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NIVERSITY OF THE PHILIPPINES

COLLEGE OF LAW
Bar Operations 2008

TAXATION LAW

Bar Operations Head Arianne Reyes

Academics Head Henry Aguda


Ryan Balisacan

Subject Head Erwin Matib

Subject Committee Ryan Romero, Diane Rosacia, Aimee Salamat, Maricon


Maralit, Kate Modesto

Information Management Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya
Committee [Design & Lay-out] * Ludee Pulido [Documentations] * Linus
Madamba * Des Mayoralgo * Jillian De Dumo * Mike
Ocampo * Abel Maglanque * Edan Marri R. Caete
BASIC CONCEPTS TAXATION

Taxation Law 1
TABLE OF CONTENTS

I. Basic Concepts in Income Taxation 3


II. General Classification of Taxpayers 4
III. Tax on Individuals 5
IV. Tax on Corporations 11
V. Taxation of Fringe Benefits 21
VI. Taxation on Partnerships 23
VII. Taxation on Estates and Trusts 24
VIII. Source of Income 25
IX. Gross Income 28
X. Exclusions from Gross Income 30
XI. Allowable deductions from Gross Income 32
XII. Non-
Non-deductible expenses 52
XIII. Capital Gains
Gains and Losses 52
XIV. Situs of Taxation 55
XV. Installment Basis 56
XVI. Returns and Payments of Tax/Withholding Taxes 57

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TAXATION LAW 1

I. BASIC CONCEPTS IN INCOME property is also known as appraisal


surplus or revaluation increment.
TAXATION
Classification of Income According to Source
Income Tax defined as a tax on all yearly 1. Income from sources within the Philippines
profits arising from property, professions, 2. Income from sources without the Philippines
trades or offices. 3. Income from sources partly within and
a tax on the net income or the entire partly without the Philippines
income realized in one taxable year.
Taxability of Income, Requisites
Nature of income tax (PED) a. there is income, gain or profit
DIRECT TAX the tax burden is borne by b. the income, gain or profit is received or
the income recipient upon whom the tax realized during the taxable year
is imposed. c. the income gain or profit is not exempt from
PROGRESSIVE TAX the tax base income tax
increases as the tax rate increases.
EXCISE TAX (privilege tax) a tax on the Tests to Determine Realization of Income
right to earn income for Tax Purposes
Realization Test no taxable income until
Purpose(s) of Income Tax: Fiscal/Non-Fiscal there is a separation from capital of
(ROM) something of exchangeable value, thereby
raise revenue to defray the expenses of the supplying the realization or transmutation
government; which would result in the receipt of income.
offset regressive sales and consumption Claim of right doctrine a taxable gain is
taxes; and conditioned upon the presence of a claim of
together with estate tax, mitigate the evils right to the alleged gain and the absence of a
arising from the inequalities of wealth by a definite unconditional obligation to return or
progressive scheme of taxation which places repay that which would otherwise constitute a
the burden on those best able to pay. gain.
Principle of Constructive Receipt of
Income all wealth which flows to the taxpayer Income Income which is credited to the
other than a mere return of capital account of or set apart for a taxpayer and
It is an amount of money coming to a which may be drawn upon by him at any
person/corporation within a specified time, time is subject to tax for the year during
whether as payment for services, interest or which so credited or set apart, although not
profit from investment. Unless otherwise then actually reduced to possession. The
specified, it means cash or its equivalent. income must be credited to the taxpayer
Income can also be thought of as a flow of without any substantial limitation or
the fruits of one's labor. (Conwi v. Court of restriction as to the time or manner of
Tax Appeals) payment or condition upon which payment
Income includes earnings, lawfully or is to be made.
unlawfully acquired, without consensual Economic benefit test any economic
recognition, express or implied, of an benefit to the employee that increases his net
obligation to repay and without restriction as worth is taxable.
their disposition.
Classifications of Income Subject to
Differentiated from Capital Philippine Income Tax
o Capital is a fund; income is a flow. A fund of 1. Compensation Income derived from
property existing at an instant of time is rendering of services under an employer-
called capital. A flow of services rendered by employee relationship.
that capital by the payment of money from it 2. Professional Income fees derived from
or any other benefit rendered by a fund of engaging in an endeavor requiring special
capital in relation to such fund through a training as professional as a means of
period of time is called income. livelihood (e.g. the fees of CPAs, doctors,
o Capital is wealth, while income is the service lawyers, engineers)
of wealth. The Supreme Court of Georgia 3. Business Income gains or profits derived
expresses the thought in the following from rendering services, selling merchandise,
figurative language: "The fact is that property manufacturing products, farming and long-
is a tree, income is the fruit; labor is a tree, term construction contracts
income the fruit; capital is a tree, income the 4. Passive Income income in which the
fruit." A tax on income is not a tax on taxpayer merely waits for the amount to
property. "Income," as here used, can be come in (e.g. interest income, royalty
defined as "profits or gains." (Madrigal v. income, dividend income, winnings and
Rafferty) prizes)
5. Capital Gain gain from dealings in capital
Increase in Property Value A mere assets
increase in the value of property is NOT
INCOME, but merely unrealized increase
in capital. The increase in the value of

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TAXATION LAW 1

II. GENERAL CLASSIFICATION OF TAXPAYERS

Who is a taxpayer?
Under Sec 22(N), a taxpayer is any person subject to [income] tax. Income taxpayers, with distinction
based on the amount of income subject to tax, or the applicable tax rates, or both, are classified as
follows:

Primary
Sub-Classification(s)
Classification
Citizens of Residents of the Philippines
the
Not Residents of the Philippines
Philippines
Residents of the Philippines
Not Engaged in Trade or Business in the Philippines
Aliens Residents
Individuals of the Not Engaged in Trade or Business in the Philippines
Philippines
Individual Employed by Regional or Area Headquarters and Regional
Special Operating Headquarters of Multinational Companies
Classes of Individual Employed by Offshore Banking Units
Individuals Individual Employed by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines
Estates and
Trusts
Domestic Corporations
Foreign Resident Corporations
Corporations Non-resident Corporations
Proprietary educational institutions and non-profit hospitals
Domestic Depositary Bank (Foreign Currency Deposit Units)
Resident international carriers
Corporations Offshore Banking Units
Resident Depositary Bank (Foreign Currency Deposit Units)
Special Classes
of Corporations Regional or Area Headquarters and Regional Operating Headquarters
of Multinational Companies
Non-resident cinematographic film owners, lessors or distributors
Non-resident owners or lessors of vessels chartered by Philippine
nationals
Non-resident lessors of aircraft, machinery and other equipment

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III. TAX ON INDIVIDUALS Engaged in trade or business in the


Philippines (NRAETB) - is taxable for
income derived within the Philippines based
A. Classifications of Individual Taxpayers
on taxable (i.e., net) income
Engaged in trade or business in the
1. Citizens
Philippines (NRANETB) - is taxable for
income derived within the Philippines based
RESIDENT a citizen is deemed as a resident of
on gross income1
the Philippines unless he qualifies as a non-
resident under Sec. 22E of the NIRC;
NOTES:
-taxable for income derived from all sources
What makes an alien a resident or non-resident
based on taxable (i.e., net) income
alien is his intention with regard to the
length and nature of his stay. Thus:
NON-RESIDENT a citizen of the Philippines
a. One who comes to the Philippines for a
who:
definite purpose which in its very nature may
(1) establishes to the satisfaction of the
be promptly accomplished is not a resident
Commissioner the fact of his physical
citizen.
presence abroad with a definite intention to
b. One who comes to the Philippines for a
reside therein.
definite purpose which in its very nature
(2) Leaves the Philippines during the taxable
would require an extended stay, and to that
year to reside abroad, either as an
end, makes his home temporarily in the
immigrant or for employment on a
Philippines, becomes a resident, though it
permanent basis.
may be his intention at all times to return to
(3) Works and derives income from abroad and
his domicile abroad when the purpose for
whose employment thereat requires him to
which he came has been consummated or
be physically present abroad most of the
abandoned. (Sec. 5, RR 2)
time during the taxable year.
Length of stay is indicative of intention.
(4) Has been previously considered as
An alien who shall have stayed in the
nonresident citizen and who arrives in the
Philippines for more than one year by the
Philippines at any time during the taxable
end of the taxable year is a resident alien.
year to reside permanently in the Philippines
NOTE FURTHER: An alien who shall come to
shall likewise be treated as a non-resident
the Philippines and stay for an aggregate
citizen for the taxable year in which he
period of more than one hundred eighty
arrives in the Philippines with respect to his
days during a calendar year shall be
income derived from sources abroad UNTIL
considered a non-resident alien in
the date of his arrival in the Philippines.
business, or in the practice of profession, in
taxable for income derived within the
the Philippines. [Sec. 25(A)(1)] Thus, if an
Philippines based on taxable (i.e., net)
alien stays in the Philippines for 180 days or
income
less during the calendar year, he shall be
deemed a non-resident alien not doing
NOTES:
business in the Philippines, regardless of
An OVERSEAS CONTRACT WORKER is taxable
whether he owns
only on income from sources within the
1. Stock in trade of the taxpayer, or other
Philippines. (Sec. 23 (c))
property of a kind which would properly
o NOTE FURTHER: A seaman who is a
be included in an inventory of a taxpayer
Filipino citizen and who receives
if on hand at the end of the taxable year
compensation for services rendered abroad
(example: Raw Materials Inventory, Work
as member of the complement of a vessel
in Process Inventory, Office Supplies
engaged exclusively in international trade is
Inventory)
treated as an overseas contract worker.
2. Property held by the taxpayer primarily
Length of stay is indicative of
for sale to customers in the ordinary
intention. A citizen of the Philippines who
course of his trade or business (example:
shall have stayed outside the Philippines for
Merchandise Inventory)
183 days or more by the end of the year is
3. Property used in the trade or business
a non-resident citizen. His presence
which is subject to the allowance for
abroad, however, need not be continuous.
depreciation (example: Office
[RR1-79]
Equipment)
actually engages in trade or business
2. Alien
therein. (Mamalateo)
RESIDENT residence is within the Philippines
and who is not a citizen thereof. An alien actually
present in the Philippines who is not a mere
B. Three Kinds of Income
transient or sojourner is a resident of the
Philippines for income tax purposes. A mere
Capital Gains subject to Capital Gains Tax
floating intention, indefinite as to time, to return
to another country is not sufficient to constitute
When the asset sold was held as a capital asset,
him a transient.
the gain or loss is called a capital gain or loss.
taxable for income derived within the
When the asset sold was not held as a capital
Philippines based on taxable (i.e., net)
income
1
Notwithstanding the general classification of aliens into
NON-RESIDENT residence is NOT in the resident and non-resident for income tax purposes, note that
Philippines and who is not a citizen thereof. there is a special classification of aliens who are taxed
differently. See subsection D.

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asset (in other words, as an ordinary asset), the A deposit is made of the 6% capital gain
gain or loss is called an ordinary gain or loss. tax otherwise due, in cash or managers
check, in an interest-bearing account with
What are capital assets? those not an Authorized Agent Bank (AAB), under
considered as ordinary assets! an Escrow Agreement between the
taxpayer and the Bureau of Internal
What are ordinary assets? FOUR Revenue that the same shall be released
CATEGORIES OF ORDINARY ASSETS are as to the taxpayer when the proceeds of the
follows [Sec. 39]: (RIDS)Real property used in sale shall have been utilized as intended.
trade or business of the taxpayer (example:
Building used as a factory) The tax exemption can only be availed of
once every 10 years
-Are all sales / dispositions of capital assets
subject to capital gains tax? NO! Only two If there is no full utilization of the
kinds of things held as capital assets are subject proceeds of sale or disposition, the portion
to the capital gains tax, as follows: of the gain presumed to have been
realized from the sale or disposition shall
1. On sale, barter, exchange or other be subject to capital gains tax (CGT). The
disposition of shares of stock of a domestic GSP or FMV at the time of sale, whichever
corporation not listed and traded through is higher, shall be multiplied by a fraction
a local stock exchange, held as a capital which the unutilized amount bears to the
asset: gross selling price in order to determine
the taxable portion.
On the net capital gain:
i.e.,
Not over P100,000 = Final Tax of 5% Unutilized amount x (higher of ) = Taxable
GSP GSP or FMV portion
On any amount in excess of P100,000 =
plus Final Tax of 10% on the excess
ALTERNATIVE TAXATION:
In case of a sale or other disposition of
Key definitions
real property to the government or any
of its political subdivisions or agencies or
Net capital gain selling price less cost
to government-owned or controlled
corporations, the tax shall be EITHER
Selling price consideration on the sale OR
the year-end tax of the individual (i.e.,
fair market value of the shares of stock at the
capital gain to be included in the
time of the sale, whichever is HIGHER
computation of income subject to
schedular rates),
Cost original purchase price

2. On sale, exchange, or other disposition of


OR the capital gain tax of 6%, at the
real property in the Philippines, held as a
option of the taxpayer
capital asset On the gross selling price, or
the current fair market value at the time of
What is the tax implication of a sale
the sale, whichever is higher, a final tax of
/ disposition of a capital asset NOT
6%
subject to capital gains tax? The
net capital gain or loss is included in the
-The capital gains tax is applied on the gross
computation of net income subject to
selling price, or the current fair market value
schedular rates (5% to 32%).
at the time of the sale, whichever is higher.
Any gain or loss on the sale is immaterial
3. Passive Income subject to Final Tax
because there is a conclusive presumption
Final tax means tax withheld from
by law that the sale resulted in a gain.
source, and the amount received by the
income earner is net of the tax already.
EXCEPTION: When sale of residence is
The tax withheld by the income payor is
not liable for capital gains tax?
remitted by him to the BIR. The income
having been tax-paid already, it need not
a. There is a sale or disposition of their
be included in the income tax return at
principal residence by natural persons.
the end of the year. These passive
income items are as follows:
b. The proceeds of the sale are fully
Interest Income:
utilized in acquiring or
o on any currency bank deposit, yield or
constructing a new principal
any other monetary benefit from
residence within 18 calendar
deposit substitutes, trust funds and
months from the date of sale or
similar arrangements - 20% final tax
disposition.
o under the expanded foreign currency
deposit system (EFCDS) - 7.5% final
The Commissioner shall have been duly
tax for residents, exempt if non-
notified by the taxpayer within 30 days
residents
from the date of sale or disposition
o on long-term deposit or investment
through a prescribed return of his
certificates (LTDIC) in banks (e.g.,
intention to avail of the tax exemption.
savings, common or individual trust
funds, deposit substitutes, investment

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management accounts and other 4. Other Income subject to Schedular


investments, which have maturity of 5 Tax Rates3
years or more) exempt Income which is neither capital gain with
Should LTDIC holder pre-terminate capital gain tax, nor passive income with
LTDIC before the 5th year, a final final tax, is other income or residual
tax shall be imposed on the entire income. It may be derived from:
income based on the remaining 1. Employer-employee relationship,
maturity: which is called compensation
income
4 years to less than 5 years 5% 2. Business or profession
3. Sale or exchange of property which
3 years to less than 4 years 12%
is not subject to the capital gain tax
less than 3 years 20% 4. Incidental sources, such as interest
or dividend, which is not subject to
final tax (i.e., dividend from a
Dividends foreign corporation in case of
o cash and/or property dividends2 resident citizens, rent income).
actually or constructively received by The tax rates on NET ordinary
an individual from or other income (schedular
a domestic corporation rates)4 are as follows:
a joint stock company Income But Tax Plus of
insurance or mutual fund over less Excess
companies than over
regional operating headquarters 10,000 5%
of multinational companies 10,000 30,000 500 10% 10,000
o share of an individual in the
30,000 70,000 2,500 15% 30,000
distributable net income after tax of a
70,000 140,000 8,500 20% 70,000
partnership (except a general
140,000 250,000 22,500 25% 140,000
professional partnership) of which he is
a partner 250,000 500,000 50,000 30% 250,000
o share of an individual member or co- 500,000 125,000 32% 500,000
venturer in the net income after tax of
an association, a joint account, or a Rule for Married Individuals Married
joint venture or consortium taxable as individuals, whether citizens, resident or
a corporation nonresident aliens, who do not derive income
Rate 10% for residents (RC, purely from compensation, shall file a return for
RA) and non-resident citizens (NRC), the taxable year to include the income of both
spouses. [Sec 51(D)]
20% for NRAETB (non-
1. Compute the income tax separately on
resident aliens engaged in trade
their respective incomes.
or business)
2. Add the two taxes to arrive at a single
income tax still due and refundable.
3. Income which is clearly joint, or which
Royalties cannot be identified as exclusively of one
o From books, literary works, and spouse, will be divided equally. [Sec
musical compositions 10% 24(A)]
o Other royalties 20% o EXCEPTION to the one-return rule:
Where it is impracticable for the
Winnings, except Philippine Charity spouses to file one return, each
sweepstakes / lotto winnings 20% spouse may file a separate return of
income but the returns so filed shall
Prizes exceeding P10,000 20% be consolidated by the Bureau for
o Prize, differentiated from winnings A purposes of verification for the taxable
prize is the result of an effort made year. [Sec 51(D)]
(e.g., prize in a beauty contest), while
3
winnings are the result of a transaction Schedular tax rates apply to all classes of individuals, with the
where the outcome depends upon exception of non-resident aliens not engaged in trade or
chance (e.g., betting). business. Should NRANETB earn other income, such is
subject to a 25% final tax.
4
Pro-forma computation of income subject to schedular tax
rates:
Gross Compensation Income P xxx
Less: Personal Exemptions (xxx)
2
A stock dividend representing the transfer of surplus to Health Insurance (xxx)
capital account shall not be subject to tax. However, if a Net Compensation Income P xxx
corporation cancels or redeems stock issued as a dividend at Add: Net Business Income xxx
such time and in such manner as to make the distribution and Net Professional Income xxx
cancellation or redemption, in whole or in part, essentially Other Income
equivalent to the distribution of a taxable dividend, the amount (capital gains, rent, etc.) xxx
so distributed in redemption or cancellation of the stock shall be Net Income subject to schedular tax rates
considered as taxable income to the extent that it represents a P xxx
distribution of earnings or profits. (Sec. 73B, NIRC) [In other where Net Business Income and Net Professional Income are
words, stock dividends are generally not subject to tax as long computed as follows:
as there are no options in lieu of the shares of stock. On the Gross Business / Professional Income P xxx
other hand, a stock dividend constitutes income if it gives Less: Itemized Deductions [OR]
the shareholder an interest different from that which his Optional Standard Deduction (xxx)
former stockholdings represented.] Net Business / Professional Income P xxx

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B. Deductions [from Income Subject to Who is a Head of the Family? [Sec 35(A),
Schedular Tax Rates], In General NIRC]
The allowable deductions from the gross income 1. An unmarried or legally separated man or
of an individual taxpayer5 are as follows: woman with dependents who may be
- one or both parents
Business Expenses and Expenses from - one or more brothers or sisters, or
Practice of Profession deductible only - one or more legitimate, illegitimate or
from business gross income and professional legally adopted children
income, respectively but not from
compensation income.6 The expenses to be Note: Senior Citizen Law (RA 7434 as
deducted may either be itemized deductions amended by 9257) provides in section 4
OR the optional standard deduction.7 that senior citizens shall be treated as
dependents provided for in the NIRC, as
Special deduction for actual premium amended and as such, individual
payments for health and/or taxpayers caring for them, be they be
hospitalization insurance taken by an relatives or not shall be accorded the
individual taxpayer provided that the privileges granted by the Code insofar as
following requisites are met: having dependents are concerned.
a. The taxpayers family gross income
does not exceed P250,000 in a 2. Such dependent must be living with AND
taxable year. dependent upon him for chief support
b. The amount deductible should only
be limited to P2,400 per family or - Chief support principal or main
P200 per month. support given regularly such that
In the case of married taxpayers, only withdrawal will result in destitute life
the spouse claiming the additional for dependent; includes situations
exemption for dependents shall be where taxpayer is away from home
entitled to this deduction. on business, or dependent is away at
school
Personal Exemptions are arbitrary
amounts allowed by law to be deducted from more than one-half of the
income to cover personal, living, or family requirements for support. Hence, if
expenses of the taxpayer. These deductions two children contribute equal
are allowed on the theory that the minimum amounts to the support of a parent,
requirements of subsistence of a taxpayer neither of them qualify as head of the
should be free from tax. family.

Kinds: 3. Such brothers or sisters or children are


not more than 21 years old
1. Basic Personal Exemptions unmarried and
not gainfully employed
OR
Kind of Taxpayer Basic Personal
regardless of age, are incapable of
Exemption (BPE)
self-support because of mental or
Single individuals P20,000 physical defect.
(includes widow/er)
Married individual who P20,000
are 2. Additional Exemptions (AE) depends on the
judicially decreed as number of qualified dependent children
legally separated, - Amount allowed as a deduction P8,000 per
and dependent child, but not to exceed four children
with no qualified - Who may claim additional exemptions?
dependents Married Individuals Additional exemptions are
Head of Family P25,000 claimed by only one spouse. Generally, the
spouse who is the gross compensation earner is
Each married individual * P32,000 the claimant of the additional exemptions. Where
the husband and wife are both compensation
income earners, the husband is the proper
* BUT note Sec 35(A) - In the case of claimant of the additional exemptions EXCEPT if
married individuals where only one of there is an express waiver by the husband in
the spouses is deriving gross income, favor of his wife, as embodied in the withholding
only such spouse shall be allowed the exemption certificate. When the spouses have
personal exemption. business and/or professional income only, either
may claim the additional exemptions at the end
of the year. The wife claims the additional
5
Remember that non-resident aliens not engaged in trade or exemptions in the following instances:
business are taxed on gross income. They may not, therefore, i. husband has no income
avail of these deductions. ii. husband works abroad
6
Thus, the only deductions that may be claimed by individuals iii. Legally separated spouses Additional
with compensation income only are personal exemptions and exemptions can be claimed by the spouse with
premium payments on health and/or hospitalization insurance.
7 custody of the child or children (but the total
See Allowable Deductions from Gross Income for the detailed
amount for the spouses shall not exceed the
discussion on itemized deductions and the optional standard
deduction. maximum of four). [Sec 35(B), NIRC]

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1. Alien individuals employed by:


Who is a dependent for purposes of a. Regional or Area Headquarters
additional exemptions? A legitimate, (RAHQ) and Regional Operating
illegitimate or legally adopted child chiefly Headquarters (ROHQ) established in
dependent upon and living with the taxpayer: the Philippines by multinational
1. not more than 21 years old, unmarried and companies
not gainfully employed OR o Multinational company, defined
2. regardless of age, is incapable of self- a foreign firm or entity
support because of mental or physical defect engaged in international trade
with affiliates or subsidiaries or
NOTE: Only children may be considered branch offices in the Asia-
dependent for purposes of additional Pacific Region and other foreign
exemptions. markets
b. Offshore Banking Units established
Who may claim personal exemptions? in the Philippines
Citizens (whether resident or non-resident) and
resident aliens are allowed to avail of basic 2. Alien individuals who are permanent
personal and additional exemptions. Non- residents of a foreign country but who
resident aliens engaged in trade or business are employed and assigned in the
are entitled to basic personal exemptions only by Philippines by a foreign service contractor
way of reciprocity, but not to additional or by a foreign service subcontractor
exemptions. [Sec. 35, NIRC] engaged in petroleum operations in
Limit of BPE Allowed to NRAETB: An the Philippines
amount equal to the exemptions allowed by
the non-resident aliens country to Filipino Tax Rate and Base - 15% of gross
citizens not residing therein but deriving income received as salaries, wages,
income therefrom, but not to exceed the annuities, compensation, remuneration
amount fixed by NIRC.[In other words, and other emoluments, such as
whichever is LOWER] honoraria and allowances
o The same tax treatment shall apply
Change of Status [Sec 35(C), NIRC] to Filipinos employed and
1. If taxpayer marries during taxable year, occupying the same positions as
taxpayer may claim the corresponding BPE those of aliens employed by these
in full for such year (i.e., no need to pro- multinational companies, offshore
rate the exemption). banking units and petroleum
2. If taxpayer should have additional service contractors and
dependent(s) during taxable year, taxpayer subcontractors.
may claim corresponding AE in full for such
year. Note that the coverage of the special
3. If taxpayer dies during taxable year, his classification (and the corresponding
estate may still claim BPE and AE for tax rate) is limited to income
himself and his dependent(s) as if he died received as wages. Hence, any
at the close of such year. income earned from all other sources
within the Philippines by the alien
4. If during the taxable year employees shall be subject to the
a. spouse dies or pertinent income tax (example: sale of
b. any of the dependents dies or marries, real property in the Philippines is
turns 21 years old or becomes gainfully subject to 6% capital gain tax, imposed
employed, taxpayer may still claim same on the gross selling price or fair market
exemptions as if the spouse or any of value of the property at the time of the
the dependents died, or married, turned sale, whichever is higher).
21 years old or became gainfully
employed at the close of such year.

TIP: When it comes to change of status, the


status beneficial to the taxpayer is used for
purposes of claiming deductions as long as the
taxpayer achieved such status at any time
during the taxable period.

D. Special Classification of Individuals and


Corresponding Tax Treatment [Sec 25(C),
(D), (E)]

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E. Summary of Tax Bases and Tax Rates

QUICK GLANCE
RESIDENT NON-RESIDENT
NRANET
CITIZEN ALIEN CITIZEN NRAETB
B
Within the Within the Within the Within the
CATEGORY OF INCOME
All sources Philippine Philippine Philippine Philippine
s s s s
1. Compensation / Business /
GIW
Graduated Tax Rates, except
Other Income, subject to

Profession
Based on Taxable (i.e, Net) Income 25%
Schedular Income Tax Rates (Sec. 24, NIRC)
for NRANETB

2. Prizes of P10,000 or less


(i.e, 5% to 32%) Not
Applicable
3. Proprietary, Educational /
Hospital
GIW -
4. Cinematographic Film and the 25%
like

5. Interest from any currency bank


deposit , etc., Royalties (other
than from books, literary works
and musical compositions), GIW 20% Final Withholding Tax
Winnings / Prizes (except prizes
P10,000 and below)

6. Royalties from books, literary


works, musical compositions GIW 10% Final Withholding Tax
GIW
7. Interest from long-term deposit EXEMPT; However: 25%
Passive Income from domestic sources,

or investment certificates, which In case of pre-termination, with remaining


have a maturity of 5 years or maturity of:
more 4 years to less than 5 years 5% on entire
subject to Final Tax

income
3 years to less than 4 years 12% on entire
income
less than 3 years 20% on entire income
8. Cash / Property Dividends from a
domestic corporation, etc., OR
share in the distributable net
GIW
income after tax of a partnership GIW 10% Final Withholding Tax
20%
(except a general professional
partnership), etc.

9. Interest (Expanded Foreign


GIW 7.5% Final
Currency Deposit System) EXEMPT
Withholding Tax
10. Winnings on Philippine
Sweepstakes / Lotto EXEMPT

11. Capital Gains on Sale of Shares Net Capital Gains within:


Capital Gains, subject
to Capital Gains Tax

(not traded in a domestic stock Not Over P100,000 5% Final Tax


exchange) Amount in Excess of P100,000 plus 10% Final Tax on the
excess
12. Capital Gains on Sale of Real
Property in the Philippines Gross Selling Price or FMV, whichever is higher 6% Final Tax

13. Sale of Shares (traded in a of 1% of the Selling Price (Stock Transaction Tax)
domestic stock exchange) Note: Stock Transaction Tax is not an income tax, but a
business (percentage) tax
Legend:
GIW Gross Income within the Philippines
FMV Fair Market Value

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TAXATION LAW 1

IV. TAX ON CORPORATIONS


C. Scope of Taxation
A. Coverage of the term Corporation [Sec
22(B)] The term corporation includes QUICK GLANCE
partnerships, no matter how created or
organized, joint-stock companies, joint accounts Type of Sources of Allowed
(cuentas en participacion), associations, or Corporation Taxable Business
insurance companies Income Deductions?
Domestic Within and Yes
It does NOT include:
Corporation (DC) without the
1. general professional partnerships
Philippines
(partnerships formed by persons for the
sole purpose of exercising their common Resident Foreign Within the Yes
profession, no part of the income of Corporation (RFC) Philippines
which is derived from engaging in any
trade or business) Non-resident Within the No*
2. joint venture or consortium formed for Foreign Corporation Philippines
the purpose of undertaking construction (NRFC)
projects or engaging in petroleum, * - Ergo, non-resident foreign corporations are
coal, geothermal and other energy taxed on GROSS INCOME.
operations pursuant to an operating
consortium agreement under a service
contract with the Government.8 NOTE: A good example of a resident foreign
corporation is the Philippine branch of a foreign
B. Classification of Corporations corporation duly licensed by the Securities and
Exchange Commission. The Philippine branch is
General Types merely an extension of the foreign head office
1. Domestic Corporation (DC) - one (i.e., non-resident foreign corporation); hence it
created or organized in the Philippines or does not have nor issue Philippine shares of
under its laws [Sec 22(C)] stock. There is only one single entity to speak of.
2. Foreign Corporation (FC) one that is However, for income tax purposes, only the
not domestic [Sec 22(D)] income of the Philippine branch from sources
Resident Foreign Corporation (RFC) within the Philippines is subject to income tax,
- a foreign corporation engaged in and the income of the Philippine branch as well
trade or business within the Philippines as that of the foreign head office from sources
[Sec 22(H)]9 outside the Philippines are exempt from
Non-resident foreign corporation Philippine income tax.
(NRFC) - a foreign corporation not - NOTE FURTHER: Marubeni Corporation v.
engaged in trade or business within the Commissioner (177 SCRA 500) clarified the
Philippines [Sec 22(I)] single entity concept. As a GENERAL
RULE, the head office of a foreign
Special Types corporation is the same juridical entity as its
1. Proprietary educational institutions and branch in the Philippines following the single
non-profit hospitals entity concept. The income from sources
2. Domestic Depository Bank (Foreign within the Philippines of the foreign
Currency Deposit Units) head office shall thus be taxable to the
3. Offshore Banking Units Philippine branch. BUT when the head
4. Resident Depository Bank (Foreign office of a foreign corporation
Currency Deposit Units) independently and directly invested in a
5. Resident international carrier domestic corporation without the funds
6. Non-resident owner or lessor of vessel passing through its Philippine branch, the
7. Non-resident cinematographic film owner, taxpayer with respect to the tax on the
lessor or distributor dividend income would be the non-
8. Non-resident lessor of aircraft, machinery resident foreign corporation itself and the
and other equipment dividend income shall be subject to the tax
9. Regional/Area Headquarters & Regional similarly imposed on non-resident foreign
Operating Headquarters of Multinational corporations.
companies
D. Tax on Domestic Corporations
Domestic corporations are subject to any or
8
In this case, the joint venture [as an entity] is not subject to some of the following:
income tax, but each member of the joint venture shall be Capital Gain Tax
taxable on his/its share in the net income of the corporation. On Final Tax on Passive Income
the other hand, a joint venture constituted for purposes other
Normal Tax [OR] Minimum Corporate
than (2) above is treated as a corporation and taxable as such.
9 Income Tax (MCIT) [OR] Gross Income Tax
The qualifier resident in the term resident foreign
corporation should not be equated with the nationality of the (GIT)
corporation. In determining nationality, the control test is often Improperly Accumulated Earnings Tax
invoked and applied, which considers corporate nationality by (IAET)
the nationality of its controlling shareholders or members.
(Mamalateo, citing Winship v. Philippine Trust Co., 90 Phil 744) 1. Capital Gains subject to Capital Gains Tax
Thus, for income tax purposes, a domestic corporation may be
formed or organized by foreigners (as long as three of them are a. On sale, barter, exchange or other
residents of the Philippines as per the Corporation disposition of shares of stock of a
Code),provided that it is organized under the laws of the domestic corporation not listed and
Philippines.

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TAXATION LAW 1

traded through a local stock exchange, following the year in which such corporation
held as a capital asset: commenced its business operations
On the net capital gain:
What amount of income tax is paid by
Not over P100,000
the corporation to the BIR? Whichever
Final Tax of 5%
is HIGHER between the normal tax and the
On any amount in excess of P100,000
minimum corporate income tax.
plus 10% Final tax on the excess
ILLUSTRATION: E Co., a domestic trading
b. On the sale, exchange or disposition of corporation, in its fourth year of operations
lands and/or buildings which are not had a gross profit from sales of P300,000 and
actually used in the business of a net taxable income of P100,000. How much
corporation and are treated as capital was the income tax paid by the corporation
assets On the gross selling price, or the for the year?
current fair market value at the time of the
sale, whichever is higher, a final tax of MCIT (P300,000 x 2%) P6,000
6% Normal income tax
NOTE: Tax treatment is the same as
that of individuals. (P100,000 x 35%) P35,000
The capital gains tax is applied on the Income Tax to be paid for the year
gross selling price, or the current fair (whichever is higher) P35,000
market value at the time of the sale,
whichever is higher. Any gain or loss Excess MCIT carry-forward
on the sale is immaterial because Any excess of the minimum corporate income
there is a conclusive presumption tax over the normal income tax shall be
by law that the sale resulted in a carried forward and credited against the
gain. NORMAL TAX for the three (3) immediately
succeeding taxable years. [Sec. 27(E)(2)] In
the year to which carried forward, the normal
2. Passive Income Subject to Final Tax tax should be higher than the MCIT.
Interest Income:
o on any currency bank deposit, yield or ILLUSTRATION: A domestic corporation had
any other monetary benefit from deposit the following data on computations of the
substitutes, trust funds and similar normal tax (NT) and the minimum corporate
arrangements - 20% income tax (MCIT) for five years.
o under the expanded foreign currency
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
deposit system (EFCDS) - 7.5%
MCIT 80,000 50,000 30,000 40,000 35,000
Dividends received from another NT 20,000 30,000 40,000 20,000 70,000
domestic corporation (Intercompany
Dividend) - EXEMPT
The excess MCIT over NT carry-forward is shown
below:
Royalties (any kind) 20%
Year 4 Year 5 Year 6 Year 7 Year 8

3. Income subject to Normal Tax [OR] MCIT 80,000 50,000 30,000 40,000 35,000
Minimum Corporate Income Tax (MCIT) NT 20,000 30,000 40,000 20,000 70,000
[OR] Gross Income Tax (GIT)

NORMAL CORPORATE INCOME TAX RATE NT is 40,000 70,000


35% of net taxable income higher
Gross Income Allowable Deductions = Less:
Taxable Income MCIT
carry-
>(40,000) > (20,000)
fwd
MINIMUM CORPORATE INCOME TAX
(MCIT) 2% of MCIT Gross Income >(20,000)
Gross Sales Sales Returns Sales
From
Returns & Allowances Cost of Goods
Year 4
Sold = MCIT GI

From
What is cost of goods sold? It includes all
Year 5
business expenses DIRECTLY incurred to
produce the merchandise to bring them to From
their present location and use. [Sec. Year 7
27(E)(4)]
MCIT gross income differentiated from the
normal tax gross income the latter would Tax 80,000 50,000 - 40,000 30,000
include other incidental income items, such Due
as rent income, interest, gain on sale of
assets, certain tax refunds, etc. -Arrow pointing downward means that the
When is the MCIT computed? beginning of normal tax is higher so that there can be an excess
the fourth taxable year immediately MCIT carry-forward against it.

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TAXATION LAW 1

-While only P40,000 out of P60,000 excess PENALTY to the corporation for the
MCIT in Year 4 was used in Year 6, the improper accumulation of its earnings, and a
unused P20,000 cannot be used in Year 8 DETERRENT to the avoidance of tax upon
because Year 8 was beyond three years shareholders who are supposed to pay
from Year 4. dividends tax on the earnings distributed to
them.
c) Exception The use of undistributed
Relief from MCIT (LLBM) The Secretary of
earnings and profits for the reasonable
Finance is authorized to suspend the imposition
needs of the business would not generally
of the minimum corporate income tax on any
make the accumulated or undistributed
corporation which suffers LOSSES:
earnings subject to the tax. What is meant by
-on account of prolonged labor dispute (losses reasonable needs of the business is
from a strike staged by employees that lasts for determined by the IMMEDIACY TEST.
more than 6 months and caused the temporary Immediacy Test - It states that the
shutdown of operations), or reasonable needs of the business
are the
-because of force majeure (acts of God and 1) immediate needs of the business;
other calamity; includes armed conflicts like war and
or insurgency), or 2) reasonably anticipated needs.

-because of legitimate business reverses How to prove the reasonable needs


(substantial losses due to fire, robbery, theft or of the business The corporation
other economic reasons). should prove that there is
1) an immediate need for the
accumulation of the earnings and
GROSS INCOME TAX (GIT) The President, profits; or
upon the recommendation of the Secretary of 2) a direct correlation of anticipated
Finance, may allow domestic corporations the needs to such accumulation of
option to be taxed at fifteen percent (15%) of profits.
gross income, after the following conditions have d) Composition: The following constitute
been satisfied: accumulation of earnings for the reasonable
Tax effort ratio 20% of needs of the business: (ILL ABE)
GNP
Ratio of IT collection to 40% 1) ALLOWANCE for the increase in the
total tax revenue accumulation of earnings up to 100% of
the paid-up capital of the corporation as
VAT tax effort 4% of GNP
of Balance Sheet date, inclusive of
Ratio of Consolidated 0.90% accumulations taken from other years;
Public Sector Financial
Position (CPSFP) to GNP 2) Earnings reserved for definite corporate
EXPANSION projects or programs
Ratio of the Corporations Does not requiring considerable capital
Cost of Sales to Gross exceed expenditure as approved by the Board of
Sales 55% Directors or equivalent body;

3) Earnings reserved for BUILDING,


Gross Sales Sales Returns Sales Returns &
PLANT or EQUIPMENT ACQUISITION
Allowances Cost of Goods Sold = GI
as approved by the Board of Directors or
equivalent body;
The election of the gross income tax option by
the corporation shall be irrevocable for three
(3) consecutive taxable years during which
4) Earnings reserved for compliance with
the corporation is qualified under the scheme.
any LOAN COVENANT or pre-existing
[Sec. 27(A)]
obligation established under a legitimate
business agreement;
4. Improperly Accumulated Earnings Tax
5) Earnings required by LAW or applicable
(IAET) [Sec. 29, as implemented by RR 2-2001
regulations to be retained by the
which prescribes rules governing the imposition
corporation or in respect of which there
of IAET]
is legal prohibition against its
distribution;
a) Rule There is imposed for each taxable
year, in addition to other taxes, a tax equal to
10% of the improperly accumulated
6) In the case of subsidiaries of foreign
taxable income of domestic and closely-
corporations in the Philippines, all
held corporations formed or availed of for
undistributed earnings intended or
the purpose of avoiding the income tax with
reserved for INVESTMENTS WITHIN
respect to its shareholders or the
THE PHILIPPINES as can be proven by
shareholders of any other corporation, by
corporate records and/or relevant
permitting the earnings and profits of the
documentary evidence.
corporation to accumulate instead of dividing
them among or distributing them to the
e) Covered Corporations Only domestic
shareholders.
and closely-held corporations are liable for
b) Rationale It is a tax in the nature of a
IAET.

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TAXATION LAW 1

6. Non- taxable joint ventures; and


Closely-held corporations are those: 7. Enterprises that are registered:
a) at least 50% in value of the outstanding
capital stock; or a. with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
b) at least 50% of the total combined b. pursuant to the Bases Conversion and
voting power of all classes of stock entitled Development Act of 1992 under R.A.
to vote 7227; and
is owned directly or indirectly by or c. under special economic zones declared by
for not more than 20 individuals. law which enjoy payment of special tax
Domestic corporations not falling rate on their registered operations or
under the aforesaid definition are, activities in lieu of other taxes, national
therefore, publicly-held or local.
corporations.
Words in regular letters are found in
To determine whether the corporation is Sec. 29(B)(2) of the NIRC. Words in
closely held corporation, insofar as such italics are additions made by the
determination is based on stock ownership, the revenue regulation to consolidate Sec.
following RULES shall be applied: 29 with other pertinent laws.

a. Stock Not Owned by Individuals. - Stock g) Computation: TI + (ET + EG + FT +


owned directly or indirectly by or for a NOLCOD) (TP + D + RN) = IATI
corporation, partnership, estate or trust shall P
be considered as being owned proportionately Year's taxable income xx
by its shareholders, partners or beneficiaries. Add: Income exempt from tax xx
Income excluded from gross
b. Family and Partnership Ownership. - An income xx
individual shall be considered as owning the Income subject to final tax xx
stock owned, directly or indirectly, by or for his
Amount of NOLCO deducted xx
family, or by or for his partner. For purposes of
this paragraph, the family of an individual Total P xx
includes his brothers or sisters (whether by Less: Income tax paid/payable for the
whole or half-blood), spouse, ancestors and taxable year xx
lineal descendants. Dividends actually or
constructively paid from the
c. Option to Acquire Stocks. - If any person applicable year's taxable income xx
has an option to acquire stock, such stock shall Amount reserved for the
be considered as owned by such person. For reasonable needs of the business
purposes of this paragraph, an option to emanating from the covered
acquire such an option and each one of a year's taxable income xx
series of option shall be considered as an Improperly accumulated taxable income P xx
option to acquire such stock. Multiplied by IAET rate 10%
Improperly accumulated earnings(IAET)
d. Constructive Ownership as Actual tax P xx
Ownership. - Stock constructively owned by
reason of the application of (a) or (c) shall, for Words in regular letters are in the statutory
purposes of applying (a) or (b), be treated as formula. Words in italics are additions made by
actually owned by such person; but stock the revenue regulation.
constructively owned by the individual by
reason of the application of (b) shall NOT be h) Limitation The profit that has been
treated as owned by him for purposes of again subjected to IAET shall no longer be
applying such paragraph in order to make subjected to IAET in later years even if not
another the constructive owner of such stock. declared as dividend. However, profits which
have been subjected to IAET, when declared
BIR Ruling 025-02 The ownership of a as dividends, shall be subject to tax on
domestic corporation for purposes of determining dividends except in those instances where the
whether it is a closely held corporation or a recipient is not subject thereto.
publicly held corporation is ultimately traced to
the individual shareholders of the parent i) Declaration of Dividends from earnings
company. Where at least 50% of the outstanding For purposes of determining the source of
capital stock or at least 50% of the total earnings or profits declared or distributed
combined voting power of all classes of stock from accumulated income, the dividends shall
entitled to vote in a corporation is owned directly be deemed to have been paid out of the
or indirectly by at least 21 or more individuals, most recently accumulated profits or
the corporation is considered as publicly held surplus and shall constitute a part of the
corporation. annual income of the distributee for the
year in which received pursuant to Section
f) Exempt Corporations: (BIG-PEN-T) 73(C) of the Code. But, where the dividends
1. Banks and other non-bank financial or portion of the said dividends declared
intermediaries; forms part of the accumulated earnings as of
2. Insurance companies; December 31, 1997, or emanates from
3. Publicly-held corporations; the accumulated income of a particular
4. Taxable partnerships; year and is therefore an exemption to the
5. General professional partnerships;

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TAXATION LAW 1

proceeding statement, such fact must be


supported by a duly executed Board E. Tax on Resident Foreign Corporations
Resolution to that effect. Resident foreign corporations are subject
to any or some of the following:
j) Period for Payment of Dividend/IAET Capital Gain Tax
The dividends must be declared and paid or Final Tax on Passive Income
issued not later than one year following Normal Tax [OR] Minimum Corporate
the close of the taxable year, otherwise, Income Tax (MCIT) [OR] Gross
the IAET, if any, should be paid within Income Tax (GIT)
fifteen (15) days thereafter. Branch Profit Remittance Tax

k) Determination of Purpose to Avoid 1. Capital Gains subject to Capital Gains


Income Tax Tax On sale, barter, exchange or other
1) The fact that a corporation is a mere disposition of shares of stock of a
holding company or investment domestic corporation not listed and
company shall be prima facie evidence traded through a local stock exchange,
of a purpose to avoid the tax upon its held as a capital asset:
shareholders or members On the net capital gain:
A "holding or investment company" is Not over P100,000 Final Tax of 5%
a corporation having practically no On any amount in excess of P100,000 plus
activities except holding property, and Final Tax of 10% on the excess
collecting the income therefrom or
investing the same; and NOTE: Tax treatment is the same as that
of individuals and domestic corporations.
2) where the earnings or profits of a The net taxable income from the sale of
corporation are permitted to accumulate real property realized by the resident
beyond the reasonable needs of the foreign corporation shall be subject to the
business. normal corporate income tax.
PRIMA FACIE INSTANCES of
accumulation of profits beyond the 2. Passive Income Subject to Final Tax
reasonable needs of a business (UBE) Interest Income:
1) Investment of substantial earnings and o on any currency bank deposit, yield or
profits of the corporation in any other monetary benefit from deposit
UNRELATED BUSINESS or in stock or substitutes, trust funds and similar
securities of unrelated business; arrangements - 20%
2) Investment in BONDS and other o under the expanded foreign currency
long-term securities; and deposit system (EFCDS) - 7.5%
3) Accumulation of earnings IN EXCESS
OF 100% OF PAID-UP CAPITAL, not Dividends received from a domestic
otherwise intended for the reasonable corporation (Intercompany Dividend) -
needs of the business. EXEMPT

-The controlling intention of the Royalties (any kind) 20%


taxpayer is that which is manifested at
the time of accumulation. A 3. Income subject to Normal Tax [OR]
speculative and indefinite purpose will Minimum Corporate Income Tax (MCIT)
not suffice. The mere recognition of a [OR] Gross Income Tax (GIT) The
future problem or the discussion of discussion with respect to this topic (income
possible and alternative solutions is not subject to normal tax, MCIT, or GIT) under
sufficient. Definiteness of plan/s the subheading of domestic corporations is
coupled with action/s taken equally applicable to resident foreign
towards its consummation is corporations, both as to concepts and
essential. computations, except that RFCs are taxed
only on income from sources within the
ONE LAST NOTE ON THE APPLICABILITY Philippines.
OF TAX RATES OF DOMESTIC
CORPORATIONS: All corporations,
NORMAL CORPORATE INCOME TAX RATE
agencies, or instrumentalities owned or
35% of net taxable income from sources
controlled by the GOVERNMENT are
within the Philippines
taxable and shall pay such rate of tax
upon their taxable income as are
imposed on domestic corporations MINIMUM CORPORATE INCOME TAX
engaged in a similar business, (MCIT) 2% of MCIT Gross Income from
industry, or activity. sources within the Philippines. The MCIT is
EXCEPTIONS (i.e, not taxable): imposed on RFCs under the same conditions
o Government Service Insurance as domestic corporations. [Sec. 28(A)(2)]
System (GSIS),
o Social Security System (SSS),
o Philippine Health Insurance GROSS INCOME TAX (GIT) The
Corporation (PHIC), President, upon the recommendation of the
o Philippine Charity Sweepstakes Office Secretary of Finance, may allow resident
(PCSO) foreign corporations the option to be taxed at
Note: Exemption for PAGCOR was fifteen percent (15%) of gross income within
withdrawn by RA 9337

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TAXATION LAW 1

the Philippines, under the same conditions as o under the expanded foreign currency
domestic corporations. [Sec. 28(A)(1)] deposit system (EFCDS) - EXEMPT

Dividends (cash and/or property)


Branch Profit Remittance Tax [Sec.
received from a domestic corporation
28(A)(5)]
(Intercorporate Dividend) 15%, AS LONG
Taxable transaction any profit remitted
AS the country in which the nonresident
by a branch to its head office
foreign corporation is domiciled allows a
Tax Rate and Base 15% based on the
tax credit for taxes deemed paid in the
total profits applied or earmarked for
Philippines equivalent to 20%
remittance without any deduction for the
tax component
20% represents the difference between the
Non-taxable activities activities which
regular income tax of 35% on corporations
are registered with the Philippine
and the 15% tax on dividends
Economic Zone Authority
Income NOT TREATED AS BRANCH
If the country within which the NRFC is
PROFITS unless effectively connected with
domiciled does NOT allow a tax credit, a
the conduct of trade or business in the
final withholding tax at the rate of 35% is
Philippines:
imposed on the dividends received from a
i. Interests, dividends, rents,
domestic corporation. [In other words, the
royalties, including remuneration
dividends are subject to the third kind of
for technical services
tax: Final Tax on [Other] Gross Income from
ii. salaries, wages premiums,
sources within the Philippines.]
annuities, emoluments
iii. other fixed or determinable
Final Tax on [Other] Gross Income from
annual, periodic or casual gains,
sources within the Philippines 35% of
profits, income
the gross income received from all sources
iv. capital gains received during each
within the Philippines, such as interests,
taxable year from all sources
dividends, rents, royalties, salaries,
within the Philippines
premiums (except reinsurance premiums),
NOTES:
annuities, emoluments or other fixed or
- imposed whether the head office of the determinable annual, periodic or casual
foreign corporation is located in a tax treaty gains, profits and income, and capital gains
country, in a tax haven or other non-treaty EXCEPT capital gains resulting from the sale
country. of shares of stock of a domestic corporation
- imposed only on the profits remitted by a not listed and traded through a local stock
Philippine branch to the head office of a exchange, held as a capital asset.
foreign corporation. Should the branch of a
domestic corporation remit profits to its Special Types of Corporations
head office, the transaction is not subject to A. Special Type of Domestic Corporations
the branch profit remittance tax. 1. Proprietary Educational Institutions
and Hospitals (Non-profit)
Tax Rate and Base 10% on net income
F. Tax on Nonresident Foreign Corporations (except on income subject to capital gains
Non-resident foreign corporations are tax and passive income subject to final tax)
subject to any or some of the following: within and without the Philippines
Capital Gain Tax CAVEAT: If gross income from unrelated
Final Tax on Passive Income trade or business or other activity exceeds
Final Tax on [Other] Gross Income 50% of total gross income derived from all
from sources within the Philippines sources, the tax rate of 35% shall be
imposed on the entire taxable income.
1. Capital Gains subject to Capital Gains - Unrelated trade, business or other
Tax On sale, barter, exchange or other activity any trade, business or other
disposition of shares of stock of a activity, the conduct of which is not
domestic corporation not listed and substantially related to the exercise or
traded through a local stock exchange, performance by such educational institution
held as a capital asset: or hospital of its primary purpose or function.
- Proprietary educational institution any
On the net capital gain: private school maintained and administered
Not over P100,000 Final Tax of 5% by private individuals or groups with an
On any amount in excess of P100,000 plus issued permit to operate from the DECS,
Final Tax of 10% on the excess CHED or TESDA.

NOTE: The gross income from the sale 2. Depository Banks (Foreign Currency
of real property realized by the non- Deposit Units) [Sec. 27(D)(3) as
resident foreign corporation shall be amended by RA 9294 (2004)]
subject to a 35% final tax imposed on Coverage of the Rule ONLY income
gross income from sources within the derived by a depository bank under the
Philippines. expanded foreign currency deposit system
2. Passive Income Subject to Final Tax from foreign currency transactions with:
Interest - nonresidents,
o on foreign loans contracted on or after - offshore banking units in the Philippines,
August 1, 1986 20% - local commercial banks including branches
of foreign banks that may be authorized

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by the Bangko Sentral ng Pilipinas (BSP) Coverage of the Rule ONLY income derived by
to transact business with foreign currency offshore banking units from foreign currency
deposit system units and transactions with:
- other depository banks under the
expanded foreign currency deposit system -nonresidents,
Tax Rate: Exempt from all taxes, -other offshore banking units
except net income from such -local commercial banks including branches of
transactions as may be specified by the foreign banks that may be authorized by the
Secretary of Finance, upon recommendation Bangko Sentral ng Pilipinas (BSP) to transact
by the Monetary Board to be subject to the business with offshore banking units
regular income tax payable by banks
-Tax Rate: Exempt from all taxes, except net
EXCEPTION: Interest income from such transactions as may be
income from foreign currency loans specified by the Secretary of Finance, upon
granted by such depository banks under recommendation by the Monetary Board to be
said expanded system to residents other subject to the regular income tax payable by
than offshore units in the Philippines or banks
other depository banks under the
expanded system shall be subject to a -EXCEPTION: Interest income derived from
final tax at the rate of 10%. foreign currency loans granted to residents other
than offshore banking units or local commercial
B. Special Types of Resident Foreign banks, including local branches of foreign banks
Corporations that may be authorized by the BSP to transact
1. International Carriers business with offshore banking units, shall be
-Tax Rate and Base 2.5% on Gross Philippine subject only to a final tax at the rate of 10%.
Billings (GPB)
What is GPB? 3. Resident Depository Bank (Foreign
In the case of International Air Carriers, GPB Currency Deposit Units) [Sec. 28(D)(7)(b)
refers to the amount of: as amended by RA 9294 (2004)]

-gross revenue derived from carriage of persons, -Coverage of the Rule ONLY income derived by
excess baggage, cargo and mail originating from a depository bank under the expanded foreign
the Philippines in a continuous and uninterrupted currency deposit system from foreign currency
flight, irrespective of the place of sale or issue transactions with:
and the place of payment of the ticket or passage
document -nonresidents,
-offshore banking units in the Philippines,
=gross revenue from tickets revalidated, -local commercial banks including branches of
exchanged and/or indorsed to another foreign banks that may be authorized by the
international airline if the passenger boards a Bangko Sentral ng Pilipinas (BSP) to transact
plane in a port or point in the Philippines business with foreign currency deposit system
units and
-for flights which originate from the Philippines, -other depository banks under the expanded
but transshipment of passenger takes place at foreign currency deposit
any port outside the Philippines on another system
airline, the gross revenue consisting of only the
aliquot portion of the cost of the ticket -Tax Rate: Exempt from all taxes, except net
corresponding to the leg flown from the income from such transactions as may be
Philippines to the point of transshipment [RR specified by the Secretary of Finance, upon
15-2002] recommendation by the Monetary Board to be
subject to the regular income tax payable by
-Air Canada vs. CIR (CTA Case No. 6572) banks
A foreign airline company selling tickets in the
Philippines through their local agents shall be -EXCEPTION: Interest income from foreign
considered as resident foreign corporation currency loans granted by such depository banks
engaged in trade or business in the country. under said expanded system to residents other
The absence of flight operations within the than offshore units in the Philippines or other
Philippine territory cannot alter the fact that the depository banks under the expanded system
income received was derived from activities shall be subject to a final tax at the rate of 10%.
within the Philippines. The test of taxability is
the source, and the source is that activity which 4. Regional or Area Headquarters and
produced the income. Regional Operating Headquarters of
multinational Companies
In the case of International Shipping, GPB
means: Regional or area headquarters not subject to
-gross revenue whether for passenger, cargo or income tax
mail originating from the Philippines up to final
destination, regardless of the place of sale or Regional or area headquarters a branch
payments of the passage or freight documents. established in the Philippines by multinational
companies and which headquarters do not earn
2. Offshore Banking Units authorized by the or derive income from the Philippines and which
Bangko Sentral ng Pilipinas (BSP) [Sec. act as supervisory, communications and
28(A)(4) as amended by RA 9294 (2004)] coordinating center for their affiliates,

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TAXATION LAW 1

subsidiaries, or branches in the Asia-Pacific 10. Data processing and communications, and
Region and other foreign markets. 11. Business development.

Regional operating headquarters 10% of their


taxable income C. Special Types of Non-resident Foreign
-a branch established in the Philippines by Corporations
multinational companies which are engaged in 1. Non-resident cinematographic film owners,
any of the following services: lessors or distributors 25% of gross
income from all sources within the
(SMART - BAD PPL) Philippines
1. general Administration and planning
2. business Planning and coordination 2. Nonresident Owner or Lessor of Vessels
3. sourcing and Procurement of raw materials Chartered by Philippine Nationals 4.5% of
and components gross rentals, lease or charter fees from
4. corporate finance Advisory services leases or charters to Filipino citizens or
5. Marketing control and sales promotion corporations, as approved by the Maritime
6. Training and personnel management Authority
7. Logistic services
8. Research and 3. Nonresident Owner or Lessor of Aircraft,
development services and product Machineries and Other Equipment 7.5% of
development gross rentals or fees .
9. technical Support and maintenance

Summary of Tax Bases and Rates of Special Corporations

QUICK GLANCE
Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non-profit) Taxable Income from all sources 10%
Depository Banks (Foreign Currency Deposit Units)
v With respect to income derived under the expanded Exempt (except that net income
foreign currency deposit system from certain foreign from such transactions is subject -
currency transactions to the regular income tax payable
v With respect to interest income from foreign currency by banks)
loans to residents other than offshore units in the
Philippines or other depository banks under the Amount of interest income 10%
expanded system
Resident Foreign Corporations
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units
v With respect to income derived by offshore banking Exempt (except that net income
units from certain foreign currency transactions from such transactions is subject -
to the regular income tax payable
v With respect to interest income derived from foreign by banks)
currency loans granted to residents other than offshore
banking units or local commercial banks Amount of interest income 10%

Resident Depository Bank (Foreign Currency Deposit Units)


v With respect to income derived under the expanded Exempt (except that net income
foreign currency deposit system from certain foreign from such transactions is subject -
currency transactions to the regular income tax payable
v With respect to interest income from foreign currency by banks)
loans to residents other than offshore units in the
Philippines or other depository banks under the Amount of interest income 10%
expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Companies Taxable Income from within the
10%
Philippines
Non-resident Foreign Corporations
Non-resident cinematographic film owners, lessors or Gross Income from the Philippines
25%
distributors
Nonresident Owner or Lessor of Vessels Chartered by Philippine Gross Rentals, Lease and Charter
4.5%
Nationals Fees from the Philippines
Nonresident Owner or Lessor of Aircraft, Machineries and Other Gross Rentals, Charges and Fees
7.5%
Equipment from the Philippines

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Exempt Corporations [Sec. 30] (CREB-CLEF- BMBEs shall be exempt from income tax for
SMB) income arising from the operations of the
The following organizations shall not be enterprise.
taxed in respect to income received by them BMBE is any business entity or enterprise
as such (e.g. membership fees): engaged in the production, processing or
1. LABOR, agricultural or horticultural manufacturing of products or commodities,
organization not organized principally for including agro-processing trading and
profit services, whose total assets including those
2. MUTUAL savings bank not having a capital arising from loans but exclusive of land on
stock represented by shares, and cooperative which the particular business entitys office,
bank without capital stock organized and plant and equipment are situated, shall not
operated for mutual purposes and without be more that P3M.
profit
3. A BENEFICIARY society, order or
association, operating for the exclusive
benefit of the members such as a fraternal
organization operating under the lodge
system, or mutual aid association or a non-
stock corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to the
members of such society, order, or
association, or non-stock corporation or their
dependents
4. CEMETERY company owned and operated
exclusively for the benefit of its members
5. Non-stock corporation or association
organized and operated exclusively for
RELIGIOUS, charitable, scientific,
athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net
income or asset shall belong to or inures to
the benefit of any member, organizer, officer
or any specific person
6. BUSINESS league chamber of commerce,
or board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual
7. CIVIC league or organization not organized
for profit but operated exclusively for the
promotion of social welfare
8. A non-stock and 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;

Notwithstanding the exemptions, income


of whatever kind and character of the
enumerated organizations from any of their
properties, real or personal, or from any of
their activities conducted for profit
regardless of the disposition made of such
income, shall be SUBJECT TO TAX.
Note:
RA 9178 Barangay Micro Business Enterprises
(BMBEs) implemented by DO 17-04, April 20,
2004

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Summary of Tax Bases, Tax Rates and Applicable Tax Regimes for Corporations

DOMESTIC RESIDENT NON-RESIDENT


Within the Within the
All sources
CATEGORY OF INCOME Philippines Philippines
1. Taxable Income (i.e., income other than 35% Normal 35% Normal
#s 2 to 9) Tax Tax

2. Interest from any currency bank deposit 35% of Gross


GIW - 20% Final Tax
, etc. Income

3. Royalties GIW - 20% Final Tax

4. Interest (Expanded Foreign Currency


Deposit System) GIW - 7.5% Final Tax EXEMPT

5. Cash / Property Dividends from a 15% or 35%,


domestic corporation EXEMPT whichever is
applicable
Net Capital Gains within:
6. Capital Gains on Sale of Shares (not
Not Over P100,000 5% Final Tax
traded in a domestic stock exchange)
Amount in Excess of P100,000 plus 10% Final Tax on
the excess
7. Capital Gains on Sale of Land and/or GSP or FMV,
Building whichever is 35% Normal 35% of Gross
higher Tax Income
6% Final Tax
8. Sale of Shares (traded in a domestic of 1% of the Selling Price (Stock Transaction Tax)
stock exchange) Note: Stock Transaction Tax is not an income tax,
but a business (percentage) tax

TAX REGIMES APPLICABLE


Normal Tax YES, but based on
YES YES
Gross Income
Minimum Corporate Income Tax YES YES NO
Gross Income Tax YES YES NO
Improperly Accumulated Earnings Tax YES, if closely-
held NO NO
corporation
Branch Profit Remittance Tax NO YES Not Applicable
Legend:
GIW - Gross Income within the Philippines
GSP Gross Selling Price
FMV Fair Market Value

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V. TAXATION OF FRINGE BENEFITS regional or area headquarters, regional


operating headquarters, offshore banking
[Sec. 33 of the NIRC]
units (OBUs), or foreign service contractor,
A. Definition of Fringe Benefit any good, the tax rate is 15% of the grossed-up
monetary value (GMV). The GMV is
service or other benefit furnished or granted in
determined by dividing the actual monetary
cash or in kind by an employer to an individual
value of the fringe benefit by 85% [100% -
employee except rank and file employees
15%].
(The fringe benefit covered by Sec 33 refers to
those enjoyed by managerial and supervisory
What is the tax implication if the employer
employees.)
gives fringe benefits to rank-and-file
employees? Fringe benefits given to a rank-
Key definitions:
Managerial employee one who is vested with and-file employee are treated as part of his
compensation income subject to income tax
the powers or prerogatives to lay down and
and withholding tax on compensation income.
execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge,
Payor of Fringe Benefit Tax (FBT) the
assign or discipline employees.
employer [but the law allows the employer to
Supervisory employees those who, in the deduct such tax as a business expense, in
determining his taxable income]
interest of the employer, effectively recommend
such managerial actions if the exercise of such
Fringe Benefits which are not taxable [Sec.
authority is not merely routinary or clerical in
33 of the NIRC, consolidated with Sec. 2.33(C) of
nature but requires the use of independent
RR 03-98] [RED CNC]
judgment.
1. Fringe benefits which are authorized and
EXEMPTED from tax under special laws
All employees not falling within any of the above
2. CONTRIBUTIONS of the employer for the
definitions are considered rank-and-file
benefit of the employee to retirement,
employees.
insurance and hospitalization benefit plans
3. Benefits given to the RANK AND FILE
Examples of fringe benefits:
employees, whether granted under a
1. Housing
collective bargaining agreement or not
2. Expense account
4. DE MINIMIS benefits
3. Vehicle of any kind
5. If the grant of fringe benefits to the employee
4. Household personnel, such as maid, driver
is required by the nature of, or NECESSARY
and others
to the trade, business, or profession of the
5. Interest on loan at less than market rate to
employer
the extent of the difference between the
6. If the grant of fringe benefits is for the
market rate and actual rate granted
CONVENIENCE of the employer
6. Membership fees, dues and other expenses
[Convenience of the Employer Rule]
borne by the employer for the employee in
social and athletic clubs or other similar
organizations NOTES:
7. Expenses for foreign travel
8. Holiday and vacation expenses De minimis benefits those which are of
9. Educational assistance to the employee or his relatively small value are offered by the employer
dependents as a means of promoting health, goodwill,
10. Life or health insurance and other non-life contentment, or efficiency of his employees, such
insurance premiums or similar amounts in as the following: (CLAMMP RUST)
excess of what the law allows 1. Monetized unused vacation leave credits
of private employees not exceeding ten (10)
B. Tax Rate and Tax Base [Generally] 32% of days during the year and the monetized
the grossed-up monetary value (GMV) value of leave credits paid to government
GMV represents the whole amount of income officials and employees;
realized by the employee. 2. Medical cash allowance to dependents
of employees not exceeding P750 per
How GMV is determined GMV is determined by semester or P125 per month;
dividing the actual monetary value of the fringe
benefit by 68% [100% - tax rate of 32%]. For BIR Ruling 019-02: To be considered de
example, the actual monetary value of the fringe minimis medical allowance, the following
benefit is P1,000. The GMV is equal to P1,470.59 conditions must concur:
[P1,000 / 0.68]. The fringe benefit tax, therefore, 1. The amount given to the EE shall be for
is P470.59 [P1470.59 x 32%]. his own medical expense;

Special Cases: 2. The amount actually given and actually


For fringe benefits received by non-resident spent shall not exceed P10, 000 in any
alien not engaged in trade of business given calendar year;
(NRANETB), the tax rate is 25% of the
grossed-up monetary value (GMV). The GMV 3. The EE must fully substantiate with or in
is determined by dividing the actual monetary his name the medical allowance to be
value of the fringe benefit by 75% [100% - granted.
25%].
For fringe benefits received by alien 3. Rice subsidy of P350 per month granted
individuals and Filipino citizens employed by by an employer to his employees;

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4. Uniforms given to employees by the BIR Ruling 034-02 (Aug 16, 2002):
employer; Representation and Transportation Allowance
5. Medical benefits given to the employees (RATA) and Personnel Economic Relief Allowance
by the employer; (PERA) are not subject to Income Tax and
6. Laundry allowance of P150 per month; Withholding Tax. Additional Compensation
7. Employee achievement awards, e.g. for Allowance (ACA) is part of other benefits under
length of service or safety achievement, Sec. 32(b)(7)(e) of the Tax Code of 1997 which
which must be in the form of a tangible are excluded from gross compensation income
personal property other than cash or gift provided the total amount of such benefits does
certificate, with an annual monetary value not exceed P30,000. It is also not subject to
not exceeding one-half () month of the withholding tax pending its formal integration
basic salary of the employee receiving the into basic pay.
award under an established written plan
Example of Benefits Necessary to the Trade
which does not discriminate in favor of
/ Business of the Employer: BIR Ruling 013-
highly paid employees;
02: Outstation Allowance given by the Philippine
8. Christmas and major anniversary
Gaming Management Corporation to its
celebrations for employees and their
managerial and supervisory employees (who will
guests;
be away from the office site for at least 8 hours
9. Company picnics and sports
to visit the lotto franchise holders for repair
tournaments in the Philippines and are
and/or inspection of equipment) intended to
participated exclusively by employees; and
cover meals and trip related expenses is clearly
10. Flowers, fruits, books or similar items
required by the nature of or necessary to the
given to employees under special
trade or business of the employer and hence, not
circumstances, e.g. on account of illness,
subject to the fringe benefits tax. It is also not
marriage, birth of a baby, etc. [as
subject to withholding tax.
enumerated in RR 03-98, as amended by
RR 10-00]
Examples of Convenience of the Employer
Tax implication of de minimis benefits: Rule:
EXEMPTED from tax. However, should the 1. The value of the meals given to the employee
amount of the benefits given be in EXCESS of the is not taxable, if the employer provides the
ceilings prescribed, the following rules apply: meals for a substantial non-compensatory
business purpose (generally, when employee
-If given to managerial / supervisory employees
is required to be on duty during the meal
The amount in excess of the ceiling prescribed
period).
is taxable as a fringe benefit (i.e., there will be a
2. Lodging is not taxable if the employee must
32% tax imposed on the grossed-up monetary
accept the lodging on the employers business
value of the residual amount).
premises as a condition of his employment.
-If given to rank-and-file employees The
amount in excess of the ceiling prescribed is
taxable as salary or compensation income.

BIR Ruling 023-02: Meal and food allowance,


although not for overtime work, is considered de
minimis if it does not exceed 25% of the basic
wage. The rules and regulations on de minimis
benefits do not allow aggregation of the amounts
set for each type of benefit.

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VI. TAXATION OF PARTNERSHIPS 1. The partnership is subject to the same


rules on corporations (capital gains tax,
final tax on passive income, normal tax,
A. Classification of Partnerships for Tax
minimum corporate income tax [MCIT]
Purposes
and gross income tax [GIT]), but is not
1. General Professional Partnerships (GPP)
subject to the improperly accumulated
partnerships formed by persons for the
earnings tax [IAET]. The partnership
sole purpose of exercising their
must file quarterly and year-end income
common profession, no part of the
tax returns.
income of which is derived from engaging
2. The taxable income of the partnership,
in any trade or business
less the normal corporate income tax
2. Other Partnerships (or General Co-
thereon, is the distributable net income of
partnerships) partnerships wherein all
the partnership.
or part of their income is derived from
3. The share of a partner in the
the conduct of trade or business
partnerships distributable net income of
a year shall be deemed to have been
B. General Professional Partnerships [Sec
actually or constructively received by the
26]
partners in the same taxable year and
Rules:
shall be taxed to them in their individual
1. A GPP as such shall not be subject to
capacity, whether actually distributed or
the income tax.
not. [Sec. 73(D)] Such share will be
2. The partners shall only be liable for
subjected to a final tax of 10% to be
income tax only in their separate and
withheld by the partnership. [Sec.
individual capacities.
24(B)(2)]
3. For purposes of computing the
distributive share of the partners, the net
income of the GPP shall be computed in Co-ownership - There is co-ownership:
the same manner as a corporation. 1. When two or more heirs inherit and
4. Each partner shall report as gross income undivided property from a decedent.
his distributive share, actually or 2. When a donor makes a gift of an
constructively received, in the net undivided property in favor of two or
income of the partnership. more donees.
5. The share of a partner shall be subject
to a creditable withholding income - When Co-ownership is not subject to tax
tax of 15%. (RR 2- 1998) When the co-ownerships activities are
limited merely to the preservation of the
NOTES: co-owned property. The co-owners are
GPP is not a taxable entity The only liable for income tax in their
partnership is a mere mechanism or a separate and individual capacities.
flow-through entity in the generation of
income by, and the ultimate mechanism - When Co-ownership is subject to tax
distribution of such income to the When the income of the co-
individual partners. (Tan v. ownership is invested by the co-
Commissioner [Oct. 3, 1994]) But, owners in business, the co-owners
the partnership itself is required to file have in effect constituted themselves
income tax returns for the purpose of into a partnership. In such a case, the
furnishing information as to the share in co-ownership shall be subject to tax as a
the gains or profits which each partner corporation.
shall include in his individual return. automatically converted into an
(RR 2- 1998) unregistered partnership the moment
the said common properties and/or
The share of an individual partner in the incomes derived from them are
the net profit of a general professional used as a common fund with intent
partnership is deemed to have been to produce profits for the heirs in
actually or constructively received proportion to their respective shares in
by the partner in the same taxable the inheritance as determined in a
year in which such partnership net project partition either duly executed in
income was earned, and shall be an extrajudicial settlement or approved
taxed to them in their individual by the court in the corresponding testate
capacities, whether actually or intestate proceeding. [Ona v. CIR,
distributed or not, at the graduated May, 25 1972]
income tax ranging from 5% to
32%. Thus, the principle of
constructive receipt of income or profit
is being applied to undistributed profits
of GPPs. The payment [to the partners]
of such tax-paid profits in another year
should no longer be liable to income
tax. (Mamalateo)

C. Other Partnerships (or General Co-


partnerships)
Rules:

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VII. TAX ON ESTATES AND TRUSTS 2. in any person not having a


substantial adverse interest in the
disposition of such part of the
A. Application of Income Tax
The tax imposed upon individuals shall apply corpus or the income therefrom,
the income of such part of the trust shall
to the income of estates or of any kind of
be included in computing the taxable
property held in trust, including:
income of the grantor.
1. Income accumulated in trust for the
benefit of unborn or unascertained
2. Income for Benefit of Grantor - Where
person or persons with contingent
any part of the income of a trust
interests, and income accumulated or
i. is, or in the discretion of the
held for future distribution under the
grantor or of any person not
terms of the will or trust;
having a substantial adverse
2. Income which is to be distributed
interest in the disposition of such
currently by the fiduciary to the
part of the income may be held or
beneficiaries, and income collected by a
accumulated for future distribution
guardian of an infant which is to be held
to the grantor, or
or distributed as the court may direct;
ii. may, or in the discretion of the
3. Income received by estates of deceased
grantor or of any person not
persons during the period of
having a substantial adverse
administration or settlement of the
interest in the disposition of such
estate; and
part of the income, be distributed
4. Income which, in the discretion of the
to the grantor, or
fiduciary, may be either distributed to
iii. is, or in the discretion of the
the beneficiaries or accumulated.
grantor or of any person not
having a substantial adverse
EXCEPTION
The tax shall not apply to employee's interest in the disposition of such
part of the income may be applied
trust which forms part of a pension,
to the payment of premiums upon
stock bonus or profit-sharing plan of
policies of insurance on the life of
an employer for the benefit of some or
the grantor,
all of his employees
such part of the income of the trust shall
i. if contributions are made to the trust
be included in computing the taxable
by such employer, or employees, or
income of the grantor.
both for the purpose of distributing to
such employees the earnings and
NOTE: 'In the discretion of the grantor'
principal of the fund accumulated by
means in the discretion of the grantor,
the trust in accordance with such
either alone or in conjunction with any
plan, and
person not having a substantial adverse
ii. if under the trust instrument it is
interest in the disposition of the part of
impossible, at any time prior to the
the income in question.
satisfaction of all liabilities with
respect to employees under the trust,
Consolidation of Income of Two or More Trusts
for any part of the corpus or income
- Where, in the case of two or more trusts,
to be (within the taxable year or
the creator of the trust in each instance
thereafter) used for, or diverted to,
is the same person, and the beneficiary
purposes other than for the exclusive
in each instance is the same, the
benefit of his employees.
taxable income of all the trusts shall be
- NOTE HOWEVER: Any amount
consolidated and the tax computed on such
actually distributed to any
consolidated income, and such proportion
employee or distributee shall be
of said tax shall be assessed and
taxable to him in the year in
collected from each trustee which the
which so distributed to the
taxable income of the trust administered by
extent that it exceeds the
him bears to the consolidated income of
amount contributed by such
the several trusts.
employee or distributee.
C. How Taxable Income of the Estate or
B. Computation and Payment of the Tax
Trust is Computed
The tax shall be computed upon the taxable
income of the estate or trust and shall be [Sec. 61] The taxable income of the estate
or trust shall be computed in the same
paid by the fiduciary. (GENERAL RULE)
manner and on the same basis as in
the case of an individual, EXCEPT that:
EXCEPTIONS:
(A) There shall be ALLOWED AS A
1. Revocable Trusts. - Where at any time
DEDUCTION in computing the taxable
the power to revest in the grantor
income of the estate or trust the
title to any part of the corpus of the
amount of the income of the estate or
trust is vested
trust for the taxable year which is to
1. in the grantor either alone or in
be distributed currently by the
conjunction with any person not
fiduciary to the beneficiaries, and the
having a substantial adverse
amount of the income collected by a
interest in the disposition of such
guardian of an infant which is to be
part of the corpus or the income
held or distributed as the court may
therefrom, or
direct, BUT the amount so allowed as
a deduction shall be included in

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computing the taxable income of the F. Fiduciaries Indemnified Against Claims


beneficiaries, whether distributed to for Taxes Paid
them or not. Any amount allowed as a Trustees, executors, administrators and
deduction under this Subsection shall other fiduciaries are INDEMNIFIED
not be allowed as a deduction under against the claims or demands of every
Subsection (B) of this Section in the beneficiary for all payments of taxes which
same or any succeeding taxable year. they shall be required to make, and they
shall have CREDIT for the amount of such
(B) In the case of income received by payments against the beneficiary or
estates of deceased persons during principal in any accounting which they
the period of administration or make as such trustees or other fiduciaries.
settlement of the estate, and in the
case of income which, in the discretion VIII. SOURCE OF INCOME [Sec. 42]
of the fiduciary, may be either
distributed to the beneficiary or
A. Classification of Income according to
accumulated, there shall be allowed as
Source
an ADDITIONAL DEDUCTION the
1. Income derived from sources within the
amount of the income of the estate or
Philippine
trust for its taxable year, which is
2. Income derived from sources without the
properly paid or credited during such
Philippine
year to any legatee, heir or beneficiary
3. Income derived from sources partly within
but the amount so allowed as a
and partly without the Philippines
deduction shall be included in
computing the taxable income of the
B. Basic Principles
legatee, heir or beneficiary.
1. Resident Citizens (RC) and Domestic
Corporations (DC) are taxable on income
(C) In the case of a trust administered in a
derived from within and without the
foreign country, the deductions
Philippines
mentioned in Subsections (A) and (B)
2. Non-resident Citizens (NRC), Non-resident
of this Section shall not be allowed:
Aliens (NRA), Resident Foreign
Provided, That the amount of any
Corporations (RFC) and Non-resident
income included in the return of said
Foreign Corporations (NRFC) are taxable
trust shall not be included in
only on income derived from within the
computing the income of the
Philippines.
beneficiaries.
C. Gross Income From Sources Within the
B. Exemption Allowed to Estates and Trusts
Philippines (RIDIC - within)
P20,000 from the income of the estate or The following items of gross income shall
trust.
be treated as gross income from
sources WITHIN the Philippines:
E. Fiduciary Returns
Guardians, trustees, executors, 1. Interests derived from sources within the
administrators, receivers, conservators and Philippines, and interests on bonds, notes
all persons or corporations, acting in any or other interest-bearing obligation of
fiduciary capacity, shall: residents
- render, in duplicate, a return of the 2. Dividends received:
income of the person, trust or estate a. from a domestic corporation; and
for whom or which they act, and b. from a foreign corporation, UNLESS less
- be subject to all the provisions which than 50% of its gross income for the
apply to individuals in case such previous 3-year period was derived
person, estate or trust has a gross from sources within the Philippines [in
income of P20,000 or over during the which case it will be treated as income
taxable year. partly from within and partly from
without]. The income which is
Such fiduciary or person filing the return considered as derived from within the
for him or it, shall: Philippines is obtained by using the
- take OATH that following formula:
he has sufficient knowledge of
the affairs of such person, trust Philippine Gross Income* x Dividend = Income Within
or estate to enable him to make Worldwide Gross Income*
such return and
NOTE: * of the corporation giving the
that the same is, to the best of
dividend
his knowledge and belief, true
and correct, and
3. Compensation for labor or personal
- be subject to all the provisions of this
services performed in the Philippines
Title which apply to individuals.
4. Rentals and royalties from property
located in the Philippines or from any
A return made by or for one or two or
interest in such property, including rentals
more joint fiduciaries filed in the province
or royalties for (stackem)
where such fiduciaries reside, under such
a. The use of or the right or privilege to
rules and regulations as the Secretary of
use in the Philippines any copyright,
Finance shall prescribe, shall be
patent, design or model, plan, secret
sufficient compliance.
formula or process, goodwill,

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trademark, trade brand or other like Philippines Abroad Partly within,


property or right; partly without
b. The use of, or the right to use in the Abroad Philippines Partly within,
partly without
Philippines any industrial, commercial
or scientific equipment;
Allowable Deductions from Gross
c. The supply of scientific, technical,
Income From Sources Within the
industrial or commercial knowledge or
Philippines
information;
GENERAL RULE:
d. The supply of any assistance that is
From the items of gross income above,
ancillary and subsidiary to, and is
the following are allowed as deductions:
furnished as a means of enabling the
a. expenses, losses and other
application or enjoyment of, any such
deductions properly allocated to
property or right as is mentioned in (a),
items of gross income
any such equipment as is mentioned in
b. ratable part of expenses, interests,
(b) or any such knowledge or
losses and other deductions
information as is mentioned in (c);
effectively connected with the
e. The supply of services by a
business or trade conducted
nonresident person or his employee in
exclusively within the Philippines
connection with the use of property or
which cannot definitely be allocated
rights belonging to, or the installation
to some items of gross income
or operation of any brand, machinery or
other apparatus purchased from such
Formula for (b):
nonresident person;
f. Technical advice, assistance or Expenses
services rendered in connection with Philippine Gross Income x Unallocated = allocated
technical management or Worldwide Gross Income Expenses to income
administration of any scientific, from within
industrial or commercial undertaking,
venture, project or scheme; and EXCEPTION:
g. The use of or the right to use: No DEDUCTIONS FOR INTEREST paid
(i) Motion picture films; or incurred abroad shall be allowed from
(ii) Films or video tapes for use in the item of gross income unless
connection with television; and indebtedness was actually incurred
(iii) Tapes for use in connection with to provide funds for use in
radio broadcasting. connection with the conduct or
operation of trade or business in the
5. Gains, profits and Income from the sale Philippines.
of real property located in the
Philippines D. Gross Income From Sources Without the
Philippines (RIDIC - without)
6. GENERAL RULE: Gains, profits and The following items of gross income shall
income from the sale of personal be treated as income from sources without
property, subject to the following rules: the Philippines:
Place of Place of Treatment** 1. Interests other than those derived
PURCHASE SALE from sources within the Philippines
Philippines Abroad Income from 2. Dividends other than those derived
Without from sources within the Philippines
Abroad Philippines Income from 3. Compensation for labor or personal
Within services performed without the
** in other words, treated as income from Philippines
the country in which sold 4. Rentals or royalties from property
located without the Philippines or
EXCEPTIONS: from any interest in such property
1. Gain from the sale of shares of 5. Gains, profits and Income from
stock in a domestic corporation the sale of real property located
treated as derived entirely from without the Philippines
sources within the Philippines
regardless of where the said shares Allowable Deductions to Gross Income
are sold. From Sources Without the Philippines
2. Gains from the sale of 1. expenses, losses, and other
(manufactured) personal property: deductions properly apportioned to
a. produced (in whole or in part) items of gross income
by the taxpayer within and 2. ratable part of any expense, loss or
sold without the Philippines, other deduction which cannot
or definitely be allocated to some items
b. produced (in whole or in part) or classes of gross income
by the taxpayer without and e.g.:
sold within the Philippines Gross Income from Expenses
treated as derived partly from Without the Philippines x Unallocated = allocated
sources within and partly from Worldwide Gross Income Expenses to income
sources without the Philippines. from
without
Place of Place of Treatment
PRODUCTION SALE

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C. QUICK GLANCE

Item of Income Test of Source of Income


Interest Residence of the debtor
Income from Services Place of performance10
Rental Location of the property
Royalty Place of use of the intangible
Gain on Sale of Real Property Location of the property sold
Gain on Sale of Personal Property (EXCEPT: Place of sale
- Shares of a domestic corporation
- Personal property produced (in whole or in
part) by the taxpayer within and sold without
the Philippines [or vice versa])
Gain on Sale of Domestic Shares Always income from within
Gain on sale of personal property produced (in Partly from without and partly from within
whole or in part) by the taxpayer within and sold
without the Philippines [or vice versa]
Dividends
a. From Domestic Corporation Income from within
b. From Foreign Corporation Income from WITHIN, IF at least 50% of its gross
income for the previous 3-year period was derived
from sources within the Philippines. [entire income
considered as income from within]

HOWEVER, if less than 50% of its gross income


for the previous 3-year period was derived from
sources within the Philippines, considered as
partly within and partly without. Income within
computed using this formula:

Philippine Gross Income* x Dividend= Income


Within
Worldwide Gross Income*

NOTE: * of the corporation giving the dividend

10
Regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment.

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IX. GROSS INCOME Fringe Benefits of Rank and File EEs


Basic Rule:
Convenience of the ER Rule
A. Basic Principles
Gross Income means all income derived If meals, living quarters, and other facilities
and privileges are furnished to an employee
from whatever source11, including (but not
for the convenience of the employer, and
limited to) the following items: (TRIP CARD
incidental to the requirement of the
GPP)
employees work or position, the value of
1. Gross income derived from the conduct of that privilege need not be included as
TRADE or business or the exercise of compensation.
a profession
2. RENTS 2. Gains Derived From Dealings In
3. INTERESTS Property Dealings in property such as
4. PRIZES and winnings sales or exchanges may result in gain or
5. COMPENSATION for services in loss. The kind of property involved (i.e.,
whatever form paid, including, but not whether the property is a capital asset or
limited to fees, salaries, wages, an ordinary asset) determines the tax
commissions, and similar items implication and income tax treatment, as
6. ANNUITIES follows:
7. ROYALTIES
8. DIVIDENDS ORDINARY CAPITAL
9. GAINS derived from dealings in property ASSET ASSET***
10. PENSIONS Gain from
11. PARTNER'S distributive share from the Capital
sale or Ordinary Gain
net income of the general professional Gain
exchange
partnership (GPP) Loss from
Capital
sale or Ordinary Loss
The term gross income whenever used Loss
exchange
without qualification, is comprehensive, as Excess of [goes into
defined above, and is different from the Gains over computation Net
limited meaning of gross income for the Losses of] Capital
purposes of minimum corporate income tax Ordinary Net Gain
or the gross income tax of corporations. Income

B. Supplementary Discussion on Some *** (except shares of stock not listed nor
Items Included in Gross Income traded in a local stock exchange and real
property subject to capital gains tax)
1. Compensation Income
a. income arising from an ER-EE relationship.
Taxable = Ordinary + net capital
It means all remuneration for services
net income net income gains
performed by an EE for his ER, including
the cash value of all remuneration paid in If the asset involved is classified as
any medium other than cash. [Sec. 78(A)] ordinary, the entire amount of the gain
It includes: from the transaction shall be included in
1. Salaries and wages the computation of gross income [Sec
2. Commissions 32(A)], and the entire amount of the
3. Tips loss shall be deductible from gross
4. Allowances income. [Sec 34(D)]. (See XI. Allowable
5. Bonuses Deductions from Gross Income -
6. Fringe Benefits of rank and file EEs Losses)
If the property sold is a capital asset
b. It does NOT include remuneration paid: (except shares of stock not listed nor
For agricultural labor paid entirely in traded in a local stock exchange and
products of the farm where the labor is real property subject to capital gains
performed, or tax), the rules on capital gains and
For domestic service in a private home, losses apply in the determination of the
or amount to be included in gross income.
For casual labor not in the course of the (See XIII Capital Gains and Losses)
employer's trade or business, or
For services by a citizen or resident of the Computation of Gain or Loss [Sec.
Philippines for a foreign govt or an intl 40(A)]:
organization. [Sec. 78(A)]
Amount realized from sale or other
Withholding Tax on Compensation Income
disposition of property
The income recipient (i.e., EE) is the Less: basis or adjusted basis_____ ____
person liable to pay the tax income, yet GAIN (LOSS)
to improve the collection of
compensation income of EEs, the State Note: Amount realized from sale or
requires the ER to withhold the tax upon other disposition of property = sum of
payment of the compensation income. money received + fair market value of
the property (other than money)
received

11
It does not include income excluded or exempted by law.

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In computing the gain or loss from the 5. Dividends Any dividend which is not
sale or other disposition of property, exempt from income tax, or which is not
the BASIS shall be as follows: subject to final tax, is taxable dividend
1. Property acquired by purchase included in the computation of the taxable
its cost, i.e., the purchase price income (gross income) in the income tax
plus expenses of acquisition. return at the end of the year.
2. Property which should be included
in the inventory its latest NOTE: Liquidating Dividend distribution
inventory value [RR-2 sec 136] of all the property of a corporation. It is
3. Property acquired by devise, strictly not dividend income, but rather a
bequest or inheritance its fair sale of shares of stock resulting in capital
market price or value as of the gain or loss.
date of acquisition
4. Property acquired by gift or 6. Annuities income derived from a capital
donation the same as if it would amount paid to an insurance company.
be in the hands of the donor or at
last preceding owner by whom it 7. Pensions paid for past employment
was not acquired by gift, EXCEPT services rendered.
that if such basis is greater than
the FMV of the property at the 8. Cancellation of debt The cancellation or
time of the gift then, for the forgiveness of indebtedness may have any
purpose of determining loss, the of three possible consequences:
basis shall be such FMV 1. It may amount to payment of income.
5. Property (other than capital asset) If, for example, an individual performs
acquired for less than an adequate services to or for a creditor, who, in
consideration in moneys worth consideration thereof, cancels the debt,
a) the amount paid by the income in that amount is realized by
transferee for the property; or b) the debtor as compensation for
the transferors adjusted basis at personal services.
the time of the transfer whichever 2. It may amount to a gift. If a creditor
is greater wishes merely to benefit the debtor,
6. Property acquired in a transaction and without any consideration
where gain or loss not recognized therefore, cancels the debt, the amount
The basis shall be the same as it of the debt is a gift to the debtor and
would have been in the hands of need not be included in the latters
the transferor increased by the report of income.
amount of gain recognized by the 3. It may amount to a capital transaction.
transferor on the transfer. If a corporation to which a stockholder
is indebted forgives the debt, the
3. Interest Income e.g., Interest income transaction has the effect of a payment
from government securities such as of dividend.
Treasury Bills
9. Prizes and Awards Contest prizes and
4. Rental Income awards received are generally taxable.
Actual rent itself included in gross Such payment constitutes gain derived
income (taxable) from labor. The EXCEPTIONS are as
Payments by lessee of obligations follows:
of lessor to third persons
considered as additional rent income of Prizes and awards received in
the lessor, and therefore included in recognition of religious, charitable,
gross income (taxable). scientific, educational, artistic, literary
Advance Rentals Receipt of or civic achievements are EXCLUSIONS
advance rentals by the lessor may or from gross income if:
may not constitute taxable income to a. The recipient was selected without
him depending on the true nature of any action on his part to enter a
the so-called advance rentals. contest or proceedings; and
o If the advance rental is in the b. The recipient is not required to
nature of prepaid rent (for the render substantial future services
lessee), received by the lessor as a condition to receiving the
under a claim of right and without prize or award.
restriction as to use, the entire Prizes and awards granted to athletes
amount is taxable income of the in local and intl sports competitions
lessor in the year received. and tournaments held in the Philippines
o If the amount received is in the and abroad and sanctioned by their
nature of a security deposit for the national associations shall be EXEMPT
faithful compliance by the lessee of from income tax.
the terms of the contract, there is
no income to the lessor unless the 10. Damage recovery
conditions which make the security Compensatory damages, as constituting
deposit the property of the lessor returns of capital, are not taxable.
occur (i.e., the lessee violates the Thus, amounts received as moral
terms of the lease agreement) damages for personal actions (such as
alienation of affection, libel, slander or

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breach of promise to marry) are not


taxable. 12. Tax Refund As a general rule, a refund
Recovered damages representing of a tax related to the business or the
recoveries of lost profits are taxable, practice of profession, is taxable income
just as profits are taxable in the regular (e.g., refund of fringe benefit tax) in the
course of business. Thus, damages year of receipt to the extent of the income
recovered in patent infringement suits tax benefit of said deduction (i.e., the tax
are taxable. benefit rule applies). However, the
following tax refunds are not to be included
11. Bad Debt Recovery in the computation of gross income:
Tax Benefit Rule Bad debts claimed as (EXCEPTIONS) (CAPIFFEDVAT)
a deduction in the preceding year(s) but 1. Philippine income tax, except the
subsequently recovered shall be included fringe benefit tax
as part of the taxpayers gross income in 2. Income tax imposed by authority of
the year of such recovery to the extent of any foreign country, if the taxpayer
the income tax benefit of said deduction. claimed a credit for such tax in the
There is an income tax benefit when the year it was paid or incurred.
deduction of the bad debt in the prior year 3. Estate and donors taxes
resulted in lesser income and hence tax 4. Taxes assessed against local benefits
savings for the company. (Sec. 4, RR 5- of a kind tending to increase the value
99) of the property assessed (Special
assessments)
Illustration: 5. Value Added Tax
6. Fines and penalties due to late
Case A Case B Case C payment of tax
Year 1 7. Final taxes
Gross Income 8. Capital Gains Tax
500,000 400,000 500,000
Less: Allowable The enumeration of tax refunds that are
Deductions not taxable (income) is derived from an
(before write-off enumeration of tax payments that are not
of Uncollectible deductible from gross income. If a tax is
Accounts/Debts) (200,000) (480,000) (495,000)
not an allowable deduction from gross
Taxable Income
income when paid (no reduction of taxable
(Net Loss) 300,000 (60,000) 5,000
before write-off income, hence no tax benefit), the refund
Deduction for is not taxable.
Accounts (2,000) (2,000) (6,000)
Receivable X. EXCLUSIONS FROM GROSS
written off
Taxable Income INCOME [Sec. 32(B)]
(Net Loss) after 298,000 (62,000) (1,000)
write-off The following are excluded from gross income:
(GIRL CRM)
Year 2
Recovery of 1. LIFE Insurance
Amounts 2,000 2,000 6,000
General rule: The proceeds of life
Written Off
insurance policies paid to heirs or
Taxable 2,000 - 5,000 beneficiaries upon the death of the insured
Income on the - Reason: Insurance is a contract of
Recovery indemnity; hence, the proceeds should
Explanation: be treated as indemnity and not as
In Case A, the entire amount recovered gain or income.
(P2,000) is included in the computation
of gross income in Year 2 because the Exception: If such amounts are held by
taxpayer benefited by the same extent. the insurer under an agreement to pay
Prior to the write-off, the taxable income interest thereon, the interest payments
was P300,000; after the write-off, the shall be included in gross income.
taxable income was reduced to
P298,000. 2. Amount Received by Insured as
In Case B, none of the P2,000 recovered RETURN of Premium
would be recognized as gross income in General rule: The amount received by the
Year 2. Note that even without the write- insured, as a return of premiums paid by
off, the taxpayer would not have paid him under life insurance, endowment, or
any income tax anyway. The taxable annuity contracts, either during the term or
income before the write-off was actually at the maturity of the term mentioned in
a net loss. the contract or upon surrender of the
In Case C, only P5,000 of the P6,000 contract
recovered would be recognized as gross - Reason: This is a return of capital and
income in Year 2. It was only to this not income.
extent that the taxpayer benefited from
the write-off. The taxpayer did not Exception: If the amounts received by the
benefit from the extra P1,000 because at insured (when added to the amounts
this point, the P1,000 was already a net already received before the taxable year
loss. under such contract) exceed the aggregate

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premiums or considerations paid (whether exclusive benefit of the said


or not paid during the taxable year), then officials and employees.
the excess shall be included in gross
income. (source unknown) b. Any amount received by an employee
or by his heirs from the employer as a
3. GIFTS, Bequests, and Devises consequence of separation of such
General rule: The value of property official or employee from the service of
acquired by gift, bequest, devise, or the employer because of
descent. o death
- Reason: These transactions are o sickness
subject to transfer taxes estate or o other physical disability or
donors taxes. o for any cause beyond the
control of the employee (i.e., the
Exception: Income from such property, as separation of the employee must
well as gift, bequest, devise or descent of be involuntary and not initiated by
income from any property, in cases of him)
transfers of divided interest, shall be
included in gross income. c. The social security benefits,
retirement gratuities, pensions and
4. COMPENSATION for Injuries or other similar benefits received by
Sickness resident or nonresident citizens of the
The amounts received as compensation for Philippines or aliens who come to reside
personal injuries or sickness, plus the permanently in the Philippines from
amounts of any damages received, whether foreign government agencies and other
by suit or agreement, on account of such institutions
injuries or sickness.
d. Payments of benefits due or to become
5. INCOME Exempt under Treaty due to any person residing in the
Income of any kind, to the extent required Philippines under the laws of the United
by any treaty obligation binding upon the States administered by the United
Government of the Philippines. States Veterans Administration

6. RETIREMENT Benefits, Pensions, e. Benefits received from or enjoyed


Gratuities, etc.- under the Social Security System
a. Retirement benefits received under
RA 7641 and those received by officials f. Benefits received from the GSIS,
and employees of private firms in including retirement gratuity received
accordance with a reasonable private by government officials and employees
benefit plan maintained by the
employer. CASE LAW:
BIR Ruling 125-98:
o REQUISITES: The phrase "shall not have availed of
i. The retiring employee has been in the privilege under a retirement benefit
the service of the same employer plan of the same or another employer"
for at least 10 years. found in Sec. 32 (B) (6) (a) of the Tax
ii. The retiring employee is not less Code means that the retiring official or
than 50 years of age at the time employee must not have previously
of his retirement received retirement benefits from
iii. The benefits shall be availed of by the same or another employer who
an employee only once. has a qualified retirement benefit
iv. That there be a reasonable plan.
private benefit plan as defined
below. BIR Ruling 143-98:
The terminal leave pay of
o A 'reasonable private benefit government employees whose
plan' means employment is coterminous is
a pension, gratuity, stock bonus exempt since it falls within the
or profit-sharing plan meaning of the phrase "for any cause
maintained by an employer for beyond the control of the said official or
the benefit of some or all of his employee" found in Sec. 32(B).
employees
wherein contributions are made 7. MISCELLANEOUS Items
by such employer for the a. Income Derived by Foreign
employees Government
for the purpose of distributing to Income derived from (1) investments in
such employees the earnings the Philippines in domestic securities
and principal of the fund thus (loans, stocks, bonds, etc.) or from (2)
accumulated and interest on deposits in banks in the
wherein it is provided in the plan Philippines by
that at no time shall any part of i. foreign governments
the corpus or income of the fund ii. financing institutions owned,
be used for, or be diverted to, controlled, or enjoying
any purpose other than for the refinancing from foreign
governments, and

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iii. international or regional financial Gains realized by the investor upon


institutions established by foreign redemption of shares of stock in a
governments. mutual fund company

b. Income Derived by the Government


or its Political Subdivisions XI. ALLOWABLE DEDUCTIONS FROM
Income derived from any public utility
or from the exercise of any essential GROSS INCOME
governmental function accruing to the
Government of the Philippines or to any The term taxable income means the pertinent
political subdivision thereof. items of gross income specified in the National
Internal Revenue Code [Sec. 32], less the
c. Prizes and Awards deductions [Sec. 34] and/or personal and
Prizes and awards made primarily in additional exemptions [Sec. 35], if appropriate,
recognition of religious, charitable, authorized for such types of income by the Code
scientific, educational, artistic, literary, or other special laws. [Sec. 31]
or civic achievement but only if:
i. recipient was selected without A. Basic Principles Governing Tax
any action on his part to enter Deductions
the contest or proceeding and He who claims it must point to the specific
ii. recipient is not required to render provision of the statute authorizing it, and
substantial future services as a he must be able to prove that he is
condition to receiving the prize or entitled to it.
award If the exemption is not expressly stated in
the law, the taxpayer must at least be
d. Prizes and Awards in Sports within the purview of the exemption by
Competition clear legislative intent. However, if there
All prizes and awards granted to is an express mention in the law or if the
athletes (1) in local and international taxpayer falls within the purview of the
sports competitions and (2) sanctioned exemption by clear legislative intent, the
by their national sports associations. rule on strict construction against the
taxpayer-claimant will not apply.
e. 13th Month Pay and Other Benefits Unlike gross income, there is no catch-all
Gross benefits received by employees provision for deductions.
of public and private entities provided Deductions must comply with the
that the total exclusion shall not substantiation requirement.
exceed P30,000 which shall cover:
i. Benefits received by government B. Kinds of Deductions
employees under RA 6686 1. Itemized Deductions business (or
ii. Benefits received by employees professional) expenses which are ordinary
pursuant to PD 851 (13th Month and necessary in the conduct of business
Pay Decree) (or in the exercise of profession)
iii. Benefits received by employees
not covered by PD 851 as 2. Optional Standard Deduction (OSD)
amended by Memorandum Order may be taken by an individual, in lieu of
No. 28 and itemized deductions [Section 34(L)]
iv. Other benefits such as REQUISITES:
productivity incentives and a. Available only to citizens and resident
Christmas bonus aliens
b. The standard deduction is optional;
What happens if the benefits i.e., unless the taxpayer signifies in his
exceed P30,000? The amount in return his intention to elect this
excess of P30,000 will be considered as deduction, he is considered as having
compensation income. availed of the itemized deductions.
c. Such election, when made by the
f. GSIS, SSS, Medicare and Other qualified taxpayer, is irrevocable for
Contributions the year in which made; however, he
GSIS, SSS, Medicare and Pag-ibig can change to itemized deductions in
contributions, and union dues of succeeding years.
individuals
*Since an individual in business or in
g. Gains from the Sale of Bonds, the practice of profession is required
Debentures or other Certificate of to file quarterly income tax returns,
Indebtedness can he choose the OSD in his quarterly
Gains realized from the sale or returns and then choose the itemized
exchange or retirement of bonds, deductions in his annual income tax
debentures or other certificate of return, or vice versa? YES, the OSD or
indebtedness with a maturity of more Itemized Deductions is against the
than 5 years. gross income of the year. Quarterly
income tax returns are only interim
h. Gains from Redemption of Shares in computations on the taxable income
Mutual Fund for the year.

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d. The amount of standard deduction is - Optional Standard Deduction [OR]


limited to ten percent (10%) of the Itemized Deductions
taxpayers gross income. [However, - Premium payments on health and/or
OSD is not available against hospitalization insurance (if requisites
compensation income arising out of are complied with)
an employer-employee relationship. - Personal Exemptions
(Sec. 34, 1st par.)] v For corporations, general professional
*NOTE: The Gross Income base of partnerships, estates and trusts
OSD is engaged in business, proprietary
For an individual in a educational institutions and hospitals
manufacturing or merchandising (non-profit), and government-owned
concern: gross income (or profit) or controlled corporations
from sales [i.e., sales less cost of - Itemized Deductions
sales], and incidental income, if
any D. Kinds of Itemized Deductions (BELT DID
For an individual whose income is CPR)
from the sale of services: gross 1. Expenses
income (or profit) from sale of 2. Interest
services [i.e., gross receipts less 3. Taxes
direct cost of services], and 4. Losses
incidental income, if any 5. Bad debts
6. Depreciation
e. Proof of actual expenses is not 7. Depletion
required, but the taxpayer should 8. Charitable and Other Contributions
keep records pertaining to his gross 9. Research and Development
income during the taxable year. 10. Pension Trust

C. Who can avail of deductions? E. Expenses [Sec. 34(A)]


GENERAL RULE: All taxpayers Only deduction allowable Ordinary and
EXCEPTION: Those earning compensation necessary trade, business or professional
income arising from personal services expenses
rendered under an employer-employee
relationship REQUISITES: (SPOD RYN)
1. It must be ORDINARY AND
Rules: necessary.
1. Compensation income earners can avail Ordinary - expense which is
themselves only of the deduction in Sec. normal in relation to the taxpayers
34 (M), i.e., premium payments on health business and the surrounding
and/or hospitalization insurance (in circumstances. The expense need
addition to the appropriate personal not be recurring.
exemption). Necessary where the
2. The following can claim ITEMIZED expenditure is appropriate or
deductions: helpful in the development of the
a. Corporations, whether domestic or taxpayers business or that the
(resident) foreign same is proper for the purpose of
b. General Professional Partnerships realizing a profit or minimizing a
c. Individuals engaged in trade, loss.
profession or business (citizen, The TWO CONDITIONS MUST
resident alien, non-resident alien CONCUR. A court may decide on
doing business in the Philippines) when an expense is, or is not,
d. Estates and trusts engaged in trade ordinary, but as much as possible,
or business it will refuse to substitute its
e. Proprietary educational institutions judgment for that of the taxpayer
and hospitals (non-profit) on the necessity of an expense.
f. Government-owned or controlled 2. It must be paid or incurred during
corporations the taxable YEAR.
3. Only individuals, EXCEPT non-resident 3. It must be paid or incurred in carrying
aliens, can elect between itemized on or which are DIRECTLY
deductions and OPTIONAL STANDARD attributable to, the development,
DEDUCTION. management, operation and/or
conduct of the trade, business or
QUICK GLANCE exercise of a profession.
4. The amount must be REASONABLE.
The following are the deductions from gross 5. It must be SUBSTANTIATED with
income: sufficient evidence, such as official
v For individuals with gross receipts or other adequate records,
compensation income only: showing:
- Premium payments on health and/or i. the amount of the expense being
hospitalization insurance (if requisites deducted, and
are complied with) ii. the direct connection or relation of
- Personal Exemptions the expense being deducted to the
v For individuals with gross income development, management,
from business or practice of operation and/or conduct of the
profession:

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trade, business or profession of the profession and use or lease of


taxpayer. properties: 1.0% of net revenue
6. It is NOT CONTRARY to law, public (i.e., gross revenue less discounts)
policy or morals.
7. The tax required to be withheld on Bribes, Kickbacks and Other Similar
the amount paid or payable must Payments No deduction shall be
have been PAID to the BIR by the allowed for any payment made, directly or
taxpayer, who is constituted as a indirectly, to an official or employee of the
withholding agent of the government national or local government,
(for instance, withholding tax on government-owned or -controlled
compensation income paid to corporation, or foreign government, or to
employees, fringe benefit tax on fringe a private corporation, general professional
benefits given to managerial and partnership, or a similar entity, if the
supervisory employees, etc.). (Sec. payment constitutes a bribe or kickback.
2.58.5, RR 2-98 as amended by Sec.
6, RR 14-2002) SPECIAL CASE: Expenses Allowable to
Private Educational Institutions [Sec.
EXAMPLES: (CERT) 34(2), RR 10-2002] In addition to the
1. Salaries, wages, and other forms of expenses allowable as deductions, a
compensation for personal services private educational institution may at its
actually rendered, including the option elect either:
grossed-up monetary value (GMV) of 1. to deduct expenditures otherwise
fringe benefit furnished by the considered as capital outlays of
employer to the employee depreciable assets incurred during
2. Travel expenses, here and abroad, the taxable year for the expansion of
while away from home in the pursuit school facilities, or
of trade, business or profession 2. to deduct allowance for depreciation
3. Rentals and/or other payments which thereof.
are required as a condition for the
continued use or possession, for F. Interest [Sec 34(B)]
purposes of the trade, business or Deduction Allowable The amount of
profession, of property to which the interest paid or incurred within a taxable
taxpayer has not taken or is not taking year on indebtedness in connection with
title or in which he has no equity other the taxpayer's profession, trade or
than that of a lessee, user or business shall be allowed as deduction
possessor from gross income.
4. Entertainment, amusement and
recreation expenses that are directly REQUISITES (Sec. 34(B) as
connected to the development, implemented by Sec. 6, RR 13-2000):
management and operation of the (WITTY CReP DL)
trade, business or profession of the 1. There is an INDEBTEDNESS.
taxpayer, or that are directly related 2. The indebtedness is that of the
to or in furtherance of the conduct of TAXPAYER.
his or its trade, business or exercise of 3. The indebtedness is connected with
a profession the taxpayers TRADE, profession,
or business.
Representation Expenses [Sec. 2, 4. The interest must be legally DUE.
RR 10-2002] incurred by a 5. The interest must be stipulated in
taxpayer in connection with the WRITING.
conduct of his trade, business or 6. The taxpayer is LIABLE to pay
exercise of profession, in interest on the indebtedness.
entertaining, providing amusement 7. The indebtedness must have been
and recreation to, or meeting with, paid or accrued during the taxable
a guest or guests at a dining place, YEAR.
place of amusement, country club, 8. The interest payment arrangement
theater, concert, play, sporting must not be between ReLATED
event, and similar events or taxpayers as mandated in Sec.
places. 34(B)(2)(b), in relation to Sec. 36(B),
both of the Tax Code of 1997.
9. The interest must not be incurred to
Ceiling [Sec. 5, RR 10-2002]
finance PETROLEUM operations.
The amount of actual
10. In case of interest incurred to acquire
entertainment, amusement and
property used in trade, business or
recreation expense paid or
exercise of profession, the same was
incurred within the taxable year by
not treated as a CAPITAL
the taxpayer, but in no case shall
expenditure,
such deduction exceed:
- For taxpayers engaged in sale of
LIMITATION: The taxpayer's allowable
goods or properties: 0.5% of net
deduction for interest expense shall be
sales (i.e., gross sales less sales
reduced by an amount equal to 42% of
returns/allowances and sales
the interest income subjected to final tax;
discounts)
- For taxpayers engaged in sale of
services, including exercise of

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provided, that effective January 1, 2009, interest which corresponds to the


the percentage shall be 33%.12 amount of the principal amortized or
Purpose: To prevent tax arbitrage or the use paid during the year shall be allowed
of back- to-back loans to take advantage as deduction in such taxable year.
of the difference between the tax rate on 2. Interest payments made: (between
interest income (20% final tax) and the related taxpayers [persons specified
rate of savings caused by the deduction of under Section 36 (B), see discussion
interest expense (35%-corporate rate) on losses below-Subsection H]
3. Interest on indebtedness incurred to
ILLUSTRATION: finance petroleum exploration
On Jan. 1, 2007, A Corp borrowed P100,000
from B Bank at a rate of 10% per annum. OPTIONAL TREATMENT OF INTEREST
On the same day A Corp. deposited the EXPENSE: At the option of the taxpayer,
same amount to C Bank at 10% interest p.a. interest incurred to acquire property used
By the end of the year A Corp would have in trade, business or exercise of a
P10,000 interest income from C Bank, and profession may be either (1) allowed as a
P10,000 interest expense payable to B Bank. DEDUCTION or (2) treated as a CAPITAL
If not for the 42% limitation, the 2 EXPENDITURE.
transactions would result in tax savings for A
Corp as ILLUSTRATION:
follows: Mr. A wanted to acquire a delivery van
Tax savings from deduction 3,500 worth P1,000,000 for his business. To
of interest expense (P10,000 finance this, he borrowed P1,000,000
x 35% from ABC Bank on January 1, 2005. The
Less: Final tax on interest 2,000 loan bears interest of 10%, and both the
income (P10,000 x 20%) interest and principal are payable on
Net Tax savings 1,500 December 31, 2005. For income tax
purposes, how should Mr. A account for
his interest expense in 2005?
Applying the limit, A corp.s deductible
interest expense would be: ANSWER: Mr. A has two options. First, he
Actual interest expense 10,000 may choose to treat the P100,000 (10%
Less: 42% of interest 4,200 of P1,000,000) interest expense As
income amended by RA 9337
Deductible interest 5,800 as an outright deduction from his gross
expense income in 2005 (which deduction shall be
subject to the limitation that it be reduced
Due to the limitation, the tax savings will be by an amount equal to 42% of the
reduced from P 1,500 to P 30: taxpayers interest income subjected to
Tax savings on interest 2,030 final tax). Alternatively, he may choose to
expense deduction (P capitalize the interest expense by
5,800 x 35%) incorporating its amount to the cost of the
Less: Final Tax on interest 2,000 vehicle obtained for his business. In this
income case, the vehicle will be recorded in his
books at a cost of P1,100,000 (purchase
Net Tax Savings 30
price of P1,000,000 plus the interest
expense of P100,000). The total cost of
the vehicle will then be gradually allowed
When is the limitation not as deduction from the gross income of the
applicable? Interest incurred or paid succeeding taxable years as depreciation
by the taxpayer on all its business expense.
related taxes shall be fully deductible
from gross income unpaid and shall not G. Taxes [Sec. 34(C)]
be subject to the limitation on Definition: The word taxes means taxes
deduction. Thus, such interest expense proper and no deduction should be
incurred or paid shall not be diminished allowed for amounts representing interest,
by the percentage of interest income surcharge, or penalties incident to
earned which had been subjected to delinquency. (Sec. 80, RR-2)
final withholding tax. (Sec. 4(c), RR 13-
2000) GENERAL RULE: All taxes, national or
local, paid or incurred during the taxable
year in connection with the taxpayer's
NON-DEDUCTIBLE INTEREST (Sec. profession, trade or business, are
34(B)(2)(b) as implemented by Sec. 4(d), deductible from gross income
RR 13-2000)
1. Interest paid in advance by the EXCEPTIONS:
taxpayer who reports income on cash Philippine income tax, except the
basis fringe benefit tax
When allowed as deduction: in the Income tax imposed by authority of
year the indebtedness is paid. any foreign country
If the indebtedness is payable in Except when the taxpayer does
periodic amortizations, the amount of NOT signify his desire to avail of
the tax credit for taxes of foreign
12
As amended by RA 9337 countries, in which case the

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TAXATION LAW 1

amount may be allowed as a to delinquency on the payment of the


deduction subject to the limitations tax. In taking a tax credit:
set forth by law. (Note that a
taxpayer qualified to take tax Tax credit is taken for The foreign
credits for foreign income taxes income tax
paid or incurred may alternatively Tax credit is taken The
claim them as deductions from against Philippine
gross income.) income tax
Estate and donors taxes
Taxes assessed against local benefits Who can claim a tax credit, and in
of a kind tending to increase the value what amount13?
of the property assessed (Special 1. The amount of income taxes paid
Assessments) or incurred during the taxable year
Value Added Tax to any foreign country
Fines and penalties due to late a. Citizens
payment of tax b. Domestic corporations
Final taxes 2. The taxpayers proportionate share
Capital Gains Tax of such taxes of the general
professional partnership/estate or
REQUISITES: (TEDY) trust paid or incurred during the
1. It must be paid or incurred within the taxable year to a foreign country,
taxable YEAR. if his distributive share of the
2. It must be paid or incurred in income of such partnership/estate
connection with the taxpayers or trust is reported for taxation
TRADE, profession or business. a. Members of general
3. It must be imposed DIRECTLY on professional partnerships
the taxpayer. b. Beneficiaries of estates or
4. It must not be specifically trusts
EXCLUDED by law from being
deducted from the taxpayers gross Who may NOT claim a tax credit?
income. 1. Alien individuals
2. Foreign corporations
EXAMPLES:
Import duties Substantiation requirements: The
Business taxes tax credits shall be allowed only if the
Occupation taxes taxpayer establishes to the
Privilege and license taxes satisfaction of the Commissioner the
Excise taxes following:
Documentary stamp taxes 1. The total amount of income
Automobile registration fees derived from sources without the
Real property taxes Philippines;
2. The amount of income derived
LIMITATION: In the case of a from each country, the tax paid
nonresident alien individual engaged in or incurred to which is claimed as
trade or business (NRAETB) and a a credit under said paragraph,
resident foreign corporation (RFC), the such amount to be determined
deductions for taxes shall be allowed only under rules and regulations
if and to the extent that they are prescribed by the Secretary of
connected with income from sources Finance; and
within the Philippines. 3. All other information necessary
for the verification and
Special Treatment of Foreign Income computation of such credits.
Tax: A taxpayer qualified to take tax Limitations: The amount of tax credit
credits for foreign income taxes paid or allowed is equivalent to the tax paid or
incurred may alternatively claim them as incurred to a foreign country during
deductions from gross income. the taxable year but not to exceed the
following limits:
What is tax credit? A credit for 1. [Per Country Limit] The amount
foreign income tax paid or incurred of tax credit shall not exceed the
reduces the Philippine income tax that same proportion of the tax against
should be paid. Tax credit is given to a which such credit is taken, which
taxpayer in order to provide relief the taxpayer's taxable income
from too onerous a burden of taxation from sources within such country
where the same income is subject to bears to his entire taxable income
both foreign income tax and the for the same taxable year; and
Philippine income tax. In determining 2. [Worldwide Limit] The total
the tax credit that may be allowed a amount of the credit shall not
taxpayer, the foreign income tax exceed the same proportion of the
should be understood to mean tax tax against which such credit is
proper only; no credit shall be taken taken, which the taxpayer's
for any amount paid or incurred to the taxable income from sources
foreign country which represents
interest, surcharge or penalty incident 13
Amounts are subject to the limitations (per country and
overall) set forth by law.

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without the Philippines taxable Amount


bears to his entire taxable income Allowed
for the same taxable year. (Whichever
is Lower)
i.e.: Country A
1. Taxable Income
per Foreign Country x Phil. income = limit Limitation A 70,000 60,000
Worldwide tax (200/1000 x
Taxable Income 350,000)
Actually paid to 60,000
Country A
2. Taxable Income for
all Foreign Countries x Phil. income = limit Country B
Worldwide tax Limitation B 35,000 35,000
Taxable Income (100/1000 x
NOTE: The second limitation 350,000)
applies where the taxpayer derives Actually paid to 38,000
income from more than one Country B
foreign country. Tax credit 95,000
allowed under
ILLUSTRATION: Limitation A
D Co., a domestic corporation, had the
following data for a year on taxable income Step 3: Compute for Limitation B
and income taxes paid: (Overall Basis).
To get tax credit (overall basis) under
Limitation B, this formula is followed:
Taxable Income, Country A P200,000
Taxable Income, Country B P100,000 Taxable Income from
Taxable Income, Philippines P700,000 sources outside the Phils x Phil. income = tax
Taxable Income tax credit
Income Tax Paid Country P 60,000 from all sources
A
Income Tax Paid Country P 38,000 The result after applying the formula above
B is compared to the tax actually paid in total
to foreign countries. The lower of the two
What is the Philippine income tax still due, amounts will be added to get the total tax
after credit for foreign income taxes? credit allowed under Limitation B.
Should D Co. choose to treat income taxes
paid to foreign countries as deductions Amount
from gross income, what is its Philippine Allowed
income tax? (Whichever
is Lower)
Answer:
Scenario A: Tax Credit option is chosen. Overall
Limit:
Step 1: Compute for total taxable 300/1000 105,000
income and Philippine income tax x 350,000
Total 98,000
Taxable Income, Country A 200,000 foreign
Taxable Income, Country B 100,000 income
Taxable Income, Philippines 700,000 taxes paid
Total Taxable Income from Tax credit 98,000
sources within and without allowed
the Phils 1,000,000 under
Limitation
Philippine Income Tax (P1Mx 350,000 B
35%)

Step 4: Compare the respective tax credits


Step 2: Compute for Limitation A (Per
allowed under Limitation A and Limitation B.
Country Basis).
The lower of the two amounts is the final
To get tax credit per country under
allowable tax credit. In this case, the
Limitation A, this formula is followed:
amount computed under Limitation A
Taxable Income (P95,000) is lower, thus it becomes the final
from Foreign Country x Phil. income = tax allowable tax credit.
Taxable Income tax credit
from all sources Step 5: Compute for the income tax still
due.
The result after applying the formula above Philippine Income tax 350,000
is compared to the tax actually paid for each Less: Allowable Tax Credit 95,000
foreign country. The lower of the two
Philippine Income Tax still due 255,000
amounts for each foreign country will be
added to get the total tax credit allowed
under Limitation A.

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Scenario B: Deduction option is chosen. There should be an identifiable


event that fixes the loss. For
Taxable Income, P 200,000 instance, when a loss results from
Country A a sale, the consummation of the
Taxable Income, 100,000 sale is the identifiable event that
Country B fixes the loss, and the deduction
Taxable Income, Phils. 700,000 should be claimed in the year that
Total Taxable Income the sale was consummated. A
(before deduction sale is consummated only when
for foreign income there is delivery.
tax) P1,000,000 4. The loss is not claimed as a
Less: Deductions for DEDUCTION for estate tax
Foreign Income Taxes purposes.
Paid 5. The loss must not be compensated
Country A by INSURANCE or other forms of
P60,000 indemnity.
Country B 6. The loss must be connected with
P38,000 (98,000) the taxpayers TRADE, business or
Net Taxable Income P 902,000 profession.
7. In the case of casualty loss,
Philippine Income Tax declaration of loss (Sworn
(902,000 x 35%) P 315,700 DECLARATION of Loss) must be
filed within 45 days from the
H. Losses [Sec. 34(D)] occurrence of the casualty loss. (RR
Losses actually sustained during the 12-77)
taxable year and not compensated for by
insurance or other forms of indemnity Despite concurrence of
shall be allowed as deductions: requisites, when is loss
If incurred in trade, profession or nonetheless NOT deductible?
business; In computing net income, no
Of property connected with the trade, deductions shall in any case be
business or profession, if the loss allowed in respect of losses from
arises from fires, storms, shipwreck, sales or exchanges of property
or other casualties, or from robbery, directly or indirectly [between related
theft or embezzlement. taxpayers (Sec. 36 (B) ]
1. Between members of a family
REQUISITES: (CATT DID) - Family -includes brothers and
1. The loss must be that of the sisters (whole and half-blood),
TAXPAYER. spouse, ancestors, and lineal
-The loss is personal to the taxpayer descendants
and is not transferable or usable by 2. Between an individual and
another. The loss of a predecessor corporation more than fifty
partnership is not deductible by a percent (50%) in value of the
successor corporation. The loss of the outstanding stock of which is
parent company may not be owned, directly or indirectly, by
deducted by its subsidiary. or for such individual; or
2. The loss must be ACTUALLY 3. Between two corporations more
sustained and charged off within than fifty percent (50%) in value
the taxable year. of the outstanding stock of which
-However, if the loss is compensated is owned, directly or indirectly, by
by insurance or otherwise, the loss is or for the same individual;
postponed to a subsequent year in 4. Between the grantor and a
which it appears that no fiduciary of any trust;
compensation at all can be had, or 5. Between the fiduciary of a trust
there is a remaining net loss (or and the fiduciary of another trust
there is no full compensation). if the same person is a grantor
Deduction will be denied if there is a with respect to each trust;
measurable right to compensation for 6. Between a fiduciary of a trust and
the loss, with ultimate collection beneficiary of such trust.
reasonably clear. So where there is
reasonable ground for Obsolescence and worthlessness;
reimbursement, the taxpayer must when deductible
seek his redress and may not secure Obsolescence: when the property has
a loss deduction until he establishes to be discarded permanently because
that no recovery may be had. In its usefulness is suddenly terminated.
other words, the taxpayer must first Worthlessness: when it can be
exhaust his remedies to recover or satisfactorily shown that the property
reduce his loss. (Plaridel Surety and had indeed become valueless.
Insurance Co. v. Collector, 21 SCRA
1187) Other Types of Losses Recognized by
the Tax Code
3. The loss is evidenced by a CLOSED Shrinkage in Value of Stocks (Sec.
and completed transaction. 99, RR-2) no loss can be deducted
from a mere shrinkage in value of

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such stock through fluctuation of the ILLUSTRATION:


market. The loss allowable in such S Co., not a dealer in securities,
case is that actually suffered when on December 27, 2000, sold for
the stock is disposed of. If stock of a P90,000, 1,000 shares of
corporation becomes worthless, its common stock of ZZ Company,
cost or other basis determined in that it acquired on January 20,
accordance with Revenue Regulation 2000 for P110,000. On January 5,
2-98 may be deducted by the owner 2001, or nine days after the sale,
in the taxable year in which the stock it acquired 900 shares of common
became worthless, provided a stock of the same company for
satisfactory showing of its P90,000. On June 10, 2001, the
worthlessness be made, as in the latest acquisition was sold for
case of bad debts. P120,000.

Wagering Losses [Sec. 34 (D)(6)] INCOME TAX IMPLICATIONS:


Wagering losses are deductible only There would have been a loss
to the extent of wagering gains. not recognized of P18,000 on
Therefore, if there are no wagering the sale of December 27,
gains, wagering loss cannot be 2000.
deducted. [Wagering gains and There would have been a gain
losses - gains and losses from of P12,000 on the sale of June
transactions where the outcome 10, 2001.
depends upon chance.]
SUPPORTING SOLUTION:
Loss from Wash Sales of Stocks or a. Determine if the sale is a
Securities [Sec. 38] A loss from a wash sale YES, because
wash sale of stock or securities is nine days after the December
generally not deductible from gross 27, 2000 sale (or within the
income. A wash sale is a sale under sixty-one day period), S. Co.
the following circumstances: (which is not a dealer in
1. There was a sale or other securities) acquired shares of
disposition of stock or securities stock which were the same as
at a loss. those disposed of.
2. Within a period beginning thirty
days before, and ending thirty b. Computation of loss not
days after, the date of sale or recognized
disposition (known as the sixty-
one day period), there was an Acquisition Cost P110,000
acquisition of shares or securities Less: Selling Price 90,000
(or option to acquire shares or Total Loss P 20,000
securities).
i.e.: Date of sale
No. of shares sold at a loss 1,000
---------------- x ---------------- Less: Number of shares 900
acquired within the 61-day
Acquisition period
occurred 30 days PRIOR OR 30 days AFTER
to the sale the sale No. of shares acquired with 100
EITHER:
no matching acquisition
3. The acquisition, or option,
should be a purchase or
Loss on a wash sale, not
exchange upon which gain or
recognized
loss is recognized under the
(900/1,000 * 20,000) P18,000
income tax law.
4. The stock or securities acquired Capital Loss recognized
were substantially the same as (100/1,000 * 20,000) P2,000
those disposed of.
5. The taxpayer is NOT a dealer in c. Computation of basis of the
securities. shares acquired on January 5,
2001 (i.e., adjusted cost).
Acquisition Cost P 90,000
INCOME TAX RULE: On the Add: Loss not 18,000
shares sold at a loss with recognized
covering acquisitions, NO LOSS
Basis of the shares
shall be recognized. On the
acquired on January
shares sold at a loss with no
5, 2001 P108,000
covering acquisitions, CAPITAL
LOSS shall be recognized (See
XIII. Capital Gains and Losses, d. Computation of the gain on
for the income tax treatment). the sale of June 10, 2001
The loss not recognized shall be Selling Price P120,000
adjusted into (i.e., added to) the
basis of the shares acquired Less: Adjusted 108,000
within the sixty-one day period. Basis
Gain on the Sale 12,000

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Gain will be recognized only if, on


What if the taxpayer is a dealer the exchange under the merger or
in securities, and the transaction consolidation, the taxpayer received
from which the loss resulted, was cash or property. The gain to be
made in the ordinary course of recognized should not exceed the
the business of such dealer? sum of money and the fair market
The loss is deductible in full. value of the property received.

Corporate readjustment: Merger or


Consolidation14 [Sec. 40(C)] Corporate readjustment: Transfer to
A merger or consolidation has income Controlled Corporation [Sec. 40(C)]
tax consequences to the corporation When a taxpayer transfers property
which is a party to the merger or to a corporation, in consideration of
consolidation, to its stockholders, and stock received for the transfer, as a
to its security holders. To the result of which transfer, the taxpayer
corporation, or to its stockholders, or (alone or together with others not
to its security holders, loss is not exceeding four [or a total of five])
recognized from the merger or gains control of the corporation15, no
consolidation. loss is recognized on the transfer of
property.
ILLUSTRATION:
Y Co. was merged into Z Co. Y Co.
transferred its properties with a book Suppose the transfer resulted in
value of P2,000,000 to Z Co., for a GAIN to the transferor, will the
which it received shares of stock of Z gain be recognized?
Co. with a fair market value of Gain will be recognized only if on
P1,800,000. Mr. AA was a the transfer, the taxpayer received
stockholder of Y Co., and he was cash or property in addition to the
asked to surrender his shares in Y shares received. The gain to be
Co. (which he acquired at a cost of recognized shall not exceed the sum
P200,000) to the company (Y Co.), of money and fair market value of
and received in return for the shares the property received.
surrendered, shares of stock of Z Co.
with a fair market value of P180,000.
The merger had the following tax If before the transfer to the
consequences: corporation, the transferor
already had control over the
corporation, the gain or loss on
To Y Co. the transfer will be recognized.
Fair Market Value of shares of P1,800,000
ILLUSTRATION:
Z Co. received
Mr. II transferred property to JJ Co.,
Less: Book Value of properties 2,000,000
of which he had control. The property
transferred
had a basis to him of P500,000. JJ
Loss not recognized P 200,000 Co. paid him with shares of stock
with a fair market value of P450,000.
To Mr. AA: Will there be a loss to recognize?
Yes. This transfer does not qualify as
Fair Market Value of Z Co.
a corporate readjustment.
shares received P 180,000
Less: Cost of Y Co. shares BIR Ruling 383-87 (Nov. 25,
surrendered 200,000 1987): Requirements for
deductibility
Loss not recognized P18,000 1. Plan of reorganization should be
adopted by each of the corporation
Suppose a merger or shown by acts of its duly
consolidation resulted in a GAIN constituted officers
to the corporation, or o Copy of the plan
stockholder, or security holder, o Complete statement of the
will the gain be recognized? cost or other basis of all
property
14 o Statement of the amount of
No gain or loss shall be recognized if in pursuance of a plan
of merger or consolidation - stock or securities and other
(a) A corporation, which is a party to a merger or property or money received
consolidation, exchanges property solely for stock in a from the exchange, including
corporation, which is a party to the merger or a statement of all
consolidation; [property for stock] or distributions or other
(b) A shareholder exchanges stock in a corporation, which
dispositions made thereof
is a party to the merger or consolidation, solely for the
stock of another corporation also a party to the merger o Statement of the amount and
or consolidation; [stock for stock ] or nature of any liabilities
(c) A security holder of a corporation, which is a party to assumed upon the exchange.
the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in such 15
corporation, a party to the merger or consolidation. Previous to the transfer there was no control, and it was the
[securities for securities] transfer that resulted in control.

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2. Taxpayer (other than the a deduction from gross income for


corporation party to the the next three (3) consecutive
reorganization) who received taxable years17 immediately
stocks or securities and other following the year of such loss.
property shall be incorporated in
his ITR for the taxable year in REQUISITES:
which the exchanges takes place a 1. Any net loss incurred in a taxable
complete statement of facts year during which the taxpayer
pertinent to the non-recognition of was exempt from income tax
gain or loss including: shall not be allowed as a
o Statement of the cost or deduction.
other basis of the stock or 2. A net operating loss carry-over
securities transferred in the (NOLCO) shall be allowed only if
exchange there has been NO SUBSTANTIAL
o Statement in full amount of CHANGE in the ownership of the
the stocks, securities, other business or enterprise.
property, and money There is no substantial change
including liabilities assumed when:
upon the exchange. a. 75% or more in nominal
value of outstanding issued
Capital Losses (See XIII. Capital shares, if the business is in
Gains and Losses) the name of the corporation,
is held by or on behalf of the
Abandonment Losses [Sec. 34(D)(7)] same persons; or
In the event a contract area where b. 75% or more of the paid up
petroleum operations are capital of the corporation, if
undertaken is partially or wholly the business is in the name
abandoned, ALL accumulated of the corporation, is held by
exploration and development or on behalf of the same
expenditures pertaining thereto persons.
shall be allowed as a deduction:
o Provided, That accumulated Applicability of the 75% interest
expenditures incurred in that rule
area prior to January 1, 1979 o The 75% equity, ownership or
shall be allowed as a interest rule shall only apply to a
deduction only from any transfer or assignment of the
income derived from the same taxpayer's net operating losses as a
contract area. result of or arising from the said
o In all cases, notices of taxpayer's merger or consolidation or
abandonment shall be filed business combination with another
with the Commissioner. person. In case the transfer or
assignment of the taxpayer's net
In case a producing well is operating losses arises from the said
subsequently abandoned, the taxpayer's merger, consolidation or
unamortized costs thereof, as combination with another person, the
well as the undepreciated costs transferee or assignee shall NOT be
of equipment directly used entitled to claim the same as
therein, shall be allowed as a deduction from gross income
deduction in the year such well, UNLESS, as a result of the said
equipment or facility is abandoned merger, consolidation or
by the contractor: combination, the shareholders of
o Provided, That if such the transferor/assignor, or the
abandoned well is reentered transferor (in case of other business
and production is resumed, or combinations) gains control of at
if such equipment or facility is least 75% or more in nominal
restored into service, the said value of the outstanding issued
costs shall be included as shares or paid up capital of the
part of gross income in the transferee/assignee (in case the
year of resumption or transferee/assignee is a corporation)
restoration and shall be or 75% or more interest in the
amortized or depreciated, as business of the transferee/assignee
the case may be. (in case the transferee/assignee is

Net Operating Loss Carry-Over


(NOLCO) [Sec. 34(D)(3)] 17
The net operating loss16 of the Exception to the Three-Year Rule For mines other
business for any taxable year than oil and gas wells, a net operating loss without the benefit
of incentives provided for under the Omnibus Investments Code
immediately preceding the current
of 1987, incurred in any of the first ten (10) years of operation
taxable year, which had not been may be carried over as a deduction from taxable income for the
previously offset as deduction from next five (5) years immediately following the year of such loss.
gross income shall be carried over as The entire amount of the loss shall be carried over to the first of
the five (5) taxable years following the loss, and any portion of
16
such loss which exceeds, the taxable income of such first year
Net operating loss is the excess of allowable deductions over shall be deducted in like manner form the taxable income of the
gross income (as defined in Sec. 32(A) of the NIRC). next remaining four (4) years.

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other than a corporation). (Sec. 2.4, i.e., Z Corporation's shares were


RR 14-2001) held "by" Y Corporation "on behalf
of" X Corporation. After the
o BIR Ruling 011-02, March merger, X now directly owns Z
27, 2002 Corporation [absorbed corporation]
The 75% equity, ownership which continues to exist in Y
or interest rule does not apply Corporation.
in this case, since the transfer
of the shares by the previous Taxpayers Entitled to Deduct
stockholders were through NOLCO from Gross Income.
straight purchase and sale 1) Any individual (including estates
and not through merger, and trusts) engaged in trade or
consolidation or business business or in the exercise of his
combination, such transfer did profession
not cause a substantial -Special Rule: An individual
change in ownership. who claims the 10% optional
standard deduction shall not
Time of Determination of simultaneously claim deduction
Substantial Change in the of the NOLCO. Further, the
Ownership of the Business three-year reglementary period
the shall continue to run
end of the taxable year when NOLCO notwithstanding the fact that
is to be claimed as deduction (e.g., in the aforesaid individual availed
the case of merger or consolidation of the 10% optional standard
of two or more corporations, such deduction during the said
change shall be determined based on period.
the ownership of the outstanding
shares of stock issued or based on 2) Domestic and resident foreign
paid-up capital as of the end of the corporations subject to the normal
taxable year, and as a result of or income tax (e.g., manufacturers
arising from the said merger or and traders) or preferential tax
consolidation). (Sec. 5, RR 14-2001) rates under the Code (e.g., private
educational institutions, hospitals,
and regional operating
By or on Behalf of the Same headquarters)
Persons -Special Rule: Corporations
o refers to the maintenance of cannot enjoy the benefit of
ownership despite change as when: NOLCO for as long as it is
subject to MCIT in any taxable
No actual change in ownership is year. The three-year
involved in case the transfer involves reglementary period on the
change from direct ownership to carry-over of NOLCO shall
indirect ownership, or vice versa. continue to run
notwithstanding the fact that
ILLUSTRATION: the corporation paid its income
Facts: P Corporation owns Q tax under the "Minimum
Corporation that has NOLCO. P Corporate Income Tax"
Corporation transfers Q computation.
Corporation's shares to R
Corporation in exchange for 100% EXCEPTIONS (Who are not entitled
of R Corporation shares. to deduct NOLCO): (bob-pie)
Held: Q Corporation's NOLCO is 1. Offshore Banking Unit (OBU) of
retained because Q Corporation's a foreign banking corporation, and
shares are held "by" R Corporation Foreign Currency Deposit Unit
"on behalf of" P Corporation, the (FCDU) of a domestic or foreign
original owner. banking corporation, duly
authorized as such by the Bangko
No actual change in ownership is Sentral ng Pilipinas (BSP);
involved as in the case of merger of
the subsidiary into the parent 2. An enterprise registered with
company. the Board of Investments
(BOI) with respect to its BOI-
ILLUSTRATION: registered activity enjoying the
Facts: X Corporation owns 100% Income Tax Holiday incentive.
of Y Corporation. Y Corporation Its accumulated net operating
owns 100% of Z Corporation. Z losses incurred or sustained during
Corporation has NOLCO. Z the period of such Income Tax
Corporation is merged into Y Holiday shall not qualify for
Corporation. purposes of the NOLCO;
Held: Z Corporation's NOLCO
should be retained and transferred 3. An enterprise registered with
to Y Corporation. Prior to the the Philippine Economic Zone
merger, X Corporation already Authority (PEZA), pursuant to
indirectly owned Z Corporation, R.A. No. 7916, as amended, with

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respect to its PEZA-registered


business activity. Its accumulated 5. Foreign corporations engaged in
net operating losses incurred or international shipping or air
sustained during the period of its carriage business in the
PEZA registration shall not qualify Philippines; and
for purposes of the NOLCO;
6. In general, any person, natural or
4. An enterprise registered under juridical, enjoying exemption
R.A. No. 7227, otherwise known as from income tax, pursuant to the
the Bases Conversion and Devt provisions of the Code or any
Act of 1992, e.g., SBMA-registered special law, with respect to its
enterprises, with respect to its operation during the period for
registered business activity. Its which the aforesaid exemption is
accumulated net operating losses applicable. Its accumulated net
incurred or sustained during the operating losses incurred or
period of its said registered sustained during the said period
operation shall not qualify for shall not qualify for purposes of
purposes of the NOLCO; the NOLCO.

ILLUSTRATION OF NOLCO:
(In Pesos) 2000 2001 2002 2003 2004
Gross Income 500,000 600,000 700,000 500,000 800,000
Less: Deductions 900,000 500,000 750,000 420,000 450,000
Net Loss [OR] (400,000) (50,000)
Net Income before NOLCO* 100,000 80,000 350,000
Less: NOLCO

From 2000
>(100,000) > (80,000)

>
From 2002 (50,000)
Taxable Income 0 0 0 0 300,000

* - whichever is applicable

Explanation:
The unused net operating loss of P220,000 (400,000 100,000 80,000) of the year 2000 could
not be carried over beyond 2003. The net operating loss of 2002 could be carried over to 2004,
since it is within the three-year period.

Q: As of yearend of 2004, what amount of NOLCO is available to the company for offsetting against
(potential) gross income of succeeding taxable years?

Answer: None. While there was an unused portion of the 2000 NOLCO, such had already expired
by yearend of 2003. The 2002 NOLCO (P50,000) was completely used up in 2004. There is,
therefore, no NOLCO available to the company for year 2005 and thereafter.

In general, a debt is not worthless simply


I. Bad Debts [Sec. 34(E)] because it is of doubtful value or difficult to
Definition: debts resulting from the collect. Worthlessness is not determined by
worthlessness or uncollectibility, in whole or an inflexible formula or slide rule calculation
in part, of amounts due the taxpayer by but upon the exercise of sound business
others, arising from money lent or from judgment. The determination of
uncollectible amounts of income from goods worthlessness in a given case must depend
sold or services rendered. (Sec. 2, RR 5-99 upon the particular facts and the
as amended by RR 25-2002) circumstances of the case. A taxpayer may
not postpone a bad debt deduction on the
Deduction Allowed: Debts due to the basis of a mere hope of ultimate collection
taxpayer actually ascertained to be or because of a continuance of attempts to
worthless and charged off within the taxable collect notes which have long become
year overdue, and where there is no showing
that the surrounding circumstances differ
Actually ascertained to be worthless from those relating to other notes which
were charged off in a prior year. While a

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mere hope probably will not justify will consider ALL PERTINENT
postponement of the deduction, a EVIDENCE, including
reasonable possibility of recovery will
permit the account to be carried along the value of the collateral, if
notwithstanding that the probabilities are any, securing the debt and the
that the debt may not be collected at all. financial condition of the
debtor in determining whether a
Good faith is not enough. Taxpayer debt is worthless, or the
must show also that he had assigning of the case for
reasonably investigated the relevant collection to an independent
facts and had drawn a reasonable collection lawyer who is not
inference from the information thus under the employ of the taxpayer
obtained by him. Where a taxpayer and who shall issue a statement
has failed to attach to his tax returns a under oath showing the propriety
statement showing the propriety of the of the deductions thereon made
deductions therein made for alleged bad for alleged bad debts. (Sec. 3, RR
debts, the account written off will be 5-99 as amended by RR 25-2002)
disallowed. (Collector v. Goodrich
International Rubber Co., 21 SCRA Other factors
1336) The flight or disappearance of the
debtor, the insolvency of the debtor, or
What does good faith require? The the death of the debtor with insufficient
taxpayer may strike a middle course properties to pay creditors, may
between pessimism and optimism and indicate worthlessness of the debt.
determine debts to be worthless in the
exercise of sound business Note: A creditor cannot deduct the
judgment based upon as complete debt of an insolvent debtor as long as it
information as is reasonably is possible to proceed against the
ascertainable. The taxpayer need not guarantor or surety who is insolvent.
have perfect discernment. (Sec. 2, RR 5- All efforts must be exhausted to collect
99 as amended by RR 25-02) from the guarantor or surety.

"Actually charged off from the 4. The debt must be actually CHARGED
taxpayers books of accounts" OFF the books of accounts of the
means that the said receivable has been taxpayer as of the end of the taxable
cancelled and written-off from the said year.
taxpayer's books of account. In no case
may any bad debt deduction be allowed NOTE: The debts due a taxpayer may arise
unless the facts pertaining to the money or out of securities held. But in a case where
property lent and its cancellation or write- securities are ascertained to be worthless
off from the taxpayer's accounting records, and charged off within the taxable year, and
after having been determined that the same are capital assets, the loss to the taxpayer
has actually become worthless, have been (other than a bank or trust company
complied with by the taxpayer. (Sec. 2, RR incorporated under the laws of the
5-99 as amended by RR 25-02) Philippines a substantial part of whose
business is the receipt of deposits) will not
EXCEPTIONS: be treated as bad debts, but as capital loss
The following are not deductible as bad debts: on the last day of the taxable year (See
1. debts not connected with profession, XIII. Capital Gains and Losses for the
trade or business income tax treatment). The date that the
2. debts sustained in a transaction entered securities were written off is immaterial.
into between family members or related [Sec. 34(E)(2)]18
taxpayers [see Sec. 36(B) or discussion
on Losses above-Subsection H] GENERAL RULE: The determination by the
Commissioner of Internal Revenue as to the
REQUISITES: (PICU) worthlessness of bad debt is adequate.
1. There must be an existing
INDEBTEDNESS due to the taxpayer, EXCEPTIONS: Who are required to submit
which must be valid and legally additional documents or to secure approval
demandable. from their regulatory agencies before they
2. The debt must be connected with are allowed to deduct bad debts from gross
PROFESSION, trade or business. income?
3. The debt must be actually ascertained
to be worthless or UNCOLLECTIBLE.
(e.g., bankrupt debtor) 18
ILLUSTRATION: Mr. A purchased bonds of B Co. on March 10,
Determining uncollectibility 2000 for P100,000 and held them as capital assets. On February
2, 2001, B Co. was declared by the Court as insolvent, and the
Before a taxpayer may charge off
bonds were totally worthless. Mr. A wrote off the bonds from his
and deduct a debt, he must ascertain books of accounts on February 4, 2001. There is no bad debt for
and must be able to demonstrate with Mr. A. He would be considered to have a capital loss of P100,000
reasonable degree of certainty the for the year 2001. The holding period of the bonds was from
uncollectibility of the debt. The March 10, 2000 to December 31 2001, or more than 12 months.
The capital loss would be considered at 50%, or at P50,000. (See
Commissioner of Internal Revenue
XIII. Capital Gains and Losses for the detailed explanation on
income tax treatment of capital asset transactions.)

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1. Banks: Without prejudice to the depreciation gets the deduction. Ordinarily,


Commissioners determination of the this is the person who owns and has a
worthlessness and uncollectibility of capital investment in the property.
debts, the taxpayer shall submit a
Bangko Sentral ng Pilipinas (BSP) / When to deduct depreciation: The period of
Monetary Board written approval of the depreciation starts when the asset is placed
writing off of the indebtedness from the in service. It ends when the asset is
banks' books of accounts at the end of disposed of, or its usefulness exhausted.
the taxable year.
Requirements for deductibility (RR REQUISITES: (TRUCE)
5-99) 1. The allowance for depreciation must be
Bad debts uncollected for 6 months for property used in the TRADE or
Resolution by the BOD of the bank business, or those not being used
Approval by the monetary board temporarily during the year (Conwell
Bros. Co. v. Collector, CTA Case No.
2. In no case may a receivable from an 411).
insurance or surety company be 2. The asset must have a limited USEFUL
written-off from the taxpayer's books life.
and claimed as bad debts deduction 3. The allowance for depreciation must be
unless such company has been REASONABLE.
declared closed due to insolvency or for 4. The allowance must be CHARGED off
any such similar reason by the during the taxable year from the
Insurance Commissioner. taxpayers books of accounts.
5. The total allowances must not EXCEED
Recovery of Bad Debts Previously the cost of the property.
Deducted (Tax Benefit Rule) (Sec. 4, RR
5-99) What is the appropriate useful life of the
The recovery of bad debts previously property? What rate of depreciation must be
allowed as deduction in the preceding year applied?
or years shall be included as part of the
taxpayer's gross income in the year of such Generally, the estimated useful life is
recovery to the extent of the income tax determined by the taxpayer himself.
benefit of said deduction. HOWEVER, where the taxpayer and the
Commissioner have entered into an
J. Depreciation [Sec. 34(F)] agreement in writing specifically dealing
Definition: Depreciation is the gradual with the useful life and rate of depreciation
diminution of the useful value of tangible of any property, the rate so agreed upon
property resulting from wear and tear and shall be binding on both the taxpayer and
normal obsolescence. The term is also the national Government in the absence of
applied to amortization of the value of facts and circumstances not taken into
intangible assets (i.e., patents), the use of consideration during the adoption of such
which in the trade or business is definitely agreement.
limited in duration.
The responsibility of establishing the
Deduction Allowable: There shall be allowed existence of such facts and
as a depreciation deduction a reasonable circumstances shall rest with the party
allowance for the exhaustion, wear and tear initiating the modification.
(including reasonable allowance for
obsolescence) of property used in the trade General Rule: Any change in the
or business. The rationale for this is that agreed rate and useful life of the
property gradually approaches a point depreciable property as specified in the
where its usefulness is exhausted. agreement shall not be effective for
taxable years prior to the taxable year
What if the property is used in in which notice in writing by certified
business and for personal purposes? mail or registered mail is served by the
The depreciation expense must be pro- party initiating such change to the
rated; only the portion attributable to other party to the agreement.
business use is deductible.
e.g., the car of the petitioner was Exception: Where the taxpayer has
used more for business than for adopted such useful life and
personal purposes. He was a law depreciation rate for any depreciable
practitioner, a law professor and property and claimed the depreciation
engaged in business. He had only expenses as deduction from his gross
one car. Consequently, of the income, without any written
value of the depreciation of the car objection on the part of the
may be considered as business Commissioner or his duly authorized
related, while thereof represents representatives, the aforesaid useful
non-deductible personal expense. life and depreciation rate so adopted by
(Jamir v. Collector, CTA Case No. the taxpayer for the depreciable asset.
443, November 28, 1959)

Who may take depreciation: The person Methods and Rates of Depreciation
who sustains an economic loss from the 1. Straight-line method
decrease in property value due to

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The depreciation expense deductible in Step 1: Compute for the


each of the years of the propertys depreciation rate under the straight-
estimated useful life is constant. line method.

Formula: Straight Line = 1 __


Deduction = Cost Salvage Value__ Depreciation Rate Estimated Useful Life
for Depreciation Estimated Useful Life
of the Property = , or 25%

NOTE: (Cost Salvage Value) is known as the Step 2: Compute for the Declining
depreciable cost.
Balance Rate (DBR).
Alternative Method:
Depreciation = 1 __ Declining = Straight Line Rate Relative to
Rate Estimated Useful Life Balance Rate Depreciation Rate x the Straight Line
of the Property Depreciation Rate

Deduction for = Depreciation x (Cost Salvage Value) = x 1.5


Depreciation Rate = 37.5%

ILLUSTRATION: Step 3: Apply the Declining Balance


H Co. acquired a machine at a cost of Rate to the book value of the
P380,000. It has no scrap (or salvage) property at the start of the current
value, and the useful life is estimated at year.
25 years. The depreciation expense per
year is P15,000, computed as follows: Year 2002:
Book value of the P400,000
Depreciation = [(380,000 0) / 25] property ***
Expense [OR] Multiplied by: DBR 37.5%
= (1/25) x (380,000 0) Deduction for
Depreciation P150,000

2. Declining-balance method, using a rate *** Since this is the year of the
not exceeding twice the rate for straight acquisition, the book value of the
line method property at the start of the year is
Under this method, the depreciation equal to its original cost.
allowance per year varies. Depreciation
is largest in the first year and continually Year 2003:
decreases towards the end of the useful Original Cost P 400,000
life of the property. The depreciation Less: 150,000
rate under the straight-line method is Accumulated
first computed, and the result is Depreciation
multiplied with the rate relative to the
Book Value of the
straight-line method rate. The product
Property,
(the declining balance rate) is then
start of P 250,000
multiplied to the yearly declining
current year
balance of the property (i.e., book value
Multiplied by: 37.5%
of the property at the start of the
DBR
current year, which is equal to its
Deduction for
original cost minus its accumulated
Depreciation P 93,750
depreciation) to determine the deduction
for depreciation for the current year.
However, in the last year of the assets Year 2004:
estimated life, the depreciation is equal Original Cost P 400,000
to the book value of the property at the Less:
start of that year (i.e., the amount of Accumulated
depreciation must be just enough to Depreciation
reduce the propertys book value to Year 2002
zero). Note that the salvage value is P150,000
ignored in the declining balance Year 2003
method. P93,750 243,750
Book Value of
ILLUSTRATION: the Property,
P Company acquired a machine on start of
January 1, 2002 at a cost of P400,000. current year P 156,250
It had a scrap value of P50,000, and a Multiplied by: 37.5%
useful life of 4 years. The company uses DBR
the declining balance method, at a rate Deduction for
of one and a half that of the straight line Depreciation P58,593.75
method. Determine the depreciation
chargeable in years 2002, 2003, 2004
and 2005.

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Year 2005:
Original Cost P 400,000 A B C D
Less: Accumulated (A/15) (= B x C)
Depreciation Year Remainin Resulti Depreciabl Deduction
Year 2002 g Useful ng e Cost for
P150,000 Life Fractio Depreciati
Year 2003 302,343.75 (Reckoni n on
P93,750 ng Point:
Year 2004 Start of
P58,593.75 the Year)
Book Value of the 2001 5 5/15 P105,000 P35,000
Property, start P 97,656.25 2002 4 4/15 P105,000 P28,000
of current year 2003 3 3/15 P105,000 P21,000
2004 2 2/15 P105,000 P14,000
Deduction for 2005 1 1/15 P105,000 P7,000
Depreciation *** P97,656.25

*** The deduction for depreciation in 4. Any other method which may be
2005 is equal to the book value of the prescribed by the Secretary of Finance
property at the start of the year upon recommendation of the
because the machine had a useful life Commissioner
of 4 years, which ended in 2005.
Special Rules:
3. Sum-of-the-years-digit method Depreciation of Properties Used in
Under this method, the annual Petroleum Operations
depreciation is computed by applying a An allowance for depreciation in
changing fraction to the depreciable cost respect of all properties DIRECTLY
of the property (original cost reduced by related to production of petroleum
the salvage value). In the fraction, the shall be allowed under the straight-
numerator is the number of remaining line or declining-balance method of
years of the estimated useful life of the depreciation at the option of the
property and the denominator is the service contractor. However, if the
sum of the numbers representing the service contractor initially elects the
years of the propertys life. declining-balance method, it may
shift to the straight-line method.
ILLUSTRATION: On January 1, 2001, J The useful life of properties used in
Company acquired a machine at a cost or related to production of
of P105,000. It had a salvage value of petroleum shall be ten (10) years
P5,000, and an estimated useful life of 5 or such shorter life as may be
years. The company uses the sum-of- permitted by the Commissioner.
the-years method in determining Properties NOT USED DIRECTLY
depreciation. Determine the depreciation in the production of petroleum shall
chargeable in years 2001, 2002, 2003, be depreciated under the straight-
2004 and 2005. line method on the basis of an
estimated useful life of 5 years.
Step 1: Compute for the sum of the
numbers representing the years of Depreciation of Properties Used in
the propertys life. Mining Operations
The property has an estimated useful An allowance for depreciation in
life of 5 years. The sum, therefore, is 15 respect of all properties used in mining
(5 + 4 + 3 + 2 + 1). This sum will be operations other than petroleum
used as the denominator in the fraction. operations, shall be computed as
follows:
Step 2: Compute for the depreciable At the normal rate of depreciation if
cost of the property. the expected life is ten (10) years
The depreciable cost is P100,000 or less; or
(P105,000 P5,000). Depreciated over any number of
years between five (5) years and
Step 3: Compute for the yearly the expected life if the latter is
deduction for depreciation (Column more than ten (10) years, and the
D). depreciation thereon allowed as
deduction from taxable income:
Provided, That the contractor
notifies the Commissioner at the
beginning of the depreciation period
which depreciation rate allowed will
be used.

Depreciation Deductible by Nonresident


Aliens Engaged in Trade or Business
(NRAETB) or Resident Foreign
Corporations (RFC)

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- A reasonable allowance for the (corporation) of the taxpayers taxable


deterioration of property arising out of income before charitable contributions.
its use or employment or its non-use in
the business, trade or profession shall Kinds of Contributions:
be permitted only when such property is 1. Contributions deductible in full
located in the Philippines. 2. Contributions subject to the statutory limit

Contributions Deductible in Full: (FoNG)


K. Depletion of Oil and Gas Wells and 1. Donations to the Government - Donations to
Mines [Sec. 34(G)] the Government of the Philippines or to any of
its agencies or political subdivisions, including
Definition: Depletion is the exhaustion of natural fully-owned government corporations,
resources due to production. It is the reduction of exclusively to finance, to provide for, or to be
cost or value of natural resources such as oil and used in undertaking PRIORITY ACTIVITIES
gas wells and mines as the resources are converted in:
into inventories. education,
health,
Limitation: A reasonable allowance for depletion youth and sports development,
computed using the cost-depletion method shall be human settlements,
granted provided that the allowance for depletion science and culture, and
shall not exceed the capital invested. in economic development,according to
a National Priority Plan determined by
ILLUSTRATION: the National Economic and Development
Land containing natural resources was purchased Authority (NEDA), in consultation with
for P100,900,000. It was estimated that the land, appropriate government agencies, including
after exploitation of its natural resources, will have its regional development councils and private
a value of P900,000. It was estimated that the philanthropic persons and institutions.
natural resource supply was 5,000,000 tons. If Any donation which is made to the
withdrawal of resources from the land in 2005 was Government or to any of its agencies or
500,000 tons, how much was the deduction for the political subdivisions not in accordance with
year? the said annual priority plan shall be
considered a contribution subject to the
Purchase Price P100,900,000 statutory limit.
Less: Residual Value of the Land
900,000 2. Donations to Certain Foreign Institutions
Depletion Base P100,000,000 or International Organizations - Donations
Divided by: Estimated Resource to foreign institutions or international
Supply, in tons 5,000,000 organizations which are fully deductible in
Depletion Base per ton P20 pursuance of or in compliance with
Multiplied by: Withdrawal of agreements, treaties, or commitments
Resources in 2005, in tons 500,000 entered into by the Government of the
Depletion Expense, 2005 P 10,000,000 Philippines and the foreign institutions or
international organizations or in pursuance of
Allowable Deduction for a Nonresident Alien special laws;
individual Engaged in Trade or Business or a
Resident Foreign Corporation Allowance for 3. Donations to Accredited Non-government
depletion of oil and gas wells or mines shall be Organizations - The term "non-government
authorized only in respect to oil and gas wells or organization" means a non-profit domestic
mines located within the Philippines. corporation:
Organized and operated exclusively for:
L. Charitable and Other Contributions [Sec. (CRWSH Cys ChE Com)
34(H)] -Scientific,
-Research,
REQUISITES: (TEE / BE) -Educational,
1. The charitable contribution must actually be -Character-building and youth and sports
paid or made to the ENTITIES specified by development,
law (i.e., Philippine government or any political -Health,
subdivision thereof exclusively for public -social Welfare,
purposes, or any of the accredited domestic -Cultural or
corporations or associations specified in the -CHaritable purposes, or
NIRC). -a COMbination thereof,
no part of the net income of which
1. It must be made within the TAXABLE year. inures to the benefit of any private
2. It must be EVIDENCED by adequate individual;
receipts or records.
3. Additional Requisite for Contributions Other Which, not later than the 15th day of the
than Money: The amount of charitable third month after the close of the
contribution of property other than money accredited non-government organizations
shall be BASED on the acquisition cost of taxable year in which contributions are
the property (i.e., not the fair market value received, makes utilization directly for
at the time of the contribution). the active conduct of the activities
4. Additional Requisite for Contributions subject constituting the purpose or function for
to the statutory limitation: It must not which it is organized and operated,
EXCEED 10% (individual) or 5%

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-UNLESS an extended period is Contributions subject to the Statutory Limit


granted by the Secretary of Finance; (DNGS)
1. Contributions made to the Government or any
The level of administrative expense shall, of its agencies or political subdivisions
on an annual basis, not exceed thirty exclusively for public purposes
percent (30%) of the total expenses; (contributions for non-priority activities)
(Sec. 1, RR 13-1998) and
2. Contributions made to accredited domestic
The assets of which, in the event of corporation or associations
dissolution, would be distributed to Organized exclusively for
-another nonprofit domestic corporation o religious,
organized for similar purpose or purposes, or o charitable,
-to the state for public o scientific,
purpose, or o youth and sports development,
-would be distributed by a court to another o cultural or
organization to be used in such manner as in o educational purposes or
the judgment of said court shall best o for the rehabilitation of veterans
accomplish the general purpose for which the
dissolved organization was organized. 3. Contributions to social welfare institutions

All the members of the Board of Trustees of 4. Contributions to non-government


the non-stock, non-profit corporation, organizations
organization or NGO do not receive no part of the net income of which inures to
compensation or remuneration for their the benefit of any private stockholder or
service to the aforementioned organization. individual
(added by Sec. 3, RR 13-1998)
Statutory Limit: Amount deductible must
Utilization means: not be in excess of:
a. Any amount, including admin expenses, paid or 10% in the case of an individual, and
utilized by an accredited NGO to accomplish 5% in the case of a corporation,
one or more of its purposes of the taxpayer's taxable income derived
b. Any amount paid to acquire an asset used from trade, business or profession before the
directly in carrying out one or more purposes deduction for contributions and donations.
for which the accredited NGO was created or In other words, the amount deductible is
organized; or the actual contribution or the statutory limit
c. Any amount set aside for a specific project computed, whichever is lower.
which comes within the NGOs purpose/s, but
the NGO has to establish that the amount will ILLUSTRATION:
be utilized within at least five (5) years, and N Co. had a gross income from business of
that the project will be better accomplished by P1,000,000 and allowable deductions (except
setting aside such amount than by immediate deductions for contributions) of P400,000. It made
payments of funds during the year a contribution that is fully
d. Any amount in cash or in kind invested in any deductible of P10,000 and contributions subject to
activity related to the purpose for which the limitation of P50,000. Compute for the total
NGO was created deduction for contributions and the taxable income
e. Any amount invested in capital sustaining and of the company.
generating activities. Provided that, any
income derived from those investments shall be ANSWER: The total deduction for contributions is
exclusively used in activities directly related to P40,000, and the taxable income is P560,000.
one or more of its purposes (Sec. 1, RR 13-
1998)

SUPPORTING SOLUTION:
Gross Income P1,000,000
Less: Allowable Deductions (except deduction for
contributions) 400,000
Taxable Income before deduction for contributions P
600,000
Multiplied by: Statutory Limit (%)
5%
Statutory Limit (in Pesos) P 30,000

Actual Contributions made (subject to limitation) P 50,000

Allowable Deduction for Contributions subject to limitation


P 30,000
(whichever is lower)

Taxable Income before deduction for contributions P 600,000


Less: Allowable Deduction for Contributions
Deductible in Full P 10,000
Allowable Deduction for Contributions subject to
limitation 30,000 40,000
Taxable Income P 560,000

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M. Research and Development [Sec. 34(L)] Q Co., a manufacturer of food seasoning, is


Definition: R&D costs are for improvements of continuously conducting research and development
processes and formulas as well as the development on its product lines. In early January 2004, it
of improved or new products. As a general rule, completed the extension and improvement of its
R&D only extends from the laboratory or drawing research and development building at a cost of
board to prototype status; i.e., so long as an P1,000,000. The extension has an estimated useful
activity still contains an element of life of 25 years. The company also incurred an
uncertainty/technical risk, it is within the realm of aggregate of P1,800,000 for other research and
R&D. development costs. Determine the tax treatment of
Quality control, routine product testing, data the various expenditures.
collection, efficiency surveys, management
studies, market research and sales promotion ANSWER:-The P1,000,000 cost of expansion of the
are NORMALLY NOT CONSIDERED R&D building cannot be deducted as research and
ACTIVITIES. development costs in 2004. However, depreciation
of P40,000 may be recognized yearly for 25 years
Tax Treatment: R&D expenditures which are paid (P1,000,000 / 25 years).
or incurred by a taxpayer during the taxable year -The other costs of P1,800,000 may be either:
in connection with his trade, business or profession a. An outright deduction from gross income for
may be treated EITHER as: P1,800,000 in 2004; [OR]
1. Ordinary and necessary expenses allowed b. A deferred expense of P1,800,000, from which
as deduction during the taxable year when paid there shall be a monthly deduction of P1,800,000
or incurred (i.e., as an outright deduction for divided by 60 months (cannot be shorter, but can
the full expenditure), or be longer), or P30,000 per month, beginning with
2. Deferred asset (or deferred expense) which is the first month from which benefits were acquired
periodically subject to amortization from the expenditure. The aggregate of monthly
deductions for a given taxable year is then
At the election of the taxpayer, the following R&D deductible from that years gross income.
expenditures may be treated as deferred assets:
1. Those paid or incurred by the taxpayer in N. Pension Trusts [Sec. 34(J)]
connection with his trade, business or Deduction Allowable: An employer establishing or
profession. maintaining a pension trust to provide for the
2. Those not treated as expenses. payment of reasonable pensions to his employees
3. Those chargeable to capital account but not shall be allowed as a deduction (in addition to the
chargeable to depreciable property. contributions to such trust during the taxable year
to cover the pension liability accruing during the
In computing taxable income, such deferred year, allowed as a deduction under Sec. 34(A)(1)
expenses shall be allowed as deduction ratably [Ordinary and Necessary Expenses]) a reasonable
distributed over a period of not less than sixty (60) amount transferred or paid into such trust during
months as may be elected by the taxpayer the taxable year in excess of such contributions
(beginning with the month in which the taxpayer
first realizes benefits from such expenditures). REQUISTES: Such reasonable amount will only be
-The taxpayer may elect this alternative not later allowed as a deduction if it:
than the time prescribed by law for filing the return 1. has not theretofore been allowed as a
for such taxable year (April 15). The method so deduction, and
elected, and the period selected by the taxpayer, 2. is apportioned in equal parts over a period of
shall be adhered to in computing taxable income ten (10) consecutive years beginning with the
for the taxable year for which the election is made year in which the transfer or payment is made.
and for all subsequent taxable years UNLESS with
the approval of the Commissioner, a change to a Background Concepts: The rules in the law on
different method is authorized with respect to a deduction for pension payments to employees
part or all of such expenditures. apply to a pension plan that is funded. An employer
-The election shall not apply to any expenditure does not provide for pension for his employees in
paid or incurred during any taxable year prior to his initial years of operations. A pension plan is
the taxable year for which the taxpayer makes the usually set up after some years of operations have
election. gone by, when the employer is already financially
capable of providing benefits to his employees.
Limitations on Deduction: The above tax Since the benefits from any pension plan consider
treatment of R&D expenses does NOT apply to: the length of service of the employee, the plan
1. Any expenditure for the acquisition or should take into account the services of the
improvement of land or the improvement of employees who were already with the employer
depreciable property, used in connection with even before the plan was set up. Such past
research and development. services will require a lump sum payment to the
2. Any expenditure incurred in ascertaining the pension fund; this is called past-service cost.
existence, location, extent, or quality of any For each year after the pension plan was set up,
deposit of ore or other mineral, including oil or there should be payment to the fund for pension
gas. for the services rendered during the year by the
NOTE: Cost of acquisition or improvements of employees. This is called present service cost.
property subject to depreciation or depletion used Present service cost deductible in full in the
in research and development becomes part of the year transferred or paid into the trust; covered
cost of the asset, and deduction from it is by by Sec. 34(A)(1) [Ordinary and Necessary
way of depreciation or depletion, as the case Expenses]
may be. Past-service cost amount so transferred is
apportioned and deductible in equal parts over
ILLUSTRATION: a period of ten (10) consecutive years

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TAXATION LAW 1

beginning with the year in which the transfer or Assessment Insurance Companies. - Assessment
payment is made; covered by Sec. 34(J) insurance companies, whether domestic or foreign,
[Pension Trusts] may deduct from their gross income the actual
deposit of sums with the officers of the
ILLUSTRATION: Government of the Philippines pursuant to law, as
F Co. established a pension trust in 2001, additions to guarantee or reserve funds.
transferring thereto a lump sum payment of
P500,000 to cover past services rendered by its Allocation of Income and Deductions [Sec. 50]
employees. Additionally, the terms of the trust are - In the case of two or more organizations, trades
such that P20,000 in pension liability would accrue or businesses (whether or not incorporated and
yearly, covering services rendered during the year whether or not organized in the Philippines) owned
by its employees. Determine the total deduction on and controlled directly or indirectly by the same
account of the pension trust allowed to F Co. from interests, the Commissioner is authorized to
2001 onwards. distribute, apportion or allocate gross income or
deductions between or among such organization,
Year Yearly Current TOTAL trade or business, if he determines that such
Amortization Liability / distribution, apportionment or allocation is
of Present necessary in order: (a) to prevent evasion of taxes;
Past Service Service or (b) to clearly reflect the income of any such
Cost Cost organizations, trades or businesses.
(= 1/10 of
P500,000) [covered
[covered by by Sec.
Sec. 34(J)] 34(A)(1)]
2001 P50,000 P20,000 P70,000
2002 P50,000 P20,000 P70,000
2003 P50,000 P20,000 P70,000
2004 P50,000 P20,000 P70,000
2005 P50,000 P20,000 P70,000
2006 P50,000 P20,000 P70,000
2007 P50,000 P20,000 P70,000
2008 P50,000 P20,000 P70,000
2009 P50,000 P20,000 P70,000
2010 P50,000 P20,000 P70,000
2011 - P20,000 P20,000
onwards

O. Special Provisions Regarding Income


and Deductions of Insurance Companies,
Whether Domestic or Foreign [Sec. 37]
Special Deduction Allowed to Insurance Companies.
- In the case of insurance companies, whether
domestic or foreign doing business in the
Philippines, the net additions, if any, required by
law to be made within the year to reserve funds
and the sums other than dividends paid within the
year on policy and annuity contracts may be
deducted from their gross income. However, the
released reserve should be treated as income for
the year of release.

Mutual Insurance Companies. - In the case of


mutual fire and mutual employers' liability and
mutual workmen's compensation and mutual
casualty insurance companies requiring their
members to make premium deposits to provide for
losses and expenses, said companies shall not
return as income any portion of the premium
deposits returned to their policyholders, but shall
return as taxable income all income received by
them from all other sources plus such portion of
the premium deposits as are retained by the
companies for purposes other than the payment of
losses and expenses and reinsurance reserves.

Mutual Marine Insurance Companies. - Mutual


marine insurance companies shall include in their
return of gross income, gross premiums collected
and received by them less amounts paid to
policyholders on account of premiums previously
paid by them and interest paid upon those amounts
between the ascertainment and payment thereof.

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XII. NON-
NON-DEDUCTIBLE EXPENSES [Sec. XIII. CAPITAL GAINS AND LOSSES [Sec.
36] 39]

GENERAL RULE: In computing net income, no Definitions:


deduction shall be allowed in respect to: (PIRI) Net Capital Gain the excess of the gains from
1. Personal, living or family expenses sales or exchanges of capital assets over the losses
Rationale: not related to conduct of trade or from such sales or exchanges
business
2. Any amount paid out for new buildings or for Net Capital Loss means the excess of the losses
permanent improvements, or betterments from sales or exchanges of capital assets over the
made to increase the value of any property or gains from such sales or exchanges
estate
EXCEPTION: Intangible drilling and Holding Period the length of time the asset was
development costs incurred in petroleum held by the taxpayer
operations which are deductible under Sec.
34(G)(1) Meaning of sale or exchange requirements
3. Any amount expended in restoring property or for capital gain
in making good the exhaustion thereof for Gain or loss is recognized in a sale or exchange
which an allowance [for depreciation or of property if the following conditions are
depletion] is or has been made (i.e., Major satisfied:
Repairs) 1. The property received in exchange is
essentially different from the property
NOTE: Nos. (2) and (3) are capital disposed of;
expenditures. Examples are: 2. The property received has a market value
a. The cost of defending or perfecting title to
property constitutes a part of the cost of the Sale a delivery of goods for money
property and is not a deductible expense. Exchange a delivery of goods for goods received.
b. The amount expended for architects
services is part of the cost of the building HOWEVER, there are transactions which the law
c. Expenditures to promote the sales of considers sales or exchanges though they do not
additional capital stock or the cost, meet the definitions given. These are:
commissions and fees for obtaining stock 1. Retirement of bonds, etc.
subscriptions are capital expenses. (Atlas 2. Short sales of properties19
Consolidated Mining Co. v. Commissioner, 3. Failure to exercise a privilege or option to buy
102 SCRA 246) or sell property;
4. Premiums paid on any life insurance policy 4. Securities becoming worthless.
covering the life of any officer, employee, or 5. Receipt of a liquidating dividend
person financially interested in the trade or
business carried on by the taxpayer, when the
taxpayer is directly or indirectly a beneficiary Percentage taken into account (Long-term /
under such policy. Short term) by taxpayers:
A person is said to be financially Taxpayers Other than a Corporation (i.e.,
interested in the taxpayers business, if individual taxpayers and taxpayers treated as
he is a stockholder thereof or he is to individuals, such as estates and trusts)
receive as his compensation a share of the - 100% if the capital asset was held for not
profits of the business. more than 12 months
- 50% if the capital asset has been held for
ILLUSTRATION: more than 12 months
CASE 1 CASE 2 NOTE:
Officer,
Officer, o GENERAL RULE: For purposes of
employee, or
employee, or computing capital loss and capital gain, the
person
person financially actual holding period is taken into
Insured financially
interested in the account.
interested in the
taxpayers trade o EXCEPTION: If securities become
taxpayers trade
or business worthless during the taxable year and are
or business
capital assets, the loss resulting therefrom
Officer,
shall be considered as a loss from the sale
Beneficiary employee, or
or exchange, on the last day of such
of Life person financially
Company taxable year, of capital assets. [Sec.
Insurance interested in the 34(D)(4)(b)]
Policy taxpayers trade Corporate Taxpayers 100% of the capital
or business gain or loss, regardless of the holding period
YES (Premium is
Premium a likewise a fringe Limitation on Capital Losses
NO (covered by
deductible benefit on the GENERAL RULE: Losses from sales or exchanges
Sec. 36)
expense? part of the of capital assets shall be allowed only to the extent
beneficiary.) of the gains from such sales or exchanges.

19
A transaction in which a speculator sells securities which he
does not own in anticipation of a decline in its price. The seller
intends to cover the sale by purchasing the securities when the
price declines, in which case he will make a profit.

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SPECIAL RULE FOR BANKS AND TRUST


COMPANIES: If a bank or trust company
incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of
deposits or the sale of bond, debenture, note,
certificate or other evidence of indebtedness, any
loss resulting from such sale shall not be subject to
the foregoing limitation and shall not be included in
determining the applicability of such limitation to
other losses.
Rationale: The securities mentioned are
ordinary assets of the bank or trust company.

Formula: (Sec. 134, RR2)


Taxable net income = Ordinary net income +
net taxable capital gains
Net taxable capital gains =
Gains of sales of capital assets, or 50%
thereof Losses from sales of capital assets,
or 50% thereof

Net Capital Loss Carry-over: If an individual


taxpayer sustains a net capital loss in a taxable
year, such loss (in an amount not in excess of the
net income20 for such year) shall be treated in the
succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than
12 months (100% deduction).

ILLUSTRATIONS: Mr. O, a citizen of the Philippines,


single, had the following data for 2001 and 2002:

2001 2002
Net Income, Business 80,000 90,000
Interest Income from notes 4,000 2,000
of clients
Capital Gain on assets:
Shares of foreign 50,000
corporations, held for 3
years 70,000
Jewelry, held for 10
months
Capital Loss on bonds, held 120,000 -
for 4 months

20
Net Income should be understood as taxable income
(Executive Order No. 37)

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TAXATION LAW 1

Mr. Os taxable income for 2001 was P64,000, and for 2002 was P78,000, computed as follows:
2001 2002
Net Income, Business P 80,000 P 90,000
Interest Income 4,000 2,000
Ordinary Net Income P84,000 P92,000
Capital Gain (50%) P25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)

Net Capital Loss (P95,000)


Net Capital Loss Carry-Over from 2001 > (64,000)
Net Capital Gain [70,000 64,000] 6,000
Total P98,000
Less: Basic Personal Exemption (20,000) (20,000)

Taxable Income > P64,000 P78,000

Legend:

> To determine the maximum that may be carried over to the next year: Taxable Income
Net Capital Loss Carry-Over from the previous year
>
P Co., a domestic corporation, had the following results of operations for a taxable year:
Ordinary Net Income P52,000
Gain on sale of capital asset, held for ten months 2,000
Gain on sale of capital asset, held for eighteen months 2,000
Loss on sale of capital asset, held for six months 1,100
Loss on sale of capital asset, held for twenty months 2,000

and in the preceding year it had a net capital loss of P1,500 and a taxable income of P60,000. The taxable
income of the corporation for the year is computed as follows***:
Ordinary net income P52,000
Gain on sale of capital asset, held for ten months (100%) P2,000
Gain on sale of capital asset, held for eighteen months 2,000
(100%)
Total Capital Gains P4,000
Loss on sale of capital asset, held for six months (100%) P1,100
Loss on sale of capital asset, held for twenty months (100%) 2,000
Total Capital Loss 3,100
Net Capital Gain 900
Taxable Income P52,900
*** For corporations, capital gains and losses are always considered at 100%, and there is
no net capital loss carry-over.

SUMMARY OF RULES
For Corporations:
1. Corporations shall recognize 100% of the capital gain or loss, regardless of the holding period.
2. Corporations cannot carry-over net capital loss.
3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from
such sales or exchanges.

For Individuals, and Taxpayers Treated as Individuals:


1. The holding period is relevant in determining the percentage of capital gains and losses to be taken into
account, as follows:
- 100% if the capital asset was held for not more than 12 months
- 50% if the capital asset was held for more than 12 months
2. Net capital loss (in an amount not in excess of the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than
12 months (100% deduction)
3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from
such sales or exchanges.

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TAXATION LAW 1

XIV. SITUS OF TAXATION [Sec. 42] funds for use in connection with the conduct or
operation of trade or business in the Philippines.
A. Gross Income From Sources Within the
C. Gross Income From Sources Without the
Philippines
Philippines.
Interests derived from sources within the
(1) Interests other than those derived from
Philippines, and interest on bonds, notes or other
sources within the Philippines as provided in A.
interest-bearing obligations of residents,
(2) Dividends other than those derived from
corporate or otherwise
sources within the Philippines as provided in A.
Dividends
(3) Compensation for labor or personal services
Compensation for labor or personal services
performed without the Philippines;
performed in the Philippines
(4) Rentals or royalties from property located
Rentals and royalties from property located in
without the Philippines or from any interest in
the Philippines or from any interest in such
such property including rentals or royalties for
property, including rentals or royalties for:
the use of or for the privilege of using without
(a) The use of or the right or privilege to use
the Philippines, patents, copyrights, secret
in the Philippines any copyright, patent, design
processes and formulas,
or model, plan, secret formula or process,
goodwill, trademarks, trade brands,
goodwill, trademark, trade brand or other like
franchises and other like properties; and
property or right;
(5) Gains, profits and income from the sale of
(b) The use of, or the right to use in the
real property located without the Philippines.
Philippines any industrial, commercial or
scientific equipment;
D. Taxable Income From Sources Without the
(c) The supply of scientific, technical,
Philippines. - Deduct from the gross income
industrial or commercial knowledge or
from sources without the Philippines
information;
(a) the expenses, losses, and other deductions
(d) The supply of any assistance that is
properly apportioned or allocated thereto
ancillary and subsidiary to, and is furnished as
and
a means of enabling the application or
(b) a ratable part of any expense, loss or other
enjoyment of, any such property or right as is
deduction which cannot definitely be
mentioned in paragraph (a), any such
allocated to some items or classes of gross
equipment as is mentioned in paragraph (b) or
income.
any such knowledge or information as is
The remainder, if any, shall be treated in full as
mentioned in paragraph (c);
taxable income from sources without the
(e) The supply of services by a nonresident
Philippines.
person or his employee in connection with the
use of property or rights belonging to, or the
E. Income From Sources Partly Within and
installation or operation of any brand,
Partly Without the Philippines.
machinery or other apparatus purchased from
Allocated or apportioned to sources within or
such nonresident person;
without the Philippines, under the rules and
(f) Technical advice, assistance or services
regulations prescribed by the Secretary of
rendered in connection with technical
Finance, upon recommendation of the
management or administration of any
Commissioner
scientific, industrial or commercial
For the purpose of computing the taxable
undertaking, venture, project or scheme; and
income therefrom, where items of gross income
(g) The use of or the right to use:
are separately allocated to sources within the
(i) Motion picture films;
Philippines, there shall be deducted:
(ii) Films or video tapes for use in
(a) the expenses, losses and other deductions
connection with television; and
properly apportioned or allocated thereto,
(iii) Tapes for use in connection with radio
and
broadcasting.
(b) a ratable part of other expenses, losses or
Gains, profits and income from the sale of real
other deductions which cannot definitely be
property located in the Philippines
allocated to some items or classes of gross
Gains; profits and income from the sale of
income.
personal property
The remainder, if any, shall be included in full
as taxable income from sources within the
B. Taxable Income From Sources Within the Philippines.
Philippines
GENERAL RULE. Deduct the expenses, losses and In the case of gross income derived from
other deductions properly allocated thereto and a sources partly within and partly without the
ratable part of expenses, interests, losses and Philippines, the taxable income may first be
other deductions effectively connected with the computed by deducting the expenses, losses or
business or trade conducted exclusively within the other deductions apportioned or allocated
Philippines which cannot definitely be allocated to thereto and a ratable part of any expense, loss
some items or class of gross income: Provided, or other deduction which cannot definitely be
That such items of deductions shall be allowed only allocated to some items or classes of gross
if fully substantiated by all the information income; and the portion of such taxable income
necessary for its calculation. The remainder, if any, attributable to sources within the Philippines
shall be treated in full as taxable income from may be determined by processes or formulas of
sources within the Philippines. general apportionment prescribed by the
EXCEPTION. - No deductions for interest paid or Secretary of Finance.
incurred abroad shall be allowed unless
indebtedness was actually incurred to provide Gains, profits and income from the sale of
personal property

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(a) produced (in whole or in part) by the XV. INSTALLMENT BASIS [Sec. 49]
taxpayer within and sold without the
Philippines, or
A. Sales of Dealers in Personal Property A
(b) produced (in whole or in part) by the
person who regularly sells or otherwise
taxpayer without and sold within the
disposes of personal property on the installment
Philippines,
plan may return as income therefrom in any
shall be treated as derived partly from sources
taxable year that proportion of the installment
within and partly from sources without the
payments actually received that year, which the
Philippines.
gross profit realized or to be realized when
payment is completed, bears to the total
F. Gains, profits and income derived:
contract price.
(a) from the purchase of personal property within
and its sale without the Philippines, or
(b) from the purchase of personal property without FORMULA:
and its sale within the Philippines
shall be treated as derived entirely form sources Gross Profit Installment payments Income to be
within the country in which sold: Provided, ---------------------- X actually received = reported for
however, That gain from the sale of shares of stock Contract price the year
in a domestic corporation shall be treated as
derived entirely form sources within the Philippines
regardless of where the said shares are sold.
The transfer by a nonresident alien or a foreign B. Sales of Realty and Casual Sales of
corporation to anyone of any share of stock issued Personal Property
by a domestic corporation shall not be effected or 1. A casual sale or other casual disposition of
made in its book unless: personal property (other than property of a kind
the transferor has filed with the Commissioner which would properly be included in the
a bond conditioned upon the future payment by inventory of the taxpayer if on hand at the
him of any income tax that may be due on the close of the taxable year) for a price
gains derived from such transfer, or exceeding One thousand pesos (P1000); or
the Commissioner has certified that the taxes, if 2. A sale or other disposition of real property
any, imposed in this Title and due on the gain
realized from such sale or transfer have been In either case the initial payments must
paid. It shall be the duty of the transferor and NOT exceed 25% of the selling price
the corporation the shares of which are sold or 'Initial payments' means the payment received in
transferred, to advise the transferee of this cash or property other than evidences of
requirement. indebtedness of the purchaser during the taxable
period in which the sale or other disposition is
Definition of Royalties - Philamlife vs. CTA made.
[CA GR SP 31283 April 25, 1995]
The CTA ruled that it is not the presence of any Income Tax Treatment: Income may be
property from which one derives rentals and returned on the same basis as sales of dealers in
royalties that is controlling, but rather it personal property (see section A)
includes royalties for the supply of scientific,
technical, industrial, or commercial knowledge C. Sales of Real Property Considered as
or information . Capital Asset by Individuals An individual
who sells or disposes of real property,
considered as capital asset, and is otherwise
qualified to report the gain therefrom under
Subsection (B) may pay the capital gains tax in
installments.

D. Tax Evasion vs. Tax Avoidance [CIR vs.


Estate of Toda (Sept, 14, 2004)]

Tax Evasion Tax Avoidance


a scheme used tax saving device
outside of those lawful within the means
means and when sanctioned by law,
availed of, it usually used by the
subjects the taxpayer taxpayer in good
to further or additional faith and at arms
civil or criminal length
liabilities

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XVI. RETURNS AND PAYMENTS OF derived from property received from a living parent
shall be included in the return of the parent, except
TAX / WITHHOLDING
WITHHOLDING TAXES
o when the donor's tax has been paid on such
A. Returns and Payment of Tax property, or
1. Individual Return (Sec. 51, NIRC) o when the transfer of such property is exempt
a. Who are required to file from donor's tax.
(a) Every Filipino citizen residing in the
Philippines; 3. Persons Under Disability If the taxpayer is
(b) Every Filipino citizen residing outside the unable to make his own return, the return may be
Philippines, on his income from sources made by his duly authorized agent or
within the Philippines; representative or by the guardian or other
(c) Every alien residing in the Philippines, on person charged with the care of his person or
income derived from sources within the property, the principal and his representative or
Philippines; and guardian assuming the responsibility of making the
(d) Every nonresident alien engaged in trade return and incurring penalties provided for
or business or in the exercise of erroneous, false or fraudulent returns.
profession in the Philippines.
Signature Presumed The fact that an
b. Those not required to file individual's name is signed to a filed return shall be
The following individuals shall not be required to prima facie evidence for all purposes that the return
file an income tax return: was actually signed by him.

a. An individual whose gross income does not c. Where to file


exceed his total personal and additional Except in cases where the Commissioner
exemptions for dependents under Section 35 otherwise permits, the return shall be filed:
Exception: That a citizen of the Philippines and If person has legal residence or place of
any alien individual engaged in business or business in the Philippines - with an authorized
practice of profession within the Philippines shall agent bank, Revenue District Officer,
file an income tax return, regardless of the Collection Agent or duly authorized
amount of gross income; Treasurer of the city or municipality in which
such person has his legal residence or principal
b. An individual with respect to pure place of business in the Philippines
compensation income, as defined in Section 32
(A)(1), derived from sources within the If there be no legal residence or place of
Philippines, the income tax on which has been business in the Philippines - with the Office of
correctly withheld under the provisions of the Commissioner.
Section 79 of this Code
Exceptions: d. When to file - The return of any individual
i. an individual deriving compensation specified above shall be filed on or before the
concurrently from two or more employers at any fifteenth (15th) day of April of each year
time during the taxable year covering income for the preceding taxable year.
ii. an individual whose compensation income
derived from sources within the Philippines e. Where to pay (Sec. 56, NIRC)
exceeds Sixty thousand pesos (P60,000) The total amount of tax imposed by this Title
shall be paid by the person subject thereto at
c. An individual whose sole income has been the time the return is filed.
subjected to final withholding tax pursuant to
Section 57(A) of this Code When the tax due is in excess of Two thousand
pesos (P2,000), the taxpayer other than a
d. An individual who is exempt from income tax corporation may elect to pay the tax in two (2)
pursuant to the provisions of this Code and other equal installments in which case:
laws, general or special. 1. the first installment shall be paid at the time
the return is filed and
Any individual not required to file an income tax 2. the second installment, on or before July 15
return may nevertheless be required to file an following the close of the calendar year
information return pursuant to rules and 3. if any installment is not paid on or before the
regulations prescribed by the Secretary of Finance, date fixed for its payment, the whole amount
upon recommendation of the Commissioner. of the tax unpaid becomes due and payable,
together with the delinquency penalties.
SPECIAL RULES:
1. Husband and Wife Married individuals, f. Capital gains on shares of stocks and real
whether citizens, resident or nonresident aliens, estate
who do not derive income purely from FILING A RETURN
compensation, shall file a return for the taxable Individuals subject to tax on capital gains:
year to include the income of both spouses, (a) From the sale or exchange of shares of stock
but where it is impracticable for the spouses to file not traded thru a local stock exchange as
one return, each spouse may file a separate return prescribed under Section 24(c) shall file a
of income but the returns so filed shall be return within thirty (30) days after each
consolidated by the Bureau for purposes of transaction and a final consolidated return on
verification for the taxable year. or before April 15 of each year covering all
stock transactions of the preceding taxable
2. Return of Parent to Include Income of year; and
Children The income of unmarried minors

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(b) From the sale or disposition of real property Return and Payment of Estimated Income Tax
under Section 24(D) shall file a return within by Individuals: The amount of estimated income
thirty (30) days following each sale or other with respect to which a declaration is required shall
disposition. be paid in four (4) installments:
o 1st installment - at the time of the declaration
PAYMENT o 2nd installment - on August 15 of the current
The total amount of tax imposed and prescribed year
shall be paid on the date the return prescribed is o 3rd installment on November 15 of the
filed by the person liable. current year
If the seller submits proof of his intention to o 4th installment - on or before April 15 of the
avail himself of the benefit of exemption of following calendar year when the final
capital gains under existing special laws, no adjusted income tax return is due to be filed
such payments shall be required.
o In case of failure to qualify for exemption h. Substituted filing for ITR of Salaried
under such special laws and implementing Individuals
rules and regulations, the tax due on the RR 19-2002
gains realized from the original transaction Certificate of Compensation Payment/Tax
shall immediately become due and payable. Withheld (BIR Form No. 2316). In general,
o If the seller, having paid the tax, submits every employer required to deduct and withhold
such proof of intent within six (6) months the tax on compensation including fringe benefits
from the registration of the document given to rank and file employees, shall furnish
transferring the real property, he shall be every employee the Certificate of Compensation
entitled to a refund of such tax upon Payment/Tax Withheld (BIR Form No. 2316), on
verification of his compliance with the or before January 31 of the succeeding calendar
requirements for such exemption. year, or if the employment is terminated before
o In case the taxpayer elects and is qualified to the close of such calendar year, on the day on
report the gain by installments, the tax due which the last payment of compensation is
from each installment payment shall be paid made. Failure to furnish the same shall be a
within (30) days from the receipt of such ground for the mandatory audit of payors
payments. income tax liabilities (including withholding tax)
upon verified complaint of the payee.
g. Quarterly declaration of income tax (Sec.
74, NIRC) The Certificate of Compensation Payment/Tax
Every individual subject to income tax under Withheld (BIR Form No. 2316) shall contain a
Sections 24 and 25(A) of this Title, who is certification to the effect that the employers
receiving self-employment income, whether it filing of BIR Form No. 1604-CF shall be
constitutes the sole source of his income or in considered as a substituted filing of the
combination with salaries, wages and other fixed employees income tax return to the extent
or determinable income, shall make and file a that the amount of compensation and tax
declaration of his estimated income for the withheld appearing in BIR Form No. 1604-CF as
current taxable year on or before April 15 of the filed with BIR is consistent with the
same taxable year. corresponding amounts indicated in BIR Form
No. 2316. It shall be signed by both the
In general, self-employment income consists of employee and employer attesting to the fact that
the earnings derived by the individual from the the information stated therein has been verified
practice of profession or conduct of trade or and is true and correct to the best of their
business carried on by him as a sole proprietor knowledge. Withholding agents/employers are
or by a partnership of which he is a member. required to retain copies of the duly signed BIR
1. Nonresident Filipino citizens, with respect to Form No. 2316 for a period of three (3) years.
income from without the Philippines, and
nonresident aliens not engaged in trade or The employee who is qualified for substituted
business in the Philippines, are not required filing of income tax return under these
to render a declaration of estimated income regulations, shall no longer be required to file
tax. income tax return (BIR Form No. 1700) since
2. The declaration shall contain such pertinent BIR Form No. 1604-CF shall be considered a
information as the Secretary of Finance, upon substituted return filed by the employer. BIR
recommendation of the Commissioner, may, Form No. 2316, duly certified by both employee
by rules and regulations prescribe. An and employer, shall serve the same purpose as if
individual may make amendments of a a BIR Form No. 1700 had been filed, such as
declaration filed during the taxable year proof of financial capacity for purposes of loan,
under the rules and regulations prescribed by credit card, or other applications, or for the
the Secretary of Finance, upon purpose of availing tax credit in the employees
recommendation of the Commissioner. home country and for other purposes with
various government agencies. This may also be
Estimated tax means the amount which the used for purposes of securing travel tax
individual declared as income tax in his final exemption, when necessary.
adjusted and annual income tax return for the
preceding taxable year minus the sum of the However, information referring to the
credits allowed under this Title against the said tax. certification, appearing at the bottom of BIR
If, during the current taxable year, the taxpayer Form No. 2316, shall not be signed by both the
reasonably expects to pay a bigger income tax, he employer and the employee if the latter is not
shall file an amended declaration during any qualified for substituted filing. In which case, BIR
interval of installment payment dates. Form No. 2316 furnished by the employer to the
employee shall be attached to the employees

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Income Tax Return (BIR Form No. 1700) to be the total tax due on the entire taxable income of
filed on or before April 15 of the following year. that year, the corporation shall either:
(A) Pay the balance of tax still due; or
i. Modes of Payment of Taxes Through (B) Carry-over the excess credit; or
Banks (C) Be credited or refunded with the excess
RR 16-2002 amount paid, as the case may be.
SECTION 3. Modes Of Payment To
Authorized Agent Banks. Aside from the In case the corporation is entitled to a tax credit
electronic payment system currently used by or refund of the excess estimated quarterly
some taxpayers in paying their BIR taxes, the income taxes paid, the excess amount shown on
rest shall pay their tax liabilities through any of its final adjustment return may be carried over
the following modes: and credited against the estimated quarterly
a) "Overthecounter cash payment" - income tax liabilities for the taxable quarters of
payment of taxes to an authorized agent the succeeding taxable years. Once the option to
bank in the currencies that are legal tender carry-over and apply the excess quarterly
in the Philippines. The maximum amount income tax against income tax due for the
allowed per tax payment shall not exceed taxable quarters of the succeeding taxable years
ten thousand pesos (P10,000.00) has been made, such option shall be
b) "Bank debit system" - taxpayer, through considered irrevocable for that taxable
a bank debit memo/advice, authorizes period and no application for cash refund or
withdrawals from his bank accounts for issuance of a tax credit certificate shall be
payment of tax liabilities. allowed.
c) "Checks" refers to a bill of exchange or
Order Instrument drawn on a bank payable c. When to File (Sec. 77, NIRC)
on demand. Quarterly declaration shall be filed within
sixty (60) days following the close of each of the
The following checks are, however, NOT first three (3) quarters of the taxable year.
acceptable as check payments for internal
revenue taxes: (SUESAP) The final adjustment return shall be filed on
1. Accommodation checks checks issued or or before the fifteenth (15th) day of April, or on
drawn by a party other than the taxpayer or before the fifteenth (15th) day of the fourth
making the payment; (4th) month following the close of the fiscal year,
2. Second endorsed checks checks issued to as the case may be.
the taxpayer as payee who indorses the
same as payment for taxes; Extension of Time to File Returns The
3. Stale checks checks dated more than six Commissioner may, in meritorious cases, grant a
(6) months prior to presentation to the reasonable extension of time for filing returns of
authorized agent bank; income (or final and adjustment returns in case
4. Postdated checks checks dated a day or of corporations)
several days after the date of presentation
to the authorized agent bank; d. Where to File (Sec. 77, NIRC)
5. Unsigned checks Except as the Commissioner otherwise permits,
6. Checks with alterations/Erasures. the quarterly income tax declaration required in
Section 75 and the final adjustment return
AABs accepting checks as payment must see to required in Section 76 shall be filed with:
it that the check covers one tax type for one o the authorized agent banks or
return period only. Second indorsement of o Revenue District Officer or
checks which are payable to the BIR or o Collection Agent or
Commissioner of Internal Revenue is absolutely o duly authorized Treasurer of the city or
prohibited municipality having jurisdiction over the
location of the principal office of the
2. Corporation Regular Returns corporation filing the return or place where
a. Quarterly Income Tax (Sec. 75, NIRC) its main books of accounts and other data
Every corporation shall file in duplicate a from which the return is prepared are
quarterly summary declaration of its gross kept.
income and deductions on a cumulative basis
for the preceding quarter or quarters upon which e. When to Pay (Sec. 77, NIRC)
the income tax, shall be levied, collected and The income tax due on the corporate quarterly
paid. returns and the final adjustment income tax shall
be paid at the time the declaration or return is
The tax so computed shall be decreased by filed in a manner prescribed by the
the amount of tax previously paid or Commissioner.
assessed during the preceding quarters and
shall be paid not later than sixty (60) days from f. Capital Gains on Shares of Stock
the close of each of the first three (3) quarters of Every corporation deriving capital gains from the
the taxable year, whether calendar or fiscal year. sale or exchange of shares of stock not traded
thru a local stock exchange as prescribed under
b. Final Adjustment Return (Sec. 76, Sections 24 (c), 25 (A)(3), 27 (E)(2),
NIRC) 28(A)(8)(c) and 28 (B)(5)(c), shall file a return
Every corporation liable to tax shall file a final within thirty (30) days after each transaction and
adjustment return covering the total taxable a final consolidated return of all transactions
income for the preceding calendar or fiscal during the taxable year on or before the fifteenth
year. If the sum of the quarterly tax payments (15th) day of the fourth (4th) month following
made during the said taxable year is not equal to the close of the taxable year.

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payees, the tax imposed or prescribed by


g. Return of Corporations Contemplating Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
Dissolution / Reorganization 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
Every corporation shall, within thirty (30) days 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28
after the adoption by the corporation of a (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
resolution or plan for its dissolution, or for the 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
liquidation of the whole or any part of its capital 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
stock, including a corporation which has been 33; and 282 of the NIRC on specified items of
notified of possible involuntary dissolution by the income shall be withheld by payor-corporation
Securities and Exchange Commission, or for its and/or person and paid in the same manner and
reorganization, render a correct return to the subject to the same conditions as provided in
Commissioner, verified under oath, setting forth Section 58 of the NIRC.
the terms of such resolution or plan and such
other information as the Secretary of Finance, Withholding of Creditable Tax at Source. -
upon recommendation of the commissioner, The Secretary of Finance may, upon the
shall, by rules and regulations, prescribe. recommendation of the Commissioner, require
the withholding of a tax on the items of income
The dissolving or reorganizing corporation shall, payable to natural or juridical persons, residing
prior to the issuance by the Securities and in the Philippines, by payor-corporation/persons
Exchange Commission of the Certificate of as provided for by law, at the rate of not less
Dissolution or Reorganization, as may be defined than one percent (1%) but not more than thirty-
by rules and regulations prescribed by the two percent (32%) thereof, which shall be
Secretary of Finance, upon recommendation of credited against the income tax liability of the
the Commissioner, secure a certificate of tax taxpayer for the taxable year.
clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Tax-free Covenant Bonds. - In any case where
Securities and Exchange Commission. bonds, mortgages, deeds of trust or other similar
obligations of domestic or resident foreign
Sec. 244. RR-2 corporations, contain a contract or provisions by
All corporations, partnerships, joint accounts and which the obligor agrees to pay any portion of
associations, contemplating dissolution or the tax imposed in this Title upon the obligee or
retiring from business without formal dissolution, to reimburse the obligee for any portion of the
shall, within 30 days after the approval of such tax or to pay the interest without deduction for
resolution authorizing their dissolution, and any tax which the obligor may be required or
within the same period after their retirement permitted to pay thereon or to retain therefrom
from business, file their IT returns covering the under any law of the Philippines, or any state or
profit earned or business done by them from the country, the obligor shall deduct bonds,
beginning of the year up to the date of such mortgages, deeds of trust or other obligations,
dissolution or retirement and pay the whether the interest or other payments are
corresponding IT due thereon upon demand of payable annually or at shorter or longer periods,
the Commissioner. In addition to the IT return, and whether the bonds, securities or obligations
they shall also submit within the same period the had been or will be issued or marketed, and the
following: interest or other payment thereon paid, within or
(a) a copy of the resolution authorizing such without the Philippines, if the interest or other
dissolution; payment is payable to a nonresident alien or to a
(b) balance sheet at the date of dissolution or citizen or resident of the Philippines.
retirement and a profit and loss statement
covering the period from the beginning of the 2. Withholding of Creditable Tax
taxable year to the date of dissolution or RR 2-98
retirement; Under the creditable withholding tax system,
(c) in the case of a corporation, the names and taxes withheld on certain income payments are
addresses of the shareholders and the intended to equal or at least approximate the tax
number and par value of the shares held by due of the payee on said income.
each; and in case of a partnership, joint
The income recipient is still required to file an
account or association, the name of the
income tax return, to report the income and/or
partners or members and the capital
pay the difference between the tax withheld and
contributed by each;
the tax due on the income.
(d) the value and a description of the assets
received in liquidation by each shareholder;
Taxes withheld on income payments covered by
(e) the name and address of each individual or
the expanded withholding tax and compensation
corporation, other than shareholders, if any,
income are creditable in nature.
receiving assets at the time of dissolution
together with a description and the value of
RR 12-2001
the assets received by such individuals or
The amounts subject to withholding tax under
corporations and the consideration if any,
this paragraph shall include not only fees but
paid by each of them for the assets received.
also per diems, allowances and any other form of
income payments not subject to withholding tax
B. WITHHOLDING TAX
on compensation.
1. Final Withholding Tax at Source
Sec. 57. NIRC In the case of professional entertainers,
Subject to rules and regulations the Secretary of professional athletes, directors involved in
Finance may promulgate, upon the movies, stage, radio, television and musical
recommendation of the Commissioner, requiring productions and other recipients of talent fees,
the filing of income tax return by certain income the amounts subject to withholding tax shall also

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include amounts paid to them in consideration Statement of Income Payments Made and
for the use of their names or pictures in print, Taxes Withheld. - Every withholding agent
broadcast, or other media or for public required to deduct and withhold taxes under
appearances, for purposes of advertisements or Section 57 shall furnish each recipient, in respect
sales proportion. to his or its receipts during the calendar quarter
or year, a written statement showing the income
Furthermore, in order to determine the or other payments made by the withholding
applicable tax rate (10% or 20%) to be agent during such quarter or year, and the
applied/withheld by the withholding agent, every amount of the tax deducted and withheld
professional entertainer, professional athlete, therefrom, simultaneously upon payment at the
director involved in movies, stage, radio, request of the payee, but not later than the
television and musical productions and other twentieth (20th) day following the close of
recipients of talent fees shall annually disclose the quarter in the case of corporate payee,
his gross income for the current year to the BIR, or not later than March 1 of the following
by submitting a notarized sworn declaration year in the case of individual payee for
thereof, copy furnished all the current payors of creditable withholding taxes. For final
the declaration duly stamped received by the withholding taxes, the statement should be
BIR. The disclosure should be filed on June 30 of given to the payee on or before January 31
each year or within fifteen (15) days after the of the succeeding year.
end of the month the talent's income reaches
P720,000, whichever comes earlier. In case his Annual Information Return. - Every
total gross income is less than P720,000 as of withholding agent required to deduct and
June 30, he/she shall submit a second disclosure withhold taxes under Section 57 shall submit to
within fifteen (15) days after the end of the the Commissioner an annual information return
month that his/her gross income for the current containing the list of payees and income
year to date reaches P720,000. The initial payments, amount of taxes withheld from each
disclosure after the effectivity of these payee and such other pertinent information as
Regulations shall be filed on or before September may be required by the Commissioner. In the
30, 2001 or within fifteen (15) days after the case of final withholding taxes, the return shall
effectivity of these Regulations, whichever comes be filed on or before January 31 of the
later. In case of failure to submit the annual succeeding year, and for creditable
declaration/disclosure to the BIR, the payor shall withholding taxes, not later than March 1 of
withhold the tax at the rate of 20%. the year following the year for which the
annual report is being submitted. This
If an individual recipient receives talent fees in return, if made and filed in accordance with the
addition to salaries from the same payor, the rules and regulations approved by the Secretary
said talent fees shall be considered as of Finance, upon recommendation of the
supplemental compensation and, thus, be Commissioner, shall be sufficient compliance
subject to the withholding tax on compensation." with the requirements of Section 68 of the NIRC
in respect to the income payments.
3. Return and Payment of Tax
Sec. 58 The Commissioner may, by rules and
Quarterly Returns and Payments of Taxes regulations, grant to any withholding agent a
Withheld. - Taxes deducted and withheld under reasonable extension of time to furnish and
Section 57 by withholding agents shall be submit the return required in this Subsection.
covered by a return and paid to, except in cases
where the Commissioner otherwise permits, an Income of Recipient. - Income upon which any
authorized Treasurer of the city or municipality creditable tax is required to be withheld at
where the withholding agent has his legal source under Section 57 shall be included in the
residence or principal place of business, or, return of its recipient but the excess of the
where the withholding agent is a corporation, amount of tax so withheld over the tax due on
where the principal office is located. his return shall be refunded to him subject to the
provisions of Section 204; if the income tax
The taxes deducted and withheld by the collected at source is less than the tax due on his
withholding agent shall be held as a special fund return, the difference shall be paid in accordance
in trust for the government until paid to the with the provisions of Section 56.
collecting officers.
All taxes withheld pursuant to the provisions of
The return for final withholding tax shall be filed this Code and its implementing rules and
and the payment made within twenty-five regulations are hereby considered trust funds
(25) days from the close of each calendar and shall be maintained in a separate account
quarter, while the return for creditable and not commingled with any other funds of the
withholding taxes shall be filed and the payment withholding agent.
made not later than the last day of the
month following the close of the quarter Registration with Register of Deeds. - No
during which withholding was made: registration of any document transferring real
Provided, That the Commissioner, with the property shall be effected by the Register of
approval of the Secretary of Finance, may Deeds unless the Commissioner or his duly
require these withholding agents to pay or authorized representative has certified that such
deposit the taxes deducted or withheld at more transfer has been reported, and the capital gains
frequent intervals when necessary to protect the or creditable withholding tax, if any, has been
interest of the government. paid: Provided, however, That the information as
may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon

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recommendation of the Commissioner, shall be services, the term "employer" (except for the
annotated by the Register of Deeds in the purpose of Subsection (A)) means the person
Transfer Certificate of Title or Condominium having control of the payment of such wages;
Certificate of Title: Provided, further, That in and
cases of transfer of property to a corporation, (2) In the case of a person paying wages on
pursuant to a merger, consolidation or behalf of a nonresident alien individual, foreign
reorganization, and where the law allows partnership or foreign corporation not engaged
deferred recognition of income in accordance in trade or business within the Philippines, the
with Section 40, the information as may be term "employer" (except for the purpose of
required by rules and regulations to be Subsection (A)) means such person.
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be Sec. 79. Income Tax Collected at Source
annotated by the Register of Deeds at the back Requirement of Withholding - Every employer
of the Transfer Certificate of Title or making payment of wages shall deduct and
Condominium Certificate of Title of the real withhold upon such wages a tax determined in
property involved: Provided, finally, That any accordance with the rules and regulations to be
violation of this provision by the Register of prescribed by the Secretary of Finance, upon
Deeds shall be subject to the penalties imposed recommendation of the Commissioner: Provided,
under Section 269 of this Code. however, That no withholding of a tax shall be
required where the total compensation income of
C. Withholding on Wages an individual does not exceed the statutory
Sec. 78. Definitions. minimum wage, or five thousand pesos
Wages - The term 'wages' means all remuneration (P5,000.00) per month, whichever is higher.
(other than fees paid to a public official) for
services performed by an employee for his Tax Paid by Recipient - If the employer, in
employer, including the cash value of all violation of the provisions of this Chapter, fails to
remuneration paid in any medium other than cash, deduct and withhold the tax as required under this
except that such term shall not include Chapter, and thereafter the tax against which such
remuneration paid: tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected
(1) For agricultural labor paid entirely in products from the employer; but this Subsection shall in no
of the farm where the labor is performed, or case relieve the employer from liability for any
(2) For domestic service in a private home, or penalty or addition to the tax otherwise applicable
(3) For casual labor not in the course of the in respect of such failure to deduct and withhold.
employer's trade or business, or
(4) For services by a citizen or resident of the Refunds or Credits -
Philippines for a foreign government or an (1) Employer. - When there has been an
international organization. overpayment of tax under this Section, refund
or credit shall be made to the employer only
If the remuneration paid by an employer to an to the extent that the amount of such
employee for services performed during one-half overpayment was not deducted and withheld
(1/2) or more of any payroll period of not more hereunder by the employer.
than thirty-one (31) consecutive days constitutes
wages, all the remuneration paid by such employer (2) Employees. - The amount deducted and
to such employee for such period shall be deemed withheld under this Chapter during any
to be wages; but if the remuneration paid by an calendar year shall be allowed as a credit to
employer to an employee for services performed the recipient of such income against the tax
during more than one-half (1/2) of any such payroll imposed under Section 24(A) of this Title.
period does not constitute wages, then none of the Refunds and credits in cases of excessive
remuneration paid by such employer to such withholding shall be granted under rules and
employee for such period shall be deemed to be regulations promulgated by the Secretary of
wages. Finance, upon recommendation of the
Commissioner.
Payroll Period - a period for which payment of
wages is ordinarily made to the employee by his Any excess of the taxes withheld over the tax due
employer, and the term "miscellaneous payroll from the taxpayer shall be returned or credited
period" means a payroll period other than, a daily, within three (3) months from the fifteenth (15th)
weekly, biweekly, semi-monthly, monthly, day of April. Refunds or credits made after such
quarterly, semi-annual, or annual period. time shall earn interest at the rate of six percent
(6%) per annum, starting after the lapse of the
Employee - any individual who is the recipient of three-month period to the date the refund of credit
wages and includes an officer, employee or elected is made.
official of the Government of the Philippines or any
political subdivision, agency or instrumentality Refunds shall be made upon warrants drawn by the
thereof. The term "employee" also includes an Commissioner or by his duly authorized
officer of a corporation. representative without the necessity of counter-
signature by the Chairman, Commission on Audit or
Employer - means the person for whom an the latter's duly authorized representative as an
individual performs or performed any service, of exception to the requirement prescribed by Section
whatever nature, as the employee of such person, 49, Chapter 8, Subtitle B, Title 1 of Book V of
except that: Executive Order No. 292, otherwise known as the
(1) If the person for whom the individual performs Administrative Code of 1987.
or performed any service does not have
control of the payment of the wages for such

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Personal Exemptions - employee on taxable compensation income for the


In General. - Unless otherwise provided by this entire taxable year in accordance with Section
Chapter, the personal and additional exemptions 24(A). The difference between the tax due from the
applicable under this Chapter shall be determined employee for the entire year and the sum of taxes
in accordance with the main provisions of this Title. withheld from January to November shall either be
withheld from his salary in December of the current
Exemption Certificate. - calendar year or refunded to the employee not
(a) When to File. - On or before the date of later than January 25 of the succeeding year.
commencement of employment with an
employer, the employee shall furnish the Sec. 79. Liability for Tax
employer with a signed withholding exemption Employer - The employer shall be liable for the
certificate relating to the personal and withholding and remittance of the correct amount
additional exemptions to which he is entitled. of tax required to be deducted and withheld under
(b) Change of Status. - In case of change of this Chapter. If the employer fails to withhold and
status of an employee as a result of which he remit the correct amount of tax as required to be
would be entitled to a lesser or greater withheld under the provision of this Chapter, such
amount of exemption, the employee shall, tax shall be collected from the employer together
within ten (10) days from such change, file with the penalties or additions to the tax otherwise
with the employer a new withholding applicable in respect to such failure to withhold and
exemption certificate reflecting the change. remit.
(c) Use of Certificates. - The certificates filed
hereunder shall be used by the employer in Employee - Where an employee fails or refuses to
the determination of the amount of taxes to file the withholding exemption certificate or willfully
be withheld. supplies false or inaccurate information thereunder,
(d) Failure to Furnish Certificate. - Where an the tax otherwise required to be withheld by the
employee, in violation of this Chapter, either employer shall be collected from him including
fails or refuses to file a withholding exemption penalties or additions to the tax from the due date
certificate, the employer shall withhold the of remittance until the date of payment. On the
taxes prescribed under the schedule for zero other hand, excess taxes withheld made by the
exemption of the withholding tax table employer due to:
determined pursuant to Subsection (A) hereof. (1) failure or refusal to file the withholding
exemption certificate; or
Withholding on Basis of Average Wages - The (2) false and inaccurate information shall not be
Commissioner may, under rules and regulations refunded to the employee but shall be
promulgated by the Secretary of Finance, authorize forfeited in favor of the Government.
employers to:
(1) estimate the wages which will be paid to an Sec. 81. Filing of Return and Payment of
employee in any quarter of the calendar year; Taxes Withheld
(2) determine the amount to be deducted and Except as the Commissioner otherwise permits,
withheld upon each payment of wages to such taxes deducted and withheld by the employer on
employee during such quarter as if the wages of employees shall be covered by a return
appropriate average of the wages so and paid to an authorized agent bank, Collection
estimated constituted the actual wages paid; Agent, or the duly authorized Treasurer of the city
and or municipality where the employer has his legal
(3) deduct and withhold upon any payment of residence or principal place of business, or in case
wages to such employee during such quarter the employer is a corporation, where the principal
such amount as may be required to be office is located.
deducted and withheld during such quarter
without regard to this Subsection. The return shall be filed and the payment made
within twenty-five (25) days from the close of each
Husband and Wife - When a husband and wife calendar quarter: Provided, however, That the
each are recipients of wages, whether from the Commissioner may, with the approval of the
same or from different employers, taxes to be Secretary of Finance, require the employers to pay
withheld shall be determined on the following or deposit the taxes deducted and withheld at more
bases: frequent intervals, in cases where such
(1) The husband shall be deemed the head of requirement is deemed necessary to protect the
the family and proper claimant of the additional interest of the Government.
exemption in respect to any dependent children,
unless he explicitly waives his right in favor of his The taxes deducted and withheld by employers
wife in the withholding exemption certificate. shall be held in a special fund in trust for the
(2) Taxes shall be withheld from the wages of Government until the same are paid to the said
the wife in accordance with the schedule for zero collecting officers.
exemption of the withholding tax table prescribed
in Subsection (D)(2)(d) hereof.

Nonresident Aliens - Wages paid to nonresident


alien individuals engaged in trade or business in
the Philippines shall be subject to the provisions of
this Chapter.

Year-End Adjustment - On or before the end of


the calendar year but prior to the payment of the
compensation for the last payroll period, the
employer shall determine the tax due from each

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TAXATION LAW 2

Taxation Law 2
TABLE OF CONTENTS

I. Transfer Taxes 65
II. Value-
Value-Added Tax 78
III. Percentage Tax 99
IV. Excise Tax 103
103
V. Documentary Stamp Tax 106
VI. Remedies 110
110
VII. Local Taxation 128
VIII. Real Property Taxation 139
IX. Tariff and Customs Code 151

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I. TRANSFER TAXES who may exercise such rights. By reason of the


restriction the transferee is incapable of freely
enjoying or disposing of the property until the
-excise taxes imposed upon the privilege of
transferors death. The transfer may be regarded
gratuitously transmitting ones property to
as having been intended to take effect in
another.
possession or enjoyment at the transferors
death.
Two Types of Transfer Taxes
Donors Tax Estate Tax
ILLUSTRATION:
Imposed upon the Imposed upon the X transfers his property to Y in naked ownership
privilege to give privilege to transmit and to Z in usufruct throughout Zs lifetime
property to heirs subject to the condition that if Z predeceases X,
Transfer is between Transfer is from the the property shall return to X. If X dies during Zs
the living deceased, through life, the value of the reversionary interest of X at
his/her estate, to the death is includible in his gross estate (see Articles
living 756-757 of the Civil Code). The transfer is
Transfer may take Transfer takes place taxable as intended to take effect at or after
place between only between natural death because the possibility of reversion to X
natural and juridical persons makes Zs interest conditional as long as X lives.
persons NOTE: Transfer with retention or reservation of
certain rights is grouped by the Tax Code under
transfer in contemplation of death.
A. ESTATE TAX
c. Revocable transfers (Sec. 85C)
PRINCIPLES Transfers where the transferor has reserved the
right to alter, amend or revoke such transfer,
Definition regardless of WON the power is actually
-a graduated tax imposed upon the privilege of exercised during his lifetime, and WON the power
the decedent to transmit property at death and is should be exercised by him alone or in
based on the entire net estate. conjunction with someone else. The power to
-not a direct tax on the property transmitted or alter, amend or revoke shall be considered to
transferred although its amount is based thereon. exist on the date of the decedents death EVEN
THOUGH:
Applicable Law the exercise of the power is subject to a
Estate taxation is governed by the statute in precedent giving of notice, or
force at the time of the death of the decedent. the alteration, amendment or revocation
The estate tax accrues as of the death of the takes effect only on the expiration of a stated
decedent and the accrual of the tax is distinct period after the exercise of the power,
from the obligation to pay the same. Upon the whether or not on or before the date of the
death of the decedent, succession takes place decedents death notice has been given or the
and the right of the State to tax the privilege to power has been exercised.
transmit the estate vests instantly upon death. If notice has not been given or the power
(Section 3, RR 2-2003) has not been exercised before the date of
his death, such notice shall be considered
Transfers Affected to have been given, or the power
1. Transfers Mortis Causa - Gratuitous exercised, on the date of his death.
transfers after death, either testate or
intestate. d. Transfers of property arising under a
general power of appointment (Sec. 85D)
2. Transfers Inter Vivos Generally attract Gross estate shall include any property passed or
donors tax. However, certain transfers inter transferred under a general power of appointment
vivos are treated as testamentary exercised by the decedent:
dispositions and are accordingly included in by will, or
the computation of the gross estate in order by deed executed in contemplation of, or
to arrive at the proper estate tax liability. intended to take effect in possession or
enjoyment at, or after his death, or
These transfers are the following: by deed under which he has retained for his
life or any period not ascertainable without
a. Transfers in contemplation of death (Sec. reference to his death or for any period which
85B) does not in fact end before his death
Term does not refer to the general expectation of o the possession or enjoyment of, or the
death which all entertain. The transfers referred right to the income from, the property, or
to are those impelled by the thought of death o the right, either alone or in conjunction
(i.e., the motivating factor or controlling motive with any person, to designate the persons
is the thought of death), regardless of whether who shall possess or enjoy the property or
the transferor was near the possibility of death or the income therefrom
not.
Q: What is a power of appointment?
b. Transfer with retention or reservation of The power or right to designate by will or by
certain rights (Sec. 85B) deed the person(s) who shall succeed to,
It involves cases where the owner transfers his possess or enjoy the property, or the income
property during life but still retains the economic therefrom, received from the estate of the
benefits the possession or enjoyment of the prior decedent. It involves the person
property, or the power to designate the persons creating the power (donor) and the person to

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TAXATION LAW 2

whom is given the right to exercise the power inures to the benefit of any individual,
(donee). provided that not more than 30% of the said
bequests, devises, legacies or transfers shall
Two Kinds of Appointment and their Effects: be used for administrative purposes

Kind of Nature Tax Effects Excluded Properties [DULUTS 200]


Appoint Implication 1. PROCEEDS of:
ment s a. Life insurance policy taken out
General DONEE has Makes DONEE - by the decedent upon his own life,
power to appointed holds the - when beneficiary is OTHER THAN the
appoint property, for appointed estate, executor or administrator,
any person all legal property - and designation is IRREVOCABLE
he chooses intents, the with all (Sec. 85E)
who shall property of the Thus, proceeds are INCLUDED in the
possess or the DONEE attributes gross estate:
enjoy the (includible in of When beneficiary is the estate,
property his estate) ownershi executor or administrator, whether
without p, under designation is revocable or irrevocable
restriction the When beneficiary is other than the
concept estate, executor or administrator, and
of owner designation is REVOCABLE
Special DONEE Not DONEE NOTE: According to the Insurance
must includible in holds the Code, the designation is presumed to
appoint the gross appointed be revocable, in case the designation
successor estate of the property of the beneficiary is not clear.
to the DONEE when in trust, b. group life insurance policy taken out
property he dies or under - by a company for its employees, (law
only within the only speaks of policies taken out by the
a limited concept decedent upon his own life)
group or of trustee c. life insurance policies-issued by the GSIS
class of to government officials or employees, as
persons they are exempt by law from taxes of all
kinds (PD 1146, as amended)
e. Transfers for insufficient consideration
(Sec. 85G) 2. Death benefits received from the SSS,
Transfers that are not bona fide sales of property accruing by reason of death (RA 1161, as
for an adequate and full consideration in money amended)
or moneys worth.
3. Amounts received from the Philippine and the
If bona fide sale no value shall be included U.S. Governments from the damages suffered
in the gross estate [Case B] during the last war (RA 227)
If not a bona fide sale - the excess of the fair
market value at the time of death over the 4. Benefits received by beneficiaries residing in
value of the consideration received by the the Philippines under laws administered by the
decedent shall form part of his gross estate. U.S. Veterans Administration (RA 360)
[Case A]
If inter vivos transfer is proven fictitious 5. Properties held in Trust by the decedent
total value of the property at the time of 6. Transfers by way of bona fide Sales
death included in the gross estate.[Case C]
7. Separate or exclusive property of the surviving
Case A Case B Case C spouse is not deemed part of the gross estate of
FMV, transfer 1,500 2,000 2,500 the decedent spouse. (Sec. 85, NIRC)
FMV, death 2,000 2,500 2,000
Consideration 800 2,000 0 8. Net estates which are not in excess of
Received P200,000 are exempt from estate tax. (Sec. 84,
NIRC)
Value 1,200 0 2,000
Included in
the Gross
Estate GROSS ESTATE
Composition
Exempt Transfers [MTTB] (Sec. 87) The following properties and interest therein at
the time of decedents death:
a. Merger of the usufruct in the owner of the Citizens and Resident Aliens all properties,
naked title real or personal, tangible or intangible,
b. Transmission or delivery of the inheritance wherever situated
or legacy by the fiduciary heirs or legatee to Non-resident Aliens only properties situated
the fideicommisary in the Philippines provided that, with respect
c. Transmission from the first heirs, legatees to intangible personal property, its inclusion
or donees in favor of another beneficiary in in the gross estate is subject to the rule of
accordance with the desire of the testator reciprocity provided for under Sect 104, NIRC
d. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable Q: What is residence for estate tax
institutions, no part of the income of which purposes?

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It refers to the permanent home, the place to availed of. Reciprocity has to be total. (CIR v.
which whenever absent, for business or pleasure, Fisher, 110 Phil 686)
one intends to return, and depends on facts and Reciprocity in exemption does not require the
circumstances, in the sense that they disclose foreign country to possess international
intent. (Corre v. Tan Corre, 100 Phil 321) It is, personality in the traditional sense (i.e.,
therefore, not necessarily the actual place of compliance with the requisites of statehood).
residence. The term residence and domicile Thus, Tangier, Morroco (Collector v. Campos-
are synonymous and are used interchangeably Rueda, 42 SCRA 23) and California, a state in
without distinction. (Collector v. Lara, 102 Phil the American Union (Collector v. de Lara, 102
813; Velilla v. Posadas, 62 Phil 624). Phil 813) were held to be foreign countries
within the meaning of Section 104.
Q: What is the situs of intangible personal
property?
GR: situs is at the domicile or residence of the Valuation of the Gross Estate (88 of the
owner. Exception: NIRC and 5 of RR 2-2003)
When it is inconsistent with the express
provisions of statute, or GENERAL RULE: The properties comprising the
Justice does not demand that it should be, as gross estate shall be valued based on FAIR
where the property has in fact a situs MARKET VALUE (FMV) as of the time of death.
elsewhere.
Real property-FMV as determined by the
CASE LAW: Collector v. Lara (102 Phil 813) Commissioner OR FMV as shown in the schedule
When the owner of personal property, during his of values fixed by the provincial and city
lifetime, extended his activities with respect to assessors, whichever is HIGHER.
his interests so as to avail himself of the
protection and benefits of the laws of the Shares of Stock
Philippines, so as to bring his person or property o Listed shares FMV is the arithmetic mean
within the reach of the Philippines, the reason for between the highest and lowest quotation at
a single place of taxation no longer obtains. His a date of death, OR the date nearest the date
property in the Philippines enjoys the protection of death, if none is available on the date of
of the government so that the right to collect the death itself
estate tax cannot be questioned. o Unlisted shares - COMMON shares are
valued based on BOOK VALUE; while
Q: What are the intangible properties which PREFERRED shares are valued at PAR VALUE
are considered by law as situated in the
Philippines? Right to usufruct, use or habitation,
Franchise which must be exercised in the annuity - the probable life of the beneficiary
Philippines in accordance with the latest basic standard
Obligations or bonds issued by any mortality table is to be taken into account, to
corporation or sociedad anonima organized or be approved by the Secretary of Finance,
constituted in the Philippines upon recommendation of the Insurance
Shares, obligations or bonds issued by any Commissioner.
foreign corporation 85% of the business of
which is located in the Philippines Decedents interest Value to be included in
Shares, obligations or bonds issued by any the gross estate is the extent of the interest
foreign corporation if such shares, obligations therein of the decedent at the time of his death
or bonds have acquired a business situs in
the Philippines
DEDUCTIONS [ELIT VTMSFH]
Shares or rights in any partnership, business
or industry established in the Philippines
1. Expenses, Losses, Indebtedness and
Q: What is the reciprocity rule? (Sec. 104, Taxes [ELIT] [fjc cult]
NIRC)
There is reciprocity if the foreign country of which a. Funeral expenses (86-A1) (max.
the decedent was a citizen and resident at the P2ook)
time of his death: Allowable deduction is whichever is lower of
did not impose a transfer tax of any -the actual funeral expenses (WON paid)
character, in respect of intangible personal up to the time of interment, or
property of citizens of the Philippines not -an amount equal to 5% of the gross
residing in that foreign country; or estate, but in no case to exceed P200,000.
allowed a similar exemption from transfer tax
in respect of intangible personal property NOTE: The unpaid portion of the funeral
owned by citizens of the Philippines not expenses incurred which is in excess of the
residing in that country P200,000 threshold is NOT allowed to be
[In sum, both states must exempt nonresidents claimed as a deduction under claims against
(citizens of the other state) from transfer taxes in the estate (see 1(c) below). (Sec. 6(A)(1) of
respect of intangible personal property.] RR 02-2003)
NOTE:
For the reciprocity rule to apply, there must Examples of funeral expenses
be TOTAL reciprocity. (RR 2-2003, Sec. 6-A1)
[For instance,] in the Philippines, both estate o The MOURNING APPAREL of the surviving
and inheritance taxes are imposed on the spouse and unmarried minor children of
estate while in California only inheritance tax the deceased, bought and used on the
is imposed. The reciprocity rule may not be occasion of the burial

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o EXPENSES for the deceaseds WAKE, o Brokerage fees for selling property of the
including food and drinks estate
o PUBLICATION CHARGES for death notices
o TELECOMMUNICATIONS EXPENSES CASE LAW: Commissioner v. CA (328 SCRA 666)
incurred in informing relatives of the The notarial fee paid for the extrajudicial
deceased settlement is deductible since such settlement
o Cost of BURIAL PLOT, TOMBSTONES, effected a distribution of the estate to the lawful
MONUMENT or MAUSOLEUM but not their heirs. Attorneys fees to be deductible from the
upkeep. In case the deceased owns a gross estate must be essential to the collection of
family estate or several burial lots, only assets, payment of debts or the distribution of
the value corresponding to the plot where property to the persons entitled to it
he is buried is deductible
o INTERMENT and/or CREMATION FEES c. Claims against the estate (86-A1)
and CHARGES Claims debts or demands of a
o All other expenses incurred for the pecuniary nature which could have been
performance of the RITES and enforced against the deceased in his
CEREMONIES incident to interment lifetime and could have been reduced to
simple money judgments. May arise out
Expenses NOT deductible as funeral of contract, tort or operation of law.
expenses
o Expenses incurred AFTER INTERMENT, Requisites for deductibility [PVN GF](RR
such as for prayers, masses, 2-2003, Sec. 6-A3):
entertainment, or the like 1) must be a PERSONAL OBLIGATION of the
o Any portion of the funeral and burial deceased existing at the time of his
expenses BORNE or DEFRAYED by death (except unpaid funeral expenses
RELATIVES and FRIENDS of the deceased and unpaid medical expenses, which are
classified into their own separate
ILLUSTRATIONS: categories)
o If five percent (5%) of the gross estate is 2) liability must have been contracted in
P220,000 and the amount actually GOOD FAITH and for adequate and full
incurred is P215,000, the maximum consideration in money or moneys worth
amount that may be deducted is only 3) the claim must be a debt or claim which
P200,000; is VALID IN LAW and ENFORCEABLE IN
o If five percent (5%) of the gross estate is COURT
P 100,000 and the total amount incurred 4) indebtedness NOT CONDONED by the
is P150,000 where P20,000 thereof is still creditor or the action to collect from the
unpaid, the only amount that can be decedent must not have prescribed.
claimed as deduction for funeral
expenses is P100,000. The entire Substantiation Requirements
P50,000 excess amount consisting of 1) The duly-notarized debt instrument, If
P30,000 paid amount and P20,000 the claim arose out of a debt instrument
unpaid amount can no longer be claimed 2) A statement showing the disposition of
as FUNERAL EXPENSES. Neither can the the proceeds of the loan, if the
P20,000 unpaid portion be deducted from indebtedness was incurred within 3 years
the gross estate as CLAIMS AGAINST THE before the death of the decedent.
ESTATE.
d. Claims against insolvent persons (86-
b. Judicial expenses of testamentary and A1)
intestate proceedings (86-A1) Deductible from the gross estate,
Allowable deductions are expenses provided that the value of the decedents
incurred, in the inventory-taking of interest in the claim is included in the
the assets comprising the gross estate, value of the gross estate.
their administration, the payment of
debts of the estate, as well as the e. Unpaid mortgages. losses and
distribution of the estate among the taxes(86-A1 and RR 2-2003, Sec. 6-
heirs, A5)
DURING THE SETTLEMENT OF THE UNPAID MORTGAGES Deductible
ESTATE BUT NOT BEYOND THE LAST DAY from gross estate, provided:
PRESCRIBED BY LAW, or the extension o That the value of the decedents
thereof, FOR THE FILING OF THE ESTATE interest in the property encumbered
TAX RETURN (RR 2-2003, Sec. 6-A2) by such mortgage or indebtedness is
included in the value of the gross
Examples of judicial expenses estate
o Fees of executor or administrator o That the deduction shall be limited to
o Attorneys fees the extent that they were contracted
o Court fees bona fide and for an adequate and full
o Accountants fees consideration in money or moneys
o Appraisers fees worth, if such unpaid mortgages or
o Clerk hire indebtedness were founded upon a
o Costs of preserving and distributing the promise or an agreement.
estate
o Costs of storing or maintaining property LOSSES deductible from the gross
of the estate estate if ALL of the following conditions
are satisfied:

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The losses the prior succession (Mr. Bs succession)


o were INCURRED DURING the was finally determined and paid
SETTLEMENT of the estate 5) No vanishing deduction on the property
o arose from FIRES, STORMS, was allowed to the estate of the prior
SHIPWRECK or OTHER CASUALTIES, decedent. (Illustration of how this
or from ROBBERY, THEFT or requirement may NOT be met: In the
EMBEZZLEMENT example above, if Mr. B received the
o are NOT COMPENSATED BY same properties as a donation from Mr. C
INSURANCE or otherwise in July 2002, a vanishing deduction on
o are not claimed as a deduction for the properties was claimed with respect
income tax purposes in an income tax to Mr. Bs estate. Thus, no more
return vanishing deduction may be claimed by
o were incurred NOT LATER THAN THE Mr. As estate)
LAST DAY FOR PAYMENT OF THE
ESTATE TAX Computation of vanishing deduction
Using the facts above, assume that Mr. A
TAXES Deductible from the gross estate inherited a car and a house from his father
IF: Mr. B. The FMV of the car was P120,000
o They have accrued as of the death of and the FMV of the house was P800,000 at
the decedent the time of Mr. Bs death. At the time Mr. A
o They were unpaid as of the time of inherited the land, it was subject to a
death mortgage of P80,000. Mr. A paid P70,000 of
NOTE: This deduction DOES NOT include the mortgage during his lifetime (leaving a
income tax upon income received after balance of P10,000). The FMV of the
death, or property taxes not accrued properties at the time of Mr. As death were
before his death, or the estate tax due P850,000 for the land and P70,000 for the
from the transmission of his estate. car. Mr. As gross estate amounted to
P3,200,000 while total deductions (excluding
2. Property previously taxed (Vanishing medical expenses, standard deductions,
deductions) (86-A2) family home) amounted to P600,000.

Deduction allowed on the property left behind 1) First, compare the values of the
by the decedent which he had acquired property at the time of the prior
previously by inheritance or donation. decedents death and at the time of
the present decedents death. The
Previously, a transfer tax had already been lower amount shall be the initial
imposed on the property, either the estate basis.
tax (if property inherited) or the donors tax in the example, the initial basis shall
(if property donated). Now that the recipient be P800,000 for the land and
of the inheritance or donation has died, the P70,000 for the car, for a total of
same property will again be subjected to a P870,000
transfer tax, the estate tax. Thus, to NOTE: The value used as initial basis
minimize the effects of a double tax on the is significant only for purposes of
same property within a short period of time, computing the amount of vanishing
i.e. five (5) years, the law allows a deduction deduction. The value included in the
to be claimed on the said property. decedents gross estate is ALWAYS
Example: Mr. A died in December 2003. In the fair market value at the time of
March 2003, Mr. B (Mr. As father) died and his death.
left Mr. A some properties as inheritance.
May vanishing deductions be claimed as 2) Then, the value in (1) shall be
deductions in computing Mr. As net taxable reduced by any payment made by
estate? the present decedent on any
YES, vanishing deductions shall be allowed if mortgage or lien on the property
the following conditions are met Mr. A paid P70,000 of the mortgage.
(REQUISITES FOR DEDUCTIBILITY): [PINID] Thus, P870,000 less 70,000 is
P800,000
1) Death the present decedent (Mr. A)
died within five years from the receipt of 3) The value as reduced in (2) shall be
the property from a prior decedent (Mr. further reduced by an amount equal
B) or donor; to:
2) Identity of the property The property
with respect to which deduction is sought Value as reduced in (2) X Total amount of
can be identified as the one received Gross Estate deductions*
from the prior decedent or the donor, or
as the property acquired in exchange for * excluding family home, medical
the original property so received. expenses, standard deduction and
3) Inclusion of the property The property amounts received under RA 4917
must have formed part of the gross 800/3200 x 600,000 equals 150,000.
estate situated in the Philippines of the This will be deducted from P800,000,
prior decedent, or the total amount of the which gives a balance of P650,000
gifts of the donor
4) Previous taxation of the property the 4) Finally, the remaining balance shall
donor's tax on the gift or estate tax on be multiplied by the corresponding
percentage:

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6. Medical expenses (86-A6) (max. of


If received by inheritance or P5ook)
%
gift: All medical expenses (cost of medicine, hospital
within one (1) year prior to the bills, doctors fees, etc.) incurred (whether paid
100%
death of the present decedent or unpaid)
More than one year but not
80% more than two years prior to Requisites for Deductibility:
the death of the decedent - The expenses were incurred by the decedent
More than two years but not within one (1) year prior to his death
60% more than three years prior to - The expenses are duly substantiated with
the death of the decedent receipts
More than three years but not PROVIDED, that in no case shall the deductible
40% more than four years prior to medical expenses exceed Five Hundred Thousand
the death of the decedent Pesos (P500,000).
More than four years but not
20% more than five years prior to NOTE: Any amount of medical expenses incurred
the death of the decedent within one year from death in excess of P500,000
CANNOT be claimed as a deduction under Claims
Since Mr. A received the inheritance in against the estate. (RR 2-2003, Sec. 6-F)
March 2003 (within 1 year from his death
in December 2003), the balance of 7. Amounts received by heirs under R.A.
P650,000 shall be multiplied by 100%. 4917 (86-A7)
Thus, the allowable vanishing deduction is
P650,000 Any amount received by the heirs from the
decedents employer as a consequence of the
3. Transfers for public purpose death of the decedent-employee in accordance
with RA No. 4917 (this law provides that
The whole amount of all the BEQUESTS, retirement benefits of private employees shall not
LEGACIES, DEVISES or TRANSFERS to or for the be subject to attachment, levy execution or any
use of the Government of the Republic of the tax) PROVIDED that such amount is included in
Philippines, or any political subdivision thereof, the gross estate of the decedent.
for exclusively public purposes shall be deductible
from gross estate, provided such amount or QUICK GLANCE:
value had been included in the gross estate. Resident or Non-resident alien
citizen decedent decedent
4. Family home (maximum of P1m)
It is the dwelling house, including the land GROSS ESTATE GROSS ESTATE
on which it is situated, where the husband and all property at the includes only that part
wife, or a head or the family, and members of time of death, of gross estate located
their family reside, as certified to by the wherever situated in the Philippines
Barangay Captain of the locality.
It is deemed constituted on the house and DEDUCTIONS DEDUCTIONS
lot from the time it is actually occupied as the funeral funeral expenses
family residence and considered as such for as expenses judicial expenses
long as any of its beneficiaries actually resides judicial claims against the
therein. (Arts. 152 and 153, Family Code) expenses estate
Temporary absence from the constituted family claims against claims against
home due to travel or studies or work abroad, the estate insolvents
etc. does not interrupt actual occupancy. The claims against unpaid mortgage
family home is generally characterized by insolvents and debt
permanency, that is, the place to which, unpaid taxes and losses
whenever absent for business or pleasure, one mortgage and transfers for public
still intends to return. (RR 2-2003, Sec. 6D) debt use
taxes and losses vanishing
Requisites for Deductibility transfers for deductions
1) The family home must be the actual public use share in conjugal
residential home of the decedent and his vanishing property
family at the time of his death, as certified deductions
by the barangay captain of the locality. family home NOTE: To compute for
2) The total value of the family home must standard total allowable
be included as part of the gross estate of deduction deductions of the first
the decedent medical six items above, this
3) Allowable deduction must be in an amount expenses formula is used:
equivalent to the current FMV of the amounts
family home as declared or included in the received under Gross World
gross estate but in no case shall the R.A. 4917 estate, expenses,
deduction exceed P1,000,000 share in Phils losses,
conjugal X indebtedness
5. Standard deduction (86-A5) (P1m) property Gross , taxes etc.
An amount equivalent to One million pesos estate,
(P1,000,000) shall be deducted from the gross world
estate without need of substantiation.
NOTE: No deduction shall be allowed in the case
of a non-resident decedent not a citizen of the

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TAXATION LAW 2

Philippines, unless the executor, administrator, or 1,000,000 standard deduction). The


anyone of the heirs, as the case may be, includes Philippine estate tax on P500,000 is
in the return required to be filed under Section P15,000
90 of the Code the value at the time of the
decedents death of that part of his gross estate Solution Limitation A:
not situated in the Philippines. (Section 86, NIRC)
To get tax credit per country under
Tax Rates Applicable: Limitation A, this formula is followed:
If the net estate is:
Net Estate in a Particular Country x Phil. estate
OF THE
BUT NOT tax = Tax credit
OVER TAX IS PLUS EXCES
OVER
S OVER
Net Estate Worldwide
200,000 Exempt
The result after applying the formula
P 200,000 500,000 0 5% 200,000
above is compared to the tax actually
500,000 2,000,000 15,000 8% 500,000
paid for each foreign country. The lower
2,000,000 5,000,000 135,000 11% 2million of the two amounts for each foreign
5,000,000 10million 465,000 15% 5million country will be added to get the total tax
10,000,000 And Over 1,215,000 20% 10million credit allowed under Limitation A.

Tax Credit for Estate Taxes (86-E) Amount


Allowed
Q: What is a tax credit? whichever
It is a remedy against international double is Lower)
taxation. To minimize the onerous effect of taxing Country G (300/1500 x
the same property twice, tax credit against 15,000) 3,000 3,000
Philippine estate tax is allowed for estate taxes Actually paid to 5,000
paid to foreign countries. Country G
Country H (150/1500 x
Q: Who may avail of tax credit? 15,000) 1,500 1,400
Only the estate of a decedent who was a citizen Actually paid to 1,400
or a resident of the Philippines at the time of his Country H
death can claim tax credit for any estate tax paid Tax credit allowed P 4,400
to a foreign country. under Limitation A

Q: What is the amount allowable as tax Solution Limitation B:


credit?
GENERAL RULE: The estate tax imposed by the Net estate in all foreign countries. x Phil. estate
Philippines shall be credited with the amounts of tax = Tax credit
any estate tax imposed by the authority of a Net Estate Worldwide
foreign country.
LIMITATIONS: The result after applying the formula
a. The amount of the credit in respect to the above is compared to the tax actually
tax paid to any country shall not exceed paid in total to foreign countries. The
the same proportion of the tax against lower of the two amounts will be added
which such credit is taken, which the to get the total tax credit allowed under
decedent's net estate situated within such Limitation B.
country taxable under the NIRC bears to
his entire net estate; (PER COUNTRY Amount
BASIS) and Allowed
(Lower)
b. The total amount of the credit shall not 450/1500 x 15,000 P 4,500
exceed the same proportion of the tax Total foreign income 6,400
against which such credit is taken, which taxes paid
the decedent's net estate situated outside Tax credit allowed P 4,500
the Philippines taxable under the NIRC under Limitation B
bears to his entire net estate. (OVERALL
BASIS)
Compare the tax credit allowed under Limitation
A and Limitation B. The lower of the two
ILLUSTRATION:
amounts is the final allowable tax credit. In this
Assume:
case, the amount computed under Limitation A
Net Estate Philippines P (4,400) is lower, thus it becomes the final
(reduced by all allowable 1,050,000 allowable tax credit.
deductions, except
standard deduction) If there is only one foreign country involved, both
Country G Net Estate 300,000 Limitations will yield the same answer. To get
Country H Net Estate 150,000 the tax credit allowable, use the formula in
Tax paid/incurred: Limitation A. The resulting amount will be
Philippines 15,000 compared to the actual tax paid to the foreign
Country G 5,000 country. The lower amount will be the final
Country H 1,400 allowable tax credit.
(Source: Reyes, Income Tax Law and
Net taxable estate is P500,000 Accounting)
(1,050,000 + 300,000 + 150,000

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TAXATION LAW 2

COMPLIANCE REQUIREMENTS Itemized assets of the decedent with their


corresponding gross value at the time of
ESTATE TAX his death, or in the case of a nonresident,
not a citizen of the Philippines, of that
1. Person Liable for Payment part of his gross estate situated in the
Primarily, the estate, through the executor or Philippines;
administrator. Payment shall be made before the Itemized deductions from gross estate
delivery of the distributive share in the allowed in Section 86; and
inheritance to any heir or beneficiary. If there The amount of tax due whether paid or
are two or more executors or administrators, all still due and outstanding.
of them are severally liable for the payment of
the tax. III: When filed
The estate tax clearance issued by the GR: Filed within six (6) months from the
Commissioner or the Revenue District Officer decedent's death.
(RDO) having jurisdiction over the estate, will Exception: The Commissioner shall have
serve as the authority to distribute the remaining authority to grant, in meritorious cases, a
properties/share in the inheritance to the heir or reasonable extension not exceeding thirty (30)
beneficiary. days for filing the return

Subsidiarily, heirs or beneficiaries, for the IV: Where filed


payment of that portion of the estate which his Except in cases where the Commissioner
distributive share bears to the value of the total otherwise permits, the return shall be filed with:
net estate. The extent of his liability, however, an authorized agent bank (AAB),
shall in no case exceed the value of his share in or Revenue District Officer (RDO),
the inheritance. Collection Officer, or
duly authorized Treasurer of the city or
2. Notice of Death municipality in which the decedent was
domiciled at the time of his death, or
A written Notice of Death must be given to the if there be no legal residence in the
BIR Philippines, with the Office of the
-within two (2) months after the death of the Commissioner.
decedent or
-within a period after the executor or Payment of Estate Tax
administrator or executor qualifies as such:
1. In all cases of transfers subject to tax or I: When paid
2. Where, though exempt from tax, the gross At the time the return is filed by the executor,
value of the estate exceeds P20,000. administrator or the heirs.

ESTATE TAX RETURN Extension of Payment


I: When required The Commissioner may allow an extension of
1. When the estate is subject to estate tax, OR payment, if he finds that the payment on the due
2. When, though exempt from tax, the gross date of the estate tax or of any part thereof
value of the estate exceeds Two hundred would impose undue hardship upon the estate or
thousand pesos (P200,000), OR any of the heirs
3. Regardless of the gross value of the estate, extension not to exceed five (5)
when the said estate consists of registered or years, in case the estate is settled judicially,
registrable property such as real property, or two (2) years in case the estate is
motor vehicle, shares of stock or other similar settled extrajudicially
property for which a clearance from the Where the taxes are assessed by reason of
Bureau of Internal Revenue is required as a negligence, intentional disregard of rules and
condition precedent for the transfer of regulations, or fraud on the part of the taxpayer,
ownership thereof in the name of the no extension will be granted by the
transferee, Commissioner.
If extension granted, the Commissioner
II: Contents may require the executor, or administrator,
The executor, or the administrator, or any of the or beneficiary, as the case may be, to
legal heirs, as the case may be, shall file a return furnish a BOND in such amount, not
under oath in duplicate, setting forth: exceeding DOUBLE the amount of the tax
1. The value of the gross estate of the decedent and with such sureties as the
at the time of his death, or in case of a Commissioner deems necessary,
nonresident, not a citizen of the Philippines, conditioned upon the payment of the said
of that part of his gross estate situated in the tax in accordance with the terms of the
Philippines; extension.
2. The deductions allowed from gross estate in
determining the net taxable estate; and Effects of granting an extension
3. Such part of such information as may at the Payment of the amount in respect of which
time be ascertainable and such supplemental the extension is granted on or before the date
data as may be necessary to establish the of the expiration of the period of the
correct taxes. extension
4. For estate tax returns showing a gross Suspension of the running of statute of
value exceeding Two million pesos limitations for deficiency assessment for the
(P2,000,000) there must be a statement period of any extension
duly certified to by a Certified Public Any amount paid after the statutory due date
Accountant containing the following: of the tax, but within the extension period,

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TAXATION LAW 2

shall be subject to interest but not to be due, and shall be entitled to a receipt or
surcharge. writing showing such discharge. (92)

Q: Can estate tax be paid in 2. Judge


installments? No judge shall authorize the executor or
Yes. In case the available cash of the estate is administrator to deliver a distributive share to
not sufficient to pay its total estate tax liability, any party interested in the estate, unless a
the estate may be allowed to pay the tax by certification from the BIR that the estate tax has
installment and a clearance shall be released only been paid is shown. (94)
with respect to the property the
corresponding/computed tax on which has been 3. Register of Deeds
paid. (RR 2-2003) The Register of Deeds shall not register in the
registry of property any transfer of real property
Government Collection of Unpaid Estate Tax or real rights therein, or any mortgage, by way of
Due donation or mortis causa or inheritance, without
a certification from the BIR of payment of the
1. Filing of Action The Government may file an estate tax, and they shall immediately notify the
action against all the heirs for the collection BIR of non-payment of tax discovered by them.
from each one of them the amount of the tax (95)
proportionate to the inheritance received.
Hereditary property consists only of that part 4. Bank
which remains after the settlement of all If a bank has knowledge of the death of a person
lawful claims against the estate for the who maintained a joint account or deposit jointly
settlement of which the entire estate is first with another, it shall not allow any withdrawal by
liable. It achieves payment of the tax and a surviving depositor from the said joint account
adjustment of the shares of each heir in the unless the Commissioner has certified that the
distributed estate as lessened by the tax. estate tax has been paid.

2. Enforcement of Tax Lien Another remedy, EXCEPTION: the administrator or any heir may,
pursuant to the lien created by Sec. 219 of with the authorization of the Commissioner,
the Tax Code upon all property and rights to withdraw an amount NOT EXCEEDING P20,000.
property belonging to the taxpayer, is by (95)
subjecting said property of the estate which is
in the hands of an heir or transferee to the 5. Lawyer, Notary Public or any
payment of the tax due on the estate. This Government Officer
remedy seeks only the payment of the tax. As Any lawyer, notary public, or any government
a holder of property belonging to the estate, officer who, by reason of his official duties,
an heir is liable for the tax up to the amount intervenes in the preparation or acknowledgment
of the property in his hands. He is individually of documents regarding partition or disposal of
answerable for the part of the tax donations mortis causa, legacy or inheritance,
proportionate to the share he received from shall furnish the BIR with copies of such
the inheritance. His liability, however, cannot documents and any information whatsoever
exceed the amount of his share. After which may facilitate the collection of estate tax.
payment of the tax, he will have a right of (95)
contribution from his co-heirs, to achieve an
adjustment of the proper share of each heir in 6. Debtor
the distributable estate. (Commissioner v. A debtor shall not pay his debts to the heirs,
Pineda, 21 SCRA 105) legatees, executor or administrator of his
creditor-decedent without a certification from the
BIR that the estate tax has been paid.
OBLIGATIONS OF EXECUTOR,
ADMINISTRATOR, OFFICERS, OTHERS EXCEPTION: if the credit is included in the
inventory of estate of the decedent. (95)
1. Executor or Administrator
When the gross estate is more than P20,000, the 7. Corporate Secretary of other
executor, administrator or any of the legal heirs responsible officer
shall: No transfer to any new owner in the books of any
a) give a written notice of death to the BIR corporation, sociedad anonima, partnership,
within two months after the decedents business or industry organized or established in
death OR after the executor or administrator the Philippines, of any shares, obligations, bonds
shall have qualified or rights by way of donations mortis causa,
b) file the estate tax return within the time legacy or inheritance shall be made, UNLESS a
prescribed by law certification from the BIR that the estate tax has
c) pay the estate tax within the time prescribed been paid is shown. (97)
by law
If the executor or administrator makes a written
application to the Commissioner for
determination of the amount of estate tax and
discharge from personal liability therefor, the
Commissioner shall notify the executor or
administrator of the amount of the tax. Upon
payment of the tax, the executor or administrator
shall be DISCHARGED from PERSONAL LIABILITY
for any deficiency in the tax thereafter found to

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ILLUSTRATIONS Family home is conjugal or


community property
o Decedent is an unmarried head of a family Conjugal Exclusive Total
Real and
a. personal
properties 5,000,000 5,000,000
Real and personal properties 5,000,000
Family home 2000000 2,000,000
family home 2,000,000 Other exclusive
Gross estate 7,000,000 properties 2,000,000 2,000,000
Less: Deductions Gross estate 7,000,000 2,000,000 9,000,000
Ordinary deductions Less: Ordinary
Funeral expenses 200,000 Deductions
Funeral
Other deductions 1,300,000
expenses 200,000
(1,500,000) Other dedns 1,300,000
Special deductions Total
Family Home 1,000,000 Conjugal
Standard deduction 1,000,000 deductions (1,500,000) (1,500,000)
Medical expenses 500,000 Net estate b4
share of spouse 5,500,000 2,000,000 7,500,000
(2,500,000)
Less Share of surviving spouse `
Net taxable estate 3,000,000 1/2 of 5,500,000 (2,750,000)
NOTE: Net Estate b4 special ded'ns 4,750,000
Although the family home is valued at P2 million, Less: Special Deductions
the maximum allowable deduction for the family Family Home (1,000,000)
home is P1million only. Standard Deduction (1,000,000)
Medical Expenses (500,000)
Medical expenses are not included in the
Net Taxable Estate 2,250,000
deductions referred under Section 86(A)(1) of the
Code but are treated as a special item of
deduction under Section 86(A)(6) of the same Family home is conjugal property,
Code. valued at P1,500,000
Conjugal Exclusive Total
Real and personal
o Decedent is a married man with a properties 5,000,000 5,000,000
surviving spouse Family home 1,500,000 1,500,000
Family home is exclusive property Other exclusive
properties 2,000,000 2,000,000
Conjugal Exclusive Total Gross estate 6,500,000 2,000,000 8,500,000
Real&personal Less: Ordinary
properties 5,000,000 5,000,000 Deductions
Family home 2,000,000 2,000,000 Funeral
Other expenses 200,000
exclusive Other
prop 2,500,000 2,500,000 deductions 1,300,000
Gross estate 5,000,000 4,500,000 9,500,000 Total Conjugal
Less: deductions (1,500,000) (1,500,000)
Ordinary Net estate b4
Deductions share of spouse 5,000,000 2,000,000 7,000,000
Funeral Less Share of surviving spouse `
expenses 200,000 1/2 of 5,000,000 (2,500,000)
Other Net Estate b4 special ded'ns 4,500,000
deductions 1,300,000 Less: Special Deductions
Total Family Home (750,000)
Conjugal Standard Deduction (1,000,000)
deductions (1,500,000) (1,500,000) Medical Expenses (500,000)
Net estate b4 Net Taxable Estate 2,250,000
share of
spouse 3,500,000 4,500,000 8,000,000
Less Share of surviving NOTE: Only 750,000 is allowed as a deduction for
spouse ` the family home, considering that it was conjugal
1/2 of 3,500,000 (1,750,000) property valued at P1,500,000. This value is
Net Estate b4 special ded'ns 6,250,000 subdivided into P750,000, which belonged to the
Less: Special Deductions decedent, and P750,000, which belonged to the
Family Home (1,000,000) surviving spouse. The part owned by the
Standard Deduction (1,000,000) decedent (P750,000) is compared with the
Medical Expenses (500,000)
P1,000,000 maximum deduction, the lower of the
Net Taxable Estate 3,750,000
two amounts being the allowable deduction.

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TAXATION LAW 2

B. Donors Tax national elections constitutes a donation, thus,


subject to gift taxes. However, the SC noted
PRINCIPLES that succeeding cases shall be governed by RA
7166 enacted by Congress on Nov. 25, 1991.
Definition The RA provides in Sec 13 that political/electoral
contributions, duly reported to the Commission
Not defined under the Tax Reform Act of 1997 . A
on Elections, are NOT subject to the payment of
gift is merely subjected to donors tax.
any gift tax.
GIFT or DONATION- an act of liberality
PROPERTIES INCLUDED
whereby a person disposes gratuitously of a thing
or right in favor of another who accepts it. (Art
Classes of Donors and their Gross Gift
725, Civil Code)
1. Citizens or Residents of the Philippines all
REQUISITES for a gift to be subject to
properties located not only within the
donors tax: [ACID]
Philippines but also in foreign countries
1. The donor must have CAPACITY
2. There must be an INTENT TO DONATE
2. Nonresident Alien all real and tangible
3. There must be DELIVERY, either actual or
properties within the Philippines, and
constructive
intangible personal property, unless there is
4. The donee must ACCEPT the donation
reciprocity, in which case it is not taxable
Kinds of Donations
Q: What are the intangible properties which
1. Donations inter vivos a donation made
are considered by law as situated in the
between living persons, which is perfected the
Philippines?
moment the donor knows of the acceptance
1. Franchise which must be exercised in the
of the gift by the donee21; subject to donors
Philippines
tax
2. Obligations or bonds issued by any
2. Donations mortis causa a donation which
corporation or sociedad anonima organized or
takes effect upon the death of the donor;
constituted in the Philippines
subject to estate tax
3. Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
Q: What are considered donations for tax
which is located in the Philippines
purposes?
4. Shares, obligations or bonds issued by any
1. Sales, exchanges and other transfers of
foreign corporation if such shares, obligations
property for less than an adequate and full
or bonds have acquired a business situs in
consideration in money or moneys worth
the Philippines
2. Condonation or remission of debt where the
5. Shares or rights in any partnership, business
debtor did not render service in favor of the
or industry established in the Philippines
creditor
Noteworthy, the element of donative intent is
Rule on Reciprocity (Sec 104, NIRC)
conclusively presumed in transfers of property for
There is reciprocity if the foreign country of which
less than an adequate or full consideration in
the decedent was a citizen and resident at the
money or moneys worth. However, real
time of his death:
property considered capital assets under the Tax
1. did not impose a transfer tax of any
Code are excepted from this rule. (Sec 100 in
character, in respect of intangible personal
relation to Sec 24(d)) Under Section 24(d), the
property of citizens of the Philippines not
fair market value itself, if higher than the gross
residing in that foreign country; or
selling price, is the base for computing the capital
2. allowed a similar exemption from transfer tax
gains tax imposed upon the sale of such capital
in respect of intangible personal property
assets. Thus, what the seller avoids in the
owned by citizens of the Philippines not
payment of the donors tax, it pays for in the
residing in that country
capital gains tax.
This rule applies to the transmission by gift of
intangible personal property located or with a
Applicable Law
situs within the Philippines of a nonresident alien.
The law in force at the time of the perfection/
completion of the donation (Sec 11, RR 2-2003)
EXEMPTIONS
NOTE: Any contribution in cash or in kind to any
candidate, political party or coalition of parties for Deductible from gross gifts in order to arrive at
campaign purposes shall be governed by the the taxable net gifts.
Election Code, as amended. (Sec. 99(C), NIRC) Not to be treated as exclusions from the gross
gifts of the donor.
CASE LAW: Abello v. CIR (Feb. 23, 2005) The
contributions of the ACCRA partners to the 1. Dowries or donations made on account of
campaign funds of Sen. Angara during the 1987 marriage before its celebration or within one
year thereafter by parents to each of their
legitimate, recognized natural, or adopted
21
In the case of donations of immovable property, children to the extent of the first P10,000.
they must be made in a public document specifying However, this exemption may not be availed
therein the property donated. The acceptance may be of by a non-resident not a citizen of the
made in the same Deed of Donation or in a separate public
document, but it shall not take effect unless it is done Philippines.
during the lifetime of the donor. If the acceptance is made Q: Can both parents making a donation
in a separate instrument, the donor shall be notified to a child in consideration of marriage
thereof in an authentic form, and this step shall be noted
in both instruments.
avail of the P10,000 deduction?

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TAXATION LAW 2

Yes. If both spouses made the gift, then the Net Gifts
gift is taxable one-half to each donor spouse. Net Gift is the net economic benefit from the
Separate donors tax returns must be filed; transfer that accrues to the donee.
husband and wife are considered as separate Accordingly, if a mortgaged property is
and distinct taxpayers for purposes of donors transferred as a gift, but imposing upon the
tax. (Section 12, RR 2-2003) However, where donee the obligation to pay the mortgage
there is failure to prove that the donation was liability, then the net gift is measured by
actually made by both spouses, the donation deducting from the fair market value of the
is taxable as an exclusive act of the husband property the amount of the mortgage assumed.
(Tang Ho v. BTA, 97 Phil 890), without (Section 11, RR 2-2003)
prejudice to the right of the wife to question
the validity of the donation without her COMPUTATION
consent pursuant to the provisions of the Civil How is donors tax computed?
Code and the Family Code. (Section 12, This general formula shall be followed:
supra)
Gross gifts made
2. Gifts made to or for the use of the National
Less: Deductions from the gross gifts
Government or any entity created by any of
Net gifts made
its agencies which is not conducted for profit,
Multiplied by applicable rate
or to any political subdivision of the said
Donors tax on the net gifts
Government
If there were several gifts made during the year,
3. Gifts in favor of an educational and/or
this formula is followed:
charitable, religious, cultural or social welfare
corporation, institution, accredited non-
Gross gifts made on this date
government organization, trust or
Less: Deductions from the gross gifts
philanthropic organization or research
Net gifts made on this date
institution or organization, provided not more
Add: all prior net gifts during the year
than 30% of said gifts will be used by such
Aggregate net gifts
donee for administration purposes
Multiplied by applicable rate
Donors tax on the aggregate net gifts
Q: What is a non-profit educational
Less: donors tax paid on prior net gifts
and/or charitable corporation, etc?
Donors tax due on the net gifts to date
It is a school, college or university and/or
charitable corporation, accredited NGO, trust
or philanthropic organization and/or research RATES OF TAX
institution or organization: The applicable donors tax rate is dependent
Incorporated as a non-stock entity, upon the relationship between the donor and the
Paying no dividends, donee.
Governed by trustees who receive no
compensation, and 1. If the donee is a stranger to the donor,
Devoting all its income, whether students the tax rate is equivalent to 30 % of the net
fees or gifts, donations, subsidies or other gifts.
forms of philanthropy, to the
accomplishment and promotion of the A stranger for purposes of the donors
purposes enumerated in its Articles of tax
Incorporation a. a person who is not a brother, sister
(whether by whole or half-blood), spouse,
4. Encumbrances on the property donated if ancestor or lineal descendant, or
assumed by the donee in the deed of b. a person who is not a relative by
donation consanguinity in the collateral line within
the fourth degree of relationship. (Sec.
5. Donations made to entities exempted under 99(B))
special laws, e.g.: Note that donations made between
o Aquaculture Department of the Southeast business organizations and those made
Asian Fisheries Development Center of the between an individual and a business
Philippines organization shall be considered as
o Development Academy of the Philippines donations made to a stranger (RR 2-
o Integrated Bar of the Philippines 2003)
o International Rice Research Institute
o National Museum 2. If the donee is not a stranger to the
o National Library donor, the tax for each calendar year shall
o National Social Action Council be computed on the basis of the total net
o Ramon Magsaysay Foundation gifts made during the calendar year:
o Philippine Inventors Commission
o Philippine American Cultural Foundation
o Task Force on Human Settlement on the
donation of equipment, materials and
services

6. Donations to persons not strangers where the


total of such net gifts for the calendar year is
not more than P100,000.00

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TAXATION LAW 2

Over But not Tax Is Plus Of the Correspon 124,000 P 204,000 P254,000
Over Excess ding
Over Donors
Tax (refer
0 100,000 Exempt
to
100,000 200,000 0 2% 100,000 schedule)
200,000 500,000 2,000 4% 200,000 Tax Due / 124,000 Donors Tax Donors Tax
500,000 1 million 14,000 6% 500,000 Payable P 204,000 P 254,000
Less: Tax Less: Tax
1 million 3 million 44,000 8% 1 million
Previously Previously
3 million 5 million 204,000 10% 3 million Paid paid
124,000 (124k+80k)
5 million 10 M 404,000 12% 5 million
204,000
10 M 1,004,000 15% 10 million Tax Due Tax Due
P80,000 P50,000

Note: A legally adopted child is entitled to all the


rights and obligations provided by law to VALUATION
legitimate children, and therefore, a donation to
him shall not be considered as a donation made
to a stranger. If the gift is made in property, the fair
market value at that time will be
OBJECT OF TAXATION considered the amount of gift.
Real Property
Donors tax shall be imposed whether the
transfer is in trust or otherwise, whether the taxable base = FMV as determined by the
gift is direct or indirect and whether the Commissioner of BIR (Zonal Value) or FMV as
property is real or personal, tangible or shown in the latest schedule of values of the
intangible. provincial and city assessor (Market Value
The computation of the donors tax is on a per Tax Declaration), whichever is higher.
cumulative basis over a period of one If there is no zonal value, the taxable
calendar year base is the FMV that appears in the latest tax
declaration
Illustrations: Improvement
1. Donation to son by parents on account of value of improvement is the construction
marriage (P100,000): cost per building permit and/or occupancy permit
Husband plus 10% per year after year of construction, or
the FMV per latest tax declaration.
Net Taxable Gift = P50,000 10,000 =
P40,000
Tax Due = None, since P40,000 is below the TAX CREDIT
P100,000 threshold
Wife same as above A situation may arise when the property given as
a gift is located in a foreign country and the
2. Donation to son and daughter-in-law by donor may be subject to donors tax twice on the
same property: first, by the Philippine
parents on account of marriage (P100,000):
Husband government and second, by the foreign
o Gift pertaining to the son government where the property is situated. The
Net Taxable Gift = P25,000 10,000 = remedy of claiming a tax credit is, therefore,
P15,000 aimed at minimizing the burdensome effect of
Tax Due = None, since P15,000 is below double taxation by allowing the taxpayer to
the P100,000 threshold deduct his foreign tax from his Philippine tax,
o Gift pertaining to the daughter-in-law subject to the limitations provided by law.
Net Taxable Gift = P25,000
Tax Due = P25,000 x 30% = P7,500 Q: Who may claim tax credit?
Wife same as above Tax credit for donors tax may be claimed only by
a resident citizen, non-resident citizen and
3. Donations to donees not considered strangers resident alien.
for tax purposes were made on:
January 30, 2002 P 2,000,000 Q: What are the limitations on the tax
March 30, 2002 -- 1,000,000 credit?
August 15, 2002 -- 500,000 1. NET GIFT (foreign country) X PHIL DONORS
ENTIRE NET GIFTS TAX
After the After the After the
first second third 2. NET GIFT(all foreign countries)X PHILDONORS
donation donation donation ENTIRE NET GIFTS TAX
Net 2,000,000 January January
Taxable Donation - Donation - NOTE: The computation of the donors tax credit
Gift P2,000,000 P2,000,000 is the same as the computation for estate tax
March March credit.
Donation - Donation -
1,000,000 1,000,000 COMPLIANCE REQUIREMENTS
Total August
P3,000,000 Donation -
500,000
DONORS TAX RETURN
Total
P3,500,000 I. Who Files

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TAXATION LAW 2

Every person, whether natural or juridical, II. VALUE-


VALUE-ADDED TAX22
resident or non-resident, who transfers or causes
to transfer property by gift, whether in trust or
otherwise, whether the gift is direct or indirect I. CONCEPT
and whether the property is real or personal,
tangible or intangible. VAT is a percentage tax imposed at every
stage of the distribution process on the sale,
Contents of the Donors Tax Return barter, or exchange, or lease of goods or
1. Each gift made during the calendar year properties, and on the performance of service in
which is to be included in computing net gifts; the course of trade or business, or on the
2. The deductions claimed and allowable; importation of goods, whether for business or
3. Any previous net gifts made during the same non-business purposes.
calendar year;
4. The name of the donee; It is a business tax levied on certain
5. Relationship of the donor to the donee; and transactions involving a wide range of goods,
6. Such further information as the Commissioner properties, and services, such tax being payable
may require. by the seller, lessor, or transferor. The tax is so-
called because it is imposed on the value not
When Filed previously subjected to VAT (De Leon, The
Filed within thirty (30) days after the date the National Internal Revenue Code Annotated,
gift is made or completed and the tax due 2000 edition)
thereon shall be paid at the same time that the
return is filed. It is also an excise tax, or a tax on the privilege
of engaging in the business of selling goods or
Where Filed and Paid services, or in the importation of goods.
Unless the Commissioner otherwise permits, it
shall be filed and the tax paid to an authorized The taxpayer (seller) determines his tax liability
agent bank, the Revenue District Officer, by computing the tax on the gross selling price or
Revenue Collection Officer or duly authorized gross receipt (output tax), and subtracting or
Treasurer of the city or municipality where the crediting the earlier VAT on the purchase or
donor was domiciled at the time of the transfer, importation of goods or on the sale of service
or if there be no legal residence in the (input tax) against the tax due on his own sale.
Philippines, with the Office of the Commissioner.
In the case of gifts made by a non-resident, the VAT payable to BIR = OUTPUT TAX INPUT TAX
return may be filed with the Philippine Embassy
or Consulate in the country where he is domiciled Computation of the VAT Payable:
at the time of the transfer, or directly with the Gross taxable sales/receipts xxx
Office of the Commissioner. Less: Sales returns xxx
Sales allowances xxx
Sales discounts xxx (xxx)
Net sales xxx
Multiply with the VAT rate 12%
Output tax (12% of Net sales) xxx

Input tax carried over from previous period xxx


Domestic purchases xxx
Importations xxx
Total xxx
Input tax (12% of Total) xxx

Total Input tax (xxx)

VAT payable (Output tax less input tax) xxx


(All amounts in the formula must be NET of VAT)

II. NATURE & CHARACTERISTICS

It is an indirect tax, the amount of which may


be shifted to or passed on the buyer,
transferee, or lessee of the goods, properties
or services. (Sec. 105)
This rule shall likewise apply to existing
contracts of sale or lease of goods, properties
or services at the time of the effectivity of RA
No. 9337. RR 16-200523

22
Credits: 2008 AD, C2005
23
Revenue Regulations (RR) No. 4-2007 dated February 7,
2007 introduced changes to RR No. 16-2005. SUCH as: SEC.
4.106-1. VAT on Sale of Goods or Properties. VAT is imposed
and collected on every sale, barter or exchange, or transactions
deemed sale of taxable goods or properties at the rate of
twelve percent (12%) (starting February 1, 2006) of the gross
selling price or gross value in money of the goods or properties
sold, bartered, or exchanged, or deemed sold in the
Philippines.

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Constitutionality of VAT the 70% limitation on the creditable input tax, 5-


year amortization of input tax on purchase of
ABAKADA Guro Party List, et. al. v Ermita capital goods, or the 5% final withholding tax by
the government.
The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC. It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic marine
The assailed provisions of RA 9337 are those that and agricultural products in their original state
say that the President, upon the recommendation are still not subject to tax. Congress also
of the Sec. of Finance, shall raise the rate of VAT provided for mitigating measures to cushion the
to 12% when VAT as a percentage of the GDP of impact of the imposition of the tax on those
the previous year exceeds 2 4/5% and when the previously exempt. Excise taxes on petroleum
deficit as a percentage of the previous years GDP products and natural gas were reduced.
exceeds 1 %. Percentage tax on domestic carriers was
removed. Power producers are now exempt from
This is NOT an undue delegation of legislative paying franchise tax.
power. It is simply a delegation of ascertainment
of facts upon which enforcement and VAT, by its very nature, is regressive. BUT the
administration of the increased rate under the Constitution does not really prohibit the
law is contingent. It is the ministerial duty of imposition of indirect taxes (which is essentially
the President to immediately impose the 12% regressive). What it simply provides is that
rate upon the existence of any of the conditions Congress shall evolve a progressive system of
specified by Congress.24 taxation. In Tolentino v. Sec. of Finance, the
Court said that direct taxes are to be preferred,
Another assailed provision is Sec. 8 amending and as much as possible, indirect taxes should be
Sec. 110(B), which imposes a limitation on the minimized but not avoided entirely because it is
amount of input tax (70% of the output tax) that difficult, if not impossible, to avoid them.
may be credited against the output tax. The
Court says this does not violate due process. The Tolentino v. Guingona
excess input tax, if any, is retained in a business
books of accounts and remains creditable in the Regressivity is not a negative standard for
succeeding quarter/s. In addition, Sec. 112(B) courts to enforce. What Congress is required by
allows a VAT-registered person to apply for the the Consti to do is to evolve a progressive
issuance of a tax credit certificate or refund for system of taxation. This provision is placed in
any unused input taxes, to the extent that such the Consti as moral incentives to legislation, not
input taxes have not been applied against the as judicially enforceable rights.
output taxes. Such unused input tax may be
used in payment of his other internal revenue The Consti mandate to evolve a progressive
taxes.25 system of taxation simply means that direct
The input tax is NOT a property or a property taxes are to be preferred as much as possible,
right within the constitutional purview of the due and indirect taxes should be minimized. Resort
process clause. A VAT-registered persons to indirect taxes should be minimized but
entitlement to the creditable input tax is a mere not avoided entirely. Also, the regressive
statutory privilege. The right to credit input tax effects are corrected by the zero rating of certain
as against the output tax is clearly a privilege transactions and through the exemptions. The
created by law, a privilege that also the law can transactions which are subject to VAT are those
remove, or in this case, limit. which involve goods and services which are used
or availed of mainly by higher income groups (
[Note: This limitation of creditable input tax has real properties held primarily for sale to
been eliminated by RA 9361, effective December customers, right or privilege to use patent,
2006. Pls refer to the discussion on input taxes copyright...)
on page30.]

With respect to Sec. 8, amending Sec. 110 (A), III. TRANSACTIONS SUBJECT TO VAT
which provides for 60-month amortization of the A. Any sale, barter or exchange of goods and
input tax on capital goods purchased: It is not properties, or similar transactions in the
oppressive, arbitrary, and confiscatory. The course of trade or business
taxpayer is not permanently deprived of his B. Any sale of services, or similar transactions,
privilege to credit the input tax. For whatever is in the course of trade or business
the purpose, it involves executive economic C. Any lease of goods and properties or similar
policy and legislative wisdom in which the Court transactions, in the course of trade or
cannot intervene. business
D. Any importation of goods, whether in the
The tax law is uniform: it provides a standard course of trade or business or not
rate of 0% or 10% (or 12% now) on all goods or
services. The law does not make any distinction RMC 9-2006: Reimbursable expenses
as to the type of industry or trade that will bear
Transactions and amounts that are subject to
24
VAT:
The rate was indeed increased to 12%, effective Feb. 1,
1. If the reimbursable expenses and/or
2006, as per Revenue Memorandum (RMC) No. 7-06, dated
January 31, 2006 advanced payments for certain expenses
25
This, however, is not accurate. The option to apply for tax (e.g. arrastre, wharfage, documentation,
credit certificate or refund is available to the VAT taxpayer only trucking, handling charges, storage fees,
in case his VAT registration is cancelled, unless he is subject to
VAT zero-rate.
duties and taxes, etc.) made by brokers on

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TAXATION LAW 2

behalf of their customers are receipted with Exception:


the brokers VAT official receipt. 1. When the sales do not exceed P100,000
2. Any advanced payment for expenses incurred (meaning not considered to be in the
(e.g. transportation, overtime and facilitation course of trade or business but only for
fee to facilitate the clearing of goods through subsistence, even if he, in the course of
customs) for the benefit of brokers, trade or business, (1) sells, barters,
notwithstanding that the same is reimbursed exchanges goods or properties, (2) leases
by their customers. goods or properties, and (3) renders
services; hence, he is not liable for either
Reimbursable expenses and/or advanced VAT or percentage tax)
payments shall NOT be subject to VAT on the
part of the broker if the following 2. Services as defined in this Code rendered
conditions/procedures are complied with: in the Philippines by nonresident foreign
1. The reimbursable expenses and/or advanced persons shall be considered as being
payments EXCEPT those incurred for the rendered in the course of trade or business.
benefit of the brokers, are receipted RR 16-2005 clarifies this: Non-resident
separately using NON-VAT Official persons who perform services in the
Acknowledgment Receipts to be issued by the Philippines are deemed to be in the
brokers to the Customers upon collection of course of trade or business, even if
the reimbursements or advances previously performance is NOT regular.
recorded as Receivable For Cash Advances
on Behalf of Customers, which recording was B. Any person who imports goods
done upon payment, on behalf of customers, RR 16-2005: the importer, whether
of the advances to the third-party service an individual or corporation and
providers who issued official receipts in the whether or not made in the course of
name of the customers and not of the brokers his trade or business, shall be liable to
2. The third-party service providers to whom the pay VAT.
advanced payments or reimbursable
expenses of the customers have been paid by
the brokers shall issue receipts in the name of RATES IN GENERAL [12%, 0%]
the Customers
3. The brokers shall record the reimbursable A. 12% VAT
expenses of or the advanced payments on
behalf of Customers under the account i. SALE OF GOODS OR PROPERTIES ( 106, A)
Receivable for Cash Advances on Behalf of
Customers On sale, barter, exchange of goods or
4. For liquidation purposes, the brokers shall properties
attach the original copy of all said official
receipts issued by the third-party service Rate: 12% VAT (beginning 1 February 2006,
providers in the name of the customers to the RMC No. 7-06)
NON-VAT official acknowledgment receipts of
the brokers issued to their Customers upon Basis: Of gross selling price or gross value in
payment by the latter of the reimbursable money of the goods or properties
expenses
PROVIDED, That the President, upon the
*The Customers may be able to claim input recommendation of the Sec. of Finance, shall,
tax for the services of the third-party service effective January 1, 2006, raise the rate of value-
providers that are subject to VAT if the same added tax to 12%, after any of the following
are receipted by the third-party service conditions has been satisfied:
providers VAT official receipts evidencing the 1. Value-added tax collection as a percentage of
latters reporting of the same for VAT Gross Domestic Product (GDP) of the previous
purposes. year exceeds 2 4/5%; or
2. National government deficit as a percentage of
GP of the previous year exceeds 1 %.
IV. PERSONS LIABLE (Sec. 105)
Who Pays: Paid by SELLER
A. Any person who, in the course of trade or
business26, Goods or properties- all tangible and intangible
(1) sells, barters, exchanges goods or objects which are capable of pecuniary
properties, (2) leases goods or properties, estimation, including:
and (a)Real properties held primarily for sale to
(3) renders services. customers or held for lease in the ordinary
course of trade or business
(b) The right or the privilege to use patent,
copyright, design, or model, plan, secret
formula or process, goodwill, trademark,
26
The phrase in the course of trade or business trade brand or other like property or right;
means the regular conduct or pursuit of a commercial (c)The right or the privilege to use in the
or an economic activity, including transactions Philippines of any industrial, commercial or
incidental thereto, by any person regardless of whether scientific equipment
or not the person engaged therein is a non-stock, The right or the privilege to use motion
nonprofit organization (irrespective of the disposition of picture films, films tapes and discs
its net income and whether or not it sells exclusively to
(e) Radio, television, satellite transmission
members or their guests), or government entity. Sec
105 and cable television time

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TRANSACTIONS DEEMED SALE (subject to


Gross Selling Price (GSP)- The total amount of 12% VAT) ( 106, B) [DR TC]
money or its equivalent which the purchaser pays
or is obligated to pay to the seller in (1) Transfer, use or consumption not in the
consideration of the sale, barter or exchange of course of business of goods properties
the goods or properties, excluding the value- originally intended for sale or for use in the
added tax. The excise tax, if any, on such goods course of business
or properties shall form part of the gross selling (e.g. when a VAT-registered person
pricexxx. withdraws goods from his business for his
personal use.- RR 16-2005)
1) The consideration stated in the sales
document, or (2) Distribution or transfer to:
2) The fair market value (FMV), (a) Shareholders or investors as share in
Whichever is HIGHER the profits of the VAT-registered persons;
FMV- whichever is the HIGHER of: or
a) FMV as determined by the (b)Creditors in payment of debt;
Commissioner (zonal value), or (NOTE: Property dividends which
b) FMV as shown in schedule of constitute stocks in trade or properties
values of the Provincial & City primarily held for sale or lease declared
assessors (real property tax out of retained earnings on or after Jan.
declaration) 1, 1996 and distributed by the company
If GSP is based on the zonal value or to its shareholders shall be subject to
market value of the property, the zonal VAT based on the zonal value or FMV at
or market value shall be deemed the time of the distribution, whichever is
INCLUSIVE of VAT. applicable. - RR 16-2005)
If the VAT is not billed separately, the
selling price stated in the sales document (3) Consignment of goods if actual sale is not
shall be deemed to be INCLUSIVE of VAT. made within 60 days following the date
such goods were consigned; and
(NOTE: Consigned goods returned by the
RR 16-2005: consignee within the 60-day period are not
Sale of Real Property on installment plan deemed sold. - RR 16-2005)
Sale of real property by a real estate dealer,
the initial payments of which in the year of sale (4) Retirement from or cessation of business,
(down payment + all payments actually or with respect to inventories of taxable goods
constructively received during the year of sale) existing as of such retirement or cessation.
do not exceed 25% of the gross selling price. (with respect to ALL goods on hand,
However, in the case of sale of real properties on whether capital goods, stock-in-trade,
the deferred-payment basis, not on the supplies or materials, as of the date of such
installment plan, (meaning the initial payments in retirement or cessation, whether or not the
the year of sale exceed 25% of the gross selling business is continued by the new owner or
price), the transaction shall be treated as cash successor. Examples are change of
sale which makes the entire selling price taxable ownership of the business (e.g. when a sole
in the month of sale. proprietorship incorporates, or the
proprietor sells his entire business) and
The real estate dealer shall be subject to VAT on dissolution of a partnership and creation of
the installment payments, including interest and a new partnership which takes over the
penalties, actually and/or constructively received business. - RR 16-2005)
by the seller.
TAX BASE on transactions deemed sale
Sale of residential lot exceeding P1.5M, Output tax = market value of the goods deemed
residential house and lot or other residential sold as of the time of the occurrence of the
dwellings exceeding P2.5M, where the instrument transactions.
of sale is executed on or after July 1, 2005, shall
be subject to [12%] VAT. Where the instrument CHANGES IN OR CESSATION OF STATUS OF
of sale was executed prior to July 1, 2005, the A VAT-REGISTERED PERSON (12% VAT) (
price needs only to exceed P1M for the 106, C)
installment sale of residential house and lot or
other residential dwellings to be subject to 10% VAT shall apply to goods disposed of or existing
VAT. as of a certain date if under the circumstances to
be prescribed in rules and regulations to be
Transmission of property to a trustee shall NOT promulgated by the Secretary of Finance, upon
be subject to VAT IF the property is to be merely recommendation of the Commissioner, the status
held in trust for the trustor and/or beneficiary. of a person as a VAT-registered person changes
However, IF the property transferred is one for or is terminatedxxx.
sale, lease or use in the ordinary course of trade
or business AND the transfer constitutes a RR 16-2005:
completed gift, the transfer is subject to VAT as a
deemed sale transaction. The transfer is a 1) Subject to output taxapplicable to
completed gift if the transferor divests himself goods/properties originally intended for sale
absolutely of control over the property, i.e., or use in business and capital goods which
irrevocable transfer of corpus and/or irrevocable are existing as of the occurrence of the
designation of beneficiary. following:

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a) Change of business activity from VAT The tax due on such importation shall constitute
taxable status to VAT-exempt status. a lien on the goods superior to all charges or
b) Approval of a request for cancellation of liens on the goods, irrespective of the possessor
registration due to reversion to exempt thereof. (as amended by RA 9337)
status
c) Approval of a request for cancellation of iii. SALE OF SERVICES & USE/LEASE
registration due to a desire to revert to OF PROPERTIES ( 108, A)
exempt status AFTER the lapse of 3
consecutive years from the time of On sale or exchange of services, use of lease
registration by a person who voluntarily properties
registered despite being exempt under
Sec. 109 (2) Rate: 12% (as amended)
d) Approval of request for cancellation of
registration of one who commenced Basis: gross receipts derived from the sale or
business with the expectation of gross exchange of services, including the use of lease
sales/receipts exceeding P1.5M but who of properties.
failed to exceed this amount during the
first 12 months of operation PROVIDED, That the President, upon the
recommendation of the Sec. of Finance, shall,
2) NOT subject to output tax effective January 1, 2006, raise the rate of value-
a) Change of control of a corporation by the added tax to 12%, after any of the following
acquisition of the controlling interest of conditions has been satisfied:
such corporation by another stockholder 1. Value-added tax collection as a percentage of
or group of stockholders. Gross Domestic Product (GDP) of the previous
b) Change in the trade or corporate name of year exceeds 2 4/5%; or
the business 2. National government deficit as a percentage of
c) Merger or consolidation of corporations. GP of the previous year exceeds 1 %.
The unused input tax of the dissolved
corporation, as of the date of merger or Sale or Exchange of Services
consolidation, shall be absorbed the The performance of all kinds of services in the
surviving or new corp. Philippines for others for a fee, remuneration or
consideration, including those performed or
TAX BASE in case of retirement/cessation of rendered by: (CLIMB-SCHERD-TFF)
business 1. Construction and service contractors;
Tax Base= acquisition cost or current market 2. stock, real estate, commercial, customs and
price of the goods or properties, whichever is immigration Brokers;
lower. 3. Lessors of property, whether personal or real;
warehousing services;
4. lessors or distributors of cinematographic
ii. IMPORTATION OF GOODS (107, A) Films;
On every importation of goods (WON goods 5. persons engaged in Milling, processing,
are for use in business) manufacturing or repacking goods for others;
6. proprietors, operators or keepers of Hotels,
Rate: 12% (as amended) motels, rest-houses, pension houses, inns,
resorts;
Basis: total value used by the Bureau of 7. proprietors or operators of Restaurants,
Customs in determining tariff and customs refreshment parlors, cafes and other eating
duties, plus customs duties, excise taxes, if any, places, including clubs and caterers;
and other charges, 8. Dealers in securities;
Where the customs duties are determined 9. lending Investors;
on the basis of the quantity or volume of the 10. Transportation contractors on their transport
goods, the value-added tax shall be based on the of goods or cargoes, including persons who
landed cost plus excise taxes, if any. transport goods or cargoes for hire and other
domestic common carriers by land relative to
PROVIDED, That the President, upon the their transport of goods or cargoes;
recommendation of the Sec. of Finance, shall, 11. Common carriers by air and sea relative to
effective January 1, 2006, raise the rate of value- their transport of passengers, goods or
added tax to 12%, after any of the following cargoes from one place in the Philippines to
conditions has been satisfied: another place in the Philippines;
1. Value-added tax collection as a percentage of 12. sales of Electricity by generation companies,
Gross Domestic Product (GDP) of the previous transmission, and distribution companies;
year exceeds 2 4/5%; or 13. services of Franchise grantees of electric
2. National government deficit as a percentage of utilities, telephone and telegraph, radio and
GP of the previous year exceeds 1 %. television broadcasting and all other franchise
grantees except those under Section 119 of
Who Pays: Paid by the importer prior to the this Code and non-life insurance companies
release of such goods from customs custody (except their crop insurances), including
surety, fidelity, indemnity and bonding
Transfer of Goods by Tax-Exempt Persons companies;
(107, B) 14. and Similar services regardless of whether or
If importer is tax-exempt, the subsequent not the performance thereof calls for the
purchasers, transferees or recipients of such exercise or use of the physical or mental
imported goods shall be considered as importers faculties.
who shall be liable for the tax on importation.

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The phrase 'sale or exchange of services' functions who make a practice of lending
shall likewise include: (A- FACT-PIE) money for themselves or others at interest
1. The lease or the use of or the right or
privilege to use any Copyright, patent, design 4. Subject to VAT: Franchise grantees of electric
or model plan, secret formula or process, utilities, telephone and telegraph, radio
goodwill, trademark, trade brand or other like and/or TV broadcasting and all other
property or right franchise grantees (including PAGCOR and its
2. The lease or the use of, or the right to use of licensees/franchisees) EXCEPT franchise
any industrial, commercial or, scientific grantees of radio and/or TV broadcasting
Equipment; whose annual gross receipts of the preceding
3. The supply of scientific, technical, industrial year do not exceed P10M (which shall be
or commercial knowledge or Information; subject to 3% franchise tax under Sec. 119,
4. The supply of any Assistance that is ancillary subject to optional registration), and
and subsidiary to and is furnished as a means franchise grantees of gas and water facilities
of enabling the application or enjoyment of (under Sec. 109, subject to 2% franchise
any such property, or right as is mentioned in tax). With respect to franchise grantees of
subparagraph (2) or any such knowledge or telephone and telegraph services, amounts
information as is mentioned in subparagraph received for overseas dispatch, message, or
(3); conversation originating from the Philippines
5. The supply of services by a nonresident are subject to the percentage tax under Sec.
person or his employee in connection with the 120 and hence exempt from VAT.
use of Property or rights belonging to, or the
installation or operation of any brand, 5. In a lease contract, the advance payment by
machinery or other apparatus purchased from the lessee may be:
such nonresident person; a) a loan to the lessor from the lessee
6. The supply of technical Advice, assistance or NOT subject to VAT
services rendered in connection with technical b) an option money for the property NOT
management or administration of any subject to VAT
scientific, industrial or commercial c) a security deposit to insure the faithful
undertaking, venture, project or scheme; performance of certain obligations of the
7. The lease of motion picture Films, films, tapes lessee to the lessor NOT subject to
and discs; and VAT. BUT if the security deposit is applied
8. The lease or the use of or the right to use to rental, it shall be subject to VAT at the
radio, television, satellite transmission and time of its application.
cable television Time. d) or pre-paid rental subject to VAT when
received, irrespective of the accounting
Lease of Properties method employed by the lessor
- subject to the tax herein imposed irrespective
of the place where the contract of lease or 6. On transportation:
licensing agreement was executed if the property All receipts from service, hire, or
is leased or used in the Philippines. operating lease of transportation
equipment not subject to the percentage
'Gross Receipts' -the total amount of money or tax on domestic common carriers and
its equivalent representing the contract price, keepers of garages shall be subject to
compensation, service fee, rental or royalty, VAT. (Pls refer to Sec. 117 for other
including the amount charged for materials percentage taxes.
supplied with the services and deposits and
advanced payments actually or constructively Common Transporting Kind of Tax
received during the taxable quarter for the carrier carrier Liability
services performed or to be performed for By land Persons Domestic 3%, Sec.
another person, excluding value-added 117
taxxxx. (as amended by RA 9337, Goods/cargo Domestic 12% VAT
underscored parts amended or added by RA By sea Domestic Domestic
9337) trip - 12%
VAT
Notes: (unless otherwise indicated, from RR 16- International
2005) trip zero-
Whether rated
transporting International 3%, Sec.
1. Persons engaged in milling, processing, persons or 118
manufacturing or repacking goods for others By air
goods/cargo
Domestic Domestic
are subject to VAT, EXCEPT palay into rice, flight -
corn into corn grits, and sugarcane into raw 12% VAT
sugar International
flight
2. For dealers in securities, gross receipts zero-rated
means gross selling price less cost of the International 3%, Sec.
securities sold. RR 7-95: Pre-need 118
companies are considered dealers in
securities. 7. Sale of electricity by generation,
transmission, and distribution companies
3. Lending investors all persons OTHER than shall be subject to 12% VAT, EXCEPT sale of
banks, non-bank financial intermediaries, power or fuel generated through renewable
finance companies and other financial sources of energy, such as, but not limited
intermediaries NOT performing quasi-banking to, biomass, solar, wind hydropower,

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geothermal, ocean energy, and other be considered an export-oriented enterprise


emerging energy sources using technologies upon accreditation under the rules &
such as fuel cells and hydrogen fuels, which regulations of Export Development Act, RA
shall be subject to 0% rate of VAT (zero- 7844 (RR 7-95)
rated). The universal charge passed on and
collected by distribution companies and 4) Sale of Gold to the Bangko Sentral ng
electric cooperatives shall be excluded from Pilipinas (BSP);
the computation of gross receipts.
5) Those considered export sales under the
8. Insurance and reinsurance commissions, as Omnibus Investment Code of 1987, and
opposed to premiums, whether life or non- other special laws (ex. Bases Conversion &
life, are subject to VAT. Non-life insurance Development Act of 1992)
premiums are subject to VAT. Life insurance Under Omnibus Investment Code:
premiums are NOT subject to VAT, for they a) Phil. port FOB value of export products
are subject to percentage tax. exported directly by a registered export
producer
b) Net selling price of export products sold
B. 0% VAT (ZERO-RATED by a registered export producer to
TRANSACTIONS) another export producer, or to an export
trader that subsequently exports the
A zero-rated sale by a VAT-registered person is a same (only when actually exported by
taxable transaction for VAT purposes, but shall the latter)
not result in any output tax. Constructive Exports:
a) sales to bonded manufacturing
Input tax on purchases of goods, properties or warehouses of export-oriented
services related to such zero-rated sale shall be manufacturers
available as tax credit or refund. (RR 16- b) sales to export processing zones
2005)27 c) sales to registered export traders
operating bonded trading warehouses
i. ZERO-RATED SALE OF GOODS OR supplying raw materials in the
PROPERTIES ( 106, (2)) manufacture of export products under
guidelines to be set by the Board in
consultation with the BIR and Bureau of
A. Export sales (IF-GONE) Customs
d) sales to diplomatic missions and other
1) The sale and actual shipment of goods from agencies and/or instrumentalities granted
the Philippines to a Foreign country AND tax immunities, of locally manufactured,
paid for in acceptable foreign currency or its assembled or repacked products, whether
equivalent in goods or services, AND paid for in foreign currency or not.
accounted for in accordance with the rules Provided that export sales of registered
and regulations of the BSP export traders may include commission
income, and that exportation of goods on
2) Sale of raw materials or packaging materials consignment shall not be deemed export
to a Nonresident buyer for delivery to a sales until the export products consigned
resident local export-oriented enterprise to are in fact sold by the consignee, and
be used in manufacturing, processing, provided finally that sales by a VAT-
packing or repacking in the Philippines of the registered supplier to a
said buyer's goods AND paid for in acceptable manufacturer/producer whose products
foreign currency AND accounted for in are 100% exported are considered export
accordance with the rules and regulations of sales. A certification to his effect must
the BSP be issued by the Board of Investment
which shall be good for 1 year unless
3) Sale of raw materials or packaging materials subsequently re-issued. (RR 16-2005)
to Export-oriented enterprise whose export
sales exceed seventy percent (70%) of total 6) The sale of goods, supplies, equipment and
annual production. Any enterprise whose fuel to persons engaged in International
export sales exceed 70% of the total annual shipping or international air transport
production of the preceding taxable year shall operations. (added by RA 9337) Provided,
that the same is limited to goods, supplies,
equipment and fuel pertaining to or
27
Thus, the benefit of being zero-rated vis--vis being exempt attributable to the transport of goods and
is that enterprises which enjoy zero-rating of transactions can
avail of input taxes on purchases of goods, properties, or
passengers from a port in the Phil. directly to
services (as either tax credit or refund, there being no output a foreign port without docking or stopping at
tax against which input tax can be credited). In mathematical any other port in the Phil., and that if any
terms, the enterprises enjoy 100% of their input taxes. portion of such fuel, goods, or supplies is
On the other hand, exempt enterprises cannot avail of these
input taxes; instead, these input taxes form part of used for purposes other than that mentioned
cost/expense. Thus, the net benefit these enterprises get from here, such portion of fuel, goods, and
their exempt transactions is 35% (in the case of corporations), supplies shall be subject to 12% VAT.
or to the extent that they can be used as deductions from
income in the computation of income tax payable (subject to
rules in income taxation). B. Foreign Currency Denominated Sale - sale
to a nonresident of goods, except those
There is therefore a 65% difference (100% in the case of zero- mentioned in Sections 149 and 150 (automobiles
rated transactions, less 35% in exempt transactions). [Editors
note] and non-essential goods like jewelry, perfume,
and yachts), assembled or manufactured in the

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TAXATION LAW 2

Philippines for delivery to a resident in the


Philippines, paid for in acceptable foreign RMC 74-99: Tax Treatment of Sales of Goods
currency AND accounted for in accordance with and Services Made by Suppliers from Western
the rules and regulations of the BSP. Territory to a PEZA registered enterprise and Sale
Transactions made by PEZA registered
Sales of locally manufactured or assembled enterprises Within and Without the Zone
goods for household and personal use to Filipinos
abroad and other non-residents of the Philippines
as well as returning Overseas Filipinos under the CROSS- BORDER DOCTRINE (adhered to by
Internal Export Program of the government paid Phil VAT law)
for in convertible foreign currency AND accounted
for in accordance with the rules and regulations NO VAT shall be imposed to form part of
of the BSP shall also be considered export sales. the cost of goods destined for CONSUMPTION
OUTSIDE of the territorial border of the taxing
C. Sales to persons or entities whose authority. Hence, actual export of goods and
exemption under special laws or services from the Phil to a foreign country must
international agreements to which the be free from VAT. Conversely, those destined for
Philippines is a signatory effectively use or consumption WITHIN the Phil shall be
subjects such sales to zero rate. e.g. imposed with the 10% VAT. (now 12%, as
a) sales to enterprises duly registered & amended)
accredited with the
i) Subic Bay Metropolitan Authority,
ii) Philippine Economic Zone Authority Tax Treatment of Sales Made:
(PEZA), A. By VAT registered Supplier from Customs
b) international agreements to which the Territory to a PEZA registered enterprise
Phil. is signatory, such as
i. Asian Development Bank (ADB), 1) if the buyer is a PEZA registered
ii. International Rice Research Institute enterprise which is subject to the 5%
(IRRI) special tax regime
(a) Sale of Goods this shall be treated
Section 6 of RR 4-2007, dated February 7, as INDIRECT EXPORT, hence
2007: considered SUBJECT TO 0% VAT.
The term effectively zero-rated sale of goods (b) Sale of Service this shall be treated
and properties shall refer to the local sale of SUBJECT TO 0% VAT under the
goods and properties by a VAT-registered person cross border doctrine
to a person or entity who was granted indirect
tax exemption under special laws or international
agreement. 2) if the buyer is a PEZA registered
enterprise which is NOT embraced by
NOTE: RR 4-2007 removed the distinction the 5% tax regime
between automatic and effectively zero- (a) Sale of Goods this shall be
rated transactions found in prior Revenue treated as INDIRECT EXPORT,
Regulations (including RR 16-2005) with respect hence considered SUBJECT TO
to prior application. The following line in RR 16- 0% VAT.
2005 has been DELETED by RR 4-2007: (b) Sale of Service this shall be
Other cases of zero-rated sales shall require treated SUBJECT TO 0% VAT
prior application with the appropriate BIR office under the cross border
for effective zero-rating. Without an approved doctrine
application for effective zero-rating, the
transaction otherwise entitled to zero-rating shall
NOTE: Any sale of goods, property or
be considered exempt. The foregoing rule
services made by a VAT registered supplier
notwithstanding, the Commissioner may
from the Customs Territory* to any
prescribe such rules to effectively implement the
registered enterprise operating in the
processing of applications for effective zero-
ecozone, REGARDLESS of the class or type
rating.
of the latters PEZA registration, is actually
qualified and thus LEGALLY ENTITLED TO
CIR vs. Seagate Technology (Philippines)
THE 0% VAT. Accordingly, all sales of goods
February 11, 2005
or property to such enterprise made by a
The BIR regulations additionally requiring an
VAT registered supplier from the Customs
approved prior application for effective zero
Territory shall be treated SUBJECT TO 0%
rating cannot prevail over the clear VAT nature of
VAT.
Seagates transactions (subject to zero-rating, as
an entity registered with the PEZA). Customs Territory means the national
Other than the general registration of a taxpayer territory of the Phil OUTSIDE of the proclaimed
the VAT status of which is aptly determined, no boundaries of the ECOZONES.
provision under our VAT law requires an
additional application to be made for such
taxpayers transactions to be considered B. By a VAT-Exempt Supplier from the Customs
effectively zero-rated. An effectively zero- Territory to a PEZA registered enterprise
rated transaction does not and cannot
become exempt simply because an Sale of goods, property and services by VAT-
application therefor was not made or, if Exempt supplier from the Customs Territory
made, was denied. to a PEZA registered enterprise shall be
treated EXEMPT FROM VAT, regardless of

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whether or not the PEZA registered buyer is 9337]; Provided, however, that the services
subject to taxes under the NIRC or enjoying referred to herein shall not pertain to those
the 5% special tax regime. made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.
C. By a PEZA Registered Enterprise to another place in the Phil., the same being
subject to 12% VAT under Sec. 108
1) Sale of Goods by a PEZA registered 5) Services performed by subcontractors and/or
enterprise to a buyer from the Customs contractors in processing, converting, of
Territory (ie domestic sales) -- this case manufacturing goods for an enterprise whose
shall be treated as a technical export sales exceed seventy percent (70%)
IMPORTATION made by the buyer. Such of total annual production.
buyer shall be treated as an IMPORTER 6) Transport of passengers and cargo by air or
thereof and shall be imposed with the sea vessels from the Philippines to a foreign
corresponding VAT. country [as added by RA 9337]; (pls see
2) Sale of Services by a PEZA registered table on page 29) and;
enterprise to a buyer from the Customs 7) Sale of power or fuel generated through
Territory this is NOT embraced by the renewable sources of energy such as, but not
5% special tax regime, hence, such seller limited to, biomass, solar, wind, hydropower,
shall be SUBJECT TO 10% VAT. geothermal, ocean energy, and other
emerging energy sources using technologies
such as fuel cells and hydrogen fuels. [as
3) Sale of Goods by a PEZA registered added by RA 9337] Zero-rating shall apply
enterprise to Another PEZA registered strictly to the sale of power or fuel generated
enterprise (ie Intra-ECOZONE Sales of through renewable sources of energy, and
Goods) this shall be EXEMPT from VAT. shall not extend to the sale of services
related to the maintenance or operation of
4) Sale of Services by ECOZONE enterprise, plants generating said power.
to Another ECOZONE enterprise (Intra-
ECOZONE enterprise Sale of Service)
(a) if PEZA registered seller is subject to RR 4-2007 removed the distinction between
5% special tax regime EXEMPT automatic and effectively zero-rated transactions
from VAT found in prior Revenue Regulations (inc. RR 16-
(b) if PEZA registered seller is subject to 2005) with respect to prior application.
taxes under NIRC (ie not subject to
5% special tax regime) subject to
0% VAT pursuant to cross border C. FINAL WITHHOLDING VAT-5% (
doctrine 114, C)

The Government or any of its political


ii. ZERO-RATED SALE OF SERVICES & subdivisions, instrumentalities or agencies,
USE/LEASE OF PROPERTIES ( 108, including government-owned or -controlled
B) corporations (GOCCs) shall, before making
payment on account of each purchase of goods
and services which are subject to the VAT
Zero-rated transactions imposed in Sections 106 and 108 of this Code,
deduct and withhold a final VAT at the rate of
1) Processing, manufacturing or repacking five percent (5%) of the gross payment thereof:
goods for other persons doing business
outside the Philippines which goods are Provided, That the payment for lease or use of
subsequently exported, where the services properties or property rights to nonresident
are paid for in acceptable foreign currency owners shall be subject to ten percent (10%)
AND accounted for in accordance with the withholding tax at the time of payment.
rules and regulations of the BSP The payor or person in control of the payment-
2) Services other than those mentioned in the considered as the withholding agent.
preceding paragraph rendered to a person The VAT withheld shall be remitted within ten
engaged in business conducted outside the (10) days following the end of the month the
Philippines or to a nonresident person not withholding was made.
engaged in business who is outside the [NOTE: This 5% final VAT withheld by the
Philippines when the services are performed, government is an innovation of RA 9337.]
the consideration for which is paid for in
acceptable foreign currency AND accounted RR 16-2005: The 5% final VAT shall represent
for in accordance with the rules and the net VAT payable of the seller. The remaining
regulations of the BSP 5% (or 7%, with the raise of VAT to 12%)
3) Services rendered to persons or entities effectively accounts for the standard input VAT,
whose exemption under special laws or in lieu of the actual input VAT directly attributable
international agreements to which the or ratably apportioned to such sales. (This
Philippines is a signatory effectively subjects means that where the 5% final VAT applies, the
the supply of such services to zero percent basic formula of output tax less input tax does
(0%) rate [as amended by RA 9337] not apply.) Should actual input VAT exceed 7%
4) Services rendered to persons engaged in of the gross payments, the excess may form part
international shipping or international air of the sellers expense or cost. On the other
transport operations, including leases of hand, if actual input VAT is less than 7% of gross
property for use thereof [as amended by RA

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payment, the difference must be closed to (g) Importation of passenger and/or cargo
expense or cost, in effect reducing it. vessels of more than five thousand tons
(5,000) whether coastwise or ocean-going,
However, 12% shall be withheld with respect to including engine and spare parts of said
the following: vessel to be used by the importer himself as
1) Lease or use of properties or property rights operator thereof; [DELETED]
owned by non-residents
(h) Importation of personal and household
2) Services rendered to local insurance
effects belonging to the residents of the
companies, with respect to reinsurance
Philippines returning from abroad and
premiums payable to non-residents; and
nonresident citizens coming to resettle in the
3) Other services rendered in the Philippines by
Philippines: Provided, That such goods are
non-residents.
exempt from customs duties under the Tariff
and Customs Code of the Philippines;
V. TRANSACTIONS EXEMPT FROM VAT (i) Importation of professional instruments
( 109) and implements, wearing apparel, domestic
animals, and personal household effects
(amendments introduced by RA 9337 indicated, (except any vehicle, vessel, aircraft,
text in ALL CAPS added by RA 9337) machinery other goods for use in the
manufacture and merchandise of any kind in
SEC. 109. Exempt Transactions. commercial quantity) belonging to persons
coming to settle in the Philippines, for their
1) SUBJECT TO THE PROVISIONS OF
own use and not for sale, barter or exchange,
SUBSECTION (2) HEREOF, The following shall be
accompanying such persons, or arriving
exempt from the value-added tax:
within ninety (90) days before or after their
(a) Sale of nonfood agricultural products; arrival, upon the production of evidence
marine and forest products in their original satisfactory to the Commissioner, that such
state by the primary producer or the owner persons are actually coming to settle in the
of the land where the same are produced; Philippines and that the change of residence
[DELETED BY RA 9337] is bona fide;
(b) Sale of cotton seeds in their original (j) Services subject to percentage tax under
state; and copra; [DELETED] Title V;
(c) Sale or importation of agricultural and (k) Services by agricultural contract growers
marine food products in their original state, and milling for others of palay into rice, corn
livestock and poultry of or kind generally into grits and sugar cane into raw sugar;
used as, or yielding or producing foods for
(l) Medical, dental, hospital and veterinary
human consumption; and breeding stock and
services subject to the provisions of Section
genetic materials therefor.
17 of Republic Act No. 7716, as amended
Products classified under this paragraph and EXCEPT THOSE RENDERED BY
paragraph (a) shall be considered in their PROFESSIONALS: [AMENDED]
original state even if they have undergone
(m) Educational services rendered by private
the simple processes of preparation or
educational institutions, duly accredited by
preservation for the market, such as freezing,
the Department of Education, Culture and
drying, salting, broiling, roasting, smoking or
Sports (DECS) Department of Education
stripping.
(DEPED), the Commission on Higher
Polished and/or husked rice, corn grits, raw Education (CHED), THE TECHNICAL
cane sugar and molasses, ordinary salt, AND EDUCATION AND SKILLS DEVELOPMENT
COPRA shall be considered in their original AUTHORITY (TESDA), and those rendered by
state; [AMENDED] government educational institutions;
[AMENDED]
(d) Sale or importation of fertilizers; seeds,
seedlings and fingerlings; fish, prawn, (n) Sale by the artist himself of his works of
livestock and poultry feeds, including art, literary works, musical compositions and
ingredients, whether locally produced or similar creations, or his services performed
imported, used in the manufacture of finished for the production of such works; [DELETED]
feeds (except specialty feeds for race horses,
(o) Services rendered by individuals
fighting cocks, aquarium fish, zoo animals
pursuant to an employer-employee
and other animals generally considered as
relationship;
pets);
(p) Services rendered by regional or area
(e) Sale or importation of coal and natural
headquarters established in the Philippines by
gas, in whatever form or state, and
multinational corporations which act as
petroleum products (except lubricating oil,
supervisory, communications and
processed gas, grease, wax and petrolatum)
coordinating centers for their affiliates,
subject to excise tax imposed under Title VI;
subsidiaries or branches in the Asia-Pacific
[DELETED]
Region and do not earn or derive income
(f) Sale or importation of raw materials to be from the Philippines;
used by the buyer or importer himself in the
(q) Transactions which are exempt under
manufacture of petroleum products subject to
international agreements to which the
excise tax, except lubricating oil, processed
Philippines is a signatory or under special
gas, grease, wax and petrolatum; [DELETED]
laws, except those under Presidential Decree

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Nos. 66, 529 [Petroleum Exploration calendar year thereafter, the amount of Eight
Concessionaires under the Petroleum Act of thousand pesos (P8,000) JANUARY 31, 2009
1949] and 1590; [AMENDED] AND EVERY THREE (3) YEARS THEREAFTER,
THE AMOUNT HEREIN STATED shall be
(r) Sales by agricultural cooperatives duly
adjusted to its present value using the
registered with the Cooperative Development
Consumer Price Index as published by the
Authority to their members as well as sale of
National Statistics Office (NS0); [AMENDED]
their produce, whether in its original state or
processed form, to non-members; their (y) Sale, importation, printing or publication
importation of direct farm inputs, machineries of books and any newspaper, magazine
and equipment, including spare parts thereof, review or bulletin which appears at regular
to be used directly and exclusively in the intervals with fixed prices for subscription
production and/or processing of their and sale and which is not devoted principally
produce; to the publication of paid advertisements;
and
(s) Sales by electric cooperatives duly
registered with the Cooperative Development [RA 9337 ADDED THE FOLLOWING TWO
authority or National Electrification SUBSECTIONS]
Administration, relative to the generation and
(S) SALE, IMPORTATION OR LEASE OF
distribution of electricity as well as their
PASSENGER OR CARGO VESSELS AND
importation of machineries and equipment,
AIRCRAFT, INCLUDING ENGINE, EQUIPMENT
including spare parts, which shall be directly
AND SPARE PARTS THEREOF FOR DOMESTIC
used in the generation and distribution of
OR INTERNATIONAL TRANSPORT
electricity; [DELETED]
OPERATIONS;
(t) Gross receipts from lending activities by
(T) IMPORTATION OF FUEL, GOODS, AND
credit or multi-purpose cooperatives duly
SUPPLIES BY PERSONS ENGAGED IN
registered with the Cooperative Development
INTERNATIONAL SHIPPING OR AIR
Authority whose lending operation is limited
TRANSPORT OPERATIONS;
to their members; [AMENDED]
(U) Services of banks, non-bank financial
(u) Sales by non-agricultural, non- electric
intermediaries performing quasi-banking
and non-credit cooperatives duly registered
functions and other non-bank financial
with the Cooperative Development Authority:
intermediaries; and
Provided, That the share capital contribution
of each member does not exceed Fifteen (z) Sale or lease of goods or properties or
thousand pesos (P15,000) and regardless of the performance of services other than the
the aggregate capital and net surplus ratably transactions mentioned in the preceding
distributed among the members; paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Five
(v) Export sales by persons who are not
hundred fifty thousand pesos (P550,000)
VAT-registered;
ONE MILLION FIVE HUNDRED THOUSAND
(w) Sale of real properties not primarily held PESOS (P1,500,0000: Provided, That not
for sale to customers or held for lease in the later than January 31st of the calendar year
ordinary course of trade or business or real subsequent to the effectivity of Republic Act
property utilized for low-cost and socialized No. 8241 and each calendar year thereafter,
housing as defined by Republic Act No. 7279, the amount of Five hundred fifty thousand
otherwise known as the Urban Development pesos (550,000) JANUARY 31, 2009 AND
and Housing Act of 1992, and other related EVERY THREE (3) YEARS THEREAFTER, THE
laws, house and lot and other residential AMOUNT HEREIN STATED shall be adjusted
dwellings valued at One million pesos to its present value using the Consumer Price
(P1,000,000) and below RESIDENTIAL LOT Index, as published by the National Statistics
VALUED AT ONE MILLION FIVE HUNDRED Office (NSO). [AMENDED]
THOUSAND PESOS (P1,500,000) AND
The foregoing exemptions to the contrary
BELOW, HOUSE AND LOT, AND OTHER
notwithstanding, any person whose sale of goods
RESIDENTIAL DWELLINGS VALUED AT TWO
or properties or services which are otherwise not
MILLION FIVE HUNDRED THOUSAND PESOS
subject to VAT, but who issues a VAT invoice or
(P2,500,000) AND BELOW: Provided, That
receipt therefor shall, in addition to his liability to
not later than January 31st of the calendar
other applicable percentage tax, if any, be liable
year subsequent to the effectivity of this Act
to the tax imposed in Section 106 or 108 without
and each calendar year thereafter, the
the benefit of input tax credit, and such tax shall
amount of One million pesos (P1,000,000)
also be recognized as input tax credit to the
shall be adjusted to its present value
purchaser under Section 110, all of this Code.
JANUARY 31, 2009 AND EVERY THREE (3)
[DELETED]
YEARS THEREAFTER, THE AMOUNTS HEREIN
STATED SHALL BE ADJUSTED TO THEIR
(2) A VAT-REGISTERED PERSON MAY ELECT
PRESENT VALUES using the Consumer Price
THAT SUBSECTION (1) NOT APPLY TO ITS SALE
Index, as published by the national Statistics
OF GOODS OR PROPERTIES OR SERVICES:
Office (NSO); [AMENDED]
PROVIDED, THAT AN ELECTION MADE UNDER
(x) Lease of a residential unit with a monthly THIS SUBSECTION SHALL BE IRREVOCABLE FOR
rental not exceeding TEN THOUSAND PESOS A PERIOD OF THREE (3) YEARS FROM THE
(10,000) Eight thousand pesos (P8,000); QUARTER THE ELECTION WAS MADE. [ADDED BY
Provided, That not later than January 31st of RA 9337]
the calendar year subsequent to the
effectivity of Republic Act No. 8241 and each

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Notes on exempt transactions (from RR 16- and other similar services rendered by
2005): persons who are not accredited by the
DepED, CHED, and/or TESDA. [RR 16-2005]
VAT-EXEMPT TRANSACTIONS
- Refer to sale of goods or properties and/or 9. Services rendered by individuals pursuant to
services and the use or lease of properties that is an employer-employee relationship;
NOT subject to VAT (output tax) and the seller is
10. Services rendered by regional or area
not allowed any tax credit of VAT (input tax) on
headquarters established in the Philippines by
purchases. The person making the exempt sale
multinational corporations which act as
of goods, properties or services shall not bill any
supervisory, communications and coordinating
output tax to his customers because the said
centers for their affiliates, subsidiaries or
transaction is not subject to VAT.
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
1. Sale/ import of agricultural, marine food
11. Transactions which are exempt under
products in original state; of livestock and poultry
international agreements to which the Philippines
Original state even if they have undergone the is a signatory or under special laws, except those
simple processes of preparation or preservation under Presidential Decree No., 529 [Petroleum
for the market, such as freezing, drying, salting, Exploration Concessionaires under the Petroleum
broiling, roasting, smoking or stripping. Act of 1949]; [AMENDED]
Polished and/or husked rice, corn grits, raw cane 12. Sales by agricultural cooperatives duly
sugar and molasses, ordinary salt, AND COPRA registered with the Cooperative Development
shall be considered in their original state; Authority to their members as well as sale of
[AMENDED] their produce. Exemption includes importation of
direct farm inputs, machineries and equipment,
Livestock or poultry does not include fighting
including spare parts thereof, to be used directly
cocks, race horses, zoo animals and other
and exclusively in the production and/or
animals generally considered as pets. [RR 16-
processing of their produce.
2005]
Original state including preservation using 13. Gross receipts from lending activities by
advanced technological means of packaging, such credit or multi-purpose cooperatives duly
as shrink wrapping in plastics, vacuum packing, registered with the Cooperative Development
tetra-pack, and other similar packaging methods. Authority; [AMENDED]
[RR 16-2005]
14. Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered with the
2. Sale/ import of fertilizers; seeds, seedlings and Cooperative Development Authority are exempt
fingerlings; fish, prawn, livestock and poultry BUT their importation of machineries and
feeds equipment, including spare parts thereof, to be
used by them are SUBJECT to VAT.
3. Import of personal and household effects of
Phil resident returning from abroad and
15. Export sales by persons who are not VAT-
nonresident citizens coming to resettle in the
registered;
Philippines
4. Import of professional instruments and 16. Sale of real properties the ff. sales are
implements, wearing apparel, domestic animals, exempt:
and personal household effects belonging to (1) Sale of real properties NOT primarily held for
persons coming to settle in the Philippines, for sale to customers or held for lease in the
their own use and not for sale, barter or ordinary course of trade or business.
exchange (2) Sale of real properties utilized for low-cost
housing as defined by RA No. 7279,
otherwise known as the "Urban
5. Services subject to percentage tax under Title Development and Housing Act of 1992" and
V:[refer to percentage tax, next part] other related laws, such as RA No. 7835 and
RA No. 8763. Low-cost housing" refers to
6. Services by agricultural contract growers and housing projects intended for homeless low-
milling for others of palay into rice, corn into grits income family beneficiaries, undertaken by
and sugar cane into raw sugar; the Government or private developers,
7. Medical, dental, hospital and veterinary which may either be a subdivision or a
services EXCEPT THOSE RENDERED BY condominium registered and licensed by the
PROFESSIONALS: [AMENDED] Housing and Land Use Regulatory
Laboratory services are exempted. If the Board/Housing (HLURB) under BP Blg. 220,
hospital or PD No. 957 or any other similar law, wherein
clinic operates a pharmacy or drug store, the sale the unit selling price is within the selling
of price ceiling per unit of P750,000.00 under
drugs and medicine is subject to VAT. [RR 16- RA No. 7279, and other laws, such as RA
2005] No. 7835 and RA No. 8763.
(3) Sale of real properties utilized for socialized
8. Educational services rendered by private housing as defined under RA No. 7279, and
educational institutions, duly accredited by other related laws, such as RA No. 7835 and
DEPED, CHED, TESDA, and those rendered by RA No. 8763, wherein the price ceiling per
government educational institutions; [AMENDED] unit is P225,000.00 or as may from time to
Educational services does not include time be determined by the HUDCC and the
seminars, in-service training, review classes NEDA and other related laws. "Socialized

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TAXATION LAW 2

housing" refers to housing programs and dwelling places (e.g., dormitories, rooms
projects covering houses and lots or home and bed spaces) except motels, motel
lots only undertaken by the Government or rooms, hotels and hotel rooms.
the private sector for the underprivileged The term 'unit' shall mean an apartment
and homeless citizens which shall include unit in the case of apartments, house in
sites and services development, long-term the case of residential houses; per person
financing, liberated terms on interest in the case of dormitories, boarding
payments, and such other benefits in houses and bed spaces; and per room in
accordance with the provisions of RA No. case of rooms for rent. [RR 16-2005]
7279and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to 18. Sale, importation, printing or publication of
projects intended for the underprivileged books and any newspaper, magazine review or
and homeless wherein the housing package bulletin which appears at regular intervals with
selling price is within the lowest interest fixed prices for subscription and sale and which is
rates under the Unified Home Lending not devoted principally to the publication of paid
Program (UHLP) or any equivalent housing advertisements;
program of the Government, the private
sector or non-government organizations. 19. SALE, IMPORTATION OR LEASE OF
(4) Sale of residential lot valued at P1.5M and PASSENGER OR CARGO VESSELS AND
below, or house & lot and other residential AIRCRAFT, INCLUDING ENGINE, EQUIPMENT
dwellings valued at P2.5M and below, where AND SPARE PARTS THEREOF FOR DOMESTIC OR
the instrument of sale/transfer/disposition INTERNATIONAL TRANSPORT
was executed on or after July 1, 2005; [to OPERATIONS;[added by RA 9337]
be adjusted every 3 years from Jan 31, The exemption from VAT on the importation and
2009]; If two or more adjacent residential local purchase of passenger and/or cargo vessels
lots are sold or disposed in favor of one shall be limited to those of 150 tons and above,
buyer, for the purpose of utilizing the lots as including engine and spare parts of said vessels;
one residential lot, the sale shall be exempt Provided, further, that the vessels to be imported
from VAT only if the aggregate value of the shall comply with the age limit requirement, at
lots does not exceed P1.5M. Adjacent the time of acquisition counted from the date of
residential lots, although covered by the vessel's original commissioning, as follows:
separate titles and/or separate tax (i) for passenger and/or cargo vessels,
declarations, when sold or disposed to one the age limit is 15 years old, (ii) for
and the same buyer, whether covered by tankers, the age limit is 10 years old, and
one or separate Deed of Conveyance, shall (iii) for high-speed passenger crafts, the
be presumed as a sale of one residential lot. age limit is 5 years old [RR 16-2005]
[RR 16-2005]
20. IMPORTATION OF FUEL, GOODS, AND
17. Lease of residential units with a monthly SUPPLIES BY PERSONS ENGAGED IN
rental per unit not exceeding P10K, INTERNATIONAL SHIPPING OR AIR TRANSPORT
regardless of the amount of aggregate OPERATIONS; [added by RA 9337]
rentals received by the lessor during the
Provided, that the said fuel, goods and supplies
year.
shall be used exclusively or shall pertain to the
Lease of residential units where the monthly
transport of goods and/or passenger from a port
rental per unit exceeds 10K but the
in the Philippines directly to a foreign port
aggregate of such rentals of the lessor during
without stopping at any other port in the
the year do not exceed One Million Five
Philippines; Provided, further, that if any portion
Hundred Pesos P1.5M shall likewise be
of such fuel, goods or supplies is used for
exempt from VAT, however, the same shall
purposes other than that mentioned in this
be subjected to three percent (3%)
paragraph, such portion of fuel, goods and
percentage tax.
supplies shall be subject to 10% VAT [RR 16-
In cases where a lessor has several
2005]
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P10K while others are leased out 21. Services of banks, non-bank financial
for more than P10K per unit, his tax liability intermediaries performing quasi-banking
will be as follows: functions and other non-bank financial
a. The gross receipts from rentals not intermediaries; and
exceeding P10K per month per unit shall
be exempt from VAT regardless of the 22. Sale or lease of goods or properties or the
aggregate annual gross receipts. performance of services other than the
b. The gross receipts from rentals exceeding transactions mentioned in the preceding
P10K per month per unit shall be subject paragraphs, the gross annual sales and/or
to VAT IF the aggregate annual gross receipts do not exceed the amount
receipts from said units only (not ofP1,500,0000: [to be adjusted every 3 years
including the gross receipts from units from Jan 31, 2009] [AMENDED]
leased for not more than P10K) exceeds For purposes of the threshold of P1,5M, the
P1.5M. Otherwise, the gross receipts will husband and the wife shall be considered
be subject to the 3% tax imposed under separate taxpayers. However, the aggregation
Section 116 of the Tax Code. rule for each taxpayer shall apply. For instance,
The term 'residential units' shall refer to if a professional, aside from the practice of his
apartments and houses & lots used for profession, also derives revenue from other lines
residential purposes, and buildings or of business which are otherwise subject to VAT,
parts or units thereof used solely as the same shall be combined for purposes of

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determining whether the threshold has been Invoice or if so included, these should
exceeded. The VAT-exempt sales shall NOT be be clearly indicated in the VAT
included in determining the threshold. [RR 16- Invoice as reimbursable expenses.
2005]

c) Importation of Goods
VI. DETERMINING THE VAT BASE VAT Base = total value (used by Bureau
of Customs in determining tariff and
a) Sale of Goods customs duties) + customs duties +
VAT Base = gross selling price or gross excise tax (if any) + other charges
value in money of the goods sold or
exchanged In case the valuation used by Bureau of
Customs in computing customs duties is
Gross selling price shall include: by volume or quantity, the LANDED
charges for packaging, delivery & COST* shall be the tax base.
insurance
excise taxes if goods are subject *LANDED COST = invoice amount +
to excise tax customs duties + freight + insurance +
other charges + excise tax (if any)
For transactions deemed sale, the output tax
shall be based on the market value of the goods NOTE: The VAT on importation shall be
deemed sold as of the time of the occurrence of paid by the importer PRIOR to the release
the transactions. However, in case of retirement of such goods from customs custody.
or cessation of business, the tax base shall be (RR 16-2005)
the acquisition cost or the current market price of
the goods or properties, whichever is LOWER. VII. INPUT TAXES

In the case of a sale where the gross selling price (amendments introduced by RA 9337 indicated,
is unreasonably lower than the fair market value, text in ALL CAPS added by RA 9337)
the actual market value shall be the tax base.
CREDITABLE INPUT TAX ( 110, A)
b) Sale of Services
VAT Base = Gross Receipts (1) Any INPUT TAX evidenced by a VAT
invoice or official receipt issued in accordance
Gross receipts means the total amount with Section 113 hereof on the following
of money or its equivalent representing transactions shall be creditable against the
the contract price, compensation, service OUTPUT TAX:
fee, rental or royalty, including the (a) Purchase or importation of goods:
amount charged for materials supplied (i) For sale; or
with the services and deposits and (ii) For conversion into or intended to
advance payments actually or form part of a finished product for sale
constructively received during the taxable including packaging materials; or
quarter for the services performed or to (iii) For use as supplies in the course of
be performed for another person, business; or
excluding VAT. (iv) For use as materials supplied in the
sale of service; or
Constructive receipt occurs when the
(v) For use in trade or business for
money consideration or its equivalent is
which deduction for depreciation or
placed at the control of the person who
amortization is allowed under this Code,
rendered the service without restrictions
except automobiles, aircraft and yachts.
by the payor. Examples:
[AMENDED]
1) deposit in banks which are made
(b) Purchase of services on which a VAT has
available to the seller of services
been actually paid.
without restrictions
2) issuance by the debtor of a notice to
(2) Input tax on domestic purchase OR
offset any debt or obligation and
IMPORTATION of goods or properties shall be
acceptance thereof by the seller as
creditable: [AMENDED]
payment for services rendered
(a) To the purchaser upon consummation of
3) transfer of the amounts retained by
sale and on importation of goods or
the contractee to the account of the
properties; and
contractor.
(b) To the importer upon payment of the
value-added tax prior to the release of the
Reimbursable expenses may be
goods from the custody of the Bureau of
EXCLUDED from the tax base IF the ff.
Customs.
conditions are complied with:
Provided, That the input tax on goods purchased
1) the expenses are supported by
or imported in a calendar month for use in
invoices/receipts in the name of the
trade or business for which deduction for
customer
depreciation is allowed under this Code, shall
2) the expenses are paid or will be paid
be spread evenly over the month of acquisition
to a 3rd party
and the fifty-nine (59) succeeding months if
3) there is no mark-up on the amounts
the aggregate acquisition cost for such goods,
billed, and
excluding the VAT component thereof, exceeds
4) the reimbursable expenses should
One million pesos (P1,000,000):
NOT be included in the Sellers VAT

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Provided, however, That if the estimated useful Determination of Creditable Input Tax (
life of the capital good is less than five (5) 110, C)
years, as used for depreciation purposes, then
the input VAT shall be spread over such a - The sum of the excess input tax carried over
shorter period: from the preceding month or quarter and the
Provided, finally, that in the case of purchase of input tax creditable to a VAT-registered person
services, lease or use of properties, the input during the taxable month or quarter shall be
tax shall be creditable to the purchaser, lessee reduced by the amount of claim for refund or tax
or licensee upon payment of the compensation, credit for value-added tax and other
rental, royalty or fee. [AMENDED] adjustments, such as purchase returns or
allowances and input tax attributable to exempt
(3) A VAT-registered person who is also sale.
engaged in transactions not subject to the value- The claim for tax credit referred to includes not
added tax shall be allowed tax credit as follows: only those filed with the BIR but also those filed
(a) Total input tax which can be directly with other government agencies, such as the
attributed to transactions subject to Board of Investments the Bureau of Customs.
value-added tax; and
(b) A ratable portion of any input tax Transitional Input Tax Credits ( 111, A)
which cannot be directly attributed to
either activity. Any person liable for VAT or who elects to be a
VAT-registered person shall be allowed INPUT
INPUT TAX- the VAT due from or paid by a VAT- TAX in his beginning inventory of goods,
registered person in the course of his trade or materials and supplies
business on importation of goods or local equivalent to eight percent (8%) TWO
purchase of goods or services, including lease or PERCENT (2%) of the value of such
use of property, from a VAT-registered person. It inventory OR
includes the transitional input tax determined in the actual VAT paid on such goods,
accordance with Section 111 of this Code. materials and supplies, whichever is
higher,
It includes input taxes which can be directly which shall be creditable against the OUTPUT
attributed to transactions subject to the VAT plus TAX. [AMENDED]
a ratable portion of any input tax which cannot
be directly attributed to either the taxable or [NOTE: subject to the filing of an inventory
exempt activity. Input tax must evidenced by a according to rules and regulations prescribed by
VAT invoice or official receipt issued by a VAT- the Secretary of finance, upon recommendation
registered person in accordance with Secs. 113 of the Commissioner]
and 237 of the Tax. [RR 16-2005]
Presumptive Input Tax Credits ( 111, B)
OUTPUT TAX- the VAT due on the sale or lease
of taxable goods or properties or services by any (1) Persons or firms engaged in the processing
person registered or required to register under of sardines, mackerel and milk, and in
Section 236 of this Code. manufacturing refined sugar and cooking oil AND
PACKED NOODLE BASED INSTANT MEALS, shall
EXCESS OUTPUT OR INPUT TAX ( 110, C) be allowed a presumptive input tax, creditable
against the output tax, equivalent to one and
If at the end of any taxable quarter: one-half percent (1 1/2%) FOUR PERCENT (4%)
the output tax exceeds the input tax, the of the gross value in money of their purchases of
excess shall be paid by the VAT-registered primary agricultural products which are used as
person. inputs to their production. [AMENDED]
the input tax exceeds the output tax, the
excess shall be carried over to the succeeding "Processing" shall mean pasteurization, canning
quarter or quarters: and activities which through physical or chemical
Provided, however, that any input tax process alter the exterior texture or form or inner
attributable to the purchase of capital goods or to substance of a product in such manner as to
zero-rated sales by a VAT-registered person may prepare it for special use to which it could not
at his option be refunded or credited against have been put in its original form or condition.
other internal revenue taxes, subject to the
provisions of Section 112.28 [AMENDED] (2) Public works contractors shall be allowed a
presumptive input tax equivalent to one and one-
half percent (1 1/2%) of the contract price with
28
As amended by RA 9361. RA 9337, effective July 1, 2005, respect to government contracts only in lieu of
amended this subsection to read as follows: If at the end of actual input taxes therefrom. [DELETED]
any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters: Provided, That the input REFUNDS OR TAX CREDITS OF INPUT TAX
tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: Provided, however,
Zero-Rated Sales ( 112, A)
That any input tax attributable to zero-rated sales by a VAT- Any VAT-registered person, whose sales are
registered person may at his option be refunded or credited zero-rated or effectively zero-rated may apply
against other internal revenue taxes, subject to the provisions
of Section 112. HOWEVER, this was again amended by
Congress through RA 9361 passed on Nov. 21, 2006. RR 2-
2007, dated January 11, 2007, provides that this regulation after its publication) except VAT returns covering taxable
enforcing the amendment introduced by RA 9361 shall take quarters ending earlier than December 2006.
effect immediately and shall apply to the quarterly VAT returns
to be filed after the effectivity of RA 9361 (which is 15 days

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for the issuance of a tax credit certificate or In proper cases, the Commissioner of Internal
refund of creditable input tax due or paid Revenue shall grant a tax credit
attributable to such sales, except transitional certificate/refund for creditable input taxes
input tax, to the extent that such input tax has within one hundred twenty (120) days from the
not been applied against output tax: [within date of submission of complete documents in
two (2) years after the close of the taxable support of the application filed in accordance
quarter when the sales were made] with subparagraph (a) above.
PROVIDED, however, That in the case of zero- In case of full or partial denial of the claim for
rated sales under Section 106(A)(2)(a)(1), (2) tax credit certificate/refund as decided by the
and (B) and Section 108 (B)(1) and (2), the Commissioner of Internal Revenue, the
acceptable foreign currency exchange proceeds taxpayer may appeal to the Court of Tax
thereof had been duly accounted for in Appeals (CTA) within thirty (30) days from the
accordance with the rules and regulations of receipt of said denial, otherwise the decision
the Bangko Sentral ng Pilipinas (BSP): shall become final. However, if no action on
PROVIDED, further, That where the taxpayer is the claim for tax credit certificate/refund has
engaged in zero-rated or effectively zero-rated been taken by the Commissioner of Internal
sale and also in taxable or exempt sale of Revenue after the one hundred twenty (120)
goods of properties or services, and the day period from the date of submission of the
amount of creditable input tax due or paid application with complete documents, the
cannot be directly and entirely attributed to any taxpayer may appeal to the CTA within 30
one of the transactions, it shall be allocated days from the lapse of the 120-day period. [RR
proportionately on the basis of the volume of 16-2005]
sales.
PROVIDED, FINALLY, THAT FOR A PERSON Manner of Giving Refund ( 112, E)-
MAKING SALES THAT ARE ZERO-RATED UNDER Refunds shall be made upon warrants drawn by
SECTION 108 (B)(6), THE INPUT TAXES SHALL the Commissioner or by his duly authorized
BE ALLOCATED RATABLY BETWEEN HIS ZERO- representative without the necessity of being
RATED AND NON-ZERO-RATED SALES. countersigned by the Chairman, Commission on
[AMENDED] audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding:
(B) Capital Goods. - A VAT-registered person Provided, That refunds under this paragraph shall
may apply for the issuance of a tax credit be subject to post audit by the Commission on
certificate or refund of input taxes paid on capital Audit.
goods imported or locally purchased, to the
extent that such input taxes have not been Notes from RR 16-2005:
applied against output taxes. The application may
be made only within two (2) years after the close Apportionment of Input Tax on Mixed
of the taxable quarter when the importation or Transactions. A VAT-registered person who is
purchase was made. [DELETED] also engaged in transactions not subject to VAT
shall be allowed to recognize input tax credit on
Cancellation of VAT Registration. ( 112, C) transactions subject to VAT as follows:
A person whose registration has been cancelled 1. All the input taxes that can be directly
due to retirement from or cessation of attributed to transactions subject to VAT may
business, or due to changes in or cessation of be recognized for input tax credit; Provided,
status under Section 106(C) of this Code may, that input taxes that can be directly
within two (2) years from the date of attributable to VAT taxable sales of goods
cancellation, apply for the issuance of a tax and services to the Government or any of its
credit certificate for any unused input tax which political subdivisions, instrumentalities or
may be used in payment of his other internal agencies, including government-owned or
revenue taxes. controlled corporations (GOCCs) shall not be
Provided, however, that he shall be entitled to a credited against output taxes arising from
refund if he has no internal revenue tax sales to non-Government entities; and
liabilities against which the tax credit certificate 2. If any input tax cannot be directly attributed
may be utilized. to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated
Where to file the claim for refund/tax credit to the VAT taxable and VAT-exempt
certificate ( 112, D) transactions and only the ratable portion
Claims for refunds/tax credit certificate shall be pertaining to transactions subject to VAT may
filed with the appropriate BIR office (Large be recognized for input tax credit.
Taxpayers Service (LTS) or Revenue District
Office (RDO)) having jurisdiction over the Illustration: ERA Corporation has the following
principal place of business of the taxpayer; sales during the month:
Provided, however, that direct exporters may
also file their claim for tax credit certificate with Sale to private entities subject to 12% 100,000.00
the One Stop Shop Center of the Department of Sale to private entities subject to 0% 100,000.00
Finance; Provided, finally, that the filing of the Sale of exempt goods 100,000.00
claim with one office shall preclude the filing of Sale to gov't. subjected to 5% final
the same claim with another office. VAT w/holding 100,000.00
Total sales for the month 400,000.00
Period within which refund or tax credit
certificate/refund of input taxes shall be The following were its input taxes (or passed on
made by its VAT suppliers):
( 112, D) Input tax on taxable goods (12%) 5,000.00
Input tax on zero-rated sales 3,000.00

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Input tax on sale of exempt goods 2,000.00 All creditable input taxes29 xxx
Input tax on sale to government 4,000.00 (as illustrated in the previous example
Input tax on depreciable capital good to be P18K) during the month or quarter
not attributable to any specific activity
any amount of input tax carried-over xxx
(monthly amortization for 60 months) 20,000.00
from the preceding month or quarter

A. The creditable input tax for the month shall Less:


be computed as follows: amount of claim for VAT refund
Input tax on sale subject to 12% P5,000.00 or tax credit certificate
Input tax on zero-rated sale (whether filed with the BIR,
3,000.00 the Department of Finance,
Ratable portion of the input tax not directly the Board of Investments, BOC) (xxx)
attributable to any activity, computed below
other adjustments (purchases returns
or allowances) (xxx)
Taxable sales (0% and 12%) X Amount of
input tax xxx
Total Sales not directly
attributable
VIII. SUBSTANTIATION REQUIREMENTS
P200,000.00
----- X P20,000.00 = P10,000.00 RR 16-2005: Substantiation of Input Tax
400,000.00 Credits

Total creditable input tax for the month (a) INPUT TAXES must be substantiated and
(P5,000+ P3,000 +P10,000) P18,000.00 supported by the following documents, and must
be reported in the information returns required
B. The input tax attributable to sales to to be submitted to the Bureau:
government for the month shall be computed as (1) For the importation of goods import
follows: entry or other equivalent document showing
actual payment of VAT on the imported
Input tax on sale to gov't. P4,000.00 goods.
(2) For the domestic purchase of goods
Ratable portion of the input tax not directly and properties invoice showing the
attributable to any activity, computed as follows: information required under Secs. 113 and
237 of the Tax Code.
Taxable sales to government X Amount of (3) For the purchase of real property
input tax public instrument i.e., deed of absolute
Total Sales not directly sale, deed of conditional sale,
attributable contract/agreement to sell, etc., together
with VAT invoice issued by the seller.
P100,000.00 X P20,000.00 = P5,000.00 (4) For the purchase of services official
receipt showing the information required
400,000.00 under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to a
Total input tax attributable to sales to registered buyer shall constitute valid proof
government P9,000.00 (P4,000 + P5,000) of substantiation of tax credit only if it shows
These amounts are not available for input tax the information required under Secs. 113 and
credit but may be recognized as cost or expense. 237 of the Tax Code.
That is because as far as sales to government are
concerned, there is a VAT that is finally withheld (b) TRANSITIONAL INPUT TAX shall be supported
(at 5%). by an inventory of goods as shown in a
detailed list to be submitted to the BIR.
C. The input tax attributable to VAT-exempt
sales for the month shall be computed as follows: (c) Input tax on "deemed sale" transactions shall
Input tax on VAT-exempt sales P2,000.00 be substantiated with the invoice required
Ratable portion of the input tax not directly (please refer to the table on page 46).
attributable to any activity, computed below:
(d) Input tax from payments made to non-
VAT-exempt sales X Amount of residents (such as for services, rentals and
input tax royalties) shall be supported by a copy of the
Total Sales not directly attributable Monthly Remittance Return of Value Added Tax
Withheld (BIR Form 1600) filed by the resident
P100,000.00 X P20,000.00 = P5,000.00 payor in behalf of the non-resident evidencing
--- remittance of VAT due which was withheld by the
400,000.00 payor.

Total input tax attributable to P7,000.00 (e) Advance VAT on sugar shall be supported by
VAT-exempt sales (P2,000+ P5,000) the Payment Order showing payment of the
- These amounts are not available for input tax advance VAT.
credit but may be recognized as cost or expense.

29
Determination of Input Tax Creditable Remember, this does NOT include input tax attributable to
exempt sales, and input tax attributable to sales subject to final
during a Taxable Month or Quarter. withholding VAT

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IX. INVOICING REQUIREMENTS ( 113) Invoicing & Recording Deemed Sale


Transactions.
A VAT-registered person shall issue: Transaction Invoicing
(1) A VAT invoice for every sale, barter or Requirement
exchange of goods or properties; and Transfer, use or Memorandum entry in
(2) A VAT official receipt for every lease of consumption not in the subsidiary sales
goods or properties, and for every sale, the course of business journal to record
barter or exchange of services. of goods or properties withdrawal of goods for
originally intended for personal use
Information Contained in the VAT Invoice or sale or for use in the
VAT Official Receipt: course of business
(1) A statement that the seller is a VAT- Distribution or Invoice, at the time of
registered person, followed by his taxpayer's transfer to the transaction, which
identification number (TIN); shareholders/investors should include all the
(2) The total amount which the purchaser pays or or creditors info prescribed in Sec.
is obligated to pay to the seller with the 113(B)
indication that such amount includes the Consignment of goods Invoice, at the time of
value-added tax: Provided, That: if actual sale is not the transaction, which
(a) The amount of the tax shall be shown as made within 60 days should include all the
a separate item in the invoice or receipt; info prescribed in Sec.
(b) If the sale is exempt from value-added 113(B)
tax, the term "VAT-exempt sale" shall be
written or printed prominently on the Retirement from or An inventory shall be
invoice or receipt; cessation of business prepared and submitted
(c) If the sale is subject to zero percent with respect to all to the RDO who has
(0%) value-added tax, the term "zero- goods on hand jurisdiction over the
rated sale" shall be written or printed taxpayers principal
prominently on the invoice or receipt; place of business not
(d) If the sale involves goods, properties or later than 30 days after
services some of which are subject to retirement or cessation
and some of which are VAT zero-rated or from the business. An
VAT-exempt, the invoice or receipt shall invoice shall be prepared
clearly indicate the breakdown of the for the entire inventory,
sale price between its taxable, exempt which shall be the basis
and zero-rated components, and the of the entry into the
calculation of the value-added tax on subsidiary sales journal.
each portion of the sale shall be shown The invoice need not
on the invoice or receipt: "Provided, That enumerate the specific
the seller may issue separate invoices or items appearing in the
receipts for the taxable, exempt, and inventory regarding the
zero-rated components of the sale. description of the goods.
(3) The date of transaction, quantity, unit cost If the business is to be
and description of the goods or properties or continued by the new
nature of the service; and owners or successors,
(4) In the case of sales in the amount of one the entire amount of
thousand pesos (P1,000) or more where the output tax on the
sale or transfer is made to a VAT-registered amount deemed sold
person, the name, business style, if any, shall be allowed as input
address and taxpayer identification number taxes.
(TIN) of the purchaser, customer or client.
xxx. X. ACCOUNTING REQUIREMENTS ( 113, B)

Notes from RR 16-2005: Notwithstanding the provisions of Section 233, all


persons subject to VAT under Sections 106 and
Only VAT-registered persons are required to print 108 shall, in addition to the regular accounting
their TIN followed by the word "VAT" in their records required, maintain a subsidiary sales
invoice or official receipts. Said documents shall journal and subsidiary purchase journal on
be considered as a "VAT Invoice" or VAT official which the daily sales and purchases are recorded.
receipt. All purchases covered by The subsidiary journals shall contain such
invoices/receipts other than VAT Invoice/VAT information as may be required by the Secretary
Official Receipt shall not give rise to any input of Finance.
tax. ...xxx.
VAT invoice/official receipt shall be prepared at
least in duplicate, the original to be given to the RR 16-2005: A subsidiary record in ledger
buyer and the duplicate to be retained by the form shall be maintained for the acquisition,
seller as part of his accounting records. purchase or importation of depreciable assets or
capital goods which shall contain, among others,
information on the total input tax thereon as well
as the monthly input tax claimed in VAT
declaration or return.

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XI. CONSEQUENCES OF ISSUING The cancellation of registration will be


ERRONEOUS VAT INVOICE OR VAT effective from the first day of the
OFFICIAL RECEIPT ( 113, D) following month.
[Added by RA 9337] Persons Required to Register for VAT ( 236,
G)
(1) If a person who is not a VAT-registered
person issues an invoice or receipt showing (1) Any person who, in the course of trade or
his Taxpayer Identification Number (TIN), business, sells, barters or exchanges goods
followed by the word "VAT": or properties, or engages in the sale or
(a) The issuer shall, in addition to any exchange of services, shall be liable to
liability to other percentage taxes, be liable register for Value-added tax if:
to: (a) His gross sales or receipts for the
(i) The tax imposed in Section 106 or past twelve (12) months, other than
108 without the benefit of any input tax those that are exempt under section 109
credit; and (a) to (u), have exceeded One million five
(ii) A 50% surcharge under Section 248 hundred thousand pesos (P1,500,000);
(B) of this code; or
(b) The VAT shall, if the other requisite (b) There are reasonable grounds to
information required under Subsection (B) believe that his gross sales or receipts for
hereof is shown on the invoice or receipt, the next twelve (12) months, other than
be recognized as an input tax credit to the those that are exempt under Section 109
purchaser under Section 110 of this Code. (A) to (U), will exceed one million five
(2) If a VAT-registered person issues a VAT hundred thousand pesos (P1,500,000).
invoice or VAT official receipt for a VAT- (2) Every person who becomes liable to be
exempt transaction, but fails to display registered under paragraph (1) of this
prominently on the invoice or receipt the Subsection shall register with the Revenue
term "VAT-exempt Sale", the issuer shall be District Office which has jurisdiction over the
liable to account for the tax imposed in head office or branch of that person, and
Section 106 or 108 as if Section 109 did not shall pay the annual registration fee
apply. prescribed in Subsection (B) hereof. If he
fails to register, he shall be liable to pay the
Transitional Period ( 113, E) - tax under Title IV as if he were a VAT-
Notwithstanding Subsection (B) hereof, taxpayers registered person, but without the benefit of
may continue to issue VAT invoices and VAT input tax credits for the period in which he
official receipts for the period July 1, 2005 to was not properly registered.
December 31, 2005, in accordance with Bureau
of Internal Revenue administrative practices that Optional Registration for Value-added Tax of
existed as of December 31, 2004. Exempt Person. ( 236, H)
(1) Any person who is not required to
Under sub-par(2), clarification: If a VAT- register for Value-added tax under
registered person issues a VAT invoice or VAT Subsection (G) hereof may elect to register
official receipt for a VAT-exempt transaction, but for Value-added tax by registering with the
fails to display prominently on the invoice or Revenue District Office that has jurisdiction
receipt the words "VAT-exempt sale", the over the head office of that person, and
transaction shall become taxable and the issuer paying the annual registration fee in
shall be liable to pay VAT thereon. The purchaser Subsection (B) hereof.
shall be entitled to claim an input tax credit on (2) Any person who elects to register under
his purchase. (RR 16-2005) this Subsection shall not be entitled to cancel
his registration under Subsection (F)(2) for
XIII. REGISTRATION REQUIREMENTS ( 236, F) the next three (3) years.
For purposes of Title IV of this Code, any
Cancellation of Registration. - person who has registered value-added tax
(1) General Rule. - The registration of any as a tax type in accordance with the
person who ceases to be liable to a tax provisions of Subsection (C) hereof shall be
type shall be cancelled upon filing with the referred to as a "VAT-registered person" who
Revenue District Office where he is shall be assigned only one Taxpayer
registered, an application for registration Identification Number (TIN). xxx.
information update in a form prescribed (amended by RA 9337)
therefor;

(2) Cancellation of VAT Registration. - IF RR 16-2005:


(a) He makes written application and can
demonstrate to the Commissioner's Annual registration fee = P500.00
satisfaction that his gross sales or
receipts for the following twelve (12) Once registered as a VAT person, the taxpayer
months, other than those that are shall be liable to output tax and be entitled to
exempt under Section 109 (A) TO (U), input tax credit beginning on the first day of the
will not exceed One million five hundred month following registration.
thousand pesos (P1,500,000); or
(b) He has ceased to carry on his trade or Non-VAT or VAT-exempt persons are also
business, and does not expect to required to register as NON-VAT persons and pay
recommence any trade or business the annual registration fee of P500.00 for every
within the next twelve (12) months. separate or distinct establishment or place of
business before the start of such business and

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every year thereafter on or before the 31st day of * quarterly return of the amount of his gross
January. Individuals engaged in business where sales or receipts within twenty-five (25) days
the gross sales or receipts do NOT exceed after the close of each taxable quarter30
P100,000.00 during any 12-month period, and prescribed for each taxpayer:
cooperatives other than electric cooperatives, are NOTE: VAT paid on a monthly basis31
required to register but will not be made to pay
the P500.00 fee. Short Period Return
Franchise grantees of radio and television Any person, whose registration has been
broadcasting whose gross annual receipt for the cancelled in accordance with Section 236, shall
preceding calendar year exceeded P10M shall file a return and pay the tax due thereon within
register within 30 days from the end of the twenty-five (25) days from the date of
calendar year. Franchise grantees of the same cancellation of registration:
whose annual gross receipts do not exceed P10M Provided, That only one consolidated return shall
derived from the business covered by the law be filed by the taxpayer for his principal place of
granting the franchise may opt for VAT business or head office and all branches.32
registration. This option, once exercised, shall be
irrevocable (as opposed to VAT-exempt persons, Persons Required to Submit Summary Lists
in general, who choose to be VAT-registered, in of Sales/Purchases.
which case VAT registration cannot be cancelled (1) Persons Required to Submit Summary Lists of
for 3 years only). Sales. All persons liable for VAT such as
manufacturers, wholesalers, service-providers,
Any person who is VAT-registered but enters into among others, with quarterly total sales/receipts
transactions which are exempt from VAT (mixed (net of VAT) exceeding Two Million Five Hundred
transactions) may opt that the VAT apply to his Thousand Pesos (P2,500,000.00).
transactions which would have been exempt. (2) Persons Required to Submit Summary Lists of
Purchases. All persons liable for VAT such as
Cancellation of VAT registration: manufacturers, service-providers, among others,
A VAT-registered person may cancel his with quarterly total purchases (net of VAT)
registration for VAT as provided for in Sec. 236 exceeding One Million Pesos (P 1,000,000.00).
(F) (2), and also in the following instances:
1. A change of ownership, in the case of a When and Where to File the Summary Lists of
single proprietorship; Sales/Purchases.
2. Dissolution of a partnership or corporation; shall be submitted in diskette form to the RDO or
3. Merger or consolidation with respect to the LTDO or LTAD having jurisdiction over the
dissolved corporation(s); taxpayer, on or before the twenty-fifth (25th)
4. A person who has registered prior to day of the month following the close of the
planned business commencement, but failed taxable quarter (VAT quarter. However,
to actually start his business taxpayers under the jurisdiction of the LTS, and
those enrolled under the EFPS, shall, through
Some instances where taxpayer will update his electronic filing facility submit their Summary List
registration by submitting a duly accomplished of Sales/Purchases to the RDO/LTDO/LTAD, on or
Registration Update Form: before the thirtieth (30th) day of the month
1. A person's business has become exempt in following the close of the taxable quarter.
accordance with Sec. 109
2. A change in the nature of the business itself Information that Must be Contained in the
from sale of taxable goods and/or services to Quarterly Summary List of Sales to be
exempt sales and/or services; Submitted: the monthly total sales generated
3. A person whose transactions are exempt from regular buyers/customers, regardless of the
from VAT who voluntarily registered under amount of sale per buyer/customer, as well as
VAT system, who after the lapse of three from casual buyers/customers with individual
years after his registration, applies for
cancellation of his registration as such; and
30
4. A VAT-registered person whose gross sales or The term "taxable quarter" shall mean the quarter
receipts for three consecutive years did not that is synchronized to the income tax quarter of the
exceed P1,500,000.00 beginning July 1, taxpayer (i.e., the calendar quarter or fiscal quarter).
2005, which amount shall be adjusted to its [RR 16-2005]
31
present value every three years using the The monthly VAT Declarations (BIR Form 2550M) of
Consumer Price Index, as published by the taxpayers whether large or non-large shall be filed and
NSO. the taxes paid not later than the 20th day following the
Upon updating his registration, the taxpayer shall end of each month.
become liable to the percentage tax imposed in The return for withholding of VAT shall be filed and the
withholding VAT paid on or before the tenth (10th) day
Sec. 116 of the Tax Code. A short period return
of the following month. [RR 16-2005]
for the remaining period that he was VAT-
registered shall be filed within twenty five (25) 32
Any person who retires from business with due notice
days from the date of cancellation of his
to the BIR office where the taxpayer (head office) is
registration. registered or whose VAT registration has been cancelled
shall file a final quarterly return and pay the tax due
thereon within twenty five (25) days from the end of
XIV. FILING OF RETURNS & PAYMENT OF VAT the month when the business ceases to operate or
when VAT registration has been officially cancelled;
VAT RETURNS( 114) Provided, however, that subsequent monthly
declarations/quarterly returns are still required to be
filed if the results of the winding up of the
- Filed by person liable to pay the VAT
affairs/business of the taxpayer reveal taxable
transactions. [RR 16-2005]

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sales amounting to P100,000.00 or more. For this For the claimed input tax arising from services
purpose, the term "regular buyers/customers" rendered in the Philippines by nonresidents, no
shall refer to buyers/customers who are engaged summary list is required to be submitted.
in business or exercise of profession AND those
with whom the taxpayer has transacted at least 6 Once any of the taxable quarters total sales
transactions regardless of amount per transaction and/or purchases exceed the threshold amounts
either in the previous year or current year. The as provided above, VAT taxpayer shall be
term "casual buyers/customers", on the other required to submit the summary lists for the next
hand, shall refer to buyers/customers who are 3 succeeding quarters, regardless of whether or
engaged in business or exercise of profession not such succeeding taxable quarter sales and/or
BUT did not qualify as regular buyers/customers purchases exceed the herein set threshold
as defined in the preceding statement. amounts of P2,500,000.00 for sales and
P1,000,000.00 for purchases.
The Quarterly Summary List of Sales to Regular
Buyers/Customers and Casual Buyers/Customers Penalties in case of failure to submit quarterly
and Output Tax shall reflect the following: summary list of sales and purchases.
(1) BIR-registered name of the buyer who is A person who fails to file, keep or supply
engaged in business/exercise of profession; a statement, list, or information required herein
(2) TIN of the buyer (Only for sales that are on the date prescribed therefor shall pay, upon
subject to VAT); notice and demand by the Commissioner of
(3) Exempt Sales; Internal Revenue, an administrative penalty of
(4) Zero-rated Sales; P1,000.00 for each such failure, unless it is
(5) Sales Subject to VAT (exclusive of VAT); shown that such failure is due to reasonable
(6) Sales Subject to Final VAT Withheld; and cause and not to willful neglect. For this
(7) Output Tax (VAT on sales subject to 10%). purpose, the failure to supply the required
(The total amount of sales shall be system- information for each buyer or seller of goods and
generated) services shall constitute a single act or omission
punishable hereof. However, the aggregate
Information that must be Contained in the amount to be imposed for all such failures during
Quarterly Summary List of Purchases a taxable year shall not exceed P25,000.00.
(1) The Quarterly Summary List of Local In addition to the imposition of the
Purchases and Input Tax administrative penalty, willful failure by such
a. BIR-registered name of the person to keep any record and to supply the
seller/supplier/service-provider; correct and accurate information at the time or
b. Address of seller/supplier/service- times as required herein, shall be subject to the
provider; criminal penalty under the relevant provisions
c. TIN of the seller; of the Tax Code (e.g., Sec. 255, Sec. 256, etc.,),
d. Exempt Purchases; upon conviction of the offender.
e. Zero-rated Purchases; The imposition of any of the penalties under the
f. (i) Purchases Subject to VAT (exclusive of Tax Code and the compromise of the criminal
VAT) on services; penalty on such violations, notwithstanding, shall
(ii) Purchases Subject to VAT (exclusive not in any manner relieve the violating taxpayer
of VAT) on capital goods; and from the obligation to submit the required
(iii) Purchases Subject to VAT (exclusive documents.
of VAT) on goods other than capital goods Finally, the administrative penalty shall be
(iv) Purchases Subject to Final VAT imposed at all times, upon due notice and
Withheld demand by the Commissioner of Internal
g. Creditable Input Tax; and (to be Revenue. A subpoena duces tecum for the
computed not on a per supplier basis submission of the required documents shall be
but on a per month basis) issued on the second offense. A third offense
h. Non-Creditable Input Tax (to be shall set the motion for a criminal prosecution of
computed not on a per supplier basis the offender.
but on a per month basis)
(The total amount of purchases shall be
system-generated) XV. ENFORCEMENT MEASURES
(2) The Quarterly Summary List of
Importations. RR 16-2005:
(a) The import entry declaration number; Administrative and Penal Provisions.
(b) Assessment/Release Date;
(c) The date of importation; (a) Suspension of business operations. In
(d) The name of the seller; addition to other administrative and penal
(e) Country of Origin; sanctions provided for in the Tax Code and
(f) Dutiable Value; implementing regulations, the Commissioner of
(g) All Charges Before Release From Internal Revenue or his duly authorized
Customs' Custody; representative may order suspension or closure
(h) Landed cost: of a business establishment for a period of not
(i) Exempt; less than five (5) days for any of the following
(ii) Taxable (Subject to VAT); violations:
(i) VAT paid; (1) Failure to issue receipts and invoices.
(j) Official Receipt (OR) Number of the OR (2) Failure to file VAT return as required
evidencing payment of the tax; and under the provisions of Sec. 114 of the Tax
(k) Date of VAT payment Code.
(3) Understatement of taxable sales or
receipts by 30% or more of his correct

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TAXATION LAW 2

taxable sales or receipt for the taxable III. PERCENTAGE TAXES


quarter.
(4) Failure of any person to register as
TAX ON PERSONS EXEMPT FROM VAT (Sec.
required under the provisions of Sec. 236 of
116, NIRC)
the Tax Code.
3% of gross quarterly sales or receipts.
(b) Surcharge, interest and other penalties.
Q: Who are liable?
The interest on unpaid amount of tax, civil
GENERAL RULE: Any person who are exempt
penalties and criminal penalties imposed in Title
from VAT and who is not a VAT-registered
XI of the Tax Code shall also apply to violations
person.
of the provisions of Title IV of the Tax Code.
Those whose gross annual sales and
receipts does not exceed P1.5M are
exempted from VAT
EXCEPTION:
Cooperatives shall be exempt from the
3% GRT.
Those earning LESS THAN P100,000
which is neither covered by percentage
tax nor by VAT.

TAX ON DOMESTIC CARRIERS AND KEEPERS


OF GARAGES (Sec. 117, NIRC)
3% of quarterly gross receipts
Gross receipts of common carriers
derived from INCOMING and OUTGOING
freight is NOT subject to local taxes
under the Local Govt Code.

Q: Who are covered? (ReCoLaKe no BA)


1. Cars for Rent or hire driven by lessee;
2. Transportation Contractors, including
persons who transport passengers for
hire;
3. Other domestic carriers by LAND;
4. Keepers of garages.
EXCEPT:
1. Owners of Bancas
2. Owners of Animal-drawn two-wheeled
vehicles

Minimum quarterly gross receipts:


Jeepneys
Manila and other cities P2,400
Provincial P1,200
Public Utility Bus
Not exceeding 30 passengers P3,600
> 30 but not > 50 passengers P6,000
Exceeding 50 passengers P7,200
Taxis
Manila and other cities P3,600
Provincial P2,400
Car for hire (with chauffeur) P3,000
Car for hire (w/o chauffeur) P1,800

TAX ON INTERNATIONAL CARRIERS (Sec.


118, NIRC)
3% of their quarterly gross receipts.
To be subject to this percentage tax, they
MUST BE DOING BUSINESS IN THE
PHILIPPINES.

Q: Who are liable?


1. International air carriers
2. International shipping carriers
Amendment introduced by RA 9337 (July
2005):

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TAXATION LAW 2

4. News services (which deals EXCLUSIVELY


with the collection of news and
Common Transporting Kind of Tax dissemination to the public)
carrier carrier Liability
By land Persons Domestic 3%, Sec. TAX ON BANKS AND NON-BANK FINANCIAL
117 INTERMEDIARIES PERFORMING QUASI-
Goods/cargo Domestic 12% VAT
BANKING FUNCTIONS (Sec. 121, NIRC)
By sea Domestic Domestic
tax on gross receipts derived from sources within
trip - 12%
VAT the Philippines by all banks and non-bank
International financial intermediaries
trip zero-
rated Definitions (from RR 09-04, Sec 2):
Whether International 3%, Sec.
transporting 118 Non-bank Financial Intermediaries refer to
By air persons or Domestic Domestic persons or entities whose principal functions
goods/cargo flight - 12% include the lending, investing or placement of
VAT
funds or evidences of indebtedness or equity
International
flight
Deposited with them, Acquired by them or
zero-rated otherwise Coursed through them, either for their
International 3%, Sec. own account or for the account of others. (LIP
118 DAC)

TAX ON FRANCHISES (Sec. 119) Quasi-banking Activities refer to the borrowing


of funds from 20 or more personal or corporate
Q: Who are liable? lenders at any one time for purposes of relending
1. Radio and broadcasting companies or purchasing receivables and other similar
a. annual gross receipts of the obligations.
preceding year does not exceed
P10M Exception:
b. 3% of gross receipts derived from If borrowing of funds is for LIMITED PURPOSE of
business covered by law granting the financing their own needs or the needs of their
franchise. agents or dealers.
c. The franchisee has the option to
register as VAT taxpayer and pay the Receipts Maturity Rate
VAT instead. 1. interest, commissions, maturity 5%
d. once option is exercised, it is discounts from lending period is 5yrs
IRREVOCABLE. activities and financial or less
leasing bases on
2. Electric, gas and water utilities remaining maturities of maturity 1%
2% of gross receipts derived from business instruments: period is
covered by the law granting the franchise. more than
5yrs
* Under RA 9337, electric companies are now 2. dividends & equity 0%
subject to VAT and not percentage tax. shares in net income of
subsidiaries
OVERSEAS COMMUNICATIONS TAX (Sec. 3. royalties, rentals of 7%
120) property (real/personal),
10% of the amount paid for the services. profits from exchange and
Levied upon EVERY overseas dispatch, all other items treated as
message or conversation TRANSMITTED gross income under sec.
FROM THE PHILIPPINES by: 32)
- telephone 4. net trading gains on 7%
- telegraph foreign currency, debt
- telewriter exchange securities, derivatives &
- wireless other similar financial
- other communication equipment instruments
services. [Note: rates in #s 3 & 4 are as amended by RA
9337]
Q: Who are liable?
Payable by: the person paying for the services COMPUTING FOR THE NET TRADING GAINS:
rendered
Payable to: the person rendering the service, Cumulative Total of the net trading gain/loss
who will in turn pay the taxes at the end of since the first month of the applicable taxable
the quarter. year
LESS: figures already reflected in the previous
Q: Who are exempted? (D GIN) months of the same year
1. Government and any of its political FIGURE TO BE REPORTED IN THE MONTHLY
subdivisions and instrumentalities; PERCENTAGE TAX
2. Diplomatic services (any embassy and
consular offices of a foreign govt) Net Trading Loss
3. International Organizations (if bases in - may only be deducted from the net trading
the Phils. and enjoying privileges, gain to arrive at the total gross receipts tax
exemptions and immunities pursuant to due.
an international agreement)

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- cannot be deducted on net trading gain 1. Premiums Refunded within 6 months after
earned on any taxable year other than the payment on account of rejection of risks
year it was incurred 2. Premiums paid upon reinsurance by a
- may not be carried over to the succeeding company that has Already paid the tax.
taxable year. 3. Premiums collected or received by any
branch of a domestic corporation, firm or
association doing business OUTSIDE the
RULE ON PRETERMINATION: Phils. on account of any life insurance of
In case the maturity period of an instrument the insured who is a NON-RESIDENT, if any
is shortened by pretermination, the maturity tax on such premiums is imposed by the
period shall be reckoned to end as of the foreign country where the branch is
date of pretermination for purposes of established.
classifying the transaction and applying the 4. Premiums collected or received on account
correct rate of tax. (RR 09-04, Sec. 5) of any reinsurance, if the insured of
personal insurance, RESIDES OUTSIDE THE
CASE LAW: China Bank v. CTA (GR 146749, PHILS., if any tax on such premiums is
June 10, 3003) The 20% withholding tax on imposed by the foreign country where the
interest income shall form part of the gross original insurance has been issued or
receipts in computing gross receipts tax on perfected.
banks. Gross Receipts is commonly understood 5. Portions of premiums collected or received
as the entire receipts without any deductions. by insurance companies on VARIABLE
CONTRACTS in excess of the amounts
TAX ON OTHER NON-BANK FINANCE necessary to insure the lives of variable
INTERMEDIARIES (Sec. 122, NIRC) contract owners.
tax on gross receipts derived by other non-
bank finance intermediaries, DOING Variable Contracts benefits under the
BUSINESS IN THE PHILIPPINES, from: contract vary as to reflect investment results of
- interest any segregated portfolios of investments.
- commissions (PD612)
- discounts from lending activities
- financial leasing CASE LAW: CIR v. Insular Life Assurance (CA
tax is based on the remaining maturities of GR SP 46516) MUTUALIZED LIFE INSURANCE
the instruments from which receipts are COMPANY is not subject to premium tax or DST
derived on policies as cooperatives. If a mutualized
MATURITY RATES life insurance company satisfies all the
maturity period is 5 5% elements of cooperative [1. managed by
yrs or less members; 2. operated with money collected from
maturity period is 3% members; 3. has for its main purpose the mutual
more than 5 yrs protection of members and not for profit] as
defined in Sec. 123, it shall not be subject to
[Note: The same rule on pretermination applies.] premiums tax.

However, RR 10-2004 has classified TAX ON AGENTS OF FOREIGN INSURANCE


pawnshops as under NON-BANK FINANCIAL COMPANIES (Sec. 124, NIRC)
INTERMEDIARIES, thus are now subject to 5%
gross receipts tax. The revenue regulation also 10% of total premiums collected.
required pawnshops to register, from VAT
taxpayers, as percentage taxpayers. Q: Who are liable?
GENERAL RULE: Tax shall be levied upon every
TAX ON LIFE INSURANCE PREMIUMS (Sec. FIRE, MARINE OR MISCELLANEOUS INSURANCE
123, NIRC) AGENT authorized to procure policies of insurance
as he may have previously been legally
5% of total premiums collected (whether authorized to transact on risks located in the
in money, notes, credits or any substitute Phils FOR COMPANIES NOT AUTHORIZED TO
for money). TRANSACT BUSINESS IN THE PHILS.
EXCEPTION: Premiums paid on reinsurance.
Q: Who are liable?
GENERAL RULE: Every person, company or where an owner of property obtains
corporation DOING LIFE INSURANCE BUSINESS insurance DIRECTLY from foreign insurance
OF ANY SORT IN THE PHILIPPINES. companies NOT authorized to transact
EXCEPTION: Purely cooperative companies or insurance business in the Phils., he shall pay
associations. a tax of 5% on the premiums paid.

Cooperative companies or associations are AMUSEMENT TAXES (Sec. 125, NIRC)


such as are
conducted by the members thereof Q: Who are liable?
with the money collected from among The proprietor, lessee or operator of cockpits,
themselves and cabarets, night or day clubs, boxing exhibitions,
solely for their own protection and professional basketball games, Jai-Alai and
NOT for profit. racetracks.

PREMIUMS NOT INCLUDED IN THE TAXABLE Q: When to pay?


RECEIPTS: V- ROAR

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TAXATION LAW 2

return should be filed and tax paid within covers sale, barter, exchange of shares of
20 days after the end of every stock of CLOSELY HELD CORPORATIONS
quarter tax shall be paid by the issuing
corporation in the primary offering or by
SOURCE RATES the seller in the secondary offering
Cockpits 18% tax base is the GSP/GVM
cabarets, night or day clubs 18% levied in accordance with the proportion
boxing exhibitions 10% of shares sold, bartered, exchanged or
professional basketball games (in 15% disposed, to the total outstanding shares
lieu of all other percentage taxes) after the listing in the local stock
Jai-Alai & racetracks (WON they 30% exchange:
charge for admissions)
NUMBER OF SHARES RATES
EXEMPTION: If boxing exhibition is a World or up to 25% of all 4% GSP/GVM
Oriental Championship in any division featuring shares
at least 1 Filipino contender and promoted >25% but not over 2% GSP/GVM
by a Filipino or by a corporation with at 33.33%
least 60% Filipino equity. Over 33.33% 1% GSP/GVM
Closely Held Corporationany corporation at
Tax Base: GROSS RECEIPTS least 50% in value of the outstanding capital
n it embraces ALL the receipts of the stock or at least 50% of the total combined
proprietor, lessee or operator of the voting power of all classes of stock entitled to
amusement place; including income from vote is owned directly or indirectly by or for
TV, radio and motion picture rights. not more than 20 individuals.

RMC 08-88 transferred the EXCLUSIVE Rules to be applied to determine whether the
JURISDICTION to levy tax on gross receipts from corporation is closely held:
ADMISSIONS to places of amusement to the 1. Stock owned directly or indirectly by
local government. corporations, partnerships, estates or trusts
shall be considered as actually owned by
TAX ON WINNINGS (Sec. 126, NIRC) its stockholders, partners or
beneficiaries in proportion to their shares as
Q: Who are liable? individuals.
1. every person who wins in horse races 2. An individual is considered the constructive
2. owners of winning race horses owner of the stock owned by members of his
family (includes only brothers and sisters
SOURCE RATES whole/half-blood, spouse, ancestors and
winnings or dividends (bases on the 10% lineal descendants)
actual amount paid to winner for 3. A person having an option to acquire stock
every winning ticket AFTER is considered the actual owner of such stock
deducting the cost of the ticket)
winnings from double, 4% C. Return on Capital Gains realized from sale of
forecast/quinella and trifecta bets Shares of Stocks
prizes, in case of owners of race 10% 1. return on capital gains realized from sale
horses of shares of stock listed and traded in the
local stock exchange
tax shall be WITHHELD by the operator, it is the duty of every stockbroker who
manager or person in charge of the horse effected the sale to collect the tax and
races before paying the dividends or remit it to the BIR within 5 banking days
prizes from date of collection and to submit to
return shall be filed and tax paid within the secretary of the stock exchange a
20 days from the date tax was deducted true and complete return
and withheld
2. return on public offerings of shares of
TAX ON SALE, BARTER OR EXCHANGE OF stocks
SHARES OF STOCK LISTED AND TRADED the corporate issuer shall file the return
THROUGH THE LOCAL STOCK EXCHANGE OR and pay the tax within 30days from the
THROUGH INITIAL PUBLIC OFFERING (IPO) date of listing of the shares in the local
(Sec. 127, NIRC) stock exchange.

A. Through the Local Stock Exchange [Note: Both IPOs and sales of stock through
of 1% of the GROSS SELLING PRICE the local exchange are EXEMPT from capital
or GROSS VALUE IN MONEY (GSP/GVM) gains tax and from regular individual or
of the shares of stocks sold, bartered, corporate income tax. Also, such tax is not
exchanged or otherwise disposed of deductible from income tax.]
through the local stock exchange OTHER
THAN THE SALE BY A DEALER IN PAYMENT OF PERCENTAGE TAXES
SECURITIES.
Tax shall be paid by seller or Q: When to file return and pay?
transferor. Persons subject to percentage taxes shall file
a QUARTERLY RETURN and PAY the tax due
B. Through IPO within 25 days after the end of each taxable
quarter. (Sec. 128 (A)(1), NIRC)

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TAXATION LAW 2

However, RR 6-2001 has changed the IV. EXCISE TAX


period from 25 days after end of quarter to
Goods Subject to Excise Tax
10 days after end of the month.
(Sec. 129, NIRC)
Goods manufactured or produced in the
Exception: Persons
Philippines for domestic sale or consumption
whose VAT registration is cancelled and
or other disposition
become liable under Sec 116
Things imported
- liable for the tax due from the
NOTE:
date of cancellation of
Excise tax is imposed in addition to VAT.
registration.
The tax attaches even on articles illicitly
retiring from business
made, or the production of which is
- must file a return and pay within
prohibited or punished by law.
20 days from closing of the
business.
Two Classifications of Excise Tax:
Specific tax- tax is based on weight or
Q: Where to file?
volume capacity or other physical unit of
At the option of the person liable, he may file
measurement
- a separate return for each branch or
place of business, or
Ad valorem tax - tax is based on selling
- a consolidated return
price or other specified value of the good
with:
Purpose and justification of excise taxes:
- authorized agent bank,
1. To curtail consumption of certain
- Revenue District Office,
commodities, excessive or indiscriminate use
- Collection Agent or City/Mun. Treasurer
of which is considered harmful to the
where the business or principal place of
individual or community.
business is located.
2. To protect a domestic industry the products
of which face competition from similar
The Commissioner may prescribe
imported articles
- rules and regulations altering the time
and manner of payment prescribed
3. To distribute the tax burden in proportion to
herein.
the benefit derived from a particular
- a minimum amount of gross receipts
government service.
where it is found that a person:
1. has failed to issue receipts or
4. To raise revenue
invoices
2. does not file a return, or
When Excise Taxes Accrue
3. if records of the books of
As to domestic products as soon as the
accounts do not correctly reflect
articles are produced, or come into
the declarations in the return.
existence as in the case of distilled spirits
(Sec. 141) and manufactured and other fuel
oils (Sec. 148)

As to imported articles as soon as the


articles are brought into the Philippine
jurisdiction with the intention to unload them
here.

Filing of Return and Payment of Excise Tax


on DOMESTIC Products (Sec. 130)

(A) Persons liable to file a return, filing of return


on removal and payment of tax

1. Person Liable to File a Return-such


person shall file a separate return for
each place of production setting forth,
among others: DAT
o Description and quantity or volume
of products removed
o Applicable tax base
o Tax due
- in the case of indigenous petroleum,
natural gas or liquefied natural gas
excise tax shall be paid by first
buyer, purchaser or transferee
for local sale, barter or transfer
- export products
excise tax shall be paid by
owner, lessee, concessionaire or
operator of the mining claim

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TAXATION LAW 2

- should domestic products be in the locality where it was


removed from the place of mined, extracted or quarried
production without the payment of
tax, the owner or possessor shall be (B) Determination of Gross Selling Price of Goods
liable for the tax due Subject to Ad Valorem Tax

2. Time of Filing of Return and Payment of Gross Selling Price= Price - VAT
Tax
GENERALLY: return shall be filed and - PRICE: That at which the goods are sold
excise tax shall be paid by the at wholesale in the place of production or
manufacturer or producer before through their sales agents to the public
removal of the domestic products from - If the goods are sold in another
place of production unless otherwise establishment where the manufacturer is
specifically allowed the owner or in the profits of which he
has an interest, wholesale price there
EXCEPTIONS:
PRODUCT TIME OF PAYMENT NOTE: if price < cost of manufacture +
nonmetallic mineral or upon removal of such expenses incurred until the goods are finally
mineral products and products from locality sold a proportionate margin of the profit
quarry sources where mined and (which is not less than 10% of such
extracted manufacturing costs + expenses) shall be
locally produced or within 15 days after added to the GSP
extracted metallic end of the calendar
mineral or mineral quarter when such (C) Manufacturers or Producers Sworn
products products were Statement
removed subject to It shall show:
conditions prescribed - different goods and products
by rules and manufactured or produced,
regulations to be - their corresponding GSP or market value
promulgated by - Costs of manufacture or production +
Secretary of Finance, expenses incurred or to be incurred until
upon recommendation goods are sold
of the Commissioner
(D) Credit for Excise Tax on Goods Actually
taxpayer shall file Exported
bond amount of In case goods produced or manufactured are
excise tax due removed and actually exported without
IMPORTED mineral or before their removal returning to the Philippines:
mineral products, from customs duty - GENERAL RULE any excise tax paid
whether metallic or shall be credited or refunded upon
nonmetallic submission of proof of actual exportation
and upon receipt of the foreign exchange
payment
3. Place of Filing of Return and Payment of - EXCEPTION (i.e., NOT credible): mineral
Tax (GENERAL RULE) products
any authorized agent bank or Revenue o EXCEPTION TO EXCEPTION: coal &
Collector Officer, or coke
duly authorized City or Municipal
Treasurer Payment of Excise Tax on IMPORTED
Articles (Sec. 131)
4. Exceptions (TO GENERAL RULE SET OUT
ABOVE) (A) Persons Liable
IN GENERAL: Sec of Finance, upon - Paid by:
recommendation of Commissioner, may owner or importer to the Customs
by rules and regulations prescribe: Officers before release from the
customhouse, OR
a. time of filing the return at intervals person found in possession of articles
for a particular class or classes of which are exempt from excise taxes
taxpayer other than those legally entitled to
exemption
b. manner and time of payment under a - In case tax-free articles brought in by
tax prepayment, advance deposit and exempted persons or entities or
other similar schemes agencies are subsequently sold,
IN THE SPECIFIC CASES of: transferred or exchanged in the Philippines
minerals, mineral products or purchaser or recipients shall be
quarry resources where the place considered importers and shall be liable for
of extraction is different from the duty and internal revenue tax due
place of processing or production, - Importation of cigar, cigarettes, distilled
or spirits and wines even if destined to tax
metallic minerals processed and duty-free shops shall be subject to all
abroad, applicable taxes, EXCEPT: (not subject to
file and pay at the Revenue tax)
District Office having jurisdiction

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1. such are brought directly into Subic Tax on Alcohol Products


Special Economic and Freeport Zone; Definition
Cagayan Special Economic Zone and a. distilled spirits substance known as ethyl
Freeport; Zamboanga City Special alcohol, ethanol or spirits of wine including
Economic Zone and not transshipped to whiskey, brandy, rum, gin and vodka, from
any other port in the Philippines whatever source, by whatever process
produced
2. importation done by government- b. wines all alcoholic beverages produced by
owned and operated duty free shop like fermentation without distillation from the
DFP, PROVIDED such products are juice of any kind of fruit; and fortified
labeled tax and duty free and not for beverages
resale c. fermented liquor alcoholic beverages
produced by fermentation without distillation
EXCEPTION TO THE EXCEPTION: if such of grain or malt (beer, lager, ale, porter)
products are eventually introduced to
Philippine customs territory, then such Sec. 141 Distilled Spirits (Rates of tax as
articles shall be deemed imported into per RR 3-2006)
Phil and be subject to all import and (for rates see Sec. 141)
excise taxes - Medicinal preparations, flavoring extracts,
other preparations except toilet preparations,
NOTE: Removal and transfer from one Freeport wherein distilled products form chief
to another Freeport shall not be deemed an ingredient
introduction to Phil territory. **same tax as chief ingredient
- Tax shall proportionally increase for any
VIOLATIONS: strength of spirit taxed over proof spirits.
- cigar, cigarettes, distilled spirits and wines in - Tax shall attach as soon as it is in existence
duty free shops which are NOT LABELED AS whether it is subsequently separated as pure
REQUIRED, as well as or impure spirits or transformed into any
- those articles obtained from duty free shops other substance either in the process of
and subsequently FOUND IN NON DUTY FREE original production or by any subsequent
SHOPS FOR RESALE process.

PENALTY: Sec. 142 Wines (Rates of tax as per RR 3-


- articles shall be confiscated and perpetrator 2006)
punished (for rates see sec. 142)
- tax due on any such goods, products, Fortified wines
machinery, equipment and other similar articles - containing more than 25% of alcohol by
shall constitute a lien on the article itself which volume
shall be superior to all other liens - natural wines to which distilled spirits are
added to increase their alcoholic strength
(B) Rate and Basis of the Excise Tax on Imported - taxed as distilled spirits
Articles
Sec. 143 Fermented Liquor (Rates of tax
Unless otherwise specified, imported articles as per RR 3-2006)
shall be subject to the same rate and basis Beer, lager beer, ale. Porter and other fermented
of excise taxes applicable to locally liquor
manufactured articles except tuba, basi, tapuy and similar domestic
fermented liquors
Exemption / Conditional Tax-Free Removal (For rates, see sec. 143)
of Certain Articles PENAL PROVISIONS:
a. denatured wine/spirits for treatment of
tobacco leaf VIOLATION BY: PENALTY
b. domestic denatured alcohol rendered Brewer or importer who summary cancellation
unfit for oral intake, but VAT should be knowingly misdeclares or withdrawal of his
paid or misrepresents in his permit
c. petroleum products sold to: sworn statement any
international carriers (Philippine or pertinent data or
foreign carriers) on their use or information
consumption outside the Philippines,
Corporation, association fined treble the
provided there is reciprocity
or partnership amount of deficiency
exempt entities covered by tax treaties,
taxes + surcharges +
conventions, international agreements,
interest
provided there is reciprocity
Person liable for acts or criminally liable and
entities which are by law exempted from
omissions prohibited penalized under Sec
direct & indirect taxes
under this section 254
d. removal of spirits under bond for
those who willfully abet liable same as
rectification
or aid in the principal
e. removal of fermented liquors to bonded
commission of such act
warehouse
or omission
f. removal of damaged liquors
offender not citizen of deported after service
g. removal of tobacco products entirely unfit
Phil of sentence
for chewing/smoking

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Tax on Tobacco Products V. DOCUMENTARY STAMP TAX


- Definition General Principles
a. cigar all rolls of tobacco or any DEFINITION: Tax on documents, instruments
substitute wrapped in leaf tobacco and papers evidencing the acceptance,
b. cigarette all rolls of finely-cut leaf assignment, sale or transfer of an obligation,
tobacco or any substitute wrapped in right or property thereto
paper or any other material
NATURE: It is an excise or privilege tax imposed
Sec. 144 Tobacco Products (Rates of tax on the privilege to enter into the transaction.
as per RR 3-2006) o It is only paid once.
(for rates, see Sec. 144) o The amount of DST depends on the
nature of the document and the value
Sec. 145 Cigars and Cigarettes (Rates of tax appearing upon its face.
as per RR 3-2006) o If the transaction is subsequently annulled or
(for rates, see sec. 145) invalidated, the tax may be refunded since
PENAL PROVISIONS: Same with Wines and the law presupposes a valid transaction.
Spirits
Q: Who are required to file the Documentary
Stamp Tax Declaration Return?
Tax on Petroleum Products a) In case of constructive affixture of
documentary stamps, by the persons
Sec. 148 Manufactured Oils and other Fuels making, signing, issuing, accepting or
(Rates of tax 1997 NIRC, as amended by RA transferring documents, instruments, loan
9337 [2005]) agreements and papers, acceptances,
(for rates, see sec. 148) assignments, sales and conveyances of the
obligation, right or property incident thereto
wherever the document is made, signed,
Tax on Miscellaneous Articles issued, accepted or transferred when the
obligation or right arises from Philippine
sources or the property is situated in the
On Automobiles (Sec. 148 of the NIRC, as Philippines at the same time such act is done
amended by RA 9224) or transaction had;
NATURE: Ad valorem tax on automobiles based
on manufacturers or importers selling price (net b) By metering machine user who imprints the
excise tax and VAT) Documentary Stamp Tax due on the taxable
documents; and
NET SELLING PRICE RATE
c) By Revenue Collection Agent, for remittance
Up to P600T 2% of sold loose documentary stamps.

P600T P1.1M P12,000 + 2% in NOTE: Wherever one party to the taxable


excess of P600T document enjoys exemption from the tax
imposed, the other party who is not exempt
P1.1M P2.1 M P112T + 40% in will be the one directly liable to file Documentary
excess of P1.1M Stamp Tax Declaration and pay the applicable
stamp tax.
over P2.1M P512T + 60% in
excess of P2.1M Q: What are the implications of failure to
stamp taxable documents?
NOTE: The untaxed document will:
imported cars NOT for sale, tax shall be o not be recorded,
based on total landed value + transaction o not be admitted or used in evidence in court
value + customs duty + other charges until the requisite stamp or stamps have been
cars used exclusively in Freeport zones affixed thereto and cancelled
are exempt o Not be notarized (No notary public or other
officer authorized to administer oaths will add
Sec. 150 Non Essential Goods his jurat or acknowledgment to any document
Sec. 151 Mineral Products subject to Documentary Stamp Tax unless
the proper documentary stamps are affixed
thereto and cancelled.

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TAX RATES APPLICABLE (1997 NIRC, as amended by RA 9243 [2004])


Document Taxable Unit Tax Due Per Unit Taxable Base
Debentures & Certificates of Indebtedness
DELETED by RA 9243
Original Issue of Shares of Stock with par P200.00 or fraction 1.00 Par value of shares of stocks
value thereof
P200.00 or fraction 1.00 -actual consideration for the
Original Issue of Shares of Stock without thereof issuance of shares of stocks
par value P200.00 or fraction 1.00 -Actual value represented by
Stock Dividends thereof each share
Sales, Agreements to Sell, Memoranda of P200.00 or fraction 0.75 Par value of such due-bills,
Sales, Deliveries or Transfer of Due-bills, thereof certificate of obligation or
Certificate of Obligation, or Shares or -25% of the DST stocks
Certificates of Stock paid upon the
-In the case of stocks without par value original issue of said
stock
Bonds, Debentures, Certificate of Stock or P200.00 or fraction 1.50 Par value of such bonds,
Indebtedness issued in foreign Countries thereof debentures or Certificate of
Stocks
Certificate of Profits or Interest in P200.00 or fraction 0.50 Face value of such certificate
Property or Accumulation thereof / memorandum
Bank Checks, Drafts, Certificate of On each Document 1.50
Deposit not bearing interest and other
Instruments
Original issue of debt instruments P200.00 or fraction 1.00 Issue price of any such debt
-For such debt instruments with terms of -proportional amount instrument
less than one year in accordance w/ the
ratio of its term in
number of days to
365 days
Bills of exchange (between points within P200.00 or fraction .30 Face value of the bill of
the Philippines) and drafts thereof exchange or draft
Bills of Exchange or order drawn in P200.00 or fraction .30 Face value of such bill of
foreign country but payable in the thereof exchange or order or the
Philippines equivalent of such value, if
expressed in foreign currency
Foreign Bills of Exchange and Letter of P200.00 or fraction .30 Face value of bill of exchange/
Credit thereof order or the equivalent of
such value if expressed in
foreign currency
Life Insurance Policies P200.00 or fraction .50 Amount of premium collected
thereof
Policies Of Insurance upon Property P4.00 premium or .50 Premium charged
fraction thereof
Fidelity Bonds and other Insurance P4.00 premium or .50 Premium charged
Policies fraction thereof
Policies of Annuities, Annuity or other P200.00 or fraction 0.50 Amount of premium or
instruments thereof installment payment of
contract price collected
Pre-Need Plans P200.00 or fraction .20 Premium or contribution
collected
Indemnity Bonds P4.00 or fraction .30 Premium charged
thereof
Certificates of Damage or otherwise and Each Certificate 15.00
Certificate or document issued by any
customs officers, marine surveyor, notary
public and certificate required by law or
by rules and regulations of a public office
Warehouse Receipts (except if value does Each Receipt 15.00
not exceed P200.00)
Jai-alai, Horse Race Tickets, lotto or P1.00 cost of ticket .10 Cost of the ticket
Other Authorized Number Games and
Additional P0.10 on
every P1.00 or
fraction thereof if
cost of ticket exceeds
P1.00
Bills of Lading or Receipts >P100 not > P1000 1.00
(except charter party) >P1000 10.00
Proxies Each Proxy 15.00
Powers of Attorney Each Document 5.00
Lease and other Hiring agreements of First 2,000 3.00
memorandum or contract for hire, use or For every P1,000 or 1.00
rent of any land or tenements or portions fractional part thereof
thereof in excess of the first
P2,000 for each year
of the term of the
contract or
agreement
Mortgages Pledges of lands, estate, or First 5,000 20.00 Amount Secured
property and Deeds of Trust On each P5,000 or 10.00 Amount Secured

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fractional part thereof


in excess of 5,000
Deed of Sale, instrument or writing and First 1,000 15.00 Consideration or Fair Market
Conveyances of Real Property (except For each additional 15.00 Value, whichever is higher (if
grants, patents or original certificate of P1,000 or fractional government is a party, basis
the government) part thereof in excess shall be the consideration)
of P1,000
Charter parties and Similar Instruments 1,000 tons and below P500.00 for the 1st 6 Tonnage and duration of the
months +P50/month contract
or fraction thereof in
excess of 6 mos
1,001 to 10,000 tons -P1,000 for the 1st 6
mos + P100/month
or fraction thereof in
excess of 6 mos
Over 10,000 tons -P1,500 for the 1st 6
mos + P150/month
or fraction thereof in
excess of 6 mos
Assignment or transfer of any mortgage, At the same rate as
lease or policy of insurance that imposed on the
Renewal of any agreement/ contract original instrument

When are shares considered issued? Upon person or party thereto, whether the
the acquisition of the stockholder of the attributes proceedings be civil or criminal; papers and
of ownership over the shares (the right to vote,
the right to receive dividends, the right to documents filed in courts by or for the
dispose, etc., notwithstanding that restrictions on national, provincial, city or municipal
the exercise of any of these rights may be governments; affidavits of poor persons for
imposed by the Corporations Articles and/or by- the purpose of proving poverty; statements
laws, the SEC, stockholder agreement, court and other compulsory information required of
order, etc.) which acquisition of such attributes of persons or corporations by the rules and
ownership shall be manifested by the acceptance regulations of the national, provincial, city or
by the Corporation of the stockholders municipal governments exclusively for
subscription to its shares of stock. The delivery of statistical purposes and which are wholly for
the certificates of stock to the stockholders is NOT the use of the bureau or office in which they
essential for the DST to accrue. [RR 13-2004] are filed, and not at the instance or for the
What is the basis of DST? The entire shares use or benefit of the person filing them;
of stock subscribed are considered issued for certified copies and other certificates placed
purposes of DST, even if not fully paid. [RR 13- upon documents, instruments and papers for
2004] the national, provincial, city or municipal
governments, made at the instance and for
When is a sale or exchange of shares the sole use of some other branch of the
taxable? There must be actual or constructive national, provincial, city or municipal
transfer of beneficial ownership of shares of stock governments; and certificates of the
from one person to another. This may be assessed value of lands, not exceeding Two
manifested by: hundred pesos (P200) in value assessed,
a) the clear exercise of attributes of ownership furnished by the provincial, city or municipal
over such stocks by the transferee, or Treasurer to applicants for registration of title
b) by an actual entry of a change in the name to land.
appearing in the certificate of stock or in the
stock and transfer book of the corporation or c. Borrowing and lending of securities executed
by any entry indicating transfer of beneficial under the Securities Borrowing and lending
ownership in any form of registry including Program of a registered exchange, or in
those of a duly authorized scripless registry, accordance with regulations prescribed by the
such as those maintained for or by the appropriate regulatory authority: Provided,
Philippine Stock Exchange. [RR 13-2004] however, That any borrowing or lending of
securities agreement as contemplated hereof
Documents and Papers Not Subject to shall be duly covered by a master securities
Stamp Tax BAD- STAF- LIMB-PC40 borrowing and lending agreement acceptable
to the appropriate regulatory authority, and
a. Policies of insurance or annuities made or which agreements is duly registered and
granted by a fraternal or beneficiary society, approved by the Bureau of Internal Revenue.
order, association or cooperative company (BIR).
conducted solely by the members thereof for
their benefit. d. Loan agreements the aggregate of which
b. Certificates of oaths administered to any does not exceed Two hundred fifty thousand
government official in his official capacity or pesos (P250,000), or any such amount as
of acknowledgment by any government may be determined by he Secretary of
official in the performance of his official Finance, executed by an individual for his
duties, written appearance in any court by purchase on installment for his personal use
any government official, in his official or that of his family and not for business or
capacity; certificates of the administration of resale, barter or hire of a house, lot, motor
oaths to any person as to the authenticity of vehicle, appliance or furniture: Provided,
any paper required to be filed in court by any however, That the amount to be set by the
Secretary of Finance shall be in accordance

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with a relevant price index but not to exceed city where the taxpayer has his residence or
ten percent (10%) of the current amount and principal place of business
shall remain in force at least for three (3)
years.
EXCEPTION:
e. Sale, barter or exchange of Shares of stock Tax may be paid thru purchase and actual
listed and traded through the local stock affixture or imprinting the stamp thru
exchange for a period of five (5) years from documentary stamp metering machine as
the effectivity of this Act. prescribed by the pertinent rules and regulations.

f. Assignment or transfer of any mortgage, WHEN:


lease or policy of insurance, or the renewal or 5 days after close of the month when the taxable
continuance of any agreement, contract, document was made, signed issued, transferred
charter, or any evidence of obligation or or accepted. (RR 6-01) [Note: 10-day rule
indebtedness, if there is no change in the provided in Sec. 200(B) of the NIRC no longer
maturity date or remaining period of coverage applicable)
from that of the original instrument.
Applicability of DST Law on Electronic
g. Fixed income and other securities Traded in Documents:
the secondary market or through an
exchange. The DST rates shall be applicable on all
documents not otherwise expressly exempted by
h. Derivatives: Provided, That for purposes of the law, notwithstanding that they are in
this exemption, repurchase agreements and electronic form. As provided for in RA 8792
reverse repurchase agreements shall be (Electronic Commerce Act), electronic documents
treated similarly as derivatives. are the functional equivalent of a written
document under existing laws, and the issuance
i. Interbranch or interdepartmental Advances thereof is therefore tantamount to the issuance
within the same legal entity. of a written document, and therefore subject to
DST. (RR 13-04, Sec. 10)
j. All Forebearances arising from sales or
service contracts including credit card and
trade receivables: Provided, That the
exemption be limited to those executed by
the seller or service provider itself.

k. Bank deposit accounts without a fixed term or


Maturity.

l. All contracts, deeds, documents and


transactions related to the conduct of
business of the Banko Sentral ng Pilipinas.

m. Transfer of property pursuant to Section


40(c)(2) of the National Internal Revenue
Code of 1997, as amended.

n. 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
quasibanks.

One-Transaction Rule:
Where only one instrument was prepared, made
signed and executed to cover a loan
agreement/promissory note, pledge/mortgage,
the documentary stamp tax shall be paid and
computed on the full amount of the loan or credit
granted. In this regard, the instrument shall be
treated as covering only one taxable transaction,
subject to the higher documentary stamp tax.
(RR 9-94, Sec. 8)

Payment of Documentary Stamp Tax


(Sec 200)
WHERE: filed and paid at
authorized agent bank within territorial
jurisdiction of Revenue District Officer which
had jurisdiction over residence or principal
place of business of taxpayer
Revenue District Officer, collection agent,
duly authorized treasurer of municipality or

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V. REMEDIES performing any act tending to


obstruct the proceedings for the
collection of the tax for the past or
STAGES IN BIR AUDIT EXAMINATION
current quarter or year or to render
(Framework of discussion)
the same totally or partially
ineffective unless such proceedings
are begun immediately
Audit Stage/Issuance of Letter of Authority

4. Prescribe REAL PROPERTY VALUES
Pre-Assessment Stage
(6E) Dividing the Philippines into

different zones or areas, and
Formal Assessment Stage
determining the FMV of real properties

in each zone or area, upon consultation
Collection Letter/Warrants
with competent appraisers from private

and public sectors. For the purpose of
Compromise and Abatement
computing any internal revenue tax, the
value of the property shall be
WHICHEVER IS HIGHER OF:
I. AUDIT STAGE (Issuance of Letter of The fair market value as determined
Authority) by the Commissioner, or
The fair market value as shown in
A. Powers of the Commissioner Relative the schedule of values of the
to the Audit Process (PATRIA-CED) provincial and city assessors
1. EXAMINE RETURNS and DETERMINE TAX 5. Inquire into BANK DEPOSIT ACCOUNTS
DUE (5) Authorizing the examination (6F) Notwithstanding any contrary
of any taxpayer and the assessment of provision of R.A. 1405 (Bank Secrecy
the correct amount of tax, WON a return Law) and other general or special laws,
has been filed by such taxpayer. the Commissioner is authorized to
inquire into bank deposits of:
NOTE: Any return filed with the A decedent to determine his gross
Commissioner shall not be withdrawn, estate, and
BUT the taxpayer may MODIFY, CHANGE Any taxpayer who has filed an
or AMEND such return within three (3) application for compromise of tax
years from the date of filing, provided liability by reason of financial
that no notice for audit or investigation of incapacity the taxpayer must
such return has been actually served on waive in writing his privilege under
the taxpayer. R.A. 1405 and other relevant laws,
before the Commissioner may
2. CONDUCT INVENTORY-TAKING, inquire into his bank accounts
SURVEILLANCE and to prescribe
presumptive gross sales and receipts 6. Accredit and register TAX AGENTS
(6C) (6G) Accrediting and registering tax
Inventory-taking at any time agents (may be individuals or general
during the taxable year, for the professional partnerships) based on the
purpose of determining the correct following criteria:
tax liabilities. Professional competence
Surveillance done if there is Integrity
reason to believe that the taxpayer Moral fitness
is not declaring his correct income,
sales or receipts for tax purposes. 7. Prescribe additional PROCEDURAL OR
Prescribe presumptive gross DOCUMENTARY REQUIREMENTS (6H)
sales and receipts if: in relation to the manner of
It is found that the taxpayer has compliance of any requirement in
failed to issue receipts and connection with the submission or
invoices, or preparation of financial statements
When there is reason to believe accompanying the tax returns.
that the books of accounts or
other records do not correctly 8. ACCESS LETTER (5B) Obtaining on a
reflect the declarations made by regular basis, from any person OTHER
the taxpayer THAN the person whose tax liability
is subject to audit or investigation,
3. Terminate TAXABLE PERIOD (6D) or from any office or officer of the
Terminating taxable period and ordering national and local governments,
the immediate payment of the tax for government agencies or
the terminated period and any instrumentalities, including BSP and
remaining tax that is unpaid, when the GOCCs, any information such as, but
taxpayer is: not limited to, costs and volumes of
retiring from business subject to production, receipts or sales and
tax, or gross incomes of taxpayers, and the
intending to leave the Philippines or names addresses, and financial
to remove his property therefrom or statements of corporations, mutual fund
to hide or conceal his property companies, insurance companies etc.

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NOTE: This is known as the Third Party Policy cases under audit by the special teams
Information Rule. in national offices

9. INTERPRET TAX LAWS and to DECIDE


TAX CASES (4) shall be under the II. PRE-ASSESSMENT STAGE
exclusive and original jurisdiction of the
Commissioner, subject to review by the A. Step 1: Issuance of Notice of
Secretary of Finance. Informal Conference

RMC 44-01 What is a notice of informal


VALIDITY: A ruling by the BIR conference?
Commissioner shall be presumed VALID A written notice informing a taxpayer
unless modified, reversed or superseded by that the findings of the audit conducted
the Secretary of Finance. on his books of accounts and
REVIEW: A taxpayer who receives an accounting records indicate that
adverse ruling from the Commissioner may, additional taxes or deficiency
within thirty (30) days from the date of assessments have to be paid.
receipt of such ruling, seek its review by the The taxpayer shall then have fifteen
Secretary of Finance, either by himself/itself (15) days from the date of his receipt of
or though his/its duly authorized the Notice for Informal Conference to
representative. explain his side.
EFFECT OF REVIEW: A reversal or
modification of the BIR ruling shall B. Step 2: Informal Conference
terminate its effectivity upon the receipt by
the taxpayer or the BIR of written notice of What matters are taken up during
reversal or modification, whichever came the informal conference?
earlier. 1. Discussion on the merits of the
NOTE: DOF Order 7-02 added that the assessment
Secretary of Finance may review the rulings 2. Attempt of taxpayer to convince the
MOTU PROPRIO. examiner to conduct a re-
investigation and/or re-examination
Section 246, NIRC: Non-retroactivity of 3. Evaluate if submission of the waiver
Rulings of the statute of limitations is
Any revocation, modification or reversal ofany necessary because evaluation
of the rulings or circulars promulgated by the may extend beyond three years
Commissioner shall not be given retroactive 4. Taxpayer to advise the examiner if
application if the revocation, modification or position paper will be submitted
reversal will be prejudicial to the taxpayers,
What is a jeopardy assessment?
EXCEPTION: A tax assessment made by an
a) Where the taxpayer deliberately misstates authorized Revenue Officer without the
or omits material facts from his return or benefit of complete or partial audit, in
any document required of him the BIR; light of the ROs belief that the
b) Where the facts subsequently gathered by assessment and collection of the
the BIR are materially different from the deficiency tax will be jeopardized by
facts on which the ruling is based; or delay caused by the taxpayers failure
c) Where the taxpayer acted in bad faith. to:
i. Comply with audit and
investigation requirements to
B. Letter of Authority present his books of accounts
and/or pertinent records
Q: What is a letter of authority? ii. Substantiate all or any of the
An official document that empowers a deductions, exemptions or credits
Revenue Officer to examine and scrutinize a claimed in his return.
taxpayers books of accounts and other It is usually issued when statutory
accounting records, in order to determine the prescriptive periods for the assessment
taxpayers correct internal revenue tax or collection of taxes are about to lapse
liabilities. due principally to the taxpayers fault.

Q: Who issues the Letter of Authority? C. Step 3: Issuance of Pre-


Commissioner for those units reporting Assessment Notice
directly to him
Regional directors for taxpayers covered by What is a pre-assessment notice
his particular region. If the Commissioner has (PAN)?
already issued an LA to investigate a A communication issued by the Regional
particular taxpayer, the Regional director shall Assessment Division or any other concerned
desist from issuing another LA for the same BIR office, informing a taxpayer who has
taxpayer. been audited of the findings of the Revenue
Officer, following the review of these
Q: What are the cases which need not be findings.
covered by a valid LA? The assessment shall be:
Cases involving civil/criminal tax fraud which in writing, and
fall under the jurisdiction of the tax fraud
division of the Enforcement Services, and

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should inform the taxpayer of the law A follow-up letter/demand letter for
and the facts on which the assessment is payment of taxes is considered a notice
made; of assessment. [REPUBLIC vs. CA
otherwise, the assessment shall be void. and NIELSON & CO. (April 30,
(Sec. 228, NIRC) 1987)]
Where the taxpayer is appealing on the
If the taxpayer disagrees with the findings ground that the assessment is
in the PAN, he has fifteen (15) days from erroneous, it is incumbent upon him to
his receipt of the PAN to file a written reply prove what is the correct and just
contesting the proposed assessment. liability by a full and fair disclosure of
all pertinent data. [Bonifacio Sy Po v.
PAN no longer required when : CTA]

(a) The finding for any deficiency tax is the Within what time may the
result of MATHEMATICAL ERROR in the Commissioner issue a notice of
computation of the tax as appearing on assessment?
the face of the return; or
(b) A DISCREPANCY has been determined If the taxpayer filed a return
between the TAX WITHHELD and the internal revenue taxes shall be
amount ACTUALLY REMITTED by the assessed within three years after the
withholding agent; or last day prescribed by law for the filing
(c) A taxpayer who opted to claim a refund or of the return. If a return is filed
tax credit of excess creditable withholding beyond the period prescribed by law,
tax for a taxable period was determined the three-year period shall be counted
to have carried over and automatically from the day the return was filed. A
applied the same amount claimed against return filed before the last day
the estimated tax liabilities for the taxable prescribed by law for filing shall be
quarter or quarters of the succeeding considered as filed on the last day.
taxable year; OR (Sec. 203, NIRC)
(d) The EXCISE TAX due on excisable articles NOTE: In short, the period for
has not been paid; or assessment is within three years from
(e) An article locally purchased or imported the time the return is filed or from the
by an exempt person, such as, but not time the return is due, WHICHEVER IS
limited to, vehicles, capital equipment, LATER.
machineries and spare parts, has been
sold, traded or transferred to a non- If the taxpayer DID NOT file a
exempt person. (Sec. 228, NIRC) return internal revenue taxes shall
be assessed within ten years after
the discovery of the failure to file the
III. FORMAL ASSESSMENT STAGE return (Sec. 222a, NIRC)

What is a Notice of Assessment (Final If the taxpayer filed a false or


Assessment Notice FAN or Formal fraudulent return with intent to
Letter of Demand)? evade tax internal revenue taxes
A declaration of deficiency taxes issued to a shall be assessed within ten years
taxpayer who fails to respond to a pre- after the discovery of the falsity or
assessment notice within the prescribed fraud (Sec. 222a, NIRC)
period of time, or whose reply to the PAN
was found to be without merit. This is o Fraud or falsity on the return with intent
commonly known as the Final Assessment to evade payment of tax is a question of
Notice (FAN). fact and the circumstances constituting
fraud must be alleged and proved in the
An assessment contains not only a court below. The finding of the trial court
computation of tax liabilities, but also a as to its existence and non-existence is
demand for payment within a prescribed final and cannot be reviewed by the
period. The ultimate purpose of assessment Supreme Court unless clearly shown to be
is to ascertain the amount that each erroneous. [CIR V. Ayala Securities
taxpayer is to pay. An assessment is a (1976)]
notice to the effect that the amount therein
stated is due as tax and a demand for o Q: Are there tax returns which are
payment thereof. (Tupaz v. Ulep, 1999) false but not fraudulent? YES. There
must be a distinction between false
The formal letter of demand shall be issued returns (due to mistakes, carelessness or
by the Commissioner or his duly authorized ignorance) and fraudulent returns (with
representative. The letter of demand intent to evade taxes). The fraud
calling for the payment of the taxpayers contemplated by law is actual and not
deficiency taxes shall state the FACTS, the constructive, and must amount to
LAW, RULES and REGULATIONS or intentional wrongdoing with the sole
JURISPRUDENCE on which the assessment object of avoiding the tax. [Aznar v. CTA
is based, OTHERWISE, the formal letter of (1974)]
demand or assessment notice shall be WAIVER: The taxpayer and the
VOID. (RR 12-99) Commissioner may agree in writing,
before the expiration of the time
NOTE:

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TAXATION LAW 2

prescribed in Sec. 203, to extend the otherwise the assessment shall become
period of assessment (Sec. 222b, NIRC) final. (228)
The waiver of prescription must be
executed properly per RMO 20-90, What are the characteristics of a valid
otherwise, invalid and results to protest?
prescription of the right to A protest is considered validly made if it
assess/collect. [PHIL JOURNALISTS satisfies the following conditions:
INC. v. CIR (December 16, 2004)]
Requirements under RMO 20-90: 1) it is made in writing, and addressed
1. definite agreed date, to the Commissioner of Internal
2. date of acceptance indicated, Revenue
and 2) it contains the information the
3. taxpayer must be furnished with following information (from RR 12-85):
a copy of the waiver. name of the taxpayer and address
for the immediate past three
Q: What is the nature of prescription on taxable years
the right to assess? nature of request whether
The law on prescription, being a remedial reinvestigation or reconsideration
measure, should be LIBERALLY CONSTRUED specifying newly-discovered
in order to afford protection. As a corollary, evidence he intends to present if it
the exceptions to the law on prescription is a request for reinvestigation
should be clearly construed. Hence, the taxable periods covered
negligence or oversight on the part of the assessment number
BIR cannot prejudice taxpayers, considering date of receipt of assessment notice
that the prescriptive period was precisely or letter of demand
intended to give them peace of mind. [CIR itemized statement of the findings
v. Goodrich Philippines (1999)] to which the taxpayer agrees as a
basis for computing the tax due,
RMC No. 48-90 Counting of the which amount should be paid
Prescriptive Periods (April 23, immediately upon the filing of the
1990) protest. For this purpose, the
The 3-year prescriptive period expires protest shall not be deemed validly
on the 1,095th day, notwithstanding the filed unless payment of the agreed
fact that within the period, there is a portion of the tax is paid first
leap year which is of 366 days. This the itemized schedule of the
principle applies to ALL adjustments with which the
prescriptive periods under the taxpayer does not agree
Code. (applied in ASIABANK v. CIR, a statement of facts and/or law in
CTA Case No.6095, Oct. 9, 2001) support of the protest.
When is an assessment deemed made? 3) It states the FACTS, applicable LAW,
An assessment is deemed made when the RULES and REGULATIONS or
demand letter or notice is RELEASED, JURISPRUDENCE on which his protest is
MAILED OR SENT by the BIR to the based, otherwise the protest shall be
taxpayer. The law does not require that the considered void and without force and
taxpayer receive the notice within the effect.
three-year or ten-year period. [CIR vs. 4) It is filed within the period prescribed by
BAUTISTA (May 27, 1959)] law

If the taxpayer does not agree with the What should the taxpayer do if his
assessment, what is his REMEDY? protest is denied or is not acted upon
o To contest an assessment by filing a by the Commissioner?
letter of PROTEST stating in detail his
reasons for contesting the assessment. Situation 1: If the Commissioner
o When no protest is seasonably made by DENIES THE PROTEST filed by the
the taxpayer, the assessment shall taxpayer the taxpayer may appeal to
become final and unappealable, and thus the Court of Tax Appeals within thirty
the tax shall be collectible. days from receipt of the decision
denying the protest (Sec. 228, NIRC)
Q: What is the nature of an assessment
when it is final and executory? Where there is a request for
It is in the nature of an enforcement reconsideration, final demand letter
judgment such that no inquiry can be made from BIR is considered a decision on
thereon on the merits of the original case. a disputed or protested assessment
which is therefore appealable to the
Within what time may the taxpayer CTA. [CIR v. ISABELA CULTURAL
protest the assessment? CORP. (July 11, 2001)]
o Within thirty (30) days by filing a
request for reconsideration or Situation 2: If the Commissioner did
reinvestigation from receipt of the NOT ACT UPON THE PROTEST within
assessment. one hundred and eighty days from
o Within sixty (60) days from filing of the time the documents were
the protest, all relevant supporting submitted the taxpayer may either:
documents must be submitted,

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TAXATION LAW 2

o Appeal to the CTA within thirty days is final, otherwise period to appeal will not
from the lapse of the 180-day commence to run. [ADVERTISING
period OR ASSOCIATES vs. CA (December 26,
o Wait until the Commissioner decides 1984)]
before he elevates the case to the NOTE: A Division of the CTA shall hear
CTA the appeal. (Sec. 11, RA 1125 as
amended by RA 9282 [2004])
NOTE: If Situation 1 occurs and the
taxpayer does not file a protest within the If the taxpayer is not satisfied with the
prescribed period, the assessment becomes CTA Divisions ruling, what is his
FINAL, EXECUTORY and DEMANDABLE. But REMEDY?
if the Situation 2 occurs and the taxpayer FIRST, he may file a motion for
does not file a protest within the prescribed reconsideration before the same
period, the assessment DOES NOT become Division of the CTA within fifteen (15)
FINAL, EXECUTORY and DEMANDABLE. In days from notice thereof. (Sec. 11, RA
cases of inaction by the Commissioner, 1125 as amended by RA 9282 [2004])
Section 228 of the Tax Code merely gave THEN, a party adversely affected by a
the taxpayer an OPTION: first, he may resolution of a Division of the CTA on a
appeal to the Court of Tax Appeals within motion for reconsideration may file a
thirty days from the lapse of the 180-day petition for review with the CTA en
period, or second, he may wait until the banc. (Sec. 18, RA 1125 as amended
Commissioner decides on his protest before by RA 9282 [2004])
he elevates his case. [LASCONA LAND Co
vs. CIR (January 4, 2000)] If the taxpayer is not satisfied with the
decision of the CTA en banc, what is his
When does the 30-day period to appeal REMEDY?
in Situation 1 commence to run? A party adversely affected by a decision or
The 30-day period starts when the taxpayer ruling of the CTA en banc may file with the
receives the decision of the Commissioner Supreme Court a verified petition for review
denying the protest. The decision of the on certiorari pursuant to Rule 45 of the 1997
Commissioner must categorically state that Rules of Court. (Sec. 19, RA 1125 as
his action on the disputed assessment amended by RA 9282 [2004]) .

EFFECTS OF RA 9282 ON THE CTAS JURISDICTION:


The CTA shall exercise

A. EXCLUSIVE APPELLATE JURISDICTION to review by appeal:


Decisions of the Commissioner 1. disputed assessments,
of Internal Revenue 2. refunds of internal revenue taxes, fees or other charges,
3. penalties in relation thereto, or
4. other matters arising under the National Internal Revenue
or other laws administered by the Bureau of Internal
Revenue;
Inaction by the Commissioner of 5. disputed assessments,
Internal Revenue 6. refunds of internal revenue taxes, fees or other charges,
7. penalties in relations thereto, or
8. other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue
Code provides a specific period of action, in which case
the inaction shall be deemed a denial;
Decisions, orders or resolutions local tax cases originally decided or resolved by them in the
of the Regional Trial Courts exercise of their
original or appellate jurisdiction;
Decisions of the Commissioner liability for customs duties, fees or other money charges,
of Customs seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
Decisions of the Central Board exercise of its appellate jurisdiction over cases involving the
of Assessment Appeals assessment and taxation of real property originally decided by
the provincial or city board of assessment appeals;
Decisions of the Secretary of customs cases elevated to him automatically for review from
Finance decisions of the Commissioner of Customs which are adverse to
the Government under Section 2315 of the Tariff and Customs
Code;
Decisions of the Secretary of involving dumping and countervailing duties under Section
Trade and Industry 301 and 302, respectively, of the Tariff and Customs Code,
(nonagricultural product, and
commodity or article)
Secretary of Agriculture safeguard measures under Republic Act No. 8800, where
(agricultural product, either party may appeal the decision to impose or not to
commodity or article) impose said duties.

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TAXATION LAW 2

B. Jurisdiction over cases involving CRIMINAL


OFFENSES: b. Over petitions for review of the
judgments, resolutions or orders of the
1. EXCLUSIVE ORIGINAL JURISDICTION Regional Trial Courts in the Exercise of
over all criminal offenses arising from their appellate jurisdiction over tax
violations of the National Internal Revenue collection cases originally decided by the
Code or Tariff and Customs Code and other Metropolitan Trial Courts, Municipal Trial
laws administered by the Bureau of Courts and Municipal Circuit Trial Courts,
Internal Revenue or the Bureau of in their respective jurisdiction.
Customs:
EXCEPTION: That offenses or felonies
where the principal amount of taxes IV. COLLECTION LETTER/WARRANTS
and fees, exclusive of charges and
penalties, claimed is less than One A. Collection of Deficiency Taxes
million pesos (P1,000,000.00) or
where there is no specified amount Within what time period must
claimed shall be tried by the regular collection of internal revenue taxes
Courts and the jurisdiction of the be made?
CTA shall be appellate.
NOTE: Any provision of law or the Rules of Return filed was No return filed, or
Court to the contrary notwithstanding, the NOT false or the return was false
criminal action and the corresponding civil fraudulent or fraudulent.
action for the recovery of civil liability for Collection with PRIOR Collection with PRIOR
taxes and penalties shall at all times be ASSESSMENT - ASSESSMENT - should
simultaneously instituted with, and jointly should be made be made within five
determined in the same proceeding by the within three years years from the date
CTA, the filing of the criminal action being from the date of of assessment (based
deemed to necessarily carry with it the assessment of the on 222c)
filing of the civil action, and no right to tax.
reserve the filling of such civil action by distraint or by distraint or levy,
separately from the criminal action will be levy, or by judicial or by judicial
recognized. proceedings proceedings
Collection WITHOUT Collection WITHOUT
2. EXCLUSIVE APPELLATE JURISDICTION PRIOR ASSESSMENT PRIOR ASSESSMENT
in criminal offenses: should be made should be made
within three years within ten years
a) Over appeals from the judgments, from the date of filing after the discovery of
resolutions or orders of the Regional Trial of return or date the falsity, fraud or
Courts in tax cases originally decided by return is due, omission to file a
them, in their respected territorial whichever is LATER return.
jurisdiction. (based on 203)
by judicial by judicial
b) Over petitions for review of the judgments, proceedings proceedings
resolutions or orders of the Regional Trial
Courts in the exercise of their appellate If tax was assessed within the different
jurisdiction over tax cases originally period agreed upon by the Commissioner
decided by the Metropolitan Trial Courts, and the taxpayer, it may be collected by
Municipal Trial Courts and Municipal Circuit distraint or levy or by a proceeding in
Trial Courts in their respective jurisdiction. court within the period agreed upon in
writing before the expiration of the 5-yr
C. Jurisdiction over TAX COLLECTION CASES: period. (Sec. 222d, NIRC)

1. EXCLUSIVE ORIGINAL JURISDICTION When shall the period for assessment or


in tax collection cases involving final and collection of taxes be suspended? (223)
executory assessments for taxes, fees, The running of the statute of limitations provided
charges and penalties. in 203 and 222 shall be suspended for the
EXCEPTION: Collection cases where period: (P-CORN)
the principal amount of taxes and
fees, exclusive of charges and 1. During which the commissioner is
penalties, claimed is less than One Prohibited from making the assessment
million pesos (P1,000,000.00) or beginning distraint or levy or a
shall be tried by the proper proceeding in court, and for sixty (60)
Municipal Trial Court, Metropolitan days thereafter
Trial Court and Regional Trial
Court. 2. When the taxpayer requests for a
Reinvestigation which is granted by the
2. EXCLUSIVE APPELLATE Commissioner
JURISDICTION in tax collection cases:
CIR vs. WYETH (September 30, 1991)
a. Over appeals from the judgments, The statutory period of limitation for
resolutions or orders of the Regional Trial collection may be interrupted when, by
Courts in tax collection cases originally the taxpayers repeated requests, the
decided by them, in their respective government has been, persuaded to
territorial jurisdiction. postpone collection to make him feel the

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TAXATION LAW 2

demand was not unreasonable or that no burden of proof is on the taxpayer claiming
harassment or injustice was meant by the refund that he is entitled to the same.
government. [CIR v. Tokyo Shipping (1995)]

RR 12-85 (Difference between Q: When are there erroneously paid, or


Reconsideration & illegally assessed or collected taxes?
Reinvestigation) Taxes are erroneously paid when a taxpayer
RECONSIDERATION refers to a pays under a mistake of fact, such as, he is
plea of re-evaluation of the not aware of an existing exemption in his
assessment on the basis of existing favor at the time that payment is made.
records WITHOUT NEED OF Taxes are illegally collected when payments
ADDITIONAL EVIDENCE. It may are made under duress.
involve both question of fact or of law
or both Q: What is the difference between a tax
credit and refund?
REINVESTIGATION refers to a REFUND takes place when there is actual
plea of re-evaluation of an reimbursement. TAX CREDIT takes place
assessment on the basis of NEWLY- upon the issuance of a tax certificate or tax
DISCOVERED EVIDENCE that a credit memo, which can be applied against
taxpayer intends to present in the any sum that may be due and collected from
reinvestigation. It may also involve a the taxpayer.
question of fact or law or both.
Q: Is payment under protest necessary
PHIL GLOBAL COMMUNICATION in claims for refund?
vs. CIR (October 31, 2006) A re- No. Section 229 of the NIRC is specific on this
evaluation of existing records which point when it provides that a suit or
results from a request for proceeding for tax refund may be maintained
reconsideration does not toll the whether or not such tax, penalty or sum has
running of the prescription period for been paid under protest or duress.
the collection of an assessed tax.
What is the procedure for obtaining a
3. When the taxpayer Cannot be located in refund or tax credit?
the Address given by him in the return First, the taxpayer must file a claim for
filed upon which a tax is being assessed refund before the Commissioner within two
or collected, but if the taxpayer informs years from the date of payment. (Sec. 229,
the Commissioner of any change in NIRC) [GENERAL RULE]
address, the running of the statute of
limitations shall not be suspended EXCEPTIONS to the rule requiring a
claim for refund: When on the face
4. When the warrant of distraint or levy is of the return upon which payment was
duly served upon the taxpayer, his made, such payment appears clearly to
authorized representative, or a member have been erroneously paid (e.g.
of his household with sufficient discretion, mathematical errors), the Commissioner
and No Property is located may refund or credit the tax even without
a written claim therefor.
5. When the taxpayer is Out of the NOTE: A return filed showing an
Philippines overpayment shall be considered as a
written claim for credit or refund.
(Sec. 204C, NIRC)
B. Remedies of the taxpayer against a
tax erroneously or illegally paid But how shall the date of payment be
determined?
When may taxes be refunded or
credited? i. If the income tax is withheld at
Taxes may be refunded or credited in the source the taxpayer is deemed to
following cases: have paid his tax liability at the end of
Taxes erroneously or illegally the taxable year.
assessed or collected
Penalties imposed without authority GIBBS vs. COMMISSIONER (November
Value of internal revenue stamps 29, 1965) A taxpayer whose income is
when they are returned in good withheld at the source will be deemed to
condition by the purchaser have paid his tax liability when the same
Unused stamps that have been falls due at the end of the tax year. It is
rendered unfit for use (Commissioner from this latter date then, or when the tax
may redeem, change or refund their liability falls due, that the 2-year
value upon proof of destruction) prescriptive period starts to run with
Any sum alleged to have been respect to payments effected thru the
excessively or in any manner withholding tax system.
wrongfully collected
ii. If the income is paid on a
Q: What is the nature of a claim for quarterly basis the two-year period
refund? is counted from the time of filing the
It partakes of the nature of an exemption and final adjustment return.
is strictly construed against the claimant. The

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CIR vs. TMX SALES (January 16, 1992) including all expenses, is
When a tax is paid in installments, the collected. (Sec. 217, NIRC)
prescriptive period should be counted HOWEVER, the remedies of
from the date of final payment or the distraint and levy shall not be
last installment. This rule proceeds from available where the amount of
the theory that there is no payment until the tax involved is not more than
the entire tax liability is completely paid. One hundred pesos.
Installments should be treated as
advances or portions of the annual tax o Q: When may the government
due. avail of the remedies of
collection? When the assessment
What should the taxpayer do if his claim shall have become final, executory
for refund is denied or is not acted upon and demandable.
by the Commissioner?
NOTE: A court MAY NOT GRANT AN
o SITUATION 1: The Commissioner INJUNCTION to restrain the collection of any
denies the claim for refund the national internal revenue tax, fee or charge
taxpayer may appeal to the CTA within imposed under the NIRC. (Sec. 218, NIRC)
thirty (30) days from the receipt of the
Commissioners decision AND within two EXCEPTION: Under Section 11 of RA
years from the date of payment. (Note 1125, as amended by RA 9282, suspension
that 229 states that no such suit or is allowed when the following conditions
proceeding shall be filed after the concur:
expiration of the 2-year period regardless
of any supervening cause that may arise 1. it is an appeal to the CTA from a
after payment) decision of the Commissioner of
Internal Revenue or Commissioner of
o SITUATION 2: The Commissioner does Customs or the Regional Trial Court,
not act on the claim, and the two-year provincial, city or municipal treasurer
period is about to lapse the taxpayer or the Secretary of Finance, the
must file a claim before the CTA before Secretary of Trade and Industry and
the 2-year period lapses, otherwise he Secretary of Agriculture, as the case
may no longer file a claim before the CTA in may be, and
case the Commissioner renders an adverse
decision beyond the 2-year period. 2. in the opinion of the Court of Tax
Appeals, the collection may jeopardize
NOTE HOWEVER! Is the two-year the interest of the Government and/or
period jurisdictional with respect to the taxpayer.
the CTA?
NO. Even if the two-year period had Q: In case of suspension, what may the
already lapsed, the same is not a taxpayer be required to do?
jurisdictional defect which, upon grounds Either to deposit the amount claimed or to
of justice and equity, may be set aside by file a surety bond for not more than double
the court. [(COMMISSIONER vs. the amount with the Court.
PHILAMLIFE (May 29, 1995)]
Q: What are tax liens? (Sec. 219, NIRC)
If the Commissioner grants the refund, When a taxpayer neglects or refuses to pay
within what time must it be claimed? his internal revenue tax liability after
Within five years from the date such demand, the amount so demanded shall be a
warrant or check was mailed or delivered, lien in favor of the government from the time
otherwise it shall be forfeited in favor of the the assessment was made by the CIR until
government and the amount thereof shall paid with interest, penalties, and costs that
revert to the general fund. may accrue in addition thereto upon ALL
PROPERTY AND RIGHTS TO PROPERTY
What can be done with a Tax Credit BELONGING to the taxpayer.
Certificate?
Tax credit certificates (TCCs) can be applied HOWEVER, the lien shall not be valid
against all internal revenue taxes, excluding against any mortgagee, purchaser or
withholding tax. TCCs which remain judgment creditor until NOTICE of such lien
unutilized after five years from the date of shall be filed by the Commissioner in the
issue shall be considered as invalid, unless Office of the Register of Deeds of the
revalidated. If not revalidated, the amount province or city where the property of the
covered by the TCC shall revert to the taxpayer is situated or located.
general fund
o Q: What is the difference between
C. Remedies of the State for Collection seizure under forfeiture and a seizure to
of Taxes enforce a tax lien? In the former all the
GENERALLY, the remedies of distraint, proceeds derived from the sale of the thing
levy or civil or criminal action may be forfeited are turned over to the Collector of
pursued SIMULTANEOUSLY. (Sec. 205, Internal Revenue; in the latter, the residue of
NIRC) such proceeds over and above what is
Remedies of distraint and levy required to pay the tax sought to be realized,
may be repeated if necessary including expenses, is returned to the owner
until the full amount due, of the property. [BPI v. Trinidad]

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The person owing the debts shall then pay the


Commissioner instead of his creditor (taxpayer)
ADMINISTRATIVE REMEDIES on the strength of such warrant.

1. Distraint-involves the SEIZURE by the Bank accounts by serving a warrant of


Government of PERSONAL PROPERTY, garnishment upon the taxpayer AND upon the
tangible or intangible, to enforce the president, manager, treasurer or other
payment of taxes; followed by the PUBLIC responsible officer of the bank. The bank shall
SALE of such property, if the taxpayer fails to then turn over to the Commissioner so much of
pay the taxes voluntarily. the bank accounts as may be sufficient to satisfy
the claim of the Government. (NOTE: distraint
What are the kinds of distraint? of bank accounts is called GARNISHMENT)
a. Actual Distraint resorted to when there
is ACTUAL delinquency in tax payment What is the remedy of the taxpayer once the
Commissioner or other proper officer issues
b. Constructive Distraint is a preventive the warrant of distraint?
remedy which aims at forestalling a The taxpayer may request that the warrant be
possible dissipation of the taxpayers lifted. The commissioner may, in his discretion,
assets when delinquency sets in. Hence, allow the lifting of the order of distraint. He may
no actual delinquency in payment is ask for a bond as a condition for the cancellation
necessary. of the warrant. (Sec. 207, NIRC)

How is ACTUAL distraint of personal If the taxpayer does not ask for the lifting of
property effected? the warrant, what shall be done with the
seized properties?
Upon failure to pay the delinquent tax at the The properties will be SOLD in a PUBLIC SALE,
time required, the proper officer shall SEIZE and the procedure shall be as follows:
and DISTRAINT any GOODS, CHATTELS, or
EFFECTS, and the PERSONAL PROPERTY, (1) The Revenue District Officer or his duly
including STOCKS and other SECURITIES, authorized representative (not the officer who
DEBTS, CREDITS, BANK ACCOUNTS and served the warrant), shall cause a notification
INTERESTS in and RIGHTS to personal of the public sale to be posted in not less than
property of the taxpayer in sufficient quantity two (2) public places in the municipality or
to satisfy the tax, expenses of distraint and city (one of which is the Office of the Mayor)
the cost of the subsequent sale. where the distraint was made. The notice
shall specify the time and place of the sale.
Who is the proper officer authorized to The time of sale shall not be less than twenty
issue the warrant of distraint? (20) days after notice to the owner and the
a. Commissioner or his duly authorized publication or posting of such notice.
representative if the amount involved is
in EXCESS of One million pesos (2) At the time of the public sale, the revenue
(P1,000,000) officer shall sell the goods, chattels, or
b. Revenue District Officer if the amount effects, or other personal property, including
involved is One million pesos (P1,000,000) stocks and other securities so distrained at a
or LESS. (Sec. 207A, NIRC) PUBLIC AUCTION, to the HIGHEST BIDDER
for CASH or with the approval of the
The officer serving the warrant of distraint Commissioner, through a DULY LICENSED
shall: COMMODITY or STOCK EXCHANGES.
make an account of the goods, chattels,
effects or other personal property (3) Any residue over and above what is required
distrained. to pay the entire claim, including expenses of
shall leave a copy with the person from sale and distraint, shall be RETURNED to the
whom the goods were taken, or at the owner of the property sold. Expenses shall
dwelling or place of business of such be limited to actual expenses of SEIZURE and
person with someone of suitable age and PRESERVATION of the property pending the
discretion. sale, no charge shall be imposed for the
indicate statement of the sum demanded services of the local internal revenue officer
and the time and place of sale of the or his deputy. (209)
distrained property. (Sec. 208, NIRC)
(4) If the amount offered by the highest bidder is
How are different kinds of personal property not equal to the amount of the tax or is very
distrained? much less than the actual market value of the
articles offered for sale, the Commissioner or
Stocks and other securities by serving a his deputy may purchase the same in behalf
copy of the warrants of distraint on the taxpayer, of the National Government for the amount of
AND upon the president, manager, treasurer or taxes, penalties and costs due thereon. The
other responsible officer of the corporation, property so purchased may thereafter be
company or association which issued the stocks resold by the Commissioner or his deputy.
or securities. (212)

Debts and credits by leaving with the (5) If the proceeds from the sale of the distrained
person owing the debts or having in his properties is not sufficient to satisfy the tax
possession or under his control such credits, or delinquency, the Commissioner or his duly
with his agent, a copy of the warrant of distraint. authorized representative shall within thirty

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TAXATION LAW 2

(30) days after execution of the distraint, 2) The certificate shall contain a description
proceed with the levy on the taxpayers real of the property upon which levy is made.
property. (207B) At the same time, written notice of the
levy shall be mailed to or served upon
May the taxpayer recover his property prior the Register of Deeds of the province or
to consummation of the sale? city where the property is located and
YES. If at any time prior to the consummation of upon the taxpayer (if he is absent from
the sale all proper charges are paid to the officer the Philippines, to his agent or manager
conducting the sale, the goods or effects of business in respect to which the
distrained shall be restored to the owner. (Sec. liability arose or to the occupant of the
210, NIRC) property in question)

How is CONSTRUCTIVE distraint effected? 3) Within twenty (20) days after the levy,
a. By requiring a taxpayer or any person in the officer conducting the proceedings
possession or control of such property to shall proceed to advertise for SALE the
SIGN a RECEIPT covering the property property or a portion thereof as may be
distrained and obligate himself to PRESERVE necessary to satisfy the claim and costs
THE SAME INTACT and UNALTERED and NOT of sale. Such advertisement shall cover a
TO DISPOSE of the same in any manner period of at least thirty (30) days. The
whatever, without the Commissioners notice shall be posted at the main
authority. entrance of the city or municipal all AND
b. If the taxpayer or person in possession or in a public and conspicuous place in the
control refuses to sign the receipt, the barrio or district where the real property
revenue officer shall prepare a list of the lies. The notice must also be published in
property and leave a copy of such list in the a newspaper of general circulation in the
premises where the properties are located, in place where the property is located, once
the presence of two (2) witnesses. a week for three (3) weeks.
CONTENTS of notice: statement of
Q: When may property of the taxpayer be amount of taxes, and penalties due,
placed in constructive distraint? time and place of sale, name of
The property of a taxpayer may be placed in taxpayer, short description of
constructive distraint, if in the Commissioners property.
opinion:
the taxpayer is retiring from any business 4) The sale shall be held either at the main
subject to tax entrance of the municipal or city hall or
the taxpayer is intending to leave the on the premises to be sold. Property will
Philippines be awarded to the highest bidder. In
the taxpayer is intending to remove his case the proceeds of the sale exceeds the
property from the Philippines or to hide or claim and costs of sale, the excess shall
conceal his property be turned over to the owner of the
the taxpayer is planning to perform any act property. (213)
tending to obstruct the proceedings for
collecting the tax due or which may be due 5) If there is no bidder for the real property
from him (206) OR if the highest bid is not sufficient to
NOTE: In constructive distraint, the pay the taxes, penalties and costs, the IR
property is not actually confiscated or Officer conducting the sale shall declare
seized by the revenue officer the property FORFEITED to the
GOVERNMENT in satisfaction of the claim.
(Sec. 215, NIRC) The Commissioner may
2. Levy is the same act of seizure as in resell the property at a public auction
distraint, but in this case, of real property, an after the giving of not less than twenty
interest in or rights to such property in order (20) days notice. (Sec. 216, NIRC)
to enforce the payment of taxes. The real
property under levy shall be sold in a public May the taxpayer recover his property
sale, if the taxes involved are not voluntarily prior to consummation of the sale?
paid following such levy. YES. At any time before the day fixed for the
sale, the taxpayer may discontinue all
How is levy of real property effected? proceeding by paying the taxes, penalties and
interest. (Sec. 213, NIRC)
1) After the expiration of time required to
pay the delinquent tax, real property may May the taxpayer recover his property
be levied upon, BEFORE, after the consummation of the sale?
SIMULTANEOUSLY or AFTER the distraint YES. Within one (1) year from the date of
of personal property belonging to the sale, the taxpayer or anyone for him, may pay
delinquent. The IR officer designated by to the Revenue District Officer the total amount
the Commissioner or his duly authorized of the following:
representative shall prepare a DULY public taxes
AUTHENTICATED CERTIFICATE showing penalties
the name of the taxpayer and the interest from the date of delinquency to the
amounts of tax and penalty due from date of sale
him. This certificate shall operate with interest on said purchase price at the rate
the force of LEGAL EXECUTION of fifteen percent (15%) per annum from
throughout the Philippines. the date of sale to the date of redemption.
(NOTE: if the property was forfeited in

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TAXATION LAW 2

favor of the government, the redemption percent (40%) of the basic assessed
price shall include only the taxes, penalties tax
and interest plus costs of sale no interest NOTE: When the basic tax involved
on purchase price since the Govt did not exceeds One Million Pesos (P1,000,000),
purchase the property anyway, it was or where the settlement offered is less
forfeited) than the prescribed minimum rates, the
NOTE: The taxpayer-owner shall not be compromise must be approved by the
deprived of possession of the said property Evaluation Board (composed of the
and shall be entitled to rents and other Commissioner and 4 deputy
income until the expiration of the period for commissioners)
redemption (Sec. 214, NIRC)
May the Commissioner compromise
cases of criminal violations?
JUDICIAL PROCEEDINGS Generally, ALL CRIMINAL VIOLATIONS may
Civil and criminal action and proceedings be compromised, EXCEPT:
instituted in behalf of the Government under a) those cases already filed in court
the authority of this Code or other law b) those involving fraud
enforced by the BIR
shall be BROUGHT IN THE NAME OF THE 2. Abatement (to cancel the entire amount of
GOVERNMENT of the Philippines tax payable)
shall be CONDUCTED BY LEGAL
OFFICERS OF THE BIR When may the Commissioner abate or
No civil or criminal action for the recovery of cancel a tax liability?
taxes or the enforcement of any fine, penalty The Commissioner may abate or cancel a tax
or forfeiture under the NIRC shall be filed in liability when:
court without the APPROVAL OF THE
COMMISSIONER approval of the 1) the tax or any portion thereof appears to
Commissioner. (Sec. 220, NIRC) be UNJUSTLY or EXCESSIVELY
ASSESSED; or
Q: How is a criminal action a collection
remedy? 2) the ADMINISTRATION and COLLECTION
The judgment in the criminal case shall: COSTS do not justify the collection of the
impose the penalty; and amount due. (costs of collection >
order payment of the taxes subject of amount of tax due)
the criminal case as finally decided
by the Commissioner. (Sec. 205,
NIRC) VI. STATUTORY OFFENSES AND PENALTIES

Q: Is an assessment necessary before A. Additions to the Tax


filing a criminal charge for tax evasion?
No, an assessment is not necessary before a 1. Civil Penalties
criminal charge can be filed. The criminal Surcharge a civil penalty imposed by law
charge need only be proved by a prima facie as an addition to the main tax required to be
showing of a willful attempt to file taxes, such paid. It is a civil administrative sanction
as failure to file a required tax return. [CIR v. provided as a safeguard for the protection of
Pascor Realty (June 29, 1999)] the State revenue and to reimburse the
government for the expenses of investigation
and the loss resulting from the taxpayers
V. COMPROMISE AND ABATEMENT fraud. A surcharge added to the main tax is
subject to interest.
1. Compromise (to reduce the amount of tax
payable) Rates of Surcharge:
There shall be imposed a penalty equivalent
Grounds for a compromise: to twenty-five percent (25%) of the
The Commissioner may compromise the amount due, in the following cases:
payment of any internal revenue tax in the FAILURE TO FILE ANY RETURN and PAY
following cases: THE TAX DUE THEREON on the date
prescribed; or
1) A REASONABLE DOUBT as to the validity Filing a return with an internal revenue
of the claim against the taxpayer exists; off