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Meness aga

University of Cebu
College of Law
UCLASS Bar Operations
Taxation Law Society

TAX LAW
BAR NOTES
2012
by:

Jamero, Jacinto
Orofeo, Daisy
Restauro, Ruth
Ruiz, Sharmine
Vallecera, Virgil
Velayo, Lovely

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References: Law Textbooks, Codes, Reviewers, Notes, Compilations, Articles and Internet Sources

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GENERAL PRINCIPLES

3. Theoretical Justice A sound tax system


must be based on the taxpayers ability to
pay.
F. Power of Taxation

A. Definition and Concept of Taxation


TAXATION
An inherent power of the State by which
the sovereign raises revenue to defray the
necessary expense of the government
TAXES
The enforced proportional contributions
from persons and property levied by the
State by virtue of its sovereignty for the
support of government and for public
needs.
B. Nature of Taxation
INHERENT ATTRIBUTE OF SOVEREIGNTY
Without revenue raised from taxation, the
government will not survive, resulting in
detriment of society.
No need for a constitutional grant before
the State can exercise the power to tax
LEGISLATIVE IN CHARACTER
Taxes are a grant of the people who are
taxed, and the grant must be made by the
immediate representatives of the people.
SCOPE OF LEGISLATIVE TAXING POWER
(PAPMASK)
1. Persons, property or occupation to be taxed
2. Amount or rate of the tax.
3. Purpose for which taxes shall be levied, provided
they are for public purposes.
4. Method of collection
5. Appointment of the tax
6. Situs of taxation
7. Kind of tax to be collected
E. Principles of Sound Tax System
CHARACTERISTICS OF A SOUND TAX SYSTEM
(FAT)
1. Fiscal Adequacy The sources of government
revenue must be sufficient to meet
government expenditures and other public
needs.
2. Administrative Feasibility Tax laws should
be capable of being effectively enforced.

TAXATION, POLICE POWER & EMINENT


DOMAIN, DISTINGUISHED
TAXATION POLICE
POWER
Levied for
Exercised
the
to promote
purpose
Public
Purpose
of raising
Welfare
revenue
through
regulations
There is no Limited to
limit
cover the
cost of
Amount
regulation,
of
issuance
Exaction
of the
license or
surveillance.
No special No direct
Or direct
benefits are
Benefits benefit
received,
Received is received damnum
Absque
injuria
NonThe nonContracts
Impair
impairment may be
ment of
rule
impaired
contracs
subsists
Taxes paid No transfer but
become
Only restraint
part of the on the exercise
Transferof
publicfunds of property
property
rights exist.
rights

Scope

Basis

Affects all
persons,
property
and
privileges
Public
necessity

Affects all
persons,
property,
privileges,
and even rights
Public necessity
And the right of
the State and
the public to
self-protection
and selfpreservation

EMINENT
DOMAIN
Taking of
property for
public use.

No exaction
Compensatin
is paid by the
government

Direct benefit
Results in the
form of just
compensation
Contracts
Maybe
impaired
Property is
taken by
the
government
upon the
payment of
just
compensation
Affects only
the particular
property
comprehended
Necessity of
the public
for the
private
property

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G. Theory / Basis of Taxation


BASIC THEORIES OF TAXATION
1. Necessity Theory
Taxes proceed upon the theory that the
existence of government is a necessity. It
cannot continue without the means to pay
its expenses, therefore, the government
has a right to compel all citizens and
property within its power to contribute.
2. Benefits-Protection Theory / Reciprocity
Theory (Symbiotic Relationship)
According to this theory, the State
demands and receives taxes from the
subjects of taxation within its jurisdiction
so that it may be able to carry its mandate
into effect and perform the functions of
government. The citizen pays from his
property the portion demanded in order
that it may be secured in the enjoyment of
the benefits of organized society.
3. Lifeblood Theory
Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the
government will not survive, resulting in
detriment to society. Without taxes, the
government would be paralyzed for lack of
motive power to activate and operate it.
UNDERLYING THEORY OF TAXATION
Taxes are the lifeblood of the nation.
Acceptance that governmental existence is
a necessity
BASIS OF TAXATION (RATIONALE)
Reciprocal duties of protection and support
between the State and its citizens and
residents
The State gives protection and for it to
continue giving protection, it must be
supported by the taxpayers in the form of
taxes.
Jurisdiction by the State over persons and
property within its territory
Is The Power To Tax The Power To Destroy?
1. Power to tax is the power to destroy
(Marshall Dictum) refers to the
unlimitedness and the degree or vigor with
which the taxing power may be employed
to raise revenue.

2. Power to tax is not the power to destroy


while the Supreme Court sits (Holmes
Dictum) the power to tax knows no limit
except those expressly stated in the
Constitution.

Reconciliation of the Two Views:


The imposition of a valid tax could not
be judicially restrained merely
because it would prejudice taxpayers
property.
An illegal tax could be judicially
declared invalid and should not work
to prejudice a taxpayers property.
Marshalls view refers to a valid tax
while Holmes view refers to an illegal
tax.
Although the power to tax is almost
unlimited, it must not be exercised in
an arbitrary manner. If the abuse is so
great so as to destroy the natural and
fundamental rights of people, it is the
duty of the judiciary to hold such an
act unconstitutional.

ASPECTS OF TAXATION
1. Levying or imposition of the tax, which is a
legislative act; and
2. Collection of the tax levied, which is essentially
administrative in character.
TAXES DISTINGUISHED FROM OTHER
IMPOSITIONS
1. Toll a demand of ownership, and an amount
charged for the cost and maintenance of
the property used; Tax is a demand of
sovereignty for the purpose of raising
public revenue.
2. Penalty a punishment for the commission of
a crime; Tax is a civil liability. A person is
criminally liable in taxation only because
he fails to satisfy his civil obligation to pay
taxes.
3. Special Assessment levied only on land
which cannot be made personal liability of
the person assessed and is based wholly

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on benefit; Exceptional both as to time and


locality.

TAX
Imposed on persons,
property and excises
Personal liability
attaches on the person
assessed in case of
non-payment
Not based on any
special or direct
benefit
Levied and paid
annually
Exemption granted Is
applicable
(Art.VI, Sec. 28(3)
1987 Constitution)

SPECIAL ASSESSMENT
Levied only on land
Cannot be made a
personal liability of
the person assessed
Based wholly on benefit
Exceptional both as to
time and locality
Exemption does not
apply. (Note: If
property is exempt from
Real Property Tax, it is
Special
Assessment.)

4. Debt A tax is not a debt because it is not an


obligation that is created by contracts,
express or implied. A tax is an obligation
imposed by law.
5. License Fee vs. Tax
LICENSE
Basis
Police power
Purpose
Regulatory
Limitations
Limited to cost of
1. Issuing the license
2. necessary inspection
or police surveillance

TAX
Power of Taxation
To generate revenue
Inherent and
constitutional limitations

10. Custom Duties and Fees These are the


duties charged upon commodities on their
being imported in or exported from a
country. Custom duties are taxes but a tax
is a broader term to include not only
customs duties but other taxes as well.
Custom fees are regulatory imposts on
goods
Debt vs. Tax
1. A debt is generally based on contract
(express or implied) while a tax is based
on laws;
2. A debt is assignable while a tax cannot
generally be assigned;
3. A debt may be paid in kind while a tax is
generally paid in money;
4. A debt may be the subject of set-off or
compensation while a tax cannot be the
subject of set-off;
5. A person cannot be imprisoned for nonpayment of debt while failure to pay tax
(other than poll tax) may result in
imprisonment;
6. A debt is governed by the ordinary periods
of prescription while a tax is governed by
the special prescriptive periods provided
for in the NIRC;
7. A debt draws interest when it is so
stipulated or where there is default, while a
tax does not draw interest except only
when delinquent.
H. Doctrines in Taxation
1. PROSPECTIVITY OF TAX LAWS

6. Effect of non-payment

LICENSE

public welfare. It is not a tax although it


may be necessary to raise the money to
pay the subsidy by means of a tax.
Subsidies are sometimes given in lieu of a
tax exemption.

TAX

Makes the business illegal

Does not make the


business illegal
Margin Fee- exaction designed to estbilaize the
currency
7. Debt- a sum of money due upon contract or one
which is evidenced upon judgment
8. Subsidy A legislative grant money in aid of a
private enterprise deemed to promote

General Rule: Tax laws are prospective in


operation because the nature and amount of the
tax could not be foreseen and understood by the
taxpayer at the time the transactions which the law
seeks to tax was completed.
Exception: While it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative
intent. But a tax law should not be given
retroactive application when it would be harsh and
oppressive.

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2. IMPRESCRIPTIBILITY

Taxing the same person (same subject or


object) twice by the same jurisdiction over
the same thing.

MODES OF ELIMINATING DOUBLE TAXATION


1. Tax Deduction a subtraction from gross
income in arriving a taxable income
2. Tax Credit an amount subtracted from
an individuals or entitys tax liability to
arrive at the total tax liability.
(Note: A deduction differs from a tax credit in
that a deduction reduces taxable income while
a tax credit reduces tax liability.)
3. Tax Exemptions a grant of immunity to
particular persons or corporations from the
obligation to pay taxes.
4. Tax Treaties agreement between two
countries specifying what items of income
will be taxed by the authorities of the
country where the income is earned.
5. Principle of Reciprocity

DIRECT DUPLICATE TAXATION (Obnoxious)


Double taxation in its prohibited or strict
sense. This violates the equal protection
clause of the Constitution.
Elements: (a) the same property or subject
matter is taxed twice when it should be
taxed only once; (b) both taxes are
imposed on the same property or subject
matter; (c) both taxes are levied for the
same purpose; (d) both taxes imposed by
the same taxing authority within the same
jurisdiction, during the same taxable
period, and covering the same kind or
character of tax.

International Juridical Double Taxation


The imposition of comparable taxes in two
or more states on the same taxpayer in
respect of the same subject matter and for
identical periods.
This double taxation usually takes place
when a person is a resident of the first
contracting State and derives income from,
or owns capital in the second contracting
State and both States impose taxes on
such income or capital. In order to
eliminate double taxation, a tax treaty is
entered into by the two contracting States.

As a rule, taxes are imprescriptible as they


are the lifeblood of the government.
However, tax statutes may provide for
statute of limitations.
The National Internal Revenue Code of
1997, the Tariff and Customs Code, and
the Local Government Code of 1991 have
provided for prescriptive periods for both
Assessment and Collection of Taxes.

3. DOUBLE TAXATION

INDIRECT DOUBLE TAXATION


Double taxation in its broad sense. This
kind is permissible and it arises in the
absence of one or more of the elements of
direct double taxation.
CONSTITUTIONALITY OF DOUBLE TAXATION
There is no constitutional prohibition against
double taxation in the Philippines (Villanueva
vs. City of Iloilo, G.R. No. L-26521, December
28, 1968)

While double taxation is not forbidden, it is


something not favored. Such taxation
should, whenever possible, be avoided and
prevented.
When there is direct double taxation, there
may be a violation of the constitutional
precepts of equal protection and uniformity
in taxation.

To eliminate double taxation, a tax treaty


resorts to the following methods:
1. An exclusive right to tax is conferred on
one of the contracting states; however, for
other items of income or capital, both
states are given the right to tax although
the amount of tax that may be imposed by
the state of source is limited; and
2.

The state of source is given a full or limited


right to tax together with the state of
residence. In this case, the treaties make it
incumbent upon the state of residence to
allow relief in order to avoid double
taxation.
a) Exemption Method the income or
capital which is taxable in the state of
source or situs is exempted in the state
of
residence
although
in
some
instances, it may be taken into account
in determining the rate of tax
applicable to the taxpayers remaining
income or capital. The focus here is on
the income or capital itself.

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Credit Method although the income


or capital which is taxed in the state of
source is still taxable in the state of
residence, the tax paid in the former is
credited against the tax levied in the
latter. The focus here is on the tax.

Most Favored Nation Clause in Tax Treaties


The purpose of the most favored nation clause is to
grant to the contracting party treatment not less
favorable than that which has been or may be
granted to the most favored among other
countries. The most favored nation clause is
intended to establish the principle of equality of
international treatment by providing that the
citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to
those of the most favored nation.
4. ESCAPE FROM TAXATION

Tax Evasion is the use by the taxpayer


of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also
known as tax dodging, and is punishable
by law.

Shifting the transfer of the burden of


tax by the original payer or the one on
whom the tax was assessed or imposed to
someone else.

Capitalization the reduction in the price


of the taxed object equal to the capitalized
value of future taxes which the purchaser
expects to be called upon to pay.

Tax Avoidance is the use by the


taxpayer of legally permissible alternative
tax rates or methods of assessing taxable
property or income in order to avoid or
reduce tax liability. It is also called tax
minimization, and is not punishable by
law.

Transformation is a method whereby


the manufacturer or producer upon whom
the tax has been imposed, fearing the loss
of his market if he should add the tax to
the price, pays the tax and endeavors to
recoup himself by improving his process of
production, thereby producing his units at
a lower cost.

Tax Exemption is the grant of immunity


to particular persons or corporations or to
persons or corporations of a particular
class from a tax which persons or
corporations generally within the same
state or taxing district are obliged to pay.
WAYS OF SHIFTING THE TAX BURDEN

1.

2.

3.

Forward shifting when the burden of


the tax is transferred from a factor of
production through factors of distribution
until it finally settles on the ultimate
purchaser
or
consumer.
(Example:
Manufacturer or producer may shift the tax
assessed to wholesaler, who in turn shifts
it to the retailer, who also shifts it to the
final purchaser or consumer.)
Backward shifting when the burden of
the tax is transferred from the consumer or
purchaser
through
the
factors
of
distribution to the factor of production.
Onward shifting when the tax is shifted
two or more times either forward or
backward.

(Note: Only INDIRECT TAXES can be shifted.)


Impact of Taxation vs. Incidence of Taxation
Impact of Taxation is the point on which a
tax is originally imposed. Insofar as the law
is concerned, the taxpayer is the person
who must pay the tax to the government.
He is the statutory taxpayer or the one
on whom the tax is formally assessed.
Incidence of Taxation is that point on which
the tax burden finally rests or settles
down. It takes place when shifting has
been effected from the statutory taxpayer
to another person. (Example: In VAT, the
seller is required by law to pay the tax, but
the burden is actually shifted or passed on
to the buyer.)
5. EXEMPTION FROM TAXATION

The grant of immunity to particular


persons or corporations or to persons or
corporations of a particular class from a tax
which persons or corporations generally
within the same state or taxing district are
obliged to pay. (51 Am. Jur. 503)

Nature of Tax Exemption

It is a mere personal privilege of the


grantee.
It is generally revocable by the
government unless the exemption is
founded on a contract which is
protected from impairment.
It implies a waiver on the part of the
government of its right to collect what
otherwise would be due to it, and so is
prejudicial thereto.

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It is not necessarily discriminatory so


long as
the exemption
has
a
reasonable foundation or rational basis.

Principles Governing Tax Exemptions

Exemptions from taxation are highly


disfavored in law.

He who claims the exemption must be able


to justify his claim by the clearest grant of
organic or statute law. If ambiguous, there
is no tax exemption. Taxation is the
rule, tax exemption is the exception.

He who claims an exemption must justify


that the legislature intended to exempt him
by words too plain to be mistaken.

He
who
claims
exemption
should
convincingly prove that he is exempted.

Tax
exemption
must
be
strictly
construed.

Tax exemptions are not presumed.

Constitutional grants of tax exemptions are


self-executing.

Tax exemptions are personal.


Note: Deductions for income tax purposes partake
of the nature of tax exemptions; hence, they are
also to be strictly construed against the taxpayer.
Kinds of Tax Exemption
As to Basis:
a. Constitutional Exemptions
immunities from taxation which
originate from the Constitution.
b. Statutory Exemptions those
which emanate from legislation
As to Form:
a) Express
or
Affirmative
Exemption

when
certain
persons, property, or transactions
are, by express provision of law,
exempted from all or certain taxes
wither entirely or in part.
b) Implied Exemption or Exemption
by Omission when a tax is
levied on certain classes of
persons, properties, or transactions
without mentioning the other
classes.
As to Scope or Extent:
a) Total Exemption when certain
persons, property, or transactions

are exempted, expressly or


impliedly, from all taxes.
b) Partial Exemption when certain
persons, property, or transactions
are
exempted,
expressly
or
impliedly, from certain taxes, either
entirely or in part.
Grounds for Granting Tax Exemption
May be based on contract. In such a case,
the public which is represented by the
government is supposed to receive a full
equivalent therefor, i.e., charter of a
corporation.
May be based on some ground of public
policy, i.e., to encourage new industries or
to foster charitable institutions. Here, the
government need not receive any
consideration in return for the tax
exemption.
May be based on grounds of reciprocity or
to lessen the rigors of international double
or multiple taxation.
(Note: Equity is not a ground for tax exemption.
Exemption is allowed only if there is a clear
provision therefor.)
Revocation of Tax Exemption

A grant of exemption is an act of liberality


which could be taken back by the
Government. Since taxation is the rule
and exemption is the exception, the
exemption may thus be withdrawn at the
pleasure of the taxing authority.

However, if the tax exemption constitutes a


binding contract and for valuable
consideration, the government cannot
unilaterally revoke the tax exemption.
Restrictions on Revocation

Non-impairment clause Where the


exemption was granted to private
parties based on material consideration
of a mutual nature, it then becomes
contractual and is covered by the nonimpairment clause of the Constitution.
Adherence to form If the tax
exemption
is
granted
by
the
Constitution, its revocation may be
effected
through
constitutional
amendment only.

6. COMPENSATION AND SET-OFF

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General Rule: Taxes cannot be the subject of


compensation or set-off.
Reasons:
1. Lifeblood theory
2. Taxes are not contractual obligations but
arise out of duty to the government
3. The government and the taxpayer are
not mutually creditors and debtors of each
other.

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Exception:
When both obligations are due and
demandable as well as fully liquidated, and all
the requisites for a valid compensation take
place by operation of law. (Domingo vs.
Garlitos, G.R. No. L-18849, June 29, 1963)

a written claim due to lapse of the


prescription period within which to make a
refund is allowed. Under this doctrine, the
taxpayer is allowed to credit such refund to
his existing tax liability.
(Note: Equitable recoupment is allowed only in
common law countries, not in the Philippines.)
7. COMPROMISE

Note: Compensation
was
allowed
in
one
exceptional case, that is, the case of
Domingo vs. Garlitos (supra). In the said
case,
compensation
was
recognized
because both the claim of the Government
for inheritance tax and the claim of the
estate for services rendered have already
become overdue and demandable and fully
liquidated. Further, an amount for the
claim of the estate had already been
appropriated by the Government.
There can be no offsetting of taxes against
The claims that a taxpayer may have
against the government, such as
reimbursement from the Oil Price
Stabilization Fund (OPSP). (Caltex Phils. vs.
COA, G.R. No. 92585, May 8, 1992)

Philex Mining cannot refuse the payment


of its Tax liabilities on the ground that it
has pending claims for VAT input
credit/refund. A taxpayer cannot refuse to
pay his taxes when they fall due simply
because he has a claim against the
government or that the collection
of the tax is contingent on the result of
the lawsuit if filed against the
government. (Philex Mining vs.
Commissioner of Internal Revenue, G.R.
No. 125704, August 28, 1998)

Doctrine of Equitable Recoupment


Where a claim for tax refund or credit is
filed beyond the prescriptive period, it can
still be applied against other taxes that
may be due.
This is a case where the taxpayer has a
claim for refund but he was not able to file

A compromise is an agreement between


two or more persons who, to avoid a
lawsuit, amicably settle their differences on
such terms as they can agree on.
A
compromise by its very nature implies
mutual agreement by the parties in regard
to the thing or subject matter which is to
be compromised. An offer of compromise
does not, therefore, assume the category
of compromise until it is voluntarily
accepted by the other party, and no
obligation arises or is created by a simple
offer or suggestion coming from one of the
parties without the acceptance by the
other.

8. TAX AMNESTY

General or intentional overlooking by the


State of its authority to impose penalties
on persons otherwise guilty of evasion or
violation of a revenue or tax law.

Partakes of an absolute forgiveness or


waiver of the government of its right to
collect.

To give tax evaders, who wish to relent and


are willing to reform, a chance to do so.
Tax Amnesty vs. Tax Exemption
Like a tax exemption, a tax amnesty is
never favored nor presumed in law, and it
is granted by statute. The terms of the
amnesty must be strictly construed against
the taxpayer and liberally in favor of the
government.
Unlike a tax exemption, a tax amnesty has
limited applicability as to cover a particular
taxing period or transaction only.
9. CONSTRUCTION AND INTERPRETATION
Construction and Interpretation of Tax Laws

When legislative intent is clear, tax laws


are to receive a reasonable construction
with a view to carrying out their purpose
and intent. They should not be construed

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as to permit the taxpayer easily to evade


the payment of taxes.
In case of doubt, tax laws are construed
strictly against the government and
liberally in favor of the taxpayer. Taxes,
being burdens, are not to be presumed
beyond what the statute expressly and
clearly declares.

Construction and Interpretation of Tax


Exemptions

Laws granting tax exemptions are


construed strictly against the taxpayer and
liberally in favor of the government.
(Principle of Strictissimi Juris)
Exceptions to application of Strictissimi Juris:
a) When the statute granting exemption
provides for liberal construction thereof;
b) In case of special taxes relating to special
cases and affecting only special classes of
persons;
c) If exemptions refer to the public property;
d) In cases of exemptions granted to
religious, charitable and educational
institutions or their property;
e) In cases of exemptions in favor of the
government, its political subdivisions or
instrumentalities.
Hornbook Doctrine
In the interpretation of tax laws, a tax
cannot be imposed without clear and express
words for that purpose and the provisions of
a taxing act are not to be extended by
implication.

I. Scope and Limitations of Taxation


INHERENT LIMITATIONS (SPINE)
1. Territoriality or Situs of Taxation
2. Public Purpose of Taxes
3. International Comity
4. Non-delegability of Taxes
5. Tax Exemption of the Government
1. SITUS OR TERRITORIALITY
Does the place of taxation depend on the
nature of the taxes being imposed?
An inherent mandate that taxation shall
only be exercised on persons, properties

and
excises within the territory of the
taxing power
Factors to Consider in Determining Situs of
Taxation:
1) Kind and classification of the taxes
2) Location of the subject matter of the tax
3) Domicile or residence of the person
4) Citizenship of the person
5) Source of income
6) Place where the privilege, business or
occupation is being exercised.
Situs of the Following Taxes:
1. Real Property Tax place where the
property is located
2. Personal Property Tax
a. tangible where it is physically
located
b. intangible mobilia sequuntur
personam
3. Tax on Person place where the
person is a resident or domicile of.
4. Income Tax interplay of the
citizenship, domicile, source of income
5. Exercise or Privilege Tax place
where the same is performed or the
privilege is exercised
6. Franchise Tax State which granted
the franchise
7. Business Tax where business is
conducted
8. Tax On Corporation where it is
incorporated

General Rule:
As to intangible personal
properties, like shares of stock, their situs
is in the domicile of the owner thereof
(mobilla sequuntur personam)
Exceptions: (a) When the property has
acquired a business situs in another
jurisdiction; or (b) When the law provides
for the situs of the subject of tax.

2. TEST IN DETERMINING PUBLIC PURPOSE


OF TAX
Duty Test whether the thing to be threatened
by the appropriation of public revenue is
something which is the duty of the State as
a government to provide
Promotion of General Welfare Test
Whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure.

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5. The power of taxation is peculiarly and
exclusively legislative.
General Rule: Taxing power may not be
delegated.

It is a general rule that the legislative is


without power to appropriate public
purpose. It is the essential character of
the direct object of the expenditure
which must determine its validity as
justifying a tax and not the magnitude
of the interests to be affected nor the
degree to which the general advantage
of the community, and thus the public
welfare, may be ultimately benefited by
their promotion. Incidental advantage
of the community, and thus the public
or to the state, which the general
advantage to the public or to the state,
which results from the promotion of
private interests, and the prosperity of
private enterprises or business does not
justify their aid by the use of public
money. (Pascual vs. Secretary of Public
Works, G.R. No. L-10405, December
29, 1960)

In the imposition of taxes, public purpose is


presumed. Hence, where an ordinance did
not specifically state the purpose for which
the tax was to be used, it is presumed that
said tax is created for a public purpose.
3. INTERNATIONAL COMITY
States find it mutually advantageous for
themselves to create self-imposed restrains
on their taxing powers especially with
reference to the properties of foreign
governments
within
their
territorial
domain.
Reciprocity is the root of this limitation
4. NON-DELEGABILITY OF LEGISLATIVE
TAXING POWER
Non-Delegable Legislative Power
1. Selection of property to be taxed
2. Determination of the purpose for which taxes
shall be levied
3. Fixing the rate of taxation.
4. Rules of taxation in general

Exceptions:
1. Authority of the President to fix tariff rates,
customs duties, etc. (Art.VI, Sec.28 (2),
Consti.)
2. Delegation to local governments (Art. X,
Sec. 5, Consti.)
3. Delegation to administrative agencies
What is actually delegated is not the act
of levy but the assessment
5. TAX EXEMPTION OF GOVERNMENT
As a matter of public policy, property of
the State or any of its political subdivision
devoted to government uses and purposes
are generally exempt from taxation.

However, it can also tax itself.


(Collector vs. Bisaya Land Transportation)
CONSTITUTIONAL LIMITATIONS
1. Due Process Clause
2. Equal Protection
Clause
3. Uniformity,
Equitability and
Progressive of Taxation
4. Non-impairment of
Contracts
5. Non-imprisonment
for non-payment of poll
tax
6. Origin of
Appropriation Revenue
and Tariff Bills
7. Non-infringement of
Religious Freedom
And Worship
8. Delegation of
Legislative Authority to
the President to fix
Tariff Rates, Import
And Export Quotas
9. Exemption of
Property Actually,
Directly and Exclusively
Used for Religious,
Charitable and

A.III, S.1
A.III, S.1
A.VI, S.20
A.III, S.10
A.III, S.20
A.VI, S.24

A.III, S.5

A. VI, S.28(2)

A.VI, S.28(3)

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Educational Purpose
10. Majority Vote of all
Members of the Congress
Required in case of a Legislative
Grant of Tax Exemptions
11. Non-impairment of
the Supreme Courts
Jurisdiction in Tax Cases
12. Tax Exemption of
Revenues and Assets of,
Including grants,
Endowments, donations
Or Contributions to
Educational Institutions
13. Other Related Provisions:
a. Power of
the
president to
veto
item/s in an
appropriation,
revenue or
tariff bill
b. Necessity of an
appropriation before
money may be paid
out of public
treasury
c. Non-appropriation of
public money or
property for the benefit
of any church
sect, or system of religion
d. Treatment of taxes
levied for special purpose
e. Internal Revenue
Allotments to LGUs
7. Non-infringement of
Religious Freedom
and Worship

UCLASS Bar Operations: Tax Law Society

A.VI, S.28(2)
A.VIII,S.(1)
and A.VIII,
S.5(2b)
A.XIV, S.2(1)
and 4(4)

A.VI, S.27(2)

2. Equal Protection Clause (Art III. Sec 1)

A. VI, S.27(2)

A. VI, S.29(2)

A. VI, S.29(3)
A.X, S. 6
A.III, S.5

1. Due Process Clause (Art III. Sec 1)


No person shall be deprived of the due
process of law
Requisites:
1.1. The interest of the public generally as
distinguished from those of a particular
class require the intervention of the State;
1.2. The means employed must be reasonably
necessary to the accomplishment of the
purpose and not unduly oppressive.

the City of Manila which imposes a permit


fee of P50.00 on aliens as a condition to
employment or engaging in any business
or occupation, where it appears that under
said ordinance, the City mayor of Manila
could withhold or refuse issuance of such
permit at will. Aliens, once admitted in the
Philippines, cannot be deprived of life
without due process of law and this
guarantee includes the means of livelihood.
(Villegas vs. Hiu Chiong Tsai Pao Ho G.R
No. L-29646. November 10, 1978)
A local ordinance which levies an ad
valorem tax on motor vehicles registered
in Manila without also taxing those which
are registered outside the city but which
enters the city and use its street
occasionally violates the rule on the
equality of taxation. (Assoc. of Customs
Brokers vs. Municipality Board of Manila
G.R. No. L-4817, May 26, 1954)

There is a denial of due process on


account if the passage of an ordinance in

All persons subject to legislation shall be


treated alike under similar circumstances
and conditions both in privilege conferred
and liabilities imposed.
The doctrine does not require that persons
or properties different in fact be treated in
law as though they were the same. What it
prohibits
is
class
legislation
which
discriminates against some and favors
others. As long as there are rational or
reasonable grounds for so doing, Congress
may group persons or properties to be
taxed and it is sufficient if all members of
the same class are subject to the same
rate and the tax is administered impartially
upon them.
The previous exemption of PAGCOR from
paying corporate income tax was not
based
on
a
classification
showing
substantial distinctions which make for
real differences, but was granted upon
PAGCORs request. It is the legislative
intent that PAGCOR be subject to the
payment of corporate income tax.
PAGCOR cannot find support in the equal
protection clause of the Constitution, as
the legislative records of the Bicameral
Conference Meeting dated October 27,
1997, of the Committee on Ways and
Means, show that PAGCORs previous
exemption from payment of corporate

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income tax was not made pursuant to a


valid classification based on substantial
distinctions and the other requirements of
a reasonable classification by legislative
bodies, so that the law may operate only
on some, and not all, without violating the
equal protection clause but was made
upon PAGCORs own request to be
exempted. (Philippine Amusement and
Gaming Corporation vs. Bureau of
Internal Revenue, G.R. No. 172087,
March 15, 2011)

A local tax on tenement houses does not


violate the rule of uniformity and equality
of taxation even if the tax in question is
not also levied one other class of buildings
in the locality where such tax is imposed...
(Villanueva vs. City of Iloilo G.R. No. L26521. December 28,1968)

Uniformity is not disregarded if a tax is


levied on admissions to cinema, theaters,
vaudeville companies, theatrical shows and
boxing exhibitions but does not tax other
places of amusement such as race tracks,
cockpits, cabarets, concert halls, circuses
and other places of amusement. (Eastern
Theatrical Co. Vs Alfonso G.R No. L-1104.
May 31 1949)

Taxpayers may be classified into different


categories. It is enough that the
classification must
rest
upon
the
substantial distinctions that make real
differences. (Antero M. Sison, Jr. vs.
Ruben B. Ancheta, G.R. No. L-59431, July
25, 1984)

3. Uniformity, Equitability And


Progressivity Of Taxation [Art. Vi
Sec.28 (1)
The rule of taxation shall be uniform
and equitable. The Congress shall
evolve a progressive system of
taxation.

Internal Revenue vs. Lingayen Gulf Electric


Co., G.R. No. L-23771, August 4, 1988)

Uniformity in taxation means that all


taxable articles or kinds of property of the
same classes shall be taxed at the same
rate. A tax is uniform when it operates with
the same force and effect in every place
where the subject of it is found. A tax of P2
a square meter of fraction thereof imposed
upon every electric sign, billboard, etc.,
wherever found in the Philippine Islands,
satisfies the requirement of the Philippine
Bill that the rule of taxation in said Islands
shall be uniform. (Churchill And Tait vs.
Conception G.R No. 11572. September 22,
1916)
A tax is uniform when it operates with the
same force and effect in every place where
the subject of it is found. Uniformity means
that all property belonging to the same
class shall be taxed alike. The legislature
has the inherent power not only to select
the subjects of taxation but to grant
exemptions. Tax exemptions have never
been deemed violative of the equal
protection
clause.
(Commissioner
of

Uniformity All taxable articles or kinds of


property of the same class shall be taxed
at the same rate. A tax is uniform when it
operates with the same force and effect in
every place where the subject of it is
found.
Equity The apportionment of the tax burden is
more or less just in the light of the
taxpayers ability to bear the tax burden.
Progressive Tax rate increases as the tax base
increases.

Progressivity of taxation is also


mandated in the Constitution. Our income
tax system is one good example of such
progressivity because it is built on the
principle of the taxpayers ability to pay.
Taxation is progressive when its rate goes
up depending on the resources of the
person affected. (Reyes vs. Almanzor, G.R.
Nos. 49839-46, April 26, 1991)
4. Non-Impairment of Contracts (Art. III,
Sec. 10, Art. XII)
No law impairing the obligation of
contracts shall be passed.

A law which changes the terms of the


contract by making new conditions, or
changing those in the contract, or
dispenses with those expressed, impairs
the obligation.
However, the non-impairment rule does not
apply to public utility franchise is subject to
amendment, alteration or repeal by the

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Congress
requires.

when

the

public

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interest

so

The
non-impairment
clause,
which
provides that no law impairing the
obligations of contracts shall be passed, is
limited in application to laws that derogate
from prior acts or contracts by enlarging,
abridging or in any manner changing the
intention of the parties.
There is
impairment if a subsequent law changes
the terms of a contract between the
parties, imposes new conditions, dispenses
with those agreed upon or withdraws
remedies for the enforcement of the rights
of the parties.
As regards franchises,
Section 11, Article XII of the 1987
Constitution provides that no franchise or
right shall be granted except under the
condition that it shall be subject to
amendment, alteration or repeal by the
Congress when the common good so
requires. It has been previously held that
a franchise partakes the nature of a grant,
which is beyond the purview of the nonimpairment clause of the Constitution.
(Philippine
Amusement
and
Gaming
Corporation vs.
Bureau of
Internal
Revenue, G.R. No. 172087, March 15,
2011)
Under Section 11, Article XII of the 1987
Constitution, PAGCORs franchise is subject
to amendment, alteration or repeal by
Congress such as the amendment under
Section 1 of R.A. No. 9337. Hence, the
provision in said section withdrawing the
exemption of PAGCOR from corporate
income tax, which may affect any benefits
to PAGCORs transactions with private
parties, is not violative of the nonimpairment clause of the Constitution.
(Philippine
Amusement
and
Gaming
Corporation vs.
Bureau of
Internal
Revenue, G.R. No. 172087, March 15,
2011)

5. Non-Imprisonment for Non-Payment of


Poll Tax (Art. III, Sec. 20)
No person shall be imprisoned for debt
or non-payment of a poll tax.

6. Origin of Revenue Appropriation, And


Tariff Bills (Art. VI, Sec. 24)
All appropriation, revenue or tariff
bills, bills authorizing increase of the
public debt, bills pf local application,
and private
bills shall originate
exclusively
in
the
House
of
Representatives, but the Senate may
purpose or concur with amendment.

7. Non-Infringement of Religious Freedom


And Worship (Art. III, Sec. 5)
No law shall be made respecting an
establishment of religion, or prohibiting
the free exercise thereof. The free
exercise and enjoyment of religious
profession
and
worship,
without
discrimination or preference, shall
forever be allowed. No religious test
shall be required for the exercise of
civil or political rights.

8. Delegation of Legislative Authority To


Fix Tariff Rates, Import And Export
Quotas [Article VI, Sec.28 (2)]
The Congress may, by law, authorize
the President within specified limits,
and subject to such limitations and
restrictions as it may impose, tariff
rates, import and export quotas,
tonnage and wharfage dues, and other
duties or imposts within the framework
of the national development program
of the Government.

9. Tax Exemption of Property Actually,


Directly And Exclusively Used For
Religious, Charitable And Educational
Purposes [Art. VI Sec.28 (3)]
Charitable Institutions, churches and
personages or convents appurtenant
thereto,
mosques,
non-profit
cemeteries, and all lands, buildings and
improvements, actually, directly and
exclusively
used
for
religious,
charitable, or educational purposes
shall be exempt from taxation

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The President may increase tariff rates as


authorized by law even for revenue
purposes only.

The
constitutional
exemption
applies only to property tax. Gifts are
subject to donors tax.
Actual use is necessary. To be exempt
from tax, the lands buildings and
improvements must not only be exclusively
but also actually and directly used for
religious and charitable purposes. (Prov of
Abrav vs. Hernando, No. L-49336 August
31, 1981)
USE overrides OWNERSHIP in that if
property although actually owned by a
religious,
charitable
or
educational
institution is actually used for a nonexempt purpose; the exemption from tax
of said property vanishes. HOWEVER, total
or
absolute
use
is
not
required,
INDCEDENTAL USE is enough.

10. Voting Requirement In Connection


With Legislative Grant of Tax Exemptions
[Art. VI, Sec.28 (4)]
No law granting any tax
exemption shall be passed without the
concurrence of a majority of all the Members of
the Congress.

11. Non-Impairment of Supreme Courts


Jurisdiction in Tax Cases (Art.VIII,
Sections 2 and 5)
The Congress shall have the
power to define, prescribe and
apportion the jurisdiction of the
various courts but may not deprive the
Supreme Court of its jurisdiction over
cases enumerated in Section 5
hereof.
Section 5. The Supreme Court shall
have the following powers:
(2) Review, revise, modify, or affirm
on appeal or certiorari, as the law or
the Rules of Court ma provide, final
judgments and orders of lower courts
in:
xxx
(b) All cases involving the legality of
any tax, impost, assessment, or toll,
or any penalty imposed in the relation
thereto.

St. Catherines Hospital is a charitable


institution, and the fact that if\t admits
pay-patients does not bar it from claiming
that it is devoted exclusively to benevolent
purposes, it being admitted that the
income derived from pay-patients is
devoted to the improvements of the charity
wards Herrera vs. QC Boa (no. L-15270
September 30 1961)
While the use of the second floor of the
man building in the case at bar for
residential purposes of the Director and his
family may find justification under the
concept of incidental use, which is
complimentary to the main or primary
purpose---educational, the lease of the
first floor thereof to the Northern
Marketing Corporation cannot by any
stretch of the imagination be considered
incidental to the purpose of education.
However, since only a portion is used for
purposes of commerce, it is only fair that
half of the assessed tax is returned to the
school involved. (Abra Valley vs. Aquino
No. L-39086 June 15 1988)

12.

Tax Exemption Of Revenues And


Assets
Including
Grants,
Endowments,
Donations,
Or
Contributions
To
Educational
Institutions (Art XIV, Sec. 4(4)
Sec. 4(3) All revenues and assets of
non-stock,
non-profit
educational
institutions used actually, directly, and
exclusively for educational purposes
shall be exempt from taxes and duties.
Upon the dissolution or cessation of
the corporate existence of such
institutions, their assets shall be
disposed of in the manner provided for
by law.

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N. Kinds of Taxes

CLASSIFICATION OF TAXES
As to Subject Matter or Object
1) Personal Tax also known as capitation tax
or poll tax. This is a tax of a fixed amount
on individuals residing within a specified
territory without regard to their property,
occupation
or
business.
Example:
community tax
2) Property Tax imposed on property, real or
personal, in proportion to its value, or in
accordance with some reasonable method
of apportionment. Example: real estate
tax
3) Excise Tax imposed on the exercise of a
privilege, the performance of an act, or
engaging in an occupation, profession, or
business. Examples: income tax, estate
tax, donors tax, VAT
As to Burden
1) Direct Tax incidence and impact of taxation
fall to one person and cannot be shifted to
another. Examples: income tax, estate tax
2) Indirect Tax incidence and liability for the
tax fall to one person but the burden
thereof can be passed on to another.
Example: VAT

3) Proportional Tax based on a fixed


percentage of the amount of the property,
receipts, or on other basis to be taxed.
As to Scope
1) National Tax imposed by the national
government.
2) Local Tax imposed by the local government.

O. Tax Laws and Regulations

Nature of Tax Laws


1. Civil in nature and are not political.
2. Not penal, being such, the rule in the
Constitution against the passage of ex post
facto laws cannot be invoked
Interpretation of Tax Laws

A statute will not be construed as


imposing a tax unless it does so clearly,
expressly and unambiguously. In case of
doubt, tax statutes ate constructed most
strongly against the government and in
favor of the citizen

As to Purpose
1) General Tax also known as fiscal or revenue
tax. This is levied for ordinary or general
purpose of the government
2) Special Tax also known as regulatory or
sumptuary tax. This is levied for a special
purpose.

As to Determination of Amount
1) Specific Tax imposed based on a physical
unit of measurement as by number,
weight, length or volume.
2) Ad Valorem Tax imposed upon the value.
3) Mixed
As to Rate
1) Progressive Tax tax rate increases as the
tax base or bracket increases.
2) Regressive Tax tax rate decreases as the
tax base or bracket increases.

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NATIONAL INTERNAL REVENUE CODE OF


1997, AS AMENDED

A.

INCOME TAXATION

1. Income Tax Systems


a) Global Tax System (prevailing until
1981) All items of gross income,
deductions, and personal and additional
exemptions, if any, were declared in one
income tax return, and one set of tax rates
were applied on the net taxable income.
b) Schedular Tax System (introduced by
BP 135) Different types of income are
subject to different rates, whether
graduated or flat income tax rates. Tax
rates will depend on the classification of
the taxable income (without deductions) or
net income (i.e., Gross income less
allowable deductions).
c) Semi-Schedular or Semi-Global Tax
System Global, in the sense that all
compensation income, business or
professional income, capital gains, passive
income, and other income not subject to
final tax are added together to arrive at
the gross income, and after deducting the
sum of allowable deductions, is subjected
to one set of graduated tax rates (if
individual) or the to the normal corporate
income tax rate (if corporation).
2. Features of the Philippine Income Tax
Law
a) Direct Tax tax burden is borne by the
income tax recipient upon whom the tax is
imposed.
b) Progressive Tax tax rate increases as
the tax base increases.
c) Comprehensive Tax adopts the
citizenship principle, the residence
principle, and the source principle.
d) Semi-Schedular or Semi-Global Tax
System
3. Criteria in Imposing Philippine Income
Tax
a) Citizenship Principle A citizen taxpayer
is subject to income tax: (1) on his
worldwide income, if he resides in the
Philippines; or (2) only on his income from
sources within the Philippines, if he
qualifies as non-resident citizen.

b) Residence Principle A resident alien is


liable to pay income tax on his income
from sources within the Philippines but
exempt from tax on his income from
sources outside the Philippines.
c) Source Principle A non-resident alien is
subject to Philippine income tax because
he derives income from sources within the
Philippines such as dividends, interests,
rents, or royalties.
4. Types of Philippine Income Tax
a) Graduated income tax on individuals;
b) Normal corporate income tax on
corporations;
c) Minimum corporate income tax (MCIT) on
corporations;
d) Special income tax on certain corporations
(e.g., private educational institutions,
foreign currency deposit units,
international carriers)
e) Capital gains tax on sale or exchange of
unlisted shares of stock (classified as
capital asset) of a domestic corporation;
f) Capital gains tax on sale or exchange of
real property classified as capital asset and
located in the Philippines;
g) Final withholding tax on certain passive
income;
h) Final withholding tax on income payments
made to non-residents (individual or
corporation);
i) Fringe benefits tax (FBT);
j) Branch profit remittance tax (BPRT);
k) Improperly accumulated earnings tax
(IAET)
5. Taxable Period
a) Calendar Period accounting period from
January 1 to December 31. This is allowed
if (1) taxpayer is an individual; (2)
taxpayer is a corporation; (3) accounting
period is other than fiscal year; (4)
taxpayer has no accounting period; or (5)
taxpayer does not keep books of accounts.
b) Fiscal Period accounting period of 12
months ending on the last day of any
month other than December, which is
allowed only to corporations.
c) Short Period income shall be computed
on the basis of a period less than 12
months. This is applicable in the case of:
(1) change in accounting period from fiscal
year to calendar year, from calendar year
to fiscal year, or from one fiscal year to
another; (2) final personal income tax
return of a decedent; (3) income tax

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return of the estate of a decedent; (4)


newly-organized corporations; and (5)
dissolving corporations.

6. Kinds of Taxpayers
a) Individual Taxpayers
(i) Resident Citizens
(ii) Non-resident Citizens

A citizen of the Philippines who


establishes to the satisfaction of
the BIR Commissioner the fact of
his physical presence abroad with a
definite intention to reside therein

A citizen of the Philippines who


leaves the Philippines during the
taxable year to reside abroad,
either as an immigrant or for
employment on a permanent basis

A citizen of the Philippines who


works and derives income from
abroad and whose employment
thereat requires him to be
physically present abroad most of
the time during the taxable year
(The phrase most of the time
means at least 183 days during the
calendar year.)
Note: A citizen who has been previously
considered as non-resident citizen and who
arrives in the Philippines at any time
during the taxable year to reside
permanently in the Philippines shall
likewise be treated as a non-resident
citizen for the taxable year in which he
arrives in the Philippines with respect to
his income derived from sources abroad
until the date of his arrival in the
Philippines.
Overseas Filipino Workers (OFWs)

OFWs refer to Filipino citizens


employed in foreign countries and who
are physically present in a foreign
country as a consequence of their
employment thereat. Their salaries
and wages are paid by an employer
abroad and are not borne by any entity
or person in the Philippines.

To be considered an OFW, they must be


duly registered as such with the
Philippine Overseas Employment
Administration (POEA) with a valid
Overseas Employment Certificate.

[Revenue Regulations (RR) No. 1-2011


dated February 24, 2011)
Under the National Internal Revenue
Code of 1997, seafarers or seamen
(those Filipino citizens who receive
compensation for services rendered
abroad as a member of the
complement of a vessel engaged
exclusively in international trade) are
also considered OFW.
An individual citizen of the Philippines
who is working and deriving income
from abroad as an OFW is taxable only
on income from sources within the
Philippines. Thus, an OFWs income
arising out of his overseas employment
is exempt from income tax.
However, if an OFW has income
earnings from business activities or
properties within the Philippines, such
income earnings are subject to
Philippine income tax.

(iii) Resident Aliens

An alien actually present in the


Philippines who is not a mere
transient or sojourner is a resident
of the Philippines for income tax
purposes.

One who comes to the Philippines


for a definite purpose, which in its
nature may be promptly
accomplished, is a TRANSIENT.
But if his purpose is of such a
nature that an extended stay may
be necessary for its
accomplishment, and to that end,
the alien makes his home
temporarily in the Philippines, he
becomes a resident, though it may
be his intention at all times to
return to his domicile abroad when
the purpose for which he came has
been consummated or abandoned.
(iv) Non-resident Aliens Engaged in
Trade or Business in the
Philippines

An individual whose residence is


not within the Philippines and who
is not a citizen thereof.

A non-resident alien individual who


shall come to the Philippines and
stay therein for an aggregate
period of more than 180 days
during any calendar year shall be

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deemed a non-resident alien doing


business in the Philippines.

notwithstanding, the statutory


minimum wage, holiday pay,
overtime pay, night shift
differential pay, and hazard pay
shall still be exempt from
withholding tax. (Republic Act No.
9504, as implemented by Revenue
Regulations No. 10-2008, July 8,
2008)

(v) Non-resident Alien Not Engaged in


Trade or Business in the
Philippines

An individual whose residence is


outside the Philippines and who is
not a citizen thereof and not doing
business therein.

(vi) Special Class of Individual


Employees

Minimum wage earner (MWE) shall


refer to a worker in the private
sector paid the statutory minimum
wage, or to an employee in the
public sector with compensation
income of not more than the
statutory minimum wage in the
non-agricultural sector where
he/she is assigned.

MWEs are exempt from income tax


and withholding tax. The
exemption covers the statutory
minimum wage, holiday pay,
overtime pay, night shift
differential pay, and hazard pay.

An employee who receives or earns


additional compensation such as
commissions, honoraria, fringe
benefits, benefits in excess of the
allowable statutory amount of
P30,000, taxable allowances and
other taxable income other than
the statutory minimum wage,
holiday pay, overtime pay, hazard
pay, and night shift differential pay
shall NOT enjoy the privilege of
being a MWE and, therefore,
his/her entire earnings are NOT
exempt from income tax and
consequently, from withholding
tax. (Republic Act No. 9504, as
implemented by Revenue
Regulations No. 10-2008, July 8,
2008)

MWEs receiving other income, such


as income from the conduct of
trade, business, or practice of
profession (except income subject
to final tax), in addition to
compensation income, are NOT
exempted from income tax on their
entire income earned during the
taxable year. This rule,

b) Corporations
(i) Domestic Corporation

A corporation created or organized in


the Philippines or under its laws.
(ii) Resident Foreign Corporation

A foreign corporation engaged in trade


or business within the Philippines.
(iii) Non-resident Foreign Corporation

A foreign corporation not engaged in


trade or business within the
Philippines.
(iv) Joint Venture and Consortium
Note: Under Section 22(B) of the NIRC, the term
corporation shall include partnerships, no matter
how created or organized, joint stock companies,
joint accounts (cuentas en participacion),
associations, or insurance companies, but does
NOT include general professional partnerships and
a joint venture or consortium formed for the
purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and
other energy operations pursuant to an operating
or consortium agreement under a service contract
with the Government.
c)

Partnerships

Taxable or Business Partnership

Includes unregistered joint ventures


and business partnerships

d) General Professional Partnerships

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
e) Estates and Trusts

Estate refers to the mass of properties


left by a deceased person.

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f)

UCLASS Bar Operations: Tax Law Society

Trust is a right to the property, whether


real or personal, held by one person for
the benefit of another

Co-ownerships

There is co-ownership when two or


more heirs inherit an undivided
property from a decedent.

A co-ownership is NOT TAXABLE when


the activities are limited merely to the
preservation of the co-owned property
but co-owners are liable for income tax
in their separate and individual
capacities.

A co-ownership is taxable when the


income of the co-ownership is invested
by the co-owners in a business
creating a partnership.

7. Income Taxation
8. Income

2. Realization Test unless the income is


deemed realized, there is no taxable
income.
3. Economic- Benefit Principle flow of wealth
realized is taxable only to the extent that
the taxpayer is economically benefited.
CAPITAL resource of person which can be used
in producing goods and services.

INCOME
All wealth which
flows into the
taxpayer other than
as a mere return of
Capital
Flow of Wealth
Source of Wealth

CAPITAL
Fund or property
which can be used
in producing goods
or services
Fund of property
Wealth

9. Gross Income
B. Classification of Taxpayer
INCOME all wealth that flows into the taxpayer
other than mere return of capital, actually
and constructively received.
INCOME TAX tax on all yearly profits arising
from property, profession, trades of offices,
or as a tax on a persons income,
emoluments, profits and the like
Requisites for income to be taxable:
(applies only to NIT)
1. There must be gain or profit.
2. The gain must be realized or received,
actually or constructively.
3. The gain must not be excluded by law
treaty from taxation.
A mere increase or decrease in the value
of property is not income or loss until after
the actual disposition of the property in
excess of its original cost.
Such increase or decrease is merely
treated as an unrealized increase or
decrease in capital as the case maybe.
Test on Taxability of Income
1. Flow of Wealth Test The determining factor
for the imposition of income tax is whether
any gain was derived from the transaction.

A. Individuals
1. Citizens
1.1 Resident Citizens (RC)
`
1.2 Non-Resident Citizens (NRC)
1.3 Overseas Filipino Workers (OFW)
2. Aliens
2.1 Resident Aliens (RA)
2.2 Non-Resident Aliens (NRA)
1. Engaged in trade or business within the
Philippines (NRAETB)
2. Not engaged in trade or business within
the Philippines (NRANETB)
2.3 Aliens employed by:
1. Regional or area headquarters (RHQ)
and Regional operating headquarters
(ROHQ) of multinational corporations
2. Offshore banking unit (OBU)
3. Petroleum service contractors and
subcontractors
B. CORPORATION
Includes:
a. Partnerships
b. Joint-stock companies
c. Joint accounts (cuentas en
participation)
d. Associations, or
e. Insurance companies(Sec. 22B)
Excludes:

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a.
b.

UCLASS Bar Operations: Tax Law Society

General professional Partnerships;


Joint Venture or Consortium formed for
the
purpose
of
undertaking
construction projects or engaging in
petroleum, coal, geothermal and other
energy operations pursuant to an
operating or consortium agreement
under a service contract with the
Government.

General Professional 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. (Section 22B)
C. ESTATES AND TRUST
Estate refers to the mass of properties
left by a deceased person.
Trust A right to the property, whether
real or personal, held by one person for the
benefit of another.
C.
1.
2.
3.
4.
5.
6.

Kinds of Income Taxes under RA 8424


Net Income Tax
Final Income Tax
Gross Income Tax
Improperly Accumulated Earnings Tax
Minimum Corporate Income Tax
Optional Corporate Income Tax

1. Net Income Tax


Means gross income less allowable
deductions and or personal exemptions
(Section 31, CTRP)
Formula Framework:
FOR INDIVIDUALS
Gross Income
-- Allowable Deductions and Personal or
Additional Exemptions
Taxable Income
x Tax Rate
Tax Due
-- Tax Credit (if any)
NET TAX DUE

Citizen
a. Resident Citizen
b. Non-resident
Citizen
c. OFW

Aliens
a. Resident Alien

b. Non-resident Alien
Engaged in trade
or business
Who comes &
stays in the Phils. for
an aggregate period
of 180 days during
any calendar year
(deemed to be a
NRAETB)
Not engaged in
trade or business

Aliens subject to Preferential Tax Rates


General Rule: Aliens employed by:
1. Regional or area headquarters and
Regional operating headquarters of
multinational companies,
2. Offshore banking units, and
3. Petroleum service contractors and
subcontractors are NOT LIABLE for the
payment of net income tax because
they are subject to tax equal to 15% of
gross income (i.e., salaries, wages,
annuities,
compensation,
remuneration, and other emoluments)
Exception: If these alien employees received the
income from sources other than from their
respective employers.

However, the net income tax does not


apply if the employee is a nonresident alien
not engaged in trade or business
(NRANETB). This type of taxpayer is
subject to Gross Income Tax and/or Final
Income Tax, as the case may be.
Income Tax Liability of Corporations
Type ofTaxpayer

Income Tax Liability of Individuals


Type of Taxpayer

Taxable
Within

Taxable
Without

Domestic
Corporation
Resident Foreign
Corporations

Taxable
Within

Taxable
Without

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Non-resident
Foreign
Corporations

UCLASS Bar Operations: Tax Law Society


1.

Compensation Income all remuneration for


services performed by an employee for his
employer under an employer-employee
relationship unless specifically excluded by
the Code.
Taxable Income (Otherwise KNOWN AS NET
INCOME) means the pertinent items of
gross income specified in this Code, less
the deductions and/or personal and
additional exemptions, if any, authorized
for such types of income by this Code or
other special laws.
A. Gross Income
Gross Income means all income derived from
whatever source, including (but not limited to) the
following items:
1. Compensation for services in whatever
from paid, including, but not limited to
fees,
salaries, wages, commissions,
and similar items;
2. Gross income derived from the conduct
of trade or business or the exercise of
a profession.
3. Gains derived from dealings in
property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and,
11. Partners distributive share from the
net income of the general professional
partnership.

The following classes of income are NOT included


in the computation of the gross income:
1. Passive income (ex. CGT from the sale
of shares of stocks and real property)
2. Income that are exempt under the
income tax law
3. Income classified as exclusions under
Section 32 (B)
A.I INCLUSIONS [Section 32 (A)]
1. Compensation for Services, etc the following
income earners are liable to pay by way of
FIT and is not included in Sec. 32 (A) (I) of
the NIRC:

2.
3.

Alien Individual Employed by


Multinational Companies
Alien Individual Employed by Offshore
banking units
Alien Individual Employed by Petroleum
Service Contractor or Subcontractor.

Revenue Regulations No. 12-2002:


Filipinos employed in managerial or
technical
position
in
multinational
companies which is either regional area
headquarters
or
regional
area
headquarters have an option to pay by way
of the net or the final income tax. But for
the Filipinos working in offshore banks and
in the petroleum services, they have no
option.
2. Gains Derived From Property Dealings
Gain must be from ordinary asset or capital
asset located within the Philippines it is not
included in the income tax return because
it is subject to final income tax.

In the sale of shares of stocks, its proceeds


may be subjected to income tax and
therefore included under Section 32, NIRC,
if the requisites for which FIT shall apply
are not present.
3. Interest, Rents, Royalties, which must be
sourced from without for net income
subject final income tax.
4. Dividends must be issued by a foreign
corporation. When it is issued by a
domestic corporation, it becomes passive
income and subject to FIT.

Kinds of Dividends
A. Cash and Property Dividends
Individual Taxpayer
a. From Domestic Corporations
RC, NRC, RA 10% (Sec. 24A)
NRAETB 20% (Sec 25A2)
NRANETB 25% on gross income
(Sec. 25B)
b. From Foreign Corporations
RC, NRC, RA, NRAETB 5 to 32%
(Sec. 24, 25A1)
NRANETB 25% on gross income
(Sec. 25B)
Corporate Taxpayer
a. Foreign to Domestic Corporations
30% (Sec. 32A)
b. Domestic to Domestic Corporations
Exempt (Sec. 27D)

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c.

Domestic to Foreign Corporations

Resident Foreign Corporations


Exempt [Sec. 28(A)(7)(D)]
Nonresident Foreign Corporations
15% subject to the condition stated in
Sec. 28(B)(5). Otherwise, it shall be taxed
at 30%. (See CIR vs. Procter and
Gamble, 204 SCRA 377,
Dec. 2, 1991)
B. Stock Dividends
General Rule: Not subject to tax because
it does not constitute income; it represents
transfer of surplus to capital account. (Sec.
73B, 1997 NIRC)
Exceptions:
a. Sec. 73B, 1997 NIRC
i. There is redemption or
cancellation
ii. The transaction involves
stock dividends, and
iii. The time end manner of
the transaction makes it essentially
equivalent to
a distribution of taxable
dividends. (see CIR vs.CA, CTA &
ANSCOR, G.R. No. 108576, Jan. 30, 1999)
b. the recipient is other than the
shareholder (Bachrach vs. Seifert, 87 Phil.
483)
c. change in the stockholders equity
results by virtue of the stock dividend
issuance.
C. Liquidating Dividends When a
corporation distributes all of its assets in
complete liquidation dissolution, the gain
realized
or loss
sustained
by the
stockholder,
whether
individual
or
corporate, is taxable income or deductible
loss, as the case may be. (Sec.73A)
A liquidating dividend is not
a dividend income. The transaction is
considered a sale or exchange of property
between the corporation and the
stockholder.
5. Annuities which are not exempt from tax are
included in the computation of gross
income.
6. Prizes and Winnings are included in the
computation of gross income if:
a. Prize amounting to 10T or less from
sources within.

b. Prize amounting to more than 10T from


sources without.
c. Prize from corporation.
7. Pension forms part of gross income if the same
is NOT EXEMPT.
8.

The

Partners Share is included in the


computation of gross income if the
partnership of which taxpayer is a partners
is a general professional partnership (GPP)
which is exempt from corporate income
tax.
Note: Section 32A of the Tax Code does not apply
to NRANETB & NRFC.

A.2 EXCLUSIONS [Section 32(B)]


1. Life insurance
2. Amount Received by insured as Return of
Premium
3. Gifts, Bequests, and Devises
4. Compensation for injuries or Sickness.
5. Income Exempt under Treaty.
6. Retirement Benefits, Pensions, Gratuities,
etc
a. Retirement benefits received under RA
7641 and RA 4917
b. Separation pays because of death,
sickness or other physical disability or
for any cause beyond the control of the
official employee.
c. Social security benefits, retirement
gratuities, pensions and other similar
benefits received by citizens or aliens
who come to reside permanently in the
Philippines
from
foreign
sources,
private or public.
d. Benefits due to residents under the
laws of the US administered by the US
Veterans Administration.
e. Benefits received from or enjoyed
under the SSS.
f. Benefits received from the GSIS.
7. Miscellaneous Items
a. Income
Derived
by
Foreign
Government.
b. Income
Derived
by
the
Government
or
its
Political
Subdivisions provided it is in the
exercise of its sovereign capacity.
c. Prizes and Awards.
d. Prizes and Awards in Sports
Competition.
e. 13th Month Pay and Other Benefits.

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f.
g.

h.

UCLASS Bar Operations: Tax Law Society

GSIS, SSS, Medicare and Other


Contributions.
Gains from the Sale of Bonds,
Debentures or other Certificate of
Indebtedness (with a maturity of
more than 5 years)
Gains from Redemption of Shares
in Mutual Fund.

1. Proceeds of Life Insurance are excluded


If payable upon death of the insured
whether in a single sum or otherwise, but if
such amounts are held by the insurer
under an agreement to pay interest
thereon, the interest payments shall be
included in gross income.
2. Amount Received By Insured As
Return Of Premium
No death occurs in this case; only a
maturity of the term.
Only the amount of premium paid is
excluded.
3. Gifts, Bequests, and Devises are
donations because they are given

A. Foreign Government
B. Philippine Government
via PVAO, SSS & GSIS
C. Private Sector R.A
4917 (with a
retirement
plan)

R.A 7641 (without a


Retirement plan)

gratuitously. The income received by the


donee from the said items is excluded. But
the income earned afterwards by the items
is subject to income tax.
4. Compensation For Injuries Or Sickness
Refers to:
a. Any amounts received by reason of
injury or sickness, such s, through
Accident or
health Insurance or
under Workmens Compensation
Acts, as compensation for personal
injuries or sickness,
b. Plus the amount of any damages
received; whether by suit or
agreement, on account of such
injuries or sickness.
c. The injury or sickness must arise
from an employer relationship
5. Retirement, Benefits, Pensions
Gratuities, Etc. --Retirement Pay: Sum of money
received upon reaching the maximum age
of employment.

RETIREMENT PAY
No Requirement
No Requirement
Requirements
1. Private retirement plan must be duly approved by the BIR.
2. Worker must be at least 50 years of age
3. Worker must have at least rendered service for 10 years
4. Benefits granted shall only be availed of once.
1. Worker must be at least 60 years old but not more than 65
years of age.
2. Worker must have served the company for at least 5
years.
SEPERATION PAY

A. Foreign Government

No Requirement

B. Philippine Government
or any private sector

Requirement:
that the cause of separation be any of the following:
1. Death
2. Sickness
3. Other Physical Disability
4. Beyond the control of the said official or employee
TERMINAL LEAVE BENEFITS

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political subdivision is still liable to pay


A. Terminal leave benefits
Cases:
tax for October
the latter
income
given upon retirement
In Re: Atty Zialcita (A.M. No. 90-6-015SC,
18,
1990)earned.
Revenue Regulation
c. Prizes
and Awards
1.Government
Employee 2-98:
Terminal leave benefits granted upon
retirement
should be
Those
made
primarilytoin recognition of
Any payment made by
an employer
an
exempted
from to
income
tax. However1.the
ruling
is applicable
religious,
charitable
scientific,
employee on account
of dismissal
DOJ employees
only.
educational, artistic, literary or civic
constitutes compensation regardless of
achievement
if:
whether the employer
is legally v.
bound
Borromeo
CA & by
Castaneda (GR No.
96032 July but
31, only
1991)
a. The
contract, statute, or Adopted
otherwise,
make
the to
ruling
in Zialcita and Borromeo
andrecipient
made it was selected without
any action
on his
part to enter the
such payment. Amounts
received
by
applicable
to employees
of the Department
of Foreign
Affairs
contest
or
proceeding:
and
reason of involuntarydetailed
separation
remain
in the Philippine embassy in England.
b.
The
recipient
is
not required to
exempt
from
income
tax
even
if
the
2. Private Sector
In Re: Atty Zialcita
render
any
substantial
future
service as a
official or employeeOn at
the
time
of
of the basis of the ruling is PD 220 which says that
condition
receiving the prize or
separation had rendered
less
than
10 in the Government
terminal
leave
benefits
or intothe private
award.
years of service and/or
50 exempt
years from income tax.
sectorbelow
shall be
2. Those granted to athletes in local and
old.
international
sports
competitions
and
B. Terminal Leave
E.O 291 by President Estrada & Revenue
Memorandum
Circular
16-200
tournaments
whether
held
in
the
6.Benefits
Miscellaneous
given on Items
a
provides that the said benefit is
exempt from tax.
Philippines
or
abroad
provided
they
are
a.
Income
derived
from
Investments
in
yearly basis.
sanctioned
by
their
national
sports
the
Philippines
in
loans,
stocks,
1. Government Employee
RR 2 -98 Sec. 2. 781 Par. A(7)
associations
bonds or other domestic securities,
from interest on
in banks
2. Private or
Sector
1. deposits
Accumulated
vacation leave benefit
Gross
received
by officials and
in the Philippines bya. vacation leave is more than
Employee
10 days,Benefits
it is subject
to
1. Foreign governments,
employees
of
public
and
private entities:
income tax
2. Financing institutions b.
owned,
controlled,
Provided,
however,
That
the total
vacation leave is less than 10 days, it is exempt from
or enjoying refinancingincome
from tax
foreign
exclusion shall not exceed P30,000 which
governments, and 2. Accumulated sick leave benefits is subject
shall cover.
to income tax
3. International or regional financial
1. Benefits received by officials and
institutions established by foreign
employees of the national and local
governments.
government pursuant to Republic Act No.
6686;
If the lender is a non-resident foreign
2. Benefits received by employees pursuant
corporation, it is subject to a FIT of
to Presidential Decree No. 851, as
20%. If the lender is a foreign
amended by Memorandum Order No. 28,
government, or a financing institution
dated August 13, 1986;
enjoying refinancing from the foreign
3.
Benefits
received
by
officials
and
govt.
or
regional
or
international
employees
not
covered
by
Presidential
institution established by such foreign
Decree No. 851, as amended by
government, it shall be exempt (Com. of
Memorandum Order No. 28, dated
Internal Revenue v. Mitsubishi Metal
August 13, 1986; and
Corp. G.R No. 54908 Jan. 22, 1990)
4. Other benefits such as productivity
incentives and Christmas bonus.
b. Income derived by the Philippine
Government or to any political
subdivision from any:
a. Public Utility
b. Exercise of any government function is
also exclusions.

Thus, income received by the


government from sources other than
those mentioned above are subject to
tax. Exceptions: GSIS, SSS, PHIC, PCSO,
and Local Water Districts
A political subdivision however
may partly earn income from (a) and (b)
and partly
from other sources. The

Exclusions
(Sec. 32B)
Refer to flow of wealth
which are not treated
as
part of gross income
due
to; (1) exempted by
statute; (3) not come
within the definition of
income
Pertain to the
computation of gross
income

Deductions
(Sec. 34)
Refer to the amounts
which the law allows
to be subtracted
from gross income in
order to arrive at net
income

Pertain to the
computation of the
net income

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Something earned or
received by the
taxpayers which do not
form part of gross
income.

UCLASS Bar Operations: Tax Law Society

B. Allowable Deductions

(Sec. 34)

Items or amounts which the law allows to be


deducted from gross income in order to
arrive at the taxable income.
KINDS
1.
2.
3.
4.

OF DEDUCTIONS:
Itemized Deductions
Personal and Additional Exemptions
Optional Standard Deduction
Special Deductions

ALLOWABLE DEDUCTIONS VS. PERSONAL


EXEMPTIONS
Allowable
Deductions
As To Amount
Generally refer to
actual expenses
incurred in the pursuit
of trade, business or
practice of profession
As To Nature
Constitute business
expenses
As To Purpose
Enable the taxpayer
to
recoup his cost of
doing business
As To Claimants
All taxpayers

which depreciation or amortization may


be allowed, shall be allowed as deduction
only if it is shown that the tax required to
be deducted and withheld there from has
been paid to BIR.(Sec. 34 [K])

Something spent or
pain in earning of
gross income

Personal
Exemptions
Arbitrary amounts
allowed by law

Pertain to personal
expenses
Recoup from personal,
family, and living
expenses

Individual taxpayers

BASIC PRINCIPLES GOVERNING


DEDUCTIONS
1. The taxpayer seeking a deduction must
point to some specific provisions of the
statute authorizing the deduction; and
2. He must be able to prove that he is
entitled to the deduction authorized or
allowed. (Atlas Consolidated Mining &
Dev. Corp. vs. Comm.)
3. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for

Taxpayer who cannot avail of deductions


from gross income
1. Citizens and resident aliens whose income is
purely compensation income (except for
premium payments on health and/or
hospitalization insurance);
Compensation
Income
Taxpayers
paying the net income tax can avail only
of the deduction under Section 34 (M)
premium payments on health and/or
hospitalization insurance for himself,
including his family not to exceed P2,
400 per family or P200 a month paid
during the taxable year.
Provided, That the said family has a
gross income of not more than P250, 000
for the taxable year:
Provided, FINALLY, that in the case of
married taxpayers, only the spouse
claiming the additional exemption for
dependents shall be entitled to this
deduction.
2. Non-resident aliens not engaged in trade or
business in the Philippines; and
3. Non-resident foreign corporation
CLASSES OF DEDUCTIONS
1. Individuals
a. With gross compensation income from
employer-employee relationship only
1. Premium payments on health
and/or hospitalization insurance
2. Personal exemptions
b. Gross income from business or practice
of profession
1. Optional Standard Deduction
(OSD)
2. Itemized deductions
3. Premium payments on health
and/or hospitalization insurance
4. Personal exemptions
2. Corporations
Itemized deductions
B.1

ITEMIZED DEDUCTIONS
1. Expenses
2. Interest

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3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion of Oil and Gas Wells and
Mines
8. Charitable and Other Contributions
9. Research and Development
10. Pension Trust
11. Premium Payments on Health and/or
Hospitalization Insurance of an Individual
Taxpayer
The above mentioned itemized deductions
are
available to ALL taxpayers EXCEPT:
1. NRFC
2. NRANETB
B.1.1

EXPENSES

Requisites to be Deductible:
1. Ordinary and Necessary Expenses
Ordinary Expenses normal or usual in
the line of business
Necessary Expenses appropriate and
helpful in the development of taxpayers
business
2. Paid or incurred within the taxable year.
3. Must be reasonable
4. Must comply with substantiation
requirements
5. Must not be contrary to law, morals,
public policy or public order
6. Corresponding tax required to be
withheld has been remitted to the BIR
7. Directly attributable to the development,
management, operation and/or conduct
of business or exercise of profession,
including the following reasonable
allowances:
a. For salaries, wages and
compensation, including
grossed-up monetary value of
fringe benefit provided FB
taxes are paid.

Aguinaldo
Company
is
engaged
the
manufacture of fishnets. It sold a parcel
of land and profit was given as bonus to
its employees. The bonus cannot be
considered as a deductible salary because
no service was rendered by the
employees. The bonus given thereto
cannot be considered as salary or
compensation because no service was

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rendered as such it is not deductible.


(Aguinaldo v. Securities No. L-29790
February 25 1982)
b.

For travel here and abroad


while away from home in the
pursuit, of trade, business or
profession.

c.

For rentals for the continued


use of property for purposes
of
trade,
business
or
profession
to
which
the
taxpayer has not or is not
taking title or in which he has
no equity other than that of a
lessee.

d.

For
entertainment
or
recreation connected to the
trade, business or profession
or directly related to or in
furtherance of the conduct of
the
business,
PROVIDED
however that the expense
incurred contrary to law,
morals, public policy or public
order shall not deductible

N. B. Bribes, kickbacks and similar payments


shall not be deductible.
Amount constituting as a bribe is not
allowed as a deduction from gross income
of a corporation. However, to the
recipient government official, the same
constitutes a taxable income. All income
from legal or illegal sources are taxable
absent any clear provisions of law
exempting the same. (Rutkin v. US, 343
US130)
CAPITAL EXPENDITURE Those that benefits
not only the current period but also
future periods. It is NOT deductible But
depreciable, except if the taxpayer is a
proprietary educational institution.
Sec. 34 A (2) is the exemption to Sec.
36(A)(2) & 36(A)(3)

Sec. 36. Items not Deductible


(2) Any amount paid out for new
buildings
or
for
permanent
improvements or betterments made to
increase the value of any property or
estate.
(3) Any amount expended in restoring
property
in making
good, 27the
For Private
andor
Personal
Use Only
exhauster thereof for which an
allowance is or has been made.

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outcome of said equation
deducted from the P200,000

shall

be

P100, 000 interest earned from the P 1M


P 100,000
33%
P 33,000
A

Private
Educational
Institution,
for
expenditure for expansion of school
facilities, otherwise considered as capital
expenditure, may at its option:
1. Deduct the expenditure in the year
incurred (as business expense); or
2. Capitalize the expenditure and deduct
for depreciation

B. 1. 2
1.
2.
3.
4.

INTEREST
Requisites to be Deductible
Taxpayer is the debtor.
Debt must be related to the business or
profession of the taxpayer
Interest should be legally due.
Interest paid or accrued during the
taxable year.

No Deduction on Interest Expense shall be


allowed in respect of interest under the
following:
1. Interest on transactions made by related
parties specified under Section 36(B)
(transactions at arms-length); or
2. If the indebtedness is incurred to finance
petroleum exploration.
3. Interest is paid in advance through
discounting or otherwise.
38% Rule under RR 13-2000 (33%
effective January 1, 2009)
The 38% (now 33%, effective January 1, 2009)
rule shall be applied to the interest
received from the money loaned when
deposited in a bank
Example:
P 1 million loan with 20% interest or P200,000
(this amount is not yet the amount to be
deducted)
If the P 1M is deposited in a bank and earns
interest, then the interest will be
multiplied by 38% (now 33%) and the

P 200,000
33,000
P 167,000 (This shall
be the allowable deduction)
Note: This limitation shall apply regardless of
whether or not a tax arbitrage scheme was
entered into by the taxpayer or regardless of the
date when the interest bearing loan and the date
when the investment was made for as long as,
during the taxable year, there is an interest
expense incurred on one side and an interest
income earned on the other side, which interest
income had been subjected to final withholding
tax. This rule shall be observed irrespective of
the currency the loan was contracted and/or in
whatever currency the investments or deposits
were made. (Revenue Regulations No. 13-2000)
Optional Treatment of Interest Expense. At
the option of the taxpayer, interest
incurred to acquire property used in
trade, business or exercise of a
profession may be allowed as a deduction
or treated as a capital expenditure.
B. 1.3
TAXES
Requisites to be Deductible:
1. Related to the business of the taxpayer
2. Imposed by law on, and payable by,
taxpayer
3. Paid or incurred during the taxable year
Exceptions:
1. Income tax.
2. Income tax paid or occurred to any
foreign country, if the taxpayer is
claiming a tax credit for such foreign tax.
3. Estate or donors tax.
4. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (special assessment).
Taxes Which May Be Claimed As Tax Credit
1. Income tax subject to withholding system
where the withholding is not final

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2.
3.

UCLASS Bar Operations: Tax Law Society

Income tax paid to a foreign country


Input tax under the VAT
Taxes allowed, when refunded or
credited, shall be included as part of
gross income in the year of receipt to the
extent of the income tax benefit of said
deduction (TAX BENEFIT RULE).
In the case of a NRAETB and RFC, the
deductions for taxes shall be allowed only
if and to the extent that they are
connected with the income from sources
within the
Philippines.

B. 1. 4

LOSSES

Requisites to be Deductible
1. Actually sustained during the taxable
year
2. Not compensated by insurance or
otherwise
3. Charged off during the taxable year
4. Not claimed as a deduction in an estate
tax return
5. Property connected with the trade or
business, if the loss arises from fires,
storms, shipwreck or other casualties or
from robbery, theft or embezzlement

B. 1. 5

For casualty losses, the taxpayer shall


notify the BIR and submit a Sworn
Declaration of Loss within 45 days after
the date of occurrence of the event.
(Revenue Memorandum Order No. 312009, October 16, 2009)
Capital loss can never be deducted from
an ordinary gain. Capital loss can only be
deducted from capital gain in accordance
Sec. 39 (c) of the NIRC. (China Banking
Corp. v. CA, Com. of Internal Revenue
and CTA G.R. No. 125508 July 19, 2000)
BAD DEBTS

Requisites to be Deductible:
1. Incurred
in
connection
with
the
taxpayers trade, profession or business
2. Actually ascertained to be worthless, and
3. Charged off within the taxable year.
Except:
a) Those not connected with profession,
trade or business, and

b) Those sustained in a transaction


entered
into
between
parties
mentioned under Section 36(B) of
this Code: clear
That
Recovery
of
Bad
Debts
previously allowed as deduction in the
preceding years shall included as part of
the gross income in the year of recovery
to the extent of the income tax benefit of
said deduction. (Tax Benefit Rule)
B. 1. 6
DEPRECIATION
A reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance
for obsolescence) of property used in the
trade or business
Requisites to be Deductible
1. Must be reasonable
2. Must be on property used in the conduct
of the business
3. Must be treated as an expenditure for the
taxable year
Property held by one person for life with
the remainder to another person
The deduction shall be computed if the
life tenants were the absolute owner of
the property and, as such the expense
shall accrue to him.
Property Held in Trust
Allowable deduction shall be apportioned
between the income beneficiaries, and
the trustees in accordance with the
pertinent provisions, on the basis of the
trust income allowable to each.
Methods of Depreciation
The term reasonable allowance shall
include (but not limited to) an allowance
computed in
accordance, with the
regulations prescribed by the Department
of Finance, under any of the following
methods
1. Straight-line method
2. Declining-balance method
3. Sum of the years-digit method
4. Any other method which may be
prescribed by the Department of Finance
upon recommendation of the
Commissioner of Internal Revenue.
Methods of Depreciation
Formula

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1.
2.
3.

UCLASS Bar Operations: Tax Law Society

Straight-line
Cost- Salvage Value
Estimated Life
Declining Balance
Cost Depreciation
x Rate
Estimated Life
Sum of the Years digits (SYD)
Nth Period x (Cost-Salvage)
SYD

Special Types of Depreciation


1. Petroleum Operations
Depreciation of all properties directly
related to production of petroleum shall
be allowed under straight-line (SL) or
declining balance (DB) method
May shift from DB to SL method
Useful life: 10 years or shorter life as
allowed by the Commissioner
Useful life of property not directly
related to production: 5 years under
straight line method
2. Mining Operations
Depreciation on all properties in mining
operations
other
than
petroleum
operations at the normal rate if expected
life is less than 10 years.
If expected life is more than 10 years,
depreciation shall be any number of
years between 5 years and the expected
life.
3. Depreciation deductible by non-resident aliens
engaged in trade/business or nonresident corporation
Only when such property is located in the
Philippines.
B. 1. 7 DEPLETION OF OIL AND GAS WELLS
AND MINES
Depletion exhaustion of natural resources as
in mines, oil, and gas wells. The natural
resources are called wasting assets. As
the physical units representing such
resources are extracted and sold, such
assets move towards exhaustion
Requisites to be Deductible
1. Must be reasonable
2. Must be on property used in the conduct
of the business
3. Must be treated as an expenditure for the
taxable year
4. Applicable only to those taxpayers who
are engaged in the business involving
natural resources

Allowed only to mining entities owning


economic interest in mineral deposits.
Features:
1. Intangible Exploration and development
drilling cost in petroleum exploration shall
be treated either as:
a. Revenue expenditures; or
b. Capital expenditures
2. The total amount of deductible for
exploration
and
development
expenditures shall not exceed 50% of net
income from mining operation. The
excess shall be carried forward to the
succeeding year until fully deducted.
B. 1. 8 CHARITABLE AND OTHER
CONTRIBUTIONS
Partial Deduction:
10% (individual) or 5% (corporation) of the
taxable income of the donor, if made to
the following donees:
1. To Government of the Republic of the
Philippines or any of its agencies /
political subdivision thereof exclusively
for public purposes, or
2. Accredited domestic corporations or
associations organized and operated
exclusively
for religious,
charitable,
scientific, youth and sports development,
cultural or educational purposes or for
the rehabilitation of veterans, or to nongovernmental organizations.

No part of the net income of which inures


to the benefit of any private stockholder
or individual.

Full Deduction:
If made to the following:
1. Donations to the Government.

The donation must be


exclusively to finance undertaking priority
activities in
accordance with
the national priority plan determined by
the NEDA
2.
Donations
to
Certain
Foreign
Institutions
or
International
Organizations.
3.
Donations
to
Accredited
Nongovernmental Organizations.

The level of administrative expense of


which shall, in no case to exceed 30% of
the total expenses; and

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The amount of any charitable contribution


of property other than money shall be
based on the acquisition cost of said
property
Contributions or gifts shall be allowable
as deduction ONLY if verified under rules
and regulations prescribed by the
Secretary
of
Finance,
upon
recommendation
of
the
Commissioner.
The deduction in this provision shall not
be deducted from the gross income which
means after deduction
The one that can avail of this deduction is
the donor under the income tax
not under donors tax.

B. 1. 9. RESEARCH AND DEVELOPMENT


Requisites to be Deductible:
When Treated as Ordinary and Necessary
Expenses:
1. Paid or incurred by him during the
taxable year
2. Incurred in connection with his trade,
business or profession.
3. Not chargeable to capital account.
May Be Treated as Deferred Expenses:
1. Paid or incurred by the taxpayer in
connection with his trade, business or
profession;
2. Nor treated as ordinary and necessary
expenses
3. Chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion.
Amount Deductible:
Amount ratably distributed over a period of 60
months beginning with the month,
taxpayer realized benefits from such
expenditures.
Exclusion from Research and Development
Expenditures
a. Any expenditure for the
acquisition or improvement of
land or for the improvement
of property to be used in
connection with research and
development
subject
to
depreciation and depletion.

b.

Any expenditure paid or


incurred for the purpose of
ascertaining the existence,
location, extent or quality of
any deposit of ore or other
mineral including oil or gas.

B. 1. 10 PENSION TRUST
Shall be allowed as deduction, a
reasonable amount transferred or paid
into such trust during the taxable year in
excess of such contributions, but only if
such amount:
1. Has not thereof been allowed as a
deduction, and
2. Is apportioned in equal parts over
a period of 10 consecutive years
beginning with the year in which
the transfer or payment is made.
Claimed by management because this
is its contribution to the pension plan.
Summary of Rules on Retirement Benefits
Plan / Pension Trust
1. Exempt from Income Tax
employees trust under Sec.
60(B)
2. Exclusion from Gross Income
amount received by the
employee from the fund upon
compliance of certain conditions
under Sec. 32(B)(6)
3. Deduction from Gross Income

a. Amounts contributed by the


employer during the taxable
year into the pension plan to
cover the pension liability
accruing during the year
considered as ordinary and
necessary expenses under
Sec. 34(A)(1)
b. 1/10 of the reasonable
amount paid by the employer
to cover pension liability
applicable to the years prior
to the taxable year, or so paid
to place the trust in a sound
financial basis deductible
under Sec. 34(J)
B. 1. 11 PREMIUM PAYMENTS ON HEALTH
AND/OR HOSPITALIZATION INSURANCE OF
AN INDIVIDUAL TAXPAYER
It is an amount of premium on health
and/or
hospitalization
paid
by
an

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UCLASS Bar Operations: Tax Law Society

individual taxpayer (head of family or


married), for himself and members of his
family during the taxable year.
Requisites to be Deductible
1. Not to exceed P2,400 per family
or P200 per month paid during
the taxable year for health and/or
hospitalization insurance taken by
the taxpayer for himself including
his family;
2. Said family has a gross income of
not more than P250,000 for the
taxable year.
3. In the case of married taxpayers,
only the spouse claiming the
additional
exemption
for
dependents shall be entitled to
this deduction.
The individual claiming this deduction
is purely compensation income earner.

B. 2. PERSONAL EXEMPTIONS FOR


INDIVIDUAL TAXPAYERS
ALLOWANCE OF PERSONAL
EXEMPTIONS (SEC. 35)
(As amended by Republic Act No. 9504)
For single individual or married
P 50,000
individual judicially decreed as
legally separated with no qualified
dependents
P 50,000
For head of family
For each married individual

P 50,000

Additional Exemption for


Dependents

P 25,000
for
Each
Dependent
Not
Exceeding
4

[Note: With the enactment of Republic Act No.


9504, all qualified individual taxpayers (whether
single, head of family, or married) are allowed to
deduct basic personal exemptions of P50,000.]
HEAD OF FAMILY
Requisites:
1. Unmarried or legally separated man
or woman;
2. Living with the following persons who
are dependent upon him for their
chief support:

a.
b.
3.

with one or both parents, or


with one or more legitimate,
recognized natural or legally
adopted children.
For 2.b and 2.c, they must be:
c. Not more than 21 years of age.
d. Not marriage and not gainfully
employed or where such children,
brother or sisters, regardless of
age are incapable of self-support
because of mental or physical
defect.

In the case of legally Separated Spouses,


additional exemptions may be claimed
only by the spouse who has custody of
the child or children.
The
total
amount
of
additional
exemptions that may be claimed by both
shall not exceed the maximum additional
exemptions (32, 00) herein allowed.

Who are Dependents


1. Legitimate, illegitimate or legally
adopted child who is:
a. Chiefly dependent upon and living
with the taxpayer;
b. Not more than 21 years of age;
c. Not married; and
d. Not gainfully employed or if such
dependent, regardless of age, is
incapable of self-support because
of mental or physical defect.
2. Senior citizen, whether a relative or
not under RR No. 2-98.
If the taxpayer marries or should have
additional dependent(s) as defined
above during the taxable year, the
taxpayer may claim the corresponding
additional exemptions, as the case may
be, in full for such year.
If the taxpayer dies during the taxable year,
his estate may still claim the personal
and additional exemptions for himself and
his dependent(s) as if he died at the
close of such year.
If the spouse or any of the dependents
marries, becomes twenty-one (21)
years old or becomes gainfully
employed during the taxable year, the
taxpayer may still claim the same
exemptions as if the house or any of the
dependents
died,
or
as
if
such
dependents married, became gainfully
employed at the close of such year.

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Note: In the above circumstances, that


which allows a higher amount of personal
exemption shall be the reckoning point in
determining the status of the taxpayer
within a taxable period.
NRAETB shall be entitled to a personal
exemption in the amount equal to the
exemption in the income tax law in the
country of which he is a subject or
citizens or residents of the Philippines
(Reciprocity Rule).

3.

Any amount expended in restoring


property or in making good the
exhaustion thereof for which an
allowance is or has been made;
4. Premiums paid on any life insurance
policy covering the life of any officer
or employee, or of any person
financially interested in any trade or
business carried on by the taxpayer,
individual or corporate, when the
taxpayer is directly or indirectly a
beneficiary under such policy.
Applies only to a rank-and-file
employee.
5. Losses from Sales or Exchanges of
Property between related taxpayers,
which includes:
a. Between members of a family;
b. Except in the case of distributions
in liquidation
a.. Between an individual and a
corporation
more
than
fifty
percent (50%) in value of
the outstanding stock of which is
owned, directly or indirectly, by
or for such individual; or,
b. Between two corporations
more than fifty percent (50%) in
value
of
the
outstanding stock of each of
which is owned, directly or
indirectly, by or for the same
individual, if either one of such
corporations, with respect to the
taxable year of the corporation
preceding the date of the sale or
exchange was, under the law
applicable to such taxable year;
or
c. Between the grantor and a
fiduciary of any trust; or
d. Between the fiduciary of a
trust and the fiduciary of another
trust if the same person
is
a grantor with respect to each
trust; or
e. Between a fiduciary of a trust
and a beneficiary of such trust
6.
Losses from Wash Sales of Sock or
Securities.
7.
Losses in wash sale are not
deductible but gains are taxable
Exception: If the loss was
incurred by a dealer or a broken
of shares of stock.

NRANETB is not entitled to personal


and/or additional exemptions.
-- Because they pay by way of
the gross income tax and there are no
deductions in
gross income tax.
B. 3. OPTIONAL AND STANDARD
DEDUCTION
a. An individual subject to income tax,
other than a nonresident alien, may elect
a standard deduction in an amount NOT
Exceeding 10% Of His Gross Income.
b. Optional standard deduction is in lieu
of all other itemized deduction
c. Unless the taxpayer signifies in his
return his intention to elect the optional
standard
deduction,
he
shall
be
considered as having availed himself of
the deductions allowed under Section 34.
d. This option is NOT applicable to
corporations.
B. 4 SPECIAL DEDUCTIONS
Insurance Companies, whether
domestic or foreign doing business in the
Philippines may be deducted from their
gross income the net additions to reserve
funds and the sums other than dividends
paid within the year on policy and annuity
contracts
C. Non-deductible Expenses
1. Personal, living or family expenses;
2. Any amount paid out for new
buildings
or
for
permanent
improvements, or betterments made
to increase the value of any property
estate.
Except: Intangible drilling and
development costs incurred in petroleum
operations which
are deductible under
Subsection (G) (1) of Section 34 NIRC;

D.

Exempt Corporations

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D. 1 EXEMPT CORPORATION WITH SEVERAL


CONDITIONS

Two companies pooling their


resources for the establishment of a joint
emergency operation is a joint
venture. Such joint venture is liable to
pay tax
because
it
is
a
corporation
distinct
from
the
two
companies. The tax codes the defines
corporation as including partnership no
matter how it was created or
organized,
thereby
a
joint
venture need not be under any of the
.standard forms or in conformity
with
the usual requirements of the law or the
partnership. (Collector of
Internal
Revenue v. Batangas, G.R. No. L-9692,
January 6, 1958)

1. General Professional Partnership


Requisites for Exemption:
a) Formed by persons for the sole
purpose of exercising their common
profession
b) No part of its come income is derived
from engaging in any trade or business

A
General
Professional
Partnership, provided that no part of its
income is derived
from
engaging in any other trade or business
is exempt form corporate
income tax.
If it is complies with the above
mentioned conditions, then each persons
engaging
in business as partners in
a general professional partnership are
liable for the
payment of income tax in
their separate and individual capacity
If the conditions set by law are
not met, the exemption from corporate
income tax
is
withdrawn
and
the
partnership is subjected to tax as an
ordinary corporation
(Tan
vs.
Del
Rosario, GR No. 109289 October 3, 1994)
If it derives income from other
sources, the GPP nonetheless remains to
be
exempt from the payment of
corporate income tax if the income from
other sources has been subjected to
final income tax.

Petitioners purchased 24
parcels of land and erected apartments
for lease. The BIR collected corporate
income tax from the petitioners. SC
upheld the BIR for there
was
a
creation of an unregistered partnership
because the petitioners contributed
money,
property
with
the
intention to divide the profit. (Evangelista
Sisters v.
Collector
No.
L-9996
October 15, 1957)

The number of property is


immaterial, what a matter most is
whether there was a
creation of an
unregistered partnership was created,
they are liable for corporate
income
tax. (Reyes vs. Commissioner L-2402021 July 29, 1968)

2. Joint Venture Under Service Contract


With the Government
Merger of two or more corporations for
the purpose of the merger is to engage
in:
1. Construction project;
2. Energy operation pursuant to a
consortium agreement; or
3. Service
contract
with
the
government.
The corporations comprising joint venture or
consortium must be engaged in the same
line of business
The joint venture or consortium itself is exempt
from corporate income taxation but the income of
each corporation comprising the joint venture or
consortium is subject to income tax.
D. 2

EXEMPT CORPORATION WIHTOUT


CONDITIONS

Government-Owned or Controlled
Corporations (GOCCs)
General Rule: GOCCs are liable for the payment
of income tax.
Exceptions:
1. GSIS
2. SSS
3. PHIC
4. PCSO
5. Local Water Districts (pursuant to
Republic Act No. 10026)
D. 3

EXEMPT CORPORATIONS WITH ONE


CONDITION THAT THE INCOME BE AS
SUH.

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1.

Labor, agricultural or horticultural


organization not organized principally
for profit;
2. Mutual savings bank not having a
capital stock organized and operated
for mutual purposes and without
profit;
3. A beneficiary society, order or
association,
operating
for
the
exclusive benefit of members such as
a fraternal organization operating
under the lodge system, or a mutual
aid association or a non-stock
corporation organized by employees
providing for the payment of life,
sickness, accident, or other benefits
exclusively to the members of such
society order or association or nonstock
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;
6. Business
league,
chamber
of
commerce, or board of trade, not
organized for profit and no part of the
net income of which inures to the
benefit of any private stockholder or
individual;
7. Civic league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare;
8. A
non-stock
and
nonprofit
educational institution;
9. Government educational institution;
10. Farmers or other mutual typhoon or
fire insurance company, mutual ditch
or irrigation company, mutual or
cooperative telephone company, or
like organization of a purely local
character, the income of which
consists solely of assessments, dues,
and fees collected from members for
the sole purpose of meeting its
expenses; and
11. Farmers , fruit growers, or like
association organized and operated

as a sales agent for the purpose of


marketing
the
products
of
its
members and turning back to them
the proceeds of sales, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them;
Note: Notwithstanding the provisions in the
preceding paragraphs, the income of the
foregoing organizations from any of their
properties, real or personal, or from any
of their activities conducted for profit
regardless of the disposition made of
such income under this Code.
2. Final Income Tax
General Principles
1. Applicable to all kinds of income
taxpayers without distinctions.
2. Where an income is already subject
to final income tax, it is no longer
subject to net income tax; otherwise,
there would be a violation of
prohibited double taxation.
3. Exemptions and deductions are not
allowed. To compute for final income
tax, the income subject thereto is
immediately multiplied with the
applicable tax rate.
4. Applicable only to passive income and
derived from sources within the
Philippines.
5. Subject to withholding tax system.
6. The payee is not required to file an
income tax return for the particular
income subjected to FWT.
7. The liability for the payment of the
tax rest primarily on the pay or as
withholding agent.
8. Applicable only when the law provide
for its application.
2. 1 PASSIVE INCOME
Interests, Royalties, Prizes, And other
Winnings. --- Interest If the depositor is a
corporation, domestic or foreign, the
exception on long-term
deposit does not apply
Prizes derived from contest or
promotions derived from sources within
the Philippine over P10, 000

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Winnings derived from gambling


For a winning to be passive it is
sufficient that is derived from sources
within the
Philippines.
Exception: If the winning is
obtained from PCSO or Lotto, it shall be
exempt from FIT
If the interest, royalties, prizes and
other winnings do not constitute passive
income, the final income will not apply
rather the net income tax at the rate of
5-32%
Cash And/Or Property Dividends.
Stock dividend is NOT subject to tax
except in the following circumstances:
1. Where treasury share is cancelled
and redeemed by the corporation.
2. Where the controlling interest or
the
ownership
of
each
stockholder is no longer uniform
after declaration of stock dividend
If the stockholder is the seller,
apply income tax. Its liability is not final
income tax on dividend because Sec. 73
of the NIRC provides taxable income.
(Com. Of
Internal Revenue vs. CA,
CTA and A. Soriano, Corp. G.R. No.
108576 January 20,
1999)
Cash and Property Dividends when
received by an individual citizen (RC,
NRC, OCW) and a resident alien from a
domestic corporation, constitute passive
income and are subject to a final income
tax.
If Cash and/or Property Dividends are
issued by a foreign corporation, the
dividend id not passive and thus final
income tax is not applicable thereon. Net
income tax is applicable at the rate of
32%.
Under Section 22 (B), and 24(B) (2), if
the General Professional Partnership
(GPP) is exempt from corporate income
tax, the share of the partners is subject
to net income tax, from corporate income
tax; however, if the GPP is subject to
corporate income tax, the share of the
partners is subject to final income tax.

2. 2 CAPITAL GAINS FROM SALE OF SHARES


OF STOCK
Individuals subject to tax on capital gains
from the sale of or exchange of shares of
stock not traded through a local stock
exchange must file a return within 30
days after each transaction and a final
consolidated return on or before April 15
of
each
year
covering
all
stock
transactions of the preceding taxable
year.
Under the exception mentioned above, a
determination of gain or loss sustained
shall be made
2. 3 CAPITAL GAINS FROM SALE OF REAL
PROPERTY
Requisites:
1.

The object sold is a real property


If seller is individual, estate or
trust, real property refers to
immovable
property
defined
under Art. 415 of the NCC.
If seller is a domestic
corporation, real property refers to land
and/or building only.
2. It is located in the Philippines.
3. It is a capital asset
4. The seller is either an individual,
estate, trust or corporation

N.B. If all the elements above are not present,


Net Income Tax shall apply.
By virtue of RR 17-2003, the buyer
from the sale of REAL PROPERTY is NOW
OBLIGED to file the return within the 30
days from the date of sale or disposition
of the real property and to remit the tax.
Capital Assets means property held by the
taxpayer (whether or not connected with
his trade or business), BUT DOES NOT
INCLUDE
a. Stock in trade of the taxpayer or
other property of a kind which
would property is included in the
inventory of the taxpayer if on
hand at the close of the taxable
year.
b. Property held by the taxpayer
primarily for sale to customers in
the ordinary course of his trade
or business,

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c.

d.

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Property used in the trade or


business, of a character which is
subject to the allowance for
depreciation
provided
in
Subsection (F) of Section 34;
Real property used in trade or
business of the taxpayer. [Section
39 (A)(1)]
Capital Assets as defined in the
Tax
Code
is
enumerated
negatively, thus the enumeration
should pertain to ordinary assets.

Exemption from FIT on Capital Gains for the


Sale of Reality:
Requisites:
a. The real property is the principal
residence by natural persons.
b. The proceeds of which is fully
utilized in acquiring or constructing
a new principal residence within 18
calendar months from the date of
sale or disposition,
c. The historical cost or adjusted basis
of the real property sold or
disposed shall be carried over to
the new principal residence built or
acquired,
d. The Commissioner shall have been
dully notified by the taxpayer within
30 days from the date of sale or
disposition,
e. The said tax exemption can only be
availed of once every 10 years
PROVIDED that:
If there is no full utilization of the
proceeds of the state or disposition, the
portion of the gain presumed to have
been realized not utilized shall be subject
to capital gains tax.
FINAL INCOME TAX ON DIFFERENT
TAXPAYERS

RATE

1. PASSIVE INCOME
a. Interest

Except on books, literary


works and musical
compositions
c. Prizes and Winnings
Winnings of P10, 000
or less
PCSO and lotto winnings
Interest on depository bank
under the Expanded
Foreign Currency Deposit
System(EFCDS)
e. Long term deposits
If not preterminated
before 5 years
If preterminated
before 5 years
f. Cash and/or property
dividends actually or
constructively received

20%FIT

20%FIT
10%FIT
20%FIT
5% - 32%
NET
Exempt
7 % FIT

Exempt
5%, 12% or
20% FIT
10% FIT

2. CAPITAL GAINS FROM


SHARES OF STOCKS
Traded in the stock
exchange
Non traded in the
stock exchange
3. CAPITAL GAINS FROM
SALE OF REAL PROPERTY
If sale was made in favor of
the government, tax to be
paid shall be at the option of
the taxpayer

of 1%
Percentage
tax
5% or 10%
FIT
6% FIT
5% - 35%
NET
or 6% FIT

A.2 On Nonresident Alien Engaged In Trade


Or Business In The Philippines
(NRATB) [Section 25 (A) (2)]
TYPE OF INCOME
(only for income within)

A. ON INDIVIDUALS
A.1 On Citizen And Resident Alien [Sec. 24
(B)]
TYPE OF INCOME
(only for income within)

b. Royalties

RATE

1. PASSIVE INCOME
a. Interest

20%FIT

b. Royalties

20%FIT

Except on books, literary


works and musical
compositions
c. Prizes and Winnings

10%FIT
20%FIT

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Winnings of P10, 000
or less
PCSO and lotto winnings
d. Cinematographic films
and similar works
Interest on depository
bank
under the Expanded
Foreign Currency Deposit
System(EFCDS)
f. Long term deposits

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5% - 32%
NET
Exempt
25%

e.

If not preterminated
before 5 years
If preterminated
before 5 years

Exempt

Exempt
5%, 12% or
20% FIT

2. CAPITAL GAINS FROM


SHARES OF STOCKS
Traded in the stock
exchange
Non traded in the
stock exchange
3. CAPITAL GAINS FROM
SALE OF REAL PROPERTY
If sale was made in favor of
the government, tax to be
paid shall be at the option of
the taxpayer

of 1%
Percentage
tax
5% or 10%
FIT
6% FIT
5% - 32%
NET
or 6% FIT

A.3 On Nonresidential Alien Not Engaged In


Trade Or Business In The Philippines
[Sec. 25 (B)]
Not subject to Net Income Tax but liable
to pay Gross Income and Final Income
Tax
On Alien Individual Employed By Regional
Or Area Headquarters And Regional
Operating
Headquarters
Of
Multinational Companies [Section
25(C)]
On Alien Individual Employed By Offshore
Banking Units [Section 25 (D)]
On Alien Individual Employed By Petroleum
Service
Contractor
And
Subcontractor [Section 25(E)]

TYPE OF INCOME
(only for income within)
1. Salaries, wages, annuities,
compensation,
remuneration and other
emoluments, such as
honoraria and allowances,
received from such
regional or area
headquarters and regional
operating headquarters/
offshore banking unit/
petroleum service
contractor or
subcontractor
2. Other sources of income
within the Philippines
which are not received
from employers
If employee is a
Resident Alien
If employee is a
Nonresident Alien
Engaged in Trade or
Business
If employee is a
Nonresident Alien
NOT Engaged in Trade or
Business
3. Capital gains from
shares of sock
Traded in the stock
exchange
Not traded in the stock
exchange
4. Capital gains from sale of
real property
If sale was made in favor of
the government, kind of tax
to be paid shall be at the
option of the taxpayer

RATE
15% FIT

5-32% Net

5-32% Net

25%GIT

of 1%
Percentage
tax
5% - 10%
FIT
6% FIT
5% - 32%
Net
or 6% FIT

Proviso: Same tax treatment shall apply to


Filipinos employed and occupying the
same position as those of aliens
employed
by
these
multinational
companies/ offshore baking units (OBU)/
petroleum
service
contractor
or
subcontractor (PSC&S).
Multinational Company means a foreign firm or
entity engaged in international trade with
affiliates or subsidiaries or branch offices

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in the Asia-Pacific
foreign markets.

Region

UCLASS Bar Operations: Tax Law Society


and

other

REVENUE REGULATIONS (RR) NO. 2-98 AS


AMENDED BY RR NO. 12-2001:

The same tax treatment is applicable to


alien individuals employed by R&AHQ and
ROHQ of multinational companies and to
Filipinos employed and occupying the
same positions, REGARDLESS of whether
or not there is an alien executive
occupying the same position. PROVIDED,
that such Filipinos shall have the option
to be taxed at either: (1) 15% of the
gross income; OR (2) at the regular rate
on their taxable income in accordance
with the NIRC, IF THE EMPLOYER ROHQ
or R&AHQ is governed by Book III of RA
8756.

Only
alien
individual
occupying
managerial and technical positions in
R&AHQ and ROHQ of multinational
companies, OBU and foreign PSC&S and
Filipinos
employed
in
the
same
establishment and occupying the same
positions as those aliens are subject to
the 15% final withholding tax based on
their gross income.

Any income earned from all other sources


within the Philippines by the alien
employees referred to under Subsections
(C), (D) and (E) shall be subject to the
pertinent net income tax as the case may
be imposed under this code. (Sec. 25 B
last phrase)

REVENUE REGULATIONS (RR) NO. 11-2010


dated October 26, 2010

Filipinos employed by Regional Operating


Headquarters (ROHQs) or Regional or Area
Headquarters
(RHQs)
of
multinational
companies occupying a managerial or
technical position shall have the option to be
taxed at either 15% of their gross income or
at the regular income tax rate on taxable
compensation income in accordance with
Section 24 of the Tax Code, if the employer is
governed by Book III of Executive Order (EO)
No. 226, as amended by Republic Act No.
8756. All other employees are considered as
regular employees who are subject to the

regular income tax rate on their taxable


compensation income.

Filipinos exercising the option to be taxed at


15% preferential rate for occupying the same
managerial or technical position as that of an
alien employed in an ROHQ or RHQ must
meet all the following requirements:
(a) Position and Function Test The
employee must occupy a managerial
position or technical position AND
must actually be exercising such
managerial or technical functions
pertaining to said position;
(b) Compensation Threshold Test In
order to be considered a managerial
or technical employee for income tax
purposes, the employee must have
received, or is due to receive under a
contract of employment, a gross
annual taxable compensation of at
least P975,000.00 (whether or not
this is actually received);
(c) Exclusivity Test The Filipino
managerial or technical employee
must be exclusively working for the
RHQ or ROHQ as a regular employee
and not just a consultant or
contractual personnel.
Exclusivity
means having just one employer at a
time.
(Note: For purposes of determining the
compensation threshold test, gross
compensation
shall
not
include
retirement
and/or
separation
pay/benefits (whether or not taxable), as
well as items considered as de minimis
benefits.)

B. ON CORPORATIONS
B.1 ON DOMESTIC CORPORATION [Sec.27]

TYPE OF INCOME
(only for income within)

RATE

1. Passive Income
a. Royalties
b. Interest on currency bank
deposits
c. Interest income on
depository bank under the
Expanded Foreign

20%FIT
20%FIT
7%

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Currency Deposit System


2. Capital Gains Tax from
shares of stocks
of 1%
Percentage
tax
of 1%
Percentage
tax

Traded in the stock


exchange
Not Traded in the stock
exchange
3. Income derived under the
Expanded Foreign Currency
Deposit System from foreign
currency transactions with
local commercial banks
(including interest income
from foreign currency loans)
4. Inter-corporate Dividends
(received by a domestic
corp.)
5. Capital Gains Tax on sale of
lands and/or buildings
(property treated as capital
assets)

B.2 ON RESIDENT FOREIGN CORPORATION


[Sec. 28 (A)]
10% FIT
TYPE OF INCOME
(only for income within)
Not subject to
tax

Special Types of
Domestic Corporations
(for income within & without)
1. Non-profit Proprietary
Educational Institutions
& Hospitals
If income from unrelated
trade, business or activity
DOES NOT EXCEED 50%
of total gross income and
such institution is duly
accredited by DECS,
TESDA, CHED
2. GOCCs, Agencies or
Instrumentalities
Except: GSIS, SSS, PCSO
PHIC

administered by private individuals or


groups with an issued permit to operate
from the Department of Education,
Culture and Sports (DECS), or the
Commission on Higher Education (CHED),
or the Technical Education and Skills
Development Authority (TESDA), as the
case may be, in accordance with existing
laws and regulations.

6% FIT

RATE
30% NET

10% NET

30% NET
Exempt

Unrelated Trade, Business or Other


Activity means any trade, business or
other activity, the conduct of which is not
substantially related to the exercise or
performance
by
such
educational
institution or hospital of its primary
purpose or function.
Proprietary Educational Institution is
any private school maintained and

RATE

1. Passive Income
a. Royalties
b. Interest on currency bank
deposits
c. Interest income on
depository bank under the
Expanded Foreign
Currency Deposit System
2. Capital Gains Tax from
shares of stocks
Traded in the stock
exchange
Not Traded in the stock
exchange
3. Income derived under the
Expanded Foreign Currency
Deposit System from foreign
currency transactions with
local commercial banks
(including interest income
from foreign currency loans)
4. Inter-corporate Dividends
(received by a domestic
corp.)

Special Types of Resident


Foreign Corporations
(for income within)
1. International Carrier (based
on Gross Philippine Billings)
2. Offshore Banking Units.
(Interest income derived from
currency loans granted to
residents other then offshore
banking units or local
commercial banks, including
local branches of foreign

20%FIT
20%FIT
7%

of 1%
Percentage
tax
5% or 10%
FIT

10% FIT

Not subject
to tax

RATE
2%
10% FIT

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banks that may be
authorized by BSP to transact
business with offshore
banking units)
3. Branch Profit Remittance
(based on the total profits
applied or earned marked
for remittance)

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branches of
foreign banks

Regional Operating
HQ

Offshore Banking
Unit (OBU)
Resident Foreign
Corp.
Acceptable Foreign
Currency

Offshore banking
units in
the Phils.
3.Local Commercial
Banks including
branches of foreign
banks

Branch Profits shall be those interests,


dividends, rents, royalties, including
remuneration for technical services,
salaries, wages, premiums, annuities,
emoluments
or
other
fixed
or
determinable annual, periodic or casual
gains, profits, income and capital
received by a foreign corporation during
each taxable year from all sources within
the Philippines which are effectively
connected with the conduct of its trade or
business in the Philippines.

Exempt
(provided it
complies
with Sec.
22 DD)
10%

depository bank
(DB)
Under RR 9-98
Domestic corp.
Resident Foreign Corp.
Under RR 9-98
Philippine Currency
Acceptable Foreign
Currency

Foreign Currency Transaction Exempt From


All Taxes (RA 9294)
1. Non-residents
1. Non-residents
2.

Any income of nonresidents, whether


individuals
or
corporations,
from
transactions with offshore banking units
shall be exempt from income tax.

15%

4. Regional Area HQs and


Regional Operating HQs
Regional or Area HQ

2. Offshore banking
units in the Phils.
3. Local Commercial
banks including
branches of foreign
banks
4. Depository banks

Exception: Net income from such transactions as


may be specified by the Secretary of Finance
upon
recommendation by the Monetary Board
Final income Tax of 10% from Foreign
Currency
Loans granted to Residents Except
1. Offshore banking
1. Offshore units in
units in the
Phils.
Phils.
2. Local
2. Depository Banks
Commercial Banks
Including of

Instances when Branch Profit remittance


tax does not apply:
1.

When such branches of foreign corp. is


registered with PEZA

2.

When the income is not effectively


connected with the conduct of its trade or
business in the Philippines.

Marubeni Corporation is a foreign


corporation duly organized and existing
under the Philippine laws with branch
office in Intramuros, Manila. Marubeni
Corporation
of
Japan
has
equity
investment in Atlantic Gulf and Pacific Co.
(AG&P) of Manila. For the first and third
quarters of 1981 AG&P directly declared
and paid cash dividends to petitioner and
withheld the corresponding 10% final
dividend tax and also withheld 15% profit
remittance tax based on the remittable
amount
after
deducting
the
final
withholding tax of 10%, respectively.

Issue: Whether or not the dividends petitioner


received from AG&P are effectively
connected with its conduct of business in
the Philippines as to be considered
branch profits subject to the 15% point
remittance tax is imposed under Section
24 (b) (2) of the NIRC
Held: The alleged overpaid taxes were incurred
for the remittance of dividend income to
be the head office in Japan which is a

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separate and distinct income taxpayer


from the branch in the Philippines. There
can be no other logical conclusion
considering the undisputed fact that the
investment was made for purposes
peculiarly germane to the conduct of the
corporate affairs of Marubeni, Japan, but
certainly not or the branch in the
Philippines. Petitioner having made this
independent investment attribute only to
the head office, cannot now claim the
increments as ordinary consequences or
its or business in the Philippines and avail
itself of the lower rate of 10%. (Marubeni
Corporation vs. Commissioner Of Internal
Revenue, GR No. 76573 September 14,
1984)

Any

C.

income of nonresidents, whether


individuals
or
corporations,
from
transactions with depository banks under
the expanded system shall be exempt
from income tax.
ON
NONRESIDENT
CORPORATION

TYPE OF INCOME
(only for income within)
1. Interest on Foreign
Loans
2. Intercorporate
Dividends
(received from domestic
corps. Subject to tax
credit
of 17%)
3. Capital Gains Tax on
Sale
of Shares of Stocks
Traded in the stock
exchange
Not traded in the stock
exchange

FOREIGN

RATE
20% FIT

Revenue Regulation 3-98


Expenses incurred by the managerial
worker were it was reimbursed by the
management.
5. Vehicle of any kind
6. Household personnel (maid or driver)
7. Interest on loans at less than market rate
to the extent of the difference between
the market rate and the actual rate
granted
8. Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs, and
similar organizations
9. Holiday and vacation expenses
10. Expenses of foreign travel
11. Revenue Regulation 3-98
12. The foreign travel must not be in line with
the trader or business.
13. Life or health insurance and other non-life
insurance premiums.
The insurance must be more than the minimum
required by RA 8282-SSS law and RA
8291-GSIS Law
This tax is in the nature of a final tax withheld
in a quarterly basis (Rev. Reg. 3-98)
A final income tax of 32% is imposed on the
grossed-up monetary value of the fringe
benefit (FB)
granted by an employer
(individual
or
corporation)
to
supervisory
and
managerial
employees except:

30% or 15% FIT

1. Where such FB is required by the nature of, OR


necessary to the trade, business or
profession of the employee, or
2. When the FB is for the convenience OR
advantage of the employer

of 1%
Percentage
Tax

Management gave the Hendersons a housing


benefit to be paid by them. In this case
SC considered the housing benefit as for
the convenience and as necessary to the
conduct of the trade or business of the
management because in this case, it was
proven that the Hendersons used the
apartment not only for residence but was
also used to entertain clients of the Corp.
(Henderson vs. Collector No. L-129154
February 28, 1961)

5% - 10% FIT

Fringe Benefit Tax


FRINGE BENEFIT -- is any good, service or
benefit furnished or granted in cash on in
kind by an employer to an individual
employee (Except rank and file) such as
but not limited to the following:
1.
2.

3.
4.

Housing
Expense Account

The

FB is payable by the employer as


withholding agent and may be claimed
later by the employer as one of the

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allowable deductions by the employer


under NIT.

a.

Under REVENUE REGULATION NO. 2-98: FB


tax is also imposed on FB granted to:
1. NRANETB 25%
2. Alien individuals and their Filipino
counterparts employed by RAHQ and/or
ROHQ of multinational companies, OBUs,
PCSC 15%
Where FB is granted to a Rank and File
employee, FB tax is not applicable. The
employee shall be liable for the payment
of net income tax.

b.

FRINGE BENEFITS NOT SUBJECT TO THE


FINAL TAX:
A. Fringe benefits not considered as gross income
1. If it is required or necessary to the
business of employer
2. If it is for the convenience or
advantage of employer
B. Fringe benefit that is not taxable under Sec.
32 (B) Exclusions from Gross Income
C. Fringe benefits not taxable under Sec. 33
Fringe Benefit Tax:
1. Fringe benefit which are authorized
and exempted under special laws, such
as the 13th
month Pay and Other
Benefits with the ceiling of P30.000.
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization
benefit
plans;
3. Benefits given to the rank and file
employees, whether granted under a
collective
bargaining agreement or
not; and
4. De minimis benefits those facilities
or privileges furnished to employees that
are of relatively small value and are
offered or furnished merely as a means of
promoting health, goodwill, contentment
or efficiency of employees.
DE MINIMIS BENEFITS
The following shall be considered as de minimis
benefits not subject to income tax as well as
withholding tax on compensation income of both
managerial and rank-and-file employees: (RR No.
10-2000, as amended by RR No. 5-2011 dated
March 16, 2011)

c.
d.
e.
f.

g.
h.

i.
j.

Monetized unused vacation leave credits


of private employees not exceeding (10)
days during the year;
Monetized value of vacation and sick
leave credits paid to government officials
and employees;
Medical cash allowance to dependents of
employees, not exceeding P750 per
semester or P125 per month;
Rice subsidy of P1,500.00 or one (1) sack
of 50kg. rice per month amounting to not
more than P1,500.00;
Uniform and clothing allowance not
exceeding P4,000 per annum;
Actually medical assistance, e.g. medical
allowance
to
cover
medical
and
healthcare
needs,
annual
medical/executive check-up, maternity
assistance, and routine consultations, not
exceeding P10,000 per annum;
Laundry allowance not exceeding P300
per month;
Employees achievement awards, e.g., for
length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary
value not exceeding P10,000 received by
the employee under an established
written plan which does not discriminate
in favor of highly paid employees;
Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum;
Daily meal allowance for overtime work
and night/graveyard shift not exceeding
25% of the basic minimum wage on a per
region basis.

All other benefits given by employers which are


not included in the above enumeration shall not
be considered as de minimis benefits, and
hence, shall be subject to income tax as well as
withholding tax on compensation income. (RR
No. 5-2011, March 16, 2011)
Note: Flowers, fruits, books, or similar items
given to employees under special circumstances
such as on account of illness, marriage, birth of a
baby, etc., which was previously considered as a
de minimis benefit, has been EXCLUDED from the
list under RR No. 5-2011.
3. Gross Income Tax

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In the computation of gross income tax,


exemptions and deductions are not
allowed.
Taxpayers who are liable for this kind of tax;
1. Nonresident alien not engaged in trade or
business (NRANETB)
2. Nonresident foreign corporations (NRFC)
Gross Income Tax (GIT) Formula

GROSS INCOME TAX


Entire Income
A Exclusion and Income subject to Final
Tax (e.g. Passive Income)
Gross Income
X Tax Rates
NET INCOME TAX DUE
TYPE OF INCOME (only for
income within)
A. NONRESIDENT ALIEN
NOT
ENGAGED IN TRADE OR
BUSINESS (NRANETB)
1. Entire income received
from all
all sources within the
Philippines
2. Capital gains from shares
of stock
Traded in the stock
exchange
Not traded in the
stock
exchange
3. Capital gains from sale of
real
property
If sale was made in
favor of the
government, rate
shall be at
the option of the
taxpayer
B. NONRESIDENT FOREIGN
CORPORATION (NRFC)

RATE

1. Not engaged in trade or


business
(all sources within the Phils.
except
reinsurance premiums)
2.
Cinematographic
film
owner,
lessor or distributor
(based on gross
income from all sources
within the
Philippines)
3. Owner of lessor of
vessels
chartered by Philippine
nationals
(based on gross rentals,
fees or
charter fees from leases or
charters
approved by the Maritime
Industry
Authority)
4. Owner or lessor of
aircraft,
machineries and other
equipment
(based on gross rentals or
fees)
4.

6% FIT

25% GIT or
6%

25% FIT

4 % FIT

7 % FIT

Improperly Accumulated Earning Tax


Improperly Accumulated Earnings
(IAE) is the points of a corporation that
are permitted to accumulate instead of
being distributed by a corporation to its
shareholders for the purpose of avoiding
the income tax with respect to its
shareholders or the shareholders of
another corporation.

25% GIT

1/2 of 1%
Percentage
tax
5% - 10%
FIT

30% GIT

Rate:

10% of the Improperly Accumulated


Taxable Income in addition to other
taxes).
Purpose: To discourage the practice of
accumulating corporate earnings/ profits
for purpose of avoiding the payment of
final income tax on dividends.
REVENUE REGULATIONS NO. 2-2001
Corporations Covered By IAET
General Rule: The IAE tax shall apply to:
1. Domestic corporations; and

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UCLASS Bar Operations: Tax Law Society

2.

Corporations which are classified as


Closely-Held Corporations.
Those corporations at least fifty percent (50%)
in value of the outstanding capital stock or at
least fifty percent (50%) of the total combined
voting power of all classes of stock entitled to
vote is owned directly or indirectly by or for not
more than twenty (20) individuals.
Domestic corporations not falling under the
aforesaid
definition
are,
therefore,
publicly-held corporations.
Exceptions: The said tax shall not apply to:
a. Publicly held corporations
b. Banks and other non-banks Financial
intermediaries.
c. Insurance companies.
d. Taxable partnerships (deemed to have
actually or constructively received the
taxable income under Sec.73D)
e. General
professional
partnerships
(exempt; taxable against the partners)
f. Non-taxable joint ventures and
g. Enterprises duly registered with the
Philippine
Economic
Zone
Authority
(PEZA) under R.A. 7916, and enterprises
registered
pursuant
to
the
Bases
Conversion and Development Act of 1992
under R.A. 7227, as well as other
enterprises duly registered under special
economic zones declared by law which
enjoy payment of special tax rate on their
registered operations or activities in lieu
of other taxes, national or local.
The investment of Manila Merchant wines in US
Treasury bills is not a reasonable need for
its business because the profit of the
Corp. was invested in an area not related
from that of its business. The Corp. must
invest in a business for which it is
primarily engaged to be excused from the
payment of IAET. (Manila Merchant Wines
v. Commissioner No. L-26145 February
1984)
25% of the profit was invested in Real Estate
business which is in line with the
companys business. The remaining 75%
must be subject to this kind of tax
(IAET). (Tuazon v. Commissioner No. L127 SCRA 397

IMPROPERLY ACCUMULATED TAXABLE


INCOME

I.A.E.T TAX BASE

+
+
+
+

Taxable income for the year


Income exempt from tax
Income excluded from gross income
Income subject to final tax
Net operating loss carry-over

Total Income
Income tax paid/ payable for the taxable
year
Dividends actually or constructively
paid/issued from the applicable years
taxable income
Amount reserved for the reasonable
needs of the business as defined in the
Regulations
Tax Base of Improperly Accumulated
Earnings Tax
EVIDENCE OF PURPOSE TO AVOID INCOME
TAX
1. The fact that any corporation is a mere
holding company shall be prima facie
evidence of a purpose to avoid the tax
upon its shareholders or members.
Instances indicative of purpose to avoid
income tax upon shareholders;

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a.

Investment of substantial earnings and


profits of the corporation in unrelated
business or in stock or securities of
unrelated business;
b. Investment in bonds and other long-term
securities;
c. Accumulation of earnings in excess of
100% of paid-up capital, not otherwise
intended for the reasonable needs of the
business as defined in these Regulations.
2. The fact that the earnings or profits of a
corporation are permitted to accumulate
beyond the reasonable needs of the
business shall be determinative of the
purpose to avoid the tax upon its
shareholders or members unless the
corporation, by the clear preponderance
of evidence, shall prove the contrary.
Reasonable needs of the business includes the
reasonably anticipated needs of the
business such as:
a.
Allowance for the increase in the
accumulation of earnings up to 100% of the
paid-up capital of the corporation as of
Balance
Sheet
date,
inclusive
of
accumulations taken from other years;
b. Reserve for definite corporate expansion
projects or programs as approved by the
Board of Directors or equivalent body;
c.
Reserved for building, plants or
equipment acquisition as approved by the
Board of Directors or equivalent body;
d. Reserved for compliance with any loan
covenant
or
pre-existing
obligation
established under a legitimate business
agreement;
e. 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;
f. In the case of subsidiaries of foreign
corporation
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.
The controlling intention of the taxpayer is that
which is manifested at the time of
accumulation, not subsequently declared
intentions which are merely the product
of afterthought. A speculative and
indefinite purpose will not suffice.
Definiteness of plan/s couples with action/s
taken towards its consummation is
essential.

Period for Payment of Dividend/Payment of


IAET
Dividends must be cleared and
paid or issued not later than one year
following the
close of the taxable year,
otherwise, the IAET, if any, should be
paid within fifteen
(15) days thereafter.
5.

Minimum Corporate Income Tax


A minimum Corporate Income Tax (MCIT)
of 2% OF GROSS INCOME is imposed on
a Domestic and Resident Foreign
Corporation beginning on the fourth
taxable year immediately following the
year
in
which
such
corporation
commenced its business operations (the
year when the corporation registers with
the BIR).

Coverage
MCIT is imposed on domestic and resident
foreign corporations;
a. Whenever such corporation has zero or
negative taxable income; or
b. Whenever the amount of MCIT is greater
than the normal income tax due from
such
corporation
determined
under
Section 27[A]
This scenario is possible if the corporation
obtained too much deduction.
Limitations
a. The MCIT shall apply only to domestic
and resident foreign corporations subject
to the normal corporate income tax
(income tax rates under Sec 27[A] of the
CTRP)
b. In the case of a domestic corporation
whose operations or activities are partly
covered under a special income tax
system and partly covered under a
special income tax system, the MCIT shall
apply on operations covered by the
regular corporate income tax system.
c. In computing for the MCIT due from a
resident foreign corporation, only the
gross income from sources within the
Philippines shall be considered for such
purpose.
Carry Forward of the Excess Minimum Tax
Any excess of MCIT over the normal
income tax can be carried forward on an
annual basis.

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UCLASS Bar Operations: Tax Law Society

The excess can be credited against the


normal income tax due in the next 3
immediately succeeding taxable years
Any amount of the excess MCIT which
cannot be credited against the normal
income tax due in the next 3-year period
shall be forfeited
Tax Rate: 2% of gross income or taxable base
pertinent to a trading or merchandising
concern or a service entity

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UCLASS Bar Operations: Tax Law Society

Tax Base: Gross Income

3.
4.

Gross Sales
Sales Return
Discount and Allowances
Cost of Goods Sold*
Gross Income
X 2%
Minimum Corporate Income Tax (MCIT)

* Cost of Goods Sold means all


business expenses directly incurred to
produce the merchandise to bring them
to their present location and use.
Relief from MCIT
The Secretary of Finance is authorized to
suspend the imposition of the MCIT on
any corporation which suffers losses
because of:
a. Prolonged labor dispute;
b. Force majeure; or
c. Legitimate business reverses.

B. Manufacturing
Gross Income = gross sales/ receipt
less sales returns, discounts and
allowances and cost of good sold.
Cost of Sales = All cost production of
finished goods, such as
1. Raw materials used;
2. Direct labor;
3. Manufacturing overhead;
4. Freight cost;
5. Insurance premiums;
6. Other costs incurred to bring the raw
materials to the factory or warehouse.
C. Services
Gross Income = Gross receipts less
sales returns, allowances, discounts and
cost of services
Cost of Services = All direct cost and
expenses necessarily incurred to provide
the service required by the customers
and clients including:
1. Salaries and employee benefits of
personnel, consultants and specialist
directly rendering the service;
2. Cost of facilities directly utilized in
providing the service.

Substantial losses from a prolonged labor


dispute - losses arising from a strike
staged by the employees which lasted for
more than six (6) months within a
taxable period and which has caused the
temporary
shutdown
of
business
operations.
Legitimate business reverses shall include
substantial losses sustained due to fire,
robbery, theft, or embezzlement, or for
other economic reason as determined by
the Secretary of Finance.

Kinds of Business
A. Trading or Merchandising Concern
Gross Income = gross sales/ receipts
less sales returns, discounts and
allowances and cost of goods sold.
1.
2.

Cost of Sales =
Invoice cost of the goods sold;
Import duties;

Freight in transporting the goods to the


place where the goods are actually sold;
Insurance while the goods are in transit.

It shall not include interest expense


except for banks and other financial
institutions.
Gross income excludes passive income
subject to final tax.
Other income and Extraordinary Income
are including sales contributory to income
taxable under the regular corporate
tax.
6.

Optional Corporate Income Tax


On optional Corporate Income Tax of
15% of the Gross Income is imposed
effective January 1, 2000, on domestic
corporations
and
resident
foreign
corporations.
OCIT is not yet applicable under our tax
laws because the President has yet to
issue an Executive Order for the
applicability of the OCIT.

Requisites:

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1.
2.
3.
4.

UCLASS Bar Operations: Tax Law Society

A tax ratio of 20% of Gross National


Products.
A ratio of 40% income tax collection of
total tax revenues.
A VAT tax effort of 4% of GNP.
A 0.9% ration of consolidated public
sector financial position to GNP.

Other Features:
Available only to firms whose ratio of:
Cost of sales
=55%
Gross sales or receipts from all sources
The election shall be irrevocable for three
(3) consecutive years.
Meaning of Gross Income

2. Corporations
a. On sale of shares of stock of a domestic
corporation not listed and traded thru a
local stock
exchanged, held as capital asset:
* In addition to the discussion on Capital Gains
under
Final Income Tax.
On the Net Capital
Gain
Not over P100,000
Amount in excess of
P100,000

On the gross selling price,


or the current fair market
value at the time of sale
whichever is higher

Gross Income
* Cost of Goods Sold means all business
expenses directly incurred to produce the
merchandise to bring them to their
present location and use.
Capital assets, gains, and losses
CAPITAL GAINS TAX
1. Individuals
a. On sale exchange, held as capital asset of
shares of stock of a domestic corporation
not listed :
and traded thru a local stock

3.
5% FIT
10% FIT

b. On sale of real property in the Philippines held


as capital asset

6% FIT

CAPITAL GAINS AND LOSSES IN


GENERAL
CONCEPT OF CAPITAL ASSETS
1. Ordinary Assets
a. Stock in trade of the taxpayer or other
properties of a kind which would property
be included in the inventory of the
taxpayer;
b. Property held by the taxpayer primarily for
sale to customers in the ordinary course
of business;
c. Property used in trade or business and
subject to depreciation; and
d. Real property used in trade or business.

4.

On the gross selling


price, or the current

5% FIT
10% FIT

b. On sale of land/building held as capital


asset:

Gross Sales
Sales Return
Discount and Allowances
Cost of Goods Sold

On the Net Capital


Gain
Not over P1000,000
Amount in excess of
P1000,000

fair market value at the


time of sale, whichever
is higher

Capital Assets include all property held


by the taxpayer whether or not
connected in trade or business but not
including those enumerated above (#1)
as ordinary assets.

DETERMINATION OF AMOUNT AND


RECOGNITION OF GAIN OR LOSS

6% FIT

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DETERMINATION OF AMOUNT AND


RECOGNITION OF GAIN OR LOSS
Computation of Gain or Loss
Capital Gain The gain derived from the sale or
exchange of capital assets.
Capital Loss The loss incurred from the sale or
exchange of capital assets.
Net Capital Gain The excess of the gains from
sales/exchange of capital assets over the
gains from such sales/exchanges.
Net Capital Loss The excess of the losses
from sales or exchanges of capital assets
over the gains from such sales or
exchanges
Basis for Determining Gain or Loss
a. Property acquired by purchase the cost
thereof
b. Property acquired by inheritance fair
market price or value as of the date of
acquisition
c. Property acquired by gift the basis shall
be the same as if it would be in the hands
of the donor or the last preceding owner
by whom it was not acquired by gift,
except that if such basis is greater than
the fair market value of the property at
the time of the gift then, for the purpose
of determining loss, the basis shall be
such fair market value
d. Property acquired for less than an adequate
consideration in money or moneys worth
the amount paid by the transferee for
the property.
Requisites for Recognition of Capital
Gain/Loss
1. The transaction must involve property
classified as capital asset; and
2. The transaction must be a sale or
exchange or one considered as equivalent
to a sale or exchange.
Transaction Resulting in Taxable Gains but
Non-Recognition of Losses
1. Sale or exchange between related
parties;
2. Wash sales by non-dealers of securities
and when not subject to the stock
transfer tax;
3. Exchanges not solely in kind in merger
and consolidation; and

4.

Sales or exchanges that are not at arms


length.

RULES ON THE RECOGNITION OF


CAPITAL GAINS OR LOSSES
A. HOLDING PERIOD
If capital asset, other than real property,
is sold or exchanged by an individual
taxpayer, only the following percentage of
the gain is subject to Income Tax:

1.
2.

Short term 100% if the capital asset


has been held for not more than 12
months
Long term 50% if the capital asset has
been held for more than 12 months

The holding period rule applies only to


transactions involving capital assets where the
taxpayer is an individual EXCEPT in the following
transactions

a.
b.

Sale of shares of stock


not traded in the stock
exchange.
Sale, exchange, or real
property located in the
Philippines.

B. NON-DEDUCTIBILITY OF NET CAPITAL


LOSSES (Loss Limitation Rule)
Losses from sales or exchange of capital assets
shall be allowed only for the extent of the gains
from such sales or exchanges
Losses from sales or exchange of ordinary
assets can be deducted from capital or ordinary
gains.
This rule applies to both individual and
corporate taxpayers.
In case of corporations, capital losses
are allowed only to extent of the capital
gains; hence, the net capital loss is not
deductible.
Exception: If any domestic bank or
trust company, a substantial part of
whose business is the receipt of deposits,
sells any bond, debenture, note or
certificate or other evidence indebtedness
issued by any corporation (including one
issued by a government or political
subdivision).

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C. NET CAPITAL LOSS CARRY-OVER RULE

If any individual taxpayer sustains in any


taxable year net capital loss, such loss
shall be treated in the succeeding taxable
year as a loss from the sale or exchange
of a capital asset held for not more than
twelve (12) months, provided that the
loss to be deducted does not exceed the
net income for such year.

The loss shall be carried over as a deduction


from gross income for the next 3
consecutive taxable years immediately
following the year of such loss.
SALE OR EXCHANGE OF CAPITAL ASSETS
The following are considered as sale or
exchange of capital assets:
1. Retirement of bonds;
2. Short sales of property
3. Failure to exercise privilege or option to
buy or sell property;
4. Securities becoming worthless;
5. Distribution in liquidation of corporations;
6. Readjustment of interest in a general
professional partnership.
Tax Free Exchanges
Sales or exchange resulting in non
recognition of gains or losses;
1) Exchange solely in kind in legitimate mergers
and consolidation; includes:
a) Between the corporations which are
parties to the merger or consolidation
(property for stocks);
b) Between a stockholder of a corporation
party to a merger or consolidation and
the other party corporation (stock for
stock);
c) Between a security holder of a
corporation party to a merger or
consolidation and the other party
corporation (securities for securities).
2) Transfer to a controlled corporation exchange
of property for stocks resulting in acquisition of
corporate control by a person, alone or together
with others not exceeding four.
Control means ownership of stocks in a
corporation amounting to at least 51% of the
total voting power of all classes of stocks entitled
to vote.

SALE OR EXCHANGE OF ORDINARY ASSETS

General riles of income taxation apply to


both as to the gain and as to the loss.
Notes:

If it is an ordinary asset, the ordinary gains


and losses are considered in determining
income or loss from trade, business or
profession. (See Secs. 32A, 34D)

If it is a capital asset, determine further


whether or not it is a real property
located in the Philippines. If it is, then it
is subject to capital gains tax. (See Secs.
24D, 27D5) (See also Secs. 24C, 27D2)
If not, the capital gains and losses are
considered in determining the taxable
income. (Sec. 39)
CAPITAL GAINS AND LOSSES SHARES OF
STOCKS
The taxation of shares of stock whether
or not listed and traded in the stock
exchange is subject to final tax.
Who are Liable to the Tax
1. Individual taxpayer, citizen or alien;
2. Corporate taxpayer, domestic or foreign
3. Other taxpayers such as estate, trust,
trust funds and pension among others.
Rates of Tax
1. Shares of stock not traded through a local
stock exchange Net capital gains
received during the taxable year from
sale, exchange, or transfer shall be taxed
as follows (on a per transaction basis):
Not over P1000,000 - 5%
Over P100,000
- 10%
2. Shares of stock listed through a local
stock exchange of 1% of the gross
selling price of the stock.
Exceptions to the Tax
1) Gains derived by dealers in securities
2) All other gains which are specifically
exempt from income tax under existing
investment incentives and other special
laws.
BIR Ruling 146-98
(Basis for Computing Gain or Loss)
The fair market value (FMV) of the sale of
shares not traded but listed in the stock
exchange is the highest closing price on
the day the shares were sold, transferred
or exchanged.

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When no sale is made in the stock exchange,


the FMV shall be the highest selling price
on the day nearest to the day of sale,
transfer or exchange.
For shares not listed in the exchange, the FMV
shall be the book value nearest the
valuation date
The above rules shall be used in
computing for the net capital gain/loss for
disposition of shares.
Important Features
1. Sale of shares of stock of a domestic
corporation listed and traded in a local
stock exchange and that of initial public
offering shall be subject to Percentage
tax (Business Tax);
2. Capital losses sustained during the year
(not listed and traded in a local stock
exchange)shall be allowed as a capital
loss deductible on the same taxable year
only (no carry over);
3. The entire amount of capital gain and
capital loss (not listed and traded in a
local stock exchange) shall be considered
without taking into account holding
period irrespective of who is the taxpayer
(all 100%);
4. Non-deductibility of losses on wash sales.
Filing and Payment of Tax
1. Listed and Traded in the Stock
Exchange The stockbroker shall turn
over the tax collected to the B.I.R. within
the five (5) banking days from the date
of collection.
2. Not traded through the stock
exchange It shall be paid by the seller
on a per transaction basis upon filing of
the required return within 3 days
following each sale or other disposition of
shares of stock.

2.

RATE AND BASIS OF TAX


A final tax of 6% is based on the gross
selling price or fair market value or zonal
value whichever is higher
Gain or loss is immaterial, there being a
conclusive presumption of gain.
Exemption of certain individuals from the
capital gains tax on the sale or
disposition of a Principal Residence.
CONDITIONS
1. Sale or disposition of the old principal
residence;
2. By natural persons citizen or resident
alien individual taxable under Sec.24 of
the Code (does not include an estate or a
trust);
3. The proceeds of which is fully utilized in
(a) acquiring or (b) constructing a new
principal residence within eighteen (18)
calendar months from date of sale or
disposition;
4. Notify the Commissioner within thirty
(30) days from the date of sale or
disposition through a prescribed return of
his intention to avail the tax exemption;
5. Can only be availed of only once every
ten (10) years;
6. The historical cost or adjusted basis of his
old principal residence sold, exchanged or
disposed shall be carried over to the cost
basis of his new principal residence
7. If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
D.

CAPITAL GAINS AND LOSSES SALE OR


OTHER DISPOSITION OR REAL PROPERTY
COVERAGE:
1. Individual Taxpayers, Estate and Trust

Sale or exchange or other disposition of


real property considered as capital
assets.

The said sale shall include pacto de retro


sale and other conditional sale.

Domestic
and
Resident
Foreign
Corporation

Sale or exchange or disposition of lands


and/or building which are not actually
used in
business and treated as capital asset.

Accounting Periods and Methods of


Accounting

I. ACCOUNTING PERIODS
General Rule: Taxable income is computed upon
the basis of taxpayers annual accounting
period (fiscal or calendar year) in
accordance
with
the
method
of
accounting employed.

If no method of accounting employed or


method does not clearly reflect the
income, computation shall be made in

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1.
2.
3.
4.

UCLASS Bar Operations: Tax Law Society

accordance w/ such method as the


opinion of the Commissioner clearly
reflects the income
Taxable income is computed based on
calendar year if:
Accounting period is other than a fiscal
year.
Taxpayer has no accounting period.
Taxpayer does not keep books.
Taxpayer is an individual.
Fiscal year: accounting period of 12
months ending on the last day of any
months ending on the last day of any
month other than December
Calendar year: accounting period from
January 1 to December 31

II. Methods of Accounting


Cash Method recognition of income and
expense dependent on inflow or outflow
of cash.
Accrual Method method under which income,
gains and profits are included in gross
income when earned whether received or
not, and expenses are allowed as
deductions when incurred: although not
yet paid. It is the right to receive and not
the actual receipt that determines the
inclusion of the amount in gross income.
Accounting for Long-Term Contracts
Persons whose gross income is derived in whole
or in part from such contracts shall report
.
such income upon the basis of
percentage of completion

Long-term
Contracts:
building,
installation or construction contracts
covering a period in excess of 1 year.
Deductions from Gross Income: all
expenditures made during the taxable
year on account
being taken of the material and
supplies on hand at the beginning and
end of the taxable
period for use in connection with the
work under the contract but not yet so
applied.
Installment Basis
When Applicable:
1. Sales of dealers in personnel property
2. Sales of realty and casual sales
personality.

of

3.
4.

Sales of real property considered as


capital asset by individuals.
Change from accrual to installment basis.

Allocation of Income and Deductions

Applicable to cases of two or more


organizations,
trades
or
business
(incorporated and organized within the
Philippines) owned for controlled directly
or indirectly by the same interest.
E.

Filing of Tax Return and Payment of Tax

1.

When and Where to File

Tax Return A report prepared by the taxpayer


showing to the internal revenue officers
an enumeration of taxable amounts and
description
of
taxable
transactions,
allowable deductions, amounts subject to
tax and the tax payable by the taxpayer
to government
PERSONS REQUIRED TO FILE INCOME TAX
RETURN
A. Individual
1. Resident Filipino citizen;
2. Non-Resident Filipino citizen, on his income
from sources within the Philippines;
3. Resident alien, on income derived from
sources within the Philippines and
4. Non-resident alien engaged in trade or
business or in the exercise of profession
in the
Philippines. (NRAETB)
B. Taxable Estate and Trust
C. General Professional Partnership
D. Corporation
1. Not exempt from income tax;
2. Exempt from income tax under Sec. 30
of NIRC but has not shown proof of
exemption.
INDIVIDUAL RETURNS
Individuals Not Required to File an Income
Tax Return:
1. One whose gross income DOES NOT
EXCEED his total personal and additional
exemptions
However, a citizen of the Philippines and
any alien individual engaged in business
or practice of profession within the
Philippines shall file an income tax return,
regardless of the amount of gross
income;

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2.

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One with respect to pure compensation


income, derived from sources within the
Philippines,

Exception:
An individual deriving compensation
concurrently from two or more employers
at any time during the taxable year shall
file an income tax return
3. One whose sole income has been
subjected to final withholding tax.
4. One who is exempt from income tax
pursuant to the provisions of this Code
and other laws, general or special.
Who Shall File: (In Duplicate)
1. A resident citizen on his income from all
sources;
2. A non-resident citizen on his income
derived
from
sources
within
the
Philippines;
3. A resident alien on his income derived
from sources within the Philippines; and
4. A non-resident alien engaged in trade or
business in the Philippines on this
income derived from sources within the
Philippines.
N.B Under RR 3-2002, regardless of the gross
income of the compensation earner, the
employer shall be the one to file the
return.
Where
1.
2.
3.
4.

to File Individual Returns


Authorized agent bank;
Revenue District Officer,
Collection Agent;
Duly authorized Treasurer of the city or
municipality in which such person has his
legal residence or principal place of
business in the Philippines, or if there be
no legal residence or place of business in
the Philippines, with the Office of the
Commissioner.

When to File Individual Returns


On or before the 15th day of April of each year
covering income for the preceding taxable year.
Individuals Subject to Tax on Capital Gains:
a. Sale or exchange of Shares of Stock Not
Traded thru a Local stock Exchange:
within (30) days after each transaction
and a final consolidated return on or
before April 15 of each year covering all
stock transactions of the preceding
taxable year

b.

Sale or Disposition of Real Property shall


file a return within 30 days following each
sale or other disposition.

CORPRATE
Every corporation,
Except foreign corporations
RETURNS
not engaged in trade or business in the
Philippines, shall render, a duplicate, a
true and accurate quarterly income tax
return and final or adjustment return.
A corporation may employ either calendar
year or fiscal year as a basis for filing
its annual income tax return.
Corporations using the Calendar Year shall file
its final consolidated income tax return
on or before April 15.
Corporations using Fiscal Year the final
consolidated income tax shall be filed on
or before the 15th day of the fourth
(4th) month following the close of
the taxable year.
Corporations deriving capital gains from the
sale or exchange of shares of stock not
traded thru a local stock exchange shall
file a return within thirty (30) days
after each transaction during the taxable
year on or before the 15th day of the
fourth (4th) month following the
close of the taxable year.
Every corporation whether using the fiscal
year or calendar year shall file quarterly
within 60 days following the close of
each quarter.
Unlike individuals, corporations are allowed
to change their taxable period from
calendar to fiscal or vice versa or fiscal to
fiscal
2.

Withholding Tax

Concept: This practice which is also known as


taxation at source, refers to the
requirement that the taxes imposed or
prescribed by the NIRC are to be
deducted and withheld by the payorcorporations
and/or
persons
from
payment made to payees-corporations
and/or persons for the former to pay the
same directly to the BIR. Thus, the taxes
are collected practically at the time the

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transaction is made or when the taxable


act occurs.
Basic Principles of the Withholding Tax
System
It is an advance payment of the taxes of the
receipt of the income.
The tax withheld is a tax credit against the
income tax liability of the recipient of the
payment.
On the part of the withholding agent, failure to
withhold, or under withholding of the tax
affects the deductibility of the payment
from gross income
Penalties are imposed for non-compliance with
the withholding tax rules.
Rationale:

a.
b.

c.
d.

To provide the taxpayer a


convenient manner to meet his
probable income tax liability.
To ensure the collection of the
income tax which could otherwise
be lost or substantially reduce
through failure
to
file
the
corresponding returns;
To improve the governments
cash flow; and
To minimize tax evasion, thus
resulting in a more efficient tax
collection

RMC No. 22-2004 (Apr. 12, 2004)

All returns required to be filed by the Tax


code shall be prepared always in
conformity with the provisions of the Tax
Code, and the rules and regulations
issued implementing the Tax Code.

Taxability of income and deductibility of


expenses shall be determined strictly in
accordance with the provisions of the Tax
Code and the rules and regulations issued
implementing the said Tax Code.

In case of difference between the


provisions of the Tax Code and the rules
and regulations issued implementing the
said Tax Code, on the one hand, and the
generally accepted accounting principles
(GAAP) and the generally accepted
auditing standards (GAAS), on the other
hand, the provisions of the Tax Code and
the
rules
and
regulations
issued
implementing the said Tax Code shall
prevail.

By An Informer To Entitle Him.


To A Reward Are As Follows:
1. He should voluntarily file a confidential
information under oath with the Law
Division of the BIR alleging therein the
specific violations constituting fraud;
2.
Information must not yet be in the
possession of the BIR, or refer to a casc
already
pending
or
previously
investigated by the BIR;
3. The informer should not be a government
employee or a relative of a government
employee within the sixth degree of
consanguinity; and
4. The information must result to collections
of revenues and/or fines and penalties
(Sec. 282, NIRC)

II.

TRANSFER TAXES

Kinds of Transfer Taxes in the Philippines


1. Estate Tax Taxes levied on the
transmission
of
properties
of
the
decedent to his heirs.
2. Donors Tax Taxes levied on the
transmission of properties from a donor
to a donee.
Note: Estate and Donors taxes are not taxes on
the property because their imposition
does not rest upon general ownership but
on the transfer of the property
3. Transfer Tax on Real Property (Sec.
135, LGC)
TRANSFER TAX
Tax on transfer of property
Rates are lower
5% to 20% - estate tax
2% to 15% or
30% - donors tax
Leaser exemptions

A.

INCOME TAX
Tax on income
Rates
are
higher
-- 5% to
32%
More
exempti
ons

Estate Tax

An excise tax on the right of transmitting


property at the time of death and on the
privilege that a person is given in
controlling to a certain extent the
disposition of his property to take effect
upon death.

Legal Requirements That Must Be Complied

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A tax imposed upon the privilege to


transmit property at the time of death;
the tax should not be construed as a
direct tax on the property of the decedent
although the tax is based thereon.

GROSS ESTATE

The value of the gross estate of the


descent shall be determined by including
the value at the time of his death of
all property, real or personal, tangible
or intangible, wherever situated;
PROVIDED, however, That in the case of
a nonresident alien decedent, only that part
which is situated in the Philippines shall be
included in his taxable estate.

SEC. 60 Imposition of Tax


(A) Application of Tax The tax imposed by
this Title upon individuals shall apply
to the income of estates or of any
kind of property held in trust, include
1. Income received by estates of
deceased persons during the period
of administration or settlement

Liable to Pay
A. Estate

When
Pending
Judicial
Settlement

B. Individual

Pending
Extra-Judicial
Settlement
when only a
coownership is
formed
(Obillos vs.
Comm. 149
SCRA 436)
Pending
Extra-Judicial
Settlement
When an
Unregistered
partnership
is
created

C. Corporation

What
Tax
imposed
Upon
individuals
Income Tax

Corporate
Income Tax

After partition, the estate tax under


Sec. 84 shall apply.

FORMULA

Gross Estate
Deductions
Net Taxable Estate
X Tax Rate
Estate Tax Due
X Tax Credit (If any)
NET ESTATE TAX DUE

Who Are Taxpayers?

1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien

SCOPE
All property of the
decedent
within and
without the
Philippines
Property located in the
Philippines
only

Intangible Properties Deemed Located in


the Philippines (Section 104, 1997 Tax Code)
1. Franchise which must be exercised in the
Philippines;
2. Shares, obligations or bonds issued by
any corporation or sociedad anonima
organized or constituted in the Philippines
in accordance with its laws;
3. Shares, obligations or bonds issued by
any foreign corporation 85% of the
business of which is located in the
Philippines;
4. Shares, obligations or bonds issued by
any foreign corporation, if such shares,
obligations or bonds have acquired a
business situs in the Philippines;
5. Shares or rights in any partnership,
business or industry established in the
Philippines.
INCLUSIONS IN THE GROSS ESTATE
a. Decedents Interest refers to all the
property, real or personal, tangible or
intangible owned by the decedent at the
time of his death.

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b.

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Transfer in Contemplation of Death


A transfer motivated by the thought of
death, although death may not be
imminent e.g. donation mortis causa.
If a taxpayer executed a deed of
donation, but afterwards he died, and the
time of his death was very near to the
terms of the execution of the deed of
donation, it is a transfer in contemplation
of death according to the Supreme Court.
(Dizon vs. Posadas, G.R. No. L-36770,
Nov. 4 1932)
When the donor makes his will within a
short time of, or simultaneously with, the
making of gifts, the gifts are considered
as having been made in contemplation of
death. (Roces vs. Posadas, G.R. No. L34937, 03/13/1993)

This contemplates of a situation where the


transferor, during his lifetime:
1. Transfer property in contemplation of or
intended to take effect in possession or
enjoyment at or after death;
2. Retains for life or for any period which
does not in fact and before his death the
possession or enjoyment of, or the right
to the income from the property, or the
right to designate the person who shall
possess or enjoy the property or the
income therefrom;
Except In case of a bona fide sale for an
adequate and full consideration in money
or moneys worth.
Note: any donors tax paid for such transfer
shall be credited to the estate tax due.
c.

Revocable Transfer refers to property


that had been transferred by the
decedent during his lifetime, personally
or through another person BUT retained
for life the right to alter, amend, revoke
or terminate the enjoyment by transferee
of the property transferred.

d.

Transfer under General Power of


Appointment a property which the
decedent never owned in his lifetime now
forms part of his gross estate.

Three
1.
2.
3.

Persons Involved:
Transferor;
1st transferee (decedent); and
2nd transferee. Where the transferor
grants authority to the 1st transferee to
determine the person who, upon the

latters death shall next possess or enjoy


the property transferred.
General Power of
Attorney
Authorized the
Decedent to appoint
any person he pleases,
including himself.

Estate of the transferor


Is INCLUDED in the
computation of the
gross estate of the 1st
transferee (decedent)
Absolute authority to
choose the next
transferee is a badge of
ownership
e.

Special Power of
Attorney
Transferor himself has
determined beforehand
who, upon the death of
the first transferee,
would next possess or
enjoy the
property.
Not included

No badge of ownership

Proceeds of Life Insurance


Taxation of the proceeds of life insurance
will depend on the designated beneficiary,
the manner of designation of such
beneficiary
(whether
revocable
or
irrevocable), and the period and source of
the funds used in paying the premiums
on the insurance contract.
Proceeds of life insurance are TAXABLE in
the following cases:

Beneficiary is the estate of the


deceased,
his
executor
or
administrator, irrespective of whether
or not the insured retained the power
of revocation

Beneficiary
is
other
than
the
decedents
estate,
executor,
or
administrator, when designation of
beneficiary is REVOCABLE
Proceeds of life insurance are NOT
TAXABLE in the following cases:

Accident insurance proceeds

Proceeds of a group insurance policy


taken out by a company for its
employees

Amount receivable by any beneficiary


irrevocably
designated
in
the
insurance policy by the insured

Proceeds of insurance policies issued


by the GSIS to government officials
and employees

Benefits accruing under the SSS law

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f.

g.

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Proceeds of life insurance payable to


heirs of deceased members of
military personnel

Prior Interests applies to all


transfers, trusts, estates, interests,
rights, powers and relinquishment of
powers made, created, arising, exercised
or relinquished before or after the
effectivity of the Tax Code.

Transfer
for
Insufficient
Consideration applicable only in cases

of transfer for insufficient consideration in


the nature of transfer in contemplation of
death, revocable transfer, and transfer
under general power appointment.
The taxable part is the excess of the fair
market value of the property at the time
of death of the decedent over the
consideration received.
Consider the motive of the transferor:
Estate Tax, if in contemplation of death
and Donors Tax (Section 100), if merely
out of generosity or kindness

Life Insurance taken by the decedent


upon his own life

Beneficiary: estate,
represented by
administrator, executor of
heir
Proceeds form part
of the GROSS
ESTATE whether
the designation is
revocable or
irrevocable

Beneficiary:
3rd person

Proceeds form part of the


GROSS ESTATE only
when the designation is
revocable

A.
RESIDENT CITIZENS, NONRESIDENT CITIZENS, AND NONRESIDENT ALIENS (RC, NC, & RA)
1.

Expenses, Losses. Indebtedness &


Taxes (ELIT)

a. Funeral Expenses

The allowed deduction is the actual


funeral expenses or 5% of the gross
estate, whichever is lower, but not
exceeding P200,000.

Funeral expenses allowed as deductions:


(RR No. 2-2003, December 16, 2002)

Mourning apparel of the surviving


spouse
or
unmarried
minor

children of the deceased, bought


and used on the occasion of the
burial;
Expenses for the deceaseds
wake, including food and drinks;
Publication charges for death
notices;
Telecommunication
expenses
incurred in informing relatives of
the deceased;
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

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corresponding to the plot where


he is buried is deductible;

Interment and/or cremation fees


and charges;

All other expenses incurred for


the performance of the rites and
ceremonies incident to interment.
Funeral expenses NOT allowed as
deductions: (RR No. 2-2003)

Expenses incurred after the


interment, such as prayers,
masses, entertainment or the
like;

Any portion of the funeral or


burial
expenses
borne
or
defrayed by relatives and friends
of the deceased;

Medical expenses as of the last


illness will not form part of
funeral expenses but should be
claimed as medical expenses if
incurred within 1 year before the
death of the decedent.

b. Judicial Expenses

Expenses allowed as deduction under


this category are those incurred in the
inventory-taking of assets comprising
the gross estate, their administration,
the payment of debts of the estate, as
well as the distribution of the estate
among the heirs.
In short, these
deductible items are expenses incurred
during the settlement of the estate but
not beyond the last day prescribed by
law, or the extension thereof, for the
filing of the estate tax return. (RR No.
2-2003)

Judicial expenses may include fees of


executor or administrator, attorneys
fees, court fees, accountants fees,
appraisers fees, clerk hire, costs of
preserving and distributing the estate,
costs of storing or maintaining property
of the estate, and brokerage fees for
selling property of the estate.
Any
unpaid amount for the aforementioned
cost and expenses claimed under
Judicial Expenses should be supported
by a sworn statement of account issued
and signed by the creditor.

The notarial fee paid for the extrajudicial


settlement is clearly a deductible
expense since such settlement effected
a distribution of the estate to his lawful
heirs. Similarly, the attorneys fees for a

guardian of the property during the


decedents lifetime should also be
considered
as
a
deductible
administration expense. The guardian
gives a detailed accounting of decedents
property and gives advice as to the
proper settlement of the estate, act
which contributed towards assets and
the subsequent settlement of the case.
(Commissioner of Internal Revenue v.
Court of Appeals, et.al., G.R. No.
123206, March 22, 2000)
c. Claims against the Estate
(Decedent is the debtor)

The word claims is generally construed


to mean debts or demands of a pecuniary
nature which could have been enforced
against the deceased in his lifetime and
could have been reduced to simple
money judgments. Claims against the
estate or indebtedness in respect of
property may arise out of contract, tort,
or operation of law.
Requisites for deductibility:
1. The liability represents a personal
obligation of the deceased existing at the
time of his death EXCEPT unpaid
obligations incurred incident to his death
such as unpaid funeral expenses and
unpaid medical expenses which are
classified under a different category of
deductions;
2. The liability was contracted in good faith
and for adequate and full consideration in
money or moneys worth;
3. The claim must be a debt or claim which
is valid in law and enforceable in court;
4. The indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed.
Note: If the claim arose out of a debt
instrument, the debt instrument must be
notarized, and if contracted within 3 years before
the death of the decedent, the executor or
administrator shall submit a statement showing
the disposition of the proceeds of the loan.
d. Claims against Insolvent Person
Decedent is the creditor. Deduction to the extent
of the claim is allowed provided the amount
claimed is included in the decedents gross
estate.

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e. Unpaid Mortgages Decedent is the


mortgagor/debtor, it is deductible provided the
amount of mortgage/debt is included in the gross
estate
If the decedent is the mortgagee/creditor,
deduction is allowed under Claims of the
deceased against insolvent persons.
f. Unpaid Taxes

Taxes which have accrued as of or before


the death of the decedent, which were
unpaid as of the time of his death,
regardless of whether or not it was
incurred in connection with trade or
business.
Taxes that are NOT deductible:
1. Income tax on income received after
death;
2. Property taxes not accrued before death;
3. Estate tax
Deductions for other Losses
Requisites:
1. Arise from fires, storms, shipwreck or
other casualties, robbery, theft or
embezzlement; (FS2ORTE)
2. Not compensated for by insurance or
otherwise;
3. Not claimed as itemized deduction in the
income tax return of the taxable estate;
4. Occurring during the settlement of the
estate;
5. Incurred not later than the last day for
the payment of the estate tax, which is
within 6 months from the death of the
decedent.
N.B. This is not to be confused with losses for
purposes of income tax deduction
because losses for purposes of income
tax deduction are deductible only when
incurred in connection with trade,
business or profession.
2.

Property
Previously
Taxed
or
Vanishing Deduction Return
A situation where property is transferred
either by way of inheritance or donation,
and the transferee dies within a period of
5 years from the date of inheritance or
donation.
Deduction is available to the decedent
transferee.
Called vanishing because as the interval
of the death between the 1st and the 2nd

decedent widens,
decreases.

Within 1 year
1-2 years
2-3 years
3-4 years
4-5 years

the

tax

deduction

DEDUCTION

TAXABLE

100%
80%
60%
40%
20%

0%
20%
40%
60%
80%

Applies only if the estate tax or donors tax,


whichever is applicable, had already been paid by
or in behalf of the transferor
Requisites:
1.

2.
3.

4.
5.
6.

Present decedent died within 5


years from the receipt of the
property from a prior decedent or
donor;
Property must be located in the
Philippines.
Property must have formed part
of the _taxable estate of the prior
decedent, or of the taxable gift of
the donor;
Estate tax on the prior succession
or donors tax on the gift must
have been finally paid;
Property must be identified as
the one received from the prior
decedent;
No vanishing deduction on the
property was allowable to the
estate of the prior decedent.

3. Transfer for Public Use


Requisites:
1. A disposition in a last will and testament,
or transfers
2. To take effect after death,
3. In favor of the Government of RP or any
of its political subdivisions, for exclusively
public purposes.
Note: This is to be distinguished from Section
87(d) which refers to the exemptions
from transfer tax of all bequests, devises,
legacies or transfers in favor of social
welfare,
cultural
and
charitable
institutions, where there is qualification
that no part of the income of the
transferee inures to the benefit of any

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individual and not more than 30% of the


property or amount transferred shall be
used
by
such
institution
for
administrative
purposes.
This
qualification or conditions do not apply
where the transferee is the Government.

Requisites:
1. Private benefit plan maintained by the
employer must be approved by the BIR;
2. Plan grants retirement benefits to
employees who have been in the service
of the employer for at least 10 years;
3. Retiring official or employee is not less
than 50 years of age at the time of his
retirement;
4. Benefit is availed of only once.
This is deductible from the gross estate
provided the same amount forms part of
the gross estate provided the same
amount forms part of the gross estate of
the decedent employee.

4. Family Home
The basis is FMV or zonal value whichever
is higher, however if it exceeds P1
million, the excess shall be subject to
estate tax.
Requisites:
1. Must have been the decedents family
home;
2. Such fact is certified to by the Barangay
Captain of the locality

B. NON-RESIDENT ALIEN
No deduction shall be allowed to a non-resident
alien, unless the executor, administrator
or anyone of the heirs includes in the
return the value at the time of his death
of that part of the gross estate of the
non-resident
not
situated
in
the
Philippines. (Section 86D, Tax Code of
1997)

5. Standard Deduction An amount equivalent


to P1 million.
6.

Medical Expenses Expenses incurred


within one year by the decedent prior to
his death substantiated with receipts, not
to exceed P500,000.

Deductions available:

7. Amounts Received By Heirs Under R.A.


4917 pertains to the private benefit
plan maintained by the employer in the
private sector subject to the following

1.
2.
3.

Expenses, Losses, indebtedness and


Taxes.
Property Previously Taxed or Vanishing
Deduction Return.
Transfers for Public Use.

DEDUCTIONS FROM THE GROSS ESTATE

ITEMS OF DEDUCTION
1. Expenses, Losses,
Indebtedness, and Taxes
(ELIT)
a. Funeral expenses

RC, NRC & RA [Section


86(A)]

NRA [Section 86(B)]

All

Proportional Application
(PA)

Actual of 5% of the estate


but in no case to
exceed P200T

Judicial expenses of the


testamentary or intestate
proceedings; includes extrajudicial
c. Claims against the estate
d. Claims of the deceased
against
insolvent persons
e. Unpaid mortgages
f. Unpaid Taxes

PA

b.

ALL

PA

ALL

PA

ALL

PA

ALL

PA

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(2)

Property Previously
Taxed (PPT) or
Vanishing Deductions Return

(3)
(4)
(5)
(6)
(7)

Transfer for Public Use


The Family Home
Standard Deduction
Medical Expenses
Amount Received by Heirs
Under
Republic Act No. 4917

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Deduction of 100% or 80%
or 60% or 40% or
20%
100%

Deduction of 100% or
80% or 60% or
40% or 20%
100%

CFMV nor more than P1M


P 1M
not to exceed P500,000
amount included in the gross
estate

NA
NA
NA

GR: Estate tax imposed shall be credited with the


amount imposed by the authority of a foreign
country, subject to the following limitations:
a.

Amount of credit shall not exceed the


same proportion of the tax against which
such credit is taken, which the decedents
net estate situated within such country
taxable bears his entire net estate; and

b.

Total amount of the credit shall not


exceed the same proportion of the tax
against which such credit is taken, which
decedents net estate situated outside the
Philippines bears his entire estate.

Formula
x
-

Gross Estate
Deductions
Taxable Net Estate
Tax Rate
Estate Tax Due
Tax Credit (if any)
NET TAX DUE

NA

C. Transmission from the first heir, legatee or


donee in favor of another beneficiary, in
accordance with the desire of the
predecessor; and
D. All bequest, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, no part of the net income of
which inures to the benefit of any
individual: Provided, however, That not
more than thirty percent (30%) of the
said bequests, devises, legacies or
transfers shall be used by such
institutions for administration purposes.
Notice of death to be filed in all cases of
transfer subject to tax or where, through
exempt from tax, the gross value of the
estate exceeds P20,000, the executor or
administrator, shall give a written notice
thereof to the Commissioner.
Also applies to Donors Tax. All are included in
the computation of the gross estate of a
non-resident alien decedent, subject to
the reciprocity rule.
WHEN, WHERE AND HOW TO PAY ESTATE
TAX

EXEMPTIONS OF CERTAIN ACQUISITIONS


AND TRANSMISSIONS TO ESTATE TAX
A. Merger of usufruct in the owner of the naked
title:
Exceptions:
(i)
death of usufructuary does not
terminate the contract of usufruct
use in inherited by heirs;
(ii)
decedent is naked owner himself.
B. Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to
the fideicommissary;

When: within 6 months from the decedents


death
Where: Except in cases when the BIR
Commissioner otherwise permits, the
return shall be filed with:
1. Authorized agent bank
2. Revenue district officer
3. Collection officer
4. Duly
authorized
treasurer
of
the
city/municipality in which the decedent
was domiciled at the time of his death
5. Office of the BIR Commissioner if there
be no legal residence in the Philippines.

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How: By the executor or administrator or any


legal heir under oath in duplicate setting
forth:
1. Value of the gross estate at the time of
the decedents death, or in case non
resident alien, of the part of his gross
estate situated in the Philippines.
2. Deductions if any;
3. Such information or data as may be
necessary to establish the correct taxes.
4. Estate tax returns with gross value
exceeding P2M shall be certified to by a
CPA containing the following:
a. Itemized asset of the decedent at the
time of his death with their gross
value, or in case of any nonresident
alien that part of his gross estate
situated in the Philippines
b. Itemized deductions under Section
86
c. Amount of tax due whether paid or
still due and outstanding.

PAYMENT OF ESTATE TAX

B.

Pay-as-you-file
procedure,
within
6
months from the decedents death; a
reasonable extension of 30 days for filing
of the return may be granted by the BIR
Commissioner in meritorious cases.
When the BIR Commissioner shall find
that payment on the due date will impose
undue hardship upon any heir, he may
extend the time for payment up to a
maximum of 5 years in case the estate is
settled judicially or in 2 years in case the
estate is settled extrajudicially.
If an extension is granted, the BIR
Commissioner may require the executor
or administrator or beneficiary to furnish
a bond in such amount not exceeding
double the amount not exceeding double
the amount of the tax and with such
sureties as the commissioner deems
necessary.

Donors Tax

A. BASIC PRINCIPLES
B. DEFINITION
Donors Tax is a tax on a donation or gift, and is
imposed on the gratuitous transfer of property

between two or more persons who are living at


the time of the transfer. 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.
C. NATURE
Donors tax is an excise tax, meaning, it is a tax
imposed on the privilege of transmitting
property/ies gratuitously during the lifetime of
the donor.
D. PURPOSE OR OBJECT
Donors tax is imposed 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)
E. REQUISITES OF VALID DONATION
1. Capacity of the donor,
2. Donative intent;
3. Delivery, whether actual or constructive;
4. Acceptance by the done
F.
TRANSFERS
WHICH
MAY
BE
CONSTITUTED AS DONATION
A. Transfer for Less Than Adequate and Full
Consideration. Where property, other than
real property referred to in Section 24(D)
(located in the Philippines, classified as
capital assets) is transferred for less than an
adequate and full consideration in money or
moneys worth, then the amount by which
the fair market value of the property
exceeded the value of the consideration shall
xxx be deemed a gift, and shall be included
in computing the amount of gifts made
during the calendar year. (Sec. 100, NIRC)
B. Condonation or Remission of Debt
Art. 1270, NCC. Condonation or
remission is essentially gratuitous, and
requires the acceptance by the obligor.
It may be made expressly or impliedly.
One and the other kinds shall be
subject to the rules which govern
inofficious
donations.
Express
condonation shall, furthermore, comply
with the forms of donation.
O
REQUISITES:
a. There must be an agreement;
b. There must be a subject matter (object of
the

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remission, otherwise there would be


nothing
to condone);
c. Cause of consideration must be liberality
(essentially gratuitous, an act of
liberality);
d. Parties must be capacitated and must
consent; requires acceptance by obligor;
implied in mortis causa & expressed in
innter vivos;
e. Formalities of a donation are required in the
case of an express remission;
f. Revocable --- subject to rules on inofficious
donation (excessive, legitime is impaired )
& ingratitude & condition not followed;
g. Obligation remitted must have been
demandable at the time of remission;
h. Waivers or remission are not to be
presumed generally.
G. TRANSFER FOR LESS OR INADEQUATE
CONSIDERATION.
Based on Sec. 100 of NIRC:

STRANGER a person who is not a brother,


sister (whole or half blood), spouse, ancestor and
lineal descendant, or of a relative by
consanguinity in the collateral line within the 4th
degree.
NOT A STRANGER a person who is a brother,
sister (whole or half blood), spouse, ancestor and
lineal
descendant
or
of
a
relative
by
consanguinity in the collateral line within the 4th
degree of relationship.
I. DETERMINATION OF GROSS GIFT
(Sec. 104, NIRC)

1.

Gross gifts include real and personal


property, whether tangible or intangible,
or mixed, wherever situated.

2.

Where the donor was a nonresident alien


at the time of donation, his real and
personal property so transferred but
which are situated outside the Philippines
shall not be included as part of his gross
gift.

3.

No donors tax shall be collected in


respect of intangible personal property if:

Sec. 100 of NIRC:


1.

If the real property transferred is a


capital asset, the capital gains tax
based on the gross selling price or fair
market value, whichever is higher, shall
be paid by the transferor (individual or
corporation). No donors tax is due on
the excess of the fair market value over
the consideration since the capital gains
tax is already computed on the higher
amount between gross selling price or
fair market value.
2. However,
if
the
real
property
transferred is classified as an ordinary
asset, the excess of the fair market
value over the amount of consideration
shall be treated as a gift, subject to the
donors tax under Sec. 99 of the Tax
Code.
The gain or loss from the sale of the real
property classified as ordinary asset shall be
computed as follows: amount realized less cost
or adjusted basis.

H. CLASSIFICATION OF DONOR
(Sec. 99 (B), NIRC)

a). donor at the time of the donation was


a citizen and resident of a foreign country
which at the time of donation did not
impose a transfer tax of any character, in
respect of intangible personal property of
citizens of the Philippines not residing in
that foreign country; or
b) the laws of the foreign country of
which the decedent or donor was a
citizen and resident at the time of
donation allows a similar exemption from
transfer of every character or description
in respect of intangible personal property
owned by citizens of the country not
residing in that foreign country.
J. COMPOSITION OF GROSS GIFT
For a resident donor- real properties, tangible
and intangible personal properties wherever
located.
For a non resident donor- real properties,
tangible or intangible properties located in the
Philippines.

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Under Sec.104 of the tax code, gross gifts include


the following:
a). Franchise which must be exercised in
the Philippines;
b). Shares, obligations or bonds issued
by any corporation or sociedad anonima
organized or constituted in the Philippines
in accordance with its laws;
c). Shares, obligations or bonds by any
foreign corporation 85% of the business
of which is located in the Philippines;

4.

L. TAX CREDIT FOR DONORS TAXES PAID


IN A FOREIGN COUNTRY
(Sec. 102A, NIRC)
1.

The donors tax imposed upon a donor


who was a citizen or a resident at the
time of donation shall be credited with
the amount of any donors tax of any
character and description imposed by the
authority of a foreign country.

2.

The amount credit taken for Donors Tax


shall be subject to each of the following
limitation:

d). Shares, obligations or bonds issued


by any foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines;
e). Shares or rights in any partnership,
business or industry established in the
Philippines.
N.B. The above enumeration is significant only in
determining the properties to be included
insofar as the non-resident alien is
concerned with regard to estate tax, and
non-resident
alien
and
foreign
corporation with regard to donors tax.
K. VALUATION OF GIFTS MADE IN
PROPERTY
(Sec. 102, NIRC)
1.

2.

If the gift is made in property, the fair


market value thereof at the time o the
gift shall be considered the amount of the
gift.
In case of real property, the provisions of
Section 88 (B) shall apply to the
valuation thereof.

Sec. 88 (B), NIRC. Properties. --- The


estate shall be appraised at its fair
market value as of the time of death.
However, the appraised value of real
property as of the time of death shall be,
whichever is higher of -d) the fair market value as determined by
the Commissioner, or
e) the fair market value as shown in the
schedule of value fixed by the Provincial
and City Assessors.
3.

If there is no zonal value, the taxable


base is the fair market value that appears
in the latest tax declaration.

If there is an improvement, the value of


improvement is the construction cost per
building permit and or occupancy permit
plus 10% per year after year of
construction, or the market value per
latest tax declaration.

i.
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 net
gifts situated within such country taxable
under the Donors Tax bears to his entire
net gifts; and
ii.
The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the donors net gifts situated outside the
Philippines taxable under the Donors tax
bears to his entire net gifts.
M. EXEMPTIONS OF GIFTS FROM DONORS
TAX
1. Gifts Made By Resident
a. Dowries or gifts on account of marriage
and before its celebration or within 1 year
thereafter by parents to each of their
legitimate, recognized natural, or adopted
children to the extent of the first P10,000
b. Gifts made to or for the use of national
government or any entity created by its
agency which is not conducted for profit or
any political subdivision of the said
government.
c. Gifts made in favor of educational and or
charitable,
religious,
cultural,
social
welfare institution, accredited NGO, trust

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or philanthropic organization or research


institution, provided however that not
more than 30% of the said donation is
devoted by the donee for administrative
purposes.
2. Gifts Made By Non-resident Alien
a. Gifts made to or for the use of national
government or any entity created by its
agency which is not conducted for profit,
or any political subdivision of the said
government.
b. Gifts made in favor of educational and or
charitable, religious, cultural, social
welfare institution, accredited NGO, trust
or philanthropic organization or research
institution, provided however that not
more than 30% of the said donation is
devoted by the donee for administrative
purposes.
3. Intangible Property, if made under the
following conditions:
a)
The donor at the time of the donation
was a citizen and resident of a foreign
country which at the time of donation did
not impose a transfer tax of any
character, in respect of intangible
personal property of citizens of the
Philippines not residing in that foreign
country; or
b)
The laws of the foreign country of which
the donor was a citizen and resident at
the time of his death or donation allows a
similar exemption from transfer taxes of
every character or description in respect
of intangible personal property owned by
citizens of the Philippines not residing in
that foreign country.

P100,00
0
200,000
500,000
1,000,00
0
3,000,00
0
5,000,00
0
10,000,0
00

OVER

BUT
NOT
OVER

PL
US

OF
EXCESS
OVER

2%

2,000
14,000

4%
6%

44,000

8%

204,000

10
%
12
%
15
%

404,000
1,004,00
0

P100,00
0
200,000
500,000
1,000,00
0
3,000,00
0
5,000,00
0
10,000,0
00

Stranger
30%
of the net
gifts

b
b)
P. CONTRIBUTION FOR ELECTION
PURPOSES

THE
TAX
EXEMPT
SHALL

Not a Stranger
From 2% to a maximum of
15%
of the net gift (see rates under
Sec. 99, NIRC)

Any person, resident or non-resident of the


Philippines shall be liable to pay donors tax of
the transfer of property by gift. (Sec. 98A)

The tax for each calendar year shall be computed


on the basis of the total net gifts made during the
calendar year in accordance with the following
schedule:

500,000
1,000,00
0
3,000,00
0
5,000,00
0
10,000,0
00

BE
Exempt

Rate of Tax
Depends if donee or beneficiary is:

N. PERSON LIABLE

O. TAX BASIS

P100,00
0
200,000

Section 99(C) of the Tax Code, as


amended, provides that any contribution
in cash or in kind to any candidate or
political party for campaign purposes
shall be governed by Republic Act (R.A.)
No. 7166 or the Election Code.
Section 13 of R.A. 7166 specifically states
that any provision of law to the contrary
notwithstanding, any contribution in cash
or in kind to any candidate or political
party or coalition of parties for campaign
purposes, duly reported to the COMELEC,
shall NOT be subject to the payment of
any donors tax.
Thus, those contributions in cash or in
kind NOT duly reported to the COMELEC
shall be subject to donors tax. (Revenue
Regulations No. 8-2009, October 22,
2009)

Q. FILING OF RETURN AND PAYMENT OF


TAX
The Donors Tax Return shall be filed within 30
days after the date the gift is made and the tax

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due thereon shall be paid at the time of filing


(Pay-as-you-file system). As regards the payment
of donors tax, no extension is allowed.
Contents:
1.
Each gift made during the year which is
included in computing the nest estate
2.
Deduction claimed and allowable
3.
Previous net gift made during the same
calendar year
4.
Name of donee
5.
Information as may be required by the
rules and regulations
Gift Splitting is the spreading of the gift over
numerous calendar years in order to avail
of lower donors tax. This is considered as
tax avoidance, and is allowed under the
law.
R. DIFFERENCE BETWEEN
AND ESTATE TAX

DONORS

TAX

Estate Tax
1. Imposed on transfer
of properly thru
succession and
donation mortis
causa
2. Accrues on the date
of death of the
decedent
3. First sum
exempted
P200,000

Donors Tax
1. Imposed on
transfer of
property thru
donation

4. Rate: 5% to 20%
5. Time for payment is
within six (6)
months
after decedents
death

4. Rate: 2% to 15%
5. Time for payment

when the return is


filed or within 30
days after gift
was made.

C.

2. Accrues at the
time the gift or
donation is made
3. First sum
exempted
P100,000

Value Added Tax


A tax on consumption levied on the sale,
barter, exchange or lease of goods or
properties or services in the Philippines
and on importation of goods into the
Philippines.

Characteristics of Value-Added Tax (VAT):


1. It is a tax on value-added of a
taxpayer;

2.
3.
4.
5.
6.
7.

It is collected through the tax credit


method;
It is a transparent form of sales tax;
It
is
a
broad-based
tax
on
consumption of goods, properties, or
services in the Philippines;
It is an indirect tax;
The tax-inclusive method is adopted
in the Philippines;
There is no cascading in the VAT
system.

CROSS BORDER DOCTRINE

Mandates that no VAT shall be imposed


to form part of the cost of the goods
destined for consumption outside the
territorial
border
of
the
taxing
authority.
Goods and services are
taxed only in the country where these
are consumed.

DESTINATION PRINCIPLE

The
destination
of
the
goods
determines taxation or exemption from
tax. Export sales of goods are subject
to 0% rate (or zero-rated), while
importations of goods are subject to
the 12% VAT.

Exports are zero-rated because the


consumption of such goods will be
made outside the Philippines, while
imports of goods are subject to 12%
VAT because they are for consumption
within the Philippines.
General Rule: In order for VAT to apply, the
transaction (sale, exchange, barter, etc.)
must be in the course of trade or
business. Otherwise, VAT will not apply.
Exception: Instances that VAT applies though
not in the course of trade or business:

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1.
2.
3.
4.

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Those incidental to business


Transactions deemed sale
Importation
Services rendered by a non-resident
person
VAT is also an indirect tax because the
burden of paying it may be shifted to
customers/consumers.
a. If an exporter is a VAT registered
person, his transactions are zero
rated (meaning he pays 0% of VAT).
On the other hand, if he is not
registered as such, he is merely
exempt. The significance of the
difference lies on the allowable
deductions provided by law. Zerorated transactions are allowed to
claim deductions, while exempt
transactions are not allowed to claim
deductions.
Under the VAT system, there is no
cascading or pyramiding, that is, the
tax should not be imposed upon another
tax (People vs. Sandiganbayan and Tan,
G.R. No. 152532, August 16, 2005). In
defining the terms gross selling price
and gross receipts, the VAT Law
expressly excludes the VAT passed on by
the sellers to the buyers. Moreover, the
input taxes due from or paid by the buyer
are allowed to be credited against his
output taxes.

FORMULA:
Output Tax Input Tax = VAT
Output Tax means the VAT due on the sale or
lease of taxable goods, properties or
services by any person registered or
required to register under the VAT
system.
Input Tax means the VAT due from or paid by
a VAT-registered person in the course of
his trade or business on importation of
goods or local purchase of goods,
properties, or services, including lease or
use of property, from a VAT-registered
person.
Different Ways of Computing VAT:
1. Cost deduction method refers to the
manner of computing the taxpayers VAT
liability by deducting his costs and

2.

expenses subject to VAT from his taxable


sales of goods, properties or services,
and multiplying the resulting value-added
by 12%.
Tax credit method refers to the
manner by which the VAT of a taxpayer is
computed wherein the input taxes shifted
by the sellers to the buyer are credited
against the buyers output taxes when he
in turn sells the taxable goods, properties
or services. This is sometimes called the
invoice method.

PERSONS LIABLE TO VAT


Any person who:
1. Sells, barters, exchanges, or leases
goods or properties in the course of trade
or business;
2. Renders services in the course of trade or
business
(including
professional
services);
3. Imports goods whether or not in the
course of trade or business;
4. Buys or is the transferee of goods
imported into the Philippines by a VATexempt person wherein the buyer shall
be deemed the importer;
5. Whose gross sales or gross receipts are
over the threshold fixed by law or
regulations.
VAT ON SALES OF GOODS OR PROPERTIES
Requisites for taxability of sale of goods or
properties:
1. The sale must be an actual or deemed
sale of goods or properties for a valuable
consideration;
2. The sale must be undertaken in the
course of trade or business;
3. The sale must be for the use or
consumption in the Philippines;
4. The sale must not be exempt from VAT
under the Tax Code, special laws, or
international agreement.
Note: The phrase in the course of trade or
business means the regular conduct or pursuit
of a commercial or an economic activity,
including transactions incidental thereto, by any
person, regardless of whether or not the person
engaged therein is a non-stock, non-profit
private
organization
(irrespective
of
the
disposition of its net income and whether or not
it sells exclusively to members or their guests),
or a government entity.

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It is immaterial whether the primary


purpose of a corporation indicates that it
receives payments for services rendered
to its affiliates on a reimbursement-ofcost basis only, without realizing profit,
for purposes of determining liability for
VAT on services rendered. As long as the
entity provides service for a fee,
remuneration or consideration, then the
service rendered is subject to VAT.
(Commissioner of Internal Revenue vs.
Court of Appeals and Commonwealth
Management and Services Corporation,
G.R. No. 125355, March 30, 2000)

ZERO-RATED
SALES
OF
GOODS
OR
PROPERTIES

A zero-rated sale of goods or properties (by a


VAT-registered
person)
is
a
taxable
transaction for VAT purposes, but shall not
result in any output tax. However, the input
tax on purchases of goods, properties, or
services, related to such zero-rated sale,
shall be available as tax credit or refund.

2.

3.

The following sales by VAT-registered persons


shall be subject to zero percent (0%) rate:
1.

Export Sales
(a) Sale and actual shipment of goods
from the Philippines to a foreign
country, irrespective of any shipping
arrangement that may be agreed
upon
which
may
influence
or
determine the transfer of ownership
of the goods so exported, paid for in
acceptable foreign currency or its
equivalent in goods or services, and
accounted for in accordance with the
rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(b) Sale of raw materials or packaging
materials to a non-resident buyer for
delivery to a resident local exportoriented enterprise to be used in
manufacturing, processing, packing
or repacking in the Philippines of the
said buyers goods, paid for in
acceptable foreign currency, and
accounted for in accordance with the
rules and regulations of the BSP;
(c) Sale of raw materials or packaging
materials
to
an export-oriented
enterprise whose export sales exceed
70% of total annual production;
(d) Sale of gold to the BSP;

(e) Transactions considered export sales


under Executive Order No. 226,
otherwise known as the Omnibus
Investments Code of 1987, and other
special laws;
(f) Sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international
air transport operations.
Foreign Currency Denominated Sale

means the sale to a non-resident of


goods assembled or manufactured in
the Philippines for delivery to a
resident in the Philippines, paid for in
acceptable foreign currency and
accounted for in accordance with the
rules and regulations of the BSP.
Sales to Persons or Entities Deemed TaxExempt
under
Special
Law
or
International Agreement

Sales of goods or property to persons


or entities who are tax-exempt under
special
laws
or
international
agreements to which the Philippines
is
signatory, such as Asian
Development
Bank
(ADB),
International Rice Research Institute
(IRRI), etc. shall be effectively
subject to VAT at zero rate.

TRANSACTIONS DEEMED SALE


The following transactions shall be deemed sale
pursuant to Section 106(B) of the 1997 Tax
Code:
1.

2.
3.
4.

5.

Transfer, use or consumption not in the


course of business of goods or properties
originally intended for sale or for use in
the course of business. Transfer of goods
or properties not in the course of
business can take place when VATregistered person withdraws goods from
his business for his personal use;
Distribution or transfer to shareholders or
investors as share in the profits of VATregistered person;
Distribution or transfer to creditors in
payment of debt or obligation;
Consignment of goods (if actual sale is
not made within 60 days following the
date such goods were consigned).
Consigned goods returned by the
consignee within the 60-day period are
not deemed sold;
Retirement from or cessation of business
with respect to all goods on hand,

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whether capital goods, stock-in-trade,


supplies or materials as of the date of
such retirement or cessation, whether or
not the business is continued by the new
owner or successor.

not, is subject to VAT. (As amended by


Revenue Regulations No. 10-2011, July
1, 2011)
Illustration: Abel Corporation (transferee)
is a merchandising concern and has an
inventory of goods for sale amounting to
Php1 Million. Nel Corporation (transferor), a
real estate developer, exchanged its real
estate properties for the shares of stocks of
Abel Corporation resulting in the acquisition
of corporate control. The inventory of goods
owned by Abel Corporation is not subject to
output tax despite the change in corporate
control because the same corporation still
owns them. This is in recognition of the
separate and distinct personality of the
corporation from its stockholders. However,
the exchange of real properties held for sale
or for lease by Nel Corporation, for the shares
of stocks of Abel Corporation, whether
resulting to corporate control or not, is
subject to VAT.

[Note: The following circumstances shall,


among others, give rise to transactions
deemed sale: (1) change of ownership of the
business; (2) dissolution of a partnership and
creation of a new partnership which takes
over the business.]
CHANGE OR CESSATION OF STATUS AS VATREGISTERED PERSON
Subject to VAT VAT shall apply to goods or
properties originally intended for sale or use in
business, and capital goods which are existing as
of the occurrence of the following:
1. Change of business activity from VAT
taxable status to VAT-exempt status. An
example is a VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in
any other business not subject to VAT;
2. Approval of a request for cancellation of
registration due to reversion to exempt
status;
3. Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of three (3)
consecutive years.
Not Subject to VAT VAT shall not apply to
goods or properties which are originally intended
for sale or for use in the course of business
existing as of the occurrence of the following:
1. Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
(individual or corporate) or group of
stockholders. The goods or properties
used in business (including those held for
lease) or those comprising the stock-intrade of the corporation, having a change
in corporate control, will not be
considered sold, bartered or exchanged
despite the change in the ownership
interest in the said corporation. However,
the exchange of goods or properties,
including the real estate properties used
in business or held for sale or for lease by
the transferor, for shares of stocks,
whether resulting in corporate control or

2.
3.

Change in the trade or corporate name of


the business;
Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed by the
surviving or new corporation.

(Note: Prior to the issuance of Revenue


Regulations No. 10-2011 dated July 1, 2011,
the VAT rules provided for exemption from
VAT on exchange of properties for shares of
stock in case of transfer of real property for
shares of stock where both parties (i.e.,
transferee and transferor) are both real
estate dealers, and the transferor gains
control of the transferee-corporation. Under
the new rules, all exchange of goods or
properties
including
the
real
estate
properties used in business or held for sale
to a corporation in exchange for stocks by
the transferor, regardless of the nature of
business of transferee or transferor or
whether the transfer will result in corporate
control or not, shall now be subject to VAT.)
VAT ON IMPORTATION OF GOODS

VAT is imposed on goods brought into the


Philippines, whether for use in business
or not. The tax shall be based on the
total value used by the Bureau of

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Customs in determining tariff and


customs duties, plus customs duties,
excise tax (if any), and other charges,
such as postage, commission, and similar
charges, prior to the release of the goods
from customs custody.
The VAT on importation shall be paid by
the importer prior to the release of such
goods from customs custody. The term
importer refers to any person who
brings goods into the Philippines, whether
or not made in the course of his trade or
business.
It includes non-exempt
persons or entities who acquire tax-free
imported goods from exempt persons,
entities or agencies.
In the case of goods imported into the
Philippines by VAT-exempt persons,
entities
or
agencies
which
are
subsequently
sold,
transferred
or
exchanged in the Philippines to nonexempt persons or entities, the latter
shall be considered the importers thereof
and shall be liable for VAT due on such
importation.

VAT ON SALES OF SERVICES


Requisites for taxability of sale of services:
3. The service must be performed or is to be
performed in the course of trade or
business in the Philippines;
4. For a valuable consideration actually or
constructively received;
5. The service is not exempt under the Tax
Code, special law, or international
agreement.
Services of the following persons are subject to
VAT:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs,
and immigration brokers;
3. Lessors of property, whether personal or
real;
4. Warehousing services;
5. Lessors or distributors of cinematographic
films;
6. Persons engaged in milling, processing,
manufacturing or repacking goods for
others;
7. Proprietors, operators or keepers of
hotels, motels, rest houses, pension
houses, inns, resorts;
8. Proprietors or operators of restaurants,
refreshments parlors, cafes, and other

9.
10.
11.

12.

13.
14.

15.

16.

eating places, including clubs and


caterers;
Dealers in securities;
Lending investors;
Transportation
contractors
on
their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
carriers by land relative to their transport
of goods or cargoes;
Common carriers by air and sea relative
to their transport of passengers, goods or
cargoes from one place in the Philippines
to another place in the Philippines;
Sales of electricity by generation,
transmission,
and/or
distribution
companies;
Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting whose annual
gross receipts of the preceding year do
not exceed P10,000,000, and franchise
grantees of gas and water utilities;
Non-life insurance companies (except
their crop insurances), including surety,
fidelity,
indemnity
and
bonding
companies;
Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties.

ZERO-RATED SALES OF SERVICES


The following services performed in the
Philippines by a VAT-registered person shall be
subject to zero percent (0%) VAT rate:
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
processing,
manufacturing or repacking rendered to a
person engaged in business conducted
outside the Philippines or to 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;
3. Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the

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4.

5.

6.
7.

UCLASS Bar Operations: Tax Law Society

Philippines is a signatory effectively


subjects the supply of such services to
0% rate;
Services rendered to persons engaged in
international shipping or air transport
operations, including leases of property
for use thereof;
Services performed by subcontractors
and/or
contractors
in
processing,
converting, or manufacturing goods for
an enterprise whose export sales exceed
70% of the total annual production;
Transport of passengers and cargo by
domestic air or sea carriers from the
Philippines to a foreign country;
Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal and steam,
ocean energy, and other emerging
sources using technologies such as fuel
cells and hydrogen fuels. (Note: The VAT
zero-rating shall apply strictly to the sale
of power or fuel generated through
renewable sources of energy, and shall
not extend to the sale of services related
to the maintenance or operation of plants
generating said power.)

VAT-EXEMPT TRANSACTIONS
The following transactions shall be exempt from
VAT:
Republic Act No. 9337, as implemented by
Revenue Regulations No. 16-2005 and last
amended by Revenue Regulations No. 162011 dated October 27, 2011
A. Sale or importation of agricultural and
marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or
producing foods for human consumption;
and breeding stock and genetic materials
therefor.
Meat, fruit, fish, vegetables and other
agricultural and marine food products
classified under this paragraph shall be
considered in their original state even if
they
have
undergone
the
simple
processes of preparation or preservation
for the market, such as freezing, drying,
salting, broiling, roasting, smoking, or
stripping, including those using advanced

technological means of packaging, such


as shrink wrapping in plastics, vacuum
packing, tetra-pack, and other similar
packaging methods.
Polished and/or
husked rice, corn grits, raw cane sugar
and molasses, ordinary salt, and copra
shall be considered as agricultural food
products in their original state.
B. Sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specially feeds for
race horses, fighting cocks, aquarium
fish, zoo animals and other animals
generally considered as pets);
C. Importation of personal and household
effects belonging to residents of the
Philippines returning from abroad and
non-resident citizens coming to resettle
in the Philippines. Provided, That such
goods are exempt from custom duties
under the Tariff and Customs Code of the
Philippines;
D. Importation of professional instruments
and
implements,
wearing
apparel,
domestic
animals,
and
personal
household effects (except any vehicle,
vessel, aircraft, machinery and other
goods for use in the manufacture and
merchandise of any kind in commercial
quantity) belonging to persons coming to
settle in the Philippines, for their own use
and not for sale, barter or exchange
accompanying such persons, or arriving
within ninety (90) days before or after
their arrival, upon the production of
evidence
satisfactory
to
the
Commissioner of Internal Revenue, that
such persons are actually coming to
settle in the Philippines and that the
change of residence is bona fide;
E.

Services subject to percentage tax under


Title V of the Tax Code;

F.

Services by agricultural contract growers


and milling for others of palay into rice,
corn into grits and sugar cane into raw
sugar;

G. Medical, dental, hospital and veterinary


services except those rendered by

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professionals; (Note: Laboratory services


are exempted. If the hospital or clinic
operates a pharmacy or drug store, the
sale of drugs and medicine is subject to
VAT.)

the cooperative is not the producer (e.g.,


trader), then only those sales to its
members shall be exempted from VAT.
(As added by Revenue Regulations No. 42007, effective April 6, 2007)

H. Educational services rendered by private


educational institutions, duly accredited
by the Department of Education (DepEd),
the Commission on Higher Education
(CHED), the Technical Education And
Skills Development Authority (TESDA)
and those rendered by government
educational institutions; (Note: The term
educational services does not include
seminars, in-service training, review
classes and other similar services
rendered by persons who are not
accredited by the DepEd, CHED, and/or
TESDA.)

It is to be reiterated, however, that sale


or importation of agricultural food
products in their original state is exempt
from VAT irrespective of the seller and
buyer thereof, pursuant to Subsection (a)
hereof.
(As
added
by
Revenue
Regulations No. 4-2007, effective April
06, 2007)

I.

Services rendered by individuals pursuant


to an employer-employee relationship;

J.

Services rendered by regional or area


headquarters
established
in
the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their
affiliates, subsidiaries or branches in the
Asia-Pacific Region and do not earn or
derive income from the Philippines;

K. Transactions which are exempt under


international agreements to which the
Philippines is a signatory or under special
laws, except those under Presidential
Decree No. 529 or the Petroleum
Exploration Concessionaires under the
Petroleum Act of 1949;
L.

Sales by agricultural cooperatives duly


registered and in good standing with the
Cooperative
Development
Authority
(CDA) to their members as well as sale of
their produce, whether in its original
state or processed form, to nonmembers; their importation of direct farm
inputs, machineries and equipment,
including spare parts thereof, to be used
directly and exclusively in the production
and/or processing of their produce;
Sale by agricultural cooperative to nonmembers can only be exempted from VAT
if the producer of the agricultural
products sold is the cooperative itself. If

M. Gross receipts from lending activities by


credit or multi-purpose cooperatives duly
registered and in good standing with the
Cooperative Development Authority;
N. Sales by non-agricultural, non-electric
and
non-credit
cooperatives
duly
registered with and in good standing with
the Cooperative Development Authority;
Provided,
That
the
share
capital
contribution of each member does not
exceed Fifteen thousand pesos (P15,000)
and regardless of the aggregate capital
and net surplus ratably distributed among
the members; (Note: Importation by
non-agricultural, non-electric and noncredit cooperatives of machineries and
equipment, including spare parts thereof,
to be used by them are subject to VAT.)
O.

Export sales by persons who are not VAT


registered;

P.

(1) Sale of real properties not primarily


held for sale to customers or held for
lease in the ordinary course of trade or
business; (2) Sale of real properties
utilized for low-cost housing as defined
by R.A. No. 7279, otherwise known as
the Urban Development and Housing Act
of 1992, and other related laws, such as
R.A. No. 7835 and R.A. No. 8763; (3)
Sale of real properties utilized for
socialized housing as defined under R.A.
No. 7279 and other related laws; (4)
Sale of residential lot valued at One
Million Nine Hundred Nineteen Thousand
Five Hundred Pesos (P1,919,500) and
below, or house and lot and other
residential dwellings valued at Three
Million
One
Hundred
Ninety-Nine
Thousand
Two
Hundred
Pesos

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(P3,199,200) and below; (As amended


by Revenue Regulations No. 16-2011,
October 27, 2011)

thereof for domestic


transport operations;
T.

[Note: With respect to number (1)


above, even if the real property is not
primarily held for sale to customers or
held for lease in the ordinary course of
trade or business but the same is used in
the trade or business of the seller, the
sale thereof shall be subject to VAT being
a transaction incidental to the taxpayers
main business. (As added by Revenue
Regulations No. 4-2007, effective April 6,
2007)]
Q. Lease of residential units with a monthly
rental per unit not exceeding Twelve
Thousand
Eight
Hundred
Pesos
(P12,800.00), regardless of the amount
of aggregate rentals received by the
lessor during the year. Notwithstanding
the foregoing, lease of residential units
where the monthly rental per unit
exceeds Twelve Thousand Eight Hundred
Pesos (P12,800.00) but the aggregate of
such rentals of the lessor during the year
do not exceed One Million Nine Hundred
Nineteen Thousand Five Hundred Pesos
(P1,919,500.00) shall likewise be exempt
from VAT, however, the same shall be
subjected to the 3% percentage tax. (As
amended by Revenue Regulations
No. 16-2011, October 27, 2011)
[Note: The term residential units shall
refer to apartments and houses and lots
used for residential purposes, and
buildings or parts or units thereof used
solely
as
dwelling
places
(e.g.,
dormitories, rooms and bed spaces)
except motels, motel rooms, hotels and
hotel rooms, lodging houses, inns, and
pension houses.)]
R. Sale, importation, printing or publication
of books and any newspaper, magazine,
review or bulletin which appears at
regular intervals with fixed prices for
subscription and sale and which is not
devoted principally to the publication of
paid advertisements;
S. Sale, importation or lease of passenger or
cargo vessels and aircraft, including
engine, equipment and spare parts

or

international

Importation of life-saving equipment,


safety and rescue equipment and
communication and navigational safety
equipment, steel plates and other metal
plates including marine-grade aluminum
plates, used for shipping transport
operations; Provided, that the exemption
shall be subject to the provisions of
Section 4 of R.A. No. 9295, otherwise
known as The Domestic Shipping
Development Act of 2004; (As amended
by RR No. 4-2007, effective April 6,
2007)

U. Importation
of
capital
equipment,
machinery, spare parts, life-saving and
navigational equipment, steel plates and
other metal plates including marine-grade
aluminum plates to be used in the
construction,
repair,
renovation
or
alteration of any merchant marine vessel
operated or to be operated in the
domestic trade; (As amended by RR No.
4-2007)
V.

Importation of fuel, goods and supplies


by persons engaged in international
shipping or air transport operations;
Provided, that the said fuel, goods and
supplies shall be used exclusively or shall
pertain to the transport of goods and/or
passenger from a port in the Philippines
directly to a foreign port or vice versa
without docking or stopping at any other
port in the Philippines unless the docking
or stopping at any other Philippine port is
for the purpose of unloading passengers
or cargoes that originated from abroad or
to load passengers and/or cargoes bound
for abroad;

W. Services of banks, non-bank financial


intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries such as money changers
and pawnshops;
X. Sale or lease of goods or properties or
the performance of services other than
the transactions mentioned in the
preceding paragraphs, the gross annual
sales and/or receipts do not exceed the
amount of One Million Nine Hundred
Nineteen Thousand Five Hundred Pesos

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(P1,919,500.00). (As amended by


Revenue Regulations No. 16-2011,
October 27, 2011)
OUTPUT TAX AND INPUT TAX
Output Tax means the VAT due on the sale or
lease of taxable goods, properties or
services by any person registered or
required to register under the VAT
system.
Input Tax means the VAT due from or paid by
a VAT-registered person in the course of
his trade or business on importation of
goods or local purchase of goods,
properties, or services, including lease or
use of property, from a VAT-registered
person.

SOURCES OF INPUT TAX


1. From purchase or importation of goods
2. From purchase of real properties for
which a VAT has actually been paid
3. From purchase of services in which VAT
has actually been paid
4. From transactions deemed sale
5. From transitional input tax
6. From presumptive input tax
7. From transitional input tax credits
allowed under the transitory and other
provisions of Revenue Regulations (RR)
No. 16-2005, as last amended by RR 162011
PERSONS WHO CAN AVAIL OF INPUT TAX
CREDIT
The input tax credit on importation of goods or
local purchases of goods, properties, or services
by a VAT-registered person shall be creditable:
1. To the importer upon payment of VAT
prior to the release of goods from
customs custody;
2. To the purchaser of the domestic goods
or properties upon consummation of the
sale; or
3. To the purchaser of services or the lessee
or licensee upon payment of the
compensation, rental, royalty or fee.
TRANSITIONAL INPUT TAX (2%)

Taxpayers who became VAT-registered


persons upon exceeding the minimum
turnover
of
P1,500,000.00
(or
P1,919,500.00 effective January 1, 2012)
in any 12-month period, or who

voluntarily register even if their turnover


does not exceed P1,500,000.00 (or
P1,919,500.00
effective
January
1,
2012), except franchise grantees of radio
and
television
broadcasting
whose
threshold is P10,000,000.00, shall be
entitled to a transitional input tax on the
inventory on hand as of the effectivity of
their VAT registration, on the following:
(a) goods purchased for resale in their
present
condition;
(b)
materials
purchased for further processing, but
which
have
not
yet
undergone
processing; (c) goods which have been
manufactured by the taxpayer; (d) goods
in process for sale; or (e) goods and
supplies for use in the course of the
taxpayers trade or business as a VATregistered person.
The transitional input tax shall be two
percent (2%) of the value of the
beginning inventory on hand or actual
VAT paid on such, goods, materials and
supplies, whichever is higher, which
amount shall be creditable against the
output tax of VAT-registered person.

PRESUMPTIVE INPUT TAX (4%)

Persons or firms engaged in the


processing of sardines, mackerel, and
milk, and in manufacturing refined sugar,
cooking oil and packed noodle-based
instant meals, shall be allowed a
presumptive input tax, creditable against
the output tax, equivalent to four
percent (4%) of the gross value in
money of their purchases of primary
agricultural products which are used as
inputs to their production.

The term processing shall mean


pasteurization, canning and activities
which through physical or chemical
process alter the exterior texture or form
or inner substance of a product in such
manner as to prepare it for special use to
which it could not have been put in its
original form or condition.
COMPUTATION OF VAT PAYABLE

In a sale of goods or properties, the


output VAT is computed by multiplying
the gross selling price by the regular rate
of VAT. For sellers of services, the output
VAT is computed by multiplying the gross
receipts by the regular rate of VAT.

In all cases where the basis for


computing the output VAT is either the

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gross selling price or the gross receipts,


but the amount of VAT is erroneously
billed in the invoice, the total invoice
amount shall be presumed to be
comprised of the gross selling price/gross
receipts plus the correct amount of VAT.
Hence, the output tax shall be computed
by multiplying the total invoice amount
by a fraction using the rate of VAT as
numerator and one hundred percent
(100%) plus rate of VAT as the
denominator. Accordingly, the input VAT
that can be claimed by the buyer shall be
the corrected amount of VAT computed in
accordance with the formula herein
prescribed.
If at the end of any taxable quarter the
output VAT exceeds the input VAT, the
excess shall be paid by the VATregistered person.
If the input VAT inclusive of input VAT
carried over from the previous quarter
exceeds the output VAT, the excess input
VAT shall be carried over to the
succeeding quarter or quarters; Provided,
however, that any input VAT attributable
to zero-rated sales by a VAT-registered
person may at his option be refunded or
applied for a tax credit certificate which
may be used in the payment of internal
revenue taxes, subject to the limitations
as may be provided for by law, as well
as, other implementing rules.

SUBSTANTIATION OF INPUT TAX CREDITS


Input taxes for the importation of goods or the
domestic purchase of goods, properties or
services made in the course of trade or business,
whether such input taxes shall be credited
against zero-rated sale, non-zero-rated sales, or
subjected to the 5% Final Withholding VAT, must
be substantiated and supported by the following
documents, and must be reported in the
information returns required to be submitted to
the BIR:
1. For the importation of goods import
entry or other equivalent document
showing actual payment of VAT on the
imported goods
2. For the domestic purchase of goods and
properties

invoice
showing
the
information required under Sections 113
and 237 of the 1997 Tax Code
3. For the purchase of real property public
instrument (i.e., Deed of Absolute Sale,
Deed
of
Conditional
Sale,
Contract/Agreement
to
Sell,
etc.)

4.

together with VAT invoice issued by the


seller
For the purchase of services official
receipt showing the information required
under Sections 113 and 237 of the 1997
Tax Code

REFUND OR TAX CREDIT OF EXCESS INPUT


TAX
Who May Claim for Refund or Tax Credit

A VAT-registered person whose sales of


goods, properties or services are zerorated or effectively zero-rated may apply
for the issuance of a tax credit certificate
(TCC) or refund of input tax attributable
to such sales.

The input tax that may be subject of the


claim shall exclude the portion of input
tax that has been applied against the
output tax.

The application should be filed within two


(2) years after the close of the taxable
quarter when such sales were made.

In case of zero-rated sales, the payments


for the sales must have been made in
acceptable
foreign
currency
duly
accounted for in accordance with the BSP
rules and regulations.

Where the taxpayer is engaged in both


zero-rated or effectively zero-rated sales
and in taxable (including sales subject to
final withholding VAT) or exempt sales of
goods, properties or services, and the
amount of creditable input tax due or
paid cannot be directly and entirely
attributed to any one of the transactions,
only the proportionate share of input
taxes
allocated
to
zero-rated
or
effectively zero-rated sales can be
claimed for refund or issuance of a tax
credit certificate.

A
VAT-registered
person
whose
registration has been cancelled (1) due to
retirement from or cessation of business,
or (2) due to changes in or cessation of
status may, within two (2) years from the
date of cancellation, apply for the
issuance of a tax credit certificate for any
unused input tax which he may use in
payment of his other internal revenue
taxes. However, he shall be entitled to a
refund if he has no internal revenue tax
liabilities against which the tax credit
certificate may be utilized.
Manner of Giving Refund

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Refund shall be made upon warrants


drawn by the Commissioner of Internal
Revenue or by his duly authorized
representative without the necessity of
being countersigned by the Chairman of
the Commission on Audit (COA), the
provision of the Revised Administrative
Code to the contrary notwithstanding.
However, the said refunds shall be
subject to post-audit by the COA.

Period to File Claim or Apply for Issuance of TCC

The application for refund or issuance of


a Tax Credit Certificate (TCC) for excess
input tax shall be decided by the BIR
Commissioner within 120 days from the
submission of documents in support of
the application.

In case of full or partial denial of the


claim for issuance of TCC or tax refund as
decided by the Commissioner of Internal
Revenue, the taxpayer may appeal to the
Court of Tax Appeals (CTA) within thirty
(30) days from the receipt of said denial,
otherwise, the decision shall become
final. However, if no action on the claim
for tax credit certificate/refund has been
taken by the Commissioner of Internal
Revenue after the one hundred twenty
(120)-day period from the date of
submission of the application with
complete documents, the taxpayer may
appeal to the CTA within 30 days from
the lapse of the 120-day period.
Summary
of
the
Aichi
Doctrine
(Commissioner of Internal Revenue vs. Aichi
Forging Company, G.R. No. 184823, October 6,
2010)

The two-year prescriptive period for


claiming a refund/credit of unutilized
input VAT shall be reckoned from the
close of the taxable quarter when the
sales were made.

The two-year prescriptive period applies


only to the administrative claims for input
VAT refund.
According to the Supreme
Court, applying the two-year prescriptive
period to judicial claims for input VAT refund
would render nugatory Section 112(D) of the
NIRC, which already provides for a specific
period within which a taxpayer should appeal
the decision or inaction of the BIR
Commissioner.

Observance of the 120-30 day rule is


mandatory and jurisdictional.
In other
words, the taxpayer may appeal to the Court

of Tax Appeals within 30 days only in case


there is full or partial denial by the
Commissioner of Internal Revenue (CIR) of
the application for refund before the lapse of
the 120-day period or in case the said period
lapses without action on the part of the CIR.
INVOICING REQUIREMENTS
A VAT-registered person shall issue:
1. VAT invoice for every sale, barter, or
exchange of goods or services;
2. VAT official receipt for every lease of
goods or properties, and for every sale,
barter, or exchange of services.
Information contained in a VAT invoice or VAT
official receipt:
1. Statement that the seller is a VATregistered person followed by his TIN;
2. The total amount which the purchaser
pays or is obligated to pay to the seller
with the indication that such amount
includes the VAT.
a) The amount of tax shall be shown as
a separate item in the invoice or
receipt;
b) If the sale is exempt from VAT, the
term VAT-EXEMPT SALE shall be
written or printed prominently on the
invoice or receipt;
c) If the sale is subject to zero percent
(0%) VAT, the term ZERO-RATED
SALE shall be written or printed
prominently on the invoice or receipt;
d) If the sale involves goods, properties
or services some of which are subject
to and some of which are VAT zerorated or VAT-exempt, the invoice or
receipt shall clearly indicate the
break-down of the sale price between
its taxable, exempt and zero-rated
components, and the calculation of
the VAT on each portion of the sale
shall be shown on the invoice or
receipt. The seller has the option to
issue separate invoices or receipts for
the taxable, exempt, and zero-rated
components of the sale.
3. Date of the transaction, quantity, unit
cost, and description of the goods;
4. In case of sales in the amount of
P1,000.00 or more and the sale is made
to a VAT-registered person, the name,
business style, address, and TIN of the
purchaser.

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Invoicing
and
Recording
Deemed
Sale
Transactions
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 A memorandum
entry in the subsidiary sales journal to
record withdrawal of goods for personal
use is required.
Distribution or transfer to shareholders,
investors, or creditors An invoice shall
be prepared at the time of the occurrence
of the transaction.
Consignment of goods An invoice shall
be prepared at the time of the occurrence
of the transaction.
Retirement from or cessation of business
An inventory shall be prepared and
submitted to the Revenue District Office
(RDO) which has jurisdiction over the
taxpayers principal place of business not
later than 30 days after retirement or
cessation from business. An invoice shall
be prepared for the entire inventory,
which shall be the basis of the entry into
the subsidiary sales journal. The invoice
need not enumerate the specific items
appearing in the inventory, but it must
show the total amount. It is sufficient to
just make a reference to the inventory
regarding the description of the goods.
However, the sales invoice number should
be indicated in the inventory filed and a
copy thereof shall form part of this
invoice. If the business is to be continued
by the new owners or successors, the
entire amount of output tax on the
amount deemed sold shall be allowed as
input taxes. If the business is to be
liquidated and the goods in the inventory
are sold or disposed of to VAT-registered
buyers, an invoice or instrument of sale
or transfer shall to prepared citing the
invoice number wherein the tax was
imposed on the deemed sale. At the
same time the tax paid corresponding to
the goods sold should be separately
indicated in the instrument of sale.
CONSEQUENCES OF ISSUING ERRONEOUS
VAT INVOICE OR VAT OFFICIAL RECEIPT
If a person who is not VAT-registered issues an
invoice or receipt showing his TIN followed by the
word VAT, the erroneous issuance shall result to
the following:
1. The non-VAT person shall be liable to:

a.

2.

The percentage taxes applicable to


his transactions;
b. VAT due on transactions under
Section 106 or 108 of the 1997 Tax
Code, without the benefit of any input
tax credit; and
c. A 50% surcharge under Section
248(B) of the 1997 Tax Code
VAT shall be recognized as an input tax
credit to the purchaser, provided the
requisite information is shown on the
receipt or invoice.

If a VAT-registered person issues a VAT invoice or


VAT official receipt for a VAT-exempt transaction,
but fails to display prominently on the invoice or
receipt the words VAT-EXEMPT SALE, the
transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser
shall be entitled to claim an input tax credit on
his purchase.
FILING OF RETURN AND PAYMENT
WITHHOLDING OF FINAL VAT ON SALES
TO GOVERNMENT
OPTIONAL REGISTRATION
Under section 109 of NIRC as amended
by RA 9337, there is an optional
registration given to a taxpayer
whereby, a taxpayer under exempt
transactions in sec 109 is given the
choice to remain to be exempt from VAT
or he can opt to be registered as a VATregistered person.
Rationale of Optional Registration:
So that the taxpayer can claim input tax
if he opts to register as a VAT registered
person and can therefore claim tax credit
against all kinds of NIRC tax.

VAT is applicable in sale of real property if


the seller is a realtor, so that if the
property is merely inherited said property
sold shall not be subject to VAT.

N.B. 106A1a & 109p of RA 9337 in relation


with RR 16-2006: For the realtor to be
subject to VAT, the gross receipt of the
seller realtor must exceed 1.5 million
pesos, however exemptions under 109p
of RA 9337 must be considered, that is:

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If sale of real property is valued only at


1.5 million or less (residential lot), or it is
a low cost and socialized housing as
defined by RA 7279, or is used for
residential purposes and valued at not
more that 2.5 million, then VAT shall not
apply.

Elements for Lease of Real Property to be


subject to VAT:
1. Lesson is engaged in trade or business of
leasing real property.
2. Lease in a period of one month must be
at least P10,000 or more.
3. Gross receipt must exceed 1.5 million
pesos in a year. Sec. 109(q) RA 9337 &
RR 16-2006)

D.

Withholding tax is also applicable to VAT


if it is the government or any of its
political subdivision, instrumentalities or
agencies, including GOCCs who shall
purchase goods or services (sec 11 RA
9337).

Documentary Stamp Tax

An excise upon the privilege, opportunity


or facility offered at exchanges for
transaction of the business. It is an
excise upon the facilities used in the
transaction of the business.

RA 9243 (mar. 20, 2004) An Act


Rationalizing the Provisions on the Documentary
Stamp Tax (DST) of the NIRC of 1997, as
amended

2.

Assignment or transfer of any mortgage,


lease or policy of insurance, or the
renewal
or
continuance
of
any
agreement, contract, charter, or any
evidence of obligation or indebtedness, if
there is no change in the maturity date or
remaining period of coverage from that of
the original instrument.
3. Fixed income and other securities traded
in the secondary market or through an
exchange.
4. Derivatives, provided that repurchase
agreements and reverse repurchase
agreements shall be treated similarity as
derivatives.
5. All contracts, deeds document and
transactions related to the conduct of
business of the Bangko Sentral ng
Pilipinas.
6. Transfer of property pursuant to Section
40(C)(2) of the NIRC of 1997, as
amended.
7. Interbank call loans with maturity of not
more than seven (7) days to cover
deficiency in reserves against deposit
liabilities, including those between or
among banks and quasi-banks.
8. Interbranch
or
interdepartmental
advances within the same entity.
9. Bank deposit accounts without a fixed
term or maturity
10. All forebearances are arising from sales
or service contracts including credit card
ad trade receivables: Provided, that the
exemption be limited to those executed
by the seller or service provider itself.

Covered Transactions
1. Original issue of shares of stock;
2. Sales, agreement to sell, memoranda of
sales, deliveries of transfers of shares or
certificates of stock;
3. All debt instruments;
4. All bills of exchange or drafts;
5. Life insurance policies;
6. Pre-need plans;
7. Policies
of
annuities,
or
other
instruments, where the annuity may be
made, transferred or redeemed.
Documents Exempt from DST
1. Sale, barter or exchange of shares of
stock listed and traded through the local
stock exchange for a period of five (5)
years from the effectively of this Act.

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1.
2.

III. LOCAL GOVERNMENT CODE OF 1991,


AS AMENDED
A. LOCAL GOVERNMENT TAXATION
1. Fundamental Principles
1.
2.
3.
4.
5.
6.
7.

8.

Shall be uniform in each local sub-unit.


Shall be equitable and based as much as
possible on the taxpayers ability to pay.
Levied for public purposes.
Shall not be unjust, excessive,
oppressive, or confiscatory.
Shall not be contrary to law, public policy,
national economic policy, or in restraint of
trade.
Collection of local taxes and other
impositions shall not be let to any person.
The revenues collected under the Code
shall inure solely to the benefit of, and
subject to disposition by the LGU levying
the tax or other imposition unless
otherwise specifically provided therein
Each LGU shall, as far as practicable,
evolve a progressive system of taxation.
(Sec. 130, LGC)

2. Nature, Aspects & Sources of Local


Taxing Power
The power of the local government unit:
8. To create its own sources of revenue,
and
9. To levy taxes, fees and charges.
(i) Grant of Local Taxing power
Local governments do not have the
inherent power to tax except that such
power may be delegated to them by law.
(Basco v. PAGCOR, G.R. No.91649 May
14, 1991)
Each local government unit shall have
the power to create its own sources of
revenue and to levy taxes, fees and
charges(TFCs) subject to limitations
provided for by Congress. (Sec. 5,
Article X, Constitution)

Local Taxing Authority shall be exercised


by the Sanggunian of the LGU concerned
through an appropriate ordinance. (Sec.
132, LGC)

Nature of the Taxing Power

3.

Not inherent
Exercised only if delegated to them by
law or Constitution
Not absolute; subject to limitations
provided for by law

Aspect of Local Taxing Power


1. Local Taxation
2. Real Property Taxation
(ii) Authority to prescribe penalties for tax
violations
Power to prescribe Penalties for Tax
Violations and Limitations thereon (Sec. 516,
LGC
1. The Sanggunian is authorized to prescribe
fines or other penalties for violations of tax
ordinances
a. In no case shall fines be less than P1,000
nor more than P5,000
b. Nor shall the imprisonment be less than
one (1) month nor more than six (6)
month.
2. Such fine or other penalty shall be imposed at
the discretion of the court.
3. The Sangguniang Barangay may prescribe a
fine of not less than P100 nor more than P1,000.
(iii) Authority to Grant local exemption
Power to Grant Local Tax Exemptions (Sec.
192, LGC)

Local government units may, through


ordinances duly approved, grant tax
exemptions, incentives or reliefs under
such terms and conditions, as they may
deem necessary

Local Government Units Exempted from


Local Taxes
1. Local water districts,
2. Cooperatives
duly
registered under R.A. No.
6938, non-stock and nonprofit hospitals,
3. Educational institutions.

The power to grant tax exemptions, tax


incentives and tax reliefs shall not apply
to regulatory fees which are levied under
the police power of the LGU.
Tax exemptions shall be conferred through the
issuance of a non-transferable tax exemption
certificate.
(iv) Withdrawal of Exemption

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(v) Authority to adjust local tax rates


Power to Adjust Local Tax Rate (Sec. 191,
LGC)
Adjustment of the tax rates as prescribed herein
should not be oftener than once every five (5)
years, and in no case shall such adjustment
exceed ten percent (10%) of the rates fixed
under the LGC.
(vi) Residual Taxing power of local
governments
Residual Taxing Powers
Power to levy taxes, fees or
changes on any base or subject NOT
a. Specifically enumerated in LGC
b. Taxed under the provisions of the
NIRC, as amended
c. Other applicable laws
Conditions:
a. That the taxes, fees, or changes shall not
be
unjust,
excessive,
oppressive,
confiscatory or contrary to declared
national policy
b. The ordinance levying such taxes, fees or
changes shall not be enacted without any
prior public hearing conducted for the
purpose.
Limitations of the Residual power
1. Constitutional limitations on taxing power
2. Common limitations prescribed in Sec. 133 of
the LGC
Fundamental principles governing the exercise of
the taxing power of the LGUs prescribed under
Sec. 130 of the LGC
The ordinance levying such residual taxes shall
not be enacted without any prior public hearing
conducted for the purpose andt he principle of
preemption.
Principle of Preemption or Exclusion
Where the National Government elects to tax a
particular area, it impliedly withholds from the
local government the delegated power to tax the
same field. This doctrine principally rests on the
intention of the Congress.
(vii) Authority to issue local tax ordinances
3. Local Taxing Authority

(i) Power to create revenues exercised thru


LGUs
(ii) Procedure for approval and effectivity of
tax ordinances
Levying
of
Local
Taxes
(Local
Tax
Ordinance)
Requisites:
2. the procedure applicable to local
government ordinances in general should
be observed (Sec. 187, LGC)
3. Procedural details (Secs. 54, 55, and 59,
LGC):
a.necessity of a quorum
b.submission approval by the local
chief executive
c. the matter of veto and overriding
the same
d.the publication and effectivity
4. Public hearings are required before any
local tax ordinance is enacted (Sec.187,
LGC)
Within 10 days after their approval, publication in
full for 3 consecutive days in a newspaper of
general circulation. In absence of such
newspaper in the province, city or municipality,
then the ordinances may be posted in at least 2
conspicuous and publicly accessible places (Sec.,
189, LGC)
4.

Scope of Local Taxing Power

All LGUs are granted general powers to levy


taxes, fees, or charges on any base or subject
not otherwise specifically enumerated therein or
taxed under the provisions of NIRC, as amended
or other applicable laws.
Levy must not be unjust, excessive, oppressive,
confiscatory or contrary to a declared national
economic policy.
No taxes, fees, charges shall be imposed without
a public hearing having been held prior to the
enactment of the ordinance.
Copies of the provincial, city or municipal tax
ordinance or revenue measures shall be
published in full for 3 consecutive days in a
newspaper of local circulation or posted in at
least 2 conspicuous and publicly accessible
places.
5. Specific Taxing Power of the LGUs
A. PROVINCES

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(vii) Taxes on Delivery Trucks/Vans

(i) Tax on transfer of real property


ownership.
Less than or equal to 50% of 1% of
total consideration
(ii) Tax on business of printing and
publication.
Less than or equal to 50% of 1% of the
gross annual receipts for the preceding
calendar
year; in the case of newly started
business, 1/20 of 1% of the capital
investment
(iii) Franchise tax
Less than or equal to 50% of 1% of
gross annual receipts of preceding calendar
year
based on (a) incoming receipts or (b)
realized within territorial jurisdiction
(iv) Tax on sand, gravel and other
quarry resources.
Less than or equal to 10% of the fair
market value (FMV)
(v) Professional tax.
in such as Sangguniang Panlalawigan
may determine in no case to exceed
P300.00.
(vi) Amusement tax.
Less than or equal to 30% of the gross
receipts from admission fees

A historical analysis of pertinent laws


reveals the legislative intent to place
professional basketball games within the
ambit of a national tax. With reference
to PD 1959, there is a recognition under
the laws of this country that the
amusement
tax
on
professional
basketball games is a national tax, and
not a local tax. Even up to the present,
the category of amusement taxes on
professional basketball games as a
national tax remains the same. This is
so provided under Section 125 of the
1997 NIRC. (PBA v. CA< GR No. 119122
Aug. 8, 2000)
Note: Section 140 of the Local Govt Code, taxes
not more than 30% of the gross receipts from
ADMISSION FEES while Section 125 of the NIRC
embraces ALL the receipts of the proprietor,
lessee or operator of the amusement place.

B. CITIES
Cities are authorized specifically to
impose TFCs that provinces and municipalities
may levy, at rates that may be above the
maximum
established
for
provinces
and
municipalities but not exceeding 50% of such
maximum rates except the rates of professional
and amusement taxes (Section 151, LGC)
C. MUNICIPALITIES
(i) Tax on Various Type of Businesses
Municipalities may levy taxes, fees and charges
not otherwise levied by provinces.
1. Manufactures, assemblers, re-packers,
etc. of liquors, distilled spirit and wines.

Rate as graduated annual fixed tax based


on gross sales or receipts for the
preceding calendar year in an amount
less than or equal to P6.5M; at P6.5M or
more, a rate not exceeding 37 1/2 of 1%
is imposed
2. Wholesales, distributions or dealers in
any article of commerce.

Rate: graduated annual fixed rate based


on gross sales or receipts not exceeding
P2M or more, the rate not exceeding
50% of 1%.

To determine whether an entity engaged


is
the
principal
business
of
manufacturing, is likewise engaged in
the separate business of selling, its
marketing system or sales operations
must be looked into. In several cases ,
the court had the occasion to distinguish
two marketing system: under the first
system, the manufacturer enters into
sales transactions and invoices the sales
at its main office where purchase orders
are sent to the companys warehouse,
where in turn actual deliveries are
made. No warehouse sales are made;
nor are separable stores maintained
where
products
may
be
sold
independently from the main office.
Under
the
second
system,
sales
transactions are entered into and
perfected at stores or warehouse
maintained by the company. The stores
and the warehouses serve as selling
centers. Entities operating under the
second system are considered engaged
in the separate business of selling. (Ilo-

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3.

4.

5.

6.

7.

UCLASS Bar Operations: Tax Law Society

Ilo Bottlers vs. Ilo-Ilo City no. L-52019


August 19 1988)
Exporters,
manufacturers,
millers,
producers, etc. of essential commodities.
Rate: not exceeding 1/2 of the rates
prescribed I (a) and 9b).
Contractors
and
other
independent
contractors.
Rate: graduated annual fixed rate when
the gross receipts exceeds P2M, the rate
is not exceeding 50% of 1%.
Banks and other financial institutions.
Rate: not exceeding 50% of 1% on the
gross receipts of preceding calendar
year.
Peddlers
Rate: not exceeding 50% per peddler
annually
Any business not otherwise specified.
Rate: as the Sanggunian may deem
proper. When the subject to excise, VAT
or percentage tax, it shall not exceed 2%
of gross receipts of the preceding
calendar year.

D. BARANGAYS
Barangays may tax, to the exclusion of the other
local government units:
1. Stores or retailers with fixed business
establishment with gross sales or receipts
of the preceding year of;
a) P50,000 barangays in cities
b) P30,000 in municipalities.
2. Service fees or charges for those
rendered in connection with the use of
barangay-owned properties
3. Barangay clearance
4. Other fees & charges on:

Commercial breeding of fighting cocks;

Places of recreation which charge


admission;

Billboards, signboards, neon signs &


other advertisements.
E. Common Revenue Raising Powers
F. Community Tax
6. Common Limitations
Powers of LGUs

on

the

Taxing

LGUs cannot levy:


1. Income tax, except when levied on banks and
other financial institutions;

2. Documentary stamp tax;


3. Taxes on estates, inheritance, gifts, legacies
and other acquisitions mortis causa, Except
transfer or real property ownership by provinces
under Section 135 and by cities under Section
151 of the LGC);
4.Custom duties, registration fees of vessels,
and wharfage on wharves, tonnage dues and all
other kinds of customs fees, charges and dues
except wharfage on wharves constructed and
maintained by the local government unit in
concerned;
5.Taxes, fees and charges (TFCs) and other
impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of
local governments in the guise of unreasonable
charges for wharfage, use of bridges or
otherwise, or other taxes in any from whatever
upon such goods or merchandise;
6.
TFCs on agricultural and aquatic
products when sold by the marginal
farmers and fishermen;
7. Taxes on business enterprises certified by
the Board of Investment as pioneer on
non-pioneer for a period of 6 and 4
years,
respectively,
from
such
registration;
8. Excise taxes on articles enumerated
under the NIRC and TFCs on petroleum
products, but not a tax on the business of
importing, manufacturing or producing
said products (Patron vs. Pilillia, G.R. No.
907776 June 3, 1991);
9. Percentage tax or value added tax on
sales, barters or exchanges of goods or
services or similar transactions thereon
(but not fixed graduated taxes on gross
sales, or on volume of production);
10. Taxes on gross receipts of transportation
contractors and persons engaged in the
transportation of passengers or freight by
hire and common carriers by air, land or
water except as provided by the Code;
11. Taxes on premium paid for reinsurance or
retrocession; common carriers by air,
land or water except as provided by the
Code;
12. TFCs for the registration of motor
vehicles and for the issuance of all kinds
of licenses or permits for the driving
thereof, except tricycles;
13. TFCs on Philippine products actually
exported except as provided by the Code;

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14. TFCs on Countryside and Barangay


Business Enterprises and on cooperatives
duly organized and registered under RA
6810 and RA 6938; and
15. TFCs of any kind on the National
Government,
its
agencies
and
Instrumentalities, and Local Governments
(Section 133, LGC).

5. Authority of Treasurer in collection and


inspection of books
Collection of Local Revenues by the
Treasurer
All local taxes, fees and charges shall be collected
by the provincial, city, municipal or barangay
treasurer, or their duly authorized deputies.

7. Collection of Business Tax

The provincial, city or municipal treasurer may


designate the barangay treasurer or hid deputy
to collect local taxes, fees or changes.

1. Tax period and Manner of Payment

Unless otherwise provided, the tax period


shall be the calendar year.

Such taxes, fees and charges may be


paid in quarterly installments. (Sec. 165,
LGC)

In case a bond is required for the purpose, the


provincial, city or municipal government shall pay
the bond that may be required under the Code.
(Sec. 170 LGC)

2. Accrual of Tax

Unless otherwise provided, shall accrue


on the first day of January of each year.

However, new taxes, fees or charges, or


charges in the rates thereof, shall accrue
on the first day of the quarter next
following the effectivity of the ordinance
imposing such new levies or rates. (Sec.
166, LGC)

8. Taxpayers Remedies
9. Civil Remedies by the LGU for collection
of Revenues
[See discussion on Remedies for
Taxation under the TAX REMEDIES.]

Local

3. Time of Payment

Unless otherwise provided shall be paid


within the first twenty (20) days of
January or of each subsequent quarter as
the case may be.

May, for a justifiable reason or cause, be


extended
without
surcharges
or
penalties, but only for a period not
exceeding six (6) months.
4. Penalties on Unpaid taxes, fees, or
charges
Fees or Charges

Surcharges not exceeding 25% of the


amount of taxes, fees or charges
including surcharges, until such amount
is fully paid.

But in no case shall be the total interest


on the unpaid amount or portion thereof
exceed thirty-six (36) months. (Sec. 168,
LGC)
(e) Interest on Other Unpaid Revenues
An interest thereon at the rate not exceeding 2%
per month from the date it is due until it is paid,
but in no case shall the total interest on the
unpaid amount or portion thereof exceed thirtysix (36) months. (Sec. 169, LGC)

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REAL PROPERTY TAXATION


i.

Fundamental Principles

Real Property Tax is a direct tax on ownership


of lands and buildings or other improvements
thereon payable regardless of whether the
property is used or not, although the value may
vary in accordance with such factor.
Characteristics of Real Property Tax
1. Direct tax on the ownership of real
property
2. Ad Valorem tax. Tha value is based on
the tax base
3. Proportion the tax is calculated on the
basis of a certain percentage of the value
assessed
4. Indivisible single obligation
5. Local tax

ii.

Real Property land, buildings, machinery and


other improvements not otherwise specifically
exempted under the said Code:

Sec. 199 (o) of the Local Government


Code

(O) Machinery embraces machines,


equipment, mechanical contrivances,
instruments, appliances or apparatus
which may or may not be attached,
permanently or temporarily, to the
real property. It includes the physical
facilities
for
production,
the
installations and appurtenant service
facilities, those which are mobile, self
powered or self-propelled, and those
not permanently attached to the real
property
which
are
ACTUALLY,
DIRECTLY, AND EXCLUSIVELY USED
TO MEET THE NEEDS OF THE
PARTICULAR INDUSTRY, BUSINESS
OR ACTIVITY and which by their
nature and purpose are designed for
necessary to its manufacturing,
mining,
logging,
commercial,
industrial, or agricultural purposes.

Typewriter is not actually, directly and


exclusively used in the machine shop

Nature of Real Property Tax

Properties Liable for Real Property Tax

iii.

because a machine shop can exist


without the typewriter, hence, no real
estate tax. (Mindanao Bus Co. v. City
Assessor of Cagayan de Oro City No. L17870 September 29 1962)
The
underground
tanks
although
installed by the lessee, Caltex, are
considered as real property for purposes
of real property taxes. It is only for
purposes of executing a final judgment
that this machinery and equipment
installed by the lessee on a leased land,
would not be considered as real
property. But in the imposition of the
real property tax, the underground
tanks are taxable as necessary fixtures
of the gasoline station without which the
gasoline
station
would
not
be
operational. (Caltex Phils. INC, V. CBAA
No. L-50466 May 31, 1982)

1. Real property tax is a national, not


local tax (Meriano Securities Industrial
Corporation vs. Court of Appeals, 114
SCRA 260)
Enforceable throughout the Philippines
and not merely in a particular
municipality or city but the proceeds of
the tax accrue to the province, city,
municipality and barrio where the realty
taxed is situated (Sec 86, PD 464)
Imposition of Real Property Tax
(i) Power to Levy
An annual valorem tax that may be
levied by a province or city or a
municipality within the Metropolitan Manila
Area on real property such as land,
building,
machinery
and
other
improvements affixed or attached to real
property; and
b) Special levies by the same local
government units on said property such
as;
1. An additional 1% tax for the
Special Education Fund;
2. An additional 5% tax on idle
lands
3. Special levy or assessment

Rates of Levy

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1) Provinces not exceeding 1% of the


assessed value of real property; and
2) Cities and Municipalities in the
Metropolitan Manila Area not more
than 2% of such assessed value.
Special Levies
1. For the Special Education Fund
The Special levy of 1% for the Special
Education Fund may be imposed by a
province, city or municipality in the
Metropolitan
Manila
Area
on
real
property, in addition to the basis real
property tax
2. On Idle Lands
A province, city or municipality within the
Metropolitan Manila Area may impose an
additional annual tax of not exceeding
5% of the assessed value of not the real
property.
3. On Lands (or Special Assessments as
then known under old Assessment
Law).
The special levy shall correspond only to a
part not exceeding 60% of the costs of said
improvements or infrastructures financed by
the province, city or municipality, as the case
may be, including the cost of acquiring land
and other real property in connection
therewith.
(ii) Exemption from real property tax
1.

2.

3.

4.

Real property owned by the Republic of


the Philippines or any of its political
subdivisions except when the beneficial
use thereof has been granted, for
consideration or otherwise, to a taxable
person;
Charitable
institutions,
churches,
personages or convents appurtenant
thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually, directly and
exclusively used by religious, charitable,
or educational purposes;
All pieces of machinery and equipment
that are actually, directly and exclusively
used by local water districts and
government-owned
or
controlled
corporations engaged in the supply and
distribution of water and/or generation
and transmission of electric power;
All real property owned by duly
registered cooperatives as provided for
under RA 6938;

Machinery and equipment used for pollution


control and environmental protection. (Sec
234, LGC)
D. Appraisal
Property Tax

and

Assessment

of

Real

1. Rule on appraisal of real property at Fair


Market Value
1.
2.

3.
4.

5.

It shall be appraised at its current and


fair market value;
It shall be classified for assessment
purposes on the basis of its actual use;
Unlike public roads which are open for
use by everyone, the LRT is accessible
only to those who pay the required fare.
It is thus apparent that petitioner does
not exist solely for public service, and
the LRT carriage ways and terminal
stations are not exclusively for public
use. (LRT V. SEC, G.R. 127316 October
12, 2000)
It shall be assessed on the basis of a
uniform classification which each local
political subdivision;
The appraisal, assessment and levy of
real property for taxation purposes and
the collection of the real property tax
shall not be let any private persons;
The appraisal and assessment of real
property shall be equitable.

Fair Market Value the amount which a


purchase willing but not compelled to buy would
pay an owner of the property, and the latter
willing but not compelled to sell would accept as
the consideration or price therefore (Army and
Navy Club vs Trinidad, 44 PHIL 383)
How to Determine Fair Market Value
For Land:
1. Assessor of the province/city or municipality
may summon the owners of the properties to be
affected and may take depositions concerning the
property, its ownership, amount, nature and
value
2. Assessor prepares a schedule of FMV for
different classes of property
3. Sanggunian enacts an ordinance
4. The schedule of FMV is published in a
newspaper of general circulation in the province,
city or municipality concerned, or in the absence
thereof, shall be posted in the provincial capitol
city or municipal hall places therein.

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5. Classes of Real Property

2. Duty to Declare Real Property

It shall be responsibility of the owner or


administrator or their representatives to
declare, under oath, the true value of real
property, taxable or exempt, within 60
days after the acquisition or upon the
completion
or
occupancy
of
the
improvement. The sworn deduction shall
be filed once every 3 years before June
30th of the year commencing 1992.
Failure or refusal to make that
declaration
within
the
prescribed
period would authorize the provincial or
city assessor to himself declare the
property in the name of the defaulting
owner if known, or against an unknown
owner, as the case may be, and to
assess
the
property
for taxation
(Sections 201-204, LGC; Heirs of
Mariano Tajonera vs. Court of Appeals,
103 Phil. 467).

3. Listing of Real Property is Assessment


Rolls
Listing of real proper whether taxable or exempt
is within the jurisdiction of LGU.
All declarations shall be kept and filed under a
uniform classification system to be established by
the provincial, city or municipal assessor.
4. Preparation of Schedules of FMV
(i) Authority to receive Evidence
The assessor of the province, city or municipality
or his deputy may summon the owner of the
properties to be affected or persons having legal
interest therein and witnesses, administer oaths,
and take depositions concerning the property, its
ownership, amount and nature of property.
(ii) Amendment of Schedule of FMV
The provincial, city or municipal assessor may
recommend to the sanggunian concerned
amendments to correct errors in valuation in the
schedule of FMV. The sangguanian concerned
shall,
by
ordinance,
act
upon
the
recommendation within 90 days from receipt
thereof.

For purposes of assessment:


a. Residential
b. Agricultural
c. Commercial
d. Industrial
e. Mineral
f. Timberland
g. Special
Special classes of Real Property (Sec 216)
a. Hospitals
b. Cultural and Specific Purposes
c.Owned and Used by Local Water Districts
d. GOCCs rendering essential public services in
the supply and distribution of water and/or
generation or transmission of electric power
6. Actual Use
Assessment

of

Property

as

Basis

of

Actual Use refers to the principal and


predominant utilization of the property by the
person in possession thereof pursuan t to Section
199(b) of the Code.
Even if the suser is not the owner of the property,
government property covered by mining leases is
subject to real property tax (Nueva Ecija vs
Imperial Mining Corp. L-59463)
Unpaid realty taxes attach to the property and
are chargeable against the person who had actual
or beneficial use and possession of it regardless
of whether or not he is the owner. To impose the
RPT on the subsequent owner which was neither
the owner nor the beneficial user of the property
during the designated periods would not only be
contrary to law but also unjust (Estate of Lim vs
City of Manila, GR No.. 90639, Feb. 21, 1990)
7. Assessment of Real Property
a. Assessment Levels (Sec 218, LGC)
-shall be fixed by ordinance of the sangguniang
panlalawigan,
sangguniang panglungsod or
sangguniang bayan or a municipality within the
MM. The assessment level shall not exceed the
rates found under Sec 218. (see LGC)
b. General revisions of assessments and
property classification

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The provincial, city or municipal assessor shall


undertake a general revision of real property
assessments within two (2) years after the
effectivity of this Code and every three (3) years
thereafter. (Section 219, LGC).

Due and payable on the 1st day of January and


the said basic and any other tax levied under the
title or real property taxation shall from the date
of accrual, constitute a lien upon the property
subject to such tax.

The assessment of real property shall not be


increased oftener than once every three (3)
years, except in case of new improvements
substantially increasing the value of said property
or of any change in its actual use (Section 220,
LGC).
c. Date of effectivity of assessment and
reassessment (Sec 221, LGC)
All assessments or reassessments made after the
first day fo Jan of any year shall take effect on
the first day of Jan of the succeeding year.
However, the reassessment of real property due
to its partial or total destruction or to a major
change in its actual use or to any great and
sudden inflation or deflation of real property
values or to the gross illegality of the assessment
when made, or to any other abnormal cause shall
be made within 90 days from the date any such
cause or causes occurred and shall take effect at
the beginning of the quarter next following the
reassement.
d. Assessment of property subject to back
taxes
Real propery for the first time shall be assessed
for taxes for the period during which it would
have been liable but in no case for more than 10
years prior to the date of initial assessment.
e. Notification of new or revised assessment
8. Appraisal and assessment of Machinery

CTA Ruling: Ownership of the Real


Property on January 1 determines the
accrual of the Real Property Tax. The real
property owned by persons under Sec.
234 of the Local Government Code on
January 1st constitutions to be exempt
from real property tax even if eventually
sold or alienated. Other real properties
owned by persons not mentioned in sec.
234, LGC on January 1st shall continue to
be liable for real property tax even if sold
or alienated to an exempt real property
tax payer.
Real
property
tax
exemption
on
government property does not extend to
beneficial user. (City of Baguio v.
Busuego, G.R. No. L-29772, 9/18/80)
In case of delinquency in the payment or
the RPT or any other tax levied under the
title on RPT, an interest at the rate of 2%
per month on the unpaid tax or portion
thereof is imposed until is shall have
been paid. The total interest on such
unpaid tax or portion thereof shall not
exceed 36 months (Sec. 255)

2. Collection of Tax
The provincial,
collects the tax.

city,

3. Periods within
property tax

municipal,
which

to

or

barangay

collect

real

Basic real property tax can be paid without


penalty in 4 equal installments (Mar 31, June 30,
Sep 30, Dec 31)

1. Brand New: FMV = acquisition cost


2. In all other cases;

Taxes can be collected

FMV= (Remaining eco life/Estimated eco life)


(Replacement Cost)

- within five (5) years from the date they become


due
- within ten (10) years from discovery of fraud, in
case there is fraud or intent to evade

E. Collection of Real Property Tax


1. Date of Accrual of Real Property Tax

Instances when period of prescription is


suspended:
a. local treasurer is legally prevented to collect
tax

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b. the owner of prop requests for reinvestigation


and writes a waiver before expiration of period to
collect
c. the owner is out of the country or cannot be
located

5. Preparation of certificate of sale (containing


the name of the purchaser, description of the
property, amount of delinquent tax and its
interest, expenses)
6. Redemption within 1 year from date of sale.

4. Special rules on payment


Payments of real property taxes shall first be
applied to prior year delinquencies, interests, and
penalties, if any, and only after said delinquencies
are settled may tax payments be credited to the
current period (Sec 250, LGC)
Interest for late payment:
- two (2%) percent each month on unpaid
amount until the delinquent amount is paid
- provided in no case shall the total interest
exceed thirty six (36) months

7. Issuance of Final Deed to purchaser (upon the


delinquent taxpayers failure to redeem).
8.Purchase of property by local treasurer for want
of bidder in case there is no bidder for the real
property advertised or if the highest bid is
insufficient to pay the RPT and other costs.
The proceeds of the sale in excess of the
delinquent tax, the interest due thereon and the
expenses of the sale shall be remitted to the
owner of the real property or person having legal
interest.

Advance and Prompt Payment


Advance payment:
- discount not exceeding 20% of annual tax (Sec
251, LGC)
Prompt Payment:
-discount not exceeding 10% of annual tax due
(Art 342, LGC)
5. Remedies of LGUs for collection of real
property tax

3. Distraint (Sec 254, LGC) with notice of


delinquency posted an published. Personal
property may be distrained to effect payment.
B. Judicial
Civil action (Sec 266, 270, LGC) filed by the
Local treasurer within 5 or 10 years as provided
in Section 270 of the LGC.

A. Adminsitrative
1. Lien (Sec 257, LGC) superior to all liens,
charges or encumbrances and is enforceable by
administrative
or
judicial
action.
It
is
extinguished only upon payment of tax and other
expenses.
2.Levy (Sec 258, LGC)
Procedure in effecting levy of real property:
1. Issuance of warrant by the LGU treasurer (on
or before or simultaneously with the institution of
civil action for collection of delinquent tax)
2. Advertise sale or auction (within 30 days after
service of warrant) by posting and publication
3. Sale
4. Report of Sale (within 30 days after sale_).

The delinquent RPT shall constitute a


lawful indebtedness of the taxpayer to
the province or city and collection of the
tax may be enforced by civil action in any
court of competent jurisdiction. The civil
action shall be filed by the local treasurer
within the time prescribed in Section 270
of the Code (Section 266, LGC).
This remedy shall be in addition to all
other remedies provided by law.

Remission of Tax
a) Condonation or reduction of Tax by the
President of the Philippines
Remission of Tax by the Sanggunian
F. Refund or Credit of Real Property Tax
Claim for tax refund or credit (Section 253,
LGC)
a. The taxpayer may file a written claim for
refund or credit with the provincial or city

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treasurer within 2 years from the date the


taxpayer is entitled to such reduction or
adjustment
b. Provincial or city treasurer should decide the
claim within 60 days from receipt of the claim
c. In case of denial of refund or credit, appeal to
LBAA within 30 days; as in protest case
G. Taxpayers Remedies
1. Contesting an assessment of value of real
property

treasurer and the difference shall be


treated as revenue.
In the event that the protest is finally
decided in favor of the protestant, the
amount or portion of the tax protested
against may either be:
a)
refunded to the protestant, or
b)
applied as tax credit to any other
existing or future tax liability of the said
protestant.

(i) Appeal to the Local Board of Assessment


Appeals

(ii)
Appeal
to
the
Assesssment appeals

Within 60 days from the date of receipt by him of


the written notice of assessment, appeal to the
local Board of Assessment Appeals of the
province or city concerned by a petition under
oath together with the supporting documents
therefore.

Within 60 days from the date of receipt by him of


the written notice of assessment, appeal to the
local Board of Assessment Appeals of the
province or city concerned by a petition under
oath together with the supporting documents
therefore.

(ii) Appeal to the


Assessment Appeals

(iii) Appeal to the


Assessment Appeals

Central

Board

of

The decision of the Board of Assessment


Appeals may be appealed within 30 days
from receipt thereof by the taxpayer to
the Central Board of Assessment Appeals,
whose decision shall be final and
executory.

Local

Central

Board

of

Board

of

The decision of the Board of Assessment Appeals


may be appealed within 30 days from receipt
thereof by the taxpayer to the Central Board of
Assessment Appeals, whose decision shall be
final and executory.

(iii) Effect of Appeal on the Payment of Tax


-does not suspend the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor without prejudice to subsequent
adjustment depending upon the final outcome of
the appeal.
2. Payment of Real Property under Protest
(i)File Protest with Local Treasurer

No protest under Real Property Tax shall


be entertained unless the tax is first paid.
When a taxpayer desires for any reason
to pay his tax under protest, he shall
indicate the amount or portion thereof
which he is contesting and such protest
shall be annotated on the tax receipts by
writing thereon the word paid under
protest, within 30 days.

The amount or portion of the tax


contested shall be held in trust by the

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TAX REMEDIES
Tax Administration and Enforcement
Requisites for Tax Regulations:
(RALP)
1. Reasonable
2. Within Authority conferred
3. Not Contrary to Law
4. Must be Published
Note: However, internal regulations and
interpretative regulations need not be
published.
Retroactivity of BIR Rulings:
General Rule: Prospective
Exceptions:
1. Where no vested right will be
impaired;
2. Where the law allows retroactive
application; and
3. If there is bad faith on the part of the
taxpayer
TAX ADMINISTRATION
Refers to the manner and procedure of
assessing and collecting or enforcing tax
liabilities.
Agencies
1.
2.
3.

Involved in Tax Administration


Bureau of Internal Revenue (BIR)
Bureau of Customs
Court of Tax Appeals

Powers and Duties of Bureau of Internal


Revenue (BIR)
1. Assessments and collection.
2. Enforcement of all forfeitures
POWERS AND DUTIES OF THE
COMMISSIONER OF INTERNAL REVENUE
(CIR)

1. Interpret provisions of this Code and


other tax laws subject to review of the
Secretary of Finance.
2. Decide
a. disputed assessment
b. refunds of internal revenue taxes,
fees and charges
c. penalties imposed in relation thereto
d. other matters arising from this Code
or other laws or portions thereof
administered by the BIR subject to
the exclusive appellate jurisdiction of
the CTA (Sec. 4)
3.
Obtain
Information,
and
to
summon/examine, and take testimony of
persons.
For the Commissioner to ascertain:
a. Correctness of any return or in
making a return where none has
been made
b. Liability of any person for any internal
revenue tax or in correcting such
liability
c. Tax compliance
The Commissioner is authorized:
a. To examine any relevant Book, paper,
record or other data
b. To Obtain any information (cost,
volume of production , receipts,
sales, gross income, etc), on a
regular basis from:
ii. Any person other than the person
under the investigation or
iii. Any office or officer of the
national/local government, govt
agencies and instrumentalities
(Bangko Sentral, govt owned and
controlled corporations)
To Summon:
a. the person liable for tax or required
to file return or
b. any officer or employee of such
person or
c. any
person
having
in
his
possession/custody/care:
i. the books of accounts
ii. accounting records of entries
relating to the business of the
person liable for tax or any other
person

to produce such books, papers,


records, and other data and to
give testimony

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To take the testimony of the person concerned,


under oath as may be relevant to the
inquiry.
To cause revenue officers and employees to
make a canvass of any revenue district
or region.

General Rule: Income tax returns are


confidential.
Exceptions:
Inspection of the returns maybe
authorized:
b. Upon written order of the
President of RP;
c. Under Finance Regulations No. 33
of the Secretary of Finance.
d. When production of the tax
return is material evidence in a
criminal
case
wherein
the
Government a party in interest;
e. By the taxpayer himself.
2. Use of the Best Evidence Obtainable.
Available when:
a. A person fails to file a return or
other document at the time
prescribed by law.
b. He willfully or otherwise files a
false or fraudulent return or other
document

Nothing in Section 5 shall be


construed as granting the Commissioner
the authority to inquire into bank
deposits other than as provided for under
sec 6 (F) of the Code.
4.
Make
assessments
and
prescribe
additional
requirements
for
tax
administration and enforcement.
ASSESMENT OF TAXES
Who Has Authority to Assess
The authority to make assessment of
internal revenue taxes is vested by law in
the Commissioner of Internal Revenue.
The authority may be delegated to
subordinate officers like the Chief of the
Tax Division or a District Revenue Officer.
However, the power to make a FINAL
assessment cannot be delegate
When is Assessment Required
1. When the taxable period (the period
fixed by law within which to pay a
tax) of a taxpayer intends to leave
the Philippines or hide/or conceals hid
property.
2. In case of deficiency taxes for failure
to file return or for filling a false or
fraudulent return.
Basic Principles Governing Assessment of
Taxes
1. Assessments
are
Prima
Facie
Presumed Correct and Made In Good
Faith.
2. Assessments should not be passed on
presumptions no matter how logical
the presumption might be.
3. Assessment is discretionary on the
part of the Commissioner. Mandamus
will not lie to compel him to assess a
tax if after investigation he finds no
ground to assess.
Means Employed in the Assessment of Taxes
1. Examination of Tax Returns.

Authority to Terminate Tax Period


When it shall come to the knowledge of the CIR
that a taxpayer is:
1. Retiring from the business subject to
tax.
2. Intending to:
a. Leave the Philippines, or
b. Remove the property there from,
or
c. Hide or conceal his property,
3. Performing any act tending
d. To obstruct the proceeding for
collecting the tax for the past or
current quarter or year,
e. Render the same totally or
partially ineffective, unless such
proceeding is begun immediately.
The above are also
grounds for constructive distrait of
personal property.
Procedure of Assessment
(Please see Chart under Taxpayer Remedies)
5.

Conduct inventory-taking, surveillance


and to prescribe presumptive gross
sales and receipts.

Inspection and Examination of Books and


Records, when made:
Exceptions:
1. In cases of fraud, irregularity, or
mistakes

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2.
3.
4.
5.

UCLASS Bar Operations: Tax Law Society

When taxpayer requests a


reinvestigation
To verify compliance with withholding
tax, laws and regulations
To verify capital gains tax liabilities
Upon order of the Commissioner

6. Examination of bank deposits to


determine the correct amount of
gross estate.
Instances When the Commissioner
may Inquire into Bank Deposits:
1. To determine the gross estate of a
decedent;
2. Where a taxpayer offers to
compromise his tax liability on the
ground of financial inability in which
case he must submit a waiver.
3. Under Republic Act No. 10021
(Exchange of Information on Tax
Matters Act), the BIR Commissioner
is authorized to inquire into bank
deposits and other related
information held by financial
institutions, and supply such
information to a requesting foreign
tax authority pursuant to an
international convention or
agreement on tax matters entered
into by the Philippines with its tax
treaty partners.
7. Terminate taxable period.
8. Prescribe real property values.
9. Accredit and register tax agents.
10. Prescription of additional procedural or
documentary requirements
I. REMEDIES UNDER NATIONAL INTERNAL
REVENUE CODE
A.

Assessment

An assessment contains not only a


computation of tax liabilities but also a
demand for payment within a prescribed
period.
Rules on Prescription
1. When the tax law itself is silent
on prescription, the tax is
imprascriptible;

2.

When no return is required, tax


is imprescriptible,
Remedy of taxpayer is to file a return.
3. Defense of prescription is
waivable;

TWO KINDS OF ASSESSMENT:


1. Pre-Assessment Notice
When Necessary:
1. If the taxpayer fails to file a return
where return is required ;
2. if he files a return but fails to pay the
tax;
3. If he files a return and pays the tax,
but payment is insufficient because
certain
deductions
claimed
are
disallowed by the BIR.
General Rule: A pre-assessment notice
is necessary before final assessment is
merely issued under Section 228:
a. The finding for any deficiency tax is
the result of mathematical error in
the computation of the tax as
appearing on the face of the return
b. Discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent
c. Taxpayer who opted to claim a refund
or tax credit of excess creditable
withholding tax for a taxable period
was determined to have carried over
against the estimated tax liabilities
for the taxable year
d. Excise tax due on excisable articles
has not been paid
e. An article locally purchased or
imported by an exempt person, such
as, but not limited to vehicles, capital
equipment, machineries, and spare
parts has been sold, traded or
transferred to non-exempt persons.
2. Final Assessment:
When Necessary
a. If the taxpayer having received a preassessment notice fails to respond
within the period provided for by the
rules and regulations
b. Under the five (5) circumstances
under Section 228 where pre
assessment is not necessary.
General Rule: Period assessment shall
be within three (3) years after the last
day prescribed by law for the filing of the
return.

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Exceptions:
1. Failure to file a return: ten (10)
years from the date of the discovery
of the omission to file the return
(Sec. 222[A]);
2. False or fraudulent return with
intention to evade the tax; ten (10)
years from the date of the discovery
of the falsity or fraud (Sec.222[A]);
Nothing in Section 222(A) shall be
construed to authorize the examination
and investigation or inquiry into any tax
return field in accordance with the
provisions of any tax amnesty law or
decree.
Fraud must be alleged and proved as a
fact. It must be the product of a
deliberate intent to evade taxes. It may
be established by the:
a.
Intentional
and
substantial
understatement of tax liability by
the taxpayer;
b.
Intentional
and
substantial
overstatement of deductions of
exemptions; and/or
c.
Recurrence
of
the
above
circumstances.

3. Agreement in writing to the extension of the


period to assess between the CIR and the
taxpayer
before the expiration of the 3-year period.

The extended period agreed upon can


further be extended by a subsequent
written agreement made before the
expiration of the extended period
previously agreed upon (Sec222 [b]).

4. Written waiver or renunciation of the


original three (3) year limitation, signed by the
taxpayer
(Sambrano vs. CTA, 101 Phil. 1).

The following procedures must be strictly


complied with in order for a Waiver of the
Defense of Prescription to be valid and binding:
a) The waiver must specify a definite agreed
date between the BIR and the taxpayer
within which the former may assess and
collect revenue taxes;
b) The waiver must be accepted by the
Commissioner of Internal Revenue or his
duly authorized representative, and the
date of acceptance must be indicated;
c) The taxpayer must be furnished a copy of
the waiver accepted by the BIR.
A waiver of the statute of limitations, to a certain
extent, is a derogation of the taxpayers right to
security against prolonged and unscrupulous
investigations and must therefore be carefully
and strictly construed. It is not a unilateral act
by either the taxpayer or the BIR, but a bilateral
agreement between two parties. Thus, the
waiver must be accepted by the BIR
Commissioner or his duly authorized
representative, and the date of acceptance must
be indicated. The taxpayer must also be
furnished a copy of the waiver accepted by the
BIR.
Note: A Waiver of the Statute of Limitation is
not a waiver of the right to invoke the defense of
prescription. It is an agreement between the
taxpayer and the BIR that the period to issue an
assessment and collect the taxes due is extended
to a certain date. [Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue (G.R. No.
162852, December 16, 2004); Commissioner of
Internal Revenue vs. FMF Development
Corporation (G.R. No. 167765, June 30, 2008)]
Reckoning
Period:

Point

of

3-year

Prescriptive

Note: Notice of the assessment is released,


mailed or sent to the taxpayer also within the
taxpayer also within the 3 year period. It is not
required that the notice be received by the
taxpayer within the prescribed period. But the
sending of the notice must clearly be proven.
(Basilan Estate, Inc. vs. CIR, 21 SCRA 17)
Requirements of a Valid Waiver of Statute of
Limitations

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Amendment of Return
If the amendment return is
substantially different from the original return,
the prescriptive period shall be counted from the
filing of the amended return. But the said period
shall run from the filling of the original return if
the same is sufficiently complete to enable the
Commissioner to make a proper assessment.
(CIR vs. Phoenix Assurance Co. No. L-19727 May
20 1965)
When Substantive:
a) Substantial underdeclaration
(exceeding 30% of that
declared) of taxable sales,
receipts or income, or
b) A substantial overstatement
(exceeding 30% of actual
deductions) of deductions
(Sec. 24B)
a) If return is
filed on or before
the due date
b) If return is
filed beyond the
due date
c) If the return is
amended

Reckoning
deadline

point

is

the

The date return is actually


filed

Depends
whether
the
amendment id substantial
or superficial.
If substantial the day
return
amendment
is
made.
If superficial the day
when original return was
filed.

If the return originally filed is


amended substantially, the counting of
the 3-year period starts from the date
the amended return was filed. (CIR V.
Phoenix Assurance Co. No. L-19727 May
20 1965)
A valid waiver of the statute of
limitations
must,
among
other
requirements,
be
executed
by
a
responsible officer of a corporation and
must contain a definite expiration date.
Moreover, the presumption that an
assessment notice sent by mail was
received by the taxpayer is only a
disputable presumption. The BIR has the
burden to prove a receipt thereof, if the
taxpayer denies having received the
same. (Akitsu Shipping Co., Ltd vs.
Com.of Internal Revenue CTA case no.
6360, promulgated on 04/26/04)

When Does Assessment Become Final and


Executory?
1.
Administrative by way of
levy, distrait, and tax lien
2.
Judicial by way of civil and
criminal actions.

It is only when the assessment has


become final and unappealable that the
5-year period to file a criminal action
commences to run. (Tupaz V. Ulep G.R.
No.-127777 October 1 1999)

It must be noted that in all cases


covered by an assessment but this
period to collect shall be to five (5)
years from the date of the assessment
but this period is suspended by the filing
of a request reconsideration which was
acted upon by the Commissioner of
Internal Revenue (CIR V. Wyeth Suaco
Laboratories, Inc G.R. No. 76281
September 30 1991)
PRESCRIPTIVE
PERIOD
FOR
THE
COLLECTION OF TAXES
General Periods for the Collection of Taxes
a) 5 years from assessment or within
period for collection agreed upon in
writing before expiration of the 5-year
period (Sec. 222, 1997 NIRC)
b) 10 years without assessment in case
of false or fraudulent return within the
intent to evade or failure to file return
(Sec. 222, 1997 NIRC).
Grounds for Suspension of the Running of
the Statute of Limitations
1. When the CIR is prohibited from making
the assessment or beginning the distraint
or levy or a proceeding in court, and for
sixty (60) days thereafter;
2. When the taxpayer requests for a
reconsideration which is granted by the
CIR;
3. When the taxpayer cannot be located in
the address given by him in the return,
unless he informs the CIR of any change
in his address.
4. When the warrant of distraint or levy is
duly served, and no property is located;
and
5. When the taxpayer is out of the
Philippines (Sec. 223, 1997 NIRC).

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A tax return is considered FILED for


purposes of starting the running of the
period limitations if
1.
2.

The return is valid it has complied


substantially with the requirements of the
law; and
The return is appropriate it is a return
for the particular tax required by law.

additional evidence that a taxpayer


intends to present in the investigation.
Both types of protests may involve
questions of fact, or law, or both.

Based on several court decisions, the


distinction between the two is significant
because a request for reconsideration
does not interrupt the running of the
statute of limitations on the collection of
deficiency tax assessments.
The
running of the prescriptive period for
collection of taxes can only be
suspended through a request for
reinvestigation, and not through a
request for reconsideration.

The filing of a request for reinvestigation


does not itself automatically suspend the
period within which the deficiency taxes
may be collected. The Tax Code of 1997
requires
that
the
request
for
reinvestigation must be granted by the
BIR Commissioner in order that it
suspends the running of the prescriptive
periods
for
the
assessment
and
collection. This is a matter which the
BIR must substantiate, especially so if
denied by the taxpayer. If no written
justifications are available, this may be
implied from the actions of the BIR
Commissioner or his representatives.

Absent showing that the request for


reinvestigation is granted by the BIR
Commissioner, the running of the statute
of limitations cannot be suspended.
Thus, aside from proving the type of
protest filed by the taxpayer, the BIR
must also show that the request has
been granted.

Note: A defective tax return is the same as if


no return was filed at all.
Assessment
ORDINARY
EXTRA
ORDINARY
(False,
fraudulent
or failure to
file return)

W/in 3 years after


5 years from
the last day
the final
prescribed by law
assessment
If government assess
and collect:
5 years
10 years from
from final
discovery of fraud,
assessment
falsity or omission
If government opted
to collect tax thru
judicial action: No
prior assessment

Collection

Within 10
years from
discover of
falsity,
fraud or
omission

The BIR can only invoke the ten-year


prescriptive
period
to
issue
an
assessment, if it is able to establish that
the taxpayer willfully filed a false return
with the intent to evade tax. For purpose
of prescription, a return is considered
false if there appears a design to
mislead or deceive on the part of the
taxpayer or at least there was culpable
negligence. (Commissioner of Internal
Revenue v. Ayala Hotels, CTA case no.
6002, promulgated on April 19, 2004)

Request for Reconsideration vs. Request


for Reinvestigation

A request for reconsideration is a


plea
for
a
re-evaluation
of
an
assessment on the basis of existing
records without the need of additional
evidence. On the other hand, a request
for reinvestigation is a plea for reevaluation of an assessment on the
basis of newly discovered evidence or

Note: A request for reinvestigation shall be


deemed a mere request for reconsideration if the
taxpayer continues to refuse or fails to submit
new evidence and cooperate in the investigation
process. (Commissioner of Internal Revenue vs.
Philippine Global Communications, Inc. G.R. No.
167146, October 31, 2006)
C.

TAX REMEDIES OF THE GOVERNMENT

Tax Remedies of the Government to Effect


Collection of Taxes
1. Compromise (Sec. 204)

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2.
3.
4.
5.
6.
7.
8.
9.

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Levy (Sec. 207B)


Tax Lien (Sec. 219)
Civil Action (Sec. 221)
Criminal Action (Secs. 221, and 222)
Forfeiture of Property (Sec. 224-225)
Suspension of business operations
violation of VAT (Sec. 115)
Enforcement of Administrative Fine

in

The remedies of distraint and levy as well


as collection by civil and criminal actions,
may,
in
the
discretion
of
the
Commissioner, be pursued singly or
independently of each other, or all of
them simultaneously.

1. Compromise

on assessments issued by the


regional offices involving basic taxes
of P500.000 or less, and minor
criminal violations.
Which May Be Compromised
Delinquent accounts
Cases under administrative protests
Civil tax cases being disputed before the
courts
Collection cases filed in courts
Criminal violations, other than those
already filed in court or those involving
criminal tax fraud; and
Cases covered by pre-assessment notices
but taxpayer is not agreeable to the
findings of the audit office as confirmed
by the review office. (Sec.2, Rev.Reg. 72001)
-

Distraint (Secs. 205-208)

The remedies of distraint and levy as well


as collection by civil and criminal actions
may,
in
the
discretion
of
the
Commissioner, be pursued singly or
independently of each other, or all of
them simultaneously.
Requisites:
1. The taxpayer must have a tax
liability.
2. There must be an offer (by the
taxpayer of an amount to be paid by
the taxpayer)
3. There must be an acceptance (by the
Commissioner or taxpayer as the
case may be) of the offer in the
settlement of the original claim.

Officers Authorized to Compromise


1. The Commissioner of Internal Revenue
(CIR) with respect to criminal and civil
cases arising from violations of the Tax
Code [Secs. 7(C) and 204, 1997 NIRC].
This power of the CIR is discretionary and
once exercised by him cannot be
reviewed of interfered with by the Courts
(Koppel, Philippines vs. CIR, 87 Phil 551)
2. By the
Regional Evaluation Boars
composed of:
a) the Regional Director as Chairman,
b) Assistant regional Director,
c) the heads of the Legal, Assessment
and Collection Divisions, and
d) the Revenue District Officer having
jurisdiction over the taxpayer, as
members;

Cases
1.
2.
3.
4.
5.

6.

Exceptions
1. Withholding tax cases;
2. Criminal tax fraud cases;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved
schedule of installment payments;
5. Cases
where
final
reports
of
reinvestigation or reconsideration have
been issued resulting to reduction in the
original assessment and the taxpayer is
agreeable to such decision.
6. Cases which become final and executory
after final judgment of a court. (Sec. 2,
Rev. Reg. 7-2001)
Minimum Compromise Rates (MCR) of Any
Tax Liability
1. In case of financial incapacity;
MCR = 10% of the basic assessed tax
2. Other cases:
MCR = 40% of the basic assessed tax
[Sec. 204 (A), 1997 NIRC]
Compromise of Criminal Violations
General Rule: All criminal violations under the
CTRP may be compromised.
Exceptions:
1. Those already filed in court
2. Those involving fraud [Sec. 204(B), 1997
NIRC].
Extent of the Commissioners Discretion to
Compromise Criminal Violations
1. Before the complaint is filed with the
Prosecutors Office:

The CIR has full discretion to compromise


except those involving fraud.

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2.

3.

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After the complaint is filed with the


Prosecutors Office but before the
information is filed with the court
The CIR can still compromise provided
the prosecutor must give consent.
After information is filed with the court:
The CIR is no longer permitted to
compromise with or without the consent
of the Prosecutor (People vs. Magdaluyo,
April 20, 1961)

Remedy in case the Taxpayer Refuses or


Fails to Abide the Tax Compromise
1. Enforce the compromise
a. If it is a judicial compromise, it can
be enforced b mere execution. A
judicial compromise is one where a
decision based on the compromise
agreement is rendered by the court
on request of the parties.
b. Any other compromise is extrajudicial
and like any other contract can only
be enforced by court action.
2. Regard it as rescinded and insists upon
original demand (Art. 2041, Civil Code).

2.

Compromise Penalty
It us an amount of money which
the taxpayer pays to compromise a tax violation.
This is paid in lieu of criminal prosecution. A
taxpayer cannot be compelled to pay a
compromise penalty. If he does not want to pay
the CIR must institute a criminal action.
Compromise vs. Abatement
Compromise involves a reduction of the
taxpayers liability, while Abatement means that
the entire tax liability of the taxpayer is
cancelled.
When May the Commissioner Abate or
Cancel a Tax Liability
1. The tax or any portion thereof appears to
be unjustly or excessively assessed;
[Sec. 204(B), 1997 NIRC]
a. When
the
filing
of
the
return/payment is made at the wrong
venue;
b. When the taxpayers mistake in
payment of his tax is due to
erroneous written official advice of a
revenue officer;
c. When the taxpayer fails to file the
return and pay the tax on time due to
substantial losses from prolonged
labor
dispute,
force
majeure,
legitimate
business
reverses,

3.

2.

provided, however, the abatement


shall only cover the surcharge and
the compromise penalty and not the
interest imposed under Sec. 249 of
the Code;
d. When the assessment is brought
about or the result of taxpayers noncompliance with the law due to a
difficult interpretation of said law.
e. When the taxpayer fails to file the
return and pay the correct tax on
time due to circumstances beyond his
control,
provided,
however, the
abatement shall only cover the
surcharge
and
the
compromise
penalty and not the interest imposed
under Sec. 249 of the Code;
f. Late payment of the tax under
meritorious
circumstances
(ex.
Failure to beat bank cut-off time,
surcharge erroneously imposed, etc.)
(Sec. 2, Rev. Reg. 13-2001)
The administration and collection costs
involved do not justify the collection of
the amount due [Sec. 204 (B), NIRC].
d. Abatement
of
penalties
on
assessment confirmed by the lower
court but appealed by the taxpayer to
a higher court.
e. Abatement
of
penalties
on
withholding tax assessment under
meritorious circumstances
f. Abatement
of
penalties
on
assessment
installment
payment
under meritorious circumstances
g. Abatement
of
penalties
on
assessment
reduced
after
reinvestigation but taxpayer is still
contesting reduced assessment; and
h. Such other circumstances which the
Commissioner may deem analogous
to the enumeration above. (Sec. 3,
Rev. Reg. 13-2001)
The Commissioner may also, even
without a claim therefor, refund or credit
any tax where on the face of the return
upon which payment was made such
payment appears clearly to have been
erroneously paid (Sec. 229, NIRC)

Distraint

The seizure by the government of


personal
property, to
enforce
the
payment of taxes, to be followed by its

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public sale, if taxes are not voluntarily


paid.
Requisites for The Exercise of The Remedy
of Distraint
1. The taxpayer must be delinquent (except
in constructive distraint) in the payment
of tax;
2. There must be a subsequent demand for
its payment;
3. The taxpayer must fail to pay the
delinquent tax at the time required within
which to assess or collect the tax has not
yet prescribed.
Kinds
1.
2.
3.

of Distraint:
Constructive Distraint (Sec. 206);
Actual Distraint (Sec. 107 par A, sec 209)
Distraint of Intangible (Sec. 208)

1.

Constructive Distraint exercised when


taxpayer is:
a) Delinquent;
b) Is retiring from any business subject to
tax;
c) Is intending to
i. Leave the Philippines,
ii. Remove his property therefrom,
iii. Hide or conceal his property,
d) Is performing any act tending to obstruct
the proceeding for collecting the tax due
or which may be due from him (Sec. 223,
NIRC).
2. Actual Distraint - when the personal
property is physically seized or taken by the
Commissioner, if the amount involved is P1,
000,000 or less.
3. Distraint of Intangible
a. Actual Distraint of Shares of Stocks and
Other Securities
b. Actual Distraint of Debts and Credits
c. Actual Distraint or Garnishment of Bank
Accounts
Actual Distraint
Made only on the
property of a delinquent
taxpayer
There is taking of
possession
Effected by leaving a list
of distrained property or
by service of a warrant

Constructive
Distraint
Made on the property
of any taxpayer,
whether delinquent or
not
The taxpayer is merely
prohibited from
disposing of his
property
Effected by requiring
the taxpayer to sign a
receipt of the property

of distraint or
garnishment
An immediate step for
collection of taxes

or by the revenue
officer preparing and
leaving a list of such
property
Not necessarily so

Requisites for the Exercise of the Remedy of


Distraint
1. The taxpayer must be delinquent (except
in constructive distraint) in the payment
of tax;
2. There must be a subsequent demand for
its payment (assessment);
3. The taxpayer must fail to pay the tax at
the time required; and
4. The period within which to assess or
collect the tax has not yet prescribed.
Persons Who Shall Seize And Distraint
Personal Property (Actual Distraint)
1. Amount of delinquent tax is more than
P1,000,000 Commissioner or his duly
authorized representatives.
2. Amount of delinquent tax is P1,000,000
or less Revenue District Officer. (Sec.
207 (A), 1997 NIRC)
Procedures for the Actual Distraint or
Garnishment
1. Commencement of distraint proceedings
either by the CIR or his duly authorized
representatives; or his the Revenue
District Officer;
2. Service of Warrant of distraint with
respect to:
a. Personal Property
i. Upon the owner of the goods,
chattels, or other personal property; or
ii. Upon the person from whose
possession such properties are taken.
b. Stocks and other securities
i. Upon the taxpayer; and
ii. Upon the president, manager,
treasurer or other responsible officer of the
corporation, company or
association which issued the said stock and
securities.
c. Bank accounts shall be garnished
by serving a warrant of distraint
i. Upon the taxpayer; and
ii. Upon the president, manager,
treasurer or other responsible officer of the
bank.

Upon receipt of the warrant


of distraint, the bank shall

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turn
over
to
the
Commissioner so much of
the bank accounts as may
be sufficient to satisfy the
claim of the government.
d. Debts and credits
i. Person owning debts;
ii.
Having in his possession or
under his control such credits; or
iii. Upon his agent.
The warrant of the distraint
shall be sufficient authority
to the person owing the
debts or having in his
possession or under his
control
any
credits
belonging to the taxpayer
to pay to the Commissioner
the amount of such debts
or credits.
Posting of Notice (Sec. 209, NIRC)

Notice specifying the time


and place of sale and the
articles distrained.

The posting shall be made


in not less than two (2)
public places in the city or
municipality
where
the
distraint is made. One place
for posting of such notice is
at the Office of the Mayor of
such city or municipality.
Sale of Property Disrained

3.

4.

Procedure for the Constructive Distraint of


Personal Property
1. Commissioner of Internal Revenue shall
require the taxpayer or any person
having possession or control of such
property to:
a. sign a receipt covering the property
distrained and
b. obligate himself to preserve the same
intact and unaltered and not to
dispose of the same in any manner
whatsoever without the express
authority of the Commissioner of
Internal Revenue
2. If the taxpayer or person in possession of
the property refuses or fails to sign the
receipt referred to, the revenue officer
effecting the constructive distraint shall:
a. Proceed to prepare a list of such
property and
b. In the presence of two (2) witnesses
leave a copy thereof in the premises

where the property distrained is


located, after which the said property
shall be deemed to have been placed
under constructive distraint.
3.

Levy

Is the seizure of the government of


real property in order to enforce
payment of taxes.

Requisites for The Exercise of The Remedy


of Levy
1. The taxpayer must be delinquent except
in constructive distraint) in the payment
of tax;
2. There must be a subsequent demand for
its payment;
3. The taxpayer must fail to pay the
delinquent tax at the time required within
which to assess or collect the tax has not
yet prescribed.
DISTRAINT
Taking
possession
of
Personal
Property
Must be made after
the expiration of the
period provided for
in the notice of
demand to pay.

LEVY
Taking possession of Real
Property

The
government
must
notify
the
public at large by
posting,
no
publication
is
needed. (sec 209)

Must be made after the


receipt of the notice after
the expiration of the date
stated in the notice, in
case the levy is instituted
simultaneously with the
distraint.
However,
in
case it is exercised
after
distraint,
levy
must be exercised within
30 days after execution
of the distraint sec 207,
par. B)
Notice must be made by
publication
AND
posting
in
the
newspaper
of
general
circulation once a week
for 3 weeks (sec. 213)

DISTRAINT
Immediately
after
the
sale,
the
purchaser becomes
the owner because
there is no right of
redemption in the
auction by way of
distraint after the
sale.

LEVY
Purchaser
has
an
inchoate
right.
The
owner
shall
not
be
deprived
of
the
possession
of
the
property and shall be
entitled to the rents and
other income until after
the expiration of the time

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But there is right of
Pre-emption the
goods
of
effects
distraint shall be
restored
to
the
owner is any time
prior
to
the
consummation
of
the sale all charges
are paid to the
officer
conducting
the sale (sec. 210)
Excess of auction
price will go back to
the original owner
(sec. 209)

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allowed
for
its
redemption. (sec. 214)
There is also a right of
pre-emption. (sec. 213,
par. 1)

Excess will not returned


to the original owner but
it will be turned over to
the government thru
the national treasury.

When May Levy Be Effected

Real property may be levied


upon
before,
simultaneously or after
distraint
of
personal
property belonging to the
delinquent; and the remedy
by distraint and levy may
be repeated if necessary
until
the
full
amount,
including all expenses, is
collected (Sec. 207-B)
Manner of Effecting Levy on Real Property
By serving upon the taxpayer a written notice of
levy in the form of certificate containing:
1. Preparation of a duly authenticated
certificate showing name of the taxpayer,
and the amounts of tax and penalty due
for him;
2. Writing upon said certificate a description
of the property upon which the levy is
made;
3. Service of written notice to the
delinquent taxpayer or occupant of the
property as well as the Register of Deeds;
4. Advertisement of the time and place of
sale of the taxpayers property or so
much thereof as may be necessary to
satisfy the claim within 20 days after the
levy, and it shall cover a period of at least
30 days;
5. Sale at public auction to the highest
bidder;
6. Description of proceeds of Sale.
4.

Tax Lien

It is legal claim or change


on property, either real or
personal, established by
law as a security in default
of the payment of taxes.
Generally, it attaches to the
property
irrespective
of
ownership
or
transfer
thereof.

Extent and Nature of Tax Lien

The tax, together with


interests, penalties, and
cost that may accrue in
addition thereto is a lien
upon all property and rights
to property belonging to the
taxpayer.

The lien shall not be valid


against any mortgagee,
purchaser,
or
judgment
creditor until notice of such
lien shall be filed by the
Commissioner of Internal
Revenue in the Office of the
Register of Deeds of the
province or city where the
property of the taxpayer is
situated or located (Sec.
219, NIRC).

Tax lien attaches not only


from the service of the
warrant of distraint but
from the time tax became
due and payable.
LIEN
Directed against the
property subject to
the tax
Regardless
of
the
owner of the property

5.

DISTRAINT
Need not be directed
against
the
property
subject to tax
Property seized must be
owned by the taxpayer

Forfeiture

As
a remedy
of
the
government for violation of
the excise tax law where
the
property
will
be
confiscated
by
the
government.
It
is

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detrimental to the health of


the public. It shall be
destroyed; If not it will be
sold at public auction.
Under levy / distraint,
where there is no buyer or
where the amount is not
enough, the property will
then be purchased by the
government.

Enforcement of The Remedy of Forfeiture:


1. In case of Personal Property
a. The forfeiture of chattels and
removable fixtures of any sort is
enforced by seizure and sale or
destruction of the specific forfeited
property
2. In case of Real Property
a. The forfeiture of real property is
enforced
by
a
judgment
of
condemnation and sale in a legal
action or proceeding, civil or
criminal, as the case may require.
3. In case of distilled spirits, liquors,
cigars,
cigarettes
manufactured,
products of tobacco and apparatus
used for their production
a. Upon forfeiture, may be destroyed
by order of the Commissioner
where the sale may be injurious to
public health or prejudicial to law
enforcement.
4. Other articles subject to excise tax
which have been manufactured or
removed in violation of the Code,
dies for printing or making fake
revenue stamps and labels
a. Upon forfeiture may be sold or
destroyed at the discretion of the
Commissioner. Forfeited property
shall not be destroyed until at least
20 days from seizure.
Effect of the Forfeiture of Property:

The effect is to transfer the


title to the specific thing
from the owner to the
government.
All
the
proceeds in case of a sale
go to the coffers of the
government (U.S vs. Suria,
20 Phil 163). Unlike in
seizure for the enforcement
of a tax lien wherein the
residue, after deducting the
tax liability and expenses

6.

will go to the taxpayer


(Bank of the Phil. Island vs.
Trinidad, 42 Phil. 220).
Property forfeited may be
sold in public auction or
private sale (Sec. 215)
In case of private sale,
there must be an approval
of
Secretary
of
the
Department
of
Finance
(Sec. 216).
There could be another
distraint
or
levy,
the
proceeds of the sale is not
enough (Sec. 217).
In forfeiture, if there will be
an excess, it will be turned
over to the delinquent
taxpayer
after
the
application of the proceeds
of the sale. In levy, the
excess shall not be turned
to the taxpayer but shall be
turned over to the National
Treasury. If the proceeds of
the sale are not enough,
there could be no more
levy.

Civil Actions

For tax remedy purposes,


these are actions instituted
by the government to
collect Internal revenue
taxes. It includes filing by
the government with the
probate
court
claims
against
the
deceased
taxpayer.

When Restored To
1. When a tax is assessed but the
assessment
becomes
final
and
unappealable because the taxpayer fails
to file an administrative protest with the
CIR within 30 days from receipt; or
2. When a protest against assessment is
filed and a decision of the CIR was
rendered but the said decision becomes
final, executory, and demandable for
failure of the taxpayer to appeal the
decision to the CTA within 30 days from
receipt of the decision.
Where To File

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2.

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Court of Tax Appeals where the


principal amount of taxes and fees,
exclusive of charges and penalties
claimed is One million pesos and above.
Regional Trial Court, Municipal Trial
Court, Metropolitan Trial Court
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is less than One million pesos.
(Sec. 7, RA No. 9282)
The approval of the CIR is Essential in
civil cases. However, under Sec. 7, 1997
NIRC, the Commissioner may delegate
such power to a Regional Director.

Defenses Which Are Precluded By Final And


Executory Assessments
1. Invalidity or illegality of the assessment;
and
2. Prescription of the governments right to
assess.
7. Criminal Actions

The judgment in the criminal case shall


not only impose the penalty but shall also
order the payment of taxes subject of the
criminal case as finally decided by the
Commissioner (Sec. 205, NIRC).

Where To File
1. Court of Tax Appeals on criminal
offenses arising from violations of the
NIRC
or
TCC
and
other
laws
administrated by the BIR and the BOC,
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is One million pesos and above.
2. Regional Trial Court, Municipal Trial
Court, Metropolitan Trial Court on
criminal offenses arising from violations
of the NIRC or TCC and other laws
administered by the BIR and the BOC,
where the principal amount of taxes and
fees, exclusive of charges and penalties
claimed is less than One million pesos or
where there is no specified amount
claimed.(Sec. 7, RA No. 9282)

No criminal action shall be begun without


the approval of the Commissioner. (Sec.
220, 1997 NIRC)

It shall be brought in the name of the


Government and shall be conducted by
the legal officers of the BIR.

Effect of Acquittal of the Taxpayer in a


Criminal Action

It does not necessarily result in the


exoneration of said taxpayer from his civil
liability to pay taxes. Rationale: The duty
to pay tax is imposed by statute prior to
and independent of any attempt on the
part of the taxpayer to evade payment. It
is not a mere consequence of the
felonious acts charged, nor is it a mere
civil liability derived from a crime.
(Republic vs. Patanao, 20 SCRA 72)
Effect of Subsequent Satisfaction of civil
Liability

The subsequent satisfaction of civil


liability by payment or prescription does
not extinguish the taxpayer criminal
liability.
No Subsidiary Imprisonment

In case of insolvency on the part of the


taxpayer, subsidiary imprisonment cannot
be imposed as regards the tax which he
is sentenced to pay.

However, it may be imposed in cases of


failure to pay the fine imposed. (Sec.
280, NIRC)

It is not a requirement for the filing


thereof
that
there
be
a
precise
computation and assessment of the tax,
since what is involved in the criminal
action is not the collection of tax but a
criminal prosecution for the violation of
the NIRC. Provided, however, that there
is a prima facie showing of a willful
attempt to evade taxes. (See Ungab vs.
Cusi, 92 SCRA 877 in relation to CIR vs.
CA, 257 SCRA 200)
INJUNCTION FOR COLLECTION OF TAXES
General Rule: Courts are prohibited from issuing
injunction for collection of tax (Sec. 218)
Exception: Court of Tax Appeals can issue
injunction for collection of tax. The provision is
merely prohibitory, not mandatory.

Under the NIRC, the civil and criminal


proceedings arising under it shall be
instituted by the legal officers of the BIR.
(sec 220).
However, Revenue Administrative
Order No. 10-95 specifically authorizes

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the Litigation and Prosecution Section o


the Legal Division of regional district
officers to institute necessary civil and
criminal actions for tax collection. A s
long as the administrative issuances
relate solely to carrying into effect the
provisions of law, they are valid and
have the force of the law. (Republic vs.
Hizon)
D.

TAX REMEDIES OF THE TAXPAYERS

GENEREAL REMEDIES OF A TAXPAYER


ADMINISTRATIVE
1. Before Payment
a. Protest filing a petition for
reconsideration
or
reinvestigation
within 30 days from receipt of
assessment within 60 days from filing
a protest, all relevant supporting
documents
should
have
been
submitted, otherwise, the assessment
shall become FINAL cannot be
appealed (Sec. 228, NIRC)

Submission
of
documents within 60
day period is optional
to the taxpayer. That
the
relevant
supporting documents
mentioned in the law
refers
to
such
documents which the
taxpayer feels would
be
necessary
to
support his protest
and not what the
Commissioner
feels
should be submitted,
otherwise,
taxpayer
would always be at the
mercy of the BIR
which
may
require
production
of
such
documents
which
taxpayer
could not
produce.
(Standard
Chartered Bank vs.
CIR, CTA Case No.
5696, Aug. 16, 2007)
Protest is a vital
documents which is a formal
declaration of resistance of the

taxpayer. It is an repository of all


arguments. It can be used in court
in case administrative remedies
have been exhausted. It is also the
format
act
of
the
taxpayer
questioning the official actuation of
the CIR. This is equivalent to a
pleading.
b. Entering into a compromise (Sec.
204, 1997 NIRC)
2. After Payment
Filing of claim for refund or tax
credit within 2 years from date of payment
regardless of any supervening cause (Sec. 229,
1997 NIRC).
JUDICIAL
1. Civil Action
a. Appeal to the Court of Tax Appeals
within 30 days from receipt of decision on
the protest or from the lapse of 180 days
due to inaction of the Commissioner
(Sec. 228, NIRC)
b. Action to contest forfeiture of chattel, at
any time before the sale or destruction
thereof, to recover the same, and upon
giving proper bond, enjoin, the sale; or
after the sale and within 6 months, an
action to recover the net proceeds
realized at the sale (Sec. 231, NIRC); and
c. Action for damages against a revenue
officer by reason of any act done in the
performance of official duty (Sec. 227,
NIRC)
2. Criminal Action
a. Filing of criminal complaint against erring
BIR officials and employees.
b. Injunction when the CTA in its opinion
the collection by the BIR may jeopardize
taxpayer.

CTA now has jurisdiction over


criminal cases with the enactment
of the new CTA law (RA No. 9282)
Acts of BIR Commissioner Considered As
Denial of Protest Which Serve As a Basis For
Appeal to the Court of Tax Appeals
1. Filing by the BIR of a civil suit for
collection of the deficiency tax (CIR vs.
Union Shipping Corporation, 185 SCRA
547)
2. Indication to the taxpayer by the
Commissioner in clear and unequivocal
language: of his final denial. (CIR vs.

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4.

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Union Shipping Corporation, 185 SCRA


547)
BIR
demand
letter
reiterating
his
previous demand to pay, sent to the
taxpayer after his project of the
assessment. (Surigao Electric Co., vs.
inc. vs. CTA, 57 SCRA 523; CIR vs. Ayala
Securities Corporation, 70 SCRA 204)
The actual issuance of a warrant of
distraint and levy in certain cases cannot
be considered a final decision on a
disputed settlement. (CIR vs. Union
Shipping Corporation, 185 SCRA 547).

after the payment of the


tax or penalty

Period to File a Written Claim to the BIR For


Refund or Credit 2 years from the date of
payment of tax or penalty sought to be refunded
or credited.
General Rule: Claim for refund or
credit must be in writing.

FILING OF CLAIM FOR TAX REFUND OR


TAX CREDIT
Grounds for Tax Refund or Tax Credit
When the tax is:
1. Erroneously or illegally assessed
collected

or

The taxpayer must comply with the


following procedures in claiming a
refund, of or tax credit for taxes
and penalties which he alleges to
have been erroneously, illegally or
exclusively assessed or collected.
a. He should file a written claim for
refund with the Commissioner
within two years after the date of
payment of the tax or penalty Sec.
204, NIRc0
b. The claim filed must state a
categorical
demand
for
reimbursement (Bermejo v. CIR,
87 Phil, 96)
c. The suit or proceeding for recovery
must be commenced in court within
2 years from date of payment of
the tax or penalty, regardless or
any supervening event that will
arise after payment (Sec. 229
NIRC)
Any penalty is alleged to have been
collected without authority; or
Any sum is alleged to have been
excessively or wrongfully collected.

2.
3.

Tax Refund
The taxpayer asks for
restitution of the money
paid as tax
Two year period to file
claim with the CIR starts

Tax Credit
The taxpayer asks that
the money so paid be
applied to his existing
tax liability
Two-year period starts
from the date such

credit was allowed (in


case credit is wrongly
made).

Exception: When there is


overpayment, a return is
considered as a written claim for
credit or refund. (Section 204, par.
C)
Appeal to the CTA may be made by
the taxpayer if the decision of the
BIR is adverse to him within a
period of 30 days from the receipt
of the decision, provided the 30 day
period is within the 2 year period
for filing the written claim for
refund or refund or credit (R.A
1125)

Taxes and claims for


refund cannot be
subject of set-off for
the simple reason that
the government and
the taxpayer are not
creditors and debtors.
(Philex Mining Corp V.
CIR, G.R No. 125704,
August 29, 1998)

How to count the 2-year period:


I. Individual
a.

In case of installment from the date


of last installment.
b. If tax is collected by way of withholding
tax system from the close of taxable
year
c. On Auction - upon the application of the
proceeds of the sale to the satisfaction of
the tax liability by virtue of distraint and
levy.
II. Corporation from the time the manual
adjusted income tax return has been filed.
When Payment under
Necessary under NIRC
Necessary under NIRC

Protest

is

Not

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A suit or proceeding for tax refund


may be maintained whether or not
such tax, penalty or sum has been
paid under protest or duress (Sec.
229, NIRC).
Note: Payment under protest is also not
necessary in refund for local taxes. (See Sec.
196, LGC). However, payment under protest is
necessary in claim for refund for real property
taxes (Sec. 252, LGC) and for customs duties
(Sec. 2308, TCC).

Suspension of the Two-year Prescriptive


Period
1.

2.

There is a pending litigation between the


Government and the taxpayer; and
CIR in that litigated case agreed to abide
by the decision of the SC as to the
collection of taxes relative thereto (Panay
Electric Co. vs. Collector, May 28, 1958)

Tax Credit Certificate


1.
2.
3.

May be applied against any internal


revenue tax, EXCEPT withholding taxes,
Original copy is surrendered to the
revenue office,
No tax refund will be given resulting from
availment of incentives granted by law
where no actual payment was made
(Sec. 204C, NIRC).

Forfeiture of Cash Refund/Tax Credit


1.

2.

Forfeiture of refund in favor of the


government when a refund check or
warrant remains unclaimed or uncashed
within 5 years from date of mailing or
delivery.
Forfeiture of Tax Credit a tax credit
certificate which remains unutilized after
5 years from date of issue, shall be
invalid, UNLESS revalidated (Sec. 230,

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REMEDY OF A TAXPAYER UNDER THE NATIONAL INTERNAL REVENUE CODE


(RR 12-99 and
Sec. 228 of the NIRC)

NOTICE OF INFORMAL
CONFERENCE

Taxpayer REQUIRED to file an


Answer within 15 Days

FILES AN ANSWER

ACCEPT

The Notice of the Internal Conference


shall contain the information regarding
the discrepancy (ies) in the taxpayers
payment of his internal revenue taxes.
The purpose of the Informal Conference
is to afford the taxpayer with an
opportunity to present his side of the
case.

FAILURE TO RESPOND within the period, the taxpayer


shall be considered IN DEFAULT
DID NOT
ACCEPT

The case shall be ENDORSED to the Assessment Division of the


Revenue Regional Officer or to the Commissioner or to his Duly
Authorized Representative by the RDO or the CSID of the Revenue
Regional Officer, or the CD in the National Office, as the case may be.

PRE-ASSESSMENT NOTICE
Taxpayer REQUIRED TO FILE an Answer within 15 Days

FILES AN ANSWER

FAILURE TO RESPOND within the period, the taxpayer shall be


considered in default.

FINAL ASSESSMENT shall be issued.

A FORMAL LETTER OF DEMAND and ASSESSMENT NOTICE


(Final Assessment) shall be caused to be issued for the payment of
the taxpayers deficiency tax liability.

Payment of the
Assessed Tax

Files a Motion for


ReconsiderationReinvestigati
on/

IN GENERAL, if the protest is


demand, in whole or in part, the
taxpayer may appeal to the CTA within
30 days from date if receipt of said
decision, OTHERWISE the
assessment shall become final
executory and demandable.
PROVIDED however, that if the
taxpayer elevates his protest to the
Commissioner within 30 days from
date of receipt of the final decision of
the Commissioners duly authorized
representative, the latters decision
shall not be considered final,
executory and demandable, in which
case, the protest shall become final,
executory and demandable.

ADMINISTRATIVE PROTEST (Motion for


Reconsideration/Reinvestigation) by the taxpayer shall be filed within
30 days from date of receipt. He shall state the facts, the appliance
law, rules and regulations, or jurisprudence on which his protest is
based OTHERWISE, his protest shall be considered void and without
force and effect. He shall submit within 60 days from the date of the
filing of the protest the required supporting documents OTHERWISE,
the assessment shall become FINAL, EXECUTORY and
DEMANDABLE

COMMISSIONERS INACTIONS
within 180 days

COMMISIONERS ACITON

DENIED, in whole or in
part

GRANTS the protest

ORDINARY APPEAL to the CTA within 30 days OTHERWISE the


assessment shall become FINAL, EXECUTORY AND
DEMANDABLE

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A.

UCLASS Bar Operations: Tax Law Society

TAX REMEDIES UNDER THE LOCAL GOVERNMENT CODE


Tax Remedies of the Local Government Units

Civil Remedies of the Local Government Units (LGU) to Effect Collection of Taxes
1. Tax lien (Sec. 173, LGC) superior to all liens, charges or encumbrances
2. Distraint (Sec. 175, lGC0
3. Levy (Sec. 176, LGC)
4. Civil Action (Sec. 183, LGC)
5. Purchase of property by LGU concerned for the amount of the assessment made thereon, the tax
delinquencies shall be cancelled (Sec. 175, LGC).

Property distrained not disposed within 120 days from date of distraint considered sold to
the LGU concerned for the amount of the assessment made thereon, the tax delinquencies
shall be cancelled (Sec. 175, LGC)
Jurisdiction of Courts Over Local Taxation Cases
1. Court of Tax Appeals appellate jurisdiction
Trial Court in the
2. exercise of its appellate or original
jurisdiction.
3. Regional Trial Courts / Municipal
Trial Courts Regular judicial courts are
not prohibited from enjoining the
collection of local taxes, subject to Rule
58 (Preliminary Injunction) of the Rules
of the Court.

Unlike the NIRC, the Local Tax


Code does not contain any specific
provision prohibiting courts from
enjoining the collection of local
taxes. Such statutory lapse or
intent
may
have
allowed
preliminary injunction where local
taxes are involved. But cannot
negate the procedural rules and
requirements under Rule 58 of the
Rules of Courts. (Valley Trading
Co. vs. CFI of Isabela, 171 SCRA
501)
Prescriptive Periods of Assessment
1. Local Taxes, Fees, Or Charges five
(5) years from the date they became
due. (Sec. 194, LGC).
2. When there is fraud or intent or
intent to evade the payment of taxes,
fees or charges ten (10) years from
discovery of the fraud or intent to evade
the payment (Sec. 194, LGC)
Prescriptive Period of Collection

Local taxes, fees, or charges may


be collected within five (5) years
from the date of assessment by
administrative or judicial action. No

over local taxation cases decided by the Regional


such action shall be instituted after
the expiration of such period (Sec.
194)
Grounds for the Suspension of the Running
of the Prescriptive Periods
1. The treasurer is legally prevented from
the assessment or collection of the tax;
2. The
taxpayer
requests
for
a
reinvestigation and executes a waiver in
writing before the expiration of the period
within which to assess or collect;
3. The taxpayer is out of the country or
otherwise cannot be located (Sec. 194)
B. Tax Remedies of the Taxpayer
I. ADIMINISTRATIVE
A. Before assessment
1. Appeal any question on constitutionality
or legality of tax ordinance within 30 days
from effectivity thereof to Secretary of
Justice (Sec. 187, LGC)
2. Declaratory relief whenever applicable.
B. After assessment
1. Protest within 60 days from receipt of
assessment (Sec. 195 LGC) Payment
under protest not necessary
2. Payment Subsequent Refund or Tax
Credit within 2 years from payment of
tax to local treasure (Sec. 196, LGC)
3. Right of Redemption 1 year from the
date of sale or from the date of forfeiture
(Sec. 179, LGC)
II. JUDICIAL
1. Court Action

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Within 30 days after receipt of


decision or lapse of 60 days of
Secretary of Justices inaction (Sec.
187 LGC)

Within 30 days from receipt when


the protest of assessment is denied
(Sec. 195, LGC)

If no action is taken by the in


refund cases and the two year
period is about to lapse (Sec. 195)

If remedies available does not


provide plain, speedy and adequate
remedy.
2. Action for declaratory relief
3. Injunction if irreparable damage would not
be caused to the caused to the taxpayer and no
adequate remedy is available.

III.

REAL PROPERTY TAX

REMEDIES
A.
Tax Remedies of the Local Government
Units
A.

Administrative
1. Real Property tax lien (Secs. 257, LGC)
superior to all liens, charges or
encumbrances;
2. Distraint (Sec. 254[A], 258 LGC);
3. Levy (Sec. 254[A], 258 LGC);
4. Purchase of property by local treasurer
for want of bidder (Sec. 263, LGC).
B. Judicial

Civil Action (Sec. 266, 270 LGC)


Prescriptive Periods in the Collection of Real
Property Taxes
1. Basic real property tax and any other
levied under the title on Real
Property Taxation five (5) years from
the date they became due. (Sec.270)
2. When there is fraud or intent to
evade the payment of taxes ten
(10) years from discovery of the fraud or
intent to evade the payment (Sec. 270)
Grounds for the Suspension of the Running
of the Prescriptive Periods
1. The treasurer is legally prevented from
the assessment or collection of the tax;
2. The
taxpayer
requests
for
a
reinvestigation and executes a waiver in

3.

B.

writing before the expiration of the period


within which to assess or collect;
The taxpayer is out of the country or
otherwise cannot be located (Sec. 270)

Tax Remedies of the Taxpayer

I. ADMINISTRATIVE
1. Protest payment under protest is
required within 30 days to provincial, city,
or municipal treasurer.

No protest shall be entertained


unless the tax is first paid. (Sec.
252 LGC)
2. Claims Tax Refund or Credit

The taxpayer may file a written


claim for refund or credit with the
provincial or city treasurer within
two years from the date the
taxpayer is entitled to such
reduction or adjustment.

In case of denial of refund or credit,


appeal to LBAA as in protest case.
3. Redemption of Real Property (Sec.
261 LGC)
4. Remedy against the Assessment /
Appeal
1st: Within 60 days from notice of
assessment of provincial, city or municipal
assessor to
LBAA (Sec. 230 LGC)
2nd: Within 30 days from receipt of
decision of LBAA to CBAA (Sec. 230 LGC)
3rd: Within 30 days from receipt of
decision of CBAA to Court of Tax Appeals en
banc.
4th: Within 15 days from receipt of
decision of Court of Tax Appeals en banc to the
Supreme Court
II. JUDICIAL
1. Court Action appeal of CBAAs decision
to Court of Tax Appeals en banc.
2. Suit assailing validity of tax; recovery of
refund of taxes paid (Sec. 64 PD 464).
3. Suit to declare invalidity of tax due to
irregularity in assessment and collection
9Sec. 64 PD 464)
4. Suit assailing the validity of tax sale
(Sec. 83 PD 464) Sec.267 LGC)

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REMEDIES OF A TAXPAYER IN REAL PROPERTY TAXATION


(Under the Local Government Code)
1. JUDICIAL REMEDY Assessment Appeals (Secs. 266-231)

POWERS OF THE
BOARD IN ITS
APPELATE
JURISDICTION
To summon witnesses;
To administer oath;
To take dispositions;
To issue subpoena and
subpoena duces tecum

EFFECT OF APPEAL
ON THE PAYMENT OF
REAL PROPERTY TAX
It shall in no case,
suspend the collection of
the corresponding realty
taxes
on
property
involved as assessed by
the Provincial or City
Assessor,
without
prejudice to subsequent
adjustment depending on
the final outcome of the
appeal

WRITTEN NOTICE OF ASSESSMENT by the


Provincial, City or Municipal Assessor

APPEAL to the LOCAL BOARD OF


ASSESSMENT APPEALS. The petition under
oath shall be filed within 60 days from the
date of receipt of the written notice together
with copies of the tax declaration or
documents in support of the appeal

WHO MAY FILE


AN APPEAL?
Any owner of
person
having
legal interest in
the property who
is not satisfied
with the action of
the Provincial or
City or Municipal
Assessor on the
assessment of his
property

LBAAs DECISION.
The Board shall decide the appeal case
within 120 days from the date of receipt of the
appeal. After the hearing, the Board shall
render its decision based on evidences
submitted or on record.
APPEAL to the CENTRAL BOARD OF
ASSESSMENT APPEALS
The Petition shall be filed within 30 days after
receipt of the decision of the LBAA. The
Decision of the CBAA shall be Final and
Executory.
APPEAL to the COURT OF TAX APPEALS
(Petition for Review under Rule 42) within 30
days after the receipt of such decision or
ruling or after the expiration of the period
fixed by law.
MOTION for RECONSIDERATION of a NEW
TRIAL within 15 days from the decision of the
CTA by division.
PETITION FOR REVIEW ON CERTIORARI
under Rule 45 of Rules of Civil Procedure

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2. ADMINISTRATIVE REMEDY Payment Under Protest (Sec. 252)

No protest shall be
entertained UNLESS the
taxpayer first pays the
tax.
There shall be annoted
on the receipt paid
under protest
The tax paid under
protest shall be held in
trust by the Treasurer

GRANTED.
The amount or portion, of the
tax protested shall be refund or
applied to tax credit6 against
the protestants existing or
future tax liability

TAX PAID UNDER PROTEST

WRITTEN PROTEST which must be filed within


30 days from payment of the taxpayer to the
Provincial or City or Municipal Treasurer
Provincial or City of Municipal Treasurers
Decision shall be rendered within 60 days from
receipt of protest

DENIED

INACTION
for a period of 60

APPEAL to the LOCAL BOARD OF


ASSESSMENT APPEALS. The petition
under oath shall be filed within 60 days
from the date of receipt of the written notice
together with copies of the tax declaration
or documents in support of the appeal.

LBAAs DECISION
The Board shall decide the appeal case within 120 days from the date of receipt of the appeal.
After the hearing, the Board shall render its decision based on evidences submitted or on record.
APPEAL to the CENTRAL BOARD OF ASSESSMENT APPEALS
The Petition shall be filed within 30 days after receipt of the decision of the LBAA. The Decision of
the CBAA shall be Final and Executory.
APPEAL to the COURT OF TAX APPEALS (Petition for Review under Rule 42) within 30 days
after the receipt of such decision or ruling or after the expiration of the period fixed by law.

MOTION for RECONSIDERTION of a NEW TRIAL within 15 days from the decision of the CTA by
division

PETITION FOR REVIEW ON CERTIORARI under Rule 45 of Rules of Civil Procedure


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3. Refund of Excessive Collection (Sec. 253)

TAX IS PAID

Assessment was found to be illegal or erroneous and the tax is


accordingly reduced or adjusted

WRITTEN CLAIM FOR REFUND/CREDIT for taxes & interest shall be filed with the Provincial or City or
Municipal Treasurer within 2 years from the date the taxpayer is entitled to such reduction or adjustment

Provincial or City or Municipal Treasurers Decision shall be rendered within 60 days from receipt of
the written claim

GRANTS

DENIED

APPEAL to the LOCAL BOARD OF ASSESSMENT APPEALS. The petition under oath
shall be filed within 60 days from the date of receipt of the written notice together with the
copies of the tax declaration or documents in support of the appeal.
LBAAs DECISION. The Board shall decide the appeal case within 120 days from the date
of receipt of the appeal. After the hearing, the Board shall render its decision based on
evidences submitted or on record.
APPEAL to the CENTRAL BOARD OF ASSESSMENT APPEALS. Petition shall be filed
within 30 days after receipt of the decision of the LBAA. The decision of the CBAA shall be
Final and Executory.
APPEAL to the COURT OF TAX APPEALS (Petition for Review under Rule 42) within 30
days after the receipt of such decision or ruling of after the expiration of the period fixed by
law.
MOTION for RECONSIDERATION of a NEW TRIAL within 15 days from the decision of the
CTA by division

PETITION FOR REVIEW ON CERTIORARI under Rule 45 Rules of Civil Procedure


Petition for Review on Certiorari under Rule 45 to the SC, or Petition for Cetitoria under
Rule 65 to the SC
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5.

TARIFF AND CUSTOMS LAW

GENERAL CONCEPTS
TARIFF Customs duties, toll or tribute payable
upon merchandise to the government.
CUSTOM DUTIES Tax assessed upon
merchandise from exported to a foreign country.
(Garcia v. Executive Sec. 211 SCRA 227 [1992])

Customs and tariffs both refer to


the taxes imposed on imported or
exported
wares,
articles
or
merchandise.
Other Types of Fees Charged by the Bureau
of Customs
1. Arrastre charge
2. Wharfage due
3. Berthing fee
4. Harbor fee
5. Tonnage due
Meaning and Scope of the Tariff and
Customs Laws

Include not only the provisions of


the Tariff and Customs Code (TCC)
and regulations pursuant thereto,
but all other laws and regulations
which are subject to the Bureau of
Customs (BOC) or otherwise within
its jurisdiction.

As to its scope, therefore, tariff and


customs laws extend not only to
the provisions of the TCC but to all
other laws as well, the enforcement
of which is entrusted to the BOC.
BUREAU OF CUSTOMS
Functions of the Bureau of Customs
1. Assessment and collection of revenues
from imported articles and all other
impositions under the tariff and customs
laws;
2. Control smuggling and related frauds;
3. Supervision and control over the entrance
and clearance of vessels and aircraft
engaged in foreign commerce;
4. Enforcement of TCC and related laws;

6.
7.

Supervision and control over the handling


of
foreign
mails
arriving
in
the
Philippines;
Supervise and control all import and
export cargoes for the protection of
government revenue;
Exclusive original jurisdiction over seizure
and forfeiture cases under the tariff and
customs laws.

Jurisdiction of Collector of Customs over


importation of Articles
1. Cause all articles for importation to be
entered in the customhouse,
2. Cause all such articles to be appraised
and classified,
3. Assess and collect the duties, taxes and
other charges thereon, and
4. Hold possession of all imported articles
until the duties, taxes and other charges
are paid thereon. (Sec. 1206, TCC)
Territorial Jurisdiction of the BOC
1. All seas within the jurisdiction of the
Philippines
2. All coasts, ports, airports, harbors, bays,
rivers, and inland waters whether
navigable or not from the sea. (1st par,
Sec. 603, TCC)
CUSTOMS DUTIES
Commencement
and
Termination
of
Application of Tariff and Customs Law
Only after importation has begun but
before importation is terminated.
Importation BEGINS:
a. When the conveying vessel or aircraft
b. Enters the jurisdiction of the Phil.
c. With intention to unload therein
Importation Is deemed TERMINATED
a. Upon payment of the duties, taxes and
other charges due upon the articles AND
legal permit for withdrawal shall have
been granted.
b. In case the articles are free of duties,
taxes and other charges, until they have
legally left the jurisdiction of the customs
(Sec. 1202, TCC)
ARTICLES UNDER TARIFF AND CUSTOMS
CODE
1. Subject to Duty a. Live
animals
and
animal
products;

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b.
c.

Vegetable products;
Animal or vegetable fats; oils and
their cleavage products; prepared
edible fats; animal or vegetable
waxes;
d. Prepared foodstuffs; beverages,
spirits and vinegar; tobacco and
manufactured
tobacco
substitutes;
e. Mineral products;
f. Products of chemical or allied
industries;
g. Plastics and articles thereof;
rubber and articles thereof;
h. Raw hides and skins; leather,
etc.;
i. Wood and articles of wood, etc.;
j. Pulp of wood, etc.;
k. Textiles and textile articles;
l. Articles of stone; plaster, cement,
etc.;
m. Footwear, headgear, etc.;
n. Natural
or
cultured
pearls
precious/semi-precious stones;
o. Base metals and articles of base
metals;
p. Machinery
and
mechanical
appliances; electric equipment;
sound recorders, etc.;
q. Vehicles, aircraft, vessels and
associated transport equipment;
r. Optical photographic, medical
surgical instruments, etc.;
s. Arms, ammunition, parts and
accessories;
t. Miscellaneous
manufactured
articles; and
u. Works of art, collectors pieces
arid antiques (Sec. 104, Title 1,
TCC)
2. Prohibited from Being Imported
(Prohibited Importation)
a. ABSOLUTELY PROHIBITED such
as; weapons of war; gambling
devices; narcotics or prohibited
drugs; immoral, obscene or
insidious articles, and those
prohibited under special laws
(Sec. 102, TCC)
b. QUALIFIEDLY
PROHIBITED

Where such conditions as to


warrant a lawful importation do
not exist, the legal effects of the
importation
of
qualifiedly
prohibited articles are the same
as those of absolutely prohibited

articles (Auyong Hian vs. CAT,


59 SCRA 110)
3. Conditionally-free from tariff and
customs duties (conditionally-free
importation)
a. Those provided in Sec. 105, TCC;
b. Those granted to government
agencies,
GOCCs
with
agreements
with
foreign
countries;
c. Those given to international
institutions entitled to exemption
by agreement or special laws;
and
d. Those that may be granted by the
President
upon
NEDAs
recommendation.
4. Free from TC duties (duty-free)

Imported goods must be entered in


a customhouse at their port of
entry otherwise they shall be
considered as contraband and the
importer is liable for smuggling
(See Sec. 101, TCC).

All articles when imported from any


country into the Philippines shall be
subject
to
duty
upon
each
importation,
even
though
previously
exported
from
the
Philippines, except as otherwise
specifically provided for in the TCC
or other laws.
Liability of Importer for Custom Duties
General Rule: All importations / exportations of
goods are subject to customs duties (Sec. 105,
TCC)
Exception:
a. Exemptions under the TCC;
b. Exemptions granted to govt
agencies,
instrumentalities
or
GOCCs with existing contracts,
commitments, agreements, or
obligations with foreign countries;
c. Exemptions
of
International
organizations
pursuant
to
agreements, or obligations with
foreign countries;
d. Exemptions granted by the Pres.
of the Phil. upon recommendation
of NEDA (Sec. 105, TCC).
Liability of Importer for Custom Duties
a. A personal debt which can be discharged
only by payment in full thereof;
b. A lien upon imported articles while they
are custody or subject to the control of
the government (Sec.1024 TCC)

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The liability of an importer is


limited to the value of the
imported merchandise. In case of
forfeiture of the seized material,
the maximum civil penalty is the
forfeiture itself. (Mendoza vs.
David, 1 SCRA 791).

Drawback A device resorted to for enabling a


commodity affected by taxes to be exported and
sold in foreign markets upon the same terms as if
it had not been taxed at all (Uy Chiano Sons vs.
Collector of Customs, 24 Phil 562)
Import Entry It is a declaration to the BOC
showing particulars of the imported article that
will enable the customs authorities to determine
the correct duties. An importer is required to file
an import entry. It must be accomplished from
disembarking of last cargo from vessel.

consumers and manufacturers, as


well as Phil. products from undue
competition posed by foreign made
products.
DUMPING
DUTY
Basis
Imposed upon
goods that are
the excess of a
foreign country
due
to
overproduction/
oversup ply and
are sold at less
than their FMV
to
the
detriment
of
local producer

Transaction value under RA 8181 It is the


invoice value of the goods plus freight, insurance,
costs, expenses and other necessary expenses.
This replaces the Home Consumption Value as
basis of valuation of goods.
CLASSIFICATION OF CUSTOMS DUTIES
A. Regular Duties those which are imposed
and collected merely as a source of revenue.
1. Ad valorem duty This is a duty based
on the value of the imported article.
2. Specific duty This is a duty based on
the dutiable weight of goods (either the
gross weight, legal weight, or net
weight).
3. Alternating duties: This is a duty which
alternates ad valorem and specific.
4. Compound Duty:
This is a duty
consisting of ad valorem and specific
duties.
B. SPECIAL DUTIES those which are
imposed and collected in addition to the
ordinary customs duties usually to protect
local industries against foreign competition.
a. Dumping duty
b. Countervailing duty
c. Marking duty
d. Discriminatory duty

Special
customs
duties
are
additional import duties imposed on
specific kinds of imported articles
under certain conditions.

The special customs duties are


imposed for the protection of

Rates
Difference
between
the
actual price and
the
normal
value of the
article.

COUNTERV
DISCRIMIN
MAKING
ALING
ATORY
DUTY
DUTY
DUTY
Imposed on
imported
items
granted
subsidy
or
subvention
upon
their
production,
manufacture
or
exportation
and
thus
allowing to
sell
prices
lower to the
detriment of
local
products.

Imposed
on
improper
ly
marked
articles
as to the
place of
origin of
said
goods.

Imposed
to
protect:
local
industries
against unfair
competition
posed
by
foreign
manufacturer
s
or
producers;
the
consumers
against
deception the
national
interest

Equivalent
to
the
bounty,
subsidy
or
subvention

5%
ad
valorem
of
articles
improper
ly
marked
clear

The
duty
shall
not
exceed 100%
ad valorem of
the articles

Imposing Authority
Special
Secretary of Commiss President of
committee
on Finance
ioner of the
anti-dumping
Customs Philippines
FLEXIBLE TARIFF CLAUSE
The President may fix tariff rates, import and
export quotas, etc. under TCC:
a. To increase, reduce or remove
existing protective rates of import
duty (including any necessary charge
in classification).

The existing rates may be increased


or decreased to any level, on one
or several stages but in no case
shall the increased rate of import
duty be higher than a maximum of
one hundred (1005) per cent ad
valorem

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To establish import quota or to ban


imports of any commodity, as may be
necessary; and
To impose an additional duty on all
imports not exceeding ten (10%) per
cent ad valorem whenever necessary
(Sec. 28, Art. VI, Constitution and
Sec. 401, TCC)

5.

Limitations Imposed Regarding the Flexible


Tariff Clause:
1. Conduct by the Tariff Commission of an
investigation in a public hearing.

The Commission shall also hear the


views and recommendations of any
government
office, agency or
instrumentality concerned.

The Commission shall submit their


findings and recommendations to
the NEDA within thirty (30) days
after the termination of the public
hearings.

The NEDA thereafter submits its


recommendation to the President.
2. The power of the President to increase or
decrease the rates of import duty within
the abovementioned limits fixed in the
Code shall include the modification in the
form of duty. In such a case the
corresponding ad valorem or specific
equivalents of the duty with respect to
the imports from the principal competing
foreign country for the most recent
representative period shall be used as
bases (Sec. 401, TCC)

7.

c.

TARIFF COMMISSION
FUNCTIONS OF THE TARIFF COMMISSION:
I. Investigative Powers
1. the administration of and the fiscal and
industrial effects of the tariff and customs
laws of this country now in force or which
may hereafter be enacted;
2. The relations between the rates of duty
on raw materials and the finished or
partly finished products;
3. The effects of ad valorem and specific
duties and of compound specific and ad
valorem duties;
4. All questions relative to the arrangement
of schedules and classification of articles
in the several schedules of the tariff law;

6.

8.

The
tariff
relations
between
the
Philippines
and
foreign
countries,
commercial
treaties,
preferential
provisions, economic alliances, the effect
of export bounties and preferential
transportation rates;
The volume of importations, compared
with
domestic
production
and
consumption;
Conditions, causes, and effects relating to
competition of foreign industries with
those of the Philippines, including
dumping and cost of production; and
In general, to investigate the operation of
customs and tariff laws, including their
relation to the national revenues, their
effect upon the industries and labor of
the country and to submit reports of its
investigation as provided.(Sec. 505, TCC)

II.
Administrative
Assistance
to
President and Congress (Sec. 506, TCC)

the

REMEDIES OF THE TAXPAYER


1. Administrative
a. Protest

Any importer or interested party if


dissatisfies with published value
within the 15 days from date of
publication.

Taxpayer within 15 days from


assessment. Payment under protest
is necessary. (Sec. 2308, 2210,
TCC)
b. Refund abatement or drawback (Sec.
1701-1708, TCC)
c. Settlement of any seizure by
payment of fine or redemption BUT
this shall not be allowed in any case
where
importation
is
absolutely
prohibited or the release would be
contrary to law. (Sec. 2307, TCC)
d. Appeal within 15 days to
Commissioner
after
notification
by
collector of his decision. (Sec. 2313,
TCC)
2. Judicial
a. Appeal within 30 days form receipt of
the decision of the Commissioner or
Secretary of Finance to the CTA (Sec.
2403, TCC, Sec. & RA 1125)
b. Action to question the legality of seizure
c. Abandonment (sec. 1801, TCC)

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TWO KINDS OF PROCEEDING IN THE


BUREAU OF CUSTOMS (BOC)
1) Customs Protest Cases
2) Customs Seizure and Forfeiture Cases
1. CUSTOMS PROTEST CASES

Deal solely with liability for customs


duties, fees and other charges.

The customs protest is required to


be filed only in case, the liability of
the taxpayer for duties, taxes, fees,
and other charges is determined
and the taxpayer disputes said
liability.

When there is no dispute as to the


correctness of the duties and taxes
paid, but the claim for refund
arises, by reason of the happening
of supervening events such as
when the raw materials imported is
utilized in the production of finished
products subsequently exported
and a duty drawback is claimed
under Sec. 106 of the same TCC, as
well as those arising under special
laws such as the Export Processing
Law and the Various Investment
Incentive Act.

No protest shall be considered


unless payment of the amount due
after liquidation has first been
made.

Failure to file the protest within the


statutory period makes the action
of
the
Collector
final
and
conclusive, except as to matters
correctible for manifest clerical
error.
Procedure On Customs Protest Cases
1. The collector shall cause the imported
goods to be entered at the customhouse.
2. The Collector shall assess, liquidate, and
collect the duties thereon, or detain the
said gods if the party liable does not pay
the same.
3. The party adversely affected (the
protestant) may file a written protest on
his foregoing liability with the collector
within 15 days after paying the liquidated
amount (the payment under protest rule
applies)
4. Hearing within 15 days from receipt of
the duly presented protest. Upon
termination of the hearing the Collector
shall decide on the same within 30 days.

The power to decide seizure and


protest cases may be abused if no
checks are instituted. Automatic
review
is
necessary
because
nobody is expected to appeal the
decision of the collector which is
favorable to the taxpayer and
adverse to the Government. This
is the reason why whenever the
decision of the collector is adverse
to the commissioner for review.
And if the commissioner affirms
such decision, the same shall be
automatically elevated to and be
finally reviewed by the Secretary
of
Finance.
(Yaokasin
V.
Commissioner of Customs GR No.
84111 December 22, 1989)

If decision is
adverse to the
protestant

Appeal with the


Commissioner within
15 days from notice

Appeal with the CTA


within 30 days from
notice

Appeal with the CTA


within 15 days from
notice

Appeal by certiorari
with the SC within 15
days from notice

If decision is
adverse to the
government

Automatic Review by
the Commissioner

Automatic review by
the Sec. of Finance

If decision of
Commissioner or Sec.
of Finance is adverse
to the protestant, he
may appeal to the
CTA, CA and SC under
the same procedure on
the left

2. SEIZURE ANS FORFEITURE CASES


These refer to matters involving smuggling
when articles are:
a) prohibited or
b) undeclared or misdeclared.

It is administrative and civil in


nature and is directed against the
res or imported articles and entails
a determination of the legality of
their importation. These are actions
in rem.
SMUGGLING an act of any person who
shall:

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1.

Fraudulently
import
any
article
contrary to law,
2. Assist in so doing, or
3. Receive, conceal, buy, sell, facilitate,
transport, conceal or sell such article
knowing its illegal importation. (Sec.
3601, TCC)
4. Exportation in any manner contrary
to law. (Sec. 3514, TCC)

The Philippines is divided into


various ports of entry entry other
than the port of entry will be
smuggling.

(i)

May
continue
beyond
the
maritime zone
(ii)
The vessel may be seized on the
high seas.
2. Over Imported Articles
a. Imported articles which may be subject
to seizure;
b. For violation of the tariff and customs
laws;
c. May be pursue in their transportation in
the Philippines by land, water or air;
d. Such jurisdiction may be exerted over
them at any place therein as maybe
necessary for the due enforcement of the
law. (2nd par.. Sec. 603, TCC).

Evidence for Conviction in Smuggling Cases


Mere possession of the article in question
UNLESS defendant could explain that his
possession is lawful to the satisfaction of the
court. (Sec. 3601, TCC)

Payment of the tax due after


apprehension is not a valid
defense. (Rodriguez v. CA, G.R.
No. 115218, September 18, 1995)

CONTRABAND

articles
of
prohibited
importations or exportations. (Sec. 3514, TCC)

Anything that was used for


smuggling
is
subject
to
confiscation, like the vessel, plane,
etc. (Llamado v. Comm. Of
Customs, 1983)
Exception: Common carriers that
are not privately chartered cannot
be confiscated.
Right Of Customs Officers to Effect Seizure
& Arrest
a) May seize any vessel, aircraft, cargo,
article, animal or other movable property
when the same is subject to forfeiture or
liable for any customs law, rules and
regulations.
b) May exercise such powers only in
conformity with the laws and provisions
of the TCC. (Sec. 2205, TCC)
DOCTRINE OF HOT PURSUIT
Requisites
1. Over vessels
a. An act done in Phil. waters which
constitutes a violation of the tariff and
customs laws
b. A pursuit of such vessel began within the
jurisdictional waters which

REGIONAL TRIAL COURT vs. BUREAU


of CUSTOMS
The RTC not have jurisdiction over
seizure
and
forfeiture
proceedings
conducted by the BOC and to interfere
with these proceedings. The Collector of
Custom has exclusive jurisdiction over all
questions touching on the seizure and
forfeiture of dutiable goods.
No petition for certiorari, prohibition or
mandamus filed with the RTC will be lie
because these are in reality attempts to
review the Commissioners actuations.
Neither replevin filed with the RTC will
issue.
DOCTRINE OF PRIMARY JURISDICITON

The Collector of Customs sitting in


seizure and forfeiture proceedings
has exclusive jurisdiction to hear
and
determine
all
questions
touching on the seizure and
forfeiture of dutiable goods.

The question of seizure and


forfeiture is for the Collector of
Customs to determine in the first
instance and then the Comm. of
Customs. Thereafter an appeal may
be taken to the CTA. RTC is thus
denied competence to act on the
matter.
Requirements for Customs Forfeiture

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1. The wrongful making by the owner,


importer, exporter or consignee or any
declaration or affidavit, or the wrongful
making or delivery by the same persons
of any invoice, letter or paper all
touching
on
the
importation
or
exportation of merchandise; and
2. That such declaration, affidavit, invoice,
letter or paper is false. (Farolan, Jr. v.
Court of Tax Appeals, G.R No. 42204
January 21, 1993)
Places Where Searches And Seizure May Be
Conducted
a. Enclosures
b. Dwelling house (there must be a search
warrant issued by a judge)
c. Vessels or aircrafts and persons or
articles conveyed therein.
d. Vehicles, beast and persons
e. Persons arriving from foreign countries
Administrative
Relative
to
Forfeitures

and Judicial Procedures


Customs
Seizures
and

Determination of probable cause and


issuance of warrant

Actual seizure of articles

Listing of description, appraisal and


classification of seized property

Report of Seizure to the Comm. of Customs


and the Chairman, Commission on Audit

Issuance by the Collector of a warrant of


detention

Notification to owner or importer

Formal hearing District Collector renders his


decisions
If decision is
adverse to the
aggrieved
owner/importer

Appeal by the aggrieve


owner/importer

If decision is
adverse to the
government

Automatic Review by
the Commissioner

Memorandum 20-87:

In forfeiture/seizure proceedings or
in protest of the assessment, if is
adverse to the government, there
must be an automatic appeal
because nobody will appeal such
decision whether such is erroneous
or correct.

But if the decision is favorable to


the government, the right to file an
appeal is limited only to 15 days
from receipt of decision with the
Office of the Commissioner.
SETTLEMENT OF FORFEITURE CASES
General Rule: Settlement of cases by payment
of fine or redemption of forfeited property is
allowed.
Exceptions:
1. Importation is absolutely prohibited,
2. Surrender of the property to the person
offering to redeem would be contrary law,
3. When there is fraud. (Sec. 2307, TCC)

Acquittal in Criminal Charge NOT


Res Judicata in Seizure or Forfeiture
Proceedings
The Act of Importing Contrary to Law
Results In Two Penalties:
1) Criminal directed against the offender
and is an ACTION IN PERSONAM.
2) Civil Case of Seizure and Forfeiture
directed against the goods of ACTION IN
REM.
Requirements For Manifest

A manifest in coastwise trade for


cargo and passenger transported
form one place or port in the
Philippines to another is required
when one or both of such places is
a port of entry (Sec. 906, TCC).

Every vessel from a foreign port


must have complete manifest of all
his cargo, except those from sea
stores. (Sec. 1005, TCC)

Articles subject to seizure do not


have to be imported goods.
Manifest are also required for
articles found on vessels or aircraft
engaged in coastwise trade.

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Unmanifested cargo is subject to


forfeiture whether the act of
smuggling is established or not
under the principle of res ipsa
loquitur. It is enough that the cargo
was unmanifested and that there
was no showing that payment of
duties thereon had been made for it
to be subject of forfeiture.

ABATEMENT The reduction or non-imposition


of customs duties on certain imported materials
as a result of:
1. Damage incurred during the voyage
2. Deficiency in contents packages
3. Loss or destruction of articles after arrival
4. Death or injury of animals
Fraudulent Practices Considered As Criminal
Offenses Against Customs Revenue Laws
1. Unlawful importation
2. Entry of imported or exported article by
means of any false or fraudulent
practices, invoice, declaration, affidavit or
other documents;
3. Entry of goods at less than their true
weights or measures or upon a
classification as to quality or value;
4. Payment of less than the amount due
5. Filling of any false or fraudulent claim for
the payment of drawback or refund of
duties
upon
the
exportation
of
merchandise; or
6. Filing of any affidavit, certificate or other
document to secure to himself or others
payment of any drawback, allowance or
refund of duties on the exportation of
merchandise greater than legally due
thereon. (Sec. 3602, TCC)
WARRANTLESS ARREST/SEIZURE
General Rule: There must be warrant before an
officer can arrest or search ones person or
property.
Exceptions: There are 9 exceptions, 2 of which
are relevant to the study of taxation.
1. The warrantless arrest/seizure of customs
police and officers because of the
provisions of Sec. 2205, 2208 and 2209
of the TCC
2. By the Officers of the Bureau of Internal
Revenue because of the provisions of
Sec. 171 of the Tax Code.

Distinction
between
the
Warrantless
Arrest / Seizure of the Officer of the
Customs and BIR:
BIR

Bureau of Customs

Under Sec. 171 of the


NIRC, BIR officers are
ALLOWED
to
enter
dwellings or residential
houses. The Provision
is very explicit about it.

In Sec. 2205 of the


TCC, it explicitly states
that the officers of the
Bureau of Customs are
PROHIBITED to enter
dwellings or residential
houses.

COURT OF TAX APPEALS


RA
NO.
9282
(Act
Expanding
The
Jurisdiction of the CTA) March 30, 2004

Court of Tax Appeals shall be o the


same level as the Court of Justice

COMPOSITION

Consists of a Presiding Justice and


(5) Associate Justices

May sit en banc or in (2) Divisions,


each Division consisting of three (3)
Justices. The Presiding Justice and
the most Senior Associate Justice
shall serve as chairmen of the two
divisions
POWERS
1. To administer oaths;
2. To receive evidence;
3. To summon witnesses by subpoena;
4. To require production or papers or
documents by subpoena duces tecum;
5. To funish contempt
6. To promulgate rules and regulations for
the conduct of its business;
7. To assess damage against appellant if
appeal to CTA is found to be frivolous or
dilatory;
8. To suspend the collection of the tax
pending appeal;
9. To render decisions on cases brought
before it;

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10. To issue order authorizing distraint of


personal property and levy of real
property.
JURISDICTION
APPEALS

OF

COURT

OF

TAX

I. EXCLUSIVE APPELATE JURISDICTION TO


REVIEW BY APPEAL
a. Decisions of the Commissioner of Internal
Revenue
1. In
cases
involving
disputed
assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto,
2. Other matters arising under the NIRC
or other laws administered by the
BIR;
b. Inaction by the Commissioner of Internal
Revenue
1. In
cases
involving
disputed
assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto.
2. Other matters arising under the NIRC
or other laws administered by the
BIR, where the NIRC provides a
specific period for action, in which
case the inaction shall be deemed a
denial;
c. Decisions, orders or resolutions of the
RTC

In local tax cases originally decided


or resolved by them in the exercise of
their original or appellate jurisdiction;
d. Decisions of the Commissioner of
Customs
1. In cases involving liability for customs
duties, fees or other money charges,
seizure, detention or release of
property affected, fines, forfeitures or
other penalties in relation thereto,
2. Other matters arising under the
Customs
Law
or
other
laws
administered by the Bureau of
Customs;
e. Decisions of the Central Board of
Assessment Appeals

In the exercise of its appellate


jurisdiction over cases involving the
assessment and taxation of real
property originally decided by the
provincial or city board of assessment
appeals;
f. Decisions of the Secretary of Finance

On customs cases elevated to him


automatically
for
review
from
decisions of the Commissioners of
Customs which are adverse to the
Government under Section 2315 of
the Tariff and Customs Code
Decisions of the Secretary of Trade and
Industry in the case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
agricultural
product,
commodity
or
article.

Involving dumping and countervailing


duties under Secs. 301and 302,
respectively, of
the Tariff
and
Customs
Code,
and
safeguard
measures under RA No. 8800, where
either party may appeal the decision
to impose or not to impose said
duties.

g.

II. JURISDICTION OVER CASES INVOLVING


CRIMINAL CASES
a. Exclusive original jurisdiction over all
criminal cases arising from violations of
the NIRC or Tariff and Customs Code and
other laws administered by the BIR or the
Bureau of Customs

Where the principal amount of taxes


and fees, exclusive of charges and
penalties claimed is less than one
million pesos (P1, 000, 000, 00) or
where there is no specified amount
claimed the offenses or penalties
shall be tried by the regular courts
and the jurisdiction of the CTA shall
be appellate.

Any provision of law or the Rules of


Court to the contrary notwithstanding
the
criminal
action
and
the
corresponding civil action for the
recovery of civil liability for taxes and
penalties shall at all times be
simultaneously instituted with and
jointly determined in the same
proceeding by the CTA, the filing of
the criminal action being deemed to
necessarily carry with it the filing of
the civil action, and no right to
reserve the filing of such civil action
separately from the criminal action
will be recognized.
b. Exclusive appellate jurisdiction in criminal
offenses

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1.

2.

UCLASS Bar Operations: Tax Law Society

Over appeals from the judgments,


resolutions or orders of the RTC in
tax cases originally decided by them,
in
their
respective
territorial
jurisdiction.
Over petitions for review of the
judgments, resolutions, or orders of
the RTC in the exercise of their
appellate jurisdiction over tax cases
originally decided by the Metropolitan
Trial Courts, Municipal Trial Courts,
and Municipal Circuit Trial Courts in
their respective jurisdiction.

III. JURISDICTION OVER TAX COLLECTION


CASES
a. Exclusive original jurisdiction in tax
collection cases involving final and
executory assessments for taxes, fees,
charges and penalties.

In collection
cases where
the
principal amount of taxes and fees,
exclusive of charges and penalties,
claimed is less than one million pesos
(P1, 000, 000, 00) shall be tried by
the proper Municipal Trial Court,
Metropolitan Trial Court and Regional
Trial Court.
b. Exclusive appellate jurisdiction in tax
collection cases
1. Over appeals from the judgments,
resolutions or orders of RTC in tax
collection cases originally decided by
them, in their respective territorial
jurisdiction.
2. Over petitions for review of the
judgments, resolutions, or orders of
the RTC in the exercise of their
appellate
jurisdiction
over
tax
collection cases originally decided by
the
Metropolitan
Trial
Courts,
Municipal Trial Courts, and Municipal
Circuit Trial Courts, in their respective
jurisdiction.

In criminal and collection cases,


the Government may directly file
said cases with the CTA covering
amounts within its exclusive and
original jurisdiction.
IV. OTHER MATTERS

Those controversies which can be


considered within the scope of the
function of the BIR / BOC under
ejusdem generis rule (e.g. action for
the nullity of distraint and levy;
questioning the propriety of the

assessment; collection of compromise


penalties).
APPEALS
PERIOD

Within 30 days after the receipt of


such decision or ruling or after the
expiration of the period fixed by law
or action;
Starts to run from the date the
taxpayer receives the appellable
decision.
The said period is jurisdictional and
non-extendible. Requests or motions
for reconsideration, however, operate
to suspend the running of the period
to appeal.

MODES OF APPEAL
1. By filing a petition for review under a
procedure analogous to that provided for
under Rule 42 of 1997 Rules on Civil
Procedure

Decision, ruling, or inaction of the


Commissioner of Internal Revenue,
Commissioner
of
Customs,
the
Secretary of Finance, the Secretary of
Trade and Industry or the Secretary
of Agriculture or the Regional Trial
Courts

This appeal shall be heard be a


Division of the CTA
2. By filing a petition for review under a
procedure analogous to that provided for
under Rule 43 of 1997 Rules on Civil
Procedure

Decisions or rulings of the Central


Board of Assessments Appeals and
the Regional Trial Courts in the
exercise of its appellate jurisdiction
This appeal shall be heard by the CTA
en banc
ISSUES THAT CAN BE RAISED ON APPEAL
General Rule: New issues cannot be raised for
the first time on appeal.
Exceptions:
1. Defense of prescription
2. Errors of administrative officials.
Tax Collection Not Suspended During Appeal
General Rule: No appeal taken to the CTA shall
suspend the payment, levy or distraint, and/or
sale of any property of the taxpayer.

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Exception: The CTA is empowered to suspend


the collection of internal revenue taxes and
customs duties only when there was a
1. Showing that collection of the tax may
jeopardize the interest of the government
and / or the taxpayer;
2. DEPOSIT of the amount claimed or file a
surely bond for not more than double the
amount of tax with the Court when
required; and
3. Showing by taxpayer that appeal is not
frivolous nor dilatory.

not
automatically
suspend
collection unless CTA issues
suspension order at any stage of
proceedings.
(Blaquera
vs.
Rodriguez, 103 Phil. 267)

PROCEDURE:
1. Any party adversely affected by a ruling, order or
decision of a Division of the CTA may file a motion
for reconsideration or new trial before the same
Division within 15 days from notice.
2. Any party adversely affected by a resolution of a
Division
of the CTA on a motion for
reconsideration or new trial may file a petition for
review with the CTA en banc
3. Any party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997 Rules
on Civil Procedure.

Power of CTA to Enjoin Collection of Taxes

Sec. 11 of RA 1125 as amended


by Sec. 9 of RA 9282 grants CTA
power to suspend collection of tax
if such collection works to serious
prejudice of either taxpayer or
government. However, Sec. 218 of
the Tax Code provides no Court
may grant injunction to restrain
collection of any tax, fee or charge
imposed by Tax Code.
The provision in Tax Code
refers to courts other than the
CTA. CTA can suspend collection
of tax. Appeal to the CTA does

NORMAL
(203)

Decisions of Tax Court have


persuasive effect and may serve
as judicial guides. They have more
persuasive value than the BIR
Rulings. CTAs findings of fact are
entitled to the highest respect.
(Raymundo vs. De Joya, 101
SCRA 495, 1980)

The Supreme Court will not set


aside conclusions reached by Tax
Court which by the very nature of
its
function,
is
dedicated
exclusively to the consideration of
tax problems and has developed
an expertise on the subject, unless
there has been an abuse or an
improvident exercise of authority
on its part. (CIR vs. CA % Atlas
Consolidated, 271 SCRA 605)

JURISDICTION
A. exclusive appellate jurisdiction
1. Decisions of the commissioner the
commissioner of internal revenue in
cases
involving
disputed
assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other
matters arising under the nirc or
other laws administered by the BIR.
a. Assessment period or assessment

Period of Assessment

Period of Collection

3yrs. from the time return


was filed

5yrs. from the date of


receipt
of final assessment

1.
Assess & collect
ABNORMAL
10yrs. from discovery of
5yrs. from date of receipt of
(222)
FFF
final assessment
- False
- Fraudulent
2.
Collect
w/o Assessment
10 yrs. from discovery of
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File
NO ASSESSMENT
Return (FFF)

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NOTICE OF INFORMAL CONFERENCE

Within 16 days, taxpayer is required to file an answer or


failure to file an answer within 15 days

PRE-ASSESSMENT NOTICE (PAN)

Within 15 days, taxpayer is required to file an answer or failure to


file an answer within 15 days from receipt of PAN

FINAL ASSESSMENT NOTICE (FAN)

PROTEST within 30 days from receipt of FAN via motion for


reconsideration/reinvestigation

Within 60 days from filing of protest submit all relevant supporting


documents
NOTE: Failure to do so shall render the assessment final

Within 180 days from the submission the Commissioner of Internal


Revenue shall act upon the protest

DENIAL OF PROTEST

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Within 30 days from receipt of denial of protestFor


appeal
via Rule
Private
and 42
Personal Use Only
of the Rules of Court to the COURT OF TAX APPEALS

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b.Refund (229)

UCLASS Bar Operations: Tax Law Society

File WRITTEN CLAIMED FOR REFUND with the commissioner


within two years from date of payment of payment of tax or
penalty regardless of any supervising clause

Denial of claim for refund within 2 year period

Within 30 days from receipt of denial for refund, appeal via Rule
42 of the Rules of Court to the COURT OF TAX APPEALS

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2. Inaction by the Commissioner of Internal Revenue


A. Assessment

NOTICE OF INFORMAL CONFERENCE

Within 15 days, taxpayer is required to file an answer or


failure to file an answer within 15 days

PRE-ASSESSMETN NOTICE (PAN)

Within 15 days, taxpayer is required to file an answer or failure to file


an answer within 15 days from receipt of PAN

FINAL ASSESSMENT NOTICE (FAN)

PROTEST within 30 days from receipt of FAN via motion for


reconsideration/reinvestigation

Within 60 days from filing of protest submit all relevant supporting documents
NOTE: Failure to do so shall render the assessment final

Within 180 days from the submission the Commissioner of Internal


Revenue shall act upon the protest

COMMISSIONERS INACTION after the lapse of 180 days from


submission of the required documents

Within 30 days from receipt of denial for refund, appeal via Rule 42 of
the Rules of Court to the COURT OF TAX APPEALS

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B.Refund 229

UCLASS Bar Operations: Tax Law Society

File WRITTEN CLAIMED FOR REFUND with the commissioner within


two years from date of payment of payment of tax or penalty
regardless of any supervising clause

Denial of claim for refund within 2 year period

Within 30 days from receipt of denial for refund, appeal via Rule 42 of
the Rules of Court to the COURT OF TAX APPEALS

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3. Decisions orders, or resolutions of the regional trial courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction.
A. Constitutionary of Tax Ordinance Requisites:
1) Public Hearing
2) Ordinance must not be unjust, excessive, confiscatory, oppressive

Public Hearing

ORDINANCE TAKES EFFECT


Within 30 days from effectively of ordinance APPEAL TO THE SECRETARY OF JUSTICE
Within 60 days from the filing of the appeal the Secretary shall act upon
the appeal

Within 30 days
from receipt of
decision of appeal

Within 30 days after


the lapse of the sixty
day period without the
secretary of justice
acting upon the appeal

REGIONAL TRIAL COURTS

Within 30 days from the decision of the RTC, appeal via Rule 42 of
the Rules of Court to the COURT OF TAX APPEALS

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B. Assessment (195)

NORMAL
ABNORMAL
(fraud or intent to
evade
the
payment of taxes
fees or charges)

PROTEST OF ASSESSMENT

Period of Assessment

Period of Collection

within 5 yrs. From the date


they become due
10 yrs. From discovery of
fraud or intent to evade
payment

Within 5 yrs. From date


of assessment
Within 5 yrs. From the
date of assessment

Notice of Assessment is issued by local treasurer

Within 60 days from receipt of Notice of Assessment Protest


of Assessment filed by taxpayer to Local Treasurer

Within 60 days from the time of filing or protest the local


treasure shall decide upon the protest

LOCAL TREASURER ACTION


Denial Protest

LOCAL TREASURER INACTION after the


lapse of 60 days from filing of Protest

Within 30 days from the receipt of denial of protest or within 30 days


after the lapse of 60 days, APPEAL TO THE REGIONAL TRIAL
COURT
Within 30 days from the decision of the RTC, appeal via Rule 43 of
the Rules of Court to the COURT OF TAX APPEALS

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4. Decision of the Commissioner of


Customs (2402 of the Tariff and
Customs Code)

COLLECTOR OF CUSTOMS (commodity is 5M or less)


If decisions of Collectors of Customs is adverse to government
Automatic Review by the Commissioner of Customs
If the decisions of the collector would be adverse to the tax payer
Within 30 days from the receipt of decision, APPEAL via rule 42 to the
Court of Tax Appeal

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5. Decisions of the Secretary of finance


on customs on cases elevated to him
automatically
for
review
from
decisions of the Commissioner of
Customs which are adverse to the
government under Section 2315 of
the tariff and Customs Code.

WRITTEN NOTICE OF ASSESSMENT


Within 60 days from the date of receipt of the written notice,
APPEAL TO LOCAL BOARD OF ASSESSMENT APPEALS

Local Board of Assessment Appeals has 120 days from the receipt of
Appeal to decide

LBAA CONCURS in the revision or the


assessment in favor of the taxpayer

Notify the owner of the property or the


person having legal interest therein of
such fact using the form prescribe for
the purpose

LBAA denies the Appeal

Within 30 days from the receipt of the


decision, APPEAL TO THE CENTRAL
BOARD OF ASSESSMENT APPEALS
Within 30 days from the receipt of the
decision of the CBAA, APPEAL VIA
RULE 42 OF RULES OF COURT TO
THE COURT OF TAX APPEALS.

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6. Decisions of the Secretary of finance on customs on cases elevated to him automatically


for review from decisions of the Commissioner of Customs which are adverse to the
government under Section 2315 of the tariff and Customs Code.
ADVERSE TO GOVERNMENT FORFEITURE & ASSESSMENT

Collector of Customs (Commodity is 5M Or Less)

If Decisions of Collectors of Customs is Adverse to Government

Automatic Review by the Commissioner of Customs

If the Decision of the Collector Would Be Affirmed by the


Commissioner (still adverse to the government)

Automatic Review by the Secretary of Finance

Within 30 Days From Receipt of Decision from Secretary of


Finance (Adverse to Govt (, Appeal via Rule 42 to the
Court of Tax Appeal

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7. Decisions of the Secretary of Trade & industry, in the case of Non-Agriculture


Products, Commodity or Article, and the Secretary of Agriculture in the case of
Agricultural Products, Commodity or Article, Involving Anti-Dumping and Countervailing
and R.A. 8800
A. SEC. 301 of the Tariff and Customs Code (ANTI DUMPING)

Written Application by any person


representing a Domestic Industry which shall
include evidence of
Dumping
Injury
Causal link between A and B

In special circumstances, the secretary shall


motu propio initiate an investigation

Require petitioner to post a Surety Bond

Within 5 days examine the accuracy and


adequacy of the Application

No sufficient evidence,
DISMISS

INVESTIGATION
Notice to Exporting member country

Within 2 days from decision to


investigate, notice must be given to the
concerned parties

Within 30 days from receipt of notice


to submit a Reply or Answer

Within 30 days from receipt of


answer, secretary shall make a
preliminary determination of the case

Imposition of Anti- Dumping


Duty

No Anti-Dumping Duty to be
imposed

Appeal via Rule 42 of the Rules of Court to the


Court of Tax Appeals

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B.SEC. 302 of the Tariff and Customs Code (Countervailing)

Petition by any person on


behalf of the Domestic
Industry

In special circumstances, Secretary


shall motu proprio initiate an
ivestigation

Within 10 days from receipt of


petition, the Secretary shall review
the accuracy and adequacy of the
petition.

No sufficient basis,
DISMISS

INVESTIGATION

Within 5 days, Notice to the


interested parties

Within 30 days from receipt of


notice, interested parties shall
submit their answer
Within 20 days from receipt of
answer of the interested parties,
Secretary shall make a
preliminary determination

No prima facie case exist

If a prima facie case exist, the


Secretary shall impose a
cash bond

Appeal via Rule 42 of the Rules of Court


to the COURT OF TAX APPEAL

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REPUBLIC ACT 8800 An Act Protecting Local Industries By Providing Safety Measures To Be
Undertaken In Response To Increased Import And Providing Penalties For Violation Thereof

Petition by any person


belonging to a
domestic industry

Request by the
President
Resolution by
House or Senate
Committee on Agriculture
House or Senate on
Trade & Commence

Secretary motu propio


Inititiates a preliminary
safeguard
investigation

Within 30 days from the petition, request,


resolution or motu propio, the Secretary shall
determine the substantial cause of serious injury to
the domestic industry.

No duties to be
imposed

Positive determination that a


substantial cause of serious injury to
the domestic industry

Appeal via Rule 42 of the Rules of Court


to the COURT OF TAX APPEAL

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Table 1. TAX RATES FOR INDIVIDUALS


GENERAL
CATEGORIES

CITIZENS
RESIDENTS

PERIOD OF STAY

SOURCES OF
INCOME
NATURE OF INCOME
Compensation,
Business, Trade
Profession
(Including casual
gains, profits,
income, and capital
gains, prizes, of
P10,000 or less).
Not included are
items of income
subject to final tax
and or special tax
treatment.
Interest from any
currency bank
deposit and yield or
any other monetary
benefit from deposit
substitute and from
trust funds and
similar
arrangements,
royalties, prizes
(except amounting
to P10,000 or less)
and other winnings
(except PCSO and
lotto winnings)

Royalties on books, as
wellGENERAL
as either
literary
CATEGORIES
works
and
musical
composition

NONRESIDENTS

Permanently
stayed in the
Philippines or
may have
stayed outside
the Philippines
LESS THAN
183 DAYS

Stayed outside
the Philippines
for 183 DAYS
OR MORE

All Sources

Within the Phil.

ALIENS
RESIDENT
S
Stayed
within the
Philippines
for MORE
THAN 12
MONTHS
from date
of arrival
Within the
Phil

NRAETB
Stayed
within the
Philippines
for MORE
THAN 180
DAYS
Within the
Phil.

NRAETB

Stayed within
the Philippines
for 180 DAYS
OR LESS
Within the Phil.

Taxable Base/Tax Rate

Taxable Income
5% - 34% (1998)
5% - 33% (1999)
5% - 32% (2000)
(Normal Tax Rate)

Gross Income
(within 25%)

Gross Income (within) 20% Final Withholding


Tax
(FWT)

Gross Income (within) 10% FWT


CITIZENS
RESIDENTS
NONRESIDENTS
RESIDENTS

ALIENS
NRAETB

NRAETB

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Interest income from


depository bank under the
expanded foreign currency
deposit system (FCDS)

Interest income from longterm deposit or deposit in


the form of savings,
common or individual trust
funds, deposit substitute
investment management
accounts in denomination
of P10,000 or as prescribed
by the BSP.
Cash and/or property
dividends actually or
constructively received
from a domestic corp. or
from a joint stock
company, insurance or
mutual fund companies, or
in the share of an
individual in the
distributable net income
after tax of an association,
joint account, or a joint
venture or consortium
taxable as a corporation
Capital gains from shares
of stock not traded in the
local stock exchange
Cinematographic film and
similar works
Proprietary educational
institution/ Hospital
Cinematographic film and
similar works
Proprietary educational
institution/ Hospital

UCLASS Bar Operations: Tax Law Society

Gross income
(within) 7.5%
FWT (Exchange
Rate to be used
shall be the
opening rate on
remittance day)

Any income
from transaction
with depositary
banks under the
expanded FCDS
or OBU- Exempt
[Sec. 27 (D) (3)]
[Sec. 28 (A) (4)]

Interest on long term deposit


In case of Pretermination
Remaining maturity of
4 yrs. to less than 5 yrs.
3 yrs. to less than 4 yrs.
less than 3 yrs.

Gross income (within) FWT


6%
8%
10%
-

Gross income
(within) 705%
FWT

Exempt

5%
12%
20%

Any income from transactions with


depository bank under the expanded
FCDS or ODU- Exempt [Sec. 27 (D) (3)] [
Sec. 28 (A) (4)]

Gross Income (within)


25%

Gross
Income
(within)
20%

Year
1998
1999
2000

(Tax on dividends shall apply on income earned on or


after Jan. 1, 1998. Sec 73 (c) provides that dividends
distributed are deemed made from most recently
accumulated profits)

Net capital gains (within)


Not over P100,00.00 - 5%
In excess of P100,000 - 10% clear

Individual Normal Tax Rate shall apply

Gross
Income
(within)
25%

N.A

Individual Normal Tax Rate shall apply


Individual Normal Tax Rate shall apply
Individual Normal Tax Rate shall apply

Gross Income (within)


25%

Gross
Income
(within)
25%

Gross Income (within)


25%
N.A

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Table 2. PREFERENTIAL TAX TREATMENT ON CERTAIN INDIVIDUALS


GENERAL
CATEGORIES

CITIZENS
RESIDENTS

SOURCE OF
INCOME
A. 15% Final
Withholding
Income Tax
(FWIT)

All Sources

NON-RESIDENTS
Within The
Phil.

A tax rate of 15% is imposed


on gross income (salaries,
wages, etc. received by every
Filipino employee occupying
the same position as an alien
employed by any of the
following:
B. Multinational
company which
is foreign firm
or entity
engaged in
international
trade with as
established
branch in the
Phils. As
follows:
C. Offshore
Banking Units
D. Foreign
petroleum
service
contractor or
sub-contractor

B. Partners in a
general
professional
partnership

ALIENS
RESIDENTS
Within the
Phil.

NRAETB
Within the
Phil.

NRAETB
Within the
Phil.

A tax rate is imposed on gross income


(salaries, wages, annuition,
compensation, remuneration, other
emoluments such as honoraria and
allowances)
1) Regional or Area Headquarters
2) Regional Operating Headquarters
3) Offshore Banking Units (OBUs)
established in the Phil.
4) Foreign petroleum service
contractor or sub-contractor
engaged in Petroleum Operations in
the Phil.

1) A general, professional
partnership is not subject
to income tax. A partner in
a general professional
partnership is liable to
income tax only in his
separate and individual
capacity.
2) For purpose of computing
the distributive share of
the partners, the net
income of the partnership
is computed in the same
manner as a corporation.
3) Each partner shall report
as gross income his
distributive share actually
or constructively received
in the net income of the
partnership.

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GENERAL CATEGORIES

UCLASS Bar Operations: Tax Law Society

CITIZENS
RESIDENTS

C. Foreign Source
Compensation. Income is
not subject to income tax.

NONRESIDENTS

ALIENS
RESIDENTS

NRAETB

NRAETB

1) Regardless of the period of


stay in the Phil., foreign
source (compensation
income is not taxable if
received by any of the
following non-resident
citizen.
a) Immigrant
b) Foreign-based
employee on a
permanent basis
c) Overseas Contract
Worker, including
overseas seaman
2) A Filipino employed as a
Philippines Embassy/
Consultant service
personnel of the Phil.
Embassy/consulate is not to
be treated as a non-resident
citizen, hence, his income is
taxable.

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TABLE 3. TAX RATES FOR CORPORATIONS

GENERAL
CATEGORIES

SOURCE OF
INCOME
NATURE OF
INCOME

DOMESTIC CORPORATIONS

FOREIGN CORPORATIONS
RFC
NRFC

DCs in general, including GOCCs,


Agencies or instrumentalities, engaged in
a similar business industry or activities
(EXCEPT GSIS, SSS, PHIC, PCSO AND
PAGCOR)

(Existing under the


laws of foreign
country, engaged in
trade or business
within the
Philippines)

(not engaged in trade


or business)

All Source

Within the Phil.

Within the Phil.

Taxable Base/Rate

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In General

UCLASS Bar Operations: Tax Law Society

TAX INCOME
35% (Normal Domestic Rate)
34% - 1998
33% - 1999
32% - 2000
A. Transition Period
1) For Corp. Adopting fiscal year
accounting period, income and
expenses shall be deemed to have
been earned and spent equally for
each month of the period.
2) (Taxable Income/12mos.) x No. of
Mos. Covered by the tax rate x Tax
Rate.
B. Optional Corporate Tax Rate of 15%
of Gross Income
The President upon
recommendation of the Secretary
of Finance. May Effective January
1, 2000 allow corporations the
option to be taxed at 15% of the
income subject to certain
conditions.
C. Government or its Political
Subdivision

Income derived (1) from


any public utility or (2) from the exercise
of any essential government function
accruing to the Government of the Phil.
Or to any political subdivision thereof is
excluded from gross income [Sec. 32(B)
(7)(b)]

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GENERAL
CATEGORIES

UCLASS Bar Operations: Tax Law Society

DOMESTIC CORPORATIONS

FOREIGN CORPORATIONS
RFC

Interest on currency
bank deposit and yield
or any other monetary
benefit from deposit
substitutes and from
trust funds and similar
arrangements royalties

Gross Income (within) 20% FWT

NRFC
Interest Income on
foreign loans
contracted on or after
Aug. 1, 1986
(20%FWT)

Income derived under


the expanded FCDS

1) Gross interest income derived by a domestic


corporation and a resident foreign corporation from
corporation from a depositary bank 7.5% FWT.
2) Income derived by a depositary bank from foreign
currency transactions with local commercial banks
including branches of foreign banks, and resident
10% Final Tax.

Any income from


transaction with
depositary banks
under FCDS shall be
exempt from income
tax

Inter-corporate
dividends and income
from a taxable
partnership

Dividends received by a domestic


corporation from another
domestic corporation shall not be
subject to tax.

Dividend received
from a domestic
corp. 15% FWT,
Provided foreign law
allows taxpayer
clause, otherwise it is
subject to normal
domestic rate

Capital Gains Realized


from the Disposition of
Land and/or Buildings

Dividends received
by a domestic
corporation not
subject to tax

Gross Selling price or FMW whatever is higher 6% FIT

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Minimum Corporate
Income Tax (MCIT)

UCLASS Bar Operations: Tax Law Society

1) Gross Income
2% MCIT beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operation.
2) Carry Forward of Excess MCIT to be carried
forward and provided against the normal income
tax [as computed under Sec. 27(A) for the (three (3)
succeeding taxable years.
3) The Secretary of Finance is authorized to suspend
MCIT on a corporation which suffers losses in
account ofa) Prolonged disputed; or
b) Force majeure
c) Legitimate business reverse; or

N.A

B. Gross Income = Gross Sales Sales returns,


Discounts, and allowances Costs of Goods *
(Trading or Manufacturing Concern)

* Cost of Goods shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For manufacturing or merchandising, cost of goods sold shall include-(a) Raw materials used; (b) Direct
labor; (c) Manufacturing overhead; (d) Freight cost; (e) insurance premium; (f) Other cost to bring the raw
materials to the factory or warehouse

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GENERAL CATEGORIES
Minimum Corporate Income
Tax (MCIT)

UCLASS Bar Operations: Tax Law Society

DOMESTIC OPERATIONS

FOREIGN CORPORATIONS
RFC
NRFC

C. Gross Income = Gross Receipt Sales Return allowances,


discount cost of Service (Service)
1) Cost of service: shall means al direct cost and expenses
necessarily incurred to provide the service including
a) Salaries and employee benefits of personnel, consultants N.A
and specials directly utilized in providing the service such
as depreciation or rental of equipment used and cost of
supplies.
2) In the case of banks, cost of service shall include interest
expense.

Improperly Accumulated
Taxable Income means
taxable income adjusted
by:
Income exempt from
tax
Income excluded from
gross income
Income amount subject
to final tax
The amount of net
operating loss carry
over deducted.
And reduced by the
sum of:
Dividends actually or
constructively paid;
and
Income tax paid for the
taxable year

1) Improperly Accumulated Taxable Income 10% tax in addition


to other income taxes (for Domestic Corporations)
2) The improperly accumulated earnings tax shall not apply to:
a) Publicly held corporations
b) Banks and other non-banks Financial intermediaries
c) Insurance companies
d) Taxable partnership
e) GPP
f) Non-Taxable joint ventures
g) Enterprises registered under PEZA
3) The fact that any corporation is a mere holding company or
investment company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members
4) The fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by
the clear preponderance of evidence, shall prove the contrary.
5) For corporations using the calendar basis the accumulated
earnings tax shall not apply on improperly accumulated
income as of Dec. 31, 1997. For fiscal year basis, the tax shall
not apply to the 12 month period of fiscal year 1997-1998.
Improperly accumulated earnings as of the end of a calendar
or fiscal year period on or after Dec. 31, 1998 shall be subject
to the 10% tax on such improperly accumulated earnings.

N.A

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Table 4. PREFERENTIAL TAX TREATMENT ON CERTAIN-CORPORATION


DOMESTIC CORPORATION
1. Education institution
2. Hospital
1. A NON_STOCK, Non-profit Educational
Institution is exempt from Income tax on its
revenue as educational institution and from the
operation of ancillary activities located within
the school premises.
a) Cafeteria/canteen
b) Dormitories
c) Bookstores
d) Scholl Bus
e) Hospitals
f) Pharmacies or Drugstores and from banks
deposits subject to certain condition.
2. If gross income from unrelated trade business
or other activity does not exceed 50% of the
total gross income derived from all sources
10% of the Taxable income will be imposed on
the following:
a) proprietary profit oriented educational
institution
b) Non-stock, non-profit hospital
3. If gross income from unrelated trade business
or other activity exceeds 50% of the total gross
income derived from all sources, the Regular
Domestic Rate will be imposed to the
following:
a) Proprietary / profit oriented educational
institution
b) Non-stock, non-profit hospital
4. Regardless of the proportion explained in item
No. 2 and 3 a profit oriented hospital will be
treated as an ordinary domestic corporation,
hence subject to the Normal Domestic rate.

FOREIGN CORPORATIONS
RFC
International Carrier (within)
Gross Phil. Billings

Offshore banking Unit (OBU)


Income derived by OBU
from foreign currency
transaction with local
commercial bankers,
including branches of foreign
bank, including any interest
income derived from foreign
currency loans granted to
residents.
10% - Final Tax
Branches (Except those
registered with PEZA). Any
profit remitted to the head
office (total profit applied or
earmarked for remittance
without any deduction for the
tax component thereof)
15% - FWT
Regional or Area
Headquarters not subject to
Income Tax

NRFC

Non-Resident Owner
or Lessor or Sea
Vessel Chartered by
Philippine national
Gross rental lease
charter
Any income from
transaction with OBU
shall be exempt from
income tax

Non-Resident owner
or lessor of aircraft
machinery and other
equipment
Gross Rental or less
7.5%

N.A

Regional Operating
Headquarters

N.A

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DC

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