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UP Taxation Law Reviewer PDF
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TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
TAXATION LAW 1
General Principles of Taxation ........... 1
DEFINITION AND CONCEPT OF TAXATION.. 1
NATURE OF THE POWER OF TAXATION ...... 1
ESSENTIAL CHARACTERISTICS OF TAX ......3
POWER OF TAXATION COMPARED WITH
OTHER POWERS ...................................... 4
PURPOSE OF TAXATION ............................. 4
PRINCIPLES OF SOUND TAX SYSTEM......... 5
THEORY AND BASIS OF TAXATION ............ 6
DOCTRINES IN TAXATION .......................... 6
SCOPE AND LIMITATION OF TAXATION .... 14
KINDS STAGES OR PROCESS OF TAXATION
................................................................ 24
REQUISITES OF A VALID TAX .................... 24
TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS .......................... 24
OF TAXES .................................................. 26
TAXATION LAW 2
Estate Tax ........................................ 119
DEFINITION ............................................... 119
NATURE .................................................... 119
PURPOSE OR OBJECT ............................... 119
TIME AND TRANSFER OF PROPERTIES ... 120
CLASSIFICATION OF DECEDENT .............. 120
GROSS ESTATE AND NET ESTATE ............ 121
COMPOSITION OF THE GROSS ESTATE ... 123
ITEMS TO BE INCLUDED IN GROSS ESTATE
............................................................... 123
DEDUCTIONS FROM ESTATE ................... 127
EXEMPTIONS AND EXCLUSIONS FROM THE
GROSS ESTATE ..................................... 133
TAX CREDIT FOR ESTATE TAXES PAID IN A
FOREIGN COUNTRY .............................. 134
FILING OF NOTICE OF DEATH .................. 135
ESTATE TAX RETURN .............................. 135
TABLE OF CONTENTS
VAT ...................................................143
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TAXATION LAW
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General Principles of
Taxation
TAXATION LAW
TAXES
(a) are enforced proportional contributions from
persons and property levied by the lawmaking 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.
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.
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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.
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TAXATION LAW
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TAXATION LAW
1. As to concept
2. As to scope
3. As to authority
Exercised
only
by
government or its political
subdivisions
Money is taken to support
the government
4. As to purpose
5. As to necessity of
delegation
6. As to person
affected
Operates on a community or
a class of individual
7. As to benefits
8. As to amount of
imposition
9. As to importance
10.
As
relationship
Constitution
11. As to limitation
to
to
Inseparable
for
the
existence of a nation it
supports police power and
eminent domain
Subject to Constitutional
and Inherent limitations.
Inferior to non-impairment
clause.
Constraints
by
Constitutional and Inherent
limitations
Police Power
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
Healthy economic standard
of society
Cost of regulation, license
and
other
necessary
expenses
Protection,
safety
and
welfare of society
Relatively
free
from
Constitutional limitations.
Superior to non-impairment
clause.
Limited by the demand for
public interest and due
process
th
Eminent Domain
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
Can be expressly delegated
to the local government
units by the law making
body
Operates on the particular
private property of an
individual
Market value of the property
expropriated
No imposition
Common necessities and
interest of the community
transcend individual rights
in property
Superior to and may
override
Constitutional
impairment
provision
because the welfare of the
State is superior to any
private contract
Bounded by public purpose
and just compensation
[Valencia and Roxas, Income Taxation 6 Edition (2013-2014), Valencia Educational Supply, pp. 9-10]
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PURPOSE OF TAXATION
TAXATION LAW
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]
Non-Revenue/Special or Regulatory
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
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.
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TAXATION LAW
Benefits-protection
theory
(symbiotic
relationship)
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.
Necessity theory
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.
DOCTRINES IN TAXATION
Prospectivity of tax laws
General rule: Tax laws are prospective in
operation.
Rationale: Nature and amount of the tax could
not be foreseen and understood by the taxpayer
at the time the transaction.
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DOUBLE TAXATON
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.
Strict sense (Direct Duplicate Taxation)
(1) the same property must be taxed twice 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.
Imprescriptibility
Unless otherwise provided by the tax itself,
taxes are imprescriptible. [CIR v. Ayala Securities
Corporation]
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)]
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Transformation
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.
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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)]
TAXATION LAW
TAX AMNESTY
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
so and become a part of the new society with
a clean slate.[Republic v. IAC (1991)]
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]
COMPROMISE
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 taxpayers liability.
Requisites of a tax compromise:
(a) The taxpayer must have a tax liability.
(b) There must be an offer (by the taxpayer
or Commissioner) of an amount to be
paid by the taxpayer.
(c) There must be acceptance (by the
Commissioner or the taxpayer, as the
case may be) of the offer in settlement
of the original claim.
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.
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Exceptions:
(1) 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
(2) 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.
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INHERENTLY LEGISLATIVE
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 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]
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.
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].
TAXATION LAW
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SITUS OF TAXATION
INCOME TAX
Who is being taxed
Citizenship
Filipino
Resident
Filipino
Source or Location
Residency
Within the PH
Taxable
Taxable
Nonresident
Taxable
Alien
Resident
Taxable
Not
Taxable
Alien
Nonresident
Not Taxable
Not
Taxable
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Outside the
PH
Taxable
Not
Taxable
Only income
from within is
Taxable
Only income
from within is
Taxable
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PROPERTY TAX
Kind of Property
Real property
Tangible Personal
property
Intangible personal
property (e.g., credits,
bills receivables, bank
deposits, bonds,
promissory notes,
mortgage loans,
judgments and
corporate stocks)
EXCISE TAX
Kind of Excise Tax
Income
Donors Tax
Estate
BUSINESS TAX
Kind of Business Tax
VAT
Sale of Real Property
Sale of Personal
Property
TAXATION LAW 1
TAXATION LAW
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.
Situs
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
sequuntur personam
(movables follow the
person)
Exceptions:
(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)
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
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
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.
Exemption of Government Entities, Agencies,
and Instrumentalities
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities of
the government are exempt from tax.
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.
Situs
Where transaction is
made
Where the real
property is located
Where the personal
property was sold
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CONSTITUTIONAL LIMITATIONS
PROVISIONS DIRECTLY AFFECTING
TAXATION
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.
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.
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Scope of
Exemption
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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]
(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]
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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
Toll
Taxes
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
Toll
Paid for the use of
anothers 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.
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License Fee
Taxes
TAXATION LAW
License and
Regulatory Fee
Imposed under the Levied under the
taxing power of the police power of the
state for purposes of state.
revenue.
Forced contributions Exacted primarily to
for the purpose of regulate
certain
maintaining
businesses
or
government
occupations.
functions.
Generally, unlimited Should
not
as to amount
unreasonably exceed
the
expenses
of
issuing the license
and of supervision.
Imposed on persons, Imposed only on the
property
and
to right to exercise a
exercise a privilege.
privilege
Failure to pay does Failure to pay makes
not necessarily make the act or business
the act or business illegal.
illegal.
Penalty for nonpayment: surcharges
or
imprisonment
(except poll tax).
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Special Assessment
Taxes
Special Assessment
Levied not only on Levied only on land.
land.
Imposed regardless of Imposed because of
public improvements
an increase in value of
land benefited by
public improvement.
Contribution of a Contribution of a
taxpayer
for
the person
for
the
support
of
the construction of a
government.
public improvement
It
has
general Exceptional both as to
application both as to time and locality.
time and place.
Taxes
A person cannot be
imprisoned for nonpayment of debt
(except when it arises
from a crime),
Governed by the
special
prescriptive
periods provided for in
the NIRC.
Does
not
draw
interest except only
when delinquent
Imposed only by
public authority
Taxes
Violation of tax laws
may give rise to
imposition of penalty.
Generally intended to
raise revenue
May be imposed only
by the government
Taxes
Based on laws
Debt
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 of Can be a subject of
set
off
or set
off
or
compensation
compensation
(see
Art. 1279, Civil Code)
Cannot be a subject of
set off or
compensation
Debt
Imprisonment is a
sanction for nonpayment
of
tax,
except poll tax.
Governed by the
ordinary periods of
prescription.
Draws interest when it
is so stipulated or
where there is default.
Can be imposed by
private individual
Penalty
Any sanction imposed
as a punishment for
violation of law or acts
deemed injurious
Designed to regulate
conduct
May be imposed by
the government or
private individuals or
entities
Can be a subject of
set off or
compensation (see
Art. 1279, Civil Code)
KINDS OF TAXES
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].
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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)
(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
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.
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).
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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, donors 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 persons
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.
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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.
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.
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.
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KINDS OF TAXPAYERS
DEFINITION OF EACH KIND OF TAXPAYER
Taxpayer- any person subject to tax imposed by
Title II of the Tax Code [Sec. 22(N), NIRC].
Person- means an individual, a trust, estate or
corporation [Sec. 22(A), NIRC].
For income tax purposes, taxpayers are
classified generally as follows:
(1) Individuals;
(2) Corporations;
(3) Partnerships; and
(4) Estates and Trusts.
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Primary
Classification
Sub-Classification(s)
Citizens of
the
Philippines
Residents citizens
Non-resident citizens
Residents
Individuals
Aliens
Special
Classes of
Individuals
Nonresidents
Engaged in
Trade or
Business in
the
Philippines
Not
Engaged in
Trade or
Business in
the
Philippines
Domestic Corporations
Corporations
Foreign Corporations
Resident
Corporations
Non-resident
Corporations
Estates and
Trusts
Partnerships
TAXATION LAW
Coownerships
INDIVIDUAL TAXPAYERS
Citizens
(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.
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INCOME TAXATION
Taxpayer
Resident Citizen
Non-resident Citizen and
OCW
Resident and Non-resident
Alien
Domestic Corporation
Foreign Corporation
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 persons
income, emoluments, profits and the like [Fisher
v. Trinidad].
NATURE
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 to
receive income or profits.
GENERAL PRINCIPLES
A resident citizen of the Philippines is
taxable on all income derived from sources
within and without the Philippines;
A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
An individual citizen of the Philippines who
is working and deriving income from abroad
as an overseas contract worker is taxable
only on income derived from sources within
the Philippines:
Provided, That a seaman shall be treated as
an overseas contract worker if he is
(a) citizen of the Philippines; and
(b) receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade
An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from
sources within the Philippines. [Sec. 23]
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Within Without
INCOME
DEFINITION
(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) 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. [Conwi v. CTA, G.R. No. 48532
August 31, 1992]
(c) Income may be received in the form of cash,
property, service, or a combination of the
three.
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]
WHEN INCOME IS TAXABLE
Existence of taxable income
(a) There is INCOME, gain or profit
(b) RECEIVED or REALIZED during the taxable
year
(c) NOT EXEMPT from income tax
(i) "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." [Madrigal vs.
Rafferty (1918)]
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REALIZATION OF INCOME
Tests of Realization
Actual vis--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 limitations or conditions upon
which payment or enjoyment is to be made or
exercised. Examples of constructive receipt
of income are:
(1) Interest credited on savings bank deposit
(2) Matured interest coupons not yet
collected by the taxpayer
(3) Dividends applied by the corporation
against the indebtedness of a
stockholder
(4) Share in the profit of a partner in a
general
professional
partnership,
although not yet distributed, is
regarded as constructively received; or
(5) Intended payment deposited in court
(consignation).
RECOGNITION OF INCOME
Methods of accounting in reporting income
and expenses
Cash method vis--vis Accrual methodCash
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 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
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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]
Installment method vis--vis Deferred method
vis--vis Percentage of completion method (in
long- term contracts)
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].
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
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.
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Deferred Payment
(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 Installment method;
property
who Provided,
initial
regularly sells in payments do not
installment
plan: exceed 25% of selling
Installment method
price
*held as ordinary If exceeds 25%-asset regardless of Deferred
payment
amount of percentage method
of initial payments
*held as inventory
Casual Sale
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
*personal
property
not
considered
inventory
Sale by Individuals
Installment method;
Provided,
initial
payments do not
exceed 25% of selling
price
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GROSS INCOME
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
Trade or business or the exercise of a
profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings in property
(10) Pensions
(11) Partners distributive share from the net
income of the general professional
partnership (GPP) [Sec 32A, NIRC]
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the employers
compensation.
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home
is
considered
as
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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
(10) Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows.[Sec. 33(B)]
Tax Rate and Tax Base
(1) Tax base is based on the grossed-up
monetary value (GMV) of fringe benefits.
(2) Rate is generally 32%
(3) 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.
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%].
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Special Cases:
(1) 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%].
(2) 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
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%].
(3) 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
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.
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.
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;
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Ordinary Assets
(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.
Ordinary
Net
Income
Net Capital
Gains (other
than those
subject to final
CGT)
Ordinary Asset
Capital Asset
Gain from sale, exchange or other disposition
Ordinary Gain (part of
Capital Gain
Gross Income)
Loss from sale, exchange, or other disposition
Ordinary Loss (part of
Allowable Deductions Capital Loss
from Gross Income)
Excess of Gains over Losses
Part of Gross Income
Net Capital Gain
Excess of Losses over Gains
Part of Allowable
Deductions from
Net Capital Loss
Gross Income
Types of Properties
Capital v. Ordinary Asset
Ordinary 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.
Capital Assets
Property held by the
taxpayer, whether or
not connected with
his trade or business
which is not an
ordinary asset.
Generally,
they
include:
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Capital Assets
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 nonbusiness
properties, such as
family car, home
appliances,
jewelry.
(1)
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Amount of Capital
Gain
Not over P 100,000
On any amount in
excess of P 100,000
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Tax Rate
- 5%
- 10%
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Vessel
Aircraft,
machineries and
other Equipment
Other assets
NonResident
Corporation
4.5%
7.5%
NonResident
Alien
25%
25%
30%
25%
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Tax Rate
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
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Lessor
Tax Rate
Domestic Corporation Net taxable income
Resident
Foreign shall be subject to
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
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Illustration:
Year 1
Gross Income
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Case A
500,000
Case B
400,000
Case C
500,000
Less: Allowable
Deductions
(before write-off
of Uncollectible
Accounts/Debts) (200,000) (480,000) (495,000)
Taxable Income
(Net Loss)
before write-off
300,000
Deduction for
Accounts
Receivable
written off
(60,000)
5,000
(2,000)
(2,000)
(6,000)
298,000
(62,000)
(1,000)
2,000
2,000
6,000
2,000
5,000
Taxable Income
(Net Loss) after
write-off
Year 2
Recovery of
Amounts
Written Off
Taxable Income
on the Recovery
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Interests
Derived from sources within the Philippines, and
interests on bonds, notes or other interestbearing obligation of residents.
Ultimately, the situs of interest income is the
residence of the debtor.
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 3year 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.
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.
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;
(3) The supply of scientific, technical, industrial or
commercial knowledge or information;
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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.
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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.
Place of
PRODUCTION
Philippines
Place of
SALE
Abroad
Abroad
Philippines
Treatment
Partly within,
partly
without
Partly within,
partly
without
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Income
Situs
(b) Intangible
General rule: Place of Sale
Shares of
Stock of
Domestic
Corporation
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Taxpayer
All taxpayers since
there is no income.
All taxpayers unless
provided that income
is to be included.
As expressly provided.
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Nontaxable
compensation for
damages on account of
(1) Personal (physical)
injuries or sickness
(2) Any other damages
recovered on
account of personal
injuries or sickness
(3) Exemplary and
moral damages for
out-of-court
settlement,
including attorneys
fees
(4) Alienation of
affection, or breach
of promise to marry
(5) Any amount
received as a return
of capital or
reimbursement of
expenses
Taxable
compensation for
damages on account
of
(1) Actual damages
for
loss
of
anticipated profits
(2) .Moral
and
exemplary
damages awarded
as a result of break
of contract
(3) Interest for nontaxable damages
above
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RA 7641
Retiring
employee
must be in the service
of same employer
CONTINUOUSLY for
at least five (5) years
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RPBP
Retiring official or
employee must have
been in the service of
the same employer
forat least ten (10)
years.
Retiring official or
employee must be at
least fifty (50) years old
at
the
time of
retirement
Retiring
employee
must be at least sixty
(60) years oldbut not
more than 65 years of
age at the time of
retirement
Availed of only once, Retiring
employee
and only when there is shall
not
have
no RPBP
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
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)
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.
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Types of deductions
There are three (3) types of deductions from
gross income:
(a) 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;
(b) 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
(c) the special deductions in Sections 37 and 38
of the NIRC, and in special laws like the BOI
law [E.O. 226].
General rules
(a) Deductions must be paid or incurred in
connection with the taxpayers trade,
business or profession
(b) Deductions must be supported by adequate
receipts or invoices (except standard
deduction)
(c) Additional requirement relating to
withholding
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.
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 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.
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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.
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.
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.
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].
(b) Extraordinary repairs are not deductible
they are capital expenditures
(1) Repairs which add material value to the
property or appreciably prolong its life
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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.
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.
Exclusions from EAR expenses:
(1) Expenses which are treated as compensation
or fringe benefits for services rendered
under an employer-employee 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, workshops,
conventions and other similar events; and
(6) Other expenses of a similar nature.
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]
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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)]
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:
(1) To deduct expenditures otherwise
considered as capital outlays or
depreciable assets incurred during the
taxable year for the expansion of school
facilities, OR
(2) To deduct allowances for depreciation
thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.
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 taxpayers brand franchise which is
analogous to the maintenance of goodwill or
title to ones 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]
TAXATION LAW
INTEREST
Requisites for deductibility.
(a) There is an indebtedness.
(b) The indebtedness is that of the taxpayer
(c) The indebtedness is connected with the
taxpayers trade, profession, or business.
(d) The interest must be legally due.
(e) The interest must be stipulated in writing.
(f) The taxpayer is LIABLE to pay interest on the
indebtedness.
(g) The indebtedness must have been paid or
accrued during the taxable year.
(h) The interest payment arrangement must not
be between related taxpayers
(i) The interest must not be incurred to finance
petroleum operations.
(j) In case of interest incurred to acquire
property used in trade, business or exercise
of profession, the same was not treated as a
capital expenditure
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 of
passive income for interest income); effective
January 1, 2009.
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.
Related Taxpayers
(a) Between members of the family, i.e. brothers
and sisters (whether by the whole or halfblood), spouse, ancestor, and lineal
descendants; or
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Tax Credit
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.
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
The following may NOT claim tax credits:
(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.
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Phil.
Income Tax
Phil.
Income Tax
Limit on
amount of
tax credit
(Per
Country
Limit)
Limit on
amount of
tax credit
(World
Wide
Limit)
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Other Losses:
(1) Abandonment losses in petroleum operation
and producing well.
(2) Losses due to voluntary removal of building
incident to renewal or replacements are
deductible from gross income.
(3) Loss of useful value of capital assets due 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 taxpayers are not
recognized, but the gains are taxable.
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
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
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
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Methods
of
allowance.
(a) Straight-line
TAXATION LAW
computing
depreciation
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dissolved
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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.
(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:
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(4)
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 pro-rate
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.
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.
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.
Limit of PE Allowed to NRAETB: An amount
equal to the exemptions allowed by the nonresident aliens country to Filipino citizens not
residing therein but deriving income therefrom,
but not to exceed the amount fixed by NIRC.[In
other words, whichever is lower]
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(2)
Government
corporations
(3) Others
TAXATION LAW
owned
and
controlled
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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
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
(5) 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
(6) Civic league or organization not organized for
profit but operated exclusively for the
promotion of social welfare
(7) A non-stock and non-profit Educational
institution
(8) Government Educational institution
(9) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
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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%
Non-Resident
Citizen
Income from
sources within the
Philippines
Allowed
Allowed
5%-32%
Resident Alien
Income from
sources within the
Philippines
Allowed
Allowed
5%-32%
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
No specific
provision
5%-32%
Non-resident
Alien Not
Engaged in
Trade or
Business
Income from
sources within the
Philippines
Not allowed
Not allowed
25%
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5%
12%
20%
Royalties
(See summary table)
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
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NRAETB NRANETB
20%
20%
20%
20%
20%
20%
20%
20%
10%
25%
20%
20%
25%
25%
Exempt
Exempt
Exempt
25%
5%
12%
25%
25%
20%
25%
NRAETB NRANETB
20%
25%
10%
20%
25%
10%
20%
25%
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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:
(a) Four (4) years to less than five (5) years 5%;
(b) Three (3) years to less than four (4) years
- 12%; and
(c) Less than three (3) years - 20%.
(2) Any income of nonresidents, whether
individuals or corporations, from transactions
with depository banks under the expanded
system shall be exempt from income tax.
TAXATION OF CAPITAL GAINS
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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
TAXATION LAW
XXX
(XXX)
XXX
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Resident
CITIZEN
ALIEN
All
Within the
sources
Philippines
Category of Income
(1) Compensation
Profession
Business
TAXATION LAW
CITIZEN
Within the
Philippines
Non-Resident
NRAETB
Within the
Philippines
NRANETB
Within the
Philippines
GIW 25%
Not
Applicable
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 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
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Computations
Pure Compensation Income
Less:
x
Less:
TAXATION OF NON-RESIDENT
ALIENS ENGAGED IN TRADE OR
BUSINESS
xx
GENERAL RULES
xx
xx
xx
ADD:
Less:
x
Less:
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Xx
Less:
x
Less:
TAXATION LAW
Xx
xx
xx
Xx
Xx
Xx
Xx
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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:
(a) Four (4) years to less than five (5) years - 5%;
(b) Three (3) years to less than four (4) years 12%; and
(c) Less than three (3) years - 20%.
CAPITAL GAINS
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INDIVIDUAL TAXPAYERS
EXEMPT FROM INCOME TAX
SENIOR CITIZENS
Who covered: any resident citizen
(a) At least 60 years old, and
(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).
TAXATION LAW
TAXATION OF DOMESTIC
CORPORATIONS
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
XXX
XXX
XXX
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XXX
&
XXX
XXX
XXX
XXX
XXX
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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.
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
is higher than the MCIT, then the corporation
does not pay the MCIT.
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.
These special corporations are:
(a) 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
(b) Firms under special income tax regime such
as those under the PEZA law [Rep. Act
7916], the Bases Conversion Development
Act [Rep. Act 7227] and forms enjoying
Income Tax Holiday (ITH) under Exec. Order
No. 226;
(c) International carriers subject to tax at 2 %
of their gross Philippine billings;
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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.
MCIT
NT
Yr 4
80K
20K
Yr 5
50K
30K
Yr 6
30K
40K
Yr 7
40K
20K
Yr 8
35K
70K
MCIT
NT
Year 4
80,000
20,000
NT is higher
n/a
Less:
MCIT
carry-fwd
Year 5
50,000
30,000
n/a
Year 6
30,000
40,000
40,000
Year 7
40,000
20,000
n/a
Year 8
35,000
70,000
70,000
>(20,000)
>(20,000)
>(40,000)*
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.
*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.
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20% of GNP
40%
4% of GNP
0.90%
Does not
exceed 55%
Gross Sales
Less: Sales Returns
SalesDiscounts&
Allowances
Cost of Goods Sold
GI
XXX
XXX
XXX
XXX
XXX
XXX
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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
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TAX ON PROPRIETARY
EDUCATIONAL INSTITUTIONS AND
NON-PROFIT HOSPITALS
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:
(a) Government Service Insurance System
(GSIS)
(b) Social Security System (SSS)
(c) Philippine Health Insurance Corporation
(PHIC)
(d) Local water districts (LWDs)
(e) Philippine Charity Sweepstakes Office
(PCSO)
[Sec. 27(C), NIRC]
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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
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 anditselfand the dividend
income shall be subject to the tax similarly
imposed on non-resident foreign corporations.
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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
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TAXATION OF NON-RESIDENT
FOREIGN CORPORATIONS
GENERAL RULE
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
Intercorporate dividends
(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 least15%
(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.
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:
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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 expanded Exempt (except that net income
foreign currency deposit system from certain from such transactions is subject
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 Philippines
distributors
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
PAGE 104
10%
10%
2.5%
-
10%
10%
10%
25%
4.5%
7.5%
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IMPROPERLY ACCUMULATED
EARNINGS OF CORPORATIONS
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.
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.
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.
TAXATION LAW
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.
Covered Corporations
Only domestic corporations classified as closelyheld corporations are liable for IAET.
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
is owned directly or indirectly by or for not more
than 20 individuals. Domestic corporations
not falling under the aforesaid definition are,
therefore, publicly-held corporations.
To determine whether the corporation is closely
held corporation, insofar as such determination
is based on stock ownership, the following rules
shall be applied:
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TAXATION OF PARTNERSHIPS
CLASSIFICATION OF PARTNERSHIPS FOR
TAX PURPOSES
(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 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%.
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.
The share of a partner in the partnerships
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)]
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Co-ownership
There is co-ownership
(1) When two or more heirs inherit and undivided
property from a decedent.
(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-ownerships 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 coownership 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.
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]
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, 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.
TAXATION LAW
TAXATION OF GENERAL
PROFESSIONAL
PARTNERSHIPS
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.
(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)
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WITHHOLDING TAX
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.
TAXATION LAW
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(3)
(4)
(5)
(6)
(7)
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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
or asset, whichever is applicable, in the payors
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 payors 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]
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Estate Tax
Estate tax laws rest in their essence upon the
principle that 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.
[Lorenzo v. Posadas, 1937]
DEFINITION
(a) A graduated tax imposed upon the privilege
of the decedent to transmit property at death
and is based on the net estate, considered as
a unit, and it is determined by subtracting
from the gross estate the allowable
deductions.
(b) Tax on the right to transmit property at
death and on certain transfers which are
made by the statute the equivalent of
testamentary dispositions and is measured
by the value of property at time of death.
IN SEC. 84, NIRC, THE FOLLOWING ARE THE
APPLICABLE TAX RATES:
Plus
Of the
excess over
5%
200,000
2 million
15,000
8%
500,000
2 million
5 million
135,000
11%
2 million
5 million
10 million
465,000
15%
5 million
10 million
and over
Over
Tax is
200,000
Exempt
200,000
500,000
500,000
NATURE
TAXATION LAW
PURPOSE OR OBJECT
PURPOSE OF ESTATE TAX
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TAXATION LAW
OF
TIME AND
PROPERTIES
TRANSFER
TAXABLE TRANSFERS
CLASSIFICATION OF
DECEDENT
The decedent may be classified into:
(1) Citizen,
(2) Resident alien; or
(3) Non-resident alien.
DEFINITION OF RESIDENCE
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GROSS ESTATE
ESTATE
TAXATION LAW 2
AND
NET
GROSS ESTATE
Sec. 104, NIRC. DEFINITIONS. For purposes of
this Title, the terms gross estate and gifts
include real and personal property, whether
tangible or intangible, or mixed, wherever
situated x x x
The gross estate of a decedent who is a citizen
or resident alien includes the following,
wherever these may be situated:
(1) Real Property
(2) Personal Property
(a) Intangible
(b) Tangible
(3) Mixed
For a non-resident decedent who is not a
Filipino citizen at the time of his death, his real
and personal property situated outside the
Philippines shall not be included as part of his
gross estate. Thus, only the following are
included in the gross estate:
(1) Real property in the Philippines
(2) Tangible personal property in the
Philippines
(3) Intangible personal property in the
Philippines, unless excluded under the
reciprocity rule
RECIPROCITY RULE
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
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
Note: In sum, both states must exempt
nonresidents (citizens of the other state) from
transfer taxes in respect of intangible personal
property.
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Non-resident Alien
Included
Not included
Included
Not included
Included,
unless
exempted on the basis
of the principle of
reciprocity
DETERMINATION OF GROSS
ESTATE AND NET ESTATE
GROSS ESTATE is determined by the value of
the properties owned by the decedent at the
time of his death.
TAXATION LAW
Included
NET ESTATE
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COMPOSITION
ESTATE
OF
THE
GROSS
TAXATION LAW
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Special
As to nature. DONEE
has power to appoint
any person he chooses
who shall possess or
enjoy the property
without restriction
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Over
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Case A
Case Case
B
C
FMV, transfer
2,000 1,500
FMV, death
2,500
2,000
1,200
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Non-resident alien
decedent
Gross Estate
All property at the time Includes only that part
of death, wherever of gross estate located
situated
in the Philippines
Deductions
Ordinary deductions
(1) Expenses, losses,
indebtedness, taxes.
(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
Ordinary deductions
(1) Proportionate
deductions for
expenses, losses,
indebtedness, taxes.
(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
property
conjugal Share in
property
TAXATION LAW
conjugal
ORDINARY DEDUCTIONS
EXPENSES, LOSSES, INDEBTEDNESS AND
TAXES
Funeral Expenses
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
[Sec. 86 (A)(1), NIRC].
Actual funeral expenses shall mean those which
are actually incurred in connection with the
interment or burial of the deceased and must be
paid out of the estate and not by another person
or out of contributions from friends and
relatives. These must be duly supported by
receipts or invoices or other evidence to show
that they were actually incurred.
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
(see 1(c) below). [Sec. 6(A)(1), RR 02-2003]
Examples of Funeral Expenses
The term funeral expenses is not confined to
its ordinary or usual meaning [RR 2-2003, Sec. 6
(A)(1)].
(1) The MOURNING APPAREL of the surviving
spouse and unmarried minor children of the
deceased, bought and used on the occasion
of the burial
(2) EXPENSES of the WAKE preceding the
burial, including food and drinks
(3) PUBLICATION CHARGES for death notices
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(4) TELECOMMUNICATIONS
EXPENSES
incurred in informing relatives of the
deceased
(5) 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
(6) INTERMENT and/or CREMATION FEES and
CHARGES
(7) All other expenses incurred for the
performance of the RITES and CEREMONIES
incident to interment
Illustrations
(1) 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;
(2) 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.
Judicial Expenses of Testamentary and
intestate Proceedings
[Sec. 86 (A)(1), NIRC]
Allowable deductions are administration
expenses essential in the settlement of the
estate or necessarily incurred, such as but not
limited to the following:
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100%
80%
60%
40%
20%
values)
TAXATION LAW
SPECIAL DEDUCTIONS
Family Home (maximum: P1,000,000)
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]
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]
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 22003 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]
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EXCLUSIONS
ESTATE
FROM
THE
GROSS
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TAX CREDIT
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.
300,000
150,000
Tax paid/incurred:
Philippines
Country G
Country H
15,000
5,000
1,400
Solution Limitation A
(iii) To get tax credit per country under
Limitation A, this formula is followed:
General Rule:
The estate tax imposed by the Philippines shall
be credited with the amounts of any estate tax
imposed by the authority of a foreign country.
Limitations
(a) 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 NIRC bears to his entire net estate;
(PER COUNTRY BASIS) and
(b) 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 NIRC bears to
his entire net estate. (OVERALL BASIS)
Amount
Allowed
(whichever
is lower)
Country G
(300/1500 x 15,000)
3,000
5,000
Country H
(150/1500 x 15,000)
1,500
1,400
3,000
1,400
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EXEMPTION OF CERTAIN
ACQUISITIONS AND
TRANSMISSIONS
Solution Limitation B:
4,500
6,400
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WHERE FILED
The administrator or executor shall register the
estate of the decedent and secure a new TIN
therefor from the Revenue District Office where
the decedent was domiciled at the time of his
death, in cases of a resident.
The return shall be filed and the corresponding
estate tax be paid with any of the following
having jurisdiction over the place where the
decedent was domiciled at the time of his
death:
(1) Accredited Agent Bank (AAB)
(2) Revenue District Officer
(3) Collection Officer
(4) Duly Authorized Treasurer of the city or
municipality
Note: Prevailing collection rules and procedures
shall be followed.
The administrator or executor cannot use his
personal TIN for the estate.
For non-resident decedent, whether a citizen or
a foreign individual, the estate tax return shall
be filed with and the TIN of the estate shall be
secured in the:
(1) RDO where the executor or administrator is
registered if he is in the Philippines;
(2) RDO having jurisdiction over the executor or
administrators legal residence if he is not
registered;
(3) Office of the Commissioner through RDO
no. 39 South Quezon City if the decedent
does not have an executor or administrator
in the Philippines.
Nonetheless, the Commissioner of Internal
Revenue has the power to allow a different
venue/place in the filing of tax returns [Sec.
9(C), RR 2-2003].
WHEN FILED
General Rule: Filed within six (6) months from
the decedent's death. [Sec. 90(B), NIRC]
Exception: The Commissioner shall have
authority to grant, in meritorious cases, a
reasonable extension not exceeding thirty (30)
days for filing the return [Sec. 90C]
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Donors Tax
REQUISITES OF VALID
DONATION
BASIC PRINCIPLES
The donors 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.
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 perfection/completion of
the donation shall govern the imposition of the
donors tax. [Sec. 11, RR 2-2003]
DEFINITION
A donors 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].
NATURE
PURPOSE OR OBJECT
TAXATION LAW
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CONDONATION/REMISSION
DEBT
OF
TAXATION LAW
CLASSIFICATION OF DONORS
[Sec. 98(A), NIRC]
(1) Citizens or Residents of the Philippines
taxable on ALL properties located not only
within the Philippines but also in foreign
countries.
(2) Nonresident Alien taxable on ALL real and
tangible
properties
WITHIN
the
PHILIPPINES, and intangible personal
property, unless there is reciprocity, in which
case intangible personal property is not
taxable
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DETERMINATION
GIFT
OF
GROSS
Tangible or Intangible
Personal
Properties
(Within the Philippines)
Except:
Reciprocity
[Sec. 104]
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EXEMPTIONS
DONORS TAX
TAXATION LAW 2
OF
GIFTS
FROM
TAXATION LAW
PERSONS LIABLE
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TAX BASIS
NET GIFTS
TAXATION LAW
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Illustration
(1) P100,000 donation to son by parents on
account of marriage:
(a) Husband
(i) Net Taxable Gift:
P50,000 10,000 = P40,000
(ii) Tax Due:
None, since P40,000 is below
P100,000
(b) Wife same as above
(2) P100,000 donation to son and daughter-inlaw by parents on account of marriage:
(a) Husband
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P 2,000,000
P 1,000,000
P 500,000
After the
first
donation
After the
After the third
second
donation
donation
Net Taxable Gift
2,000,000 January
January
Donation
- Donation
P2,000,000
P2,000,000
March
March
Donation
- Donation
1,000,000
1,000,000
Total
August
P3,000,000
Donation
500,000
Total
P3,500,000
Corresponding Donors Tax (refer to schedule)
124,000
124,000
P 204,000
P254,000
But not
Over
0
100,000
200,000
500,000
1M
3M
5M
10M
100,000
200,000
500,000
1M
3M
5M
10M
Tax Is
Exempt
0
2,000
14,000
44,000
204,000
404,000
1,004,000
Plus
Of the
Excess
Over
2%
4%
6%
8%
10%
12%
15%
100,000
200,000
500,000
1M
3M
5M
10M
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VAT
CONCEPT
Sec. 4.105-2, RR 16-2005. NATURE AND
CHARACTERISTICS OF VAT. VAT is a tax on
consumption levied on the sale, barter,
exchange or lease of goods or properties and
services in the Philippines and on importation of
goods into the Philippines.
xxx
(2)
(3)
(4)
(5)
CHARACTERISTICS/ ELEMENTS
OF A VAT-TAXABLE
TRANSACTION
(1) It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or
properties and services in the Philippines and
on importation of goods into the Philippines.
[RR 16-2005]
TAXATION LAW
CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v Ermita
(2005):
(1) The validity of raising the VAT rate from 10%
to 12% by the President was upheld by SC.
(2) 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.
(3) 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% limitation on the
creditable input tax, 5-year amortization of
input tax on purchase of capital goods, or the
5% final withholding tax by the government.
(4) 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.
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TAXATION LAW
APPLICABILITY OF ECOZONES
IMPACT OF TAX
(1) The impact of taxation is on the statutory
taxpayer, the one from whom the
government collects.
(2) The impact of VAT is on the seller or importer
upon whom the tax has been imposed. [Sec.
105, NIRC]
INCIDENCE OF TAX
(1) The incidence of tax is on the one who bears
the burden of taxation.
(2) The incidence of VAT is on the final
consumer.
Contex v CIR (2004): The Supreme Court
clarified the difference between the concepts of
impact of tax (liability) and incidence of tax
(burden). The seller remains directly and legally
liable for payment of the VAT but the burden is
borne by the consumer or final purchaser.
[RMC 74-99]
(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
latters PEZA registration, is actually
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
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TAXATION LAW
PERSONS LIABLE
Value-added Tax (VAT) is a percentage tax
imposed upon:
(1) Any person who, in the course of trade or
business, sells, barters, exchanges, leases
goods or properties, or renders services.
The term person refers to any individual,
trust, estate, partnership, corporation, joint
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[RR 16-2005]
PERSON LIABLE: gross sales/receipts >
P1,919,500/year [per RR 16-2011]
(1) Any person (natural or juridical) engaged in
sale or exchange of real properties
(2) Real estate lessors
(3) Non-resident lessors (property located in the
Philippines)
(4) Non-stock, Non-profit organizations
(5) Government agencies, instrumentalities,
GOCCs
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 (RR 16-2011)
(4) Lease of residential units (rental per unit
>12,800/month OR total rental from ALL
units>P1,919,500/year)
TAXATION LAW
NOT TAXABLE:
(1) Not primarily held for sale
(2) Low cost or socialized housing
(3) Residential lot < P1,919,500
(4) House and lot/ other residential dwelling<
P3,199,200
(5) Lease (rental per unit < 12,800/month and
total rental from all units < P1,919,500/ year)
(6) Transmission to a trustee (Except when the
transmission is deemed a sale transaction)
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.
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 Tax-free
exchange]
(8) Advance payment by the lessee
(9) Security deposits for lease agreements
The real estate dealer shall be subject to VAT on
the installment payments, including interest
and penalties, actually and/or constructively
received by the seller.
ON INSTALLMENT PLAN
[RR 16-2005]
Scope [Sec. 4.106 3]
Installment Plan
Deferred Payment
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EXPORT SALES
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FOREIGN CURRENCY
DENOMINATED SALE (FCDS)
TAXATION LAW
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CONSIGNMENT OF GOODS IF
ACTUAL SALE IS NOT MADE WITHIN
60 DAYS FOLLOWING THE DATE
SUCH GOODS WERE CONSIGNED
DISTRIBUTION OR TRANSFER TO
SHAREHOLDERS, INVESTORS OR
CREDITORS
TAXATION LAW
CHANGE OR CESSATION OF
STATUS AS VAT-REGISTERED
PERSON
[Sec.106(C), NIRC]
Rate: 12%
Basis: the acquisition cost or the current market
price of the goods or properties, whichever is
LOWER.
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TAXATION LAW
VAT ON
GOODS
IMPORTATION
OF
Rate: 12%
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 nonexempt persons or entities who acquire tax-free
imported goods from exempt persons, entities
or agencies [RR 16-2005]
TRANSFER OF GOODS
EXEMPT PERSONS
BY
TAX
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Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease
of properties.
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. Examples:
(1) deposit in banks which are made available to
the seller of services without restrictions
(2) issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for services
rendered
(3) transfer of the amounts retained by the
contractee to the account of the contractor.
[RR 16-2005]
TAXATION LAW
MEANING OF SALE/EXCHANGE OF
SERVICES - the performance of all kind of
services in the Philippines for others for a fee,
remuneration or consideration, whether in kind
or in cash, including those performed or
rendered by the following: (unless otherwise
indicated, from RR 16-2005)
(1) Construction and service contractors
(2) Stock, real estate, commercial, customs and
immigration brokers
(3) Lessors of property, whether personal or real
In a lease contract, the advance payment by
the lessee may be:
(a) a loan to the lessor from the lessee - NOT
subject to VAT
(b) an option money for the property - NOT
subject to VAT
(c) a security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor - NOT subject to VAT
BUT if the security deposit is applied to
rental, it shall be subject to VAT at the
time of its application
(d) Pre-paid rental - subject to VAT when
received, irrespective of the accounting
method employed by the lessor
(4) Persons engaged in warehousing services
(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
(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
Gross receipts means gross selling price
less cost of the securities sold. RR 7-95:
Pre-need companies are considered dealers
in securities.
(10) Lending investors
All persons OTHER than banks, non-bank
financial intermediaries, finance companies
and other financial intermediaries NOT
performing quasi-banking functions who
make a practice of lending money for
themselves or others at interest
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Kind of
carrier
Persons
Domestic
Goods/ cargo
Domestic
By sea/air
Domestic
Whether
transporting
persons
or
goods/ cargo
International
Tax Liability
3% percentage
tax (Sec. 117,
NIRC)
12% VAT (Sec.
108, NIRC)
Domestic trip 12% VAT
International trip
zero-rated VAT
Doing business
in
the
Philippines - 3%
percentage tax
(Sec. 118, NIRC)
International trip
- zero-rated VAT
(Sec. 108 (B)(6),
NIRC)
TAXATION LAW
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ZERO-RATED SALE OF
SERVICES
[Sec. 108 (B), NIRC]
A zero-rated sale by a VAT-registered person is
a taxable transaction for VAT purposes, but
shall not result in any output tax.
Input tax on purchases of goods, properties or
services related to such zero-rated sale shall be
available as tax credit or refund. (RR 16-2005)
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(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
TAXATION LAW
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EXEMPT TRANSACTION,
ENUMERATED
TAXATION LAW
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TRANSITIONAL TAX
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DETERMINATION OF
OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX
CREDITS
TAXATION LAW
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100,000.00
100,000.00
100,000.00
100,000.00
400,000.00
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SUBSTANTIATION
TAX CREDITS
In a Sale of Goods/Properties
OF
INPUT
[RR 16-2005]
(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.
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.
(2) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as shown
in a detailed list to be submitted to the BIR.
(3) Input
tax
on
"DEEMED
SALE"
TRANSACTIONS shall be substantiated with
the invoice required.
(4) INPUT TAX FROM PAYMENTS MADE TO
NON-RESIDENTS (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
non-resident evidencing remittance of VAT
due which was withheld by the payor.
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DESTINATION PRINCIPLE OR
CROSS-BORDER DOCTRINE
DESTINATION PRINCIPLE
TAXATION LAW
INVOICING REQUIREMENTS
INVOICING
GENERAL
REQUIREMENTS
IN
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TAXATION LAW
Transaction
Invoicing Requirement
Consignment of goods
if actual sale is not
made within 60 days
Retirement from or
cessation of business
with respect to all
goods on hand
INVOICING
AND
RECORDING
DEEMED SALE TRANSACTIONS
Transaction
Invoicing Requirement
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/investor
s or creditors
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
CONSEQUENCES
OF
ISSUING
ERRONEOUS VAT INVOICE OR VAT
OFFICIAL RECEIPT
[Sec. 113 (D), NIRC]
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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
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Jeopardy Assessment
A tax assessment made by an authorized
Revenue Officer (RO) without the benefit of
complete or partial audit, in light of the ROs
belief that the assessment and collection of the
deficiency tax will be jeopardized by delay
caused by the taxpayers 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.
It is usually issued when statutory prescriptive
periods for the assessment or collection of taxes
are about to lapse due principally to the
taxpayers fault.
Tax Delinquency v. Tax Deficiency
a. 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]
b. 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 [Sec. 6(A), NIRC]
(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 [Sec 6(B), NIRC]
The CIR shall assess the proper tax on the
best evidence obtainable when:
(a) the taxpayer fails to submit the
required returns, statements reports
and other documents
(b) there is a reason to believe that any
such report is false, incomplete or
erroneous
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TAXATION LAW
(3)
Conduct
INVENTORY-TAKING,
SURVEILLANCE and to PRESCRIBE
presumptive gross sales and receipts [Sec.
6(C), NIRC]
(a) Inventory-taking at any time during
the taxable year, for the purpose of
determining the correct tax liabilities.
(b) Surveillance done if there is reason
to believe that the taxpayer is not
declaring his correct income, sales or
receipts for tax purposes.
(c) Prescribe presumptive gross sales and
receipts if:
(i) It is found that the taxpayer has
failed to issue receipts and invoices,
or
(ii) 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 [Sec. 6(D),
NIRC]
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:
(a) retiring from business subject to tax, or
(b) intending to leave the Philippines or to
remove his property therefrom or to
hide or conceal his property;
(c) 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 [Sec.
6(E), NIRC]
(a) 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.
(b) For the purpose of computing any
internal revenue tax, the value of the
property shall be WHICHEVER IS
HIGHER OF:
(i) The FMV as determined by the
Commissioner, or
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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
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COLLECTION
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]
TAXATION LAW
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]
Collection
should
be
with
prior made within 5
assessment
years
from
the date of
assessment
of the tax.
[Sec. 203 in
relation
to
Sec.
222,
NIRC]
by distraint or
levy, or by
by distraint or judicial
levy, or by proceedings
judicial
proceedings
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Where return
filed was NOT
false or
fraudulent:
Where no
return filed, or
the return was
false or
fraudulent:
should
be
made within
ten years after
the discovery
of the falsity,
fraud
or
omission
to
file a return.
Collection
should
be
without prior made within 3
assessment
years
from
the date of
filing
of
return or date
return is due,
whichever is
LATER [based
on Sec. 203, by
judicial
NIRC]
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]
REMEDIES OF
COLLECTION
THE
GOVERNMENT
IN
Administrative
(1) Distraint of Personal Property including
garnishment deposit
(2) Summary remedy of levy on real property
(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
Judicial
(1) Civil
(2) Criminal
TAXATION LAW
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REFUND
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GOVERNMENT REMEDIES
ADMINISTRATIVE REMEDIES
(a) In the case of a VAT-registered Person. (i) Failure to issue receipts or invoices; or
(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.
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JUDICIAL REMEDIES
Offender
MODE
TAXATION LAW
OF
PROCEEDING
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]
Criminal Action
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]
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]
Penalty
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Criminal Offenses
Offense
Who is liable
PAGE 186
Penalty
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Offense
Unlawful Use of
Alcohol [Sec. 261]
Who is liable
TAXATION LAW
Penalty
Denatured Any person who for the purpose Fine: P20,000 - P100,000; AND
of manufacturing any beverage, Imprisonment - 6 years 1 day - 12
uses denatured alcohol or years
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.
Fine: P10,000-P20,000
AND
Imprisonment: 2-4 years
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Offense
Misdeclaration
or
Misrepresentation
of
Manufacturers Subject to Excise
Tax [Sec. 268]
Who is liable
TAXATION LAW
Penalty
PAGE 188
Forfeiture of goods
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Offense
Who is liable
TAXATION LAW
Penalty
Penalty for Selling, Transferring, Any taxpayer, whose property Fine: at least P5,000 AND
Encumbering or in any way has
been
placed
under at least twice the value of the
disposing of property Placed constructive distraint
property
under Constructive Distraint
OR
[Sec. 276]
Imprisonment: 2 years 1 day - 4
years
OR Both
Failure to Surrender Property Any person having in his Fine: P 5,000 or more
Placed under Distraint and Levy possession or under his control OR
[Sec. 277]
any property or rights to Imprisonment: 6 months 1 day property, upon which a warrant 2 years,
of constructive distraint or actual OR Both
distraint and levy has been
issued
Procuring Unlawful Divulgence Any person procures an officer or Fine: not more than P 2,000
of Trade Secrets [Sec. 278]
employee of the BIR to divulge OR
any confidential information Imprisonment: 6 months - 5
regarding the business, income years
or inheritance of any taxpayer, OR Both
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
return
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)
(1) Extort or willfully oppress under color of law;
(2) 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;
(3) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully neglect
to perform any of the duties enjoined by law;
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STATUTORY
PENALTIES
OFFENSES
AND
CIVIL PENALTIES
(1) Surcharge
(2) Interest
SURCHARGE
Surcharge - penalty imposed in addition to the
tax required to be paid [Sec. 248(A), NIRC]
Rates of Surcharge (25% or 50%)
(1) 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
TAXATION LAW
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COMPROMISE AND
ABATEMENT OF TAXES
TAXATION LAW
CASES
WHICH
CANNOT
BE
COMPROMISED: [Sec. 2, R.R. 30-2002]
(1) Withholding tax cases, unless the applicanttaxpayer 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
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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Commissioner or
Regional Director
Issues Letter of
Authority (LA)
Is response w/n
15 days? Is it
meritorious?
NO to
either
Yes to
both
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
If MR is denied, appeal to
the CTA within remainder
of the 30 days
CTA decides on
the appeal
YES
Appeal made
on time?
NO
Appeal to
Supreme Court
PAGE 192
Assessment
becomes Final,
Warrant of Distraint
& Levy Issued
END
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START
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 mayors office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
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))
Officer
conducts
public auction
Yes
Internal
revenue
officer,
designated by the Commissioner,
shall prepare a certificate with the
force of a nationwide legal
execution (Sec. 207 B)
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)
Excess of proceeds
of the sale over claim
and cost of sale shall
be turned over to the
owner (Sec. 213)
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Organization
Function of the BIR
TAXATION LAW 2
and
RULE-MAKING AUTHORITY OF
THE SECRETARY OF FINANCE
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]
TAXATION LAW
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Provinces
May levy only:
[Sec.
134, (1) Transfer of Real Property
LGC]
Ownership
(2) Business of Printing and
Publication
(3) Franchise Tax
(4) Tax on Sand, Gravel and
Other Quarry Resources
(5) Professional Tax
(6) Amusement Tax
(7) Annual Fixed Tax for every
delivery truck or van
Municipalities May levy taxes, fees and
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:
(1) Taxes on stores or retailers
(2) Service fees or charges
(3) Barangay clearance
(4) Other fees and charges [Sec.
152, 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]
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Province
Municipality
City
(135)
(151)
(136)
(137)
(138)
(139)
(140)
(141)
(143)
(147)
(148)
(149)
Barangay
(152a)
(152b)
(152c)
(152d)
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Rate/Amount
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.
started Not
exceeding
1/20 of 1%
Gross
annual
receipts for the
preceding
calendar year
Capital
investment
PAGE 199
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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Tax Imposed
TAXATION LAW 2
Rate/Amount
Base
Exemptions
Others
Gross
annual
receipts for the
preceding
calendar year
based on the
incoming
receipt,
or
realized, within
its
territorial
jurisdiction
Not
more Capital
than 1/20 of investment
1%
TAXATION LAW
Fair
market
value in the
locality
per
cubic meter of
resources
referred to in
Column 1
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
Distribution
of
proceeds:
(a)
Province
30%
(b)
Component
City/ Municipality
where
resources
were extracted 30%
(c)Barangay
where
resources
were
extracted - 40%
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Tax Imposed
Rate/Amount
Base
(5) Professional
Tax.
Provinces may levy
annual professional tax
on
each
person
engaged in the exercise
of
a
profession
requiring government
examination [Sec 139,
LGC]
Such amount
as
the
Sangguniang
Panlalawigan
may
determine, in
no case to
exceed
P300.00
Such
reasonable
classification by
the
Sangguniang
Panlalawigan
TAXATION LAW
Exemptions
Others
Professionals
To be paid to the
exclusively
province where the
employed by the profession
is
government
practiced, or where a
principal office is
maintained.
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.
(6) 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
Exception
to province
and
exemption:
Pop, municipality
where
rock, or similar amusement
places
concerts
are located.
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Tax Imposed
TAXATION LAW 2
Rate/Amount
Base
(7) Annual Fixed Tax For Amount not Every truck, van,
Every Delivery Truck or exceeding
vehicle
Van of Manufacturers P500
or
Producers,
Wholesalers
of,
Dealers, or Retailers in,
Certain
Products.
Imposed on vehicles
used for the delivery of
distilled
spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers
in
the
province,
whether directly or
indirectly [Sec 141, LGC]
and
PAGE 202
TAXATION LAW
Exemptions
Others
Manufacturers,
producers,
wholesalers, dealers
and retailers referred
to in column 1 shall be
exempt from tax on
peddlers
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Other Information
PAGE 203
Barangays
have
the
exclusive power to tax
gross receipts amounting
to:
(a) 50k or less: in cities
(b) 30k
or
less:
in
municipalities [Sec. 143
(d), Sec. 152, LGC]
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Other Information
(5) Contractors
and
other In accordance with the schedule in
independent contractors
Sec. 143 (e)
(6) Banks and other financial Not exceeding fifty percent 50% of
institutions
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 and profit from
exchange or sale of property,
insurance premium.
(7) Peddlers engaged in the sale of Not exceeding P50.00 per peddler
any merchandise or article of annually.
commerce
(8) 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
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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 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.
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 Baos, 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:
(1) 60% to the city/municipality where the
factory is located
(2) 40% to the city/municipality where the
plantation is located
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Community tax
Who may levy [Sec. 156,
LGC]
TAXATION LAW 2
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Cities or municipalities
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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.
SC Ruling
Airport Authority
is a GOCC, not
exempt
from
RPT. Legislature
in amending the
law specifically
deleted GOCCS
from
the
enumeration in
Sec 234(a).
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All other
Cases
TAXATION LAW
Depreciation
Allowance
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Instances for
Suspension of
Prescriptive
Period
Prescriptive
Periods for
Collection
Collecting
Authority
TAXATION LAW
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Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Govt 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)
Yes
Yes
Is real property
tax exempt?
Property shall be
dropped from
assessment roll
(sec. 206)
No
END
No
END
Appeal to the
Supreme Court w/
in 15 days
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START
Assessor submits
assessment roll to
local
treasurer
(sec. 248)
Amount of tax
protested shall be
refunded or
applied as tax
credit (Sec. 252)
Yes
LT grants
protest?
Yes
LT decides w/in
60 days?
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
Yes
LT grants
refund/tax
credit?
Yes
Taxpayer happy.
END
No
No
END
Appeal to the
Supreme Court w/
in 15 days
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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 is mailed
to or served upon
the delinquent
owner (sec. 258)
No
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)
Sanggunian
concerned
may, by ordinance sell
and dispose of the real
property acquired under
the preceding section at
public auction. (sec. 264)
END
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EXCEPT:
(1) amendment
by
the
master,
consignee or agent
(2) 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
EXCEPT:
(1) Obvious clerical error or any other
discrepancy is committed in the
preparation
(2) Without fraudulent intent
(3) Discovery would not have been made
until after examination of the
importation is completed
Translated into the official language, if
written in another language
Master shall deliver and mail the cargo
manifest to: (endorsed by boarding
officer)
(a) Chairman
(b) COA
(c) Collector (Present original)
(b) Import entry
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 (a) by
the importer, being holder of the bill of
lading, (b) by any other holder of the bill
of lading in due course, (c) by a customs
broker acting under authority from a
holder of the bill, or (d) by a person duly
empowered to act as agent or attorneyin-fact for such holder. 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
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Exception: Relieved
regulations
by
laws
or
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Exceptions:
(1) Fraud
(2) Protest
(3) Compliance audit pursuant to the
provisions of the Code
Appraisal,
TAXATION LAW
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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 (90) 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 (P2,000.00): And
provided, finally, That the personal and
household effects (except luxury items) of
a returning resident who has not stayed
abroad for six (6) months shall be subject
to fifty (50)per cent ad valorem duty
across the board, the total dutiable value
of which does not exceed two thousand
pesos (P2,000.00); any excess shall be
subject to the corresponding duty
provided in this Code;
(g) 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
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CLASSIFICATION OF DUTIES
(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]
(a) Ad valorem; Methods of valuation
The tax rates are based on 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
(a) In case such value is not
ascertainable, the reports of the
Revenue or commercial attaches; or
(b) 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]
TAXATION LAW
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)
(1) Transaction value
Price actually paid or payable for goods
when sold for export to Philippines
(a) commissions & brokerage fees
(b) cost of containers
(c) cost of packing (labor, materials)
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Less:
Less:
Less:
PRICE
COMMISSIONS/ADDITIONS
COSTS
DUTIES and TAXES
DEDUCTIVE VALUE
Similar goods
(a) like characteristics and like component
materials
(b) capable of performing same functions
(c) commercially interchangeable
(d) produced in same country
(e) produced by same producer
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
TAXATION LAW
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REMEDIES
Government
Administrative/Extrajudicial
Search, seizure, forfeiture, arrest
(1) 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]
Sec. 1508
(a) When an importer has an outstanding
and demandable account with the Bureau
of Customs,
(1) Collector shall hold the delivery of the
article.
(2) Upon notice, he may sell such
importation or a portion of it to satisfy
the obligation.
(b) Importer may settle his obligation
anytime before the sale.
TAXATION LAW
Commissions;
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Abandonment
Article is deemed abandoned when [Sec. 1801,
TCC]:
(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
the notice to claim such importation
Effect [Sec. 1802, TCC]:
(a) deemed to have renounced his interest and
property rights
(b) ipso facto deemed property of the
Government
(c) 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]
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(a) had knowledge of the existence of
abandoned article
(b) custody or charge of such article
(c) 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)
Abatement and Refund
When available:
(1) Abatement for Damage incurred during
Voyage [Sec. 1701]
(2) Abatement or Refund for the following:
(a) Missing Packages [Sec. 1702]
(b) Deficiency of Contents in Packages [Sec.
1703]
(c) Articles Lost or Destroyed after Arrival
[Sec. 1704]
(d) Dead or Injured Animals [Sec. 1705]
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Collector determines
probable cause
(illegal importation)
Collectors
decision favorable
to taxpayer/
adverse to govt?
Yes
Amount
involved less
than 5M?
Yes
Collector conducts
hearing
Does
commissioner
decide w/in 30
days?
No
Taxpayer appeals
to Customs
Commissioner 15
days from receipt
of notice
Is
Commissioners
decision favorable
to taxpayer/
adverse to govt?
Yes
No
Inaction construed as affirmation
of Collectors decision
Does
Commissioner
decide w/n 30
days?
No
Yes
Yes
Automatic Review* by
the Secretary of
Finance (SOF) (Sec.
2313, CMO 3-2002)
Is SOFs
decision
favorable to
taxpayer/adverse
to govt?
No
No
Does SOF
decide within
30 days?
Yes
No
Yes
END
Inaction construed
as affirmation of
Collectors
decision
Decision becomes
final &
unappealable
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
commissioners decision
(or of collectors 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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Anti-Dumping [Sec.
301, TCC as amended
by RA 8752]
Where a product or
commodity is imported
in the Philippines at an
export price less than
the normal value in the
ordinary course of
trade for the like
product or article
destines
for
consumption in the
exporting country or
materially regarding
establishment of a
domestic
industry
producing the like
product (Sec. 3, RA
8752)
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Countervailing [Sec.
302 as amended by RA
8751]
Whenever any product,
commodity or article of
commerce is granted
directly or indirectly by
the government in the
country of origin or
exportation, any kind
or form of specific
subsidy upon the
production,
manufacture
or
exportation of such
product, commodity or
article,
and
the
importation of such
subsidized
product,
has
caused
or
threatens to cause
material injury to a
domestic industry or
has
materially
retarded the growth or
prevents
the
establishment of a
domestic industry
Marking
[Sec. 303]
Discriminatory
[Sec. 304]
If at the time of
importation any article
(or its container if the
article
cannot
be
marked), is not marked
in any official language
of the Philippines and
in a conspicuous place
as legibly, indelibly
and permanently as
the nature of the
article (or container).
This is used to prevent
deception
of
consumers.
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
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(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
non-agricultural
products, the Secretary
of Agriculture shall
first establish that the
application of such
safeguard measures
will be in the public
interest
(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 8800
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Anti-Dumping Duty
= Normal Value Export Price
Marking
[Sec.
Discriminatory
[Sec. 304]
303]
Commissioner
Customs
of
5% ad valorem of the
articles
President (through
proclamation)
For non-agricultural
products:
Secretary of Trade and
Industry
For
agricultural
products:
Secretary
of
Agriculture
Secretary of Agriculture
For a):
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appropriately set to a
level not exceeding onethird 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:
(a) 0 - if price difference
is at most 10% of the
trigger price
(b) 30% of the amount
by which the price
difference exceeds
10% of the trigger
price
(c) 50% - if it exceeds
40% but less than
60%
(d) 70% - if it exceeds
60 but at most 75%
(e) 90% - if it exceeds
75%
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Notes:
Exceptions to the Marking of Articles: [In the
following situations, the containers shall be the
one subject to marking.]
(a) Article is incapable of being marked
(b) Article cannot be marked prior to shipment
to the Philippines without injury
(c) Article cannot be marked prior to shipment
to the Philippines, except at an expense
economically prohibitive of its importation
(d) Marking of a container of such article will
reasonably indicate the origin of such article
(e) Article is a crude substance
(f) Article is imported for use by the importer
and not intended for sale in its imported or
any other form
(g) Article is to be processed in the Philippines
by the importer or for his account otherwise
than for the purpose of concealing the origin
of such article and in such manner that any
mark contemplated by this section would
necessarily be obliterated, destroyed or
permanently concealed
(h) 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
(i) Article was produced more than twenty years
prior to its importation into the Philippines
(j) 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
JUDICIAL REMEDIES
JURISDICTION OF THE COURT OF TAX
APPEALS
Civil Tax Cases
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.
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JUDICIAL PROCEDURES
Civil cases
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Criminal cases
Institution and prosecution of criminal actions
(1) Institution of criminal action
Instituted by the filing an information in the
name of the People of the Philippines
(a) Those involving violations of the NIRC and
other laws enforced by the BIR - Must be
approved by the Commissioner of Internal
Revenue
(b) 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
Shall interrupt the running of the period of
prescription
(2) Prosecution of criminal action
(a) Conducted and prosecuted under the
direction and control of the public
prosecutor
(b) 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.
(1) Institution on civil action in criminal action
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.
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