule, the situs of the income from sale of real property is where the realty is located.
Place of PRODUCTION Philippines
Place of SALE Abroad
Abroad
Philippines
Treatment Partly within, partly without Partly within, partly without
Shares of Stock of Domestic Corporation Treated as derived entirely from sources within the Philippines regardless of where the said shares are sold.
Sale Of Personal Property General Rule: Gains, profits and income from the sale of personal property, subject to the following rules:
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SITUS OF INCOME TAXATION Income
The exclusion of income should not be confused with the reduction of gross income by the application of allowable deductions. While exclusions are simply not taken into account in determining gross income, deductions are subtracted from gross income to arrive at net income. [De Leon]
Situs
Interest Dividends Services Rentals Royalties Sale of Real Property Sale of Personal
TAXATION LAW
Residence of the debtor Residence of the corporation Place of performance Location of the property Place of exercise Location of realty
Items of Exclusions representing return of capital (a) Amount of capital is generally recovered through deduction of the cost or adjusted basis of the property sold from the gross selling price or consideration, or through the deduction from gross income of depreciation relating to the property used in trade or business before it is sold. (b) It may also related to indemnities, such as proceeds of life insurance paid to the insured’s beneficiaries and return of premiums paid by the insurance company to the insured under a life insurance, endowment or annuity contract. (c) Damages, in certain instances, may also be exempt because they represent return of capital.
(a) Tangible (1) Purchase and sale: Location of Sale (2) Manufactured w/in and sold w/o: Partly w/in and partly w/o (3) Manufactured w/o and sold w/in: Partly w/in and partly w/o (b) Intangible General rule: Place of Sale
Exception: Shares of stock of domestic corporations: Place of incorporation of Place of incorporation of
Items of Exclusion because it is subject to another internal revenue tax The value of property acquired by gift, bequest, devise or descent is exempt from income tax on the part of the recipient because the receipt of such property is already subject to transfer taxes (estate tax or donor’s tax)
Shares Stock Domestic Corporation
EXCLUSIONS FROM GROSS INCOME
Items of Exclusions because they are expressly exempt from income tax (1) Under the Constitution (2) Under a tax treaty (3) Under special laws
Exclusions from gross income refer to income received or earned but is not taxable as income because it is exempted by law or by treaty. Such tax-free income is not to be included in the income tax return unless information regarding it is specifically called for. Receipts which are not in fact income are, of course, excluded from gross income.
Rationale for the exclusions The term “exclusions” refers to items that are not included in the determination of gross income because: 68
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(a) They represent return of capital or are not income, gain or profit; (b) They are subject to another kind of internal revenue tax; (c) They are income, gain or profit expressly exempt from income tax under the Constitution, tax treaty, Tax Code, or a general or special law. [Mamalateo]
Tax Credit refers to amounts subtracted from the computed tax in order to arrive at taxes payable.
(A) EXCLUSIONS CONSTITUTION
Taxpayer
Return of capital
All taxpayers since there is no income. Already subject to All taxpayers unless internal revenue tax provided that income is to be included. Express exclusion As expressly provided.
THE
(B) EXCLUSIONS UNDER THE TAX CODE (SEC. 32, NIRC) (a) Proceeds of life insurance policies.— General rule: The proceeds of life insurance policies paid to his estate or to any beneficiary (but not a transferee for a valuable consideration), directly or in trust, upon the death of the insured, are excluded from the gross income of the beneficiary. However, if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments received by the insured shall be included in gross income. The interest income shall be taxed at the graduated income tax rates.
Exclusions distinguished from deductions and tax credit Exclusions from gross income refer to flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) it is exempted by the Constitution or a statute; or (2) it does not come within the definition of income. Deductions, on the other hand, are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income.
UNDER
(a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function (b) Also, all assets and revenues of a nonstock, non-profit private educational institution used directly, actually and exclusively for private educational purposes shall be exempt from taxation.
Taxpayers who may avail of the exclusions
Exclusion
TAXATION LAW
(b) Return of premium paid.— General rule: The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract is a return of capital and not income. This refers to the cash surrender value of the contract.
Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income.
Exception: If the amounts received by the insured (when added to the amounts already 69
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received before the taxable year under such contract) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income.
TAXATION LAW
whether by suit or agreement, on account of such injuries or sickness are excluded from gross income. Examples of nontaxable and taxable damages recoveries are:
(c) Amounts received under life insurance, endowment or annuity contracts.— Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment or annuity contracts are excluded from gross income, but if such amounts (when added to amounts already received before the taxable year under such contract) exceed the aggregate premiums of considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. However, in the case of a transfer for valuable consideration, by assignment or otherwise, of a life insurance, endowment , or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation.
Nontaxable – compensation for damages on account of
Taxable – compensation for damages on account of
Personal (physical) Actual damages for injuries or sickness loss of anticipated profits Any other damages recovered on account of personal injuries or sickness
.Moral and exemplary damages awarded as a result of break of contract
Exemplary and moral Interest damages for out-of- taxable court settlement, above including attorney’s fees
for nondamages
Alienation of affection, Any damages as or breach of promise compensation for to marry unrealized income
(d) Value of property acquired by gift, bequest, devise or descent.— Gifts, bequests and devises (which are subject to estate or gift taxes) are excluded from gross income, BUT not the income from such property. If the amount received is on account of services rendered, whether constituting a demandable debt or not, or the use or opportunity to use of capital, the receipt is income (Pirovano v. Commissioner G.R. No. L-19865, July 31, 1965).
Any amount received as a return of capital or reimbursement of expenses (f) Income exempt under tax treaty.— Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (g) Retirement benefits, pensions, gratuities, etc..— These are: (1) Retirement benefits under RA 7641, RA 4917, and Section 60(B) of the NIRC (2) Terminal pay
(e) Amount received through accident or health insurance (Compensation for damages).— As a rule, amounts received through accident or health insurance or under workmen’s compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received, 70
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(3) Retirement Benefits from foreign government agencies (4) Veterans benefits (5) Benefits under the Social Security Act (6) GSIS benefits
A 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his employees wherein contributions are made by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund thus accumulated by the trust in accordance with such plan (trust fund)
Retirement benefits received under RA 7641(The Retirement Pay Law) and those received by officials and employees of private firms under a reasonable private benefit plan (RPBP) maintained by the employer under RA 4917 (now Section 32(B)(6)(a) of NIRC) are excluded from gross income subject to income tax.
RA 7641
RPBP
Retiring employee must be in the service of same employer CONTINUOUSLY for at least five (5) years Retiring employee must be at least sixty (60) years old but not more than 65 years of age at the time of retirement Availed of only once, and only when there is no RPBP
Retiring official or employee must have been in the service of the same employer for at least ten (10) years. Retiring official or employee must be at least fifty (50) years old at the time of retirement
TAXATION LAW
Further, it should be provided in the plan that at no time prior to the satisfaction of all liabilities with respect to employees under any trust, shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of his employees. Terminal pay/Separation pay Any amount received by an employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness, other physical disability or for any cause beyond the control of the employee. The phrase “for any cause beyond the control of the said official or employee” means that the separation of the employee must be involuntary and not initiated by him.
Retiring employee shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer Plan must be reasonable. Its implementation must be fair and equitable for the benefit of all employees (e.g. from president to laborer) Plan must be approved by BIR
The separation must not be of his own making. Notes: Sickness must be life-threatening or one which renders the employee incapable of working Retrenchment of the employee due to unfavorable business conditions or financial reverses is considered as involuntary. However, resignation or availment of an optional early retirement plan is voluntary and bars a claim under this provision.
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TAXATION LAW whether held in the Philippines or abroad, AND (2) sanctioned by their national sports associations shall not be included in gross income and shall be tax exempt. [Sec. 32 B7d, NIRC]
BIR Ruling 143-98: The “terminal leave pay” (amount paid for the commutation of leave credits) of retiring government employees is considered not part of the gross salary, and is exempt from taxes. The government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. (Commissioner v. Castaneda, 203 SCRA 72). Retirement BENEFITS from foreign government agencies – The social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public; Payments of VETERANS benefits under U.S. Veterans Administration – Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration Social Security Act benefits – Payments of benefits received under the Social Security Act of 1954 (RA 8282), as amended, e.g., Maternity Benefits GSIS benefits – Benefits received from GSIS under the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees are not taxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98] Winnings, prizes and award, including those in sports competitions.—All prizes and awards granted to athletes: (1) in local and intern ational sports competitions and tournaments
Prizes and awards made primarily in recognition of charitable, literary, educational, artistic, religious, scientific, or civic achievement are not taxable, provided: (1) Recipient was selected without any action on his part to enter the contest or proceeding; and (2) Recipient is not required to render substantial future services as a condition to receiving the prize or award
(C) UNDER SPECIAL LAWS Personal Equity and Retirement Account (1) Under R.A. 6657 (Comprehensive Agrarian Reform Package Law), gain arising from the transfer of agricultural property covered by the law shall be exempt from capital gains tax. (2) Under R.A. 6938 (Cooperative Code of the Philippines), as amended by R.A. 9520, cooperatives transacting business with both members and non-members shall not be subject to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members' deposits. (3) Under R.A. 7916 (PEZA Law), as amended, PEZA-registered enterprises are given income tax holidays of six or four years from the date of commercial operations, depending on whether their activities are considered pioneer or non-pioneer. (4) Under R.A. 9178 (Barangay Micro Business Enterprises Act of 2002), BMBEs shall be 72
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exempt from income tax for income arising from the operation of the enterprise.
TAXATION LAW
Types of deductions There are three (3) types of deductions from gross income: (1) itemized deductions in Section 34(A) to (J) and (M) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines; (2) optional standard deduction in Section 34(L) available only to individual taxpayers deriving business, professional, capital gains and passive income not subject to final tax, or other income; and (3) the special deductions in Sections 37 and 38 of the NIRC, and in special laws like the BOI law (E.O. 226).
DEDUCTIONS FROM GROSS INCOME Deductions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to arrive at taxable income. In general, deductions or allowable deductions are business expenses and losses incurred which the law allows to reduce gross business income to arrive at net income subject to tax. [Sec. 65, Rev. Reg. No. 2] Deductions are in the nature of an exemption from taxation; they are strictly construed against the claimant, who must point to a specific provision allowing them and who has the burden of proving that they falls within the purview of such provision. Thus, all deductions must be substantiated, except when the law dispenses with the records, documents or receipts to support the deductions.
General rules: (a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession (b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding
If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent [Commissioner of Customs v. Philippine Acetylene Co., G.R. No. L-22443 May 29, 1971]
Return of capital (cost of sales or services) Income tax is levied by law only on income; hence, the amount representing return of capital should be deducted from proceeds from sales of assets and should not be subject to income tax.
However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction will not apply. [Commissioner v. Anoldus Caprentry Shop, G.R. No. 71122 March 25, 1988]
Costs of goods purchased for resale, with proper adjustment for opening and closing inventories, are deducted from gross sales in computing gross income (Sec. 65, Rev. Reg. 2) (a) Sale of inventory of goods by manufacturers and dealers of properties: In sales of goods representing inventory, the amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not
The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of income tax. It is because many taxpayers spend adequate expenditures in order to obtain a legitimate income.
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TAXATION LAW
subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of manufacturers) and cost of sales (in the case of dealers) is deducted from gross sales and is reflected above the gross income line in a profit and loss statement.
expenditures directly connected with or pertaining to the taxpayer’s trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income.
(b) Sale of stock in trade by a real estate dealer and dealer in securities: Real estate dealers and dealers in securities are ordinarily not allowed to compute the amount representing return of capital through cost of sales. Rather they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged.
Includes: (a) Salaries, wages, and other forms of compensation for personal services actually rendered, including the grossedup monetary value of fringe benefits furnished or granted by the employer to the employee (b) Travel expenses (c) Rentals (d) Entertainment, recreation and amusement expenses (e) Other expenses such as repairs or those incurred by farmers and other persons in agribusiness
(c) Sale of services: Their entire gross receipts are treated as part of gross income.
ITEMIZED DEDUCTIONS Requisites for deductibility of business expenses.— (a) Ordinary AND necessary; ORDINARY - normal and usual in relation to the taxpayer's business and surrounding circumstances; need not be recurring NECESSARY - appropriate and helpful in the development of taxpayer's business or are proper for the purpose of realizing a profit or minimizing a loss (b) Paid or incurred during the taxable year; (c) Others: (not in the SC syllabus) (1) 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 profession; (2) Substantiated by adequate proof – documented by official receipts or adequate records, which reflect the amount of expense deducted and the connection or relation of the expense to the business/trade of the taxpayer);
These are enumerated in Section 34 of the NIRC. Additional deductions are granted to insurance companies in Section 37, while losses from wash sales of stock or securities by a dealer in securities are provided for in Section 38 of the NIRC. Other itemized deductions could be granted under general or special laws, e.g. additional training expenses are allowed to enterprises registered with PEZA, BOI, and SBMA. Timing of Claiming Deductions A taxpayer has the right to deduct all authorized allowances for the taxable year. As a rule, if he does not within any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them from the income of the next of any succeeding year [Sec. 76, Income Tax Regulations]
EXPENSES Business expenses deductible from gross income include the ordinary and necessary 74
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(3) Legitimately paid (not a BRIBE, kickback, or otherwise contrary to law, morals, public policy); (4) If subject to withholding tax, the tax required to be withheld on the expense paid or payable is shown to have been properly withheld and remitted to the BIR on time; (5) Amount must be reasonable.
TAXATION LAW
accounting, expenses are deductible in the taxable year in which: (1) all events have occurred which determine the liability; and (2) the amount of liability can be determined with reasonable accuracy. KINDS OF BUSINESS EXPENSES These are: (1) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossedup monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (Compensation for (2) Travelling expenses (3) Cost of materials (4) Rentals and/or other payments for use or possession of property (5) Repairs and maintenance (6) Expenses under lease agreements (7) Expenses for professionals (8) Entertainment expenses (9) Political campaign expenses (10) Training expenses (11) Others
Note: The expenses allowable to a nonresident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business or trade conducted within the Philippines exclusively. [Sec. 77 RR 2] COHAN Rule: This relief will apply if the taxpayer has shown that it is usual and necessary in the trade to entertain and to incur similar kinds of expenditures, there being evidence to show the amounts spent and the persons entertained, though not itemized. In such a situation, deduction of a portion of the expenses incurred might be allowed even if there are no receipts or vouchers. Absence of invoices, receipts or vouchers, particularly lack of proof of the items constituting the expense is fatal to the allowance of the deduction [Gancayco v. Collector, G.R. No. L-13325, April 20, 1961]
Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid
Substantiation requirement – Sec. 34(A)(1)(b), NIRC: No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (1) the AMOUNT of the expense being deducted, and (2) the DIRECT CONNECTION or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.
Given for personal services must be actually rendered and reasonable. For income payment to be allowed as deduction, the withholding tax must have been paid [RR No. 12-2013]. Bonuses are deductible when: (a) made in good faith (b) given as additional compensation for personal services actually rendered (c) such payments, when added to the stipulated salaries, do not exceed a
When to ACCRUE expenses: “all–events test” states that under the accrual method of 75
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reasonable compensation for the services rendered
TAXATION LAW
On the accrual basis, rent is deductible as expense when liability is incurred during the period of use. On cash basis, rent is deductible when it is incurred and paid.
Traveling expenses This include transportation expenses and meals and lodging [Sections 65 and 66, Rev. Reg. No. 2] (1) Expenses must be reasonable and necessary. (2) Must be incurred or paid “while away from home” (3) Tax home is the principal place of business, when referring to “away from home” (4) Incurred or paid in the conduct of trade or business.
If the advance payment is a prepaid rental, such payment is taxable income to the lessor in the year when it was received. However, an advance payment is not deductible expense of the lessee until the period is used. [Valencia and Roxas] Repairs and maintenance (a) Incidental or ordinary repairs are deductible. Repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient working condition, may be deducted as expenses, provided the plant or property account is not increased by the amount of such expenditure. The life of the asset referred to is the probable, normal, useful life for the purpose of the allowance for the return of the capital investment – not what the life that would have been if no repairs had been made after the property was damaged by a casualty. Since the repairs prolonged the lives of the said vessels of petitioners, the disallowance must be sustained. [Visayan Transportation Co. v. CTA, CTA Case No. 1119, Sept. 30, 1964]
Note: However, necessary transportation expenses of the taxpayer (which are different from the transportation expenses included in the term “travel expenses”) in its “tax home” are deductible. Thus, a taxpayer operating its business in Manila is allowed transportation expenses from its office to its customers’ place of business and back. But the transportation expenses of an employee from his residence to its office and back are not deductible as they are considered personal expenses. Cost of materials Deductible only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that their cost has not been deducted in determining the net income for any previous year.
(b) Extraordinary repairs are not deductible – they are capital expenditures (1) Repairs which add material value to the property or appreciably prolong its life (2) Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserves if such account is kept. [Sec. 68, Rev. Regs. 2]
Rentals and/or other payments for use or possession of property (1) Required as a condition for continued use or possession of property. (2) For purposes of trade business or profession. (3) Taxpayer has not taken or is not taking title to the property or has no equity other than that of lessee, user, or possessor.
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TAXATION LAW
Entertainment/Representation expenses These are entertainment, amusement and recreation (EAR) expenses incurred or paid during the year that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer.
All maintenance expenses on account of nondepreciable vehicles for taxation purposes are disallowed in its entirely. [RR No. 12-2012] Expenses under lease agreements Requisites for deductibility: (1) Required as a condition for continued use or possession; (2) For purposes of the trade, business or possession; (3) Taxpayer has not taken or is not taking title to the property or has no equity other than that of lessee, user, or possessor.
Requisites for deductibility: (a) Reasonable in amount. (b) Paid or incurred during the taxable period. (c) Directly connected to the development, management, and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct thereof. (d) Not to exceed such ceiling as the Secretary of Finance prescribe (under RR 10-02, in no case to exceed 0.50% of net sales for sellers of goods or properties or 1% of net revenues for sellers of services, including taxpayers engaged in the exercise of profession and use or lease of properties) (e) Not incurred for purposes contrary to law, morals, public policy or public order. (f) Must be substantiated with sufficient evidence such as receipts and/or adequate records.
Expenses for professionals Deductible in the year the professional services are rendered, not in the year they are billed, provided that the “all events” is present. “All events test” requires: (a) Fixing a right to income or liability to pay; and (b) The availability of reasonably accurate determination of such income or liability. The “all-events test” does not demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. [Commissioner v. Isabela Cultural Corporation, GR. 172231, Feb. 12, 2007]
Exclusions from EAR expenses: (1) Expenses which are treated as compensation or fringe benefits for services rendered under an employeremployee relationship (2) Expenses for charitable or fund raising events (3) Expenses for bona fide business meeting of stockholders, partners or directors (4) Expenses for attending or sponsoring an employee to a business league or professional organization meeting (5) Expenses for events organized for promotion marketing and advertising, including concerts, conferences, seminars,
A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals. [Mamalateo]
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workshops, conventions and other similar events; and (6) Other expenses of a similar nature.
TAXATION LAW (b) To deduct depreciation thereof.
allowances
for
Thus, where the expansion expense has been claimed as a deduction, no further claims for yearly depreciation of the school facilities are allowed.
Political campaign expenses Amount expended for political campaign purposes or payments to campaign funds are NOT deductible either as business expenses or as contribution [CTA Case No. 695, April 30, 1969, citing Mertens]
Advertising Expenses The media advertising expenses which were found to be inordinately large and thus, not ordinary, and which were incurred in order to protect the taxpayer’s brand franchise which is analogous to the maintenance of goodwill or title to one’s property, are not ordinary and necessary expenses but are capital expenditures, which should be spread out over a reasonable period of time. [CIR v. General Foods Phils. Inc, GR No. 143672, April 24, 2003]
Training expenses Under Section 30 of the Tax Code, as implemented by Sec. 20 of the Revenue Regulations No. 2, organization and preoperating expenses of a corporation (including training expenses) are considered as capital expenditures and are therefore, not deductible in the year they are paid or incurred. But taxpayers who incur these expenses and subsequently enter the trade or business to which the expenditures relate can elect to amortize these expenditures over a period not less than sixty (60) months. [BIR Ruling 102-97, Sept. 29, 1997]
INTEREST Requisites for deductibility.— (1) There is an indebtedness. (2) The indebtedness is that of the taxpayer (3) The indebtedness is connected with the taxpayer‘s trade, profession, or business. (4) The interest must be legally due. (5) The interest must be stipulated in writing. (6) The taxpayer is LIABLE to pay interest on the indebtedness. (7) The indebtedness must have been paid or accrued during the taxable year. (8) The interest payment arrangement must not be between related taxpayers (9) The interest must not be incurred to finance petroleum operations. (10) 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,
This rule, however, does not apply to a situation where an existing corporation incurs these same expenditures for the purpose of expanding its business in a new line of trade, venture or activity. Others (a) Expenses Allowable to Private Educational Institutions: (b) In addition to the expenses allowable as deductions under the NIRC, a private proprietary educational institution may at its OPTION, elect either: (a) To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred during the taxable year for the expansion of school facilities, OR
Limitation: The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax (see chapter on taxation 78
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of passive income for interest income); effective January 1, 2009.
TAXATION LAW (2) Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with respect to each trust; or (3) Fiduciary and Beneficiary
Non-deductible interest expense.— (a) Interest paid in advance by the taxpayer who reports income on cash basis shall only be allowed as deduction in the year the indebtedness is paid. (b) If the indebtedness is payable in periodic amortizations, only the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. (c) Interest payments made between related taxpayers. (d) Interest on indebtedness incurred to finance petroleum exploration.
INTEREST SUBJECT TO SPECIAL RULES. Interest paid in advance (1) No deduction shall be allowed if within the taxable year an individual taxpayer reporting income on cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise. (2) But the deduction shall be allowed in the year the indebtedness is paid Interest periodically amortized If the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year
Related Taxpayers (a) Between members of the family, i.e. brothers and sisters (whether by the whole or half-blood), spouse, ancestor, and lineal descendants; or (b) Except in case of distributions in liquidation, between an individual and a corporation, where the individual owns directly or indirectly more than 50% of the outstanding stock of the corporation (c) Except in the case of distributions in liquidation, between two corporations where: (1) Either one is a personal holding company of a foreign personal holding company with respect to the taxable year preceding the date of the sale of exchange; and (2) More than 50% of the outstanding stock of each is owned, directly or indirectly, by or for the same individual; or (d) Between parties to a trust – (1) Grantor and Fiduciary; or
Interest expense incurred to acquire property for use in trade/business/profession At the option of the taxpayer, interest expense on a capital expenditure may be allowed as: (1) A deduction in full in the year when incurred; (2) A capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure. Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. [Paper Industries Corp. v. Commissioner, 250 SCRA 434]
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Reduction of interest expense/interest arbitrage The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax; effective January 1, 2009. [RA 9337]
TAXATION LAW
corporations subject to the limitations set forth by law. (3) Estate and donor‘s taxes (4) Percentage tax on stock transaction; (5) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special Assessments) (6) Value Added Tax (7) Fines and penalties (8) Final taxes (9) Capital Gains Tax (10) Import duties (11) Business taxes (12) Occupation taxes (13) Privilege and license taxes (14) Excise taxes (15) Documentary stamp taxes (16) Automobile registration fees (17) Real property taxes (18) Electric energy consumption tax under BP 36
This limitation is apparently intended to counter the tax arbitrage scheme where a taxpayer obtains an interest-bearing loan and places the proceeds of such loan in investments that yield interest income subject to preferential tax rate of 20% final withholding tax. [Valencia and Roxas]
TAXES Taxes Proper: Refers to national and local taxes; Requisites for deductibility.— Such tax must be: (a) Paid or incurred within the taxable year; (b) Paid or incurred in connection with the taxpayer‘s trade, profession or business; (c) Imposed directly on the taxpayer. (d) Not specifically excluded by law from being deducted from the taxpayer‘s gross income.
Treatments of surcharges/interests/fines for delinquency.— The amount of deductible taxes is limited to the basic tax and shall not include the amount for any surcharge or penalty on delinquent taxes. However, interest on delinquent taxes, although not deductible as tax, can be deducted as interest expense at its full amount. [CIR v Palanca, 18 SCRA 496]
Non-deductible taxes.— General Rule: 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
Although interest payment for delinquent taxes is not deductible as tax, the taxpayer is not precluded thereby from claiming said interest payment as deduction as such. [CIR v. Vda. de Prieto, 1960]
Exceptions: (1) Philippine income tax, except Fringe Benefit Taxes; (2) Income tax imposed by authority of any foreign country, if taxpayer avails of the Foreign Tax Credit (FTC) Exception to exception: When the taxpayer does NOT signify his desire to avail of the tax credit for taxes of foreign countries, the amount may be allowed as a deduction from gross income of citizens and domestic
Treatment of special assessment.— Special assessments and other taxes assessed against local benefits of a kind tending to increase the value of the property assessed are non-deductible from gross income.
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Tax credit vis-à-vis deduction.— Tax credit – amount allowed by law to reduce the Philippine income tax due, subject to limitations, on account of taxes paid or accrued to a foreign country
Tax Credit
TAXATION LAW
(1) Non-resident citizens (2) Aliens, whether resident or non-resident (3) Foreign corporations, whether resident on non-resident Note: Tax credits for foreign taxes are allowed only for income derived from sources outside the Philippines. The above taxpayers are not entitled to tax credit; they are taxable only on income derived from Philippine sources.
Tax Deduction
Taxes are deductible Taxes are deductible from the Phil. Income from gross income in tax itself computing the taxable income Effect: Reduces Effect: Reduces Philippine income tax taxable income upon liability which the tax liability is calculated Sources: Only foreign Sources: Deductible income taxes may be taxes (e.g. business claimed as credits tax, excise tax) against Philippine income tax.
Limitations on Tax Credit.— (1) [Per Country Limit] The amount of tax credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and (2) [Worldwide Limit] The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable bears to his entire taxable income for the same taxable year. Formula: Limit #1 Taxable Limit on Income Per amount Foreign of tax Phil. Country x = credit Income Tax (Per Worldwide Country Taxable Limit) Income
An amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer's liability, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed. [CIR v. Bicolandia Drug Corp. G.R. No. 148083, July 21, 2006] The following may claim tax credits: (1) Resident citizens (2) Domestic corporations, which include all partnerships except general professional partnerships (3) Members of general professional partnerships (4) Beneficiaries of estates or trusts
Limit #2 Taxable Income For all Foreign Countries x Worldwide Taxable Income
The following may NOT claim tax credits: 81
Phil. = Income Tax
Limit on amount of tax credit (World Wide Limit)
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Note: Computation of FTC: Limit #2 applies where taxes are paid to two or more foreign countries. Allowable tax credit is the lower between the tax credit computed under Limit #1 and that computed under Limit#2.
TAXATION LAW
No loss is recognized in the following.— (a) Merger, consolidation, or control securities (where no gains are recognized either); (b) Exchanges not solely in kind; (c) Related taxpayers (see above – (c) Interest expense incurred to acquire property for use in trade/business/profession) (d) Wash sales; (e) Illegal transactions
FTC Limitations – lowest of the 3: (1) Actual FTC (2) For taxes paid to one foreign country (3) For taxes paid to 2 or more foreign countries
Other types of losses.— Capital losses (1) Incurred in the sale or exchange of capital assets (allowable only to the extent of capital gains, except for banks and trust companies under conditions in Sec. 39 of NIRC where loss from such sale is not subject to the foregoing limitation); (2) Resulting from securities becoming worthless and which are capital assets (considered loss from sale or exchange) on last day of the taxable year; (3) Losses from short sales of property; (4) Losses due to failure to exercise privileges or options to buy or sell property.
LOSSES Requisites for deductibility.— (1) Loss must be that of the taxpayer (e.g., losses of the parent corp. cannot be deducted by its subsidiary); (2) Actually sustained and charged off within the taxable year; (3) Incurred in trade, business or profession; (4) 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; (5) Sustained in a closed and completed transaction; (6) Not compensated for by insurance or other form of indemnity; (7) Not claimed as a deduction for estate tax purposes; (8) In case of casualty loss, filing of notice of loss with the BIR within 45 days from the date of the event that gave rise to the casualty; and (9) The taxpayer must prove the elements of the loss claimed, such as the actual nature and occurrence of the event and amount of the loss.
Securities becoming worthless (a) Loss in shrinkage in value of stock through fluctuation in the market is not deductible from gross income. (To be deductible, the loss must be actually suffered when the stock is disposed of.) (b) Exception: If the stock of the corporation becomes worthless, the cost or other basis may be deducted by its owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts. Losses on wash sales of stocks or securities Wash Sale - a sale or other disposition of stock or securities where substantially identical securities (substantially the same as those disposed of) are acquired or purchased (or
In case a non-depreciable vehicle is sold at a loss, the loss incurred from the sale of nondepreciable vehicle is not allowed as a deduction. [RR No. 2-2013]
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there was an option to acquire, and the acquisition or option should be by purchase or exchange upon which gain or loss is recognized under the income tax law) within a 61-day period, beginning 30 days before the sale and ending 30 days after the sale
TAXATION LAW
Requisites for NOLCO: (1) The taxpayer was not exempt from income tax the year the loss was incurred; (2) There has been no substantial change in the ownership of the business or enterprise wherein: (a) AT LEAST 75% of nominal value of outstanding issued shares is held by or on behalf of the same persons; or (b) AT LEAST 75% of the paid up capital of the corporation is held by or on behalf of the same persons.
General rule: Not deductible from gross income Exception: If by a dealer in securities in the course of ordinary business, it is deductible. Wagering losses Losses from wagering (gambling) are deductible only to the extent of gains from such transactions. A wager is made when the outcome depends upon CHANCE.
Taxpayers Entitled to NOLCO (1) Individuals engaged in trade or business or in the exercise of his profession (including estates and trusts); Note: An individual who avails of 40% OSD shall not simultaneously claim deduction of NOLCO. However, the three-year reglementary period shall continue to run during such period notwithstanding the fact that the aforesaid taxpayer availed of OSD during the said period. (2) Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) or under special laws (e.g., PEZA-registered companies) Note: Domestic and resident foreign corporations taxed during the taxable year with Minimum Corporate
NOLCO (Net Operating Loss Carry Over) Net operating loss (NOL)is the excess of allowable deductions over gross income for any taxable year immediately preceding the current taxable year. NOLCO: The NOL of the business or enterprise which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross incomefor the next three (3) consecutive taxable years immediately following the year of such loss, provided however, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction. [Sec. 34(3)(D), NIRC] Exception: Mines other than oil and gas wells, where a net operating loss without the benefit of incentives provided for under EO No. 226 (Omnibus Investments Code) incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss.
Income Tax cannot enjoy the benefit of NOLCO. However, the three-year period for the expiry of he NOLCO is not interrupted by the fact that the corporation is subject to MCIT during such three-year period.
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Other Losses: (1) Abandonment lossesin petroleum operation and producing well. (2) Losses due to voluntary removal of buildingincident to renewal or replacements are deductible from gross income. (3) Loss of useful value of capital assetsdue to charges in business conditions is deductible only to the extent of actual loss sustained (after adjustment for improvement, depreciation and salvage value) (4) Losses from sales or exchanges of property between related taxpayersare not recognized, but the gains are taxable.
TAXATION LAW
General rule: Taxpayer must ascertain and demonstrate with reasonable certainty the uncollectibility of debt Exceptions: (1) Banks as creditors – BSP Monetary Board shall ascertain the worthlessness and uncollectibility of the debt and shall approve the writing off (2) Receivables from an insurance or surety company (as debtor) may be written off as bad debts only when such company is declared closed due to insolvency or similar reason The taxpayer must show that the debt is indeed uncollectible even in the future. He must prove that he exerted diligent efforts to collect: (1) Sending of statement of accounts (2) Collection letters (3) Giving the account to a lawyer for collection (4) Filing the case in court [Phil. Refining Corp. v. CA, G.R. No. 118794, May 8, 1996]
Losses of farmers incurred in the operation of farm business are deductible.
BAD DEBTS Debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer actually ascertained to be worthless and the corresponding receivable should have been written off or charged off within the taxable year.
In ascertaining the debt to be worthless, it is not enough that the taxpayer acted in good faith. He must show that he had reasonably investigated the relevant facts from which it became evident, in the exercise of sound, objective business judgment, that there remained no practical, but only a vague prospect that the debt would be paid [Collector v. Goodrich, 1967]
Requisites for deductibility.— (1) Valid and legally demandable debt due to the taxpayer (2) Debt is connected with the taxpayer's trade, business or practice of profession; (3) Debt was not 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 (taxpayer had determined with reasonably degree of certainty that the claim could not be collected despite the fact that the creditor took reasonable steps to collect); and (5) Actually charged off the books of accounts of the taxpayer as of the end of the taxable year
Rev. Reg. No. 5-1999: “Actually ascertained to be worthless” – (1) Determination of worthlessness must depend upon the particular facts and circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of 84
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attempts to collect, where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year (2) Accounts receivable may be written off as bad debts even without conclusive evidence that they had definitely become worthless when: (a) the amount is insignificant; and (b) collection through court action may be more costly to the taxpayer
TAXATION LAW
Requisites for Deductibility. – (1) It must be reasonable. (2) It must be charged off during the year. (3) The asset must be used in profession, trade or business. (4) The asset must have a limited useful life. (5) The depreciable asset must be located in the Philippines if the taxpayer is a nonresident alien or a foreign corporation. [Valencia and Roxas] No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the threshold amount of P2,400,000, unless the taxpayer’s main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in the operations. [RR No. 12-2012]
“Actually charged off from the taxpayer’s book of accounts” Receivable which has actually become worthless at the end of the taxable year has been cancelled and written off. Mere recording in the books of account of estimated uncollectible accounts does not constitute a write-off.
Methods of allowance.— (1) Straight-line
Effect of recovery of bad debts.— Tax Benefit Rule on Bad Debts Bad debts claimed as deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer‘s gross income in the year of such recovery the extent of the income tax benefit of said deduction. Also called the equitable doctrine of tax benefit. (1) Allowance must be reasonable (2) Charged off during the taxable year from the taxpayer‘s books of accounts. (3) Does not exceed the acquisition cost of the property.
computing
(2) Declining balance
(3) Sum-of-the-yeardigit (SYD) (4) Any other method which may be prescribed by the Secretary of Finance upon the recommendation of the CIR
DEPRECIATION An annual reasonable allowance to reduce the wasteful value of the tangible fixed assets resulting from wear and tear and normal obsolescence For intangible assets, the annual allowance to rduce their useful value is called amortization. 85
depreciation
cost- salvage value estimated life (cost – depreciation) x Rate estimated life nth period x costsalvage SYD
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CHARITABLE CONTRIBUTIONS
TAXATION 1
AND
OTHER
TAXATION LAW
treaties or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws (3) Donations to Accredited Non-government Organizations subject to conditions set forth in RR No. 13-98 – NGO means a non-stock non-profit domestic corporation or organization: (a) Organized and operated exclusively for: i. scientific, ii. research, iii. educational, iv. character-building and youth and sports development, v. health, vi. social welfare, vii. cultural or viii. charitable purposes, or ix. a combination thereof, (b) No part of the net income of which inures to the benefit of any private individual (c) Directly utilizes contributions for the active conduct of the activities constituting the purpose or function for which it is organized, not later than 15th day of the month following the close of its taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the CIR (d) Administrative expense ,on an annual basis, must not exceed 30% of total expenses for the taxable year (e) Upon dissolution, its assets would be distributed to another accredited NGO organized for a similar purpose or purposes, OR to the State for public purpose, OR would be distributed by a competent court of justice to another accredited NGO to be used in such
Requisites for deductibility.— (1) Actually PAID or made to the ENTITIES or institutions specified by law; (2) Made within the TAXABLE year. (3) It must be EVIDENCED by adequate receipts or records. (4) For Contributions Other than Money: The amount shall be BASED on the acquisition cost of the property (i.e., not the fair market value at the time of the contribution). (5) For Contributions subject to the statutory limitation: It must NOT EXCEED 10% (individual) or 5% (corporation) of the taxpayer‘s taxable income before charitable contributions Amount that may be deducted.— Kinds of Contributions: (1) Contributions deductible in full; (2) Contributions subject to the statutory limit. Contributions Deductible in Full: (1) Donations to the Government of the Philippines, or to any of its agencies, or political subdivisions, including fully owned government corporations – (a) Exclusively to finance, provide for, or to be used in undertaking priority activities in 1. Education 2. Health 3. Youth and sports development 4. Human settlements 5. Science and culture, and 6. Economic development (b) in accordance with a National Priority Plan determined by NEDA (otherwise, subject to statutory limit) (2) Donations to Certain Foreign Institutions or International Organizations which are fully deductible in compliance with agreements, 86
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TAXATION LAW
CONTRIBUTIONS TO PENSION TRUSTS
manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.
Contribution to a pension trust may be claimed as deduction as follows: (a) Amount contributed for the present/normal service cost – 100% deductible (b) Amount contributed for the past service cost – 1/10 of the amount contributed is deductible in year the contribution is made, the remaining balance will be amortized equally over nine consecutive years
Contributions subject to the Statutory Limit These contributions are not deductible in full as specified by the law or such deduction has not met the requirements to be deducted in full. Those made to: (1) Government or any of its agencies or political subdivisions exclusively for public purposes (contributions for non-priority activities) (2) Accredited domestic corporation or associations organized exclusively for i. Religious ii. Charitable iii. Scientific iv. youth and sports development v. cultural vi. educational purposes or vii. rehabilitation of veterans (3) Social welfare institutions (4) Non-government organizations: No part of the net income of which inures to the benefit of any private stockholder or individual
General Rule: An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction, a reasonable amount transferred or paid into such trust in excess of the contributions to such trust made during the taxable year. Requisites for deductibility of payments to pension trusts.— (a) There must be a pension or retirement plan established to provide for the payment of reasonable pensions to employees; (b) The pension plan is reasonable and actuarially sound; (c) It must be funded by the employer; (d) The amount contributed must no longer be subject to the employer’s control or disposition; and (e) The payment has not theretofore been allowed before as a deduction.
Statutory Limit: (a) 10% in the case of an individual (individual donor), and (b) 5% in the case of a corporation (corporate donor), of the taxpayer's/donor’s income derived from trade, business or profession computed before the deduction for contributions and donations The amount deductible is the actual contribution or the statutory limit computed, whichever is lower
DEDUCTIONS UNDER SPECIAL LAWS (1) Special deductions for productivity bonus
and manpower training under the Productivity Incentives Act of 1990 (2) Deductions for training expenses of qualified jewelry enterprises (Jewelry Industry Development Act of 1998) (3) Deductions under the Adopt-a-School Act of 1998 (4) Deductions under the Expanded Senior Citizens Act of 2003. [Domondon]
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OPTIONAL STANDARD DEDUCTION
TAXATION LAW
PARTNERSHIPS (1) General Co-Partnership For purposes of taxation, the Code considers general co-partnerships as corporations. Hence, rules on OSD for corporations are applicable to general copartnerships.
Individuals, except non-resident aliens (a) May be taken by an individual in lieu of itemized deductions except those earning purely compensation income. (b) If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services. (c) Amount: 40% of gross sales or gross receipts (under RA 9504, effective July 6, 2008)
(2) General Professional Partnerships (GPP) (a) If the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the items of deductions claimed by the GPP and the items of deduction claimed by the partners. (b) If the GPP avails of OSD in computing its net income, the partners comprising it can no longer claim further deduction from their share in the said net income for the following reasons: (i.) The partners’ distributive share in the GPP is treated as his gross income not his gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be deducted not from his gross income but from his gross sales/receipts; and, (ii.) The OSD being in lieu of the itemized deductions allowed in computing taxable income as defined under Section 32 of the Tax Code, it will answer for both the items of deduction allowed to the GPP and its partners. (c) Since one-layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter, the
Requisites: (1) Taxpayer is a citizen or resident alien; (2) Taxpayer’s income is not entirely from compensation; (3) Taxpayer signifies in his return his intention to elect this deduction; otherwise he is considered as having availed of the itemized deductions. (4) Election is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years. Corporations, except non-resident foreign corporations The option to elect Optional Standard Deduction granted is now granted to corporations (domestic and resident foreign corporations) by virtue of RA 9504. (a) The OSD is 40% of its gross income. (b) The domestic and resident foreign corporation shall keep such records pertaining to his gross income as defined in Section 32 of the NIRC during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance upon recommendation of the CIR. (c) Corporations availing of OSD are still required to submit their financial statements when they file their annual ITR and to keep such records pertaining to its gross income. (RR 2-2010).
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type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items of deduction allowed under Sec. 34 can be claimed both at the level of the GPP and at the level of the partner in order to determine the taxable income. On the other hand, should the GPP opt to claim the OSD, the individual partners are deemed to have availed also of the OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing taxable income. (d) If the partner also derives other gross income from trade, business or practice of profession apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its gross income from trade, business or practice of profession but not to include his share from the net income of the GPP. (RR 2-2010)
TAXATION LAW
spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Additional exemptions for taxpayer with dependents (1) An individual, whether single or married, shall be allowed an additional exemption of P25,000 for each qualified dependent child (QDC), provided that the total number of dependents for which additional exemptions may be claimed shall not exceed 4 dependents (depends on the number of qualified dependent children) (a) Married Individuals: Additional exemptions for QDC are claimed by only one spouse. Generally, the spouse who is the gross compensation earner is the claimant of the additional exemptions. (b) Where the husband and wife are both compensation income earners: the husband is the proper claimant of the additional exemptions EXCEPT if there is an express waiver by the husband in favor of his wife, as embodied in the application for registration (BIR Form No. 1902) or in the Certificate of Update of Exemption and of Employer’s and Employee’s Information (BIR Form No. 2305), whichever is applicable. (c) When the spouses have business and/or professional income only: either may claim the additional exemptions at the end of the year. (d) The employed spouse shall be automatically entitled to claim the additional exemptions for children in the following instances: (i) spouse is unemployed (ii) spouse is a non-resident citizen deriving income from foreign sources
PERSONAL AND ADDITIONAL EXEMPTION (R.A. NO. 9504, MINIMUM WAGE EARNER LAW) Basic personal exemptions According to RA 9504 (effective July 6, 2008) basic personal exemption is Fifty thousand pesos (P50,000) for each individual taxpayer, regardless of status, i.e., whether single, married or head of the family. But note Sec 35(A) of NIRC – In the case of married individuals where only one of the 89
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(e) Legally separated spouses: Additional exemptions can be claimed by the spouse with custody of the child or children (but the total amount for the spouses shall not exceed the maximum of four). [Sec 35(B), NIRC] (f) If the taxpayer should have additional dependents during the taxable year, he may claim the corresponding additional exemption, as the case may be, in full for such year.
TAXATION LAW
Status-at-the-end-of-the-year rule Change of Status [Sec 35(C), NIRC] (1) If taxpayer marries during taxable year, taxpayer may claim the corresponding BPE in full for such year (i.e., no need to prorate the exemption). (2) If taxpayer should have additional dependent(s) during taxable year, taxpayer may claim corresponding AE in full for such year. (3) If taxpayer dies during taxable year, his estate may claim BPE and AE as if he died at the close of such year. (4) If during the taxable year (a) spouse dies; or (b) any of the dependents dies or marries, turns 21 years old or becomes gainfully employed, taxpayer may still claim same exemptions as if the spouse or any of the dependents died, or married, turned 21 years old or became gainfully employed at the close of such year.
(2) Who is a dependent for purposes of additional exemptions? (i) A taxpayer’s child, whether legitimate, illegitimate or legally adopted child (ii) chiefly dependent for support upon on the taxpayer (iii) living with the taxpayer (iv) not more than 21 years old, unmarried and not gainfully employed or (v) regardless of age, is incapable of self-support because of mental or physical defect. [Sec 35(B), NIRC]
Note: When it comes to change of status, the status beneficial to the taxpayer is used for purposes of claiming deductions as long as the taxpayer achieved such status at any time during the taxable period.
Note: Only children (not parents) may be considered “dependent” for purposes of additional exemptions.
Exemptions claimed by non-resident aliens Non-resident aliens engaged in trade or business are entitled personal exemptions subject to reciprocity. It means that NRAETB shall be allowed a personal exemption only if the income tax law in his country grants allowance for personal exemptions to the citizens and residents of the Philippines as stipulated in the reciprocity tax treaty with the Philippine Government.
The definition of the term “dependent” under Section 35(B) of the NIRC now includes a “Foster Child” or a child placed under planned temporary substitute parental care by a Foster Parent or a Foster Family. [RMC No. 41-20i3, Jan. 23, 2013] (3) Who may claim personal exemptions? (a) Citizens (whether resident or nonresident) and resident aliens (b) Non-resident aliens engaged in trade or business are entitled personal exemptions subject to reciprocity. (See below)
Limit of PE Allowed to NRAETB: An amount equal to the exemptions allowed by the nonresident alien’s country to Filipino citizens not residing therein but deriving income therefrom, 90
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but not to exceed the amount fixed by NIRC.(In other words, whichever is lower)
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Commissioner, G.R. No. 106949-50, Dec. 1, 1995] (8) Non –deductible taxes (9) Non-deductible losses (10) Losses on Wash Sales (except if by dealer in securities in ordinary course of
Items not deductible.— General rule: In determining deductions, one of the general rules (see above) is that deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession. Capital expenditures (e.g. acquisition cost of a building) are also not deductible, because these are not expenses, but form part of assets.
EXEMPT CORPORATIONS These are: (1) Proprietary Educational Institutions and hospitals (2) Government owned and controlled corporations (3) Others
In computing taxable net income, no deduction shall be allowed in respect to: (1) Personal, living or family expenses (note: they are not deductible from compensation and business/professional income under Section 24(A), NIRC) (2) Any amount paid out for new buildings or for permanent improvements (capital expenditures), or betterments made to increase the value of any property or estate (3) Any amount expended in restoring property (major repairs) or in making good the exhaustion thereof for which an allowance [for depreciation or depletion] is or has been made (4) Premiums paid on any life insurance policy covering the life of any officer, employee, or any person financially interested in the trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy (5) Interest expense and bad debts between related parties [See Sec. 36(B), NIRC)] (6) Losses from sales or exchanges of property between related taxpayers. (7) Non-deductible interest – should the taxpayer elect to deduct interest payments against its gross income, he cannot at the same time capitalize such interest and claim depreciation on the undepreciated cost which includes the interest. [PICOP v.
Corporations & associations enumerated under Section 30 of the 1997 NIRC, as amended, including those which have been issued tax exemption rulings/certificates prior to June 30, 2012, shall file their respective Applications for Tax Exemption/Revalidation with the Revenue District Office (“RDO”) where they are registered. If a corporation or association which has been issued a Tax Exemption Ruling fails to file its annual information return, it shall automatically lose its income tax-exempt status beginning the taxable year for which it failed to file an annual information return, in addition to the sanctions imposed under Section 250 of the NIRC, as amended. [RMO No. 20-2013] PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS By way of exception, proprietary educational institutions and hospitals are liable for net income at a rate of only ten percent (10%). All hospitals and non-stock, non-profit organizations operating hospitals which were issued tax exempt rulings prior to November 1, 2012 shall submit a Request for Revalidation of their tax exemption. [Revenue Memorandum Circular No. 4-2013]
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(See Tax on Domestic Corporations, Tax on Proprietary Educational Institutions and Hospitals)
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religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person (6) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual (7) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare (8) A non-stock and non-profit Educational institution (9) Government Educational institution (10) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses and (11) Farmers', fruit growers', or like association organized and operated as a Sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;
GOVERNMENT OWNED AND CONTROLLED CORPORATIONS All corporations, agencies, or instrumentalities owned or controlled by the Government are subject to income tax, except: (1) GSIS (2) SSS (3) PHIC (4) Local water districts (LWDs) (5) PCSO (See Tax on Domestic Corporations, Tax on Government-Owned or Controlled Corporations, Agencies or Instrumentalities) OTHERS The following organizations shall not be taxed in respect to income received by them as such: (1) Labor, agricultural or horticultural organization not organized principally for profit (2) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit (3) A Beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents (4) CEMETERY company owned and operated exclusively for the benefit of its members (5) Non-stock corporation or association organized and operated exclusively for
Note: Notwithstanding the exemptions, income of whatever kind and character of the enumerated organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax. RA 9178 Act to Promote the Establishment of Barangay Micro Business Enterprises (BMBEs) implemented by DO 17-04, April 20, 2004 92
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(1) BMBEs shall be exempt from income tax for income arising from the operations of the enterprise. (2) BMBE is any business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing trading and services, whose total assets including those arising from loans but exclusive of land on which the particular business entity’s office, plant and equipment are situated, shall not be more than P3M.
TAXATION LAW Recreational Clubs - RMC 35-2012 (August 3, 2012) clarifies taxability of clubs organized exclusively for pleasure, recreation and other non-profit purposes (recreational clubs). Income from whatever sources including but not limited to membership fees, assessment dues, rental income, and service fees are subject to income tax and VAT.
TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND RESIDENT ALIENS Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens) Classification
Taxable Income
Basic Personal Exemption
Additional Personal Exemption
Tax Rates
Resident Citizen
Income from sources within and outside the Philippines
Allowed
Allowed
5%-32%
Allowed
Allowed
5%-32%
Allowed
Allowed
5%-32%
No specific provision
5%-32%
Not allowed
25%
Non-Resident Citizen
Resident Alien
Income from sources within the Philippines Income from sources within the Philippines
Non-resident Alien Engaged in Trade or Business
Income from sources within the Philippines
Lower amount between PE allowed to Filipinos in the foreign country where he resides vs. PE in the Philippines
Non-resident Alien Not Engaged in Trade or Business
Income from sources within the Philippines
Not allowed
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GENERAL RULE THAT RESIDENT CITIZENS ARE TAXABLE ON INCOME FROM ALL SOURCES WITHIN AND WITHOUT THE PHILIPPINES
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employer abroad and is not borne by an entity or person in the Philippines. They must be duly registered with the Philippine Overseas Employment Administration (POEA) with valid Overseas Employment Certificate (OEC). (ii.) An OCW’s income arising out of his overseas employment is exempt from income tax. (2) A resident alien or non-resident alien is taxable only on income from sources WITHIN the Philippines. (i.) A resident alien is an individual whose residence is in the Philippines and who is not a Filipino citizen. (ii.) A non-resident alien is an individual whose residence and citizenship is not in the Philippines. (a) An alien actually present in the Philippine who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. (b) Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. (c) If he lives in the Philippines and has no definite intention to stay, he is a resident. (d) One who comes to the Philippines for a definite purpose which, in its
General rule: A Filipino resident citizen is taxable on income from all sources (within and without the Philippines) (1) Non-resident citizens: A non-resident citizen is taxable only on income derived from sources within the Philippines. A non-resident citizen is a Filipino citizen who: (1) Establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein (2) Leaves the Philippines during the taxable year to reside abroad (as immigrant or for employment on a permanent basis) (3) Works and derives income from abroad and whose employment requires him to be present abroad most of the time during the taxable year (4) Has been previously considered as a non-resident and arrives in the Philippines at any time during the taxable year to reside here permanently (only with respect to his income from sources abroad until the date of his arrival in the country) (2) Other considerations: (1) A Filipino citizen working and deriving abroad as an Overseas Contract Worker is taxable only on income from sources WITHIN the Philippines. (i.) OCW refers to Filipino citizens in foreign countries, who are physically present in a foreign country as a consequence of their employment in that country. Their salaries and wages are paid by an 94
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(iii.)
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nature, may be promptly accomplished is a transient. (e) But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose of which he came has been consummated or abandoned. [Sec. 5, RR No. 2] In general, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. Intended Stay in the Philippines: i. Up to 180 days – NRANETB ii. More than 180 days up to 2 years – NRAETB iii. Greater than 2 years – Resident alien
ON
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rank and file EEs and other forms of compensation. INCLUSIONS (1) Monetary compensation– If compensation is paid in cash, the full amount received is the measure of the income subject to tax. (a) Regular salary/wage (i) Salary – earnings received periodically for a regular work other than manual labor, such as monthly salary of an employee (ii) Wages – 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. [Sec. 78A, NIRC] (b) Separation pay/retirement benefit not otherwise exempt (i) Retirement pay – a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b] General rule: Retirement pay is taxable Exceptions: (1) SSS or GSIS retirement pays. (2) Retirement pay (R.A. 7641) due to old age provided the following requirements are met: (1) The retirement program is approved by the BIR Commissioner; (2) It must be a reasonable benefit plan. (fair and equitable) (3) The retiree should have been employed for 10 years in the said company;
COMPENSATION
Income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It includes, but is not limited to salaries and wages, commissions, tips, allowances, bonuses, Fringe Benefits of
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(4) The retiree should have been 50 years old or above at the time of retirement; and (5) It should have been availed of for the first time. (ii) Separation pay – taxable if voluntarily availed of. It shall not be taxable if involuntary i.e. Death, sickness, disability, reorganization /merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee (3) Bonuses, 13th month pay, and other benefits not exempt (i) Tips and Gratuities – those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1] (ii) Thirteenth month pay and other benefits - Not taxable if the total amount received is P30,000 or less. Any amount exceeding P30,000 is taxable. [Sec. 32 (7)e, NIRC] (iii) Overtime Pay – premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. It constitutes compensation. (4) Directors’ fees Fees – received by an employee for the services rendered to the employer including a director’s fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the performance of their official duty over and above their regular salaries.
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(2) Nonmonetary compensation - If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the measure of the income subject to tax. (a) Fringe benefit not subject to tax (See Chapter on Gross Income for the discussion of Taxable and Non-taxable fringe benefits) If the recipient of the fringe benefits is a rank and file employee, and the said fringe benefit is not tax-exempt, then the value of such fringe benefit shall be considered as part of the compensation income of such employee subject to tax payable by the employee. [Domondon] EXCLUSIONS (1) Fringe benefit subject to tax (See Chapter on Gross Income for the discussion of Taxable and Non-taxable fringe benefits) Where the recipient of the fringe benefit is not a rank and file employee, and the said benefit is not tax-exempt, then the same shall not be included in the compensation income of such employee subject to tax. The fringe benefit [tax] is instead levied upon the employer, who is required to pay. [Domondon] Convenience of the ER Rule If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation [Henderson v. Collector (1961)] (2) De minimis benefits (a) Facilities or privileges of relatively small value furnished by an employer to his employees and are as a means of 96
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promoting the health, goodwill, contentment, or efficiency of his employees. (b) These are exempt from fringe benefit tax and compensation income tax.
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(2) Health and hospitalization insurance (a) Premium Paid on Health or Hospitalization Insurance [Sec.34 (M)] (b) Amount of premium paid on health and/or hospitalization by an individual taxpayer (head of family or married), for himself and members of his family during the taxable year.
(3) Bonuses, 13th month pay and other benefits and payments specifically excluded from taxable compensation income (a) Gross benefits received by employees of public and private entities provided that the total exclusion shall not exceed P30,000 (amounts in excess are considered compensation income) (b) Benefits include: (i) Benefits received by government employees under RA 6686 (ii) Benefits received by employees pursuant to PD 851 (13th Month Pay Decree) (iii) Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28; and, (iv) Other benefits such as productivity incentives and Christmas bonus
Requisites for Deductibility (1) Insurance must have actually been taken (2) The amount of premium deductible does not exceed P2,400 per family or P200 per month whichever is lower during the taxable year. (3) That said family has a gross income of not more than P250,000 for the calendar year. (4) In case of married individual, only the spouse claiming additional exemption shall be entitled to this deduction. Note: The spouse claiming the additional exemptions for qualified dependent children shall be the same spouse to claim the deductions for premium payments. The following may avail of the deduction (1) Individual taxpayers earning purely compensation income during the year. (2) Individual taxpayer earning business income or in practice of his profession.
DEDUCTIONS (1) Personal exemptions and additional exemptions (See the Chapter on Deductions for the full discussion of Personal and additional exemptions) (a) Basic Personal Exemptions According to RA 9504 (effective July 6, 2008) basic personal exemption is Fifty thousand pesos (P50,000) for each individual taxpayer, regardless whether single, married or head of the family. (b) Additional Exemptions (AE)- depends on the number of qualified dependent children Amount allowed as a deduction P25,000 per dependent child, but not to exceed four children [RA 9504]
TAXATION OF COMPENSATION INCOME OF A MINIMUM WAGE EARNER Statutory minimum wage – earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment. [Sec.22 GG, as amended by RA 9504] Minimum wage earner – shall refer to a worker in the private sector paid the statutory 97
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minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. [Sec.22 HH, as amended by RA 9504]
TAXATION LAW (1) (2) (3) (4)
Interest income Royalties Dividends from domestic corporations Prizes and other winnings
Interest income (a) on any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20% final tax (b) under the expanded foreign currency deposit system (EFCDS) - 7.5% final tax for residents, exempt if non-residents (c) Treatment of income from long-term deposits
The minimum wage shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard pay
On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments, which have maturity of 5 years or more) – exempt
Compensation income including overtime pay, holiday pay and hazard pay, earned by minimum wage earners who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be imposed on the entire income based on the remaining maturity:
TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION All income obtained from doing business and/or engaging in the practice of a profession shall be included in the computation of taxable income. (5-32% For citizens, resident aliens & NRA Engaged in trade or business; 25% in case of NRANETB)
4 years to less than 5 years 3 years to less than 4 years less than 3 years
5% 12% 20%
Royalties (See summary table)
TAXATION OF PASSIVE INCOME
Dividends from domestic corporation (a) cash and/or property dividends actually or constructively received by an individual from (1) a domestic corporation (2) a joint stock company (3) insurance or mutual fund companies (4) regional operating headquarters of multinational companies
PASSIVE INCOME SUBJECT TO FINAL TAX “Final tax” means tax withheld from source, and the amount received by the income earner is net of the tax already. The tax withheld by the income payor is remitted by him to the BIR. The income having been tax-paid already, it need not be included in the income tax return at the end of the year. These passive income items are as follows: 98
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(b) share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner (c) share of an individual member or coventurer in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation (d) RATE: (1) 10%for residents (RC, RA) and non resident citizens (NRC); (2) 20% for NRAETB(non-resident aliens engaged in trade or business) (e) A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. (f) However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to
TAXATION LAW the extent that it represents a distribution of earnings or profits. [Sec. 73B, NIRC] (1) In other words, stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock. (2) On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented.
PRIZES AND OTHER WINNINGS (1) Winnings, except Philippine Charity sweepstakes / lotto winnings – 20% (2) Prizes exceeding P10,000 – 20% Prize, differentiated from winnings A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the result of a transaction where the outcome depends upon chance (e.g., betting).
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Summary Table of Rates NOTE: Bar Syllabus 2015 EXCLUDES NRA-NETB Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources
INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS (a) Interest from any currency bank deposit (b) Yield or any other monetary benefit from deposit substitute (c) Yield or any other monetary benefit from trust funds and similar arrangements (d) Royalties, in general (other than royalties described in letter “e”) (e) Royalties on books as well as other literary works and musical compositions (f) Prizes exceeding P10,000 (g) Other winnings (other than Philippine Charity Sweepstakes and Lotto winnings) (h) Interest incomes received from a depositary bank under expanded foreign currency deposit system
(i) Interest income from long-term deposit or investment evidenced by certificates prescribed by BSP. If preterminatedbefore fifth year, a final tax shall be imposed based on remaining maturity: (1) 4 years to less than 5 years (2) 3 years to less than 4 years (3) Less than 3 years CASH AND/OR PROPERTY DIVIDENDS Cash and/or property dividends actually or constructively received from a domestic corp. or from a joint stock co., insurance or mutual fund companies and regional operating headquarters of multinational companies (beginning January 1, 2000) Share of an individual in the distributable net income after tax of a PARTNERSHIP (other than a general professional partnership) (beginning January 1, 2000) Share of an individual in the net income after tax of an ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE or CONSORTIUM taxable as a corporation, of which he is a member or a co-venturer (beginning January 1, 2000) 100
Citizens, Residents 20%
NRAETB
NRANETB
20%
25%
20%
20%
25%
20%
20%
25%
20%
20%
25%
10%
10%
25%
20%
20%
25%
20%
20%
25%
Exempt
Exempt
Exempt
25%
5% 12% 20%
25% 25% 25%
NRAETB
NRANETB
10%
20%
25%
10%
20%
25%
10%
20%
25%
7 1/2% Note: NRC – Exempt (RR 12011) Exempt
5% 12% 20% Citizens, Residents
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(a) For interest from foreign currency loans granted by FCDUs to residents other than Offshore Banking Units (OBUs) or other depository banks under the expanded system – tax rate is 10% if payors are RESIDENTS, whether individuals or corporations.
TAXATION LAW
PASSIVE INCOME NOT SUBJECT TO TAX Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP shall be exempt from tax
(b) For interest from foreign currency loans granted by OBUs to residents other than OBUs or local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with OBUs - tax rate is 10% if payors are RESIDENTS, whether individuals or corporations.
But should the holder of the certificate preterminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: (1) Four (4) years to less than five (5) years 5%; (2) Three (3) years to less than four (4) years 12%; and (3) Less than three (3) years - 20%.
(c) Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors – tax rate is 25% if payee is: (a) non-resident alien individual, or (b) nonresident foreign corporation. The term “cinematographic films” includes motion picture films, films, tapes, discs and other such similar or related products.
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.
(d) Informer’s reward given to persons who voluntarily provide definite and sworn information that lead to or was instrumental in the discovery of fraud or violation of the provisions of the NIRC or special laws being administered by the BIR and resulted in the actual recovery or collection of revenues, surcharges and fees and/or the conviction of the guilty party or parties, and/or the imposition of any fine or penalty or the actual collection of a compromise amount, in case of amicable settlement, shall be subject to income tax, collected as a final withholding tax, at the rate of 10%, pursuant to Sec. 282 of the NIRC [RR 16-2010]
TAXATION OF CAPITAL GAINS INCOME FROM SALE OF SHARES OF STOCK OF A PHILIPPINE CORPORATION Shares traded and listed in the stock exchange – exempt The transaction is exempt from income tax regardless of the nature of business of the seller or transferor. However, it is subject to the one-half of one percent (1/2 of 1%) stock transaction tax imposed under Sec. 127(A) of the Tax Code based on the gross selling price or gross value in money of the shares of stock sold or transferred. 101
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Shares not listed and traded in the stock exchange – subject to final tax On sale, barter, exchange or other disposition of shares of stockof a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:
TAXATION LAW
(b) Under Sec. 24(A), at the option of the taxpayer. (2) In case of the sale of or disposition of their principal residence by natural persons (a) Requirements: (1) Sale or disposition by a natural person of his principal residence, (2) The proceeds of which is fully utilized in acquiring/constructing a new principal residence, (3) Such acquisition/construction taking place within 18 calendar months from the date of sale or disposition, (4) The taxpayer notifies the Commissioner within 30 days from the sale/disposition through a prescribed return of his intention to avail of the exemption, (5) The tax exemption can only be availed of once every 10 years. (b) Tax treatment: Exempt from capital gains tax (CGT). If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to CGT. (c) How taxable portion and tax determined:
On the net capital gain: Not over P100,000 = Final Tax of 5% On any amount in excess of P100,000 = plus Final Tax of 10% on the excess Key Definitions (a) Net capital gain: selling price less cost (b) Selling price: consideration on the sale OR fair market value of the shares of stock at the time of the sale, whichever is higher (c) Cost: original purchase price INCOME FROM THE SALE OF REAL PROPERTY SITUATED IN THE PHILIPPINES What property covered Property located in the PH classified as capital assets What transactions covered Sales, exchanges, or other disposition of real property (classified as capital assets), including pacto de retro sales and other forms of conditional sales of the following: citizens, resident aliens, NRAETB, NRANETB, domestic corporations.
𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 𝑢𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑 [ ] 𝑥[ ] 𝑜𝑟 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒
Tax rate General rule: 6% of—whichever is higher (a) Gross selling price, or (b) Fair market value (determined in accordance with Sec. 6(E)). Except (1) In case of sales made to the government, any of its political subdivisions or agencies, or to GOCCs, it can be taxed either: (a) Under Sec. 24(C)(1) – 6% CGT, or
(1) The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired. (2) Computation for the basis of new principal residence: XXX Historical cost of old principal residence Add: Additional cost to acquire XXX 102
UP COLLEGE OF LAW new principal residence* Adjusted cost bases of the new principal residence *Additional cost to acquire new principal residence: Cost to acquire new principal residence Less: Gross selling price of old principal residence Additional cost to acquire new principal residence
TAXATION 1
TAXATION LAW
XXX
(2) At 30% corporate income tax, if the seller is a corporation. Rule: Capital gain/loss is recognized in full.
XXX
Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Section 39(A)(1) of the NIRC.
(XXX) XXX
Determination of whether short- or longterm: If held for <12 mos, then short-term. Otherwise, long-term.
Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Section 39(A)(1) of the NIRC, namely: (1) Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or (2) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or (3) Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or (4) Real property used in trade or business of the taxpayer.
Summary Tables of Rates (Tables include NRAETB and NRANETB)
excess of P100,000
INCOME FROM THE SALE, EXCHANGE, OR OTHER DISPOSITION OF OTHER CAPITAL ASSETS Other properties shall be subject to income tax— (1) At the graduated income tax rates, if the seller is an individual; (a) Long-term capital gains: only 50% is recognized. (b) Short-term capital asset transactions: 100% subject to tax. (Sec. 39(B))
Section 24(C).Capital Gains Tax from Sale of Shares of Stock of a domestic corporation NOT TRADED in the Stock Exchange RES/CIT NRAETB NRANETB Tax base: Net Capital Gain Tax rate: 5% 5% 5% Not over 10% 10% 10% P100,000
Section 24(D).Capital Gains Tax from Sale of Real Property Classified as Capital Asset RES/CIT NRAETB NRANETB Tax base: Gross selling price or current fair market value, whichever is higher Tax rate: 6% 6% 6%
Amount in 103
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Category of Income (1) Compensation / Business Profession (2) (3) Prizes of P10,000 or less
All sources
/
(4) Interest from any currency bank deposit , etc., Royalties (other than from books, literary works and musical compositions), Winnings / Prizes (except prizes P10,000 and below) (5) Royalties from books, literary works, musical compositions (6) Interest from long-term deposit or investment certificates, which have a maturity of 5 years or more
(7) Cash / Property Dividends from a domestic corporation, etc., OR share in the distributable net income after tax of a partnership (except a general professional partnership), etc. (8) Interest (Expanded Foreign Currency Deposit System) (9) Winnings on Philippine Sweepstakes / Lotto (10) Capital Gains on Sale of Shares of Domestic Corp. (not traded in a domestic stock exchange) (11) Capital Gains on Sale of Real Property in the Philippines (12) Sale of Shares of Domestic Corp. (traded in a domestic stock exchange) (13) Sale of Real Property located Abroad (14) Sale of Shares of Foreign Corp (15) Passive Income from Abroad
TAXATION LAW
ALIEN
Non-Resident CITIZEN NRAETB
NRANETB
Within the Philippines
Within the Philippines
Within the Philippines
Within the Philippines
Based on Taxable (i.e, Net) Income Schedular Income Tax Rates (Sec. 24, NIRC) (i.e, 5% to 32%)
Gross Income Within the Philippines (GIW) – 20% Final Withholding Tax
GIW – 10% Final Withholding Tax
GIW – 25%
EXEMPT; However: In case of pre-termination, with remaining maturity of: 4 years to less than 5 years – 5% on entire income 3 years to less than 4 years – 12% on entire income less than 3 years – 20% on entire income
GIW – 10% Final Withholding Tax
GIW – 7.5% Withholding Tax
Final
GIW- 20%
EXEMPT
EXEMPT Net Capital Gains within: Not Over P100,000 – 5% Final Tax Amount in Excess of P100,000 – plus 10% Final Tax on the excess Gross Selling Price or FMV, whichever is higher – 6% Final Withholding Tax ½ of 1% of the Selling Price (Stock Transaction Tax) Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax Schedular Income Tax Rates (Sec. 24 , NIRC) (i.e, 5% to 32%)
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Computations Pure Compensation Income
Less:
x Less:
Gross Compensation Income Personal & Additional Exemptions and hospitalization/health insurance premium Taxable Income Rate Income Tax Creditable Withholding Tax on Compensation Income Tax Payable
TAXATION OF NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS
xx
(See above summary tables) xx xx
GENERAL RULES Subject to an income tax in the same manner as an individual citizen and a resident alien individual on taxable income from all sources within the Philippines
xx xx xx
Mixed-Income (i.e., compensation income and business income/income from the practice of profession) Less:
ADD: Less:
x Less:
Gross Compensation Income Personal & Additional Exemptions and hospitalization/health insurance premium Taxable Compensation Income Gross Business Income &/or Income from Practice of Profession Allowable Deduction (itemized or optional deduction) Taxable Income Rate Income Tax Creditable Withholding Tax on Compensation Income/Other Allowable Tax Credit Tax Payable
Nonresident alien doing business in the Philippines: a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year
Xx
CASH AND/OR PROPERTY DIVIDENDS
Xx Xx
The following shall be subject to an income tax of twenty percent (20%) on the total amount thereof: (a) Cash and/or property dividends from: (1) A domestic corporation; (2) A joint stock company; (3) An insurance or mutual fund company; (4) A regional operating headquarter of multinational company; (5) The share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner; (6) The share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a coventurer; (b) Interests (c) Royalties (in any form); and (d) Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to graduated tax) and
Xx Xx Xx Xx
Xx Xx
Pure Business/Professional Income
Less:
x Less:
Gross Business Income &/ or Income from Practice of Profession Allowable Deduction (itemized or optional deduction) Personal & Additional Exemptions and hospitalization/health insurance premium Total Taxable Income Rate Income Tax Creditable Withholding Tax on Compensation Income/Other Allowable Tax Credit Tax Payable
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Xx xx
xx Xx Xx
Xx Xx
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other winnings (except Philippine Charity Sweepstakes and Lotto winnings);
TAXATION LAW
(1) Net over P100,000 – 5% of net capital gains realized (2) On any amount in excess of P100,000 – 10% of net capital gains realized (b) Sale, barter or exchange of real properties – 6% of gross selling price or current FMV whichever is higher
EXCEPT: (1) The following Royalties shall be subject to a final tax of ten percent (10%) on the total amount thereof: (a) On books as well as other literary works; and (b) On musical compositions (2) Cinematographic films and similar works shall be subject to twenty-five percent (25%) of the gross income (3) Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax But should the holder of the certificate preterminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: (i) Four (4) years to less than five (5) years 5%; (ii) Three (3) years to less than four (4) years 12%; and (iii) Less than three (3) years - 20%.
NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS (1) Alien individuals employed by: (a) Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (ROHQ) established in the Philippines by multinational companies Multinational company, defined a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets (b) Offshore Banking Units established in the Philippines (2) Alien individuals who are permanent residents of a foreign country but who are employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines
Tax Rate and Base - 15% of gross income received as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances.
CAPITAL GAINS Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the similar tax prescribed on citizens and resident aliens. (a) Sale, barter or exchange of Shares of stock in domestic corporation not traded –
The same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these multinational companies, offshore banking
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units and petroleum service contractors and subcontractors.
(b) Who are considered minimum wage earners under RA 9504 (Sec. 4 (b) RA 7432, as amended by RA 9994) and/or the aggregate amount of gross income earned by the senior citizen during the taxable year does not exceed the amount of his personal exemptions (BPE and APE).
Note that the coverage of the special classification (and the corresponding tax rate) is limited to income received as wages. Hence, any income earned from all other sources within the Philippines by the alien employees shall be subject to the pertinent income tax (example: sale of real property in the Philippines is subject to 6% capital gain tax, imposed on the gross selling price or fair market value of the property at the time of the sale, whichever is higher)
INDIVIDUAL TAXPAYERS FROM INCOME TAX
TAXATION LAW
MINIMUM WAGE EARNERS Rule: they shall be exempt from payment of income tax on their taxable income Limit: however, if he receives “other benefits” in excess of the allowable statutory amount of P30,000, then he shall be taxable on the exceeds benefits as well as his salaries, wages, and allowances, just like an employee receiving compensation income beyond the statutory minimum wage.
EXEMPT
Individual Taxpayers exempt from income tax are: (1) Senior Citizens (2) Minimum wage earners (3) Exemptions granted under international agreements
EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS (SEC. 32(B)) See RMC No, 31-2013, April 12, 2013 – taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments/embassies/diplomatic missions and international organizations situated in the Philippines
All individuals and entities claiming exemption from imposition of taxes on income and, consequently, from withholding taxes are required to provide a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of the related income. The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption, as well as the corresponding exemption from imposition of withholding tax. Failure on the part of the taxpayer to present the said tax exemption certificate or ruling as herein required shall subject him to the payment of appropriate withholding taxes due on the transaction. [RMC No. 8=2014]
TAXATION OF CORPORATIONS
DOMESTIC
TAX PAYABLE Taxes payable are: (1) Regular tax (2) Minimum Corporate Income Tax
REGULAR TAX Normal Corporate Income Tax Rate: 30% of Taxable Income (effective January 1, 2009) Gross Income Less: Allowable Deductions Taxable Income
SENIOR CITIZENS Who covered: any resident citizen— (a) At least 60 years old, and 107
XXX XXX XXX
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This means that the term “gross income” will also include all items of gross income enumerated under Section 32(A) of the NIRC, except: (a) income exempt from income tax, and (b) income subjected to FWT.
MINIMUM CORPORATE INCOME TAX (MCIT) (1) Applies to domestic corporations and RFCs whenever such corporations have zero or negative taxable income or whenever the MCIT is greater than the normal income tax due from such corporations. (2) Imposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. For purposes of the MCIT, the taxable year in which business operations commenced shall be the year when the corporation registers with the BIR (not in which the corporation started commercial operations). (3) Tax rate: 2% of the Gross Income Imposition of MCIT Gross Sales Less: Sales Returns Sales Discounts Allowances Cost of Goods Sold MCIT GI
The computation by type of business.— Merchandising/Manufacturing Service Concerns Concerns Net Sales P Gross xxx receipts/revenue P xxx Less: Cost of Sales Less: Direct cost xxx of services xxx Gross Income P Gross income xxx P xxx “Net Sales” is gross sales less sales returns, discounts and allowances.
XXX XXX & XXX XXX
TAXATION LAW
“Direct cost of services” includes salaries of personnel rendering the services, expenses on the facilities directly utilized, cost of supplies, and the like. “Direct costs and expenses” shall only pertain to those costs exclusively and directly incurred in relation to the revenue realized by the sellers of services. These refer to costs which are considered indispensable to the earning of the revenue such that without such costs, no revenue can be generated.
XXX XXX
COMPUTATION OF GROSS INCOME.— The term “Gross Income” shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
Pointers.— MCIT is in the nature of a tax credit, not an allowable deduction. Its purpose is to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income.
If apart from deriving income from core business activities there are other items of gross income realized or earned by the taxpayer which are subject to the normal corporate income tax, they must be included as part of gross income for computing MCIT. [Sec. 27 (E), NIRC; RR 12-2007]
Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income tax? No, the MCIT is not an additional tax. The MCIT is compared with the regular income tax, which is due from a corporation. If the regular income
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is higher than the MCIT, then the corporation does not pay the MCIT.
TAXATION LAW
MCIT gross income differentiated from the normal tax gross income The latter would include other incidental income items, such as rent income, interest, gain on sale of assets, certain tax refunds, etc.
Who are covered by MCIT? The MCIT covers domestic and resident foreign corporations which are subject to the regular income tax. The term “regular income tax” refers to the regular income tax rates under the Tax Code. Thus, corporations which are subject to a special corporate tax system do not fall within the coverage of the MCIT.
What amount of income tax is paid by the corporation to the BIR? Whichever is higher between the normal tax and the minimum corporate income tax Illustration: E Co., a domestic trading corporation, in its fourth year of operations had a gross profit from sales of P300,000 and net taxable income of P100,000. How much was the income tax paid by the corporation for the year?
These special corporations are: (1) Corporations that are subject to ten percent (10%) preferential tax rate: Proprietary educational institutions, nonprofit hospitals, Offshore Banking Units (OBUs) on their income from foreign currency transactions which has been subjected to a final income tax at 10% of such income, and depository banks under the expanded foreign currency deposit system on their income from foreign currency transactions which has subjected to final income tax at 10%; RFCs engaged in business as Regional Operating Headquarters (2) Firms under special income tax regime such as those under the PEZA law [RA 7916], the Bases Conversion Development Act [RA 7227] and forms enjoying Income Tax Holiday (ITH) under EO No. 226; (3) International carriers subject to tax at 2 ½% of their gross Philippine billings;
MCIT (P300,000 x 2%) P6,000 Normal income tax (P100,000 x 30%) P30,000 Income Tax to be paid for the year (whichever is higher) P30,000 Quarterly MCIT Computation.— The computation and the payment of MCIT shall likewise apply at the time of filing the quarterly corporate income tax. In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT.
Note: For domestic corporations whose operations or activities are partly covered by the regular income tax and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular corporate income tax system.
Items allowed to be credited against quarterly MCIT due: (a) CWT, (b) Quarterly income tax payments under the normal income tax; and (c) MCIT paid in the previous taxable quarter(s). Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the quarterly MCIT tax due.
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Annual Income Tax Computation.— The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year. The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax.
TAXATION LAW
Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the annual MCIT due as the same can only be applied against normal income tax. Manner of Filing and Payment.— The MCIT shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis. CARRY FORWARD OF EXCESS MINIMUM TAX Any excess of the minimum corporate income tax over the normal income tax shall be carried forward on an annual basis. The excess can be credited against the normal income tax in the nextthree (3) succeeding taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the normal tax should be higher than the MCIT.
In the computation of annual income tax due, if the normal income tax due is higher than the computed annual MCIT, the following shall be allowed to be credited against the annual income tax: (a) quarterly MCIT payments, (b) quarterly normal income tax payments, (c) excess MCIT in the prior year/s (subject to the prescriptive period allowed for its creditability), (d) CWTs in the current year, (d) excess CWTs in the prior year.
Illustration.— A domestic corporation had the following data on computations of the normal tax (NT) and the minimum corporate income tax (MCIT) for five years.
If in the computation of annual income tax due, the computed annual MCIT due is higher than the annual normal income tax due, the following may be credited against the annual income tax: (a) quarterly MCIT payments of current taxable quarter, (b) quarterly normal income tax payments in current year, (c) CWTs in the current year, (d) excess CWTs in the prior year.
MCIT NT
Yr 4 80K 20K
Yr 5 50K 30K
Yr 6 30K 40K
Yr 7 40K 20K
Yr 8 35K 70K
The excess MCIT over NT carry-forward is shown as follows:
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MCIT NT
Year 4 80,000 20,000
NT is higher n/a Less: MCIT carry-fwd
TAXATION 1 Year 5 50,000 30,000
Year 6 30,000 40,000 40,000
n/a
TAXATION LAW Year 7 40,000 20,000
Year 8 35,000 70,000 70,000
n/a >
> (40,000)*
>
(20,000) (20,000)
From Year 4 From Year 5 From Year 7 Tax Due
80,000
50,000
-
40,000
30,000
Arrow pointing downward means that the normal tax is higher so that there can be an excess MCIT carry-forward against it.
(3) Legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons).
*Cannot carry forward an amount higher than the NT, hence the excess of 60K from Year 4 was reduced to 40K. The unused P20,000 cannot be used in Year 8 because Year 8 was beyond three years from Year 4.
OPTIONAL GROSS INCOME TAX (OGIT).— Section 27 (A) of the NIRC provides for an optional gross income tax of 15% based on gross income. The President, upon the recommendation of the Secretary of Finance, may, effective January 1, 2000, allow domestic corporations the option to be taxed at fifteen percent (15%) of gross income as defined therein, after the following conditions have been satisfied:
RELIEF FROM THE MCIT UNDER CERTAIN CONDITIONS (SEC. 27 (E), NIRC) The Secretary of Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT upon submission of proof by the applicantcorporation that the corporation sustained substantial losses on account of the following (LMB): (1) Prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations), or (2) Force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or
Tax effort ratio Ratio of Income Tax collection to total tax revenues VAT tax effort Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP
20% of GNP 40% 4% of GNP 0.90%
Ratio of the Corporation’s Does not Cost of Sales to Gross Sales exceed 55%
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TAXATION 1 XXX XXX XXX XXX
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Note: Words in regular letters are found in Sec. 29(B)(2) of the NIRC. Words in italics are additions made by the revenue regulation to consolidate Sec. 29 with other pertinent laws.
XXX
APPLICABILITY OF THE MCIT WHERE A CORPORATION IS GOVERNED BOTH UNDER THE REGULAR TAX SYSTEM AND A SPECIAL INCOME TAX SYSTEM For corporations whose operations or activities are partly covered by the regular income tax and partly covered under special income tax system, the MCIT shall apply on operations by the regular income tax system
XXX
The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of gross income tax, gross income should be the same as gross income for purposes of MCIT in cases of trading, merchandising and manufacturing concern business. However, for service enterprises, gross income means gross receipts less sales returns, discounts, allowances and cost of services.
ALLOWABLE DEDUCTIONS ITEMIZED DEDUCTIONS (1) Bad debts (2) Expenses (3) Losses (4) Taxes (5) Depreciation (6) Interest (7) Depletion of oil and gas wells and mines (8) Charitable and other contributions (9) Research and development (10) Pension trusts
Note: At present, the OGIT has not been implemented in the Philippines.
CORPORATIONS EXEMPT FROM THE MCIT: (BIPTENG) (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.
Optional standard deduction Before RA 9504, effective July 6, 2009, OSD only applied to individuals except non-resident aliens. But by virtue of RA 9504, it now also applies to corporations, except non-resident foreign corporation. Moreover, the rate was increased from 10% to 40%.
TAXATION OF PASSIVE INCOME PASSIVE INCOME SUBJECT TO TAX
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Note: (1) and (5) below are more appropriate for the next section. The SC Syllabus, however, included both in this section
Inter-corporate dividends Dividends received from another domestic corporation - exempt
Passive income subject to tax: (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties (2) Capital gains from the sale of shares of stock not traded in the stock exchange (3) Income derived from depository bank under the expanded foreign currency deposit system (4) Inter-corporate dividends (5) Capital gains realized from the sale, exchange, or of lands and/or buildings
Capital gains realized from the sale, exchange, or disposition of lands and/or buildings On the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6% Note: Tax treatment is the same as that of individuals. The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain.
Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties On any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements - 20%
PASSIVE INCOME NOT SUBJECT TO TAX (1) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from incomeexemptfromincome tax
Capital gains from the sale of shares of stock not traded in the stock exchange On sale, barter, exchange or other disposition of shares of stockof a domestic corporation not listed and traded through a local stock exchange, held as a capital asset: On the net capital gain: (1) First P100,000: Final Tax of 5% (2) On any amount in excess of P100,000: plus 10% Final tax on the excess
Except: net income from transactions specified by the Secretary of Finance upon recommendation by the Monetary Board
Income derived from depository bank under the expanded foreign currency deposit system Under the expanded foreign currency deposit system (EFCDS) - 7.5%
BUT: Interest income from foreign currency loans granted by such depository banks under said expanded foreign currency 113
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deposit system to residents, other than offshore banking units in the Philippines, shall be subject to a final tax at the rate of 10%.
TAXATION LAW
there is a conclusive presumption by law that the sale resulted in a gain.
TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS
(2) Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt fromexemptfrom income tax.
Tax Rate and Base – 10% on net income (except on income subject to capital gains tax and passive income subject to final tax) within and without the Philippines
TAXATION OF CAPITAL GAINS
Caveat: If gross income from unrelated trade or business or other activity exceeds 50% of total gross income derived from all sources, the tax rate of 30% shall be imposed on the entire taxable income.
INCOME FROM SALE OF SHARES OF STOCK On sale, barter, exchange or other disposition of shares of stockof a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:
Unrelated trade, business or other activity – any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.
On the net capital gain: (1) First P100,000: Final Tax of 5% (2) On any amount in excess of P100,000: plus 10% Final tax on the excess
INCOME FROM THE SALE OF REAL PROPERTY SITUATED IN THE PHILIPPINES
Proprietary educational institution – any private school maintained and administered by private individuals or groups with an issued permit to operate from the DECS, CHED or TESDA. [Sec. 27(B), NIRC]
Philippine & (iii) Income from the sale, exchange, or other disposition of other capital assets On the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6%
TAX ON GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES OR INSTRUMENTALITIES FOR GOCCS: General rule: GOCCs are taxable as any other corporation engaged in similar business, industry or activity, except: (1) Government Service Insurance System (GSIS) (2) Social Security System (SSS)
Note: Tax treatment is the same as that of individuals. The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because 114
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(3) Philippine Health Insurance Corporation (PHIC) (4) Local water districts (LWDs) (5) Philippine Charity Sweepstakes Office (PCSO) [Sec. 27(C), NIRC]
FOR INSTRUMENTALITIES AGENCIES OF GOVERNMENT:
TAXATION LAW concept. Thus, the income from sources within the Phils. of the foreign head office shall thus be taxable to the Philippine branch.
But, when the head office of a foreign corporation independently and directly invested in a domestic corporation without the funds passing through its Philippine branch, the taxpayer, with respect to the tax on dividend income, would be the non-resident foreign corporation itself and the dividend income shall be subject to the tax similarly imposed on nonresident foreign corporations.
AND
General rule: The government is exempt from tax. Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfilfulfill a constitutional mandate and national policy, no one can doubt its wisdom. [Mactan Cebu Airport v Marcos, 1996]
Definition of “doing business” under the Foreign Investment Act of 1991 The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate 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 of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
If the taxing authority is the local gov’t unit RA 7160 expressly prohibits LGUs from levying tax on the Nat’l Gov’t, its agencies and instrumentalities and other LGUs.
TAXATION OF RESIDENT FOREIGN CORPORATIONS GENERAL RULE A resident foreign corporation is a corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. (a) A Philippine branch of a foreign corporation duly licensed by the SEC is considered a resident foreign corporation. Thus, only the income of the Philippine branch from sources within the Philippines is subject to Philippine income tax. (b) Marubeni v. Commissioner: As general rule, the head office of a foreign corporation is the same juridical entity as its branch in the Philippines following the single entity 115
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transacts business in its own name and for its own account; [Sec. 3 (d)]
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On any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements – Final tax of 20%
WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN THE PHILIPPINES
INCOME DERIVED FROM A DEPOSITORY BANK UNDER THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM Under the expanded foreign currency deposit system (EFCDS) – Final tax of 7.5%
Resident foreign corporations are subject to any or some of the following: (1) Capital Gains Tax (2) Final Tax on Passive Income (3) Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT) (4) Branch Profit Remittance Tax
CAPITAL GAIN FROM SALE OF SHARES OF STOCK NOT TRADED IN THE STOCK EXCHANGE On sale, barter, exchange or other disposition of shares of stock ofstockof a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:
MINIMUM CORPORATE INCOME TAX The discussion with respect to this topic (income subject to normal tax, MCIT, or GIT) under the subheading of domestic corporations is equally applicable to resident foreign corporations, both as to concepts and computations, except that RFCs are taxed only on income from sources within the Philippines. (a) Normal Corporate Income Tax Rate30% of net taxable income from sources within the Philippines [RA 9337] (b) Minimum Corporate Income Tax (MCIT)2% of MCIT Gross Income from sources within the Philippines. The MCIT is imposed on RFCs underRFCsunder the same conditions as domestic corporations. [Sec. 28(A)(2)] (c) Gross Income Tax (GIT) The President, upon the recommendation of the Secretary of Finance, may allow resident foreign corporations the option to be taxed at fifteen percent (15%) of gross income within the Philippines, under the same conditions as domestic corporations. [Sec. 28(A)(1)]
On the net capital gain: (a) First P100,000: Final Tax of 5% (b) On any amount in excess of P100,000: plus 10% Final tax on the excess INTERCORPORATE DIVIDENDS Dividends received from a domestic corporation liable to tax under the NIRCexempt Exclude: (1) International carrier (2) Offshore banking units (3) Branch profits remittances (4) Regional or area headquarters and regional operating headquarters of multination companies (Note: Expressly excluded as indicated in the SC Syllabus. The following discussion is for information purposes)
TAX ON CERTAIN INCOME
INTERNATIONAL CARRIER Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB)
INTEREST FROM DEPOSITS AND YIELD OR ANY OTHER MONETARY BENEFIT FROM DEPOSIT SUBSTITUTES, TRUST FUNDS AND SIMILAR ARRANGEMENTS AND ROYALTIES 116
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What is GPB.— In the case of International Air Carriers, GPB refers to the amount of: (a) 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 (b) gross revenue from tickets revalidated, exchanged and/or indorsed to another international airline if the passenger boards a plane in a port or point in the Philippines (c) for flights which originate from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, the gross revenue consisting of only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transhipment transshipment [RR 15-2002]
TAXATION LAW
sale or payments of the passage or freight documents. OFFSHORE BANKING UNITS Coverage of the Rule.— Only income derived by offshore banking units from foreign currency transactions with: (1) non-residents, (2) other offshore banking units (3) local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units Tax Rate.— Exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks Exception: Interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of 10%.
Air Canada vs. CIR (CTA Case No. 6572): (a) A foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. (b) The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. (c) The test of taxability is the source, and the source is that activity which produced the income.
BRANCH PROFITS REMITTANCES Taxable transaction – any profit remitted by a branch of a multinational corporation to its head office Tax Rate and Base – 15% final tax based on the total profits applied or earmarked for remittance without any deduction for the tax component. The 15% final tax should excluding: (a) profits on activities which are registered with the Philippine Economic Zone Authority (PEZA) and (b) passive income gains and profits received not directly connected
In the case of International Shipping, GPB means: Gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of
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with the conduct of its trade or business in the Philippines.
TAXATION LAW (2) business planning and coordination (3) sourcing and procurement of raw materials and components (4) corporate finance advisory services (5) marketing control and sales promotion (6) training and personnel management (7) logistic services (8) research and development services and product development (9) technical support and maintenance (10) data processing and communications, and (11) business development.
Income not treated as branch profits unless effectively connected with the conduct of trade or business in the Philippines: (1) Interests, dividends, rents, royalties remuneration for technical services (2) salaries, wages premiums, annuities, emoluments (3) other fixed or determinable annual, periodic or casual gains, profits, income (4) capital gains received during each taxable year from all sources within the Philippines Notes: (1) imposed whether the head office of the foreign corporation is located in a tax treaty country, in a tax haven or other nontreaty country. (2) imposed only on the profits remitted by a Philippine branch to the head office of a foreign corporation.
TAXATION OF NON-RESIDENT FOREIGN CORPORATIONS GENERAL RULE Except as otherwise provided, the tax is 30% of the gross income (except certain passive income)received during each taxable year from all sources within the Philippines, such as interests (except interests on foreign loans, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains EXCEPT capital gains on the sale of shares of stock (not listed and traded through a local stock exchange), of a domestic corporation which are subject to the tax rates prescribed for individuals and resident foreign corporations.
REGIONAL OR AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF MULTINATIONAL COMPANIES Regional or area headquarters: not subject to income tax Regional or area headquarters – a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
TAX ON CERTAIN INCOME INTEREST ON FOREIGN LOANS (1) on foreign loans contracted on or after August 1, 1986 – 20% (2) under the expanded foreign currency deposit system (EFCDS) - exempt
Regional operating headquarters (a) 10% of their taxable income (b) a branch established in the Philippines by multinational companies which are engaged in any of the following services: (1) general administration and planning
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(a) Intercorporate Dividend – 15%, as long as the country in which the nonresident foreign corporation is domiciled allows a tax credit for taxes “deemed paid” in the Philippines equivalent to at least 15% (b) 15% represents the difference between the regular income tax of 30% on corporations and the 15% tax on dividends (“tax sparing credit”) (c) If the country within which the NRFC is domiciled does NOT allow a tax credit, a final withholding tax at the rate of30% is imposed on the dividends received from a domestic corporation.
TAXATION LAW (b) On any amount in excess of P100,000 plus Final Tax of 10% on the excess
Exclude: (1) Film rentals and other payments to nonresident cinematographic film owner, lessor or distributor Final tax of 25% of gross income from all sources within the Philippines (2) Rental, lease and charter fees payable to non-resident owner or lessor of vessels chartered by Philippine nationals Final tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Authority
CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT TRADED IN THE STOCK EXCHANGE On sale, barter, exchange or other disposition of real property or on shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as a capital asset:
(3) Rentals, charter and other fees payable to non-resident owner or lessor of aircraft machineries and other equipment Final tax of 7.5% of gross rentals or fees
ON THE NET CAPITAL GAIN: (a) First P100,000 Final Tax of 5%
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TAXATION LAW
Summary of Tax Bases and Rates of Special Corporations (Quick Glance) Type of Corporation
Tax Rate
Tax Base
Domestic Corporations Proprietary Educational Institutions and Hospitals Taxable Income from all sources (Non-profit) Depository Banks (Foreign Currency Deposit Units) (1) With respect to income derived under the Exempt (except that net income expanded foreign currency deposit system from from such transactions is subject certain foreign currency transactions to the regular income tax payable (2) With respect to interest income from foreign by banks) currency loans to residents other than offshore units in the Philippines or other depository banks Amount of interest income under the expanded system Resident Foreign Corporations International Carriers Gross Philippine Billings Offshore Banking Units (1) With respect to income derived by offshore Exempt (except that net income banking units from certain foreign currency from such transactions is subject transactions to the regular income tax payable (2) With respect to interest income derived from by banks) foreign currency loans granted to residents other than offshore banking units or local commercial Amount of interest income banks Resident Depository Bank (Foreign Currency Deposit Units) Exempt (except that net income (1) With respect to income derived under the from such transactions is subject expanded foreign currency deposit system from to the regular income tax payable certain foreign currency transactions by banks) (2) With respect to interest income from foreign currency loans to residents other than offshore Amount of interest income units in the Philippines or other depository banks under the expanded system Regional or Area Headquarters Exempt Regional Operating Headquarters of Multinational Taxable Income from within the Companies Philippines Non-resident Foreign Corporations [EXCLUDED] Non-resident cinematographic film owners, lessors or Gross Income from the distributors Philippines Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter Philippine Nationals Fees from the Philippines Non-resident Owner or Lessor of Aircraft, Machineries Gross Rentals, Charges and Fees and Other Equipment from the Philippines 120
10%
-
10%
2.5%
-
10%
-
10% 10%
25% 4.5% 7.5%
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IMPROPERLY ACCUMULATED EARNINGS OF CORPORATIONS
TAXATION LAW
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.
See: Sec. 29, as implemented by RR 2-2001 which prescribes rules governing the imposition of IAET 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.
Composition The following constitute accumulation of earnings for the reasonable needs of the business: (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, (2) inclusive of accumulations taken from other years; (3) Earnings reserved for definite corporate Expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; (4) Earnings reserved for Building, Plant or Equipment Acquisition as approved by the Board of Directors or equivalent body; (5) Earnings reserved for compliance with any Loan Covenant or pre-existing obligation established under a legitimate business agreement; (6) Earnings required by Law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; (7) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for Investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.
Rationale: 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 tax on the earnings distributed to them. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. 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 Immediacy Test It states that the “reasonable needs of the business” are the (1) immediate needs of the business; and (2) reasonably anticipated needs.
Covered Corporations Only domestic corporations classified as closelyheld corporations are liable for IAET. 121
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TAXATION LAW reason of the application of (a) or (c) shall, for purposes of applying (1) or (2), be treated as actually owned by such person.
Closely-held corporations are those: (1) at least 50% in value of the outstanding capital stock; or (2) at least 50% of the total combined voting power of all classes of stock entitled to vote (3) is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publiclyheld corporations.
But stock constructively owned by the individual by reason of the application of (b) shall NOT be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. BIR RULING 025-02 The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company.
To determine whether the corporation is closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownership. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner.
Where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered as a publicly-held corporation, thus, exempt from IAET. DETERMINATION OF REASONABLE NEEDS OF THE BUSINESS: An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not necessary for the purpose of the business, considering all the circumstances of the case.
For purposes of this paragraph, the ‘family of an individual’ includes his brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants. (3) Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall be considered as owned by such person.
To determine the “reasonable needs” of the business in order to justify an accumulation of earnings, the Regulations adhere to the socalled “Immediacy Test” under American jurisprudence as adopted in this jurisdiction. Accordingly, the term “reasonable needs of the business” means the immediate needs of the business, including reasonably anticipated needs. In either case, the corporation should be able to prove: (a) an immediate need for the accumulation of the earnings and profits, or (b)
For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership. - Stock constructively owned by 122
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the direct correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and the penalty tax would apply.
TAXATION LAW
NPC in general is subject to income tax; PAGCOR is not subject to income tax [RA 9337] QUALIFICATION FOR TAX EXEMPTION UNDER SECTION 30 OF THE 1997 NIRC: (1) It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans. (2) It should meet the following tests: (a) Organizational Test – requires that the corporation or association’s constitutive documents exclusively limit its purposes to one or more of those described in paragraph (E) of Section 30 of the 1997 NIRC. (b) Operational Test – mandates that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in paragraph (E) of Section 30 of the 1997 NIRC, as amended. A corporation or association fails to meet this test if a substantial part of its operations may be considered “activities conducted for profit”. (3) All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specified person. (4) It must not be a branch of a foreign nonstock, non-profit corporation. [RMO No. 20-2013]
TAX EXEMPT CORPORATIONS (1) Government educational institutions. (2) Non-stock and non-profit educational institutions. (3) Nonprofit labor, agricultural or horticultural organizations (4) Associations of farmers, fruit growers, and the like whose primary function is to market the product of their members (5) Organizations with a purely local operation whose income is derived only from assessment, duties and fees collected from their members to meet operational expenses such as fire insurance company, farmers’ or other mutual typhoon associations, mutual ditch or irrigation company and mutual or cooperative telephone company (6) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans, provided that no individual person owns its assets or no individual person receives benefit on its earnings (7) Non-stock/ non-profit mutual savings bank or non-stock/ non-profit cooperative bank (8) Non-profit civic league or organization operating exclusively for the promotion of social welfare (9) Cemetery company owned and operated exclusively for the benefit of its members (10) Non-profit business league, chamber of commerce, or board of trade (11) Associations, orders, beneficiary societies operating for the exclusive benefits of their members. [Sec.30, NIRC]
TAXATION OF PARTNERSHIPS CLASSIFICATION OF FOR TAX PURPOSES
PARTNERSHIPS
(1) General Professional Partnerships (GPP)– partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which 123
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is derived from engaging in any trade or business. A GPP is exempt from income tax. It is, however, required to file a tax return for its income for the purpose of furnishing information as to the share in the gains or profits that each partner shall include in his individual tax return. (2) Other Partnerships (or General Copartnerships) – partnerships wherein all or part of their income is derived from the conduct of trade or business. An ordinary business partnership is considered as a corporation and is thus subject to corporate tax of 30%.
TAXATION LAW
(2) When a donor makes a gift of an undivided property in favor of two or more donees. When Co-ownership is not subject to tax When the co-ownership’s activities are limited merely to the preservation of the co-owned property and to the collection of the income from the property. The income derived by a coowner from the property shall be reported in his individual tax return regardless of whether such income is actually or constructively received. When Co-ownership is subject to tax The following circumstances would render a co-ownership subject to a corporate income tax: (a) When a co-ownership is formed or established voluntarily, or upon agreement of the parties; (b) When the individual co-owner reinvested his share, and (c) When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide to same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership.
Other Partnerships (or general co-partnerships) Rules: (1) The partnership is subject to the same rules on corporations (capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT]), but is not subject to the improperly accumulated earnings tax [IAET]. The partnership must file quarterly and year-end income tax returns. (2) The taxable income of the partnership, less the normal corporate income tax (30%) thereon, is the distributable net income of the partnership.
Automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. [Ona v. CIR, May, 25 1972]
The share of a partner in the partnership’s distributable net income of a year shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. [Sec. 73(D)] Such share will be subjected to a final tax of 10% to be withheld by the partnership. [Sec. 24(B)(2)] CO-OWNERSHIP There is co-ownership (1) When two or more heirs inherit and undivided property from a decedent.
JOINT VENTURE AND CONSORTIUM To constitute a” joint venture,” certain factors are essential. Each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, 124
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material or money,; profits must be shared among the parties; there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; and usually, there is single business transaction.
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(3) For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. (4) Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. (5) The distributive share of a partner (actual or constructive) shall be subject to a creditable withholding income tax of 10% if the amount share is not more than P720,000 and 15% if the amount of the share is more than P720,000. [RR 2- 1998] (6) If the partnership sustains a net operating loss, the partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income.
An unincorporated joint venture is taxed likes a corporation. The share of the joint venture partners will no longer be taxable to them because they partake of dividends if paid to a domestic or resident corporation. However, an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations pursuant to the consortium agreement with the Philippine Government is not subject to the corporate income tax. Only the joint venture partners will be taxed on their respective shares in the income of the joint ventures. Two elements necessary to exempt a joint venture or consortium from tax (1) The joint venture must be an unincorporated entity formed by two or more persons (2) The joint venture was formed for the purpose of undertaking a construction project, or engaging in the petroleum and other energy operations with operating contract with the government.
GPP IS NOT A TAXABLE ENTITY The GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism distribution of such income to the individual partners. [Tan v. Commissioner (Oct. 3, 1994)] But the partnership itself is required to file income tax returns for the purpose of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. [RR 2- 1998]
TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS
The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by the partner in the same taxable year in which such partnership net income was earned, and shall be taxed to them in their individual capacities, whether actually distributed or not, at the graduated income tax ranging from 5% to 32%.
RULES (1) A GPP is a partnership formed by persons for the purpose of exercising their common profession, no part of the income of which is derived from engaging in trade or business. A GPP as such shall not be subject to the income tax. It is not a taxable entity for income tax purposes. (2) The partners shall only be liable for income tax only in their separate and individual capacities.
Thus, the principle of constructive receipt of income or profit is being applied to 125
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undistributed profits of GPPs. The payment [to the partners] of such tax-paid profits in another year should no longer be liable to income tax. [Mamalateo]
TAXATION LAW
In addition, the withholding tax that should have been withheld and remitted to the BIR as well as the penalties for non-, late or erroneous payment of the withholding tax such as surcharges and deficiency interest are assessed by the BIR. [Mamalateo]
WITHHOLDING TAX
WITHHOLDING AGENT Any person or entity who is required to deduct and remit the taxes withheld to the government. (a) In general, any juridical person, whether or not engaged in trade or business; (b) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents. In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCL) shall be issued to the buyer unless the withholding tax due on the sale, transfer or exchange of real property has been duly paid; ac. All government offices, including GOCCs, as well as local government units.
CONCEPT Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. It is a systematic way of collecting taxes at source, an indispensable method of collecting taxes to ensure adequate revenue for the government. The withholding of income tax on compensation income, on certain income payments made to resident taxpayers, and on income payments made to non-resident taxpayers is very important for all taxpayers, because the obligation to withhold and remit the tax is mandatory and prescribed by law. In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. The amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. In an ad valorem tax, the tax paid or withheld is not deducted from the tax base, except when the law clearly spells out in defining the tax base.
All income payments which are required to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who, at the same time, claims the expenses. [RR 30-2003] Duties and Obligations of the Withholding Agent (1) To Register - withholding agent is required to register within ten (10) days after acquiring such status with the Revenue District office having jurisdiction where the business is located (2) To Deduct and Withhold - withholding agent is required to deduct tax from all
The duty to withhold is different from the duty to pay income tax. The revenue officers generally disallow the expenses claimed as deduction from gross income, if no withholding of tax as required by law or the regulations was withheld and remitted to the BIR within the prescribed dates.
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(3)
(4)
(5)
(6)
(7)
(8)
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money payments subject to withholding tax To Remit the Tax Withheld - withholding agent is required to remit tax withheld at the time prescribed by law and regulations To File Annual Return - withholding agent is required to file the corresponding Annual Information Return at the time prescribed by law and regulations To Issue Withholding Tax Certificates withholding agent shall furnish Withholding Tax Certificates to recipient of income payments subject to withholding (Available, BIR Website) To submit an alphabetical list of employees and list of payees on income payments subject to creditable and final withholding taxes which are required to be attached as integral part of the Annual Information Returns (BIR Form No. 1604CF/1604-E) and Monthly Remittance Returns (BIR Form No. 1601-C, etc.). [RR No. 1-2014, as clarified by RMC No. 52014] For hospitals and clinics, to submit the names and addresses of medical practitioners in the following classifications, every 15th day after the end of each calendar quarter, to the Collection Division of the Revenue Region for non-large taxpayers and at the Large Taxpayers Document Processing and Quality Assurance Division (LTDP&QAD) in the National Office or Large Taxpayers District Office (LTDO) in the Region for large taxpayers, where such hospital or clinic is registered, using the prescribed format. [RR No. 14-2013] In cases covered by substituted filing, to furnish each employee with the original copy of Certificate of Compensation/Tax Withheld (BIR Form No. 2316) and submit to the BIR the duplicate copy not later than February 28 following the close of the calendar year.
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Withholding agents shall require all individuals and entities claiming exemption from imposition of taxes on income and, consequently, from withholding taxes to provide a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of the related income. The withholding agent’s failure to withhold notwithstanding the lack of tax exemption certificate or ruling shall cause the imposition of penalties under Section 251 and other pertinent Sections of the 1997 Tax Code. [RMC No. 8-2014]
KINDS WITHHOLDING OF FINAL TAX OF CERTAIN INCOMES Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by specific section of the NIRC on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of the NIRC. WITHHOLDING OF CREDITABLE TAX AT SOURCE The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent(32%), which shall be credited against the income tax liability of the taxpayer for the taxable year.
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Withholding of creditable tax (RR 2-98) (a) Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. (b) The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due on the income. (c) Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.
TAXATION LAW employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government.
TAXES AS SPECIAL FUND IN TRUST The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. RETURN AND PAYMENT IN CASE OF GOVERNMENT EMPLOYEES If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose.
WITHHOLDING OF VAT (1) On gross payments for the purchase of goods (2) On gross payments for the purchase of services (3) Payments made to government public works contractors (4) Payments for lease or use of property or property rights to non-resident owners
STATEMENTS AND RETURNS Every employer required to deduct and withhold a tax shall: (1) Furnish to each such employee in respect of his employment a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld and such other information as the Commissioner may prescribe (a) During the calendar year, on or before January thirty-first (31st) of the succeeding yea; or (b) If his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made (2) Submit to the Commissioner an annual information return on or before January thirty-first (31st) of the succeeding year containing: (a) A list of employees;
FILING OF RETURN AND PAYMENT OF TAXES WITHHELD WHERE TO FILE AND PAY: (1) Authorized agent bank; (2) Collection Agent; (3) the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located; or (4) As Commissioner otherwise permits. PERIOD FOR FILING AND PAYMENT: (a) The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter. (b) The Commissioner may, with the approval of the Secretary of Finance, require the 128
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(b) The total amount of compensation income of each employee; (c) The total amount of taxes withheld therefrom during the year, accompanied by copies of the written statements furnished to employees, and such other information as may be deemed necessary.
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tax under Sec. 25(A)(1) of the Tax Code (d) Winnings (except from Philippine Charity Sweepstake Office and Lotto) (e) Interest income on foreign currency deposit (f) Interest income from long term deposit (g) Cash and/or property dividends (h) Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property (2) Income Payments to a Non-Resident Alien Engaged in Trade or Business in the Philippines (a) On Certain Passive Income (i) cash and/or property dividend (ii) share in the distributable net income of a partnership (iii) Interest on any bank deposits (iv) Royalties (v) Prizes (except prizes amounting to P10,000 or less which is subject to tax under Sec. 25(A)(1) of the Tax Code. (vi) Winnings (except from Philippine Charity Sweepstake Office and Lotto) (b) Interest on Long Term Deposits (c) Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property (3) Income Derived from All Sources Within the Philippines by a Non-Resident Alien Individual Not Engaged in Trade or Business (a) On gross amount of income derived from all sources within the Philippines (b) On Capital Gains presumed to have been realized from the sale, exchange or disposition of real property located in the Philippines
The Commissioner may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required.
FINAL WITHHOLDING TAX AT SOURCE Under the final withholding tax system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from payee on the said income (e.g., interest on deposits, royalties, etc.). The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of the withholding agent’s failure to withhold the tax or in case of under-withholding, the deficiency tax shall be collected from him. The payee is not required to file an income tax return for the particular income, nor is he liable for the payment of the tax. [Sec. 2.57, RR No. 2-98] The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax, such as gross receipts tax in the case of a bank. INCOME PAYMENTS SUBJECT TO FINAL WITHHOLDING TAX: (1) Income Payments to a Citizen or to a Resident Alien Individual (a) Interest on any peso bank deposit (b) Royalties (c) Prizes (except prizes amounting to P10,000 or less which is subject to 129
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(4) Income Derived by Alien Individual Employed by a Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies (5) Income Derived by Alien Individual Employed by Offshore Banking Unit (6) Income of Aliens Employed by Foreign Petroleum Service Contractors and Subcontractors (7) Income Payment to a Domestic Corporation (a) Interest from any currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements derived from sources within the Philippines (b) Royalties derived from sources within the Philippines (c) Interest income derived from a depository bank under the Expanded Foreign Currency Deposit (FCDU) System (d) Income derived by a depository bank under the FCDU from foreign transactions with local commercial banks (e) On capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined in accordance with Sec. 6(E) of the NIRC, whichever is higher (8) Income Payments to a Resident Foreign Corporation (a) Offshore Banking Units (b) Tax on branch Profit Remittances (c) Interest on any currency bank deposits and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements and
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royalties derived from sources within the Philippines (d) Interest income on FCDU (e) Income derived by a depository bank under the expanded foreign currency deposits system from foreign currency transactions with local commercial banks (9) Income Derived from all Sources Within the Philippines by a Non-Resident Foreign Corporation (a) Gross income from all sources within the Philippines such as interest, dividends, rents, royalties, salaries, premiums (except re-insurance premiums), annuities, emoluments or other fixed determinable annual, periodic or casual gains, profits and income or capital gains (b) Gross income from all sources within the Philippines derived by a nonresident cinematographic film owner, lessor and distributor (c) On the gross rentals, lease and charter fees derived by a non-resident owner or lessor of vessels from leases or charters to Filipino citizens or corporations as approved by the Maritime Industry Authority (d) On the gross rentals, charter and other fees derived by a non-resident lessor of aircraft, machineries and other equipment (e) Interest on foreign loans contracted on or after August 1, 1986 (10) Fringe Benefits Granted to the Employee (except Rank and File) Goods, services or other benefits furnished or granted in cash or in kind by an employer to an individual employee (except rank and file) such as but not limited to the following: (a) Housing (b) Vehicle of any kind 130
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(c) (d) (e) (f)
Interest on loans Expenses for foreign travel Holiday and vacation expenses Educational assistance to employees or his dependents (g) Membership fees, dues and other expense in social and athletic clubs or other similar organizations – Health insurance (h) Informers Reward
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Income payments subject to Expanded Withholding Tax: (1) Professional fees / talent fees for services rendered by the following individuals: (a) Those individually engaged in the practice of profession or callings (b) Professional entertainers such as but not limited to actors and actresses, singers and emcees (c) Professional athletes including basketball players, pelotaris and jockeys (d) Directors involved in movies, stage, radio, television and musical directors (e) Insurance agents and insurance adjusters (f) Management and technical consultants (g) Bookkeeping agents and agencies (h) Other recipient of talent fees (i) Fees of directors who are not employees of the company paying such fees whose duties are confined to attendance art and participation in the meetings of the Board of Directors (2) Professional fees, talent fees, etc for services of taxable juridical persons (3) Rental of real property used in business (4) Rental of personal properties in excess of P 10,000 annually (5) Rental of poles, satellites and transmission facilities (6) Rental of billboards (7) Cinematographic film rentals and other payments (8) Income payments to certain contractors (a) General engineering contractors (b) General building contractors (c) Specialty contractors (d) Other contractors like: (i) Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land, air or water, where the gross
CREDITABLE WITHHOLDING TAX Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on the income. The income recipient is still required to file his income tax return as prescribed in Section 51 of the NIRC, wither to report the income and/or pay the difference between the tax withheld and the tax due on the income. EXPANDED WITHHOLDING TAX A kind of withholding tax which is prescribed on certain income payments and is creditable against the income tax due of the payee for the taxable quarter/year in which the particular income was earned. An income payment is subject to the expanded withholding tax if the following conditions concur: An expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income tax; (a) The income is fixed or determinable at the time of payment; (b) The income is one of the income payments listed in the regulations that is subject to withholding tax; (c) The income recipient is a resident of the Philippines liable to income tax; and (d) The payor-withholding agent is also a resident of the Philippines.
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payments by the payor to the same payee amounts to at least two thousand pesos (P2,000) per month, regardless of the number of shipments during the month (ii) Filling, demolition and salvage work contractors and operators of mine drilling apparatus (iii) Operators of dockyards (iv) Persons engaged in the installation of water system, and gas or electric light, hear or power (v) Operators of stevedoring, warehousing or forwarding establishments (vi) Printers, bookbinders, lithographers and publishers, except those principally engaged in the publication or printing of any newspaper, magazine, review or bulletin which appears at regular intervals, with fixed prices for subscription and sale (vii) Advertising agencies, exclusive of payments to media (viii) Independent producers of television, radio and stage performances or shows (ix) Independent producers of "jingles" (x) Labor recruiting agencies (xi) Persons engaged in the installation of elevators, central air conditioning units, computer machines and other equipment and machineries and the maintenance services thereon (xii) Messengerial, janitorial, security, private detective and other business agencies (xiii) Persons engaged in landscaping services (xiv) Persons engaged in the collection and disposal of garbage
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(xv) TV and radio station operators on sale of TV and radio airtime, and (xvi) TV and radio blocktimers on sale of TV and radio commercial spots (xvii) Persons engaged in the sale of computer services, computer programmers, software developer/designer, etc. (9) Income distribution to the beneficiaries of estates and trusts (10) Gross commission or service fees of customs, insurance, stock, real estate, immigration and commercial brokers and fees of agents of professional entertainers (11) Commission, rebates, discounts and other similar considerations paid/granted to independent and exclusive distributors, medical/technical and sales representatives and marketing agents and sub-agents of multi level marketing companies (12) Income payments to partners of general professional partnerships (13) Payments made to medical practitioners through a duly registered professional partnership (14) Payments for medical/dental/veterinary services thru hospitals/clinics/health maintenance organizations, including direct payments to service providers (15) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property (16) Additional income payments to government personnel from importers, shipping and airline companies or their agents (17) Certain income payments made by credit card companies (18) Income payments made by the top 10,000 private corporations to their purchase of goods and services from their local/resident suppliers other than those covered by other rates of withholding 132
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(19) Income payments by government offices on their purchase of goods and services, from local/resident suppliers (20) Tolling fees paid to refineries (21) Payments made by pre-need companies to funeral parlors (22) Payments made to embalmers by funeral parlors (23)Income payments made to suppliers of agricultural products (24) Income payments on purchases of mineral, mineral products and quarry resources
medical practitioner and his patient. [RR No. 14-2013]
Income payments to RESPs (i.e., real estate consultants, real estate appraisers and real estate brokers) who passed the licensure examination given by the Real Estate Service under the Professional Regulations Commission (PRC) are classified as professional fees subject to 10%/15% EWT.
The different kinds of compensation are: (1) Regular compensation - includes basic salary, fixed allowances for representation, transportation and others paid to an employee (2) Supplemental compensation - includes payments to an employee in addition to the regular compensation such as but not limited to the following: (a) Overtime Pay (b) Fees, including director's fees (c) Commission (d) Profit Sharing (e) Monetized Vacation and Sick Leave (f) Fringe benefits received by rank & file employees (g) Hazard Pay (h) Taxable 13th month pay and other benefits (i) Other remunerations received from an employee-employer relationship
WITHHOLDING TAX ON COMPENSATION The tax withheld from income payments to individuals arising from an employeremployee relationship. Compensation is any remuneration received for services performed by an employee from his employer under an employee-employer relationship.
On the other hand, income payments to RESPs (i.e., real estate consultants, real estate appraisers and real estate brokers) who failed or did not take up the licensure examination given by the Real Estate Service under the PRC are classified as commission/brokerage fees subject to 10% EWT. [RR No. 10-2013] It shall be the duty and responsibility of the hospitals, clinics, HMOs and similar establishments to withhold and remit taxes due on the professional fees of their respective accredited medical practitioners, paid by patients who were admitted and confined to such hospitals and clinics. [RR No. 14-2013]
Exemptions from Withholding tax on compensation: Remuneration as an incident of employment (a) Retirement benefits received under RA 7641 (Retirement Pay Law) and those received by officials and employees of private firms, under a reasonable private benefit plan.
The withholding tax on professional fees paid to medical practitioners shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient, as shown in a sworn declaration jointly executed by the
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(b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee such as retrenchment, redundancy or cessation of business (c) Social security benefits, retirement gratuities, pensions and other similar benefits (d) Payment of benefits due or to become due to any person residing in the Philippines under the law of the US administered US Veterans Administration (e) Payment of benefits made under the SSS Act of 1954, as amended (f) Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by the government employee (g) Remuneration paid for agricultural labor (h) Remuneration for domestic services (i) Remuneration for casual labor not in the course of an employer's trade or business (j) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization (k) Payment for damages – actual, moral, exemplary damages received by an employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employeremployee relationship. (l) Proceeds of Life Insurance – the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise; provided however, that interest payments agreed under the policy for the amounts which are held by the insured under such an agreement shall be INCLUDED in the gross income. (m) Amount received by the insured as a return of premium
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(n) Compensation for injuries or sickness – amounts received through accident or health insurance or under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. (o) Income exempt under Treaty (p) Thirteenth (13th) month pay and other benefits (not to exceed P 30,000) (i) Mandatory 1 month basic salary received after the twelfth *12th) month pay (ii) Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices including the Additional Compensation Allowance (ACA) granted and paid to all officials and employees of the Nations Government (NGAs) including State Universities and Colleges (SUCs), Government-Owned-or-Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and Local Government Units (LGUs) (a) De minimis benefits, given in excess of the ceilings prescribed in regulations, shall be taxable to the recipient –employee only if such excess is beyond the P30,000 threshold. (q) GSIS, SSS, Medicare and other contributions – GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees (r) Compensation income of MWEs who work in the private sector and being paid the statutory minimum wage (SMW), as fixed by Regional Tripartitie Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission 134
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(NWPC), applicable to the place where he/she is assigned (s) Compensation income of employees in the public sector with compensation income of not more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she is assigned.
TAXATION LAW
or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable. Where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. [Mamalateo]
TIMING OF WITHHOLDING The obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense
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I. ESTATE TAX
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laid neither on the property nor on the transferor or the transferee. In other words, it is an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. (Lorenzo v Posadas)
A. BASIC PRINCIPLES “...death is the generating source from which the taxing power takes its being, and that it is the power to transmit or the transmission from the dead to the living on which the tax is more immediately based. Hence it accrues as of the death of the decedent by operation of law.” Lorenzo v Posadas (1937)
D. PURPOSE OR OBJECT Purpose: To tax the shifting of economic benefits and enjoyment of property from the dead to the living.
(1) Inheritance tax accrues at the time of the decedent’s death, but the obligation to pay the same is different and is fixed by law. The tax is measured by the value of the property AT THE TIME OF DEATH. (2) Inheritance tax is measured (i.e. tax base) by the value at that time of such property as passes to him (i.e. death). Subsequent appreciation or depreciation is immaterial; (3) Inheritance taxation is governed by the statute in force at the time of the death of the decedent Tax laws cannot be given retroactive effect unless they explicitly provide for it. (Note that inheritance taxes are no longer imposed under the NIRC. Only estate taxes are imposed.)
Taxable objects/subjects: (1) Right/privilege of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death; (2) on certain transfers, during his lifetime, which are made by law as equivalent to testamentary disposition. 4 Justification Theories for the Imposition of Estate Tax (1) Benefit received theory– The State collects the tax because of the services it renders in the distribution of the estate of the decedent, either by law or in accordance with his will. (2) Privilege theory or state partnership theory – Succession to the property of a deceased person is not a right but a privilege granted by the State and consequently, the legislature can constitutionally burden such succession with a tax. The State collects the tax because of the protection it provides in the acquisition of large estates. Hence, the State is a “silent or passive partner” in the accumulation of said large property. (3) Ability to pay theory – Receipt of inheritance, which is in the nature of unearned wealth or windfall, places assets into the hands of the heirs and beneficiaries. This creates an ability to pay
B. DEFINITION ESTATE TAX is tax on the (i) right to transmit property at death and on certain transfers by the decedent during his lifetime OR (ii) those which are made by the law equivalent of testamentary dispositions. There must be a transfer of ownership or quantifiable interest or economic benefits from the decedent to the living person.
C. NATURE Estate tax is not a direct tax on property. Neither is it a capitation tax; that is, the tax is 137
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the tax and thus contributes to government income. (4) Redistribution of wealth theory – Receipt of inheritance is a contributing factor to the inequalities in wealth and income. The imposition of estate tax reduces the property received by the successor, which helps promote a more equitable distribution of wealth in society. The tax base is the value of the property and the progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of inheritance in the present form. The taxes paid by rich people are programmed for disbursement by Congress for the benefit of the poor in terms on social services, education, health, etc.
E. TIME AND PROPERTIES
TRANSFER
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(2) The statute that governs estate taxation. (3) The accrual of the estate tax. Art. 777, Civil Code. The rights to the succession are transmitted from the moment of the death of the decedent. Sec. 3, RR 2-2003. THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX. It is a wellsettled rule that estate taxation is governed by the statute in force at the time of death of the decedent. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. Taxable Transfers Taxable transfers are complete when the transferor divested himself of all economic beneficial interest in himself or his estate.
OF
Decedent’s interest is to its extent at the time of his death. (Sec. 85(A))
(1) Transfers Mortis Causa – Gratuitous transfers that take effect after death, either testate or intestate. A donation which purports to be one inter vivos but withholds from the donee the right to dispose of the donated property during the donor's lifetime is in truth one mortis causa. In a donation mortis causa "the right of disposition is not transferred to the donee while the donor is still alive." The requisites of a testamentary disposition should be fulfilled.
Estate taxation is governed by the statute in force at the time of death of the decedent. Estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. (Sec. 3, RR 2-2003) Despite the transfer of properties and rights at the time of death, the executor or administrator shall not deliver a distributive share to any party interested in the estate, unless there is a certification from CIR that estate tax has been paid. (Sec94)
Characteristics: (Maglasang v Heirs of Cabatingan, 2002) (i) It conveys no title or ownership to the transferee before the death of the transferor; or what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive; (ii) That before his death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may
Time of death governs: (1) The determination of the extent of the decedent’s interest for computing his gross estate. 138
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be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed; (iii) That the transfer should be void if the transferor should survive the transferee.
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whenever absent, one intends to return (animus revertendi), and depends on facts and circumstances, in the sense that they disclose intent. It is therefore, not necessarily the actual place of residence. (Corre v Tan Corre, 1956) Situs of Intangible Personal Properties General Rule: Mobilia Sequuntur Personam Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of owner thereof. Situs is the domicile or residence of the owner. (Collector v Fisher) Exceptions: (1) When it is inconsistent with express provisions of law (2) When justice does not demand that it should be, as where the property in fact has a situs elsewhere Intangible Properties which are considered situated in the Philippines (Sec 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 (5) Shares or rights in any partnership, business or industry established in the Philippines
Donation Mortis Causa is subject to Estate Tax. (2) Transfers Inter Vivos Gratuitous transfers that take effect after death, either testate or intestate. (See Donor’s Tax for requisites) General Rule: Donation Inter Vivos are subject to Donor’s Tax. Exceptions: (subject to estate tax) when inter vivos is treated by law as substitutes for testamentary dispositions (i.e., transfers which are inter vivos in form but mortis causa in substance)i.e. transfers in contemplation of death [Sec. 85(B), NIRC] (a) Transfer with retention or reservation of certain rights [Sec. 85(B), NIRC] (b) Revocable transfers [Sec. 85(C), NIRC] (c) Transfers of property arising under general power of appointment [Sec. 85(D), NIRC] (d) Transfers for insufficient consideration [Sec. 85(G), NIRC] Note: see further discussion in the valuation of Gross Estate
F. CLASSIFICATION OF DECEDENT Estate Tax applies only to individuals. The decedent may be classified into: (1) Citizen (RC/NRC) (2) Resident alien (RA); or (3) Non-resident alien (NRA).
F.2. RULE OF RECIPROCITY
F.1. CONCEPT OF RESIDENCE
There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: (a) Did not impose a transfer tax of any character, in respect of intangible personal
Residence and domicile are used interchangeably without distinction. For purposes of estate taxation, “residence” refers to the permanent home, the place to which 139
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property of citizens of the Philippines not residing in that foreign country; OR (b) Allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country
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If there is reciprocity, the intangible personal property of an NRA shall not be included in his gross estate. If there is no reciprocity, such intangible personal property will be included.
G. GROSS ESTATE VIS-À-VIS NET ESTATE Gross Estate
Net Estate
Value at the time of death of all the decedent’s property wherever situated HOWEVER, in the case of a NRA at the time of his death, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. [Sec 85, NIRC]
Value of the estate after all deductions have been made against the gross estate; subject to the graduated tax rates. [Sec. 6, RR 2-2003] This is the TAX BASE.
Formula for Estate Tax (see Annex A for expanded formulae) Gross Estate (Sec. 85) Less: Deductions (Sec. 86) ------------------------------------------------------Net estate before share of surviving spouse (if married) Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C)) ------------------------------------------------------= Net taxable estate Multiply by: Tax rate (Sec. 84) ------------------------------------------------------= Estate Tax Due Less: Tax Credit, if any (Sec. 86(E), or 110 (B)) ------------------------------------------------------= Estate Tax Due, if any
H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION) Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom RC/NRC/RA
NRA
Composition and Determination of GROSS Estate The value at the time of his death of all the The value at the time of his death of all the deceased’s: deceased’s: a. Real property wherever situated a. Real property located in the Phil. b. Tangible personal property wherever b. Tangible personal property located in the situated, and Phil., and c. Intangible personal property wherever c. Intangible personal property with a situs in situated the Phil. (subject to the rule of reciprocity) 140
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RC/NRC/RA
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Note: If there is reciprocity, intangible assets are excluded from gross estate Exclusions from GROSS Estate(Sec 85H and Sec 87) GSIS proceeds/ benefits Accruals from SSS Proceeds of life insurance where the beneficiary is irrevocably appointed Proceeds of life insurance under a group insurance taken by employer War damage payments and Benefits received from US Veterans Administration Transfer by way of bona fide sales Transfer of property to the National Government or to any of its political subdivisions Separate property of the surviving spouse Merger of usufruct in the owner of the naked title Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the fideicommissay k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance with the desire of their predecessor l. Acquisition and/or transfer expressly declared as not taxable m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions a. b. c. d. e. f. g. h. i. j.
Deductions from GROSS estate to arrive at the NET estate Ordinary deductions (1) Expenses, losses, indebtedness, taxes. (ELIT) (a) Funeral expenses (b) Judicial expenses (c) Claims against the estate (d) Claims against insolvent persons (e) Unpaid mortgage and debt (f) Taxes (g) Losses (2) Vanishing deductions (3) Transfers for public use (4) Amounts received under R.A. 4917 Special deductions (a) Family home (b) Standard deduction (c) Medical expenses Share in conjugal property
Ordinary deductions1 (1) Proportionate deductions for expenses, losses, indebtedness, taxes. (ELIT)2 (a) Funeral expenses (b) Judicial expenses (c) Claims against the estate (d) Claims against insolvent persons (e) Unpaid mortgage and debt (f) Taxes (g) Losses (2) Vanishing deductions (3) Transfers for public use No Amounts received under R.A. 4917 No special deductions Share in conjugal property
1 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003] 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 𝑃ℎ𝑖𝑙 2 Formula for Proportionate Deductions of NRA: Allowable Deduction = 𝑥 ELIT 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 𝑊𝑜𝑟𝑙𝑑
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Valuation of Gross Estate (Sec 88) General Rule: Gross Estate = FMV at the time of the decedent’s death
(1) Probable life of the beneficiary in accordance with the latest basic standard mortality table shall be taken into account.
Real Property (1) Appraised value, whichever is higher between: (a) FMV, as determined by the Commissioner (zonal value) or (b) FMV, as shown in the schedule of values fixed by the Provincial or City Assessor. If there is no zonal value, the taxable base is the FMV that appears in the latest tax declaration. (2) If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration.
J. ITEMS TO BE INCLUDED IN GROSS ESTATE Items to be included in the Gross Estate [Sec. 85, NIRC] (1) Property owned by the decedent actually and physically present in his estate at the time of his death; (2) Decedent’s interest; (3) Properties not physically in the estate, such as: (a) Transfers in contemplation of death [Sec. 85(B), NIRC]; (b) Transfers with retention or reservation of certain rights [Sec. 85(B), NIRC]; (c) Revocable transfers [Sec. 85(C), NIRC]; (d) Property passing under general power of appointment [Sec. 85(D), NIRC]; (e) Transfers for insufficient consideration [Sec. 85(G), NIRC]; (f) Proceeds of life insurance [Sec. 85(E), NIRC]; (g) Claims against insolvent persons; and (h) Capital of the surviving spouse [Sec. 85(H), NIRC].
Personal Property (1) FMV at the time of death. If none, acquisition cost for recently acquired properties or the current market price for the previously acquired properties. (Sec 40(B) (2) Stocks, bonds, and other securities. (a) If listed and traded stocks = value is the mean between the highest and lowest quoted selling prices at the date of death; if none, nearest the date of death (Sec 5 RR02-2003) (b) If unlisted stocks = (ordinary common shares) book value at time of death or (preferred shares) par value NB: Bonds, mortgages, and Certificates of Stocks are taxable at the place where they are physically located. (3) Proceeds of Life Insurance with Revocable Beneficiary: face value of policy (not cash surrender value)
Property Owned Actually and Physically This includes properties and interest in properties possessed such as land, buildings, shares of stock, vehicles, bank deposits, etc. The decedent is actually and physically in possession of. Decedent’s interest (Sec. 85(A)) This includes any interest having value or capable of being valued which is owned by the decedent existing at the time of death, such as dividend declared on or before death, but is received by the estate after death, partnership profits which have accrued before his death, but received after death. This also includes
Right to Usufruct use or habitation, and annuity
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those transferred by the decedent at the time of his death. Note: When decedent had relinquished his interest BEFORE his death, he could not be deemed to have transmitted interest in such property at his death.
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(2) The enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by: (a) The decedent alone; (b) The decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power, to alter, amend, revoke, or terminate; or (c) Where any such power is relinquished in contemplation of the decedent death.
Transfers in Contemplation of Death (Sec. 85(B)) The term “in contemplation of death”, as used in estate taxation, does not refer to the general expectation of death. The words mean that it is the thought of death, as a controlling motive, which induces the disposition of the property for the purpose of avoiding the tax. The decedent’s motive is a question of fact. Thus, the imminence of death may afford convincing evidence of the impelling cause of transfer. However, it is a contemplation of death and not necessarily contemplation of imminent death to which the statute refers. These transfers should be without or with insufficient considerations.
Exception: Bona fide sale for an adequate and full consideration in money or money’s worth Note: The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death EVEN THOUGH: (a) The exercise of the power is subject to a precedent giving of notice, or (b) The alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised.
The law does not specify the number of years prior to a decedent’s death within which a transfer can be considered in contemplation of death. (De leon) Transfers with retention or reservation of certain rights These are transfers with retention or reservation of certain rights that result to the incapacity of transferee to freely enjoy and dispose of the property until the transferor’s death, and the transfer may be regarded as having been intended to take effect in possession or enjoyment at the transferor’s death. These does not include bona fide sale for an adequate and full consideration.
If notice has not been given or the power has not been exercised before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death. Transfer of property under general power of appointment (Sec. 85(D)) Power of Appointment – the right to designate the person or property who shall enjoy and possess certain property from the estate of a prior decedent. (Domondon) (i) General Power of Appointment: when it gives to the decedent the power to appoint any person he pleases including himself.
Revocable Transfers (Sec. 85(C)) General Rule: A transfer is a revocable transfer where: (1) There is a transfer by trust or otherwise, 143
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The decedent holds the appointed property with all the attributes of ownership. He had a power exercisable in favor of himself, his creditors or creditors of his estate (AmJur) (ii) Special Power of Appointment: when the decedent can appoint only among a designated class of persons other than himself, his estate, the creditors of his estate, or if it the power of appointment expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate.
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consideration in money or money’s worth, but is NOT a bona fide sale for an adequate and full consideration in money or money’s worth. The value to be included in the gross estate is the excess of the fair market value of the property at the time of the decedent’s death over the consideration received. Example: Case A: If bona fide sale – no value shall be included in the gross estate Case B: If not a bona fide sale - the excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. Case C: If inter vivos transfer is proven fictitious/simulated – total value of the property at the time of death included in the gross estate.
General Rule: Property over which the decedent held a power of appointment is excluded in his gross estate Exception: (included, if) the power of appointment is GENERAL. Among those to be included in the gross estate is property arising under a general power of appointment exercised by the decedent: (1) By will; or (2) By deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death; or (3) By deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death – (a) The possession or enjoyment of, or the right to the income from the property; or (b) The right either alone or in conjunction with any person, to designate the persons who shall enjoy or possess the property or the income therefrom.
Over
Case A
FMV, transfer
2,000 1,500 2,500
FMV, death
2,500 2,000 2,000
Consideration received
2,000 800
Value included in the 0 Gross Estate
Case B
Case C
0
1,200 2,000
The transfer for insufficient consideration must fall under any of the following: (1) Transfer in contemplation of death; (2) Revocable transfer, or (3) Property passing under a GPA. - Otherwise, the tax imposed is donor’s tax.
Transfers for insufficient consideration (Sec. 85(G)) Transfers, trusts, interests, rights, or powers (denominated as transfer in contemplation of death, revocable transfer and property passing under general power of appointment) made, created, exercised or relinquished for a
Proceeds of life insurance (Sec. 85(E)) Inclusion of proceeds of life insurance to the gross estate depends on i) designated beneficiary; ii) revocability of the insurance; iii) period and source of funds used in premiums.
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When taxable (included in the Gross Estate) Proceeds of life insurance taken out by the decedent on his own life shall be included in the gross estate in the following cases: (1) Beneficiary is the estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the power of revocation; or (2) Beneficiary is other than the decedent’s estate, executor or administrator, when designation of beneficiary is not expressly made irrevocable. Note: Under the Insurance Code of 1978, if not clear or silent, the designation of the beneficiary is presumed to be revocable; hence, includible in the decedent’s gross estate.
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employees , which are exempt from all taxes; (PD 1146) (5) Benefits accruing under the SSS law (RA 1161) (6) Proceeds of life insurance payable to heirs of deceased members of military personnel (RA 360) To determine the conjugal or separate character of proceeds, the following factors are considered: (1) Policy was taken before marriage – Source of funds determines ownership of the proceeds of life insurance (2) Policy was taken during marriage (a) Beneficiary is estate of the insured – Proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable (b) Beneficiary is third person – Proceeds are payable to beneficiary even in premiums were paid out of the conjugal
When not taxable (1) Accident insurance proceeds as the Tax Code specifically mentions only life insurance policies (2) Proceeds of a group insurance policy taken out by a company for its employees (3) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute and the insured did not retain any legal interest in the insurance (4) Proceeds of insurance policies issued by the GSIS to government officials and should be proven. As a rule, regardless of the amount the debtor is unable to pay, the full amount of the claim against the insolvent person should be included in the gross estate of the decedent. The portion of the claim which is not collectible should be allowed as a deduction from the gross estate.
Claims Against Insolvent Persons For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debts. A judicial declaration of insolvency is not required but the incapacity of the debtor Deductions and/or losses already deducted from gross income can no longer be deducted from gross estate. Further, deductions should not be compensated for any insurance or extrajudicial settlement. Otherwise, they are not valid deductions.
K.1 ORDINARY DEDUCTIONS
Capital of the Surviving Spouse[Sec.85(H), NIRC] It is NOT part of the gross estate of the deceased spouse. (See Exclusions)
1.A. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES, ETC. (ELIT) i. Funeral Expenses (Sec. 86 (A)(1)(a)) Actual funeral expenses shall mean (i) those which are actually incurred (ii) in connection
K. DEDUCTIONS FROM ESTATE
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with, and before the interment or burial of the deceased and (iii) must be paid out of the estate and not by another person or out of contributions from friends and relatives. These must be (iv) duly supported by receipts or invoices or other evidence to show that they were actually incurred. They include: (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.
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expenses borne or defrayed by relatives and friends of the deceased are not deductible. (iii) Medical expenses as of the last illness will not form part of funeral expenses but should be claimed as medical expenses. (Sec. 6, RR 22003) Illustrations (a) If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that may be deducted is only P200,000; (b) If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted from the gross estate as CLAIMS AGAINST THE ESTATE.
ii. Judicial Expenses of Testamentary and Intestate Proceedings (Sec. 86 (A)(1)(b)) Expenses allowed as deduction under this category are (i) those incurred in the inventorytaking of assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. In short, these deductible items are expenses (ii) 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. (Sec. 86 (A)(2), RR 2-2003). These expenses must be (iii) for the benefit of the estate, and (iv) substantiated by recipts OR if unpaid, should be supported by a sworn statement of account issued and signed by the creditor.
Limitation: Allowable deduction is not to exceed P200,000 and whichever is lower of: (a) The actual funeral expenses (whether or not paid) up to the time of interment, or (b) An amount equal to 5% of the gross estate. The unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold is NOT allowed to be claimed as a deduction under “claims against the estate”. (Sec. 6(A)(1), RR 02-200) Not included are: (i) Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. (ii) Any portion of the funeral and burial 146
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Judicial expenses may include: (1) Fees of executor or administrator (2) Attorney’s fees (Commissioner v CA (2000) (3) Court fees (4) Accountant’s fees (5) Appraiser’s fees (6) Clerk hire (7) Costs of preserving and distributing the estate (8) Costs of storing or maintaining property of the estate (9) Brokerage fees for selling property of the estate
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Requisites for Deductibility of Claims Against the Estate: (a) The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of internment) and unpaid medical expenses which are classified under a different category of deductions. (b) The liability was contracted in good faith and for adequate and full consideration in money or money’s worth (c) The claim must be a debt or claim which is valid in law and enforceable in court; (d) The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed. (e) They must be reasonably certain in amount, and substantiated.
Not deductible (a) Compensation paid to a trustee of the decedent’s estate for his services rendered for the purpose of managing the decedent’s real estate for the benefit of the testamentary heirs (Lorenzo v. Posadas) (b) Expenses incurred by the presumptive heir and that of her witnesses for appearance at the trial to oppose the probate of a will. (c) Attorney’s fees incident to litigation incurred by the heirs in asserting their respective rights, or claims as to who are entitled to the estate left by the deceased. (d) Premiums paid by the administrator on his bond, being exclusively used for his account, since the giving of the bond is in the nature of a qualification for the office and not necessary in the settlement of his estate.
Substantiation Requirements In case of simple loan (including advances): (1) The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender. (2) Duly
notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death - If the creditor is a corporation, the sworn certification should be signed by the President, or Vice-President, or other principal officer of the corporation. - If the creditor is a partnership, the sworn certification should be signed by any of the general partners.
iii. Claims Against the Estate (Sec. 86 (A)(1)(c)) The word “claims” is generally construed to mean (i) debts or demands of a pecuniary nature (ii) which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgements. These are liabilities of the estate or indebtedness of such (iii) arising out of: contract, tort, or operation of law. (Dizon v CTA, 2008) 147
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- In case the creditor is a bank or other financial institutions, the Certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loan of the decedentdebtor. - If the creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with. When the lender, or the President/Vice-president/principal officer of the creditor-corporation, or the general partner of the creditorpartnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within 15 days from the execution thereof.
TAXATION LAW 2 creditor of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident creditor is a resident;
(4) A statement under oath executed by the
administrator or executor of the estate reflecting the disposition of the proceeds of the loan if it was contracted within 3 years prior to the death of the decedent. If the unpaid obligation arose from purchase of goods or services: (1) Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of services), as duly acknowledged, executed and signed by decedent-debtor and creditor, and statement of account given by the creditor as duly received by the decedent-debtor (2) Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death.
(3) Proof of financial capacity of the creditor to
lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor - In case the creditor is an individual who is no longer required to file income tax returns with the Bureau, a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a nonresident, the executor/ administrator or any of the legal heirs must submit a duly notarized declaration by the
(3) Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary ledger/records of the debtor-decedent, should likewise be submitted. Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the
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documents mentioned in the preceding paragraphs.
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decedent’s interest therein, should always form part of the taxable gross estate. (RR 22003)
iv. Claims Against Insolvent Persons (Sec. 86 (A)(1)(d)) These are claims of the estate (i) against insolvent persons (ii) which are not collectible. To be deductible from the gross estate:
Unpaid Taxes Requisites for Deductibility (a) Taxes which have accrued as of or before the death of the decedent (if it was incurred after, it is chargeable to the income of the estate), and (b) Unpaid as of the time of his death, regardless of whether or not it was incurred in connection with trade or business
Additional Requirements: (a) The incapacity of the debtor to pay his obligation should be proven, although a judicial declaration of insolvency is not required; (b) The full amount owed by the insolvent must first be included in the decedent’s gross estate; and (c) If the insolvent could only pay a partial amount, the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction.
Not included: (a) Income tax upon income received after death, or (b) Property taxes not accrued before his death, or (c) The estate tax due from the transmission of his estate Casualty Losses Requisites for Deductibility (a) Incurred during the settlement of the estate (b) Arising from fires, storms, shipwreck, or other casualties from robbery, theft, or embezzlement (c) Not compensated by insurance or otherwise (d) At the filing of the estate tax return, such losses have not been claimed as a deduction for income tax purposes in an income tax return (e) Incurred not later than the last day for the payment of the estate tax as prescribed by law.
v. Unpaid Mortgages, Losses and Taxes (Sec. 86(A)(1)(e)) Unpaid Mortgages Requisites for Deductibility [Sec. 6-A5(a), RR 22003] (a) The value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estates. (b) The mortgages were contracted bona fide and for an adequate and full consideration in money or money’s worth. In case the loan of the decedent is only an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as a receivable of the estate, the said unpaid obligation shall not be allowed as a deduction. In all instances, the mortgaged property, to the extent of the
Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or estate tax purposes. (Sec. 6(A)(5)), Rev. Reg 2-2003)
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NOTE: See Formula for computing Ordinary Deductions of NRA above.
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determined and paid by the prior decedent or by the donor, as the case may be. (5) No previous vanishing deduction on the property – No such deduction on the property, or the property given in exchange therefor, was allowed in determining the value of the net estate of the prior decedent. This is intended to preclude the application of the vanishing deduction on the same property more than once.
1. B. PROPERTY PREVIOUSLY TAXED/PPT (SEC. 86(A)(2)) ALSO CALLED AS VANISHING DEDUCTIONS This is an amount allowed to reduce the taxable estate of a decedent where property: (1) Received by him from a prior decedent by gift, bequest, device, or inheritance (2) Transferred to him by gift, has been the object of previous transfer transaction
Limitations (1) Value of property – The deduction is limited by the value of property previously taxed or the aggregate value of such property if more than one item, as finally determined for the purpose of the prior estate tax (or gift tax) or the value of such property in present decedent’s gross estate, whichever is lower. (2) Deduction for mortgage or lien – The initial value (in number 1 above) shall be reduced by the total amount paid, if any, by the present decedent on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment, of such mortgage or other lien from the gross estate of the prior decedent, or gift or donor, in determining the estate tax of the prior decedent or the donor’s tax. (3) Deductions for expenses, etc. – The value as reduced in #2 shall be further reduced by an amount which bears the same ratio to the amounts allowed as deductions for: (a) Expenses, losses, indebtedness, and taxes (ordinary deductions), and (b) Transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the decedent’s gross estate; and (4) Percentage of deductions – The vanishing deduction shall be the value (final basis) in #3 multiplied by the ff. percentages:
Conditions (1) There must be 2 deceased persons and the first one is the donor (2) The second decedent dies within 5 years after the death of a prior decedent, or in case of gift, the decedent-donee dies within the same period after the date of the gift. Requisites (1) Death – The present decedent died within 5 years from the date of the prior decedent OR date of gift. (2) Identity of the property– The property with respect to which deduction is sought can be identified as the one who received from prior decedent, or from the donor, or as the property acquired in exchange for the original property so received. (3) Inclusion of the property – The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or have been included in the total amount of the gifts of the donor made within 5 years prior to the present decedent’s death. (4) Previous taxation of property – The estate tax on the prior succession, or the donor’s tax on the gift must have been finally
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Rate 100% Within one (1) year prior to the death of the present decedent 80% More than one year but not more than two years prior to the death of the decedent 60% More than two years but not more than three years
subdivision thereof, for exclusively public purposes. The whole amount of all the bequests, legacies, devises, or transfers to or for the use of shall be deductible from gross estate, (iii) provided such amount or value had been included in the computation of the gross estate. Thus, there is no limitation for the amount to be deducted.
40%
1.D. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917
20%
More than three years but not more than four years prior to the death of the decedent More than four years but not more than five years prior to the death of the decedent
(An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to attachment, levy, execution, or any tax whatsoever. (Sec. 86(A)(7)) Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with RA 4917, provided that such amount is included in the gross estate of the decedent. These include: (1) Retirement benefits from private firms with private benefit plan, if the retiring employee is 50 years old or older. This can only be once availed. (2) Benefits granted in case of separation beyond the control of the employee. RA 4917 provides that retirement benefits of private employees shall not be subject to attachment, levy execution or any tax.
FORMULA FOR VANISHING DEDUCTIONS: (please take note of the limitations above) Value Taken of Property Less: Mortgage debt paid, if any = Initial Basis Less: Proportionate Deduction** = Final Basis Multiplied by Deduction Rate VANISHING DEDUCTION **Proportionate Deduction 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
𝒙 (𝑬𝑳𝑰𝑻 + 𝑻𝑷𝑼)
SPECIAL DEDUCTIONS (A) Family Home (Sec. 86(A)(4)) 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 to by the Barangay Captain of the locality. It is deemed constituted on the house and lot from the time it is actually occupied as the family residence and considered as such for as long as any of its beneficiaries actually resides therein. (Arts. 152 and 153, Family Code)
Note: Amount of Vanishing Deductions is NOT subtracted from the value of the CPG to determine the share of surviving spouse. It is deducted from the exclusive property of the decedent.
1. C. TRANSFERS FOR PUBLIC PURPOSE (SEC. 86(A)(3)) These are (i) dispositions in a last will and testament or transfers to take effect after death (ii) in favor of the Government of the Republic of the Philippines, or any political 151
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Temporary absence from the constituted family home due to travel or studies or work abroad, etc. does not interrupt actual occupancy. 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. (Sec. 6(D), RR 2-2003)
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Beneficiaries of a Family Home (1) The husband and wife, or an unmarried person who is the head of a family; and (2) Their parents, ascendants, descendants, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support.
It must be part of the ACP or CPG, or the exclusive properties of either spouse. It may also be constituted by an unmarried head of a family on his or her own property. (Sec. 6(D), RR 2-2003 citing Art. 156, FC). For purposes of availing this deduction, a person may constitute only one family home. Sec. 6(D), RR 2-2003 citing Art. 161, FC.
Limitation: P 1,000,000.00 (B) Standard Deduction (Sec. 86(A)(5), Sec.
6(E), RR 2-2003) An amount equivalent to one million pesos (P1,000,000) shall be deducted from the gross estate without need of substantiation.
Requisites for Deductibility (Sec. 6(D)(b), RR 22003) (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. (2) The total value of the family home must be included as part of the gross estate of the decedent (3) Allowable deduction must be in an amount equivalent to the current FMV 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 in no case shall the deduction exceed P1,000,000. (4) The decedent was married or if single, was a head of the family. (5) Along with the decedent, any of the beneficiaries must be dwelling in the family home. (6) The family home as well as the land on which it stands must be owned by the decedent. Therefore, the FMV of the family home should have been included in the computation of the decedent’s gross estate.
(C) Medical Expenses (Sec. 86(A)(6), NIRC; Sec.
6(F), RR 2-2003) All medical expenses (cost of medicine, hospital bills, doctors’ fees, etc.) incurred (whether paid or unpaid). Requisites for Deductibility 1. The expenses were incurred by the decedent within 1 year prior to his death 2. The expenses are duly substantiated with receipts and other documents in support thereof Limitation Provided, that in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000). Not allowed as deduction: (i) Any amount of medical expenses incurred within one year from death in excess of P500,000 shall no longer be allowed as a deduction under this subsection. Neither can (ii) any unpaid amount thereof in excess of the P500,000 threshold nor (iii) any unpaid amount for medical expenses incurred prior to the one-year period from date of death be allowed to be deducted 152
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from the gross estate under “Claims against the estate”. (RR 2-2003, Sec. 6-F)
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interest in the estate is taxed. Net share of the surviving spouse is neither an ordinary nor a special deduction.
NET SHARE OF THE SURVIVING spouse in the conjugal partnership property (Sec. 86(C), NIRC; Sec. 6(H), RR 2-2003)
L. EXCLUSIONS FROM ESTATE Capital of the Surviving Spouse (Sec. 85(H)) Capital: property of the spouses brought into marriage. Strictly speaking, capital under the Civil Law refers to the property brought by the husband to the marriage while that brought into the marriage by the wife known is as paraphernal property. (Domondon)
The amount deductible is the net share of the surviving spouse in the conjugal partnership property. The net share is equivalent to ½ of 50% of the conjugal property after deducting the obligations chargeable to such property. The share of the surviving spouse must be removed to ensure that only the decedent’s
Exclusive Property of Each Spouse If ACP governs property relations If CPG governs property relations The community of property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. (Art. 91 Family Code)
The husband and wife place in a common fund the proceeds, products, fruits, and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in marriage settlements. (Art. 106, Family Code)
(1) The following are excluded from the community property: (a) Property acquired by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator, or grantor that they shall form part of the (1) The following are exclusive property of each community property. spouse: (b) Property for personal and exclusive use of (a) That which is brought to the marriage as either spouse; however, jewelry shall form his or her own part of the community property. (b) That which each acquires DURING the (c) Property acquired before the marriage by marriage by gratuitous title either spouse who has legitimate (c) That which is acquired by right of descendants from a former marriage, and redemption, by barter or by exchange with the fruits as well as the income, if any, of property belonging to only one of the such property. (Art. 92 Family Code) spouses (2) Property acquired during the marriage is (d) That which is purchased with exclusive presumed to belong to the community, unless money of the wife or the husband (Art. it is proved that it is one of those excluded 109, Family Code) therefrom. (2) Property bought on instalments paid partly from exclusive funds of either or both spouses and partly from conjugal funds belong to the 153
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buyer or buyers if full ownership was vested BEFORE the marriage subject to reimbursement advanced by the conjugal partnership or by either or both spouses. (Art. 118, Family Code) (3) Whenever an amount or credit payable within a period of time belongs to one of the spouses, the sums collated during the marriage in partial payments or by instalments on the principal are considered the exclusive property of the spouse. However, interest falling due during the marriage on the principal belong to the conjugal partnership. (4) All property acquired during the marriage whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses,, is presumed to belong to the conjugal partnership, unless it is proved that it pertains exclusively to the husband or to the wife.
If separation of property governs property relations Separation of property may refer to present or future property or both. It may be total or partial. In the latter case, the property not agreed upon as separate shall pertain to the absolute community. (Art. 144, Family Code) To each spouse shall belong all earnings from his or her profession, business or industry, and all fruits, natural, industrial, or civil, due or received during the marriage from his or her separate property. (Art. 145, Family Code) Exemptions: (1) Where net estate does not exceed P200,000. (Sec. 84) (2) The following transmissions shall not be taxed: (a) Merger of the usufruct in the owner of the naked title (b) Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicomissary (c) The transmission from the first heir, legatee, or done in favor of another beneficiary in accordance with the desire of the predecessor (d) All bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, and provided that not more than 30% of the said bequests, etc shall be used by such institution for administration purposes. Note: Effectivity of Family Code (Aug 3, 1988) Exemptions under special laws 154
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(1) Benefits received by members from the GSIS and the SSS by reason of death (2) Amounts received from the Philippines and US governments for damages suffered during the last war. (3) Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veteran Administration (4) Bequests, legacies, or donations mortis causa to social welfare, cultural, or charitable organizations. Bequests to be used actually, directly and exclusively for educational purposes are also exempt from tax. (5) Grants and donations to the Intramuros Administration
M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY It is a remedy against international double taxation. To minimize the onerous effect of taxing the same property twice, tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.
Who may claim: RC/NRC/RA. Only the estate of a decedent who was a citizen or a resident of the Philippines at the time of his death can claim tax credit for any estate tax paid to a foreign country. General Rule The estate tax imposed by the NIRC shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.
Limitations on Credit A. For Estate Taxes paid to one foreign country (Specific Country Limitation) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under the tax code bears to his entire net estate.
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 =
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
B. For estate taxes paid to 2 or more foreign countries (Global Limitation) 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 estate situated outside the Philippines taxable under the tax code bears to his entire net estate.
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 =
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
155
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
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Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax credit. If there is only one foreign country involved, both Limitations will yield the same answer. The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final allowable tax credit. Illustration: Net Estate – Philippines (reduced by all allowable P1,050,000 deductions, except standard deduction) Country G Net Estate
300,000
Country H Net Estate
150,000
Tax paid/incurred: Philippines Country G Country H
15,000 5,000 1,400
Net Estate – Philippines (reduced by all allowable P1,050,000 deductions, except standard deduction) Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The Philippine estate tax on P500,000 is P15,000 Solution – Limitation A (1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid for each foreign country. (2) The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under Limitation A. Amount lower) Country G (300/1500 x 15,000)
3,000
Actually paid to Country G
5,000
Country H (150/1500 x 15,000)
1,500
Actually paid to Country H
1,400
3,000
1,400
Tax credit allowed under Limitation A P 4,400 Solution – Limitation B:
156
Allowed
(whichever
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(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid in total to foreign countries. (2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B. Amount Allowed (Lower) 450/1500 x 15,000
4,500
Total foreign income taxes 6,400 paid Tax credit allowed under Limitation A
P 4,400 from tax, the value of the gross estate exceeds P20,000.
N. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS
Period of sending notice: A written Notice of Death must be given to the BIR. (a) Within 2 months after the death of the decedent or (b) Within 2 months after the executor or administrator or executor qualifies as such.
(1) Merger of usufruct in the owner of the naked title (2) Transmission or delivery of the inheritance or legacy by the fiduciary heir (1st heir) to the fideicomissary (2ndheir). Pending transmission of the property, the fiduciary is entitled to all the rights of a usufructuary, although the fideicomissary is entitled to all the rights of a naked owner. (3) Transmission from the first heir, legatee or done in favour of another beneficiary, in accordance with the desire of the predecessor. (4) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual; provided, however, that not more than 30% of said bequest, devises, legacies or transfers shall be used by such institutions for administration purposes.
Who will file: executor, administrator, or any of the legal heirs, as the case may be.
P. ESTATE TAX RETURN (Section 90 – 91) When Required (Copies in duplicate) (1) When the estate is subject to estate tax, OR (2) When, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), OR (3) Regardless of the gross value of the estate, when the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.
O. FILING OF NOTICE OF DEATH (Section 89) Notice of Death When needed: (i) in all cases of transfers subject to tax or (ii) where, though exempt 157
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Contents The executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth: (1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (2) The deductions allowed from gross estate in determining the net taxable estate; and (3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. (4) For estate tax returns showing a gross value exceeding P2,000,000 - there must be a statement duly certified to by a Certified Public Accountant containing the following: (a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a non-resident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (b) Itemized deductions from gross estate allowed in Section 86; and (c) The amount of tax due whether paid or still due and outstanding.
constructive possession of any property of the decedent may file this return.
Period for Filing General Rule: Filed within 6 months from the decedent's death.
Non-resident decedent does not have an executor or administrator in the Philippines The estate tax return shall be filed with and the TIN for the estate shall be secured from the Office of the Commissioner through RDO 39 QC. The foregoing provisions notwithstanding, the Commissioner of Internal Revenue may continue to exercise his power to allow a different venue/place in the filing of tax returns.
Where to file the estate tax return and pay the tax due (Sec. 9, RR 2-2003) Resident Citizen (RC and RA) The executor or administrator shall register the estate of the decedent and secure a new TIN from the RDO where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with: (1) An authorized agent bank (AAB), or (2) Revenue District Officer (RDO), or (3) Collection Officer, (4) Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death, or Non-resident decedent (NRA/NRC) with executor or administrator in the Philippines The estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO where such executor or administrator is registered. If the executor or administrator is not registered, the estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO having jurisdiction over the executor or administrator’s legal residence.
Exception: The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return. Who will file: executor, administrator, or any of the legal heirs, as the case may be, under oath. If there is no executor or administrator appointed, qualified, and acting within the Philippines, any person in actual or 158
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Payment: Pay as you file At the time the return is filed by the executor, administrator or the heirs. The executor or administrator means the executor or administrator of the decedent, or if there is none appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. The estate tax shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary.
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date of the expiration of the period of the extension (2) Suspension of the running of statute of limitations for deficiency assessment for the period of any extension (3) Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge. Can estate tax be paid in installments? Yes! In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/computed tax on which has been paid. (Sec. 9(F), RR 2-2003)
Exception: In meritorious cases, the Commissioner grant reasonable extension not exceeding 30 days from filing. Extension of Payment (Sec. 9(E), RR 2-2003) The Commissioner may allow an extension of payment, if he finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs: (1) Extension not to exceed 5 years, in case the estate is settled judicially, or (2) 2 years in case the estate is settled extrajudicially.
Who are liable for the payment of estate taxes Primarily, the estate, through the executor or administrator. (1) Payment shall be made before the delivery of the distributive share in the inheritance to any heir or beneficiary. (2) If there are two or more executors or administrators, all of them are severally liable for the payment of the tax. (3) The estate tax clearance issued by the Commissioner or the RDO having jurisdiction over the estate, will serve as the authority to distribute the remaining properties/share in the inheritance to the heir or beneficiary.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If extension granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.
Subsidiarily, heirs or beneficiaries, for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance. Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent,
Effects of granting an extension (1) Payment of the amount in respect of which the extension is granted on or before the 159
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xxx. The heirs shall be liable therefor, in proportion to their share in the inheritance. Marcos v. CA (1997)
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(1) Sue all the heirs and collect from each of them the amount of tax proportionate to the inheritance received (2) By virtue of a lien created under Sec 219, sue only one heir and subject the property he received from the estate to the payment of estate tax. Such heir may go against the other heirs.
Note: When there is income tax deficiency of the estate and the estate has been distributed to the heirs, the remedies are:
Tax Rates: If the Net Estate is
Over
But not Over P 200,000.00
P 200,000.00 500,000.00
The Tax Shall be
Plus
Of the Excess Over
Exempt 5%
P 200,000.00
8%
500,000.00
2,000,000.00 5,000,000.00 135,000.00
11 %
2,000,000.00
5,000,000.00 10,000,000.00 465,000.00
15 %
5,000,000.00
10,000,000.00
20 %
10,000,000.00
500,000.00
0
2,000,000.00 P 15,000.00
1,215,000.00
Exempt: If net taxable estate ≤ 200,000
II. DONOR’S TAX perfection/completion of the donation shall govern the imposition of the donor’s tax. (Sec. 11, RR 2-2003)
A. BASIC PRINCIPLES The donor’s tax is imposed on donations inter vivos or those made between living persons to take effect during the lifetime of the donor. It supplements the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime of the deceased.
B. DEFINITION A donor’s tax is levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift. (Sec. 98(A), NIRC). It 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. [Sec. 98(B), NIRC]
It shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by delivery, either actually or constructively, of the donated property, to the donee. Thus, the law in force at the time of the
It is the tax on donations. Thus, it is a tax on (i) an act of the donor disposing gratuitously of a thing/right in favour of a done located within 160
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the Philippines, and on (ii) sales/exchanges of properties, other than real property (defined in Sec 24D) classified as capital asset within the Philippines, for less than adequate and full consideration in money or money’s worth.
(1) (2) (3) (4) (5)
C. NATURE Donor’s tax is not a property tax but a tax imposed on the transfer of property by way of gift inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR (1965)]
(2)
Donative intent of the donor3 Capacity of the donor Delivery of the donated property Acceptance of the donee Donation must be in the proper form (a) Movable: orally or in writing if value is equal to or less than P5,000. Otherwise, it shall be in writing. (b) Immovable: must be made in a public document.
In order that the donation of an immovable may be valid, it must be made in a public document specifying therein the property donated. The acceptance may be made in the same Deed of Donation or in a separate public document, but 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. (Sec. 11, RR 2-2003)
D. PURPOSE OR OBJECT (1)
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To supplement estate tax; To prevent avoidance of income tax through the device of splitting income among numerous donees, who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income tax.
A gift that is incomplete because of reserved powers becomes complete when either: (a) the donor renounces the power OR (b) his right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfillment of some condition, other than because of the donor’s death. [Sec. 11, RR 2-2003]
Taxable transaction/object/event : gratuitous transfer of property between two or more persons who are living at the time of the transfer, 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 NB: If donor is RC/NRC/RA = liable for donor’s tax REGARDLESS of where the gift was made or where property is located
F. TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION
NRA = liable for donor’s tax only if the property donated is w/in the Phil.
(1) Sale, exchange or transfer of property for insufficient consideration (2) Condonation or remission of debt where the debtor did not render service in favor of the creditor
E. REQUISITES OF VALID DONATION (Art 725, NCC) Requisites of a VALID and COMPLETE donation
Note: The transfers which may be constituted as donation is exempt from the donative intent requirement. 3
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Condonation or remission of debt is defined as an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives. (Dizon v CTA, 2008) (3) Renunciation in favor of other heirs (Sec 11, RR 2-2003) (a) Renunciation by the surviving spouse of their share in the ACP/CPG after the dissolution of the marriage in favor of heirs of the deceased spouse or any other person/s (b) Renunciation by an heir, specifically and categorically in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate However, general renunciation by an heir, including the surviving spouse, of their share in the hereditary estate left by the decedent is NOT subject to DT
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capital gains tax under Sec. 24 (D) and 2) the transfer was for less than an adequate and full consideration in money or money’s worth. In this case, the amount by which the fair market value of the property exceed the value of the consideration shall be considered a gift.
H. CLASSIFICATION OF DONOR Donor’s Tax applies to individuals and corporations (in their secondary purpose). They may be classified into: (a) Residents (RC/RA/DC/RFC) (b) Non-Residents (NRC/NRA/NRFC) Such classification is important in determining the deductions from the gross gift of the donor, and in filing the return. Situs of Intangible Personal Properties General Rule: Mobilia Sequuntur Personam Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits promissory notes, and corporate stocks) follows the residence/domicile of owner thereof. Situs is the domicile or residence of the owner. (Collector v Fisher) Exceptions: (1) When it is inconsistent with express provisions of law (2) When justice does not demand that it should be, as where the property in fact has a situs elsewhere Intangible Properties which are considered situated in the Philippines (Sec 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
G. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION In order for the rule to apply, there must be 1) a transfer of property, other than real property classified as a capital asset and subject to 162
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(4) Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines (5) Shares or rights in any partnership, business or industry established in the Philippines
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(1) Did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; OR (2) Allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country
Rule of Reciprocity There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death:
If there is reciprocity, the intangible personal property of an NRA shall not be included in his gross estate. If there is no reciprocity, such intangible personal property will be included.
I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT) Resident
Nonresident
Composition and Determination of GROSS Estate Gifts made by donor who is either a resident or citizen at the time of the donation: (a) Real property wherever situated (b) Tangible personal property wherever situated, and (c) Intangible personal property wherever situated
Gifts made by donor who is non-resident alien at the time of the donation: (a) Real property located in the Phil. (b) Tangible personal property located in the Phil., and (c) Intangible personal property with a situs in the Phil. (subject to the rule of reciprocity) Note: If there is reciprocity, intangible assets are excluded from gross gifts
Deductions and Exemptions from GROSS gift to arrive at NET Gifts
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Resident
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Nonresident
Deductions (These are exempt donations but are Deductions (These are exempt donations but are deductible from, and not treated as exclusions deductible from, and not treated as exclusions from the gross gift) from the gross gift) (1) Dowries or donations made: (a) On account of marriage (b) Before its celebration or within one year thereafter (c) By parents to each of their legitimate, recognized natural, or adopted children (d) To the extent of the first P10,000 (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. (3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, Provided not more than 30% of said gifts will be used by such donee for administration purposes.
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. (2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, provided not more than 30% of said gifts will be used by such donee for administration purposes. Common Exemptions (1) Encumbrances on the property donated if assumed by the donee in the deed of donation. (2) 2. Donations made to entities exempted under special laws.
Common Exemptions (1) Encumbrances on the property donated if assumed by the donee in the deed of donation. (2) Donations made to entities exempted under special laws Note: NOT SUBJECT TO DONOR’S TAX (1) Contributions to candidate or political party for campaign purposes duly reported to COMELEC (2) Gift to Parish Priest or Church (applies only to real property tax) (3) Onerous Donations or Donations in exchange for goods/services (since they are subject to income tax)
SUBJECT TO DONOR’S TAX Gratuitous Donations to Association
Homeowners’
J. VALUATION OF GIFTS MADE IN PROPERTY Taxable Base:
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Net gifts i.e. net economic benefit from the transfer that accrues to the done AT THE TIME OF DONATION (1) If gift is personal property = FMV at the time of donation (2) If gift is real property = whichever is HIGHER (a) FMV as determined by the Commissioner of Internal Revenue (Zonal Value) or (b) FMV in the latest schedule of values fixed by the provincial and city assessor (MV per Tax Declaration) NOTE: Real property considered as capital assets under the Tax Code are excepted from this rule because the taxable value taken into account in the computation of tax is the higher of either the zonal value or the assessor’s value; not the consideration. Therefore, the insufficiency and inadequacy of the consideration paid would not affect the computation of the tax due and payable [Sec. 100 in relation to Sec. 24(d), NIRC] Under Section 24(d), the fair market value itself, if higher than the gross selling price, is the basis for computing the capital gains tax imposed upon the sale of such capital assets.
TAXATION LAW 2 Thus, what the seller avoids in the payment of the donor’s tax, it pays for in the capital gains tax.
(3) If there is an improvement = construction
cost (based on the building permit and/or occupancy permit ) + 10% per year after the year of construction; or the FMV based on the latest tax declaration. (4) If unlisted stocks = Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the adjusted liability value is the indicated value of the equity. Note: Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the FMV 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. [Sec. 11, RR 2-2003] However, where the consideration is fictitious, the entire value of the property shall be subject to donor’s tax.
K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY Who may claim the tax credit (1) Resident citizen (2) Non-resident citizen (3) Resident alien 1. Per Country Limit 𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 165
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2. Worldwide Limit 𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐴𝑙𝑙 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 personal, tangible or intangible. (Sec. 98, NIRC)
L. EXEMPTIONS OF GIFTS FROM DONOR’S TAX (See table above)
DONOR’S TAX RETURN
(1) Encumbrances on the property donated if
When Required (Copies in duplicate): When there is a transfer by gift.
assumed by the donee in the deed of donation. (2) Donations made to entities exempted under special laws. (a) Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines (b) Development Academy of the Philippines (c) Integrated Bar of the Philippines (d) International Rice Research Institute (e) National Museum (f) National Library (g) National Social Action Council (h) Ramon Magsaysay Foundation (i) Philippine Inventor’s Commission (j) Philippine American Cultural Foundation (k) Task Force on Human Settlement on the donation of equipment, materials and services
NOTE: Separate return is filed for each gift made on different dates during the year reflecting therein any previous net gifts made in the same calendar year. In case of donation to relatives, only one return shall be filed for several gifts by the donor to the different donees on the same date. If the gift involves CPG, each spouse shall file separate return wrt his/her respective share in the CPG. Contents (1) Each gift made during the calendar year which is to be included in computing net gifts; (2) The deductions claimed and allowable; (3) Any previous net gifts made during the same calendar year; (4) The name of the donee; (5) Relationship of the donor to the donee; (6) Such further information as the Commissioner may require.
M. PERSON LIABLE (see Classification of Donor)
Period for Filing General Rule: The return must be filed within 30 days after the date when the gift was made or completed. The tax due thereon shall be paid at the same time that the return is filed.
Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or 166
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Who will file: Any person who made a gift, such must be filed under oath.
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“Net Gifts” (a) The net economic benefit from the transfer that accrues to the donee. (b) 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 the mortgage assumed. (Sec. 11, RR 22003)
Where to file the donor’s tax return and pay the tax due (Sec. 9, RR 2-2003) Resident Unless the Commissioner permits otherwise, the return shall be filed and tax paid to: (1) To Authorized Agent Bank (AAB) or the Revenue District Officer having jurisdiction over the place of the domicile of the donor at the time of the transfer. (2) If no AAB = to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer, (3) if no legal residence in Phil or NRA = with Revenue District No. 39 - South Quezon City or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer.
General Formula Gross Gifts Less: Deductions from gross gifts ----------------------------------------------------Net gifts Multiply by: Tax rate ----------------------------------------------------= Estate Tax Due Less: Tax Credit, if any ----------------------------------------------------= Donor’s Tax Due, if any
Non-residents (1) The Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or (2) Directly with the Office of the Commissioner.
If there are several gifts during the year Gross Gifts made on a certain date Less: Deductions from gross gifts ----------------------------------------------------Net gifts made on a certain date Add: Prior Net gifts during the year ----------------------------------------------------=Aggregate Net Gifts Multiply by: Tax rate ----------------------------------------------------= Donor’s Tax on Aggregate Net Gifts Less: Donor’s Tax Paid on Prior Net Gifts ----------------------------------------------------Donor’s Tax Due on the Net Gifts to Date Less: Tax Credit, if any ----------------------------------------------------= Donor’s Tax Due, if any
Payment: Pay as you file. Who are liable for the payment of donor’s tax Every person, whether natural or juridical, resident or non-resident, who transfers or causes to transfer property 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. (Sec. 98, NIRC)
N. TAX BASIS The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar. (Sec. 99, NIRC) 167
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Tax Rate (1) IF NOT A STRANGER
Net Gift Over
But not Over
The Tax Shall be
Plus
Of the Excess Over
100,000.00
Exempt
100,000.00
200,000.00
0
2%
100,000.00
200,000.00
500,000.00
P 2,000.00
4%
200,000.00
500,000.00
1,000,000.00
14,000.00
6%
500,000.00
1,000,000.00
3,000,000.00
44,000.00
8%
1,000,000.00
3,000,000.00
5,000,000.00
204,000.00
10%
3,000,000.00
5,000,000.00
10,000,000.00
404,000.00
12%
5,000,000.00
10,000,000.00
and over
1,004,000.00
15%
10,000,000.00
(2) IF A STRANGER: 30% (1) Rate applicable shall be based on the law prevailing at the time of donation. (2) When the gifts are made during the same calendar year but on different dates, the donor's tax shall be computed based on the total net gifts during the year. Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a: Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or Relative by consanguinity in the collateral line within the fourth degree of relationship. Exempt: If gift/donation ≤ 100,000
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SUMMARY OF TRANSFER TAXES TRANSFER TAXES Estate Tax
Donor’s Tax
Time for filing a return and payment of tax FILED: within six (6) months from the decedent's death. E: not exceeding 30 days (in meritorious cases) NB: Written notice of death to CIR w/in 2 mos. After death PAID: before the delivery of the distributive share in the inheritance to any heir or beneficiary; upon filing of return. E: extension (when payment on the due date would impose undue hardship) not to exceed 1. 5 years, in case the estate is settled through the courts; or 2. 2 years in case the estate is settled extra-judicially.
NOTE: separate return is filed for each gift made on different dates during the year reflecting therein any previous net gifts made in the same calendar year. FILED: within thirty (30) days after the gift (donation) is made In case of donation to relatives, only one return shall be filed for several gifts by the donor to the different donees on the same date. If the gift involves CPG, each spouse shall file separate return wrt his/her respective share in the CPG.
NB: when extension is granted, a bond may be required by CIR ≤ 2x amount of tax
Where to file and to whom paid General Rule: to the Authorized Agent Bank (AAB), Revenue Collection Officer (RCO) or duly authorized Treasurer of the city or municipality in the Revenue District Office having jurisdiction over the place of domicile of the decedent at the time of his death
Resident GR: to AAB of the RDO having jurisdiction over the place of the domicile of the donor at the time of the transfer.
Exception: (1) If no AAB = to the RCO or duly Authorized City or Exception: If NRA/NRC, Municipal Treasurer where the donor was domiciled at If w/ Aor, Eor in Phil = to the AAB of the RDO where such the time of the transfer, Aor,Eor is registered/domiciled, if not yet registered with the BIR. (2) If no legal residence in Phil or NRA = with Revenue If w/o Aor,Eor in Phil = to AAB under the jurisdiction of District No. 39 - South Quezon City or with the RDO No. 39 Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer. Non-resident (1) The Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or (2) Directly with the Office of the Commissioner.
Who should file (1) The Eor/Aor or any of the legal heirs of the decedent, whether resident or non-resident of the Philippines, under any of the following situations: (a) In all cases of transfers subject to estate tax; (b) Where though exempt from estate tax, the gross value of the estate exceeds two hundred thousand (P200,000) pesos; or (c) Regardless of the gross value of the estate, where the said estate consists of registered or
Any person, natural or juridical, resident or non-resident, who transfers or causes to transfer property 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.
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registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership therof in the name of the transferee; or (2) If there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. NB: Eor/Aor has the primary obligation to pay the estate tax but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance.
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ESTATE TAX FORMULAE EXCLUSIVE
COMMUNITY
Gross Estate4 Add: Taxable Transfers & Others Revocable Transfers/Donation Mortis Causa Transfers in contemplation of death Property passing under GPoA Transfers for insufficient consideration5 Decedent’s Interest Accrued6 Proceeds of Life Insurance w/ revocable beneficiary7 Family Home Claims against an Insolvent Person8 Amount received by heirs
TOTAL
Value Taken of Property Less: Mortgage debt paid, if any Initial Basis Less: Proportionate Deduction Final Basis Multiplied by Deduction Rate
Less: (Ordinary Deductions) 7 ELIT9 Vanishing Deductions Transfers for Public Use Retirement Benefits received by heirs
VANISHING DEDUCTION **Proportionate Deduction
Net Estate Less: (Special Deductions10) Standard Deduction Family Home Medical Expenses Amounts received by heirs Net Taxable Estate (before share of surviving spouse) Less: Share of Surviving Spouse
=
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
𝒙 (𝑬𝑳𝑰𝑻 + 𝑻𝑷𝑼)
If only 1 country is involved: (whichever is lower) Estate Tax Credit =
𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑊𝑜𝑟𝑙𝑑 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
OR actual estate tax paid to foreign country Net Taxable Estate Multiply by Tax Rate Estate Tax Due Less: Tax Credit11, if any
If two or more countries are involved: (whichever is lower) Estate Tax Credit = OR
ESTATE TAX DUE
𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑜𝑓 𝐴𝐿𝐿 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
OR actual estate tax paid to foreign country
4
DO NOT INCLUDE: EXEMPTIONs
5
Amount included in the GE = FMV at the time of death – consideration amount
6
Accrued before his death but only received after his death, e.g. dividends declared on/before, and received after death; partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death 7 Beneficiary must be the estate of the decedent, Eor/Aor or a third person. If premiums are paid using conjugal funds, part of conjugal funds. 8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT. 9 If NRA, Allowable Deduction wrt ELIT = 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 𝑥 𝐸𝐿𝐼𝑇 𝑊𝑜𝑟𝑙𝑑 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 10 These are not allowable deductions when TP is NRA. 11 Applies only to RC/NRC/RA
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DONOR’S TAX ON FIRST DONATION Gross Gift Less: Deductions (those not beneficial to the done e.g. mortgage)
xxx
Net Gift Less: Exemptions, if applicable
xxx xxx
Net Taxable Gift Multiply by Tax Rate
xxx xx%
Donor’s Tax Due Less: Tax Credit12, if any DONOR’S TAX DUE
xxx xxx xxx
xxx
If only 1 country is involved: (whichever is lower) Tax Credit =
ON SUBSEQUENT DONATIONS w/in the same calendar year Gross Gift Less: Deductions (those not beneficial to the done e.g. mortgage)
xxx xxx
𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑃ℎ𝑖𝑙 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
If two or more countries are involved: (whichever is lower) Tax
Credit
𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
Net Gift Less: Exemptions, if applicable
xxx xxx xxx xxx xxx xx%
Donor’s Tax on Aggregate Net Gifts Less: Donor’s tax on previous net gifts during the year
xxx xxx
Donor’s Tax Due Less: Tax Credit13, if any DONOR’S TAX DUE
xxx xxx xxx
12 13
Applies only to RC/NRC/RA Applies only to RC/NRC/RA
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𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
OR 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑤/𝑜
Net Taxable Gift Add: All previous net gifts during the year Aggregate Net Gifts Multiply by Tax Rate
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 ′ 𝑠 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 ′ 𝑠 𝑇𝑎𝑥
OR actual donor’s tax paid to foreign country
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ESTATE TAX GR: w/in 6m after death E: extension of 30d
DEATH
NOTICE OF DEATH to RDO by Eor/Aor
Get TIN for ESTATE
Prepare the LIST of assets and liabilities and their supporting documents
ESTATE TAX RETURN + PAYMENT (NB: Date of payment may be extended, 5yrs or 2yrs), if estate exceeds 200,000php
CANCEL TIN
Transfer properties to the heirs
DONOR’S TAX
NO TAX RETURN NECESSARY
Full Exemption COMPLETION/ PERFECTION OF DONATION
Exempt Partial Exemption w/in 30d after gift was made
DONOR’S TAX RETURN + PAYMENT (NB: Date of payment may be extended ≤ 6 months)
Liable
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III. Value-Added Tax (VAT) (d)
A. CONCEPT VAT is a consumption tax imposed at every stage of distribution process on (i) the sale, barter, exchange, or lease of goods or properties and (ii) rendition of services in the course of trade or business, or the (iii) importation of goods, whether such imported goods are for use in business or non-business purposes. (Sec. 4.105-2, RR 16-2005) The taxpayer (seller) determines his tax liability by computing the tax on the gross selling price or gross receipt (output tax), and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the purchase of service (input tax) against the tax due on his own sale
(e)
(f)
B. CONSTITUTIONALITY OF VAT
(g)
ABAKADA Guro Party List, et. al. v Ermita (2005): (a) The validity of raising the VAT rate from 10% to 12% by the President was upheld by SC. (b) With respect to Sec. 8, amending Sec. 110 (A), which provides for 60-month amortization of the input tax on capital goods purchased: It is not oppressive, arbitrary, and confiscatory. The taxpayer is not permanently deprived of his privilege to credit the input tax. For whatever is the purpose, it involves executive economic policy and legislative wisdom in which the Court cannot intervene. (c) The tax law is uniform: it provides a standard rate of 0% or 10% (or 12% now) on all goods or services. The law does not make any distinction as to the type of industry or trade that will bear the 70%
TAXATION LAW 2 limitation on the creditable input tax, 5year amortization of input tax on purchase of capital goods, or the 5% final withholding tax by the government. It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic marine and agricultural products in their original state are still not subject to tax. Congress also provided for mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. VAT, by its very nature, is regressive. BUT the Constitution does not really prohibit the imposition of indirect taxes (which is essentially regressive). What it simply provides is that Congress shall “evolve a progressive system of taxation”. In Tolentino v. Sec. of Finance (1995), the Court said that direct taxes are to be preferred, and as much as possible, indirect taxes should be minimized… but not avoided entirely because it is difficult, if not impossible, to avoid them.
Tolentino v. Secretary of Finance (1995): (a) Regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to “evolve a progressive system of taxation.” This provision is placed in the Consti as moral incentives to legislation, not as judicially enforceable rights. (b) The regressive effects are corrected by the zero rating of certain transactions and through the exemptions
C. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE TRANSACTION 174
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TAXATION LAW 2 the regulations of the Bangko Sentral ng Pilipinas
General Characteristics/Nature: (1) Privilege/Percentage Tax – imposed by law directly not on the thing or service but on the ACT (sale, barter, exchange, lease, importation, or perfrormance of service) (2) Ad Valorem Tax –the amount is based on the gross selling price or gross value in money of the goods or service, including the use or lease or properties. (3) Indirect Tax – it may be shifted or passed on to the buyers, transferee, or lessee of the goods, properties or services as part of the purchase price. (4) Excise Tax - a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods but unlike excise, it is not applied only to a few selected goods
Transactions Covered and their elements (summary): General Requirements (1) Done in the course of trade or business (ICT/B) w/n profit-oriented: rule of regularity + incidental thereto (inc isolated) Exception: (a) NRC/NRA who perform services in Phil, even if no regularity (b) Importation of Goods may be for business or non-business use (2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php (3) OR there are reasonable grounds to believe that gross sales or receipts for the past 12 months or the next 12 months will exceed 1,919,500php.
General Features: (1) VAT uses the Tax Credit Method (2) All goods, properties and services (except exempt) including goods subject to excise taxes, and use or lease of properties, whether real or presonal, are subject to tax at all levels of distribution. (3) Although tax is levied at all stages, the total value of the goods is subject to tax only once. (4) VAT, as a general rule, follow the destination principle (goods and services are taxed only in the country where they are consumed). Therefore, no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority.
Taxable Transactions and Specific Requirements (1) Sale, Barter, Exchange or Lease (SBEL) of Goods or Properties14 Goods/Personal Properties (i) Actual/deemed sale for a valuable consideration (ii) for use or consumption in the Phil (regardless of the payment arrangements) (iii) not exempt from VAT (NIRC, special law, special agreement)
EXCEPTIONS: (a) The service is performed in the Philippines; (b) The service falls under any of the categories provided in Section 102(b) of the Tax Code; and (c) It is paid for in acceptable foreign currency that is accounted for in accordance with 14 Sec
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D. IMPACT OF TAX TAX
Real Properties (RP) 15: (i) Seller (w/n natural) executes contract to SBE of RP (ii) RP is in the Phil (iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor) (iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable activity (NOT a capital asset) (v) Not exempt from VAT (NIRC, special law, special agreement)
The transfer must be made in the Philippines. If the title to the goods were transferred outside the Philippines, then the same is not subject to VAT.
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Impact
Incidence
The impact of taxation is on the statutory taxpayer, the one from whom the government collects. Seller/Importer – Seller/Importer is the one who collects the tax and pays to the government
The incidence of tax is on the one who bears the burden of taxation
Buyer/Final Consumer – the buyers is the one who bears the burden of the taxation.
Under this method, the tax is computed by determining the difference between the output tax on his sales and the input tax on the purchases of goods, services, capital goods, supplies, and materials.
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Residential House and Lot
INCIDENT OF
A VAT-registered person is entitled to credit input taxes evidenced by VAT invoice or official receipt against the output tax payable. The tax credit method refers to the manner by which the value added tax of a taxpayer is computed. The input taxes shifted by the sellers to the buyer are credited against the buyer’s output taxes when he sells the taxable goods, properties or services.
(1) Importation of Goods
Residential Lot
V.
E. TAX CREDIT METHOD
Sale of Services16 (i) for a valuable consideration (actually/constructively received) (ii) performed ICTB in the Phil. (iii) not exempt from VAT (NIRC, special law, special agreement) (iv) person rendering service is VAT-liable (v) no ee-er relationship
Casual Sale (Capital Assets) Regular Sales (Ordinary Assets) Commercial Property (Sale/Lease) Residential Units (Lease)
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Subject to CGT (6%)
Input tax – the VAT due on or paid by a VATregistered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business.
Subject to 12% VAT If monthly rental ≤ 12,800 = VAT and OPTexempt If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT If SP > 1,919,500.00 = subject to VAT IF SP ≤ 1,919,500.00 = VAT-exempt
Output tax – the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of the Code. If at the end of any taxable month or quarter:
If SP > 3,199,200.00 = subject to VAT IF SP ≤ 3,199,200.00 = VAT-exempt
Sec 108
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(a) The output tax exceeds the input tax, the
TAXATION LAW 2 (2) the service falls under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP.
excess shall be paid by the VAT-registered person (b) The input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters
F. DESTINATION PRINCIPLE
G. PERSONS LIABLE
This provides that the destination of goods determines the taxation or exemption from VAT.
Transactions subject to VAT: (1) Sale, Barter or Exchage of Goods or Properties (2) Sale of Services, including Lease or use of Properties (3) Importation of Goods.
CIR v. American Express International (2005): As a general rule, goods and services are taxed only in the country where they are consumed. (Deoferio Jr. and Mamalateo. The Value Added Tax in the Philippines, p. 43)
Persons Liable: Any persons who sells, barters, exchanges, or leases goods or properties, or who renders services, in the course of trade or buesiness, and any person who imports goods, whether or not in the course of business, is liable to pay either VAT or 3% percentage tax.
Corollarily, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Atlas Consolidated Mining & Dev. Corp. v. CIR (2007): Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 12% VAT. [Deoferio Jr. and Mamalateo, p. 422]
The term “person” refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association (Sec. 4.1051, RR 16-2005). The following are liable to pay VAT: (1) Any person who sell, barters, exchange or leases goods or properties If real property: persons engaged in real estate business: (i) Any person who SBE of real properties ICT/B (ii) Real estate lessors/ sub-lessors (iii) NRA/NRC lessors when RP is in Phil (iv) non-stock, non-profit corp engaged in SBE of real properties ICT/B, regardless of disposition of income (v) Gov’t inc GOCCs in SBEL of RP ICT/B
CIR v. American Express (2005): The court enumerated the exceptions to the destination principle. As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT law itself provides for a clear exception, under which the supply of service shall be zero-rated when the following requirements are met: (1) The service is performed in the Philippines; 177
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(1) Who renders services (2) Who imports goods If importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to nonexempt persons, purchasers/recipients will be deemed the importer If the Philippine branch of an NRFC “imported”, first local buyer will be deemed the importer
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Rate: 12% VAT beginning 1 February 2006 [RMC No. 7-06] Transactions: Every sale, barter or exchange, or transactions “deemed sale” of taxable goods or properties (RR 16-2005) Basis: Gross selling price or gross value in money of the goods or properties sold, bartered or exchanged. Who Pays: Paid by SELLER/TRANSFEROR. (Sec. 106, NIRC)
Additional Requirements to be subject to VAT: (1) As regards person who sells, barters or exchanges goods or properties, or sale of services, is required to register for VAT when: (i)such act is done in the course of trade or business, and (ii) if his gross sales or receipts for the past 12 months or the next 12 months exceed P1,919,500; (2) As regards person who imports, it is not necessary that such importation is made in the course of trade or business. (3) Any person who elects to register for VAT (cf Optional VAT Registration)
Goods or properties – all tangible and intangible objects which are capable of pecuniary estimation, including: (1) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; (2) 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; (3) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (4) The right or the privilege to use motion picture films, films tapes and discs; (5) Radio, television, satellite transmission and cable television time.
Persons NOT LIABLE to pay VAT: (1) Any person whose gross sales or receipts are less than P,1919,500 AND is not VAT registered. (subject to OPT) (2) Is exempt under Section 109; (3) Marginal income earners are not subject to business taxes because they are not considered as engaged in trade or business. A marginal income earner is an individual deriving gross sales or receipts of not exceeding P100,000 during any 12-month period (Rev. Reg. 11-2000)
Requirements (1) Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto (including isolated transactions) (2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php OR there are reasonable grounds to believe that gross sales or receipts for the past 12 months or the next 12 months will exceed 1,919,500php. (3) Additional Requirements depending on the nature of property:
General Rule: VAT and Percentage Tax cannot be charged together. It’s either the transaction is under VAT or Other Percentage Tax. Exception: When one erroneously declares himself to VAT registered.
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Goods/Personal Properties (i) Actual/deemed sale for a valuable consideration (ii) for use or consumption in the Phil (regardless of the payment arrangements) (iii) not exempt from VAT (NIRC, special law, special agreement)
or not it sells exclusively to members or their guests), or government entity. Exception: (1) 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. (Sec. 105, NIRC; RR 16-2005) (2) Importation of Goods, may be for business or non-business use.
Real Properties (RP) 17: (i) Seller (w/n natural) executes contract to SBE of RP (ii) RP is in the Phil (iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor) (iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable activity (NOT a capital asset) (v) not exempt from VAT (NIRC, special law, special agreement)
CIR v CA (2002): “In the course of trade or business” requires the regular conduct or pursuit of a commercial or economic activity, regardless of WON it is profit-oriented. Gross (Sales) Selling Price (GSP): total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling price.
“In the course of trade or business” Rule of Regularity: 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 nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether
General Rule: GSP is the total amount of money paid in consideration of SBEL Excludes: VAT, sales discounts 18 and, allowances and returns Includes: Excise tax paid, initial payments19, interests and penalties (if instalment), commission income (if exported), purchase price, charges for packing, delivery and insurance If goods/personal properties, GSP = amount paid in consideration IF DEEMED SALE: FMV at the time of the transaction
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Casual Sale (Capital Assets) Regular Sales (Ordinary Assets) Commercial Property (Sale/Lease) Residential Units (Lease)
Residential Lot Residential House and Lot
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Subject to CGT (6%)
Subject to 12% VAT If monthly rental ≤ 12,800 = VAT and OPTexempt If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT If SP > 1,919,500.00 = subject to VAT IF SP ≤ 1,919,500.00 = VAT-exempt
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It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening of a future event 19 Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
If SP > 3,199,200.00 = subject to VAT IF SP ≤ 3,199,200.00 = VAT-exempt
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NB: in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment, furniture, fixture), tax base = whichever is lower, i. acquisition cost ii. current market price of goods If real property, GSP = amount higher: i. consideration stated in the sales document ii. FMV, whichever is higher of: i. Zonal value: FMV as determined by CIR ii. Real Property Tax Value: FMV as determined by provincial & city assessors IF ON INSTALLMENT (RR16-2005)20: GSP = down payments received + interests + penalties + other charges – amount of mortgage (paid) Note:
TAXATION LAW 2 consideration, the additional VAT shall be paid accordingly (RMC 03-96) IF DEFERRED21 GSP = entire selling price or zonal/FMV, whichever is higher Thus, subsequent receipt of unpaid balance is NOT subject to VAT Note: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales and 2) when GSP is unreasonably lower than AMV22
AS REGARDS SALE OF REAL PROPERTY Taxable: (1) On installment plan (2) Pre-selling by real estate dealers (3) Sale of residential lot >P1,919,500 ; or house and lot/other residential dwelling >P3,199,200 (4) Lease of residential units (rental per unit > 12,800/mont h OR total If zonal/FMV, tax base = rental from U ALL p 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇) 𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟 units>P1,919, o 𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇) 500/year) n full collection, if a difference is uncovered because the zonal value or market value at the date of sale is higher than the total receipts or collections based on the agreed
Not taxable: (Sec. 109 (P)(Q)(V)) (1) Not primarily held for sale or lease in the course of trade or business OR those held for sale or lease in the course of trade or business BUT does not exceed P 1,919,000. (2) Low cost or socialized housing (3) Residential lot when value does not exceed P1,919,500 (4) House and lot/other residential dwelling < P3,199,200
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Considered instalment when the initial payment is less than or equal to 25% of GSP. Taxable only on the payment actually or constructively received. Initial payments – payment/payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property during the year when the sale or disposition of the real property was made.
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Considered deferred payment when the initial payment is more than 25% of GSP. Treated as cash sale and the entire selling price is taxable on the month of sale 22 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same quantity or quality sold in the immediate locality or the nearest date of sale.
constructively received during the year of sale. property sold (except as to the excess when such mortgage exceeds the cost or other basis of the property to the seller) and notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale.
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(5) Lease (rental per unit < 12,800/month and total rental from all units < P1,919,500/ year) (6) Transmission to a trustee (Except: transmission is deemed sale transaction) General Rule: 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. Exception: However, if the property transferred is originally intended for sale, lease or use in the ordinary course of trade or business AND the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale transaction. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary. (7) Transfer to corporation in exchange of shares of stocks (see Sec. 40, NIRC for Taxfree exchange) (8) Advance payment by the lessee (9) Security deposits for lease agreements.23
TAXATION LAW 2 (b) The value of goods or properties sold and subsequently returned or for which allowances were granted by a VATregistered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum is issued.
(2) Sales Discounts – bona fide or regular discounts given to purchasers, which are ascertainable and definitely agreed upon between the vendor and the vendee at the time of sale are deductible from the GSP. (a) If given after the sale or are in the nature of a rebate or partial remission of indebtedness, they will not be allowed as a deduction from the GSP. (b) Furthermore the discuont must be expressly indicated in the sales invoice and the amount forming part of the gross sales duly recorded in the books fo accounts. (c) Credits for allowances to cover roll back in prices and other adjustments are not deductible.
I. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES
Allowable Deductions from Gross Selling Price The following are deductible from the gross selling price: (1) Sales returns and allowances – the selling price of the goods or properties returned and not sold necessarily reduces the gross sales on which the rate is applied. (a) Sales returns and allowances for which a proper credit/refund was made during the month or quarter to the buyer for sales previously recorded as table sales are allowed as a deduction in the period when they are made. Excess may be carried over to the succeeding period.
Rate: 0% VAT Transactions: Every sale, barter or exchange, or transactions “deemed sale” of taxable goods or properties (RR 16-2005) Zero-Rated Sales on Goods or Property (RR 162005) A zero-rated sale of goods or properties by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services,
23 Please
take note of the difference between security deposits and those applied to rent.
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related to such zero-rated sale, shall be available as tax credit or refund. (1) Export Sales (2) Foreign Currency Denominated Sales (3) Sales of Goods or Property to perons or entites who are tax-exempt/Effectively Zero-Rated Sales
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the transport of goods and passengers from a port in the Phil. directly to a foreign port without docking or stopping at any other port in the Phil. (b) If any portion of such fuel, goods, or supplies is used for purposes other than that mentioned, such portion of fuel, goods, and supplies shall be subject to 12% VAT. (RR 16-2005) (6) Those considered export sales under the Omnibus Investment Code of 1987, and other special laws (ex. Bases Conversion & Development Act of 1992)
Export Sales [Sec. 106(A)(2)(a), NIRC] (1) The (i) sale and actual shipment of goods from the Philippines to a foreign country AND (ii) paid for in acceptable foreign currency or its equivalent in goods or services, AND (iii) accounted for in accordance with the rules and regulations of the BSP (2) 2.(i) Sale of raw materials or packaging materials to a nonresident buyer (ii) for delivery to a resident local export-oriented enterprise (iii) to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods AND (iv) paid for in acceptable foreign currency AND (v) accounted for in accordance with the rules and regulations of the BSP. (3) (i) Sale of raw materials or packaging materials (ii) to export-oriented enterprise (iii) whose export sales exceed seventy percent (70%) of total annual production. (a) Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an exportoriented enterprise upon accreditation under the rules & regulations of Export Development Act, RA 7844 (RR 7-95) (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP) (5) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations (RA 9337) (a) Limited to goods, supplies, equipment and fuel pertaining to or attributable to
Under Omnibus Investment Code (EO 226): Considered Export Sales (1) Phil. port FOB value of export products exported directly by a registered export producer; OR (2) Net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same (only when actually exported by the latter) evidenced by landing certificates. Constructive Exports (without actual exportation): (1) Sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) Sales to export processing zones (RA 7916); (3) Sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products (RA 7227) (4) Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not. 182
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(5) Sales by a VAT-registered supplier to a manufacturer/producer whose products are 100% exported are considered export sales. A certification to this effect must be issued by the Board of Investment which shall be good for 1 year unless subsequently reissued. (RR 16-2005)
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(2) (i) The local sale of goods and properties (ii) by a VAT-registered person (iii) to a person or entity who was granted indirect tax exemption under special laws or international agreement. (RR 16-2005) ECOZONES shall be managed and operated by the PEZA as separate customs territory. (Sec. 8, RA 7916 “Special Economic Zone Act of 1995”). Consequently, sales made by a person in the customs territory to a PEZAregistered entity are considered exports to a foreign country and thus, zero-rated. Conversely, sales by a PEZA-registered entity to a person in the customs territory are deemed imports from a foreign country.
Export sales of registered export traders shall include commission income, and that exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee. Foreign Currency Denominated Sale (FCDS) (1) (i) Sale to a nonresident of goods (except those mentioned in Sections 149 and 150 i.e.automobiles and non-essential goods like jewelry, perfume, and yachts), (ii) assembled or manufactured in the Philippines (iii) for delivery to a resident in the Philippines (iv) paid for in acceptable foreign currency AND (v) accounted for in accordance with the rules and regulations of the BSP. (2) (i) Sales of locally manufactured or assembled goods (ii) for household and personal use (iii) to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government (iv) paid for in convertible foreign currency AND (v) accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales. (RR 16-2005)
Tax treatment of sales to & by PEZA-registered enterprise within & without the ecozone [rmc 7499]: (1) Any sale of goods, property or services made by a VAT registered supplier from the Customs Territory** to any registered enterprise operating in the ecozone, REGARDLESS of the class or type of the latter’s PEZA registration, is actually qualified and thus LEGALLY ENTITLED TO THE 0% VAT. **“Customs Territory” shall mean the national territory of the Philippines outside of the proclaimed boundaries of the ECOZONES except those areas specifically declared by other laws and/or presidential proclamations to have the status of special economic zones and/or free ports. [Sec. 2(g), Rule 1, Part I, RA 7916-IRR] (2) By a VAT-Exempt Supplier from the Customs Territory to a PEZA registered enterprise
Effectively Zero-Rated Sales (1) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.
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shall be treated EXEMPT FROM VAT, regardless of whether or not the PEZA registered buyer is subject to taxes under the NIRC or enjoying the 5% special tax regime. (3) By a PEZA Registered Enterprise (a) Sale of Goods by a PEZA registered enterprise to a buyer from the Customs Territory (ie domestic sales) -- this case shall be treated as a technical IMPORTATION made by the buyer. Such buyer shall be treated as an IMPORTER thereof and shall be imposed with the corresponding VAT. (b) Sale of Services by a PEZA registered enterprise to a buyer from the Customs Territory – this is NOT embraced by the 5% special tax regime, hence, such seller shall be SUBJECT TO 12% VAT. (c) Sale of Goods by a PEZA registered enterprise to Another PEZA registered enterprise (ie Intra-ECOZONE Sales of Goods) – this shall be EXEMPT from VAT. (4) Sale of Services by ECOZONE enterprise, to Another ECOZONE enterprise (IntraECOZONE enterprise Sale of Service) (a) if PEZA registered seller is subject to 5% special tax regime - EXEMPT from VAT (b) if PEZA registered seller is subject to taxes under NIRC (ie not subject to 5% special tax regime) – subject to 0% VAT pursuant to “cross border doctrine”
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the goods or properties, whichever is lower. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. The gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale. (RR 16-2005) 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. (2) Distribution or transfer to shareholders, investors or creditors (a) Shareholders or investors as share in the profits of the VAT-registered persons; (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation
J. TRANSACTIONS DEEMED SALE (SEC. 106 (B)
Not in the course of business of goods or properties originally intended for sale or for use in the course of business cf Sec 40 (C) (2) regarding capital assets Example: when a VAT-registered person withdraws goods from his business for his personal use. (RR 16-2005)
Rate: 12% VAT Basis: Market value of the goods deemed sold as of the time of the occurrence of the transactionsor as the Commissioner shall prescribe. In the case of retirement/cessation of business, the tax base shall be the acquisition cost or the current market price of
Distribution or transfer to shareholders, investors or creditors As regards distribution to shareholders or investors as share in the profits of the VATregistered persons, property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of 184
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retained earnings 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 FMV at the time of the distribution, whichever is applicable. (RR 16-2005)
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Subject to output VAT (RR 16-2005 sec. 4.106 (b)) 12%VAT is applicable to goods/properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following: (1) Change of business activity from VAT taxable status to VAT-exempt status Example: A VAT-registered person engaged in a taxable activity like wholesaler or retailer who decides to discontinue such activity and engages instead in life insurance business or in any other business not subject to VAT. (2) Approval of request for cancellation of a registration due to reversion to exempt status (3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2) (4) Approval of request for cancellation of registration of one who commenced business with the expectation of gross sales/receipts exceeding P1,919,500 (per RR 16-2011) but who failed to exceed this amount during the first 12 months of operation
Consignment of goods Consigned goods returned by the consignee within the 60-day period are not deemed sold. (RR 16-2005) Retirement from or cessation of business With respect to ALL goods on hand, whether capital goods, stock-in-trade, supplies or materials, as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor ARE CONSIDERED DEEMED SALES Examples: change of ownership of the business (e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business) and dissolution of a partnership and creation of a new partnership which takes over the business. (RR 16-2005)
K. CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON (SEC 106 C) Rate: 12% VAT Basis: the acquisition cost or the current market price of the goods or properties, whichever is LOWER.
Not Subject to Output Vat – 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 (individual or corporate) or group of stockholders. Note: Exchange of goods or properties including the real estate properties used in business or held for sale or for lease by the transferor, for shares of stocks, whether resulting in corporate control or not, is SUBJECT TO VAT (RR 10-11)
VAT shall apply to goods disposed of or existing as of a certain date if under the circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.
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(2) Change in the trade or corporate name of the business (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed the surviving or new corporation. Note: The INPUT VAT of the dissolved corporation will be absorbed by the surviving corporation (4) Inventory used for promotions and Office Supplies
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Note: Importation of goods to bonded warehouse for processing is not importation. Importation connotes permanency and gain. Thus, if goods are only for exhibit, such goods are VAT-exempt. Customs duty – amount of customs duty legally due and paid by the importer. Therefore, if importer is entitled to 90% customs duty exemption, the 10% duty paid should be the base in computation of the VAT. Other similar chargers – specific charges which an importer has to pay. (a) Other taxes (special import tax) (b) Bank charges (c) Arrastre charges (d) Wharfage dues (e) Brokerage fees (f) All other charges or expenses
L. VAT ON IMPORTATION OF GOODS Rate: 12% VAT Basis: total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges (such as postage, commission). Where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. Landed Cost = invoice amount + customs duties + freight + insurance + other charges + excise tax (if any) Who Pays: IMPORTER prior to the release of such goods from customs custody (Sec. 107 (A), NIRC) Importer: any person who brings goods into the Philippines, whether or not made in the course of his trade or business, including non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies (RR 16-2005)
Landed Cost - invoice amount including costs of loading, shipping and unloading, customs duties, freight, insurance, other charges, excise tax (if any) Expenses incurred after the release of the goods such as those incurred in delivering goods do not form part of the landed cost. Transfer of goods by tax exempt persons: (1) If importer is tax-exempt, the subsequent purchasers, transferees or recipients of such imported goods shall be considered as importers who shall be liable for the tax on importation. (2) The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. (as amended by RA 9337)
Importation of goods BEGINS when the carrying vessel/aircraft enters the Philippine jurisdiction with an intention to unload its cargoes. It ENDS when there is already paymentof duties/taxes/other charges and issuance of permit to withdraw.
M. VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES [Sec 108] 186
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or consideration.” (Sec 108, Diaz v Secretary of Finance, 2011). It includes:
Rate: 12% Basis: Gross receipts derived from the sale or exchange of services, including the use or lease of properties.
(1) Construction and service contractors (2) Stock, real estate, commercial, customs and immigration brokers (3) Lessors of property, whether personal or real24 (4) Persons engaged in warehousing service. (5) Lessors or distributors of cinematographic films (6) Persons engaged in milling, processing, manufacturing or repacking goods for others are subject to VAT, EXCEPT palay into rice, corn into corn grits, and sugarcane into raw sugar (not subject to VAT) (7) Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and movie houses (8) Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers (9) Dealers in securities including pre-need companies “Gross receipts” means gross selling price less cost of the securities sold. RR 795: (10) Lending investors: All persons OTHER than banks, non-bank financial intermediaries, finance companies and other financial intermediaries NOT performing quasibanking functions who make a practice of lending money for themselves or others at interest. (11) Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common
Gross Receipts - the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. (Sec. 108 (A), NIRC) “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. (a) Deposit in banks which are made available to the seller of services without restrictions (b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered (c) Transfer of the amounts retained by the contractee to the account of the contractor. (RR 16-2005) Requisites for taxability (1) The service must be performed or is to be performed (which may be performed by a subcontractor) in the course of trade or business in the Philippines; (2) For a valuable consideration actually or constructively received; and (3) The service is not exempt under the Tax Code, special law or international agreement (4) Person selling or rendering service is liable to VAT
24 SUBJECT TO VAT
“Sale/Exchange of Services”: means the performance of all kinds of services in the Philippines for others for a fee, remuneration
Pre-Paid Rental Security deposit when applied to the rental
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NOT SUBJECT TO VAT Loan to the lessor from the lessee Option money for the property Security deposit to insure the faithful performance of certain obligations of the lessee to the lessor
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carriers by land relative to their transport of goods or cargoes (12) 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 (13) Sales of electricity by generation, transmission, and/or distribution companies EXCEPT sale of power or fuel generated through renewable sources of energy, such as, but not limited to, biomass, solar, wind hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels, which shall be subject to 0% rate of VAT (zero-rated). (14) Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees (including PAGCOR and its licensees/franchisees) EXCEPT franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) (which shall be subject to 3% franchise tax under Sec. 119, subject to optional registration), and franchise grantees of gas and water utilities (under Sec. 109, subject to 2% franchise tax) With respect to franchise grantees of telephone and telegraph services, amounts received for overseas dispatch, message, or conversation originating from the Philippines are subject to the percentage tax under Sec. 120 and hence exempt from VAT (15) Non-life insurance companies including surety, fidelity, indemnity and bonding companies; EXCEPT crop insurance, life and disability insurance, and health and accident insurance
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Insurance and reinsurance commissions, as opposed to premiums, whether life or non-life, are subject to VAT while non-life insurance premiums are subject to VAT. (16) Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties “Lease of Properties“: subject to the VAT imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret (2) formula or process, goodwill, trademark, trade brand or other like property or right (3) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment (4) The supply of scientific, technical, industrial or commercial knowledge or information (5) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in #2 or any such knowledge or information as is mentioned in #3 (6) 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 (7) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme (8) The lease of motion picture films, films, tapes and discs 188
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(9) The lease or the use of or the right to use radio, television, satellite transmission and cable television time
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outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP The services referring to ‘processing, manufacturing, repacking’ and ‘services other than those in (1)’ both require (i) payment in foreign currency; (ii) inward remittance; (iii) accounted for by the BSP; (iv) AND that the service recipient is doing business outside the Philippines. If this is not the case, taxpayers can circumvent just by stipulating payment in foreign currency. (CIR v. Burmeister) (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate (as amended by RA 9337) (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof [as amended by RA 9337]; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Phil.
Additional services subject to VAT: (1) Services performed in the exercise or practice of profession or calling by individuals subject to professional tax under the LGC, and professional services rendered by general professional partnerships (GPPs); (2) Services performed by actors/actresses, talents, singers, emcees, radio/television broadcasters, choreographers, musical/radio/movie/television/stage directors, and professional athletes; (3) Services rendered by customs, real estate, stock, immigration and commercial brokers; (4) Services rendered by doctors, and lawyers. (5) Association dues or membership fees and other assessment or charges for the beneficial services of the homeowner’s association (RMC No. 9-2013) (6) Lease/use of sports facilities and equipment (RA 6847) The performance of the services should not be in pursuit of an employer-employee relationship between the service-provider and the service-recipient.
N. ZERO-RATED SALE OF SERVICES A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. The following services performed in the Philippines by VAT-registered persons are effectively 0% VAT sales of services: (1) Processing, manufacturing or repacking goods for other persons doing business 189
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to another place in the Phil. (the same being subject to 12% VAT under Sec. 108) (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (as added by RA 9337) and; (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. (as added by RA 9337) 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.
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(a) Sale of goods or properties and/or services and the use or lease of properties that is NOT subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. (b) The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers. (RR 162005) (c) But, the VAT-registered person may elect that the exemption not apply to its sale of goods or properties or services; provided that the election made shall be irrevocable for a period of three (3) years from the quarter the election was made (Sec. 109(2), NIRC). Exempt Transactions Enumerated (1) Sale/import of agricultural, marine food products in original state; of livestock and poultry; breeding stock and genetic materials Original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Also includes preservation using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods (RR 16-2005) Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, AND COPRA shall be considered in their original state Livestock or poultry do not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. (2) Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds (including ingredients)
Effectively zero-rated sale of service – a local sale of services by a VAT-registered person to a person or entity granted indirect tax exemption under special laws or international agreement. The taxpayer must seek prior approval or prior confirmation from the appropriate offices of the BIR so that a transaction is qualified for effective zero-rating except in export sales and foreign denominated sales. RR 4-2007 removed the distinction between automatic and effectively zerorated transactions found in prior Revenue Regulations (inc. RR 16-2005) with respect to prior application from the BIR.
O. VAT EXEMPT TRANSACTIONS Vat Exempt Transactions, in general 190
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(3) Import of personal and household effects of Phil resident returning from abroad and nonresident citizens coming to resettle in the Philippines (4) Import of professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange Does not include vehicles, vessels, aircrafts, machineries, and other goods for use in manufacturing in commercial quantities) (5) Services subject to percentage tax (6) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar (7) 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 medicine is subject to VAT. [RR 16-2005] (8) Educational services rendered by private educational institutions, duly accredited by DEPED, CHED, TESDA, and those rendered by government educational institutions; “Educational services” does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, CHED, and/or TESDA. [RR 16-2005] (9) Services rendered by individuals pursuant to an employer-employee relationship (10) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
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Region and do not earn or derive income from the Philippines (11) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under PD No. 529 [Petroleum Exploration Concessionaires under the Petroleum Act of 1949] (12) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce to nonmembers. Exemption includes importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT. [RR 16-2005] (13) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority (14) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority are exempt BUT their 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) Sale of real properties – the ff. sales are exempt: (a) Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business. 191
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TAXATION LAW 2 Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA No. 7279 and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-government organizations. (d) Sale of residential lot valued at P1,919,500 and below, or house & lot and other residential dwellings valued at P3,199,200 and below 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 does not exceed P1,919,500. [RR 13-2012] Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [RR 16-2005] Sale, transfer or disposal within a 12-month period of 2 or more adjacent residential lots, house and lots or other residential
However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s main business. [RR 4-2007] (b) Sale of real properties utilized for lowcost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws, such as RA No. 7835 and RA No. 8763. “Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No. 7279, and other laws, such as RA No. 7835 and RA No. 8763. (c) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. ZZZZZ"Socialized housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by the 192
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dwellings to one buyer, whether from the same or from different sellers shall be considered one single transaction. Hence, the sale of the adjacent lots shall be subject to VAT if the aggregate value exceeds P1,919,500 for residential lots and P3,199,200 for residential house lots or residential dwellings, notwithstanding that the value of the individual properties do not exceed the VAT exemption thresholds. Sale/purchase of parking lots shall not be considered a sale of residential lot/dwelling. Hence, it shall be subject to VAT regardless of its selling price. [RR 13-2012] (17) Lease of residential units with a monthly rental per unit not exceeding P12,800, regardless of the amount of aggregate rentals received by the lessor during the year.
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(b) The gross receipts from rentals exceeding P12,800 per month per unit shall be subject to VAT IF the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P12,800 ) exceeds P1,919,500 . Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code. The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. [RR 16-2005] (18) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; (19) Transport of passengers by international carriers (Added by RA 10378) (20) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations [added by RA 9337]; The exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and spare parts of said vessels;
Lease of residential units where the monthly rental per unit exceeds P12,800 but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos P1,919,500 shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P12,800 while others are leased out for more than P12,800 per unit, his tax liability will be as follows: (a) The gross receipts from rentals not exceeding P12,800 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts.
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Provided, further, that the vessels to be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessel's original commissioning, as follows: o for passenger and/or cargo vessels, the age limit is 15 years old, o for tankers, the age limit is 10 years old, and o for high-speed passenger crafts, the age limit is 5 years old [RR 162005] (21) Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport operations; [added by RA 9337] The said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; If any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 12% VAT starting Feb. 1, 2006. [RR 16-2005] (22) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and (23) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,919,500 For purposes of the threshold of P1,919,500, the husband and the wife shall be considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply.
For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. The VAT-exempt sales shall NOT be included in determining the threshold. [RR 16-2005]
Other Services Exempt from VAT – such services are those subject to percentage tax (infra) (1) Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages; (2) Services rendered by international air/shipping carriers; (3) Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10,000,000 and by franchise grantees of gas and water utilities; (4) Services rendered for overseas dispatch, message, by franchise grantees or conversation originating from the Philippines; (5) Services by any person, company or corporation (except purely cooperative (6) companies or associations) doing life insurance business of any sort in the Philippines; (7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies; (8) Services rendered by proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, jai-alai and race tracks; and (9) Receipts on sale, barter for exchange of shares of stock listed and traded through
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the local stock exchange or through initial public offering.
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(2) Purchase of real properties for which VAT has actually been paid (3) Purchase of services in which VAT has actually been paid (4) Transactions deemed sale (5) Presumptive Input Tax (6) Transitional Input Tax
P. INPUT TAX AND OUTPUT TAX, DEFINED Output tax – the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of the Code. (Sec 110 A)
Presumptive Input Tax (Sec. 111(B)) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil and packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to FOUR PERCENT (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.
Input tax – the VAT due on or paid by a VATregistered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. (1) It includes the transitional input tax and the presumptive input tax as determined in accordance with Section 111 of the Code. (2) It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (3) Input tax must be evidenced by a VAT invoice or official receipt issued by a VATregistered person in accordance with Secs. 113 and 237 of the Code. [RR 16-2005]
“Processing” means pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. Claiming of input Tax on motor vehicles subject to the ff conditions: (1) Purchase of vehicle must be substantiated with official receipts and other records; (2) Taxpayer has to prove the direct connection of the motor vehicle to the business; (3) Only one vehicle for land transport is allowed for the use of an official/employee with value not exceeding P2.4 million; (4) No depreciation shall be allowed for yachts, helicopters, airplanes
Q. SOURCES OF INPUT TAX (1) Purchase or importation of goods (evidenced by VAT invoice/receipt) (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 in the course of business; or (d) For use as materials supplied in the sale of service; or (e) For use in trade or business for which deduction for depreciation or amortization is allowed under the Code.
Transitional Input Tax (Sec 111) Who may avail: (i) By a person who becomes VAT-liable for the 1st time, or (ii) any person who elects to be a VAT-registered person 195
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(P1,000,000). If the aggregate acquisition cost does not exceed P1,000,000, the total input taxes will be allowable as credit against output tax in the month of acquisition.25 (b) However, if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period (3) To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee.
Rate: 2% Input VAT of the value of the beginning inventory on hand or actual VAT paid on such, goods, materials and supplies, whichever is HIGHER, which amount shall be creditable against the output tax of VATregistered person. Tax base: The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional input tax, EXCLUDING goods that are exempt from VAT under Sec. 109 of the Tax Code. (RR 162005)
Input tax on purchase of services, lease or use of properties shall be creditable: (1) To the purchaser upon payment of the compensation, royalty or fee (2) To lessee or licensee upon payment of the compensation, royalty or fee
Note: A real estate dealer is entitled to claim transitional input VAT based on the value of the entire (including the value of the land and the improvements thereon) real property sold regardless of whether there was in fact actual payment of VAT on the purchase of the real property. At the time the purchase was made, there was still no VAT imposed. (Fort Bonifacio Development Corp. v. CIR)
Transitional tax The following persons shall be allowed INPUT TAX in his beginning inventory of goods, materials and supplies an equivalent to TWO PERCENT (2%) of the value of such inventory; OR the actual VAT paid on such goods, materials and supplies, whichever is HIGHER, which shall be creditable against the OUTPUT TAX. (1) Any person liable for VAT or (2) who elects to be a VAT-registered person
R. PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT Input tax on domestic purchase or importation of goods or properties shall be creditable: (1) To the purchaser upon consummation of sale and on importation of goods or properties; and (2) To the importer upon payment of the VAT prior to the release of the goods from the custody of the Bureau of Customs. (a) The input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under the Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos
Presumptive input tax There shall be allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil and packed noodle based instant meals 25 Please refer below for the example.
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S.3. ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS26
S. DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS
There are four possible transactions a VATregistered person may enter into: (i) VAT taxable, (ii) VAT-exempt, (iii) zero-rated VAT and (iv) sale to governments.
Output VAT – Input VAT = VAT Payable
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: (1) All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit. Input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall not be credited against output taxes arising from sales to non-Government entities (2) If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall be pro-rated to the VAT taxable and VATexempt transactions and ONLY the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.
S.1. DETERMINATION OF OUTPUT TAX (RR 16-2005) Output VAT in a sale of goods/properties shall be computed by multiplying the total amount indicated in the invoice or receipt by 12%. 𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇 = 𝐺𝑟𝑜𝑠𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
Output VAT in a sale of services shall be computed by multiplying the total amount indicated in the invoice or receipt by 12%. 𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇 = 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
S.2. DETERMINATION OF INPUT TAX CREDITABLE (1) The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VATregistered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale.
S.4. DETERMINATION OF THE OUTPUT TAX AND VAT PAYABLE AND COMPUTATION OF VAT PAYABLE OR EXCESS TAX CREDITS If at the end of any taxable month or quarter: The output tax exceeds the input tax, the excess shall be paid by the VAT-registered person The input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters
(2) The claim for tax credit referred to includes not only those filed with the BIR but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs.
26 Please refer below for the example
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multiplying the total invoice amount by a fraction using the rate of VAT as numerator and one hundred percent (100%) plus rate of VAT as the denominator. Accordingly, the input tax that can be claimed by the buyer shall be the corrected amount of VAT computed in accordance with the formula herein prescribed.
Illustration: For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80. Since output tax exceeds the input tax for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT payable is 100 minus 80 = 20. If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the input tax inclusive of input tax carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output tax; Provided, That, the excess input tax shall be carried over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules.
There shall be allowed as a deduction from the output tax the amount of input tax deductible to arrive at VAT payable on the monthly VAT declaration and the quarterly VAT returns.
T. SUBSTANTIATION OF INPUT TAX CREDITS (1) INPUT TAXES must be substantiated and supported by the following documents, and must be reported in the information returns required to be submitted to the Bureau: (a) For the importation of goods = Import entry or other equivalent document showing actual payment of VAT on the imported goods. (b) For the domestic purchase of goods and properties = Invoice showing the information required under Secs. 113 (Invoicing and Accounting Requirements for VAT-Registered Persons) and 237 (Issuance of Receipts or Sales or Commercial Invoices) of the Tax Code. (c) For the purchase of real property = public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller. (d) For the purchase of services = official receipt showing the information required under Secs. 113 and 237 of the Tax Code.
Illustration: For a given taxable quarter XYZ Corp. has output VAT of 100 and input VAT of 110. Since input tax exceeds the output tax for such taxable quarter, the 70% limitation is imposed to compute the amount of input tax which may be utilized. The total allowable input tax which may be utilized is 70 (70% of the output tax). Thus, the net VAT payable is 100 less 70 = 30. The unutilized input tax amounting to 40 is carried over to the succeeding month. In all cases where the basis for computing the output tax is either the gross selling price or the gross receipts, but the amount of VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the gross selling price/gross receipts plus the correct amount of VAT. Hence, the output tax shall be computed by 198
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A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of the Tax Code.
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(4) Input tax from payments made to nonresidents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the nonresident evidencing remittance of VAT due which was withheld by the payor.
(2) TRANSITIONAL INPUT TAX shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR.
(5) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.
(3) Input tax on "deemed sale" transactions shall be substantiated with the invoice required.
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Example regarding the input tax on goods where deduction for depreciation is allowed from RR 162005 Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The data pertinent to the sold assets are as follows: Selling Price Passed-on VAT Original Cost of Asset Accumulated Depreciation at the time of sale
-
P 5,000,000.00 (exclusive of VAT) 500,000.00 3,000,000.00 1,000,000.00
Unutilized Input Tax (Sold Asset)
-
100,000.00
Accounting:
SELLER
BUYER
Oct. 1, 2005 Cash P 1,100,000.00 Installment Receivable 4,400,000.00 Accumulated Depreciation 1,000,000.00 Output Tax 500,000.00 Asset 3,000,000.00 Gain on sale of asset 3,000,000.00
Oct. 1, 2005 Asset Input Tax
To Record VAT Liability:
------------
Output Tax Input Tax VAT Payable
P 5,000,000.00 500,000.00
Cash Installment Payable
1,100,000.00 4,400,000.00
500,000.00 100,000.00 400,000.00
Periodic Receipt of Installment:
Periodic Subsequent Payment:
Cash
Installment Payable Cash
1,100,000.00 Installment Receivable 1,100,000.00
1,100,000.00 1,100,000.00
* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread evenly over a period of 60 months starting the month of purchase. If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer was made but subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.
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Example regarding the allocation of input tax on mixed transactions from RR 16-2005 Illustration: ERA Corporation has the following sales during the month: Sale to private entities subject to 10% Sale to private entities subject to 0% Sale of exempt goods Sale to gov’t. subjected to 5% final VAT Withholding Total sales for the month
-
P100,000.00 100,000.00 100,000.00
-
100,000.00 P400,000.00
The following input taxes were passed on by its VAT suppliers: Input tax on taxable goods (10%) Input tax on zero-rated sales Input tax on sale of exempt goods Input tax on sale to government Input tax on depreciable capital good not attributable to any specific activity (monthly amortization for 60 months)
-
P5,000.00 3,000.00 2,000.00 4,000.00
-
P20,000.00
A. The creditable input tax for the month shall be computed as follows: Input tax on sale subject to 10% P 5,000.00 Input tax on zero-rated sale 3,000.00 Ratable portion of the input tax not directly attributable to any activity: Taxable sales (0% and 12%) Total Sales
P100,000.00 400,000.00
X
Amount of input tax not directly attributable
X P20,000.00
- P5,000.00
Total input tax attributable to sales - P9,000.00 to government
B. The input tax attributable to sales to government for the month shall be computed as follows: Input tax on sale to gov’t. P 4,000.00 Ratable portion of the input tax not directly attributable to any activity: Taxable sales to the government Total Sales
P100,000.00 X P20,000.00 400,000.00
X
Amount of input tax not directly attributable
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Total input tax attributable to sales to government
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P 9,000.00
C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows: Input tax on VAT-exempt sales P 2,000.00 Ratable portion of the input tax not directly attributable to any activity: VAT-exempt sales Total Sales
X
Amount of input tax not directly attributable
P100,000.00 X P20,000.00 400,000.00
-
P 5,000.00
Total input tax attributable to VAT-exempt sales
P 7,000.00
The table below shows a summary of the foregoing transactions of ERA Corporation: Output VAT
Input VAT not directly Attributable to any Activity
Creditable Input VAT
Net VAT Payable
Excess Input VAT for carryover/
VAT for refund
Unrecove rable VAT
Sale Subject to 10% VAT 10,000 5,000 5,000 10,000 10,000 0 0 0 0 Sale Subject to 0% VAT 0 3,000 5,000 8,000 8,000 0 0 8,000 0 Sale of Exempt Goods 0 2,000 5,000 7,000 0 0 0 0 7,000* Sale to Government subject to 5% Final withholding VAT 4,000 for input5,000 5,000 5,000*** as cost0or expense. 0 **4,000* * These amounts 10,000 are not available tax credit9,000 but may be**recognized
Standard input VAT of 5% on sales to Government as provided in SEC. 4.114-2(a) *** Withheld by Government entity as Final Withholding VAT The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense. Notwithstanding the foregoing provisions, for persons engaged in both zero-rated sales under Sec. 108(B)(6) of the Tax Code and non-zero rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated sale and non-zero-rated sale. 202
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or sea vessels from the Philippines to a foreign country, the input taxes shall be allocated ratably between his zero-rated sales and non-zero-rated sales (sales subject to regular rate, subject to final VAT withholding and VAT-exempt sales). (RR 16-2005)
U. REFUND OR TAX CREDIT OF EXCESS INPUT TAX (CF REFUND OF ERRONEOUSLY PAID TAXES) Who may claim for refund/apply for issuance of tax credit certificate (1) Zero-Rated Sales (Sec. 112(A), NIRC) (a) Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate/refund of creditable input tax due or paid attributable to such sales, EXCEPT transitional input tax, to the extent that such input tax has not been applied against output tax, within two (2) years after the close of the taxable quarter when the sales were made. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax. (b) The acceptable foreign currency exchange proceeds must have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) in the case of zero-rated transactions paid for in acceptable foreign currency and requiring that such be accounted for in accordance with BSP rules & regulations (Secs. 106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1) and (2), NIRC). (c) Where the taxpayer is engaged in zerorated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. (d) In the case of a person engaged in the transport of passenger and cargo by air
Requirements:(Summary) (i) The claimant should be a VATregistered person (ii) There should be an application filed with the BIR or DOF center, as the case may be, within 2yrs after close of taxable quarter. (iii) The claimed input tax must not have been applied to any output tax during the period covered and subsequent periods covered by the claim. (iv) The claimed input tax must have been deducted from the VAT quarterly return. (v) The claimed input tax are directly attributable to 0%-rated transactions. (vi) Acceptable foreign currency exchange proceeds must have been duly accounted for (vii) Claimed input tax must be duly supported by VAT invoices/receipts. (viii) VAT returns for the succeeding quarters must have been submitted. (2) Cancellation of VAT Registration. (a) A person whose registration has been cancelled due to (i) retirement from or cessation of business, or due to changes in or (ii) cessation of status under Section 106(C) of the Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused 203
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input tax which may be used in payment of his other internal revenue taxes. (b) He shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.
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Manner of giving refund Revenue Memorandum Circular no. 57-2013 (August 23, 2013): Unutilized creditable input taxes attributed to zero-rated sales can only be recovered through the application for refund or tax credit. There is no other mode of recovering unapplied input taxes aside from an application for refund or tax credit. The Memorandum Circular also instructed the disallowance of unutilized creditable input taxes attributable to VAT zerorated sales that is claimed as a deduction for income tax purposes.
Period to file claim/apply for issuance of tax credit certificate This period must be distinguished from normal tax refunds for erroneous payments where an administrative claim and judicial claim may be made together, and the reckoning point of the 2 years is from the date of the erroneous payment. (1) Application for issuance of tax credit certificate or refund of creditable input tax (except transitional input tax) w/in 2 years after the close of the taxable quarter when the sale was made. If the VAT registration has been cancelled due to retirement or cessation of business, or change of status, the 2 year period shall be after the date of cancellation (2) Administrative Claim The CIR shall grant the tax credit/refund within 120 days from the date of submission of complete documents in support of the application “Complete Documents” is determined by taxpayer himself. Taxpayer may only resort to a Judicial Claim either after the end of the 120 day period or after a decision is made by the Commission, whichever comes first. (3) Judicial Claim In case of denial of the application or the expiry of the 120 days, the taxpayer may appeal to the CTA within 30 days
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on Audit, the provisions of the Administrative Code of 1987 notwithstanding: provided that refunds shall be subject to post audit by the Commission on Audit. (Sec. 112(D), NIRC) Destination principle or cross-border doctrine (see above)
V. INVOICING REQUIREMENTS (Sec 113) Invoicing requirements in general A VAT-registered person shall issue: (1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services Only VAT-registered persons are required to print their TIN followed by the word “VAT” in their invoice or ORs. Said documents shall be considered as a “VAT Invoice” or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT 204
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OR shall not give rise to any input tax. [RR 1605]
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(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and (4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VATregistered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client. (5) Name of buyer and seller
Note: VAT component of all transactions shall be separately indicated in the VAT invoice or receipt. (RR 18-2011) Information Contained in the VAT Invoice or VAT Official Receipt: (1) A statement that the seller is a VATregistered person, followed by his taxpayer's identification number (TIN); (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT: (a) The amount of the tax shall be shown as a separate item in the invoice/receipt; (b) If the sale is exempt from VAT, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt; (c) If the sale is subject to zero percent (0%) value-added tax, the term "zerorated sale" shall be written or printed prominently on the invoice or receipt;
Invoicing Requirements and Recording in Deemed Sale Transactions Transaction 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 Distribution or transfer to shareholders/investors or creditors
Invoicing Requirement Memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use
Invoice, at the time of the transaction, which should include all the info prescribed above; data in the invoice shall be duly recorded in the subsidiary sales journal Consignment of goods if actual sale is not Invoice, at the time of the transaction, which should made within 60 days include all the info prescribed above; data in the invoice shall be duly recorded in the subsidiary sales journal
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Retirement from or cessation of business An inventory shall be prepared and submitted to the with respect to all goods on hand RDO who has jurisdiction over the taxpayer’s principal place of business not later than 30 days after retirement or cessation from business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory regarding the description of the goods. If the business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes. Consequences of issuing erroneous vat invoice or vat official receipt
(1) the transaction shall become taxable and the (2) issuer shall be liable to pay VAT thereon. (3) The purchaser shall be entitled to claim an input tax credit on his purchase. [RR 1605]
Issuance of a VAT Invoice or VAT Receipt by a non-VAT person If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word "VAT", the erroneous issuance shall result to the ff: (1) The non-VAT person shall be liable to: Percentage taxes applicable to his transactions; VAT due on transactions under Section 106 or 108 of the Code, without the benefit of any input tax credit; and A 50% surcharge under Section 248 (B) of the code; (2) The VAT shall, if the other requisite information required is shown on the invoice/receipt, be recognized as an input tax credit to the purchaser.
W. FILING OF RETURN AND PAYMENT (Sec 114) VAT returns - VAT paid on a monthly basis. Payments in the monthly VAT declarations shall be credited in the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of the end of a quarter. (1) Filed by person liable to pay the VAT (2) Quarterly return of the amount of his gross sales or receipts within twenty-five (25) days after the close of each taxable quarter prescribed for each taxpayer. (3) The monthly VAT Declarations of taxpayers whether large or non-large shall be filed and the taxes paid not later than the 20th day following the end of each month.
Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VAT-registered Person If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale:
Note: VAT paid on a monthly basis. Payments in the monthly VAT declarations shall be credited in the quarterly VAT return to arrive at the net VAT payable or excess input tax/over-payment as of the end of a quarter.
Administrative and Penal Provisions (Sec 115) 206
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(1) Suspension of business operations. In addition to other administrative and penal sanctions provided for in the Tax Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following violations: (a) Failure to issue receipts and invoices. (b) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code. (c) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. (d) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code. (2) Surcharge, interest and other penalties. The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code (VAT).
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or services to the government shall be subject to the 5% final withholding tax. The government shall, before making payment on account of each purchase of goods and/or services taxed at 12% VAT (Sec. 106 and 108) deduct and withhold a final VAT due at the rate of 5% of the gross payment thereof. (Mamalateo, Reviewer on Taxation, 2008) Sales to Government (1) The Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall, before making payment on account of each purchase of goods and services which are subject to the VAT (Secs. (2) 106 and 108, NIRC), deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. The payment for lease or use of properties or property rights to nonresident owners shall be subject to 12% withholding tax at the time of payment. (a) The payor or person in control of the payment is considered as the withholding agent. (b) The VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made. The 5% final VAT shall represent the net VAT payable of the seller. The remaining 7% effectively accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (This means that where the 5% final VAT applies, the basic formula of output tax less input tax does not apply.) Should actual input VAT exceed 7% of the gross payments, the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT is less than 7% of gross payment, the
X. WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT (RR 16-2005) General Rule: Withholding tax does not apply on transactions subject to VAT. The exceptions are: (1) Gross payments by the government shall be subject to the 5% final withholding tax; (2) Gross payments by resident VAT-taxpayers to non-resident foreign persons of rentals, royalties, reinsurance premiums, and services done in the Philippines—12% (Sec. 114(c), NIRC) * Beginning Nov. 1, 2005, when R.A. 9337 became effective, all sales of goods, properties, 207
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difference must be closed to expense or cost, in effect reducing it. The 5% final VAT shall represent the net VAT payable of the seller. The remaining 7% effectively accounts for the standard input VAT, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. (This means that where the 5% final VAT applies, the basic formula of output tax less input tax does not apply.) (1) Should actual input VAT exceed 7% of the gross payments, the excess may form part of the sellers’ expense or cost. (2) On the other hand, if actual input VAT is less than 7% of gross payment, the difference must be closed to expense or cost, in effect reducing it. However, 12% final VAT shall be withheld with respect to the following: (1) Lease or use of properties or property rights owned by non-residents; (2) Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents; and; Other services rendered in the Philippines by non-residents. VAT FORMULA (IN GENERAL) Actual Sales/Receipts Add: Excise Tax Transactions Deemed Sale
xxx xxx xxx
Less: Sales Returns and Allowances Sales Discounts
xxx xxx
Remaining Merchandise (Cessation of VAT-registered Status)
Total Sales (Taxable Base) Multiplied by 12% Output VAT on sales or gross recipts Less: Input VAT on purchases and services Transitional Input VAT, if applicable Presumptive Input VAT, if applicable Input VAT Carry-over from previous period Creditable VAT withheld Net VAT payable (refundable) 208
xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx 12%
xxx xxx
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MONTHLY RETURN Gross Sales/Receipts for the Month Multiplied by VAT rate Output VAT Less Input Taxes: Transitional/Presumptive Input Tax On taxable goods/services Net VAT Payable Add Penalties: Surcharge Interest Compromise Total Amount Payable
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xxx 12% xxx xxx xxx xxx xxx xxx
xxx xxx
xxx xxx
INVOLVING GOVERNMENT When Actual Input VAT > Standard Input VAT: excess forms part of seller’s expense/cost When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income Sales xxx Output VAT (Sales x 12%) Purchases Input VAT (Purchases x 12%)
xxx
xxx xxx
OUTPUT VAT Payable: Output VAT Less: Actual Input VAT xxx Standard Input VAT (Sales x 7%) Cost of sale/Expense (Income and expense summary) Net VAT Payable Less: Creditable Withholding Tax (Sales x 5%) Output VAT Payable
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xxx xxx xxx xxx
xxx xxx xxx
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Quick Notes on VAT Transactions subject to VAT General Requirements (1) Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto (inc isolated) EXCEPTION: (a) NRC/NRA who perform services in Phil, even if no regularity (b) Importation of Goods may be for business or non-business use (2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php OR there are reasonable grounds to believe Taxable Transactions and Specific Requirements (1) SBEL of Goods or Properties27 Goods/Personal Properties (i) Actual/deemed sale (4) for a valuable consideration (ii) for use or consumption in the Phil (regardless of the payment arrangements) (iii) not exempt from VAT (NIRC, special law, special agreement) Real Properties28: (i) Seller (w/n natural) executes contract to SBE of RP (ii) RP is in the Phil (iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor) (iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable activity (NOT a capital asset) not exempt from VAT (NIRC, special law, special agreement) (2) S of Services29 (i) for a valuable consideration (actually/constructively received) (ii) performed ICTB in the Phil. (iii) not exempt from VAT (NIRC, special law, special agreement) (iv) person rendering service is VAT-liable (v) no ee-er relationship (3) I of Goods 27
Sec 106
28
Casual Sale (Capital Assets) Regular Sales (Ordinary Assets) Commercial Property (Sale/Lease) Residential Units (Lease)
29
Subject to CGT (6%) Subject to 12% VAT If monthly rental ≤ 12,800 = VAT and OPT-exempt If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT
Residential Lot
If SP > 1,919,500.00 = subject to VAT IF SP ≤ 1,919,500.00 = VAT-exempt
Residential House and Lot
If SP > 3,199,200.00 = subject to VAT IF SP ≤ 3,199,200.00 = VAT-exempt
Sec 108
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Persons Liable to pay VAT (1) any person who SBEL goods or properties if real property: persons engaged in real estate business: (i) Any person who SBE of real properties ICT/B (ii) Real estate lessors/ sub-lessors (iii) NRA/NRC lessors when RP is in Phil (iv) non-stock, non-profit corp engaged in SBE of real properties ICT/B, regardless of disposition of income (v) Gov’t inc GOCCs in SBEL of RP ICT/B (2) who renders services (3) who imports goods if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt persons, purchasers/recipients = importer if the Philippine branch of an NRFC “imported”, first local buyer = importer
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Tax Bases of VAT (1) Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL excludes: VAT, sales discounts30 and, allowances and returns (2) includes: Excise tax paid, initial payments31, interests and penalties (if instalment), commission income (if exported), purchase price, charges for packing, delivery and insurance o If goods/personal properties, GSP = amount paid in consideration IF DEEMED SALE: FMV at the time of the transaction NB: in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment, furniture, fixture), tax base = whichever is lower, (i) acquisition cost (ii) current market price of goods o If real property, GSP = amount higher: i. consideration stated in the sales document ii. FMV, whichever is higher of Zonal value: FMV as determined by CIR NB: Deferred Payments (initial > 25% Real Property Tax Value: FMV as determined by provincial & city GSP) assessors Instalment Plan (initial ≤ 25% GSP) o
IF ON INSTALLMENT: GSP = down payments received + interests + penalties + other charges – amount of mortgage (paid) NB: If zonal/FMV, tax base = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇) 𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟 𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇) Upon full collection, if a difference is uncovered because the zonal value or market value at the date of sale is higher than the total receipts or collections based on the agreed consideration, the additional VAT shall be paid accordingly (RMC 03-96)
o
IF DEFERRED GSP = entire selling price or zonal/FMV, whichever is higher NB: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales and 2) when GSP is unreasonably lower than AMV32
(2) Gross Value in money of goods (3) Gross Receipts derived from transaction: total amount of money/equivalent = contract price + compensation + service fee + rental fee + royalties + amount charged for materials supplied with the services + deposits and advanced payments actually or constructively received + costs items of 30
It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening of a future event Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale 32 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same quantity or quality sold in the immediate locality or the nearest date of sale. 31
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TAXATION LAW 2
construction projects – (VAT + amounts earmarked for payments to unrelated 3rd party + amounts received as reimbursement + monies/receipts held in trust w/c do not redound to the benefit of taxpayer + universal charge passed on and collected by distribution companies and electric coop (if sale of electricity) + receivables + local taxes) IF DEALER IN SECURITIES: gross selling price – cost of securities sold (4) Total Value/Landed Cost (determined on the basis of quantity/volume of goods) Total Value used by Customs: tariff and customs duties + custom duties +excise tax + charges Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties + freight + insurance + other charges +excise tax – expenses incurred after release of goods (e.g. cost of delivery) Customs duty: amount of customs duty legally due and paid by the importer Charges: special import tax,foreign marginal fees, bank and arrastre charges, wharfage dues, broker fees, other charges paid to complete importation
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TAXATION LAW 2
Rates of VAT (A) Output Tax (Sale/Barter/Exchange/Lease) (1) 12% standard rate: applied directly to TB (2) 0%: applied directly to TB (B) Input Tax (Purchase from VAT-registered businesses/Importation of goods) (1) 12% standard rate: applied directly to TB (2) 0%: applied directly to TB (3) 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt good) existing at the date a person commences business and/or becomes liable to VAT) or 12% actual input tax rate, higher (4) 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a VAT-registered person in manufacturing or processing certain food products (5) 7% FWT (standard input VAT, when government), 5% withholding Creditable Input VAT Requirements (1) Proper documentation (2) No double input tax credit is allowed. Input VAT on a particular purchase transaction can be claimed once only upon consummation of the sale of goods and based on the entire GSP (whether paid on cash, credit or instalment) (3) Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed. (4) Transactions should have been made with VAT-registered persons. (5) IF MIXED TRANSACTIONS and input VAT cannot be directly attributable:: Formula
Input Tax Treatment
Untraceable Input VAT x
(𝑉𝐴𝑇 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠) 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Creditable Input VAT
Untraceable Input VAT x
(𝑍𝑒𝑟𝑜−𝑟𝑎𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠) 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Input VAT Credit, eligible for tax refund or TCC
Untraceable Input VAT x
(𝑉𝐴𝑇−𝑒𝑥𝑒𝑚𝑝𝑡 𝑠𝑎𝑙𝑒𝑠) 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Cost of Sales or Operating Expense
Untraceable Input VAT x
(𝑆𝑎𝑙𝑒 𝑡𝑜 𝐺𝑜𝑣′𝑡) 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Compare to Standard Input VAT (Creditable against Standard input VAT)
NB: Creditable Input VAT is (1) increased by any input VAT carried over from the preceding month or quarter (2) decreased by (i) amount of the claim for refund or tax credit for VAT filed during the same period (ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable capital goods (iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales
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VAT-EXEMPT and 0% VAT VAT-Exempt Non-VAT taxable transaction Taxpayer is relieved from payment of VAT for w/c he is directly liable NO output and input VAT Optional VAT Registration Partial relief Only removes VAT at the exempt stage
0% VAT Taxable transaction No output VAT, but input VAT is available as tax credit or refund Total relief All VAT is removed at whatever stage
SALE OF SERVICES VAT-Exempt 0% VAT NB: There are 31 VAT-exempt sales of (1) Processing, manufacturing, repacking goods to services (Sec 109 and special laws) non-resident (5) (2) Processing, manufacturing, repacking goods to (1) wrt lease of property =exempt export-oriented (3) if advance payment = loan, option (3) Services other than processing, manufacturing, money, security deposit repacking (4) NB: if security deposit is applied to (4) Services to exempted persons (3): effectively 0rate rental = VAT (5) Sale of power/fuel-generated through renewable (2) wrt persons engaged in milling, resources (3) processing, manufacturing or repacking (6) Services rendered to int’l shipping/air transport goods = exempt (2) if palay rice; corn corn grits; (7) Transport of passengers and cargo by air from Phil sugar cane raw sugar to Foreign (3) (3) wrt franchise grantees of electric utilities, telephone and telegraph, radio and/or (8) Transactions of VAT-reg person to foreign embassies (2) television broadcasting = exempt if annual gross receipts <= 10M; franchise grantees of gas and water utilities; of telephone & telegraph services, amounts received for overseas dispatch from Phil. (4) wrt PREMIUMS of non-life insurance companies = exempt if life and disability insurance; crop insurance; health and accident insurance (included are only those with exceptions) Exceptions to the Exemptions (Subject to VAT) (5) sale/import of agricultural & marine food (1) wrt livestock and poultry DOES NOT INCLUDE products in their original state; livestock fighting cocks, race horses, zoo animals and pets and poultry (used/yield for human (2) DOES NOT INCLUDE vehicles, vessels, aircrafts, consumption); breeding stock and machineries, and other goods for use in genetic materials manufacturing in commercial quantities (6) import of professional instruments, (3) DOES NOT INCLUDE those under Petroleum implements, wearing apparel, domestic Exploration Concessionaires under Petroleum Act animals, and personal household effects of 1949 215
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(7) Transactions exempt pursuant to special (4) Wrt sale by agricultural coops to non-members, if laws seller is the member = VAT (8) Cooperatives Wrt sale by non-agri, non-electric and non-credit, importation of machineries and equipment = VAT (9) Residential lots ≥ 1,919,500 & lot & (5) DOES NOT INCLUDE parking lot dwellings ≥ 3,199,200 (6) If any portion of such goods are used for purposes (10) lease of residential units, other than those stated = VAT if ≤ 12,800/unit/month (regardless of aggregate amount); if ≥ 12,800/unit/month (AND aggregate amount is ≥ 1,919,500) (11) importation of fuels, goods, supplies by international shipping or air transport Importation of Services
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TAXATION LAW 2
SALE OF GOODS
VAT-Exempt 0% VAT Real Property Actual Export Sales (3) (i) Not primarily held ICT/B (ii) Low-cost or socialized housing Deemed Export Sales (iii) Residential lot <= 1,919,500 (i) Internal or constructive export sales (iv) House and/or other residential dwellings <= (a) Raw/Packaging materials to non-resident buyer 3,199,200 (5) (v) Lease (12,800/unit/year or total (b) Raw/Packaging materials to export-oriented (3) 1,919,500/year) (c) Phil. Port FOB value of export products (2)33 (vi) Transmission to a trustee (d) Net selling price of export products (4)34 E: if transmission is deemed sale (e) sales to bonded manufacturing warehouses (2)35 (vii) Transfer to corporation in exchange of SoS (f) sales to export processing zones36 (viii) Advance payments/Security Deposits in (g) sales to enterprises duly accredited by Subic Bay lease Metropolitan Authority (2) E: if applied to the rent (h) sales to registered export traders (3) (i) sales to diplomatic missions etc. (2) As regards ecozones and PEZA-registered (j) sale by VAT-supplier to manufacturer/producer entities whose products are 100% exported (3) (i) Made by VAT-exempt supplier from customs (ii) Sale of gold to BSP territory to any registered enterprise inside (iii) Sale of goods/supplies/equipment/fuel to persons ecozone engaged in int’l shipping/air transport (4) (ii) Intra-ecozone enterprise sale of service, if (iv) Docking/Undocking services to foreign vessels PEZA registered seller is subject to 5% special tax regime Foreign currency denominated goods (iii) Intra-ecozone sales of goods (i) To a NRC/NRA of goods (5) (ii) To a NRC/NRA of goods locally manufactured for household and personal use (2) E: automobiles and non-essential goods Effectively-zero rated sales (3) (i) Made by VAT registered supplier from customs territory to any registered enterprise inside ecozone (ii) Intra-ecozone enterprise sale of service, if PEZA registered seller is subject to NIRC taxes
Under Omnibus Investment Code (EO226) Ibid 35 RA7227 36 RA 7916 33
34
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Taxable Activity/Property Actual SBE of Goods or Properties Goods/ Personal Properties Real Properties IF sale is on instalment plan AND ZV/FMV > SP (excluding VAT) Deemed Sale Transactions Not ICB/T, but originally intended for sale/use ICB/T Transfer to SH in share of profit or Cr in payment of debt Consignment after 60d Retirement/Cessation of business Sale of Services Importation of Goods In general When custom duties are based on quantity or volume
TAXATION 2
TAXATION LAW 2
TR
12%
Tax Base
Tax Payable
Gross Selling Price = amt. paid to the seller = consideration/FMV, higher =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉 (𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑜𝑛) VAT Payable paid by seller/transferor
12%
FMV (at the time of transaction) E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV or determined by CIR AC or current market price, lower
12 %
12%
Gross receipts derived Total Value used by BOC =tariff & custom duties + custom duties + excise tax + charges = landed cost + excise tax
VAT Payable paid by performer VAT paid by importer PRIOR tp the release of goods in Customs custody
(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration. (2) The cancellation for registration will be effective from the first day of the following month the cancellation was approved. (3) What is the treatment for Withholding of VAT on Government Money Payments? The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sales to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost. The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trusts, whether large or nonlarge taxpayers, shall withhold twelve percent (12%) VAT with respect to the following payments: (i) Lease or use of properties or property rights owned by non-residents; and (ii) Other services rendered in the Philippines by non-residents. 218
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Person
(cannot be cancelled w/in 3years; franchise of radios/tv broadcasting, irrevocable)
Optional Registration
Before start of business and every year thereafter (on/before Jan 31)
Person Liable for VAT
TAXATION 2
Before start of business or within 10d before the beginning of taxable quarter
Register to RDO for every separate and distinct establishment
Did not register: Still liable for VAT No input credit
TAXATION LAW 2 VAT-registered Person (w/ TIN)
VAT AND NON-VAT REGISTRATION Registration Fee (500php) to authorized bank agent, RDOfficer, Rev Collection Officer, authorized city/municipal treasurer EXEMPT from 500php 1. if aggregate gross sales/receipts ≤ 100,000; 2. cooperative; 3. individuals earning pure compensation income; 4. overseas workers
Compliance activities after registration: 1. Registration of books of accounts (3) of the business/occupation/calling including practice of profession, before using the same. 2. Registration of sales invoices and official receipts (If there are transactions not subject to VAT, registration of non-VAT invoices or nonVAT official receipts) 3. Annual Registration: Pay registration fee for every place of business that generates sales after updating the registration records. 4. Filing of the Monthly VAT Declaration and Quarterly VAT Return to be submitted to RTO/LTDO
Certificate of Registration
APPROVE
DENY CANCELLATION/UPDATE OF VAT REGISTRATION (registration of a taxpayer of a franchise grantee of radio and/or tv broadcasting whose gross annual receipts≤ 10,000,000 = irrevocable)
Certificate of Non-VAT
Before start of business or within 10d before the beginning of taxable quarter
Register to RDO for every separate and distinct establishment
Registration Fee (500php) to authorized bank agent, RDOfficer, Rev Collection Officer, authorized city/municipal treasurer
Cancellation/Update necessitating cancellation
APPROVE
w/in 25d from cancellation
Filing of Short Period Return (for the remaining period that he was VAT-reg)
DENY
EXEMPT from 500php if aggregate gross sales/receipts ≤ 100,000; cooperative; individuals earning pure compensation income; overseas workers
Minor change in original registration w/in 15d from change
Notice of Change (f change of address)
Instances when a taxpayer may CANCEL his registration: 1. 2. 3. 4. 5. 6.
When TP’s gross sales/receipts for the following 12 months ≤ 1,919,500 When TP has ceased to carry on his T/B and does not expect to recommence within 12m In case of a single proprietorship, a change of ownership Dissolution of a partnership or corporation Merger/consolidation wrt dissolved corporations Person who registered prior to planned business commencement but failed to actually start business
UPDATE his registration: RE applications for VAT zero-rating: Taxpayers shall file their application directly with the Audit Information, Tax Exemption and Incentives Division (AITEID) under the Assessment Service, or with the LTAID I and II, BIR National Office, as the case may be.
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1. When TP’s business has become exempt 2. When there is a change of the nature of business (from vatable to exempt) 3. When TP a tax-exempt individual who applied for optional registration and cancelled his registration after 3yrs. 4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,500
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TAXATION LAW 2
VAT REFUND OR VAT CREDIT CERTIFICATE
Input Tax wrt Zero-rated and Effectively zero-rated Sales VAT-registered Taxpayer If VAT-exempt changes his status to VATregistered = transitional input tax
w/in 2 years after close of the taxable quarter when sales are made
Direct Tax Credit Presumptive Input Tax Transitional Input Tax Actual Input Tax not related to zero-rated sales
Carry-over Tax Credit
VAT- registered cancelling their registration (regardless of the source of input tax) Application for refund or TCC to CIR + supporting docs
w/in 2 years after close of the taxable quarter when sales are made w/in 120 days from submission
w/in 120 days from submission
GRANTED DENIED
VAT-exempt Transactions
w/in 30 days from receipt of denial
Apply against OUTPUT VAT
Non-VAT Taxpayer
INACTION w/in 30 days from expiration of 120-days
ISSUANCE
Appeal to CTA
NO INPUT TAX
Related INPUT VAT shall be treated as a cost of sale or operating expense DENIED
Related INPUT VAT shall be treated as cost of purchases
Related OUTPUT VAT shall be treated as an operating expense
GRANTED
Tax Credit Certificate
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Tax Refund
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TAXATION 2
IV. Tax remedies under the NIRC
TAXATION LAW of filing after it was due, whichever is LATER (ii) Return filed was false or fraudulent – 10 years from date of discovery of fraud or falsity
A. TAXPAYER’S REMEDIES
No return filed – 10 years from date of discovery of omission Criminal offense o 5 years from date of commission, and if not known then, from discovery and the institution of judicial proceedings for its investigation and punishment.
(1) ADMINISTRATIVE (BIR) (a) Before payment (i) Filing a petition or reconsideration or reinvestigation; and (ii) Entering into a compromise (b) After payment (i) Filing a claim for refund; and (ii) Filing a claim for tax credit
Assessment (1) JUDICIAL (CTA/RTC) (a) Civil action (i) Appeal to the CTA (ii) Action to contest forfeiture of chattel; and (iii) Action for damages (b) Criminal action (i) Filing a criminal complaint against erring BIR officials and employees
(i) Concept of assessment Assess means to impose a tax; to charge with a tax; to declare a tax to be payable; to apportion a tax to be paid or contributed, to fix a rate; to fix or settle a sum to be paid by way of tax; to set, fix or charge a certain sum to each taxpayer; to settle determine or fix the amount of tax to be paid (84 C.J.S 74-750) An assessment is the notice to the effect that the amount therein stated is due from a taxpayer as a tax with a demand for payment of the same within a stated period of time. (Commissioner v. CTA, 27 SCRA 1159)
Periods: Assessment o Return was filed (i) Not false or fraudulent – 3 years from date of filing of the return OR date legally due or actual date of filing after it wad due, whichever is LATER (ii) False or fraudulent - 10 years from date the fraud or falsity was discovered o No return filed – 10 years from the discovery of omission Collection o Assessment made – 3 years from date of finality of assessment o No assessment (i) With return filed which is not false or fraudulent – 3 years from date of filing of the return OR date or actual date
A. Requisites for valid assessment (a) The taxpayer shall be informed in writing of the law and the facts on which the assessment is made (Sec. 228, NIRC) (b) An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period (CIR v. PASCOR) (c) An assessment must be served on and received by the taxpayer (CIR v. PASCOR) B. Constructive methods of income determination C. Inventory method for income determination D. Jeopardy assessment 221
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E. Tax delinquency and tax deficiency
TAXATION LAW
(1) Period during which the commissioner is Prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter (2) When the taxpayer requests for a Reinvestigation which is granted by the Commissioner (3) When the taxpayer Cannot be located in the Address given by him in the return filed upon which a tax is being assessed or collected, BUT if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations shall not be suspended (4) When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and No Property is located (5) When the taxpayer is Out of the Philippines
(ii) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement (a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons (b) (iii) When assessment is made Prescriptive period for assessment (Sec. 203, NIRC) General Rule: 3 years If the taxpayer filed a return: internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. If a return is filed beyond the period prescribed by law: the three-year period shall be counted from the day the return was filed.
(iv) General provisions on additions to the tax (a) Civil penalties (b) Interest (c) Compromise penalties
Exception: (i) False return, (ii) Fraudulent return with intent to evade tax, (iii) Failure to file a return (Sec. 222, NIRC)
(v) Assessment process (a) Tax audit (b) Notice of informal conference (c) Issuance of preliminary assessment notice (d) Notice of informal conference (e) Issuance of preliminary assessment notice (f) Exceptions to issuance of preliminary assessment notice (g) Reply to preliminary assessment notice
NB: Waiver The taxpayer and the Commissioner may agree in writing, before the expiration of the time prescribed in Sec. 203, to extend the period of assessment (Sec. 222(b), NIRC) (1) The waiver of prescription must be executed properly, otherwise, invalid and results to prescription of the right to assess/collect. (Philippine Journalists Inc. vs. CIR, December 16, 2004) (2) Requirements for a valid waiver under RMO 20-90: i) definite agreed date, ii) date of acceptance indicated, and iii) taxpayer must be furnished with a copy of the waiver. (a) Prescriptive period for assessment (1) False, fraudulent, and non-filing of returns (b) Suspension of running of statute of limitations
(h) Issuance of formal letter of demand and assessment notice/final assessment notice (i) Disputed assessment (j) Administrative decision on a disputed assessment (vi) Protesting assessment 222
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(a) Protest of assessment by taxpayer (1) Protested assessment (2) When to file a protest (3) Forms of protest (4) Content and validity of protest (b) Submission of documents within 60 days from filing of protest (c) Effect of failure to protest (d) Period provided for the protest to be acted upon
TAXATION LAW the tax fraud division of the Enforcement Services, and Policy cases under audit by the special teams in national offices
(2) Issuance of Preliminary Assessment Notice (PAN) - The Assessment Division issues PAN if it determines that there exists sufficient basis to assess the taxpayer for any deficiency tax. It shall show in detail the facts and the law on which the proposed assessment is based. (3) Reply to PAN Taxpayer is given time to respond: 15 days from date of receipt of PAN (i) If he/she fails to respond: taxpayer is considered in default; a formal letter of demand and assessment notice shall be issued to the taxpayer (ii) If he/she responds: a FAN/FLD shall be issued within 15 days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties.
(vii) Rendition of decision by Commissioner (a) Denial of protest (1) Commissioner’s actions equivalent to denial of protest (a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy (2) Inaction by Commissioner (viii) Remedies of taxpayer to action by Commissioner (a) In case of denial of protest (b) In case of inaction by Commissioner within 180 days from submission of documents (c) Effect of failure to appeal
The notice for informal conference and the PAN shall not be required in any of the ff cases, in which case, issuance of the Formal Assessment Notice (FAN) shall be sufficient: (a) The finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) A discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) 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
Assessment Process [Sec. 228, NIRC; RR 12-99; RR 18-13] (1) Tax Audit - a tax audit, revenue officers examine the books of account and other accounting records of taxpayers to determine the correct tax liability. This is through the issuance of a Letter of Authority. Letter of Authority: 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. Cases which need not be covered by a valid LA: Cases involving civil/criminal tax fraud which fall under the jurisdiction of 223
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quarters of the succeeding taxable year; or (d) The excise tax due on excisable articles has not been paid; or (e) An article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare (2) parts, has been sold, traded or transferred to a non-exempt person.
TAXATION LAW
(4) Issuance of formal letter of demand and final assessment notice (FAN/FLD) A Final Assessment Notice (FAN) is a declaration of deficiency taxes issued to a taxpayer who: o fails to respond to a preassessment notice within the prescribed period of time, or o whose reply to the PAN was found to be without merit. o Sec 228: The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void o An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period.
REINVESTIGATION – refers to a plea of re-evaluation of an assessment on the basis of newly-discovered evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both. Failure to file a protest against FLD/FAN within 30 days, the assessment shall become final, executory and demandable
Protesting Assessment Protest of assessment by taxpayer Made within thirty (30) days from receipt of the assessment. Protest is either a request for reconsideration or a request for reinvestigation, or both The protests shall state: (Failure to state shall render protest null and void) (1) Nature of protest, whether Reconsideration or reinvestigation, specifying new or additional evidence if request for reinvestigation (2) Date of the assessment notice (3) Applicable law, rules and regulations, or jurisprudence on which his protest is based. In case of request for reinvestigation, submission of documents within 60 days from filing of protest Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted, otherwise the assessment shall become final. “Relevant supporting documents” – documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer “Assessment shall become final” – taxpayer is barred from disputing the correctness of the issue assessment by
(5) Disputed Assessment The taxpayer or his duly authorized representative may protest administratively against the formal letter of demand and assessment notice within thirty days (30) from date of receipt. The taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation RECONSIDERATION – refers to a plea of re-evaluation of the assessment on the basis of existing records without need of additional evidence. It may involve both question of fact or of law or both
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introduction of newly discovered or additional evidence, and the FDDA shall consequently be denied. Only applies to request for reinvestigation
(6) Administrative decision on a disputed assessment - The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. Commissioner may either grant the appeal, deny the appeal or not act upon the protest.
(a) Appeal to the CTA within 30 days from the date of receipt of the decision (b) Elevate his protest through request for reconsideration to the If the Commissioner denies the protest filed by the taxpayer, the latter may appeal to the CTA within 30 days from receipt of the decision denying the protest. A motion for reconsideration of the Commissioner’s denial of the protests shall not toll the 30 day period to appeal to the CTA.
(b) Inaction Remedies of Taxpayer to Action by Commissioner: In case of inaction within 180 days from submission of documents If the protest is not acted upon by the Commissioner’s duly authorized representative within 180 days from filing of the protest or from submission of required documents, the taxpayer may either: (a) Appeal to the CTA within 30 days after the expiration of the 180 days, (b) Await the final decision of the Commissioner’s duly authorized representative. If the Commissioner did not act upon the petition within 180 days from the time the documents were submitted, the taxpayer may either: (a) Appeal to the CTA within thirty days from the lapse of the 180-day period OR (b) Wait until the Commissioner decides before he elevates the case to the CTA.
(a) Denial Rendition of Decision by Commissioner CIR’s actions deemed equivalent to denial of protest: Filing of collection suit against taxpayer (CIR v. Union Shipping) Issuing a warrant of distraint and levy (Commissioner v. Algue) Where there is a request for reconsideration, final demand letter from BIR (CIR v. Isabela Cultural Corp) Notice of delinquency (CIR v. Ayala Securities) Inaction by Commissioner - If the protest is not acted upon within one hundred eighty (180) days from submission of documents, the inaction by the Commissioner is considered as a denial of protest. Remedies of Taxpayer to Action by Commissioner: In case of denial of protest If the protest is denied, in whole or in part, by the Commissioner’s duly authorized representative, the taxpayer may either:
(7) Issuance of a Final Decision on a disputed assessment (FDDA) – The decision of the Commissioner or his duly authorized representatives shall state:
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(a) Facts, the applicable law, rules and regulations or jurisprudence on which such decision is based, (b) That the same is his final decision
TAXATION LAW In case personal service is not practicable, the notice shall be served by substituted service or by mail.
(2) SUBSTITUTED SERVICE – substituted service can be resorted to when the party is not present at the registered or known address under the following circumstances: May be left at the party’s registered address, with his clerk or with a person having charge thereof. May be left in place where business activities of the party are conducted with his clerk or person having charge thereof. May be left in the place of residence with a person of legal age residing therein. If no person is found, the revenue officers concerned shall bring a barangay official and 2 disinterested witnesses to the address so that they may personally observe and attest to such absence. The notice shall then be given to said barangay official. Should party be present but refuses to receive the notice, the revenue officers shall bring a barangay official and 2 disinterested witnesses in the presence of the party so that they may personally observe and attest such act of refusal. The notice shall then be left with the barangay official.
(8) Raising the issue to the CTA Remedy if the taxpayer is not satisfied with the CTA Division’s ruling: FIRST, he may file a motion for reconsideration before the same Division of the CTA within fifteen (15) days from notice thereof. (Sec. 11, RA 1125 as amended by RA 9282 [2004]) THEN, a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration may file a petition for review with the CTA en banc. (Sec. 18, RA 1125 as amended by RA 9282 [2004]) Remedy if the taxpayer is not satisfied with the decision of the CTA en banc: A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Court. (Sec. 19, RA 1125 as amended by RA 9282 [2004]) Modes of Service - The notices to the taxpayer required may be served by the Commissioner or his duly authorized representative through the following modes: (1) PERSONAL SERVICE – the notice shall be served through personal service by delivering personally a copy thereof to the party at his registered or known address or wherever he may be found. A known address shall mean a place other than the registered address where business activities of the party are conducted or his place of residence.
(3) SERVICE BY MAIL – Service by mail is done by sending a copy of the notice by registered mail to the registered or known address of the party with instruction to the Postmaster to return the mail to the sender after 10 days if undelivered. A copy of the notice may also be sent thorugh reputable professional courier service. If no registry or reputable professional courier service is available, service may be done by ordinary mail 226
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Collection
Distraint of Personal Property
When the government may avail of the remedies of collection General Rule: When the assessment shall have become final, executory and demandable. Exception: In case of false or fraudulent return with intent to evade tax or of failure to file a return, a proceeding in court for collection may be filed without assessment within 10 years from discovery of falsity, fraud or omission. (Sec. 222(a), NIRC)
Distraint – remedy enforced on the goods, chattels, or effects, and other personal property of whatever character including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property (Sec. 205(a), NIRC)
Injunction not available No court may grant injunction to restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC) Exception: When the all of the following conditions concur: (1) It is an appeal to the CTA from a decision of the CIR, or Commissioner of Customs or the RTC, provincial, city or municipal treasurer or the Secretary of Finance, the case may be, AND (2) In the opinion of the Court of Tax Appeals, the collection may jeopardize the interest of the Government and/or the taxpayer. (Sec. 11, R.A. 1125 as amended by R.A. 9282)
Constructive Distraint – may be placed by the Commissioner on any taxpayer to safeguard the interest of the Government (Sec. 206, NIRC). Delinquency of the taxpayer is not necessary.
Kinds of Distraint: (1) Constructive Distraint (2) Actual Distraint
Grounds for Constructive Distraint: When in the opinion of the Commissioner, (1) the taxpayer is retiring from any business subject to tax; or (2) the taxpayer is intending to leave the Philippines; or (3) the taxpayer is intending to remove his property from the Philippines or to hide or conceal his property; or (4) the taxpayer is planning to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him (Sec. 206, NIRC)
Requisite before availing of injunction (1) Taxpayer has to deposit the amount claimed; OR (2) File an injunction bond with the Court for not more double the amount (R.A. 1125)
How constructive distraint is effected: (1) Signing of receipt by the taxpayer By requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the Commissioner (2) If the taxpayer refuses to sign the receipt: signing of receipt by revenue officer in the presence of two witnesses
Waiver of prescriptive period If tax was assessed within the different period agreed upon by the Commissioner and the taxpayer, it may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5-yr period.(Sec. 222d, NIRC)
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In case the taxpayer or the person having the possession and control of the property refuses or fails to sign the receipt, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnesses, leave a copy thereof in the premises where the property distrained is located (Sec. 206, NIRC) Note: In constructive distraint, the property is not actually confiscated or seized by the revenue officer. Actual distraint - placed on a person who owes any delinquent tax or delinquent revenue (see Sec. 207, NIRC); involves actual seizure of the property
TAXATION LAW Government. (NOTE: distraint of bank accounts is called GARNISHMENT)
Summary remedy of distraint of personal property (1) Purchase by the government at sale upon distraint (2) Report of sale to the Bureau of Internal Revenue (BIR) (3) Constructive distraint to protect the interest of the government Procedure for Actual Distraint (1) Commencement of Distraint Proceedings Who issues the warrant of distraint: (a) Commissioner or his duly authorized representative – where the amount involved is more than P1M (b) Revenue District Officer – where the amount involved is P1M or less (Sec. 207(A), NIRC)
Garnishment – taking of personal properties, usually cash or sums of money, owned by a delinquent taxpayer which is in the possession of a third party Distraint of intangible properties (Sec. 208, NIRC) (1) Stocks and other securities: by serving a copy of the warrants of distraint on the taxpayer, AND upon the president, manager, treasurer or other responsible officer of the corporation, company or association which issued the stocks or securities. (2) Debts and credits: by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The person owing the debts shall then pay the Commissioner instead of his creditor (taxpayer) on the strength of such warrant. (3) Bank accounts: by serving a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall then turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the
(2) Service of Warrant of Distraint How actual distraint is effected: The proper officer shall seize and distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts and interests in and rights to personal property of the taxpayer in sufficient quantity to satisfy the tax, expenses of distraint and the cost of the subsequent sale. (Sec. 207(A), NIRC) (3) Report on the Distraint A report shall be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director. (4) Power of the CIR or proper officer to lift the order of distraint The taxpayer may request that the warrant be lifted. The commissioner may, in his discretion, allow the lifting of the order of distraint. He may ask for a bond as a
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condition for the cancellation of the warrant. (Sec. 207(A), NIRC)
proceed with the levy on the taxpayer’s real property. (Sec. 207(B), NIRC)
(5) Notice of Sale of Distrained Properties The Revenue District Officer or his duly authorized representative (not the officer who served the warrant), shall cause a notification of the public sale to be posted in not less than two (2) public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made. The notice shall specify the time and place of the sale. The time of sale shall not be less than twenty (20) days after notice to the owner and the publication or posting of such notice. (Sec. 209, NIRC)
(7) Release of the Properties from Distraint If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (Sec. 210, NIRC) (8) Purchase by the government at sale upon distraint If the amount offered by the highest bidder is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due. The property so purchased may be resold by the Commissioner or his deputy. (Sec. 212, NIRC)
(6) Sale at Public Auction (a) At the time of the public sale, the revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained at a PUBLIC AUCTION, to the HIGHEST BIDDER for CASH or with the approval of the Commissioner, through a DULY LICENSED COMMODITY or STOCK EXCHANGES. (b) Any residue over and above what is required to pay the entire claim, including expenses of sale and distraint, shall be RETURNED to the owner of the property sold. Expenses shall be limited to actual expenses of SEIZURE and PRESERVATION of the property pending the sale, no charge shall be imposed for the services of the local internal revenue officer or his deputy. (Sec. 209, NIRC) (c) If the proceeds from the sale of the distrained properties are not sufficient to satisfy the tax delinquency, the Commissioner or his duly authorized representative shall within thirty (30) days after execution of the distraint,
(9) Report of sale to BIR Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record. (Sec. 211, NIRC) Summary remedy of levy on real property (1) Release of the Properties from Distraint If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (Sec. 210, NIRC) (2) Purchase by the government at sale upon distraint If the amount offered by the highest bidder is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the 229
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Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due. The property so purchased may be resold by the Commissioner or his deputy. (Sec. 212, NIRC)
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Note: The taxpayer-owner shall not be deprived of possession of the said property and shall be entitled to rents and other income until the expiration of the period for redemption (Sec. 214, NIRC) (6) Final Deed of Purchaser After the period of redemption, a final deed of sale is issued in favor of the purchaser.
(3) Report of sale to BIR Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record. (Sec. 211, NIRC)
Forfeiture to government for want of bidder Forfeiture to Government for Want of Bidder Forfeiture implies a divestiture of property without compensation in consequence of a default or offense. The effect of forfeiture is to transfer the title of the specific thing from the owner to the government. (De Leon, NIRC Annotated, p. 412)
(4) Forfeiture in Favor of the Government If there is no bidder for the real property OR if the highest bid is not sufficient to pay the taxes, penalties and costs, the IR Officer conducting the sale shall declare the property FORFEITED to the GOVERNMENT in satisfaction of the claim. (Sec. 215, NIRC)
Instances when forfeiture is appropriate (1) All chattels, machinery, and removable fixtures of any sort used in the unlicensed production of articles (Sec. 268, NIRC) (2) Dies and other equipment used for the printing or making of any internal revenue stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or tag. (Sec. 268, NIRC) (3) Liquor or tobacco shipped under a false name or brand (Sec. 262, NIRC)
(5) Redemption of Property Sold At any time before the day fixed for the sale, the taxpayer may discontinue all proceeding by paying the taxes, penalties and interest. (Sec. 213, NIRC) Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the Revenue District Officer the total amount of the following: public taxes + penalties + interest from the date of delinquency to the date of sale + interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of sale to the date of redemption. (Sec. 214, NIRC)
Remedy of enforcement of forfeitures (1) Forfeiture of chattels and removable fixtures: enforced by the seizure, sale or destruction of the specific forfeited property. (2) Forfeiture of real property: enforced by a judgment of condemnation and sale in a legal action or proceeding civil or criminal as the case may require (Sec. 224, NIRC)
Note: If the property was forfeited in favor of the government, the redemption price shall include only the taxes, penalties and interest plus costs of sale (no interest on purchase price since the Government did not “purchase” the property anyway, it was forfeited)
When property to be sold or destroyed (1) Forfeited chattels and removable fixtures: sold in the same manner and under the same conditions as the public notice and 230
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the time and manner of sale as are prescribed for sales of personal property distrained for the non-payment of taxes (2) Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco and all apparatus used in or about the illicit production of such articles: destroyed by the order of the Commissioner when the sale or use would be injurious to public health pr prejudicial to the enforcement of the law (3) All other articles subject to excise tax manufactured or removed in violation of the Code, dies for the printing or making of internal revenue stamps and labels: sold or destroyed in the discretion of the Commissioner (4) Forfeited property shall not be destroyed until at least 20 days after seizure. (Sec. 225, NIRC)
TAXATION LAW
whichever is higher, pursuant to Sec. 6(E) of the Tax Code. (5) Anyone could bid except foreign nationals, corporate or otherwise, and those qualified under existing laws, rules and regulations, including employees of the Bureau of Internal Revenue. (6) Bidders shall be required to post a bond in cash or manager’s check in an amount representing 10% of the minimum bid price at least one day before the scheduled public auction. (7) Unless the Commissioner allows extension of time to pay, in meritorious cases, the winning bidder shall pay the full amount of his bid cash or manager’s check within two days after receipt of notice of award. (8) All taxes and expenses relative to the issuance of title shall be borne by the winning bidder. (9) The winning bidder shall be responsible at his own expense for the ejectment of squatters and/or occupants, if any, of the auctioned property. (10) Negotiated or private sale shall be resorted to as a consequence of failed public bidding for two consecutive times. (11) Negotiated or private sale shall in all cases be approved by the Secretary of Finance. (12) Public auction sale shall be approved by the Commissioner or his authorized representative. (13) The Government reserves the right to reject or cancel any or all bids.
Resale of real estate taken for taxes (RR No. 22-2002) (1) All acquired/forfeited properties transferred in the name of the Republic of the Philippines, having passed the oneyear redemption period, shall be converted into cash from the date of acquisition or forfeiture. (2) The sale of acquired/forfeited real properties shall be by sealed bids in a public auction to be witnessed by a representative of the COA. (3) The Notice of Sale of the acquired real properties shall be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the Philippines which must be completed at least 20 days prior to the date of such public auction. (4) Unless the Commissioner of Internal Revenue provides otherwise, the Minimum Bid Price/Floor Price shall be the latest fair market value as determined by the Commissioner or the fair market value shown in the latest tax declaration issued by the provincial, city or municipal assessor,
Disposition of funds recovered in legal proceedings or obtained from forfeiture All judgments and monies recovered and received for taxes, costs, forfeitures, fines and penalties shall be paid to the Commissioner or his authorized deputies as the taxes themselves are required to be paid, and except as specially provided, shall be accounted for and dealt within the same way. (Sec. 226, NIRC)
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Further distraint or levy The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected. (Sec. 217, NIRC)
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The Commissioner may compromise the payment of any internal revenue tax in the following cases: (1) A REASONABLE DOUBT as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (FINANCIAL INCAPACITY)
Tax lien Tax liens (1) When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest, penalties, and costs that may accrue in addition thereto upon ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING to the taxpayer. (2) HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until NOTICE of such lien shall be filed by the Commissioner in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located. (Sec. 219, NIRC)
Limits of the Commissioner’s power to compromise: (1) For cases of financial incapacity: a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax (2) For other cases: a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax Note: When the basic tax involved exceeds One Million Pesos (P1,000,000), or where the settlement offered is less than the prescribed minimum rates, the compromise must be approved by the Evaluation Board (composed of the Commissioner and 4 deputy commissioners) Abatement - to cancel the entire amount of tax payable
Seizure under forfeiture vs. 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. (BPI v. Trinidad)
When the Commissioner may abate or cancel a tax liability: (1) The tax or any portion thereof appears to be UNJUSTLY or EXCESSIVELY ASSESSED; or (2) The ADMINISTRATION and COLLECTION COSTS do not justify the collection of the amount due. (e.g. when the costs of collection are greater than the amount of tax due)
Compromise Authority of the Commissioner to compromise and abate taxes Compromise – to reduce the amount of tax payable Grounds for a compromise
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JUDICIAL REMEDIES Suit to recover tax based on false or fraudulent returns A proceeding in court for the collection of the tax assessed may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission. Provided, that in a fraud assessment which has become final and executor, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Sec. 222, NIRC)
A. Civil Action Two ways by which civil liability is enforced: (1) By filing a civil case for the collection of sum of money with the proper regular court; and (2) By filing an answer to the petition for review filed by the taxpayer with the Court of Tax Appeals. (Mamalateo, 2008) B. Criminal Action
False Return v. Fraudulent Return A false returns is due to mistakes, carelessness or ignorance and a fraudulent return is filed with intent to evade taxes.
Any person convicted of a crime under the Code shall: (1) Be liable for the payment of the tax, and (2) Be subject to the penalties imposed under the Code. (Sec. 253(A), NIRC)
The fraud contemplated by law is actual and not constructive, and must amount to intentional wrongdoing with the sole object of avoiding the tax. (Aznar v. CTA, 1974)
Form and Mode of Proceeding: Civil and criminal action and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR: (1) Shall be BROUGHT IN THE NAME OF THE GOVERNMENT of the Philippines; and (2) Shall be CONDUCTED BY LEGAL OFFICERS OF THE BIR (3) Shall be filed in court with the approval of the Commissioner. (Sec. 220, NIRC)
Payment of tax not defense Payment of the tax due after a case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the Code. (Sec. 253(A), NIRC) Liability of person who aids or abets: Any person who wilfully aids or abets in the commission of a crime penalized under the Code or who causes the commission of any such offense by another shall be liable in the same manner as the principal. (Sec. 253(B), NIRC)
Criminal action as a collection remedy The judgment in the criminal case shall impose the penalty; and order payment of the taxes subject of the criminal case as finally decided by the Commissioner. (Sec. 205, NIRC)
Refund
Assessment not necessary before filing a criminal charge for tax evasion An assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of a wilful attempt to file taxes, such as failure to file a required tax return. (CIR v. Pascor Realty, June 29, 1999)
Grounds and requisites for refund Requirements for refund as laid down by cases (a) Necessity of written claim for refund (b) Claim containing a categorical demand for reimbursement 233
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(c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause
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3. Forfeiture to the government for want of bidder 4. Further Distraint or Levy 5. Tax Lien 6. Compromise and Abatement 7. Penalties and Fines
Legal basis of tax refunds Judicial 1. Civil 2. Criminal 3. Statutory offenses and penalties
Statutory basis for tax refund under the tax code (a) Scope of claims for refund (b) Necessity of proof for claim or refund (c) Burden of proof for claim of refund (d) Nature of erroneously-paid tax/illegally assessed collected (e) Tax refund vis-à-vis tax credit (f) Essential requisites for claim of refund
Civil Penalties 1. Surcharge 2. Interest CIVIL PENALTIES Surcharge
Who may claim/apply for tax refund/tax credit (a) Taxpayer/withholding agents of nonresident foreign corporation Prescriptive period for recovery erroneously or illegally collected
of
Surcharge – penalty imposed in addition to the tax required to be paid (Sec. 248(A), NIRC)
tax
Rates of Surcharge (25% or 50%) 25% of the amount due in the following cases: (1) Failure to file any return and pay the tax due on the date prescribed; or (2) Filing a return with an internal revenue officer other than those with whom the return is required to be filed unless the Commissioner authorizes otherwise; or (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or (4) Failure to pay the full or part of the amount of tax due on or before the date prescribed for its payment (Sec. 246 (A), NIRC)
Other consideration affecting tax refunds
A. GOVERNMENT REMEDIES (1) Administrative remedies (a) Tax lien (b) Levy and sale of real property (c) Forfeiture of real property to the government for want of bidder (d) Further distraint and levy (e) Suspension of business operation (f) Non-availability of injunction to restrain collection of tax
50% of the tax or of the deficiency tax in the following cases: (1) Willful neglect to file the return within the period prescribed; or (2) A false or fraudulent return is willfully made (Sec. 248(B), NIRC)
(2) Judicial remedies Administrative 1. Distraint of Personal Property including garnishment deposit 2. Summary remedy of levy on real property 234
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(a) Qualified and elects to pay the tax on installment but fails to pay the tax or any installment or any part of such amount or installment or before the date prescribed for its payment; or (b) Where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof (249(D), NIRC)
Prima facie evidence of a false or fraudulent return: Substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions. Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim ofdeductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration or for overstatement. (Sec. 248(B), NIRC)
Compromise and Abatement of Taxes (see discussion under Remedies of the Taxpayer)
Interest
Cases which may be compromised: (Sec. 2, R.R. 30-2002) (1) Delinquent accounts (2) Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office (3) Civil tax cases being disputed before the courts (4) Collection cases filed in courts (5) Criminal violations, other than those already filed in court or those involving criminal tax fraud
In General 20% per annum on the unpaid amount of tax, interest at the rate of twenty percent (20%) per annum from the date prescribed for payment until the amount is fully paid. (Sec. 249(A), NIRC) Deficiency Interest 20% per annum on any deficiency in the tax due from the date prescribed for its payment until the full payment thereof. (Sec. 249(B), NIRC) Delinquency interest 20% per annum on the unpaid amount in case of failure to pay: (a) The amount of the tax due on any return required to be filed; or (b) The amount of the tax due for which no return is required; or (c) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the letter of demand and assessment notice (Sec. 249(C), NIRC)
Cases which cannot be compromised: (Sec. 2, R.R. 30-2002) (1) Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold (2) Criminal tax fraud cases confirmed as such by the CIR or his duly authorized representative (3) Criminal violations already filed in court (4) Delinquent accounts with duly approved schedule of installment payments (5) Cases where final reports of reinvestigation ore reconsideration have been issued
Interest on extended payment 20% per annum on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid if any person required to pay the tax is: 235
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resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis (6) Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and (7) Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer
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The taxpayer fails to submit the required returns, statements reports and other documents There is a reason to believe that any such report is false, incomplete or erroneous (3) Conduct inventory-taking, survaillance and to prescribe presumptive gross sales and receipts Inventory-taking – at any time during the taxable year, for the purpose of determining the correct tax liabilities. Surveillance – done if there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for tax purposes. Prescribe presumptive gross sales and receipts if: o It is found that the taxpayer has failed to issue receipts and invoices, or o When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made by the taxpayer (4) Terminate Taxable Period Terminating taxable period and ordering the immediate payment of the tax for the terminated period and any remaining tax that is unpaid, when the taxpayer is: Retiring from business subject to tax, or Intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property; Performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partially
V. Organization and Function of the Bureau of Internal Revenue POWERS OF THE COMMISSIONER (A) To make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6, NIRC) (1) Examination of Returns and Determination of Tax Due (a) After a return has been filed, the CIR may authorize the examination of any taxpayer and the assessment of the correct amount of tax. (b) Failure to file a return shall not prevent the CIR from authorizing the examination. (2) Best evidence obtainable The CIR shall assess the proper tax on the best evidence obtainable when:
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ineffective unless such proceedings are begun immediately (5) Prescribe Real Property Values Dividing the Philippines into different zones or areas, and determining the FMV of real properties in each zone or area, upon consultation with competent appraisers from private and public sectors. For the purpose of computing any internal revenue tax, the value of the property shall be WHICHEVER IS HIGHER OF: o The FMV as determined by the Commissioner, or o The FMV as shown in the schedule of values of the provincial and city assessors (6) Inquire into Bank Deposit Accounts Notwithstanding any contrary provision of R.A. 1405 (Bank Secrecy Law) and other general or special laws, the Commissioner is authorized to inquire into bank deposits of: A decedent to determine his gross estate, and Any taxpayer who has filed an application for compromise of tax liability by reason of financial incapacity: the taxpayer must waive in writing his privilege under R.A. 1405 and other relevant laws, before the Commissioner may inquire into his bank accounts. (7) Accredit and register Tax Agents Accrediting and registering tax agents (may be individuals or general professional partnerships) based on the following criteria: Professional competence Integrity Moral fitness
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(8) Prescribe additional procedural or documentary requirements In relation to the manner of compliance of any requirement in connection with the submission or preparation of financial statements accompanying the tax returns. (B) To obtain information and to summon, examine, and take testimony of persons (Sec. 5, NIRC) (1) Examine Returns and Determine Tax due Authorizing the examination of any taxpayer and the assessment of the correct amount of tax, WON a return has been filed by such taxpayer. (2) Access Letter Obtaining on a regular basis, from any person other than the person whose tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies or instrumentalities, including BSP and GOCCs; Any information such as, but not limited to, costs and volumes of production, receipts or sales and gross incomes of taxpayers, and the names addresses, and financial statements of corporations, mutual fund companies, insurance companies etc. (C) Interpret Tax Laws and to Decide Tax cases (1) Shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (2) A ruling by the BIR Commissioner shall be presumed valid unless modified, reversed or superseded by the Secretary of Finance. 237
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(3) A taxpayer who receives an adverse ruling from the Commissioner may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance, either by himself/itself or though his/its duly authorized representative. (4) A reversal or modification of the BIR ruling shall terminate its effectivity upon (9) The receipt by the taxpayer or the BIR of written notice of reversal or modification, whichever came earlier.
(c)
(d)
(e)
**The Secretary of Finance may now also review the rulings MOTU PROPRIO. (DOF ORDER 7-02)
ORGANIZATION AND FUNCTION OF THE BIR RULE-MAKING AUTHORITY SECRETARY OF FINANCE
OF
(f)
THE
AUTHORITY OF SECRETARY OF FINANCE TO PROMULGATE RULES AND REGULATIONS (Sec. 244, NIRC) The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for effective enforcement of the provisions of the Code. (g)
SPECIFIC PROVISIONS TO BE CONTAINED IN RULES AND REGULATIONS (Sec. 245, NIRC) (a) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept; (b) The forms of labels, brands or marks to be required on goods subject to an excise tax, 238
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and the manner in which the labelling, branding or marking shall be effected; The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labelled, branded or marked; The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses; The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business ort by the person for whom such denaturing is done or by whom, such alcohol is dealt in; The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes;
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(h) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and regulations which the Commissioner may consider suitable for the enforcement of the said Title III; (i) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics; (j) The manner in which internal revenue taxes, such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax:
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respectively, through collection officers or through duly authorized agent banks: Provided, further, That the Commissioner can exercise this power within six (6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive computerization program, whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said large taxpayers. For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the following criteria: (1) Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at least P100,000 for any quarter of the preceding taxable year; (2) Excise tax - Business establishment with excise tax paid or payable of at least P1,000,000 for the preceding taxable year; (3) Corporate Income Tax - Business establishment with annual income tax paid or payable of at least P1,000,000 for the preceding taxable year; and (4) Withholding tax - Business establishment with withholding tax payment or remittance of at least P1,000,000 for the preceding taxable year.
Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax.
Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors. The penalties prescribed under Section 248 shall be imposed on any violation of the rules and regulations issued by the Secretary of
Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations require that the tax returns, papers and statements and taxes of large taxpayers be filed and paid, 239
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Finance, upon recommendation of the Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers.
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prescribed by the Commissioner in the closure order
VI. Tax Remedies under the NIRC
NON-RETROACTIVITY OF RULINGS (Sec. 246, NIRC) General Rule: No retroactive application if the revocation, modification or reversal of rules and regulations, rulings or circulars will be prejudicial to the taxpayers Exceptions: (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.
Remedies: method by which a cause of action can be enforced by law or equity. It is a procedure which may be availed of by a person as a means to obtain the relief desired In tax, these remedies may be availed of if the taxpayer overpaid, or if the taxpayer paid the wrong king of tax, or did not pay. TAXPAYER’S REMEDIES 1. ADMINISTRATIVE (BIR) (a) Before payment (i) Filing a petition or reconsideration or reinvestigation; and (ii) Entering into a compromise (b) After payment (iii) Filing a claim for refund; and (iv) Filing a claim for tax credit
POWER OF THE COMMISSIONER TO SUSPEND THE BUSINESS OPERATION OF A TAXPAYER (Sec 115, NIRC) The Commissioner or his authorized representative is empowered to suspend the business operations and temporarily close the business establishment of any person for any of the following violations: (a) IN THE CASE OF A VAT-REGISTERED PERSON. (i) Failure to issue receipts or invoices; (ii) Failure to file a value-added tax return as required under Section 114; or (iii) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter. (b) FAILURE OF ANY PERSON TO REGISTER AS REQUIRED UNDER SECTION 236. -
2. JUDICIAL (CTA/RTC) (a) Civil action (i) Appeal to the CTA (ii) Action to contest forfeiture of chattel; and (iii) Action for damages (b) Criminal action (iv) Filing a criminal complaint against erring BIR officials and employees Note: Petition for declaratory Relief is not under the jurisdiction of the CTA.
The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements
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Assessment
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(c) Percentage Method: This method is a computation whereby determinations are made by the use of percentages or ratios considered typical of the business under investigation. By reference to similar business or situations, percentage computations are secured to determine sales, gross profit or even net profit. (d) Unit and Value Method: The determination of gross receipts may be computed by applying price and profit figures to the known ascertainable quality of business done by taxpayer
Concept of assessment Assess means to impose a tax; to charge with a tax; to declare a tax to be payable; to apportion a tax to be paid or contributed, to fix a rate; to fix or settle a sum to be paid by way of tax; to set, fix or charge a certain sum to each taxpayer; to settle determine or fix the amount of tax to be paid (84 C.J.S 74-750) An assessment is the notice to the effect that the amount therein stated is due from a taxpayer as a tax with a demand for payment of the same within a stated period of time. (Commissioner v. CTA, 27 SCRA 1159)
Inventory method for income determination (Net Worth Method) Holland v. US: In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an "opening net worth" or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination, and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income.
Requisites for valid assessment: (1) The taxpayer shall be informed in writing of the law and the facts on which the assessment is made (Sec. 228, NIRC) (2) An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period (CIR v. PASCOR) (3) An assessment must be served on and received by the taxpayer (CIR v. PASCOR) Note: The presumption of the correctedness of assessment CANNOT be made to rest on another presumption e.g. presumption of regularity of performance of official functions. Constructive methods of income determination (a) Rely upon circumstantial evidence of determining the correct income or transaction of a taxpayer (Indirect Method) (b) Expenditure Method: It proceeds on the theory that where the amount of money which a taxpayer spends during a given year exceeds his reported income, and the source of such money is otherwise unexplained, it may be inferred that such expenditures represent unreported income.
Formula Increase in Net worth Add: Non-deductible Item Less: Non-taxable income or receipts subjected to final tax transfer taxes Taxable Net Income Less: Personal and additional exemptions NET INCOME SUBJECT TO TAX 241
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collection to ordinary protest may be courts is the proper subject to Motion to remedy. Dissmiss SUBJECT to SUBJECT to administrative administrative penalties of: penalties of: 1. 25% surcharge 1. interest 2. interest 2. compromise 3. compromise penalty penalty Mamalateo: Reviewer on Taxation (2014) p559
Jeopardy Assessment A tax assessment made by an authorized Revenue Officer (RO) without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of the deficiency tax will be jeopardized by delay caused by the taxpayer’s failure to: i) comply with audit and investigation requirements to present his books of accounts and/or pertinent records or ii.) substantiate all or any of the deductions, exemptions or credits claimed in his return.
Deficiency – amount still due and collectible from a taxpayer upon audit or investigation. A deficiency tax has to go through the process of filing the protest against the assessment by the by the taxpayer and denial of such protest by the BIR. (Mamalateo, 2008)
It is usually issued when statutory prescriptive periods for the assessment or collection of taxes are about to lapse due principally to the taxpayer’s fault. Tax Delinquency v. Tax Deficiency Tax Delinquency Tax Deficiency It is when: It is when: Self-assessed The amount of tax taxpayer filed his tax imposed by law is return but did not pay greater than the or only partially paid amount shown in the the tax tax return Deficiency Tax If no amount is shown assessed by the BIR in the return, or if became final and there is no return, executory amount by which the tax as determined by the CIR exceeds the amount previously assessed as a deficiency CAN be collected CANNOT be IMMEDIATELY immediately through collected. CAN be 1. Administrative collected only AFTER Actions (warrant of the process of protest distraint or levy) 2. Judicial Actions Thus, a civil action for collection to ordinary Thus, civil action for courts pending
Delinquency – failure of the taxpayer to pay the tax due on the date fixed by law or indicated in the assessment notice or letter of demand. Powers of the Commissioner: (A) To make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6, NIRC) (1) Examination of Returns and Determination of Tax Due (b) After a return has been filed, the CIR may authorize the examination of any taxpayer and the assessment of the correct amount of tax. (c) Failure to file a return shall not prevent the CIR from authorizing the examination. (2) Best evidence obtainable The CIR shall assess the proper tax on the best evidence obtainable when: The taxpayer fails to submit the required returns, statements reports and other documents 242
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There is a reason to believe that any such report is false, incomplete or erroneous (3) Conduct inventory-taking, survaillance and to prescribe presumptive gross sales and receipts Inventory-taking – at any time during the taxable year, for the purpose of determining the correct tax liabilities. Surveillance – done if there is reason to believe that the taxpayer is not declaring his correct income, sales or receipts for tax purposes. Prescribe presumptive gross sales and receipts if: o It is found that the taxpayer has failed to issue receipts and invoices, or o When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made by the taxpayer (4) Terminate Taxable Period Terminating taxable period and ordering the immediate payment of the tax for the terminated period and any remaining tax that is unpaid, when the taxpayer is: Retiring from business subject to tax, or Intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property; Performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partially ineffective unless such proceedings are begun immediately (5) Prescribe Real Property Values
Dividing the Philippines into different zones or areas, and determining the FMV of real properties in each zone or area, upon consultation with competent appraisers from private and public sectors. For the purpose of computing any internal revenue tax, the value of the property shall be WHICHEVER IS HIGHER OF: o The FMV as determined by the Commissioner, or o The FMV as shown in the schedule of values of the provincial and city assessors (6) Inquire into Bank Deposit Accounts Notwithstanding any contrary provision of R.A. 1405 (Bank Secrecy Law) and other general or special laws, the Commissioner is authorized to inquire into bank deposits of: A decedent to determine his gross estate, and Any taxpayer who has filed an application for compromise of tax liability by reason of financial incapacity: the taxpayer must waive in writing his privilege under R.A. 1405 and other relevant laws, before the Commissioner may inquire into his bank accounts. (7) Accredit and register Tax Agents Accrediting and registering tax agents (may be individuals or general professional partnerships) based on the following criteria: Professional competence Integrity Moral fitness (8) Prescribe additional procedural or documentary requirements (Sec. 6(H), NIRC) 243
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In relation to the manner of compliance of any requirement in connection with the submission or preparation of financial statements accompanying the tax returns.
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(C) Interpret Tax Laws and to Decide Tax cases (Sec. 4, NIRC; RMC 44-01) (1) Shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (2) A ruling by the BIR Commissioner shall be presumed valid unless modified, reversed or superseded by the Secretary of Finance. (3) A taxpayer who receives an adverse ruling from the Commissioner may, within thirty (30) days from the date of receipt of such ruling, seek its review by the Secretary of Finance, either by himself/itself or though his/its duly authorized representative. (4) A reversal or modification of the BIR ruling shall terminate its effectivity upon (5) The receipt by the taxpayer or the BIR of written notice of reversal or modification, whichever came earlier.
(B) To obtain information and to summon, examine, and take testimony of persons (Sec. 5, NIRC) (a) Authorizing the examination of any taxpayer and the assessment of the correct amount of tax, WON a return has been filed by such taxpayer. Note: Any return filed with the Commissioner shall not be withdrawn, BUT the taxpayer may MODIFY, CHANGE or AMEND such return within three (3) years from the date of filing, provided that no notice for audit or investigation of such return has been actually served on the taxpayer. (b) Access Letter (Sec. 5(B), NIRC) Obtaining on a regular basis, from any person other than the person whose tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies or instrumentalities, including BSP and GOCCs; Any information such as, but not limited to, costs and volumes of production, receipts or sales and gross incomes of taxpayers, and the names addresses, and financial statements of corporations, mutual fund companies, insurance companies etc. Note: This is known as the Third Party Information Rule.
Note: DOF Order 7-02 added that the Secretary of Finance may review the rulings MOTU PROPRIO.
When Assessment is Made Prescriptive period for assessment (Sec. 203, NIRC) If the taxpayer filed a return: internal revenue taxes shall be assessed (FAN) within three years after the last day prescribed by law for the filing of the return. If a return is filed beyond the period prescribed by law: the three-year period shall be counted from the day the return was filed. Exception: (1) False return; (2) Fraudulent return with intent to evade tax; 244
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(3) Failure to file a return (Sec. 222, NIRC) These exceptions have a prescriptive period of 10 years from the discovery of the fraudulent act or discovery of omission.
newly-discovered evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both.
Waiver of Period for Assessment The taxpayer and the Commissioner may agree in writing, before the expiration of the time prescribed in Sec. 203, to extend the period of assessment (Sec. 222(b), NIRC)
Note: A request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. (Phil Global Communication v. CIR) When the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected, BUT if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations shall not be suspended.
The waiver of prescription must be executed properly, otherwise, invalid and results to prescription of the right to assess/collect. (Philippine Journalists Inc. vs. CIR, December 16, 2004) Requirements for a valid waiver under RMO 2090: (1) definite agreed date, (2) date of acceptance indicated, and (3) taxpayer must be furnished with a copy of the waiver.
When the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and No Property is located. When the taxpayer is Out of the Philippines
Suspension of running of statute of limitations (Sec. 223, NIRC) (P-CORN) Period during which the commissioner is Prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty (60) days thereafter.
General Provisions on Additions to the Tax (A) Civil penalties (Sec. 248, NIRC) Surcharge A civil penalty imposed by law as an addition to the basic tax required to be paid. A surcharge added to the main tax is subject to interest.
When the taxpayer requests for a Reinvestigation which is granted by the Commissioner RR 12-85 (Difference between Reconsideration &Reinvestigation) Reconsideration – refers to a plea of reevaluation of the assessment on the basis of existing records without need of additional evidence. It may involve both question of fact or of law or both
Rates of Surcharge: There shall be imposed a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: (1) FAILURE TO FILE ANY RETURN and PAY THE TAX DUE THEREON on the date prescribed; or (2) Filing a return with an internal revenue officer than those with whom the return is
Reinvestigation – refers to a plea of reevaluation of an assessment on the basis of 245
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required to be filed (except when authorized by the Commissioner); or (3) FAILURE TO PAY THE DEFICIENCY TAX within the time prescribed for its payment (4) FAILURE TO PAY THE FULL OR PART of the amount of tax shown on any return required to be filed, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.
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20% per annum on any unpaid amount of tax, from the date prescribed for payment until the amount is fully paid. Deficiency Interest – the interest due on any amount of tax due or installment thereof which is not paid on or before the date prescribed for its payment (Mamalateo, 2008) Delinquency Interest- the interest required to be paid in case of failure to pay: (1) the amount of tax due on any return required to be filed, or (2) amount of 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, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed until the amount is fully paid, which interest shall form part of the tax.
The penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in the following cases: (1) WILLFUL NEGLECT to FILE THE RETURN within the period prescribed (2) A FALSE OR FRAUDULENT RETURN is wilfully made (3) Prima-facie evidence of false or fraudulent return: (i) 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) or (ii) ii)substantial overstatement of deductions (a claim of deduction in an amount exceeding 30% of actual deductions)
The delinquency interest is in addition to the interest in the FAN as a result of failure to pay the deficiency tax assessed within the time prescribed for its payment. (First Lepanto Taisho Insurance Corp. v. CIR, 2013)
Section 5 of RR 12-99 is hereby amended by modifying Section 5.5 thereof which provides for modes of procedures in computing for the tax and/or applicable surcharge. In cases of late payment of a deficiency tax assessed, the taxpayer shall be liable for the delinquency interest (no longer civil penalties under RR 1299) provided under Section 249 (C)(3) of the 1997 National Internal Revenue Code, as amended. (RR 18-2013)
(c) Compromise penalties Compromise penalty v. Compromise Compromise penalty – an amount of money paid by a taxpayer to compromise a tax violation that he has committed, which may be the subject of criminal prosecution. The basis of the amount paid is the gross sales or receipts during the year or the tax due.
(B) Interest (Sec 249, NIRC)
Compromise – an amount of money paid by the taxpayer to settle his civil liability for tax assessed by the government. The basis of the
In General
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amount paid is the basic tax assessed. (Mamalateo, 2008)
issue to the taxpayer the PAN for the proposed assessment.
Assessment Process[Sec. 228, NIRC; RR 12-99] (1) First Step: Tax Audit In a tax audit, revenue officers examine the books of account and other accounting records of taxpayers to determine the correct tax liability. This is through the issuance of a Letter of Authority.
The PAN shall show in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based.
Letter of Authority: 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.
If he/she fails to respond: taxpayer is considered in default; a formal letter of demand and assessment notice shall be issued to the taxpayer
(3) Third Step: Reply to PAN Taxpayer is given time to respond: 15 days from date of receipt of PAN
The regulations use the term “reply” to distinguish the written objection(s) against a FAN issued by the BIR, where the generic term “protest” or the specific term “request for reconsideration” or “request for reinvestigation” is utilized.
Cases which need not be covered by a valid LA: (a) Cases involving civil/criminal tax fraud which fall under the jurisdiction of the tax fraud division of the Enforcement Services, and (b) Policy cases under audit by the special teams in national offices
The PAN shall not be required in any of the ff cases, in which case, issuance of the Formal Assessment Notice (FAN) shall be sufficient: (a) The finding for any deficiency tax is the result of MATHEMATICAL ERROR in the computation of the tax as appearing on the face of the return; or (b) A DISCREPANCY has been determined between the TAX WITHHELD and the amount ACTUALLY REMITTED by the withholding agent; or (c) 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) The EXCISE TAX due on excisable articles has not been paid; or
Section 3 of RR 12-99 is hereby amended by deleting Section 3.1.1 thereof which provides for the preparation of a Notice of Informal Conference, thereby renumbering other provisions thereof, and prescribing other provisions for the assessment of tax liabilities (RR No. 18-2013). Thus, there is no Informal Conference needed in an assessment process.
(2) Second Step: Issuance of Preliminary Assessment Notice (PAN) (Sec. 228, NIRC; RR18-2013) If after review and evaluation by the Commissioner or his duly authorized representative, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall
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(e) An article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to a non-exempt person. (Sec. 228, NIRC)
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against the formal letter of demand and assessment notice within thirty days (30) from date of receipt. The taxpayer may either file a reconsideration or reinvestigation. Note: Failure to file protest within 30 days shall make the assessment become final, executor and demandable.
In the above-cited cases, a FLD/FAN shall be issued outright.
Protesting Assessment [Sec 228, NIRC; RR 1299]
(4) Fourth Step: Issuance of formal letter of demand and final assessment notice
(a) Protest of assessment by taxpayer Made within thirty (30) days from receipt of the assessment.
A Final Assessment Notice (FAN) is a declaration of deficiency taxes issued to a taxpayer who: fails to respond to a pre-assessment notice within the prescribed period of time, or whose reply to the PAN was found to be without merit.
Protest is either a request for reconsideration or a request for reinvestigation, or both A protest is considered validly made if it satisfies the following conditions: (1) it is made in writing, and addressed to the Commissioner of Internal Revenue, (2) it contains the information required by the rule, (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 and (4) It is filed within the period prescribed by law
Sec 228: The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. Effects of Issuance of FAN and LD (1) Creation of Tax Liabilities (2) Taxpayer does not have to pay deficiency tax assessment yet BUT 20% deficiency interest per annum starts (3) Business of the taxpayer does not become illegal by reason of non-payment. (as opposed too non-payment of local business deficient taxes, where the business becomes illegal)
(b) In case of a request for reinvestigation, submission of documents within 60 days from filing of protest Within sixty (60) days from filing of the protest, all relevant supporting documents must be submitted, otherwise the assessment shall become final. (Sec. 228) This will toll the prescriptive period for assessment or collection.
(5) Fifth Step: Disputed Assessment The taxpayer or his duly authorized representative may protest administratively 248
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In case of a request for reconsideration, no additional documents need be submitted. Further, the prescriptive period will not be suspended. (See the difference between the two above)
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the inaction by the Commissioner is considered as a denial of protest. (f) Referral of case for collection. Remedies of Commissioner
(c) Effect of failure to protest: the assessment shall become final, executory and demandable.
Taxpayer
to
Action
by
(a) In case of denial of protest If the CIR or his authorized agent DENIES THE PROTEST filed by the taxpayer, the latter may either (1) appeal to the CTA within 30 days from receipt of the decision denying the protest (Sec. 228, NIRC) The 30-day period starts when the taxpayer receives the decision of the Commissioner denying the protest. The decision of the Commissioner must categorically state that his action on the disputed assessment is final, otherwise period to appeal will not commence to run. (Advertising Associates Vs. CA) (2) File a motion for reconsideration to CIR, if decided by CIR; OR elevate his protest through a request for reconsideration to the CIR, if the denial is made by the authorized representative. within 30 days from receipt of the decision denying the protest
(d) Period provided for protest to be acted upon: Protest should be acted upon within 180 days from submission of documents. (6) Sixth Step: Administrative decision on a disputed assessment The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. The CIR may deny, approve or not act upon the protest. Denial The CIR must state the facts and laws upon which such protest was denied. Denial may be made by the CIR or any of his authorized representatives. Rendition of Decision by Commissioner CIR’s actions deemed equivalent to denial of protest: (a) Filing of collection suit against taxpayer (CIR v. Union Shipping) (b) Issuing a warrant of distraint and levy (Commissioner v. Algue) (c) Where there is a request for reconsideration, final demand letter from BIR (CIR v. Isabela Cultural Corp) (d) Notice of delinquency (CIR v. Ayala Securities) (e) Inaction by Commissioner - If the protest is not acted upon within one hundred eighty (180) days from submission of documents,
Note that a Motion for Reconsideration on the CIR’s denial of the protest or administrative appeal shall not toll the 30-day period to appeal to the CTA (RR 18-2013) Note: A Division of the CTA shall hear the appeal. (Sec. 11, RA 1125 as amended by RA 9282 [2004]) (b) In case of inaction by Commissioner within 180 days from submission of documents If the Commissioner or his duly authorized representative did NOT ACT UPON THE 249
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PROTEST within 180 days from the time the documents were submitted, the taxpayer may either: (a) Appeal to the CTA within (30) thirty days from the lapse of the 180-day period OR (b) Wait until the Commissioner or his duly authorized representative decides before he elevates the case to the CTA.
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Rules of Court. (Sec. 19, RA 1125 as amended by RA 9282 [2004]) (c) Effect of failure to appeal If the taxpayer fails to file an appeal, the assessment shall become final, executory and demandable. Collection
RCBC v. CIR (2007): In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: (a) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; OR (b) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other.
Requisites When the government may avail of the remedies of collection: General Rule: When the assessment shall have become final, executory and demandable. Exception: In case of false or fraudulent return with intent to evade tax or of failure to file a return, a proceeding in court for collection may be filed without assessment within 10 years from discovery of falsity, fraud or omission. (Sec. 222(a), NIRC) Injunction not available No court may grant injunction to restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC) Exception: When the all of the following conditions concur: (a) It is an appeal to the CTA from a decision of the CIR, or Commissioner of Customs or the RTC, provincial, city or municipal treasurer or the Secretary of Finance, the case may be, AND (b) In the opinion of the Court of Tax Appeals, the collection may jeopardize the interest of the Government and/or the taxpayer. (Sec. 11, R.A. 1125 as amended by R.A. 9282)
Remedy if the taxpayer is not satisfied with the CTA Division’s ruling: FIRST, he may file a motion for reconsideration before the same Division of the CTA within fifteen (15) days from notice thereof. (Sec. 11, RA 1125 as amended by RA 9282 [2004]) THEN, a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration may file a petition for review with the CTA en banc. (Sec. 18, RA 1125 as amended by RA 9282 [2004]) Remedy if the taxpayer is not satisfied with the decision of the CTA en banc: A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997
Requisite before availing of injunction (a) Taxpayer has to deposit the amount claimed; OR (b) File an injunction bond with the Court for not more double the amount (R.A. 1125) 250
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Prescriptive periods
Collection assessment
Collection assessment
with
without
Where return filed was NOT false or fraudulent: prior should be made within 5 years from the date of assessment of the tax. (Sec. 203 in relation to Sec. 222, NIRC)
Where no return filed, or the return was false or fraudulent: should be made within 5 years from the date of assessment (based on Sec. 222(c), NIRC)
by distraint or levy, or by judicial proceedings prior should be made within 3 years from the date of filing of return or date return is due, whichever is LATER (based on Sec. 203, NIRC)
by distraint or levy, or by judicial proceedings should be made within ten years after the discovery of the falsity, fraud or omission to file a return. by judicial proceedings
by judicial proceedings Waiver of prescriptive period If tax was assessed within the different period agreed upon by the Commissioner and the taxpayer, it may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5-yr period.(Sec. 222d, NIRC)
stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property (Sec. 205(a), NIRC). When the distraint proceedings validly begins, the prescription of collection is suspended. Kinds of Distraint: (1) Constructive Distraint (2) Actual Distraint
Remedies of the Government in Collection Administrative Distraint of Personal Property including garnishment deposit Summary remedy of levy on real property Forfeiture to the government for want of bidder Further Distraint or Levy Tax Lien Compromise and Abatement Penalties and Fines
Constructive Distraint – may be placed by the Commissioner on any taxpayer to safeguard the interest of the Government (Sec. 206, NIRC). Delinquency of the taxpayer is not necessary. Grounds for Constructive Distraint: When in the opinion of the Commissioner, (a) the taxpayer is retiring from any business subject to tax; or (b) the taxpayer is intending to leave the Philippines; or (c) the taxpayer is intending to remove his property from the Philippines or to hide or conceal his property; or (d) the taxpayer is planning to perform any act tending to obstruct the proceedings for
Judicial Civil Distraint of Personal Property Criminal Distraint – remedy enforced on the goods, chattels, or effects, and other personal property of whatever character including 251
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collecting the tax due or which may be due from him (Sec. 206, NIRC)
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company or association which issued the stocks or securities. Debts and credits: by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The person owing the debts shall then pay the Commissioner instead of his creditor (taxpayer) on the strength of such warrant. Bank accounts: by serving a warrant of garnishment upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall then turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (NOTE:distraint of bank accounts is called GARNISHMENT)
How constructive distraint is effected: (1) Signing of receipt by the taxpayer By requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the Commissioner (2) If the taxpayer refuses to sign the receipt: signing of receipt by revenue officer in the presence of two witnesses In case the taxpayer or the person having the possession and control of the property refuses or fails to sign the receipt, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnesses, leave a copy thereof in the premises where the property distrained is located (Sec. 206, NIRC)
Procedure for Actual Distraint (A) Commencement of Distraint Proceedings Who issues the warrant of distraint: Commissioner or his duly authorized representative – where the amount involved is more than P1M Revenue District Officer – where the amount involved is P1M or less (Sec. 207(A), NIRC)
Note: In constructive distraint, the property is not actually confiscated or seized by the revenue officer. Actual distraint – placed on a person who owes any delinquent tax or delinquent revenue (see Sec. 207, NIRC); involves actual seizure of the property. In his kind of distraint, taxpayer should have already been delinquent.
(B) Service of Warrant of Distraint How actual distraint is effected: The proper officer shall seize and distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts and interests in and rights to personal property of the taxpayer in sufficient quantity to satisfy the tax, expenses of distraint and the cost of the subsequent sale. (Sec. 207(A), NIRC)
Garnishment – taking of personal properties, usually cash or sums of money, owned by a delinquent taxpayer which is in the possession of a third party Distraint of intangible properties (Sec. 208, NIRC) Stocks and other securities: by serving a copy of the warrants of distraint on the taxpayer, AND upon the president, manager, treasurer or other responsible officer of the corporation,
(C) Report on the Distraint A report shall be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director.
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(D) Power of the CIR or proper officer to lift the order of distraint The taxpayer may request that the warrant be lifted. The commissioner may, in his discretion, allow the lifting of the order of distraint. He may ask for a bond as a condition for the cancellation of the warrant. (Sec. 207(A), NIRC)
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If the proceeds from the sale of the distrained properties are not sufficient to satisfy the tax delinquency, the Commissioner or his duly authorized representative shall within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer’s real property. (Sec. 207(B), NIRC) (G) Release of the Properties from Distraint If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (Sec. 210, NIRC)
(E) Notice of Sale of Distrained Properties The Revenue District Officer or his duly authorized representative (not the officer who served the warrant), shall cause a notification of the public sale to be posted in not less than two (2) public places in the municipality or city (one of which is the Office of the Mayor) where the distraint was made.
(H) Purchase by the government at sale upon distraint If the amount offered by the highest bidder is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due. The property so purchased may be resold by the Commissioner or his deputy. (Sec. 212, NIRC)
The notice shall specify the time and place of the sale. The time of sale shall not be less than twenty (20) days after notice to the owner and the publication or posting of such notice. (Sec. 209, NIRC) (F) Sale at Public Action At the time of the public sale, the revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrainedat a PUBLIC AUCTION, to the HIGHEST BIDDER for CASH or with the approval of the Commissioner, through a DULY LICENSED COMMODITY or STOCK EXCHANGES.
(I) Report of sale to BIR Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record. (Sec. 211, NIRC)
Any residue over and above what is required to pay the entire claim, including expenses of sale and distraint, shall be RETURNED to the owner of the property sold. Expenses shall be limited to actual expenses of SEIZURE and PRESERVATION of the property pending the sale, no charge shall be imposed for the services of the local internal revenue officer or his deputy. (Sec. 209, NIRC)
Summary Remedy of Levy on Real Property Levy– seizure of real property, an interest in or rights to such property in order to enforce the payment of taxes. (Sec. 205, NIRC) The real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy. When levy may be effected: after the expiration of time required to pay the delinquent tax, real property may be levied upon, before, 253
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simultaneously or after the distraint of personal property belonging to the delinquent. (Sec. 207(B), NIRC)
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Within twenty (20) days after the levy, the officer conducting the proceedings shall proceed to advertise for SALE the property or a portion as may be necessary to satisfy the claim and costs of sale. Such advertisement shall cover a period of at least thirty (30) days. The notice shall be posted at the main entrance of the city or municipal all AND in a public and conspicuous place in the barrio or district where the real property lies. The notice must also be published in a newspaper of general circulation in the place where the property is located, once a week for three (3) weeks.
In case the warrant of levy is NOT issued before or simultaneously with the warrant of distraint on the personal property AND the personal property of the taxpayer is not sufficient to satisfy his tax delinquency: the CIR or his duly authorized representative shall within 30 days after execution of the distraint, proceed with the levy on the taxpayer’s real property. (Sec. 207(B), NIRC) Procedure for Levy
CONTENTS of notice: statement of amount of taxes, and penalties due, time and place of sale, name of taxpayer, short description of property. (Sec. 213, NIRC)
(A) Issuance of Warrant of Levy The IR officer designated by the Commissioner or his duly authorized representative shall prepare a DULY AUTHENTICATED CERTIFICATE showing the name of the taxpayer and the amounts of tax and penalty due from him.
(D) Sale The sale shall be held either at the main entrance of the municipal or city hall or on the premises to be sold. Property will be 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. (Sec. 213, NIRC)
This certificate shall operate with the force of LEGAL EXECUTION throughout the Philippines. The certificate shall contain a description of the property upon which levy is made. (Sec. 207(B), NIRC)
(E) Forfeiture in Favor of the Government If there is no bidder for the real property OR if the highest bid is not sufficient to pay the taxes, penalties and costs, the IR Officer conducting the sale shall declare the property FORFEITED to the GOVERNMENT in satisfaction of the claim. (Sec. 215, NIRC)
(B) Service of the Warrant Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the taxpayer (If he is absent from the Philippines: to his agent or manager of business in respect to which the liability arose or to the occupant of the property in question). (Sec. 207(B), NIRC)
(F) Redemption of Property Sold At any time before the day fixed for the sale, the taxpayer may discontinue all proceeding by paying the taxes, penalties and interest. (Sec. 213, NIRC) Within one (1) year from the date of sale, the taxpayer or anyone for him, may pay to the
(C) Advertisement of the Sale 254
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Revenue District Officer the total amount of the following: public taxes + penalties + interest from the date of delinquency to the date of sale + interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of sale to the date of redemption. (Sec. 214, NIRC)
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Remedy of enforcement of forfeitures Forfeiture of chattels and removable fixtures: enforced by the seizure, sale or destruction of the specific forfeited property. Forfeiture of real property: enforced by a judgment of condemnation and sale in a legal action or proceeding civil or criminal as the case may require (Sec. 224, NIRC)
Note: If the property was forfeited in favor of the government, the redemption price shall include only the taxes, penalties and interest plus costs of sale – no interest on purchase price since the Government did not “purchase” the property anyway, it was forfeited)
When property to be sold or destroyed Forfeited chattels and removable fixtures – sold in the same manner and under the same conditions as the public notice and the time and manner of sale as are prescribed for sales of personal property distrained for the nonpayment of taxes
Note: The taxpayer-owner shall not be deprived of possession of the said property and shall be entitled to rents and other income until the expiration of the period for redemption (Sec. 214, NIRC)
Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco and all apparatus used in or about the illicit production of such articles – destroyed by the order of the Commissioner when the sale or use would be injurious to public health pr prejudicial to the enforcement of the law
(G) Final Deed of Purchaser After the period of redemption, a final deed of sale is issued in favor of the purchaser. Forfeiture to Government for Want of Bidder Forfeiture implies a divestiture of property without compensation in consequence of a default or offense. The effect of forfeiture is to transfer the title of the specific thing from the owner to the government. (De Leon, NIRC Annotated, p. 412)
All other articles subject to excise tax manufactured or removed in violation of the Code, dies for the printing or making of internal revenue stamps and labels – sold or destroyed in the discretion of the Commissioner
Instances when forfeiture is appropriate (1) All chattels, machinery, and removable fixtures of any sort used in the unlicensed production of articles (Sec. 268, NIRC) (2) Dies and other equipment used for the printing or making of any internal revenue stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or tag. (Sec. 268, NIRC) (3) Liquor or tobacco shipped under a false name or brand (Sec. 262, NIRC)
Forfeited property shall not be destroyed until at least 20 days after seizure. (Sec. 225, NIRC) Resale of real estate taken for taxes(RR No. 222002) All acquired/forfeited properties transferred in the name of the Republic of the Philippines, having passed the one-year redemption period, shall be converted into cash from the date of acquisition or forfeiture. 255
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and/or occupants, if any, of the auctioned property.
The sale of acquired/forfeited real properties shall be by sealed bids in a public auction to be witnessed by a representative of the COA.
Negotiated or private sale shall be resorted to as a consequence of failed public bidding for two consecutive times.
The Notice of Sale of the acquired real properties shall be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the Philippines which must be completed at least 20 days prior to the date of such public auction.
Negotiated or private sale shall in all cases be approved by the Secretary of Finance. Public auction sale shall be approved by the Commissioner or his authorized representative.
Unless the Commissioner of Internal Revenue provides otherwise, the Minimum Bid Price/Floor Price shall be the latest fair market value as determined by the Commissioner or the fair market value shown in the latest tax declaration issued by the provincial, city or municipal assessor, whichever is higher, pursuant to Sec. 6(E) of the Tax Code.
The Government reserves the right to reject or cancel any or all bids. Disposition of funds recovered in legal proceedings or obtained from forfeiture All judgments and monies recovered and received for taxes, costs, forfeitures, fines and penalties shall be paid to the Commissioner or his authorized deputies as the taxes themselves are required to be paid, and except as specially provided, shall be accounted for and dealt within the same way. (Sec. 226, NIRC)
Anyone could bid except foreign nationals, corporate or otherwise, and those qualified under existing laws, rules and regulations, including employees of the Bureau of Internal Revenue.
Further distraint or levy The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected. (Sec. 217, NIRC)
Bidders shall be required to post a bond in cash or manager’s check in an amount representing 10% of the minimum bid price at least one day before the scheduled public auction.
Tax lien Unless the Commissioner allows extension of time to pay, in meritorious cases, the winning bidder shall pay the full amount of his bid cash or manager’s check within two days after receipt of notice of award.
Tax Lien is a legal claim or charge on the property, real or personal, as security for the payment of same debt or obligation. It attaches from the time the tax became due and payable.
All taxes and expenses relative to the issuance of title shall be borne by the winning bidder.
When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest,
The winning bidder shall be responsible at his own expense for the ejectment of squatters
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penalties, and costs that may accrue in addition thereto upon ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING to the taxpayer.
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(1) A REASONABLE DOUBT as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (FINANCIAL INCAPACITY)
HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until NOTICE of such lien shall be filed by the Commissioner in the Office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located. (Sec. 219, NIRC)
Limits of the compromise:
Commissioner’s
power
to
For cases of financial incapacity: a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax
Seizure under forfeiture vs. 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. (BPI v. Trinidad)
For other cases: a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax Note: When the basic tax involved exceeds One Million Pesos (P1,000,000), or where the settlement offered is less than the prescribed minimum rates, the compromise must be approved by the Evaluation Board (composed of the Commissioner and 4 deputy commissioners)
Compromise Authority of the Commissioner to compromise and abate taxes
All criminal cases may be compromised except: (a) those already filed in court and (b) those involving fraud.
Compromise – to reduce the amount of tax payable (This should not be taken similarly with compromise penalty.) The CIR has authority to compromise and abate tax. However, the CIR is not authorized to accept anything less than what is adjudicated in favor of the Government.
The taxpayer’s offer to compromise shall not be considered until (RR 9 – 2013) (a) He waives in writing his privilege under RA 1405 or other special laws (b) He gave authority to CIR to inquire into his bank accounts (c) There is payment of compromise offer.
It should be noted that there should be consent of BOTH the taxpayer and the CIR, otherwise it will be void.
Abatement – to cancel the entire amount of tax payable
Grounds for a compromise: The Commissioner may compromise the payment of any internal revenue tax in the following cases: 257
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When the Commissioner may abate or cancel a tax liability: (1) The tax or any portion thereof appears to be UNJUSTLY or EXCESSIVELY ASSESSED; or (2) The ADMINISTRATION and COLLECTION COSTS do not justify the collection of the amount due. (e.g. when the costs of collection are greater than the amount of tax due)
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discovery of the falsity, fraud or omission. Provided, that in a fraud assessment which has become final and executor, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Sec. 222, NIRC)
False Return v. Fraudulent Return A false returns is due to mistakes, carelessness or ignorance and a fraudulent return is filed with intent to evade taxes.
CIVIL AND CRIMINAL ACTIONS Form and Mode of Proceeding: Civil and criminal action and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR: (a) shall be BROUGHT IN THE NAME OF THE GOVERNMENT of the Philippines; and (b) shall be CONDUCTED BY LEGAL OFFICERS OF THE BIR (c) shall be filed in court with the approval of the Commissioner. (Sec. 220, NIRC)
The fraud contemplated by law is actual and not constructive, and must amount to intentional wrongdoing with the sole object of avoiding the tax. (Aznar v. CTA, 1974) Payment of tax is not a valid defense. (Sec 253A) Refund Nature of a claim for refund: It partakes of the nature of an exemption and is strictly construed against the claimant. The burden of proof is on the taxpayer claiming the refund that he is entitled to the same. (CIR v. Tokyo Shipping, 1995)
Criminal action as a collection remedy: The judgment in the criminal case shall impose the penalty; and order payment of the taxes subject of the criminal case as finally decided by the Commissioner. (Sec. 205, NIRC)
Grounds for Refund: (1) Tax erroneously or illegally assessed or collected (Sec. 229, NIRC) (2) Penalty claimed to have collected without authority (Sec. 229, NIRC) (3) Any sum alleged to have been excessively or in any manner wrongfully collected (Sec. 229, NIRC) (4) Value of internal revenue Stamps when they are returned in good condition by the purchaser (Sec. 204, NIRC) (5) Unused stamps that have been rendered unfit for use (Commissioner may redeem, change or refund their value upon proof of destruction) (Sec. 204, NIRC)
Assessment not necessary before filing a criminal charge for tax evasion An assessment is not necessary before a criminal charge can be filed. The criminal charge need only be proved by a prima facie showing of a wilful attempt to file taxes, such as failure to file a required tax return. (CIR v. Pascor Realty, June 29, 1999) Suit to recover tax based on false or fraudulent returns A proceeding in court for the collection of the tax assessed may be filed without assessment at any time within ten (10) years after the 258
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Requirements for refund as laid down by cases: (1) Necessity of written claim for refund (2) Claim containing a categorical demand for reimbursement (3) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause
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Note: Under Sec. 229, there is no exception to the 2-year prescriptive period.
Legal Basis of Tax Refunds Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this principle are found in Art. 2142 and Art. 2154 of the NCC. When money is paid to another under the influence of a mistake of fact, on the mistaken supposition of the existence of a specific fact, where it would not have been known that the fact was otherwise, it may be recovered. The ground upon which the right of recovery rests is that money paid through misapprehension of facts belongs in equity and in good conscience to the person who paid it.
General Rule: The taxpayer must file a written claim for refund stating a categorical demand for reimbursement before the Commissioner within two years from the date of payment. (Sec. 229, NIRC) When it comes to recovery of unutilized input VAT, Section 112, and not Section 229 of the 1997 Tax Code, is the governing law. Second, prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but Section 112(A). The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. (CIR v. San Roque)
The government comes within the scope of solutio indebiti principle, where that: “enshrined in the basic legal principles is the time honoured doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempt from the application of this doctrine. Statutory Basis for Tax Refund Scope of Claims for Refund (Sec. 204, NIRC) The Commissioner may: (a) Credit or refund taxes erroneously or illegally received or penalties imposed without authority; (b) Refund the value of internal revenue stamps when they are returned in good condition by the purchaser; and (c) In the Commissioner’s discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction.
Exceptions to requirement of a written claim: When on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid (e.g. mathematical errors), the Commissioner may refund or credit the tax even without a written claim therefore. (Sec. 229, NIRC) A return filed showing an overpayment shall be considered as a written claim for credit or refund. (Sec. 204(C), NIRC) 259
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Necessity of Proof for Claim or Refund No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (Sec. 204, NIRC)
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the basis for the grant of the refund…To grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved.
A return filed showing an overpayment shall be considered as a written claim for credit or refund.(Sec. 204, NIRC) Burden of Proof for Claim of Refund Tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the taxing authority. (United Airlines, Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010)
Who may claim/apply for tax refund/tax credit The proper person to claim refund or tax credit is the person on whom the tax is imposed by the statute.
Nature of erroneously paid tax/illegally assessed collected 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.
Taxpayer/withholding agents of non-resident foreign corporation - the withholding agent is directly and independently liable for the correct amount of tax that should be withheld and for deficiency assessments, surcharges and penalties. Prescriptive Period for Recovery of Erroneously or Illegally Collected
Tax refund vis-à-vis tax credit REFUND takes place when there is actual reimbursement while TAX CREDIT takes place upon the issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due and collected from the taxpayer.
Tax
Two-year period when counted: From the date that tax was paid. How date of payment determined: If the income tax is withheld at source – payment is at the end of the taxable year. If the income is paid on a quarterly basis – payment is from the time of filing the final adjustment return.
Essential requisites for claim of refund (Comm. v. CA and Citytrust, cited in United Airlines Inc. v. CIR, 2010): The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be
CIR vs. TMX Sales (January 16, 1992): When a tax is paid in installments, the prescriptive period should be counted from the date of final payment or the last installment. This rule proceeds from the theory that there is no payment until the entire tax liability is completely paid. Installments should be 260
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treated as advances or portions of the annual tax due.
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GOVERNMENT REMEDIES Administrative remedies
Other Consideration Affecting Tax Refunds
Tax lien Levy and sale of real property Forfeiture of real property to the government for want of bidder Further distraint and levy Suspension of business operation Non-availability of injunction to restrain collection of tax
Remedy of the taxpayer upon denial or inaction on the claim for refund: (a) CIR denies claim - appeal to the CTA within thirty (30) days from the receipt of the Commissioner’s decision and within two years from the date of payment. (b) CIR does not act on the claim and the 2year period is about to lapse - file a claim before the CTA before the 2-year period lapses. Otherwise, he may no longer file a claim before the CTA in case the Commissioner renders an adverse decision beyond the 2-year period. (Revised Rules of the CTA, as amended)
The Commissioner or his authorized representative is empowered to suspend the business operations and temporarily close the business establishment of any person for any of the following violations: In the case of a VAT-registered Person(a) Failure to issue receipts or invoices; or (b) Failure to file a value-added tax return as required under Section 114; or (c) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter.
Period for claiming refund once granted: Within five years from the date such warrant or check was mailed or delivered, otherwise it shall be forfeited in favor of the government and the amount thereof shall revert to the general fund. (Sec. 230, NIRC) Period for using the Tax Credit Certificate (TCC): Tax credit certificates (TCCs) can be applied against all internal revenue taxes, excluding withholding tax. TCCs which remain unutilized after five years from the date of issue shall be considered as invalid, unless revalidated. If not revalidated, the amount covered by the TCC shall revert to the general fund. (Sec. 230, NIRC)
Failure of any Person to Register as Required under Section 236. The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order. (Sec. 115, NIRC) Non-availability of injunction to restrain collection of tax 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 National Internal Revenue Code. (Sec. 218, NIRC)
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Judicial remedies (a) Civil Action (b) Criminal Action
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Offender
Penalty
A public officer or the maximum penalty employee prescribed for the offense shall be imposed on him shall be dismissed from public office, and perpetually disqualified from holding any public office, to vote, and to participate in any election CPA his license shall be automatically revoked or cancelled once he is convicted Corporations, imposed on the partner, associations, president, general partnerships etc. manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation (Sec. 253, NIRC)
Form and Mode of Proceeding (supra) Civil Action Two ways by which civil liability is enforced: by filing a civil case for the collection of sum of money with the proper regular court; and by filing an answer to the petition for review filed by the taxpayer with the Court of Tax Appeals.(Mamalateo, 2008) Criminal Action Any person convicted of a crime under the Code shall: (a) be liable for the payment of the tax, and (b) be subject to the penalties imposed under the Code. (Sec. 253(A), NIRC) Payment of tax not defense: Payment of the tax due after a case has been filed shall not constitute a valid defense in any prosecution for violation of the provisions under the Code. (Sec. 253(A), NIRC) Liability of person who aids or abets: Any person who wilfully aids or abets in the commission of a crime penalized under the Code or who causes the commission of any such offense by another shall be liable in the same manner as the principal. (Sec. 253(B), NIRC)
Minimum amount of fine: The fines imposed for any violation of the Code shall not be lower than the fines imposed herein or twice the amount of taxes, interests and surcharges due from the taxpayer, whichever is higher. (Sec. 253, NIRC) Prescriptive period for criminal action: All violations of any provision of the Code shall prescribe after five (5) years. (Sec. 281, NIRC)
Offender
Penalty
Not a citizen of he shall be deported the Philippines immediately after serving the sentence
Criminal Offenses
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Offense
XXX
Who is liable
Penalty
Willful attempt to evade or Any person who willfully defeat tax. (Sec. 254) attempts in any manner to evade or defeat any tax or the payment thereof.
Fine: P30,000 P100,000 AND Imprisonment: 2-4 years Plus other penalties Any person required to pay any Fine: P10,000 or more tax, make a return, keep any AND record, or supply correct and Imprisonment:1-10 years accurate information Plus other penalties
Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation (Sec. 255) Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently withdraws the same return or statement Making false entries, records, Any financial officer or or reports, or using falsified or Independent CPA engaged to fake accountable forms (Sec. examine and audit books of 257) accounts of taxpayers under Sec.232 (A) and any person under his direction. Unlawful pursuit of business Any person who carries on any (Sec. 258) business for which in annual registration fee is imposed without paying the tax as required by law. A person engaged in the business of distilling, rectifying, repacking, compounding or manufacturing any article subject to excise tax. Illegal Collection of Foreign Any person who knowingly Payments (Sec. 259) undertakes the collection of foreign payments under Sec. 67 without a license or without complying with the implementing rules and regulations. Unlawful Possession of Any person, manufacturer or 263
Fine - P10,000 - P20,000 AND Imprisonment: 1-3 years Plus other penalties
Fine P50,000 P100,000 AND Imprisonment: 2-6 years
Fine: P5,000 - P20,000 AND Imprisonment: 6 months2 years Fine: P30,000 - P50,000 AND Imprisonment: 1-2 years
Fine: P20,000 - P50,000; AND Imprisonment: 1-2 years
Fine:
P20,000
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Offense
Who is liable
Cigarette Paper in Bobbins or importer of cigar or cigarettes Rolls, Etc. (Sec. 260) Unlawful Use of Denatured Any person who for the purpose Alcohol (Sec. 261) of manufacturing any beverage, uses denatured alcohol or alcohol specially denatured to be used for motive power or withdrawn under bond for industrial uses or alcohol knowingly misrepresented to be denatured to be unfit for oral intake or who knowingly sells or offers for sale such preparations containing as an ingredient such alcohol.
XXX
Penalty P100,000; AND Imprisonment - 6 years 1 day - 12 years Fine: P20,000 P100,000; AND Imprisonment - 6 years 1 day - 12 years
Any person who unlawfully recovers or attempt to recover by distillation or other process any denatured alcohol or who knowingly sells or offers for sale, conceals or otherwise disposes of alcohol as recovered or redistilled Shipment or Removal of Any person who ships, Fine: P20,000 – P Liquor/Tobacco Products transports or removes 100,000; AND under False Name or Brand or Imprisonment: 6 years 1 as an Imitation of any Existing day - 12 years or Known Product Name or Brand (Sec. 262) Unlawful Possession or Any person who owns or is Removal of Articles Subject to found in possession of these Excise Tax W/o Payment of the articles Tax (Sec. 263) Where: Fine: P1,000 - P2,000 Value of goods < P1,000 AND Imprisonment: 60-100 days Value of goods < P50,000 but Fine: P10,000-P20,000 >P1000 AND Imprisonment: 2-4 years 264
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Offense
Who is liable
Value of goods but >P50,000
XXX
Penalty
< P150,000, Fine: P30,000 - P60,000 AND Imprisonment: 4-6 years
Value of goods > P150,000
Failure or Refusal to Issue Receipts or Sales or Commercial Invoices, Violations Related to the Printing of Such Receipts or Invoices and Other Violations (Sec. 264) Offenses Relating to Stamps (Sec. 265) Failure to Obey Summons (Sec. 266)
Declaration under Penalties of Perjury (Sec. 267)
Misdeclaration Misrepresentation Manufacturers Subject Excise Tax (Sec. 268)
or of to
Fine: P50,000 P100,000 AND Imprisonment: 10-12 years Any person who, being required Fine: P 1,000 - P50,000 under Section 237 to issue AND receipts or sales or commercial Imprisonment: 2- 4 years invoices
Fine: P20,000 - P50,000 AND Imprisonment: 4-8 years Any person who being duly Fine: P 5,000 - 10,000; summoned to appear to testify, AND or to appear and produce books Imprisonment:1-2 years of accounts, records, memoranda or other papers, or to furnish information as required under the pertinent provisions of this Code. Any person who willfully files a Penalty for Perjury under declaration, return or statement the Revised Penal Code containing information which is not true and correct as to every material matter Any manufacturer subject to Summary cancellation or excise tax withdrawal of the permit to engage in business as a manufacturer of articles subject to excise tax Any person who conducts an Forfeiture of property unlicensed business or uses used dies for printing false stamps
Use of Property in Unlicensed Business or Use of Dies for Printing False Stamps, Etc. (Sec. 268) Illegal Storage or Removal of Any person subject to excise tax Forfeiture of goods 265
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Offense Goods (Sec. 268)
Who is liable
XXX
Penalty
who fails to store the goods in proper place, or removes goods without payment of excise tax
Penalty for Second and Subsequent Offenses (Sec. 274) Violation of Other Provisions of the Tax Code or Rules or Regulations in General (Sec. 275)
Maximum of the penalty prescribed for the offense
Any person who violates any provision of this Code or any rule or regulation promulgated by the Department of Finance for which no specific penalty is provided by law Penalty for Selling, Any taxpayer, whose property Transferring, Encumbering or has been placed under in any way disposing of constructive distraint property Placed under Constructive Distraint (Sec. 276)
Failure to Surrender Property Any person having in his Placed under Distraint and possession or under his control Levy (Sec. 277) any property or rights to property, upon which a warrant of constructive distraint or actual distraint and levy has been issued Procuring Unlawful Divulgence Any person procures an officer of Trade Secrets (Sec. 278) or employee of the BIR to divulge any confidential information regarding the business, income or inheritance of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, and which it is unlawful for him to reveal, and any person who publishes or prints in any manner whatever, not provided by law, any income, profit, loss or expenditure appearing in any income tax 266
Fine: P1000 or less OR Imprisonment: 6 months or less OR Both Fine: at least P5,000 AND at least twice the value of the property OR Imprisonment: 2 years 1 day - 4 years OR Both Fine: P 5,000 or more OR Imprisonment: 6 months 1 day - 2 years, OR Both
Fine: not more than P 2,000 OR Imprisonment: 6 months 5 years OR Both
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Offense
Who is liable
XXX
Penalty
return knowledge or information to their superior officer, or to report as otherwise required by law; or (i) without the authority of law, demand or Accept or attempt to collect, directly or indirectly, as payment or otherwise, any sum of money or other thing of value for the compromise, adjustment or settlement of any charge or complaint for any violation or alleged violation of law.
Penalties Imposed on Public Officers(Sec. 269, NIRC) The law imposes a fine of not less than P50,000 nor more than P100,000 or imprisonment for not less than 10 years nor more than fifteen years on every official, agent or employee of the BIR or of any agency or employee of the Government charged with the enforcement of the Tax Code, who shall: (CONED- FRAP) (a) Extort or willfully oppress under color of law; (b) knowingly Demand other or greater sums than are authorized by law or receive any fee, compensation or reward, except as by law prescribed, for the performance of any duty; (c) willfully Neglect to give receipts, as by law required, for any sums collected in the performance of duty, or who willfully
(d)
(e)
(f) (g)
(h)
Informer’s Reward[Sec. 282, NIRC] To whom given: Persons instrumental in the discovery of violations of the NIRC and in discovery and seizure of smuggled goods. Amount of reward: 10% of the revenues, surcharges or fees recovered and/or fine/penalty imposed, or P1,000,000, whichever is LOWER.
neglect to perform any of the duties enjoined by law; Conspire or collude with another or others to defraud the revenues or otherwise violate the law; willfully make Opportunity for any person to defraud the revenues, or who do or omit to do any act with intent to enable any other person to defraud the revenues; negligently or by design Permit the violation of the law by any other person; make or sign any False certificate or return in any case where the law requires the making by them of such entry, certificate or return; having knowledge or information of a violation of any provision of the Code or of any fraud committed on the revenues collectible by the BIR, fail to Report such
The same amount shall be given if the offender offered to compromise and such offer has been accepted and collected by the Commissioner. 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.
STATUTORY OFFENSES AND PENALTIES
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Civil Penalties (a) Surcharge (b) Interest
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In General 20% per annum on the unpaid amount of tax, interest at the rate of twenty percent (20%) per annum from the date prescribed for payment until the amount is fully paid. (Sec. 249(A), NIRC)
Surcharge Surcharge - penalty imposed in addition to the tax required to be paid (Sec. 248(A), NIRC)
Deficiency Interest 20% per annum on any deficiency in the tax due from the date prescribed for its payment until the full payment thereof. (Sec. 249(B), NIRC)
Rates of Surcharge (25% or 50%) 25% of the amount due in the following cases: (a) Failure to file any return and pay the tax due 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 the Commissioner authorizes otherwise; 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 the full or part of the amount of tax due on or before the date prescribed for its payment (Sec. 246 (A), NIRC)
Delinquency interest 20% per annum on the unpaid amount in case of failure to pay: (a) The amount of the tax due on any return required to be filed; or (b) The amount of the tax due for which no return is required; or (c) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the letter of demand and assessment notice (Sec. 249(C), NIRC)
50% of the tax or of the deficiency tax in the following cases: (a) Willful neglect to file the return within the period prescribed; or (b) A false or fraudulent return is willfully made (Sec. 248(B), NIRC)
Interest on extended payment 20% per annum on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid if any person required to pay the tax is: (a) Qualified and elects to pay the tax on installment but fails to pay the tax or any installment or any part of such amount or installment or before the date prescribed for its payment; or (b) Where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof (249(D), NIRC)
Prima facie evidence of a false or fraudulent return: Substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions. Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration or for overstatement. (Sec. 248(B), NIRC)
COMPROMISE AND ABATEMENT OF TAXES (see discussion under Remedies of the Taxpayer)
Interest
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Cases which may be compromised: (Sec. 2, R.R. 30-2002) (1) Delinquent accounts (2) Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office (3) Civil tax cases being disputed before the courts (4) Collection cases filed in courts (5) Criminal violations, other than those already filed in court or those involving criminal tax fraud
XXX
(3) Criminal violations already filed in court (4) Delinquent accounts with duly approved schedule of installment payments (5) Cases where final reports of reinvestigation ore reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis (6) Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and (7) Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer
Cases which cannot be compromised: (Sec. 2, R.R. 30-2002) (1) Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold (2) Criminal tax fraud cases confirmed as such by the CIR or his duly authorized representative
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Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC START
Commissioner or Regional Director Issues Letter of Authority (LA)
Revenue Officer (RO) conducts Audit w/in 120 days. If 120 days lapse LA is revalidated,
Send Formal Letter of demand and Final Assessment Notice (FAN) is issued
Is response w/n 15 days? Is it meritorious?
NO to either
Yes to both
File protest w/n 30 days from receipt of assessment. Submit supporting papers wi/in 60 days from protest
Protest made w/in 30 days? Supporting papers submitted w/in 60 days?
Assessment becomes Final, Warrant of Distraint & Levy Issued
RO sends notice of informal conference
Taxpayer responds w/in 15 days
Taxpayer responds w/in 15 days
Regional Assessment Division issues a Preliminary Assessment Notice (PAN)
ASSESSMENT ENDS
YES to both
Commissioner decides on protest within 180 days
NO to either
Decision favorable to taxpayer?
YES
ASSESSMENT ENDS
YES
Commissioner decides w/n 180 days?
NO
NO
Appeal to the Court of Tax appeals within 30 days OR file motion for reconsideration within 30 days. MR tolls 30 day period to appeal to CTA
Appeal to the Court of Tax Appeals w/in 30 days after lapse of 180 days OR wait for a decision by the BIR (Lascona Land oil vs. CIR)
If MR is denied, appeal to the CTA within remainder of the 30 days
CTA decides on the appeal
YES
Appeal made on time?
If CTA decision is unfavorable to taxpayer, file MR with CTA Division w/in 15 days. Appeal to CTA en banc if MR denied.
NO
Appeal to Supreme Court
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Assessment becomes Final, Warrant of Distraint & Levy Issued
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Flowchart II: Procedures for Distraint and Levy-NIRC RCO - Revenue Collection Officer RDO - Revenue District officer RRD - Revenue Regional Director LGU- Local Government Unit
START
Person owing any delinquent tax to fails to pay w/in the time required
Delinquent tax more than 1M?
No RDO posts notice in at least 2 public places in the municipality/city where the distraint is made. One place of posting must be at the mayor’s office. Time of sale shall not be less than 20 days after the notice (Sec. 209)
Goods shall be restored to owner, if charges are paid (Sec. 210)
Commissioner seizes sufficient personal property to satisfy the tax, charge & expenses of seizure (Sec. 207 (A))
Yes
RDO seizes sufficient personal property to satisfy the tax, charges & expenses of seizure (Sec. 207 (A))
Property may be resold and the net proceeds shall be remitted to the National Treasury as internal revenue. (Sec. 212)
Distraining Officer accounts for the goods distrained (Sec. 208)
Bid less than amount of tax/ FMV of goods distrained?
Officer conducts public auction
Yes
Commissioner may purchase property for the National Government (Sec. 212)
No, bid just right W/in 5 days after sale, distraining officer shall enter return of proceedings in the records of RCO, RDO and RRD (Sec. 213)
W/in 2 days after the sale, officer shall report to the Commissioner. (Sec. 211)
Internal revenue officer, designated by the Commissioner, shall prepare a certificate with the force of a nationwide legal execution (Sec. 207 B)
Real property may be levied on before, simultaneously, or after the distraint of personal property (207 (B))
W/n 10 days after receipt of the warrant, levying officer shall report to the Commissioner who shall have the authority to lift the warrant of levy (Sec. 207 B)
W/n 1 year from forfeiture, the taxpayer, may redeem said property by paying full amount of the taxes and charges (Sec. 215)
Excess of proceeds over the entire claim, shall be returned to the owner. No charge shall be imposed for the services of the officer (Sec. 209)
Levy shall be affected by writing upon said certificate a description of the property. Notice of the levy shall be served upon the Register of Deeds of LGU where the property is located and upon the owner (Sec. 207 B)
W/n 20 days after levy, officer shall post notice at the main entrance of the municipal/city hall & in public place in the barrio/district where the real estate lies for at least 30 days by AND publish it once a week for 3 weeks. Owner may prevent sale by paying all charges (Sec. 213)
W/n 2 days, he shall make a return of the forfeiture. Register of Deeds, upon registration of forfeiture shall transfer title to the Government w/o court order. (Sec. 215)
Officer sells the goods to the highest bidder for cash or with the Commissioner’s approval, through commodity/ stock exchanges. (Sec. 209)
Sale shall be held at the main entrance of the municipal/city hall, or on the premises of the levied property. (Sec. 213)
Officer conducting the sale shall forfeit the property to the Government (Sec. 215)
Yes
No bidder or highest bid insufficient?
No, bid ok The Commissioner may, after 20 days notice, sell property at public auction or at private sale with approval of the SoF. Proceeds shall be deposited with the National Treasury (Sec. 216)
W/n 1 year from sale, the owner may redeem, by paying to the RDO the amount of the taxes, penalties, and interest thereon from the date of delinquency to the date of sale, and 15% per annum interest on purchase price from the date of purchase to the date of redemption. (Sec. 214)
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W/n 5 days after the sale, levying officer shall enter return of the proceedings upon the records of the RCO, RDO and RRD (Sec. 213)
Excess of proceeds of the sale over claim and cost of sale shall be turned over to the owner (Sec. 213)
Owner shall not be deprived of the possession and shall be entitled to the fruits until 1 year expires (Sec. 214)
Levy and distraint may be repeated until the full amount due, and all expenses are collected. (Sec. 217)
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VI. Organization and Function of the BIR RULE-MAKING AUTHORITY SECRETARY OF FINANCE
OF
XXX
manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses;
THE
(f) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business ort by the person for whom such denaturing is done or by whom, such alcohol is dealt in;
Authority of secretary of finance to promulgate rules and regulations(Sec. 244, NIRC) The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for effective enforcement of the provisions of the Code. Specific provisions to be contained in rules and regulations(Sec. 245, NIRC) (a) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept;
(g) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes;
(b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labelling, branding or marking shall be effected; (c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labelled, branded or marked;
(h) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and regulations which the Commissioner may consider suitable for the enforcement of the said Title III;
(d) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; (e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their 272
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(i) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics;
computerization program, whichever comes earlier:
(j) The manner in which internal revenue taxes, such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax:
For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the following criteria: (a) Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at least P100,000 for any quarter of the preceding taxable year; (b) Excise tax - Business establishment with excise tax paid or payable of at least P1,000,000 for the preceding taxable year; (c) Corporate Income Tax - Business establishment with annual income tax paid or payable of at least P1,000,000 for the preceding taxable year; and (d) Withholding tax - Business establishment with withholding tax payment or remittance of at least P1,000,000 for the preceding taxable year.
Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said large taxpayers.
Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax.
Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors.
Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations require that the tax returns, papers and statements and taxes of large taxpayers be filed and paid, respectively, through collection officers or through duly authorized agent banks:
The penalties prescribed under Section 248 shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers.
Provided, further, That the Commissioner can exercise this power within six (6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive 273
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Non-retroactivity of rulings (Sec. 246, NIRC)
XXX
business operations and temporarily close the business establishment of any person for any of the following violations:
General Rule:No retroactive application if the revocation, modification or reversal of rules and regulations, rulings or circulars will be prejudicial to the taxpayers
In the case of a vat-registered person (a) Failure to issue receipts or invoices; (b) Failure to file a value-added tax return as required under Section 114; or (c) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter.
Exceptions: Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or Where the taxpayer acted in bad faith.
Failure of any person to register as required under section 236.The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order.
POWER OF THE COMMISSIONER TO SUSPEND THE BUSINESS OPERATION OF A TAXPAYER(Sec 115, NIRC) The Commissioner or his authorized representative is empowered to suspend the
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VIII. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED
XXX
Authority to prescribe penalties for tax violations The sanggunian may impose (1) a surcharge not exceeding twenty-five percent (25%) of the amount of taxes, fees or charges not paid on time and (2) 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. (Sec. 168, LGC)
LOCAL GOVERNMENT TAXATION Fundamental principles (UEPIP) Taxation shall be uniform in each local government unit; Taxes, fees, charges and other impositions shall: (EPUC) (1) be equitable and based as far as practicable on the taxpayer's ability to pay; (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; The collection of local taxes, fees, charges and other impositions shall not be let to any private person; 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,
Authority to grant local tax exemptions LGUs may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. (Sec. 192, LGC) Withdrawal of exemptions Unless otherwise provided, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or judicial, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and education institutions, are withdrawn upon the effectivity of the Code. (Sec. 193, LGC)
Each local government unit shall, as far as practicable, evolve a Progressive system of taxation. (SEC. 130, LGC)
Authority to adjust local tax rates LGUs shall have the authority to adjust the tax rates as prescribed not oftener than once every five (5) years, but in no case shall the adjustment exceed ten percent (10%) of the rates fixed by the Code. (Sec. 191, LGC)
Nature and Source of Taxing Power Grant of local taxing power under the Local Government Code Each LGU shall exercise its power to create its own sources of revenue levy taxes, fees, and charges. Both are subject to the provisions in the LGC and consistent with local autonomy Taxes, fees and charges levied accrue exclusively to the local government units. (Sec. 129, LGC)
Residual taxing power of local governments LGU may exercise the power to levy taxes or charges on ANY base or subject
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Required: Not otherwise specifically enumerated in the LGC or taxed under NIRC or other applicable laws
XXX
in a newspaper of local circulation. In provinces, cities and municipalities where there are no newspapers of local circulation, it must be posted in at least two (2) conspicuous and publicly accessible places. (Sec. 188, LGC)
Not unjust, excessive, oppressive, confiscatory or contrary to declared national policy
Scope of Taxing Power
Pursuant to an ordinance enacted with public hearing conducted for the purpose. (Sec. 186, LGC)
LGU
Scope of Taxing Power
Provinces May levy only: (Sec. 134, Transfer of Real Property LGC) Ownership Business of Printing and Publication Franchise Tax Tax on Sand, Gravel and Other Quarry Resources Professional Tax Amusement Tax Annual Fixed Tax for every delivery truck or van Municipalitie May levy taxes, fees and s charges not otherwise levied by provinces (Sec. 142, LGC) Cities May levy taxes, fees and charges which the province or municipality may impose (Sec. 151, LGC) Barangays May levy only: Taxes on stores or retailers Service fees or charges Barangay clearance Other fees and charges (Sec. 152, LGC)
Authority to issue local tax ordinances The power to impose a tax, fee, or charge, or to generate revenue under this Code shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance. (Sec. 132, LGC) Local Taxing Authority Power to create revenues exercised thru LGUs Each LGU shall exercise its power to create its power to create its own sources of revenue and to levy taxes, fees and charges. (Sec. 128, LGC) Exercised by the Sanggunian concerned through an appropriate ordinance. (Sec. 132, LGC) Ordinances may be vetoed by local chief executives of the LGUs, except the Punong Barangay, on the ground that it is ultra vires or prejudicial to public welfare. His reasons shall be stated in writing. (Sec. 55 (a) and (b), LGC) Procedure for approval and effectivity of tax ordinances A public hearing must be conducted prior to the enactment of a tax ordinance. (Sec. 187, LGC)
But all LGUs may also impose reasonable service fees, rates for operation of public utilities, andtoll fees and charges. (See letter e below) (Sec. 153-155, LGC)
Within ten (10) days after the approval of the ordinance, certified true copies of all tax ordinances or revenue measures shall be published in full for three (3) consecutive days 277
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XXX
Specific taxing power of local government unit (LGUs) Power Tax on Transfer of Real Property Tax on Business of Printing and Publication Franchise tax Tax on sand, gravel and other quarry resources Professional tax Amusement tax Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products Tax on Business Fees and charges on regulation/licensing of business and occupation Fees for Sealing and Licensing of Weights and Measures Fishery Rentals, Fees and Charges Community Tax Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers Service Fees on the use of Barangayowned properties Barangay Clearance Other Fees and Charges (on commercial breeding of fighting cocks, cockfights, cockpits; places of recreation which charge admission fees; outside ads) Service Fees and Charges (153) Public Utility Charges (154) Toll Fees or Charges (155) Real Property Tax
Province
Municipality
City
(135)
(151)
(136)
(137)
(138)
(139) (140)
(141)
(143)
(147)
(148)
(149)
Barangay
(152a) (152b) (152c)
(152d)
(within Metro Manila)
Taxing powers of provinces
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Tax Imposed
Rate/Amount
Tax on Transfer of Not more Real Property. than 50% of Imposed on the sale, 1% donation, barter, or any other mode of transfer of ownership or title to real property (Sec 135m LGC)
XXX
Base
Exemptions
Others
Total acquisition price or fair market value, whichever is higher
Sale, transfer, or other disposition of real property pursuant to R.A. 6657 (Comprehensive Agrarian Reform Law)
Evidence of payment of tax is to be required by Register of Deeds as a requisite to registration; and by the provincial assessor as a condition for cancellation of old tax declaration. Tax must be paid 60 days from the date of execution of deed or from the date of decedent's death.
Tax on Business of Not Printing and exceeding Publication (Sec 136, 50% of 1% LGC) Imposed on the business of persons engaged in printing, and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature Newly business
started Not exceeding 1/20 of 1%
Gross annual receipts for the preceding calendar year
Capital investment
279
Receipts from printing and/or publishing of books and other reading materials prescribed by the DECS as school texts or references
In the succeeding calendar year, regardless of when business started operating, tax shall be based on gross receipts for preceding calendar year, or any fraction thereof.
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Rate/Amount
Franchise Tax (Sec 137, LGC) Not Notwithstanding any exceeding exemption granted by 50% of 1% any law or any other special law, tax may be imposed on business enjoying a franchise
Newly-started business
Base
XXX
Exemptions
Gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction In the succeeding calendar year, regardless of when business started operating, tax shall be based on gross receipts for preceding calendar year, or any fraction thereof. Permit to extract sand, gravel and other quarry resources to be issued exclusively by the provincial governor pursuant to an Ordinance by the Sangguniang Panlalawigan
Not more than 1/20 of Capital 1% investment
Tax on Sand, Gravel Not more and Other Quarry than 10% Resources. Levied on ordinary stones, gravel, earth and other quarry resources as defined in the NIRC, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction (Sec 138, LGC)
Others
Fair market value in the locality per cubic meter of resources referred to in Column 1
Distribution of proceeds: Province - 30% Component City/ Municipality where resources were extracted - 30% Barangay where resources were extracted - 40%
Professional Tax. Such amount Such Provinces may levy as the reasonable 280
Professionals exclusively
To be paid to province where
the the
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Tax Imposed
Rate/Amount
annual professional tax on each person engaged in the exercise of a profession requiring government examination (Sec 139, LGC)
Sangguniang Panlalawiga n may determine, in no case to exceed P300.00
Base
XXX
Exemptions
Others
classification by employed by the profession is practiced, the government or where a principal Sangguniang office is maintained. Panlalawigan A person who pays for professional tax may practice his profession anywhere in the country without being subjected to similar taxes. Employers shall require payment of professional tax as a condition for employment.
Amusement Tax. Collected from proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement (Sec 140, LGC)
Payable annually, on or before Jan 31. In case of theaters or cinemas, tax shall first be deducted and withheld by their proprietors, lessees and operators
Not more Gross receipts Holding of operas, than 10% from admission concerts, dramas, (amended by fees recitals, painting, RA 9640, and art exhibitions, 2009) flower shows, musical programs, literary and oratorical presentations Proceeds to be shared equally by the province Exception to and municipality where exemption: Pop, amusement places are rock, or similar located. concerts
Annual Fixed Tax For Amount not Every truck, van, Every Delivery Truck exceeding vehicle or Van of P500 Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. Imposed on vehicles 281
Manufacturers, producers, wholesalers, dealers and retailers referred to in column 1 shall be exempt from tax on peddlers
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Rate/Amount
Base
XXX
Exemptions
Others
used for the delivery of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the sanggunian, to sales outlets, or consumers in the province, whether directly or indirectly (Sec 141, LGC) Taxing powers of cities The City may levy taxes, fees, charges which the province or municipality may impose. Those levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of LGC. Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not more than 50% Exception: Rates of professional and amusement taxes. (Sec. 151, LGC)
C. TAXING POWERS OF MUNICIPALITIES C.1. TAX ON VARIOUS TYPES OF BUSINESSES [Sec. 143, LGC] Rate/Amount and Base Manufacturers, assemblers, In accordance with the schedule repackers, processors, brewers, in Section 143 [a], NIRC distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature Wholesalers, distributors, or Schedule in Article 143 [b], NIRC dealers in any article of commerce of whatever kind or 282
Other Information
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nature Exporters and on manufacturers, millers, producers, wholesalers, distributor, dealers or retailers of essential commodities enumerated below: [RWCCLAPS] (1) Rice and corn (2) Wheat and or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt, and other agricultural, marine, and fresh water products, whether in original state or not (3) Cooking oil and cooking gas (4) Cement (5) Laundry soap, detergents, and medicine (6) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; (7) Poultry feeds and other animal feeds; (8) School supplies Retailers
Contractors and other independent contractors Banks and other financial institutions
TAXATION LAW Other Information
Not exceeding 1/2 of rates prescribed in the schedule in Sec 143, NIRC
Gross sales or receipts for the preceding calendar year of: 400k or less: 2% per annum more than 400k: 1% per annum
In accordance with the schedule in Sec. 143 [e] Not exceeding fifty percent 50% of 1% on the gross receipts of the preceding calendar year from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property 283
Barangays have the exclusive power to tax gross receipts amounting to: 50k or less: in cities 30k or less: in municipalities [Sec. 143 [d], Sec. 152, LGC]
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Rate/Amount and Base Other Information and profit from exchange or sale of property, insurance premium. Peddlers engaged in the sale of Not exceeding P50.00 per any merchandise or article of peddler annually. commerce Any business which the Catch-all provision. sanggunian concerned may deem proper to tax If on any business subject to excise, value-added or percentage tax is subject to tax not exceeding two percent [2%] of gross sales or receipts of the preceding calendar year
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON MUNICIPALITIES WITHIN METRO MANILA
(a) combined total gross sales/receipts IF subject to the same tax rate (b) separate reports on gross sales/receipts if subject to different tax rates
Such municipalities may not 50% more than the maximum rates prescribed in Sec 143. [Sec. 144, LGC]
Yamane vs. Lepanto Condo Corp. (Oct. 23, 1995): Condominium corporations are not business entities, and are thus not subject to local business tax. Even though the corporation is empowered to levy assessments or dues from the unit owners, these amounts are not intended for the incurrence of profit by the corporation, but to shoulder the multitude of necessary expenses for maintenance of the condominium.
C.3. TAX ON RETIREMENT ON BUSINESS Upon termination of a business subject to tax under Sec.143 a sworn statement of its gross sales or receipts for the current year shall be submitted. If the tax paid is less than the tax due, the difference shall be paid before the business is considered officially retired. [Sec. 145, LGC]
C.4 RULES ON PAYMENT OF BUSINESS TAX
Ericsson Telecoms vs. City of Pasig. (Nov. 2007): Business tax must be based on gross receipts, it being different from gross revenue. The right to receive income, and not the actual receipt determines when to include the amount in gross income.
(1) Taxes in Sec. 143 shall be paid for every separate or distinct establishment or place where business subject to tax is conducted. (2) One line of business is not exempted by being conducted with some other businesses for which such tax has been paid (3) The tax on a business must be paid by the person conducting it. (4) If a person operates 2 or more businesses mentioned in Sec 143 which are taxed; computation shall be based on:
C.5. FEES AND CHARGES REGULATION & LICENSING
FOR
General rule: As a condition to the conduct of business or profession, the municipality may impose reasonable fees and charges not yet imposed by the province, commensurate with 284
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the cost of regulation, inspection and licensing. [Sec.147, LGC]
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RULE 2: Where there is NO branch or sales outlet in the city/municipality where the sale is made, sale shall be recorded in the principal office and the tax shall be paid to such city/municipality.
Exception: Professional tax in Sec. 139 Specific rules: (1) Municipality has power to impose reasonable rates for sealing and licensing of weights and measures [Sec. 148, LGC] (2) The Municipality has exclusive authority to grant fishery privileges in municipal waters. The sangguniang bayan may: (a) Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus fry areas, within a definite zone of the municipal waters, as (b) Grant marginal fishermen the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag or fry of other species and fish from the municipal waters by nets, traps or other fishing gears free of rental, fee, charge or imposition. (c) Issue licenses for the operation of fishing vessels of three [3] tons or less (3) The Sanggunian may penalize the use of explosives, noxious or poisonous substances, electricity, muro-ami, and other deleterious methods of fishing and prescribe a criminal penalty therefor [Sec. 149, LGC]
RULE 3: In the case of manufacturers, contractors, producers, and exporters having factories, project offices, plants, and plantations, proceeds shall be allocated as follows: (1) 30% of sales recorded in the principal office shall be made taxable by the city/municipality where the principal office is located (2) 70% shall be taxable by the city/municipality where the factory, project office, plant, or plantation is located Illustration of Rules 1 to 3: A company has a principal office in Mandaluyong, while its sales office and factory are in Sta Rosa: (1) sales made in Sta Rosa, will be recorded in Sta Rosa (2) sales made in Los Baños, Calamba or Cabuyao [i.e. delivered to customers located in those places], will be recorded in Mandaluyong (3) aside from sales made in Sta Rosa, Sta Rosa also gets 70% of sales recorded in Mandaluyong, pursuant to Rule 3 RULE 4: In case the plantation is located in a place other than the place where the factory is located, the 70% in Rule 3 will be divided as follows: 60% to the city/municipality where the factory is located 40% to the city/municipality where the plantation is located
C.6. SITUS OF TAX COLLECTED According to Sec. 150 of the LGC,situs shall be determined by the ff. rules: RULE 1: In case of persons maintaining/operating a branch or sales outlet making the sale or transaction, the tax shall be recorded in said branch or sales outlet and paid to the municipality/city where the branch or sales outlet is located.
RULE 5: In case of 2 or more factories, plantations, etc. in different localities, the 70% shall be prorated among the localities where the factories, plantations, etc. are located in 285
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proportion to their respective volume of production.
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(2) Service Fees or Charges. For services rendered in connection with the regulations or the use of barangay-owned properties or facilities such as palay, copra, or tobacco dryers. (3) Barangay Clearance. A city or municipality cannot issue a permit for business without a clearance from the barangay concerned. The sangguniang barangay may impose a reasonable fee on the clearance. (4) Other Charges Allowed. (a) charges on commercial breeding of fighting cocks, cockfights and cockpits; (b) charges on places of recreation which charge admission fees; and (c) charges on billboards, signboards, neon signs, and outdoor advertisements. [Sec. 152, LGC]
Illustration: A company has a principal office in Valenzuela and has its factory in Bulacan. It also has branches selling merchandise in Muntinlupa, Bacolod, Cebu. (1) sales made in Muntinlupa, Bacolod and Cebu will go to the said cities (2) sales in all other places which do not have a sales branch shall be distributed as follows: 30% to Valenzuela and 70% to Bulacan Excise Tax: Allied Thread Co., Inc. v. City Mayor of Manila [1984] Tax is imposed on the performance of an act or occupation, enjoyment of a privilege. The power to levy such tax depends on the place in which the act is performed or the occupation is engaged in; not upon the location of the office.
E. COMMON POWERS
REVENUE
RAISING
(1) Service fees and charges LGUs may impose and collect such reasonable fees and charges for services rendered. [Sec. 153, LGC] (2) Public utility charges LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction. [Sec. 154, LGC] (3) Toll fees or charges (a) The sanggunian may prescribe the terms and conditions and fix the rates for the imposition of 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 local government unit concerned. (b) The sanggunian may also discontinue the collection of the tolls when public safety and welfare requires. (c) No toll fees or charges shall be collected from:
Sales Tax: Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur [1959] 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.
D. TAXING POWERS OF BARANGAYS The following shall exclusively accrue to the barangays: (1) Taxes on Stores or Retailers with Fixed Business Establishments. (a) Rate: not greater than one percent (1%) (b) Base: (i) Cities: gross sales or receipts of the preceding calendar year of P50,000.00 or less (ii) Municipalities: gross sales or receipts of P30,000.00 or less
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(i) Officers and enlisted men of the AFP and members of the PNP on mission (ii) Post office personnel delivering mail
TAXATION LAW (iii) Physically-handicapped (iv) Disabled citizens who are sixty-five (65) years or older. [Sec. 155, LGC]
F. COMMUNITY TAX Who may levy Cities or municipalities [Sec. 156, LGC] (1) Individuals who are: (a) Inhabitants of the Philippines (b) Eighteen years of age or over (c) Either: (i) Regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year (ii) Engaged in business or occupation (iii) Owns real property with an aggregate assessed value of P1,000 or more Persons Liable (iv) Is required by law to file an income tax return [Sec. 157 &158, (2) Juridical Persons LGC] (a) Every corporation no matter how created or organized, (b) Whether domestic or resident foreign, (c) Engaged in or doing business in the Philippines (1) Individuals (a) Annual community tax of P5.00 PLUS annual additional tax of P1.00 per P1,000.00 of income regardless whether from business, exercise of profession or property (b) Never to exceed P5000 (c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based on total property owned by them and the total gross receipts or earnings derived therefrom (2) Juridical Persons (a) Annual community tax of P500.00 PLUS annual additional tax of not more than P10,000.00 according to the ff. schedule: (i) P2.00 for every P5,000 worth of real property in the Philippines owned during the preceding year based Rates [Sec. 157 (ii) P2.00 for every P5,000.00 of gross receipts derived from business in &158, LGC] the Philippines during the preceding year. (b) Dividends received by a corporation from another corporation shall be deemed part of the gross receipts or earnings for purposes of computing additional tax. Persons Exempt (1) Diplomatic and consular representatives [Sec. 159, LGC] (2) Transient visitors who stay in the Philippines for not more than 3 months 287
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TAXATION 2
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Where individual resides, or where the principal office of the juridical entity is located. Accrues on the 1st day of January of each year to be paid not later than the last day of February of each year If unpaid within the prescribed period, an interest of 24% shall be added per annum from the due date until payment. [Sec. 161, LGC]
Presentation of Community Tax Certificate is necessary when an individual subject to community tax: (1) 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 (7) receives any salary or wage from any person or commission
(3) Estate tax, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided; (4) 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 LGU concerned; (5) Taxes, fees or charges on 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, or other taxes, fees, or otherwise (6) Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen; (7) 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; (8) Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or charges on petroleum products; (9) Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (10) Taxes on the Gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in the Code; (11) Taxes on premiums paid by way or Reinsurance or retrocession;
Presentation of certificate is not needed in the registration of a voter. [Sec. 163, LGC] The city or municipal treasurer shall deputize the barangay treasurers to collect, provided the latter be bonded. If: actually and directly collected by the city or municipal treasurer, community tax accrues entirely to the general fund. If: collected through the barangay treasurers, apportioned equally. [Sec. 164, LGC]
COMMON LIMITATIONS ON TAXING POWERS OF LGUS
THE
Unless otherwise provided, the following cannot be levied by the local governments: [IDEC-GAPEP-GRR-ECN]: (1) Income tax, except when levied on banks and other financial institutions; (2) Documentary stamp tax;
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PENALTIES ON UNPAID TAXES, FEES OR CHARGES
(12) 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; (13) Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided; (14) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under the Cooperative Code of the Philippines; and (15) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. [Sec. 133, LGC]
(1) Surcharge not exceeding 25% on taxes, fees or charges NOT paid on time; and (2) Interest not exceeding 2% per month of the unpaid taxes, fees or charges including surcharges, until the amount is fully paid (3) In no case shall the total interest exceed 36 months. [Sec. 168, LGC]
AUTHORITY COLLECTION BOOKS
AND
MANNER
OF TREASURER AND INSPECTION
IN OF
All local taxes, fees and charges shall be collected by the local treasurer or their duly authorized deputies [Sec. 170, LGC]
COLLECTION OF BUSINESS TAX TAX PERIOD PAYMENT
TAXATION LAW
OF
The local treasurer may, by himself or through his deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any person subject to local taxes, fees and charges in order to ascertain, assess and collect the correct amount of the tax, fee or charge.
Based on calendar year, unless otherwise provided. May be paid annually or in quarterly instalments. [Sec. 165, LGC]
ACCRUAL OF TAX General rule: Accrues on the first day of January of each year
Examination must be done during business hours, only once for every tax period and shall be certified to by the examining official. [Sec. 171, LGC]
Except: New taxes, fees or charges, or changes in the rates thereof which shall accrue on the first day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. [Sec. 166, LGC]
TAXPAYER’S REMEDIES PERIODS OF ASSESSMENT AND COLLECTION OF LOCAL TAXES, FEES OR CHARGES
TIME OF PAYMENT Within the 20 days of January or of each subsequent quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It may be extended by the sanggunian for justifiable reasons, without surcharges or penalties. Extension cannot exceed 6 months. [Sec. 167, LGC]
Assessment: Within 5 years from the date they become due In case of Fraud or Intent to Evade Tax: Within 10 years from discovery of fraud or intent to evade payment. [Sec. 194, LGC] Collection: 5 years from the date of assessment by administrative or judicial action.
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CIVIL REMEDIES, IN GENERAL
Instances When Running of Prescription Periods is Suspended (1) When the treasurer is legally prevented from making the assessment or collection (2) When taxpayer requests for reinvestigation and executes a waiver in writing before lapse of the period for assessment or collection. (3) When the taxpayer is out of the country or otherwise cannot be located [Sec. 194 (d), LGC]
(1) Administrative action (2) Judicial action
PROCEDURE ACTION
FOR
ADMINISTRATIVE
Distraint of personal property Personal properties subject to distraint: goods, chattels or effects and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property
PROTEST OF ASSESSMENT Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise it shall become final and executory. [Sec. 195, LGC]
Procedure: [Sec. 175, LGC] (1) Seizure of personal property (2) Accounting of distrained goods (3) Publication of time and place of sale and the articles distrained (4) Release of distrained property upon payment prior to sale (5) Procedure of sale (6) Disposition of proceeds
CLAIM FOR REFUND OF TAX CREDIT FOR ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR CHARGE Requires a written claim for refund or credit to be filed with local treasurer before protest is entertained. Must be brought within 2 years from payment of tax or from the date the taxpayer became entitled to refund or credit [Sec. 196, LGC]
Levy of real property Levy upon real property and interest in or rights to real property Procedure [Sec. 176, LGC] (1) Preparation of a duly authenticated certificate by the LGU Treasurer effecting the levy on the real property (2) Service of written notice of levy to the assessor and Register of Deeds (3) Annotation of the levy on the tax declaration and the certificate of title (4) Advertisement and Sale [Sec. 178, LGC]
CIVIL REMEDIES BY THE LGU FOR COLLECTION OF REVENUES LOCAL GOVERNMENT’S LIEN FOR DELINQUENT TAXES, FEES OR CHARGES Non-payment of a tax, fee or charge creates a lien superior to all liens or encumbrances in favor of any other person, enforceable by administrative or judicial action
Further distraint or levy The remedies by distraint or levy may be repeated if necessary until the full amount due, including all expenses, is collected [Sec. 184, LGC]
The lien may only be extinguished upon full payment of the delinquent local taxes, fees, and charges including related surcharges and interests. [Sec. 173, LGC]
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Exemption of personal property from distraint or levy (ToB-CUPLA) (1) Tools and implements necessarily used by the taxpayer in his trade or employment (2) One horse, cow, carabao, or other Beast of burden, such as the delinquent taxpayer may select and necessarily used by him in his ordinary occupation (3) his necessary Clothing, and that of all his family (4) household furniture and Utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding P10,000 (5) Provisions, including crops, actually provided for individual or family use sufficient for 4 months (6) the professional Libraries of doctors, engineers, one fishing boat and net, not exceeding the total value of P10,000 by the lawful use of which a fisherman earns his livelihood (7) any material or Article forming part of a house or improvement of any real property
TAXATION LAW
of local taxes. Such lapse may have allowed preliminary injunction under Rule 58, ROC where local taxes are involved.
B. REAL PROPERTY TAXATION A. FUNDAMENTAL PRINCIPLES (CAPUE) (1) Current fair market value is the basis for assessment All real property, whether taxable or exempt, shall be appraised at the CURRENT AND FAIR MARKET VALUE prevailing in the locality where the property is situated. [Sec. 201, LGC] (2) Actual use shall be the basis of classification for assessment (a) Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. (b) Actual Use- refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof [Sec. 199 (b), LGC] (c) MCIAA v. Marcos [G.R. No. 120082, Sept. 11, 1996]: “Usage means direct, immediate and actual application of the property
Penalty on local treasurer for failure to issue and execute warrant of distraint or levy Automatically dismissed from the service after due notice and hearing [Sec. 177, LGC]
(3) Private persons cannot be left to the appraisal, assessment, levy and collection of real property tax. (4) uniform classification within each local government unit shall be observed. (5) equitable appraisal and assessment is required. [Sec. 197, LGC]
PROCEDURE FOR JUDICIAL ACTION The local government may institute an ordinary civil action with regular courts of proper jurisdiction for the collection of delinquent taxes, fees, charges or other revenues. The civil action shall be filed by the local treasurer. [Sec. 183, LGC]
B. NATURE OF REAL PROPERTY TAX (1) It is a direct tax on the ownership or use of real property (2) It is an ad valorem tax. Value is the tax base. (3) It is proportionate because the tax is calculated on the basis of a certain percentage of the value assessed.
Valley Trading Co. vs. CFI of Isabela, (1989); Angeles City v. Angeles City Electric Corporation, (2010): LGC does not contain a provision prohibiting courts from enjoining the collection 291
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(4) It creates a single, indivisible obligation (5) It attaches on the property [i.e., a lien] and is enforceable against it. (6) With respect to LGUs, it is levied thru a delegated power
prevents improving, utilizing or cultivating the same. [Sec. 238, LGC]
SPECIAL LEVY FOR PUBLIC WORKS A tax ordinance shall describe with reasonable accuracy the nature, extent and location of the public works to be undertaken, the estimated cost, the metes and bounds by monuments and lines and the number of annual installments which should not be less than 5 nor more than 10 years. The sanggunian may fix different rates for different parts or sections thereof, depending on whether such land is more or less benefited by the proposed work. [Sec. 241, LGC]
C. IMPOSITION OF REAL PROPERTY TAX C.1. COVERAGE FOR A PROVINCE, OR A CITY OR MUNICIPALITY WITHIN METRO MANILA (1) (2) (3) (4)
Land Building Machinery Other improvements not exempted [Sec. 232, LGC]
TAXATION LAW
specifically
SPECIAL EDUCATION FUND (SEF)
The rate shall be as follows: Province: not exceeding one percent (1%) of the assessed value of real property; and City or municipality within Metro Manila: not exceeding two percent (2%) of the assessed value of real property. [Sec. 233, LGC]
A province, or city or municipality within Metro Manila may levy and collect an annual tax of one percent (1%) on the assessed value of real property which shall be in addition to the basic real property tax.
SPECIAL LEVY ON IDLE LANDS A province, or city or municipality within Metro Manila may levy an annual tax on idle lands at the rate not exceeding five percent [5%] of the assessed value of the property in addition to the basic tax
C.2. EXEMPT FROM REAL PROPERTY TAX (1) Owned by the Republic of the Philippines or any of its political subdivisions except when beneficial use is granted for a consideration or to a taxable person. (2) Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes. (3) Machinery and equipment actually, directly and exclusively used by local Water utilities 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 as provided for under
Lands covered (1) Agricultural Lands More than one hectare in area suitable for cultivation, dairying, inland fishery, and other agricultural uses, one-half of which remain uncultivated or unimproved (2) Other than Agricultural More than one thousand square meters in area one half of which remain unutilized or unimproved [Sec. 236 and 237, LGC] Exempt Idle Lands Lands exempt by reason of force majeure, civil disturbance, natural calamity or any cause or circumstance which physically or legally 292
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Republic Act No. 6938 [Cooperative Code of the Philippines]. (5) Machinery and equipment used for pollution control and Environmental protection. [Sec. 234, LGC]
TAXATION LAW
Provision SC Ruling involved LGC. in Sec 234 (a). Properties exempt from RPT: real properties owned by the Republic or any of its political subdivisions… Manila Sec 133 (o), MIAA falls Airport LGC under the Authority term vs. CA Sec 234 (a), “instrumentality” (2006) LGC outside the scope of LGS’s local taxing powers under Sec 133[o].
Provincial Assessor of Marinduque v. CA [G.R. No. 170532, Apr. 30, 2009]:A claim for exemption under Sec. 234 (e) should be supported by evidence that the property sought to be exempt is actually, directly and exclusively used for pollution control and environmental protection. Proof of Exemption (1) Documentary evidence such as affidavits, by-laws, contract, articles of incorporation (2) Given to local assessor (3) Within 30 days from date of declaration (4) Failure to file, will be listed as in Assessment Rolls as taxable GOCCs Philippine Ports Authority vs. City of Iloilo [G.R. No. 109791, July 14, 2003]: GOCCs are not covered by the exemption since the exemption only refers to instrumentalities without personalities distinct from the government.
Charitable Institutions Lung Center of the Philippines vs. Quezon City [G.R. No. 144104, June 29, 2004]: A charitable institution doesn't lose its character and its exemption simply because it derives income from paying patients so long as the money received is devoted to the charitable object it was intended to achieve, and no money inures to the benefit of persons managing the institution.
Mactan Airport v. MIAA cases Provision SC Ruling involved Mactan Sec 133 (o), Airport Airport LGC. LGUs Authority is a Authority not allowed to GOCC, not vs. levy… [o] exempt from Marcos taxes/fees/ch RPT. (1996) arges of any Legislature in kind on the amending the national gov’t, law its agencies, specifically instrumentalit deleted ies and LGUs. GOCCS from the Sec 234 (a), enumeration
Property leased to private entities is not exempt from RPT, as it is not actually, directly and exclusively used for charitable purposes. Portions of the land occupied by the hospital and portions used for its patients, whether paying or non-paying, are exempt from real property taxes.
D. APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX D.1. DECLARATION OF REAL PROPERTY 293
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Declaration by the Owner or Administrator Prepare a sworn statement declaring the true value of the property which shall be the current and fair market value of the property.
The local assessor must maintain an assessment roll wherein all real property, whether taxable or exempt, located within the territorial jurisdiction of the LGU, is listed.
It must contain a sufficient description of the property to enable the assessor or his deputy to identify the same for assessment purposes
Real property in general— Shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property.
The declaration must be filed with the assessor once every three (3) years during the period from January 1 to June 30. [Sec. 202, LGC]
For undivided real property— May be in the name of the estate or of the heirs and devisees, or in the name of one or more coowners
Declaration by Any Person Acquiring Real Property or Making Improvements The sworn statement declaring the true value of the property must be filed to the provincial, city or municipal assessor within sixty [60] days after the acquisition or upon completion or occupancy of the improvement, whichever comesealier. [Sec. 203, LGC]
Real property of a corporation, partnership or association— Same manner as an individual Real property owned by the Republic of the Philippines, its instrumentalities, political subdivision, the beneficial use has been granted to a taxable person—
Declaration by the Provincial or City or Municipal Assessor When the person required to file the sworn declaration refuses or fails to make sich declaration, the provincial, city or municipal assessor shall declare the property in the name of the defaulting owner.
In the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease. [Sec. 205, LGC]
D.3. APPRAISAL AND VALUATION OF REAL PROPERTY
Notice of Transfer of Real Property Any person who shall transfer real property ownership to another shall notify the provincial, city or municipal assessor within sixty [60] days from the date of such transfer.
Land The assessor of the province, city or municipality or his deputy may summon the owners or persons having legal interest therein and witnesses, administer oaths, and take deposition concerning the property, its ownership, amount nature, and value. [Sec. 213, LGC]
The notification shall include: (1) Mode of transfer, (2) Description of the property alienated, and (3) Name and address of the transferee [Sec. 208, LGC]
Before any general revision of property assessment is made, there shall be prepared a schedule of FMV by the provincial, city or municipal assessors; which shall be published in a newspaper of general circulation or in the
D.2. LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS
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absence thereof, shall be posted in the provincial capital, city or municipal hall and in two other conspicuous public places therein. [Sec. 212, LGC]
TAXATION LAW Allowance
Classes of real property (1) Residential (2) Agricultural (3) Commercial (4) Industrial (5) Mineral (6) Timberland (7) Special – all lands, buildings and other improvements actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and GOCCs rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power [Sec. 216, LGC]
percent (5%) of its original cost or replacement cost, for each year of use The remaining value shall be fixed at not less than twenty percent (20%) of such original, replacement or reproduction cost for so long as the machinery is useful and in operation. [Sec. 225, LGC]
D.4. ASSESSMENT OF REAL PROPERTY I. ASSESSMENT LEVELS Assessment level – is the percentage applied to the fair market value to determine the taxable value of the property [Sec. 199(g), LGC] Assessment levels shall be fixed by ordinances of the sanggunian at rates not exceeding those prescribed in Sec. 218
Machinery Brand New
II. GENERAL ASSESSMENTS CLASSIFICATION
The FMV is the acquisition cost If the machinery is imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus cost of inland transportation, handling, and installation charges at the present site. [Sec. 224, LGC] All other FMV is determined by Cases dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement/reproduction cost. [Sec. 224, LGC] Depreciation Rate—not exceeding five
REVISIONS OF AND PROPERTY
The local assessor shall undertake a general revision of real property assessments every 3 years. [Sec. 219, LGC]
III. DATE OF EFFECTIVITY ASSESSMENT OR REASSESSMENT
OF
General rule: All assessments or reassessments made after the first day of January of any year shall take effect on the first day of January of any year Exceptions: reassessments due to (1) partial or total destruction (2) major change in actual use; (3) great and sudden inflation or deflation of real property values; (4) gross illegality of the assessment when made; or (5) any other abnormal cause shall be made within ninety (90) days from the date of 295
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any cause and shall take effect at the beginning of the quarter next following the reassessment. [Sec. 221, LGC]
IV. ASSESSMENT OF SUBJECT TO BACK TAXES
TAXATION LAW of general circulation in the locality once a week for two consecutive weeks. [Sec. 249, LGC] Within five years from the date they become due
PROPERTY
Prescriptive Periods for Within ten years from Collection discovery of fraud, in case there is fraud or intent to evade Local treasurer is legally prevented to collect tax. The owner or property Instances for requests for Suspension reinvestigation and writes of a waiver before expiration Prescriptive of period to collect. Period The owner of property is out of the country or cannot be located [Sec. 270, LGC] The local treasurer. Collecting He may deputize the Authority barangay treasurer to collect all taxes upon filing of a bond. [Sec. 247, LGC]
Property declared for the first time: assessed for taxes for the period during which it would have been liable but in no case for more than ten [10] years prior to the date of initial assessment [Sec. 222, LGC]
V. NOTIFICATION OF NEW OR REVISED ASSESSMENT When real property is assessed for the first time or when an existing assessment is increased or decreased, the local assessor shall within thirty [30] days give written notice of the new or revised assessment to the person in whose name the property is being declared. Notice may be given personally or by registered mail or through the assistance of the punong barangay to the last known address of the person to be served. [Sec. 223, LGC]
E. COLLECTION OF REAL PROPERTY TAX
E.1. SPECIAL RULES ON PAYMENT I. PAYMENT OF REAL PROPERTY TAX IN INSTALLMENTS
Real property tax for any Date of year shall accrue on the Accrual first day of January. [Sec. 246, LGC] On or before the 31st of January or on any date prescribed, the local treasurer shall post the notice of the dates when Notice for the tax may be paid Collection without interest at a conspicuous and publicly accessible place at the city or municipal hall.
Payment of real property tax and the additional tax for the Special Education Fund, without interest, may be made in four [4] equal instalments: 1st : March 31st 2nd : June 30th 3rd : September 30th 4th : December 31st This shall not apply to special levies which shall be governed by ordinance of the sanggunian concerned.
The notice shall also be published in a newspaper 296
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Payments of real property taxes shall first be applied to prior years delinquencies, interests and penalties, if any, and only after the delinquencies are settled may tax payments be credited for the current period. [Sec. 250, LGC]
II. INTERESTS PROPERTY TAX
ON
UNPAID
TAXATION LAW
include a duly authenticated certificate showing the name of the owner or person having legal interest therein, description of the property, amount of the tax due and interest thereon. Warrant must be mailed or served to owner or person having legal interest in the property Written notice of levy must be mailed or served to the assessor and the Register of Deeds where the property is located The Register of Deeds must annotate the levy on the tax declaration and certificate of title [Sec. 258, LGC] Failure to issue or execute the warrant of levy within one year from the time the tax becomes delinquent or within thirty days from the date of the issuance thereof shall be dismissed from service [Sec. 259, LGC]
REAL
In case of failure to pay the basic real property tax or any other tax when due shall subject the taxpayer to the payment of interest at the rate of two percent per month on the unpaid amount or a fraction thereof until the delinquent tax shall have been fully paid. But the total interest on the unpaid tax shall not exceed thirty-six months. [Sec. 255, LGC]
III. CONDONATION OF REAL PROPERTY TAX
Purchase by LGU for Want of Bidder There is no bidder; or
By SANGGUNIAN: in case of general failure of crops or substantial decrease in the price of agricultural or agri-based products or calamity in any LGU [Sec. 276, LGC]
When Available
The highest bid is for an amount insufficient to pay the real property tax and the related interest and costs of sale The local treasurer conducting the sale shall purchase the Duty of the property in behalf of the LGU to Local satisfy the claim and within two Treasurer years thereafter shall make a report of his proceedings. Within one year from the date of Redemption forfeiture Period
By the PRESIDENT of the Philippines: when public interest so requires [Sec. 277, LGC]
E.2. REMEDIES OF LGUS FOR COLLECTION OF REAL PROPERTY TAX I. ADMINISTRATIVE Local Government’s Lien— The basic real property tax shall constitute a lien on the property subject to tax, superior to all liens, charges or encumbrances in favour of any person, irrespective of the owner or possessor thereof, enforceable by administrative or judicial action and may only be extinguished upon payment of the tax and the related interests and expenses. [Sec. 257, LGC]
II. JUDICIAL The LGU may enforce the collection by civil action in any court of competent jurisdiction. Must be filed by local treasurer within 5 to 10 years. [Sec. 266 in relation to Sec. 270, LGC]
Levy Upon the failure to pay the tax when due, the local treasurer shall issue a warrant levying the real property subject to tax. The warrant shall
F. TAXPAYER’S REMEDIES 297
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F.1. ADMINISTRATIVE
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Effect of payment of tax Appeal on assessments of real property shall not suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor without prejudice to the subsequent readjustment depending upon the final outcome of the appeal. [Sec. 231, LGC]
Protest Appeal to the Local Board of Assessment Appeals (LBAA) (1) Appeal must be filed within 60 days from the date of receipt of the written notice of assessment (2) By filing a petition under oath in the form prescribed for the purpose (3) Copies of tax declarations and other affidavits or documents must be submitted [Sec. 226, LGC]
Payment of real property under protest Protest must be filed with the local treasurer. No protest shall be entertained unless the tax is first paid. The protest must be in writing and filed within 30 days from payment of the tax to the local treasurer.
The LBAA shall decide the appeal within 120 days from the date of receipt of such appeal
Meralco v. Nelia Barlis [G.R. No. 114231, May 18, 2001]: The trial court has no jurisdiction to issue a writ of prohibition which seeks to set aside the warrant of garnishment over petitioner’s bank deposit in satisfaction of real property taxes without paying first under protest the tax assessed and without exhausting available administrative remedies.
The LBAA shall have the power to summon witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena duces tecum and/or subpoena The LBAA must furnish the appellant a copy of the decision of the board. [Sec. 229, LGC] Fels Energy v. Province of Batangas [G.R. No. 168557, Feb. 16, 2007]: Under Section 226 of R.A. No 7160, the last action of the local assessor on a particular assessment shall be the notice of assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure likewise does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor.
The local treasurer shall decide the protest within 60 days from receipt. Appeal to the CTA En Banc Appeal must be filed through a petition for review within 30 days from the receipt of the decision of CBAA [Sec. 11, R.A. 1125 as amended] Appeal to the SC Appeal must be filed within 15 days from receipt of decision of the CTA [Rule 45, Rules of Court]
Victorias Milling v. CTA [G.R. No. L-24213, Mar. 13, 1968]: The failure to appeal within the statutory period renders the assessment final and unappealable.
F.2. JUDICIAL Question on the legality of a tax ordinance Any question on the constitutionality or legality of a tax ordinance may be raised on appeal within 30 days from effectivity to the Secretary of Justice who shall render a decision within 60 days from the date of receipt of the appeal.
Appeal to the Central Board of Assessment Appeals (CBAA) Appeal must be filed within 30 days from the receipt of the decision of LBAA [Sec. 229, LGC]
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The appeal shall not have the effect of suspending the effectivity of the tax ordinance and the accrual and payment of the tax.
TAXATION LAW
Assailing the validity of a tax sale No court shall entertain any action assailing the validity of any sale at public auction until the taxpayer shall have deposited with the court the amount for which the real property was sold, together with interest of two percent per month from the date of sale to the time of the institution of the action. [Sec. 267, LGC]
Within 30 days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. [Sec. 187, LGC]
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Flowchart V: Procedure for Assessment of Land Value for Real Property Tax Purposes-Local Gov’t Code For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto Owner declares real property once every 3 years (sec. 202) w/n Jan 1 to June 30
START
Submit documents supporting exemption w/ in 30 days from declaration (sec. 206)
Required Documents submitted w/in 30 days?
Property proven as tax exempt?
Yes No Property shall be listed as taxable in the assessment roll (sec. 206)
Assessor prepares assessment rolls wherein real property shall be listed, valued and assessed (sec. 205)
Assessor declares real property if owner/ administrator fails to do so (sec. 204)
Owner may claim for tax exemption (sec. 206)
Yes
Yes
Is real property tax exempt?
Property shall be dropped from assessment roll (sec. 206)
No END
Within 30 days from assessment, assessor sends notice to owner (sec. 223)
No
Owner may protest assessment within 60 days from receipt of notice to the Local Board of Assessment Appeals (LBAA) (Sec. 226)
END
LBAA must decide within 120 days from receipt of appeal (sec. 229)
If CBAA rejects protest, owner may appeal to the CTA en banc within 30 days from receipt of decision
Appeal to the Supreme Court w/ in 15 days
300
If LBAA rejects protest, owner may appeal to the Central Board of Assessment Appeals (CBAA) w/in 30 days from receipt of notice (Sec. 229)
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TAXATION LAW
Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property Tax-Loc Gov’t Code For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto LT- Local Treasurer LGU - Local Government Unit LBAA- Local Board of Assessment Appeals CBAA- Central Board of Assessment Appeals CTA- Court of Tax Appeals
START
Assessor submits assessment roll to local treasurer (sec. 248)
Amount of tax protested shall be refunded or applied as tax credit (Sec. 252)
LT posts notice of deadline for payment at a conspicuous place at the LGU hall OR publish the same in a newspaper of general circulation in the LGU 1x a week for 2 consecutive weeks (sec. 249)
Yes
LT grants protest?
Yes
LT collects the tax starting Jan 1 of the calendar year. (Sec. 257)
LT decides w/in 60 days?
Owner pays the tax. Written protest must be filed with the local treasurer w/in 30 days from payment. (sec. 252)
LT must decide w/ in 60 days from receipt of protest (sec. 252)
No Refund or tax credit must be claimed with the local treasurer w/in 2 years from the date taxpayer is entitled to such (sec. 253)
LT acts on claim for refund/tax credit w/in 60 days?
No
Taxpayer may appeal within within 60 days from receipt of notice (or expiration of 60 days) to the LBAA (Sec. 226) LBAA must decide within 120 days from receipt of appeal (sec. 229)
Yes
LT grants refund/tax credit?
Yes
Taxpayer happy. END
If LBAA rejects protest/ refund, owner may appeal to the CBAA w/ in 30 days from receipt of notice (Sec. 229)
No
No
Taxpayer may appeal w/in 60 days from receipt of notice (or expiration of 60 days) to LBAA (Sec. 226)
END
Appeal to the Supreme Court w/ in 15 days
301
If CBAA rejects protest/ refund, owner may appeal to the CTA en banc within 30 days from receipt of decision (Rule 43, ROC)
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Flowchart VII: Procedure for Levy for Purposes of Satisfying Real Property Taxes-Local Gov’t Code START
Tax constitutes a lien on the property superior to all liens & may only be extinguished upon payment of the tax and charges. (sec. 257)
Before the date of sale, the owner may stay the proceedings by paying the delinquent tax, interest & the expenses of sale.
Sale is held: 1. at the main entrance of the LGU building, OR 2. on the property to be sold, OR at 3. any other place specified in the notice
Is there a bidder?
Yes Bidder pays & 30 days after the sale, the LT shall report the sale to the sanggunian
LT shall deliver to purchaser certificate of sale
Proceeds of sale in excess of delinquent tax, interest & expenses of sale remitted to the owner (sec. 260)
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto Warrant of Levy issued by the Local Treasurer (LT), which has the force of legal execution in the LGU concerned. (sec. 258)
Time for payment of real property taxes expires
30 days from service of warrant, local treasurer shall advertise sale of the property by: 1. posting notice at main entrance of LGU hall/bldg and in a conspicuous place in the barangay where prope is located AND 2. by publication once a week for 2 weeks (sec. 260) (Note: In cases of levy for unpaid local taxes publication is once a week for 3 weeks)
Warrant is mailed to or served upon the delinquent owner (sec. 258)
written notice of the levy & the warrant is mailed/served upon the assessor and the Registrar of Deeds of the LGU (sec. 258)
LT shall purchase the property in behalf of the LGU (sec. 263) (Note: in cases of levy for unpaid local taxes, LT may purchase if there is no bidder or if the highest bid is insufficient-sec. 181)
No
w/in 1 year from sale, owner may redeem upon payment of the 1. delinquent tax, 2. interest due, 3. expenses of sale (from date of delinquency to date of sale) and 4. add’l interest of 2% per month on the purchase price from date of sale to date of redemption. (sec. 261) Delinquent owner retains possession and right to the fruits (sec. 261)
LT returns to the purchaser/bidder the price paid + interest of 2% per month (sec. 261)
If property is not redeemed, the local treasurer shall execute a deed of conveyance to the purchaser (sec. 262)
Registrar of Deeds shall transfer the title of the forfeited property to the LGU w/o need of a court order (sec. 263)
W/n 1 year from forfeiture, the owner, may redeem the property by paying to the local treasurer the full amount of the tax and the related interest and the costs of sale otherwise the ownership shall be vested on the local government unit concerned. (sec. 263)
Sanggunian concerned may, by ordinance sell and dispose of the real property acquired under the preceding section at public auction. (sec. 264)
Levy may be repeated until the full amount due, including all expenses, is collected. (sec. 265)
END
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IX. Tariff and Customs Code of 1978, as Amended
TAXATION LAW
duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided [Sec. 100, TCC] Articles – goods, wares, merchandise and in general anything that may be made subject of importation or exportation [Sec. 3574, TCC] U.S. Dollars, having ceased to be legal tender in the Philippines, fall within the meaning of the term merchandise [Bastida v, Commissioner of Customs, G.R. No. L-20411, October 24, 1970]
A. TARIFF AND DUTIES, DEFINED Tariff Taxes or list of articles liable to duties A list or schedule of articles on which a duty is imposed upon the importation into the country, with the rates at which they are severally taxed. And derivatively, the system of imposing duties or taxes on the importation of foreign merchandise
C. PURPOSE FOR IMPOSITION For the protection of consumers and manufacturers, as well as Phil. products from undue competition posed by foreign-made products.
Custom duties – taxes on the importation or exportation of commodities. Tariff or tax assessed upon the merchandise imported from or exported to a foreign country
D. FLEXIBLE TARIFF CLAUSE
Note: export tariff had been abolished except upon logs [Sec. 1, EO 26].
Constitutional Basis: Sec. 28[2], Art. VI, 1987 Constitution. The Congress may, by law, authorize the President to fix with specified limits, and subject to such limitations and restrictions, as it may impose, tariff rates, import and export quotas, tonnage and wharfage duties, and other duties or imposts within the framework of the national development program of the Government.
Import tariff – articles, when imported from any foreign country, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided under the Code or special laws [Sec. 100, TCC]
The flexible tariff clause refers to the authority given to the President, upon the recommendation of NEDA, to adjust the tariff rates in the interest of national economy, general welfare and/or national security [Sec. 401, TCC]
B. GENERAL RULE: ALL IMPORTED ARTICLES ARE SUBJECT TO DUTY
The President is empowered to: (1) increase, reduce or remove existing rates [increase in the rate cannot exceed 100% ad valorem], including authority to modify the form of duty (2) establish import quota or ban import of any commodity
Export tariff – levied, assessed and collected an export duty on the gross FOB value at the time of shipment based on the prevailing rate on traditional export products, such as certain wood products, mineral products, plant and vegetable products [Sec. 514, TCC]
IMPORTATION BY THE GOVERNMENT TAXABLE. All articles, when imported from any foreign country into the Philippines, shall be subject to 303
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E.2. OBLIGATIONS OF IMPORTER I. CARGO MANIFEST
(3) impose an additional duty not exceeding 10% ad valorem Procedure: (1) Tariff Commission shall conduct an investigation and hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, produce evidence, and be heard. It shall also hear the views and recommendations of any government office, agency or instrumentality concerned. (2) Commission shall be submit their findings and recommendations to the NEDA within 30 days after the termination of the public hearings (3) NEDA recommends the same to the President (4) Order issued by the President shall take effect 30 days after promulgation
Every vessel from foreign port must have on board a complete manifest of all the cargo All the cargo intended to be landed at a port in the Philippines must be described in separate manifests for each port of call The manifest shall include: (1) Port of departure (2) Port of delivery (3) Marks, numbers, quantity and description of the packages (4) Names of the consignees General rule: It cannot be changed or altered after entry of vessel. Exception: Amendment by the master, consignee or agent attached to the original manifest CANNOT amend the manifest after the invoice and/or entry covering the importation have been received and recorded in the office of the appraiser
Note: Only number 3 is required in cases of imposition of additional duty not exceeding 10% ad valorem
E. REQUIREMENTS IMPORTATION
OF
E.1. BEGINNING IMPORTATION
OF
AND
ENDING
TAXATION LAW
EXCEPT: Obvious clerical error or any other discrepancy is committed in the preparation Without fraudulent intent Discovery would not have been made until after examination of the importation is completed
Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein [Sec. 1202, TCC] Importation is deemed terminated upon payment of duties, taxes and other charges due upon the articles, or secured to be paid, at a port of entry AND the legal permit for withdrawal shall have been granted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. [Sec. 1202, TCC]
It must be translated into the official language, if written in another language Master shall deliver and mail the cargo manifest to (endorsed by boarding officer): (1) Chairman (2) COA (3) Collector (Present original)
Note: The payment of the duties, taxes, fees and other charges must be in full. [Papa v. Mago, G.R. No. L-27360, February 28, 1968] 304
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II. IMPORT ENTRY
TAXATION LAW
in the state in which they were actually received by him; (4) That, to the best of the declarant's information and belief, the entries, invoices and bill of and the declaration thereon under penalties of falsification of perjury are in all respects genuine and true, and were made by the person by whom the same purpose to have been made.
Imported articles must be entered in the customhouse at the port of entry within fifteen days from date of discharge of the last package from the vessel either (1) by the importer, being holder of the bill of lading (2) by any other holder of the bill of lading in due course, (3) by a customs broker acting under authority from a holder of the bill, or (4) by a person duly empowered to act as agent or attorney-in-fact for such holder.
Form (1) signed by the importer, consignee or holder of the bill, by or for whom the entry is effected [Sec. 1305] (2) in the required number of copies in such form as prescribed by regulations; and (3) shall contain the names of the importing vessel or aircraft, port of departure and date of a the number and mark of packages, or the quantity, if in bulk, the nature and correct commodity description of the articles contained therein, and its value as set forth in a proper invoice to be presented in duplicate the entry [Sec. 1306]
The Collector may grant an extension of not more than fifteen days. [Sec. 1301, TCC] All imported articles, except importation admitted free of duty, shall be subject to a formal or informal entry. Kinds of Import Entry (1) Formal Entry (2) Informal Entry
Articles to be cleared on informal entry [Sec. 1302] (1) Articles of a commercial nature intended for sale, barter or hire, the dutiable value of which is P2000 or less, and (2) Personal and household effects or articles, regardless of value, imported in passenger's baggage mail, or otherwise, for personal use, may be cleared on an informal entry whenever duty, tax or other charges are collectible.
Content and Form of Import Entry Content [Sec. 1304] (1) That the entry delivered to the Collector contains a full account of the value or price articles, including subject of the entry; (2) That the invoice and entry contain a just and faithful account of the value or price of said articles including and specifying the value of all containers or coverings, and that nothing has been omitted, therefrom or concealed whereby the government of the Republic of the Philippines be defrauded of any part of the duties lawfully due on the articles; (3) That, to the best of the declarant's information and belief, all the invoke and bills of lading to the articles are the only ones in existence relating to the importation in question and that they are
The Collector may, upon instruction of the Secretary of Finance, when he deems it necessary for the protection of the revenue, require a formal entry regardless of value. Types of Formal Entry [Sec. 1302, as amended] A formal entry may be: 305
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(1) for immediate consumption, or (2) under irrevocable domestic letter of credit, bank guarantee or bond for: (a) placing the article in customs bonded warehouse; (b) Constructive warehousing and immediate transportation to other ports of the Philippines upon proper examination and appraisal; or (c) Constructive warehousing and immediate exportation.
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pilot, owner, officer or employee of the vessel. If he omits or disregards this duty and a punishable discrepancy between the declared weight and actual weight of the cargo exists, the inevitable conclusion is that he is negligent or careless. Similarly, if in the exercise or performance of this duty, he is negligent or careless resulting in the commission of excessive discrepancy in the weight of the ship's cargo penalized under the law, carelessness or incompetency is, nonetheless, imputable to him.
Note: Import entries under irrevocable domestic letter of credit, bank guarantee or bond shall be subject to the provisions of Title V, Book 11 of this Code. All importations entered under formal entry shall be covered by a letter of credit or any other verifiable document evidencing payment. [R.A. 9135, April 27, 2001]
IV. LIABILITY FOR PAYMENT OF DUTIES [Sec. 1204, TCC] General rule: the liability for duties, taxes, fees and other charges attaching on importation constitutes a personal debt due from the importer to the government; it constitutes a lien upon the articles imported which may be enforced while such articles are in custody or subject to the control of the government.
III. DECLARATION OF CORRECT WEIGHT OR VALUE
How to discharge: Discharged only by payment in full of all duties, taxes, fees and other charges legally accruing
Classification When article not specifically classified in the Code, the interested party, importer or foreign exporter may submit a sample with full description of component materials in a written request.
Exception: Relieved by laws or regulations
V. LIQUIDATION OF DUTIES Value Upon written application, Collector shall furnish importer within 30 days the latest information as to the DV of articles to be imported.
When made: Upon approval by the Collector of the returns of the appraiser and reports of the weights, gauge or quantity [Sec. 1601, TCC] How: the liquidation shall be made on the face of the entry showing the particulars thereof, initiated by the liquidating clerk, approved by the chief liquidator, and recorded in the record of liquidations. [Sec. 1601, TCC]
Importer must present all pertinent papers and documents, act in good faith and unable to obtain information due to unusual conditions Information given is not an appraisal nor is it binding upon the Collector’s right of appraisal.
Additional Process: A daily record of all entries liquidated shall be posted in the public corridor of the customhouse, stating the name of the vessel or aircraft, the port from which she arrived, the date of her arrival, the name of
The declaration, ascertainment or verification of the correct weight of the cargo at the port of loading is the duty or obligation of the master, 306
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the importer, and the serial number and date of the entry. A daily record must also be kept by the Collector of all additional duties, taxes and other charges found upon liquidation, and notice shall promptly be sent to the interested parties. [Sec. 1601, TCC]
less than five pesos, no refund or collection shall be made. [Sec. 1604, TCC] Other Notes: Readjustment of Appraisal, Classification or Return [Sec. 1407, TCC] Prescriptive Period for Appraisal, Classification or Return General rule: Appraisal, classification or return as finally passed upon and approved or modified by the Collector shall not be altered or modified in any manner.
Tentative and Final Liquidation Tentative Liquidation [Sec. 1602, TCC] When liquidation shall be deemed to be tentative: If to determine the exact amount due under the law in whole or in part some future action is required [only as to item/s affected]
Exceptions: (1) Within one year after payment of the duties, upon statement of error in conformity with seventeen hundred and seven hereof, approved by the Collector (2) Within fifteen days after such payment upon request for reappraisal and/or reclassification addressed to the Commissioner by the Collector, if the appraisal and/or classification is deemed to be low (3) Upon request for reappraisal and/or reclassification, in the form of a timely protest addressed to the Collector by the interested party if the latter should be dissatisfied with the appraisal or return (4) Upon demand by the Commissioner of Customs after the completion of compliance audit pursuant to the provisions of this Code." [R.A. 9135, April 27, 2001]
Effect: shall to that extent be subject to future and final readjustment and settlement; entry in such case shall be stamped "Tentative liquidation" Final Liquidation [Sec. 1603, TCC as amended by RA 9135] When liquidation is final and conclusive upon all the parties: when articles have been entered and passed free of duty or final adjustment of duties made, after the expiration of 3 years from the date of the final payment of duties. Exceptions: (1) Fraud (2) Protest (3) Compliance audit pursuant provisions of the Code
to
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the
Note: Exceptions do not apply in case of tentative liquidation
VI. KEEPING OF RECORDS Fractions in the Liquidation — a fraction of a peso less than fifty centavos shall be disregarded, and a fraction of a peso amounting to fifty centavos or more shall be considered as one peso. In case of overpayment or underpayment of duties, taxes, surcharges, wharfage and/or other charges paid on entries, where the amount involved is
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 of 3 years from the date of importation, all records of their importations and/or books of accounts, business and computer systems and all customs commercial data including payment 307
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records relevant to the verification of the accuracy of the transactions value declared by the importer/customs brokers on the import duty
TAXATION LAW
more than two years and, if the offender is an alien, he shall be deported after serving the sentence. When the defendant is shown to have or to have had possession of the article in question, such possession shall be deemed sufficient evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of the court. [Sec. 3601, TCC]
All brokers are required to keep at their principal place of business for a period of 3 years from date of importation copies Custom officer authorized by BOC may enter during office hours any premises or place where the records are kept to conduct an audit examination, inspection, verification or investigation The officer may make copies or take extracts from any of such documents Certified copy may be evidence admissible in all courts as if original.
F.2. OTHER FRAUDULENT PRACTICES (1) Various Practices against Customs Revenue: Any person who (1) makes or attempts to make any entry of imported or exported article by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or (2) by means of any false statement, written or verbal, or by means of any false or fraudulent practice whatsoever, or (3) shall be guilty of any willful act or omission by means of whereof the Government might be deprived of the lawful duties, taxes and other charges, or any portion thereof, accruing from the article or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission [Sec. 3602, TCC] (2) Failure to Report Fraud: Any master, pilot in command or other officer, owner or agent of any vessel or aircraft trading with or within the Philippines and any employee of the Bureau of Customs, who, having cognizance of any fraud upon the customs revenue, shall fail to report all information relative thereto to the Collector, as required by law [Sec. 3603, TCC] (1) Concealment or Destruction of Evidence of Fraud: Any person who willfully conceals or destroys, any invoice, book or paper
F. IMPORTATION IN VIOLATION OF TCC F.1. SMUGGLING In order to prevent smuggling and to secure the collection of the legal duties, taxes and other charges, the customs service shall exercise surveillance over the coast, beginning when a vessel or aircraft enters Philippine territory and concluding when the article imported therein has been legally passed through the customhouse. [Sec. 2202] Smuggling – any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell, or in any manner facilitate the transportation, concealment, or sale of such article after importation, knowing the same to have been imported contrary to law; includes the exportation of articles in a manner contrary to law. [Sec. 3519, TCC] Penalties for Unlawful Importation: Person found guilty of smuggling shall be punished by a fine of not less than six hundred pesos nor more than five thousand pesos and imprisonment for not less than six months nor 308
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(2)
(3)
(4)
(5)
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relating to any article liable to duty, after an inspection thereof has been demanded by the Collector of any Collection district, or at any time conceals or destroys any such invoice, book or paper for the purpose of suppressing any evidence of fraud therein contained [Sec. 3605, TCC] Affixing Seals: Any person who shall willfully break or destroy any seal placed by a customs official upon any car, or other conveyance by land, sea or air, or any compartment thereof [Sec. 3606, TCC] Removal, Breakage, Alteration of Marks: Any person who alters, defaces or obliterates any distinctive mark placed by a customs official on any package of warehoused articles [Sec. 3607, TCC] Removing Goods from Customs Custody: Any importer or owner of warehoused articles, or person in his employ, who by contrivance, fraudulently opens the warehouse, or gains access to the articles, except in the presence of the proper official of the customs acting in the execution of his duty [Sec. 3608, TCC] Failure to Keep Importation Records and Give Full Access to Customs Officers: Any person who shall fraudulently remove warehoused articles from any public or private warehouse or shall fraudulently conceal such articles in any such warehouse, or shall aid or abet any such removal or concealment [Sec. 3609, TCC]
TAXATION LAW
(1) Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and detached parts thereof, except when authorized by law. (2) Written or printed article in any form containing: (a) any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines (b) forcible resistance to any law of the Philippines (c) containing any threat to take the life of or inflict bodily harm upon any person in the Philippines. (3) Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character. (4) Articles, instruments, drugs and substances designed, intended or adapted for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly information where, how or by whom human conception is prevented or unlawful abortion produced. (5) Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances. (6) Lottery and sweepstakes tickets, advertisements thereof and lists of drawings therein. Except those authorized by the Philippine Government (7) Any article manufactured in whole or in part of gold silver or other precious metal, or alloys thereof, the stamps brands or
G. CLASSIFICATION OF GOODS G.1. TAXABLE IMPORTATION All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in other laws. [Sec. 100, TCC]
G.2. PROHIBITED IMPORTATION [Sec. 101, TCC] (POPP-LAW-DING)
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marks of which do not indicate the actual fineness or quality of said metals or alloys. (8) Any adulterated or misbranded article of food or any adulterated or misbranded drug in violation of the provisions of the "Food and Drugs Act." (9) Marijuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative, or preparation thereof, Except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue for medicinal purposes only (10) Opium pipes and parts thereof, of whatever material. (11) All other articles the importation of which is prohibited by law.
(3)
G.3. CONDITIONALLY-FREE IMPORTATION [Sec. 105, TCC] The following articles shall be exempt from the payment of import duties upon compliance with the formalities prescribed in, or with, the regulations which shall be promulgated by the Commissioner of Customs with the approval of the Secretary of Finance: (1) Aquatic products (e.g., fishes, crustaceans, mollusks, marine animals, seaweeds, fish oil, roe), caught or gathered by fishing vessels of Philippine registry: Provided, That they are imported in such vessels or in crafts attached thereto: And provided, further, That they have not been landed in any foreign territory or, if so landed, they have been landed solely for transshipment without having been advanced in condition; (2) Equipment for use in the salvage of vessels or aircrafts, not available locally, upon identification and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and
(4)
(5)
(6)
310
TAXATION LAW other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six [6] months from the date of acceptance of the import entry: Provided, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding six [6] months from the expiration of the original period; Cost of repairs, excluding the value of the article used, made in foreign countries upon vessels or aircraft documented, registered or licensed in the Philippines, upon proof satisfactory to the Collector of Customs [1] that adequate facilities for such repairs are not afforded in the Philippines, or [2] that such vessels or aircrafts, while in the regular course of her voyage or flight was compelled by stress of weather or other casualty to put into a foreign port to make such repairs in order to secure the safety, seaworthiness or airworthiness of the vessel or aircraft to enable her to reach her port of destination; Articles brought into the Philippines for repair, processing or reconditioning to be re-exported upon completion of the repair, processing or reconditioning: Provided, That the Collector of Customs shall require the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six [6] months from the date of acceptance of the import entry; Medals, badges, cups and other small articles bestowed as trophies or prizes, or those received or accepted as honorary distinction; Personal and household effects belonging to residents of the Philippines returning from abroad including jewelry, precious
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stones and other articles of luxury which were formally declared and listed before departure and identified under oath before the Collector of Customs when exported from the Philippines by such returning residents upon their departure therefrom and during their stay abroad; personal and household effects including wearing apparel, articles of personal adornment [except luxury items], toilet articles, portable appliances and instruments and similar personal effects, excluding vehicles, watercrafts, aircrafts, and animals purchased in foreign countries by residents of the Philippines which were necessary, appropriate and normally used for the comfort and convenience in their journey and during their stay abroad upon proof satisfactory to the Collector of Customs that same have been in their use abroad for more than six [6] months and accompanying them on their return, or arriving within a reasonable time which, barring unforeseen circumstances, in no case shall exceed ninety days before or after the owners' return: Provided, 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 two thousand pesos [P2,000.00]: Provided further, That the returning residents have not previously received the benefit under this section within one year from and after the last exemption granted: Provided furthermore, That a fifty [50] per cent ad valorem duty across the board shall be levied and collected on the personal and household effects [except luxury items] in excess of two thousand pesos: And provided, finally, That the personal and household effects [except luxury items] of a returning resident who has not stayed abroad for six months shall be subject to fifty per cent ad valorem duty
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across the board, the total dutiable value of which does not exceed two thousand pesos; any excess shall be subject to the corresponding duty provided in this Code; (7) Wearing apparel, articles of personal adornment, toilet articles, portable tools and instruments, theatrical costumes and similar effects accompanying travelers, or tourists. or arriving within a reasonable time before and after their arrival in the Philippines, which are necessary and appropriate for the wear and use of such persons according to the nature of the journey, their comfort and convenience: Provided, That this exemption shall not apply to articles intended for other persons or for barter, sale or hire: Provided, further, That the Collector of Customs may, in his discretion, require either a written commitment or a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within three [3] months from the date of acceptance of the import entry: And Provided finally, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding three months from the expiration of the original period; (8) Personal and household effects and vehicles belonging to foreign consultants and experts hired by, and/or rendering service to, the government, and their staff or personnel and families, accompanying them or arriving within a reasonable time before or after their arrival in the Philippines, in quantities and of the kind necessary and suitable to the profession, rank or position of the person importing them, for their own use and not for barter, sale or hire provided that, the Collector of Customs may in his discretion require 311
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either a written commitment or a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges upon the articles classified under this subsection; conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six [6] months after the expiration of their term or contract; And Provided, finally, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for term not exceeding six [6] months from the expiration of the original period; (9) Professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos and/or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as Overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing them, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the arrival of their owners, which shall not be later than February 28, 1979 upon the production of evidence satisfactory to the Collector of Customs that such persons are actually coming to settle in the Philippines, that change of residence was bona fide and that the privilege of free entry was never granted to them before or that such person qualifies under the provisions of Letters of Instructions 105, 163 and 210, and that the articles are brought from their former place of abode, shall be exempt from the payment of customs duties and taxes: Provided, That vehicles, vessels,
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aircrafts, machineries and other similar articles for use in manufacture, shall not be classified hereunder; (10) Articles used exclusively for public entertainment, and for display in public expositions, or for exhibition or competition for prizes, and devices for projecting pictures and parts and appurtenances thereof, upon identification, examination, and appraisal and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within six [6] months from the date of acceptance of the import entry; Provided, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding six [6] months from the expiration of the original period; and technical and scientific films when imported by technical, cultural and scientific institutions, and not to be exhibited for profit: Provided, further, That if any of the said films is exhibited for profit, the proceeds therefrom shall be subject to confiscation, in addition to the penalty provided under Section Thirty-six hundred and ten as amended, of this Code; (11) Articles brought by foreign film producers directly and exclusively used for making or recording motion picture films on location in the Philippines, upon their identification, examination and appraisal and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within six [6] months from the date of acceptance of the import entry, unless extended by the Collector of Customs for another six [6] months; 312
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photographic and cinematographic films, undeveloped, exposed outside the Philippines by resident Filipino citizens or by producing companies of Philippine registry where the principal actors and artists employed for the production are Filipinos, upon affidavit by the importer and identification that such exposed films are the same films previously exported from the Philippines. As used in this paragraph, the terms "actors" and "artists" include the persons operating the photographic cameras or other photographic and sound recording apparatus by which the film is made; (12) Importations for the official use of foreign embassies, legations, and other agencies of foreign governments: Provided, That those foreign countries accord like privileges to corresponding agencies of the Philippines; (13) Articles imported for the personal or family use of the members and attaches of foreign embassies, legations, consular officers and other representatives of foreign governments: Provided, That such privilege shall be accorded under special agreements between the Philippines and the countries which they represent: And Provided, further, That the privilege may be granted only upon specific instructions of the Secretary of Finance in each instance which will be issued only upon request of the Department of Foreign Affairs; (14) Imported articles donated to, or for the account of, any duly registered relief organization, not operated for profit, for free distribution among the needy, upon certification by the Department of Social Services and Development or the Department of Education, Culture and Sports, as the case may be; (15) Containers, holders and other similar receptacles of any material including kraft paper bags for locally manufactured
TAXATION LAW
cement for export, including corrugated boxes for bananas, mangoes, pineapples and other fresh fruits for export, except other containers made of paper, paperboard and textile fabrics, which are of such character as to be readily identifiable and/or reusable for shipment or transportation of goods shall be delivered to the importer thereof upon identification, examination and appraisal and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges within six months from the date of acceptance of the import entry; (16) Supplies which are necessary for the reasonable requirements of the vessel or aircraft in her voyage or flight outside the Philippines, including articles transferred from a bonded warehouse in any collection district to any vessel or aircraft engaged in foreign trade, for use or consumption of the passengers or its crew on board such vessel or aircrafts as sea or air stores; or articles purchased abroad for sale on board a vessel or aircraft as saloon stores or air store supplies: Provided, That any surplus or excess of such vessel or aircraft supplies arriving from foreign ports or airports shall be dutiable; (17) Articles and salvage from vessels recovered after a period of two years from the date of filing the marine protest or the time when the vessel was wrecked or abandoned, or parts of a foreign vessel or her equipment, wrecked, abandoned in Philippine waters or elsewhere: Provided, That articles and salvage recovered within the said period of two years shall be dutiable; (18) Coffins or urns containing human remains, bones or ashes, used personal and household effects [not merchandise] of the deceased person, except vehicles, the value of which does not exceed ten 313
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thousand pesos, upon identification as such; (19) Samples of the kind, in such quantity and of such dimension or construction as to render them unsalable or of no appreciable commercial value; models not adapted for practical use; and samples of medicines, properly marked "sample-sale punishable by law," for the purpose of introducing a new article in the Philippine market and imported only once in a quantity sufficient for such purpose by a person duly registered and identified to be engaged in that trade: Provided, That importations under this subsection shall be previously authorized by the Secretary of Finance: Provided, however, That importation of sample medicine shall be previously authorized by the Secretary of Health that such samples are new medicines not available in the Philippines: Provided, finally, That samples not previously authorized and/or properly marked in accordance with this section shall be levied the corresponding tariff duty. (20) Commercial samples, except those that are not readily and easily identifiable [e.g., precious and semi-precious stones, cut or uncut, and jewelry set with precious stones], the value of any single importation of which does not exceed ten thousand pesos [P10,000.00] upon the giving of a bond in an amount equal to twice the ascertained duties, taxes and other charges thereon, conditioned for the exportation of said samples within six [6] months from the date of the acceptance of the import entry or in default thereof, the payment of the corresponding duties, taxes and other charges. If the value of any single consignment of such commercial samples exceeds ten thousand pesos [P10,000.00],the importer thereof may select any portion of same not exceeding in value of ten thousand pesos [P10,000.00]
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for entry under the provision of this subsection, and the excess of the consignment may be entered in bond, or for consumption, as the importer may elect; (21) Animals (except race horses), and plants for scientific, experimental, propagation, botanical, breeding, zoological and national defense purposes: Provided, That no live trees, shoots, plants, moss, and bulbs, tubers and seeds for propagation purposes may be imported under this section, except by order of the Government or other duly authorized institutions: Provided, further, That the free entry of animals for breeding purposes shall be restricted to animals of recognized breed, duly registered in the book of record established for that breed, certified as such by the Bureau of Animal Industry: Provided, furthermore, That certificate of such record, and pedigree of such animal duly authenticated by the proper custodian of such book of record, shall be produced and submitted to the Collector of Customs, together with affidavit of the owner or importer, that such animal is the animal described in said certificate of record and pedigree: And Provided, finally, That the animals and plants are certified by the National Economic and Development Authority as necessary for economic development; (22) Economic, technical, vocational, scientific, philosophical, historical, and cultural books and/or publications: Provided, That those which may have already been imported but pending release by the Bureau of Customs at the effectivity of this Decree may still enjoy the privilege herein provided upon certification by the Department of Education, Culture and Sports that such imported books and/or publications are for economic, technical, vocational, scientific, philosophical, 314
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historical or cultural purposes or that the same are educational, scientific or cultural materials covered by the International Agreement on Importation of Educational Scientific and Cultural Materials signed by the President of the Philippines on August 2, 1952, or other agreements binding upon the Philippines. (23)Educational, scientific and cultural materials covered by international agreements or commitments binding upon the Philippine Government so certified by the Department of Education, Culture and Sports. (24) Bibles, missals, prayer books, Koran, Ahadith and other religious books of similar nature and extracts therefrom, hymnal and hymns for religious uses; (25) Philippine articles previously exported from the Philippines and returned without having been advanced in value or improved in condition by any process of manufacture or other means, and upon which no drawback or bounty has been allowed, including instruments and implements, tools of trade, machinery and equipment, used abroad by Filipino citizens in the pursuit of their business, occupation or profession; and foreign articles previously imported when returned after having been exported and loaned for use temporarily abroad solely for exhibition, testing and experimentation, for scientific or educational purposes; and foreign containers previously imported which have been used in packing exported Philippine articles and returned empty if imported by or for the account of the person or institution who exported them from the Philippines and not for sale, barter or hire subject to identification: Provided, That any Philippine article falling under this subsection upon which drawback or bounty has been allowed shall, upon re-importation thereof, be subject to
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a duty under this subsection equal to the amount of such drawback or bounty. (26) Aircraft, equipment and machinery, spare parts commissary and catering supplies, aviation gas, fuel and oil, whether crude or refined, and such other articles or supplies imported by and for the use of scheduled airlines operating under Congressional franchise: Provided, That such articles or supplies are not locally available in reasonable quantity, quality and price and are necessary or incidental for the proper operation of the scheduled airline importing the same; (27) Machineries, equipment, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals, and transportation and communication facilities imported by and for the use of new mines and old mines which resume operations, when certified to as such by the Secretary of Agriculture and Natural Resources upon the recommendation of the Director of Mines, for a period ending five [5] years from the first date of actual commercial production of saleable mineral products: Provided, That such articles are not locally available in reasonable quantity, quality and price and are necessary or incidental in the proper operation of the mine; and aircrafts imported by agro-industrial companies to be used by them in their agriculture and industrial operations or activities, spare parts and accessories thereof; (28) Spare parts of vessels or aircraft of foreign registry engaged in foreign trade when brought into the Philippine exclusively as replacements or for the emergency repair thereof, upon proof satisfactory to the Collector of Customs that such spare parts shall be utilized to secure the safety, seaworthiness or
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I. AD VALOREM; VALUATION
airworthiness of the vessel or aircraft, to enable it to continue its voyage or flight; (29) Articles of easy identification exported from the Philippines for repair and subsequently reimported upon proof satisfactory to the Collector of Customs that such articles are not capable of being repaired locally: Provided, That the cost of the repairs made to any such article shall pay a rate of duty of thirty per cent ad valorem; (30) Trailer chassis when imported by shipping companies for their exclusive use in handling containerized cargo, upon posting a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges due thereon to cover a period of one year from the date of acceptance of the entry, which period for meritorious reasons may be extended by the Commissioner of Customs from year to year, subject to the following conditions: (a) That they shall be properly identified and registered with the Land Transportation Commission; (b) That they shall be subject to customs supervision fee to be fixed by the Collector of Customs and subject to the approval of the Commissioner of Customs; (c) That they shall be deposited in the Customs zone when not in use; and (d) That upon the expiration of the period prescribed above, duties and taxes shall be paid, unless otherwise reexported
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METHODS
OF
The tax rates are based on (1) the cost (FMV) or price of the imported articles, in wholesale quantities in the principal market of the exporting country or the country of origin, including expenses connected with the importation, such as insurance, freight, packaging, loading and unloading charges, but excluding internal excise taxes to be remitted or rebated; or (2) In case such value is not ascertainable, the reports of the Revenue or commercial attaches; or (3) If still not ascertainable, the domestic wholesale market price in the ordinary course of trade less import duty and not more than 25% for expenses and profits. [Sec. 201, TCC] Note: General rule: The following methods are sequentially applied Exception: [CAO 4-2004] Methods 4 and 5 may be reversed at the request of the importer, subject to the approval of the Commissioner. Ground to refuse the request: if the Commissioner deems that he will experience real difficulties in determining the dutiable value using Method 5 Basis for all Methods of Valuation [Sec. 201, TCC and CAO 4-2004] Transaction value – Price actually paid or payable for goods when sold for export to Philippines commissions & brokerage fees cost of containers cost of packing (labor, materials) assists (value of goods and services supplied by the buyer free of charge or at a reduced price for use in connection with the production and sale for export of the good)
H. CLASSIFICATION OF DUTIES H.1. ORDINARY/REGULAR DUTIES Ordinary or regular duties refer to those that, as a matter of course, are imposed on dutiable articles [Sec. 104, TCC]
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royalties & license fees value of any part of the proceeds of subsequent resale, disposal or use of imported goods that accrue directly or indirectly to seller cost of transport loading, unloading, handling insurance
(5) (6) (7)
Dutiable Value (DV) must not include: (1) charges for construction, erection, assembly maintenance or technical assistance undertaken after importation (2) cost of transport after importation (3) duties and taxes of Phil (4) other permissible deduction under WTO Valuation Agreement
(8)
TAXATION LAW outstanding voting stock or shares of bother seller and buyer; One of them directly or indirectly controls the other; Both of them are directly or indirectly controlled by a 3rd person; Together they directly or indirectly control a 3rd person; or Related by affinity or consanguinity up to 4th civil degree.
If related, use of TV acceptable if: (1) circumstances surrounding transaction show that relationship did not influence the price (2) TV closely approximates: (3) TV of unrelated buyers of identical or similar goods (4) Deductive value of identical or similar goods determined according to method #4 (5) Computed value of identical or similar goods determined according to method #5
ALL the following conditions must be satisfied so the TV shall be the DV (CREPD): (1) sale for export to Phil (2) no restrictions as to the disposition or use of goods by buyer except: (3) those imposed by law or Phil authorities (4) limit the geographical area where goods may be resold (5) do not substantially affect the value of the goods (6) not be subject to some condition or consideration for which value cannot be determined (7) no part of the proceeds of any subsequent disposal shall accrue to the seller (8) buyer and seller are not related or if they are, relationship did not affect the price
Transaction Value of Identical Goods The DV shall be the transaction value of identical goods sold for export to the Phil and exported at or about the same time as the goods being valued. Identical goods must be same commercial level and substantially same quantity as the goods being valued. Identical goods (1) Same in all respects (physical characteristics, quality and reputation) (2) Produced in the same country as the goods being valued (3) Produced by producer of the goods being valued
Deemed related if: (1) They are officers or directors of one another’s business; (2) They are legally recognized partners in business; (3) There exists in an er-ee relationship between them; (4) Any person directly or indirectly owns, controls or holds 5% or more of the
Excludes: imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the 317
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producer free of charge or at a reduced rate When no identical goods produced by the same person: Identical goods produced by different producer in the same country
TAXATION LAW
If NO similar goods at same commercial level and same quantity, (1) TV of similar goods at a different commercial level and different quantity may be utilized (2) TV shall be adjusted upward or downward to account for the difference
If NO identical goods at same commercial level and same quantity, (1) TV of identical goods at a different commercial level and different quantity may be utilized (2) TV shall be adjusted upward or downward to account for the difference
Deductive value DV is determined on the basis of sales in the Phil of goods being valued of identical or similar imported goods less certain expenses resulting from importation and sale of goods.
Transaction value of similar goods The DV shall be the transaction value of similar goods sold for export to the Phil and exported at or about the same time as the goods being valued.
Deductive Value is determined by making a deduction from the established price per unit for the aggregate of the ff. elements: (a) Commissions or (b) additions made in connection with profit and general expenses and (c) transport, insurance and associated costs (d) customs duties and other national taxes
Similar goods must be same commercial level and substantially same quantity as the goods being valued. Similar goods (1) like characteristics and like component materials (2) capable of performing same functions (3) commercially interchangeable (4) produced in same country (5) produced by same producer
Less: Less: Less:
PRICE COMMISSIONS/ADDITIONS COSTS DUTIES and TAXES DEDUCTIVE VALUE
The sales must meet the following conditions: (1) sold in the Phil in the same condition as imported (2) sales taken place at or about the same time of importation of good being valued
Excludes: imported goods for which engineering, development, artwork, design work, plans and sketches is undertaken in the Phil and provided by the buyer to the producer free of charge or at a reduced rate
If no sale took place at or about the time of importation, use sales at the earliest date after importation (of the similar or identical good])but before expiration of 90 days
When no similar goods produced by the same person: similar goods produced by different producer in the same country
If no sale meet the above conditions, importer may choose the use of sales of goods being valued after further processing
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“At or about the same time” 45 days prior to and 45 days following the importation Computed value DV is determined on the basis of cost of production + profit + general expenses reflected in sales from exporting country to the Phil of goods of same class or kind
TAXATION LAW
Legal Weight – weight at the time of their sale to the public in usual retail quantities Net Weight – only the actual weight at the time of importation excluding the weight of the immediate and all other containers
H.2. SPECIAL DUTIES These are additional import duties imposed on specific kinds of imported articles [See Table of Special Duties]
DV is calculated by: Determining aggregate of relevant costs, charges and expenses or value of (1) materials and (2) production or processing costs Costs* containers, packing, assists, engineering, artwork, plans and sketches undertaken in Phil and charged to producer profits and general expenses cost of transport, insurance and charges to the port or place of importation
I. REMEDIES I.1. GOVERNMENT I. ADMINISTRATIVE/EXTRAJUDICIAL Search, seizure, forfeiture, arrest Enforcement of Tax Lien Tax Lien – attaches upon the articles imported which may be enforced while such are in custody or subject to the control of the government [Sec. 1204]
*Note: these additional costs are added only if not included in the determination of the aggregate of relevant costs, charges and expenses or value of materials and production.
Sec. 1508. When an importer has an outstanding and demandable account with the Bureau of Customs, Collector shall hold the delivery of the article. Upon notice, he may sell such importation or a portion of it to satisfy the obligation. Importer may settle his obligation anytime before the sale.
Fallback value If DV cannot be determined using any of the above methods, use other reasonable means consistent with principles and general provisions of General Agreements on Tariffs and Trade [GATT]
Seizure and Forfeiture [Sec. 2205] Who may effect: (1) Customs official; (2) Fisheries Commissions; (3) Philippine Coast Guard
II. SPECIFIC [Sec. 202, TCC] Rates are based on units of weight number or measurement Kinds of weight: Gross Weight – weight of same, together with the weight of all containers, packages, holders and packings, of any kind, in which said articles are contained, held or packed at the time of importation
Note: Person who is exercising such an authority has the duty to make known his official character, upon being questioned at the time of the exercise. If his authority came from a special authorization, he has the duty to exhibit the written authority upon demand. 319
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TAXATION LAW
(2) appraised value of article and/or fine, expenses, costs What is seized: To make seizure of any vessel, aircraft, cargo, animal or any movable property when the same is subject to forfeiture or liable for any fine under the tariff and customs law
Note: Article will not be released if: (1) there is prima facie evidence of fraud in the importation (2) article is prohibited by law
Where authority may be exercised: At any place within the jurisdiction of the Bureau of Customs
Report to Commissioner and Chairman of Commission of Audit Written notice to owner or importer. He shall he given opportunity to be heard
Other Rights/Authority of the Official effecting the search and seizure (1) Authority to require assistance of any police officer if necessary [Sec. 2207] (2) At any time, right to enter, pass through or search any inclosure or warehouse, or other building, not being a dwelling house [Sec. 2208] (3) Right to enter and search a dwelling house, upon warrant issued by the Judge of the Court, or any responsible officer as may be authorized [Sec. 2209] (4) Right to Search Vessels or Aircrafts and Persons or Articles Conveyed [Sec. 2210] (5) Right to Search Vehicles, Beasts and Persons when he has reasonable cause to suspect the presence therein of dutiable or prohibited article introduced into the Philippines contrary to law [Sec. 2211] (6) Search of Persons Arriving From Foreign Countries [Sec. 2212]
Notification to an unknown owner (1) posting for 15 days in the public corridor of customhouse (2) publication in newspaper (3) other means Collector considers desirable Collector shall make a list and particular description and classification of the seized property, appraisal based on local wholesale values by (1) at least 2 appraising officials (2) absent such, 2 competent disinterested citizens If within 15 days from notification, no owner or agent is found or appears before Collector, then the property would be forfeited to Government and sold at auction Settlement [Sec. 2307] While case is pending, Collector may accept settlement of any seizure case (1) Upon approval of Commissioner (2) Payment of fine (25% to 80% of the landed cost of the article)
Administrative Proceedings [Secs 2301 – 2316] Procedure for Seizure: Collector shall issue a warrant for the detention of the property Cash bond If the importer wishes to secure release of article for legitimate use (1) amount fixed by Collector
In case of forfeiture, should pay the domestic market value of the seized article
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When settlement not allowed (1) Fraud in importation (2) Importation prohibited by law (3) Release would be contrary to law
TAXATION LAW
Scope Limited to the subject matter of a single adjustment (refers to the entire content of one liquidation including duties, fees, surcharges and fines) or other independent transaction
Compromise [Sec. 2316, TCC] Commissioner may compromise any case subject to approval by Secretary of Finance
Other requirements: (1) Payment of the amount due and the corresponding docket fee shall be made before protest [Sec. 2308] (2) Upon demand of Collector, the importer shall furnish samples of the articles which are the subject of the protest
II. JUDICIAL Requisites for filing of criminal/civil case [Sec, 2401, TCC]: (1) Brought in the name of the government of the Phil (2) Conducted by Customs officers (3) With approval from the Commissioner
Effect of Failure to Protest Failure renders the action of the Collector final and conclusive except for manifest error
Rules on appeal including jurisdiction The party aggrieved by a ruling of the Commissioner in any matter brought before him upon protest or by his action or ruling in any case of seizure may appeal to the Court of Tax Appeals, in the manner and within the period prescribed by law and regulations.
Review of Commissioner [Sec. 2313] A person aggrieved by the decision or Collector in any matter presented upon protest or by his action in any case of seizure may, within days after notification on writing by the Collector of his actions or decisions, file a written notice to the Collector with a copy furnished to the Commissioner of his intention to appeal the action or decision of the Collector to the Commissioner
Unless an appeal is made to the Court of Tax Appeals in the manner and within the period prescribed by laws and regulations, the action or ruling of the Commissioner shall be final and conclusive. [Sec. 2402, TCC]
Automatic Review Happens in case a decision is made adverse to the Government
I.2. TAXPAYER I. PROTEST When made: at the time payment of the amount claimed to be due is made within 15 days thereafter [Sec. 2308]
II. ABANDONMENT When article deemed abandoned (1) owner, importer or consignee expressly signifies in writing to Collector his intention to abandon (2) after due notice, fails to file an entry within 30 days from date of discharge of last package from vessel or aircraft (3) after filing entry, fails to claim his importation 15 days from date of posting of
Form (1) Must be in writing (2) Must point out the particular decision or ruling of the Collector of Customs to which exception is taken or objection made (3) Must state the grounds relied upon for relief [Sec. 2310, TCC] 321
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the notice to claim such importation [Sec. 1801, TCC]
TAXATION LAW
Refund in case of excess payments due to: (1) manifest clerical error made in invoice or entry (2) error in return of weight, measure and gauge (certified, under penalties of falsification or perjury, by examining official) (3) error in the distribution of charges on invoices [which does not involve any question of law and certified, under penalties of falsification or perjury, by examining official] [Sec. 1707]
Effect [Sec. 1802, TCC] (1) deemed to have renounced his interest and property rights (2) ipso facto deemed property of the Government If the abandoned articles are transferred to a customs bonded warehouse, the operator shall be liable for the payment of duties and taxes in the case of loss of the stored abandoned imported articles [R.V. Marzan v. CA, GR No. 128064, March 4, 2004]
Conditions for refund of excess payments (1) errors discovered before payment or discovered within 1 year after the final liquidation (2) written request and notice from importer or statement of error certified by the Collector
Liability of Official for Failure to Report Abandonment Any official or employee who: (1) had knowledge of the existence of abandoned article (2) custody or charge of such article fails to report within 24 hours from time article deemed abandoned shall be punished according to sec. 3604 (fine: P5000 – P50,000; imprisonment: 1 yr – 10 yrs, perpetual disqualification to hold public office, vote and participate in election)
How claimed (1) Claim made in writing (2) Collector shall verify with the records in his office (3) Certify claim to Commissioner with his recommendation and necessary papers (4) Commissioner shall then cause the claim to be paid if found correct If the result of the refund would result to a corresponding refund of the internal revenue taxes on the same importation, Collector shall certify to Commissioner who shall cause the said excess to be paid, refunded or credited in favor of the importer
III. ABATEMENT AND REFUND When available (1) Abatement for Damage incurred during Voyage [Sec. 1701] (2) Abatement or Refund for the following: (3) Missing Packages [Sec. 1702] (4) Deficiency of Contents in Packages [Sec. 1703] (5) Articles Lost or Destroyed after Arrival [Sec. 1704] (6) Dead or Injured animals [Sec. 1705]
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Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and Customs Code START
Collector seizes goods and reports it to the Commissioner and to COA. Owner is notified of seizure
Collector determines probable cause (illegal importation)
Collector’s decision favorable to taxpayer/ adverse to gov’t?
Yes
Importer may secure release of goods by filing of cash bond (Sec. 2301)
Amount involved less than 5M?
Yes
Collector conducts hearing
Automatic review* by Customs Commisioner (Sec. 2313)
Does commissioner decide w/in 30 days?
No Taxpayer appeals to Customs Commissioner 15 days from receipt of notice
Is Commissioner’s decision favorable to taxpayer/ adverse to gov’t?
Yes
No Inaction construed as affirmation of Collector’s decision
Does Commissioner decide w/n 30 days?
No
Yes
No, amount is at least 5M Is Commissioner’s decision favorable to Yes taxpayer/ adverse to gov’t?
Yes
Automatic Review* by the Secretary of Finance (SOF) (Sec. 2313, CMO 3-2002)
Is SOF’s decision favorable to taxpayer/adverse to gov’t?
No No
Does SOF decide within 30 days?
Yes
No Yes Decision becomes final & unappealable
END
Inaction construed as affirmation of Collector’s decision
Appeal to the Court of Tax Appeals within 30 days from notice of decision
MR within 15 days from receipt of decision
Appeal to CTA en banc 15 days from receipt of decision denying MR
Inaction construed as affirmation of commissioner’s decision (or of collector’s decision in case of inaction by commissioner)
Appeal to the Supreme Court
No Appeal to CTA
END
*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591
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TABLE OF SPECIAL DUTIES: When Imposed Anti-Dumping Countervailing [Sec. 301, TCC [Sec. 302 as Marking as amended by amended by [Sec. 303] RA 8752] RA 8751] Where a Whenever any If at the time product or product, of commodity is commodity or importation imported in article of any article [or the Philippines commerce is its container at an export granted if the article price less than directly or cannot be the normal indirectly by marked], is value in the the not marked in ordinary government in in any official course of trade the country of language of for the like origin or the product or exportation, Philippines article destines any kind or and in a for form of conspicuous consumption specific place as in the subsidy upon legibly, exporting the indelibly and country or production, permanently materially manufacture as the nature regarding or exportation of the article establishment of such (or of a domestic product, container). industry commodity or This is used producing the article, and the to prevent like product importation of deception of [Sec. 3, RA such consumers. 8752] subsidized product, has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment
Discriminatory [Sec. 304] Whenever the President finds that the public interest will be served thereby, additional customs duty shall be imposed upon articles wholly or in part the growth or product of, or imported in a vessel of, any foreign country whenever he shall find as a fact that such country — (1) Imposes, directly or indirectly, upon any Phil product unreasonable charge, exaction, regulation or limitation which is not equally enforced upon the like articles of other foreign countries; or 324
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Safeguard [RA 8800] [Sec 5] General Safeguard Measure: Whenever there is a positive final determination of the Commission that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry; however, in the case of nonagricultural products, the Secretary of Agriculture shall first establish that the application of such
[Sec 21] Special Safeguard Measure for Agricultural Products: Imposed upon agricultural products, consistent with Phil international treaty obligations, if its: (a) Cumulative import volume in a given year exceeds its trigger volume subject to the conditions under Sec. 23, RA 8800, or but not currently; and (b) Actual CIF import price is less than its trigger price subject to conditions under Sec. 24, RA
UP COLLEGE OF LAW Anti-Dumping [Sec. 301, TCC as amended by RA 8752]
Countervailing [Sec. 302 as amended by RA 8751] of a domestic industry
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Marking [Sec. 303]
Discriminatory [Sec. 304]
TAXATION LAW
Safeguard [RA 8800]
safeguard (2) measures will Discriminates be in the in fact against public interest the commerce of the Philippines, as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country.
325
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TABLE OF SPECIAL DUTIES: Imposing Authority and Amount AntiDumping Countervailing [Sec. 301, [Sec. 302 as Marking Discriminatory TCC as amended by RA [Sec. 303] [Sec. 304] amended by 8751] RA 8752] Secretary of Trade and Commissioner President Industry - non-agricultural of Customs [through a products proclamation] Secretary of Agriculture agricultural products Tariff Commission - decides whether or not to impose antidumping/countervailing duty
AntiEquivalent Dumping the subsidy Duty = Normal Value Export Price
to 5% ad valorem Not exceeding of the articles 100% ad valorem upon the articles
TAXATION LAW
Safeguard [RA 8800]
For non- Secretary of agricultural Agriculture products: Secretary of Trade and Industry For agricultural products: Secretary of Agriculture tariff increase, either ad valorem or specific, or both, to be paid through a cash bond set at a level sufficient to redress or prevent injury to the domestic industry [Sec. 8, RA 8800]
For a]: appropriately set to a level not exceeding one-third of the applicable out-quota customs duty on the agricultural product under consideration in the year when it is imposed For b], compute as follows: 0 - if price difference is at most 10% of the trigger price 30% of the
326
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Countervailing [Sec. 302 as amended by RA 8751]
TAXATION 2
Marking [Sec. 303]
TAXATION LAW
Discriminatory [Sec. 304]
Safeguard [RA 8800]
amount by which the price difference exceeds 10% of the trigger price 50% - if it exceeds 40% but less than 60% 70% - if it exceeds 60 but at most 75% 90% - if it exceeds 75% obliterated, destroyed or permanently concealed
Notes: Exceptions to the Marking of Articles (in the following situations, the containers shall be the one subject to marking): (1) Article is incapable of being marked (2) Article cannot be marked prior to shipment to the Philippines without injury (3) Article cannot be marked prior to shipment to the Philippines, except at an expense economically prohibitive of its importation (4) Marking of a container of such article will reasonably indicate the origin of such article (5) Article is a crude substance (6) Article is imported for use by the importer and not intended for sale in its imported or any other form (7) Article is to be processed in the Philippines by the importer or for his account otherwise than for the purpose of concealing the origin of such article and in such manner that any mark contemplated by this section would necessarily be
(8) An ultimate purchaser, by reason of the character of such article or by reason of the circumstance of its importation, must necessarily know the country of origin of such article even though it is not marked to indicate its origin (9) Article was produced more than twenty years prior to its importation into the Philippines (10) Article cannot be marked after importation except at an expense which is economically prohibitive, and the failure to mark the article before importation was not due to any purpose of the importer, producer, seller or shipper to avoid compliance with this section
327
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X. Judicial Remedies
TAXATION LAW
(3) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (4) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code; (5) Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. [Sec. 7, RA No. 1125 as amended]
A. JURISDICTION OF THE COURT OF TAX APPEALS B.
A.1. CIVIL TAX CASES I. EXCLUSIVE ORIGINAL JURISDICTION Tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more.
II. EXCLUSIVE APPELLATE JURISDICTION CTA DIVISION (1) Decisions and Inaction of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue; Inaction of the Commissioner shall be deemed a denial in which the taxpayer may appeal. Inaction does not necessarily constitute a formal decision and the taxpayer may opt to await the final decision of the Commissioner by constitute a formal decision and the taxpayer may opt to await the final decision of the Commissioner beyond the 180 days and may appeal such final decision. For claim for refund, the taxpayer must file a petition for review with the CTA prior to the expiration of the two year prescriptive period. (2) Decisions, orders or resolutions of the RTC in local tax cases and in tax collection cases originally decided or resolved by them in their original jurisdiction.
CTA EN BANC (1) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: (2) Cases arising from administrative agencies – Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; (3) Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and (4) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction involving final 328
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TAXATION LAW
II. EXCLUSIVE APPELLATE JURISDICTION IN CRIMINAL CASES CTA DIVISION
and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos; (5) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases and in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction; (6) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over tax collection cases; (7) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals;
(1) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction. (2) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.
CTA EN BANC (1) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs; (2) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; and (3) Decisions, resolutions or orders of the Regional trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph [f].
A.2. CRIMINAL CASES [Sec. 7, RA 1125 as amended]
I. EXCLUSIVE ORIGINAL JURISDICTION All criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs. Principal amount of taxes and fees, exclusive of charges and penalties, claimed is more than or equal to One million pesos (P1,000,000.00). The filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized.
B. JUDICIAL PROCEDURES B.1. JUDICIAL ACTION FOR COLLECTION OF TAXES I. INTERNAL REVENUE TAXES The remedies for the collection of internal revenue taxes, fees or charges, and any 329
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B.2. CIVIL CASES I. WHO MAY APPEAL, MODE OF APPEAL, EFFECT OF APPEAL
increment thereto resulting from delinquency can be through the institution of a civil or criminal action. [Sec. 205, NIRC]
Appeal to CTA Division (1) A party aggrieved or adversely affected by the decision or ruling or inaction of (a) The Commissioner of Internal Revenue; (b) The Commissioner of Customs; (c) The Secretary of Finance; (d) The Secretary of Trade and Industry; (e) The Secretary of Agriculture; or (f) The RTC exercising original jurisdiction (2) may appeal within 30 days from the receipt of the copy of the decision or ruling, or the expiration of the period fixed by law for the Commissioner to decide, to the Court of Tax Appeals Division.
Note: Please refer to Taxpayer’s Remedies (B. Collection) When this remedy is resorted to: The tax assessment becomes final and executory because of the failure to appeal. Even pending decision of the administrative protest [CIR v. Union Shipping, 1990]
II. LOCAL TAXES The LGU concerned may enforce the collection of delinquent taxes, fees, charges or other revenues by civil action in any court of competent jurisdiction. The civil action shall be filed by the local treasurer. [Sec. 183, LGC]
Mode of Appeal: Rule 42 Aggrieved party may file a motion for reconsideration or new trial within 15 days from receipt of the copy of the decision.
MTC/RTC depending on jurisdictional threshold amount. Prescriptive period Local taxes, fees, or charges may be collected within 5 years from the date of assessment by administrative or judicial action.
Appeal to CTA en Banc A party adversely affected by a decision or resolution of a Division of the Court on a motion for reconsideration or new trial may appeal within 15 days from receipt of the copy of the decision.
No judicial or administrative action for collection can be instituted after lapse of the period for assessment except when there is fraud or intent to evade tax. [Sec. 194 LGC]
Mode of Appeal: Rule 43 A party adversely affected by a decision or ruling of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction may appeal within 30 days from the receipt of the copy of the decision.
The running of the periods of prescription shall be suspended for the time during which: (1) The treasurer is legally prevented from making the assessment of collection; (2) The taxpayer requests for a reinvestigation and executes a waiver in writing before 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. 194, LGC]
SUSPENSION OF COLLECTION OF TAX General rule: No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any property of the taxpayer for the satisfaction of his tax liability as provided under existing laws. 330
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account. The hearing before such justice shall proceed in all respects as though the same had been made before the Court.
Exception: Where the collection of the amount of the taxpayer’s liability, sought by means of a demand for payment, by levy, distraint or sale of any property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the Government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability
Upon the completion of such hearing, the justice concerned shall promptly submit to the Court a written report thereon, stating therein his findings and conclusions. Thereafter, the Court shall render its decision on the case, adopting, modifying, or rejecting the report in whole or in part, or, the Court may, in its discretion, recommit it to the justice with instructions, or receive further evidence. [Sec. 12, RA No. 1125, as amended; also Sec. 3, Rule 12, A.M. No. 05-11-07]
Injunction not available to restrain collection No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code. [Sec. 217, NIRC]
Court Official – In default or ex parte hearings, or in any case where the parties agree in writing, the Court may delegate the reception of evidence to the Clerk of Court, the Division Clerks of Court, their assistants who are members of the Philippine bar, or any Court attorney. The reception of documentary evidence by a Court official shall be for the sole purpose of marking, comparison with the original, and identification by witnesses of such documentary evidence. The Court official shall have no power to rule on objections to any question or to the admission of exhibits, which objections shall be resolved by the Court upon submission of his report and the transcripts within ten days from termination of the hearing. [Sec. 4, Rule 12, A.M. No. 05-11-07]
Note: The Local Government Code does not have a provision prohibiting injunction in the collection of tax.
TAKING OF EVIDENCE The Court may receive evidence in the following cases: (1) In all cases falling within the original jurisdiction of the Court in Division pursuant to Section 3, Rule 4 of these Rules; and (2) In appeals in both civil and criminal cases where the Court grants a new trial pursuant to Section 2, Rule 53 and Section 12, Rule 124 of the Rules of Court. [Sec. 2, Rule 12, A.M. No. 05-11-07]
MOTION FOR RECONSIDERATION OR NEW TRIAL
Taking of evidence by: Justice— The Court may, motu proprio or upon proper motion, direct that a case, or any issue therein, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises at any stage of the proceedings, or when the taking of an account is necessary, or when the determination of an issue of fact requires the examination of a long
[Rule 15, A.M. No. 05-11-07] Who: Any aggrieved party may seek a reconsideration or new trial of any decision, resolution or order of the Court. May be opposed by: The adverse party may file an opposition to the motion for reconsideration or new trial within ten days after his receipt of 331
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a copy of the motion for reconsideration or new trial of a decision, resolution or order of the Court.
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materially affecting the substantial rights of the movant: (1) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or (2) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial and, which, if presented, would probably alter the result.
When: He shall file a motion for reconsideration or new trial within fifteen days from the date he received notice of the decision, resolution or order of the Court in question. The Court shall resolve the motion for reconsideration or new trial within three months from the time it is deemed submitted for resolution.
A motion for new trial shall include all grounds then available and those not included shall be deemed waived.
How: The motion shall be in writing stating its grounds, a written notice of which shall be served by the movant on the adverse party.
Restrictions: No party shall be allowed to file a second motion for reconsideration of a decision, final resolution or order; or for new trial.
A motion for new trial shall be proved in the manner provided for proof of motions. A motion for the cause mentioned in subparagraph [a] of the preceding section shall be supported by affidavits of merits which may be rebutted by counter-affidavits. A motion for the cause mentioned in subparagraph (b) of the preceding section shall be supported by affidavits of the witnesses by whom such evidence is expected to be given, or by duly authenticated documents which are proposed to be introduced in evidence.
II. APPEAL TO THE CTA, EN BANC No civil proceeding involving matter arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act. A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc. [Sec. 18, RA No. 1125 as amended]
A motion for reconsideration or new trial that does not comply with the foregoing provisions shall be deemed pro forma, which shall not toll the reglementary period for appeal. Effect: The filing of a motion for reconsideration or new trial shall suspend the running of the period within which an appeal may be perfected.
III. PETITION FOR REVIEW ON CERTIORARI TO THE SUPREME COURT [Rule 16, A.M. No. 05-11-07] A party adversely affected by a decision or ruling of the Court en banc may appeal by filing with the Supreme Court a verified petition for review on certiorari within fifteen days from receipt of a copy of the decision or
Grounds: A motion for new trial may be based on one or more of the following causes
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INSTITUTION ON CRIMINAL ACTION
resolution, as provided in Rule 45 of the Rules of Court. If such party has filed a motion for reconsideration or for new trial, the period herein fixed shall run from the party’s receipt of a copy of the resolution denying the motion for reconsideration or for new trial.
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In cases within the jurisdiction of the Court, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding. The filing of the criminal action shall necessarily carry with it the filing of the civil action. No right to reserve the filing of such civil action separately from the criminal action shall be allowed or recognized.
The motion for reconsideration or for new trial filed before the Court shall be deemed abandoned if, during its pendency, the movant shall appeal to the Supreme Court.
B.3. CRIMINAL CASES I. INSTITUTION AND PROSECUTION OF CRIMINAL ACTIONS INSTITUTION OF CRIMINAL ACTION
II. APPEAL AND PERIOD TO APPEAL CRIMINAL CASES Period to Mode of Appeal Appeal Regional 15 days from Appeal Trial Court in receipt of pursuant to the exercise decision Sec. 3[a] and of its original 6, Rule 122 of jurisdiction the Rules of [to CTA Court Division] CTA Division 15 days from Petition for [to CTA En receipt of review as Banc] decision provided in Rule 43 of the May be Rules of extended for Court good cause for not more The Court en than 15 days banc shall act on the appeal. Regional Trial 15 days from Petition for Courts in the receipt of review as exercise of decision provided in their Rule 43 of the appellate Rules of jurisdiction Court [To CTA division] Deciding Body
Instituted by the filing an information in the name of the People of the Philippines Those involving violations of the NIRC and other laws enforced by the BIR: Must be approved by the Commissioner of Internal Revenue Those involving violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs: Must be approved by the Commissioner of Customs Institution shall interrupt the running of the period of prescription
PROSECUTION OF CRIMINAL ACTION Conducted and prosecuted under the direction and control of the public prosecutor Those involving violations of the NIRC and other laws enforced by the BIR or violations of the tariff and Customs Code and other laws enforced by the Bureau of Customs - The prosecution may be conducted by their respective duly deputized legal officers.
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Solicitor General as counsel for the People and government officials sued in their official capacity The Solicitor General shall represent the People of the Philippines and government officials sued in their official capacity in all cases brought to the Court in the exercise of its appellate jurisdiction. He may deputize the legal officers of the Bureau of Internal Revenue in cases brought under the National Internal Revenue Code or other laws enforced by the Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau of Customs, to appear in behalf of the officials of said agencies sued in their official capacity: Provided, however, such duly deputized legal officers shall remain at all times under the direct control and supervision of the Solicitor General.
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the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern. [De Castro v. Judicial and Bar Council (2010)]
C.3. REQUISITES FOR CHALLENGING THE CONSTITUTIONALITY OF A TAX MEASURE OR ACT OF TAXING AUTHORITY I. CONCEPT OF LOCUS STANDI AS APPLIED IN TAXATION The doctrine of locus standi is the right of appearance in a court of justice. The doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a "real party in interest," which is defined as "the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit." In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public right on behalf of the general public because of conflicting public policy issues. On one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic public services.
III. PETITION FOR REVIEW ON CERTIORARI TO THE SUPREME COURT A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure. [Sec. 19, R.A. No. 1125 as amended]
C. TAXPAYER’S SUIT IMPUGNING THE VALIDITY OF TAX MEASURES OR ACTS OF TAXING AUTHORITIES C.1. TAXPAYER’S SUIT, DEFINED
The Court has adopted the "direct injury test" to determine locus standi in public suits. In People v. Vera, it was held that a person who impugns the validity of a statute must have "a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result." The "direct injury test" in public suits is similar to the "real party in interest" rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.
Taxpayer’s suit – refers to a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. [Kilosbayan v. Guingona, Jr. (1994)]
C.2. DISTINGUISHED FROM CITIZEN’S SUIT The plaintiff in a taxpayer's suit is in a different category from the plaintiff in a citizen's suit. In 334
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II. DOCTRINE OF TRANSCENDENTAL IMPORTANCE
[Planter’s Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008]
Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court relaxed the requirement in cases of "transcendental importance" or with "far reaching implications." Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest. [Ibid]
As applied to taxation: It is well-stated that the validity of a statute may be contested only by one who will sustain a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds, upon the theory that "the expenditure of public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the request of a taxpayer. [Pascual v. Secretary of Public Works (1960)]
Planters Products, Inc. v. Fertiphil Corp.: Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution shall be collected until adequate capital is raised to make PPI viable."
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation. He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or contract. In other words, for a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act. [Mamba v. Lara, G.R. No. 165109, Dec. 14, 2009]
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.
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III. RIPENESS DETERMINATION
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course to certain reglementary periods. The TCC provides that a protest can be raised provided that payment first be made of the amount due. The decision of the Collector can be reviewed by the Commissioner of Customs who can approve, modify or reverse the decision or action of the Collector. If the party is not satisfied with the ruling of the Commissioner, he may file the necessary appeal to the Court of Tax Appeals. Afterwards, the decision of the Court of Tax Appeals can be appealed to this Court.
“Ripeness for judicial determination” means that litigation is inevitable or there is no adequate relief available in any other form or proceeding. CJH Development Corp. v. BIR [GR No. 172457, Dec. 24, 2008]: However, CJH is not left without recourse. The Tariff and Customs Code provides for the administrative and judicial remedies available to a taxpayer who is minded to contest an assessment, subject of
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