TAX REMEDIES AND PRESCRIPTION PERIODS

TAX PREWEEK LECTURE 2014
TAX PREBAR LECTURE 2015

Justice Japar Dimaampao
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TAX REMEDIES
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A. Two Aspects of Tax Administration

* There are 8 rules on these based on decided cases and Tax Laws

- 4 on assessment and 4 on collection

A.1. ASSESSMENT

NIRC
Local Government
Real Property Taxation
Taxation
Definition of Assessment
Basis of Definition:
Sec 228 of NIRC
Sec 195

Requirements:

Requirements:
(1) Written notice and

demand;
(1) Written notice and

demand;
(2) it must state facts and (2) it must indicate or

law upon which it is
specify the local
based;
charge/fee/other

imposition;
(3) Jurisprudence: the

Pastor Doctrine states
#2 requirement is only
that it must be: duly
applicable to
received by the Tax
assessment under
Payer (if not duly
Local Government
received its not a valid taxation
assessment)

*Section 228 completely
defines
assessment,
absent one of these
elements its not a valid
assessment
(plus
Jurisprudence)
Sec 199(F) of RA 7160

It is an act or process of
determining the value of
real property including
discovery, classification
or appraisal thereof.

Tariff & Customs Code

Pilipinas Petroleum Shell

vs.
Customs Commissioner

SC: Assessment under TCC
is termed as liquidation
which means:

Requirements:
Meralco vs. Barles:
To be considered as valid
assessment for purposes
of real property taxation,
remember KAMLA:

(1) it must indicate the
Kind of property;
(2) the Assessed value of
such property;
(3) Market value of such
real property;
(4) Level of assessment;
(5) Actual use;
(Keyword: FOR)

(1) Final computation as

determined by the
collector of Customs
on duties on imported
merchandise;

(2) it must be based on

Official report as to
the quantity, character
and value thereof;

(3) Rates of duties as
determined by the
collector of customs
must be indicated
therein;

Rules on Prescriptive Period

Basis:
Section 203:
3-year period
-
contemplates
a
situation wherein the
return is neither false nor
fraudulent

Section 222:
10-year period
- applied in cases of false
or fraudulent returns;
failure to file a return
PHOENIX DOCTRINE:
Basis:
Section 194:
5-year prescriptive
period: if no fraud is
employed;

10-year prescriptive
period: if there was
fraud employed;

Basis:
Section 219 & 220:

3-year general
assessment: every 3
years, there is a general
assessment on real
properties

10-year
imprescriptibility:
Old rule but carried over
in Section 222 of RA
7160:
Selle Arcillas * UST Faculty of Civil Law
Basis:
Section 1602 has been
amended by RA 9135,
Section 4:

Its no longer 1 year but
3-years from the final
payment of customs
duties.

Section 203 is silent on

amended returns but
jurisprudence tells us that
if the return is amended,
the commencement of the
3-year period will depend
on whether the
amendment is substantial
or not.

Substantial amendment:
Count the 3-year period
from the filing of the
substantially amended
return.

If not Substantial:
Count the 3-year period
from the filing of the
original return.

As to the 10-year period,
if a property has already
been declared, it can still
be assessed 10 years
prior to the declaration
but beyond this, the real
property
taxes
are
imprescriptible.

Grounds for the Suspension of Prescriptive Periods

Keyword:
PRAWN
(Section 223 +
Jurisprudence)

Prescriptive period is
suspended if:

(1) BIR is prohibited from
making an assessment;

(2) when a request for
reinvestigation is granted;
Keyword:
PRO
(Section 194)

(3-year period for general
assessment under Sec 219
provides no ground for
suspension.)
is

Prescriptive period
suspended if:

(1) the local treasurer is
legally prevented from
making an assessment;


(R.A. 9135, Section 4
provides no ground for
suspension.)

(request for motion for

reconsideration will not (taxpayer must execute a
suspend the running of the waiver);
prescriptive period);

* R.R. 18-2013 defines
request for
reinvestigation is a
remedy properly filed if
there is a newly
discovered evidence.

(3) Fernandez Hermanos
vs. Commissioner:
an answer to a petition
for review filed by the
taxpayer before the CTA;

(4) Waiver of statute of
limitations; it must be in
writing, signed by the
taxpayer, accepted by the
BIR in writing, and must
be executed before the
expiration
of
the
prescriptive period;
(3) when the taxpayer is

out of the Philippines;


(5) No property can be
the subject of distraint or
levy;
Methods in Making an Assessment
Basis / Keyword:
Sec 06(B) + NPC
====================
Net Worth Investigation
Method:

Formula:

There is really no specific method recognized when it
comes to assessment of local tax BUT based on
Assessment Revenue Regulations 3-75, there are 3
methods (2 of which are recognized in a decided case) that may
be used by the local government in making an
assessment of real property tax: CIR
Net worth, end
Less: Net worth, beginning
Reyes vs. Almanzor:
(answer)
(1) Comparable Sales Approach Method:
Add: items which have
understated the income/ (2) Income Approach Method (income of the property)
over-expenses that are non- (3) Replacement or Reproduction Cost Method

deductible

Less: Exclusions that have

overstated the income

Final Amount
x

(this will be compared by the
BIR with the income you have
reported, if there is a difference
that is the subject of the
deficiency tax)

Old Method:
Ad Valorem System

New Method:
Transaction Valuation
System

Transaction Value is the
price actually paid or payable
for goods when sold for export
to the Philippines.

*RA
8181
amended
Sec201 of the TCC. This
amendment in effect
recognizes this new
system.

====================
Section 06(C) of NIRC:
Presumptive Gross Sales or

Receipts Method

Note: BIR has the power to fix a
presumed sales or receipts; this is
rebuttable; no violation of due
process because there can only be a
violation if the presumption is
conclusive.
The BIR can fix a presumed

sales or receipts in two
instances:

(1) when the taxpayer fails

to issue receipts or invoices;

(2) if his books of accounts
do not reflect the correct
sales or receipts or income
as the maybe;

====================
Cash Expenditure Method

Example:
Taxable Year (TY):

beginning: 100,000
during: 200,000
Total income for the TY:

300,000
Expenses: 400,000
The difference of 100,000
between the total income

for the taxable year and
the expenses is the
unreported income.

Best Evidence
Obtainable Rule
(BEO)
Section 06(B)

This may be resorted to
by the BIR in 4 instances
when: FINE

(1) the taxpayer filed a
false report;

(2) an incomplete report
is filed;

(3) no report at all is filed;

(4) an erroneous report is
filed;

A.2. COLLECTION

NIRC
Local Government
Real Property Taxation
Tariff & Customs Code
Taxation
Rules on Prescriptive Period to collect IR/Local/Real Property/Tariff Taxes
Basis:
Section 203, 222
Basis:
Section 194

1. Section 203
5-year period to collect;

*This is subject to conflicting views.
10-year period to collect
BIRs view: 5 years
- applies if there was
Tax Authors: 3 years
fraud employed

Justice D:
What is clear is in Section
222 you will find the 5-year
period.

> Sec. 222(a) its clear that it
is 5 years if there is a prior
assessment; if there is none
apply the 10 year period;

In these 2 provisions, in 203
(return is neither false nor
fraudulent) and 222 (return
if FFF), the BIR has 2
options:

OPTION 01: to conduct a
prior assessment before
collection

Basis:
Section 270


10-year period to collect
- applies if there was
fraud employed

Basis:
Section 270

(before it is 1 year)
(this is the common provision

between 203 & 222);

OPTION 02: BIR may
immediately
resort
to
collection without prior
assessment;

Justice D: So how do we apply the
rules on prescriptive periods on
these two options?

Under OPTION 01:
Assessment must be
made within 3 years from
the filing of the return if
filed before the deadline,
and if on the deadline take
note of the PHOENIX
Doctrine.

Under OPTION 02:

NOTE: Prior assessment is not a
condition sine qua non before the BIR
can resort to collection.

Under these two options is where the
conflicting views mentioned above arise
(5 or 3 yeas period to collect).
2. Section 222

Here, there are no conflicting

views.

Under OPTION 01:

The assessment must be
made within 10 years from
the discovery of such fraud,
falsity or failure to file the
tax return followed by the 5-
year period to collect.
Keyword:
PRAWN
(similar as above)

Prescriptive period is suspended if:

(1) BIR is prohibited from

making distraint, levy, or
collection

> RA 9282, Section 9, par. 4:
when an injunction order is
issued by the CTA which has
the authority to restrain the
collection of IR and other
taxes; this is in effect an
exception to Section 218 of
the NIRC on the no
injunction rule; the no
court phrase in that section
does not include the CTA;
Grounds for the Suspension of Prescriptive Periods

Keyword:
Keyword:
PRO
PRO
(similar as above)
(similar as above)

Prescriptive period is suspended if:
Basis:

Section 270
(1) the local treasurer is
legally prevented from
collecting;


(no clear provision)
(taxpayer must execute a

waiver);

(3) when the taxpayer is out

of the Philippines;

Pacquiaos Case:
2 grounds when the CTA
may enjoin the collection of
IR Taxes: when

a. To the opinion of the CTA
the collection of these taxes
will jeopardize the interest
of the taxpayer or the
government;

b. The taxpayer (Pacquiao)
must post a surety bond not
more than double the
amount of that unpaid taxes,
interests and surcharges;


(3) an answer to a petition
for review filed by the
taxpayer before the CTA;

(4) Waiver of statute of
limitations;

(5) No property can be the
subject of distraint or levy;
Q: Pending Protest: May the
BIR resort to collection
without resolving such
protest?
A: YES.
Republic vs. Lim 16 SCRA 584:
SC: The BIR need not

rule on such protest. When
BIR files a collection case,
the effect of this is that there
is an implied denial of such
protest/request (for
reinvestigation or motion
for reconsideration).

Remedies Against a Collection Case Pending Protest

The rules under the NIRC doesnt apply here.

The local treasurer or customs officer as the case may be is required to rule on the protest or request.

There is no jurisprudence on this yet.
*Collection case = implied

denial of the request/protest.

Remedies available to the
Taxpayer (Jurisprudence):

1. An implied denial is
considered as a decision by
the BIR appealable to the
CTA.

2. File a motion to dismiss
the collection case on the
ground that the action is
premature (as you have
already
appealed
decision of the BIR).

the
CTA has the authority to

restrain the collection of IR
taxes + 2 requisites
mentioned above.
Rule on Issuance of Injunction Order

Q: May the RTC issue an injunction or restraining order
with respect to the collection of local taxes and real
property tax?

A: Justice Vitugs opinion: There is really no provision
under RA 7160 on no injunction rule unlike under the
NIRC. But SC said that the collection of local taxes and real
property taxes may still be restrained applying Section 58.

This is Justice Ds humble contribution to Remedial Law:
CSP
1. There must be clear and unmistakable right
2. There must be substantial and material violation
of such right
3. Paramount or urgent necessity to issue the writ to
prevent irreparable damage

If these conditions are met then yes, the collection of local
or real property taxes may be restrained by the Court.
Jurisprudence:
Rallos vs. Galco (?)

SC:

RTCs have no jurisdiction to

restrain the seizure or
forfeiture of smuggled
goods.

This is where you apply the
Doctrine
of
Primary
Jurisdiction. It is an
exclusive original
jurisdiction by the Collector
of Customs in the first
instance whose decision
may be reviewed by the CIR.

B. Administrative Remedies available to the Government:

Administrative
Remedies that may be
availed of by the
Government

NIRC

Local
Government
Taxation

Real Property
Taxation

Tariff & Customs
Code
Enforcement of Tax
Lien

* Basis: Section 219



* Maritime Co. Case:

If there are 2
claimants over the
subject property, the
claim
of
the
government
predicated on tax
lien always preferred
to that claim based
on judgment.
* Slight difference
with NIRCs
provision:

Tax lien under the

TCC is quite peculiar.

The Collector of
Customs may resort
to Tax Lien under 2
conditions:
a. Under Section
1204: The goods
must be in the
custody of the BOC

b. the importation is
neither prohibited
neither irregular;

* If the importation
is
irregular
or
prohibited
the
remedy is seizure.
* Civil Law on
Preference &
Concurrence of
Credits: #1 on the
list is Taxes except
when the property is
not specific.

Distraint of Personal
Property

* Basis: Section 207A


(Because the subject
here is real property


and distraint
pertains to personal
property.)
* Seizure is the word

used under the TCC.

* Forfeiture is the
penalty, seizure is the
remedy;

* Nature of forfeiture
proceedings: in rem
but they are not
criminal in nature
(Section 24B is an
erroneous provision).
Levy on Real
Property

* Basis: Section 207B


* Section 178:
*Section 213:
* Section 260
requires public sale

or auction

or auction

(Because the subject
here are goods,
articles and
merchandise and the
remedy of levy
pertains to real
property.)

or auction
Publication of Notice of Sale

Dont apply LTD (publication is a notice to the whole world).
SC: Notice of sale must be given to the delinquent taxpayer because

that is the only way through which he can prevent the sale;
it is a proceeding in personam;

Common aspect of Sections 213, 178 and 260: The taxpayer can
prevent the levy but the only way he can exercise such right is when a
personal notice of public sale. If there is no notice given to the
taxpayer, all the proceedings are considered invalid.

C. Judicial Remedies
* This may partake the nature of filing a, institution of, and later on
prescriptive

Judicial Remedies

Civil Action

NIRC

(BIR can file a civil
case in court)

Real Property
Taxation
Criminal Action

of RA 7160
Section 281:
5-year prescriptive
period.

Q: Sections 194 and 270 mentioned fraud,
with that word, does that imply that LGUs can
institute criminal proceedings in court?

A: NO; there is really no authority/provision
granting the LGUs to institute criminal
proceedings in courts even if there was fraud
employed.
Prescriptive Periods

Tariff & Customs
Code

Criminal Action

Local Government
Taxation
* Basis:
Section 3601
The application of
the 5-year period
depends upon the
nature
of
the
criminal violation:
(Lim Sr. vs. CA)

1. Failure to file a
return:

* Count the 5 year

period from the
service of the final
notice of assessment

2. Filing of a false or
fraudulent return:

* Section 281:
Count the 5 year
period from the
commission of such
violation; if such
commission is
unknown, from the
discovery.

NOTE: From the
discovery of such
violation and institution
of criminal
proceedings.

- dont forget the and
- this means that the
institution of criminal
proceedings will only
commence to run if
there is such judicial
proceedings for its
punishment or
investigation

SC: practically, the
period is imprescriptible
because the filing
D. Administrative Remedies available to the Taxpayer

Administrative
Remedies

NIRC

Local Government
Taxation
Real Property
Taxation
Tariff & Customs

Code

Protest
Section 228
Section 195
Section 252:
Payment under
protest
Section 2308

* protest may be filed
before the collector of
customs;

Prescriptive Period:
15 days from the
date of payment;



* filed before the local
treasurer

30 days from the

receipt of final notice
of assessment.
60 days from the

receipt of final notice
of assessment.

* implies that
payment must first be
made before you
protest the same;

* this requirement
only applies to real
property tax;

SC:
payment
is
mandatory otherwise
the local treasurer
may
not
take
cognizance of that
protest/
it
can
outrightly ignore the
same.

30 days from the date
of payment.

Tax Refund

Compromise
Of
Tax Liabilities
Section 229

2 years

2 years

Section 253

2 years

*Doctrine
of
supervening cause
applicable (claim of
refund
may
be
suspended by this)

Section 204

(You will never find a
provision on
compromise; LGUs do
not have the power to
compromise tax
liabilites)

(No provision on
compromise)

Section 1701-1708

* there is really no
prescriptive period
here under the TCC;

* Sec 1707 provides
for a 1-year period
but this applies only
to manifest error; for
erroneous payment
or undue payment =
there is really no
provision;

Jurisprudence:
Philippine
______
Fertilizer vs. Customs
Commissioner

SC: apply the 6-year
period for quasi-
contracts (because
we are talking here of
erroneous payment
and undue payment)
under article 1145.

*follow the
prescriptive periods
under the civil code;
Art 1144-47 & 1149.
Periods: 10-6-4-1-5

Justice Vitug:
Section 2316

Fines, penalties and
forfeiture upon
approval of the
Secretary of Finance.
10
Discussion:
PROTEST under NIRC

*BQ: Procedure of the review of the decision BIR on disputed assessment adverse to the taxpayer up to the
Supreme Court.

A: Start with what must be disputed? > final notice of assessment; this must be questioned before the BIR then
raffled off to CTA division within then CTA en banc then SC.

*RR 18-2013: formal letter of demand with assessment notice > this is equivalent to final notice of assessment.

3-Notice Rule:

1. Informal notice of conference;

- you are given 15d to respond; failure to do so this will be followed by:

2. Preliminary Assessment Notice (PAN);

- taxpayer is given 15 days to respond, failure to do so BIR will issue:

3. Final notice of Assessment;

- this is the subject of protest

*SC in Metrostar Case: PAN is mandatory, failure to comply with this: all the subsequent assessment notice
is void ab initio.

*Keyword: MACEN will help you remember when PAN may be dispensed with (section 228):

1. Mathematical error
- you can easily determine the tax liability here that is why PAN is dispensed with

2. When it involves taxes Actually withheld

- you can easily determine the difference between the taxes actually withheld and
remitted by the withholding agent;

3. When the taxpayer availed of the tax Credit

- excess of withholding taxes may be applied against estimated tax liabilities

4. When what are involved are Excise taxes

- tax code has given preferential tax treatment on excise taxes because we derived bulk wealth here

5. Non-tax exempt persons

- locally produced machineries etc are transferred to non-exempt persons

Prescriptive Period: Protest under the NIRC

*30 days from the receipt of final notice of assessment to question the same before the BIR.

*What should be filed within this period:

1. Request for reinvestigation

- based on newly discovered evidence

2. Request for motion for reconsideration

-based on existing records or evidence

* Recall:
BIR has 180 days to resolve the request. If the decision was made within this period, such denial of
written claim for refund/MR/Reinves may be elevated to the CTA division within 30 days from
receipt thereof.

* Inaction on the part of BIR/ no decision was made by BIR:

Section 228 provides one remedy: within 30 days from the lapse of the 180d period, the taxpayer
may appeal such inaction to the CTA.

* SC in Lacsona Case: additional remedy: you may await the decision of the BIR which may be rendered for few years.

*Justice Peralta: there are 2 exclusive options when there is inaction in the part of BIR:

11
a. Taxpayer may appeal the inaction within 30d from the lapse of the 180d; or
b. He may await such decision of the BIR and when he receives such, he may appeal the same
within 30d from the receipt thereof.

BRIEF PROCEDURE OF PROTEST:

1. Taxpayer to BIR

Q: Is a motion for reconsideration against the decision denying your MR/Rein of the BIR allowed?
A: SC ruled MR is not allowed. It will never toll the 30day period within which to appeal with the CTA.
Q: How about motion for extension of time to file a petition for review under Rule 43, is this allowed?
A: In Metroshopping Corporation vs. Toledo, SC held that that is allowed. Rule 07 of the Rules of the CTA allow
the same applying in suppletory character the provisions of Rules 43, 44 which allow extension of time.
2. BIR to CTA division to CTA en banc

* File a petition for review under Rule 42 raising questions of facts or law or both.
This case will first be raffled off to CTA division whose decision is appealable to CTA en banc.
Q: What is the applicable prescriptive period?
A: Rule 08, section 3(b) of the Rules of the CTA provides for 15-day period.
When you appeal a CTA decision in division, the petition that must be filed is under Rule 43.
Q: Is a motion for reconsideration mandatory (on the CTA divisions ruling) before you can elevate
it to CTA en banc?
A: Rule 08 of the Rules of the CTA states that MR is mandatory.
Q: Is a motion for extension of time to file a petition for review under Rule 45, is this allowed?
A: Yes.
3. CTA en banc to Supreme Court

*CTA en banc decision is the one that may be elevated to the Supreme Court.
Q: What is the applicable prescriptive period?
A: Rule 16 of the Rules of the CTA pursuant to RA 9282 provides for 15-day period
(15 days from the receipt of the decision of the CTA en banc)
Q: Is a motion for reconsideration allowed (on the CTA en bancs ruling) before you can elevate it to SC?
A: Rule 16 of the Rules of the CTA provides that the taxpayer may file an MR.
Q: Is a motion for extension of time to file a petition for review under Rule 45, is this allowed?
A: Yes.

4. Summary on the Rules on Motion for Reconsideration:

1. From BIR to CTA, MR is prohibited;
2. From CTA division to CTA en banc, MR is mandatory;
3. From CTA en banc to SC, MR is optional;
5. Summary on the Rules on Motion For Extension of time (ME):
1. From BIR to CTA, ME is allowed;
2. From CTA division to CTA en banc, ME is allowed;
3. From CTA en banc to SC, ME is allowed;

Discussion:
REFUND under NIRC

* When a taxpayer receives assessment, he may protest or dispute that without paying the tax;

- He must file a motion for reconsideration / reinvestigation, or he may pay the tax and thereafter file

a written claim for refund;

* Unlike in protest where there is a form prescribed, in refund there is no standard form for this;
SC has emphasized that the tax refund must contain the following:
3 indispensible requisites of tax refund:
1. It must be in writing / written claim for refund;
2. There must be categorical demand for the reimbursement of the taxes illegally
or erroneously collected;
3. It must be filed within the 2-year period from the date of payment;

* Jurisprudence on the 2-year period:
12
1. CIR vs. TMX Sales

- SC here clarified the phrase from the date of payment which means:

> If the one claiming for refund is a corporate taxpayer,
the 2 year period is reckoned from the filing of the FAR;

(the dates that are supposed to confuse you should be ignored such as: 1st, 2nd, 3rd quarterly returns were filed;
focus on when FAR was filed.)
2. CIR vs. CA
- CTA here committed a blunder in applying the 2-year period
- The return here was filed on April 02, 1986;
- The CTA considered April 15, 1988 as the deadline; This is wrong!
- It is the date of payment that is material, do not consider the deadline because that only becomes
material in assessment under Section 203;

3. BPI Case (in relation to Corporation Law: dissolving corporations)
- Dissolving corporation filing for a refund
- Effect of the dissolution: it shortens the taxable period
- SC in construing Section 52(c), look for this: when was the approval for the plan for dissolution given?
- this is the material date;
SC: From the date of the approval count 30 days thereafter,
this is the reckoning date for the 2 year period.

- Suppose leap year intervenes, ignore that. Because jurisprudence tells us that you do not apply

the provisions of the Civil Code, you apply the Revised Administrative Code of 1987, Section 31

Chapter 08, wherein it defines 1 year to be constituted of 12 months,
ignore the number of days;
lex posteriori derogat priori: the recent law prevails over prior law

4. Suppose it involves VAT, the 2-year period will be reckoned from the close of the taxable quarter;

BRIEF PROCEDURE OF REFUND:

1. The decision of the BIR on tax refund is appealable to the CTA division;
- Petition for review under Rule 42 raising questions of law or fact;
- According to Rule 04, Section 3(a)(2), when you appeal the BIR decision on tax refund,
observe these two periods:

a. 30 days from receipt of the BIR decision denying the written claim for refund; and

b. it must be filed within 2-years from the date of payment

- SC: General Rule: The 2-year period from the date of payment applies:

b.1. to the filing of written claim for refund before the BIR;

b.2. when a petition for review of the BIR decision denying the claim for refund is
filed before the CTA

Exceptions: 2-year period is not observed under the following situations:

1. a. precursor case: Aichi Case: Refund of VAT or issuance of tax credit in regard to unutilized input tax
- the 2-year period is not applicable here
- SC: construed Section 112(c) of the NIRC
- SC: there is only one period that must be observed here, the 30-day period;
- take note of the 120-day period within which the BIR may render a decision
- Effect:
a. 30 days from receipt of the decision rendered within 120 days:
you may file a petition for review under Rule 42
b. BIR did not render any decision/ inaction within the 120-day period
you may appeal such inaction within 30-days from the lapse or expiration
of the 120-day period
c. Justice Peralta:
Even if the decision was rendered beyond the 120-day period, given that the 2-year
Period is not applicable, the taxpayer can still avail of appeal; Forget about the
2-year period in refund of VAT.

1. b. latest case: San Roque Power Case: Refund of VAT
13
- the 2-year period is not applicable here

* NOTES ON THESE 2 CASE:
- If the subject of refund is other than VAT, observe the 2-year period;
- In cases of refund of VAT, observe the 30-day period ;

2. Judicial Claim for Refund
Administrative claim for

refund
- claim filed by the taxpayer
before the BIR

- apply the 2-year period
Judicial claim for refund

- appeal made by the taxpayer
involving a written claim for
refund to the CTA;

- apply the 30-day period;

ignore the 2-year period

2. The decision of CTA division is appealable to the CTA en banc;
- apply the 15-day period under Rule 08 of the Rules of the CTA

3. The decision of the CTA en banc is appealable to the Supreme Court;

- apply the 15-day period

Discussion: Section 204
COMPROMISE under NIRC

* 2 Grounds:

1. Financial Incapacity

- Minimum Compromise Rate: 10%

2. Doubtful Validity of an Assessment

- Minimum Compromise Rate: 40%

- Examples of Doubtful Validity case:

2.a. Jeopardy Assessment

- it is an assessment made without partial or complete audit this makes it doubtful

- the BIR has reasonable ground to believe that the taxpayers failure to submit documents

will jeopardize such assessment or collection; such delay in the submission of these

requirements should not jeopardize such assessment of taxes;
2.b. Assessment made under BEO

- the assessment may be based on other sources

- hearsay evidence may be covered by this

* but still, the fundamental evidentiary rules must be complied with;

- the technical rules of evidence are not applicable in BIR and CTA proceedings

- SC: photocopies of consumption interest have no probative value

> this do not qualify under BEO

* Minimum Compromise Rate means not lower than 10/40% of the total tax liability but it
may be more than because that is favorable to the government

* 7 Cases which may not be compromised: WAAFFER
1. Withholding tax cases
2. Actually filed criminal cases in court (even if no fraud is involved)
3. Approved scheduled payments on installments
4. Fraud in criminal cases / criminal fraud cases
5. Final judgment of the court
6. Estate tax cases if the request for compromise is based on financial incapacity
7. Report (final) regarding request for reinvestigation or reconsideration

- situation here: taxpayer agreed to such final report and his signature on that agreement is
binding upon him therefore he is estopped from raising this ground for compromise

14
========================================================================================
INCOME TAX
========================================================================================
* 4 Rules:

1. Sources of income;

2. Tax Base (whether you can claim deductions or not);

3. Income Tax Rates;

4. Filing of income tax return;

* 2 Basic categories of taxpayers:

1. Individual Taxpayers;

- Section 61: taxable income of estates and trust shall be computed in the same manner and on the
same basis as individuals subject to 3 exceptions;
2. Corporate Taxpayers;

I. 12 SALIENT FEATURES OF INCOME TAX SYSTEM

Basis: Tan vs. Del Rosario JR. (237 SCRA 324, October 3, 1994
SC: recognized 2 systems of income system:

1. Schedular: System/ Approach/Tax treatment (all these 3 terms refer to the same concept)

v Jurisprudential Definition: Schedular approach system it is a system employed where the income tax
treatment varies and made to depend on the kind or category of taxable income of the taxpayer.

v Simplified Definition: it is a system that categorizes income and provides for different tax rules
Varies different tax rules
Made to depend merely classifies/categorzes income
you must first classify the income before you can apply different tax rules

v Bases under NIRC:

1. Section 24, 25: different tax rates
2. Section 26 correlate with Section 31, 32A,

v Characteristics of Schedular Tax System: / Why we have adopted this system

a. Categorizes income
b. Provides different rules
c. Imposes different tax rates
d. Covered taxpayers: individual taxpayers

v How do we tax the income of individual taxpayers?

The income of individual TP is taxed under the scheduler tax system, then explain: it (1) must first
classify the income of the taxpayer, (2) it provides for different tax rules for different categories (3) it
imposes different tax rates.

v Compensation Income Formula:

Gross compensation income
Less: a. Basic personal exemption (50,000) + additional exemption (25k/dependent) Max:100k
b. Deductions
*c. Premiums on health and or hospitalization insurance of TP (2,400/year or 200/month)
---------------------------------------------------------------------------------------------------------
Taxable Compensation Income

*new item of deduction

v Passive income
o Dont report in ITR
o Subject to final tax

2.
Global: System/ Approach/Tax treatment (all these 3 terms refer to the same concept)

v Jurisprudential Definition: it is a system employed where the tax treatment views indifferently the tax
base and generally treats in common all categorizes of taxable income of the taxpayer

v Simplified Definition: it is a system that provides for uniform tax rules and does not generally classify
nor categorize income
views indifferently uniform tax rules
15
generally treats in common all categorizes of taxable income of the taxpayer global system does
not generally classify or categorize income

v Bases under NIRC:

o Section 27A, 28A,B: they generally follow general rules and do not generally
classify/categorize income (uniform corporate rate: 30%)
27A: Domestic Corporations
28A: Resident Foreign Corporations
28B: Non-Resident Foreign Corporations

v Characteristics of Global Tax System/approach:

a. it provides for uniform tax rules/treatment
b. it does not generally classify/categorize income
c. it imposes uniform corporate rate of 30%

1994 Bar Question: Distinguish "schedular treatment" from "global treatment" as used in income taxation.
A: 4 points of distinctions: Schedular maybe differentiated from global system:
(use: in contrast, whereas, as compared, while, on the other hand to distinguish)

a. As to Tax Treatment:
SCHEDULER SYSTEM: different tax rules;
GLOBAL SYSTEM: uniform tax rules
b. As to Categorization:
SCHEDULER SYSTEM: classifies/categorizes
GLOBAL SYSTEM: does not generally classify/categorizes
c. As to Tax Rates:
SCHEDULER SYSTEM: it imposes different tax rates
GLOBAL SYSTEM:
d. As to Taxpayers Covered:
SCHEDULER SYSTEM: individual
GLOBAL SYSTEM: corporate

II. TWO METHODS ADOPTED UNDER NIRC

Net Income Taxation
Gross Income Taxation
Characteristics / Features
1. It allows deductions (Sec 34)
1. It allows NO deductions
2. It grants personal exemptions (Sec 35)
2. It grants no personal exemptions
3. Tax Base: Taxable Income (Section 31)
3. Tax Base: Gross Income (Section 25B)

Jurisprudential Definition of Gross Income: Blacks Law
Total income from all sources minus deductions, Total income from all sources before deductions
exemptions or other tax reductions
exemptions and other tax reductions
Deductions

Taxpayers Entitled to Deductions:
Taxpayers NOT Entitled to Deductions:
4 individual TP & 2 Corporate TP
1 Individual; 1 Corporate

A. Individual Taxpayers
A. NRA-NETB

> whose stay is not more than 180d
1.
RC (Section 24a1a)

> entitled to personal exemptions
B. NRFC
> Section 23: entitled to deduct expenses
> because the tax base is gross
without since he can be taxed on income

derived within and without

2.
NRC (Section24a1b)
> he can claim deductions
> Can he claim expenses incurred without?
No, since he can only be taxed could only
16
3.
4.
be taxed on income derived from sources

within it follows that he can only claim
expenses paid or incurred within.

RA Individual
No, because based on Section 23d, he can
only be taxed on income derived within.

Favorite Bar Question: NRA-ETB (Section 25A1)
No, he can only be taxed on income
derived within.

>engaged in trade or business: criteria:

a. more than 180 days aggregate
- apply the totality rule
- need not be continuous/uniterrupted
b. deemed engaged in trade/business
- legal fiction
- in the eyes of the law

> Sec 35b: NRA can claim personal exemptions

but these conditions must be complied:

1. It must be shown that the foreign
government of the alien grants personal
exemption to Filipino citizens doing
business in his country; reciprocity

2. How much maybe granted? Only 50,000.
Not more than the maximum granted by
our law even if the foreign country
grants higher exemption to Filipinos.

3.How about additional personal exemption?
Subject to conflicting views;
Justice D: No, the legislative intent was to
apply the principle of reciprocity only
to personal exemption and not to
additional personal exemptions.

B. Domestic Corporations

> It can claim deductions

> Can it claim expenses incurred without?
Section 27A correlate Section 23e;
Yes, entitled to deduct expenses
without since it can be taxed on income
derived within and without

C. Resident Foreign Corporations
> Section 28a1
> Taxable only on income within;
> It can claim deductions
> Can it claim expenses incurred without?
No, because based on Section 23f, he can
17
only be taxed on income derived within.

> Section 22H
> What may constitute doing business?
Jurisprudential Tests: SCIA
a. Substance Test: It implies continuity of
dealings
b. Contract Test: consider the place
where the contracts are perfected in
claiming deductions
c. Intetion Test: it is the intention to
continue the substance or body of the
business in the PH
d. Actual Performance of Commercial
(POSSIBLE
BAR
IN
MERC)
Transactions: It is not enough that
goods are imported in the PH, there
must be an actual commercial
transaction performed in the PH.

DC and RFC CAN NEVER CLAIM ADDITIONAL
PERSONAL EXEMPTION!

Advantages
Q: In your opinion, which is the more better system to adopt?

1. It is a just, fair, equitable and reasonable tax 1. No deductions are allowed.
system, Explain:
> Deductions are no longer allowed because of the
because it allows deductions and
abuse in over-claiming deductions, overstatement
personal exemptions. This is consistent with the of expenses, which lead to graft and corruption.
State Policy underlying the adopting of net
The elimination of the source of corruption will
income taxation to provide as much as possible bring about the generation of more revenues for
an equitable relief to a greater number of
the government. It minimizes graft and corruption.
taxpayers in order to improve levels of

disposable number of income and increase
2. It simplifies our income tax system.
economic activity
> Since no more deductions are allowed, the taxpayer

can easily compute their tax liability by just
2. It minimizes fraud in taxpayers claim for
multiplying the rate with the taxable income in
deductions, Explain:
order to arrive at the tax liability. No need for
> Tax Audit examination - measure designed to accountants. Just add all the expenses and multiply
check whether the claims for deduction
with the applicable rate.
taxpayer are correct.

3. Conclusion:
3. Conclusion:
If we minimize graft and corruption, more
These two advantages will eventually, revenues for the government = translated to more
inevitably achieve every method and system of services. If tax system is simple, more people will be
taxation and that is to generate more revenues for encouraged to pay since they understand the system.
the government which may be used to carry out the
legitimate objectives of the government.

III. Section 23: General Principles

* Section 23: within and without

- Other term for:

a. Income derived from sources within: on-shore income

b. Income derived from sources without: global income

- Summary of Section 23:

a. Individual taxpayers are taxable only on income from sources within except resident citizen because
18
resident citizens can be taxed not only from income derived from sources within but also income derived
from sources without;

* There is only one individual taxpayer whose income derived from sources without (global income)
that may be taxed: resident citizen, all the rest only income within

b. Corporate taxpayers, there are three: Domestic Corporation, Resident Foreign Corporation,
Non-resident Foreign Corporation
Corporate taxpayers are taxable on income derived from sources within, except DC because
domestic corporations can be taxed not only from income derived from sources within but also income
derived from sources without;

IV. Tax Base

* Questions themed as whether or not this taxpayer can claim deductions, you should take note of this tax base, if:
Taxable income it means deductions are allowed.
Gross income implies that no deductions are allowed.


- Can claim deductions as the tax base is taxable income except NRA-NETB because the tax base is
gross income/ entire income

- NRA-NETB cannot claim deductions and personal exemptions;

* He is considered as NETB because his aggregate stay in the Philippines is 180 days or less;

* If his aggregate stay in the Philippines is more than 180 days then he is considered as ETB then
he can claim deductions;

B. Corporate Taxpayers

- Can claim deductions as the tax base is taxable income except NRFC as their tax base is gross income;

V. Tax Rates


- Subject to progressive rates of 5-32% except NRA-NETB because the applicable rate to them is 25% final tax;


- DC & RFC are subject to corporate/regular/normal corporate rate of 30% except NRFC because in their case,
the 30% becomes a final tax;

VI. Filing of Income Tax Returns


- Required to file income tax returns except NRA-NETB because they are subject 20% is a final tax, apply the rule:
final tax withheld constitutes as final or full settlement of the tax liabilities on those items of income, therefore
no return is required to be filed;


- Required to file quarterly corporate income tax return except NRFC because in as much as
the 30% is a final tax it is likewise considered as the full settlement of the tax liability; therefore,
NRFCs are not required to file quarterly corporate income tax returns;

VII. Notes

1. Income Tax Situs

* Correlate Section 23 with Section 42 because this case 25 years ago was asked, it may come
out again in the bar exams;

* Tan vs. Del Rosario JR: Jurisprudential Definition of situs: RPN (section 23)
> comprehensive income tax situs

> Residence

- criteria in imposing tax on the income of: RC, RA, RFC
Place

- criteria in imposing tax on the income of: NRC, NRA, NRFC
Nationality/citizenship of the taxpayer

- criteria in imposing tax on the income of (irrespective of the source of income): RC, DC,
19
* Section 42 enumerates the kinds and categories of income

> Consistent criterion: place or location

- place where services were rendered, location of property if it involves rent income,

* NCD vs. CIR: Interest Income

- It has a peculiar income tax situs;
- Its not the place where the elements of the transaction occurred but the residence of the debtor;

2. Net Income Taxation, Gross Income (NRA-NETB and NRFC)

* Tan vs. Del Rosario: we have adopted this method or system that imposes different rates (scheduler system),
when different rates are imposed, different rules are provided therein. With the adoption of the
uniform corporate of 30%, in effect we have adopted the global system in the case of individual taxpayers
because individual taxpayers have a uniform rate, necessarily it provides for uniform rules.

3. The filing of ITR, the method that may be developed as provided for in Section 51, 75, 76 and 77:
Pay as you File System (section 57A1)

- you pay your income tax when you file your income tax return;

- How often do you file?
a. Individual taxpayer: Section 51C: Annual Filing of income tax: Deadline April 15
b. Corporate taxpayer: Section 77C: procedure
b.1. DC shall file/declare its quarterly income tax return in the 1st, 2nd and 3rd quarters
in a cumulative basis; carry over in simple language
b.2. DC shall then file its Final Adjustment Return, setting forth all the adjustments in its income and
expenses for the entire year

4. Substituted Filing of Income Tax Return

* applies only to individual taxpayers regardless of the amount of income received as long as the following are met:

*Requirements to be exempt from the filing of ITR:

(1) only source of income is compensation income;
(2) only one employer in the Philippines;
(3) the tax withheld by the employer must be the same or equal to the income tax due in
applying the 5-32% progressive rates;

* the tax withheld is the same as the income tax due;

5. Statistics
* more questions are asked on individual taxpayers than corporate taxpayers;

6. Basis of the government to collect: Partnership Theory

The right of the government to collect taxes emanates form the partnership in the production of income b providing
protection, resources and incentives and proper climate for the production of income.

7. Tests of Taxable Income: Filipinas Synthetic Fiber Corp. vs. CA 316 SCRA 480

A. 33 AmJur 1994: The right to receive

> The right to receive and not the actual receipt that determines when to include in the amount in
gross income.
> BIR Regulation 02, Section 52: Constructive Receipt of Income

2 Requisites:

a. the amount must be credited to the account of the taxpayer; set apart for the taxpayer
e.g. deposit in the bank, the interest income is credited in the account

b. can be withdrawn without limitations or restrictions = the right to receive

B. Constructive Receipt/Constructively Realized

> Cash/property dividends of RC, NRC, RA (Section Section 24B2) , NRA-ETB (25A2),
> Share of a partner from the net income of GPP (Section 26)

*Source: GPP is tax exempt

*Subject to 5-32% and must be reported

VS.
> Share of a business partner from the net income after tax of a taxable business partnership = taxable
as long as he has the right to receive (Section 73D); >Probable Bar!
20
*Source is a taxable entity

*Subject to final tax
> Rental Consigned to the Court for unjustified refusal to receive

* set apart for the lessor, he can withdraw it anytime
> Rental Consigned to the Court for unjustified refusal to receive

C. All Events Test (Filipinas Synthetic Fiber Corp. vs. CA 316 SCRA 480)

> applies to deductibility of expense

> requisites: USA so that amount may be considered as taxable:

Unconditional, valid and enforceable, not subject to any future time

Susceptible: the amount is susceptible of reasonable estimate / reasonable accuracy

Amount: reasonable expectation that amount will be paid in due course

8. Basis of Computation of Taxpayers Income (Section 43)

* It shall be based on the taxpayers annual accounting period.

* Correlate with Section 22 p and q

* 2 Accounting Periods

a. Calendar Year

- January to December
b. Fiscal Year

- ending on any month other than December

* Q: Are all taxpayers allowed to adopt these periods?

A: Only corporate taxpayers may employ or adopt fiscal year period.

9. Two Methods of Collection of Income Tax

Creditable Withholding Tax
Final Withholding Tax
(Section 57A)
(Section 57B)
Withholding Agent is:

1. Agent of the government
2. Agent of the taxpayer

*Withholding agent has the legal personality
to file a claim for refund.
> allowed because it is not only an agent
of the government in the collection of
tax but also an agent of the taxpayer in
the withholding of tax. Such being the
case, it is technically considered a
taxpayer.

> It is conceptually impossible to consider

as person liable for tax as not subject to
tax.
Items of Income Covered

Section 57A: 6 out of 28 are favorite ones:

RP-WIDS

Section 78:
Royalties
wages, salaries, emoluments, commissions; - no qualification/threshold amount

Prizes
- threshold amount: more than 10,000 to
be subject to final tax

Winnings
- except lotto and PCSO winnings
- no threshold amount

Interest Income
- from bank deposits (PH currency or FX)

21
Dividend Income (favorite!)

- Subject to Final Tax if:
a. recipient is an individual TP (Sec24&25)
b. recipient is NRFC: 15% FT (Sec28B(50(b))

- NOT subject to Final Tax/Exempt:

a. recipient is another DC (DC to DC)

- intracorporate dividend (Sec27D..)

b. recipient is another RFC

- intracorporate dividend (Sec28..

Share of a partner from the net income after
tax of a taxable partnership
- Section 73D, 24 and 25
- no qualification/threshold amount
Nature of Tax Withheld

Final
Other term: tax credit
- final tax withheld serve as full settlement
of the tax liability
- a complete settlement of the tax liability
- no need to report in ITR
Bicolandia Drug Corp. vs. Commissioner

Distinction:
Tax Credit it reduces taxpayers tax liability
Tax Deduction it reduces the taxpayers
taxable income; Section 34c;

Senior Citizens Law:

20% discount granted to senior citizens can
no longer be claimed as tax credit but as tax
deduction.
Legal Effect of Tax Withheld
It does not extinguish taxpayers liability;
Extinguishes the liability since its a final tax;
NRA-NETB ad NRFC not required to file No need to report;
income tax return;

10. Favorite Bar Items under Section 32A
1. compensation income
2. gains from dealings with property
3. royalties
4. dividend income
5. prizes and Winnings
6. share of a partner in the net income of GPP

* compensation for services in whatever form paid as long as the services are rendered under an Ee-Er
relationship such payment shall be taxed as compensation income (see chart below)

Cancellation
Life insurance

11. Misc:
* Claim of right doctrine: income derived from legal or illegal sources are taxable (derived from whatever source)
* GR: Payment by mistake not taxable because of the obligation to return it

XPN: the recipient can dispose = taxable
* GR: Trust not taxable

XPN: the recipient can freely dispose = taxable

22
==========================================================================================
INDIVIDUAL TAXPAYERS

==========================================================================================

I. Compensation Income

* 2 forms of compensation income: R.R. 2, Section 50

Premiums on Life Insurance Policy
paid by the Employer
Cancellation, forgiveness,
renunciation of
indebtedness or obligation
Tax Implications/Consequence/Incidence

Basis: Section 33B(10)

Insured Employee:
3 Tax Implications of
Cancellation,etc:
A. Compensation income
Creditor Employer:
condoned the EE in
consideration of
services rendered >
amounts to taxable
compensation income

B. Donation
Creditor Any Person:
condoned the EE in
consideration of
services rendered >
amounts to table
donation > donors tax

Debtor/Donee:
Not subject to income
tax;

C. Capital Transaction
Debtor Stockholder:
Indirect dividend on his
part that is considered
taxable;

Creditor Corporation:
Condoned
the obligation
of SH;

* determine first if:

rank-and-file, managerial, supervisory;
apply the EE-ER test

a. rank-and-file:

- those premiums are

considered as taxable
compensation income/
gross compensation income

- falls under in whatever
form paid in 32A1

b. managerial/ supervisory:
- those premiums are taxable as
fringe benefit subject to final
tax to the ER

Compensation
Fringe Benefit
Income
(Sec 33B)
Taxpayers Covered
Rank & file;
Managerial;
Managerial
supervisory
Justice Ds clarification on Section 33:
Basic salary of
If received by
managerial and
rank and file are
supervisory EE
not subject to
are still subject
final tax/fringe
to compensation
benefit tax but
income and not
still taxable as
as fringe benefit;
part of their
compensation
income 5-32%;

Tax Base
Taxable
Grossed Up
Compensation
Monetary Value
Income
Tax Rate
23
5-32%
Dont memorize!

Basta Final tax

rates

Reporting Requirement

Must be reported Need not be

reported since

final tax

Paid by employer

[SORRY AYAW MA-DELETE NUNG

EXTRA SPACES]

* Gross Compensation Income - all remuneration for services performed by an employee for his employer under
that Ee-Er relationship unless specifically excluded by the tax code

* 4 Fold Test to Determine Ee-Er Relationship SPDC

Selection
Payment: Compensation
Dismissal
Control Test

* Another rule that only applies to individual taxpayers:
- From gross compensation income, individual taxpayers can deduct personal exemptions (section 35);
- Remember 3 items are deductible from gross compensation income (before there are 2):

Gross compensation income xxx

Less:

Basic Personal exemptions 50,000

Additional Personal exemptions 25,000 but not to exceed 100,000

Premiums on Health &
2,400/year (200/month), the family income must not be

Hospitalization Insurance
more than 250,000 and the claimant must be the spouse
24

claiming the additional personal exemption

* Section 35(C): Change of Status:

- additional dependent comes during the taxable year, he may claim the additional exemption of 25,000;

- death of the dependent;

- dependent becoming 21 y/o during the taxable year;

- marriage of the dependent during the taxable year;

- gainful employment during the taxable year;

> uniform answer: despite these events the taxpayer may still claim the additional personal exemption of 25,000
> all these events occurred at the close of the taxable year;

II. Fringe Benefits
* Tax Base: Grossed Up Monetary value; tax rates: final tax rates; paid by employer
* must be correlated with the rules on compensation income;
* remember that compensation income is subject to 5-32% and that income must be reported by the compensation earner;
VS.
* fringe benefits are subject to final tax, therefore the managerial or supervisory employee are not required to report such;

* Fringe Benefits: HEV/HIM/EHEL
Housing
Expense Account
Vehicle
Household personnel
Interest on Loan Benefit
Membership benefit
Expenses for foreign travel
Holiday and vacay expenses
Educational benefit
Life insurance premiums

** Frequently Asked: Housing Benefit

> RR 3-98 provides for exempt housing units (not found in the Tax Code)
> Housing unit that is situated within the business premises of the ER (Collector vs. Henderson)
1. Convenience of the Employer Rule:
- Any benefit or given or granted for the convenience of the ER is exempt, this includes the monetary
value of the housing unit situated within the premises of the ER
- exempt because it is granted for the convenience of ER pursuant to this rule
2. Adjacent Housing Unit:
- Exempt? It depends:
* yes, provided located maximum of 50m within the perimeter of the business premises
* expanded concept of the fringe benefit of housing unit
3. Temporary Housing Unit:
* yes, if the length of stay is 3 months or less; if more than 3 months no longer exempt
4. Military Housing Unit
* yes, pursuant to the state policy to provide housing within the military camp so that
they may be on call to meet the exigencies of military service
III. De Minimis Benefits

* Covered by 7 Revenue Regulations: 3-98, 10-200; 5-2008; 10-2008; 5-2011; 8-2012; 1-2015

* Characterisics/Features; Purpose
1. To promote: CHEG > Contentment Health, Efficiency and Good will
2. Of relatively small value

* Summary: CREBA-10 (most probable bar questions)

Clothing allowance/uniform benefit: 5,000/year = exempt;
Rice subsidy

: 1,500/month = tax exempt (de minimis benefit)
25
Exclusive: enumeration now is exclusive enumeration that is why:

BFF is no longer tax exempt: The value of Books, Flowers, and Fruits are now taxable.
Amount representing monetized value of vacation and sick leave credits

NOTE: If what you see in the problem, the recipient of this monetized value of sick and vacation credits is:

Government employee you can immediately answer this as FULLY exempt (no more limitations/qualifications);

Do not apply the 10-day period;

Private employee you have to qualify, because it is exempt only up to the 10-day vacation leave credits

in excess of the 10-day period, that is already taxable;
sick leave credits: irrespective of the number of days that is taxable.

10,000 in the form of (1) CBA Benefits; or (2) productivity scheme benefits
* Most Recent Item declared exempt de minimis benefits (as of January 2015):

* Probable Bar: New Threshold Amounts to be tax exempt
1. Christmas Gift/Bonus Threshold: 5,000 (not taxable) > answers WON Christmas pay is taxable
2. Lump Sum Limitation: 82,000 (no longer 30,000)
> covers: 13th moth pay, Christmas pay/bonus, and
3. Clothing allowance/ uniform benefit: 5,000/year = exempt;
4. Employees Achievement award (promote efficiency) = 10,000 lump sum
5. Yearly medical = not more than 10,000
6. Anniversary = 5,000
7. Meal allowance for overtime work (includes graveyard shift) = not more than 25% of the minimum pay
8. Cash medical benefits given to dependents of employees = 125

* Now there are now 11 exempt de minimis benefits; exclusive list

IV. GROSS INCOME
* Self-Employment Income covers:
1. Business or trade income;
2. Professional income
3. share of partner from the income of the partnership

* Gross Income/Profit from the conduct of trade or business formula:

Gross sales/receipts
Less: cost of goods sold
Sales return and allowances

V. Interest Income from Long Term Deposit/Investment Certificate (Sec22FF as clarified by RMC 18-2011)

* Depositor: individual taxpayer, except: NRA-NETB; (exemption does not apply to corporate taxpayers)
Depositary: only banks (finance companies/financial intermediaries not qualififed)
Kind of Deposit: time, savings, trust fund, management account (investment certificate)
Term: at least 5 years (if less than 5 years, exemption will not apply)

* Requisites for exemption: Keyword: FIBA

Five years or more (if the term is less than 5 years = taxable)
Individual (applies only to individuals)
Bank (depository must be a bank excluding financing companies)
Account (it must be in the form of an account with the bank- savings, LTD, investment account, etc.)

VI. Gains on Dealings with Properties >99% sure si Justice lalabas to :D

* applies only to individual taxpayers

* gains = profits;
dealings = sale, barter, exchange; (lease not covered)
property = asset in Sec39

* Ordinary Asset vs. Capital Asset

Sec. 39A(1) memorize the definition of ordinary and capital asset
> SMI-ED Phil. Technology vs. Commissioner (10/12/2014)

- defines ordinary asset: by enumeration
26
capital asset: by exclusion

> 5 Ordinary Assets: DRIPSused in trade or business

1. Depreciable property

2. Real property

3. Inventoriable asset

4. property Primarily held by the taxpayer for sale in the ordinary course of business
5. Stock in trade

*definition: Ordinary asset is an asset that is confined to the following

> Capital asset: if not one of DRIPS

*definition: Capital asset means property held by the taxpayer, whether or not held in connection
with the taxpayers business/trade, but does not include/excludes/except DRIPS

*Ordinary Gain - sale, exchange or disposition of DRIPS
Capital Gain - sale, exchange or other disposition of property held by the taxpayer, whether or not held in connection
with the taxpayers business/trade, but does not include/excludes/except DRIPS

*Jurisprudential Tests: Conversion of Capital Asset to Ordinary Asset

>if one of these is present, capital asset is deemed converted to ordinary asset

1. Tuason JR. vs. Lingad

>Broker & seller relationship; Real Estate Business
Area: more than 7 hectares have been developed
Subdivision: inherited property converted to subdivision; Sale of such subdivided lots
Imporivemnet (is property is improved its an indication of intention to sell)
Continuity of sale of subdivided lots

2. Calasanz vs. Commissioner (inherited property substantially improved, converted to subdivision)
Laying out of streets
Instalaltion of drainage, lighting system
Construction of gutters

3. 34 AmJur 89
A capital asset ceases to be one if the amount spent for the improvement is double the original
value of the property,

4. 34 AmJur 92
A capital asset ceases to be one if its substantially improved, actively sold, or both. Presumed to be held primarily
for sale in the ordinary course of business.

VII. HPR: Holding Period Rule

- only applies to individual taxpayers; meaning the 50% reduction of taxable capital gain applies to individuals;
- if the sale of the property was made:
a. 12 months: 100% taxable
b. beyond or more than the 12-month period: the gain is only 50% taxable;
- it is a form of tax avoidance (reduces the capital gain to 50%)
- corporate taxpayers: 100% taxable regardless of the period the property was held

VIII. Capital Loss Limitation
- capital loss is only deductible from capital gain (not from ordinary gain)
> rationale: because capital loss is not business related expense; it will violate the matching of cost principle
which requires that only expenses paid or incurred in relation to the business of the taxpayer
may be deducted

- applies to both individual and corporate taxpayers except bank and trust companies

IX. Net Capital Loss Carry Over

* only individual taxpayers can carry over net capital loss;

* net capital loss the excess of capital loss over capital gain;
* corporate taxpayers are not allowed to carry over net capital loss; but they can carry over NOLCO
27

NELCO (39D)
NOLCO (34d3)

Taxpayers covered

Individual taxpayers
No distinction

Transactions covered

Capital transactions
Ordinary transactions

Period

succeeding year > only 1 3 consecutive years

year
*mining corporations:

up to 5

X. Dividend Income (Sec 32 A(7))

Cases/Situations: Dividends income is:
Tax Exempt

Subject to Final Tax
Subject to Regular Tax Rates
1. Liquidating dividends
> mere return of capital
1. Recipient is individual taxpayer, 1. Source: Foreign Corporation

subject to final tax
> at least 50% of its world

(no need to report)
income is derived from PH
2. GR: Stock Dividends

income within 3 taxable years
(section 73b)
2. NRFC receiving dividends
then dividends received by
> transfer of surplus account
from DC
corporation is income within
to capital account; there is in

effect no flow of wealth
2. Indirect dividend
therefore no realized gain.

3. Script dividend
3. dividends: DC to DC

4. dividends: RC from DC

XPNs: (stock div not tax exempt)

CURD
Change in stockholders interest
Usufructury recipient = taxable
Redemption of shares of stock
- there is a gain realized
Disguised dividends
- dividends are guised as
stocks to avoid tax

XI. Frequently Asked Question in 32B:

1. Life Insurance policy

> correlate with Section 85E

Beneficiary:
1. Estate, Executor,
Administrator

2. Third person
Tax Implication
Income Tax
Excluded
(not subject to
income tax)
Excluded
(not subject to
income tax)
Tax Implication on:

Estate Tax
Always included
(subject to estate tax)
Qualify: Designation is:
1. Revocable:
- subject to estate tax
2. Irrevocable: exempt
- exempt
28
2. Gifts, Bequests or Devises

Tax Implications
Donor
Donee
1. donees tax has been
abolished by PD 69;

Inter vivos
Subject to donors tax

Mortis causa
2. subject to income tax

1. heirs not subject to
inheritance tax
> abolished
Subject to estate tax
2. no income tax:
by express provision by
law excluded

* Q: Are moral and exemplary damages taxable?
A: Exempt from income tax because there is no realized gain or profit.
Basis: Article 2217 & 2229 of civil code

* 9 Grounds for the award of moral damages: MBA-SWS-PAF

Moral shock
Besmirched reputation
Anguish (mental)
Social humiliation
Wounded feelings
Similar injury
Physical suffering
Anxiety (serious)
Fright

3. Compensation for injuries/illness
4. Retirement Benefits

Retirement benefits received from Private
Employer (individual or corporate)
Separation pay
Requirements
Only one condition:
Received on account of cause beyond the
control of the employee
- economic crisis,
- compulsory retirement:
2. length of service: at least 10 years
* terminal leave pay = exempt
of service
(received under a compulsory
3. age: at least 50 years
retirement judicially declared by
4. limitation: availed of only one
the SC as cause beyond the EEs
> subsequent retirement benefit received
control)
from another private employer is tax

exempt; if subsequent employer is
1. source of payment: no requirement
the government the limitation does
2. length of service: no requirement
not apply
3. age: no requirement
4. limitation: no limitation

4 conditions:

1. source of payment: paid under BIR
approved retirement plan

5. Miscellaneous Items:
(a) Section 32B7(a)
(b) Section 32B7(b)

29
Section 32B7(c)
Section 32B7(d)
Awards , prizes
Awards: athletes, etc.
Requirements to be Tax Exempt
1. To be exempt award
Competition
must
be
must be received:
sanctioned by National
SCRA-LEC
Sports Association:
Scientific

Charitable
Other Tax Implications:
Religious
Basis: RA 7549
Artistic
not Tax Code

Literary
1. Recipient athlete of
Educational civi
the award:
Civic
tax exempt

2. There must be no
2. donor/contributor:
action on the part of
exempt from donors
the recipient
tax

3. Must be received
3. donor/contributor:
unconditionally
can claim award as

deduction from
gross icome

==========================================================================================
CORPORATE TAXPAYERS
==========================================================================================

* YMCA Doctrine: (before this is the St. Lukes Doctrine)

> Sec30 last paragraph: memorize: (basis why YMCA was taxed on its rent income)
Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character 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, shall be subject to tax imposed
under this Code.

> YMCA is a charitable institution and religious organization, but nonetheless the Supreme Court ruled
that it can be taxed on rent income derived from the lease of its properties; It can still be taxed on interest
income from its bank deposits subject to 20%; it can still be taxed on income derived from gain from
sale or exchange of real or personal properties;

* St. Lukes is a charitable institution but cannot invoke the exemption under Section 30;
it is taxable at 10% as nonprofit hospital because one of the requisites in NOON was not met;

* To be considered as taxable charitable institution: NOON

a.) it must be formed or organized as Non-stock, non-profit organization;
b.) it must be Operated exclusively for charitable purposes;

- not met by St. Lukes by admitting paying patients
c.) it must be Organized exclusively for charitable purposes;

- proven by the articles of incorporation

d.) No part of its income hall belong to or insure to the benefit of the member, organizer

* Therefore, Section 27(B) is the law applicable:
* Preferential rate of 10% is applicable to St. Lukes Medical Center

* Section 30(h): Non-stock, non profit Educational Institutions
a. Interest Income: Test of Exemption:
Use if interest income proven to be ADE used for educational purpose = exempt

1. 18 Exempt Corporations
30

Section 22B: 3 corporations
1. GPP
2. Joint Construction Venture
3. Joint Consortium
Conditions to be exempt

Section 27(c): 4 corporations

4. GSIS
5. SSS
6. Philhealth
7. PCSO
Section 30: 11 corporations

8-18: see codal

from corporate income tax:

a. must engage in petroleum,
coal, geothermal or other
energy operations;
b. consortium agreement with
the agreement

2. Significant Corporate Rules: MCIT, IAET, Tax Sparing Credit Rule

a. Minimum Corporate Income Tax (MCIT) (Section 27E)

> Basis of imposition of MCIT:
DC owe their corporate existence and their privilege to do business to the government.
They even benefit from the efforts of the government to improve the financial market
and to ensure favorable business climate. It is therefore fair for the government to require of them
to make a reasonable contribution of 2%.

> Persons covered: DC, RC (NRFC = not covered)
> Tax Rate: 2%;
Tax Base: gross income

> Purpose: To forestall the prevailing practice of corporations of over claiming deductions in order to reduce income

tax payments
> Creba vs. Romulo: Its not a tax on capital, its a tax on income and the basis is gross income.
> 4-year Rule: MCIT applies only to the 4th year of corporate existence because the law recognizes that the first

3 years is still the adjustment period/time to recover
> If a domestic corporation sustained a net loss or it has no taxable income, it is liable to pay MCIT because the basis
is gross income
> If MCIT is more than the normal income tax, apply the carry forward feature

- the excess MCIT can be carried over to the succeeding 3 consecutive years
> The Secretary of Finance may, on equitable grounds, suspend the application of MCIT:

(safeguard provisions of MCIT)
a. prolonged labor disputes

b. force majeure
c. serious legitimate business reverses
b. Improperly Accumulated Earnings

> Tax Base: Improperly or unjustified corporate earnings or profits
> Tax Rate: 10%

> Purpose: it is imposed by way of penalty to corporations which withheld the declaration
of dividends = unsound business practice
> Not Covered:
Banks
Publicly held corporations
Insurance companies

> Immediacy Test: test applied to determine whether the corporation has used the surplus or corporate
profits for the reasonably anticipated needs/immediate needs of its business, if yes, this tax
cannot be imposed.

c. Tax Sparing Credit Rule
> Tax Base: amount of cash or property dividend
31
> Tax Rate: 15%

> Purpose: to encourage foreign investors
> credit: actual grant not required; it is sufficient to prove that there is tax credit provision
in the foreign revenue code

3. Common Income Tax Rules (applies to both Individual and Corporate TP)

a.
Classification of Assets (Section 39A1) : Ordinary Assets & Capital Assets
b.
Capital Loss Limitation Rule (Section 39C)
GR: Capital loss is only deductible to capital gain (not to ordinary gain)

- but you can deduct ordinary loss from capital gain

- applicable to both individual and corporate taxpayers
XPNS: (for 2 types corporate taxpayers)

1. Banks
2. Trust Companies
c. Capital Gains Tax of 6% based on gross selling price or zonal valuation whichever is higher
> you must compare these two values, the higher amount is always the one due
> applies to properties not used in business
> Make a distinction:
c.1. if the seller is DC = it cannot avail of any tax avoidance scheme
c.2. if the buyer is the government, the individual seller has options:

1. avail of 6% CGT; or

2. tax rate under Section 24A

> Sale may include involuntary sale: extrajudicial sale (Act 3115)
* Supreme Transliner Inc. vs. BPI Family Savings:

- Mortgagor fails to exercises right of redemption: 6% CGT applies

- Tax Base: bid price of the highest bidder

- Deadline: must be paid within 30d from the expiration of the 1year period to redeem

> Section 24D(1) and (2) vs. Section 27D(5)

Section 24D(1) and (2)
Section 27D(5)
Common features:
Applicable to the following transactions:

1. Sale, exchange or other disposition or real property classified as capital asset;
2. Presumed Gain Principle/ Gain by legal fiction of law
> by fiction of law, gain is derived from the sale
3. Tax Base: gross selling price or zonal value, whichever is higher
> disregards price
4. Tax Rate: 6%
Seller
Individual taxpayer
Domestic Corporation
Property Covered
Real
Lands and buildings
(Not applicable to machineries and
equipment)
Sale
Absolute and conditional sale
Absolute sale only
Option
Buyer has the option to avail of 6%;
No option
Tax Avoidance Scheme
Subject of sale: residential
None
If seller is individual: yes

Requirements: 24D2

1. proceeds of the sale must be applied

to purchase new principal residence
32
(presupposes that the subject of sale

is an old principal residence)

2. comply with the 18 month period

3. observe the 30d notice rule (notify

BIR from the date of sale)

4. comply with the 10 year period,

availed of only once

5. escrow agreement

d.
Sale of Shares of Stock

1.
Listed: of 1% of the gross selling price (considered as percentage tax not an income tax)
2.
Not Listed: Income Tax

Net Capital Gain not more than 100,000 = 5% final tax
Net Capital Gain in excess of 100,000 = 10% final tax
> It is enough to know that this involves capital transactions that if the stocks are:
Listed: subject to percentage taxes
Not listed: subject to final tax rates
4. Common Organizations: REC

- exempt
- not exempt

Exemptions from:

Religious
Corporate
Income Tax
Real Property
Tax
provided ADE
Educational:
Donors Tax
Estate Tax
(see enumeration
below)
(see enumeration
below)
VAT
Private
Non-stock
Non-profit
Government
Charitable
provided ADE
provided ADE
provided ADE
provided ADE

*10 Exempt Donations (inter vivos donations given to these organizations are not subject to donors tax):

CARTER-CPSS
Charitable organixation
Accredited non-government organizations
Religious organizations
Trust foundations/organization
Educational organization (non-stock, non-profit)
Research organizations
Cultural organization
Philantropic
Social welfare organizations
RA 7549: contributions given to Sports competitions

*3 Exempt Donations (mortis causa donations given to these organizations are not subject to estate tax):

CSC
Charitable organixation
Social welfare organizations
Cultural organization
33

5. Allowable Deductions

Optional Standard Deduction
Itemized Deduction
(section 34L, amended by RA 9504)
Amendments by RA 9504:

Rate: 40% (before 30%)
Base:
Individual Taxpayers:
Gross sales/receipts
(gross income
Corporate Taxpayers:
Gross Income
(before not available to corporate)

Once OSD is chosen, the choice is
irrevocable for the taxable year;
(see codal)
(mas favorite ang OSD)

*Tests: WON Expense is deductible
1. Section 34a1a:
Development
Operation
Management or conduct of the business
2. Atlas Development vs. Commissioner
Recapitalization/reorganization costs are not deductible
3. Esso Standard vs. Commissioner
Test of production of income not in the disposition of income:
If incurred for this, deductible
4. Isabela Drug case
All Events Test
1. amount can be fixed with reasonable accuracy
2. liability to pay must be based on agreement or contract
5. General food Inc vs. Commissioner
expenses paid or incurred to protect brand or franchise is not deductible because it partakes
the nature of capital transaction

* Recovery of debts previously written off to be deductible/ Bad Debts Expense:
SC: Requisites to be deductible:
1. Such amount is uncollectible in the future (there must be proof);
2. There must be earnest efforts exerted before you can claim bad debts as deductible;
Earnest efforts: send (1) statement of account to debtor, (2) collection letter; (3) refer to lawyer;
(4) file collection case

* Tax Refund: To be considered as taxable when refunded, it must be:

a. it must be a deductible tax

*non-deductible tax if refunded: special assessment, income tax, donors tax, estate tax

b. it must be actually claimed

6. Interest Income:
* Non-deductible Interest Income:
1. Capital
2. PICOP vs. CIR: theoretical interest is non-deductible because:

a. not based or incurred, merely computed

b. not arising from interest bearing obligation

* Tax Situs of Interest Income: residence of the debtor

34
7. Section 35: Additional Personal Exemptions

a. Change of Status of taxpayer (still qualified as dependent)
* basis: Section 35C last part: by legal fiction/contemplation of law, marriage is deemed to have
taken place at the end of the taxable year (as if no marriage)

b. Marriage of dependent during the taxable year or Gainful employment (still qualified as dependent)
* basis: Section 35C last part: by legal fiction/contemplation of law
35

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TAX PREWEEK LECTURE 2014

TAX PREBAR LECTURE 2015

(1) Written notice and

(1) Written notice and

(2) it must state facts and (2) it must indicate or

Tariff & Customs Code

Pilipinas Petroleum Shell

(1) Final computation as

(2) it must be based on

Rules on Prescriptive Period

Selle Arcillas * UST Faculty of Civil Law

Section 203 is silent on

Grounds for the Suspension of Prescriptive Periods

(request for motion for

(3) when the taxpayer is

Selle Arcillas * UST Faculty of Civil Law

Presumptive Gross Sales or

The BIR can fix a presumed

(1) when the taxpayer fails

Taxable Year (TY):

Total income for the TY:

Selle Arcillas * UST Faculty of Civil Law

between the total income

Selle Arcillas * UST Faculty of Civil Law

(this is the common provision

Here, there are no conflicting

Under OPTION 01:

(1) BIR is prohibited from

Grounds for the Suspension of Prescriptive Periods

(taxpayer must execute a

(3) when the taxpayer is out

Selle Arcillas * UST Faculty of Civil Law

SC: The BIR need not

Remedies Against a Collection Case Pending Protest

The rules under the NIRC doesnt apply here.

*Collection case = implied

Selle Arcillas * UST Faculty of Civil Law

CTA has the authority to

Rule on Issuance of Injunction Order

Rallos vs. Galco (?)

RTCs have no jurisdiction to

* Maritime Co. Case:

Tax lien under the

Selle Arcillas * UST Faculty of Civil Law

* Seizure is the word

requires public sale

requires public sale

requires public sale

Publication of Notice of Sale

SC: Notice of sale must be given to the delinquent taxpayer because

* Basis: Section 183

* Basis: Section 266

* Basis: Section 205

* Basis: Section 2401

Selle Arcillas * UST Faculty of Civil Law

* Count the 5 year

D. Administrative Remedies available to the Taxpayer

Tariff & Customs

30 days from the

60 days from the

Selle Arcillas * UST Faculty of Civil Law

Selle Arcillas * UST Faculty of Civil Law

PROTEST under NIRC