TAXATION LAW
2019 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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University of Santo Tomas
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Academics Committee
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No. ____________
Printed in the Philippines, September 2019.
ACADEMIC YEAR 2019-2020
CIVIL LAW STUDENT COUNCIL
LYODYCHIE Q. CAMARAO
MARIA FRANCES FAYE R. GUTIERREZ
KRYSTAL GAYLE R. DIGAY
PRESIDENT
INTERNAL VICE PRESIDENT
SECRETARY
TEAM: BAR-OPS
NICOLE MARIE A. CORTES
MARYLOU RENZI M. OLOTEO
CHRISTINE JOYCE P. ANDRES
KRIZA NIÑA B. MALALUAN
ELOUISA ANN DC. CARREON
CIARI T. MENDOZA
ELISHA ELAINE D. BAYOT
JOSEPHINE GRACE W. ANG
PATRICIA MAE D. GUILLERMO
RAFAEL JEROME M. MENDOZA
KHYNA MATHEA N. CANLAS
MARSHAN DEINN S. GUALBERTO
KIER JOHN V. UY
GLENN MATTHEW C. MANLAPID
VAN ANGELO K. RESPICIO
JAMES ROSS L. TAN
LOUELL JUDE B. QUE
MON FRANCIS A. TOLENTINO
CLARA LOUISSE J. YUMANG
JOCHRIS DANIEL Z. GUADES
JERREMIAH KRIZIAH B. BATALLER
CHAIRPERSON
VICE-CHAIRPERSON
SECRETARY
ASST. SECRETARY
HEAD, PUBLIC RELATIONS OFFICER
ASST. HEAD, PUBLIC RELATIONS OFFICER
HEAD, FINANCE COMMITTEE
HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS, COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS, COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
ATTY. AL CONRAD B. ESPALDON
ADVISER
ACADEMICS COMMITTEE
EDREA JEAN V. RAMIREZ
AYA DOMINIQUE S. CAPARAS
ARIANNA LAINE T. SARMIENTO
BELLE COLLEEN T. DE LEON
PAMELA NICOLE S. MANALO
RUTH MAE G. SANVICTORES
LAURISSE MARIE T. PERIANES
CIARI T. MENDOZA
SECRETARY GENERAL
ASST. SECRETARY GENERAL
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTE
EXECUTIVE COMMITTEE
LAYOUT ARTIST
COVER DESIGN ARTIST
TAXATION LAW COMMITTEE
JYRUS CIMATU
TAXATION LAW COMMITTEE HEAD
KATE LEANDER
ASST. HEAD, INCOME TAXATION
RAFAEL JEROME MENDOZA
ASST. HEAD, GENERAL PRINCIPLES, TRANSFER TAXATION and
TAX REMEDIES
AYA CAPARAS
ASST. HEAD, BUSINESS TAXATION, TARIFFS AND CUSTOMS, and
LOCAL GOVERNMENT TAXATION
MEMBERS
MICHAELLA RAMIREZ
FIDEL SALO
ATTY. PRUDENCE ANGELITA A. KASALA
ATTY. LEAN JEFF M. MAGSOMBOL
ADVISERS
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA
REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN
REGENT
ATTY. ARTHUR B. CAPILI
FACULTY SECRETARY
ATTY. ELGIN MICHAEL C. PEREZ
LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC
JUDGE PHILIP A. AGUINALDO
SWDB COORDINATOR
LENY G. GADANIA, R.G.C.
GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION
JUSTICE JAPAR B. DIMAAMPAO
ATTY. ABELARDO T. DOMONDON
ATTY. NOEL M. ORTEGA
ATTY. VIRGINA JEANNIE P. LIM
ATTY. PRUDENCE ANGELITA A. KASALA
ATTY. BENEDICTA DU-BALADAD
ATTY. RIZALINA V. LUMBERA
ATTY. LEAN JEFF M. MAGSOMBOL
For being our guideposts in understanding the intricate sphere of Taxation Law.
-Academics Committee 2019
TABLE OF CONTENTS
I. GENERAL PRINCIPLES OF TAXATION..............................................................................1
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
Definition and Concept .......................................................................................................................................... 1
Purpose of Taxation ............................................................................................................................................... 1
Nature and Characteristics of Taxation ......................................................................................................... 2
Power of Taxation as distinguished from Police Power and Power of Eminent Domain ... 4
Theory and Basis of Taxation ............................................................................................................................. 6
Principles of a Sound Tax System ..................................................................................................................... 7
Scope and Limitations of Taxation ................................................................................................................. 8
1. Inherent limitations ........................................................................................................................................ 9
2. Constitutional limitations ......................................................................................................................... 14
Summary Rules on Exemption of Properties Actually, Exclusively and Directly Used for
Religious, Educational and Charitable Purposes .................................................................................. 19
Stages or Aspects of Taxation .......................................................................................................................... 28
Definition, Nature and Characteristics of Taxes .................................................................................... 28
Requisites of a Valid Tax .................................................................................................................................... 29
Tax as distinguished from other forms of exactions ........................................................................... 29
Kinds of Taxes .......................................................................................................................................................... 30
Situs of Taxation ..................................................................................................................................................... 31
Construction and Interpretation.................................................................................................................... 33
1. Tax Laws ............................................................................................................................................................ 33
2. Tax Exemptions and Exclusions ............................................................................................................ 33
3. Tax Rules and Regulations........................................................................................................................ 34
4. Penal provisions of Tax Laws .................................................................................................................. 34
5. Non-retroactive application to Taxpayers ...................................................................................... 34
Sources of Tax Laws ............................................................................................................................................. 34
Doctrines in Taxation........................................................................................................................................... 35
1. Prospectivity of Tax Laws ......................................................................................................................... 35
2. Imprescriptibility of Taxes ....................................................................................................................... 35
3. Double Taxation ............................................................................................................................................ 36
4. Most-Favored Nation Clause .................................................................................................................. 38
5. Power to Tax involves Power to Destroy .......................................................................................... 38
6. Exemption from Taxation ......................................................................................................................... 41
7. Doctrine of Equitable Recoupment ...................................................................................................... 44
8. Compensation and Set-off ........................................................................................................................ 44
9. Compromise and Tax Amnesty .............................................................................................................. 45
10. Taxpayer’s Suit................................................................................................................................................ 46
a) Nature and Concept ............................................................................................................................. 46
b) As distinguished from a citizen’s suit ......................................................................................... 47
c) Requisites of a taxpayer’s suit challenging the constitutionality of a tax measure
or act of a taxing authority; concept of locus standi, doctrine of transcendental
importance and ripeness for judicial determination.......................................................... 47
II. NATIONAL TAXATION (NATIONAL INTERNAL REVENUE CODE OF 1997, as
amended. EXCLUDE amendments introduced by R.A. No. 10963 or the Tax
Reform for Acceleration and Inclusion Law) ............................................................. 49
A. Organization and Functions of the Bureau of Internal Revenue .................... 49
1. Rule-making authority of the Secretary of Finance .....................................................................49
2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue ..............51
a) Powers and duties of the Bureau of Internal Revenue ......................................................51
b) Power of the Commissioner to interpret tax laws and to decide tax cases .............52
c) Non-retroactivity of rulings .............................................................................................................53
B. Income Tax .................................................................................................................... 55
1. Definition, Nature and General Principles ........................................................................................55
a) Income Tax systems – Global, Schedular and Semischedular or Semi-Global
Taxpayer’s income ................................................................................................................................55
b) Features of the Philippine Income Tax Law ............................................................................55
c) Criteria in imposing Philippine income tax .............................................................................55
d) Types of Philippine income taxes .................................................................................................55
e) Taxable period ........................................................................................................................................56
f) Kinds of taxpayers.................................................................................................................................56
2. Income Tax ........................................................................................................................................................56
a) Definition, Nature and General Principles ................................................................................57
b) Income .........................................................................................................................................................57
(1) Definition and nature ..................................................................................................................57
(2) When income is taxable .............................................................................................................58
i. Existence of income .............................................................................................................58
ii. Realization of income .........................................................................................................58
iii. Recognition of income ........................................................................................................59
iv. Cash method of accounting versus Accrual method of accounting ............59
(3) Tests in determining whether income is earned for tax purposes .....................59
i. Realization test.......................................................................................................................59
ii. Claim of right doctrine or doctrine of ownership, command or control..60
iii. Economic benefit test, doctrine of proprietary interest ...................................60
iv. Severance test .........................................................................................................................60
v. All events test..........................................................................................................................60
c) Classification of income......................................................................................................................60
d) Situs of Income Taxation ...................................................................................................................60
3. Gross Income....................................................................................................................................................61
a) Definition ...................................................................................................................................................61
b) Concept of income from whatever source derived ..............................................................62
c) Gross income vis-à -vis net income vis-à -vis taxable income ..........................................63
d) Classification of income subject to tax........................................................................................65
(1) Compensation income ................................................................................................................65
(2) Fringe benefits ................................................................................................................................65
(3) Professional income.....................................................................................................................66
(4) Income from business .................................................................................................................66
(5) Income from dealings in property........................................................................................66
(6) Passive investment income......................................................................................................77
(7) Prizes and awards .........................................................................................................................88
(8) Annuities, proceeds from life insurance or other types of insurance ................90
(9) Pensions, retirement benefit or separation pay............................................................91
(10) . Income from any source whatever .................................................................................. 91
e) Exclusions from gross income ........................................................................................................ 94
(1) Rationale for the exclusions .................................................................................................... 94
(2) Taxpayers who may avail of the exclusions .................................................................... 94
(3) Exclusions distinguished from deductions and tax credits .................................... 94
(4) Exclusions under the Constitution....................................................................................... 95
(5) Exclusions under the Tax Code .............................................................................................. 95
(6) Exclusions under special laws............................................................................................. 106
4. Deductions from Gross Income ........................................................................................................... 107
a) General rules......................................................................................................................................... 107
b) Return of capital ................................................................................................................................. 108
c) Itemized deductions ......................................................................................................................... 108
d) Optional Standard Deduction ...................................................................................................... 133
e) Personal and Additional Exemptions (see page 117)
f) Items not deductible ......................................................................................................................... 135
5. Income Tax on Individuals .................................................................................................................... 137
a) Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens.. 140
(1) Coverage – Income from all sources within and without the Philippines;
exceptions ...................................................................................................................................... 140
(2) Taxation on compensation income................................................................................... 141
i. Inclusions – monetary and nonmonetary compensation ............................. 141
ii. Exclusions – Fringe benefits subject to tax; De Minimis benefits; 13th
month pay and other benefits and payments specifically excluded from
taxable compensation income .................................................................................... 141
iii. Deductions ............................................................................................................................ 141
b) Income Tax on Non-Resident Aliens Engaged in Trade or Business....................... 153
c) Income Tax on Non-Resident Aliens Not Engaged in Trade or Business .............. 153
d) Individual Taxpayers Exempt from Income Tax ................................................................ 153
(1) Senior citizens ............................................................................................................................. 154
(2) Minimum wage earners .......................................................................................................... 155
(3) Exemptions granted under international agreements ........................................... 156
6. Income Tax on Corporations ................................................................................................................ 156
a) Income Tax on Domestic Corporations and Resident Foreign Corporations ..... 159
(1) Regular tax .................................................................................................................................... 159
(2) Minimum Corporate Income Tax (MCIT) ...................................................................... 160
(3) Branch Profit Remittance Tax ............................................................................................. 163
(4) Allowable deductions .............................................................................................................. 163
i. Itemized deductions (see page 108)
ii. Optional Standard Deductions (see page 133)
(5) Taxation of Passive Income (see page 164)
(6) Taxation of Capital Gains (see page 164)
b) Income Tax on Non-Resident Foreign Corporations ....................................................... 164
c) Income Tax on Special Corporations ....................................................................................... 164
(1) Domestic Corporations ........................................................................................................... 164
i. Proprietary educational institutions and hospitals ......................................... 164
ii. Non-profit hospitals ......................................................................................................... 165
iii. Government-owned or controlled corporations, agencies or
instrumentalities ............................................................................................................... 167
iv. Depository banks (foreign currency deposit units) ........................................ 167
(2) Resident Foreign Corporations .......................................................................................... 167
i.
ii.
iii.
iv.
International carriers doing business in the Philippines ............................. 167
Off-shore banking units .................................................................................................. 168
Resident depository banks (foreign currency deposit units) ..................... 168
Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies ............................................................................................... 168
(3) Improperly Accumulated Earnings Tax (IAET) .......................................................... 169
(4) Exemptions from Tax on Corporations .......................................................................... 170
(5) Tax on other Business Entities: General Partnerships, General Professional
Partnerships, Co-ownerships, Joint Ventures and Consortia .............................. 172
7. Filing of Returns and Payment of Income Tax ............................................................................. 178
a) Definition of a Tax Return and Information Return ......................................................... 178
b) Period within which to file Income Tax Return of Individuals and
Corporations ......................................................................................................................................... 178
c) Persons liable to file Income Tax Returns ............................................................................. 179
(1) Individual taxpayers ................................................................................................................. 179
i. General rule and exceptions......................................................................................... 179
ii. Substituted filing ................................................................................................................ 180
(2) Corporate taxpayers ................................................................................................................. 180
d) Where to file Income Tax Returns ............................................................................................. 180
e) Penalties for Non-filing of Returns ............................................................................................ 181
8. Withholding of taxes ................................................................................................................................. 181
a) Concept of withholding taxes ....................................................................................................... 181
b) Kinds of Withholding Taxes .......................................................................................................... 183
C. Transfer Taxes .......................................................................................................... 187
1. Estate Tax........................................................................................................................................................ 189
a) Basic principles, concept, and definition................................................................................ 189
b) Nature, purpose, and object .......................................................................................................... 189
c) Time and transfer of properties.................................................................................................. 190
d) Classification of decedent............................................................................................................... 190
e) Gross estate and net estate............................................................................................................ 190
f) Determination of gross and net estate .................................................................................... 190
g) Items to be included in the gross estate ................................................................................. 192
h) Deductions and exclusions from estate .................................................................................. 200
i) Tax credit for estate taxes paid to a foreign country ....................................................... 206
j) Exemption of certain acquisitions and transmissions .................................................... 206
k) Estate tax return ................................................................................................................................. 207
2. Donor’s Tax .................................................................................................................................................... 210
a) Basic principles, concept and definition ................................................................................. 210
b) Nature, purpose and object ........................................................................................................... 212
c) Requisites of a valid donation ...................................................................................................... 212
d) Transfers which may be constituted as donation.............................................................. 213
(1) sale/exchange/transfer of property for insufficient consideration (see page
199)
(2) condonation/remission of debt .......................................................................................... 213
(3) transfer for less than adequate and full consideration .......................................... 213
e) Classification of donor ..................................................................................................................... 214
f) Determination of gross gift............................................................................................................ 214
g) Composition of gross gift ................................................................................................................ 215
h) Valuation of gifts made in property .......................................................................................... 215
i) Tax credit for donor’s taxes paid to a foreign country .................................................... 216
j) Exemption of gifts from donor’s
tax . ............................................................................................................................................................. 216
k) Persons liable ....................................................................................................................................... 219
D. Value-Added Tax (VAT) ...........................................................................................221
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
E.
F.
G.
H.
16.
17.
Concept of VAT-taxable transactions ............................................................................................... 221
Characteristics of VAT-taxable transactions ................................................................................ 221
Elements of VAT-taxable transactions ............................................................................................ 222
Impact and incidence of tax .................................................................................................................. 224
Tax credit method ...................................................................................................................................... 225
Destination Principle / Cross Border Doctrine........................................................................... 225
Persons liable ............................................................................................................................................... 226
Imposition of VAT ...................................................................................................................................... 227
a) On sale of goods or properties ................................................................................................... 228
b) On importation of goods................................................................................................................. 232
c) On services............................................................................................................................................. 233
Transactions deemed sale...................................................................................................................... 236
Change or cessation of status as VAT-registered person ..................................................... 237
Zero-rated and effectively zero-rated sales of goods or properties................................. 238
VAT-exempt transactions....................................................................................................................... 244
a) VAT exempt transactions; in general; enumeration ........................................................ 244
Input and Output tax................................................................................................................................. 251
a) Definition ................................................................................................................................................ 251
b) Sources of input tax........................................................................................................................... 252
c) Persons who can avail of input tax credits ........................................................................... 254
d) Determination of output/input tax; VAT payable; excess input tax credits........ 254
(1) Determination of output tax................................................................................................. 254
(2) Determination of creditable input tax ............................................................................ 255
(3) Allocation of input tax on mixed transactions ............................................................ 255
(4) Determination of the output tax and VAT payable and computation of VAT
payable or excess tax credits ............................................................................................... 255
e) Substantiation of input tax credits ............................................................................................ 256
Refund or tax credit of excess input tax.......................................................................................... 256
a) Who may claim for refund/apply for issuance of tax credit certificates ............... 256
b) Period to file claim/apply for the issuances of tax credit certificates .................... 259
c) Manner of giving refunds ............................................................................................................... 263
d) Destination principle/Cross-border doctrine (see page 225)
Invoicing Requirements .......................................................................................................................... 263
a) In general................................................................................................................................................ 263
b) In “deemed sale” transactions ..................................................................................................... 264
c) Consequences of issuing erroneous VAT invoice or VAT official receipt ............. 264
Filing of returns and payment ............................................................................................................. 264
Withholding of final VAT on sales to government..................................................................... 266
Percentage Taxes (concept and nature only) ....................................................267
Excise Tax (concept and nature only) .................................................................269
Documentary Stamp Taxes (concept and nature only) ..................................270
Tax Remedies under the NIRC ...............................................................................271
1. General Concepts ........................................................................................................................................ 271
a) Assessment ............................................................................................................................................ 271
(1) Requisites of a valid assessment........................................................................................ 272
b) Tax delinquency as distinguished from Tax deficiency .................................................. 276
c) Jeopardy assessment ........................................................................................................................ 277
d) Prescriptive period for assessment .......................................................................................... 277
(1) General rule ................................................................................................................................... 279
(2) False or fraudulent returns and non-filing of returns............................................. 283
(3) Suspension of the running of statute of limitations ................................................. 284
2. Civil penalties, additions to the tax.................................................................................................... 285
a) Surcharge ................................................................................................................................................ 285
b) Delinquency interest and deficiency interest ...................................................................... 287
c) Compromise penalty......................................................................................................................... 287
3. Assessment process and reglementary periods ......................................................................... 287
a) Letter of Authority and Tax Audit.............................................................................................. 287
b) Notice of Informal Conference ..................................................................................................... 289
c) Issuance of Preliminary Assessment Notice; general rule and exceptions .......... 289
d) Issuance of Formal Letter of Demand and Final Assessment Notice....................... 290
e) Disputed Assessment ....................................................................................................................... 291
4. Collection ........................................................................................................................................................ 292
a) Requisites ............................................................................................................................................... 292
b) Prescriptive periods; suspension of running of statute of limitations ................... 292
I. Taxpayer’s remedies ............................................................................................... 293
1. Protesting an assessment ....................................................................................................................... 294
a) Period to file protest ......................................................................................................................... 294
b) Form, content, and validity of protest ..................................................................................... 294
c) Submission of supporting documents ..................................................................................... 295
d) Effect of failure to file protest ...................................................................................................... 296
e) Decision of the Commissioner on the protest filed ........................................................... 296
(1) Effect of failure to appeal ....................................................................................................... 298
2. Compromise and abatement of taxes ............................................................................................... 299
3. Recovery of Tax Erroneously or Illegally Collected .................................................................. 304
a) Tax refund as distinguished from Tax credit ....................................................................... 305
b) Grounds, requisites and period for filing a claim for refund or issuance of a tax
credit certificate .................................................................................................................................. 305
c) Statutory basis and proof of claim for refund or tax credit .......................................... 309
d) Proper party to file claim for refund or tax credit ............................................................. 311
J. Government remedies ............................................................................................ 314
1. Administrative remedies ........................................................................................................................ 314
a) Tax lien ..................................................................................................................................................... 314
b) Distraint and levy ............................................................................................................................... 315
c) Forfeiture of real property ............................................................................................................ 319
d) Suspension of business operation ............................................................................................. 320
e) Non-availability of injunction to restrain collection of tax ........................................... 320
2. Judicial remedies – civil or criminal action (see page 426 onwards)
K. LOCAL TAXATION [LOCAL GOVERNMENT CODE (LGC) OF 1991, as
amended] ................................................................................................................... 271
L. Local government taxation .................................................................................... 326
1. Fundamental principles........................................................................................................................... 326
2. Nature and source of taxing power ................................................................................................... 327
a) Grant of local taxing power under the LGC ........................................................................... 327
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
b) Authority to prescribe penalties for tax violations .......................................................... 328
c) Authority to grant local tax exemptions................................................................................. 328
d) Withdrawal of exemptions ............................................................................................................ 329
e) Authority to adjust local tax rates ............................................................................................. 329
f) Residual taxing power of local governments....................................................................... 330
g) Authority to issue local tax ordinances .................................................................................. 331
Local taxing authority .............................................................................................................................. 331
a) Power to create revenues exercised through Local Government Units (LGUs) 331
b) Procedure for approval and effectivity of tax ordinances ............................................ 331
Scope of taxing power .............................................................................................................................. 332
Specific taxing power of LGUs.............................................................................................................. 332
Taxing powers of provinces (Exclude: Rates) ............................................................................. 332
a) Tax on transfer of real property ownership ........................................................................ 334
b) Tax on business of printing and publication........................................................................ 334
c) Franchise tax ........................................................................................................................................ 334
d) Tax on sand, gravel and other quarry services ................................................................... 334
e) Professional tax ................................................................................................................................... 335
f) Amusement tax.................................................................................................................................... 335
g) Tax on delivery truck/van ............................................................................................................. 335
Taxing powers of cities (Exclude: Rates) ....................................................................................... 339
Taxing powers of municipalities (Exclude: Rates) .................................................................... 340
a) Tax on various types of businesses........................................................................................... 342
b) Ceiling on business taxes imposable by LGUs within Metro Manila........................ 344
c) Tax on retirement of business ..................................................................................................... 344
d) Rules on payment of business taxes ......................................................................................... 344
e) Fees and charges for regulation & licensing ........................................................................ 344
f) Situs of tax collected ......................................................................................................................... 344
Taxing powers of barangays (Exclude: Rates) ............................................................................ 345
Common revenue raising powers ...................................................................................................... 347
a) Service fees and charges ................................................................................................................. 347
b) Public utility charges ........................................................................................................................ 347
c) Toll fees or charges ........................................................................................................................... 347
Community tax............................................................................................................................................. 347
Common limitations on the taxing powers of LGUs ................................................................. 348
Collection of business taxes .................................................................................................................. 350
a) Tax period and manner of payment ......................................................................................... 351
b) Accrual of tax ........................................................................................................................................ 351
c) Time of payment ................................................................................................................................. 351
d) Penalties on unpaid taxes, fees or charges ........................................................................... 351
e) Authority of treasurer in collection and inspection of books ..................................... 351
Taxpayer’s remedies ................................................................................................................................. 352
a) Periods of assessment and collection of local taxes, fees or charges ...................... 354
b) Protest of assessment ...................................................................................................................... 355
c) Claim for refund of tax credit for erroneously or illegally collected tax, fee or
d) charge ....................................................................................................................................................... 356
15. Civil remedies by the LGUs for collection of revenues............................................................ 356
a) Local government’s lien for delinquent taxes, fees or charges .................................. 356
b) Civil remedies, in general ............................................................................................................... 358
(1) Administrative action .............................................................................................................. 359
(2) Judicial action ............................................................................................................................... 360
M. Real property taxation ............................................................................................ 362
N.
O.
P.
Q.
1. Fundamental principles........................................................................................................................... 362
2. Nature of real property tax .................................................................................................................... 362
3. Imposition of real property taxes ....................................................................................................... 363
a) Power to levy real property taxes.............................................................................................. 363
b) Exemption from real property taxes ........................................................................................ 366
4. Appraisal and assessment of real property tax........................................................................... 369
a) Rule on appraisal of real property tax at fair market value ......................................... 370
b) Declaration of real property ......................................................................................................... 371
c) Listing of real property in assessment rolls ......................................................................... 371
d) Preparation of schedules of fair market values .................................................................. 372
(1) Authority of assessor to take evidence ........................................................................... 372
(2) Amendment of schedule of fair market values ........................................................... 372
e) Classes of real property................................................................................................................... 372
f) Actual use of property as basis of assessment .................................................................... 373
g) Assessment of property .................................................................................................................. 373
(1) General revisions of assessments and property classifications......................... 374
(2) Date of effectivity of assessment or reassessment ................................................... 374
h) Assessment of property subject to back taxes .................................................................... 375
i) Notification of new or revised assessments ......................................................................... 375
Collection of real property tax...................................................................................................................... 375
1. Date of accrual of real property taxes and special levies ....................................................... 375
2. Collection of taxes ....................................................................................................................................... 376
a) Collecting authority ........................................................................................................................... 376
b) Duty of assessor to furnish local treasurer with assessment rolls ........................... 376
c) Notice of time for collection of taxes ........................................................................................ 376
3. Periods within which to collect real property taxes ................................................................. 376
4. Special rules on payment ........................................................................................................................ 376
a) Payment of real property taxes in installments ................................................................. 376
b) Interests on unpaid real property taxes ................................................................................. 376
c) Condonation of real property taxes .......................................................................................... 377
5. Remedies of LGUs for collection of real property taxes.......................................................... 378
a) Issuance of notice of delinquency for real property tax payment ............................ 378
b) Local government’s lien .................................................................................................................. 378
c) Remedies in general .......................................................................................................................... 378
d) Resale of real estate taken for taxes, fees or charges....................................................... 379
e) Further levy until full payment of amount due................................................................... 379
Refund or credit of real property taxes ................................................................................................... 381
1. Payment under protest ............................................................................................................................ 381
2. Repayment of excessive collections .................................................................................................. 382
Taxpayer’s remedies ......................................................................................................................................... 382
1. Contesting an assessment of value of real property ................................................................. 383
a) Appeal to the Local Board of Assessment Appeals (LBAA) .......................................... 383
b) Appeal to the Central Board of Assessment Appeals (CBAA)...................................... 383
c) Effect of payment of tax................................................................................................................... 384
Payment of real property tax under protest ......................................................................................... 384
III. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES (P.D. No. 1464), as amended
by the CUSTOMS MODERNIZATION AND TARIFF ACT (Republic Act No. 10863,
which took effect on June 16, 2016) ...........................................................................387
A. Tariff and duties .................................................................................................................................................. 387
1. Definitions ...................................................................................................................................................... 387
2. Kinds or Classification of Duties ......................................................................................................... 387
a) Ordinary/regular duties ................................................................................................................. 387
(1) Ad valorem (Exclude: Methods of Valuation) ............................................................. 387
(2) Specific............................................................................................................................................. 387
b) Special duties........................................................................................................................................ 387
3. Flexible tariff clause .................................................................................................................................. 388
B. Accrual and Payment of Tax and Duties ................................................................................................. 392
1. General Rule .................................................................................................................................................. 392
a) Taxable Importations ....................................................................................................................... 392
b) Prohibited Importations................................................................................................................. 392
c) De Minimis Importations (Small Value Importations) ................................................... 394
d) Conditionally-Free and Duty-Exempt Importations ........................................................ 396
2. Goods Declaration ...................................................................................................................................... 401
a) Filing of Goods Declaration ........................................................................................................... 401
b) Provisional Goods Declarations .................................................................................................. 402
c) Relief Consignments ......................................................................................................................... 402
d) Misdeclaration, Misclassification, and Undervaluation in Goods Declarations . 403
(1) Definition and distinction ...................................................................................................... 403
(2) Imposition of Surcharges ....................................................................................................... 403
C. Unlawful Importation or Exportation (Exclude: Penalties).......................................................... 404
1. Technical smuggling and Outright smuggling ............................................................................. 404
2. Other fraudulent practices .................................................................................................................... 405
D. Remedies ... ............................................................................................................................................................. 406
1. Government ................................................................................................................................................... 406
a) Administrative/extrajudicial ....................................................................................................... 406
(1) Search, seizure, forfeiture, arrest ...................................................................................... 412
b) Judicial ..................................................................................................................................................... 413
2. Taxpayer ......................................................................................................................................................... 414
a) Protest ...................................................................................................................................................... 415
b) Abandonment....................................................................................................................................... 416
c) Abatement and refund..................................................................................................................... 417
IV. JUDICIAL REMEDIES [R.A. No. 1125, as amended, and the Revised Rules of the
Court of Tax Appeals (CTA)] .........................................................................................426
A. Jurisdiction of the CTA ..................................................................................................................................... 426
1. Exclusive appellate jurisdiction over civil tax cases ................................................................ 427
a) Cases within the jurisdiction of the court en banc............................................................ 427
b) Cases within the jurisdiction of the court in divisions ................................................... 428
2. Criminal cases .............................................................................................................................................. 430
a) Exclusive original jurisdiction ..................................................................................................... 430
b) Exclusive appellate jurisdiction in criminal cases ............................................................ 431
B. Judicial procedures ............................................................................................................................................ 431
1. Judicial action for collection of taxes ................................................................................................ 431
a) Internal revenue taxes ..................................................................................................................... 431
b) Local taxes .............................................................................................................................................. 432
(1) Prescriptive period.................................................................................................................... 432
2. Civil cases ........................................................................................................................................................ 433
a) Who may appeal, mode of appeal, effect of appeal ........................................................... 433
(1) Taking of evidence ..................................................................................................................... 438
(2) Motion for reconsideration or new trial ........................................................................ 439
b) Appeal to the CTA, en banc ............................................................................................................ 439
c) Petition for review on certiorari to the SC ............................................................................ 441
3. Criminal cases ............................................................................................................................................... 442
a) Institution and prosecution of criminal actions ................................................................. 442
(1) Institution of civil action in criminal action ................................................................. 442
b) Appeal and period to appeal ......................................................................................................... 442
(1) Solicitor General as counsel for the people and government officials sued in
their official capacity ................................................................................................................ 442
c) Petition for review on certiorari to the SC ............................................................................ 443
DISCLAIMER
THE RISK OF USE OF THIS BAR
REVIEW MATERIAL SHALL BE
BORNE BY THE USER
GENERAL PRINCIPLES OF TAXATION
3.
GENERAL PRINCIPLES
Provide social protection and all the needs
under its jurisdiction
DEFINITION AND CONCEPT OF TAXATION
-
Taxation is the power by which the sovereign,
through its law-making body, raises revenue to
defray the necessary expenses of government. It is
merely a way of apportioning the costs of
government among those who, in some measure,
are privileged to enjoy its benefits and must bear its
burdens (Aban, 2001).
PURPOSE OF TAXATION
It is a mode by which governments make exactions
for revenue in order to support their existence and
carry out their legitimate objectives. Taxation may
refer to either or both the power to tax or the act or
process by which the taxing power is exercised
(Vitug, 2006).
1. Primary or revenue purpose – to raise funds
or property to enable the State to promote the
general welfare and protection of the people.
2. Secondary
or
non-revenue
purposes[PR2EP]
In other words, taxation is:
-
a.
The inherent power of the sovereign exercised
through legislature
To impose burdens
Upon subjects and objects
Within its jurisdiction
For the purpose of raising revenues
To carry out the legitimate objects of
government
Promoting sustainable growth and
inclusive
economic
growth
by
rationalization of Philippine internal
revenue system
-
2.
b.
To rationalize means to enact policies
for the betterment of the tax system
that would benefit the government,
and trickle down to the constituents.
Regulation of activities/industries – Taxes
may also be imposed for a regulatory
purpose as, for instance, in the
rehabilitation and stabilization of a
threatened industry which is affected with
public interest, like the oil industry (Caltex
Philippines, Inc. v. Commission on Audit, et
al., G.R. No. 92585, May 8, 1992).
Taxation also has a regulatory purpose as
in the case of taxes levied on excises or
privileges like those imposed on tobacco
and alcoholic products, or amusement
places like night clubs, cabarets, cockpits,
etc (Aban, 2001).
To provide equitable relief to improve
levels of disposable income and increase
economic activity
-
Promotion of general welfare– taxation
may be used as an implement of police
power to promote the general welfare of
the people.
In the case of Lutz v. Araneta (G.R. No. L7859, December 22, 1955), the Supreme
Court upheld the validity of the Sugar
Adjustment Act, which imposed a tax on
milled sugar since the purpose of the law
was to strengthen an industry that is so
undeniably vital to the economy – the
sugar industry (Aban, 2001).
STATE POLICY OF TAXATON In Re: TRAIN LAW
1.
While there is no meaning in law with
regard to social protection, it is
defined as enacting policies that would
reduce poverty, promoting efficient
labor markets, etc. (United Nations
Research
Institute
for
Social
Development)
Disposable income is synonymous
with purchasing power. It is financial
empowerment of the citizen wherein
their eraning are not burdened by
taxes
imposed
which
is
counterproductive to the policy of
promoting general welfare via
increasing economic activity through
trade and commerce.
c.
1
Reduction of social inequality – a
progressive system of taxation prevents
the undue concentration of wealth in the
hands of few individuals. Progressivity is
based on the principle that those who are
able to pay more should shoulder the
bigger portion of the tax burden.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
d.
Encourage economic growth – the grant of
incentives or exemptions encourage
investment thereby stimulating economic
activity.
e.
Protectionism – Protective tariffs and
customs duties are imposed as taxes in
order to protect important sectors of the
economy or local industries, as in the case
of foreign importations.
2. Legislative in character
It is inherently legislative in nature and
character in that the power of taxation can only
be exercised through the enactment of law.
It is legislative in nature since it involves the
promulgation of laws. The legislature
determines the coverage, object, nature, extent
and situs [CONES] of the tax to be imposed.
Such power is exclusively vested in the
legislature except where the Constitution
provides otherwise (Art. VI, Sec. 28[2], Art. X,
Sec. 5, Constitution)(1 Cooley Taxation, 3rd Ed.).
NATURE AND CHARACTERISTICS OF TAXATION
Nature of taxation
It is based on the principle that taxes are a
grant of the people who are taxed, and the
grant must be made by the immediate
representative of the people, and where the
people have laid the power, there it must
remain and be exercised (CIR v. Fortune
Tobacco Corporation, 559 SCRA 160, 2008).
The nature of the State’s power to tax is two-fold.
It is both an inherent and a legislative power
(1996 Bar).
1. Inherent attribute of sovereignty
The power to tax is an attribute of sovereignty
and is inherent in the State. It is a power
emanating from necessity because it imposes a
necessary burden to preserve the State's
sovereignty
(Phil.
Guaranty
Co.
v.
Commissioner, L-22074, April 30, 1965).
Q: May legislative bodies enact laws to raise
revenues in the absence of constitutional
provisions granting said body the power of tax?
Explain. (2005 Bar)
A: YES. The constitutional provisions relating to the
power of taxation do not operate as grants of the
power of taxation to the government, but instead
merely constitute a limitation upon a power which
would otherwise be practically without limit.
Moreover, it is inherent in nature, being an
attribute of sovereignty. There is, thus, no need for
a constitutional grant for the State to exercise this
power.
It is an essential and inherent attribute of
sovereignty, belonging as a matter of right to
every independent government, without being
expressly conferred by the people (Pepsi-Cola
Bottling Company of the Phil. v. Mun. of
Tanauan, Leyte, 69 SCRA 460).
It does not need constitutional conferment.
Constitutional provisions do not give rise to the
power to tax but merely impose limitations on
what would otherwise be an invincible power
(Churchill and Tait v. Concepcion, 34 Phil. 969).
Q: Is the grant of the power of taxation inherent
for both National and Local Government?
A: NO. It is inherent in the National Government but
not in the Local Government Unit (LGU) since the
latter is merely a State’s agency to carry out in
detail the objects of the government. The LGU can
only impose taxes when it is granted by the:
Q: Why is the power to tax considered inherent
in a sovereign State? (2003 Bar)
A: It is considered inherent in a sovereign State
because it is a necessary attribute of sovereignty.
Without this power no sovereign State can exist or
endure. The power to tax proceeds upon the theory
that the existence of a government is a necessity
and this power is an essential and inherent
attribute of sovereignty, belonging as a matter of
right to every independent state or government. No
sovereign state can continue to exist without the
means to pay its expenses; and that for those
means, it has the right to compel all citizens and
property within its limits to contribute, hence, the
emergence of the power to tax (51 Am. Jur.,
Taxation 40).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
a.
b.
Constitution
e.g. LGU’s taxation power outside autonomous
region (Art. X, Sec. 5, 1987 Constitution)
Legislation by Congress
e.g. LGU’s taxation power within the
autonomous region (Art. X, Sec. 20, 1987
Constitution)
Scope of legislative power in taxation
1.
The determination of: [ASK-MAPS]
a.
2
Amount or Rate of tax
GENERAL PRINCIPLES OF TAXATION
b.
Subjects of taxation (persons, property,
occupation, excises or privileges to be
taxed, provided they are within the taxing
jurisdiction)
Kind of tax to be collected
Method of collection (not exclusive to the
Congress)
Apportionment of the tax (whether the tax
shall be of general application or limited to
a particular locality, or partly general and
partly local)
Purposes for which taxes shall be levied,
provided they are public purposes
Situs of taxation
followed by the seizure and confiscation of
property after the observance of due process.
The grant of tax exemptions and condonations
The power to specify or provide for
administrative as well as judicial remedies
(Philippines
Petroleum
Corporation
v.
Municipality of Pililla, G.R. No. 85318, June 3,
1991).
Q: Can police power and taxation co-exist in one
actof the government?
c.
d.
e.
f.
g.
2.
3.
Similarities among taxation,
police power and eminent domain
1.
2.
3.
4.
They are inherent powers of the State.
All are necessary attributes of the sovereign.
They exist independently of the Constitution.
They constitute the three methods by which the
State interferes with private rights and
property.
5. They presuppose equivalent compensation.
6. The legislature can exercise all three powers.
A: YES. Taxation is no longer envisioned as a
measure merely to raise revenue to support the
existence of the government. Taxes may be levied
with a regulatory purpose to provide a means for
the rehabilitation and stabilization of a threatened
industry which is affected with public interest as to
be within the police power of the state (Caltex
Philippines, Inc. v. Commission on Audit, 208 SCRA
726). Thus, the power of taxation may be exercised
to implement police power (Tiu v. Videogram
Regulatory Board, 151 SCRA 208).
Characteristics of taxation [CUPS]
1. Comprehensive - It covers persons, businesses,
activities, professions, rights and privileges.
2. Unlimited - It is so unlimited in force and
searching in extent that courts scarcely venture
to declare that it is subject to any restrictions,
except those that such rests in the discretion of
the authority which exercises it (Tio v.
Videogram Regulatory Board, G.R. No. 75697,
June 18, 1987).
3. Plenary - It is complete. Under NIRC, the BIR
may avail of certain remedies to ensure the
collection of taxes.
Taxes, being the lifeblood of the government,
that should be collected without unnecessary
hindrance, every precaution must be taken not
to unduly suppress it (Republic v. Caguioa, 536
SCRA 193 [2007]).
4. Supreme- It is supreme insofar as the selection
of the subject of taxation is concerned, but it
does not mean that it is superior to the other
inherent powers of the State.
Q: Explain the concept of “wide spectrum of
taxation.”
A: It means that taxation is one that extends to
every business, trade, or occupation; to every
object of industry; use or enjoyment; and to every
species of possession. It imposes a burden which, in
case of failure to discharge the same, may be
3
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
DISTINCTIONS AMONG THE THREE INHERENT POWERS OF THE STATE
Authority who
exercises the
power
Purpose
Persons affected
Amount of
monetary
imposition
Benefits received
Non-impairment
of contracts
Test of validity
TAXATION
Government or its political
subdivision
POLICE POWER
Government or its political
subdivision
To raise revenue in
support
of
the
Government. Regulation is
merely incidental
Upon the community or
class of individuals
Promotion
welfare
regulations
No ceiling except inherent
limitations
Limited to the cost of
regulation, issuance of
license or surveillance
Maintenance of healthy
economic standard of
society/no direct benefit
Protection of a secured
organized society, benefits
received
from
government/no
direct
benefit
Tax laws generally do not
impair contracts, unless
the government is party to
contract
granting
exemption
for
a
consideration
Must not be contrary to
inherent
and
constitutional limitations
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
of
general
through
Upon the community or
class of individuals
EMINENT DOMAIN
Government or public
service companies and
public utilities
To facilitate the taking of
private property for public
purpose
On an individual as the
owner of a particular
property
No imposition, the owner
is paid the fair market
value of his property
The person receives the
fair market value of the
property
taken
from
him/direct benefit results
Contracts may be impaired
Contracts may be impaired
Must comply with the tests
on “lawful subjects” and
“lawful means”
Must be for public purpose
and with payment of just
compensation
4
GENERAL PRINCIPLES OF TAXATION
Q: Ordinance No. SP-2095 of he Quezon City
government imposes a Socialized Housing Tax
(SHT) equivalent to 0.5% on the assessed value
of land in excess of Php100,000. The SHT will be
used as one of the sources of funds for urban
development and housing program. Can Quezon
City impose such tax?
those especially punitive effects of taxation, and the
belief that taxes are the lifeblood of the State yet at
the same time, it has been recognized that taxation
may be made the implement of the State’s police
power (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines,
et al., G. R. No. 158540, August 3, 2005).
A: YES. Cities are allowed to exercise such powers
and discharge such functions and responsibilities as
are necessary, appropriate, or incidental to efficient
and effective provision of the basic services and
facilities which include, among others, programs
and projects for low-cost housing and other mass
dwellings. The collections made accrue to its
socialized housing programs and projects. The tax is
not a pure exercise of taxing power or merely to
raise revenue; it is levied with a regulatory purpose.
The levy is primarily in the exercise of the police
power for the general welfare of the entire city.
(Ferrer, Jr. vs. Bautista, G.R. No. 210551, June 30,
2015)
Q: Galaxia Telecommunications Company
constructed a telecommunications tower for the
purpose of receiving and transmitting cellular
communications. Meanwhile, the municipal
authorities passed an ordinance entitled “An
Ordinance Regulating the Establishment of
Special Projects” which imposed fees to regulate
activities
particularly
related
to
the
construction and maintenance of various
structures, certain construction activities oCo
the identified special projects, which includes
“cell sites” or telecommunications towers. Is the
imposition of the fee an exercise of the power of
taxation?
Q: Distinguish taxation power from police
power.
A:NO. The designation given by the municipal
authorities does not decide whether the imposition
is properly a license tax or a license fee. The
determining factors are the purpose and effect of
the imposition as may be apparent from the
provisions of the ordinance. If the generating of
revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that
incidentally revenue is also obtained does not make
the imposition a tax (Gerochi v. Department of
Energy, 527 SCRA 696, 2007).
A:
TAXATION
POLICE POWER
Purpose
To raise revenue
To promote public
purpose
through
regulations
Amount of Exaction
No limit
Limited to the cost of
regulation, issuance of
the
license
or
surveillance
Benefits Received
No special or direct No direct benefit is
benefit is received by received; a healthy
the taxpayer; merely economic standard of
general benefit of society is attained
protection
Non-impairment of Contracts
Contracts may not be Contracts
may
be
impaired
impaired
Transfer of Property Rights
Taxes paid become No transfer but only
part of public funds
restraint in its exercise
Scope
All persons, property All persons, property,
and excises
rights and privileges
The fees in the ordinance are not impositions on the
building or structure itself; rather, they are
impositions on the activity subject of government
regulation, such as the installation and construction
of the structures. It is primarily regulatory in nature,
and not primarily revenue-raising. While the fees
may contribute to the revenues of the municipality,
this effect is merely incidental. Thus, the fees
imposed in the said ordinance are not taxes (Smart
Communications, Inc., v. Municipality of Malvar,
Batangas, G.R. No. 204429, February 18, 2014).
Q: Revenue laws R.A. 6260 and P.D. 276 were
enacted to establish the Coconut Investment
Fund and Coconut Consumers Stabilization Fund
(coco-levy funds). These funds shall be owned
by the coconut farmers in their private
capacities under the Coconut Industry Code.
Taxation is distinguishable from police power as to
the means employed to implement these public
good goals. Those doctrines that are unique to
taxation arose from peculiar considerations such as
In 2000, E.O. 313 was issued creating the
Coconut Trust Fund and designating the UCPB as
the trustee bank. This aimed to provide financial
5
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
assistance to the coconut farmers, to thecoconut
industry, and to other agri-related programs.
UCPB suggested that the coco-levy funds are
closely similar to the SSS funds, which have been
declared to be not public funds but properties of
the SSS members and held merely in trust by the
government.Are the coco-levy funds in the
nature of taxes and thus, can only be used for
public purpose?
scheme under the previous law), does not provide
for a peso for peso reimbursement of the 20%
discount given by private establishments, no
constitutional infirmity obtains because, being a
valid exercise of police power, payment of just
compensation is not warranted.
The 20% discount is intended to improve the
welfare of senior citizens who, at their age, are less
likely to be gainfully employed, more prone to
illnesses and other disabilities, and thus, in need of
subsidy in purchasing basic commodities. The
discount serves to honor senior citizens who
presumably spent the productive years of their lives
on contributing to the development and progress of
the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law.
As to its nature and effects, the 20% discount is a
regulation affecting the ability of private
establishments to price their products and services
relative to a special class of individuals, senior
citizens, for which the Constitution affords
preferential concern (Manila Memorial Park v.
DSWD, 2013).
A: YES. The coco-levy funds were raised pursuant to
law to support a proper governmental purpose.
They were raised with the use of the police and
taxing powers of the State for the benefit of the
coconut industry and its farmers in general.
Unlike ordinary revenue laws, R.A. 6260 and P.D.
276 did not raise money to boost the government’s
general funds but to provide means for the
rehabilitation and stabilization of a threatened
industry, the coconut industry, which is so affected
with public interest as to be within the police power
of the State. The subject laws are akin to the
imposed sugar liens. It cannot be likened to SSS Law
which collects premium contributions that are not
taxes and not for public purpose. The SSS members
pay contributions in exchange for insurance
protection and benefits like loans, medical or health
services, and retirement package (Pambansang
Koalisyon ng mga Samahang Magsasaka at
Manggagawa sa Niyugan v. Executive Secretary, G.R.
Nos. 147036-37, April 10, 2012).
THEORY AND BASIS OF TAXATION
The theories underlying the power of taxation are:
1. Lifeblood theory
2. Necessity theory
3. Benefits-protection
theory
(doctrine
symbiotic relationship)
4. Jurisdiction over subject and objects
Q: On February 26, 2004, R.A. 9257 was issued,
amending R.A. 7432, which provides that the
20%senior citizen discount may be claimed as a
tax deduction from gross income, gross sales or
gross receipts. Petitioners challenge its
constitutionality and pray that the tax credit
treatment of the 20% discount be reinstated.
They posit that the resolution of this case lies in
the determination of whether the legally
mandated 20% senior citizen discount is an
exercise of police power or eminent domain. If it
is police power, no just compensation is
warranted. But if it is eminent domain, the tax
deduction scheme is unconstitutional because it
is not a peso for peso reimbursement of the 20%
discount given to senior citizens. Thus, it
constitutes taking of private property without
payment of just compensation. Is the tax
deduction scheme an exercise of police power or
the power of eminent domain?
Q: Discuss the meaning and the implications of
the statement: “Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need” (1991 Bar).
A: It expresses the underlying basis of taxation
which is governmental necessity, for indeed,
without taxation, a government can neither exist
nor endure.
Considering that taxes are the lifeblood of the
government and in Holmes’s memorable metaphor,
the price we pay for civilization, tax laws must be
faithfully and strictly implemented (CIR v. Acosta,
G.R. No. 154068, August 3, 2007). Taxes should be
collected promptly. No court shall have the
authority to grant an injunction to restrain the
collection of any internal revenue tax, fee or charge
imposed by the NIRC (Angeles City v. Angeles Electric
Cooperation, 622 SCRA 43, 2010).
A: POLICE POWER. The 20% discount given to
senior citizens is a valid exercise of police power.
Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
of
Lifeblood theory
6
GENERAL PRINCIPLES OF TAXATION
The government chiefly relies on taxation to obtain
the means to carry on its operations. Taxes are
essential to its very existence. (CIR v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003)
Special benefits to taxpayers are not required. A
person cannot object to or resist the payment of
taxes solely because no personal benefit to him can
be pointed out arising from the tax (Lorenzo v.
Posadas, 64 Phil. 353). The expenses of government,
having for their object the interest of all, should be
borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold
himself honored in contributing to those expenses
(ABAKADA Guro Party List v. Ermita, G.R. No. 168056,
September 1, 2005).
Manifestations of lifeblood theory:
1.
2.
3.
4.
5.
Imposition even in the absence of constitutional
grant.
State’s right to select objects and subjects of
taxation.
No injunction to enjoin collection of taxes
except for a period of 60 days upon application
to the CTA as an incident of its appellate
jurisdiction.
Taxes could not be the subject of compensation
and set-off, subject to certain exceptions.
A valid tax may result in destruction of
property.
Jurisdiction over subjects and objects
It is the country, state or sovereign that gives
protection and has the right to demand payment of
taxes with which to finance activities so it could
continue to give protection. Taxation is territorial
because it is only within the confines of its territory
that a country, state or sovereign may give
protection.
Necessity theory
PRINCIPLES OF A SOUND TAX SYSTEM
The theory behind the exercise of the power to tax
emanates from necessity. Without taxes, the
government cannot fulfill its mandate of promoting
the general welfare and wellbeing of the people
(Gerochi v. DOE, 527 SCRA 696, 2007). It is a
necessary burden to preserve the State’s
sovereignty and a means to give the citizenry an
army to resist aggression, a navy to defend its
shores from invasion, a corps of civil servants to
serve, public improvements for the enjoyment of
the citizenry, and those which come within the
State’s territory and facilities and protection which
a government is supposed to provide (J.Dimaampao,
2015).
Basic principles of a sound tax system (canons of
taxation) [FAT]
1.
Fiscal adequacy
Revenue raised must be sufficient to meet
government/public expenditures and other
public needs (Chavez v. Ongpin, G.R. No. 76778,
June 6, 1990).
Neither an excess nor
a deficiency of revenue vis-à-vis the needs of
government would be in keeping with the
principle (Vitug, 2006).
2.
Administrative feasibility
The tax system should be capable of being
effectively administered and enforced with the
least inconvenience to the taxpayer (Diaz v.
Secretary of Finance, G.R. No. 193007, July 19,
2011).
Benefits-protection theory
(doctrine of symbiotic relationship)
It involves the power of the State to demand and
receive taxes based on the reciprocal duties of
support and protection between the State and its
citizens.
Q: True or False. A law that allows taxes to be
paid either in cash or in kind is valid.
Taxes are what we pay for a civilized society.
Without taxes, the government would be paralyzed
for lack of motive power to activate and operate it.
Hence, despite the natural reluctance to surrender
part of one’s earned income to the taxing
authorities, every person who is able must
contribute his share in the running of the
government. The government, for its part, is
expected to respond in the form of tangible and
intangible benefits intended to improve the lives of
the people and enhance their material and moral
values” (CIR v. Algue, G.R. No. L-28896, February 17,
1988).
A: TRUE. There is no law which requires payment
of taxes in cash only. However, a law allowing
payment of taxes in kind, although valid, may pose
problems of valuation, hence, will violate the
principle of administrative feasibility.
3.
7
Theoretical justice
a. Must take into consideration the taxpayer’s
ability to pay (Ability to Pay Theory).
b. Art. VI, Sec. 28(1), 1987 Constitution
mandates that the rule on taxation must be
uniform and equitable and that the State
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
must evolve a progressive system of
taxation.
A: NO. Without E.O. 73, the basis for collection of
real property taxes will still be the 1978 revision of
property values. Certainly, to continue collecting
real property taxes based on valuations arrived at
several years ago, in disregard of the increases in
the value of real properties that have occurred since
then, is not in consonance with a sound tax system.
Fiscal adequacy, which is one of the characteristics
of a sound tax system, requires that sources of
revenues must be adequate to meet government
expenditures and their variations (Chavez v. Ongpin,
186 SCRA 331, G.R. No. 76778, June 6, 1990).
A violation of the principle of a sound tax system
may or may not invalidate a tax law
A tax law will retain its validity even if it is not in
consonance with the principles of fiscal adequacy
and administrative feasibility because the
Constitution does not expressly require so. These
principles are only designated to make our tax
system sound. However, if a tax law runs contrary
to the principle of theoretical justice, such violation
will render the law unconstitutional considering
that under the Constitution, the rule of taxation
should be uniform and equitable (J. Dimaampao,
2015).
SCOPE AND LIMITATION OF TAXATION
Inherent limitations [PITIE]
1.
2.
3.
4.
5.
Q: Is the VAT law violative of the administrative
feasibility principle?
A: NO. The VAT law is principally aimed to
rationalize the system of taxes on goods and
services. Thus, simplifying tax administration and
making the system more equitable to enable the
country to attain economic recovery (Kapatiran ng
Mga Naglilingkod sa Pamahalaan v. Tan, G.R. No.
81311, June 30, 1988).
Constitutional limitations
1.
Provisions directly affecting taxation
a. Prohibition against imprisonment for
non-payment of poll tax (Art. III, Sec. 20)
b. Uniformity and equality of taxation (Art.
VI, Sec. 28)
c. Grant by Congress of authority to the
president to impose tariff rates (Art. VI ,
Sec. 28)
d. Prohibition against taxation of religious,
charitable entities, and educational
entities (Art. VI, Sec. 28)
e. Prohibition against taxation of non-stock,
non-profit educational institutions (Art.
IX, Sec. 4)
f. Majority vote of Congress for grant of tax
exemption (Art. VI, Sec. 28)
g. Prohibition on use of tax levied for special
purpose (Art. VI, Sec. 29)
h. President’s veto power on appropriation,
revenue, tariff bills (Art. VI, Sec. 27)
i. Non-impairment of jurisdiction of the
Supreme Court (Art. VI, Sec. 30)
j. Grant of power to the LGUs to create its
own sources of revenue (Art. IX, Sec. 5)
k. Origin of Revenue and Tariff Bills (Art. VI,
Sec. 24)
l. No appropriation or use of public money
for religious purposes (Art. VI, Sec. 28)
2.
Provisions indirectly affecting taxation (Art. III,
1987 Constitution)
a. Due process (Sec. 1)
Q: Is the imposition of VAT on tollway
operations valid?
A: YES. Administrative feasibility is one of the
canons of a sound tax system. Non-observance of
the canon, however, will not render a tax imposition
invalid “except to the extent that specific
constitutional or statutory limitations are
impaired.” Thus, even if the imposition of VAT on
tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the
Constitution (Diaz v. Secretary of Finance, 654 SCRA
96, G.R. No. 193007, July 19, 2011).
Q: Frank Chavez, as taxpayer, and Realty Owners
Association of the Philippines, Inc. (ROAP),
alleged that E.O. 73 providing for the collection
of real property taxes as provided for under
Section 21 of P.D. 464 (Real Property Tax Code)
is unconstitutional because it accelerated the
application of the general revision of
assessments to January 1, 1987 thereby
increasing real property taxes by 100% to 400%
on improvements, and up to 100% on land
which would necessarily lead to confiscation of
property. Is the contention of the Chavez and
ROAP correct?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Public Purpose
Inherently Legislative
Territorial
International Comity
Exemption of government entities, agencies
and instrumentalities
8
GENERAL PRINCIPLES OF TAXATION
b.
c.
d.
e.
Equal protection (Sec. 1)
Religious freedom (Sec. 5)
Non-impairment of obligations
contracts (Sec. 10)
Freedom of the press (Sec. 4)
Determination when enacted tax law is for
public purpose
of
It lies in the Congress. However, this will not
prevent the court from questioning the propriety of
such statute on the ground that the law enacted is
not for a public purpose; but once it is settled that
the law is for a public purpose, the court may no
longer inquire into the wisdom, expediency or
necessity of such tax measure.
The limitations are discussed in detail below.
INHERENT LIMITATIONS
Public purpose
NOTE: If the tax measure is not for public purpose,
the act amounts to confiscation of property.
The proceeds of tax must be used (a) for the support
of the State or (b) for some recognized objective of
the government or to directly promote the welfare
of the community.
Principles relative to public purpose
1.
Tax is considered for public purpose if:
1. It is for the welfare of the nation and/or for
greater portion of the population;
2. It affects the area as a community rather than as
individuals; and
3. It is designed to support the services of the
government for some of its recognized objects.
2.
NOTE: Legislature is not required to adopt a
policy of “all or none” for the Congress has the
power to select the object of taxation (Lutz v.
Araneta, G.R. No. L-7859, 22 December 1955).
Tests in determining public purpose
1.
Duty test -Whether the thing to be furthered by
the appropriation of public revenue is
something which is the duty of the State as a
government to provide.
3.
4.
NOTE: The term “public purpose” is not
defined. It is an elastic concept that can be
hammered to fit modern standards.
Jurisprudence states that “public purpose”
should be given a broad interpretation. It does
not only pertain to those purposes which are
traditionally viewed as essentially government
functions, such as building roads and delivery of
basic services, but also includes those purposes
designed to promote social justice. Thus, public
money may now be used for the relocation of
illegal settlers, low-cost housing and urban
agrarian reform (Planters Products, Inc. v.
Fertiphil Corporation, G.R. No. 166006, March 14,
2008).
2.
Tax revenue must not be used for purely private
purposes or for the exclusive benefit of private
persons.
Inequalities resulting from the singling out of
one particular class for taxation or exemption
infringe no constitutional limitation because
the legislature is free to select the subjects of
taxation.
5.
An individual taxpayer need not derive direct
benefits from the tax.
Public purpose is continually expanding. Areas
formerly left to private initiative now lose their
boundaries and may be undertaken by the
government if it is to meet the increasing social
challenges of the times.
The public purpose of the tax law must exist at
the time of its enactment (Pascual v. Secretary of
Public Works, G.R. No. L-10405, December 29,
1960).
Q: Are subsequent laws, which convert a public
fund to private properties, valid?
A: NO. Taxes could be exacted only for a public
purpose; they cannot be declared private properties
of individuals although such individuals fall within
a distinct group of persons (Pambansang Koalisyon
ng mga Samahang Magsasaka at Manggagagawa sa
Niyugan v. Exec. Sec., G.R. Nos. 147036-37, April 10,
2012).
Promotion of general welfare test - Whether the
proceeds of the tax will directly promote the
welfare of the community in equal measure.
When a tax law is only a mask to exact funds
from the public when its true intent is to give
undue benefit and advantage to a private
enterprise, that law will not satisfy the
requirement of "public purpose" (Planters
Products, Inc. v. Fertiphil Corporation, G.R. No.
166006, March 14, 2008).
Q: Lutz assailed the constitutionality of Sections
2 and 3 of C.A. 567, which provided for an
increase of the existing tax on the manufacture
of sugar. Lutz alleged such tax as
unconstitutional and void for not being levied
9
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
for a public purpose but for the aid and support
of the sugar industry exclusively. Is the tax law
increasing the existing tax on the manufacture
of sugar valid?
Non-delegable legislative powers
A: YES. The protection and promotion of the sugar
industry is a matter of public concern. The
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. Legislative discretion
must be allowed full play, subject only to the test of
reasonableness. If objective and methods alike are
constitutionally valid, there is no reason why the
State may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made
to implement the State’s police power (Lutz v.
Araneta, G.R. No. L-7859, December 22, 1955).
3.
4.
5.
1.
2.
XPNs:
1. Delegation to Local Government – Refers to the
power of LGUs to create its own sources of
revenue and to levy taxes, fees and charges (Art.
X, Sec. 5, 1987 Constitution)
Q: Is the tax imposed on the sale, lease or
disposition of videograms for a public purpose?
A: YES. Such tax is imposed primarily for answering
the need for regulating the video industry,
particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and
the proliferation of pornographic videotapes. While
the direct beneficiary of said imposition is the movie
industry, the citizens are held to be its indirect
beneficiaries (Tio v. Videogram Regulatory Board,
G.R. No. 75697, June 18, 1987).
Inherently legislative
2.
Only the legislature has the full discretion as to the
persons, property, occupation or business to be
axed provided these are all within the State’s
territorial jurisdiction. It can also fully determine
the amount or rate of tax, the kind of tax to be
imposed and method of collection (1 Cooley 176184).
NOTE:Art. X, Sec. 5 of the Constitution does not
change
the
doctrine
that
municipal
corporations do not possess inherent powers of
taxation; what it does is to confer municipal
corporations a general power to levy taxes and
otherwise create sources of revenue and they
no longer have to wait for a statutory grant of
these powers and the power of the legislative
authority relative to the fiscal powers of local
governments has been reduced to the authority
to impose limitations on municipal powers.
Thus, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved
in favor of municipal corporations (Quezon City
et al. v. ABS-CBN Broadcasting Corporation, G.R.
No. 162015, March 6, 2006).
Delegation to the President – The authority of
the President to fix tariff rates, import or export
quotas, tonnage and wharfage dues or other
duties and imposts (Art. VI, Sec. 28(2), 1987
Constitution).
NOTE:When Congress tasks the President or
his/her alter egos to impose safeguard
measures under the delineated conditions, the
President or the alter egos may be properly
deemed as agents of Congress to perform an act
that inherently belongs as a matter of right to
the legislature. It is basic agency law that the
agent may not act beyond the specifically
delegated powers or disregard the restrictions
imposed by the principal (Southern Cross
Cement Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540, August
3, 2005).
GR: The power to tax is exclusively vested in the
legislative body, being inherent in nature; hence, it
may not be delegated (Delegata potestas non potest
delegari).
The powers which Congress is prohibited from
delegating are those which are strictly, or inherently
and exclusively, legislative. Purely legislative
power, which can never be delegated, has been
described as the authority to make a complete law,
complete as to the time when it shall take effect and
as to whom it shall be applicable; and to determine
the expediency of its enactment (ABAKADA Guro
Party List v. Hon. Exec. Sec., G.R. No. 168056,
September 1, 2005). It cannot be delegated without
infringing upon the theory of separation of powers
(Pepsi-Cola Bottling Company of the Phil. v. Mun. of
Tanauan, 69 SCRA 460, February 27, 1976).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Selection of subject to be taxed
Determination of purposes for which taxes shall
be levied
Fixing of the rate/amount of taxation
Situs of tax
Kind of tax
3.
10
Delegation to administrative agencies – When
the delegation relates merely to administrative
implementation that may call for some degree
of discretionary powers under sufficient
standards expressed by law (Cervantes v.
Auditor General, G.R. No. L-4043, May 26, 1952)
or implied from the policy and purpose of the
GENERAL PRINCIPLES OF TAXATION
act (Maceda v. Macaraig, G.R. No. 88291, June 8,
1993).
Q: R.A. 9337 (The VAT Reform Act) provides that
the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following
conditions have been satisfied. “(i) value-added
tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or (ii) national
government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent
(1 ½%).” Was there an invalid delegation of
legislative power?
NOTE: Technically, this does not amount to a
delegation of the power to tax because the
questions which should be determined by
Congress are already answered by Congress
before the tax law leaves Congress.
Q: In order to raise revenue for the repair and
maintenance of the newly constructed City Hall
of Makati, the City Mayor ordered the collection
of P1.00, called “elevator tax”, every time a
person rides any of the high-tech elevators in
the City Hall during the hours of 8am to 10am,
and 4pm to 6pm. Is the imposition of elevator
tax valid? (2003 Bar)
A: NO. There is no undue delegation of legislative
power but only of the discretion as to the execution
of the law. This is constitutionally permissible.
Congress did not abdicate its functions or unduly
delegate power when it describes what job must be
done, who must do it, and what is the scope of his
authority. The Secretary of Finance, in this case,
becomes merely the agent of the legislative
department, to determine and declare the event
upon which its expressed will is to take effect. The
President cannot set aside the findings of the
Secretary of Finance, who is not under the
conditions acting as her alter ego or subordinate
(ABAKADA Guro Party List v. Ermita, etc., et al., G. R.
No. 168056, September 1, 2005).
A: No. The imposition of a tax, fee or charge, or the
generation of revenue under the Local Government
Code (LGC), shall be exercised by the Sanggunian of
the LGU concerned through an appropriate
ordinance (Sec. 132, LGC). The city mayor alone
could not order the collection of the tax; as such, the
"elevator tax" is an invalid imposition.
Q: The Municipality of Malolos passed an
ordinance imposing a tax on any sale or transfer
of real property located within the municipality
at a rate of ¼ of 1% of the total consideration of
the transaction. “X” sold a parcel of land in
Malolos which he inherited from his deceased
parents and refused to pay the aforesaid tax. He
instead filed appropriate case asking that the
ordinance be declared null and void since such a
tax can only be collected by the national
government, as in fact he has paid the BIR the
required capital gains tax.
Territorial
Taxation may be exercised only within the
territorial jurisdiction, the taxing authority (61 Am.
Jur. 88). Within the territorial jurisdiction, the
taxing authority may determine the “place of
taxation” or “tax situs.”
GR: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.
The Municipality countered that under the
Constitution, each local government is vested
with the power to create its own sources of
revenue and to levy taxes, and it imposed the
subject tax in the exercise of said Constitution
authority. Resolve the controversy. (1991 Bar)
Reasons:
1. Taxation is an act of sovereignty which could
only be exercised within a country’s territorial
limits.
2. This is based on the theory that taxes are paid
for the protection and services provided by the
taxing authority which could not be provided
outside the territorial boundaries of the taxing
State.
A: The ordinance is void. The LGC only allows
provinces and cities to impose a tax on the transfer
of ownership of real property (Secs. 135 and 151,
LGC). Municipalities are prohibited from imposing
said tax that provinces are specifically authorized to
levy.
XPNs:
1. Where tax laws operate outside territorial
jurisdiction –
i.e. Taxation of resident citizens on their
incomes derived abroad.
While it is true that the Constitution has given broad
powers of taxation to LGUs, this delegation,
however, is subject to such limitations as may be
provided by law (Art. X, Sec. 5, 1987 Constitution).
11
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
Where tax laws do not operate within the
territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.
income --- 30% for individual and 35% for
corporate non-resident stockholders --- was
deducted at source and remitted to the BIR.
On May 15, 1984, ABCD filed with the
Commissioner of Internal Revenue a formal
claim for refund, alleging that under the RP-US
Tax Treaty, the deduction withheld at source as
tax on dividends earned was fixed at 25% of said
income. Thus, ABCD asserted that it overpaid
the withholding tax due on the cash dividends
given to its non-resident stockholders in the U.S.
The Commissioner denied the claim.
International comity
It refers to the respect accorded by nations to each
other because they are sovereign equals. Thus, the
property or income of a foreign state may not be the
subject of taxation by another State.
This is a limitation founded on reciprocity designed
to maintain harmonious and productive
relationships among the various state. Under
international comity, a state must recognize the
generally-accepted tenets of international law,
among which are the priniciples of sovereign
equality among states and of their freedom from
suit without their consent, that limits that authority
of a government to effectively impose taxes in a
sovereign state and its instrumentalities, as well as
in its property held and activities undertaken in that
capacity.
On January 17, 1985, ABCD filed a petition with
the Court of Tax Appeals (CTA) reiterating its
demand for refund.
Is the contention of ABCD Corporation correct?
Why or why not? (Bar 2009)
A: YES. The provision of a treaty must take
precedence over and above the provisions of the
local taxing statute consonant with the principle of
international comity. Tax treaties are accepted
limitations to the power of taxation. Thus, the CTA
should apply the treaty provision so that the claim
for refund representing the difference between the
amount actually withheld and paid to the BIR and
the amount due and payable under the treaty,
should be granted (Hawaiian-Philippine Company v.
CIR, CTA Case No. 3887, May 31, 1988).
International comity as a limitation on the
power to tax
The Constitution expressly adopted the generally
accepted principles of international law as part of
the law of the land (Art. II, Sec. 2, 1987 Constitution).
Thus, a State must recognize such generally
accepted tenets of international law that limit the
authority of the government to effectively impose
taxes upon a sovereign State and its
instrumentalities.
Principle of Pacta Sunt Servanda in Taxation
Observance of any treaty obligation binding upon
the government of the Philippines is anchored on
the constitutional provision that the Philippines
“adopts the generally accepted principles of
international law as part of the law of the land (Art.
II, Sec. 2, 1987 Constitution). Pacta sunt servanda is
a fundamental international law principle that
requires agreeing parties to comply with their
treaty obligations in good faith. Hence, the
application of the provisions of the NIRC must be
subject to the provisions of tax treaties entered into
by the Philippines with foreign countries.
(Air Canada vs. CIR, G.R. No. 169507, January 11,
2016)
Reasons:
1. Par in parem non habet imperium. As between
equals there is no sovereign (Doctrine of
Sovereign Equality).
2. The concept that when a foreign sovereign
enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the
other.
3. The rule of international law that a foreign
government may not be sued without its
consent so that it is useless to impose a tax
which could not be collected.
Exemption from taxation of government entities
Q: X(B) ABCD Corporation (ABCD) is a domestic
corporation with individual and corporate
shareholders who are residents of the United
States. For the 2nd quarter of 1983, these U.S.based individual and corporate stockholders
received cash dividends from the corporation.
The corresponding withholding tax on dividend
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
GR: The government is exempt from tax.
Reason:Otherwise, we would be “taking money
from one pocket and putting it in another” (Board of
Assessment Appeals of Laguna v. CTA, G.R. No. L18125, May 31, 1963).
12
GENERAL PRINCIPLES OF TAXATION
XPN: When it chooses to tax itself. Nothing prevents
Congress
from
decreeing
that
even
instrumentalities or agencies of the government
performing government functions may be subject to
tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one
can doubt its wisdom (MCIAA v. Marcos, G.R. No.
120082, September 11, 1996).
A government instrumentality falls under Section
133(o) of the LGC, which states:
Government may tax itself
(o) Taxes, fees or charges of any kind on the
National
Government,
its
agencies
and
instrumentalities and local government units.”
“SEC. 133.Common Limitations on the Taxing Powers
of Local Government Units. — Unless otherwise
provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following: xxx
Since sovereignty is absolute and taxation is an act
of high sovereignty, the State if so minded could tax
itself, including its political subdivisions (Maceda v.
Macaraig, G.R. No. 88291, June 8, 1993).
Q: LLL is a government instrumentality created
by Executive Order to be primarily responsible
for integrating and directing all reclamation
projects for the National Government. It was not
organized as a stock or a non-stock corporation,
nor was it intended to operate commercially and
compete in the private market.
National government is exempt from local
taxation
If the taxing authority is the LGU, R.A. 7160
expressly prohibits LGUs from levying tax on the
National
Government,
its
agencies
and
instrumentalities and other LGUs.
In Manila International Airport Authority v. CA, G.R.
No. 155650 (2006) MIAA's Airport Lands and
Buildings are exempt from real estate tax imposed
by local governments. Being an instrumentality of
the national government, it is exempt from local
taxation. Also, the real properties of MIAA are
owned by the Republic of the Philippines and thus
exempt from real estate tax.
By virtue of its mandate, LLL reclaimed several
portions of the foreshore and offshore areas of
the Manila Bay, some of which were within the
territorial jurisdiction of Q City. Certificates of
title to the reclaimed properties in Q City were
issued in the name of LLL in 2008. In 2014, Q City
issued Warrants of Levy on said reclaimed
properties of LLL based on the assessment for
delinquent property taxes for the years 2010 to
2013.
Agency of the government
a.
Are the reclaimed properties registered in
the name of LLL subject to real property tax?
b. Will your answer be the same in (a) if from
2010 to the present time, LLL is leasing
portions of the reclaimed properties for the
establishment and use of popular fastfood
restaurants J Burgers, G Pizza, and K
Chicken? (2015 Bar)
It refers to any of the various units of the
government, including a department, bureau, office,
instrumentality,
or
government-owned
or
controlled corporation, or a local government or a
distinct unit therein.
Taxability of agencies of government
1.
2.
A:
a. The reclaimed properties are not subject to real
property tax because LLL is a government
instrumentality. Under the law, real property
owned by the Republic of the Philippines is
exempt from real property tax unless the
beneficial use thereof has been granted to a
taxable person (Sec. 234, LGC). When the title of
the real property is transferred to LLL, the
Republic remains the owner of the real
property. Thus, such arrangement does not
result in the loss of the tax exemption (Republic
of the Philippines, represented by The Philippine
Reclamation Authority v. City of Paranaque, 677
SCRA 246 [2012]).
Performing governmental functions: tax
exempt unless expressly taxed
Performing proprietary functions: subject to
tax unless expressly exempted
Instrumentality of the government
It refers to any agency of national government, not
integrated within the department framework,
vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers,
administering special funds, and enjoying
operational autonomy, usually through charter.
Taxability of instrumentalities of government
13
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
NO. As a rule, properties owned by the Republic
of the Philippines are exempt from real
property tax except when beneficial use thereof
has been granted, for consideration or
otherwise, to a taxable person. When LLL leased
out portions of the reclaimed properties to
taxable entities, such as popular fast food
restaurants, the reclaimed properties are
subject to real property tax (Sec. 234(a), LGC;
GSIS v. City Treasurer and City Assessor of the
City of Manila, 2009).
It refers to to any agency:
a.
b.
c.
Q: Is PEZA a government instrumentality or a
GOCC? Is it exempt from real property taxation?
NOTE: Government instrumentality may include a
GOCC and there may be “instrumentality” that does
not qualify as GOCC.
A: PEZA is an instrumentality of the government. It
is not integrated within the department framework
but is an agency attached to the Department of
Trade and Industry. PEZA is also vested with special
functions or jurisdiction by law. Congress created
the PEZA to operate, administer, manage and
develop special economic zones in the Philippines.
Although a body corporate vested with some
corporate powers, the PEZA is not a GOCC that is
taxable for real property taxes because it was not
organized as a stock or non-stock corporation.
Taxability of GOCCs
GOCCs perform proprietary functions; hence they
are subject to taxation. However, certain
corporations have been granted exemption under
Section 27(c) of R.A. 8424 as amended by R.A. 9337,
which took effect on July 1, 2005, to wit:
1.
2.
3.
Being an instrumentality of the national
government, it cannot be taxed by LGUs (PEZA v.
Lapu-lapu City, 742 SCRA 524).
Q: The Philippine Fisheries Development
Authority (PFDA) took over the management
and operation of the Lucena Fishing Port
Complex (LFPC) which is one of the fishery
infrastructure projects undertaken by the
National Govenrment under the Nationwide
Fish Port-Package built on a reclaimed land. The
City Government of Lucena then demanded
payment of realty taxes on the LFPC property. Is
PFDA liable for the real property tax assessed on
the Lucena Fishing Port Complex?
4.
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation
(PHIC)
Philippine Charity Sweepstakes Office (PCSO)
CONSTITUTIONAL LIMITATIONS
Taxation, being inherent in sovereignty, need not be
clothed with any constitutional authority for it to be
exercised by the sovereign state. Instead,
constitutional provisons are meant and intended
more to regulate and define, rather than to grant,
the power emanating therefrom.
Provisions directly affecting taxation
1. Prohibition against imprisonment for nonpayment of poll tax
A: NO. The exercise of the taxing power of LGUs is
subject to the limitations enumerated in Sec. 133 of
the LGC. Under Sec. 133(o) of the LGC, LGUs have no
power to tax instrumentalities of the national
government like the PFDA. Thus, PFDA is not liable
to pay real property tax except those portions which
are leased to private persons or entities. Also, as
property of public dominion, the Lucena Fishing
Port Complex is owned by the Republic of the
Philippines and thus exempt from real estate tax
(Philippine Fisheries Development Authority v.
Central Board of Assessment Appeals, G.R. No.
178030, December 15, 2010).
Basis:No person shall be imprisoned for debt or
non-payment of a poll tax (Art. III, Sec. 20).
A poll tax is one levied on persons who are
residents within the territory of the taxing
authority without regard to their property,
business or occupation. Thus, only the basic
community tax under the LGC could qualify as a
poll tax, and the non-payment of other
(additional) taxes imposed, not being in the
nature of poll taxes, may validly be subjected by
law to imprisonment (Vitug, 2006).
Government-owned and controlled corporation
(GOCC)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
organized as a stock or non-stock corporation,
vested with functions relating to public needs
whether governmental or proprietary in
nature, and
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of
its capital stock
14
GENERAL PRINCIPLES OF TAXATION
In other words, while a person may not be
imprisoned for non-payment of a cedula or poll
tax, he may be imprisoned for non-payment of
other kinds of taxes where the law so expressly
provides (J. Dimaampao, 2015).
discriminatory and violative of the equal
protection clause of the Constitution since
complainants were not given the same
exemption. Is the suit meritorious or not?
Reason briefly (2004 Bar).
2. Uniformity and equality of taxation
A: YES, the suit is meritorious. The VAT is designed
for economic efficiency; hence, should be neutral to
those who belong to the same class. Professionals
are a class of taxpayers by themselves who, in
compliance with the rule of equality of taxation,
must be treated alike for tax purposes. Exempting
lawyers and doctors from a burden to which other
professionals are subjected will make the law
discriminatory and violative of the equal protection
clause of the Constitution. While singling out a class
for taxation purposes will not infringe upon this
constitutional limitation (Shell v. Vano, 94 Phil. 389
[1954]), singling out a taxpayer from a class will no
doubt transgress the constitutional limitation
(Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City, 22
SCRA 603 [1968]). Treating doctors and lawyers as
a different class of professionals will not comply
with the requirements of a reasonable, hence valid
classification, because the classification is not based
upon substantial distinction which makes real
differences. The classification does not comply with
the requirement that it should be germane to the
purpose of the law either (Pepsi-Cola Bottling Co.,
Inc. v. City of Butuan, 24 SCRA 789 [1968]).
Basis:The rule of taxation shall beuniform and
equitable. The Congress shall evolve a
progressive system of taxation (Art. VI, Sec.
28[1]).
Explain the following concepts in taxation:
a.
Uniformity – It means that all taxable articles
or kinds of property of the same class shall
be taxed at the same rate.
A tax is considered uniform when it
operates with the same force and effect in
every place where the subject is found.
Different articles may be taxed at different
amounts provided that the rate is uniform
on the same class everywhere, with all
people at all times.
Equitability – Taxation is said to be equitable
when its burden falls on those better able to
pay.
Q: Heeding the pronouncement of the President
that the worsening traffic condition in the
metropolis was a sign of economic progress, the
Congress enacted Republic Act No. 10701, also
known as An Act Imposing a Transport Tax on
the Purchaseof PrivateVehicles.
Equality – It is accomplished when the
burden of the tax falls equally and
impartially upon all the persons and
property subject to it.
Q: Explain the requirement of uniformity as a
limitation in the imposition and/or collection of
taxes (1998 Bar).
Under RA 10701, buyers of private vehicles are
required to pay a transport tax equivalent to 5%
of the total purchase price per vehicle
purchased. RA 10701 provides that the Land
Transportation Office (LTO) shall not accept for
registration any new vehicles without proof of
payment of the 5% transport tax. RA 10701
further provide that existing owners of private
vehicles shall be required to pay a tax equivalent
to 5% of the current fair market value of every
vehicle registered with the LTO. However, RA
10701 exempts owners of public utility vehicles
and the Government from the coverage of the
5% transport tax.
A: Uniformity in the imposition and/or collection of
taxes means that all taxable articles, or kinds of
property of the same class shall be taxed at the
same rate. The requirement of uniformity is
complied with when the tax operates with the same
force and effect in every place where the subject of
it is found (Churchill & Tait v. Conception, 34 Phil.
969). Different articles may be taxed at different
amounts provided that the rate is uniform on the
same class everywhere with all people at all times.
Accordingly, singling out one particular class for
taxation purposes does not infringe the
requirement of uniformity.
A group of private vehicle owners sue on the
ground that the law is unconstitutional for
contravening the Equal Protection Clause of
theConstitution.
Q: A law was passed exempting doctors and
lawyers from the operation of the value-added
tax. Other professionals complained and filed a
suit
questioning
the
law
for
being
15
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Rule on the constitutionality and validity of RA
10701. (Bar 2017)
Meaning of “evolve” as used in the Constitution
The constitutional provision has been interpreted
to mean simply that "direct taxes are to be
preferred and as much as possible, indirect taxes
should be minimized.” The mandate of Congress is
not to prescribe but to evolve a progressive tax
system. This is a mere directive upon Congress, not
a justiciable right or a legally enforceable one. We
cannot avoid regressive taxes but only minimize
them (Tolentino et.al. v. Secretary of Finance, G.R. No.
115455, Oct. 30, 1995).
A: RA 10701 is valid and constitutional. A levy of tax
is not unconstitutional because it is not intrinsically
equal and uniform in its operation. The uniformity
rule does not prohibit classification for purposes of
taxation. (British American Tobacco v. Jose Isidro N.
Camacho, G.R. No. 163583, April 15, 2009).
Uniformity in taxation, like the kindred concept of
equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities.
Uniformity does not forfend classification as long
as: (1) the standards that are used therefor are
substantial and not arbitrary, (2) the categorization
is germane to achieve the legislative purpose, (3)
the law applies, all things being equal, to both
present and future conditions, and (4) the
classification applies equally well to all those
belonging to the same class. (Rufino R. Tan v. Ramon
R. Del Rosario, Jr., G.R. Nos. 109289, October 3, 1994,
237 SCRA 324). All of the foregoing requirements of
a valid classification having been met and those
which are singled out are a class in themselves,
there is no violation of the “Equal Protection
Clause” of the Constitution.
Q: Is VAT regressive?
A: YES. The principle of progressive taxation has no
relation with the VAT system in as much as the VAT
paid by the consumer or business for every goods
bought or services enjoyed is the same regardless
of income. In other words, the VAT paid eats the
same portion of an income, whether big or small.
The disparity lies in the income earned by a person
or profit margin marked by a business, such that the
higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by
VAT. A converse, the lower the income or profit
margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower
income group or businesses with low-profit
margins that is always hardest hit (ABAKADA Guro
v. Ermita, G.R. No. 168056, September 1, 2005).
Q: Does the 20% Sales Discount for Senior
Citizens and Persons with Disabilities violates
the constitutional right of equal protection
clause?
3. Grant by Congress of authority to the
president to impose tariff rates
A: NO. The equal protection clause is not infringed
by legislation which applies only to those falling
within a specified class. If the groupings are
characterized by substantial distinctions that make
real differences, one class may be treated an
regulated differently from another (Southern Luzon
Drug Corporation v. DSWD, G.R. No. 199669, April 25,
2017).
Basis:The Congress may, by law, authorize the
President to fix within specified limits and
subject to such limitations and restrictions at it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues and other
duties or imposts within the framework of the
national development program of the
Government (Art. VI, Sec. 28 [2]).
Progressive taxation
Flexible tariff clause
Taxation is progressive when tax rate increases as
the income of the taxpayer increases. It is based on
the principle that those who are able to pay more
should shoulder the bigger portion of the tax
burden.
This clause provides the authority given to the
President to adjust tariff rates under Sec. 401 of
the Tariff and Customs Code [now Sec. 1608 of
R.A. 10863, known as Customs Modernization
and Tariff Act (CMTA) of 2016] (Garcia v.
Executive Secretary, G.R. No. 101273, July 3,
1992). This authority, however, is subject to
limitations and restrictions indicated within the
law itself.
Q: Does the Constitution prohibit regressive
taxes?
A:NO, the Constitution does not really prohibit the
impostion of regressive taxes. What it simply
provides is that Congress shall evolve a progressive
system of taxation.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Requisites on the authority of the President
in imposing tax
16
GENERAL PRINCIPLES OF TAXATION
a.
Delegated by Congress through a law – The
authorization granted to the President
must be embodied in a law. Hence, the
justification cannot be supplied simply by
inherent executive powers.
A: It covers real property taxes only. Accordingly, a
conveyance of such exempt property can be subject
to transfer taxes.
Properties exempt under the Constitution from
the payment of property taxes
It is Congress which authorizes the
President to impose tariff rates, import and
export quotas, tonnage and wharfage dues,
and other duties or imposts. Thus, the
authority cannot come from the Finance
Department, the National Economic
Development Authority, or the World
Trade Organization, no matter how
insistent or persistent these bodies may be
(Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Phil., G.R. No. 158540, August 3, 2005).
b.
1.
2.
3.
4.
5.
Meaning of “charitable”
Subject to Congressional limits and
restrictions – The authorization to the
President can be exercised only within the
specified limits set in the law and is further
subject to limitations and restrictions
which
Congress
may
impose.
Consequently, if Congress specifies that the
tariff rates should not exceed a given
amount, the President cannot impose a
tariff rate that exceeds such amount.
It is not restricted to relief of the poor or sick. The
test whether an enterprise is charitable or not is
whether it exists to carry out a purpose recognized
in law as charitable or whether it is maintained for
gain, profit, or private advantage (Lung Center of the
Philippines v. Quezon City, G.R. No. 144104, June 29,
2004).
Also, an organization must meet the substantive test
of charity. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of
government. In other words, charitable institutions
provide for free goods and services to the public
which would otherwise fall on the shoulders of
government (CIR v. St. Luke’s Medical Center, Inc.,
G.R. No. 195909 September 26, 2012).
Assuming there is a conflict between the
specific limitation in the Constitution and
the general executive power of control and
supervision, the former prevails in the
specific instance of safeguard measures
such as tariffs and imposts, and would thus
serve to qualify the general grant to the
President of the power to exercise control
and supervision over his/her subalterns
(Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Phil., G.R. No. 158540, August 3, 2005).
c.
Within the framework
development program.
of
Charitable institutions
Churches and parsonages or convents
appurtenant thereto
Mosques
Non-profit cemeteries
All lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes shall be
exempt from taxation (Art. VI, Sec. 28[3]).
Meaning of “actual, direct and exclusive use of
the property for religious, charitable and
educational purposes”
It is the direct and immediate and actual application
of the property itself to the purposes for which the
charitable institution is organized. It is not the use
of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes.
national
4. Prohibition against taxation of religious,
charitable entities, and educational entities
NOTE: In the case of Lung Center of the Philippines v.
City Assessor of Quezon City (433 SCRA 119), the
Court ruled that under the 1987 Constitution, for
"lands, buildings, and improvements" of the
charitable institution to be considered exempt, the
same should not only be "exclusively" used for
charitable purposes; it is required that such
property be used "actually" and "directly" for such
purposes.
Basis:Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or
educational purposes shall be exempt from
taxation (Art. IV, Sec. 28 [3]).
Q: What is the coverage of tax exemption?
17
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
"Exclusive" is defined as possessed and enjoyed to
the exclusion of others; debarred from participation
or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more
commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.
of a corporation, of the taxpayer’s taxable
income derived from trade or business or
profession (Sec.34 [H], NIRC).
2.
The words "dominant use" or "principal use" cannot
be substituted for the words "used exclusively"
without doing violence to the Constitution and the
law.
In sum, the Court ruled that the portions of the land
leased to private entities as well as those parts of the
hospital leased to private individuals are not
exempt from taxes.
For purposes of donor’s and estate taxation–
Donations in favor of religious and charitable
institutions are generally not subject to tax
provided, however, that not more than 30% of
the said bequests, devises, or legacies or
transfers shall be used by such institutions for
administration purposes (Secs. 87[D] and 101,
NIRC).
Rules on taxation of non-stock corporations for
charitable and religious purposes
Q: In 1991, Imelda gave her parents a Christmas
gift of P100,000 and a donation of P80,000 to the
parish church. She also donated a parcel of land
for the construction of a building to the PUP
Alumni Association a non-stock, non-profit
organization. Portions of the Building shall be
leased to generate income for the association.
1.
a.
For purposes of income taxation
a. The income of non-stock corporations
operating exclusively for charitable and
religious purposes, no part of which inures
to the benefit of any member, organizer or
officer or any specific person, shall be
exempt from tax.
Is the Christmas gift of P100,000 to Imelda’s
Parents subject to tax?
b. How about the donation to the parish
church?
c. How about the donation to the PUP alumni
association? (1994 Bar)
A:
a. The Christmas gift of P100,000 given by Imelda
to her parents is not taxable because under the
law (Sec. 99[A], NIRC), net gifts not exceeding
P100,000 are exempt.
b. The donation of P80,000.00 to the parish
church even is tax exempt provided that not
more than 30% of the said bequest shall be
used by such institutions for administration
purposes (Sec. 101[A][3], NIRC).
c. The donation to the PUP alumni association
does not also qualify for exemption both under
the Constitution and the aforecited law because
it is not an educational or research
organization,
corporation,
institution,
foundation or trust.
However, the income of whatever kind and
nature from any of their properties, real or
personal or from any of their activities for
profit regardless of the disposition made of
such income shall be subject to tax (Sec. 30
[E] and last par., NIRC).
NOTE: An organization may be considered
as non-profit if it does not distribute any
part of its income to stockholders or
members. However, despite its being a taxexempt institution, any income such
institution earns from activities conducted
for profit is taxable, as expressly provided
in the last paragraph of Sec. 30 (CIR v. St.
Luke’s Medical Center, Inc., G.R. No. 195909,
September 26, 2012).
b.
Q: The Constitution exempts from taxation
charitable institutions, churches, parsonages,
or convents appurtenant thereto, mosques, and
non-profit cemeteries and lands, buildings and
improvements
actually,
directly,
and
exclusively used for religious, charitable or
educational purposes. Mercy hospital is a 100
bed hospital organized for charity patients. Can
said hospital claim exemption from taxation
under the provision? (1996 Bar)
Donations
received
by
religious,
charitable, and educational institutions are
considered as income but not taxable
income as they are items of exclusion.
On the part of the donor, such donations
are deductible expense provided that no
part of the income of which inures to the
benefit of any private stockholder or
individual in an amount not exceeding
10% in case of individual, and 5% in case
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A: YES. Mercy hospital can claim exemption from
taxation under the provision of the Constitution,
18
GENERAL PRINCIPLES OF TAXATION
but only with respect to real property taxes
provided that such real properties are used
actually, directly, and exclusively for charitable
purposes.
Requisite to
avail of this
exemption
Test for the
grant of this
exemption
Q: Art. VI, Sec. 28(3) of the Constitution provides
that charitable institutions, churches and
parsonages or covenants appurtenant thereto,
mosques, non-profit cemeteries and all lands,
buildings and improvements actually, directly,
and exclusively used for religious, charitable or
educational purposes shall be exempt from
taxation. To what kind of taxes does this
exemption apply? (2000 Bar)
NOTE: Under the 1987 Constitution, the doctrine of
exemption by incidental purpose is no longer
applicable. Such doctrine is only applicable to cases
where the cause of action arose under the 1935
Constitution. Under the 1987 Constitution, it must
be proved that the properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for the purpose
of institution for the exemption to be granted
(Sababan, 2008).
A: This exemption applies only to property taxes.
What is exempted is not the institution itself but the
lands, buildings, and improvements actually,
directly and exclusively used for religious,
charitable, and educational purposes (CIR v. CA, et
al., G.R. No. 124043, October 14, 1998).
5. Prohibition against taxation of non-stock,
non-profit educational institutions
Basis: All revenues and assets of non-stock, nonprofit educational institutions used actually,
directly, and exclusively for educational
purposes shall be exempt from taxes and duties.
Q: The Roman Catholic Church owns a 2-hectare
lot in a town in Tarlac province. The southern
side and middle part are occupied by the church
and a convent, the eastern side by the school
run by the church itself. The south eastern side
by some commercial establishments, while the
rest of the property, in particular, the
northwestern side, is idle or unoccupied. May
the church claim tax exemption on the entire
land? (2005 Bar)
Subject to conditions prescribed by law, all
grants,
endowments,
donations,
or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax (Sec 4 (3] and [4], Art XIV).
Actually, directly, and exclusively used
A: NO. The portion of the land occupied and used by
the church, convent and school run by the church
are exempt from real property taxes while the
portion of the land occupied by commercial
establishments and the portion, which is idle, are
subject to real property taxes. The “usage” of the
property and not the “ownership” is the
determining factor whether or not the property is
taxable (Lung Center of the Philippines v. Quezon City,
G.R. No. 144104, June 29, 2004).
The use of the term “actually, directly, and
exclusively used” referring to religious
institutions cannot be applied to non-stock, nonprofit educational institutions. The provision of
Article VI, Section 28(3) applies to religious,
charitable, and educational institutions – while
Article XIV applies solely to non-stock, nonprofit educational institutions.
Hence, in this case, we should apply its literal
interpretation – “solely” – in consonance with
the principle of strictissimi juris. The word
“exclusively” indicates that the provision is
mandatory (J. Dimaampao, 2015, citing McGee v.
Republic, 94 Phil. 821).
SUMMARY RULES ON EXEMPTION OF
PROPERTIES ACTUALLY, EXCLUSIVELY AND
DIRECTLY USED FOR RELIGIOUS, EDUCATIONAL
AND CHARITABLE PURPOSES
Coverage of
constitutional
provision
Property must be “actually,
directly, and exclusively used”
by religious, charitable and
educational institutions.
Use of the property for such
purposes, not the ownership
thereof
Covers real property tax only.
The income of whatever kind
and nature from any of their
properties, real or personal or
from any of their activities for
profit regardless of the
disposition made of such
income shall be subject to tax.
Grantee
Taxes
Granted
19
ART. XIV, SEC.
4(3)
Non-stock, nonprofit educational
institution
Income
tax,
Customs duties,
Property tax
ART. VI, SEC.
28(3)
Religious,
educational,
charitable
Property tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The last paragraph of Section 30 of the Tax Code is
without force and effect with respect to non-stock,
nonprofit educational institutions, provided, that
the non-stock, nonprofit educational institutions
prove that its assets and revenues are used actually,
directly and exclusively for educational purposes.
Moreover, the tax-exemption constitutionallygranted to nonstock, nonprofit educational
institutions, is not subject to limitations imposed by
law.
incidental to and reasonably necessary for the
accomplishment of the main purpose of a
university, which is to educate its students (Abra
Valley College, Inc. v. Aquino, 245 Phil. 83; 162 SCRA
106 (1988), cited in CIR vs. De La Salle University,
Inc., G.R. No. 196596, November 9, 2016).
b. and c.: NO. If the university actually, directly and
exclusively uses for educational purposes the
revenues earned from the lease of its school
building, such revenues shall be exempt from taxes
and duties. The tax exemption no longer hinges on
the use of the asset from which the revenues were
earned, but on the actual, direct and exclusive use
of the revenues for educational purposes. To avail
of the exemption, the taxpayer must factually prove
that it used actually, directly and exclusively for
educational purposes the revenues or income
sought to be exempted.
The tax exemption granted by the Constitution to
non-stock, nonprofit educational institutions is
conditioned only on the actual, direct and exclusive
use of their assets, revenues and income for
educational purposes. a plain reading of the
Constitution would show that Article XIV, Section
4(3) does not require that the revenues and income
must have also been sourced from educational
activities or activities related to the purposes of an
educational institution. The phrase all revenues is
unqualified by any reference to the source of
revenues.
In sum, The crucial point of inquiry then is on the
use of the assets or on the use of the revenues.
These are two things that must be viewed and
treated separately (CIR vs. De La Salle University,
Inc., G.R. No. 196596, November 9, 2016).
When a non-stock, nonprofit educational
institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes,
it shall be exempted from income tax, VAT, and LBT.
On the other hand, when it also shows that it uses
its assets in the form of real property for
educational purposes, it shall be exempted from
RPT (CIR vs. De La Salle University, Inc., G.R. No.
196596, November 9, 2016).
Donor’s Tax, Estate Tax, VAT and other taxes
Art. XIV, Sec. 4(4) which provides that “all grants,
endowments, donations, or contributions used
actually, directly and exclusively for educational
purposes shall be exempt from tax” is not selfexecuting as it requires legislative enactment
providing certain conditions for exemption.
However, since Sec. 101(a)(3) of NIRC under
Donor’s tax declared its exemption, then these
donations are tax exempt (J. Dimaampao, 2015).
Q: De La Salle University leases out a portion of
its property to private concessionaires, i.e.,
commercial canteens and bookstores. The lease
payments were factually proven to be used for
educational purposes.
Under the Estate Tax, non-stock, non-profit
educational institutions are not included under the
exempt transfers mortis causa, hence, they are not
tax exempt.
a.
Is the land owned by De La Salle University
subject to real property tax?
b. Are the lease payments received by De La
Salle University subject to income tax?
c. Are the lease payments received by De La
Salle University subject to VAT? (2016 Bar)
Pursuant to Section 109(m), private educational
institutions shall be exempt from VAT, provided
they are accredited as such either by DepEd or
CHED. However, this does not extend to other
activities involving the sale of goods and services.
A:
a. YES. The leased portion of the building may be
subject to real property tax. The test of exemption
from taxation is the use of the property for
purposes mentioned in the Constitution. The lease
of a portion of a school building for commercial
purposes, removes such asset from the property tax
exemption granted under the Constitution. There is
no exemption because the asset is not used actually,
directly and exclusively for educational purposes.
The commercial use of the property is also not
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
However, they shall be subject to internal revenue
taxes on income from trade, business or other
activity, the conduct of which is not related to the
exercise or performance of their educational
purposes or functions (J. Dimaampao, 2015).
Q: Under Art. XIV, Sec. 4(3) of the 1987
Constitution, all revenues and assets of nonstock, non-profit educational institutions, used
20
GENERAL PRINCIPLES OF TAXATION
actually,
directly
and
exclusively
for
educational purposes, are exempt from taxes
and duties. Are incomes derived from
dormitories, canteens and bookstores as well as
interest income on bank deposits and yields
from deposit substitutes automatically exempt
from taxation? (2000 Bar)
A: (1) Yes. Pursuant to Section 30 (l) of the Tax
Code, in relation to Article XIV of the 1987
Philippine Constitution, Government education
institutions are exempt from tax on income used
actually, directly and exclusively for educational
purposes.
Tax rates of proprietary non-profit educational
institutions
and
proprietary
non-profit
hospitals
A: NO. The interest income on bank deposits and
yields from deposit substitutes are not
automatically exempt from taxation. There must be
a showing that the incomes are used actually,
directly, and exclusively for educational purposes.
30 %
Private, nonprofit
hospitals and
educational
institutions
whose gross
income from
unrelated
trade, business
or
other
activity
exceeds 50%
of total gross
income from
all sources.
The income derived from dormitories, canteens
and bookstores are not also automatically exempt
from taxation. There is still a requirement for
evidence to show actual, direct and exclusive use
for educational purposes.
NOTE: The 1987 Constitution does not distinguish
with respect to the source or origin of the income.
The distinction is with respect to the use which
should be actual, direct and exclusive for
educational purposes. Where the Constitution does
not distinguish with respect to source or origin, the
NIRC should not make distinctions (Mamalateo,
2008).
Hospitals and
educational
institutions
claiming to be
proprietary
non-profit but
do not meet
the definition
thereof.
Tax on proprietary non-profit educational
institutions
and
proprietary
non-profit
hospitals
Section 27(b) of the NIRC did not remove the
exemption from income tax of proprietary nonprofit hospitals as charitable institutions. The
provision merely introducedthe preferential
income tax rate of 10% for proprietary non-profit
educational institutions and proprietary non-profit
hospitals (CIR v. St. Luke’s Medical Center, G.R. No.
195909, September 26, 2012).
10%
Private, nonprofit
hospitals and
educational
institutions
whose gross
income from
unrelated
trade,
business or
other activity
does
not
exceed 50%
of total gross
income from
all sources.
Exempt
Organized
and operated
exclusively
for charitable
purposes,
and no part
of its net
income
or
asset
shall
belong to or
inure to the
benefit of any
member,
organizer,
officer or any
specific
purpose.
6. Majority vote of Congress for grant of tax
exemption
Basis:No law granting any tax exemption shall be
passed without the concurrence of a majority of
all the members of Congress (Section 28 [4], Art.
VI).
Proprietary – private
Non-Profit – no net income or asset accrues to or
benefits any member of specific person, with all the
net income or asset devoted to the institution’s
purposes and its activities conducted not for profit.
The inherent power of the State to impose taxes
carries with it the power to grant tax
exemptions.
Charitable institutions – one providing for free
goods and services to the public which would
otherwise fall on the shoulders of the government.
Granting of exemptions
Exemptions may be created:
1. By the Constitution; or
2. By statute, subject to limitations as the
Constitution may provide.
Q: UP Los Banos, a government education
institution, requested for a confirmation for its
tax exemption under Section 30 (l) of the Tax
Code. (1) Is UP Los Banos exempt from income
tax?
21
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Required vote for grant of tax exemption
appropriation, revenue or tariff bill but the
veto shall not affect the item or items which he
does not object (Art. VI, Sec. 27[2]).
In granting tax exemptions, the absolute
majority vote of all the members of Congress is
required. It means at least 50% plus 1 of all the
members voting separately (Art. VI, Sec. 28[4],
1987 Constitution).
The item or items vetoed shall be returned to the
Lower House of Congress together with the
objections of the President. If after consideration
2/3 of all the members of such House shall agree
to pass the bill, it shall be sent, together with the
objection, to the other House by which it shall
likewise be considered, and if approved by 2/3
of all the members of that House, it shall become
a law (J. Dimaampao, 2015).
Tax amnesties, tax condonations, and tax
refunds are in the nature of tax exemptions.
Such being the case, a law granting tax
amnesties, tax condonations, and tax refunds
requires the vote of of an absolute majority of
the members of the Congress.
9. Non-impairment
Supreme Court
Reason for the separate vote for Senate and
Congress: Because the sheer number of
Congressmen would dilute the vote of the
Senators.
jurisdiction
of
the
Basis:The Supreme Court shall have the power
to review, revise, reverse, modify or affirm on
appeal on certiorari as the laws or the Rules of
Court may provide, final judgments or orders of
lower courts in xxx all cases involving the
legality of any tax, impost, assessment, or toll or
any penalty imposed in relation thereto (Art.
VIII, Sec. 5[2][b]).
Required vote for withdrawal of such grant
of tax exemption
A relative majority or plurality of votes is
sufficient, that is, majority of a quorum.
7. Prohibition on use of tax levied for special
purpose
NOTE: These jurisdictions are concurrent with
the RTCs; thus, the petition should generally be
filed with the RTC following the hierarchy of
courts. However, questions on tax laws are
usually filed direct with the Supreme Court as
these are impressed with paramount public
interest. It is also provided under Art. VI, Sec. 30
of the Constitution that “no law shall be passed
increasing the appellate jurisdiction of the
Supreme Court without its advice and
concurrence.”
Basis: All money collected on any tax levied for a
special purpose shall be treated as a special fund
and paid out for such purpose only. If the
purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the
government (Sec. 29[3], Art. VI).
NOTE: In Gaston v. Republic Planters Bank, 158
SCRA 626, the Court ruled that the “stabilization
fees” collected by the State (PHILSUCOM) for the
promotion of the sugar industry were in the
nature of taxes and no implied trust was created
for the benefit of sugar industries. Thus, the
revenues derived therefrom are to be treated as
a special fund to be administered for the purpose
intended. No part thereof may be used for the
exclusive benefit of any private person or entity
but for the benefit of the entire sugar industry.
Once the purpose is achieved, the balance, if any
remaining, is to be transferred to the general
funds of the government (Vitug, 2006).
The courts cannot inquire into the wisdom of a
taxing act, EXCEPT when there is an allegation of
violation of constitutional limitations or
restrictions.
10.Grant of power to the LGUs to create its own
sources of revenue
Basis:Each LGU shall have the power to create its
own sources of revenues and to levy taxes, fees
and charges subject to such guidelines and
limitations as the Congress may provide,
consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments (Art.
X, Sec. 5).
8. President’s veto power on (1)
appropriation, (2) revenue, (3) tariff bills
(ART bill)
Justification in the delegation of legislative
taxing power to local governments
Basis:The President shall have the power to veto
any particular item or items in an
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
of
22
GENERAL PRINCIPLES OF TAXATION
Delegation of legislative taxing power to local
governments is justified by the necessary
implication that the power to create political
corporations for purposes of local selfgovernment carries with it the power to confer
on such local government agencies the authority
to tax.
extensive changes that the result may be a
rewriting of the whole. The Senate may not only
concur with amendments but also propose
amendments. To deny the Senate's power not
only to "concur with amendments" but also to
"propose amendments" would be to violate the
coequality of legislative power of the two houses
of Congress and in fact make the House superior
to the Senate (Tolentino v. Secretary of Finance,
G.R. No. 115873, Aug. 25, 1994).
Exception to non-delegation of legislative
powers
The general principle against the delegation of
legislative powers as a consequence of the
principle of separation of powers is subject to
one well-established exception: legislative
powers may be delegated to LGUs. Included in
this grant of legislative power is the grant of local
taxing power.
Q: Why must appropriation, revenue, or tariff
bills originate from the Congress?
Q: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
(2003 Bar)
Q: Mounting budget deficit, revenue generation,
inadequate fiscal allocation for education,
increased emoluments for health workers, and
wider coverage for full VAT benefits are the
reasons why R.A. 9337 was enacted. R.A. 9337 is
a consolidation of three legislative bills namely,
H.B. Nos. 3555 and 3705, and S.B. No. 1950.
Because of the conflicting provisions of the
proposed bills, the Senate agreed to the request
of the House of Representatives for a committee
conference. The Conference Committee on the
Disagreeing
Provisions
of
House
Bill
recommended the approval of its report, which
the Senate and the House of the Representatives
did.
A: On the theory that, elected as they are from the
districts, the members of the House of
Representatives can be expected to be more
sensitive to the local needs and problems.
A: No. The Congress cannot abolish the local
government’s power to tax as it cannot abrogate
what is expressly granted by the fundamental law.
The only authority conferred to Congress is to
provide the guidelines and limitations on the local
government’s exercise of the power to tax.
The local government’s power to tax is the most
effective instrument to raise the needed
revenues.
The right of LGUs to collect taxes due must always
be upheld to avoid severe tax erosion. This
consideration is consistent with the State policy to
guarantee the autonomy of the local government
and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to empower them
to achieve their fullest development as self-reliant
communities and make them effective partners in
the attainment of national goals (Dimaampao,
2015).
1. Does R.A. 9337 violate Art. VI, Sec. 24 of the
Constitution on exclusive origination of
revenue bills?
2. Does R.A. 9337 violate Art. VI, Sec. 26(2) of
the Constitution on the “No-Amendment
Rule”?
A:
1. NO. It was H.B. Nos. 3555 and 3705 that
initiated the move for amending provisions of
the NIRC dealing mainly with the VAT. Upon
transmittal of said House bills to the Senate, the
Senate came out with S.B. No. 1950 proposing
amendments not only to NIRC provisions on the
VAT but also amendments to NIRC provisions
on other kinds of taxes.
11.Origin of Revenue and Tariff Bills
Basis: All appropriation, revenue or tariff bills,
bills authorizing increase of the public debt, bills
of local application, and private bills shall
originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments (Art VI, Sec. 24).
Since there is no question that the revenue bill
exclusively originated in the House of
Representatives, the Senate was acting within
its Constitutional power to introduce
amendments to the House bill when it included
provisions in S.B. No. 1950 amending corporate
What is required to originate in the House of
Representativesis not the law but the revenue
bill which must “originate exclusively” in the
lower house. The bill may undergo such
23
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
income taxes, percentage, excise and franchise
taxes. Verily, Art. VI, Sec. 24 of the Constitution
does not contain any prohibition or limitation
on the extent of the amendments that may be
introduced by the Senate to the House revenue
bill. The Senate can propose amendments and
in fact, the amendments made are germane to
the purpose of the house bills, which is to raise
revenues for the government. The sections
introduced by the Senate are germane to the
subject matter and purposes of the house bills,
which is to supplement our country’s fiscal
deficit, among others. Thus, the Senate acted
within its power to propose those amendments.
Basis:No person shall be deprived of life, liberty,
or property without due process of law xxx (Art.
III, Sec. 1).
NO. The “no-amendment rule” refers only to
the procedure to be followed by each house of
Congress with regard to bills initiated in each of
said respective houses, before said bill is
transmitted to the other house for its
concurrence or amendment. Verily, to construe
said provision in a way as to proscribe any
further changes to a bill after one house has
voted on it would lead to absurdity as this
would mean that the other house of Congress
would be deprived of its Constitutional power
to amend or introduce changes to said bill.
Thus, Art. VI, Sec. 26 (2) of the Constitution
cannot be taken to mean that the introduction
by the Bicameral Conference Committee of
amendments and modifications to disagreeing
provisions in bills that have been acted upon by
both houses of Congress is prohibited
(ABAKADA Guro v. Executive Secretary, G.R. No.
168056, 168207, 168461, 168463 and 168730,
September 1, 2005).
Q: When is deprivation of life, liberty and
property by the government done in compliance
with due process?
12.No appropriation or use of public money for
religious purposes
While it is true that the Philippines as a State is not
obliged to admit aliens within its territory, once an
alien is admitted, he cannot be deprived of life
without due process of law. This guarantee includes
the means of livelihood. The shelter of protection
under the due process and equal protection clause
is given to all persons, both aliens and
citizens(Villegas v. Hiu Chiong Tsai Pao Ho, G.R. No.
L-29646, Nov. 10, 1978).
2.
Requirements of due process in taxation
A. Substantive Due Process
1. Tax must be for public purpose;
2. It must be imposed within territorial
jurisdiction;
B. Procedural Due Process
No arbitrariness or oppression either in the
assessment or collection.
A: If the act is done:
1. Under authority of a law that is valid or the
Constitution itself (substantive due process);
and
2. After compliance with fair and reasonable
methods of procedure prescribed by law
(procedural due process).
Q: When may violation of due process be
invoked by the taxpayer?
A: The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support
in the Constitution, as where it can be shown to
amount to a confiscation of property (Reyes v.
Almanzor, G.R. Nos. L-49839-46 April 26, 1991).
Basis:No public money or property shall be
appropriated, applied, paid or employed directly
or indirectly for the use, benefit or support of
any sect, church, denomination, sectaraian
institution, or system of religion or of any priest,
preacher, minister, or other religious teacher or
dignitary as such EXCEPT when such priest,
preacher, minister or dignitary is assigned to the
armed forces or to any penal institution or
government orphanage or leprosarium (Art. VI,
Sec. 29[2]).
Illustrative cases of violations of the due
process clause
1.
2.
This is in consonance with the inviolable
principle of separation of the Church and State.
3.
4.
Provisions indirectly affecting taxation
1. Due Process
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
24
Tax amounting to confiscation of property
Subject of confiscation is outside the
jurisdiction of the taxing authority
Law is imposed for a purpose other than a
public purpose
Law which is applied retroactively imposes
unjust and oppressive taxes
GENERAL PRINCIPLES OF TAXATION
5.
The law is in violation of inherent
limitations
permissible government policy or legitimate end of
the government.
2. Equal Protection
Q: What is the “rational basis” test? Explain
briefly. (2010 Bar)
Basis:No person shall be denied the equal
protection of the laws (Art. III, Sec. 1).
A: The rational basis test is applied to gauge the
constitutionality of an assailed law in the face of an
equal protection challenge. It has been held that “in
areas of social and economic policy, a statutory
classification that neither proceeds along suspect
lines nor infringes constitutional rights must be
upheld against equal protection challenge if there is
any reasonably conceivable state of facts that could
provide a rational basis for the classification.”
Under the rational basis test, it is sufficient that the
legislative classification is rationally related to
achieving some legitimate State interest (British
American Tobacco v. Camacho and Parayno, GR No.
163583, April 15, 2009).
Define equal protection of the law
It means that all persons subjected to such
legislation shall be treated alike, under like
circumstances and conditions, both in the
privileges conferred and in the liabilities
imposed (1 Cooley 824-825; Sison Jr. v. Ancheta,
G.R. No. 59431, July 25, 1984).
The power to select subjects of taxation and
apportion the public burden among them
includes the power to make classifications. The
inequalities which result in the singling out of
one particular class for taxation or exemption
infringe no Constitutional limitation (Lutz v.
Araneta, G.R. No. L-7859, Dec. 22, 1955).
Q: RC is a law abiding citizen who pays his real
estate taxes promptly. Due to a series of
typhoons and adverse economic conditions, an
ordinance is passed by MM City granting a 50%
discount for payment of unpaid real estate taxes
for the preceding year and the condonation of
all penalties on fines resulting from the late
payment. Arguing that the ordinance rewards
delinquent taxpayers and discriminates against
prompt ones, RC demands that he be refunded
an amount equivalent to ½ of the real taxes he
paid. The municipal attorney rendered an
opinion that RC cannot be reimbursed because
the ordinance did not provide for such
reimbursements. RC files suit to declare the
ordinance void on the ground that it is a class
legislation. Will a suit prosper? (2004 Bar)
Requisites for a valid classification [PEGS]
1.
2.
3.
4.
Apply both to present and future conditions
Apply equally to all members of the same
class
Must be germane to the purposes of the law
Must be based on substantial distinction
Q: Is Revenue Memorandum Circular No. 47-91
classifying copra as an agricultural non-food
product discriminatory and violative of the
equal protection clause?
A:NO. It is not violative and not discriminatory
because there is a material or substantial difference
between coconut farmers and copra producers, on
one hand, and copra traders and dealers, on the
other. The former produce and sell copra, the latter
merely sells copra. The Constitution does not forbid
the differential treatment of persons, so long as
there is reasonable basis for classifying them
differently (Misamis Oriental Association of Coco
Traders Inc. v. Secretary of Finance, G.R. No. 108524,
November 10, 1994).
A: NO. The remission or condonation of taxes due
and payable to the exclusion of taxes already
collected does not constitute unfair discrimination.
Each set of taxes is a class by itself and the law
would be open to attack as class legislation only if
all taxpayers belonging to one class were not
treated alike (Juan Luna Subdivision, Inc., v.
Sarmiento, G.R. L-3538, May 28, 1952).
Q: An E.O. was issued pursuant to law, granting
tax and duty incentives only to businesses and
residents within the “secured area” of the Subic
Economic Special Zone, and denying said
incentives to those who live within the zone but
outside such “secured area:” Is the
Constitutional right to equal protection of the
law violated by the Executive Order? (2000 Bar)
Principle of Equality
It admits of classification or distinctions as long as
they are based upon real and substantial differences
between the persons, property, or privileges and
those not taxed must bear some reasonable relation
to the object or purpose of legislation or to some
25
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: NO. Equal protection of the law clause is subject
to reasonable classification. Classification, to be
valid, must (1) rest on substantial distinctions; (2)
be germane to thepurpose of the law; (3) not be
limited to existing conditions only, (4) apply
equally to all members of the same class. There are
substantial differences between big investors
being enticed to the “secured area” and the
business operators outside that are in accord with
the equal protection clause that does not require
territorial uniformity of laws.
religion; and it constitutes neither personal
sponsorship of, nor hostility to religion (Walz v. Tax
Commission, 397 US 664).
Q: Is the imposition of fixed license fee a prior
restraint on the freedom of the press and
religious freedom?
A: YES. As a license fee is fixed in the amount and
unrelated to the receipts of the taxpayer, the license
fee, when applied to a religious sect, is actually
being imposed as a condition for the exercise of the
sect’s right under the Constitution (Tolentino v.
Secretary of Finance, G.R. No. 115873, August 25,
1994).
The classification applies equally to all the resident
individuals and businesses within the “secured
area.” The residents, being in like circumstances
to contributing directly to the achievement of
the end purpose of the law, are not categorized
further. Instead, they are similarly treated, both in
privileges granted and obligations required (Tiu, et
al, v. CA, et al, G.R. No. 127410, January 20, 1999).
Q: Is a municipal license tax on the sale of bibles
and religious articles by a non-stock, non-profit
missionary organization at minimal profits
valid?
Q: The City Council of Ormoc enacted Ordinance
No. 4, Series of 1964 taxing the production and
exportation of only centrifugal sugar. At the
time of the enactment, plaintiff Ormoc Sugar Co.
was the only sugar central in Ormoc. Petitioner
alleged that said Ordinance is unconstitutional
for being violative of the equal protection
clause. Is the Ordinance valid?
A: NO. Such imposition of license tax constitutes
curtailment of religious freedom and worship
which is guaranteed by the Constitution (American
Bible Society v. City of Manila, 101 Phil. 386).
Q: Is VAT registration restrictive of religious
and press freedom?
A: NO. The VAT registration fee, although fixed in
amount, is not imposed for the exercise of a
privilege but only for defraying part of the cost of
registration (Tolentino v. Secretary of Finance, G.R.
No. 115873, August 25, 1994).
A:NO. Equal protection clause applies only to
persons or things identically situated and does not
bar a reasonable classification of the subject of
legislation. The classification, to be reasonable,
should be in terms applicable to future conditions as
well. The taxing ordinance should not be singular
and exclusive as to exclude any substantially
established sugar central, of the same class as
Ormoc Sugar Co., from the coverage of the tax
(Ormoc Sugar Industry v. City Treasurer of Ormoc
City, G.R. No. L-23794, February 17, 1968).
4. Non-impairment clause
Basis: No law impairing the obligation of contracts
shall be passed (Art. III, Sec. 10).
Instances when there is impairment of the
obligations of contract
3. Religious Freedom
When the law changes the terms of the contract by:
Basis: No law shall be made respecting an
establishment of religion, or prohibiting the free
exercise thereof. The free exercise and enjoyment of
religious profession and worship, without
discrimination or preference, shall forever be
allowed. No religious test shall be required for the
exercise of civil or political rights (Art. III, Sec. 5).
1.
2.
3.
Rationale for the non-impairment clause in
relation to contractual tax exemption
Q: Is the real property tax exemption of
religious organizations violative of the nonestablishment clause?
When the State grants an exemption on the basis of
a contract, consideration is presumed to be paid to
the State and the public is supposed to receive the
whole equivalent therefore.
A: NO. Neither the purpose nor the effect of the
exemption is the advancement or the inhibition of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Making new conditions; or
Changing conditions in the contract; or
Dispenses with the conditions expressed
therein.
26
GENERAL PRINCIPLES OF TAXATION
NOTE: This applies only where one party is the
government and the other party, a private person.
unilaterally granted can be withdrawn at the
pleasure of the taxing authority without violating
the Constitution (Mactan Cebu International Airport
Authority v. Marcos, G.R. No. 120082, September 11,
1996).
Rules regarding non-impairment of obligation
and contract with respect to the grant of tax
exemptions
1.
2.
3.
Q: A law was passed granting tax exemptions to
certain industries and investments for a period
of 5 years but 3 years later, the law was
repealed. With the repeal, the exemptions were
considered revoked by the BIR, which assessed
the investing companies for unpaid taxes
effective on the date of the repeal of the law.
If the grant of the exemption is merely a
spontaneous concession by the legislature, such
exemption may be revoked. (Unilaterally
granted by law)
If it is without payment of any consideration or
the assumption of any new burden by the
grantee, it is a mere gratuity and exemption
may be revoked. (Franchise)
However, if the tax exemption constitutes a
binding
contract
and
for
valuable
consideration,
the
government
cannot
unilaterally revoke the tax exemption.
(Bilaterally agreed upon)
NPC and KTR companies questioned the
assessments on the ground that, having made
their investments in full reliance with the period
of exemption granted by the law, its repeal
violated their Constitutional right against the
impairment of the obligations and contracts. Is
the contention of the company tenable or not?
(2004 Bar)
A: The contention is untenable. The exemption
granted is in the nature of a unilateral exemption.
Since the exemption given is spontaneous on the
part of the legislature and no service or duty or
other remunerative conditions have been imposed
on the taxpayer receiving the exemption, it may be
revoked by will by the legislature (Christ Church v.
Philadelphia, 24 How 300 [1860]). What constitutes
an impairment of the obligation of contracts is the
revocation of an exemption which is founded on a
valuable consideration because it takes the form
and essence of a contract (Casanovas v. Hord, 8 Phil.
12 [1907]; Manila Railroad Co. v. Insular Collector of
Customs [1915]).
In Tolentino v. Secretary of Finance, 1994, the Court
ruled that R.A. 7716 (E-VAT Law) does not violate
the non-impairment clause. The contention that the
imposition of the VAT on the sales and leases of real
estate by virtue of contracts entered into prior to
the effectivity of the law would violate the
constitutional provision that “No law impairing the
obligation of contracts shall be passed” is without
legal basis.
The parties to a contract cannot fetter the exercise
of the taxing power of the State. For not only are
existing laws read into contracts in order to fix
obligations as between parties, but the reservation
of essential attributes of sovereign power is also
read into contracts as a basic postulate of the legal
order.
5. Freedom of the Press
The Contract Clause has never been thought as a
limitation on the exercise of the State’s power of
taxation save only where a tax exemption has been
granted for a valid consideration.
Basis: No law shall be passed abridging the freedom
of speech, of expression, or of the press, or the right
of the people peaceably to assemble and petition the
government for redress of grievances (Art. III, Sec.
4)
Q: X Corporation was the recipient in 1990 of
two tax exemptions both from Congress, one
law exempting the company’s bond issues from
taxes and the other exempting the company
from taxes in the operation of its public utilities.
The two laws extending the tax exemptions
were revoked by Congress before their expiry
dates. Were the revocations Constitutional?
(1997 Bar)
Q: Is R.A. 7716 unconstitutional for it violates
the freedom of the press under Art.III, Sec. 4 of
the Constitution by imposing VAT on the gross
receipts of newspapers from advertisements
and on their acquisition of paper, ink and
services for publication?
A:NO. Even with due recognition of its high estate
and its importance in a democratic society, however
the press is not immune from general regulation by
the State. It has been held that the publisher of a
newspaper has no immunity from the application of
general laws. He has no special privilege to invade
A: YES. The exempting statutes are both granted
unilaterally by Congress in the exercise of taxing
powers. Since taxation is the rule and tax
exemption, the exception, any tax exemptions
27
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
the rights and liberty of others. He must answer for
libel. He may be punished for contempt of court.
Like others, he must pay equitable and
nondiscriminatory taxes on his business (Tolentino
v. Secretary of Finance, G.R. No. 115873, August 25,
1994).
NOTE: The term “assessment” which here
means notice and demand for payment of a tax
liability, should not be confused with
“assessment” relative to a real property
taxation, which refers to the listing and
valuation of taxable real property.
STAGES OF TAXATION
Q: Is the approval of the court, sitting as probate
or estate settlement court, required in the
enforcement of the estate tax? (2005 Bar)
Stages/Aspects of a system of taxation [LAPR]
(2006 Bar)
1.
A:NO. The approval of the court, sitting in probate,
is not a mandatory requirement in the collection of
estate tax. On the contrary, under Section 94 of the
NIRC, it is the probate or settlement court which is
forbidden to authorize the executor or judicial
administrator of the decedent’s estate, to deliver
any distributive share to any party interested in the
estate, unless a certification from the Commissioner
of the Internal Revenue that the estate tax has been
paid is shown (Marcos II v. CA, G.R. No.120880, June
5, 1997).
Levy or imposition (tax legislation) – This
refers to the enactment of a law by Congress
authorizing the imposition of tax. It further
contemplates the determination of the subject
of taxation, purpose for which the tax shall be
levied, fixing the rate of taxation and the rules
of taxation in general.
Q: Taxes are assessed for the purpose of
generating revenue to be used for public needs.
Taxation itself is the power by which the State
raises revenue to defray the expenses of
government. A jurist said that a tax is what we
pay for civilization. In our jurisdiction, which of
the following statements may be erroneous?
NOTE: Assessment and collection may be delegated
but not levy since it is exclusively conferred with the
Congress.
3.
1. Taxes are pecuniary in nature.
2. Taxes
are
enforced
charges
and
contributions.
3. Taxes are imposed on persons and property
within the territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of
the government.
5. Taxes are assessed according to a reasonable
rule of apportionment. (2004 Bar)
GR: Tax shall be paid by the person subject
thereto at the time the return is filed (Sec.
56[A][1], NIRC).
XPN: When the tax due is in excess of P2,000,
the taxpayer other than a corporation may elect
to pay the tax in 2 equal installments in which
case, the first installment shall be paid at the
time the return is filed and the second
installment, on or before July 15 following the
close of the calendar year (Sec. 56[A][2], NIRC).
A:(4) Taxes are levied by the executive branch of
government. This statement is erroneous because
levy refers to the act of imposition by the legislature
which is done through the enactment of a tax law.
Levy is an exercise of the power to tax which is
exclusively legislative in nature and character.
Clearly, taxes are not levied by the executive branch
of government (NPC v. Albay, G.R. No. 87479, June 4,
1990).
2.
NOTE: If any installment is not paid on or
before the date fixed for its payment, the whole
amount of the tax unpaid becomes due and
payable, together with delinquency penalties.
4. Refund – The recovery of any alleged to have
been erroneously or illegaly assessed or
collected, or of any penalty claimed to have
been collected without authority, or of any sum
alleged to have been excessively, or in any
manner wrongfully collected.
Assessment
and
collection
(tax
administration) – This is the act of
administration and implementation of the tax
law by executive through its administrative
agencies.
DEFINITION, NATURE AND
CHARACTERISTICS OF TAXES
The act of assessing and collecting taxes is
administrative in character, and therefore can
be delegated (J. Dimaampao, 2015,).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Payment – The act of compliance by the
taxpayer, including such options, schemes or
remedies as may be legally available.
Definition and nature of tax
28
GENERAL PRINCIPLES OF TAXATION
Taxes are enforced proportional contributions from
persons and properties, levied by the State by virtue
of its sovereignty for the support of the government
and for all its public needs (1 Cooley 62).
Characteristics of taxes
1.
2.
3.
4.
5.
6.
7.
Amount
4.
It is levied by the state which has jurisdiction
over the person or property
It is levied by the state through its law-making
body
It is an enforced contribution not dependent on
the will of the person taxed
It is generally payable in money
It is proportionate in character
It is levied on persons and property
It is levied for a public purpose
Purpose
Authority
VAT on toll way operations cannot be deemed a tax
on tax due to the nature of VAT as an indirect tax.
The seller remains directly and legally liable for the
payment of VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added
to the selling price. Once shifted, the VAT ceases to
be a tax and simply becomes part of the cost that the
buyer must pay in order to purchase the good,
property or service (Renato V. Diaz and Aurora Ma.
F. Timbol, v. Secretary of Finance and CIR, G.R. No.
193007, July 19, 2011).
TAX AS DISTINGUISHED FROM
OTHER FORMS OF EXACTIONS
TAX
Object
Definition
Basis
An all-embracing
term to include
various kinds of
enforced
contributions
imposed
upon
persons for the
attainment
of
public purpose
Persons, property,
etc.
TAX
An
enforced
proportional
contribution
from persons
and
property
for
public
purpose/s
Demand
of
sovereignty
TARIFF/
CUSTOMS
DUTIES
Only a kind of
tax therefore
limited
coverage
Purpose
Basis
Amount
Goods
imported
exported
For the support
of
the
government
May be imposed
by the State only
TOLL
Amount
is
limited to the
cost
and
maintenance of
public
improvement
For the use of
another’s
property
May be imposed
by
private
individuals
or
entities
NOTE: Taxes may be imposed only by the
government under its sovereign authority; toll fees
may be demanded by either the government or
private individuals or entities, as an attribute of
ownership.
It should be for a public purpose.
It should be uniform.
The person or property being taxed should be
within the jurisdiction of the taxing authority.
The tax must not impinge on the inherent and
constitutional limitations on the power of
taxation.
Coverag
e
the
is
[SLEP4]
REQUISITES OF A VALID TAX
1.
2.
3.
TAX
Generally,
amount
unlimited
or
Subject
TOLL
A consideration
paid for the use
of a road, bridge
or the like, of a
public nature
Effect of
NonPayment
Time of
Payment
Demand
of
proprietorship
29
TAX
Imposed to raise
revenue
Collected under
the power of
taxation
Generally,
amount
is
unlimited
Imposed
on
persons,
property, rights
or transaction
Non-payment
does not make
the
business
illegal
Normally paid
after the start of
business
LICENSE FEE
For
regulation
and control
Collected under
police power
Limited to the
necessary
expenses
of
regulation and
control
Imposed on the
exercise of a right
or privilege
Non-payment
makes
the
business illegal
Normally
paid
before
the
commencement
of the business
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Q: A municipality, BB, has an ordinance which
requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed
annual fee of P20,000. Subsequently, the
municipal board proposed an ordinance
imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of
liquor in stores, restaurants and other
establishments. The municipal mayor, CC,
refused to sign the ordinance on the ground that
it would constitute double taxation. Is the
refusal of the mayor justified? Reason briefly.
(2004 Bar)
Mode of
Payment
Set-off
Effect of nonpayment
A: NO.The refusal of the mayor is not justified. The
impositions are of different nature and character.
The fixed annual fee is in the nature of a license fee
imposed through the exercise of police power while
the 5% tax on purchase or consumption is a local tax
imposed through the exercise of taxing powers.
Both a license fee and a tax may be imposed on the
same business or occupation, or for selling the same
article and this is not in violation of the rule against
double taxation (Campania General de Tabacos de
Filipinos v. City of Manila, 8 SCRA 367 [1963]).
TAX
Nature
Subject
Person
Liable
Purpose
Scope
An
enforced
proportional
contribution
from persons
and property
for
public
purpose/s
Imposed
on
persons,
property rights
or transactions
A
personal
liability of the
taxpayer
For
the
support of the
government
Regular
exaction
Assignability
Bears interest
only
if
delinquent
Prescription
Governed by
the
special
prescriptive
periods
provided for in
the NIRC
Purpose
Authority
TAX
An enforced
proportional
contribution
from persons
and property
for
public
purpose/s
To
raise
revenue
Maybe
imposed by
the State only
Payable
in
kind or in
money
Subject to setoff
No
imprisonment
(except when
debt
arises
from crime)
Interest
depends upon
the
written
stipulation of
the parties
Governed by
the ordinary
periods
of
prescription
PENALTY
Sanction imposed
as a punishment for
a violation of the
law or acts deemed
injurious; violation
of tax laws may give
rise to imposition of
penalty
To regulate conduct
Maybe imposed by
private entities
KINDS OF TAXES
As to object:
Not a personal
liability
of
the
person assessed
Contribution to the
cost
of
public
improvement
Exceptional as to
time and locality
TAX
Obligation
created by law
Basis
Interest
Definitio
n
SPECIAL
ASSESSMENT
An
enforced
proportional
contribution from
owners of lands
especially
those
who are peculiarly
benefited by public
improvements
Levied only on land
Payable
in
money or in
kind
Not subject to
set-off
May result in
imprisonment
Not assignable
DEBT
Obligation
based
on
contract,
express
or
implied
Assignable
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
30
1.
Personal/poll or capitation tax – A fixed amount
imposed upon all persons, or upon all persons
of a certain class, residents within a specified
territory, without regard to their property or
occupation. (e.g. community tax)
2.
Property tax – Tax imposed on property,
whether real or personal, in proportion either
to its value, or in accordance with some other
reasonable method of apportionment.(e.g. real
property tax)
3.
Privilege/excise tax – A charge upon the
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation. An
excise tax is a tax that does not fall as property
GENERAL PRINCIPLES OF TAXATION
tax. (e.g. income tax, estate tax, donor’s tax,
VAT)
indirect taxes (Asia International Auctioneers, Inc. v.
CIR, G.R. No. 179115, September 26, 2012).
NOTE: This is different from the excise tax under
the NIRC which is a business tax imposed on items
such as cigars, cigarettes, wines, liquors,
frameworks, mineral products, etc.
As to tax rates:
1.
As to burden or incidence:
2.
1.
2.
Direct
Indirect
Q: Distinguish a direct from an indirect tax. Give
examples (Bar 1994, 2000, 2001, 2006).
A:(1) Direct taxes are demanded from the very
person who, as intended, should pay the tax which
he cannot shift to another.
3.
Specific – tax of a fixed amount imposed by the
head or number, or by some standard of weight
or measurement. (e.g. excise tax on cigar,
cigarettes and liquors)
Ad valorem – tax based on the value of the
property with respect to which the tax is
assessed. It requires the intervention of
assessors or appraisers to estimate the value of
such property before the amount due can be
determined. (e.g. real estate tax, income tax,
donor’s tax and estate tax)
Mixed – a choice between ad valorem and/or
specific depending on the condition attached.
As to purposes:
(2)Indirect taxes are demanded in the first
instance from one person with the expectation that
he can shift the burden to someone else, not as a tax
but as a part of the purchase price.
Income tax, estate and donor's tax are considered
as direct taxes. On the other hand, value-added tax,
excise tax, other percentage taxes, and
documentary stamp tax are indirect taxes.
1.
2.
General/fiscal or revenue – tax imposed solely
for the general purpose of the government. (e.g.
income tax and donor’s tax)
Special/regulatory or sumptuary – tax levied
for specific purpose, i.e. to achieve some social
or economic ends. (e.g. tariff and certain duties
on imports)
NOTE: The liability for payment of the indirect taxes
lies only with the seller of the goods or services, not
in the buyer thereof. Thus, one cannot invoke one’s
exemption privilege to avoid the passing on or the
shifting of the VAT to him by the
manufacturers/suppliers of the goods. Hence, it is
important to determine if the tax exemption granted
specifically includes the indirect tax, otherwise, it is
presumed that the tax exemption embraces only
those taxes for which the buyer is directly liable (CIR
v. PLDT, 478 SCRA 61).
As to scope or authority to impose:
Indirect taxes, like VAT and excise tax, are different
from withholding taxes (direct taxes). To
distinguish, indirect taxes, the incidence of taxation
falls on one person but the burden thereof can be
shifted or passed on to another person, such as
when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it.
On the other hand, in case of withholding taxes, the
incidence and burden of taxation fall on the same
entity, the statutory taxpayer. The burden of
taxation is not shifted to the withholding agent who
merely collects, by withholding, the tax due from
income payments to entities arising from certain
transactions and remits the same to the
government. Due to this difference, the deficiency
VAT and excise tax cannot be “deemed” as
withholding taxes merely because they constitute
1.
1.
2.
National tax – Tax levied by the National
Government. (e.g. income tax, estate tax,
donor’s tax, VAT, other percentage taxes and
documentary stamp taxes)
Local or municipal – Tax levied by a local
government. (e.g. real estate tax and
community tax)
As to graduation:
2.
3.
Progressive – A tax rate which increases as the
tax base or bracket increases. (e.g. income tax,
estate tax and donor’s tax)
Regressive – The tax rate decreases as the tax
base or bracket increases.
Proportionate – A tax of a fixed percentage of
amounts of the base (value of the property, or
amount of gross receipts etc.). (e.g. VAT and
other percentage taxes)
SITUS OF TAXATION
It is the place or authority that has the right to
impose and collect taxes (Commissioner of Internal
Revenue v. Marubeni Corporation, G.R. No. 137377,
December 18, 2001).
31
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Factors that determine the situs of taxation
[ReCiNS2]
1.
2.
3.
4.
5.
country grants exemption or does not impose
taxes on intangible properties to Filipino
citizens (F-SOB3-SR).
Residence of the taxpayer
Citizenship of the taxpayer
Nature of the tax
Subject matter of the tax
Source of income
a.
b.
Rules Observed in Fixing Tax Situs
c.
a. Poll/Capitation/Community Tax -Residence
of taxpayer, regardless of the source of income
or location of property of the taxpayer
d.
b. Property Tax
i.
Real Property - Location of the
property (lex reisitae / lex situs),
regardless of whether the owner is a
resident or non-resident
e.
Rationale:
1. The taxing authority has control
because of the stationary and fixed
character of the property.
2. The place where the real property is
situated gives protection to the real
property; hence the property or its
owner
should
support
the
government of that place.
ii.
Application of the doctrine of mobilia
sequuntur personam not mandatory in all
cases
Such doctrine has been decreed as a mere
"fiction of law having its origin in
considerations of general convenience and
public policy, and cannot be applied to limit or
control the right of the State to tax property
within its jurisdiction," and must "yield to
established fact of legal ownership, actual
presence and control elsewhere, and cannot be
applied if to do so would result in inescapable
and patent injustice" (Wells Fargo Bank and
Union Trust v. Collector, G.R. No. L-46720, June
28, 1940).
Personal Property
Tangible – Location of the property
Intangible GR: Domicile of the owner, wherever it
is actually kept or located, pursuant to
the principle of the mobilia sequntur
personam, which literally means
“movable follows the person/owner.”
c. Excise Tax
i. Income Tax (Criteria: Place, Nationality,
Residence)
 Place (applied to NRA, NRFC, NRC) From sources of income derived within
the Philippines
 Nationality (applied to RC, DC) - From
sources of income derived within and
without the Philippines
 Residence (applied to RA, RFC) - From
sources of income derived within the
Philippines
XPN:
1.
2.
When the property has acquired a
business
situs
in
another
jurisdiction, such that it has
definite
location
there,
accompanied by some degree of
permanency;
When an express provision of the
statute provides for another rule.
ii. Donor’s Tax and Estate Tax (Criteria:
Place, Nationality, Residence)
 Place (applied to NRA) - Taxed on
properties situated within the
Philippines
NOTE: Under Sec. 104 of the NIRC, in case of
donor’s and estate tax, the following properties
are considered as situated, thus taxed, in the
Philippines and the residence of their owners
are immaterial, EXCEPT where the foreign
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Franchise which must be exercised in the
Philippines;
Shares, obligations or bonds issued by any
corporation or sociedad anonimaorganized
or constituted in the Philippines in
accordance with its laws;
Shares, obligations or bonds by any foreign
corporation 85% of its business is located
in the Philippines;
Shares, obligations or bonds issued by any
Foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines;
Shares or rights in any partnership,
business or industry established in the
Philippines.
32
GENERAL PRINCIPLES OF TAXATION

Nationality (applied to RC, NRC) Taxed upon their properties wherever
situated
Residence (applied to RA) - Taxed
upon their properties wherever
situated.
government and in favor of the taxpayer. This is
because taxes are burdens on the taxpayer, and
should not be unduly imposed or presumed beyond
what the statutes expressly and clearly import (CIR
v. The Philippine American Accident Insurance, Inc.,
453 SCRA 668, G.R. No. 141658 March 18, 2005).
iii. VAT – Place where the transaction is made.
If the transaction is made (perfected and
consummated) outside of the Philippines,
we can no longer tax such transaction (J.
Dimaampao, 2015).
The rule that, in case of doubt of legislative intent,
the doubt must be liberally construed in favor of
taxpayer does not extend to cases involving the
issue of the validity of the tax law itself which, in
every case, is presumed valid.

Tax exemption and exclusion
NOTE: Situs of taxation of excise tax is the place
where the privilege is exercised. In case of a
franchise, which is a right or privileges granted to it
by the government, the situs of taxation is the place
where the franchise holder exercises its franchise
regardless of the place where its services or
products are delivered. Thus, in a franchise of
electric power distribution, the franchisee is liable
within the jurisdiction it exercises its privilege (City
of Iriga v. Camarines Sur III Electric Cooperative, G.R.
No. 192945, September 5, 2012).
GR: Statutes granting tax exemptions are construed
in strictissimi juris against the taxpayers and
liberally in favor of the taxing authority (MCIAA v.
Marcos, G.R. No. 120082 September 11, 1996).
Tax refunds are in the nature of tax exemptions
which are construed in strictissimi juris against the
taxpayer and liberally in favor of the government
(Kepco Philippines Corporation v. CIR, G.R. No.
179961, January 31, 2011).
The Documentary Stamp Tax is in the nature of an
excise tax because it is imposed upon the privilege,
opportunity, or facility offered at exchanges for the
transaction of the business (CIR v. Pilipinas Shell
Petroleum Corporation, G.R. No. 192398, September
29, 2014).
It is a basic precept of statutory construction that
the express mention of one person, thing, act, or
consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.
Thus, the omission or removal of PAGCOR from
exemption from the payment of corporate income
tax is to require it to pay corporate income tax
(PAGCOR v. BIR, G.R. No. 172087, March 15, 2011).
Remedies available against multiplicity of situs
Tax laws and treaties with other States may:
1. Exempt foreign nationals from local taxation
and local nationals from foreign taxation under
the principle of reciprocity;
2. Credit foreign taxes paid from local taxes due;
3. Allow foreign taxes as deduction from gross
income; or
4. Reduce the Philippine income tax rate.
XPNs:
1. If the grantee of the exemption is a political
subdivision or instrumentality, the rigid rule of
construction does not apply because the
practical effect of the exemption is merely to
reduce the amount of money that has to be
handled by the government in the course of its
operations (MCIAA v. Marcos, G.R. No. 120082,
September 11, 1996).
2. The exemption granted in favor of NAPOCOR
must be liberally construed. It is a recognized
principle that the rule on strict interpretation
does not apply in the case of exemptions in
favor of a government political subdivision or
instrumentality. In the case of property owned
by the state or a city or other public
corporations, the express exemption should not
be construed with the same degree of strictness
that applies to exemptions contrary to the
policy of the state, since as to such property
"exemption is the rule and taxation the
exception” (Maceda v. Macaraig, G.R. No. 88291,
May 31, 1991).
CONSTRUCTION AND INTERPRETATIONS
Tax laws
GR: Tax statutes must be construed strictly against
the government and liberally in favor of the
taxpayer (MCIAA v. Marcos, G.R. No. 120082
September 11, 1996). The imposition of a tax cannot
be presumed.
XPN: Unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the
equally well-settled rule that the imposition of a tax
cannot be presumed. Where there is doubt, tax
laws must be construed strictly against the
33
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
Erroneous payment of the tax, or absence of law
for the government’s exaction (CIR v. Fortune
Tobacco Corporation, G.R. Nos. 167274-75, July
21, 2008).
Revenue statutes are substantive laws and in no
sense must their application be equated with that of
remedial laws (CIR v. Acosta, G.R. No. 154068, August
3, 2007).
Tax rules and regulations
GR: Tax laws operate prospectively whether they
enact, amend or repeal.
The construction placed by the office charged with
implementing and enforcing the provisions of a
Code should be given controlling weight unless
such interpretation is clearly erroneous.
XPN: Tax laws may only be given retroactive
application if the legislature expressly or impliedly
provides that it shall be given retroactive
application.
It is of course axiomatic that a rule or regulation
must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or
regulation is to be valid. In case of conflict between
a statute and an administrative order, the former
must prevail. To be valid, an administrative rule or
regulation must conform, not contradict, the
provisions of the enabling law. An implementing
rule or regulation cannot modify, expand, or
subtract from the law it is intended to implement.
Any rule that is not consistent with the statute itself
is null and void (Fort Bonifacio Development
Corporation v. CIR, G.R. No. 175707, November 19,
2014).
BIR Rules and Regulations that revoke, modify
or reverse a ruling or circular
GR: It shall not be given retroactive application if
the revocation, modification, or reversal will be
prejudicial to the taxpayers.
XPNs:
1. It may be given retroactive effect even if such
would be prejudicial to the taxpayer in the
following cases:
a. Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
b. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based;
c. Where the taxpayer acted in bad faith (Sec.
246, NIRC).
Revenue Memorandum Circulars (RMCs) must not
override, supplant, or modify the law, but must
remain consistent and in harmony with the law
they seek to apply and implement (CIR v. SM Prime
Holdings, Inc., 613 SCRA 774, 2010).
2.
Admittedly the government is not estopped from
collecting taxes legally due because of mistakes or
errors of its agents. But like other principles of law,
this admits of exceptions in the interest of justice
and fair play, as where injustice will result to the
taxpayer (CIR v. CA, G.R. No. 117982, February 6,
1997).
NOTE: Retroactive application of revenue laws may
be allowed if it will not amount to denial of due
process. There is violation of due process when the
tax law imposes harsh and oppressive tax (J.
Dimaampao, 2015).
Penal provisions of tax laws
In criminal cases, statutes of limitations are acts of
grace, a surrendering by the sovereign of its right to
prosecute. They receive strict construction in favor
of the Government and limitations in such cases will
not be presumed in the absence of clear legislation
(Lim v. CA, G.R. No. 48134-37, October 18, 1990).
SOURCES OF TAX LAWS
The following may be said to be the sources of tax
laws:
Non-retroactive application to taxpayers
1.
2.
3.
4.
5.
Tax laws, including rules and regulations operate
prospectively unless otherwise legislatively
intended by express terms or by necessary
implication (Gulf Air Company, Philippine Branch v.
CIR, G.R. No. 182045, September 19, 2012).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If the revocation is due to the fact that the
regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as
to affect past transactions, because a wrong
construction of the law cannot give rise to a
vested right that can be invoked by a taxpayer.
6.
34
Constitution
National Internal Revenue Code
Tariff and Customs Code
Local Government Code (Book II)
Local tax ordinances / City or municipal tax
codes
Tax treaties and international agreements
GENERAL PRINCIPLES OF TAXATION
7.
8.
9.
Special laws
Court decisions
Revenue
rules
and
regulations
and
administrative rulings and opinions (Tabag,
2015)
reversed the ruling and issued a new one stating
that the tax covers printing companies. Could
the BIR now assess DEF Printers for back taxes
corresponding to the years before the new
ruling? Reason briefly. (2004 Bar)
DOCTRINES IN TAXATION
A: NO. The reversal of the ruling shall not be given a
retroactive application, if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot assess DEF Printers for back taxes because it
would be violative of the principle of nonretroactivity of rulings and doing so would result to
grave injustice to the taxpayer who relied on the
first ruling in good faith (Sec. 246, NIRC;
Commissioner v. Burroughs, Ltd., G.R. No. L-66653,
June 19, 1986).
Prospectivity of tax laws
GR: Tax laws must only be imposed prospectively.
XPN: If the law expressly provides for retroactive
application. Retroactive application of revenue
laws may be allowed if it will not amount to denial
of due process. There is a violation of due process
when the tax law imposes harsh and oppressive tax
(CIR v. Acosta, G.R. No. 154068 August 3, 2007).
The retroactive application of the BIR regulation
that is prejudicial to the taxpayer is a violation of
due process. When there is a clash between the
lifeblood doctrine and due process, the latter
prevails (Dimaampao, J., 2015; Commisioner v. CIR,
G.R. No. 117982. February 6, 1997).
Ex post facto law as applied in taxation
The prohibition against ex post facto laws applies
only to criminal matters and not to laws which are
civil in nature.
NOTE: SEC. 246. Non-Retroactivity of Rulings – Any
revocation, modification, or reversal of any of the
rules and regulations promulgated by the
Commissioner or any of the rulings or circulars
promulgated by him shall not be given retroactive
application if the revocation, modification, or
reversal will be prejudicial to the taxpayers, except
in the following cases:
NOTE: When it comes to civil penalties like fines
and forfeiture (except interest), tax laws may be
applied retroactively unless it produces harsh and
oppressive consequences which violate the
taxpayer’s constitutional rights regarding equity
and due process. But criminal penalties arising
from tax violations may not be given retroactive
effect.
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the BIR;
(b) Where the facts subsequently gathered by the
Bureau of Internal Revenue are materially
different from the facts on which the ruling is
based; or
(c) Where the taxpayer acted in bad faith.
Q: In 1997, Mrs. Rocosta filed an amended
return which showed an overpayment of
income tax for her 1996 income report. She now
claims a refund of taxes withheld on her 1996
income as provided for in the 1997 NIRC. Should
the 1997 tax reform retroactively apply?
A: NO. Tax laws are prospective in operation, unless
the language of the statute clearly provides
otherwise. At the time Mrs. Rocosta filed her
amended return, the 1997 NIRC was not yet in
effect. Hence, she has no reason at that time to think
that the filing of an amended return would
constitute the written claim for refund required by
applicable law (CIR v. Acosta, G.R. No. 154068,
August 3, 2007).
Imprescriptibility of taxes
GR: Taxes are imprescriptible by reason that it is the
lifeblood of the government.
XPN: Tax laws may provide for statute of
limitations. In particular, the NIRC and LGC provide
for the prescriptive periods for assessment and
collection.
Q: Due to an uncertainty whether or not a new
tax law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR on
that issue. The BIR issued a ruling that printing
companies are not covered by the new law.
Relying on this ruling, DEF Printers did not pay
said tax. Subsequently, however, the BIR
Tax laws provide for statute of limitations in the
collection of taxes for the purpose of safeguarding
taxpayers from any unreasonable examination,
investigation or assessment (CIR v. B.F. Goodrich
Phils., G.R. No. 104171, February 24, 1999).
35
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
NOTE: Although the NIRC provides for the
limitation in the assessment and collection of taxes
imposed, such prescriptive period will only be
applicable to those taxes that were returnable. The
prescriptive period shall start from the time the
taxpayer files the tax return and declares his
liability (Collector of Internal Revenue v. Bisaya Land
Transportation Co., Inc., G.R. Nos. L-12100 & L-11812,
May 29, 1959).
two or more States on the same taxpayer
in respect of the same subject matter and
for identical periods (CIR v. SC Johnson
and Son, Inc., G.R. No. 127105, June 25,
1999).
Q: Differentiate between double taxation in the
strict sense and in a broad sense and give an
example of each (2015 Bar).
Double taxation (duplicate taxation)
A: Double taxation in the strict sense pertains to the
direct double taxation. This means that the taxpayer
is taxed twice by the same taxing authority, within
the same taxing jurisdiction, for the same property
and same purpose. On the other hand, double
taxation in broad sense pertains to indirect double
taxation. This extends to all cases in which there is a
burden of two or more impositions. It is the double
taxation other than those covered by direct double
taxation.
There is no constitutional prohibition against
double taxation in the Philippines. It is something
not favored, but is permissible, provided some
other constitutional requirement is not thereby
violated, such as the requirement that taxes must be
uniform (Villanueva v. City of Iloilo, 1968).
Two Types:
1.
Q: The City of Manila assessed and collected
taxes from the individual petitioners pursuant
to Sec. 15 (Tax on Wholesalers, Distributors, or
Dealers) and Sec. 17 (Tax on Retailers) of the
Revenue Code of Manila (Ordinance No. 7794).
At the same time, the City of Manila imposed
additional taxes upon the petitioners pursuant
to Sec. 21 of the Revenue Code of Manila, which
imposes tax on a person who sold goods and
services in the course of trade or business based
on a certain percentage of his gross sales or
receipts in the preceding calendar year, as a
condition for the renewal of their respective
business licenses for the year 1999. Is there
double taxation?
As to validity
A. Direct (strict sense)- Double taxation in
the objectionable or prohibited sense
since it violates the equal protection
clause of the Constitution.
Elements of Direct Double Taxation
i. The same property is taxed twice
when it should be taxed only once;
and
ii. Both taxes are imposed
a. on the same subject matter,
b. for the same purpose,
c. by the same taxing authority,
d. within the same jurisdiction,
e. during the same taxing period;
and
f. the taxes must be of the same
kind or character (City of Manila
v. Coca Cola Bottlers Philippines,
G.R. No. 181845, August 4, 2009).
A: YES. All the elements of double taxation
concurred upon the City of Manila’s assessment on
and collection from the petitioners of taxes for the
first quarter of 1999 pursuant to Sec. 21 of the
Revenue Code of Manila. Firstly, because Sec. 21 of
the Revenue Code of Manila imposed the tax on a
person who sold goods and services in the course of
trade or business based on a certain percentage of
his gross sales or receipts in the preceding calendar
year, while Sec. 15 and Sec. 17 likewise imposed the
tax on a person who sold goods and services in the
course of trade or business but only identified such
person with particularity, namely, the wholesaler,
distributor or dealer (Sec. 15), and the retailer (Sec.
17), all the taxes — being imposed on the privilege
of doing business in the City of Manila in order to
make the taxpayers contribute to the city’s
revenues — were imposed on the same subject
matter and for the same purpose. Secondly, the
taxes were imposed by the same taxing authority
(the City of Manila) and within the same
All the elements must be present in order
to apply double taxation in its strict sense.
B. Indirect (broad sense)- It is a
permissible double taxation. It is indirect
when some elements of direct double
taxation are absent.
2. As to scope
A. Domestic Double Taxation - When the
taxes are imposed by the local and
national government within the same
State.
B. International Double Taxation – Refers
to the imposition of comparable taxes in
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
36
GENERAL PRINCIPLES OF TAXATION
jurisdiction in the same taxing period (i.e., per
calendar year). Thirdly, the taxes were all in the
nature of local business taxes (Nursery Care
Corporation v. Acevedo, 731 SCRA 280, G.R. No.
180651, July 30, 2014, penned by Justice Bersamin).
tobacco; and (2) on cigar or cigarette (La Suerte
Cigar & Cigarette Factory v. CA, G.R. No. 125346,
November 11, 2014).
Q: X, a lessor of a property, pays real estate tax
on the premises, a real estate dealer’s tax based
on rental receipts and income tax on the rentals.
He claims that this is double taxation. Decide.
(1996 Bar)
Q: Under the NIRC, the earnings of banks from
“passive” income are subject to a 20% final
withholding tax (FWT). Apart from the FWT,
banks are also subject to a 5% gross receipts tax
(GRT) which is imposed by the NIRC on their
gross receipts, including the “passive” income. Is
there double taxation on the banks’ “passive”
income?
A: There is no double taxation. The real estate tax is
a tax on property; the real estate dealer’s tax is a tax
on the privilege to engage in business; while the
income tax is a tax on the privilege to earn an
income. These taxes are imposed by different taxing
authorities and are essentially of different kind and
character (Villanueva v. Iloilo, GR L-26521, Dec. 28,
1968).
A:NONE. Subjecting interest income to FWT and
including it in the computation of the GRT is not
double taxation. Firstly, the taxes herein are
imposed on two different subject matters as FWT is
the passive income generated in the form of interest
on deposits and yield on deposit substitutes, while
the subject matter of the GRT is the privilege of
engaging in the business of banking.
Q: BB Municipality has an ordinance which
requires that all stores, restaurants, and other
establishments selling liquor should pay an
annual fee of P20,000. Subsequently, the
municipal board proposed an ordinance
imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of
liquor in stores, restaurants and other
establishments. The municipal mayor, CC,
refused to sign the ordinance on the ground that
it would constitute double taxation. Is the
refusal of the mayor justified? Reason briefly.
(2004 Bar)
Secondly, although both taxes are national in scope
because they are imposed by the same taxing
authority, the taxing periods they affect are
different. The FWT is deducted and withheld as
soon as the income is earned, and is paid after every
calendar quarter in which it is earned. On the other
hand, the GRT is neither deducted nor withheld, but
is paid only after every taxable quarter in which it is
earned.
Third, these two taxes are of different kinds or
characters as the FWT is an income tax subject to
withholding, while the GRT is a percentage tax not
subject to withholding (CIR v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003).
A:NO. The impositions are of different nature and
character. The fixed annual fee is in the nature of a
license fee imposed through the exercise of police
power, while the 5% tax on purchase or
consumption is a local tax imposed through the
exercise of taxing powers. Both license fee and tax
may be imposed on the same business or
occupation, or for selling the same article and this is
not in violation of the rule against double taxation
(Compania General de Tabacos de Filipinas v. City of
Manila, G.R. No. L-16619, June 29, 1963).
Q: Under the R.A. 103511 or the Sin Tax Law,
stemmed leaf tobacco, a partially prepared
tobacco, is subject to an excise tax for each kilo
thereof. On the other hand, cigars and
cigarettes, of which stemmed leaf tobacco is a
raw material, are also subjected to specific tax
under Sec. 142 of the 1997 NIRC. Is there double
taxation in prohibited sense when excise
specific tax is imposed on stemmed leaf tobacco
and again on the finished product of which
stemmed leaf tobacco is a raw material?
Modes of eliminating double taxation
Local legislation and tax treaties may provide for:
1.
A:NONE. In this case, there is no double taxation in
the prohibited sense despite the fact that they are
paying the specific tax on the raw material and on
the finished product in which the raw material was
a part, because the specific tax is imposed by
explicit provisions of the NIRC on two different
articles or products: (1) on the stemmed leaf
2.
3.
37
Tax credit – an amount subtracted from
taxpayer’s tax liability in order to arrive at the
net tax due.
Tax deduction – an amount subtracted from the
gross amount on which a tax is calculated.
Tax exemption – a grant of immunity to
particular persons or entities from the
obligation to pay taxes.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
4.
5.
Imposition of a rate lower than the normal
domestic rate
Tax treaty - The purpose is to reconcile the
national fiscal legislation of the contracting
parties in order to help the taxpayer avoid
simultaneous taxation in two different
jurisdictions (international double taxation).
This is to encourage the free flow of goods and
services and the movement of capital,
technology and persons between countries,
conditions deemed vital in creating robust and
dynamic economies.
The purpose of a most favored nation clause is to
grant to the contracting party treatment not less
favorable than that which has been or may be
granted to the "most favored" among other
countries. This is intended to establish the principle
of equality of international treatment by providing
that the citizens or subjects of the contracting
nations may enjoy the privileges accorded by either
party to those of the most favored nation. The
essence of the principle is to allow the taxpayer in
one state to avail of more liberal provisions granted
in another tax treaty to which the country of
residence of such taxpayer is also a party provided
that the subject matter of taxation is the same as
that in the tax treaty under which the taxpayer is
liable (CIR v. S.C. Johnson and Son, Inc., G.R. No.
127105, 1999).
Tax treaty resorts to several methods:
1. First, it sets out the respective rights to tax
of the state of source or situs and of the state
of residence with regard to certain classes of
income or capital. In some cases, an
exclusive right to tax is conferred on one of
the contracting states; however, for other
items of income or capital, both states are
given the right to tax, although the amount
of tax that may be imposed by the state of
source is limited;
2. The second method for the elimination of
double taxation applies whenever the state
of source is given a full or limited right to tax
together with the state of residence. In this
case, the treaties make it incumbent upon
the state of residence to allow relief in order
to avoid double taxation. There are two
methods of relief:
Power to tax involves the power to destroy
Q: Is the power to tax a power to destroy?
A: There are two views on this:
1.
It is a destructive power which interferes with
the personal and property rights of the people
and takes from them a portion of their property
for the support of the government (Paseo Realty
& Development Corporation v. CA, G.R. No.
119286, October 13, 2004).
a. Exemption method - the income or
capital which is taxable in the state of
source or situs is exempted in the state of
residence, although in some instances it
may be taken into account in
determining the rate of tax applicable to
the taxpayer's remaining income or
capital;
b. Credit method - although the income or
capital which is taxed in the state of
source is still taxable in the state of
residence, the tax paid in the former is
credited against the tax levied in the
latter.
Therefore, it should be exercised with caution
to minimize injury to the proprietary rights of
the taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill
the ‘hen that lays the golden egg’ (McCulloch v.
Maryland, 4 Wheat, 316 4 L ed. 579, 607) (Roxas
v. CTA, 23 SCRA 276).
NOTE: It is more reasonable to say that the
maxim “the power to tax is the power to
destroy” is to describe degree of vigor with
which the taxing power may be employed in
order to raise revenue, and not the purposes for
which the taxing power may be used (Cooley,
1876).
The basic difference between the two
methods is that in the exemption method,
the focus is on the income or capital itself,
whereas the credit method focuses upon
the tax (CIR v. S.C. Johnson and Son, Inc., G.R.
No. 127105, 1999).
2.
Justice Holmes dictum –“The power to tax is
not the power to destroy while this Court
sits.”
While taxation is said to be the power to
destroy, it is by no means unlimited. When a
legislative body having the power to tax a
certain subject matter actually imposes such a
Most-favored nation clause
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
US Chief Justice Marshall dictum - The power to
tax involves the power to destroy.
38
GENERAL PRINCIPLES OF TAXATION
burdensome tax as effectually to destroy the
right to perform the act or to use the property
subject to the tax, the validity of the enactment
depends upon the nature and character of the
right destroyed. If so great an abuse is
manifested as to destroy natural and
fundamental rights which no free government
consistently violate, it is the duty of the
judiciary to hold such an act unconstitutional.
1. Shifting of tax burden
Shiftingis the transfer of the burden of tax by
the original payer or the one on whom the tax
was assessed or imposed to another or
someone else without violating the law.
Examples of taxes when shifting may apply are
VAT, percentage tax, excise tax on excisable
articles, ad valorem tax that oil companies pay
to BIR upon removal of petroleum products
from its refinery.
Reconciliation of the two dicta
Marshall’s view refers to a valid tax while Holmes’
view refers to an invalid tax.
Ways of shifting the tax burden
1.
The power to tax involves the power to destroy
since the power to tax includes the power to
regulate even to the extent of prohibition or
destruction, when it is used validly as an implement
of police power in discouraging and prohibiting
certain things or enterprises inimical to the public
welfare.
2.
However, if it is employed solely to raise revenues,
the modern view is that it cannot be allowed to
confiscate or destroy. If this is to be done, the tax
may be successfully attacked as an unconstitutional
exercise of discretion, which is usually vested in the
legislature (Cruz, 2007).
3.
Forward shifting – When the burden of tax
is transferred from a factor of production
through the factors of distribution until it
finally settles on the ultimate purchaser or
consumer.
Backward shifting – When the burden is
transferred from the consumer through
the factors of distribution to the factors of
production.
Onward shifting – When the tax is shifted
two or more times either forward or
backward.
NOTE: Only indirect taxes may be shifted. In
case of direct taxes, the shifting of burden can
only be made via contractual provision.
While the power to tax is so unlimited in force and
so searching in extent that the courts scarcely
venture to declare that it is subject to any
restrictions whatever, it is subject to the inherent
and constitutional limitations which are intended
to prevent abuse on the exercise of the otherwise
plenary and unlimited powers. It is the court’s role
to see to it that the exercise of the power does not
transgress these limitations (Tio v. Videogram
Regulatory Board et al., 151 SCRA 213).
How to determine if a tax is direct or
indirect
It is direct taxes when the impact or liability for
the payment of tax as well as incidence or
burden of tax of the tax falls on the same
person. On the other hand, it is indirect taxes
when the impact or liability for the payment of
tax falls on one person but the incidence or
burden thereof can be shifted or passed to
another.
In order to maintain the general public’s trust and
confidence in the government, this power must be
used justly and not treacherously (Roxas y Cia v.
CTA, 23 SCRA 276). It should be exercised with
caution to minimize injury to the proprietary rights
of the taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kills the ‘hen
that lays the golden egg’ (CIR v. SM Prime Holdings,
Inc., 613 SCRA 774 (2010)).
NOTE: In indirect taxation, a distinction is
made between the liability for the tax and
burden of the tax: The seller who is liable for
the VAT may shift or pass on the amount of VAT
it paid on goods, properties, or services to the
buyer. In such a case, what is transferred is not
the seller's liability but merely the burden of
the VAT (Diaz v. The Secretary of Finance, G.R.
No. 193007, July 19, 2011). Where the burden of
the tax is shifted to the purchaser, the amount
passed on to it is no longer a tax but becomes
an added cost on the goods purchased, which
constitutes a part of the purchase price. The
proper party to question or seek a refund of an
indirect tax is the statutory taxpayer, the
Taxpayers may seek redress before the courts in
case of illegal imposition of taxes and irregularities
as the Constitution overrides any legislative or
executive act that runs counter to it (Sison Jr. v.
Ancheta, G.R. No. L-59431, July 25, 1984).
Escape from taxation
39
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another (Silkair v. CIR, G.R. No.
166482, January 25, 2012).
Q: Maria Suerte, a Filipino citizen, purchased a
lot in Makati City in 1980 at a price of P1 million.
Said property has been leased to MAS
Corporation, a domestic corporation engaged in
manufacturing paper products, owned 99% by
Maria Suerte. In October 2007, EIP Corporation,
a real estate developer, expressed its desire to
buy the Makati property at its fair market value
of P300 million, payable as follows: (a) P60
million down payment; and (b) balance, payable
equally in twenty four (24) monthly consecutive
instalments. Upon the advice of a tax lawyer,
Maria Suerte exchanged her Makati property for
shares of stocks of MAS Corporation. A BIR
ruling, confirming the tax-free exchange of
property for shares of stock, was secured from
the BIR National Office and a Certificate
Authorizing Registration was issued by the
Revenue District Officer (RDO) where the
property was located. Subsequently, she sold
her entire stockholdings in MAS Corporation to
EIP Corporation for P300 million. In view of the
tax advice, Maria Suerte paid only the capital
gains tax of P29,895,000 (P100,000 x 5% plus
P298,900,000 x 10%), instead of the corporate
income tax of P104,650,000 (35% on P299
million gain from sale of real property). After
evaluating the capital gains tax payment, the
RDO wrote a letter to Maria Suerte, stating that
she committed tax evasion.
Meaning of impact and incidence of taxation
IMPACT OF
TAXATION
It refers to the
statutory liability to
pay the tax. It falls on
the person originally
assessed with a
particular tax.
It is the imposition of
tax. (Liability)
It is on the seller
upon whom the tax
has been imposed.
INCIDENCE OF
TAXATION
It is the economic
cost of tax. It is also
known as burden of
taxation.
It is the payment of
tax. (Burden)
It is on the final
consumer,
the
place at which the
tax comes to rest.
2. Tax avoidance / tax minimization
Tax avoidance is a scheme where the taxpayer
uses legally permissible alternative method of
assessing taxable property or income, in order
to avoid or reduce tax liability.
It is a tax saving device within the means
sanctioned by law. This method should be used
by the taxpayer in good faith and at arm’s
length (CIR v. The Estate of Benigno Toda Jr., G.R.
No. 30554, February 28, 2004).
Is the contention of the RDO tenable? Or was it
tax avoidance that Maria Suerte had resorted to?
Explain.
Q: Mr. Pascual’s income from leasing his
property reaches the maximum rate of tax
under the law. He donated ½ of his said
property to a non-stock, non-profit educational
institution whose income and assets are
actually, directly, and exclusively used for
educational purposes, and therefore qualified
for tax exemption under Art. XIV, Sec. 4 (3) of
the Constitution and Sec. 3 (h) of the NIRC.
Having thus transferred a portion of his said
asset, Mr. Pascual succeeded in paying a lesser
tax on the rental income derived from his
property. Is there tax avoidance or tax evasion?
Explain. (2000 Bar).
A: NO. The exchange of the real state property for
the shares of stocks is considered as a legitimate tax
avoidance scheme (Sec. 40 [C2 b] NIRC). The sale of
the shares of stocks of domestic corporation, which
is a capital asset, is subject to a final tax of 5% on the
first P100,000 and 10% on the amount in excess of
P100,000 (Sec. 24[C] NIRC).
3. Tax evasion / tax dodging
Tax evasion is a scheme where the taxpayer
uses illegal or fraudulent means to defeat or
lessen payment of a tax.
It is a scheme used outside of those lawful
means and when availed of, it usually subjects
the taxpayer to further or additional civil or
criminal liabilities (CIR v. The Estate of Benigno
Toda Jr. G.R. No. 30554, February 28, 2004).
A: YES. Mr. Pascual has exploited a legally
permissive alternative method to reduce his
income by transferring part of his rental income to
a tax exempt entity through a donation of ½ of the
income producing property. The donation is
likewise exempt from donor’s tax. The donation is
the legal means employed to transfer the incidence
of income tax on the rental income.
Elements to be considered in determining
that there is tax evasion [USE]
1.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
40
Course of action is unlawful;
GENERAL PRINCIPLES OF TAXATION
2.
3.
Accompanying state of mind which is
described as being evil, in bad faith, willful
or deliberate and not accidental; and
End to be achieved, i.e., payment of less
than that known by the taxpayer to be
legally due, or non-payment of tax when it
is shown that the tax is due.
Q: Gloria Kintanar was charged of violation of
Art. 255 of the NIRC for failure to make or file
her ITRs. Kintanar claimed that entrusted the
duty of filing the said returns to her husband
who filed their ITRs, through their hired
accountant. Is Gloria Kintanar guilty of tax
evasion and be held liable?
Distinguish tax avoidance from tax evasion
Validity
Effect
TAX
AVOIDANCE
Legal and not
subject
to
criminal penalty
Minimization of
taxes
A:YES. Supreme Court, in its resolution, affirmed
the conviction of a taxpayer for tax evasion due to
non-filing of income tax returns (ITR). The accused
Gloria Kintanar was not able to satisfactorily
convince the court that she did not deliberately and
willfully neglect to file her ITR, considering that she
entrusted the filing to her husband who caused the
filing through an accountant. The court believed
that the accused was not relieved from her criminal
liability. As principal, she must assume
responsibility over the acts of her accountant (Sec.
51(f) NIRC). The CTA doctrine on willful blindness
simply means that an individual or corporation can
no longer say that the errors on their tax returns are
not their responsibility or that it is the fault of the
accountant they hired.
TAX EVASION
Illegal
and
subject
to
criminal penalty
Almost
always
results in absence
of tax payment.
Evidence that may be used to prove tax evasion
1.
2.
Failure of taxpayer to declare for taxation
purposes his true and actual income derived
from business for two (2) consecutive years
(Republic v. Gonzales, G.R. No. L-17744, April 30,
1965).
Substantial under declaration of income in the
income tax return for four (4) consecutive
years coupled by intentional overstatement of
deductions (Perez v. CTA, G.R. No. L-10507, May
30, 1958).
Hence, the natural presumption is that the
petitioner knows what are her tax obligations
under the law. As a businesswoman, she should
have taken ordinary care of her tax duties and
obligations and she should know that their ITRs
should be filed, and should have made sure that
their ITRs were filed. She cannot just left entirely to
her husband the filing of her ITR. Petitioner also
testified that she does not know how much was her
tax obligations, nor did she bother to inquire or
determine the facts surrounding the filing of her
ITR. Such neglect or omission as aptly found by the
former second division is tantamount to “deliberate
ignorance or conscious avoidance.” Further, such
non-compliance with the BIR’s notices clearly
shows petitioner’s intent not to file her ITR (People
v. Kintanar, G.R. No. 196340, August 26, 2009).
Q: CIC, thru its authorized representative BT,
sold a 16-storey commercial building to RA for
100M who then sold it on the same day to RMI
for 200M. These two transactions were
evidenced by two separate Deeds of Absolute
Sale notarized on the same day by the same
notary public. For the sale of the property to
RMI, RA paid a capital gains tax in the amount of
P10M. Is the scheme perpetuated by Toda a case
of tax evasion or tax avoidance?
Tax exemption
A: It is a tax evasion scheme. The scheme resorted
to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning (one way of tax
avoidance). Such scheme is tainted with fraud.
Exemption from Taxation
It is the grant of immunity, express or implied, to
particular persons or corporations, from a tax upon
property or an excise tax which persons or
corporations generally within the same taxing
districts are obliged to pay.
In the case, it is obvious that the objective of the sale
to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI
would then subject the income to only 6%
individual capital gains tax and not the 35%
corporate income tax (CIR v. The Estate of Benigno
Toda Jr., GR No. 147188, Sept. 14, 2004).
It is the legislature, unless limited by a provision of
the state constitution, which has full power to
exempt any person or corporation or class of
property from taxation, its power to exempt being
as broad as its power to tax. Other than Congress,
41
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
the Constitution may itself provide for specific tax
exemptions, or local governments may pass
ordinances on exemption only from local taxes
(John Hay Peoples Alternative Coalition et al. v. Lim
et. al., G. R. No. 119775, October 24, 2003).
6.
Nature of tax exemption
8.
1.
7.
Personal in nature and covers only taxes for
which the grantee is directly liable.
NOTE: Since the power to tax includes the
power to exempt thereof which is essentially a
legislative prerogative, it follows that a
municipal mayor who is an executive officer
may not unilaterally withdraw such an
expression of a policy thru the enactment of a
tax (Philippine Petroleum Corporation v. Mun. of
Pililla, G.R. No. 90776, June 3, 1991).
NOTE: It cannot be transferred or assigned by
the person to whom it is given without the
consent of the State.
2.
3.
4.
Strictly construed against the taxpayer.
Implies a waiver on the part of the government
of its right to collect what otherwise would be
due.
Exemptions are not presumed. But the strict
interpretation does not apply in the case of
exemptions running to the benefit of the
government itself or its agencies. The burden is
upon the claimant to establish right to
exemption beyond reasonable doubt.
9.
A tax refund may only be considered as a tax
exemption when it is based either on a taxexemption statute or a tax-refund statute. Tax
refunds or tax credits are not founded principally
on legislative grace, but on the legal principle of
quasi-contracts against a person’s unjust
enrichment at the expense of another.
NOTE: The erroneous payment of tax as a basis for
a claim of refund may be considered as a case of
solutio indebiti, which the government is not
exempt from its application and has the duty to
refund without any unreasonable delay what it has
erroneously collected.
Principles governing tax exemptions
3.
4.
Tax exemptions are highly disfavored in law.
Tax exemptions are personal and nontransferable.
He who claims an exemption must justify that
the legislature intended to exempt him by
words too plain to be mistaken. He must
convincingly prove that he is exempted.
It must be strictly construed against the
taxpayer.
Kinds of tax exemption
As to basis:
1. Constitutional – Immunities from taxation
which originate from the Constitution.
2. Statutory – Those which emanate from
legislation.
3. Contractual – Agreed to by the taxing authority
in contracts lawfully entered into by them
under enabling laws.
4. Implied – When particular persons, properties
or excises are deemed exempt as they fall
outside the scope of the taxing provision.
NOTE: Deductions for income tax purposes
partake of the nature of tax exemptions, hence,
they are also be strictly construed against the
taxpayer.
5.
Constitutional grants of tax exemptions are
self-executing.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Revocations are constitutional even though the
corporate do not have to perform a reciprocal
duty for them to avail of tax exemptions.
Not all refunds are in the nature of a tax
exemption
NOTE: Taxation is the rule and exemption is the
exception (FELS Energy Inc. v. Province of Batangas,
516 SCRA 186). The burden of proof rests upon the
party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed. As a rule, tax
exemptions are construed strongly against the
claimant. Exemptions must be shown to exist
clearly and categorically, and supported by clear
legal provision (PAGCOR v. BIR, G.R. No. 172087,
March 15, 2011).
1.
2.
Tax exemption is generally revocable, unless
founded on contracts which are protected by
the Non-impairment clause.
In order to be irrevocable, the tax exemption
must be founded on a contract or granted by
the Constitution.
The congressional power to grant an
exemption necessarily carries with it the
consequent power to revoke the same.
NOTE: The law looks with disfavor on tax
exemptions and he who would seek to be thus
privileged must justify it by words too plain to
42
GENERAL PRINCIPLES OF TAXATION
be mistaken and too categorical to be
misinterpreted (Western Minolco Corporation v.
CIR, G.R. No. L-61632, August 16, 1983).
5.
6.
social justice provisions of the Constitution
through the progressive system of taxation,
which would result to equal distribution of
wealth etc. (Domondon, 2009).
Treaty
Licensing ordinance
NOTE: There is no tax exemption based solely on
the ground of equity (Davao Gulf v. CIR, 293 SCRA
76).
As to extent:
1. Total – Connotes absolute immunity
2. Partial – One where a collection of a part of the
tax is dispensed with
Q: The BTC Power Corporation (BTC) entered in
a Build-Operate-Transfer (BOT) agreement
with National Power Corporation (NPC), a taxexempt entity as provided by its Charter under
a special law. The BOT Agreement provided that
NPC shall be responsible for the payment of all
taxes imposed on the power station except
income & permit fees. Later on, the City
Treasurer demanded payment of business taxes
and penalties. BTC contended that NPC should
be liable for such taxes and penalties, as
provided for in their BOT agreement. NPC,
however, contends that it’s a tax-exempt entity.
Is NPC correct?
As to object:
1. Personal – Granted directly in favor of certain
persons
2. Impersonal – Granted directly in favor of a
certain class of property
These exemptions must not be confused with tax
exemptions granted under franchises which are
not contracts within the purview of the nonimpairment clause of the constitution (Cagayan
Electric Co. v. Commissioner, G.R. No. L-601026,
September 25, 1985).
A: NO. The 1991 Local Government Code (LGC)
repealed NPC’s exemption from all taxes under its
Charter. It removed the blanket exclusion of
government instrumentalities from local taxation
as it expressed a general repeal of all statutes
granting exemptions from local taxes. Considered
as the most revolutionary piece of legislation on
local autonomy, the LGC effectively deals with the
fiscal constraints faced by LGUs. It widens the tax
base of LGUs to include taxes which were
prohibited by previous laws.
NOTE: Contractual tax exemptions may not be
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment
clause of the Constitution (Vitug, 2000).
Nevertheless, since taxation is the rule and
exemption therefrom is the exception, the
exemption may thus be withdrawn at the pleasure
of the taxing authority. The only exception to this
rule is where the exemption was granted to private
parties based on material consideration of a
mutual nature, which then becomes contractual
and is thus covered by the non-impairment clause
of the Constitution (MCIAA v. Marcos, G.R. No.
120082, September 11, 1996).
In recent years, the increasing social challenges of
the times expanded the scope of state activity, and
taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic
progress and the protection of local industries as
well as public welfare and similar objectives.
Taxation assumes even greater significance with
the ratification of the 1987 Constitution (Batangas
Power Corporation v. Batangas City, G.R. No. 152675,
April 28, 2004).
Rationale/grounds for exemption
The inherent power of the State to impose taxes
naturally carries with it the power to grant tax
exemptions.
The rationale or grounds for tax exemption are the
same as the non-revenue/special or regulatory
purposes of taxation:
a.
b.
c.
Revocation of tax exemption
Since taxation is the rule and exemption is the
exception, the exemption may thus be withdrawn at
the pleasure of the taxing authority (Mactan Cebu
International Airport Authority v. Marcos et al., 261
SCRA 667).
Sumptuary or regulatory purpose. The
sumptuary purpose of tax exemption is to
promote the general welfare and to protect the
health, safety or morals of inhabitants.
Tax exemptions made the implement of the
state’s police power.
Compensatory purpose. The compensatory
purpose of tax exemption is to implement the
By granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
Thus, in withdrawing the exemption of the press
43
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
(media) from VAT, the law merely subjects the
same to the same tax burden to which other
businesses have long ago been subject. It is not
discriminatory as the exemptions are granted for a
purpose, in some cases, to encourage agricultural
production and, in other cases, for the personal
benefit of the end-user rather than for profit
(Tolentino v. Sec. of Finance, G.R. No. 115455,
October 30, 1995).
NOTE: Equitabe recoupment is allowed only in
common countries, not in the Philippines.
Q: True or False. The doctrine of equitable
recoupment allows a taxpayer whose claim for
refund has prescribed to offset tax liabilities
with his claim of overpayment.
A: True. The doctrine arose from common law
allowing offsetting of a prescribed claim for refund
against a tax liability arising from the same
transaction on which an overpayment is made and
underpayment is due. The doctrine finds no
application to cases where the taxes involved are
totally unrelated, and although it seems equitable, it
is not allowed in our jurisdiction (CIR v. UST, 104
Phil 1062 (1958)).
Restrictions on revocation of tax exemptions
1.
2.
3.
4.
Non-impairment clause.
A municipal franchise once granted as a
contract cannot be altered or amended except
by actual consent of the parties concerned.
Adherence to form. If the exemption is granted
by the Constitution, its revocation may be
affected through constitutional amendment
only.
Where the tax exemption grant is in the form of
a special law and not by a general law even if
the terms of the general act are broad enough
to include the codes in the general law unless
there is manifest intent to repeal or alter the
special law (CIR v. CA, 207 SCRA 487).
Compensation and set-off
Compensation or set-off shall take place when two
persons, in their own right, are creditors and
debtors of each other (Article 1278, Civil Code).
Rules governing compensation or set-off as
applied in taxation
NOTE: Withdrawal of tax exemption is not to be
construed as prohibiting future grants of tax
exemptions (Domondon, 2009). The erroneous
application and enforcement of the law by public
officers do not preclude subsequent correct
application of the statute, and the government is
never estopped by the mistake or error on the part
of its agents (Philippine Basketball Association v. CA,
337 SCRA 358, August 8, 2000).
GR: No set-off is admissible against the demands
for taxes levied for general or local governmental
purposes.
Taxes cannot be subject to compensation because
the government and the taxpayer are not creditors
and debtors of each other. (Philex Mining
Corporation v. CIR, 356 Phil. 189, 198; 294 SCRA 687,
695 (1998), cited in CIR v. Toledo Power Company,
G.R. No. 196415. December 2, 2015, Del Castillo, J.)
Q: Differentiate Tax Exemption from Tax
Assumption.
NOTE: The prevalent rule in our jurisdiction
disfavors set-off or legal compensation of tax
obligations for the following reasons: (1) taxes are
of a distinct kind, essence and nature, and these
impositions cannot be so classed in merely the same
category as ordinary obligations; (2) the applicable
laws and principles governing each are peculiar, not
necessarily common to each and (3) public policy is
better subserved if the integrity and independence
of taxes be maintained (lifeblood doctrine). The
collection of a tax cannot await the results of a
lawsuit against the government (Republic v.
Mambulao Lumber Company, 4 SCRA 622, 1962;
Francia v. IAC, G.R. No. L-67649, June 28, 1988;
Caltex Philippines, Inc. v. Commission on Audit, et al.,
G.R. No. 92585, May 8, 1992).
A: A tax exemption is a grant of immunity from
payment of tax, while an assumption of tax liability
does not provide immunity from payment of tax as
it merely allows the shifting of the burden of
taxation to another entitiy (BIR Ruling No. ITAD 0232017 dated 13 July 2017).
Doctrine of equitable recoupment
It is a principle which allows a taxpayer, whose
claim for refund has been barred due to
prescription, to recover said tax by setting off the
prescribed refund against a tax that may be due and
collectible from him. Under this doctrine, the
taxpayer is allowed to credit such refund to his
existing tax liability.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
XPN: Where both the claims of the government and
the taxpayer against each other have already
become due, demandable, and fully liquidated,
44
GENERAL PRINCIPLES OF TAXATION
compensation takes place by operation of law and
both obligations are extinguished to their
concurrent amounts. In the case of the taxpayer’s
claim against the government, the government
must have appropriated the amount thereto
(Domingo v. Garlitos, G.R. No. L-18994, June 29,
1963).
Compromise and tax amnesty
Compromise
Compromise is a contract whereby the parties, by
reciprocal concessions, avoid litigation or put an
end to one already commenced. It implies the
mutual agreement by the parties in regard to the
thing or subject matter which is to be compromised.
Offsetting can be allowed if the determination of
the taxpayer’s liability is intertwined with the
resolution of the claim for tax refund of
erroneously or illegally collected taxes under
Section 229 of the NIRC (CIR v. Toledo Power
Company, G.R. No. 196415. December 2, 2015)
Compromises are generally allowed and
enforceable when the subject matter thereof is not
prohibited from being compromised and the person
entering such compromise is duly authorized to do
so.
Note: In CIR v. Toledo Power Company, the
SC did not allow BIR to assess Toledo
Power if deficiency taxes and claim
compensation because the case involves a
VAT refund claim under Section 112.
Persons allowed to enter into compromise of tax
obligations
The law allows the following persons to do
compromise in behalf of the government:
Ratio: To award such refund despite the existence
of that deficiency assessment is an absurdity and a
polarity in conceptual effects” and that “to grant
the refund without determination of the proper
assessment and the tax due would inevitably result
in multiplicity of proceedings or suits (CIR v. CTA,
G.R. No. 106611, July 21, 1994, 234 SCRA 348).
1. BIR Commissioner, as expressly authorized by
the NIRC, and subject to the following
conditions:
a. When a reasonable doubt as to validity of the
claim against the taxpayer exists; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax (Sec. 204[A], NIRC).
Q: Can an assessment for a local tax be the
subject of set-off or compensation against a final
judgment for a sum of money obtained by a
taxpayer against the local government that
made the assessment? (2005 Bar)
2. Collector of Customs, with respect to customs
duties limited to cases where the legitimate
authority is specifically granted such as in the
remission of duties (Sec. 709, TCC).
3. Customs Commissioner, subject to the
approval of the Secretary of Finance, in cases
involving the imposition of fines, surcharges, and
forfeitures (Sec. 2316, TCC).
A: NO. Taxes and debts are of different nature and
character. Taxes cannot be subject to
compensation for the simple reason that the
Government and the taxpayers are not creditors
and debtors of each other, debts are due to the
Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity
(South African Airways v. CIR, 612 SCRA 665, 2010).
The taxes assessed or the obligation of the
taxpayer arising from law, while the money
judgment against the government is an obligation,
arising from contract, whether express or implied.
Inasmuch as taxes are not debts, it follows that the
two obligations are not susceptible to set-off or
legal compensation. Hence, no set-off or
compensation between the two different classes of
obligations is allowed (Francia v. IAC, 162 SCRA
753, 1988).
Tax amnesty
Tax amnesty, being a general pardon or intentional
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law. It partakes of an
absolute waiver by the government of its right to
collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate
(Asia International Auctioneers, Inc. v. CIR, G.R. No.
179115, September 26, 2012).
A tax amnesty, much like a tax exemption, is never
favored or presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and
liberally in favor of the taxing authority (Asia
NOTE: It is only when the local tax assessment and
the final judgment are both overdue, demandable,
as well fully liquidated may set-off or compensation
be allowed (Domingo v. Garlitos, 8 SCRA 443, 1963).
45
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
International Auctioneers, Inc. v. CIR, G.R. No.
179115, September 26, 2012).
undeclared sales. While the case was pending
before the SC, Garment Co filed a Manifestation
and Motion that it had availed and was able to
comply with the government’s tax amnesty
program under the 2007 Tax Amnesty Law.
However, BIR contends that Garment Co is
disqualified per “BIR RMC 19-2008” or “A Basic
Guide on the Tax Amnesty Act of 2007” which
disqualifies taxpayers with issues and cases
that were ruled by any court (even without
finality) in favor of the BIR prior to amnesty
availment of the taxpayer. Did Garment Co
qualify for the tax amnesty program?
Tax Amnesty distinguished from Tax
Exemption
TAX AMNESTY
Scope of
immunity
Immunity from
all
criminal,
civil
and
administrative
obligations
arising
from
non-payment of
taxes
TAX
EXEMPTION
Immunity from
civil
liability
only
General pardon
given to all
erring
taxpayers
A freedom from
a charge or
burden
to
which others
are subjected
How
applied
Applied
retroactively
Applied
prospectively
Presence
of actual
revenue
loss
There
is
revenue
loss
since there was
actually taxes
due
but
collection was
waived by the
government
None, because
there was no
actual
taxes
due as the
person
or
transaction is
protected by
tax exemption
Grantee
A: YES. While tax amnesty, similar to a tax
exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing
authority, it is also a well-settled doctrine that the
rule-making power of administrative agencies
cannot be extended to amend or expand statutory
requirements or to embrace matters not originally
encompassed by the law. Administrative
regulations should always be in accord with the
provisions of the statute they seek to carry into
effect, and any resulting inconsistency shall be
resolved in favor of the basic law. Thus, BIR RMC 192008 is invalid as the exception goes beyond the
scope of the provisions of the 2007 Tax Amnesty
Law (CS Garment, Inc. v. CIR, G.R. No. 182399, March
12, 2014).
Taxpayer’s suit
It is a case where the act complained of directly
involves the illegal disbursement of public funds
collected through taxation.
Q: Does the mere filing of tax amnesty return
shield the taxpayer from immunity against
prosecution?
In the case of Abaya v. Ebdane (515 SCRA 720), the
prevailing doctrine in the taxpayer’s suits is:
A:NO. The taxpayer must have voluntarily
disclosed his previously untaxed income and must
have paid the corresponding tax on such previously
untaxed income (People v. Judge Castañeda, 165
SCRA 327[1988]).
1. To allow the taxpayers to question contracts
entered into by the National Government or
government owned and controlled corporations
allegedly in contravention of law;
2. To allow the taxpayer to sue when there is a
claim that public funds are illegally disbursed or
public money is being deflected to any improper
purpose, or that there is a wastage of public
funds through the enforcement of an invalid or
unconstitutional law;
3. Significantly, a taxpayer need not be a party to
the contract to challenge its validity.
Q: Can a taxpayer claim tax amnesty if he is a
withholding tax agent?
A: The claim of a taxpayer under a tax amnesty
shall be allowed when the liability involves the
deficiency in payment of income tax. However, it
must be disallowed when the taxpayer is assessed
on his capacity as a withholding tax agent because
the person who earned the taxable income was
another person other than the withholding agent
(LG Electronics Philippines, Inc. v. CIR, G.R. No.
165451, December 3, 2014).
A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that
public money is being deflected to any improper
purpose, or that there is wastage of public funds
through the enforcement of an invalid or
Q: The BIR assessed Garments Co deficiencies
on taxes for non-payment of VAT on its
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
46
GENERAL PRINCIPLES OF TAXATION
unconstitutional law (Land Bank of the Philippines v.
Cacayuran, 696 SCRA 861, G.R. No. 191667, April 17,
2013).
2.
Q: Through E.O. No. 30, the President created a
trust for the benefit of the Filipino People under
the name and style of the CCP. The trust was to
undertake the construction of a national theater
and music hall to awaken the nation’s
consciousness on cultural heritage and to
promote, preserve and enhance the same.
Pursuant thereto, CCP’s Board of Trustees
received foreign donations and financial
commitments. Petitioner, however, claims that
in issuing E.O. No. 30, there was an
encroachment by the President on the
legislative’s prerogative to enact laws. The trial
court dismissed the petition on the ground that
Gonzales did not have the personality to
question the issuance of EO No. 30 since the
funds administered by the CCP came from
donations, without a single centavo raised by
taxation. Does the petitioner have the
personality to question the validity of EO No. 30
based on a taxpayer’s suit?
A taxpayer’s suit is proper only when there is an
exercise by the Congress of its spending or taxing
power.
Taxpayer’s Suit distinguished from a citizen’s
suit
The plaintiff in a taxpayer’s suit is in a different
category from the plaintiff in a citizen’s suit. In the
former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere
instrument of the public concern (David v.
Macapagal-Arroyo, 489 SCRA 160, G.R. No. 171409,
May 3, 2006).
In the case of a taxpayer’s suit, plaintiff is allowed to
sue where there is a claim that public funds are
illegally disbursed, or that public money is being
deflected to any improper purpose, or that there is
a wastage of public funds through the enforcement
of an invalid or unconstitutional law (Francisco, Jr. v.
Nagmamalasakit na mga Manananggol ng mga
Manggagawang Pilipino, Inc., 415 SCRA 44, G.R. No.
160262, November 10, 2003).
A: NO. Gonzales did not meet the requisite burden
to warrant the reversal of the trial court’s decision.
It was pointed out therein that one valid reason why
such an outcome was unavoidable was that the
funds administered by the Center came from
donations and contributions and not from taxation.
Accordingly, there was the absence of the pecuniary
requisite or monetary interest. Gonzales has not
satisfied an element for a taxpayer’s suit (Gonzales
v. Marcos, G.R. No. L-31685, July 31, 1975).
In a citizen’s suit, the interest of the petitioner
assailing the constitutionality of a statute must be
direct and personal. He must be able to show, not
only that the law or any government act is invalid,
but also that he sustained or is in imminent danger
of sustaining some direct injury as a result of its
enforcement, and not merely that he suffers thereby
in some indefinite way. It must appear that the
person complaining has been or is about to be
denied some right or privilege to which he is
lawfully entitled or that he is about to be subjected
to some burdens or penalties by reason of the
statute or act complained of (Francisco, Jr. v.
Nagmamalasakit na mga Manananggol ng mga
Manggagawang Pilipino, Inc., 415 SCRA 44, G.R. No.
160262, November 10, 2003).
Q: COA issued Circular No. 89-299, which lifted
the pre-audit of government transactions of
National
Government
Agencies
and
Government-Owned
or
–Controlled
Corporations. Hence, De Llana, as a taxpayer,
filed a petition for certiorari alleging that the
pre-audit duty on the part of COA cannot be
lifted by a mere circular, considering that the
pre-audit is a constitutional mandate. He further
claims that, because of the lack of pre-audit by
COA, serious irregularities in government
transactions have been committed. Is he entitled
to the extraordinary writ of certiorari?
Two requisites of a taxpayer’s suit:
1.
The petitioner is directly affected by the alleged
act.
Public funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed; and
A: YES. A taxpayer is deemed to have the standing
to raise a constitutional issue when it is established
that public funds from taxation have been disbursed
in alleged contravention of the law or the
Constitution. Petitioner claims that the issuance of
Circular No. 89-299 has led to the dissipation of
public funds through numerous irregularities in
government
financial
transactions.
These
NOTE: A taxpayer’s suit would fail if what are
alleged to be illegally disposed of are object
which were acquired from private sources
(Joya, et al. v. PCGG, et al., G.R. No. 96541, August
24, 1993).
47
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
transactions have allegedly been left unchecked by
the lifting of the pre-audit performed by COA, which,
petitioner argues, is its Constitutional duty. Thus,
petitioner has standing to file this suit as a taxpayer,
since he would be adversely affected by the illegal
use of public money (Dela Llana v. COA, 665 SCRA
176, 2012).
Locus standi
The party suing as a taxpayer must prove that he has
sufficient interest in preventing the illegal
expenditure of money raised by taxation. Thus,
taxpayers have been allowed to sue where there is a
claim that public funds are illegally disbursed or
that public money is being deflected to any
improper purpose, or that public funds are wasted
through the enforcement of an invalid or
unconstitutional law.
The taxpayer must establish that:
1. He has a personal and substantial interest in the
case; and
2. He has sustained or will sustain direct injury as
a result of its enforcement or that he stands to be
benefited or injured by the judgment in the case,
or is entitled to the avails of the suit (Public
Interest Center, Inc. v. Roxas, 513 SCRA 457, G.R.
No. 125509, January 31, 2007)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
48
BUREAU OF INTERNAL REVENUE
the manner in which the process of denaturing
shall be effected, so as to render the alcohol
suitably denatured and unfit for oral intake, the
bonds to be given, the books and records to be
kept, the entries to be made therein, the
reports to be made to the CIR, and the signs to
be displayed in the business or by the person
for whom such denaturing is done or by whom,
such alcohol is dealt in.
7. The manner in which revenue shall be
collected and paid, the instrument, document
or object to which revenue stamps shall be
affixed, the mode of cancellation, the manner in
which the proper books, records, invoices and
other papers shall be kept and entries therein
made by the person subject to the tax, as well
as the manner in which licenses and stamps
shall be gathered up and returned after serving
their purposes.
8. The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and
other transfers mortis causa, as well as on gifts
and such other rules and regulations which the
CIR may consider suitable for the enforcement
of the said Title III.
9. The manner tax returns, information and
reports shall be prepared and reported and the
tax collected and paid, as well as the conditions
under which evidence of payment shall be
furnished the taxpayer, and the preparation
and publication of tax statistics.
10. The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
through the collection officers of the BIR or
through duly authorized agent banks which are
hereby deputized to receive payments of such
taxes and the returns, papers and statements
that may be filed by the taxpayers in
connection with the payment of the tax:
Provided, however, that notwithstanding the
other provisions of the NIRC prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks: Provided,
further, that the CIR can exercise this power
within 6 years from the approval of R.A. 7646
or the completion of its comprehensive
computerization program, whichever comes
earlier: Provided, finally, that separate venues
for the Luzon, Visayas and Mindanao areas may
be designated for the filing of tax returns and
ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE (BIR)
RULE-MAKING AUTHORITY OF
SECRETARY OF FINANCE
The Secretary of Finance, upon recommendation of
the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement
of the provisions of NIRC (Sec. 244, NIRC).
General principles on the rule-making power
1. Rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve
weight and respect by the courts.
2. All such issuances must not override, but must
remain consistent and in harmony with the law
they seek to apply and implement.
3. Administrative rules and regulations are
intended to carry out, neither to supplant nor to
modify, the law (CIR v. CA, G.R. No. 108358,
January 20, 1995).
Specific Provisions to be Contained in Rules and
Regulations
Rules and regulations must contain provisions
specifying, prescribing, or defining: (SLE2D RIDES)
1.
2.
3.
4.
5.
6.
The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions to discover
persons and property liable to national
internal revenue taxes, and the manner their
lists and records of taxable persons and taxable
objects shall be made and kept.
The forms of labels, brands or marks to be
required on goods subject to excise tax, and the
manner how the labeling, branding or marking
shall be effected.
The condition and manner for goods intended
for export, which if not exported would be
subject to an excise tax, shall be labeled,
branded or marked.
The conditions to be observed by revenue
officers respecting the institutions and conduct
of legal actions and proceedings;
The conditions under which goods intended for
storage in bonded warehouses shall be
conveyed thither, their manner of storage and
method of keeping entries and records, also the
books to be kept by Revenue Inspectors and
the reports to be made by them in connection
with their supervision of such houses.
The conditions under which denatured alcohol
may be removed and dealt in, the character and
quantity of the denaturing material to be used,
49
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
payment of taxes by said large taxpayers (Sec.
245, NIRC).
c.
d.
Various Kinds of Revenue Issuances by the CIR
1.
2.
Revenue Regulations (RRs) – issuances signed
by the Secretary of Finance (SoF), upon
recommendation of the CIR, that specify,
prescribe or define rules and regulations for
the effective enforcement of the provisions of
the Tax Code.
Rulings issued by International Tax Affairs
Division (ITAD); and
Rulings issued thru delegated authorities
or unnumbered rulings
8.
Revenue Audit Memorandum Orders (RAMOs) –
declarations of audit programs of the BIR for a
specific taxable year signed by the CIR.
9.
Revenue Memorandum Rulings (RMRs) –
rulings, opinions and interpretations signed by
the CIR with respect to the 1997 Tax Code as
amended, as applied to a specific set of facts,
with or without established precedents, for
guidance of taxpayers.
Revenue Memorandum Orders (RMOs) issuances signed by the CIR that provide
directives
or
instructions;
prescribe
guidelines; and outline processes, operations,
activities, workflows, methods and procedures
necessary in the implementation of stated
policies, goals, objectives, plans and programs
of the BIR in all areas of operations, except
auditing.
10. Revenue Bulletins (RBs) – periodic issuances,
notices and official announcements of the CIR
that consolidate the BIR’s position on certain
issues, for the guidance of the public signed by
the CIR.
3.
Revenue Memorandum Circulars (RMCs) issuances signed by the CIR which publish
pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations, and
precedents issued by the BIR and other
agencies/offices.
11. Revenue Travel Assignment Orders (RTAOs) –
issued by the CIR transferring, assigning or reassigning revenue officers or employees to
other or special duties connected with the
enforcement or administration of revenue laws
as the exigencies of the services may require.
4.
Revenue Administrative Orders (RAOs)issuances signed by the CIR that cover subject
matters dealing strictly with the permanent
administrative set-up of the BIR, more
specifically, the organizational structure,
statements of functions and/or responsibilities
of BIR offices, definitions and delegations of
authority, staffing and personnel requirements
and standards of performance.
Limit: Revenue officers assigned to perform
assessment or collection functions shall not
remain in the same assignment for more than 3
years.
5.
6.
7.
Large Taxpayer
A large taxpayer is anyone who satisfies any of the
following criteria:
Revenue Delegation of Authority Orders
(RDAOs) - issuances signed by the CIR which
refer to functions delegated by the CIR to
revenue officials in accordance with law.
1.
2.
Revenue Special Orders (RSOs) – administrative
order issued by the CIR assigning revenue
officers and employees of the BIR to special
duties which shall not exceed 1 year.
3.
BIR Rulings – official positions of the CIR to
queries raised by taxpayers and other
stakeholders relative to clarification and
interpretation of tax laws. Rulings may come in
different forms:
a.
b.
4.
The Secretary of Finance, upon recommendation of
the CIR, may modify or add to the above criteria for
determining a large taxpayer after considering such
BIR Rulings
VAT Rulings
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
For VAT - Business establishment with VAT
paid or payable of at least P100,000 for any
quarter of the preceding taxable year;
For Excise Tax - Business establishment with
excise tax paid or payable of at least P1 million
for the preceding taxable year;
For Corporate Income Tax - Business
establishment with annual income tax paid or
payable of at least P1 million for the preceding
taxable year; and
For Withholding Tax - Business establishment
with withholding tax payment or remittance of
at least P1 million for the preceding taxable
year.
50
BUREAU OF INTERNAL REVENUE
factors as inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Sec. 248 of the
NIRC shall be imposed on any violation of the rules
and regulations issued by the Secretary of Finance,
upon recommendation of the CIR, prescribing the
place of filing of returns and payments of taxes by
large taxpayers (Sec. 245, NIRC).
government (Marcos v. CIR, G.R. No. 120880, June 5,
1997).
Powers of the Commissioner
1. Power to interpret tax laws and to decide cases
(Sec. 4, NIRC);
2. Power to obtain information and to
summon/examine and take testimony of
persons (Sec. 5, NIRC);
JURISDICTION, POWER
AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
Q: What are the purposes of these powers?
A:
1. To ascertain correctness of the return;
2. To make a return when none has been made;
3. To determine liability of any person for any
internal revenue tax;
4. To collect such liability;
5. To evaluate tax compliance.
Powers and duties of the BIR [JEnAReS]
1.
2.
3.
4.
5.
Assessment and collection of all national
internal revenue taxes, fees and charges;
Enforcement of all forfeitures, penalties and
fines;
Execution of judgments in all cases decided in
its favor (by the CTA and regular courts);
Give effect and administer the supervisory and
police powers conferred to it by the NIRC and
other laws;
Recommend to the Secretary of Finance all
needful rules and regulations for the effective
enforcement of the provision of the NIRC.
Q: What is the scope of such powers? [SO-Ass2Sex]
A:
1. To examine any book, paper, record, or other
data which may be relevant or material to such
inquiry;
2. To obtain any information (costs, volume of
production, receipts, sales, gross income) on a
regular basis, from any person other than the
person under investigation and any office or
officer of the national/local government;
3. To summon the following to produce records
and to give testimony:
a. The person liable for tax or required to file a
return;
b. Any officer or employee of such person;
c. Any person having in his possession, custody
and care the books of accounts, accounting
records of entries related to the business of
such taxpayer.
Chief Officials of the BIR
The BIR is headed by the CIR and 6 Deputy
Commissioners, who lead the following divisions:
1.
2.
3.
4.
5.
6.
Operations group
Legal Inspection Group
Resource and Management Group
Information Systems Group
Prosecution Group
Special Concerns Group
Q: Is the BIR authorized to collect estate tax
deficiencies by the summary remedy of levy
upon and sale of real properties of the decedent
without first securing the authority of the court
sitting in probate over the supposed will of the
decedent? (1998 Bar)
4.
Power to make assessments and prescribe
additional requirements for tax administration
and enforcement (Sec. 6, NIRC);
5. Power to assign internal revenue officers and
other employees (Secs. 16 and 17, NIRC);
6. Power to suspend the business operations of a
taxpayer for vialations of VAT rules (Sec. 115,
NIRC)
A: YES, the BIR is authorized to collect estate tax
deficiency through the summary remedy of levying
upon and sale of real properties of a decedent
without the cognition and authority of the court
sitting in probate over the supposed will of the
deceased because of the collection of estate tax is
executive in character. As such the estate tax is
exempted from the application of the statute of
non-claims, and this is justified by the
necessity of government funding, immortalized in
the maxim that taxes are the lifeblood of the
Q: When can the CIR suspend the business
operation of a taxpayer?
A:
1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
51
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
2.
Failure to file a VAT return as required
under Sec. 114; or
Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipts for the taxable
quarter.
A: [RICA]
1. To Recommend promulgation of rules and
regulations by the Secretary of Finance;
2. To Issue rulings of first impression or to
reverse, revoke or modify any existing rule
of the BIR;
3. GR: To Compromise or abate any tax
liability;
Failure of any person to register as required
under Sec. 236:
XPN: The Regional Evaluation Board may
compromise
assessments
involving
deficiency taxes of P500,000 or less and
minor crime violations.
The temporary closure of the establishment
shall be for the duration of not less than 5 days
and shall be lifted only upon compliance with
whatever requirements prescribed by the CIR
in the closure order (Sec. 115 NIRC).
4.
The CIR is also authorized: (TInDER PRIM)
1.
2.
3.
4.
5.
6.
7.
8.
9.
To Assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are kept.
To terminate taxable period for reasons
provided in the NIRC;
To make or amend return in case taxpayer fails
to file a return or files a false or fraudulent
return;
3.To examine returns and determine tax due;
To prescribe any additional requirements for
the submission or preparation of financial
statements accompanying tax returns;
To inquire into bank deposits of
a. Decedent to determine his gross income;
b. A taxpayer who filed application to
compromise payment of tax liability by
reason of financial incapacity;
c. A specific taxpayer or taxpayers subject of
a request for the supply of tax information
from a foreign tax authority pursuant to an
international convention or agreement on
tax matters to which the Philippines is a
signatory or a party of. Provided, that the
information obtained from the banks and
other financial institutions may be used by
the BIR for tax assessment, verification,
audit and enforcement purposes;
Q: Will errors or mistakes of administrative
officials bind the government as to the
collection of taxes?
To delegate powers vested upon him to
subordinate officials with rank equivalent to
Division Chief or higher, subject to limitations
and restrictions imposed under the rules and
regulations.
To prescribe real property values;
To take inventory of goods of any taxpayer, and
place any business under observation or
surveillance IF there is reason to believe that
such is not declaring his correct income, sales
or receipts for tax purposes;
To register tax agents.
NOTE: In the Citytrust case, which involves a claim
for refund, the error or neglect was the failure of
the Solicitor General to present its evidence, as
counsel for the CIR, due to the unavailability of the
necessary records from BIR, prompting the
Solicitor to submit the case for decision without
presenting any evidence. While in Goodrich, the
error committed refers to the neglect of the BIR to
make assessment within the 3-year period as
required in Sec. 203, NIRC.
A: GR: Errors or mistakes of administrative officials
(including the BIR) should never be allowed to
jeopardize the financial position of the government.
Reason: Taxes are the lifeblood of the nation
through which the government agencies continue
to operate and with which the State effects its
functions for the welfare of its constituents (CIR v.
Citytrust and CTA, G.R. No. 106611, July 21, 1994).
XPN: For the purpose of safeguarding taxpayers
from any unreasonable examination, investigation
or assessment, our tax law provides a statute of
limitations in the collection of taxes. Thus, the law
on prescription, being a remedial measure, should
be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law
on prescription should perforce be strictly
construed (CIR v. Goodrich Philippines Inc., G.R No.
104171, February 24, 1999).
Powers of the Commissioner to interpret tax
laws and to decide tax cases
Q: What are the powers of the BIR which cannot
be delegated?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
52
BUREAU OF INTERNAL REVENUE
The power to interpret the provisions of NIRC and
other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
b. Has the right of the Government to assess
and collect deficiency taxes from Vantage
Point, Inc. for the year 2012 prescribed?
Explain your answer. (2017 Bar)
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or
other matters arising under the NIRC or other laws
or portions thereof administered by the BIR is
vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax
Appeals (Sec. 4, NIRC).
A:
a. Generally, a valid waiver of the statute of
limitations for the assessment and collection of
taxes must be executed by the taxpayer and
accepted by the BIR prior to the expiration of
the period which it seeks to extend. The same
must also be executed by the taxpayer or his
duly authorized representative, or in the case
of a corporation, it must be signed by any of its
responsible officers (CIR v. Kudos Metal
Corporation, G.R. No. 178087, May 5, 2010).
Power to interpret
a) The NIRC, and
b) Other tax laws.
Such requirements must be met considering
that a waiver of the statute of limitations under
the NIRC, to a certain extent, is a derogation of
the taxpayers right to security against
prolonged and unscrupulous investigations
and must therefore be carefully and strictly
construed. (Philippine Journalists, Inc. v. CIR,
G.R. No. 162852, December 16, 2004).
Power to decide on
a) Disputed assessments,
b) Refunds of internal revenue taxes,
c) Fees or other charges, and penalties imposed in
relation thereto,
d) Other matters arising under the nirc or other
laws or portions thereof administered by the
BIR.
b.
Q: On January 27, 2017, Ramon, the comptroller
of Vantage Point, Inc., executed a document
entitled “Waiver of the Statute of Limitations” in
connection with the BIR’s investigation of the
tax liabilities of the company for 2012.
However, the Board of Directors of Vantage
Point, Inc., did not adopt a board resolution
authorizing Ramon to execute the waiver.
Non-retroactivity of rulings
The rulings of the BIR are not retroactive. Any
revocation, modification, or reversal of any of the
rules and regulations promulgated or any of the
rulings or circulars promulgated by the CIR shall
not be given retroactive application if it will be
prejudicial to the taxpayers, except in the following
cases:
On October 14, 2017, Vantage Point, Inc.,
received a preliminary assessment notice from
the BIR indicating its deficiency withholding
taxes for the year 2012. Vantage Point, Inc.,
filed its protest. On October 30, 2017, the BIR
issued a formal letter of demand and final
assessment notice. Vantage Point, Inc., again
filed a protest. The CIR denied the protests and
directed the collection of the assessed
deficiency taxes.
1.
2.
Accordingly, Vantage Point, Inc., filed a petition
for review in the CTA to seek the cancellation
and withdrawal of the assessment on the
ground of prescription.
a.
YES, the final assessment was issued beyond
the three-year prescriptive period to make an
assessment. (Section 203, NIRC). The Waiver
did not extend the three-year prescriptive
period since it was executed after the
expiration of such period.
3.
Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
Where the taxpayer acted in bad faith (Sec. 246,
NIRC).
NOTE: If the revocation is due to the fact that the
regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as to
affect past transactions, because a wrong
construction of the law cannot give rise to a vested
right that can be invoked by a taxpayer.
What constitutes a valid waiver of the
statute of limitations for the assessment
and collection of taxes? Explain your
answer.
53
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Q: XYZ Corporation, an export oriented
company, was able to secure a BIR Ruling in
June 2005 that exempts from tax the
importation some of its raw materials. The
ruling is of first impression, which means the
interpretation made by the CIR is one without
established
precedents.
Subsequently,
however, the BIR issued another ruling which in
effect would subject to tax such kind of
importation. XYZ Corporation is concerned that
said ruling may have a retroactive effect, which
means that all their importations done before
the issuance of the second ruling could be
subject to tax.
companies are not covered by the new law.
Relying on this ruling, DEF Printers did not pay
said tax. Subsequently, however, the BIR
reversed the ruling and issued a new one
stating that the tax covers printing companies.
Could the BIR now assess DEF Printers for back
taxes corresponding to the years before the
new ruling? Reason briefly. (2004 Bar)
A: NO. Reversal of a ruling shall not be given a
retroactive application if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot assess DEF printers for back taxes because
it would be violative of the principle of nonretroactivity of rulings and doing so would result in
grave injustice to the taxpayer who relied on the
first ruling in good faith (Sec. 246, NIRC; CIR v.
Burroughs, Inc., 142 SCRA 324[1986]).
a. What is a BIR Ruling?
b. What is required to make a BIR ruling of
first impression a valid one?
c. Does a BIR ruling have a retroactive effect,
considering the principle that tax
exemptions should be interpreted strictly
against the taxpayer? (2007 Bar)
A:
a. A BIR ruling is an administrative interpretation
of the Revenue Law as applied and
implemented by the Bureau. They can be relied
upon by taxpayers and are valid until
otherwise determined by the courts or
modified or revoked by a subsequent ruling or
opinion. They are accorded great weight and
respect, but not binding on the courts
(Commission v. Ledesma, L-17509, January 30,
1970).
b. A BIR ruling of first impression, to be a valid
ruling, must be issued within the scope of
authority granted to the CIR, and not
contravene any law or decision of the SC (CIR v.
Michel Lhuillier Pawnshop, Inc., G.R. No. 150947,
July 15, 2003; Sec. 7, NIRC).
c. A BIR ruling cannot be given retroactive effect
if it would be prejudicial to the taxpayer. Sec.
246 of the NIRC provides for retroactive effect
in the following cases:
1.
2.
3.
Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the rulings is based; or
Where the taxpayer acted in bad faith (Sec.
246, NIRC).
Q: Due to an uncertainty whether or not a new
tax law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR on
that issue. The BIR issued a ruling that printing
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
54
INCOME TAXATION
1.
INCOME TAXATION
DEFINITION, NATURE AND
GENERAL PRINCIPLES
Income taxation is in the nature of an excise taxation
system, or taxation on the exercise of privilege, the
privilege to earn yearly profits from various sources.
It is a system that does not provide for the taxation of
property (Domondon, 2013).
2.
Income tax systems
1.
2.
3.
Global tax system – System employed where the
tax system views indifferently the tax base and
generally treats in common all categories of
taxable income of the individual (Tan v. Del
Rosario, Jr., 237 SCRA 324, 331).
Schedular tax system – System employed where
the income tax treatment varies and is made to
depend on the kind or category of taxable
income of the taxpayer (Tan v. Del Rosario, Jr.,
237 SCRA 324, 331).
Semi-schedular or semi-global tax system – All
compensation income, business or professional
income, capital gain, passive income, and other
income not subject to final tax are added
together to arrive at the gross income. After
deducting the allowable deductions and
exemptions from the gross income, the taxable
income is subjected to one set of graduated tax
rate for individual or normal corporate income
tax rate for corporation (Mamalateo, 2014).
3.
4.
Criteria in imposing Philippine income tax
Schedular Treatment vs. Global Treatment (1994
Bar)
SCHEDULAR
TREATMENT
Different tax rates
Different categories of
taxable income
Usually
used
in
income taxation of
individuals
(Business
income,
professional income,
passive
income,
illegal income)
You cannot add all of
them together, due to
different tax rates.
Direct tax– Tax burden is borne by the income
recipient upon whom the tax is imposed. It is a
tax demanded from the very person who, it is
intended or desired, should pay it (i.e income tax,
donor’s tax, estate tax). On the other hand,
indirect tax is a tax demanded in the first
instance from one person in the expectation and
intention that he can shift the burden to someone
else (i.e. value-added tax [“VAT”], where the
seller is liable to pay the output VAT, but shifts
the burden to the buyer).
Progressive tax– Tax base increases as the tax
rate increases. It is founded on the “ability to
pay” principle.
Comprehensive – It adopted the citizenship
principle, the residence principle and the source
principle.
Semi-schedular or semi-global taxsystem
(Mamalateo, 2014).
1.
Citizenship or nationality principle– A citizen of
the Philippines is subject to Philippine income
tax
a. On his worldwide income, if he resides in the
Philippines;
b. Only on his income from sources within the
Philippines, if he qualifies as a non-resident
citizen.
2.
Residence or domicile principle–A resident alien
is liable to pay Philippine income tax on his
income from sources within the Philippines but
is exempt from tax on his income from sources
outside the Philippines.
Source principle – An alien is subject to
Philippine income tax because he derives income
from sources within the Philippines. A nonresident alien or non-resident foreign
corporation is liable to pay Philippine income tax
on income from sources within the Philippines,
despite the fact that he has not set foot in the
Philippines (Mamalateo, 2014).
3.
GLOBAL TREATMENT
Unitary or single tax rate
No need for classification
as all taxpayers are
subjected to a single tax
rate
Applied to corporations
Note:
(Business
income,
professional
income,
passive income, illegal
income)
All of them are added
together and subjected to
a single tax rate.
Only resident citizens
corporations are taxable
income.
and domestic
on worldwide
Types of Philippine income tax [MC2F3 – BINGOS]
1.
2.
3.
Features of the Philippine Income Tax Law
55
Minimum corporate income tax (MCIT)
Capital gains tax on sale or exchange of unlisted
shares of stock of a domestic corporation
classified as capital asset
Capital gains tax on sale or exchange of real
property located in the Philippines classified as
capital asset
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
4.
Final withholding tax on certain passive
investment incomes
5. Final withholding tax on income payments made
to non-resident individuals or corporations
6. Fringe benefit tax (FBIT)
7. Branch profit remittance tax
8. Improperly accumulated earnings tax (IAET)
9. Normal corporate income tax on corporations
10. Graduated income tax on individuals, or
11. Optional income tax of 8% for individuals
12. Special income tax on certain corporations
1.
2.
3.
4.
5.
When the corporation is newly organized
and commenced operations on any day
within the year
When the corporation changes its
accounting period
When a corporation is dissolved
When the Commissioner of Internal
Revenue, by authority, terminates the
taxable period of a taxpayer (NIRC, Sec.
6[D]).
In case of final return of the decedent and
such period ends at the time of his death
Taxable Period
Kinds of Taxpayers:
Taxable period is a period within which the net
income is computed as a whole for income tax
purposes.
1.
Individuals
a. Citizen
i.
Resident Citizen (RC)
ii.
Non-Resident Citizen (NRC)
b. Aliens
i.
Resident Alien (RA)
ii.
Non-Resident Alien (NRA)
(1) Engaged in Trade or Business
(NRA-ETB)
(2) Not Engaged in Trade or Business
(NRA-NETB)
iii.
Special Alien
c. Special class of individual employees
i.
Minimum wage earner
2.
Corporations
a. Domestic
b. Foreign
i.
Resident foreign corporation (RFC)
ii.
Non-resident foreign corporation
(NRFC)
c. Joint venture and consortium
d. Partnership
3.
4.
Estates
Trusts
Kinds of taxable periods
1. Calendar period
The 12 consecutive months starting from
January 1 and ending December 31.
Instances when calendar year shall be the
basis for computing net income
1.
2.
3.
4.
When the taxpayer is an individual
When the taxpayer does not keep books of
account
When the taxpayer has no annual
accounting period
When the taxpayer is an estate or a trust
NOTE: Taxpayers other than a corporation are
required to use only the calendar year.
The final adjustment return shall be filed on or
before the fifteenth (15th) day of April.
2. Fiscal period
It is a period of 12 months ending on the last day
of any month other than December (NIRC, Sec. 22
[Q]).
Importance of knowing the classification of
taxpayers
NOTE: The final adjustment return shall be filed
on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the fiscal year.
In order to determine the applicable [GREED]
1. Gross income
2. Income tax Rates
3. Exclusions from gross income
4. Exemptions
5. Deductions
3. Short period
GR: The taxable period, whether it is a calendar
year or fiscal year always consists of 12 months.
INCOME TAX
XPN: Instances when the taxpayer may have a
taxable period of less than 12 months:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Income tax is a tax on all yearly profits arising from
property, profession, trade, or business, or a tax on
person’s income, emoluments, profits and the like
56
INCOME TAXATION
(Fisher v. Trinidad, G.R. No. L-19030, October 20,
1922).
4.
It is generally regarded as an excise tax. It is not
levied upon persons, property, funds, or profits but
on the privilege of receiving said income or profit.
5.
Purposes of income tax
6.
1.
2.
3.
To provide large amounts of revenues
To offset regressive sales and consumption taxes
To mitigate the evils arising from the inequality
in the distribution of income and wealth which
are considered deterrents to social progress by a
progressive scheme of taxation (Madrigal v.
Rafferty, G.R . No. 12287, August 8, 1918).
Income
Income refers to all wealth which flows into the
taxpayer other than as mere return of capital. It
includes the forms of income specifically described
as gains and profits, including gains derived from the
sale or other disposition of capital assets (R.R. No. 2,
Sec. 36).
State partnership theory
It is the basis of the government in taxing income. It
emanates from its partnership in the production of
income by providing the protection, resources,
incentive and proper climate for such production
(CIR v. Lednicky, G.R. Nos. L-18169, L-18262 & L21434, July 31, 1964).
Income is a flow of service rendered by capital by
payment of money from it or any benefit rendered by
a fund of capital in relation to such fund through a
period of time (Madrigal v. Rafferty, G.R. No. 12287,
August 8, 1918).
Income tax vs. Property tax
BASIS
Incidence
Who pays
the tax
How
measured
Frequency
of taxation
INCOME TAX
The incidence of
an income tax
falls on the
earner.
The earner pays
income tax.
Income tax is
measured
by
the amount of
income
received over a
period of time.
Income is taxed
only once.
Income vs. Capital (1995 Bar)
PROPERTY
TAX
The incidence
of a property
tax is on the
property itself.
The owner of
the
property
pays
the
property tax.
Property tax is
measured
by
the value of the
property at a
specific date.
CAPITAL
INCOME
Constitutes
the Any wealth which flows
investment which into the taxpayer other
is the source of than a mere return of
income
capital
Is the wealth
Is the service of wealth
Is the tree
Is the fruit
Fund
Flow
Return or recovery Income is subject to
of capital is not income tax
subject to income
tax
(Madrigal v. Rafferty, 38 Phil. 414)
Objects being taxed in income taxation
Property may
be taxed on a
recurring basis.
1.
2.
3.
General Principles
2.
3.
Fruit of Capital
Fruit of Labor
Fruit of Labor and Capital combined
Q: Assuming Mr. R withdraws money from his
bank account, is it income?
Except when otherwise provided in the NIRC:
1.
contract worker (OCW) is taxable only on
income from sources within the Philippines;
An alien, (RA or NRA), is taxable only on income
within the Philippines;
A domestic corporation (DC) is taxable on all
income derived within and without the
Philippines;
A foreign corporation, (engaged or not in trade
or business in the Philippines), is taxable only on
income derived from sources within the
Philippines.
A RC is taxable on all income derived from
sources within and without the Philippines;
A NRC is taxable only on income derived from
sources within the Philippines;
An individual citizen who is working and
deriving income from abroad as an overseas
A: NO, because income is other than a mere return of
capital.
Income held in trust for another
57
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
As a general rule, income held in trust for another is
not taxable since the trustee has no free disposal of
the amount thereof except if the income under trust
may be disposed of by the trustee without limitation
or restriction (North American Consolidated v. Burnet,
286 U.S. 417).
h. Increase in net worth resulting from
adjusting entries (Domondon, 2013).
Q: Mr. X borrowed ₱10,000 from his friend Mr. Y
payable in one year without interest. When the
loan became due, Mr. X told Mr. Y that he (Mr. X)
was unable to pay because of business reverses.
Mr. Y took pity on Mr. X and condoned the loan.
Mr. X was solvent at the time he borrowed the
₱10,000 and at the time the loan was condoned.
Did Mr. X derive any income from the
cancellation or condonation of his indebtedness?
Explain. (1995 Bar)
When income is taxable
The following are important considerations to
discover whether or not there is income for tax
purposes:
1.
2.
3.
4.
Existence of income
Realization of income
Recognition of income
Methods of accounting
A: NO. Mr. X did not derived any income from the
cancellation or condonation of his indebtedness.
Since it is obvious that the creditor merely desired to
benefit the debtor in view of the absence of
consideration for the cancellation, the amount of the
debt is considered as a gift from the creditor to the
debtor and need not be included in the latter’s gross
income.
The important considerations are discussed in
details below.
1. Existence of income
A primary consideration in income taxation is
that there must be income before there could be
income taxation (Domondon, 2013).
Security advances and security deposits paid by a
lessee to a lessor
The amount received by the lessor as security
advances or deposits is not considered income
because it will eventually be returned to the lessee;
hence the lessor did not earn, gain, or profit
therefrom (Tourist Trade and Travel v. CIR, CTA Case
No. 4806, January 19, 1996).
Receipts not considered as income
a. Advance payments or deposits for payments;
Advances are not revenues of the period in
which they are received but as revenue of the
period or periods in which they are earned.
2. Realization of income
b. Property received as compensation but
subject to forfeiture;
c. Assessments for additional corporate
contributions;
d. Increments resulting from revaluation of
property;
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
a.
b.
Until the revalued property is disposed of
there is no income realized.
NOTE: Mere increase in the value of property is not
considered as income for tax purposessince it is an
unrealized increase in capital.
e. Parent’s share in the accumulated and
current equity on subsidiaries’ net earnings
prior to distribution;
f. Money earmarked for some other persons not
included in gross income;
g. Money or property borrowed;
Q: Mr. Castillo is a resident Filipino citizen. He
purchased a parcel of land in Makati in 1970 at a
consideration of ₱1 million. In 2011, the land had
a fair market value of ₱20 million. Mr. Ayala
offered to buy the same for ₱20 million. Is Mr.
Castillo liable to pay for income tax in 2011 based
on the offer to buy by Mr. Ayala? (2011 Bar)
Borrowed money has to be repaid by the
debtor. On the other hand, the creditor does
not receive any income upon payment
because it is merely a return of capital.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The earning process is complete or virtually
complete
An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997).
58
INCOME TAXATION
A: NO. Mr. Castillo is not liable for income tax in 2011
ws for income tax attaches only if there is a gain
realized resulting from a closed and completed
transaction (Madrigal v. Rafferty, G.R. No. L12287,
August 7, 1918).
c.
d.
e.
Transfer of the amounts retained by the
payor to the account of the contractor
Interest coupons that have matured and are
payable but have not been encashed
Undistributed share of a partner in the
profits of a general professional partnership
Increase in the net worth of a taxpayer
4. Methods of accounting
The increase in the net worth of a taxpayer is
taxable if it is the result of the receipt of
unreported or unexplainable tax income.
However, if they are merely shown as correction
of errors in its entries in its books relating to its
indebtedness to certain creditor which had been
erroneously overstated or listed as outstanding
when they had in fact been duly paid, they are not
taxable.
Accounting methods for tax purposes comprise a
set of rules for determining how to report income
and deductions.
As a general rule, the law does not provide for a
specific method of accounting to be employed by
the taxpayer. The law only authorizes the CIR to
employ particular method of accounting of
income where:
NOTE: If and when there are substantial
limitations or conditions under which payment is
to be made, such does not constitute
constructively realized.
a. The taxpayer does not employ a method for
computing income, or
b. The taxpayer’s method for accounting does
not clearly reflect the income (Domondon, 205,
citing Sec. 43 of NIRC).
3. Recognition of income
When income considered received for Philippines
income tax purposes:
a. If actually or physically received by taxpayer;
or
b. If constructively received by taxpayer.
Cash method versus accrual method of
accounting
In cash method, income is recognized only upon
actual or contructive receipt of cash payments or
property but no deductions are allowed from the
cash income unless actually disbursed through an
actual or contructive payment in cash or
property. Stated otherwise, income is earned
when cash is collected, and expense is incurred
when cash is dibursed.
Actual vis-a-vis constructive receipt
1.
2.
Actual receipt – income may be actual receipt
or physical receipt.
Constructive receipt – occurs when money
consideration or its equivalent is placed at the
control of the person who rendered the
service without restriction by the payor (Sec.
4.108-4, R.R. 16-2005).
Meanwhile, in accrual method, income is
recognized in the period it is earned, regardless of
whether it has been received or not. In the same
manner, expenses are accounted for in the period
they are incurred and not in the period they are
paid (Domondon, 2013). Amounts of income
accrue when the right to receive them become
fixed, when there is a created enforceable
liability. Similarly, liabilities are accrued when
fixed and determinable in amount, without
regard to indeterminacy merely of time of
payment (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007).
The income is credited to the account of the
taxpayer and set apart for him which he can
withdraw at any time without restrictions
and/or conditions although not yet actually
received by him physically or reduced to his
possession is already taxable to him.
Examples of income constructively received:
[BITIS]
a.
b.
Deposits in banks which are made available
to the seller of services without restrictions
Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for services
rendered
Tests in determining whether income is
earned for tax purposes
1.
59
Realization test – There is no taxable income
unless income is deemed realized. Revenue is
generally recognized when both conditions
are met:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
2.
3.
4.
5.
The earning process is complete or
virtually complete; and
An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997).
accuracy. The amount of liability does not have to be
determined exactly; it must be determined with
"reasonable accuracy."
The propriety of an accrual must be judged by the
facts that a taxpayer knew, or could reasonably be
expected to have known, at the closing of its books
for the taxable year. Accrual method of accounting
presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing
the accrual of an item of income or deduction. From
the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for
its legal services. The failure to determine the exact
amount of the expense during the taxable year when
they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of
these liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired into
the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting.
For another, it could have reasonably determined
the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time
legal consultant (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007).
Claim of Right Doctrine / Doctrine of
Ownership, Command, or Control – A
taxable gain is conditioned upon the presence
of a claim of right to the alleged gain and the
absence of a definite unconditional obligation
to return or repay. (CIR v. Javier, G.R. 78953)
Economic - Benefit test / Doctrine of
Proprietary Interest – Taking into
consideration the pertinent provisions of law,
income realized is taxable only to the extent
that the taxpayer is economically benefited.
Severance test – Income is recognized when
there is separation of something which is of
exchangeable value (Eisner v. Macomber, 252
US 189).
All Events test
Requisites:
a. Fixing of a right to income or liability to
pay; and
b. Availability of the reasonable accurate
determination of such income or liability.
Q: Isabela Cultural Corporation (ICC) incurred
professional fees for legal services that pertain
to the 1984 and 1985. ICC did not claim
deductions for said expenses in 1984 and 1985
since the cost of the services was not yet
determinable at that time. It claimed deductions
only in 1986 when ICC received the billing
statements for said services. BIR, however,
contends that since ICC is using the accrual
method of accounting, expenses for professional
services that accrued in 1984 and 1985, should
have been declared as deductions from income
during the said years and the failure of ICC to do
so bars it from claiming said expenses as
deduction for the taxable year 1986. Decide.
Classification of income
A: The expenses should have been claimed as
deductions in 1984 and1985. For a taxpayer using
the accrual method, the accrual of income and
expense is permitted when the all-events test has
been met.
Income from sources within the Philippines
As to source:
1.
2.
3.
Refer to discsussions on “Classification of income
subject to tax.”
Situs of income taxation
1.
2.
The all-events test requires the right to income or
liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.
However, the test does not demand that the amount
of income or liability be known absolutely, only that
a taxpayer has at his disposal the information
necessary to compute the amount with reasonable
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Gross income and taxable income from sources
within the Philippines
Gross income and taxable income from sources
without the Philippines
Income partly within or partly without the
Philippines
3.
60
Interests derived from sources within the
Philippines
Dividends from domestic and foreign
corporations, if more than 50% of its gross
income for the three-year period ending with
the close of the taxable year prior to the
declaration of dividends was derived from
sources within the Philippines
Compensation for services performed within the
Philippines
INCOME TAXATION
4.
5.
6.
7.
Rentals and royalties from properties located in
the Philippines or any interest in such property
including rentals or royalties for the use of or for
the privilege of using within the Philippines
intellectual property rights such as trademarks,
copyrights, patents, etc.
Gains on sale of real property located in the
Philippines
Gains on sale of personal property other than
shares of stock within the Philippines
Gains on sale of shares of stock in a domestic
corporation
a. Produced
in
whole within and
sold within
b. Produced
in
whole
without
and sold without
c. Produced within
and sold without
d. Produced without
and sold within
Dividend
income
from:
a. Domestic
Corporation
b. Foreign
Corporation – If
for the 3-year
period preceding
the declaration of
dividend, the ratio
of
such
corporation’s Phil
income to the
world (total) was:
- Less
than
50%
- 50% to 85%
- More
than
85%
Income from sources without the Philippines
1.
2.
3.
Interest and dividends derived from sources
other than those within the Philippines
Compensation for services performed outside
the Philippines
Rentals and royalties from properties located
outside the Philippines or any interest in such
property including rentals or royalties for the
use of or for the privilege of using outside the
Philippines intellectual property rights such as
trademarks, copyrights, patents, etc.
Income derived partly within and partly without
the Philippines
Gains, profits, or incomes other than those
enumerated above shall be allocated or apportioned
to sources within or without the Philippines
Royalties
Merchandising
Gain on sale of
personal
property
purchased and not
produced
Gain on sale of real
property
Mining income
Farming income
Gain on sale of
domestic stock
Interest
Gain on sale of
transport document
Manufacturing:
Income purely without
Income partly within and
and partly without
Income partly within and
and partly without
Income within
Entirely without
Proportionate*
Entirely within
*Formula (Proportionate)
Phil. Gross Income
x Dividend received =
Income within
Entire Gross Income
Summary rules on determination of situs
according to kinds of income
KINDS OF INCOME
Service
or
compensation
income
Rent
Income purely within
GROSS INCOME
TAX SITUS
Place of performance of
service
Except when otherwise provided, gross income
means all income derived from whatever source,
including but not limited to the following items:
[CG2I- R2DAP3]
Location of property (real
or personal)
Place of use of intangibles
Place of sale
Place of sale
1.
Compensation for services in whatever form
paid, including, but not limited to fees, salaries,
wages, commissions and similar items
2. Gross income derived from the conduct of trade
or business or the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner’s distributive share from the net income
of the general professional partnership (NIRC,
Sec. 32 [A])
Location of property
Location of the mines
Place of farming activities
Income
within
the
Philippines
Residence of the debtor
Place of activity that
produces the income
61
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
NOTE: The above enumeration of gross income
under NIRC is NOT exclusive.
received the amount does not alter the fact that it is
remitted in satisfaction of its tax obligations. Since
the income withheld is an income owned by
Express Transport, the same forms part of its
gross receipts (CIR v. Solidbank Corp., G.R. No. 148191,
November 25, 2003).
Concept of income from whatever source derived
“Income from whatever source” includes all
income not expressly excluded or exempted from the
class of taxable income, irrespective of the voluntary
or involuntary action of the taxpayer in producing
the income (Gutierrez v. CIR, CTA Case No. 65, August
31, 1955).
Q: Explain briefly whether the following items
are taxable or non-taxable:
1. Income from jueteng;
2. Gain arising from expropriation of
property;
3. Taxes paid and subsequently refunded
4. Recovery of bad debts previously
charged off;
5. Gain on the sale of a car used for personal
purposes. (2005 Bar)
Therefore, the source is immaterial – whether
derived from illegal, legal, or immoral sources, it is
taxable. As such, income includes the following
among others:
1.
2.
3.
4.
5.
6.
7.
8.
Treasure fund;
Punitive damages representing profit lost;
Amount received by mistake;
Cancellation or condonation of the taxpayer’s
indebtedness;
Receipt of usurious interest;
Illegal gains;
Taxes paid and claimed as deduction
subsequently refunded;
Bad debt recovery.
A:
1. Taxable. Gross income includes "all income
derived from whatever source" (Sec. 32[A],
NIRC), which was interpreted as all income not
expressly excluded or exempted from the class
of taxable income, irrespective of the voluntary
or involuntary action of the taxpayer in
producing the income. Thus, the income may
proceed from a legal or illegal source such as
from jueteng. Unlawful gains, gambling
winnings, etc. are subject to income tax. The
NIRC stands as an indifferent neutral party on
the matter of where the income comes from (CIR
v. Manning, G.R. No. L-28398, August 6, 1975).
2. Taxable. Sale, exchange or other disposition of
property to the government of real property is
taxable. It includes taking by the government
through condemnation proceedings (Gonzales v.
CTA, G.R. No. L-14532, May 26, 1965).
3. Taxable if the taxes were paid and subsequently
claimed as deduction and which are
subsequently refunded or credited. It shall be
included as part of gross income in the year of
the receipt to the extent of the income tax benefit
of said deduction (NIRC, Sec. 34 C [1]). However,
it is not taxable if the taxes refunded were not
originally claimed as deductions.
4. Taxable under the tax benefit rule. Recovery of
bad debts previously allowed as deduction in the
preceding years shall be included as part of the
gross income in the year of recovery to the extent
of the income tax benefit of said deduction (NIRC,
Sec. 34 E [1]). This is sometimes referred as the
Recapture Rule.
Q: Is money received under payment by mistake,
income subject to income tax?
A: Income paid or received through mistake may be
considered as “income from whatever source
derived” irrespective of the voluntary or involuntary
action of the taxpayer in producing income.
Moreover, under the “claim of right doctrine,” the
recipient even if he has the obligation to return the
same has a voidable title to the money received
through mistake (Gutierrez v. CIR, CTA Case No. 65,
August 31, 1955).
Q: Congress enacted a law imposing a 5% tax on
the gross receipts of common carriers. The law
does not define the term “gross receipts.” Express
Transport a bus company has time deposits with
ABC Bank. In 2007, Express Transport earned ₱1
million interest, after deducting the 20% final
withholding tax from its time deposits with the
bank. The BIR wants to collect a 5% gross
receipts tax on the interest income of Express
Transport without deducting the 20% final
withholding tax. Is the BIR correct? (2006 Bar)
NOTE: “Tax benefit rule” refers to the principle
that if a taxpayer recovers a loss or expense that
was deducted in a previous year, the recovery
must be included in the current year’s gross
A: YES. The term "Gross Receipts" is broad enough
to include income constructively received by the
taxpayer. The amount withheld is paid to the
government on its behalf, in satisfaction of
withholding taxes. The fact that it did not actually
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
62
INCOME TAXATION
income to the extent that it was previously
deducted (Black, 2004).
5.
Taxable. Since the car is used for personal
purposes, it is considered as a capital asset hence
the gain is considered income (NIRC, Sec. 32 A [3]
and Sec. 39 A [1]).
Gross income vis-à-vis net income vis-à-vis
taxable income
Net income taxation
Net income taxation is a system of taxation where the
income subject to tax may be reduced by allowable
deductions.
Taxable income or net income
This refers to the pertinent items of gross income
specified in the NIRC, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by the NIRC or
other special laws.
63
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Distinguish gross income from net income
BASIS
As to
deductions
As to
exemptions
As to tax base
Advantages/
Disadvantages
GROSS INCOME
Allows no deductions
NET INCOME
Allows deductions
Grants no exemptions
Grants exemptions
Gross Income
Simplifies the income tax system
Net Income
Confusing and complex process of filing
income tax return
Vulnerable to corruption on account of
margin of discretion in the grant of
deductions
Substantial reduction in corruption and tax
evasion since the exercise of discretion, to
allow or disallow deductions, is dispensed
with
More administratively feasible
Does away with wastage of manpower and
supplies
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
64
Provides equitable reliefs in the form of
deductions, exemptions and tax credit
Tax audit minimizes fraud
INCOME TAXATION
Q: Lao is a big-time swindler. In one year he was
able to earn ₱1 Million from his swindling
activities. When the CIR discovered his income
from swindling, the CIR assessed him a deficiency
income tax for such income. The lawyer of Lao
protested the assessment on the following
grounds:
Self-help income is the amount saved for doing a
work by the taxpayer himself instead of hiring
someone to do the work. Self-help income is exempt
from tax. e.g.A person wants to repaint his house.
Instead of hiring a painter, that person did the
painting job himself to save money.
Classification of income subject to tax
a.
The income tax applies only to legal income,
not to illegal income;
b. Lao’s receipts from his swindling did not
constitute income because he was under
obligation to return the amount he had
swindled, hence, his receipt from swindling
was similar to a loan, which is not income,
because for every peso borrowed he has a
corresponding liability to pay one peso; and
c. If he has to pay the deficiency income tax
assessment there will be hardly anything left
to return to the victims of the swindling. How
will you rule on each of the three grounds for
the protest? (1995 Bar)
The following are income subject to tax:
1.
2.
3.
4.
5.
6.
7.
Compensation income
Fringe benefits
Professional income
Income from business
Income from dealings in propery
Passive investment income
Annuities, proceeds from life insurance or
other types of insurance
8. Prizes and awards
9. Pensions, retirement benefit or separation pay
10. Income from any source whatever
A:
a. Sec. 32 of the NIRC includes within the purview
of gross income all income from whatever source
derived. Hence, the illegality of the income will
not preclude the imposition of the income tax
thereon.
b. When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition,
express or implied, of an obligation to repay and
without restriction as to their disposition, he has
received taxable income, even though it may still
be claimed that he is not entitled to retain the
money, and even though he may still be adjudged
to restore its equivalent. To treat the embezzled
funds as not taxable income would perpetuate
injustice by relieving embezzlers of the duty of
paying income taxes on the money they enrich
themselves with, by embezzlement, while honest
people pay their taxes on every conceivable type
of income (James v. U.S., 202 US 401).
c. The deficiency income tax assessment is a direct
tax imposed on the owner which is an excise on
the privilege to earn an income. It will not
necessarily be paid out of the same income that
was subjected to the tax. Lao’s liability to pay the
tax is based on him having realized a taxable
income from his swindling activities and will not
affect his obligation to make restitution.
Payment of the tax is a civil obligation imposed
by law while restitution is a civil liability arising
from a crime.
The classifications of income subject to tax are
discussed in detail below.
Compensation income
Compensation income includes all remuneration for
services rendered by an employee for his employer
unless specifically excluded under the NIRC (R.R. 298, Sec. 2.78.1).
Refer to “Taxation on compensation income” for
further discussion.
Fringe benefits
Fringe benefit is any good, service or other benefit
furnished or granted by an employer, in cash or in
kind, in addition to basic salaries, to an individual
employee, except a rank and file employee, such as
but not limited to:
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market rate
and the actual rate granted
6. Membership fees, dues and other expenses
athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
The tax implication when there is exchange of
services without compensation is that both parties
are taxable as if both each sold their services.
65
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
9.
Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows (NIRC, Sec. 33 [B];
R.R. 3-98, Sec. 2.33 [B])
goods sold, for a trading concern, or cost of
production for a manufacturing concern.
Cost of services
All direct costs and expenses necessarily incurred to
provide the service required by the customers and
clients including:
Refer to “Taxation on compensation income” for
further discussion.
1. Salaries and employee benefits of personnel,
consultants, and specialists directly rendering the
service; and
2. Cost of facilities directly utilized in providing the
service (NIRC, Sec. 27 E [4]).
Professional income
Professional income refers to the fees received by a
professional from the practice of his profession,
provided that there is no employer-employee
relationship between him and his clients.
Income from dealings in property
The existence or nonexistence of employeremployee relationship is material to determine
whether the income is a compensation income or
professional income. If the employer-employee
relationship is present, then it is considered
compensation income. Otherwise, it is a professional
income.
Types of properties from which income may be
derived
1.
a.
For purposes of taxation, there is no deduction
allowed against compensation income, whereas
allowable deductions may be made from
professional income.
b.
NOTE: Professional income shall be subject to
creditable withholding tax rates prescribed (R.R. No.
2-98).
c.
d.
Income from business
Business income refers to income derived from
merchandising, mining, manufacturing, and farming
operations.
Examples of ordinary assets
a. The condominium building owned by a
realty company, the units of which are for
rent or for sale.
b. Machinery
and
equipment
of
a
manufacturing
concern
subject
to
depreciation
c. The motor vehicles of a person engaged in
transportation business.
NOTE: Business is any activity that entails time and
effort of an individual or group of individuals for
purposes of livelihood or profit.
Gross income derived from business
The term “gross income” derived from business shall
be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold. In
the case of taxpayers engaged in the sale of service,
“gross income” means gross receipts less sales
returns, allowances and discounts (NIRC, Sec. 27 [A]).
2.
Capital assets – include property held by the
taxpayer (whether or not connected with his
trade or business) other than SOUR above.
Examples of capital assets
a. Jewelry not used for trade or business
b. Residential houses and lands owned and
used as such
c. Automobiles not used in trade or business
d. Stock and securities held by taxpayers other
than dealers of securities
Cost of goods sold
It includes all business expenses directly incurred to
produce the merchandise, to bring them to their
present location and use such as invoice cost of the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Ordinary assets – refer to properties held by the
taxpayer used in connection with his trade or
business which includes the following: [SOUR]
Stock in trade of the taxpayer or other property
of a kind which would properly be included in
the inventory of the taxpayer if on hand at the
close of the taxable year;
Property held by the taxpayer primarily for sale
to customers in the ordinary course of trade or
business;
Property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in the nirc; and
Real property used in trade or business of the
taxpayer.
66
INCOME TAXATION
Construction and interpretation of capital assets
business, shall be considered
as ordinary assets.
The general rule has been laid down that the codal
definition of a capital asset must be narrowly
construed while the exclusions from such definitions
must be interpreted broadly (Tuazon v. Lingad, 58
SCRA 176).
Taxpayers
habitually
engaged in the
real estate
business
Taxpayers not
engaged in the
real estate
business
Q: Distinguish “capital asset” from “ordinary
asset” (2003 Bar)
A: “Capital assets” include property held by the
taxpayer whether or not connected with his trade or
business, but the term does not include any of the
following, which are consequently considered
“ordinary assets”:
Taxpayer
changing
business from
real estate to
non-real estate
business
Taxpayers
originally
registered to be
engaged in the
real estate
business but
failed to
subsequently
operate
Abandoned and
idle real property
Real property
subject of
involuntary
transfer
(including
expropriation or
foreclosure sale)
1. Stock in trade of the taxpayer or other property of
a kind which would be properly included in the
inventory of the taxpayer if on hand at the close of
the taxable year;
2. Property held by the taxpayer primarily for sale
to customers in the ordinary course of trade or
business;
3. Property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in sec. 34 (f) of the nirc; or
4. Real property used in trade or business of the
taxpayer.
GUIDELINES IN DETERMINING WHETHER A
REAL PROPERTY IS A CAPITAL ASSET OR
ORDINARY ASSET
Real estate
All real properties acquired
dealer
are ordinary assets.
Real estate
All real properties which are:
developer
- Acquired
whether
developed or undeveloped;
- Held by the real estate
developer primarily for sale
or for lease in the ordinary
course of trade or business
or which would be included
in the inventory of the
taxpayer if on hand at the
close of the taxable year;
and
- Used in trade or business,
whether in the form of land,
building, or improvements
shall be considered as
ordinary assets
Real estate lessor All real properties whether
land
and/or
other
improvements, which are for
lease/rent or being offered
for lease/rent, or for use or
being used in the trade or
All real properties acquired in
the course of trade or
business shall be considered
as ordinary assets.
Real properties whether land,
building,
or
other
improvements, which are
used or being used or have
been previously used in the
trade or business shall be
considered
as
ordinary
assets.
It will not result in the
reclassification
of
real
property from ordinary to
capital asset.
All real properties originally
acquired by them shall
continue to be treated as
ordinary assets.
It shall continue to be treated
as ordinary assets.
No effect on the classification
of the property in the hands of
the involuntary seller.
Significance of determining whether the capital
asset is ordinary asset or capital asset
They are subject to different rules. There are special
rules that apply only to capital asset transactions, to
wit:
1.
2.
3.
Holding period rule
Capital loss limitation
Net capital loss carry-over (NELCO)
Q: State with reason the tax treatment of the
following in the preparation of annual income
tax returns: Income realized from sale of:
a.
67
Capital assets; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
Ordinary assets. (2005 Bar)
NOTE: Gain is the difference between the proceeds
of the sale or exchange and the acquisition value of
the property disposed by the taxpayer.
A:
a. Generally, income realized from the sale of
capital assets are not reported in the income tax
return as they are already subject to final taxes
(capital gains tax on real property and shares of
stocks not traded in the stock exchange). What
are to be reported in the annual income tax
return are the capital gains derived from the
disposition of capital assets other than real
property or shares of stocks in domestic
corporations, which are not subject to final tax.
b. Income realized from sale of ordinary assets is
part of Gross Income, included in the Income Tax
Return (NIRC, Sec. 32 A [3]).
Ordinary income vs. Ordinary loss
ORDINARY INCOME
It includes the gain
derived from the sale
or
exchange
of
ordinary asset.
Capital gain vs. Capital loss
CAPITAL GAIN
It includes the
gain derived from
the
sale
or
exchange of an
asset
not
connected with
the trade or
business.
Q: May capital asset be reclassified as ordinary
asset?
A:YES. Property initially classified as capital asset
may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tends to show
that the activity was in furtherance of or in the course
of the taxpayer’s trade or business.
ORDINARY
GAIN
A gain derived
from the sale or
exchange
of
ordinary assets
such as SOUR
Capital loss may not exceed
capital gains when used as a
deduction to income.
CAPITAL GAIN
A gain derived from the sale or
exchange of capital assets or
property whether or not
connected with the trade or
business of the tax payer other
than SOUR
Actual gain vs. Presumed gain
ACTUAL GAIN
Excess of the
selling
price
over the cost of
the asset
A: The one-hectare agricultural land owned by Juan
is a capital asset because it is not a real property used
in trade or business. The one-half hectare residential
property owned by Alpha Corporation is an ordinary
asset because the owner is engaged in the purchase
and sale of real property (NIRC, Sec. 39; RR 7-03).
PRESUMED GAIN
The law presumes that the
seller of real property
classified as capital asset
realized gains, which is taxed
at 6% of the selling price or fair
market value, whichever is
higher.
Difference between treatment of capital gains
and losses between individuals and corporations
Computation of the amount of Gain or Loss
Gains derived from dealings in property mean all
income derived from the disposition of property
whether real, personal or mixed for:
BASIS
Availability
of holding
period
Money, in case of sale
Property, in case of exchange
Combination of both sales and exchange, which
results in gain
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
CAPITAL LOSS
The loss that may be
sustained from the sale or
exchange of an asset not
connected with the trade or
business.
Ordinary gain vs. Capital gain
Q: In January 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000. This
property has a current fair market value of ₱10
million in view of the construction of a concrete
road traversing the property. Juan agreed to
exchange his agricultural lot in Laguna for a onehalf hectare residential property located in
Batangas, with a fair market value of ₱10 million,
owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the
property in 2007 for ₱9 million. What is the
nature of the real properties exchanged for tax
purposes – capital or ordinary asset? (2008 Bar)
1.
2.
3.
ORDINARY LOSS
The loss that may be
sustained from the sale
or exchange of ordinary
asset.
68
INDIVIDUAL
Holding period
available
CORPORATION
No
holding
period
The
percentages of
gain or loss to
be taken into
Capital gains and
losses are taxable
to the extent of
100%
INCOME TAXATION
Extent of
Recog
-nition
(Taxabi
-lity)
Deductibi
-lity of
capital
losses
Availability
of NCLCO
account shall
be the ff.:
100% - if the
capital assets
have been held
for 12 months
or less; and
50% - if the
capital asset
has been held
for more than
12 months
Nondeductibility of
Net
Capital
losses
Capital losses
are
allowed
only up to the
extent of the
capital gains;
hence, the net
capital loss is
not deductible.
NCLCO
allowed
actually
earned
(presumed
gains)
Nondeductibility of
Net Capital losses
As to holding
period
XPN:
If
any
domestic bank or
trust company, a
substantial part
of
whose
business is the
receipt
of
deposits,
sells
any
bond,
debenture, note
or certificate or
other evidence of
indebtedness
issued by any
corporation
(including one
issued
by
a
government or
political
subdivision)
NCLCO
not
allowed
As to Net Loss
Carry Over
As to
deductions
As to actual
gains
SUBJECT TO
FINAL TAX
There is a
fixed rate for
the tax
GR: It does
not
matter
whether
or
not
capital
gains
are
XPN:
Disposition of
shares
not
traded in the
stock
exchange or
thru
initial
public
offering
Not allowed
Holding
period
is
considered.
Could
availed
be
Holding period rule (long term capital gain vis-àvis short term capital gain)
Where the taxpayer held the capital asset sold for
more than 12 months, the gain derived therefrom is
taxable only to the extent of 50%. Consequently, if
the taxpayer held the capital asset sold for a year or
less, the whole gain shall be taxable. The same also
applies to capital loss. It is a form of tax avoidance
since the taxpayer can exploit it in order to reduce
his tax due (NIRC, Sec. 39 [B]).
Capital gains subject to final tax vs. capital gains
reported in the income tax return
BASIS
XPN:
Disposition of
shares
not
traded in the
stock
exchange or
thru
initial
public
offering
GR: Holding
period
is
immaterial
NOTE: Holding period does not find application in
the case of disposition of:
REPORTED
IN THE ITR
The
capital
gains
are
aggregated
with
other
income
to
constitute
gross income
subject
to
deductions
There must be
actual capital
gains earned
1.
2.
Shares of stock; and
Real property considered as capital asset,
whether the seller is an individual, trust, estate
or a private corporation.
Only individual taxpayers can avail of the holding
period rule. It is not allowed to corporations.
Net Capital Gain and Net Capital Loss
Net capital gain is the excess of the gains from sales
or exchanges of capital assets over the losses from
such sales or exchanges. Net capital loss is the excess
69
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
1.
2.
Recognition of gain or loss in exchange of
property
Ordinary merger or consolidation, or
The acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock provided that:
a.
GR: Upon the sale or exchange of property, the entire
amount of the gain or loss shall be recognized.
XPN: Instances where no gain or loss is recognized:
1. A corporation which is a party to a merger or
consolidation exchanges property solely for
stock in a corporation which is a party to the
merger or consolidation;
2. A shareholder exchanges stock in a corporation
which is a party to the merger or consolidation
solely for the stock of another corporation, also a
party to the merger or consolidation;
3. A security holder of a corporation which is party
to the merger or consolidation exchanges his
securities in such corporation solely for stock
securities in another corporation, a party to the
merger or consolidation; or
4. If property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such a corporation, as a result of
such exchange said person gains control of said
corporation, provided that stocks issued for
services shall not be considered as issued in
return for property.
b.
A merger or consolidation must be
undertaken for a bona fide business
purpose and not solely for the purpose
of escaping the burden of taxation
In determining whether a bona fide
business purpose exists each and every
step of the transaction shall be
considered and the whole transaction
or series of transactions shall be treated
as a single unit
In determining whether the property transferred
constitutes a substantial portion of the property of
the transferor, the term “property” shall be taken to
include the cash assets of the transferor
Capital Loss Limitation Rule
Losses from sale or exchanges of capital assets shall
be allowed only up to the extent of the gains from
such sales or exchanges (NIRC, Sec. 39 (C)).
Thus, under this capital loss limitation rule, capital
loss is deductible only up to the extent of capital gain.
The taxpayer can only deduct capital loss from
capital gain. If there is no capital gain, then no
deduction is allowed because you cannot deduct
capital loss from ordinary gain.
“No gain or loss shall be recognized” means that if
there is a gain it shall not be subject to tax and if
there is a loss it shall not be allowed as a deduction.
A: The requisites for the non-recognition of gain or
loss are as follows:
Rationale:To allow the deduction of non-business
(capital) losses from business (ordinary) income or
gain could mean the reduction or even elimination of
taxable income of the taxpayer through personal,
non-business related expense, resulting in
substantial losses of revenue to the government
(Mamalateo, 2014).
a.
b.
Where the capital loss limitation rule will not
apply:
Q: When is gain or loss not recognized in cases of
transfer of shares of stock of corporation in
exchange of property?
c.
d.
The transferee is a corporation;
The transferee exchanges its shares of stock for
property/ies of the transferor;
The transfer is made by a person, acting alone or
together with others, not exceeding four
persons; and
As a result of the exchange, the transferor, alone
or together with others, not exceeding four,
gains control of the transferee (CIR v. Filinvest
Development Corporation, G.R. Nos. 163653 and
167689, July 19, 2011).
-
-
Merger or consolidation for purposes of taxation
Merger or consolidation means:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
70
If a bank or trust company is incorporated under
the laws of the Philippines,
a business whose substantial part is the receipt of
deposits,
sells any bond, debenture, note or certificate or
other evidence of indebtedness issued by any
corporation, with interest coupons or in
registered form,
any losses resulting from such sale shall not be
subject to the above limitations and shall not be
included in determining the applicability of such
limitation to other losses (NIRC, Sec. 39 [C]).
INCOME TAXATION
Q: Can you deduct ordinary loss from ordinary
gain and from capital gain?
Tax treatment of capital gains and losses
1. From Sale of Stocks of Corporations
a. Stocks Traded in the Stock Exchange –
subject to stock transaction tax of ½ of 1%
on its gross selling price
b. Stocks Not Traded in the Stock Exchange –
subject to capital gains tax.
A: YES in both cases. Ordinary loss may be deducted
from ordinary gain while only from certain types of
capital gain may ordinary loss be deducted.
Rule on Matching Cost
Under this rule, only ordinary and necessary
expenses are deductible from gross income or
ordinary income. Capital loss is a non-business
connected expense as it can be sustained only from
capital transactions. To allow that capital loss as a
deduction from ordinary income would run counter
to the rule on matching cost against revenue.
2. From Sale of Real Properties/Land and/or
Buildings in the Philippines – capital gain
derived is subject to capital gains tax but no loss
is recognized because gain is presumed.
NOTE: the NIRC speaks of real property with
respect to individual taxpayers, estate and trust
but only speaks of land and/or building with
respect to domestic corporations.
Net Capital Loss Carry Over (NCLCO)
If any taxpayer, other than a corporation, sustains in
any taxable year a net capital loss, such 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 (NIRC, Sec. 39 [D]).
Gains from sale to the government of real
property classified as capital asset
The taxpayer has the option to either:
a. Include as part of gross income subject
allowable deductions
and
personal
exemptions, then subject to the schedular
tax; or
Rules with regard to NCLCO
1.
2.
3.
4.
NCLCO is allowed only to individuals, including
estates and trusts.
The net loss carry-over shall not exceed the net
income for the year sustained and is deductible
only for the succeeding year.
The capital assets must not be real property or
stocks listed and traded in the stock exchange.
Capital asset must be held for not more than 12
months.
NOTE: This is not available to a
corporate taxpayer.
b.
3. From Sale of Other Capital Assets– the rules on
capital gains and losses apply in the
determination of the amount to be included in
gross income subject to the graduated rates of 532% for individuals and the normal corporate
income tax of 30% for corporations, and not
subject to capital gains tax.
NCLCO vs Net Operating Loss Carry Over
(NOLCO)
BASIS
As to
source
As to
who
can
avail
As to
period
of
carryover
NCLCO
Arises
from
capital
transactions
meaning
involving capital
asset
Can be availed of
by
individual
taxpayer only
NOLCO
Arises
from
ordinary
transactions
meaning involving
ordinary asset
May be carried
over only in the
next succeeding
taxable year
Allows carryover of
operating loss in 3
succeeding taxable
years or 5 years, in
the case of mining
companies
Subject to final tax of 6% on capital gains
(Sec. 24 [D], NIRC).
Capital gains from sale of shares of stock not
traded in the stock exchange
A final tax at the rate of fifteen percent (15%) is
imposed. (Sec. 24, R.A. 10963)
NOTE: What is controlling is whether or not the
shares of stock are traded in the local stock exchange
and not where the actual sale happened(Del Rosario
v. CIR, CTA, Case No. 4796, December 1, 1994).
Can be availed of by
individual
and
corporate taxpayer
Persons liable to pay capital gains tax on the sale
of shares of stock not traded in the stock
exchange
1.
71
Individuals – both citizens and aliens
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
3.
Corporations – both domestic and foreign
Estates and Trusts
3.
4.
Rules in determining the selling price of the
shares disposed
1.
2.
3.
4.
5.
6.
In case of cash sale — the selling price is the total
consideration as indicated in the deed of sale;
If the consideration is partly in money and partly
in kind — the selling price is the cash or money
received plus the fair market value of the
property received;
In case of exchange — the selling price is the fair
market value (FMV) of the property received;
If the FMV of the shares of stock disposed is higher
than the amount of amount and/or fair market
value of the property received, the excess of the
FMV of the shares of stock disposed over the
amount of money and the FMV of the property,
shall be deemed a giftsubject to the donor’s
tax(R.R. 6-2008).
In the case of shares of stock not listed and
traded in the local stock exchange, the value of
the shares of stock at the time of sale shall be the
FMV. In determining the value of the shares, the
Adjusted Net Asset Method shall be used
whereby all assets and liabilities are adjusted to
FMV. The net of adjusted asset minus the
liability values is the indicated value of the
equity.
The appraised value of real properties shall be
the highest of the three:
a. FMV determined by the Commissioner,
b. FMV as shown in the schedule of values
fixed by provincial and city assessors, or
c. FMV as determined by independent
appraiser (R.R. 6-2013).
Q: As to tax implication, distinguish shares of
stocks not listed and traded through stock
exchange from those listed and traded through
stock exchange (2008, 2011 Bar)
A:
As to
nature
As to kind
of tax
As to rate
As to tax
base
Important features as regards capital gains from
sale of shares of stock
Capital gains tax
Percentage tax
Not over
₱100,000 = 5%
In excess of
₱100,000 = 10%,
If before TRAIN
law was passed
½ of 1%, if
before TRAIN
Law was
passed
15% final tax, if
covered by the
TRAIN Law
Net capital gain
6/10 of 1%
Gross selling
price
Q: John, US citizen residing in Makati City, bought
shares of stock in a domestic corporation whose
shares are listed and traded in the Philippine
Stock Exchange at the price of ₱2 Million. A day
after, he sold the shares of stock through his
favorite Makati stockbroker at a gain of
₱200,000.
No capital loss carry-over for capital losses
sustained during the year (not listed and traded
in a local stock exchange) shall be allowed but
capital losses may be deducted on the same
taxable year only.
The entire amount of capital gains and capital
loss (not listed and traded in a local stock
exchange) shall be considered without taking
into account the holding period irrespective of
the type/kind of taxpayer.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
LISTED AND
TRADED
Business
A: The shares of stock (whether listed and traded in
the local stock exchange, listed but not traded in the
local stock exchange, or not listed) shall be treated as
ordinary assets and the ordinary gain, if any, from
the sale or transfer thereof shall be subject to the
graduated income tax rates in the case of an
individual seller, or to the normal corporate income
tax, in the case of corporate seller.
The above rules apply to DC, RFC, and NRFC.
2.
NOT LISTED
AND TRADED
Income
Q: What is the effect if the sale is made by a dealer
in securities?
NOTE: The basis of determining the Capital Gains
Tax (CGT) is the capital gain and not the fair market
value.
1.
Non-deductibility of losses on wash sales and
short sales.
Gain from sale of shares of stock in a foreign
corporation is not subject to capital gains tax but
to graduated rates either as capital gain or
ordinary income depending on the nature of the
trade of business of the taxpayer.
a.
72
Is John subject to Philippine income tax on
the sale of his shares through his
stockbroker? Is he liable for any other tax?
INCOME TAXATION
b. If John directly sold the shares to his best
friend, a US citizen residing in Makati, at a
gain of ₱200,000, is he liable for Philippine
income tax? If so what is the tax base and
rate?
A
corporation
selling its
own stocks
A:
a. NO. The gain on the sale or disposition of shares
of stock of a domestic corporation held as capital
assets will not be subjected to income tax if
these shares sold are listed and traded in the
stock exchange (NIRC, Sec. 24 [C]).
Corporation
selling
stocks
of
another
corporation
However, the seller is subject to the percentage
tax of ½ of 1% of the gross selling price (NIRC,
Sec. 127 [A]).
b.
May be subject to percentage tax
on initial public offerings.
If sold through LSE: subject to
stock transaction tax of 50% of 1%
(0.50%)
If not sold through LSE: treated as
a capital asset
If domestic stocks were sold:
Subject to 15% capital gains tax
YES. The sale of shares of stocks of a domestic
corporation held as capital, not through a
trading in the local stock exchange, is subject to
capital gains tax based on the net capital gain
during the taxable year. The tax rate is 15%.
If foreign stocks were sold: Subject
to regular income tax (NOT subject
to capital loss limitation rule,
holding period rule, and net
capital loss carry over)
Q: Federico, a Filipino citizen, migrated to the
United States some six years ago and got a
permanent resident status or green card. Should
he pay Philippine income tax on the gains he
derived from the sale in the New York Stock
Exchange of shares of stock in PLDT, a Philippine
corporation? (2011 Bar)
Capital gains realized from the sale of real
property/ land and/or buildings
Treatment of sale or disposition of real property
located in the Philippines treated as capital asset
A final tax of 6% shall be imposed based on the
higher amount between:
A: YES. The gain from the sale of shares of stock in a
domestic corporation shall be treated as derived
entirely from sources within the Philippines,
regardless of where the said shares are sold (NIRC,
Sec. 42[E]).
1.
2.
General rule on shares of stocks
Transaction
Sold by a
dealer
in
securities
Sold by an
individual
non-dealer
in securities
from
sources
within
the
Philippines is subject to capital
gains tax.
Not subject to income tax. Excess
of price above par is not
considered as an income.
Tax Treatment
Treated as an ordinary asset
whose ordinary gains and losses
are subject to regular income tax.
If sold through LSE: subject to
stock transaction tax of 50% of 1%
(0.50%)
If not sold through LSE: treated as
a capital asset
The gross selling price; or
Whichever is higher between the current fair
market value as determined by:
a. Zonal Value – prescribed zonal value of real
properties as determined by the CIR; or
b. Assessed Value – the fair market value as
shown in the schedule of values of the
Provincial and City assessors (NIRC, Sec. 24
D [1]).
Actual gain or loss is immaterial since there is a
conclusive presumption of gain.
As regards transactions affected by the 6% capital
gain tax, the NIRC speaks of real property with
respect to individual taxpayers, estate and trust but
also speaks of land and/or building with respect to
domestic corporations.
If domestic stocks were sold:
Subject to 15% capital gains tax
based on net gain
NOTE: The above discussion ofCGT on sale or
disposition of real properties shall apply only to
domestic corporations, since foreign corporations
(RFC and NRFC) cannot own properties in the
Philippines.
If foreign stocks were sold: Subject
to regular income tax (also subject
to capital loss limitation rule,
holding period rule, and net
capital loss carry over). Only gain
73
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Tax treatment if property is not located in the
Philippines
own name. Is the assignment subject to CGT or
regular corporate income tax?
Gains realized from the sale, exchange or other
disposition of real property not located in the
Philippines by resident citizens or domestic
corporations shall be subject to ordinary income
taxation (RR 7-2003, Sec. 4. [F]) but subject to foreign
tax credits.
A: NO. While the conveyance of property by the DA
in favor of the BFAR was pursuant to a Deed of
Assignment, the assignment was made without
monetary consideration. Hence, it is not subject to
CGT. Neither is it subject to the regular corporate
income tax since the DA and the BFAR, which are
both government agencies exercising purely
governmental functions when the Deed was
executed, are exempt from such regular corporate
income tax. (See BIR Ruling No. 229-2017 dated 15
May 2017).
Such income may be exempt in the case of nonresident citizens, alien individuals and foreign
corporations (RR 7-2003, Sec. 4. [F]).
Transactions covered by the “presumed” capital
gains tax on real property
Q: Manalo, Filipino citizen residing in Makati
City, owns a vacation house and lot in Tagaytay,
which he acquired in 2000 for ₱15 million. On
Jan. 10, 2013, he sold said real property to
Mayaman, another Filipino residing in Quezon
City for ₱20 million. On Feb. 9, 2013, Manalo filed
the capital gains return and paid ₱1.2 million
representing 6% capital gains tax. Since Manalo
did not derive any ordinary income, no income
tax return was filed by him for 2013. After the tax
audit conducted in 2014, the BIR officer assessed
Manalo for deficiency income tax computed as
follows: ₱5 million (₱20million less ₱15 million)
x 30%= ₱1.5 million, without the capital gains tax
paid being allowed as tax credit. Manalo
consulted a real estate broker who said that the
₱1.2 million capital gains tax should be credited
from the ₱1.5 million deficiency income tax.
It covers:
1. Sale;
2. Exchange; or
3. Other disposition, including pacto de retro and
other forms of conditional sales (NIRC, Sec. 24 D
[1]).
NOTE: “Sale, exchange, or other disposition”
includes taking by the government through
expropriation proceedings.
Q: Hopeful Corporation obtained a loan from
Generous Bank and executed a mortgage on its
real property to secure the loan. When Hopeful
Corporation failed to pay the loan, Generous
Bank extrajudicially foreclosed the mortgage on
the property and acquired the same as the
highest bidder. A month after the foreclosure,
Hopeful Corporation exercised its right of
redemption and was able to redeem the
property. Is Generous Bank liable to pay capital
gains tax as a result of the foreclosure sale?
Explain. (2014 Bar)
a.
a. Is the BIR officer’s tax assessment correct?
Explain.
b. b. If you were hired by Manalo as his tax
consultant, what advice would you give him
to protect his interest? Explain. (2008 Bar)
A:
a. NO. The BIR officer’s tax assessment is wrong
for two reasons. First, the rate of income tax
used is the corporate income tax although the
taxpayer is an individual. Second, the
computation of the gain recognized from the
sale did not consider the holding period of the
asset. The capital asset having been for more
than 12 months, only 50% of the gain is
recognized (Sec. 39B, NIRC).
A: NO. In a foreclosure of a real estate mortgage, the
capital gains tax accrues only after the lapse of the
redemption period because it is only then that there
exists a transfer of property. Thus, if the right to
redeem the foreclosed property was exercised by
the mortgagor before the expiration of the
redemption period, as in this case, the foreclosure is
not a taxable event (See RR No. 4-99; Supreme
Transliner, Inc. v. BPI Family Savings Bank, Inc. G.R.
No. 165617, February 25, 2011).
b.
Q: The Department of Agriculture (DA), through
its Secretary, executed a Deed of Assignment of a
parcel of land in favor of the Bureau of Fisheries
and Aquatic Resources (“BFAR”) without any
monetary consideration. By virtue of the Deed,
BFAR applied for the issuance of a land title in its
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
74
I will advise him to ask for the issuance of the
final assessment notice and request for the
crediting of the capital gains tax paid against the
income tax due. The taxpayer should explain
that the capital gains tax was paid in good faith
because the property sold is a capital asset and
considering that what was paid is also an income
INCOME TAXATION
tax it should be credited against the income tax
assessment on the ground of equity. Once the
final assessment is made, I will advise him to
protest within 30 days from receipt, invoking
the holding period and the wrong tax rate used.
Q: In Jan. 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000. This
property has a current fair market value of ₱10
million in view of the construction of a concrete
road traversing the property. Juan agreed to
exchange his agricultural lot in Laguna for a onehalf hectare residential property located in
Batangas, with a fair market value of ₱10 million,
owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the
property in 2007 for ₱9 million.
Q: A corporation, engaged in real estate
development, executed deeds of sale on various
subdivided lots. One buyer, after going around
the subdivision, bought a corner lot with a good
view of the surrounding terrain. He paid ₱1.2
million, and the title to the property was issued.
A year later, the value of the lot appreciated to a
market value of ₱1.6 million, and the buyer
decided to build his house thereon. Upon
inspection, however, he discovered that a huge
tower antenna had been erected on the lot
frontage totally blocking his view. When he
complained, the realty company exchanged his
lot with another corner lot with an equal area but
affording a better view. Is the buyer liable for
capital gains tax on the exchange of the lots?
(1997 Bar)
a.
What is the nature of real properties
exchanged for tax purposes – capital asset or
ordinary asset? Explain.
b. Is Juan Gonzales subject to income tax on the
exchange of property? If so, what is the tax
based and rate? Explain.
c. Is Alpha Corporation subject to income tax on
the exchange of property? If so, what is the
tax base and rate? Explain. (2008 Bar)
A:
a. The one hectare agricultural land owned by Juan
Gonzales is a capital asset because it is not a real
property used in trade or in business. The one
half hectare residential property owned by
Alpha Corporation is an ordinary asset because
the owner is engaged in the purchase and sale of
real property (Sec. 39, NIRC, Revenue
Regulations No. 7-03).
b. YES. The tax base in a taxable disposition of a
real property classified as a capital asset is the
higher between two values; the fair market
value of the property received in exchange and
the fair market value of the property exchanged.
Since the fair market value of these two
properties is the same, the said fair market value
should be taken as the tax base which is P10
Million. The income tax rate is 6 % (Sec. 24D (1)
NIRC).
c. YES. The gain from the exchange constitutes an
item of gross income, and being a business
income, it must be reported in the annual
income tax return of Alpha Corporation. From
the pertinent items of gross income, deductions
allowed by law from gross income can be
claimed to arrive at the net income which is the
tax base for the corporate income tax rate of
30% (Sec. 27 A and Sec. 31 NIRC).
A: YES. The buyer is subject to capital gains tax on
the exchange of lots on the basis of prevailing fair
market value of the property transferred at the time
of the exchange or the fair market value of the
property received, whichever is higher (NIRC, Sec. 21
[E]).
Real property transactions subject to capital gains
tax are not limited to sales. It also includes exchanges
of property unless exempted by a specific provision
of law.
Q: A, a doctor by profession, sold in the year 2000
a parcel of land which he bought as a form of
investment in 1990 for ₱1 million. The land was
sold to B, his colleague and at a time when the
real estate prices had gone down, for only
₱800,000 which was then the fair market value
of the land. He used the proceeds to finance his
trip to the United States. He claims that he should
not be made to pay the 6% final tax because he
did not have any actual gain on the sale. Is his
contention correct? (2001 Bar)
A: NO. The 6% capital gains tax on sale of a real
property held as capital asset is imposed on the
income presumed to have been realized from the
sale, which is the fair market value or selling price
thereof, whichever is higher (NIRC, Sec. 24 [D]).
Q: Sps. Salvador are the registered owners of a
parcel of land. The Republic, represented by the
DPWH filed a Complaint before the RTC for the
expropriation of a portion of said parcel of land
for the construction of a highway. The RTC
rendered judgment in favor of the Republic
Actual gain is not required for the imposition of the
tax but it is the gain by fiction of law which is taxable.
Thus, capital gains tax is imposed even though the
sale results in net loss.
75
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
condemning the subject property. The RTC
likewise directed the Republic to pay
respondents consequential damages equivalent
to the value of the capital gains tax and other
taxes necessary for the transfer of the subject
property in the Republic's name. The RTC
reasoned that the payment of capital gains tax
and other transfer taxes is but a consequence of
the expropriation proceedings. Is the RTC correct
in awarding consequential damages to the Sps.
Salvador as the payment for capital gains tax?
3.
4.
5.
6.
7.
A: No. It is settled that the transfer of property
through expropriation proceedings is a sale or
exchange within the meaning of Sections 24(D) and
56(A) (3) of the NIRC, and profit from the transaction
constitutes capital gain. Since capital gains tax is a tax
on passive income, it is the seller, or respondents in
this case, who are liable to shoulder the tax.
8.
Q: Mr. H decided to sell the house and lot wherein
he and his family have lived for the past 10 years,
hoping to buy and move to a new house and lot
closer to his children’s school. Concerned about
the capital gains tax that will be due on the sale
of their house, Mr. H approaches you as a friend
for advice if it is possible for the sale of their
house to be exempted from capital gains tax and
the conditions they must comply with to avail
themselves of said exemption. How will you
respond? (2015 Bar)
In fact, BIR Ruling No. 476-2013 has constituted the
DPWH as a withholding agent tasked to withhold the
6% final withholding tax in the expropriation of real
property for infrastructure projects. As far as the
government is concerned, the capital gains tax in
expropriation proceedings remains a liability of the
seller, as it is a tax on the seller's gain from the sale of
real property. (Republic of the Philippines,
represented by the DPWH, vs. Spouses Salvador, G.R.
No. 205428, June 7, 2017, Del Castillo, J.)
Sale of Principal Residence
A: Mr. H may avail the exemption from capital gains
tax on sale of principal residence by natural persons.
Under the law, the following are the requisites:
Principal residence – refers to the dwelling house,
including the land on which it is situated, where the
individual and members of his family reside, and
whenever absent, the said individual intends to
return. Actual occupancy is not considered
interrupted or abandoned by reason of temporary
absence due to travel or studies or work abroad or
such other similar circumstances (RR No. 14-00).
1.
2.
NOTE: The address shown in the ITR is conclusively
presumed as the principal residence. If the taxpayer
is not required to file a return, certification from
Barangay Chairman or Building Administrator (for
Condominium units) shall suffice.
3.
Sale of principal residence by an individual
4.
Asale of principal residence by an individual is
exempt from capital gains tax provided the following
requisites are present:
1.
2.
proceeds of the sale of the principal residence
have been fully utilized in acquiring or
constructing new principal residence within 18
calendar months from the date of sale or
disposition;
The historical cost or adjusted basis of the real
property sold or disposed will be carried over to
the new principal residence built or acquired;
The Commissioner has been duly notified,
through a prescribed return, within 30 days
from the date of sale or disposition of the
person’s intention to avail of the tax exemption;
and
Exemption was availed only once every 10
years.
Q: If the taxpayer constructed a new residence
and then sold his old house, is the transaction
subject to capital gains tax?
Sale or disposition of the old actual principal
residence;
By a citizen or resident alien;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Proceeds from which is fully utilized in
acquiring or constructing a new principal
residence within 18 calendar months from the
date of sale or disposition;
Notify the CIR within 30 days from the date of
sale or disposition through a prescribed return
of his intention to avail the tax exemption;
Can be availed of once every 10 years;
The historical cost or adjusted basis of his old
principal residence shall be carried over to the
cost basis of his new principal residence;
If there is no full utilization, the portion of the
gains presumed to have been realized shall be
subject to capital gains tax; and
The 6% capital gains tax due shall be deposited
with an authorized agent bank subject to release
upon certification by the RDO that the proceeds
of the sale have been utilized (R.R. No. 14-00).
A: YES. Exemption from capital gains tax does not
find application since the law is clear that the
proceeds should be used in acquiring or constructing
76
INCOME TAXATION
a new principal residence. Thus, the old residence
should first be sold before acquiring or constructing
the new residence.
Passive investment income
Passive income refers to income derived from any
activity in which the taxpayer has no active
participation or involvement.
Q: What is meant by “income subject to final tax?”
(2001 Bar)
A: Income subject to final tax refers to an income
wherein the tax due is fully collected through the
withholding tax system. Under this procedure, the
payor of the income withholds the tax and remits it
to the government as a final settlement of the income
tax due on said income. The recipient is no longer
required to include the item of income subjected to
“final tax” as part of his gross income in his income
tax returns.
Example: Interest income from bank deposits. The
bank (payor) deducts and/or withholds the final
withholding tax from the interest income. The bank
is required to remit the tax to the government. On the
other hand, the taxpayer need not declare the
interest income in his/her income tax return.
77
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Summary rules on the tax treatment of certain passive income as applied to individuals
Sources Of Income
RC
NRC
RA
NRAETB
NRA –
NETB
Within
and
without
Within
Within
Within
Within
20%
25%
NATURE OF INCOME
TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary
benefits from deposit substitutes, trust funds and similar
arrangements
20%
20%
20%
XPN:
If the depositor has an employee trust fund or accredited
retirement plan, such interest income, yield or other monetary
benefit is exempt from final withholding tax.
Interest income under the Expanded Foreign Currency Deposit
System
15%
Exempt
15%
Exempt
NOTE: If the loan is granted by a foreign government, or an
international or regional financing institution established by
government, the interest income of the lender shall not be subject
to the final withholding tax.
Interest Income from long-term deposit or investment in the Held for:
form of savings, common or individual trust funds, deposit
5 years or more – exempt
substitutes, investment management accounts and other
4 years to less than 5 years – 5%
investments evidenced by certificates in such form prescribed by
3 years to less than 4 years – 12%
the BSP (RR. 14-2012)
Less than 3 years – 20%
DIVIDEND
Dividend from a DC or from a joint stock company, insurance or
mutual fund company and regional operating headquarters of a
multinational company; or on the share of an individual in the
10%
10%
10%
20%
distributable net income after tax of partnership (except that of a
GPP) of which he is a partner, or on the share of an individual in
the net income after tax of an association, a joint account or joint
venture or consortium taxable as a corporation of which he is a
member of co-venturer
ROYALTY INCOME
Royalties on books, literary works and musical composition
10%
10%
10%
10%
Other royalties (e.g. patents and franchises)
20%
20%
20%
20%
PRIZES AND WINNINGS
Prizes exceeding ₱10,000
20%
20%
20%
20%
Winnings
20%
20%
20%
20%
Winnings from Philippines Charity sweepstakes and lotto
winnings which are less than 10,000 pesos
Exempt Exempt Exempt Exempt
Otherwise, follow 20%
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
78
Exempt
Exempt
20%
10%
25%
25%
25%
Exempt
INCOME TAXATION
Summary rules on the tax treatment of certain passive income as applied to corporations(NIRC, Sec. 27
[D])
NATURE OF INCOME
Interests from any currency bank deposits, yield, or any other
monetary benefits from deposit substitutes and from trust fund
and similar arrangement and Royalties derived from sources
within the Philippines
NOTE: Interest income or yield earned by DC from sources
outside the Philippines shall not be subject to final tax of 20% but
included in the gross income and subject to NCIT.
Interest Income derived under expanded foreign currency
deposit system
Interestderived by depositary bank under the expanded foreign
currency deposit system from foreign currency loans granted to
residents other than offshore banking units (OBUs)
NOTE: If granted to nonresidents, OBUs, local commercial banks
or branches foreign banks authorized by BSP to transact business
– EXEMPT
Interest received by NRFC on foreign loans(NIRC, Sec. 28 [5a])
Dividends received from Domestic Corporation (Inter-corporate
Dividend)
79
DC
20%
RFC
20%
NRFC
Shall be considered
as part of gross
income subject to
35% NCIT.
15%
15%
Exempt
10%
10%
Exempt
–
Exempt
–
Exempt
20%
15% (subject to tax
credit sparing rule)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Interest income
Tax-exempt interest income [FIL2D]
twenty (20) or more individual or corporate
lenders at any one time. The mere flotation of a
debt instrument is not considered to be a public
borrowing and is not deemed a deposit substitute,
if there are only 19 or less individual or corporate
lenders at any one time (R.R. 14-2012).
1.
Foreign currency deposit system
It is the amount of compensation paid for the use
of money or forbearance from such use.
2.
3.
4.
5.
6.
From bank deposits. The recipient must be any
following tax exempt recipients:
a. Foreign government;
b. Financing institutions owned, controlled
or financed by foreign government
It refers to the conduct of banking transactions
whereby any person whether natural or judicial
may deposit foreign currencies forming part of the
Philippine international reserves, in accordance
with the provisions of RA 6426, An Act Instituting a
Foreign Currency Deposit System in the
Philippines, and for other purposes.
Regional
or
international
financing
institutions
established
by
foreign
government (nirc, sec. 25 a [2]);
On loans extended by any of the above
mentioned entities;
On bonds, debentures, and other certificate of
indebtedness received by any of the above
mentioned entities;
On bank deposit maintained under the
expanded foreign currency deposit;
From long term investment or deposit with a
maturity period of 5 years or more.
Interest income subject to 15% final tax
If the interest is received by an individual taxpayer
(except nonresident individual) from a depository
bank under the expanded foreign currency deposit
system, it shall be subject to a final tax at the rate of
15% of such income (NIRC, Sec. 24 [B][1]).
Nonresident citizen and Nonresident alien are
exempt from payment of the 15% final tax on
interest income under the expanded foreign
currency deposit system.
NOTE: In order to avail exemption under item no.
4, the recipient must be a non-resident alien or
non-resident foreign corporation. Otherwise, it is
subject to final tax of 15%.
Meanwhile, interest income derived by a domestic
corporation and resident foreign corporation from
a depository bank under the expanded foreign
currency deposit system (EFCDS) shall be subject
to final income tax rate of 7.5%. Correspondingly,
interest income received by NRFC shall be exempt.
Long-term deposits or investments
Certificate of time deposit or investment in the
form of savings, common or individual trust funds,
deposit substitutes, investment management
accounts or other investments, with maturity of
not less than 5 years, the form of which shall be
prescribed by the Bangko Sentral ng Pilipinas
(BSP) and issued by banks (not by nonbank
financial intermediaries and finance companies) to
individuals in denominations of ₱10,000 and other
denominations as may be prescribed by the BSP
(NIRC, Sec. 22 [FF]).
Interest income subject to 10% final tax
Interest derived from foreign currency loans
granted by depositary banks to residents (DC or
RFC) other than offshore banking units in the
Philippines or other depositary banks under the
expanded system shall be subject to 10% final tax.
Deposit substitute
NOTE: If the loan is granted to nonresidents, OBUs,
or local commercial banks, including branches of
foreign banks authorized by the BSP to transact
business, it shall be EXEMPT.
This is an alternative form of obtaining funds from
the public other than deposits, through the
issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for
the purpose of re-lending or purchasing of
receivables and other obligations, or financing
their own needs or the needs of their agent or
dealer (NIRC, Sec. 22 [Y]).
“Interest Income subject to Final Withholding
Tax (20%)” vs. “Income subject to Gross
Receipts Tax (5%) on banks”
20% FWT ON
INTEREST INCOME
In order for an instrument to qualify as a deposit
substitute, the borrowing must be made from
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
80
5% GROSS
RECEIPTS
TAX ON BANKS
INCOME TAXATION
It is an income tax
under Title II of the
NIRC (Tax on Income).
FWT is imposed on the
gross interest income
realized in a taxable
year.
FWT is a withholding
tax.
dollar deposit is subject to 7.5% if the earner is
a resident individual (Sec. 24B NIRC).
It is a business tax
(percentage
tax)
under Title V (Other
Percentage Taxes).
Gross Receipts Tax
(GRT) is measured by
a certain percentage
on the gross receipts
or earnings.
GRT
is
not
a
withholding tax.
Q: What is the tax treatment of the following
interest on deposits with:
a. BPI Family Bank?
b. A local offshore banking unit of a foreign
bank? (2005 Bar)
A:
a. It is a passive income subject to a withholding
tax rate of 20%.
b. It is a passive income subject to final
withholding tax rate of 7.5% (Sec. 24 [B][1],
NIRC).
NOTE: The 20% final tax withheld on a bank’s
passive income should be included in the
computation of GRT (China Banking Corporation v.
CIR, G.R. No. 175108, February 27, 2013).
Both interests are not to be declared as part of
gross income in the income tax return.
Q: Maribel, a retired public school teacher,
relies on her pension from the GSIS and the
Interest Income from a time deposit of
₱500,000 with ABC Bank. Is Maribel liable to
pay any tax on her income?
Q: On 2004, Edison (Bataan) Cogeneration
Corporation [EBCC] received from the CIR a
Formal Letter of Demand and Final Assessment
Notice assessing EBCC of deficiency Final
Withholding Tax (FWT) for taxable year 2000.
Upon the CIR’s inaction to the letter-protest
filed by EBCC, the latter elevated the case to the
CTA. The CTA Division held, among others, that
EBCC was not liable for the deficiency FWT
assessment on interest payments on loan
agreements for taxable year 2000 since its
liability for interest payment became due and
demandable only on 2002. The CIR contended
that EBCC was liable to pay the interest from the
date of the execution of the contract on 2000,
not from the date of the first payment on 2002,
as the loan agreement clearly indicated that the
interest was to be paid separately from the
principal. The decision of the CTA Division was
affirmed by the CTA en banc. Is EBCC liable for
deficiency FWT for the year 2000?
A: YES. Maribel is exempt from tax on the pension
from the GSIS (Sec. 28 b [7] F, NIRC). However, with
her time deposit, the interest she receives thereon
is subject to 20% final withholding tax.
Q: In 2007, spouses Renato and Judy Garcia
opened peso and dollar deposits at the
Philippine branch of the Hong Kong Bank in
Manila. Renato is an overseas worker in Hong
Kong while Judy lives and works in Manila.
During the year, the bank paid interest income
of ₱10,000 on the peso deposit and US$1,000 on
the dollar deposit. The bank withheld final
income tax equivalent to 20% of the entire
interest income and remitted the same to the
BIR.
a. Are the interest incomes on the bank
deposits of spouses Renato and Judy
Garcia subject to income tax? Explain.
b. Is the bank correct in withholding the
20% final tax on the entire interest
income? Explain. (2008 Bar)
A: No, EBCC's liability for interest payment became
due and demandable starting 2002. The obligation
of EBCC to deduct or withhold tax arises at the time
an income is paid or payable, whichever comes
first, and considering further that under the RR 0298, the term "payable" refers to the date the
obligation becomes due, demandable or legally
enforceable, the CTA en banc correctly ruled that
EBCC had no obligation to withhold any taxes on
the interest payment for the year 2000 as the
obligation to withhold only commenced on June 1,
2002, and thus cancelling the assessment for
deficiency FWT on interest payments arising from
EBCC' s loan from Ogden. (Edison (Bataan)
Cogeneration Corporation vs. CIR, G.R. No. 201665 &
201668, August 30, 2017, Del Castillo, J.)
A:
a. YES. The interest income from the peso bank
deposit is subject to 20% final withholding tax.
The interest income from the dollar deposit is
subject to 7.5% final withholding tax but only
on the portion of the interest attributable to
Judy or $500. The interest on the dollar deposit
attributable to Renato, a non-resident is
exempt from income tax (Sec. 24B(1) NIRC).
b.
NO. Only the interest income on a peso deposit
is subject to 20%. The interest income from a
81
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Dividend income
5. Indirect dividend – one made through the
exercise of right or other means of payment, e.g.
Cancellation orcondonation of indebtedness
Dividend is any distribution made by a corporation
to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in
other property.
6. Liquidating dividend – one resulting from the
distribution by a corporation of all its property or
assets in compete liquidation or dissolution. It is
generally a return of capital, and hence, it is not
income. However, it is taxable income with respect
to the excess of amount received over cost of the
shares surrendered (Dimaampao, 2015).
Kinds of dividends
1.
Cash dividend – paid in given sum of money
2. Property dividend – one paid in corporate
property such as bonds, securities or stock
investments held by the corporation, not its
own stock. They are taxable to the extent of the
fair market value of the property received at
the time of distribution.
Inter-corporate dividends
There is inter-corporate dividend when a dividend
is declared by one corporation and received by
another corporation which is a stockholder to the
former.
3. Stock dividend – one paid by a coporation
with its own stock.
The following rules shall apply:
Stock dividends, strictly speaking, represent
capital and do not constitute income to its
recipient. So that the mere issuance thereof is
not subject to income tax as they are nothing
but enrichment through increase in value of
capital investment. In a loose sense, stock
dividends issued by the corporation, are
considered unrealized gain, and cannot be
subjected to income tax until that gain has been
realized. Before the realization, stock
dividends are nothing but a representation of
an interest in the corporate properties
(Commissioner v. ANSCOR, G.R. No. 108576,
January 20, 1999).
1.
Rationale:The law assumes that the
dividends received will be incorporated to
the capital which will eventually be taxed
when the corporation gets income from its
use of the capital.
b.
XPNs:
a. Change in the stockholder’s equity,
right/interest in the net assets of the
corporation;
b. Recipient is other than the shareholder;
c. Cancellation or redemption of shares of
stock;
d. Distribution treasury shares;
e. Dividends declared in the guise of treasury
stock dividend to avoid the effects of
income taxation; and
f. Different classes of stock were issued.
Dividends received by a NRFCfrom a DC
shall be subject to 15% FWT. This is
known as the tax sparing rule (NIRC, Sec.
28 [B][5][b]).
Tax sparing rule
Under this rule, the dividends received
shall be subject to 15% FWT, provided,
thatthe country in which the corporation is
domiciled either (i) allows a tax credit of
15% against the taxes due from the foreign
corporation for taxes deemedpaidor (ii)
does not impose income tax on such
dividends(CIR v. Wander Philippines Inc.,
G.R. No. L-68375, April 15, 1988);
otherwise, the dividend shall be subject to
30%.
NOTE: A stock dividend does not constitute
taxable income if the new shares did not confer
new rights nor interests than those previously
existing, and that the recipient owns the same
proportionate interest in the net assets of the
corporation (RR No. 2, Sec. 252).
The phrase “deemed paid” “tax credit”
does not mean tax credit actually granted
by the foreign country. There is no
statutory provision or revenue regulation
requiring “actual grant”.
4. Scrip dividend – one that is paid in the form or
promissory notes
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Dividends received from DC
a. Dividends received by a DC and RFCfrom a
domestic corporation shall not be subject
to tax (NIRC, Sec. 27 [D][4]);
82
INCOME TAXATION
2.
The 15% represents the difference
between the NCIT of 30% on corporations
and the 15% tax on dividends.
Dividends received from a foreign
corporation:
a.
b.
joint venture or consortium
taxable as corporation for which
he is a member or co-venturer
Exempt
Inter-corporate dividends received
from tax from domestic corporation by
another domestic corporation and
resident foreign corporation
(Tabag, 2015)
Dividends received by a DCfrom a foreign
corporation shall be subject to 30% NCIT;
1.
Dividends received byRFC and NRFCfrom a
foreign corporation shall be subject to
30% NCIT, IF the income of the foreign
corporation is derived from sources within
the Philippines; IF the said income is
derived from sources outside the
Philippines, the dividends received shall
be exempt from tax.
Summary of tax treatment of dividend received
from domestic corporation
RECIPIENT
DC / RFC
RC, NRC, RA
NRA – ETB
NRA
–
NETB
NRFC
In determining whether income is derived
from sources within or without the Philippines,
the ratio of the foreign corporation’s Philippine
gross income to the world gross income within
the 3-year period preceding the declaration of
such dividend should be considered.
PHILIPPINE GROSS
INCOME = % WORLD
GROSS INCOME
Less than 50%
50 - 85%
More than 85%
1.
2.
1.
2.
3.
4.
30% subject to preferential treaty
tax rate
Dividend received from foreign corporation
Dividend received from foreign corporation is
subject to Philippine income tax if at least 50% of
the world (total) income of the foreign corporation
must be derived from the Philippines for three
years preceding the declaration of such dividend
(Dimaampao, 2015).
SOURCE OF
INCOME
Entirely without
Proportionate
(partly
within;
partly without)
Entirely within
Q: Does tax on income and dividends amount to
double taxation?
A: NO. Tax on income is different from tax on
dividend because they have different tax basis
(Afisco Insurance Companies v. CA, G.R. No. 1123675,
January 25, 1999).
TAX TREATMENT OF DIVIDEND INCOME
Subject
to basic
tax
Subject
to final
tax
TAXABLE (TAX RATE) /
EXEMPT
Tax exempt
10%
20%
25%
Dividends
from
foreign
corporation
Share in the income of a GPP
Cash and/or property dividends
actually
or
constructively
receieved by individuals from
domestic corporation or from a
joint stock company, insurance
or mutual fund company and
regional
operating
headquarters of multinationals
Inter-corporate
dividends
received
from
domestic
corporation by non-resident
foreign corporation
Share of an individual in the
distributable net income after
tax of a partnership (other than
a GPP) which he is a partner
Share of an individual in the net
income (after tax) of an
association, joint account, or a
Q: What are disguised dividends in income
taxation? (1994 Bar)
A: Disguised dividends are those income payments
made by a domestic corporation, which is a
subsidiary of a non-resident foreign corporation, to
the latter ostensibly for services rendered by the
latter to the former, but which payments are
disproportionately larger than the actual value of
the services rendered. In such case, the amount
over and above the true value of the service
rendered shall be treated as a dividend, and shall be
subjected to the corresponding tax on Philippine
sourced gross income. E.g. Royalty payments under
a corresponding licensing agreement.
Q: Suppose the creditor is a corporation and the
debtor is its stockholder, what is the tax
83
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
implication in case the debt is condoned by the
corporation?
However, a final withholding tax of 15% is imposed
on the amount of cash dividends received from a
domestic corporation like BBB, Inc. if the tax
sparing rule applies (Sec. 28(B)(5)(b), NIRC).
Pursuant to this rule, the lower rate of tax would
apply if the country in which the non-resident
foreign corporation is domiciled would allow as a
tax credit against the tax due from it, taxes deemed
paid in the Philippines of 15% representing the
difference between the regular income tax rate and
the preferential rate.
A: This may take the form of indirect distribution of
dividends by a corporation. On the part of the
stockholder whose indebtedness has been
condoned he is subject to 10% final tax, on the
masked dividend payment. On the part of the
corporation, said amount cannot be claimed as
deduction. When the corporation declares
dividends, it can be considered as interest on
capital therefore not deductible.
Q: Fred, was a stockholder in the Philippine
American Drug Company. Said corporation
declared a stock dividend and that a
proportionate share of stock dividend was
issued to Fred. The CIR, demanded payment of
income tax on the aforesaid dividends. Fred
protested the assessment made against him and
claimed that the stock dividends in question are
not income but are capital and are, therefore,
not subject to tax. Are stock dividends income?
Q: BBB, Inc., a domestic corporation, enjoyed a
particularly profitable year in 2014. In June
2015, its Board of Directors approved the
distribution of cash dividends to its
stockholders. BBB, Inc. has individual and
corporate stockholders. What is the tax
treatment of the cash dividends received from
BBB, Inc. by the following stockholders: (2015
Bar)
a. A resident citizen
b. Non-resident alien engaged in trade or
business
c. Non-resident alien not engaged in trade or
business
d. Domestic corporation
e. Non-resident foreign corporation
A: NO. Stock dividends are not income and are
therefore not taxable as such. A stock dividend,
when declared, is merely a certificate of stock
which evidences the interest of the stockholder in
the increased capital of the corporation. A
declaration of stock dividend by a corporation
involves no disbursement to the stockholder of
accumulated earnings and the corporation parts
with nothing to its stockholder. The property
represented by a stock dividend is still that of the
corporation and not of the stockholder. The
stockholder has received nothing but a
representation of an interest in the property of the
corporation and as a matter of fact, he may never
receive anything, depending upon the final
outcome of the business of the corporation (Fisher
v. Trinidad, G,R, No. L-21186, February 27, 1924).
A:
a. A final withholding tax of 10% shall be imposed
upon cash dividends actually or constructively
received by a resident citizen from BBB, Inc,
(Sec. 24(b)(2), NIRC).
b.
A final withholding tax of 20% shall be imposed
upon cash dividends actually or constructively
received by a non-resident alien engaged in
trade or business from BBB, Inc. (Sec. 24(a)(2),
NIRC).
c.
A final withholding tax equal to 25% of the
entire income received from all sources within
the Philippines, including the cash dividends
received from BBB, Inc. (Sec. 25(b), NIRC).
d.
Dividends received by a domestic corporation
from another domestic corporation, such as
BBB, Inc., shall not be subject to tax (Sec.
27(d)(4), NIRC).
e.
Dividends received by a non-resident foreign
corporation from a domestic corporation are
generally subject to an income tax of 30% to be
withheld at source (Sec. 28 (b)(1), NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Q: The JV was tasked to develop and manage
FDC’s 50% ownership of its PBCom Office
Tower Project “the Project”. FDC paid its
subscription by executing a Deed of Assignment
of its rights and interests in the Project worth
₱5.7M in favor of the JV. The BIR assessed
deficiency income tax on the gain on the
supposed dilution and/or increase in the value
of FDC’s shareholdings in FAC. Did the BIR
properly impute deficiency income taxes to FDC
which was supposedly incurred by it as a
consequence of the dilution of its shares in FAC?
A: NO. The mere appreciation of capital is not
taxable. Gain is realized upon disposition. No
deficiency income tax can be assessed on the gain
on the supposed dilution and/or increase in the
84
INCOME TAXATION
value of FDC’s shareholdings in FAC (CIR v. Filinvest
Development Corporation, G.R. Nos. 163653 &
167689, July 19, 2011).
Q: Is the redemption of stocks of a corporation
from its stockholders as well as the exchange of
common with preferred shares considered as
“essentially equivalent to the distribution of
taxable dividend” making the proceeds thereof
taxable?
A: YES. The general rule states that a stock dividend
representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to
make the distribution and cancellation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
cancellation of the stock shall be considered as
taxable income to the extent it represents a
distribution of earnings or profits accumulated.
The redemption converts into money the stock
dividends which become a realized profit or gain
and consequently, the stockholder’s separate
property. Profits derived from the capital invested
cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the
existence of any business purpose for the
redemption (CIR v. CA, G.R. No. 108576, January 20,
1999).
85
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Summary of Rules on Dividends
RECIPIENT
RC
RA
DC
10% final tax
10% final tax
NRC
10% final tax
NRAETB
20% final tax
NRANETB
25% final tax
DC
RFC
NRFC
Exempt
dividends)
Exempt
dividends)
SOURCE OF DIVIDENDS
RFC
NRFC
Regular income tax (0-32%) Regular income tax (0-32%)
Less than 50% of income of RFC/NRFC is from PH: Nontaxable Income from sources outside PH are not taxable for
RA, NRC, NRAETB, and NRANETB)
If 50%-85% of income of RFC/NRFC is from PH, a proportion
of the income is considered as income within the Philippines,
subject to regular income tax (or 25% final tax for
NRANETB).
(intercorporate
(intercorporate
30% subject
treaty tax rate
preferential
If more than 85% of income of RFC/NRFC is from PH, entire
dividend income is considered as income within the
Philippines, subject to regular income tax (or 25% final tax
for NRANETB).
Same rule for RFCs and Regular corporate income
NRFCs (see below)
tax (30%)
Less than 50% of income of RFC/NRFC is from PH: Nontaxable Income from sources outside PH are not taxable for
RFC and NRFC)
If 50%-85% of income of RFC/NRFC is from PH, a proportion
of the income is considered as income within the Philippines,
subject to regular income tax (or 30% final tax on gross
income for NRFC).
If more than 85% of income of RFC/NRFC is from PH, entire
dividend income is considered as income within the
Philippines, subject to regular income tax (or 30% final tax
on gross income for NRFC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
86
INCOME TAXATION
Royalty income
recognized as income at the time it is applied. The
purpose of security deposit is to ensure contract
compliance. It is not income to the lessor until the
lessee violates any provision of the contract.
No definition was provided for royalty income
under the NIRC. Nonetheless, Webster Dictionary
defined the same as a share of the earnings as from
invention, book or play, paid to the inventor, writer,
etc. for the right to make, use or publish the same
(Tabag, 2015).
Rent is subject to special rate
1.
Morever, in Universal Food Corporation vs. CA, 1970,
it was defined to be the compensation for the use of
a patented invention.
2.
Tax treatment of royalty income
Subject to
10% final
tax
Subject to
20% final
tax
Subject to
basic tax
Items considered as additional rent income
Royalties on books, other literary
works and musical composition
from sources within the
Philippines.
Royalties derived from sources
within the Philippines other than
royalties subject to 10% to final
tax.
Royalties derived by RC and DC
from sources without the
Philippines.
Additional rent income may be grouped into 2:
1. Obligations of Lessors to 3rd parties assumed by
the lessee:
a.
b.
c.
d.
(Tabag, 2015)
2.
Rent vs. Royalty
BASIS
As
to
reporting
As to tax rate
RENT
Must
be
reported
as
part of gross
income
Regular
progressive
tax
if
individual
Those paid to non-resident owner or lessor of
vessels chartered by Philippine national – 4.5%
of gross rentals (NIRC, Sec. 28 B [3])
Those paid to non-resident owner or lessor of
aircraft, machineries and other equipment –
7.5% of gross rental or fees (NIRC, Sec. 28 B [4])
ROYALTY
Need not be
reported
since subject
to final tax.
Final tax
Real estate taxes on leased premises
Insurance premiums paid by lessee on
property
Dividends paid by lessee to stock-holders
of lessor-corporation
Interest paid by lessee to holder of bonds
issued by lessor-corporation
Value of permanent improvement made by
lessee on leased property of the lessor upon
expiration of the lease
Lease of personal property
Rental income on the lease of personal property
located in the Philippines and paid to a nonresident taxpayer shall be taxed as follows:
Vessel
Aircraft,
machineries and
other equipment
Other assets
Rental income
Rental income is a fixed sum, either in cash or in
property equivalent, to be paid at a definite period
for the use or enjoyment of a thing or right. All
rentals derived from lease of real estate or
personal property, of copyrights, trademarks,
patents and natural resources under lease.
NRC
4.5%
7.5%
NRA
25%
25%
30%
25%
Tax treatment of leasehold improvements by
lessee
Recognized methods in reporting the value of
permanent improvement
Prepaid rent
Where the lease contract provides that the lessee
will erect a permanent improvement on the rented
property and after the term of the lease, the
improvement shall become the property of the
lessor, the lessor may, at his option, report the
income therefrom upon either of the following
methods:
Prepaid or advance rental is taxable income to the
lessor in the year received, if received under a claim
of right and without restriction as to its use,
regardless of method of accounting employed.
NOTE: Security deposit applied to the rental of
terminal month or period of contract must be
87
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
1.
2.
Outright Method – the fair market value of the
building or improvement shall be reported as
additional rent income at the time when such
building or improvements are completed; and
Spread Out Method – allocate over the life of the
lease the estimated book value of such
buildings or improvements at the termination
of the lease and report as additional rent for
each year of the lease an aliquot part thereof in
addition to the regular rent income.
Tax treatment of advance rental/long term
lease
If the advance payment by the lessee is really a loan
to the lessor, or anoption money for the property or
a security deposit for the faithful performance of
certain obligations of the lessee, the lessor realizes
no taxable income in the year the advance payment
is received. If the advance payment is, in fact, a
prepaid rental, there is taxable income to the lessor
whether the latter is using the cash or accrual
method of accounting.
NOTE: With the outright method it would only be
counted for 1 rental payment unlike with the
spread out method it would be distributed to the
remaining term of the lease contract.
FORMS OF
ADVANCE
PAYMENT
A loan to the
lessor from
the lessee
Q: X leased his vacant lot in Binondo to Y for a
term of 10 years at an annual rental of
₱600,000. The contract provides that Y will put
up a building on the lot and after 10 years, the
building will belong to X. The building was
erected at a cost of ₱6,000,000 and has an
estimated useful life of 30 years. Assuming the
fair value of the completed building is the same
as the construction cost, what is the total
income of X if he opts to report his income on
the leasehold improvements using:
a.
b.
a.
b.
An
option
money for the
property
Outright method
Spread out method
A
security
deposit
to
insure
the
faithful
performance
of the lease
A:
If X reports his income on the improvements in the
year it was completed, his total rental income shall
be:
FMV of the building in
₱6,000,000
the year of completion
Add: Annual rental
600,000
Total rental income
₱6,600,000
A
security
deposit which
restricts the
lessor as to its
use
If X reports his income on the improvements using
the spread out method, his total rental income shall
be:
Cost of the building
₱6,000,000
Less: Accumulated depreciation at
the end of lease term
(₱6,000,000/30 years x 10 years)
2,000,000
Book value of the building at the
expiration of lease
₱4,000,000
Divided by: Lease term
Annual income of X on
the improvement
Regular rental income
Total annual rental income
Prepaid rental
without
restriction as
to its use
10
TAX
TREATMENT
G.R.:
taxable
XPN:
If the
lessee violates
the terms of
the contract
G.R.:
Nontaxable
XPN:
If the
lessee violates
the terms of
the contract
G.R.:
Nontaxable
XPN: Security
deposit applied
to rental shall
be subject tom
VAT at the time
of
its
application
Taxable
₱400,000
600,000
₱1,000,000
88
Non-
XPN:
If the
lessee violates
the terms of
the contract
G.R.
Nontaxable
Prizes and awards
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
WHEN
TAXABLE
Taxable at the
time it is
applied
In the year it
is
received
irrespective of
the
accounting
method
employed by
the lessor
INCOME TAXATION
It refers to amount of money in cash or in kind
received by chance or through luck and is generally
taxable except if specifically mentioned under the
exclusion from computation of gross income under
Sec. 32[B] of NIRC.
b.
2. All prizes and awards granted to athletes in
local and international sport competitions and
tournaments whether held in the Philippines or
abroad and sanctioned by their national sports
associations
Tax treatment for prizes and winnings
Generally, prizes exceeding ₱10,000 and other
winnings from sources within the Philippines shall
be subject to 20% final withholding tax, if received
by a citizen, resident alien or non-resident engaged
in trade or business in the Philippines. If the
recipient is a non-resident alien not engaged in
trade or business in the Philippines, the prizes and
other winnings shall be subject to 25% final
withholding tax. If the recipient is a corporation
(domestic or foreign), the prizes and other
winnings are added to the corporation’s operating
income and the net income is subject to 30%
corporate income tax.
RECIPIENTS
Citizen, resident alien or
non-resident engaged in
trade or business in the
Philippines
Non-resident alien not
engaged in trade or business
in the Philippines
Corporation (domestic or
foreign)
NOTE: The national sports association referred
to by law that should sanction said sport activity
is the Philippine Olympic Committee.
3. Prizes that winning inventors receive from the
nationwide contest for the most innovative New
and Renewable Energy Systems jointly
sponsored by the PNOC and other organizations
for during the first ten years reckoned from the
date of the first sale of the invented products,
provided that such sale does not exceed
₱200,000 during any twelve-month period (R.A.
No. 7459, Sec. 5 and 6; BIR Ruling 069-2000).
TAX RATES
Subject to 20%
final
withholding tax
Summary of tax treatment of prizes and other
winnings
Exemp
t from
tax
Subject to 25%
final
withholding tax
Subject to 30%
corporate
income tax
Prizes and winning subject to income tax
1.
2.
3.
Prizes derived from sources within the
Philippines not exceeding ₱10,000 are
included in the gross income.
Winnings derived from sources within the
Philippines is subject to final tax on passive
income except PCSO and lotto winnings which
are tax exempt.
Prizes and winnings from sources outside the
Philippines
Prizes and awards exempt from income tax
1. Prizes and awards made primarily in
recognition of religious, charitable, scientific,
educational, artistic, literary, or civic
achievement
provided,
the
following
conditions are met:
a.
The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
Subjec
t to
basic
tax
The recipient was selected without any
action on his part to enter the contest or
proceeding; and
89
1) Prizes and award made primarily in
recognition of
•Religious, charitable;
•Scientific;
•Educational artistic, literary; or
•Civic achievement.
Provided the recipient was:
a) Selected without any action on his
part to enter the contest or proceeding
(not constituting gains from labor); and
b) Not required to render substantial
future services as a condition to receive
the prize/award.
2) All prizes and awards granted to
athletes in local and international
sports competitions and tournaments,
whether held in the Philippines or
abroad and sanctioned by their
respective national sports association
3) PCSO/Lotto winnings (except NRANETB)
1) Prizes and Other winnings derived by
resident
citizens
and
domestic
corporation from sources without the
Philippines.
2) Prizes and Winnings received by
corporation from sources within the
Philippines
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
NOTE: However, in the case of a transfer for a
valuable consideration by assignment or
otherwise, of a life insurance, endowment or
annuity contract or any interest therein, only
the actual value of such consideration and the
amount of the premiums and other sums
subsequently paid by the transferee are
exempt from taxation.
3) Prizes received by individuals from
sources
within
the
Philippines
amounting to P10,000 or more
1) Prizes received by individuals
(except NRA-NETB) from sources
within Philippines exceeding ₱10,000
2) Other winnings from sources within
the Philippines regardless of amount
(Other than PCSO and Lotto winnings)
Prizes and other winnings (including
PCSO and Lotto winnings) received by
NRA-NETB
Subjec
t to
20%
final
tax
2.
Subjec
t to
25%
final
tax
(Tabag, 2015)
NOTE: The life insurance proceeds must be
paid by reason of the death of the insured.
Payments for reasons other than death are
subject to tax up to the excess of the premiums
paid.
Annuities, proceeds from life insurance and
other types of insurance
Annuity
Any policy loans or borrowings made on the policy
shall be deducted as advances from the life
insurance proceeds received upon death.
It refers to the periodic installment payments of
income or pension by insurance companies during
the life of a person or for a guaranteed fixed period
of time, whichever is longer, in consideration of
capital paid by him.
Recipients
proceeds
The portion representing return of premium is not
taxable while that portion that represents interest
is taxable.
of
non-taxable
life
insurance
Proceeds of life insurance policies paid to
individual beneficiaries upon the death of the
insured are exempt. Also, it has been held that
proceeds of life insurance policies taken by a
corporation on the life of an executive to indemnify
it against loss in case of his death do not constitute
taxable income (El Oriente Fabrica de Tabacos v.
Posadas, G.R. No. 34774, September 21, 1931).
NOTE: The portion of annuity net of premiums is
taxable being interest or earnings of the premium
and not return of capital.
Q: X purchased a life annuity for ₱100,000
which will pay him ₱10,000 a year. The life
expectancy of X is 12 years. How much is
excluded from the gross income of X?
Difference between the tax treatment of life
insurance proceeds under income and estate
taxation
A: The ₱100,000 is excluded from the gross income
of X since it represents a return of premiums which
is not income but a return of capital.
In estate taxation, the concept of revocability or
irrevocability in the designation of the beneficiary
is necessary to determine whether the life
insurance proceeds are included in the gross estate
or not. However, if the appointed beneficiary is the
estate, executor or administrator, the proceeds
shall be included from the gross estate.
Proceeds of life insurance
GR: Amounts received under a life insurance,
endowment, or annuity contact, whether in a single
sum or in installments, paid to the beneficiaries
upon the death of the insured are excluded from the
gross income of the beneficiary.
NOTE: Under the Insurance Code, the insured shall
have the right to change the beneficiary he
designated in the policy, unless he has expressly
waived this right in said policy. Notwithstanding
the foregoing, in the event the insured does not
change the beneficiary during his lifetime, the
designation shall be deemed irrevocable (R.A.
10607, Sec. 11).
XPNs:
1. If such amounts, when added to amounts
already received before the taxable year under
such contract, exceed the aggregate premiums
or considerations paid, the excess shall be
included in the gross income.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Interest payments thereon if such amounts are
held by the insurer under an agreement to pay
interest shall be taxable. If paid to a transferee
for a valuable consideration, the proceeds are
not exempt.
90
INCOME TAXATION
On the other hand, in income taxation, there is no
need for the determination of revocability or
irrevocability of the beneficiary for purposes of
exclusion of such proceeds from the gross income.
They are non-taxable regardless of who the
recipient is.
The amounts that do not qualify as exclusions are
considered as part of income subject to tax
(Domondon, 2013).
Q: ABC Corp. took two insurance policies
covering the life of its employee, Y. The first
insurance designated W, wife of Y as the
beneficiary; while in the second insurance, it
was ABC Corp. which was the designated as the
irrevocable beneficiary. In both insurances, it
was ABC Corp. paying the premiums. Y died.
Income from any whatever source
Refer to “Exclusions from Gross Income” for further
discussion.
“Income from whatever source derived”implies
that all income not expressly exempted from the
class of taxable income under our laws form part of
the taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the
income. The source of the income may be legal or
illegal.
a.
Do the proceeds form part of the taxable
income of the recipients?
b. Are the proceeds part of the taxable estate
of the deceased?
Examples of “income from whatever source
derived” which form part of the taxable income
of the taxpayer
A:
a. NO. The proceeds are not part of the taxable
income of the recipients. Section 32(B)(1)
expressly excludes from income taxation
proceeds of life insurance. This is based on the
theory that such proceeds, for income tax
purposes, are considered as forms of
indemnity. Thus, they are non-taxable
regardless of who the recipient is.
1.
2.
3.
4.
b. NO. The proceeds of the two policies are
excluded as part of the gross estate. For estate
tax purposes, the determining factor on
whether the proceeds of insurance shall be
excluded in the gross estate is when the
designation of the beneficiary is made
irrevocable. Pursuant to the amendment
introduced by R.A. 10607 approved on August
15, 2013, the second paragraph of Sec. 11 of the
Insurance Code now reads “Notwithstanding
the foregoing, in the event the insured does not
change the beneficiary during his lifetime, the
designation shall be deemed irrevocable”.
Thus, since the Y did not exercise his right to
change W as his beneficiary, the designation is
deemed irrevocable and hence, the proceeds of
the insurance not taxable.
Gains arising from expropriation of
property which would be considered as
income from dealings in property;
Gains from gambling;
Gains from embezzlement or stealing
money;
Gains, money or otherwise derived from
extortion, illegal gambling, bribery, graft
and corruption, kidnapping, racketeering,
etc.
Rationale: These are taxable because title is
merely voidable.
5.
In stock options, the difference between
the fair market value of the shares at the
time the option is exercised and the option
price constitutes additional compensation
income to the employee (Commissioner v.
Smith, 324 U.S. 177).
6.
Money received under solutio indebiti
Rationale:Under the claim of right doctrine,
the recipient, even if he has the obligation to
return the same, has a voidable title to the
money received through mistake.
Pensions, retirement benefit or separation pay
7.
It refers to amount of money received in lump sum
or on staggered basis in consideration of services
rendered given after an individual reaches the age
of retirement.
Condonation of
consideration.
indebtedness
for
a
Rationale: This is because when a creditor
cancels a debt as part of a business transaction,
the debtor is enriched or receives financial
advantages thereby increasing his net assets,
and thus realizes taxable income.
Pension being part of gross income is taxable to the
extent of the amount received except if there is a
BIR approved pension plan (NIRC, Sec. 32 B [6]).
91
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Condonation of indebtedness
Recovery of accounts previously written off when taxable/when not taxable
Tax treatment for condonation of indebtedness
“Tax Benefit Rule” or Equitable Doctrine of Tax
Benefit
1. When cancellation of debt is income. If an
individual performs services for a creditor, who
in consideration thereof, cancels the debt, it is
income to the extent of the amount realized by
the debtor as compensation for his services.
2. When cancellation of debt is a gift. If a creditor
merely desires to benefit a debtor and without
any consideration therefore cancels the amount
of the debt, it is a gift from the creditor to the
debtor and need not be included in the latter’s
income. The creditor is subject to donor’s tax.
3. When cancellation of debt is a capital
transaction. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of payment of a
dividend (R.R. No. 2, Sec. 50).
4. An insolvent debtor does not realize taxable
income from the cancellation or forgiveness
(CIR v. Gin Co. 43 F.2d 327).
5. The insolvent debtor realizes income resulting
from the cancellation or forgiveness of
indebtedness when he becomes solvent
(Lakeland Grocery Co. v. CIR, 36 BTA 289).
It is a principle that if a taxpayer recovers a loss or
expense that was deducted in a previous year, the
recovery must be included in the current year's
gross income up to the extent that it was previously
deducted.
Two instances where Tax benefit rule applies
1.
2.
Recovery of bad debts
The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be
included as part of the taxpayer’s gross income in
the year of such recovery to the extent of the
income tax benefit of said deduction.
If the taxpayer did not benefit from deduction of
the bad debt written-off because it did not result in
any reduction of his income tax in the year of such
deduction as in the case where the result of the
taxpayer’s business operation was a net loss even
without deduction of the bad debts written-off, his
subsequent recovery thereof shall be treated as a
mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income.
Q: Mr. Gipit borrowed from Mr. Maunawain
₱100,000.00, payable in 5 equal monthly
installments. Before the first installment
became due, Mr. Gipit rendered general
cleaning services in the entire office building of
Mr. Maunawain, and as compensation therefor,
Mr. Maunawain cancelled the indebtedness of
Mr. Gipit up to the amount of ₱75,000.00. Mr.
Gipit claims that the cancellation of his
indebtedness cannot be considered as gain on
his part which must be subject to income tax,
because according to him, he did not actually
receive payment from Mr. Maunawain for the
general cleaning services. Is Mr. Gipit correct?
Explain. (2014 Bar)
Receipt of tax refund or credit
If a taxpayer receives tax credit certificate or
refund for erroneously paid tax which was claimed
as a deduction from his gross income that resulted
in a lower net taxable income or a higher net
operating loss that was carried over to the
succeeding taxable year, he realizes taxable income
that must be included in his income tax return in
the year of receipt.
A: NO. Section 50 of Rev. Regs. No. 2, otherwise
known as Income Tax Regulations, provides that if
a debtor performs services for a creditor who
cancels the debt in consideration for such services,
the debtor realizes income to that amount as
compensation for his services. In the given
problem, the cancellation of Mr. Gipit’s
indebtedness up to the amount of ₱75,000.00 gave
rise to compensation income subject to income tax,
since Mr. Maunawain condoned such amount as
consideration for the general cleaning services
rendered by Mr. Gipit.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Recovery of bad debts
Receipt of tax refund or credit
XPN: The foregoing principle does not apply to tax
credits or refunds of the following taxes since these
are not deductible from gross income:
a. Income tax;
b. Estate tax;
c. Donor’s tax; and
d. Special assessments.
General rule on taxation of debts
Borrowed money is not part of taxable income
because it has to be repaid by the debtor. On the
92
INCOME TAXATION
other hand, the creditor does not receive any
income upon payment because it is merely a return
of the investment.
4.
James Doctrine
This doctrine provides that even though the law
imposes a legal obligation upon an embezzler or
thief to repay the funds, the embezzled or stolen
money still forms part of the gross income since the
embezzler or thief has no intention of repaying the
money.
5.
6.
Proceeds of stolen or embezzled property are
taxable
The money or other proceeds of the sale or other
disposition of stolen property is subject to income
tax because the proceeds are received under a
“claim of right”.
Source rules in determining income from within
and without
The following are considered as income from
sources within the Philippines:
1.
2.
3.
Interest: Residence of the debtor. – The
residence of the obligor who pays the interest
rather than the physical location of the
securities, bonds or notes or the place of
payment, is the determining factor of the
source of interest income. If the obligor or
debtor is a resident of the Philippines, the
interest income is treated as income from
within the Philippines (National Development
Company v. CIR, G.R. No. L-53961, June 30,
1987).
Dividends: Residence of the corporation
paying the dividends. – Dividends received
from a domestic corporation or from a foreign
corporation are treated as income from
sources within the Philippines, unless less than
50% of the gross income of the foreign
corporation for the three-year period
preceding the declaration of such dividends
was derived from sources within the
Philippines, in which case only the amount
which bears the same ratio to such dividends
as the gross income of the corporation for such
period derived from sources within the
Philippines bears to its gross income from all
sources shall be treated as income from
sources within the Philippines.
Services: Place of performance of the
service. – If the service is performed in the
Philippines, the income is treated as from
sources within the Philippines, regardless of
the residence of the payor, of the place in which
the contract for service was made, or of the
place of payment.
Rentals and royalties: Location or use of the
property or interest in such property. – If
the property is located or used in the
Philippines, the rent or royalties are income
from sources within the Philippines.
Sale of real property: Location of real
property. – If the real property sold is located
within the Philippines, the gain is considered as
income from the Philippines.
Sale of personal property:Place where the
sales contract was consummated. –
It depends:
a. Personal property produced within and sold
without, or produced without and sold
within the Philippines
– Any gain, profit, or income shall be
treated as derived partly from sources
within and partly from sources without the
Philippines.
b. Purchase of personal property within and
sale without, or purchase without and sale
within the Philippines
–Any gain, profit, or income shall be
treated as derived entirely from sources
within the country in which sold.
c. Shares of stock in a domestic corporation
– Gain, profit, or income is treated as
derivedentirelyfrom sources within the
Philippines, regardless of where said
shares are sold (Mamalateo, 2014).
Refer to previous discussion on “Situs of Income
Taxation.”
Q: ABC, a domestic corporation, entered into a
software license agreement with XYZ, a nonresident foreign corporation based in the U.S.
Under the agreement which the parties forged
in the U.S., XYZ granted ABC the right to use a
computer system program and to avail of
technical know-how relative to such program.
In consideration for such rights, ABC agreed to
pay 5% of the revenues it receives from
customers who will use and apply the program
in the Philippines. Discuss the tax implication of
the transaction. (2010 Bar)
A:The amount payable under the agreement is in
the nature of a royalty. The term royalty is broad
enough to include compensation for the use of an
intellectual property and supply of technical knowhow as a means of enabling the application or
enjoyment of any such property or right (Sec 42(4)
NIRC). The royalties paid to the non-resident US
Corporation, equivalent to 5% of the revenues
93
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
derived by ABC for the use of the program in the
Philippines, is subject to a 30% final withholding
tax, unless a lower tax rate is prescribed under an
existing tax treaty (Sec 28(B)(1) NIRC).
“Exclusion from gross income” vs. “deductions
from gross income”
EXCLUSION FROM
GROSS INCOME
Exclusions from gross income
It refers to a flow of wealth
to the taxpayer which are
not treated as part of gross
income, for purposes of
computing the taxpayer’s
taxable income, due to the
following reasons:
a. It
is
expressly
exempted from income
tax by the fundamental
law or statute;
b. It is subject to another
kind
of
internal
revenue tax; and
c. It does not come within
the definition of income
as when the amount
received
represents
return of capital.
Pertains to the computation
of gross income
Exclusions from gross income refer to the flow of
wealth to the taxpayers which are not considered
part of gross income for purposes of computing the
taxpayer’s taxable income due to the following:
1. It is exempted by the fundamental law or by
statute;
2. It does not come within the the definition of
income.
The exlcusion of income should not be confused
with the reduction of gross income by application
of allowable deductions. Exclusions are not taken
into account in determining gross income,
however, deductions are subtracted from the gross
income (Tabag, 2015).
Construction of exclusions
Exclusions are in the nature of tax exemptions, thus
they must be strictly construed against the
taxpayer and liberally in favor of the Government.
It behooves upon the taxpayer to establish them
convincingly.
Something received or
earned by the taxpayer
which do not form part of
gross income
Example of an exclusion
from gross income is
proceeds of life insurance
received by the beneficiary
upon the death of the
insured which is not an
income or 13th month pay of
an employee not exceeding
₱82,000 which is an income
not recognized for tax
purposes
Rationale for exclusion
There are exclusions from the gross income either
because they:
1.
2.
3.
4.
Represent return of capital;
Are not income, gain or profit; or
Are subject to another kind of internal revenue
tax;
Are income, gain or profit that is expressly
exempt from income tax under the
Constitution, Tax treaty, NIRC, or general or a
special law.
Pertains to the
computation of net
income
Something spent or
paid in earning
gross income
Example
of
deduction
business rental
a
is
Difference among exclusions, deductions and
tax credit
Taxpayers who may avail of exclusions
EXCLUSIONS
Incomes
received or
earned but are
not taxable
because of
exemption by
virtue of a law
or treaty; hence,
not included in
the
All kinds of taxpayers – individuals, estates, trusts
and corporations, whether citizens, aliens,
whether residents or non-residents may avail of
the exclusions.
Rationale: The excluded receipts are not
considered as income for tax purposes (Domondon,
2013).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
DEDUCTION
FROM GROSS
INCOME
It refers to amounts
which the law
allows
to
be
deducted
from
gross income in
order to arrive at
net income.
94
DEDUCTIONS
These are
included in
the gross
income but
are later
deducted to
arrive at net
income
TAX CREDIT
It refers to
foreign taxes
paid
beforehand
but are
claimed as
credits
against
Philippine
income tax to
INCOME TAXATION
computation of
gross income.
“Gift” is any transfer not in the ordinary course of
business which is not made for full and adequate
consideration in money or money’s worth. The
giver is called the donor and the recipient is called
the donee.
arrive at the
tax due and
payable
Exclusions under the constitution
Q: If Mr. Generous gave a gift to Ms. Gorgeous
what are the tax implications?
Income derived by the Government or its political
subdivisions from the exercise of any essential
government function
A: Mr. Generous, the donor is subject to donor’s tax
while Ms. Gorgeous the donee is not subject to
donee’s tax. Donee’s tax has been abolished by P.D.
69. The value of the gift received by Ms. Gorgeous is
not included in the computation of gross income
pursuant to Sec. 32(B)(3), NIRC, gifts, bequest and
devises are excluded from gross income.
Income derived by the Government or its political
subdivision is exempt from gross income, if the
source of the income is from any public utility or
from the exercise of any essential governmental
functions.
Exclusions under the NIRC
Bequest and Devise
Items that are excluded in gross income and
exempt from gross income taxation [GLAM-RIC]
1. Gifts, bequests and devises
2. Life insurance proceeds
3. Amount received by insured as return of
premium
4. Retirement benefits, pensions, gratuities, etc.
5. Income exempt under treaty
6. Compensation for injuries or sickness
7. Miscellaneous items. (13P2IG3)
a.
b.
c.
d.
e.
f.
g.
h.
Bequest is a gift of personal property and devise is a
gift of real property. Both are donations mortis
causa. The giver is either known as the testator or
decedent while the recipient may be the heirs or
beneficiaries.
Tax implications of a Bequest and Devise
The estate of the testator or the decedent is subject
to estate tax, while the heirs or beneficiaries are not
required to pay donee’s tax as the same was already
abolished. The value of the bequest and/or the
devise received by the heirs or beneficiary/ies
is/are not included in the computation of their
gross income since gifts, bequest and devises are
excluded from gross income (NIRC, Sec. 32 [B]).
13thmonth pay and other Benefits;
Prizes and awards
Prizes and awards in sports competitions
Income derived by foreign government
Income derived by the government or its
political subdivisions
GSIS,
SSS,
Medicare
and
other
contributions
Gains from the sale of bonds, debentures
or other certificate of indebtedness
Gains from redemption of shares in mutual
fund (NIRC, Sec. 32 [B])
Donation inter vivos and mortis causa
Regardless of whether the donation is inter vivos or
mortis causa, it is excluded from gross income for it
is not product of capital or industry. Furthermore,
the property is already subject to donor’s or estate
taxes as the case may be.
The exclusions are discussed in detail below.
Gift Tax Test
GIFTS, BEQUESTS AND DEVISES
The value of property acquired by gift, bequest,
devise, or descent is excluded from gross income.
Provided, however, that income from such
property, as well as gift, bequest, devise or descent
of income from any property, in cases of transfers
of divided interest, shall be included in gross
income.
When a person gives a thing or right to another and
it is not a “legally demandable obligation,” then it is
treated as a gift and excluded from gross income.
However, if there is a legally demandable obligation
to give such as for services rendered by one to the
donor or due to his merits, the amount received is
taxable income to the recipient.
NOTE: The consideration is based on pure
liberality and is already subject to donor’s or estate
tax as the case may be. Moreover, there is no
income.
Q: Quiroz worked as chief accountant of a
hospital for 45 years. When he retired at the age
of 65, he received retirement pay equivalent to
2 months salary for every year of service as
95
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
provided in the hospital BIR approved
retirement plan. The Board of Directors of the
hospital felt that the hospital should give Quiroz
more than what was provided for in the
hospital’s retirement plan in view of his loyalty
and invaluable services for 45 years. Hence, it
resolved to pay him a gratuity of ₱1 million over
and above his retirement pay. The CIR taxed the
₱1 million as part of the gross compensation
income of Quiroz who protested that it was
excluded from income because (a) it was a
retirement pay, and (b) it was a gift.
A: The wife and daughter should pay income tax
because it is fruit of labor. They should also pay
donor’s tax because they gave D ₱250,000.00. For
C, since he pays the salary of D, it is not subject to
tax; it is a deductable item. It is a business expense
and therefore it is an allowable deduction. For D,
there is no tax because payment of obligation is not
taxable.
Q: Capt. Canuto is a member of the Armed
Forces of the Philippines. Aside from his pay as
captain, the government gives him free
uniforms, free living quarters in whatever
military camp he is assigned, and free meals
inside the camp. Are these benefits income of
Capt. Canuto? Explain. (1995 Bar)
Is Quiroz correct in claiming that the additional
₱1 million was gift and therefore excluded from
income?
A: NO. The amount received was in consideration
of his loyalty and invaluable services to the
company which is clearly a compensation income
received on account of employment. Under the
employer’s ‘motivation test,’ emphasis should be
placed on the value of Quiroz services to the
company as the compelling reason for giving him
the gratuity; hence it should constitute a taxable
income. The payment would only qualify as a gift if
there is nothing but ‘good will, esteem and
kindness’ which motivated the employer to give the
gratuity (Stonton v. U.S., 186 F. Supp. 393).
A: NO. The free uniforms, free living quarters and
the free meals inside the camp are not income to
Capt. Canute because these are facilities or
privileges furnished by the employer for the
employer’s convenience which are necessary
incidents to proper performance of the military
personnel’s duties.
Life insurance proceeds
Life insurance is insurance on human life and
insurance appertaining thereto or connected
therewith (IC, Sec. 179).
Q: C is a creditor of D. The debt is condoned by
C. What is the tax implication of the
condonation of debt?
Conditions for the exclusion of life insurance
proceeds from gross income [ProHeDS]
A: For D, that amount is a remuneratory donation
and is subject to income tax. It is not a gift because
it started from an obligation and not from pure
liberality of the donor. C should pay donor’s tax if
the amount condoned is more than ₱100,000.00.
1.
2.
3.
4.
Rationale for the exclusion of the proceeds from
life insurance
Q: C lends D ₱150,000.00 but D failed to pay the
debt. C told D that D should work in C’s
Restaurant and part of D’s salary will be applied
to the obligation. What is the tax implication
there?
They are not considered as income because they
partake the nature of an indemnity or
compensation rather than gain to the recipient. Life
insurance proceeds also serve the same purpose as
nontaxable inheritance.
A: For D, it is fruit of labor and it is subject to income
tax. For C, since he pays the salary of D, it is not
subject to tax; it is a deductable item. It is a business
expense and therefore it is an allowable deduction.
Exceptions to the rule that the amount of the
proceeds of life insurance should be excluded
from the gross income [ASV-PPC]
Q: C lends D ₱250,000.00 but D failed to pay the
debt. D is a government employee. C told D that
D’s wife and daughter should work in C’s
Restaurant and part of their salary will be
applied to the obligation. What is the tax
implication?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Proceeds of life insurance policies;
Paid to the Heirs or beneficiaries;
Upon the Death of the insured;
Whether in a single Sum or otherwise.
1.
96
If there is an Agreement between the insured
and the insurer to the effect that the amount
shall be withheld by the insurer under an
agreement to pay interest thereon, the interest
held by the insurer pursuant to that agreement
INCOME TAXATION
2.
3.
4.
5.
6.
is the one taxable but not the principal amount
(NIRC, Sec. 32 B [1]).
Where the life insurance policy is used to
Secure a money obligation
Where the life insurance policy was
transferred for a Valuable consideration
The recipient of the insurance proceeds is a
business Partner of the deceased and the
insurance was taken to compensate the
partner-beneficiary for any loss in income that
may result as the death of the insured partner
The recipient of the insurance proceeds is a
Partnership in which the insured is a partner
and the insurance was taken to compensate the
partnership for any loss in income that may
result from the dissolution of the partnership
caused by the death of the insured partner
The recipient of the life insurance proceeds is a
Corporation in which the insured was an
employee or officer (R.R. No. 2, Sec. 62).
b.
c.
Interest earned on the proceeds from life
If such amounts of the life insurance proceeds are
held by the insurer under an agreement to pay
interest thereon, the interest payments shall be
included in the gross income (NIRC, Sec. 32 [B][1]).
It depends. If the heirs, estate, administrator or
executor is designated as beneficiary, the
proceeds form part of the estate whether the
designation is revocable or irrevocable.
If the person designated is a 3rd person (which
includes the employer,) the proceeds form part
of the estate if the designation is revocable. If
the designation is irrevocable, the proceeds
will not be included in the gross estate.
It shall be considered as revocably designated.
However, if the insured fail to exercise his right
to change the beneficiary during his lifetime,
then the designation shall be deemed
irrevocable. Under Sec. 11 of the Insurance
Code of the Philippines, as amended by R.A.
10607, the insured has the right to change the
beneficiary he designated in the policy, unless
he has expressly waived this right in said
policy. Notwithstanding the foregoing, in the
event the insured does not change the
beneficiary during his lifetime, the designation
shall be deemed irrevocable.
Q: On 30 June 2000, X took out a life insurance
policy on his own life in the amount of
₱2,000,000.00. He designated his wife, Y, as
irrevocable beneficiary to ₱1,000,000.00 and
his son, Z, to the balance of ₱1,000,000.00 but,
in the latter designation, reserving his right to
substitute him for another. On 01 September
2003, X died and his wife and son went to the
insurer to collect the proceeds of X’s life
insurance policy. Are the proceeds of the
insurance subject to income tax on the part of Y
and Z for their respective shares? Explain.
(2003 Bar)
Designation of the beneficiary
In determining income tax, life insurance proceeds
are always considered as exclusions regardless of
whether the beneficiary is designated as revocable
or irrevocable. The designation is material only in
determining the gross estate of the decedent to
determine his gross estate.
Q: Suppose the employer insures the life of his
employee and the one paying the premiums on
that life insurance policy is the employer. If the
employee dies:
A: NO. The law explicitly provides that proceeds of
life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
taxation. The proceeds of life insurance received
upon the death of the insured constitute a
compensation for the loss of life, hence a return of
capital, which is beyond the scope of income
taxation (Section 32(B)(1), NIRC).
a.
Are the proceeds of the life insurance policy
excluded from the gross income?
b. Will the proceeds form part of the estate of
the decedent and therefore subject to estate
tax?
c. Assuming the designation of the 3rd person
in the policy is silent whether his
designation is revocable or irrevocable,
what is the rule?
Q: Noel is a bright computer science graduate.
He was hired by HP. To entice him to accept the
job, he was offered the arrangement that part of
his compensation package would be an
insurance policy with a face value of ₱20
million. The parents of Noel are made the
beneficiaries of the insurance policy. Will the
proceeds of the insurance form part of the
income of the parents of Noel and be subject to
income tax? (2007 Bar)
A:
a. YES. The manner of designation or the name of
the beneficiary is immaterial. The amount of
the proceeds is excluded from the gross
income.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: NO. The proceeds of life insurance policies paid
to the heirs or beneficiaries upon the death of the
insured are not included as part of the gross income
of the recipient. There is no income realized
because nothing flows to Noel’s parents other than
a mere return of capital, the capital being the life of
the insured (Sec. 32 [B][1], NIRC).
the period of the policy, he must have paid a total of
₱30,400 (₱1,520 x 20 years). Accordingly, he will be
subject to report as taxable income the amount of
₱19,600 (NIRC, Sec. 28).
Return of premium paid
Conditions for the exclusion of the return of
premium paid from gross income
Amounts received under life insurance
contracts under life insurance endowment or
annuity contracts
1.
2.
3.
Endowment –The insurer agrees to pay a sum
certain to the insured if he outlives a designated
period. If he dies before that date, the proceeds are
to be paid to the designated beneficiary.
Treatment of proceeds
endowment policies
received
4.
Amount received by insured;
As a return of premium paid by him;
Under a life insurance, endowment or annuity
contract;
Either:
a.
b.
under
c.
If the insured dies and the beneficiary receives the
life insurance proceeds, these are not taxable
income because they are excluded from gross
income as proceeds from life insurance.
If the insured does not die and survives the
designated period, the amount pertaining to the
premiums he paid are excluded from gross income,
but the excess shall be considered part of his gross
income.
During the term;
At the maturity of the term mentioned in
the contract; or
Upon surrender of the contract.
NOTE: The amount returned is not income but
mere return of capital.
Return of premium v. Life insurance proceeds
The difference lies in cases where the insured in a
life insurance contract survives. In order that life
insurance proceeds may be totally exempt from
income taxation, the insured must die. If he
survives, there is only a partial exemption, i.e., only
the portion of the proceeds representing return of
premiums previously paid is excluded, being a
mere return of capital.
Q: Suppose A obtained an endowment policy
valued at ₱1 million. He paid premiums
amounting to ₱800,000. Upon maturity, he
received ₱1 million, what amount is taxable?
A: The amount of ₱200,000 is taxable. The
difference between the value of the insurance and
the actual premiums paid forms part of A’s gross
income.
Retirement Benefits, Pensions, Gratuities, etc.
Q: Mario worked his way through college. After
working for more than 2 years in X Corporation,
Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On the day of his
retirement on April 30, 1985, he received his
endowment insurance policy, for which he was
paying an annual premium of ₱1,520 since
1965, also matured. He was then paid the face
value of his insurance policy in the amount of
₱50,000. Is his ₱50,000 insurance proceeds
exempt from income taxation?
1.
2.
Retirement benefits, pensions, gratuities, etc.
that are excluded from gross income [7FRUGS2]
3.
4.
5.
6.
7.
A: The ₱50,000 insurance proceeds is not totally
exempt from income tax. The excluded amount is
that portion which corresponds to the premiums
that he had paid since 1965. At the rate of ₱1,520
per year multiplied by twenty (20) years which was
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Retirement benefits under R.A. 7641
Social security benefits, retirement gratuities,
pensions and other similar benefits received by
resident or non-resident citizens or resident
alien from Foreign government agencies and
other institutions, private or public
Retirement received by officials and employees
of private firms, whether individual or
corporate, in accordance with a Reasonable
private benefit plan maintained by the
employer
Benefits from the US Veterans Administration
GSIS benefits
SSS
Separation pay
Salient features of R.A. 7641, amending the
Labor Code with regard to the retirement pay of
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INCOME TAXATION
qualified employees in the absence of any
retirement plan
1.
exclusive benefit of the said officials and employees
(NIRC, Sec. 32 B [6]a).
Where the retirement plan is established in
the CBA or other applicable employment
contract –Any employee may be retired
upon reaching the retirement age
established in the CBA or other applicable
employment contract.
Conditions in order to avail the exemption
under a RPBP [Approved-10-50-once]
1.
2.
In case of retirement, the employee shall be
entitled to receive such retirement benefits as
he may have earned under existing laws and
any CBA and other agreements: Provided,
however, that an employee's retirement
benefits under any collective bargaining and
other agreements shall not be less than those
provided by the law.
2.
3.
4.
The RPBP must be approved by the BIR;
The retiree must have been in the service of
same employer for at least 10 years at the time
of retirement;
The private employee or official must be at
least 50 years old at the time of his retirement;
and
The benefits under the RPBP must have been
availed of only once.
NOTE: Once the benefits under the RPBP have
been availed of, the retiree can no longer avail of the
same exemption for the second time under another
RPBP but can avail exemption under another
ground such as SSS or GSIS benefits.
In the absence of a reasonable private
benefit plan or agreement providing for
retirement benefits of employees in the
establishment
Meaning of the phrase “shall not have availed of
the privilege under a retirement benefit plan of
the same or another employer” under Sec.
32(B)(6)(a) of the NIRC
a.
i.
Optional – the conditions are:
An employee upon reaching the age of
60 years or more but not beyond 65;
ii. Who has served at least 5 years in the
said establishment;
iii. May retire and shall be entitled to
retirement pay equivalent to ½ month
salary for every year of service, a
fraction of at least 6 months being
considered as one whole year.
b. Mandatory – the conditions are:
i. An employee upon reaching the age of
beyond 65 years which is the
compulsory retirement age;
ii. Who has served at least 5 years in the
said establishment;
iii. May retire and shall be entitled to
retirement pay equivalent to ½ month
salary for every year of service, a
fraction of at least 6 months being
considered as one whole year (RA
7641, Retirement Pay Law).
It means that the retiring official must not have
previously received retirement benefits from the
same or another employer who has a qualified
retirement benefit plan (BIR Ruling No. 125-98).
Q: Ma. Isabel Santos was the Human Resource
Manager of Servier Philippines, Inc. (Servier)
since 1991. In 1998, Santos suffered a sudden
attack of “alimentary allergy”. She fell into coma
and was confined in the hospital. After a year of
medical treatment, evaluation disclosed that
she has not recovered mentally and physically.
Servier was constrained to terminate the
services of Santos effective 31 August 1999.
Servier paid disability retirement benefits but
withheld a portion for taxation purposes. Under
the retirement plan of Servier, employees are
barred from claiming from additional benefits
on top on that provided for in the Plan. Santos
was 41 years of age at the time of her
termination. Under the circumstances, was the
withholding of a portion of the retirement
benefits proper?
Reasonable Private Benefit Plan (RPBP)
Pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of
some or all his officials or employees, wherein
contributions are made by such employer for the
officials or employees, or both, for the purpose of
distributing the earnings and principal of the fund
thus accumulated, any part of which shall not be
used or diverted to any purpose other than for the
A: YES. Pursuant to the NIRC provisions on
exclusion, retirement benefits received in
accordance with a reasonable private benefit plan
maintained by the employer (under R.A. No. 4917)
are exempted provided that the retiring official or
employee has been in the service of the same
99
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
employer for at least 10 years and is not less than
50 years of age at the time of his retirement.
Here, Santos was qualified for disability retirement.
At the time of her retirement, she was only 41 years
of age; and had been in the service for more or less
8 years. As such, the above exclusion is not
applicable for failure to comply with the age and
length of service requirements. Therefore, Servier
cannot be faulted for deducting a portion from
Santos’ total retirement benefits for taxation
purposes (Santos v. Servier Philippines, Inc., G.R. No.
166377, 28, November 2008).
Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On his retirement,
he received ₱400,000 as retirement benefit. Is
Mario’s ₱400,000 retirement benefit subject to
income tax?
A: YES. Mario’s ₱400,000 retirement benefit is
subject to income tax. To be exempt, the retirement
pay must have been extended to an employee who
is at the service of his employer for at least 10 years.
The amount cannot be considered as separation
pay that would have exempted benefits from
income tax since it was Mario who had decided to
retire instead of being required to do so.
Retirement benefits paid by an employer which
does not have a private benefit plan but has an
existing CBA providing for retirement benefits
of employees are excluded from income tax
Conditions in order that separation pay may be
excluded from gross income
It is excluded provided that the minimum age
requirement and the length of service are met.
Under RA 7641, the actual retirement age may even
be lower than 60 years of age, pursuant to the CBA
or other applicable employment contract which is
deemed the law between the parties Thus, for
purposes of determining the taxability of
retirement benefits received by retiring employees,
the retirement age is that age established in the
CBA or other applicable employment contract.
However, if the CBA or other applicable
employment contract does not provide for a
retirement age, the minimum requirement of 50
years provided for under Section 32 (B)(6)(a), of
the 1997 NIRC, as amended, shall apply in order to
qualify for the exemption granted therein (BIR
Ruling No. SB [041] 603-2009, September 22, 2009).
1.
2.
3.
a.
Because of death, sickness
or other physical disability;
or
b. For any cause beyond the
control of the official or
employee (NIRC, Sec 32 B
[6] b).
Causes beyond the control of the employee
1.
2.
3.
Q: Mel received from his first employer,
₱20,000 as retirement benefit and was
subsequently employed by another employer.
After rendering 10 years, Mel retired from his
second employer and received ₱50,000.
Payment was made under a BIR approved
retirement plan. Is the said amount taxable or
not?
Retrenchment
Cessation of business
Redundancy (R.R. 2-98, Sec. 2 b
[2])
Q: Who will be the recipient of separation pay if
the cause of separation is death, physical
disability or sickness? (2007 Bar)
A:
1. In case of death, the estate unless there is a
designated beneficiary.
2. In case of physical disability or sickness, the
employee is the recipient of the separation pay.
A: YES. It is taxable because the benefit of
exemption can only be availed of once.
Q: If the second employer is a Government
entity (assuming Mel was employed by the
DPWH), would your answer be the same?
Tax treatment for separation pay
Separation pay is not taxable irrespective of the age
of the employee, length of service, number of
benefits received or the recipient thereof (NIRC,
Sec. 32 B [6] b).
A: NO. According to R.A. 8291 (The GSIS Act of
1997), all benefits he received are tax exempt,
including retirement gratuity.
Q: Mario worked his way through college. After
working for more than 2 years in X Corporation,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Amount received by an official, employee or by
his heirs;
From the employer; and
As a consequence of separation of such official
or employee from the service of the employer:
Terminal leave pay
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INCOME TAXATION
Terminal leave pay is the amount received arising
from the accumulation of sick leave or vacation
leave credits. (Commutation of leave credits)
1.
2.
Q: Bernardo, a retired employee of the SC filed a
request with the SC for the refund of the amount
of ₱59,502 which were deducted from his
terminal leave pay as withholding tax. The
Court said that the terminal leave pay of
Bernardo, which he received by virtue of his
compulsory retirement, can never be
considered as part of his salary subject to
income tax. Hence, Bernardo’s request was
granted. Is terminal leave pay subject to income
tax?
For private employees – vacation leaves are
exempt from tax up to 10 days while sick leaves
are always taxable.
For government employees – both vacation and
sick leaves are tax exempt irrespective of the
number of days.
Tax treatment of sick leave credits
They are taxable irrespective of the number of days.
This applies if the sick or vacation leave credits do
not form part of the compulsory retirement benefit.
Q: Jacobo worked for a manufacturing firm. Due
to business reverses the firm offered voluntary
redundancy program to reduce overhead
expenses. Under the program an employee who
offered to resign would be given separation pay
equivalent to his 3 months basic salary for
every year of service. Jacobo accepted the offer
and received ₱400,000 as separation pay under
the program.
A: NO. Since terminal leave pay is applied for by an
officer or employee who has already severed his
connection with his employer and who is no longer
working, it necessarily follows that the terminal
leave pay or its cash equivalent is no longer
compensation for services rendered. Therefore, it
cannot be received by the said employee as salary.
It is one of those excluded from gross income and is
therefore not subject to tax (Re: Request of Atty.
Bernardo Zialcita, AM 90-6-015-SC, October 18,
1990).
After all the employees who accepted the offer
were paid, the firm found its overhead is still
excessive.
Hence
it
adopted
another
redundancy program. Various unprofitable
departments were closed. As a result, Kintanar
was separated from the service. He also
received ₱400,000 as separation pay.
Q: A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of 65
years. Upon compulsory retirement, A received
the money value of his accumulated leave
credits in the amount of ₱500,000.00. Is said
amount subject to tax? Explain. (1996 Bar)
a.
Did Jacobo derive income when he
received his separation pay?
b. Did Kintanar derive income when he
received his separation pay? (1995 Bar)
A: NO. The commutation of leave credits, more
commonly known as terminal leave pay, i.e., the
cash equivalent of accumulated vacation and sick
leave credits given to an officer or employee who
retires, or separated from the service through no
fault of his own, is exempt from income tax.
Compulsory retirement is considered as cause
beyond the control of the employee. Hence, all
benefits received are tax exempt (BIR Ruling 23891 dated November 8, 1991; Commissioner v. CA and
Efren Castaneda, GR No. 96016, October 17, 1991;
Re: Request of Atty. Zialcita for Reconsideration,
A.M. No. 90-6-015-SC, October 18, 1990).
A:
a. YES. Because his separation from employment
was voluntary on his part in view of his offer to
resign. What is excluded from gross income is
any amount receivedby an official or employee
as a consequence of separation of such official
or employee from the service of the employer
for any cause beyond the control of the said
official or employee (NIRC, Sec 28).
b. NO. Because his separation from employment
is due to causes beyond his control. The
separation was involuntary as it was a
consequence of the closure of various
unprofitable departments pursuant to the
redundancy program.
Q: Assuming it does not form part of the
terminal leave pay, as when it is given annually
to the employee, wherein the vacation or sick
leave may be converted into cash. What is the
tax treatment of the cash equivalent of such
vacation leave credits?
Q: Z, a Filipino immigrant living in the United
States for more than 10 years. He is retired and
came back to the Philippines a balikbayan.
Every time he comes to the Philippines, he stays
here for about a month. He regularly receives a
pension from his former employer in the United
A: It depends.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
States, amounting US$1,000 a month. Does the
US$1,000 pension become taxable because he is
now residing in the Philippines?
subject to income tax, hence no withholding tax
shall be imposed. The benefits received under the
BIR-approved plan upon meeting the service
requirement and age requirement are explicitly
excluded from gross income. The ex gratia payment
also qualifies as an exclusion from gross income
being in the nature of benefit received on account
of separation due to causes beyond the employees’
control (Section 32(B), NIRC). The cash equivalent
of unused vacation and sick leave credits qualifies
as part of separation benefits excluded from gross
income (CIR v. Court of Appeals, GR No. 96O16,
October 17, 1991).
A: NO. The law provides that pensions received by
resident or non-resident citizens of the Philippines
from foreign government agencies and other
institutions, private or public, are excluded from
gross income (NIRC, Sec. 32 B [6] c).
Q: X, an employee of ABC Corporation died. ABC
Corporation gave X’s widow an amount
equivalent to X’s salary for one year. Is the
amount considered taxable income to the
widow? Why? (1996 Bar)
For category B employees, all the benefits received
by them will also be exempt from income tax, hence
not subject to withholding tax. These are benefits
received on account of separation due to causes
beyond the employees’ control, which are
specifically excluded from gross income (Section
32(B), NIRC).
A: NO. Any amount received by an official or
employee or by his heirs from the employer as a
consequence of separation of such official or
employee from the service of the employer because
of death sickness or other physical disability or for
any cause beyond the control of the said official or
employee are excluded from gross income (Sec.
32(B), NIRC).
Income exempt under tax treaty
Income of any kind, to the extent required by any
treaty obligation binding upon the Government of
the Philippines is exempt from tax(NIRC, Sec. 32 B
[5]).
Q: A Co., a Philippine corporation, has two
divisions manufacturing and construction. Due
to the economic situation, it had to close its
construction division and lay-off the employees
in that division. A Co. has a retirement plan
approved by the BIR, which requires a
minimum of 50 years of age and 10 years of
service in the same employer at the time of
retirement. There are 2 groups of employees to
be laid off:
NOTE: Public policy recognizes the principles of
reciprocity and comity among nations.
Reasons for granting tax exemption through a
treaty
1.
2.
1. Employees who are at least 50 years of age
and has at 10 years of service at the time of
termination of employment.
2. Employees who do no meet either the age or
length of service A Co. plans to give the
following:
Examples of tax treaties entered into by the
Philippines
1. RP-Japan Tax Treaty
2. RP-US Tax Treaty
3. RP-France Tax Treaty
4. RP-Switzerland Tax Treaty
5. RP-Netherlands Tax Treaty
a.
For category (A) employees – the
benefits under the BIR approved plan
plus an ex gratia payment of one month
of every year of service.
b. For category (B) employees – one
month for every year of service.
Most Favored Nation Clause
This grants to the contracting party treatment not
less favorable than which has been or may be
granted to the most favored among other countries.
It allows the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to
which the country ofresidence ofsuch taxpayer is
also a party; provided that the subject matter of
taxation is the same as that in the tax treaty under
which the taxpayer is liable (CIR v. SC Johnson and
For both categories, the cash equivalent of
unused vacation and sick leave credits. A Co.
seeks your advice as to whether or not it will
subject any of these payments to WT. Explain
your advice. (1999 Bar)
A:For category A employees, all the benefits
received on account of their separation are not
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Reciprocity
To lessen the rigors of international juridical
double taxation
102
INCOME TAXATION
Son Inc., G.R. No. 127105, June 25, 1999).
Q: In the problem above, If the salary actualized
is given by the employer, is it taxable?
Compensation for injuries or sickness
A: If it is given by the employer as backwages, it is
taxable.
Kinds of compensation for injuries or sickness
that may be excluded from gross income
1.
2.
Q:Ms. A and her minor children instituted an
action for damages arising from a crime.The
Court awarded them with actual, consequential,
moral and exemplary damages. Separately, Ms.
A also instituted a civil case for the annulment
of a sale of real property. The Court granted the
annulment of the sale with damages and
ordered the transfer of the subject property to
A. Are the damages awarded by the Court
claissified as taxable income?
Amounts received through accident or health
insurance or Workmen’s Compensation Act as
compensation for personal injuries or sickness
Amounts of any damages received whether by
suit or agreement on account of such injuries
or sickness (NIRC, Sec. 32 B [4]).
NOTE: They are mere compensation for injuries or
sickness suffered and not income. It is intended to
make the injured party whole as before the injury.
A: It depends. Pursuant to Section 32 (B) (4) of the
Tax Code, compensatory damages, actual damages,
moral damages, exemplary damages, attorney’s
fees, and the cost of the suit are excluded from gross
income.
However,
consequential
damages
representing loss of the victim’s earning capacity
are not excluded from gross income. Such
consequential damages are mere replacements of
income which would have been subjected to tax, if
earned. Thus, only the consequential damages is
subject to income tax. (See BIR Ruling No. 026-2018
dated 18 January 2018).
Q: JR was a passenger of an airline that crashed.
He survived the accident but sustained serious
physical
injuries
which
required
hospitalization for 3 months. Following
negotiations with the airline and its insurer, an
agreement was reached under the terms of
which JR was paid the following amounts:
₱500,000 for his hospitalization; ₱250,000 as
moral damages; ₱300,000 for loss of income
during the period of his treatment and
recuperation. In addition, JR received from his
employer the amount of ₱200,000 representing
the cash equivalent of his earned vacation and
sick leaves. Which if any, of the amounts are
subject to income tax? (2005 Bar)
Q: What is the income tax implication in the
following insurances?
a. Life Insurance
b. Fire Insurance
c. Accident Insurance
A: The amount of ₱200,000 that JR received from
his employer is subject to income tax, except the
money equivalent of 10 days unutilized vacation
leave credits which is not taxable. Amounts of
vacation allowances or sick leave credits which are
paid to an employee constitute compensation (RR
2-98, as amended by R.R. 10-2000, Sec. 2.78 A [7]).
A:
a. Life Insurance beneficiaries are not liable for
income tax
b. Fire insurance is not taxable because it is a
mere return of capital.
c. Accident insurance is not taxable because it is
considered
compensation
for
injuries
sustained.
The amounts that JR received from the airline are
excluded from gross income and not subject to
income tax because they are compensation for
personal injuries suffered from an accident as well
as damages received as a result of an agreement on
account of such injuries (NIRC, Sec. 32 B [4]).
Profit actualized
Profit actualized is always taxable as compared to
salary actualized wherein we need to qualify who
paid the salary.
Q: A was hospitalized for two months because of
car accident. B, the person who hit him gave
₱22,000, A’s two months salary. Is that ₱22,000
taxable?
Miscellaneous items
A: NO. It is not part of gross income. It is salary
actualized given not by the employer and it is
compensation for injuries sustained.
13th month pay and other benefits
Gross benefits received by officials and employees
of public and private entities may be excluded from
103
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
gross income provided that the total exclusion shall
not exceed P82,000. The excess would be
considered as part of the compensation income of
the employee where it is subject on a schedular rate
(NIRC, Sec. 32 B [7] e).
received a Fellowship Award from the
University of California to pursue a master’s
degree in American literature. The fellowship is
for $10,000 plus free board and lodging. Should
Q include these awards and fellowship in her
gross income? (1993 Bar)
NOTE: The amount of ₱30,000, specifically
referring to the general amount of 13th month pay
and other benefits as one of the exclusions from
gross compensation income received by an
employee, is increased to ₱82,000 (R.A. No. 10653,
implemented by R.R.3-2015). Accordingly, the
amount of ₱82,000 shall ONLY apply to the 13 th
month pay and other benefits, and in no case apply
to other compensation received by an employee
under an employer-employee relationship such as
basic salary. It shall apply to the 13th month pay and
other benefits paid or accrued beginning January
1, 2015(RR 3-2015). However, the P80,000 also
includes amount given in excess of the de minimis
benefits.
A: The first award granted to Q, a Palanca award,
requires submission of literary works. Hence, this
is included in the gross income because it fails to
meet the legal requirement that the recipient was
selected without any action on his part to enter the
contest or proceeding.
In the second award, Q did not file any application
to enter into any contest. The award was given to
her in recognition for her outstanding performance
in the field of sports. However, the recognition in
the field of sports is not among those stated under
Sec. 28 B [8] e, to wit: “Prizes and awards made
primarily in recognition of religious charitable,
scientific, educational, artistic, literary, or civic
achievement”. Therefore, this is subject to tax and
should be included in her gross income.
Prizes and awards including those in sports
competition
Requisites in order for prizes and awards be
exempted from tax
1.
2.
3.
The fellowship award of $10,000 is however,
excluded from her income as she was selected
without any action on her part and the same was
given to her in recognition of her literary and
educational achievement, presumably without her
being required to render future services for the
grantor.
Primarily in recognition of Scientific, Civic,
Artistic, Religious, Educational, Literary, or
Charitable achievement [SCAR-CEL]
The recipient was selected without any action
on his part to enter the contest or proceeding;
and
He is not required to render substantial future
services as condition to receiving the prize or
award.
Requisites for the exclusion of prizes and
awards in sports competition from gross
income [PATS]
1.
2.
3.
Q: JM, received a prize of ₱100,000 for winning
the on-the-spot peace poster contest sponsored
by the Lions Club. Is the award included in the
gross income of JM for tax purposes?(2000 Bar)
4.
A: NO. It is not included. It is subject to a final tax of
20% for the amount is in excess of ₱10,000,
otherwise it would be included in his gross income
and subjected to a scheduler rate (NIRC, Sec. 24 B
[1]).
NOTE: National sports associations are those duly
accredited by the Philippine Olympic Committee.
The sports competitions and tournaments are
whether held in the Philippines or abroad.
NOTE: The prize constitutes a taxable income for it
was made primarily in recognition of his artistic
achievement which he won due to an action on his
part to enter the contest (NIRC, Sec. 32 B [7] c).
Q: Mr. A, a citizen and resident of the
Philippines, is a professional boxer. In a
professional boxing match held in 2013, he won
prize money in United States (US) dollars
equivalent to ₱300,000,000.
Q: Q won ₱2,500 as part of the Palanca Award
for an outstanding short story. She was also
named MVP of the Varsity volleyball team and
was given a trophy and ₱10,000. Finally, she
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
All Prizes and awards;
Granted to Athletes;
In local and international sports Tournaments
and competitions; and
Sanctioned by their national sports
associations (NIRC, Sec. 32 B [7] d).
a.
104
Is the prize money paid to and received by
Mr. A in the US taxable in the Philippines?
Why?
INCOME TAXATION
b. May Mr. A's prize money qualify as an
exclusion from his gross income? Why?
c. The US already imposed and withheld
income taxes from Mr. A's prize money.
How may Mr. A use or apply the income
taxes he paid on his prize money to the US
when he computes his income tax liability
in the Philippines for 2013? (2015 Bar)
Neither is the BIR correct in collecting the donor’s
tax from Ayala Land Corporation. The law is clear
when it categorically stated “That the donors of
said prizes and awards shall be exempt from the
payment of the donor’s tax.”
Income derived by foreign government
For an income derived by foreign government from
investments in the Philippines be exempted from
tax:
A:
a. YES. Under the NIRC, the income within and
without of a resident citizen is taxable. Since
Mr. A is a resident Filipino citizen, his income
worldwide is taxable in the Philippines.
b. NO. Under the law, all prizes and awards
granted to athletes in local and international
sports competitions whether held in the
Philippines or abroad and sanctioned by their
national sports association are excluded from
gross income. However, in this case, there is no
showing that the boxing match was sanctioned
by the Philippine National Sports Commission.
Therefore, the prize money is not excluded.
c. Mr. A may avail of tax credit against his tax
liability in the Philippines for taxes paid in
foreign countries. He has to signify in his
income tax return his desire to avail of the tax
credit.
1.
2.
3.
It must be an income derived from investments
in the Philippines;
It must be derived from BOnds, Loans or other
Domestic securities, Stocks or Interests on
deposits in banks; [BOLDSI] and
The recipient of such income from investment
in the Philippines must be a:
a. foreign government;
b. financing institutions owned, controlled or
financed by foreign government; or
c. regional or international financing
institutions established by foreign
government (NIRC, Sec. 32 B [7]).
NOTE: The exclusion may be premised either on
the principle of comity or upon the principle of
reciprocity.
Q: A won ₱100,000 in a competition sanctioned
by the national sports association. Give the tax
implication/s as to the recipient as well as to the
donor/contributor.
Income derived by the government or its
political subdivisions from the exercise of any
essential government function
A: As to the recipient of the award, it is exempt from
income tax. As to the contributor/donor of the
award, it is exempt from donor’s tax not based on
the NIRC but on R.A. 7549. Contributor/donor is
allowed to claim it as a deduction from gross
income based on R.A. 7549.
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup Boxing
Council, a sports association duly accredited by
the Philippine Boxing Association. Onyoc
received the amount of ₱500,000 as his prize
which was donated by Ayala Land Corporation.
The BIR tried to collect income tax on the
amount received by Onyoc who refuses to pay.
Decide. (1996 Bar)
Income derived by the Government or its political
subdivision is exempt from gross income, if the
source of the income is from any public utility or
from the exercise of any essential governmental
functions.
A: The prize will not constitute a taxable income to
Onyoc, hence the BIR is not correct in imposing the
income tax. R.A. 7549 explicitly provides that “All
prizes and awards granted to athletes in local and
international sports tournaments and competitions
in the Philippines or abroad and sanctioned by their
respective national sports association shall be
exempt from income tax.”
2. Proprietary Functions: subject to tax
XPN: Unless expressly exempted
Government
Owned
Corporations (GOCC)
and
Controlled
GOCCs performing:
1. Governmental Function:
GR:
Government
agencies
performing
governmental functions are tax exempt
XPN: Unless expressly taxed
NOTE: Under Sec. 27 (c) of RA 8424 the following
corporations have been granted exemptions:
1.
2.
105
Government Service Insurance System
Social Security System
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
4.
Philippine Health Insurance Corporation
Philippines Charity Sweepstakes Office
RA 7929, Urban Development and Housing Act
of 1992
7. RA 8502, Jewelry Industry Development Act of
1998
8. RA 8282, which exempts income of the SSS
form income taxation
9. RA 8479, An Act Deregulating the Downstrean
Oil Industry and For Other Purposes
10. RA 9182, The Special Purpose Vehicle Act
11. R.A. 9505, PERA Act of 2008
6.
Q: X Rural Bank and Y Rural Bank are the
constituent banks in a Plan of Consolidation
Agreement and Articles of Consolidation. The
constituent banks did not previously avail of or
enjoy the five-year tax exemption granted
under RA No. 7353 or the Rural Banks Act of
1992. The consolidated bank, Z Rural Bank,
was issued a Certificate of Authority to operate
as a rural bank under RA No. 7353. Is Z Rural
Bank, a bank formed through consolidation,
entitled to tax exemption under RA No. 7353?
Personal Equity and
(PERA)
PERA refers to the voluntary retirement account
established by and for the exclusive use and benefit
of the contributor for the purpose of being invested
solely in PERA investment products in the
Philippines (R.A. 9505, Sec. 3).
A: YES. Rural banks created and organized under
the provisions of RA No. 7353 are exempt from the
payment of all taxes, fees and charges (except
corporate income tax and local taxes) for a period
of five years from the date of commencement of
operations. Rural banks formed through
consolidation may still enjoy the tax exemption for
the entire period of five years from the date of
commencement of operations in case any or both
of the constituent banks did not avail this
exemption, or for the remaining period in case the
tax exemption was availed. (See BIR Ruling No.
272-2017 dated 7 June 2017).
Contributors
A contributor may be any person with the capacity
to contract and who possesses a tax identification
number. The contributor establishes and makes
contributions to a PERA.
PERA Investment Products
Gains from the sale of bonds, debentures or
other certificate of indebtedness
It may be a unit investment bust fund, mutual fund,
annuity contract, insurance pension products, preneed pension plan, shares of stock and other
securities listed and traded in a local exchange,
exchange-traded bonds or any other investment
product or outlet which the concerned Regulatory
Authority may allow for PERA purposes.
The bonds, debentures or other certificate of
indebtedness sold, exchanged or retired must be
with a maturity of more than 5 years.
Gains from redemption of shares in a mutual
fund company
Regulatory Authority
Mutual fund company means an open-end and
close-end investment company as defined under
the Investment Company Act (NIRC, Sec.22 [BB]).
It refers to the Bangko Sentral ng Pilipinas (BSP) as
regards banks, other supervised financial
institutions and trust entities, the Securities and
Exchange Commission (SEC) for investment
companies, investment houses stockbrokerages
and pre-need plan companies, and the Office of the
Insurance Commission (OIC) for insurance
companies.
Exclusions under special laws
Statutory income tax exemptions
1.
2.
3.
4.
5.
PD 87, Oil Exploration and Development Act, as
amended by PD 1354
EO 226, The Omnibus Investment Code of
1987, as amended
RA 3538, the exemption of salaries paid in
dollars to non-Filipino citizens for services
rendered to the Ford Foundation
RA 6938, Cooperative Code of the Philippines,
as amended by RA 1176, 8241 and 8424
RA 7482, Senior Citizens Act as amended by RA
9257
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Retirement Account
Requirement in order to qualify as PERA
investment product
To qualify as a PERA investment product, the
product must be non-speculative, readily
marketable, and with a track record of regular
income payments to investors.
Requirement for tax-exemption
106
INCOME TAXATION
The concerned Regulatory Authority must first
approve the product before being granted taxexempt privileges by the BIR.
Income earned from investments
reinvestments of the PERA
taxpayer. This is consistent with the rule that
tax exemptions must be strictly construed
against the taxpayer and liberally in favor of
the State.
and
4.
5.
All income earned from the investments and
reinvestments of the maximum amount allowed
herein are tax exempt.
General rules in claiming deductions
Maximum annual PERA contribution allowed by
this Act
CONTRIBUTORS
If the contributor
is single
If the contributor
is married
OFW
1.
MAXIMUM ANNUAL PERA
CONTRIBUTIONS
₱100,000 or its equivalent in
any convertible foreign
currency at the prevailing
rate at the time of the actual
contribution
Each of the spouses shall be
entitled to make a maximum
contribution of one hundred
thousand pesos (₱100,000)
or its equivalent in any
convertible foreign currency.
Double the allowable
maximum amount
This posits that the deductions must, as a
general rule, “match” the income, i.e. helped
earn the income (Domondon, 2013).
Ordinary and necessary expenses must have
been paid or incurred during the taxable year
for it to be deductible from gross income.
Further, the deduction shall be taken for the
taxable year in which 'paid or accrued' or 'paid
or incurred.' Otherwise, the expenses are
barred as deductions in subsequent years (CIR
v. Isabela Cultural Corporation, G.R. No. 172231,
February 12, 2007).
2.
These refer to items or amounts authorized by law
to be subtracted from pertinent items of gross
income to arrive at the taxable income.
3.
Nature of deductions
Where no withholding made but still deductible
A deduction will also be allowed in the following
cases where no withholding of tax was made:
Requisites before deductions are allowed
There must be specific provision of law
allowing the deductions, since deductions do
not exist by implication.
The requirements of deductibility must be met.
1.
Refer to discussions on itemized deductions for
the requirements of each deduction.
3.
Deductions must be supported by adequate
receipts or invoices (XPN: standard
deduction).
The withholding and payment of tax required
must be shown.
Any income payment which is otherwise
deductible shall be allowed as a deduction from
gross income only if it is shown that the income
tax required to be withheld has been paid to
the BIR (Sec. 2.58.5, RR 2-98).
The items of amounts allowed as deductions
represent the expenses (reduction of wealth) of the
taxpayer (other than personal expenses and capital
expenditures) in earning the income (increase of
wealth) subject to tax as well as reasonable living
expenses.
2.
Deductions must be paid or incurred in
connection with the taxpayer’s trade, business,
or profession.
Matching concept of deductibility
DEDUCTIONS FROM GROSS INCOME
1.
The deductions must not have been waived.
The withholding and payment of tax required
must be shown (Domondon, 2013).
2.
There must be proof of entitement to the
deductions. The burden of proof to establish
the validity of claimed deduction is on the
107
The payee reported the income and the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure to
withhold the tax, and surcharges, if applicable,
at the time of the original audit and
investigation;
The recipient/payee failed to report the
income on the due date thereof, but the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
withhold the tax and surcharges, if applicable,
at the time of the original audit and
investigation; or
The
withholding
agent
erroneously
underwithheld the tax but pays the difference
between the correct amount and the amount of
tax withheld, including the interest, incident to
such error, and surcharges, if applicable, at the
time of the original audit and investigation
(Sec. 2.58.5, RR 2-98).
For trading or merchandising concern, CGS
means the invoice cost of goods sold, plus import
duties, freight in transporting the goods to the place
where the goods are actually sold, including
insurance while the goods are in transit.
For manufacturing concern, CGS means all costs
incurred in the production of the finished goods
such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the
raw materials to the factory or warehouse. The
term may be used interchangeably with "cost of
goods manufactured and sold".
Persons who are NOT ALLOWED to claim
deductions from gross income
NRA-NETB and NRFC are subject to final tax on
their gross income derived from sources within the
Philippines, hence, no deductions allowed to them.
Cost of services (COS)
COS means all direct costs and expenses necessarily
incurred to provide the services required by the
customers and clients including:
NOTE: A RC, NRC, and RA whose income is purely
compensation income are also not entitled to such
deductions.
1.
Deductions that
corporation
can
be
claimed
by
a
2.
Domestic Corporations (DC) and Resident Foreign
Corporation (RFC) may opt between the OSD OR
the Itemized Deductions, except Non-Resident
Foreign Corporation (NRFC) which is subject to
final tax on its gross income from sources within
the Philippines.
Salaries and employee benefits of
personnel, consultants and specialists
directly rendering the service, and
Cost of facilities directly utilized in
providing the service such as depreciation
or rental of equipment used and cost of
supplies.
NOTE: COS shall not include interest expense
except in the case of banks and other financial
institutions (RR 16-08).
Return of capital (cost of sales or services)
Itemized Deductions under TRAIN (Sec. 34)
The amount representing return of capital should
be deducted from the proceeds from the sales of
assets and should not be subject to income tax. Cost
of goods purchased for resale, with proper
adjustment for opening and closing inventories are
deducted from gross sales in computing gross
income (Rev. Reg. 2, Sec. 65).
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed other than premium
payments on health and/or hospitalization
insurance, in computing taxable income subject to
income tax there shall be allowed the following
deductions from gross income:
The mere return of capital is allowed as deduction
from gross income in order to arrive at income
subject to tax. While in general, the nomenclature
of “cost of sales or cost of solds good” is applied, the
return of capital have different components
depending upon the nature of the business being
taxed (Domondon, 2013).
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Cost of goods sold (CGS)
CGS shall include the purchase price or cost to
produce the merchandise and all expenses directly
incurred in bringing them to their present location
and use.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Expenses
Interest
Taxes
Losses
Bad debts
Depreciation
Depletion of oil and gas wells and mines
Charitable and other contributions
Research and development
Contributions to pension trusts
The itemized deductions are discussed in detail
below.
108
INCOME TAXATION
EXPENSES
2.
There shall be allowed as deduction from gross
income
3.
1.
2.
3.
4.
All the ordinary and necessary expenses
Paid or incurred during the taxable year
In carrying on or which are directly
attributable
to,
the
development,
management, operation and/or conduct of the
trade, business or exercise of a profession (Sec.
34[a], NIRC).
Ordinary expenses versus capital expenditures
Ordinary expenses are those which are common to
incur in trade or business. On the other hand,
capital expenditures are those incurred to improve
assets and benefits for more than 1 taxable year.
Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year.
Requisites for deductibility of expenses (in
general)
[D-STROWN]
1.
2.
3.
4.
5.
6.
7.
Paid or incurred during the taxable year;
The expense must be substantiated by proof;
(substantiation rule)
The expense must be incurred in trade or
business carried on by the taxpayer (must be
directly attributable to the development,
management, operation, and or conduct of
trade or business of the taxpayer, or in the
exercise of the taxpayer’s profession);
The expense must be reasonable;
The expense must be ordinary and necessary;
If subject to withholding taxes, proof of
payment to bir; and
Expenses must not be against public policy,
public moral or law such as bribes, kickbacks,
for immoral purposes.
Substantiation rule
The taxpayer shall substantiate the expense being
deducted with sufficient evidence such as official
receipts or other adequate records showing:
1.
2.
The amount of the expense being deducted;
and
The direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer
(Sec. 34 (A)(1)(B), NIRC).
Q: When there are no receipts to prove a
deduction, can the taxpayer still claim it as a
deduction?
Ordinary expenses - It is any expense that is
normal or usual in relation to the taxpayer’s
business and the surrounding circumstances
(General Electric, Inc. v. Collector, CTA Case No.
1117, July 14, 1963).
A:YES. The lack of supporting vouchers, receipts,
and other documentary proof however may be
excused under Sec. 235 of the NIRC, the provision
which requires the preservation of the books of
accounts and other accounting records for a period
of 3 years from the date of last entry (Basilan
Estates v. CIR, G.R. No. L-022492, September 5,
1967).
Necessary expenses - is one which is appropriate
and helpful in the development of taxpayer’s
business and is intended to minimize losses or to
increase profits (Ibid.).
Cohan rule
Test to determine whether or not an expense is
ordinary and necessary
Under this principle, taxpayers may use estimates
when they can show that there is some factual
foundation on which to base a reasonable
approximation of the expense, they can prove that
they had made a deductible expenditure but just
cannot prove how much that expenditure was
(Cohan v. CIR, 39 F (2d) 540).
If they are directly attributable to the development,
management, operation, and or conduct of trade or
business of the taxpayer, or in the exercise of the
taxpayer’s profession, including:
1.
Travel expenses in pursuit of trade or
business;
Rental and other payments for the continued
use or possession of property, for the purpose
of trade, business or profession; and
Entertainment, amusement and recreation
expenses during the taxable year.
Reasonable allowances for salaries, wages and
other compensation for personal services
actually rendered, including gross monetary
value of fringe benefits;
It is the use of estimates or approximations of the
amount of cash and other assets where the
taxpayer lacks adequate records.
109
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
NOTE: If there is showing that expenses have been
incurred but the exact amount thereof cannot be
ascertained due to the absence of receipts and
vouchers of the expenditures involved, the BIR will
make an estimate of deduction that may be
allowable in computing the taxpayer's taxable
income bearing heavily against the taxpayer whose
inexactitude is of his own making. That
disallowance of 50% of the taxpayer’s claimed
deduction is valid (RMC 23-2000).
Pont, 308 US 488 [1940]). Paying premiums for the
insurance of a person not connected to the
company is not normal, usual or customary.
Another reason for its non-deductibility is the fact
that it can be considered as an illegal compensation
made to a government employee. This is so
because if the insured, his estate or heirs were
made as the beneficiary (because of the
requirement of insurable interest), the payment of
premium will constitute bribes which are not
allowed as deduction from gross income (Sec.
34[A][1][c], NIRC).
Examples of ordinary and necessary expenses
1.
2.
3.
4.
5.
6.
7.
Salaries, wages and other forms of
compensation for personal services actually
rendered
Travelling expenses
Rental expenses
Entertainment, amusement and recreation
Advertising and promotional expenses
Cost of materials and supplies
Repairs
Even if the company was made the beneficiary,
whether directly or indirectly, the premium is not
allowed as a deduction from gross income (Sec.
36[A][14], NIRC).
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
protect its brand franchise for one of its line
products. In its income tax return, MFC included
the advertising expense as deduction from
gross income, claiming it as an ordinary
business expense. Is MFC correct? Explain.
(2009 Bar)
Q: MC, a contractor who won the bid for the
construction of a public highway, claims as
expense, facilities fee which according to them
is
standard
operating
procedure
in
transactions with the government. Are these
expenses allowable as deduction from gross
income?
A: NO. The protection of taxpayer’s brand franchise
is analogous to the maintenance of goodwill or title
to one’s property which is in the nature of a capital
expenditure. An advertising expense, of such
nature does not qualify as an ordinary business
expense, because the benefit to be enjoyed by the
taxpayer goes beyond one taxable year (CIR v
General Foods Inc. 401 SCRA 545).
A: NO. The alleged facilitation fees which they
claims as standard operating procedure in
transactions with the government comes in the
form of bribes or “kickback” which are not allowed
as deductions from gross income as they are illegal
(NIRC, Sec. 34 A [1] c).
Q: Freezy Corporation, a domestic corporation
engaged in the manufacture and sale of ice
cream, made payments to an officer of Frosty
Corporation, a competitor in the ice cream
business, in exchange for said officer’s
revelation of Frosty Corporation’s trade
secrets. May Freezy Corporaton claim the
payment to the officer as deduction from its
gross income? Explain. (2014 Bar)
Q: OXY is the president and CEO of ADD
Computers, Inc. When OXY was asked to join
the government service as director of a bureau
under the Department of Trade and Industry,
he took a leave of absence from ADD. Believing
that its business outlook, goodwill and
opportunities improved with OXY in the
government, ADD proposed to obtain a policy
of insurance on his life. On ethical grounds, OXY
objected to the insurance purchase but ADD
purchased the policy anyway. Its annual
premium amounted to ₱100,000. Is said
premium deductible by ADD Computers, Inc.?
(2004 Bar)
A: NO. Payments made in exchange for the
revelation of a competitor’s trade secrets is
considered as an expense which is against law,
morals, good customs or public policy, which is not
deductible (3M Philippines, Inc. v. CIR, G.R. No.
82833, September 26, 1988).
A: NO. The premium is not deductible because it is
not an ordinary business expense. The term
"ordinary" is used in the income tax law in its
common significance and it has the connotation of
being normal, usual or customary (Deputy v. Du
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Also, the law will not allow the deduction of bribes,
kickbacks and other similar payments. Applying
the principle of ejusdem generis, payment made by
Freezy Corporation would fall under “other similar
110
INCOME TAXATION
payments” which are not allowed as deduction
from gross income (Section 34(A)(l)(c), NIRC).
Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
Q: How can the taxpayer prove that the
expense has been paid or incurred during the
taxable year?
Requisites before an employer can deduct
compensation payments to employees
A: It is a basic requirement that all expenses must
be substantiated by original copy of receipts or in
the absence thereof, a taxpayer can still prove that
the claimed deduction was really paid or incurred
by providing other evidence such as certified true
copies of the official receipts in case of loss,
payment vouchers and checks.
1.
2.
The payments must be reasonable.
They are, in fact, payments for personal
services rendered (Rev. Reg. 2, Sec. 70).
NOTE: Reasonable and true compensation is only
such amount as would ordinarily be paid for
services like enterprises in like circumstances.
Q: Amounts of income accrue where the right to
receive them become fixed, where there is
created an enforceable liability. Similarly,
liabilities are accrued when fixed and
determinable in amount, without regard to
indeterminacy merely of time of payment. For a
taxpayer using the accrual method, when do the
facts present themselves in such a manner that
the taxpayer must recognize income or
expense? (2012 Bar)
Inclusions in compensation for services which
are allowed as deductions from gross income
1.
2.
3.
A: The accrual of income and expense is permitted
when the ALL-EVENTS TEST has been met. This
test requires: (1) fixing of a right to income or
liability to pay, and (2) the availability of the
reasonable accurate determination of such income
or liability. The all-events test requires the right to
income or liability be fixed, and the amount of such
income or liability be determined with reasonable
accuracy (CIR v. Isabela Cultural Corporation, G.R.
No. 172231, February 12, 2007).
4.
Wages,
salaries,
commissions,
professional fees, vacation-leave pay,
retirement pay, and other compensation
Bonuses in good faith
Pensions and compensation for injuries
if not compensated for by insurance or
otherwise
Grossed-up monetary value of fringe
benefit provided for, as long as the final
tax imposed has been paid. The fringe
benefit must have been granted to
managerial and supervisory employees,
otherwise it cannot be availed as
deduction.
Q: What are the requisites for deductibility of
bonus? (2006 Bar)
A:
1. The payment of the bonus is made in good
faith for additional compensation;
2. It must be for personal services actually
rendered; and
3. The bonus when added to salaries is
“reasonable” when measured by the
amount and quality of the services
performed with relation to the business of
the particular taxpayer.
Q: When is “all-events” test applicable?
A: It is applicable when:
1. A person who uses the cash method where
all sales have been fully paid by the buyers
thereof;
2. A person who uses the installment sales
method, where the full amount of
consideration is paid in full by the buyer
thereof within the year of sale;
3. A person who uses the accrual method,
whereby an expense is deductible for the
taxable year in which all the events had
occurred which determined the fact of the
liability and the amount thereof could be
determined with reasonable accuracy;
4. A person who uses the completed method,
whereby the construction project has
been completed during the year the
contract was signed.
Bonuses to employees made in good faith and as
additional compensation for the services actually
rendered by the employees are deductible,
provided such payments, when added to the
stipulated salaries, do not exceed a reasonable
compensation for the services rendered (Kuenzle &
Streiff, Inc. v. CIR, G.R. No. L-18840, May 29, 1969).
Bonuses given to corporate officers out of sale of
corporate land are not deductible as an ordinary
111
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
business expenses in the absence of showing what
role said officers performed to effectuate said sale.
The taxpayer must show that personal services had
been rendered and that the amount was
reasonable (Aguinaldo Industries Corporation v.
CIR, G.R. No. L-29790, February 25, 1982).
are allowed as a deduction from gross income so
long as the employer is not a direct or indirect
beneficiary under the policy of insurance. Since the
parents of the employee were made the
beneficiaries, the prohibition for their deduction
does not exist (NIRC, Sec. 36 A [4]).
The following conditions may be taken into
consideration:
Travelling/transportation expenses
1.
2.
3.
4.
5.
Requisites for its deductibility
The payment made in good faith
The character of the taxpayer’s business; e.g.
the volume and amount of its net earnings; its
locality; the type and extent of the services
rendered; the salary policy of the corporation
The size of the particular business
The
employees’
qualification
and
contributions to the business venture
General economic conditions (C.M. Hoskins &
Co., Inc. v. CIR, G.R. No. L-24059, November 28,
1969)
1.
2.
3.
NOTE: Travelling expense includes transportation,
meals and lodging (RR No. 2).
“Away from home”
It means away from the location of the employee’s
principal place of employment regardless of where
the family residence is maintained.
Q: Gold and Silver Corporation gave extra 14 th
month bonus to all its officials and employees
in the total amount of ₱75 million. When it filed
its corporate income tax return the following
year, the corporation declared a net operating
loss. When the income tax return of the
corporation was reviewed by the BIR the
following year, it disallowed as item of
deduction the ₱75 million bonus the
corporation gave its officials and employees on
the ground of unreasonableness. The
corporation claimed that the bonus is an
ordinary and necessary expense that should be
allowed. If you were the CIR, how will you
resolve the issue? (2006 Bar)
Rules in deducting travel expenses
1.
2.
A: I will rule against the deductibility of the bonus.
The extra bonus is not normal to the business and
unreasonable. Giving an extra bonus at a time that
the company suffers operating losses is not a
payment done in good faith and is not normal to
the business, hence unreasonable and would not
qualify as ordinary and necessary expense.
3.
4.
Q: Noel is a bright computer science graduate.
He was hired by Hewlett Packard. To entice him
to accept the job, he was offered the
arrangement that part of his compensation
would be an insurance policy with a face value
of ₱20 million. The parents of Noel are made the
beneficiaries of the insurance policy. Can the
company deduct from its gross income the
amount of the premium?
The employer cannot claim as a deduction the
excess over the cost of a business plane ticket
or its equivalent, whether paid directly by the
employer to the airline company or
reimbursed to the employee.
Deductions to be claimed by the employer for
the allowance which are pre-computed by the
employer on a daily basis, or reimbursement
for the cost of meals and lodging in foreign
trips by the employee for the pursuit of
employer’s trade or business may not exceed;
a. $150 per day for trips to US, Australia,
Canada, Europe, Middle East and Japan;
b. $100 per day for other places.
Reimbursement for travel taxes, airport fees
and other charges, if duly receipted or
substantiated, may be deducted by the
employer as business expenses.
Subject to the above rules, expenses incurred
in attending two foreign professional
conventions a year shall constitute a
deductible expense.
NOTE: These maybe considered as fringe benefit
subject to fringe benefits tax. In such cases, it is
deductible from the employer’s gross income
(Domondon, 2009).
Costs of materials
A: YES, the premiums paid are ordinary and
necessary business expenses of the company. They
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Reasonable and necessary expenses;
Incurred or paid while away from home; and
In pursuit of trade, business or profession.
Materials and supplies are deductible only to the
amount actually consumed or used in the
112
INCOME TAXATION
operation during the taxable year, provided that
the cost of such materials and supplies has not
been deducted in determining the net income for
any previous year.
NOTE: It is NOT the cost of the leasehold
improvements but only its annual depreciation that
is considered as rental expense.
Repairs and maintenance
Methods utilized to determine materials used
1.
2.
Actual consumption
inventory method
Direct purchase method
method
Repairs are allowed as deduction when it is minor
and ordinary, and keeps the asset in its ordinary
working condition. Major and extraordinary
repairs are capitalized and included in determining
depreciation expense because they tend to prolong
the life of the asset.
or
Q: Assuming the taxpayer purchases materials
but has no record of consumption, is it
deductible?
EXPENSES UNDER LEASE AGREEMENTS
A: YES, provided the net income is clearly reflected
by direct purchase method.
Expenses under the lease agreement which
may be allowed as deductions by the lessor
If a taxpayer carries incidental materials or
supplies on hand for which no record of
consumption is kept or of which physical
inventories at the beginning and end of the year are
not taken, it will be permissible for the taxpayer to
include in his expenses and deduct from gross
income the total cost of such supplies and
materials as were purchased during the year for
which the return is made, provided the net income
is clearly reflected by this method (Section 67, RR
2).
Since the rentals are considered as income of the
lessor (owner of the property), such lessor may
deduct all ordinary and necessary expenses paid or
incurred during the taxable year to the earning of
the income (RR No. 19-86, Sec. 2.01).
Among such deductions may be cost of repairs and
maintenance, salaries and wages of employees
attendant to such lease, interest payment, property
taxes, etc.
Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may
take deduction in his return for an aliquot part of
such sum each year, based on the number of years
the lease will run.
Rentals and/or other payments for use or
possession of property
Requisites for its deductibility
1.
2.
3.
4.
Payment was made as a condition to the
continuous use of or possession of the
property;
Taxpayer has not taken or is not taking title to
the property or has no equity other than that
of a lessee, user or possessor;
Property must be used in the trade or
business; and
The withholding tax must have been withheld
and paid.
Taxes paid by a tenant to or for a landlord for
business property are additional rent and
constitute a deductible item to the tenant and
taxable income to the landlord; the amount of the
tax being deductible by the latter.
The cost of leasehold improvements are NOT
considered business expenses since they are
capital investments.
In order to return to such taxpayer his investment
of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such
improvements divided by the number of years
remaining of the term of the lease, and such
deduction shall be in lieu of a deduction for
depreciation. If the remainder of the term of lease
is greater than the probable life of the building
erected, or of the improvements made, this
deduction shall take the form of an allowance for
depreciation (Section 74, RR No. 2).
Inclusions in rental expense
1.
2.
3.
Aliquot part of the amount used to acquire
leasehold over the number of years the
lease will run
Taxes and other obligations of the lessor
paid by the lessee
Annual depreciation of the cost of the
leasehold improvements introduced by
the lessee over the remaining period of the
lease, or over the life of the improvements,
whichever period is shorter.
Expenses for professionals
113
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Examples of expenses for professionals
1. Supplies expense
2. Expenses paid in the operation and repair of
transportation equipment used in making
professional calls
3. Membership dues to professional associations
or societies and subscriptions to journals
4. Office rentals
5. Utilities expense for water and electricity
consumed in connection with the exercise of
the profession
6. Communication expense
7. Expenses for hiring employees or office
assistants
8. Expenses incurred for books, furniture and
professional instruments and equipment with
short useful life
Entertainment, amusement and recreation
expense shall be allowed as a deduction from gross
income but in no case shall exceed:
1.
2.
3.
NOTE: Those of a permanent character are not
allowable as deductions.
For taxpayers engaged in sale of goods or
properties – 0.50% of net sales (i.e., gross
sales less sales returns or allowances and
sales discounts)
For taxpayers engaged in sale of services,
including exercise of profession and use or lease
of properties – 1% of net revenue (i.e., gross
revenue less discounts)
For taxpayers deriving income from both sale of
goods and services – the allowable deduction
shall in all cases be determined based on an
apportionment
formula
taking
into
consideration the percentage of the net
sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the
maximum percentage ceiling provided (Sec. 5,
RR 10-2002).
Entertainment/representation expenses
Apportionment Formula:
Net sales/net revenue
x
Total Net sales and revenue
Requisites to avail of this deduction
1.
2.
3.
4.
5.
6.
Paid or incurred during the taxable year
Directly connected to the development,
management, and operation of the business,
trade or profession of the taxpayer; or directly
related to or in furtherance of the conduct of
its trade, business or exercise of a profession
Not contrary to law, morals, good customs,
public policy or public order
Must not constitute as a bribe, kickback, or
other similar payment
Duly substantiated by adequate proof or
receipt
Withholding tax, if any, should have withheld
therefrom and paid
Q: What are included as entertainment,
amusement and recreation expenses?
A: They include representation expenses and/or
depreciation or rental or public order; expense
relating to entertainment facilities.
NOTE: “Representation expenses” shall refer to
expenses incurred by a taxpayer in connection
with the conduct of his trade, business or exercise
of profession, in entertaining, providing
amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of
amusement, country club, theater, concert, play,
sporting event and similar events or places.
Q: Who may claim Entertainment, amusement
and recreation expenses?
If the taxpayer is the registered member of a
country, golf, or sports club, the presumption is
that the expenses are fringe benefits subject to the
FBT unless the taxpayer can prove these are
actually representation expenses (Ingles, 2015).
“Entertainment facilities” shall refer to a yacht,
vacation home or condominium; and any other
similar item of real or personal property used by
the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees
(RR 10-2002, Sec. 2).
A:
1. Individuals engaged in business, including
taxable estates and trusts
2. Individuals engaged in practice of profession
3. Domestic corporation
4. Resident foreign corporation
5. General professional partnerships, including
its members
Ceiling or limitation on the amount allowed as
entertainment, amusement and recreation
expense
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Actual Expense
To be considered an entertainment facility, it must
be owned or form part of the taxpayer’s trade,
business, or profession for which he claims
depreciation or rental expense.
114
INCOME TAXATION
A yacht is considered an entertainment facility if its
use is not restricted to specified officers or
employees. If the yacht is restricted to them, it
would be a fringe benefit, subject to the FBT.
is not deductible from taxable income. Efforts to
establish reputation are akin to acquisition of
capital assets, and therefore, expenses related
thereto are not business expense but capital
expenditures (Atlas Consolidated Mining &
Developmet Corporation v. CIR, G.R. No. L-26911,
January 27, 1981)
Expenses
that
are
not
considered
entertainment, amusement and recreation
expenses
1.
2.
3.
4.
5.
6.
Q: Algue, Inc. is a domestic corporation engaged
in engineering, construction and other allied
activities. Philippine Sugar Estate Development
Company (PSEDC) appointed Algue as its agent,
authorizing it to sell its land, factories and oil
manufacturing processes. Pursuant to said
authority and through the joint efforts of the
officers of Algue, they formed the Vegetable Oil
Investment Corporation, inducing other
persons to invest in it. This new corporation
later purchased the PSEDC properties. For this
sale, Algue received as an agent a commission of
₱125,000 and from this commission the
₱75,000 promotional fees were paid to the
officers of Algue. Is the promotional expense
deductible?
Expenses which are treated as compensation
or fringe benefits for services rendered under
an employer-employee relationship
Expenses for charitable or fund-raising events
Expenses for bona fide business meeting of
stockholders, partners or directors
Expenses for attending or sponsoring an
employee to a business league or professional
organization meeting
Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences,
seminars,
workshops,
conventions, and other similar events
Other expenses of similar nature (RR 10-2002,
Sec. 3)
Advertising and Promotional Expenses
A: YES. The promotional expense paid by PSEDC to
Algue amounting to ₱75,000 is deductible for it was
reasonable and not excessive. Algue proved that
the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the
payees in inducing investors and prominent
businessmen to venture in an experimental
enterprise (Vegetable Oil Investment Corporation)
and involve themselves in a new business requiring
millions of pesos (CIR v. Algue, G.R. No. L-28896
February 17, 1988).
Requisites for the deductibility of advertising
and promotional expenses [Sub-pro-ser]
1.
2.
3.
Substantiated with sufficient evidence;
All payments for the purchase of
promotional giveaways, contest prizes
or similar material must be properly
receipted; and
All payments for services such as radio
and TV time, print ads, talent fees,
advertising expense or know-how must
be subjected to withholding tax.
Political Campaign Expenses
Rule on deduction and
campaign expenditures
Kinds of advertising and their deductibility
1.
2.
3.
Advertising to stimulate the CURRENT sale of
merchandise or use of services are deductible
as business expenses, provided the amount
incurred is reasonable.
Advertising designed to stimulate the FUTURE
sale of merchandise or use of services must be
spread over a reasonable period of time that it
help earn the income
Ratio: Matching concept of deductibility
Advertising to promote the sales of SHARES OF
STOCK or to create a corporate image is not
deductible as an advertisement (Domondon,
2009).
withholding
of
All individuals, juridical persons and political
parties, with respect to their income payments
made as campaign expenditures and/or purchase
of goods and services intended as campaign
contributions are constituted as withholding
agents for purposes of the creditable tax withheld
on income payments (R.R. No. 8-2009).
NOTE: A creditable income tax at the rate of 5%
shall be withheld on income payments made by
political parties and candidates of local and
national elections of all their campaign
expenditures, and income payments made by
individuals or juridical persons for their purchases
of goods and services intended to be given as
Expenses paid to advertising firms to promote sale
of capital stock for acquisition of additional capital
115
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
campaign contribution to political parties and
candidates (R.R. No. 8-2009).
Requirements under the NIRC for interest to be
deductible
Training Expenses
1.
2.
3.
Grants for manpower training and special studies
given to rank-and-file employees pursuant to a
program prepared by the labor-management
committee for development skills identified as
necessary by the appropriate government agencies
shall entitle the business enterprise to a special
deduction from gross income equivalent to fifty
percent (50%) of the total grants over and above
the allowable ordinary and necessary business
deductions for said grants under the NIRC (RA No.
6071, Sec. 7[2]; RMC No. 102-90, Sec. 1).
4.
5.
6.
7.
Other business expenses allowed by special
laws as deductions
1.
2.
3.
4.
5.
Q: How is interest as a deduction from gross
income defined? (1992 Bar)
Discounts granted by establishments for
senior citizens and PWDs (RR 8-2010 and RR 52017);
Expenses incurred by a private health and
non-health
facility,
establishment,
or
institution, in complying with the Expanded
Breastfeeding Promotion Act of 2009 – up to
twice the actual amount incurred (RA 10028);
Expenses incurred in training schemes
pursuant to the Jewelry Industry Development
Act of 1998 – additional 50% of actual amount
incurred (RA 8502);
Expenses incurred for adopting a school based
on the Adopt-a-School program – additional
50% of actual amount incurred (RA 8525);
A lawyer or professional partnerships
rendering actual free legal services, as defined
by the Supreme Court, shall be entitled to an
allowable deduction from gross income, the
amount that could have been collected for the
actual free legal services rendered up to ten
percent (10%) of gross income derived from
the actual performance of the legal profession,
whichever is lower (RA 9999).
A: Interest shall refer to the payment for the use or
forbearance or detention of money, regardless of
the name it is called or denominated. It includes the
amount paid for the borrower’s use of money
during the term of the loan, as well as for his
detention of money after the due date for its
repayment (R.R. 13-2000, Sec. 2[a]).
Q: What are the deductible interest expenses?
A: Interest:
1. On taxes, such as those paid for deficiency or
delinquency, since taxes are considered
indebtedness (provided that the tax is a
deductible tax.) However, fines, penalties, and
surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation on
deduction
2. Paid by a corporation on scrip dividends
3. On deposits paid by authorized banks of the
BSP to depositors, if shown that the tax on such
interest was withheld
4. Paid by a corporate taxpayer, liable on a
mortgage upon real property of which the said
corporation is the legal or equitable owner,
even though it is not directly liable for the
indebtedness
INTEREST
The amount of interest
1. paid or incurred
2. within a taxable year
3. on indebtedness
4. in connection with the
profession, trade or business
taxpayer's
Non-deductible Interest Expense
1.
shall be allowed as deduction from gross income
(Sec 34 (B), NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
There must be an indebtedness
The indebtedness must be that of the taxpayer
The interest must be legally due and stipulated
in writing
The interest must be paid or incurred during
the taxable year
The indebtedness must be connected with the
taxpayer’s trade, business, or exercise of
profession
The interest arrangement must not be
between related taxpayers
The allowable deduction have been reduced by
an amount equal to 33% of the interest income
subject to tax (NIRC, Sec. 34[B][1] as amended
by R.A. 6337).
2.
3.
116
Interest on preferred stock, which in reality is
dividend
Interest on unpaid salaries and bonuses
Interest calculated for cost keeping
INCOME TAXATION
4.
5.
6.
7.
Interest paid where parties provide no
stipulation in writing to pay interest
If the indebtedness is incurred to finance
petroleum exploration
Interest paid on indebtedness between
related taxpayers
Interest on indebtedness paid in advance
through discount or otherwise and the
taxpayer reports income on cash basis
A: NO. CIR’s powers of distribution, apportionment
or allocation of gross income and deductions under
Section 43 of the NIRC and Section 179 of RR No. 2
does not include the power to impute “theoretical
interests” to the controlled taxpayer’s transactions.
There must be proof of actual receipt or realization
of income (CIR v. Filinvest Development
Corporation, G.R. Nos. 163653 & 167689, July 19,
2011).
NOTE: Interest is allowed as a deduction in the
year the indebtedness is paid, not when the
interest was paid in advance. If the indebtedness is
payable in periodic amortizations, the amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as deduction in such taxable year.
Interest paid in advance
Interest paid in advance through discount or
otherwise in case of cash basis taxpayer is allowed
as deduction in the year the debt is paid.
Optional treatment of interest expense on
capital expenditure
Related Taxpayers
1.
2.
3.
4.
5.
6.
Interest incurred to acquire property used in trade,
business or profession may be allowed either:
1. Treated as capital expenditure, i.e., it forms
part of the cost of the asset; or
2. As a deduction (Sec. 34 [B][2], NIRC).
Members of the same family, brothers and
sisters, whether in full or half blood, spouse,
ancestors and lineal descendants
Stockholders and a corporation, when he holds
more than 50% in value of its outstanding
capital stock, except in case of distribution in
liquidation
Corporation and another corporation, with
interlocking stockholders
Grantor and fiduciary in a trust
Fiduciary of a trust and fiduciary in another
trust, if the same person is a grantor with
respect to each trust
Fiduciary of a trust and beneficiary of such
trust
NOTE: Interest paid in advance, interest
periodically amortized and interest incurred to
acquire property used in trade or business is also
treated the same, the taxpayer can deduct it as an
outright deduction or capital expenditure.
Interest periodically amortized
If indebtedness is payable in periodic
amortizations, interest is deducted in proportion
to the amount of the principal paid.
Arm’s length interest rate
Interest expense incurred to acquire property
for use in trade / business / profession
It is the rate of interest which was charged or
would have been charged at the time the
indebtedness arose in independent transaction
with or between unrelated parties under similar
circumstances.
Q: Is the interest on loans used to acquire
capital equipment or machinery deductible
from gross income? (1999 Bar)
Theoretical interest is not deductible
A: YES. The law gives the taxpayer the option to
claim it as a deduction or treat it as capital
expenditure interest incurred to acquire property
used in trade, business or exercise of a profession
(Section 34 [B][3], NIRC).
It is not deductible because:
1.
2.
It is not paid or incurred for it is merely
computed or calculated;
It does not arise from interest bearing
obligation (PICOP v. CA, G.R. Nos. 10694950;84-85, December 1, 1995).
Reduction
arbitrage
of
interest
expense/interest
Limitation on the amount of deductible interest
expense
Q: Does the CIR have the power to impute
theoretical interest?
The taxpayer’s otherwise allowable deduction for
interest expense shall be reduced by an amount
117
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
equal to 33% of the interest income subject to final
tax (Sec. 34 [B][1], NIRC).
She deducted only the ₱25,000 which she
believed was due from her. She received the
refund amounting to P50,000 in 2008. What
should have been the proper tax treatment of
the payment of ₱75,000 in 2006?
This is to safeguard from tax arbitrage schemes.
This limitation on the deductibility of interest
expense was legislated to specifically address the
tax arbitrage arising from the difference between
the 20% final tax on interest income and the
normal corporate income tax rate under which
interest expense can be claimed as a deduction.
A: Sally should have deducted the total ₱75,000
customs duties in 2006. When she received the
refund of ₱50,000 in 2008, she should have
included the amount as part of her income. Under
the tax benefit rule, taxes allowed as deductions,
when refunded or credited shall be included as
part of gross income in the year of receipt to the
extent of the income tax benefit of said deduction.
This limitation shall apply regardless of whether or
not a tax arbitrage scheme was entered into by the
taxpayer or regardless of the date of the interest
bearing loan and the date when the investment
was made, for as long as, during the taxable year,
there is an interest expense incurred on one side
and an interest income earned on the other side,
which interest income had been subjected to final
withholding tax.
Limitation on the deduction
In the case of NRAETB and RFC, the deductions for
taxes shall be allowed only if and to the extent that
they are connected with income from sources
within the Philippines (Sec. 34 [C][2], NIRC).
NOTE: The rate of interest limitation is actually the
difference between the normal corporate income
tax and the 20% final tax as a percentage of the
NCIT rate, rounded off. Thus under the 30% NCIT,
(30%-20%) / 30% = 33.33%.
Requisites for deductibility of taxes
1.
2.
Tax arbitrage
3.
It is a strategy which takes advantage of the
difference in tax rates or tax systems as the basis
for profit.
4.
TAXES
Payments must be for taxes;
Tax must be imposed by law on, and payable
by the taxpayer;
Paid or incurred during the taxable year in
connection with taxpayer’s trade, business or
profession; and
Taxes are not specifically excluded by law from
being deducted from the taxpayer’s gross
income.
When to claim deductions for taxes
Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or
business, shall be allowed as deduction xxx (Sec 34
C, NIRC).
GR: Taxes may be deducted only on the year it was
paid or incurred.
Examples of taxes which are deductible
XPN: In the case of contingent tax liability, the
obligation to deduct arises only when the liability
is finally determined.
1.
2.
3.
Non-deductible taxes
Import duties
Business licenses, excise and stamp taxes
Local government taxes such as real property
taxes, license taxes, professional taxes,
amusement taxes, franchise taxes and other
similar impositions
Taxes not allowed as deduction from gross income
to arrive at taxable income:
1.
Q: In 2006, Sally, a fruit market operator
received an assessment for customs duties for
her imported market equipment in the amount
of ₱75,000. Believing that the amount is
excessive, she paid the same under protest.
Because of the assurances from her retained
CPA that she stands a good chance of being able
to secure a refund of ₱50,000 she did not deduct
the same anymore from her income tax return.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
2.
Income tax provided
(Philippine income tax)
under
the
NIRC
GR: Income taxes imposed by authority of any
foreign country
XPN: When the taxpayer does not signify in his
return his desire to avail of the tax credit.
3.
118
Estate tax and donor’s taxes
INCOME TAXATION
4.
5.
6.
7.
8.
Special assessments - taxes assessed against
local benefits of a kind tending to increase the
value of property assessed.
Stock transaction tax - Taxes on sale, barter,
exchange of shares of stock listed and traded
through the local stock exchange or through
initial public offering.
Final taxes
Presumed capital gains tax
VAT
TAX CREDIT
Subtracted
from
Tax due
Reduces
The taxpayer’s
tax
liability
peso for peso
TAX
DEDUCTION
Income before
tax
Income
upon
which
tax
liability
is
computed
Persons entitled to claim tax credit
Treatments of surcharges / interests / fines for
delinquency
1.
2.
3.
4.
These are not considered as taxes, hence they are
not allowed as deductions. However, interest on
delinquent taxes is deductible as they considered
as interest on indebtedness and not as taxes (CIR v.
Palanca, Jr., 18 SCRA 496).
Resident citizens
Domestic corporations (Sec. 34 C [3][a], NIRC)
Members of a GPP
Beneficiary of an estate or trust (Sec. 34
[C][3][b], NIRC)
Persons not entitled to claim tax credit
1.
Treatment of special assessment
2.
Special assessments are deductible as taxes where
these are made for the purpose of maintenance or
repair of local benefits, if the payment of such
assessment is ordinary and necessary in the
conduct of trade, business or profession.
3.
Alien individuals, whether resident or nonresidents
Foreign corporation, whether resident or nonresidents
Non-resident citizen including overseas
contracted workers and seamen
Limitations when claiming tax credit
Where the assessments are made for the purpose
of constructing local benefits tending to increase
the value of the property assessed, the payments
are in the nature of capital expenditures that are
not deductible.
1.
Tax credit vis-a-vis deduction
2.
Treatment to income taxes paid in foreign
countries
The taxpayer may either claim it as:
1. Foreign tax credits against Philippine income
tax due of citizens and domestic corporations;
or
2. A deduction from gross income of citizens and
domestic corporations.
The amount of the credit in respect to the tax
paid or incurred to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayer’s taxable income from sources within
such country bears to his entire taxable
income.
The total amount of the credit shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer’s
income from sources without the Philippines
taxable under Title II of the NIRC (Tax on
Income) bears to his entire taxable income for
the same taxable year (Sec. 34 [C][4], NIRC).
Q: Are taxes paid and subsequently refunded
taxable or non-taxable? (2005 Bar)
Foreign tax credit
A: Taxable only if the taxes were paid and claimed
as deduction and which are subsequently refunded
or credited. It shall be included as part of gross
income in the year of the receipt to the extent of the
income tax benefit of said deduction (Sec. 34[C][1],
NIRC). Not taxable if the taxes refunded were not
originally claimed as deductions.
It is the right of an income taxpayer to deduct from
income tax payable the foreign income tax he has
paid to a foreign country subject to certain
limitations. This is to avoid the rigors of indirect
double taxation, although not prohibited by the
Constitution for being violative of the due process,
results to a tax being paid twice on the same subject
matter or transaction.
LOSSES
1.
Tax credit vs. Tax deduction
119
Actually sustained during the taxable year, and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
Not compensated for by insurance or other
forms of indemnity shall be allowed as
deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade,
business or profession, if the loss arises
from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement (Sec. 34 (D), NIRC).
Measurement of casualty loss
1.
2.
Actuall loss shall be reduced by insurance
recovery or any form of indemnity. Any excess
of cost to restore over the book value shall be
capitalized (Tabag, 2015).
Requisites for deductibility
The requisites for deductibility of a loss are:
[TAE-TIE-C45]
1.
2.
3.
4.
5.
6.
7.
Q: X, a travelling salesman in Sulu. In the course
of his travel, a band of MNLF seized his car by
force and used it to kidnap a foreign missionary.
The next day, the military and the MNLF band
had a chance encounter which caused X’s car to
be a total wreck. Can X deduct the value of his
car from his income as casualty loss? (1993 Bar)
Loss belongs to the taxpayer
Actually sustained and charged off during the
taxable year
Evidenced by a closed and completed
transaction
Not compensated by insurance or other forms
of indemnity
Not claimed as a deduction for estate tax
purposes in case of individual taxpayers
Must be connected with taxpayer’s trade,
business or profession or incurred in any
transaction or incurred by an individual in any
transaction entered into for profit though not
connected with his trade, business or
profession
If it is casualty loss, it is evidenced by a
declaration of loss file within 45 days with the
bir
A: It depends. If X is an employee of a company, he
cannot deduct the losses incurred since an
individual taxpayer who derives income from
compensation is allowed only personal and
additional deductions and the reasonable
premiums for health and hospitalization insurance.
If X is engaged in trade or business, he can deduct
the value of the car from his gross income provided
he can recover only up to the amount of the casualty
loss that does not exceed its book value, and that it
is not compensated by insurance or otherwise.
Types of losses
1.
3.
Ordinary losses – incurred in trade, profession
or business.
Casualty losses – The loss is of property
connected with trade, business or profession
arising from fire, storm, shipwreck or other
casualty, or from robbery, theft or
embezzlement.
a.
The taxpayer was not exempt from income
tax in the year of such net operating loss;
and
b. There has been no substantial change in
the ownership of the business or
enterprise.
NOTE: NOLCO is on a first-in first-out basis.
These are the loss or physical damage suffered
by property used in trade, business or the
profession that results from unforseen
identifiable events that are sudden, unexpected
and unusual in character (Domondon, 2013).
“Substantial change in ownership of the
business or enterprise”
A declaration of loss must be filed with the BIR
within 45 days after the date of event.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Net Operating Loss Carry-over (NOLCO)
This refers to the excess of allowable
deduction over gross income of the business in
a taxable year. The net operating loss of the
business or enterprise for any taxable year
immediately preceding the current taxable
year, which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross income for the
next 3 consecutive taxable years immediately
following the year of such loss; provided that:
These are losses that are incurred by a taxable
entity as a result of its day to day operations
conducted for profit or otherwise (Domondon,
2013).
2.
Total loss – Actual loss is the book value of
the asset.
Partial loss – Book value or cost to restore
the asset to its normal operating condition,
whichever is lower.
120
INCOME TAXATION
The 75% equity rule (or ownership or interest
rule) shall only apply to transfer or assignment
of the taxpayer’s net operating losses as a
result of or arising from the said taxpayer’s
merger or consolidation or business
combination with another person.
However, such corporation cannot enjoy the
benefit of NOLCO for as long as it is subject to
MCIT in any taxable period.
An individual who claims the 40% OSD cannot
claim deduction of NOLCO simultaneously.
Even if NOLCO was not claimed, the 3-year
period shall continue to run (RR 14-2001).
The transferee or assignee shall not be entitled
to claim the same as a deduction from gross
income except when as a result of the said
merger, consolidation or combination, the
shareholders of the transferor/assignor, or the
transferor gains control of:
1. At least 75% or more in nominal value of
the outstanding issued shares or paid up
capital of the transferee/assignee, if a
corporation;
2. At least 75% or more interest in the
business of the transferee/assignee, if not
a corporation (75% equity rule) (R.R. 142001, Sec. 2.4).
Who are not qualified to avail NOLCO?
1.
2.
3.
4.
5.
Determination of whether or not there is
substantial change in ownership
6.
Substantial change in ownership shall be
determined on the basis of any change in the
ownership in said business or enterprise
arising from or incident to its merger,
consolidation, or combination with another
person. It shall be determined as of the end of
the taxable year when NOLCO is to be claimed
as deduction (RR 14-2001, Sec. 5.1).
4.
A: It is to insure that only costs or expenses
incurred in earning the income shall be deductible
for income tax purposes consonant with the
requirement of the law that only necessary
expenses are allowed as deductions from gross
income. The term “necessary expenses”
presupposes that in order to be allowed as
deduction, the expense must be business
connected, which is not the case insofar as capital
losses are concerned. This is also the reason why all
nonbusiness connected expenses like personal,
living and family expenses, are not allowed as
deduction from gross income (Section 36(A)(1) of
the 1997 NIRC).
A: A net operating loss during the first 10 years of
operation shall be allowed as NOLCO for the next 5
years.
Persons entitled to deduct NOLCO from
gross income
2.
3.
Capital losses - Losses from sale or exchange of
capital assets. It is deductible to the extent of
capital gains only.
Q: What is the rationale for the rule prohibiting
the deduction of capital losses from ordinary
gains? Explain. (2003 Bar)
Q: In case of mines other than oil and gas wells,
NOLCO shall be allowed for what period?
1.
OBUs for a foreign banking
corporation and FCDU of a domestic
banking corporations
Enterprise registered with the BOI
enjoying the Income Tax Holiday
Incentive
PEZA-registered enterprise
SBMA-registered enterprise
Foreign corporations engaged in
international shipping or air carriage
business in the Philippines
Any person, natural or juridical,
enjoying exemption from income tax
(RR 14-2001)
Individuals engaged in trade or business
or in the exercise of his profession
Domestic
and
Resident
foreign
corporation subject to the normal income
tax or preferential tax rates
Estates and trusts
Refer to discussions on “Dealings in property” for
further discussion.
Effect of NOLCO when the corporate
taxpayer is subject to MCIT
Securities becoming worthless
The running of the 3-year period for the
expiry of NOLCO is not interrupted by the fact
that such corporation is subject to MCIT in any
taxable year during such 3-year period.
If securities become worthless during the taxable
year and are capital assets, the loss resulting
therefrom shall be considered as a loss from the
121
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
sale or exchange, on the last day of such taxable
year, of capital assets (Section 34 (D), NIRC).
Losses from shares of stock, held as capital asset,
which have become worthless during the taxable
year shall be treated as capital loss as of the end of
the year. However, this loss is not deductible
against the capital gains realized from the sale,
barter, exchange or other forms of disposition of
shares of stock during the taxable year, but must be
claimed against other capital gains. For the 5% and
10% net capital gains tax to apply, there must be an
actual disposition of shares of stock held as capital
asset, and the capital gain and capital loss used as
the basis in determining net capital gain, must be
derived and incurred respectively, from a sale,
barter, exchange or other disposition of shares of
stock (RR No. 06-08).
NOTE: Securities becoming worthless refer to
shares when offered for sale or requested for share
redemption, no amount can be realized by the
owner of the share (RR No. 06-08).
Q: Are worthless securities deductible from
gross income for income tax purposes? (1999
Bar)
A: Worthless securities, which are ordinary assets,
are not allowed as deduction from gross income
because the loss is not realized. However, if these
worthless securities are capital assets, the owner is
considered to have incurred a capital loss as of the
last day of the taxable year and therefore,
deductible to the extent of capital gains. This
deduction, however, is not allowed to a bank or
trust company (Sec. 34 [D][4], [E][2], NIRC).
5. Special Losses
a. Wagering losses – deductible only to the
extent of gain or winnings deemed to only
apply to individuals (Sec. 34 [D][6], NIRC)
b. Losses on wash sales of stocks
Wash sale - A sale of stock or securities where
substantially identical securities are acquired
or purchased within 61-day period, beginning
30 days before the sale and ending 30 days
after the sale.
GR: Losses from wash sale are not deductible
since these are considered as artificial loss.
XPN: Whentaxpayer is a dealer in securities, and
the transaction from which the loss resulted was
made in the ordinary course of business of such
dealer, the loss is deductible in full.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
122
INCOME TAXATION
LOSSES
Ordinary losses
Capital losses
Securities becoming
worthless
RULES ON DEDUCTIBILITY
Deductible, net of indemnity
N.B. May be deducted from capital gains
Deductible to the extent of capital gains only
Deductible – if worthless securities are capital assets (except where the taxpayer is
a bank or trust company)
Non-deductible - If worthless securities are ordinary assets
GR Losses from wash sale are not deductible
Losses on wash sales
of stocks / securities
Wagering losses
NOLCO
Abandonment losses
in
petroleum
operations
XPN When taxpayer is a dealer in securities, and the transaction from which the loss
resulted was made in the ordinary course of business of such dealer, the loss is
deductible in full.
Deductible only to the extent of wagering gains.
Deductible for the next 3 consecutive years following the year of such loss. Provided
that:
i. The taxpayer was not exempt from income tax in the year of such net operating
loss; and
ii. There has been no substantial change in the ownership of the business or
enterprise.
N.B. A net operating loss during the first 10 years of operation shall be allowed as
NOLCO for the next 5 years in case of mines other than oil and gas wells,
i. When a contract area where petroleum operations are undertaken is partially or
wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction.
ii. When a producing well is subsequently abandoned, the unamortized costs
thereof, as well as the undepreciated costs of equipment directly used therein,
shall be allowed as a deduction in the year of abandonment.
Note: If such abandoned well is re-entered and production is resumed, or if such
equipment or facility is restored into service, the said costs shall be included as part
of gross income in the year of resumption or restoration.
123
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Non-deductible losses
1.
2.
3.
4.
5.
To prove that the taxpayer exerted diligent
efforts to collect the debts:
Losses not incurred in trade, profession or
business or in any transaction entered into
profit;
Losses from sales or exchanegs of property
entered into between related taxpayers (not
deductible as provided under Section 36 of the
NIRC but the gains are taxable;
Losses from exchanges of property in a
coprporate readjustment;
Losses from illegal transactions;
Loss on voluntary removal of building on land
purchased with a view to erect another
building. Such loss shall form part of the cost of
the new building to be erected (Tabag, 2015).
a.
b.
c.
d.
2.
3.
4.
5.
Marcelo doctrine
A loss in one line of business is not permitted as a
deduction from gain in another line of business
(Marcelo Steel Corporation v. CIR, G.R. No. L-12401,
October 31, 1960).
These are debts due to the taxpayer actually
ascertained to be worthless and charged off in the
books of the taxpayer within the taxable year except
those:
2.
In no case may a receivable from an insurance
or surety company be written off from the
taxpayer’s books and claimed as bad debts
deduction unless such company has been
declared closed due to insolvency or for any
such similar reason by the Insurance
Commissioner (RR 5-1999).
Not connected with trade, business or
profession; and
Between related taxpayers (Sec 35 (E),
NIRC).
6.
Bad debts refer to debts resulting from the
worthlessness or uncollectibility, in whole or in
part, of amount due to the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered (RR 5-99, Sec. 2).
1.
2.
3.
Bad Debt Theory
4.
5.
Absence of creditor is not bad debt.
Requisites for deductibility [UST-CAR]
6.
The debts are uncollectible despite diligent
effort exerted by the taxpayer;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Must not be sustained in a transaction entered
into between related parties.
Related parties
NOTE: A mere recording in the taxpayer’s books of
account of estimated uncollectible accounts does
not constitute a write-off of the said receivable,
hence, it shall not be a valid basis for its deduction
as a bad debt expense.
1.
Existing indebtedness subsisting due to the
taxpayer which must be valid and legally
demandable;
Connected with the taxpayer’s trade, business
or practice of profession;
Actually charged off in the books of accounts of
the taxpayer as of the end of the taxable year;
Actually ascertained to be worthless and
uncollectible as of the end of the taxable year;
and
NOTE: In lieu of requisite No. 5, the BSP, thru
its Monetary Board, shall approve the writing
off of said indebtedness from the banks’ books
of accounts at the end of the taxable year (RR
5-1999).
BAD DEBTS
1.
Sending of statement of accounts;
Sending of collection letters;
Giving the account to a lawyer for
collection; and
Filing a collection case in court.
124
Members of the same family (brothers and
sisters, whether whole or half-blood; spouse,
ancestors, and lineal descendants)
An individual and a corporation more than fifty
percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly,
by or for such individual
Two corporations more than fifty percent
(50%) in value of the outstanding stock of each
of which is owned, directly or indirectly, by or
for the same individual
The grantor and a fiduciary of any trust
The fiduciary of a trust and the fiduciary of
another trust of the same person is a grantor
with respect to each trust
A fiduciary of a trust and a beneficiary of such
trust
INCOME TAXATION
NOTE: Relatives by affinity and collateral relatives
other than brothers and sisters are not considered
related parties.
deduction (Sec. 34 [E], NIRC). This is also known as
the tax benefit rule.
DEPRECIATION
Q: What factors will determine whether or not
the debts are bad debts? (2004 Bar)
There shall be allowed as a depreciation deduction
a
1. Reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence)
2. Of property used in the trade or business (Sec. 34
[F], NIRC).
A: The factors to be considered include, but are not
limited to, the following:
1.
2.
3.
4.
5.
The debtor has no property or visible
income;
The debtor has been adjudged bankrupt or
insolvent;
There are numerous debtors with small
amounts of debts and further action on the
accounts would entail expenses exceeding
the amounts sought to be collected;
The debt can no longer be collected even in
the future; and
Collateral shares have become worthless.
Depreciation is the gradual diminution in the useful
value of tangible property resulting from
exhaustion, wear and tear and obsolescence
(Domondon, 2013).
Requisites for deductibility
1.
NOTE: "Worthless" is not determined by an
inflexible formula or slide rule calculation, but upon
the exercise of sound business judgment. In order
that debts be considered as bad debts because they
have become worthless, the taxpayer should:
2.
a.
5.
b.
3.
4.
Ascertain the debt to be worthless in the year
for which the deduction is sought; and
Act in good faith in ascertaining the debt to be
worthless (CIR v. Goodrich International Rubber
Co., G.R. No. L-22265, December 22, 1967).
The property subject to depreciation must be
property withlife of more than 1 year.
The property depreciated must be used in
trade, business, or exercise of a profession.
The depreciation must have been charged off
during the taxable year.
The depreciation method used must be
reasonable and consistent.
A depreciation schedule should be attached to
the income tax return.
Person entitled to claim depreciation expense
The person entitled to claim depreciation expense is
the person who sustains an economic loss from the
decrease in property value due to depreciation
which is usually the owner. Non-resident aliens and
foreign corporations are allowed to deduct only
when the property is located within the Philippines
(Sec. 34 [F], NIRC).
Testimony of a CPA as substantial evidence for
the deductibility of a claimed worthless debt
Mere testimony of a CPA explaining the
worthlessness of said debts is seen as nothing more
than as a self-serving exercise which lacks probative
value. Mere allegations cannot prove the
worthlessness of such debts (Philippine Refining Co.
v. CA, G.R. No. 118794, May 8, 1996).
Depreciable and non-depreciable assets for tax
purposes
Deductibility of “reserves for bad debts” from
gross income for income tax purposes
1.
Bad debts must be charged off during the taxable
year to be allowed as deduction from gross income.
The mere setting up of reserves will not give rise to
any deduction (Sec. 34 [E], NIRC).
Effect of recovery of bad debts
That recovery of bad debts previously allowed as
deduction in the preceding years shall be included
as part of the gross income in the year of recovery
to the extent of the income tax benefit of said
125
Depreciable assets:
a. Only property that is used for trade,
business or exercise of a profession or held
for the production of income;
b. All kinds of tangible property (other than
land) with life of more than 1 year and do
not form part of the stock in trade that are
part of the inventory;
c. All kinds of intangible property (other than
shares of stock) with life of more than 1
year;
d. Subject
to
exhaustion
within
a
determinable period of time, that is it has a
limited useful life.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
Non-depreciable assets:
a. Land, apart from the improvements of
physical development added to it, cannot
be depreciated;
b. Inventories or stock in trade;
c. Personal effects or clothings, except
customes used in theatrical business;
d. Bodies of minerals subject to depletion;
e. Automobiles and other transportation
equipment used solely by the taxpayer for
pleasure;
f. Building used solely by the taxpayer as his
residence, and the furniture or furnishing
used in said building;
g. Intangibles, the use in trade, business or
exercise of profession is not of limited
duration.
Determination of depreciation method
The BIR and the taxpayer may agree in writing on
the useful life of the property to be depreciated
subject to modification if justified by facts or
circumstances. The change shall not be effective
before the taxable year on which notice in writing
by certified mail or registered mail is served by the
party initiating. However, if there is no agreement
and the BIR does not object to the rate and useful life
being used by the taxpayer, the same shall be
binding.
Method to be used in depreciation of properties
used in petroleum operations
It may either be straight line or declining balance
method with a useful life of 10 years or shorter, as
allowed by the CIR.
Q: Is depreciation of goodwill deductible from
gross income? (1999 Bar)
NOTE: If the property is not directly related to
production, depreciation is for 5 years using
straight line method (Sec. 34 F[4], NIRC).
A: Goodwill may or may not be subject to
depreciation.
GR: Depreciation for goodwill is not allowed as
deduction from gross income. While intangibles
maybe allowed to be depreciated or amortized, it is
only allowed to those intangibles whose use in the
business or trade is definitely limited in duration
(Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not
the case with goodwill.
Method to be used in depreciation of properties
used in mining operations other than
petroleum operations
1.
2.
XPN: If the goodwill is acquired through capital
outlay and is known from experience to be of value
to the business for only a limited period (Sec. 107,
RR No. 2). In such case, the goodwill is allowed to be
amortized over its useful life.
Provided, that the contractor notifies the CIR at the
beginning of the depreciation period which
depreciation rate allowed will be used.
Methods for computing depreciation allowance
under NIRC
1.
2.
3.
4.
Q: What is the annual depreciation of a
depreciable fixed asset with a cost of ₱100,000
having a salvage value of ₱10,000 and an
estimated useful life of 20 years under the
straight line method?
Straight line method – The annual depreciation
charge is calculated by allocating the amount to
be depreciated equally over the number of
years of the estimated useful life of the tangible.
It results in a constant charge over the useful
life;
Declining balance method – accelerated method
of depreciation which writes off a relatively
larger amount of the asset’s cost nearer the
start of its useful life than that of the straight
line;
Sum of the years digit method – accelerated
method of depreciation expense in the earlier
years and lower charges in the later years;
Any other method which may be prescribed by
Department of Finance upon recommendation
of the CIR.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
At the normal rate of depreciation if the
expected life is less 10 years or less; or
Depreciated over any number of years
between 5 years and the expected life if the
latter is more than 10 years and the
depreciation thereon is allowed as
deduction from taxable income.
A: The annual depreciation is ₱4,500 computed as
follows: Acquisition cost less salvage value, then
divide the difference by its useful life. [100,000 –
10,000 = 90,000] then [90,000 / 20 = 4,500]
Q: Z purchased fully depreciated machineries
and entered the machineries in his books at
₱120,000. Based on the independent appraisal
and engineering report, Z assigned to the
machineries an economic life of 5 years.
Adopting the straight-line method, Z claimed a
depreciation deduction of ₱24,000 in his
126
INCOME TAXATION
income tax return. Is the deduction proper,
considering that in the hands of the original
owner, the said machineries were already fully
depreciated? (1983 Bar)
public purposes, or to accredited domestic
corporations, or
b. Associations organized and operated
exclusively for religious, charitable, scientific,
youth and sports development, cultural or
educational
purposes
or
for
the
rehabilitation of veterans, or
c. To social welfare institutions, or to
nongovernment organizations
A: YES. The starting point for the computation of
the deductions for depreciation is the reasonable
cost of acquiring the asset and its economic life. The
fact that the machineries were already depreciated
by its original owner does not matter. Z is allowed a
depreciation allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence) of the machineries which he is using
in his trade or business (Sec. 34 [F], NIRC).
Depletion refers to the deduction form gross income
arising from the exhaustion of natural resources like
mines and oil and gas wells as a result of production
or severance from such mines or wells.
2. In accordance with rules and regulations
promulgated by the secretary of finance, upon
recommendation of the commissioner,
3. No part of the net income of which inures to the
benefit of any private stockholder or individual
4. In an amount not in excess of
a. 10% in the case of an individual, and
b. 5% in the case of a corporation, of the
taxpayer's taxable income derived from
trade, business or profession (Sec 34 (H),
NIRC).
Conditions for deductibility: (COILE)
Requisites for deductibility [AW-SEA]
DEPLETION OF OIL AND GAS WELLS AND MINES
a.
b.
c.
d.
e.
1.
2.
3.
The method allowed under the rules and
regulations prescribed by the Secretary of
Finance is cost depletion method;
Can be availed of by oil and gas wells and mines;
The basis of cost depletion is the capital
invested in the mine which is the accumulated
exploration and development expenses;
When the allowance shall equal the capital
invested no further allowance shall be granted;
In case of RFC, allowance for depletion shall be
authorized only in respect to oil and gas wells
and mines located in the Philippines.
4.
5.
The contribution or gift must be actually paid;
It must be paid within the taxable year;
It must be given to the organization specified
by law;
It must be evidenced by adequate receipts or
records; and
The amount of charitable contribution of
property other than money shall be based on
the acquisition cost of said property.
Contributions that are deductible in full
These are: [GAFA]
1. Donations to the Government of the
Philippines, or political subdivisions including
fully-owned government corporation to be
used exclusively in undertaking priority
activities in: [CHEESHY]
Persons who may avail deduction for depletion
Annual depletion deductions are allowed only to
mining entities which own an economic interest in
mineral deposits (RR 5-76, Sec. 3).
a.
b.
c.
d.
e.
f.
g.
Economic interest
It means interest in minerals in the place of
investment therein or secured by operating or
contract agreement for which income is derived,
and return of capital expected, from the extraction
of mineral.
2.
CHARITABLE AND OTHER CONTRIBUTIONS
1. Contributions or gifts actually paid or made
within the taxable year,
a. To, or for the use of the Government of the
Philippines or any of its agencies or any
political subdivision thereof exclusively for
3.
127
Culture
Health
Economic Development
Education
Science
Human Settlement
Youth and Sports development
Donations to foreign institutions and
international organizations in compliance with
treaties and agreements with the Government.
Donations to accredited NGO’s
a. Exclusively for: [C2HES2Y-RC]
i. Cultural
ii. Charitable
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
iii.
iv.
v.
vi.
vii.
Health
Educational
Scientific
Social welfare
Character building &youth and sports
Development
viii. Research
ix. Any combination of the above
b.
c.
d.
4.
the same shall be allowable as a deduction up to
150% of the value of the donation (RA 9500).
Contributions to the National Book Trust Fund shall
likewise be exempt from donor’ tax and the same
shall be allowable as a deduction up to 150% of the
value of the donation (RA 9521).
Donations that are subject to limitation
Donation must be utilized not later than
the 15th day of the 3rd month following the
close of taxable year;
Administrative expense must not exceed
30% of the total expenses;
Upon dissolution, assets shall be
transferred to another non-profit domestic
corporation or to the State.
1.
2.
3.
4.
Donations of prizes and awards to Athletes (RA
7549, Sec. 1)
Donations that are deductible in FULL under
special laws
Donations to:
1. The Integrated Bar of the Philippines (IBP) (PD
81)
2. Development Academy of the Philippines (PD
205)
3. Aquaculture Department of the Southeast Asian
Fisheries and Development Center (SEAFDEC)
(PD 292)
4. National Social Action Council (PD 294)
5. National Museum, Library and Archives (PD
373)
6. University of the Philippines and other state
colleges and universities
7. Philippine Rural Reconstruction Movement
8. The Cultural Center of the Philippines (CCP)
9. Trustees of the Press Foundation of Asia
10. Humanitarian Science Foundation
11. Artesian Well Fund (RA 1977)
12. International Rice Research Institute
13. National Science Development Board (now the
DOST) and its agencies and to public or
recognized non-profit, non-stock educational
institutions (RA 3589)
14. Ministry of Youth & Sports Development (PD
604)
15. Social Welfare, Cultural & Charitable Institution
(PD 507)
16. Museum of Philippine Costumes (PD 1388)
17. Intramuros Administration (PD 1616)
18. Lungod ng Kabataan (PD 1631)
19. Foster child agencies (RA 10165)
Gifts and donations to the University of the
Philippines shall be exempt from donor’s tax and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Donations that are not in accordance with the
priority plan
Donations whose conditions are not complied
with
Donations to the Government of the Philippines
or political subdivision exclusive for public
purposes
Donations to domestic corporations organized
exclusively for:
a. Scientific
b. Educational
c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social welfare
Limitations on deductions
Amount deductible shall not exceed:
1. For individuals - 10% of taxable income before
contributions
2. For corporations - 5% of taxable income before
contributions (Sec. 34 [H][1], NIRC)
RESEARCH AND DEVELOPMENT EXPENDITURE
1.
2.
3.
128
Taxpayer may treat research or development
expenditures,
Which are paid or incurred by him during the
taxable year
In connection with his trade, business or
profession as:
a. Ordinary and necessary expenses, which
are not chargeable to capital account, and
shall be allowed as deduction during the
taxable year when paid or incurred, or
b. Deferred expenses
- Paid or incurred by the taxpayer in
connection with his trade, business or
profession;
- Not treated as ordinary expenses; and
- Chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion (Sec. 34(I), NIRC).
INCOME TAXATION
Period for amortizing the deferred research
and development expenditures
5.
In computing taxable income,
- Such deferred expenses shall be allowed as
deduction,
- Ratably distributed over a period of not less than
60 months (beginning with the month in which
the taxpayer first realizes benefits from such
expenditures).
6.
Deductible payment to pension trusts
1.
Research and development expenditures that
are not deductible
2.
Any expenditure:
1. For the acquisition or improvement of land or
for the improvement of property to be used in
connection with research and development
subject to depreciation and depletion; and
2. Paid or incurred for the purpose of ascertaining
the existence, location, extent or quality of any
deposit of ore or other mineral including oil or
gas (Sec. 34 [I][3], NIRC).
2.
3.
4.
5.
Q: When can an employer claim as deduction the
payment of reasonable pension?
An employer establishing or maintaining a
pension trust
To provide for the payment of reasonable
pensions to his employees
Shall be allowed as a deduction (in addition to
the contributions to such trust during the
taxable year to cover the pension liability
accruing during the year, allowed as a
deduction for ordinary and necessary
expenses)
A reasonable amount transferred or paid into
such trust during the taxable year in excess of
such contributions,
But only if such amount:
a. Has not theretofore been allowed as a
deduction, and
b. Is apportioned in equal parts over a period
of 10 consecutive years beginning with the
year in which the transfer or payment is
made (Sec. 34 (J), NIRC).
A: If the employer contributes to a private pension
plan for the benefit of its employee.
Q: Are the following expenses deductible from
gross income:
a.
Employer’s contribution to the Christmas
fund of his employees
b. Contribution to the construction of a chapel
of a university that declares dividends to its
stockholders
c. Premiums paid by the employer for the life
insurance of his employees
d. Contribution to a newspaper fund for needy
families when such newspaper organizes a
group of civic spirited citizens solely for
charitable purposes. (1968 Bar)
A:
a. YES. Under No. 27 RAMO 1-87 subject to the
condition that the contribution does not exceed
½ month’s basic salary of all the employees. It
is part of the ordinary and necessary expenses.
b. NO, part of the net income of the university
inures to the benefit of its private stockholders
(Sec. 34 [H], NIRC).
c. NO, for the beneficiary is the employer (Sec. 36
[A][4], NIRC).
d. NO, contributions to a newspaper fund for
needy families are not deductible for the
Requisites for deductibility [P-FRANC]
1.
2.
3.
4.
Employer’s current liability – amount
contributed during the taxable year shall be
treated as an ordinary and necessary expense
Employer’s liability for past services – 1/10 of
the reasonable amount paid to cover pension
liability applicable to the preceding 10 years
NOTE: When an employer makes a contribution to
his employee’s Personal Equity and Retirement
Account (PERA), the employer can claim this
amount as a deduction but only to the extent of the
employer’s contribution that would complete the
maximum allowable PERA contribution of an
employee (RR 2011-17, with RA 9505).
PENSION TRUSTS
1.
with the year in which the transfer or payment
is made
The payment has not yet been allowed as a
deduction
The amount contributed must no longer be
subject to the control and disposition of the
employer
The employer must have established a pension
or retirement plan to provide for the payment
of reasonable pensions to his employees
It must be funded by the employer
The pension plan is reasonable and actuarially
sound
The deduction is apportioned in equal parts
over a period of 10 consecutive years beginning
129
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
reason that the income inures to the benefit of
the private stockholder of the printing
company.
Taxpayers who claim deductions for expenses, the
amounts of which are subject to withholding tax,
must prove that said deductions were in fact
subjected to proper withholding. If no withholding
was made, then claimed deductions will not be
allowed (Sec. [34][K], NIRC).
Q: On December 6, 2001, LVN Corp. donated a
piece of vacant lot situated in Mandaluyong City
to an accredited and duly registered non-stock,
non-profit educational institution to be used by
the latter in building a sports complex for
students.
No deductions shall be allowed notwithstanding
payments of withholding tax at the time of the audit
investigation or reinvestigation/reconsideration in
cases where no withholding of tax was made (RR
12-2013).
May the donor claim in full as deduction from its
gross income for the taxable year 2001 the
amount of the donated lot equivalent to its fair
market value/zonal value at the time of the
donation? (2002 Bar)
SPECIAL DEDUCTIONS
Special deductions allowable under the NIRC
A: NO. Donations and/or contributions made to
qualified institutions consisting of property other
than money shall be based on the acquisition cost
of the property. The donor is not entitled to claim
as full deduction the fair market value/zonal value
of the lot donated (Sec. 34 [H], NIRC).
Q: The Filipinas Hospital for Crippled Children is
a charitable organization. X visited the hospital
and gave ₱100,000 to the hospital and ₱5,000 to
a crippled girl whom he particularly pitied. A
crippled son of X is in the hospital as one of its
patients. X wants to exclude both the ₱100,000
and the ₱5,000 from his gross income. Discuss.
(1993 Bar)
A: If X is earning from compensation income, he
could not deduct either the ₱100,000 and the
₱5,000. If he is earning from trade or business, he
could deduct the ₱100,000 if the hospital is
accredited as a institution. If not, then no deduction
is allowed.
1.
Private proprietary educational institutions –In
addition to the expenses allowed as deduction,
they have the option to treat the amount
utilized for the acquisition of depreciable assets
for expansion of school facilities as:
a. Outright expense (the entire amount is
deducted from gross income); or
b. Capital asset and deduct only from the
gross income an amount equivalent to its
depreciation every year (Sec. 34 [A][2],
NIRC).
2.
Estates and trusts can deduct the:
a. Amount of income paid, credited or
distributed to the heirs/beneficiaries; and
b. Amount applied for the benefit of the
grantor (Sec. 61, NIRC).
3.
Insurance companies can deduct:
TYPE OF
INSURANCE
However, he could not deduct the ₱5,000 because
to qualify for exemption, the charitable
contribution must be given to accredited
organizations or associations (Sec. 34 [H][1], NIRC).
Non-Life
Q: On the part of the contributor, are
contributions to a candidate in an election
allowable as a deduction from gross income?
(1998 Bar)
A: The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to the development,
management and/or operation and/or conduct of
trade or business or profession.
Mutual
marine
insurance
Additional requirements for deductibility
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
130
SPECIAL DEDUCTIONS
1. Net additions, if any,
required by law to be
made within the year to
reserve funds;
2. Sum paid on the policy
within the year and
annuity contracts other
than dividends, provided
that the released reserve
be treated as income for
the year of release (Sec. 3
[A], NIRC).
1. Amounts repaid to policy
holders on account of
premiums previously paid
by them;
2. Interest paid upon those
amounts between the date
of ascertainment and the
INCOME TAXATION
Mutual
insurance –
mutual fire
and mutual
employer’s
liability and
mutual
workmen’s
compensation
and mutual
casualty
insurance
Assessment
Insurance
Aid Services for Practicing Lawyers, under BAR
Matter No. 2012, issued by the SC.
date of its payment (Sec. 37
[B], NIRC).
1. Portion of the premium
deposits returned to the
policy holders;
2. Portion of the premium
deposits retained for the
payment
of
losses,
expenses and reinsurance
reserve (Sec. 37 [C], NIRC).
6. Deductions under the Expanded Senior Citizen
Act of 2003
a. Deduction from gross income of private
establishments for the 20% sales discount
granted to senior citizens on the sale of goods
and/or services
b. Additional deduction from gross income of
private establishments for compensation
paid to senior citizens.
Tax treatment of senior citizens discount
Amount actually deposited
with
officers
of
the
Government
of
the
Philippines pursuant to law
as addition to guarantee or
reserve funds (NIRC, Sec. 37
[D]).
With the effectivity of RA 9257 on 21 March 2004,
there is now a new tax treatment for senior citizens'
discount granted by all covered establishments.
This discount should be considered as a deductible
expense from gross income and no longer as tax
credit (CIR v. Central Luzon Drug Corp., G.R. No.
159610, 2008).
Deductions under special laws
Persons who could avail of the deduction for the
20% senior citizens discount
1. Special dedutions for productivity bonus and
manpower training under the Productivity
Incentives Act of 1990
2. Deductions for training expenses of qualified
jewelry enterprises
3. Deductions under the Adopt-a-School Act of
1998
4. Deductions under the Magna Carta for Persons
with Disability
5. Deduction under Free Legal Assistance Act of
2010
1.
2.
Resident citizens and domestic corporations;
and
Non-resident
citizens,
aliens
(whether
residents or not) and foreign corporations,
from their income arising from their profession,
trade or business, derived from sources within
the Philippines.
Establishments that can claim the discounts
granted as deduction
Free Legal Assistance Act of 2010
1.
2.
3.
4.
A lawyer or professional partnerships rendering
actual free legal services, as defined by the SC,
shall be entitled to an allowable deduction from
the gross income.
5.
Deduction would be the amount that could have
been collected for the actual free legal services
rendered or up to 10% of the gross income
derived from the actual performance of the legal
profession, whichever is lower.
6.
7.
8.
9.
Condition for it to be availed of as a deduction
from gross income
Hotels and similar lodging establishments
Restaurants
Recreation centers
Theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of
culture, leisure and amusement
Drug stores, hospitals, pharmacies, medical and
optical clinics, and similar establishments
dispensing medicines
Medical and dental services in private facilities
Domestic air and sea transportation companies
Public land transportation utilities
Funeral parlors and similar establishments
Conditions in order for establishments to avail
the 20% sales discounts as deduction from gross
income
It shall be deductible provided that the actual
free legal services contemplated shall be
exclusive of the minimum 60-hour mandatory
legal aid services rendered to indigent litigants
as required under the Rule on Mandatory Legal
1.
131
Only that portion of the gross sales exclusively
used, consumed or enjoyed by the senior citizen
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
3.
4.
5.
6.
7.
shall be eligible for the deductible sales
discount.
The gross selling price and the sales discount
must be separately indicated in the official
receipt or sales invoice issued by the
establishment from the sale of goods or services
to the senior citizen.
Only the actual amount of the discount on a
sales discount not exceeding 20% of the gross
selling price can be deducted from the gross
income, net of value-added tax, if applicable, for
income tax purposes, and from gross sales or
gross receipts of the business enterprise
concerned, for VAT or other percentage tax
purposes.
The discount can only be allowed as deduction
from gross income for the same taxable year
that the discount is granted.
The business establishment giving sale
discounts to qualified senior citizens is required
to keep separate and accurate record of sales,
which shall include the name of the senior
citizen, OSCA ID, gross sales/receipts, sales
discounts granted, dates of transaction and
invoice number for every sale transaction to
senior citizen.
Only those establishments selling any of the
qualified goods and services to a Senior Citizen
where an actual discount was granted can claim
the deductions.
The seller must not claim the optional standard
deduction during the taxable year (Sec. 7, RR 72010).
1.
Toll fees of skyways and expressways are
likewise subject to 20% discount which can be
availed of only by a person with disability
owning the vehicle (Rev. Reg. 1-2009).
Additional deduction from gross income of
private establishments for compensation paid
to senior citizens
Provided, however, that the foregoing
privileges granted to PWDs shall not be claimed
if the said PWD claims a higher discount as may
be granted by the commercial establishment
and/or existing laws or in combination with
other discount program/s.
Private establishments employing senior citizens
shall be entitled to additional deduction from their
gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens
provided the following are present:
1. Employment shall have to continue for a period
of at least 6 months;
2. Annual taxable income of the senior citizen does
not exceed the poverty level as may be
determined by the NEDA thru the National
Statistical Coordination Board (NSCB). For this
purpose, the senior citizen shall submit to his
employer a sworn certification that his annual
taxable income does not exceed the poverty level
(R.R. 7-2010, Sec. 12).
Thus, if a PWD is also a senior citizen, he can
only claim one 20% discount on a particular
sales transaction.
2.
Sales on discounts on (PWD)
PWDs are entitled to claim at least 20% discount.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The following establishments relative to the
sale of goods or services for their exclusive use
or enjoyment:
a. Hotels and similar lodging establishments
and restaurants;
b. Sports and recreation centers;
c. Theatres, cinema houses, concert halls,
circuses, carnivals and other similar places
of culture, leisure and amusement;
d. Drugstore
regarding
purchase
of
medicines;
e. Medical and dental privileges in
government facilities such as but not
limited to diagnostic and laboratory fees
including professional fees of attending
doctors in private facilities, subject to
guidelines to be issued by the DOH, in
coordination with the PHIC
f. Domestic air and sea transportation based
on the actual fare except promotional fare.
If the promotional fare discount is higher
than the 20% discount privilege, the pwd
may choose the promotional fare and
should no longer be entitled to the 20%
discount privilege; and
g. Land transportation privileges in bus fares
such as ordinary, aircon fares and on public
railways such as LRT, MRT, PNR and such
other similar infrastructures that will be
constructed, established and operated by
public or private entity.
132
Conditions for Availment by establishments of
sales discounts as special deduction from gross
income:
a. Allowed as deduction from gross income
for the same taxable year when the
discount is granted;
b. Only that portion of the gross sales
exclusively used, consumed, or enjoyed by
the PWD shall be eligible for the deduction
INCOME TAXATION
c.
d.
Only the actual amount of the sales
discount granted or a sales discount not
exceeding 20% of the gross selling price or
gross receipt can be deducted from the
gross income, net of VAT, if applicable, for
income tax purposes and from gross sales
or receipts of the business enterprise
concerned, for VAT or other percentage tax
purposes and shall be subject to proper
documents under pertinent provisions of
the tax code;
The business establishment giving sales
discount to qualified person with disability
is required to keep separate and accurate
record of sales, which shall include the
name of the PWD, ID Number, gross
sales/receipts, sales discounts granted,
date of transactions and invoice number for
every sale transaction to PWD.
“cost of service” in case of individual seller of
services, is not allowed to be deducted for purposes
of determining the basis of the OSD pursuant to RA
9504 (RR 16-2008).
Itemized Deductions vs. OSD
ITEMIZED
DEDUCTIONS
It must be
substantiated
by receipts.
The election to claim either the OSD or itemized
deductions must be signified in the income tax
return filed for the first quarter of the taxable year.
Unless the corporation signified in his return his
intention to elect optional standard deduction, it
shall be considered as having availed itself of the
itemized deduction.
Optional Standard Deduction
OSD is a fixed percentage deduction which is
allowed to certain taxpayers without regard to any
expenditure. This is in lieu of the itemized
deduction.
Once the election is made, the same type of
deduction must be consistently applied for all
succeeding quarters and in the annual income tax
return. In other words, the choice shall be
irrevocable for the taxable year for which the return
is made.
The optional standard deduction is an amount not
exceeding:
1. 40% of the gross sales or gross receipts of a
qualified individual taxpayer; or
2. 40% of the gross income of a qualified
corporation (Sec. 34 [L], NIRC).
NOTE: A taxpayer who is required but fails to file
the quarterly income tax return for the first quarter
shall be deemed to have elected to avail of itemized
deductions for the taxable year.
Illustration:
A corporation has gross sales of ₱1M, sales return
of ₱25k, cost of goods sold of ₱600k, rental income
of ₱275k and with an itemized deductions of
₱200,000.
Gross Sales
Rental Income
TOTAL REVENUE
Less: Sales Returns
Cost of goods
sold
GROSS INCOME
Less: Deductions
OSD (650k x
40%)
Itemized
TAXABLE INCOME
Rate of Taxos
INCOME TAX DUE
OSD
1,000,000
275,000
1,275,000
25,000
600,000
ITEMIZED
1,000,000
275,000
1,275,000
25,000
600,000
650,000
650,000
Persons who may avail of the OSD under the
NIRC
260,000
390,000
30%
117,000
OPTIONAL STANDARD
DEDUCTION
It requires no proof of
expenses incurred because
the allowable deduction is a
percentage not exceeding
40% of gross sales or
receipts or gross income as
the case may be
200,000
450,000
30%
135,000
1.
Individuals
a. Resident citizens (RC)
b. Non-resident citizens (NRC)
c. Resident aliens (RA)
2.
Corporations
a. Domestic (DC)
b. Resident foreign corporations (RFC)
3.
4.
Partnerships
Estates and trusts
An individual who avails of the OSD is not required
to submit final statements provided that said
individual shall keep such records pertaining to his
gross sales or gross receipts.
NOTE: It should be emphasized that the “cost of
sales” in case of individual seller of goods, or the
133
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A corporation is still required to submit its
financial statements when it files its annual income
tax return and keep such records pertaining to its
gross income.
It depends on the accounting method used by the
taxpayer in recognizing income and deductions:
1. Accrual basis – the OSD shall be based on the
gross sales during taxable year.
2. Cash Basis – the OSD shall be based on the
gross receipts during the taxable year.
Persons who may not avail of the OSD
1.
2.
Non-resident aliens, (NRA) whether or not
engaged in trade or business in the Philippines;
and
Non- resident foreign corporations (NRFC)
NOTE: Costs of sales or costs of services are not
allowed to be deducted for purposes of
determining the basis of the OSD in case of an
individual taxpayer.
Following the new income tax forms as prescribed
in RR 2-2014, the following are not entitled to avail
the OSD:
For other individual taxpayers allowed by law to
report their income and deductions under a
different method of accounting, the gross sales or
gross receipts shall be determined in accordance
with the said acceptable method of accounting
(RR 16-2008).
Corporation, partnerships and other nonindividuals:
1. Exempt under the NIRC and other special laws,
with no other taxable income;
2. With income subject to special or preferential
tax rates;
3. With income subject to special or preferential
tax rates, plus income subject to income tax
under Sec. 27(A) and Sec. 28 (A)(1)of the NIRC;
4. Juridical entities whose taxable base is gross
revenue or receipts (e.g. special RFC; nonresident foreign corporations [NRFC]; special
NRFC).
CORPORATION
In case of a corporation, the basis of the OSD is
the gross income. Sales returns, discounts and
allowances and cost of goods (or cost of services)
are deducted from the gross receipts to arrive at
gross income. The method of accounting is not
taken into consideration unlike in the case of an
individual.
Q: In 2012, Dr. K decided to return to his
hometown to start his own practice. At the end
of 2012, Dr. K found that he earned gross
professional income in the amount of
P1,000,000.00; while he incurred expenses
amounting to P560,000.00 constituting mostly
of his office space rent, utilities, and
miscellaneous expenses related to his medical
practice. However, to Dr. K’s dismay, only
P320,000.00 of his expenses were duly covered
by receipts. What are the options available for
Dr. K so he could maximize the deductions from
his gross income? (2015 Bar)
GENERAL PROFESSIONAL PARTNERSHIP
1. For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same manner as
a corporation. As such, a GPP may claim either
the itemized deductions allowed under Sec. 34
or in lieu thereof, it can opt to avail of the OSD
allowed to a corporation.
2. If the GPP avails of itemized deductions under
Sec. 34 of the NIRC in computing net income, the
partners may still claim itemized deductions
on their net distributive share that have not
been claimed by the GPP.
A: Dr. K may opt to use the optional standard
deduction (OSD) in lieu of the itemized deduction.
OSD is a maximum of 40% of gross receipts during
the taxable year. Proof of actual expenses is not
required, but Dr. K shall keep such records
pertaining to his gross receipts.
The partners, however, are not allowed to
claim OSD on their share of net income
because the OSD is a proxy for all items of
deductions allowed in arriving at taxable
income.
Determination of OSD allowed for individuals,
corporations, and GPPs
3. If the GPP avails of OSD in computing net
income, the partners may no longer claim
further deductions from their net distributive
share, whether itemized or OSD (RR 2-2010).
INDIVIDUAL
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
134
INCOME TAXATION
Items not deductible
In computing net income, no deduction shall in any
case be allowed in respect to:
1.
2.
Personal, living or family expenses
– These are personal expenses and not related
to the conduct of trade or business.
Any amount paid out for new buildings of for
permanent improvements, or betterments
made to increase the value of any property or
estate
– These are capital expenditures added to the
cost of the property and the periodic
depreciation is the amount that is considered as
deductible expense.
NOTE: Shall not apply to intangible drilling and
development costs incurred in petroleum
operations which are deductible under
Subsection (G)(1) of Sec. 34 of the NIRC.
3.
4.
Any amount expended in restoring property or
in making good the exhaustion thereof for
which an allowance is or has been made (Major
Repairs)
Premiums paid on any life insurance policy
covering the life of any officer or employee, or
of any person financially interested in any trade
or business carried on by the taxpayer,
individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such
policy (Sec. 36 [A], NIRC)
NOTE: A person is said to be financially
interested in the taxpayer’s business, if he is a
stockholder thereof or if he receives as
compensation his share of the profits of the
business.
5.
6.
7.
Interest expense, bad debts, and losses from
sales of property between related parties
Bribes, kickbacks and other similar payments
Items where the requisites for deductibility are
not met
135
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
SUMMARY OF RULES ON DEDUCTIONS WITH LIMITS
Transportation
Travel Allowance
Entertainment,
Amusement, And
Recreational
Expense
Interest Expense
Taxes
Capital Losses
Wageriing Losses
LIMIT
Cost of the plane ticket. Any excess is disallowed
$150 per day for trips to US, Australia, Canada, Europe, Middle East and Japan; $100
per day for other places.
Engaged in sale of goods or properties
– 0.50% of net sales (i.e., gross sales less sales returns or allowances and sales
discounts)
Engaged in sale of services, including exercise of profession and use or lease of
properties
– 1% of net revenue (i.e., gross revenue less discounts)
The allowable deduction have been reduced by an amount equal to 33% of the
interest income subject to tax
In the case of NRAETB and RFC, the deductions for taxes shall be allowed only if and
to the extent that they are connected with income from sources within the
Philippines
Deductible up to the extent of capital gains
Deductible only to the extent of wagering gains.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
136
INCOME TAXATION
INCOME TAX ON INDIVIDUALS
Classes of individual taxpayers:
1. Citizen
a. Resident Citizen (RC)
b. Non-Resident Citizen (NRC)
i. Overseas Contract Worker (OCW)
ii. Seaman
RA
An individual
whose
residence is
within
the
Philippines
but who is not
a
citizen
thereof (Sec.
22 [F], NIRC)
2. Aliens
a. Resident Alien (RA)
b. Non- Resident Alien (NRA)
i. Engaged in Trade or Business (NRA-ETB)
ii. Not Engaged in Trade or Business (NRANETB)
c. Special Aliens
Engaged in
NOT engaged
trade or
in trade or
business
business
An alien who An alien who
stays in the stays in the
Philippines
Philippines for
for
an 180 days or
aggregate
less (Sec. 25
period
of [B], NIRC)
more than
180
days(Sec. 25
[A], NIRC)
SPECIAL CLASS OF INDIVIDUAL EMPLOYEES:
MINIMUM WAGE EARNER
Refers to a worker in the private sector paid the
statutory minimum wage or to an employee in
the public sector with compensation income of
not more than the statutory minimum wage in
the non-agricultural sector where he is assigned.
3. Special class of individual employees
 Minimum wage earner
CITIZENS
RC
A citizen of the
Philippines
who stays in
the Philippines
without
the
intention
of
transferring
his
physical
presence
abroad
whether
to
stay
permanently
or temporarily
as an overseas
contract
worker
permanently abroad or to
return to and reside in the
Philippines (Sec. 22 [E], NIRC).
ALIENS
NRA
An individual whose residence
is not within the Philippines
and who is not a citizen thereof
(Sec. 22 [G], NIRC)
NRC
A citizen of the Philippines
who:
a. Establishes
to
the
satisfaction of the CIR the
fact of his physical presence
abroad with a definite
intention to reside therein;
b. Leaves the Philippines
during the taxable year to
reside abroad, either as an
immigrant
or
for
employment
on
a
permanent basis;
c. Works and derives income
from abroad and whose
employment
thereat
requires
him
to
be
physically present abroad
most of the time during the
taxable year;
d. Has
been
previously
considered as a nonresident
citizen and who arrives in
the Philippines at any time
during the taxable year to
reside permanently in the
Philippines. (Note: Treated
as NRC with respect to
income
derived
from
sources abroad until the
date of his arrival)
Significance of classifying an alien as a resident
or a non-resident
BASIS
Tax
treatment
Personal
exemption
RA
0% 35%
schedular
rate
Entitled
NRA
ETB
NETB
50%35%
25% of
schedular
gross
rate
income
Entitled
subject to
the rule on
reciprocity
Not
entitled
Special classes of aliens under NIRC
Special
aliens
are
individuals
with
managerial/highly technical positions working in:
[ROP]
NOTE: Taxpayer shall submit
proof to the CIR to show his
intention of leaving the
Philippines
to
reside
137
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
1.
2.
3.
Regional or area headquarters and regional
operating headquarters of multinational
companies established in the Philippines
Offshore banking units (OBU) established in the
Philippines. OBUs are foreign banks allowed to
operate in the Philippines and to conduct
foreign currency transactions
Petroleum service contractors and subcontractors in the Philippines
insurance
Net Compensation Income
Add: Net business income or
Net professional income
Other income
Taxable income subject to
graduated rates
NOTE: When a special alien leases a property, he
shall be taxed under NRA-EBT and NRA-NEBT,
depending on the number of stay because the 15%
applies only to his compensation income.
Special aliens are not required to submit ITR
because the obligation to file income ITR rests upon
his employer.
Two instances where alternative taxation may
be applied
1.
2.
Filipino considered as special alien
When a taxpayer’s capital asset is sold to the
Government (Involuntary Sale or Expropriation)
Alternative taxation for Filipino considered as
special alien
When a Filipino is considered as a special alien
because he is employed and occupying the same
position as those of aliens employed by
multinational companies, he may:
1.
Avail of the 15% tax rate without deduction
(GIT);
Meaning of seamen as contemplated in the law
They should be working in a ship engaged
exclusively in international trade or commerce. If
engaged only in local trade or commerce, they are
just considered as normal employees.
Formula in determining taxable income
The term taxable income means the pertinent items
of gross income specified in this Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by this Code or other special laws. (Sec. 31,
NIRC)
Gross Compensation Income
Less: Personal exemptions
(xxx)
Premium payment on health
and/or hospitalization
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
xxx
138
(xxx)
__________
xxx
xxx
xxx
xxx
__________
xxx
INCOME TAXATION
General Principles and Applicable Tax Rates
INCOME DERIVED FROM
SOURCES
INDIVIDUAL TAXPAYER IS A:
GROSS OR NET
RATE
Within the
Philippines
Outside the
Philippines
Gross Income Taxation
(GIT) or Net Income
Taxation (NIT)
RC
√
√
Employee:
NIT
;
Businessman: NIT/GIT, if
he availed of the OSD
0-35%
NRC
√
X
NIT
0-35%
OCW/Seaman
√
X
NIT
0-35%
RA
√
X
Employee: GIT
Businessman: GIT
0-35%
NRA-EBT
√
X
NRA-NEBT
√
X
Special Alien
√
X
Estate Under Judicial
Settlement
√
√
Irrevocable Trust
√
Co-owners
√
NIT
0-35%
GIT
25%
GIT
15%
NIT
0-35%
√
NIT
0-35%
√
NIT
0-35%
139
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Graduated rates applicable to the income of
individuals
INCOME BRACKET
Not over ₱250,000
Over
₱250,00
0
but not
over
₱400,00
0
Over
₱400,00
0
but not
over
₱800,00
0
Over
₱800,00
0
but not
over
₱2,000,0
00
Over
₱2,000,0
00
but not
over
₱8,000,0
00
Over
₱8,000,0
00
APPLICABLE TAX
RATE
Tax
+
exempt
20% of
the
+ excess
over
₱10,000
25% of
the
₱30,000 + excess
over
₱30,000
30% of
the
₱130,00
excess
+
over
0
₱800,00
0
32% of
the
₱490,00
excess
+
over
0
₱2,000,
000
35% of
the
₱2,410,
excess
+
over
000
₱8,000,
000
Applicability
Allowed
deductions
Allowable
itemized
deductions or
Optional
Standard
Deduction
(OSD)
Business tax
Percentage
Tax or VAT
1 . If itemized:
FS – if gross
is less than 3
million pesos;
Audited FS –
if gross is
more than 3
million
2 . If OSD, no
FS
required
INCOME TAX ON RESIDENT CITIZENS, NONRESIDENT CITIZENS AND RESIDENT ALIENS
Coverage
1.
What are the salient features of both the
graduated and the 8% income tax rates? (RMC
50-2018)
Graduated
IT rates
In
general,
applicable to
all individuals
Net taxable
income
Required
financial
statements
(Sec. 24 [A] [2], TRAIN)
Particulars
Basis of IT
2.
3.
8% IT rates
May be availed
only
by
qualified
individuals
engaged in the
business
or
practice
of
profession
whose gross
sales/receipts
and other nonoperating
income does
noe
exceed
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
3,000,000
pesos
Gross
sales/receipts,
and other nonoperating
income
Allowed
reduction of
only 250,000
pesos from an
individual
whose income
comes purely
from business
or practice of
profession
If qualified, not
subject to PT
If qualified, no
FS required
4.
140
A citizen of the Philippines residing therein is
taxable on all income derived from sources
within and without the Philippines;
A nonresident citizen is taxable only on income
derived from sources within the Philippines;
An individual citizen of the Philippines who is
working and deriving income from abroad as an
OFW is taxable only on income derived from
sources within the Philippines: Provided, that a
seaman who is a citizen of the Philippines and
who receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an
overseas contract worker;
An alien individual, whether a resident or not of
the Philippines, is taxable only on income
derived from sources within the Philippines
(Sec. 23, NIRC).
INCOME TAXATION
The general rule is that resident citizens are taxable
on income from all sources within and without the
Philippines. Whereas, nonresident citizens,
overseas contract workers, seamen who are
members of the complement of a vessel engaged
exclusively in international trade, resident aliens,
and nonresident aliens are taxable only on income
from sources within the Philippines.
Requisites for
income [SAR]
taxability of compensation
1. Personal services actually rendered
2. Payment is for such services rendered
3. Payment is reasonable
Payment for the services rendered by an
independent contractor
Q: Ms. C, a resident citizen, bought ready-towear goods from Ms. B, a nonresident citizen.
Payment for the services of an independent
contractor is not classified as compensation income
since there is no employer-employee relationship.
The income of the independent contractor is
derived from the conduct of his trade or business,
which is considered as business income and not
compensation income.
a.
If the goods were produced from Ms. B’s
factory in the Philippines, is Ms. B’s income
from the sale to Ms. C taxable in the
Philippines? Explain.
b. If Ms. B is an alien individual and the goods
were produced in her factory in China, is Ms.
B’s income from the sale of the goods to Ms.
C taxable in the Philippines? Explain. (2015
Bar)
Q: Give an instance that payment is made for
services rendered yet it may not qualify as
compensation income.
A:
a. YES. The income of Ms. B from the sale of readyto-wear goods to Ms. C is taxable. A nonresident
citizen is taxable only on income derived from
sources within the Philippines. In line with the
source rule of income taxation, since the goods
are produced and sold within the Philippines,
Ms. B’s Philippine-sourced income is taxable in
the Philippines. (Sec. 23, NIRC)
b. YES. But only a proportionate part of the
income. Gains, profits and income from the sale
of personal property produced by the taxpayer
without and sold within the Philippines, shall be
treated as derived part. (Sec. 42 [E], NIRC).
A: The share of a partner in a general professional
partnership. The general partner rendered services
and the payment is in the form of a share in the
profits is not within the meaning of compensation
income because it is derived from the exercise of
profession classified as professional income.
Inclusions in Compensation Income
1.
Monetary compensation
a. Regular salary/wage
b. Separation pay/retirement benefit not
otherwise exempt
c. Bonuses, 13th month pay, and other
benefits not exempt
d. Director’s fees
Compensation income includes all remuneration for
services rendered by an employee for his employer
unless specifically excluded under the NIRC (R.R. 298, Sec. 2.78.1).
2.
Non-monetary compensation
 Fringe benefit not subject to tax
The name by which the remuneration for services is
designated is immaterial. Thus, salaries, wages,
emoluments, honoraria, allowances, commissions
(i.e. transportation, representation, entertainment
and the like); fees including director’s fees, if the
director is, at the same time, an employee of the
employer/ corporation; taxable bonuses and fringe
benefits except those which are subject to the fringe
benefits tax; taxable pensions and retirement pay;
and other income of a similar nature constitute
compensation income (R.R. 2-98, Sec. 2.78.1).
1.
2.
3.
Taxation on Compensation Income
Exclusions from Compensation Income
Fringe benefit subject to tax
De minimis benefit
13th month pay and other benefits and
payments specifically excluded from taxable
compensation income
The above exclusions are discussed in detail below
Deductions from Compensation Income
1.
2.
The test is whether such income is received by
virtue of an employer-employee relationship.
Personal exemptions
Additional exemptions
Fringe Benefits
141
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Fringe benefit is any good, service or other benefit
furnished or granted by an employer in cash or in
kind, in addition to basic salaries, to an individual
employee, except rank and file employee, such as
but not limited to:
Rank-andfile
employees
but requires the use of
independent judgment.
Employees who are holding
neither
managerial
nor
supervisory position.
[HEV-HIM-HEEL]
Nature of a fringe benefit tax (FBT)
1.
2.
3.
4.
FBT is a final withholding tax imposed on the
grossed-up monetary value (GMV) of fringe
benefit furnished, granted or paid by the employer
to the employee, except rank and file employees
(R.R. 3-98, Sec. 2.33 [A]).
Housing
Expense account
Vehicle of any kind
Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market
rate and the actual rate granted
6. Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs or other similar
organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel
9. Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows (Sec. 33 [B], NIRC;
R.R. 3-98, Sec. 2.33 [B])
Grossed-up Monetary Value
This represents the whole amount of income
realized by the employee, which includes the net
amount of money or net monetary value of
property which has been received, plus the amount
of fringe benefit tax thereon otherwise due from the
employee but paid by the employer for and in
behalf of his employee (R.R. 3-98, Sec. 2.33).
Computing for the GMV
It shall be determined by dividing the monetary
value of the fringe benefit by the grossed-up divisor.
The grossed-up divisor is the difference between
100% and the applicable individual tax rates.
Tax treatment for fringe benefits
Thus:
If the benefit is not tax-exempt and the recipient is:
1. A rank and file employee – the value of such
fringe benefit shall be considered as part of the
compensation income of such employee
subject to tax payable by the employee.
2. A managerial or supervisory employee – the
value shall not be included in the
compensation income of such employee
subject to tax. The fringe benefit tax (FBT) is
payable by the employer on behalf of the
employee (Sec. 33, NIRC).
EMPLOYEE
Citizen, RA, NRAEBT
NRA-NEBT
Special alien and any
Filipino employees
who are employed
and occupying the
same position as
those occupied or
held by the special
alien employees.
Employees in special
economic
zones
(Clark
Special
Economic Zone and
Subic
Special
Economic and Free
Trade Zone)
Difference among Managerial, Supervisory and
Rank-and-File Employees
Managerial
employees
Supervisory
employees
Employees who are given
powers or prerogatives to lay
down and execute management
policies and/or to hire, transfer,
suspend,
lay-off,
recall,
discharge, assign or discipline
employees.
Employees who effectively
recommend such managerial
actions, if the exercise of such
authority is not merely
routinary or clerical in nature
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
GROSSEDUP
DIVISOR
FBT
RATE
65%
35%
75%
25%
85%
15%
75%/ 85%
25%/
15%
If the fringe benefit is granted or furnished in:
1.
142
Money, or is directly paid for by the employer –
the value is the amount granted or paid;
INCOME TAXATION
2.
3.
Property other than money and ownership is
transferred to the employee – the value of the
fringe benefit shall be equal to the fair market
value of the property as determined in
accordance with the authority of the
Commissioner to prescribe real property
values (zonal valuation);
Property other than money BUT ownership is
NOT transferred to the employee – the value of
the fringe benefit is equal to the depreciation
value of the property (R.R. 3-98, Sec 2.33).
FBT is not an additional tax on the employer.
Rather, the employer can claim the fringe benefit
and the FBT as a deductible expense from his gross
income. The deduction for the employer is the
grossed-up monetary value of the fringe benefit.
(Sec. 32 [B] [3], NIRC)
Salaries and wages of managerial
supervisory employee, not subject to FBT
or
Basic salary of managerial or supervisory employee
is excluded and not subject to FBT because it is part
of his compensation income.
NOTE: These guidelines are only used in instances
where there are no specific guidelines. For
example, there are specific guidelines for the
valuation of real property and automobiles.
Purpose behind Fringe Benefit Tax
The FBT is a measure to ensure that an income tax
is paid on fringe benefits. If they were given in cash,
an income is automatically withheld and collected
by the government. An additional compensation
which is given in non-cash form is virtually untaxed.
Such a situation has caused inequity in the
distribution of the tax burden. The FBT can enhance
the progressiveness and fairness of the tax system
(Dimaampao, 2011).
Q: Who is required to pay the Fringe Benefit
Tax? (2003 Bar)
A: It is the employer who is legally required to pay
an income tax on the fringe benefit. The fringe
benefit tax is imposed as a final withholding tax
placing the legal obligation to remit the tax on the
employer, such that, if the tax is not paid, the legal
recourse of the BIR is to go after the employer. Any
amount or value received by the employee as a
fringe benefit is considered tax paid hence, net of
the income tax due thereon. The person who is
legally required to pay (same as statutory incidence
as distinguished from economic incidence) is that
person who, in case of non-payment, can be legally
demanded to pay the tax.
Reasons why the Fringe Benefit Tax is collected
from the employer
Valuation of benefits is easier at the level of the
firm. The problem of allocating the benefits among
individual employees is avoided. Collection of the
FBT is also ensured because the FBT is withheld at
the source and does not depend on the selfdeclaration of the individual (Dimaampao, 2011).
Fringe Benefit Tax as a deductible expense
143
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Compensation Income vs. Fringe Benefit
COMPENSATION INCOME
Part of the gross income of an
employee
As part of gross income of an
employee
As to who should pay the tax
NOTE: The person who is legally
required to pay is that person who,
in case of non-payment, can be
legally demanded to pay the tax.
As to taxpayers covered
As to treatment
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The employee is liable to pay the tax
on his income earned.
Managerial, supervisory, and rankand-file employees
Subject to creditable withholding
tax – the employer withholds the tax
upon the payment of the
compensation income.
144
FRINGE BENEFIT
GR: Not reported as part of the
gross income of an employee
XPN: Fringe benefits given to a
rank-and-file employee are
included in his gross income
The employer pays the fringe
benefit tax on behalf of the
employee.
Managerial and supervisory
employees
Subject to final withholding tax
INCOME TAXATION
Fringe benefits exempt from fringe benefits tax
a.
1.
Fringe benefits which are authorized and
exempted from tax under the NIRC or special
laws
(e.g. separation benefits which are given to
employees who are involuntarily separated from
work)
b.
Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans
Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not
De minimis benefits, whether given to rank and
file employees or to supervisory or managerial
employees(Sec 32 [3], NIRC)
Fringe benefits granted to employee as
required by the nature of, or necessary to the
trade, business or profession of the employer
Fringe benefits granted for the convenience of
the employer (Employer’s Convenience Rule)
(Sec. 33 [A], NIRC)(Sec. 32, NIRC; R.R. 3-98, Sec.
2.33 [C])
1.
2.
3.
4.
5.
6.
Benefits which are considered necessary to the
business of the employer or are granted for the
convenience of the employer
2.
3.
4.
5.
NOTE: Although a fringe benefit may be exempted
from the FBT, it may still fall under a different tax
under another law, such as the compensation
income tax or the like.
6.
Convenience of the Employer Rule
An exemption from taxation is granted to benefits
which are given to the employee for the exclusive
benefit or convenience of the employer.
7.
Requirements for the application of the
convenience of the employer rule where the
employer furnished living quarters
8.
Such shall not be considered as part of the
employee’s gross compensation income if:
a.
b.
Furnished to the employee during his work
day; or
To have the employee available for work
during his meal period (No. 2.3, RAMO, 1-87).
9.
It is furnished in the employer’s business
premises, and
Employee is required to accept such lodging as
a condition of his employment (No. 2.2, RAMO
No. 1-87).
Housing privilege of military officials of the
Armed Forces of the Philippines, consisting of
officials of the Philippine Army, Philippine
Navy and Philippine Air Force
A housing unit which is situated inside or
adjacent to the premises of a business of
factory – it is considered adjacent to the
premises if it is located within the maximum 50
meters from the perimeter of the business
premises
Temporary housing for an employee who stays
in a housing unit for 3 months or less
The use of aircraft (including helicopters)
owned and maintained by the employer
Reasonable business expenses which are paid
for by the employer for the foreign travel of his
employee for the purpose of attending business
or conventions
A scholarship grant to the employee by the
employer, if the education or study involved is
directly connected with the employer’s trade,
business or profession, and there is a written
contract between them that the employee is
under obligation to remain in the employ of the
employer for a period of time that they have
mutually agreed upon
Cost of premiums borne by the employer for
the group insurance of his employees
Expenses of the employee which are
reimbursed, if they are supported by receipts
in the name of the employer and do not partake
the nature of a personal expense of the
employee
Motor vehicles used for sales, freight, delivery
service and other non-personal uses (R.R. 3-98)
Q: X was hired by Y to watch over Y’s fishponds
with a salary of ₱10,000. To enable him to
perform his duties well, he was also provided a
small hut, which he could use as his residence in
the fishponds. Is the fair market value of the use
of the small hut by X a “fringe benefit” that is
subject to the 35% tax imposed by Sec. 33 of the
NIRC? (2001 Bar)
Requirements for the application of the
convenience of the employer rule in case of free
meals
Such shall not be considered as part of the
employee’s gross income if:
A: NO. X is neither a managerial nor a supervisory
employee. Only managerial or supervisory
employees are entitled to a fringe benefit subject to
the FBT. Even assuming that he is a managerial or
145
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
supervisory employee, the small hut is provided for
the convenience of the employer, hence does not
constitute a taxable fringe benefit (Sec. 3, NIRC).
(Sec. 33, NIRC)
4.
Housing privilege subject to FBT
1.
2.
3.
4.
5.
Employer leases residential property for use of
the employee;
Employer owns a residential property and
assigns the same for the use by the employee;
Employer purchases a residential property on
installment basis and allows use by the
employee;
Employee purchases a residential property and
transfers ownership to the employee;
The employee provides a monthly fixed
amount for the employee to pay his landlord.
Expenses treated as non-taxable fringe benefits
1.
2.
Housing privilege exempt from FBT
1.
Housing privilege of military officials of the
Armed Forces of the Philippines consisting of
officials of the Philippine Army, Philippine
Navy, and Philippine Air Force (Sec. 2.33 [D] [1]
[f], NIRC);
3.
4.
NOTE: Benefit to said officials shall not be
treated as taxable fringe benefit in accordance
with the existing doctrine that the State shall
provide its soldiers with necessary quarters
which are within or accessible from the
military camp so that they can readily be on call
to meet the exigencies of their military service.
2.
A motor vehicle shall be subjected to fringe benefits
tax whenever the employer:
A housing unit which is situated inside or
adjacent to the premises of a business or
factory;
1.
2.
3.
4.
5.
Temporary housing for an employee who
stays in a housing unit for three (3) months or
less (R.R. 3-98, Sec. 2.33 [D] [1] [g]).
6.
2.
3.
Expenses incurred by the employee but which
are paid by his employer;
Expenses paid for by the employee but
reimbursed by his employer;
Personal expenses of the employee (like
purchases of groceries for the personal
consumption of the employee and his family
members, salaries of household personnel,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Purchases vehicle in employee’s name,
regardless of usage of vehicle;
Provides employee cash for vehicle purchase;
Purchases car on installment in the name of the
employee;
Shoulders a portion of the purchase price;
Owns and maintains a fleet of motor vehicle for
the use of the business and employees;
Leases and maintains a fleet of motor vehicles
for the use of the business and employees.
XPN: The use of aircraft (including helicopters)
owned and maintained by the employer shall be
treated as business use and not be subject to the
fringe benefits tax.
Expenses treated as taxable fringe benefits
1.
Expenditures incurred by the employee and
paid by his employer but are duly receipted for
and in the name of the employer, and such do
not partake the nature of a personal expense
attributable to the said employee.
Expenditures paid for by the employee and
reimbursed by his employer but are duly
receipted for and in the name of the employer,
and such do not partake the nature of a
personal expense attributable to the said
employee.
Representation and transportation allowances
which are fixed in amounts and are regularly
received by the employees as part of their
monthly compensation income.
Business expenses which are paid for by the
employer for foreign travel of his employees in
connection with business meetings or
conventions (R.R. 3-1998).
Motor vehicle subject to fringe benefit tax
NOTE: A housing unit is considered adjacent to
the premises if it is located within the
maximum 50 meters from the perimeter of the
business premises.
3.
etc.) paid for or reimbursed by the employer to
the employee, whether or not the same are duly
receipted for in the name of the employer;
Membership fees, dues, and other expenses
borne by the employer for his employee, in
social and athletic clubs or other similar
organizations shall be treated as taxable fringe
benefits of the employee in full
Interest on loan at less than market rate
If the employer lends money to his employees free
of interest or at a rate lower than 12%, such interest
foregone by the employer or the difference of the
146
INCOME TAXATION
interest assumed by the employee and the rate of
12% shall be treated as fringe benefit.
2.
The cost of premiums borne by the employer
for the group of insurance of employees (R.R. 398, Sec. 2.33 [D] [10]).
The rule shall apply to installment payments or
loans with interest rate lower than 12% (R.R. 3-98,
Sec. 2.33 [D] [5]).
Stock Options
Expenses for foreign travel
The difference between the fair market value and the
exercise price at the time of exercise of stock options
are subject to FBT.
GR:
Fixed
and
variable
transportation,
representation and other allowances are subject to
FBT.
NOTE: Employees receive stock options as part of
their payment for the services they rendered to
their employer, which entitles them to buy their
employer’s shares of stock at an agreed price.
XPN: They are subject to FBT if incurred or
reasonably expected to be incurred by the
employee in the performance of his duties, subject
to the following conditions:
1.
2.
De Minimis Benefits
These are facilities or privileges furnished or
offered by an employer to his employees
(managerial, supervisory or rank and file) that are
of relatively small value and are offered or
furnished by the employer merely as a means of
promoting the health, goodwill, contentment and
efficiency of his employees.
Ordinary and necessary in the pursuit of
employer’s business and paid or incurred by
employee; and
Liquidated or substantiated by receipts or
other adequate documentation (R.R. 3-98, Sec.
2.33 [D] [7] [c]).
Educational assistance to the employee or his
dependents
Q:Mapagbigay Corporation grants all its
employees (rank and file, supervisors, and
managers) 5% discount of the purchase price of
its products. During an audit investigation, the
BIR assessed the company the corresponding
tax on the amount equivalent to the courtesy
discount received by all the employees,
contending that the courtesy discount is
considered as additional compensation for the
rank and file employees and additional fringe
benefit for the supervisors and managers. In its
defense, the company argues that the discount
given to the rank and file employees is a de
minimis benefit and not subject to tax. As to its
managerial employees, it contends that the
discount is nothing more than a privilege and its
availment is restricted.
GR: The cost of the educational assistance to the
employee which is borne by the employer shall be
treated as taxable fringe benefit.
XPN: A scholarship grant shall not be treated as
taxable fringe benefit if:
1.
2.
3.
Education/study is directly connected with
employer’s trade, business or profession;
There is written contract that the employee
shall remain employed with the employer for a
period of time mutually agreed upon by the
parties; and
The educational assistance extended to the
dependents of the employee was provided
through a competitive scheme(R.R. 3-98, Sec.
2.33 [D] [9] [b]).
Is the BIR assessment correct? (2016 Bar)
A: NO. The 5% discount of the purchase price of its
products, so-called “courtesy discounts” on
purchases, granted by Mapagbigay Corporation to
all its employees (rank and file, supervisors, and
managers) otherwise known as “de minimis
benefits,” furnished or offered by an employer to
his employees merely as a means of promoting the
health, goodwill, contentment, or efficiency of his
employees, are not considered as compensation
subject to income tax and consequently to
withholding tax. (Rev. Regs. 2-98, Sec. 2.78.1[A][3],
as amended by RR No. 8-2000, RR No. 5-2008, RR No.
10-2008, RR No. 5-2011, and RR No. 8-2012).
Life or health insurance
GR: The cost of life or health insurance and other
non-life insurance premiums borne by the
employer are taxable fringe benefits.
XPNs:
1. Contributions of the employer for the benefit of
employee to the SSS, GSIS, or similar
contributions arising from provisions of any
existing law;
147
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
As such, de minimis benefits, if given to
supervisors and managerial employees, they are
also exempt from the fringe benefits tax.
Q:What are de minimis benefits and how are
these taxed? Give three (3) examples of
deminimis benefits. (2015Bar)
A: De minimis fringe benefits and their
respective ceiling amounts
As per R.R. 2-98 and 3-98, as amended by R.R. 52008, 5-2011, 5-2011, 8-2012, and 1-2015, de
minimis benefits include:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
148
INCOME TAXATION
Monetized unused vacation leave credits of
employees
Medical cash allowance to dependents of
employees
Rice subsidy
Uniforms and clothing allowances
Actual medical assistance, e.g. medical allowance
to cover medical and healthcare needs, annual
medical/executive check up, maternity
assistance, and routine consultations
Laundry allowance
Employee achievement awards under an
established written plan which does not
discriminate in favor of highly paid employees
(e.g. for length of service or safety achievement)
Gifts given during Christmas and major
anniversary celebrations
Daily meal allowance for overtime work
Benefits received by virtue of Collective
Bargaining Agreement (CBA) and productivity
incentive scheme
Qualify:
1. Private employees:
a. Vacation leave - exempt up to 10 days
b. Sick leave – always taxable
2. Government employees:
Vacation and sick leave are always tax
exemptregardless of the number of days.
Not exceeding ₱750 per semester or ₱125 per
month
₱1,500 or one sack of 50-kg rice per month
amounting to not more than P1,500
Not exceeding ₱5,000 per annum (R.R. 8-2012)
Not exceeding ₱10,000 per annum
Not exceeding ₱300 per month
In the form of tangible personal property other than
cash or gift certificate with an annual monetary
value not exceeding ₱10,000
Not exceeding ₱5,000 per employee per annum
Not exceeding 25% of the basic minimum wage on a
per region basis
Not exceeding ₱10,000 per employee per annum
(R.R. 1-2015)
149
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
All other benefits given by employers, which are not
included in the above enumeration shall NOT be
considered as de minimis benefits, and hence, shall
be subject to income tax, as well as to withholding
tax on compensation income. The benefits provided
in the Regulations shall apply to income earned
starting the year 2011(R.R. 5-2011).
gifts in cash or in kind and other benefits of
similar nature actually received by officials and
employees of both government and private
offices.
In no case shall the exemption apply to other
compensation received by an employee under an
employer employee relationship, such as basic
salary and other allowances (R.A. No.10653 as
clarified by R.R. 3-2015).
NOTE: Flowers, fruits, books, similar items given to
employees under special circumstances (e.g. on
account of illness, marriage, birth of baby, etc.) are
now taxable.
De minimis benefits in excess of respective
ceilings
The amount of benefits exceeding their respective
ceilings shall be considered as part of “other
benefits” under Sec. 32[B][7][e] of the NIRC.
Under Sec. 32 [B][7][e] of the NIRC, 13th month pay
and other benefits are excluded from gross income,
provided that they do not exceed ₱82,000. Any
excess thereof is considered part of the
compensation income of an individual, hence,
subject to income tax.
13th Month Pay and other Benefits
The 13th month pay and other benefits are excluded
from gross income, provided that they do not
exceed ₱82,000. Any excess thereof is considered
part of the compensation income of an individual,
hence, subject to income tax (Sec. 32 [B] [7] [e],
NIRC).
NOTE: The amount of ₱30,000, specifically referring
to the total amount of 13th month pay and other
benefits as one of the exclusions from gross
compensation income received by an employee, is
increased to ₱82,000(R.A. No. 10653).
The amount of ₱82,000 shall apply to the 13th month
pay and other benefits paid or accrued beginning
January 1, 2015(R.R. 3-2015, Sec. 3).
The threshold amount of P82,000 shall apply to
the 13th-month pay and other benefits which
covers only the following:
1.
2.
Thirteenth-month pay equivalent to the
mandatory one month basic salary of officials
and employees of the government, (whether
national or local), including government-owned
or -controlled corporations, and or private
offices received after the 12th-month pay; and
Other benefits, such as Christmas bonus,
productivity-incentive bonus, loyalty award,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
150
INCOME TAXATION
Summary of tax implications of employees
SALARY
SICK LEAVE/
VACATION
LEAVE/SERVICE
INCENTIVE LEAVE
(SIL)
 Fixed salary – Taxable
 Other Benefits (ECOLA, 13th month pay, Christmas Bonus,
Transportation/Representation allowances, tips, etc) – the 1st ₱82,000.00 is
exempted from income tax, any excess is taxable.
 Transportation/Representation allowances
o If there is liquidation, not taxable.
o If there is no liquidation, taxable.
 If paid or availed of as salary of an employee who is on vacation or on sick leave
notwithstanding his absence from work, it constitutes taxable compensation.
(R.R. 6-82)
Monetized value of unutilized vacation leave credits of private employees (RR 2-98)
 10 days or below – not taxable
 Any excess over 10 days is taxable
Sick leave credits of private employees - Always taxable
Vacation and sick leave credits of government employees - Always tax-exempt
Service Incentive Leave - Not taxable
SEPARATION PAY
 It is only taxable if voluntarily availed of by the employee.
 If due to any cause beyond the control of the official or employee, it is not
taxable.
 The phrase “for any cause beyond the control of the said official or employee”
connotes involuntariness on his/her part.
 Examples of involuntary separation:
a. Death
b. Sickness
c. Disability
d. Reorganization
e. Company at the brink of bankruptcy
 2nd, 3rd, 4th ad infinitum separation pay is not taxable as long as the employee is
not at fault.
 Any payment received on account of dismissal constitutes compensation
regardless of whether the employer is legally bound by contract, statute, or
otherwise, to make such payment. (Sec. 2.78.1(B)(1)(b), R.R. 2-98)
 Financial assistance with the condition that you have to leave the company – that
amount is taxable.
BACKWAGES
Taxable because it is income actually given by the employer
RETIREMENT
BENEFITS
 Generally, retirement benefits are tax-exempt because they are mere provisions
for the person’s impending state of unemployment.
 The following retirement benefits are tax-exempt:
a. SSS or GSIS retirement pays;
b. Optional Retirement Plan - Retirement pay due to old age under R.A. 7641,
subject to the following conditions:
i. The retirement program is approved by the BIR Commissioner;
ii. It must be a reasonable benefit plan, i.e., it must be fair and equitable for
the benefit of all employees.
iii. The retiree should have been employed for at least 10 years in the said
company;
iv. The retiree should have been 50 years old at the time of retirement; and
v. It should have been availed of for the first time.
151
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
 DBP Case – Tax free means, the company will shoulder the taxes
NOTE: It does not include pre-terminated annuity and gratuity programs (they
are taxable except if the employee is more than 60 years old).
TERMINAL LEAVE
PAYMENTS
They are not taxable regardless of whether the recipient is a government or private
employee.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
152
INCOME TAXATION
previous discussions on capital gains under
“Dealings in Property.”
INCOME TAX ON NON-RESIDENT ALIENS
ENGAGED
IN TRADE OR BUSINESS
Q: Assuming X, a resident citizen, married and
has 4 qualified dependents. In 2009, he earned a
monthly compensation income of ₱25,000. In
addition to his compensation income, he earned
₱150, 000 as net income from his retail business.
How much is his taxable income for the year
2009?
Non-Resident Aliens Engaged in Trade or Business
are taxed on their income derived from all sources
within the Philippines in the same manner as an
individual citizen or a resident alien individual,
subject to the schedule rate of 5-32% and are
granted Personal and Additional Exemptions,
subject to the rule of reciprocity.
A: X’s taxable income for the year 2009 is ₱300,000
computed as follows:
A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period
of more than one hundred eighty (180) days during
any calendar year shall be deemed a nonresident
aliendoing business in the Philippines.
Gross Income (₱25,000 x 12)
Less:
Basic Personal exemption
Additional Exemption (25K x 4)
PHHI
Q:Patrick is a successful businessman in the
United States and he is a sole proprietor of a
supermarket which has a gross sales of $10
million and an annual income of $3 million. He
went to the Philippines on a visit and, in a party,
he saw Atty. Agaton who boasts of being a tax
expert. Patrick asks Atty. Agaton: if he (Patrick)
decides to reacquire his Philippine citizenship
under RA 9225, establish residence in this
country, and open a supermarket in Makati City,
will the BIR tax him on the income he earns from
his U.S. business? If you were Atty. Agaton, what
advice will you give Patrick? (2016 Bar)
₱300,000
(50,000)
(100,000)
--------____________
Net Compensation Income
150,000
Add: Net business income
150,000
Taxable income
____________
₱300,000
NOTE: Premium payment on health and/or
hospitalization insurance cannot be availed of since
the family gross income is more than ₱250,000 for
the taxable year.
A: I will advise Patrick that if he reacquires his
Philippine citizenship and establish residence in
the Philippines, he shall be considered as a
resident citizen subject to tax on incomes derived
from sources within or without the Philippines.
[NIRC of 1997, Sec. 23 (A)] Consequently, the BIR
could now tax him on his income derived from
sources without the Philippines which is the income
he earns from his U.S. business (Domondon).
Q: How much is his income tax payable?
A: From the taxable income of ₱300,000, the income
tax payable is ₱65,000.
Over ₱250,000
but not over
P500,000
INCOME TAX ON NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS
₱50,000+30% of the
excess over ₱250,000
Q: Assume that X is a non-resident alien not
engaged in trade or business. He earned gross
income in the amount of ₱1.5 million from his
one-night concert in the Philippines. How much
will he pay for his income tax?
Non-Resident Aliens Not Engaged in Trade or
Business are taxed on their income received from all
sources within the Philippines as interest, cash
and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual
or periodic or casual gains, profits, and income, and
capital gains, a tax equal to twenty-five percent
(25%) of such income.
A: X must pay ₱375,000 as income tax (₱1,500,000
x 25%). Since X is a non-resident alien not engaged
in trade or business, his gross income within the
Philippines is subject to 25% final tax and is not
allowed any deductions.
INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
Capital gains realized from the sale of shares of
stock in any domestic corporation and real property
shall be subject to capital gains tax. Refer to
153
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The following individuals are exempt from income
tax:
trust funds, deposit substitutes, investment
management
accounts
and
other
investments evidenced by certificates in
such form prescribed by the Bangko Sentral
ng Pilipinas before the fifth year, he shall be
subject to the final withholding tax imposed
on the entire income, depending on the
holding period of the deposit or
investment. If held for a period of:
 Four years to less than five years — 5%
 Three years to less than four years —
12%; and
 Less than three years — 20%
1. Senior Citizens
A senior citizen is any Filipino citizen who is a
resident of the Philippines, and who is sixty (60)
years old or above. It may apply to senior citizens
with “dual citizenship” status, provided they prove
their Filipino citizenship and have at least six (6)
months residency in the Philippines (Sec. 2, R.R. 72010).
Income tax of senior citizens
G.R.:Qualified senior citizens deriving returnable
income during the taxable year, whether from
compensation or otherwise, are subject to income
tax and are required to file their income tax returns
and pay the tax as they file the return.
XPNs:
1. If the returnable income of a senior citizen is in
the nature of compensation income but he
qualifies as a minimum wage earner under R.A.
9504;
2. If the aggregate amount of gross income
earned by the senior citizen during the taxable
year does not exceed the amount of his
personal exemptions (basic and additional);
d.
The 10% final withholding tax –
i.
On cash and/or property dividends
actually or constructively received
from a domestic corporation or from
a joint stock company, insurance or
mutual fund company and regional
operating headquarters of a
multinational company; or
ii.
On the share of an individual in the
distributable net income after tax of
a partnership (except a general
professional partnership) of which
he is a partner; or
iii.
On the share of an individual in the
net income after tax of an
association, a joint account, or a joint
venture or consortium taxable as a
corporation of which he is a member
or a co-venturer(Sec. 24 [B][2],
NIRC);
e.
Capital gains tax from sales of shares of
stock not traded in the stock exchange (Sec.
24 [C], NIRC; and
The 6% final withholding tax on presumed
capital gains from sale of real property,
classified as capital asset, except capital
gains presumed to have been realized from
the sale or disposition of principal
residence (Sec. 24 [D], NIRC).
XPNs to the XPN:
The exemption of senior citizens from income
tax will not extend to all types of income earned
during the taxable year. Hence, they can still be
liable for other taxes such as:
a.
b.
c.
The 20% final withholding tax on interest
income from any currency bank deposit,
yield and other monetary benefit from
deposit substitutes, trust fund and similar
arrangements; royalties (except on books,
as well as other literary works and musical
compositions, which shall be imposed a
final withholding tax of 10%); prizes
(except prizes amounting to P10,000 or
less which shall be subject to income tax at
the rates prescribed under Sec. 24(A) of the
NIRC, and other winnings (except
Philippine Charity Sweepstakes and Lotto
winnings) (Sec. 24 [B][1], NIRC);
The 7.5% final withholding tax on interest
income from a depository bank under the
expanded foreign currency deposit system
(Sec. 24 [B][1], NIRC);
If the senior citizen will pre-terminate his
5-year long-term deposit or investment in
the form of savings, common or individual
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
f.
Requirements in order for senior citizen to avail
tax exemption
1.
2.
154
He must be qualified as such by the CIR or RDO
of the place of his residence;
He must file a Sworn Statement on or before
January 31 of every year that his annual taxable
income for the previous year does not exceed
the poverty level as determined by the National
Economic and Development Authority (NEDA)
thru the National Statistical Coordinating Board
(NSCB);
INCOME TAXATION
3.
If qualified, his name shall be recorded by the
RDO in the Master List of Tax-Exempt Senior
Citizens for that particular year, which the RDO
is mandatorily required to keep.
of the statutory limit of P30,000 (Now at
P90,000) is no longer entitled to the
exemption provided by R.A. 9504.
A:
a. The MWE is exempt for the entire taxable year
2008. As it stands, the calendar year 2008
remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot
declare the income earned by a minimum wage
earner from 1 January 2008 to 5 July 2008 to be
taxable and those earned by him for the rest of
that year to be tax-exempt. To do so would be to
contradict the NIRC and jurisprudence, as
taxable income would then cease to be
determined on a yearly basis.
2. Minimum Wage Earners
A minimum wage earner is a worker in the private
sector paid the statutory minimum wage, or to an
employee in the public sector with compensation
income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is
assigned (Sec. 22 [HH], NIRC, as amended by R.A.
9504).
Minimum wage earners shall be exempt from the
payment of income tax on their taxable income.
Holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income
tax (Sec. 24 [A] [2], NIRC, as amended by R.A. 9504).
NOTE: The above ruling that the MWE
exemption is available for the entire taxable
year 2008 is premised on the fact of one's status
as an MWE during the entire year of 2008.
However, minimum wage earners receiving “other
benefits” exceeding P82,000 limit shall be taxable
on the excess benefits,
b.
When the wages received exceed the minimum
wage anytime during the taxable year, the
employee loses the MWE qualification.
Therefore, wages become taxable as the
employee ceased to be an MWE. But the
exemption of the employee from tax on the
income previously earned as an MWE
remains. The improvement of one's wage
cannot justly operate to make the employee
liable for tax on the income earned as an MWE.
c.
Sections 1 and 3 of RR 10-2008 add a
requirement not found in the law by effectively
declaring that an MWE who receives other
benefits in excess of the statutory limit of
P30,000 is no longer entitled to the exemption
provided by R.A. 9504.
Statutory Minimum Wage
It refers to the rate fixed by the Regional Tripartite
Wage and Productivity Board, as defined by the
Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment
(DOLE) (Sec. 22 [GG], NIRC, as amended by R.A.
9504).
NOTE: Effective June 2, 2016, the daily minimum
wage rate in NCR for non-agricultural sector is
P491 (P481.00 basic wage+ P10.00 COLA) (National
Wages and Productivity Commission Per Wage Order
No. NCR-20).
R.A. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of
the minimum wage as determined by the wage
boards, including the corresponding holiday,
overtime, night differential and hazard pays.
The minimum wage exempted by R.A. 9504 is
distinct and different from other payments
including allowances, honoraria, commissions,
allowances or benefits that an employer may
pay or provide an employee.
Q: R.A. 9504 was approved and took effect on 6
July 2008. The law granted MWEs exemption
from payment of income tax on their minimum
wage, holiday pay, overtime pay, night shift
differential pay and hazard. On 24 September
2008, the BIR issued RR 10-2008 implementing
the provisions of R.A. 9504. Decide the
following:
a.
Whether an MWE is exempt for the entire
taxable year 2008 or from 6 July 2008 only;
b. Whether an MWE who becomes non-MWE
during the year still qualifies for the
exemption;
c. Whether Sections 1 and 3 of RR 10-2008 are
consistent with the law in providing that an
MWE who receives other benefits in excess
The treatment of bonuses and other benefits
that an employee receives from the employer in
excess of the P30,000 (now at 90,000) is
taxable. The treatment of this excess cannot
operate to disenfranchise the MWE from
enjoying the exemption explicitly granted by
155
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
R.A. 9504(Soriano v. Secretary of Finance, G.R.
Nos. 184450, 184508, 184538 & 185234, January
24, 2017).
3. Persons exempted
agreement
a service contract with the government
(Sec. 22 [B], NIRC).
Kinds of corporation under the NIRC
under international
Those
employed
by
Embassies/Diplomatic Missions
1.
Foreign
2.
Only the following shall be exempt from Philippine
income tax:
1.
2.
3.
4.
5.
Diplomatic agents who are not nationals or
permanent residents of the Philippines;
Members of family of the diplomatic agent
forming part of his/her household who are not
Philippine nationals;
Members of the administrative and technical
staff of the mission together with members of
their families forming part of their respective
households who are not nationals or
permanent residents of the Philippines;
Members of the service staff of the mission
who are not nationals or permanent residents
of the Philippines; and
Private servants of members of the mission
who are not nationals or permanent residents
of the Philippines (RMC No. 31-2013 citing
Vienna Convention on Dimplomatic Relations).
3.
4.
2.
INCOME TAX ON CORPORATIONS
A corporation for income tax purposes shall:
1.
2.
Include:
a. Partnerships
b. Joint stock companies
c. Joint accounts (cuentasen participacion)
d. Associations, or
e. Insurance companies
NOTE: The distributive share of each
partner in a general professional
partnership shall form part of partner’s
gross income in its individual tax returns
subject to graduated income tax rates.
c.
Does the JVA entered into by and between
Weber and Prime create a separate taxable
entity? (2007 Bar)
A joint venture or consortium formed for
purposes of undertaking construction
projects
or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Special NRFC
a. Non-resident cinematographic film
owners, lessors or distributors
b. Non-resident owners or lessors of
vessels chartered by Philippine
nationals
c. Non-resident lessors of aircraft,
machinery and other equipment
Q: Weber Realty Company, which owns a 3hectare land in Antipolo entered into a JOINT
VENTURE AGREEMENT (JVA) with Prime
Development Company for the development of
said parcel of land. Weber Realty as the owner of
the land contributed the land to the Joint
Venture and Prime Development agreed to
develop the same into a residential subdivision
and construct residential houses thereon. They
agreed that they would divide the lots between
them.
Not include:
a. General Professional Partnerships (GPP)
b.
Domestic Corporations (DC) – a corporation
created or organized in the Philippines or under
its laws and is liable for its income from sources
within and without (Sec. 22 [C], NIRC)
Resident Foreign Corporation (RFC) – a
corporation which is not domestic and is
engaged in trade or business in the Philippines
and is liable for income from sources within the
Philippines
Non-resident Foreign Corporation (NRFC) – a
corporation which is not domestic and not
engaged in trade or business in the Philippines
and is liable for income from sources within and
without
Special Types of Corporations – those
corporations subject to different tax rates
1. Special RFC
a. Domestic depositary banks (foreign
currency deposit units)
b. International carriers
c. Offshore banking units
d. Regional or Area Headquarters and
Regional operating Headquarters of
multinational companies
A: NO. Since the arrangement between Weber
Realty Co. and Prime Development Co. is for the
purpose of undertaking a construction project,
156
INCOME TAXATION
there is no separate taxable entity pursuant to Sec.
22 [B] of the NIRC.
The term 'corporation' shall include partnerships,
no matter how created or organized, joint-stock
companies,
joint
accounts
(cuentasenparticipacion), association, or insurance
companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum,
coal, geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government (Sec.
22[B], NIRC).
157
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Kinds of corporate taxpayers and their rates (2008 Bar)
CORPORATE TAXPAYER IS A:
TAXABILITY OF INCOME
DERIVED FROM SOURCES
Within the Outside the
Philippines Philippines
DC
RFC
NRFC
Special Domestic Corporations
1. Proprietary educational
institutions
XPN: Those whose gross
income from unrelated
sources exceeds 50% of
their total gross income
2. Non-profit hospitals
3. Government-owned or
controlled corporations
including the PCSO
4. Exempt government
institutions
Special
Resident
Foreign
Corporation
1. International carrier
2.
3.
Offshore banking units
Branch profit
remittances
4. Regional area
headquarters
5. Regional operating
headquarters
Special Non-resident Foreign
Corporation
1. Cinematographic film
owner/lessor/distributor
2. Lessor of machinery,
equipment, aircraft and
others
3. Lessor of vessels
chartered by Philippine
nationals
√
√
√
X
√
X
√
Net taxable
income
Net taxable
income
GROSS income
Net taxable
income
RATE
30%
30%
30%
10%
√
10%
30%
Tax-exempt
GROSS income
√
2 ½% of Philippine
gross billings
10%
of
gross
income
15%
of
remittances
Tax-exempt
10%
X
GROSS income
25%
of
income
√
X
gross
7 ½% of gross
income
4 1/2 % of gross
income
(Sec 27 and 28, NIRC)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
TAX BASE
158
INCOME TAXATION
INCOME TAX ON DC AND RFC
Normal corporate income tax (NCIT) or Regular
Tax
DC is a corporation created or organized in the
Philippines or under its laws and is liable for its
income from sources within and without (Sec. 22
[C], NIRC).
An income tax of thirty percent (30%) shall be
imposed upon the taxable income derived during
the taxable year from all sources within and without
the Philippines for DC while from all sources within
the Philippines for RFC.
Outline of taxes imposed on DC
1. Normal corporate income tax (NCIT)
- 30% of taxable income from all sources within
and without the Philippines
2.
Minimum corporate income tax (MCIT)
- 2% of gross income, if MCIT applies
3.
Gross income tax (Optional corporate income
tax)
- 15% of gross income, if qualified
4.
5.
Illustration:
Gross Sales
Less:
Sales Returns/Allowances/Discounts
Cost of Goods Sold/Cost of Services
___________________________________________
Gross Income
Less:
Improperly Accumulated Earnings Tax
- 10% of improperly accumulated earnings
Taxable Income
x 35%
___________________________________________
NCIT due
Final tax on passive income
RFC is a corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the Philippines
(Sec. 28 [A][1], NIRC).
Gross Income
It includes all items enumerated under Sec. 32 [A] of
the NIRC, except income exempt from income tax
and income subject to final withholding tax (R.R. 122007).
NOTE: The general rule is that RFC shall be liable for
a 30% income tax on their income from within the
Philippines,
except
for
resident
foreign
corporations that are international carriers which
shall be taxed at 2 ½% on their Gross Philippine
Billings. (Sec 28 [A][3], NIRC).
Cost of Goods Sold (COGs) in general
It includes all business expenses directly incurred to
produce the merchandise and bring them to their
present location and use.
Outline of taxes imposed on RFC
1.
NCIT
– 30% of taxable income from sources within
the Philippines (Sec. 28 [A], NIRC)
2.
MCIT
– 2% of gross income, if MCIT applies
3.
GIT (Optional corporate income Tax)
- 15% of gross income, if qualified
4.
5.
6.
7.
8.
9.
Allowable Deductions
___________________________________________
Cost of Goods Sold (COGs) for Trading or
Merchandising
This shall include the invoice cost of the goods sold,
plus import duties and freight in transporting the
goods to the place where they are actually sold,
including insurance while the goods are in transit.
Cost of Goods Sold (COGs) for a Manufacturing
Concern
Final tax on passive income
Interest from deposits and yields and royalties
Capital gains from sale of shares not traded in
the stock exchange
Income derived under the Expanded Foreign
Currency Deposit System
Inter-corporate dividends
Branch profit remittance tax
This shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
Cost of Goods Sold (COGs) for a Service Concern
(Cost of Services)
Regular Tax
159
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
This shall mean all direct costs and expenses
necessarily incurred to provide the services
required by the customers and clients, including
salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service, and cost of facilities directly utilized in
providing the service, such as depreciation or rental
of equipment used and cost of supplies.
MCIT is a new concept introduced by R.A. 8424 to
the Philippine taxation system. It came about as a
result of the perceived inadequacy of the selfassessment system in capturing the true income of
corporations.
Congress intended to put a stop to the practice of
corporations which, while having large turnovers,
report minimal or negative net income resulting in
minimal or zero income taxes year in and year out,
through under-declaration of income or overdeduction of expenses otherwise called tax shelters.
The MCIT serves to put a cap on such tax shelters.
Optional Gross Income Tax (Optional Corporate
Income Tax)
The President, upon the recommendation of the
Secretary of Finance may, effective January 1, 2000,
allow domestic corporations the option to be taxed
at 15% of gross income, subject to the following
conditions:
1. A tax effort ratio of 20% of GNP;
2. A ratio of 40% of income tax collection to total tax
revenue;
3. A VAT tax effort of 4% of GNP;
4. A 0.9% ratio of Consolidated Public Sector
Financial Position to GNP.
As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base
was broader, the tax rate was lowered(Chamber of
Real Estate and Builders’ Association, Inc. v. Hon.
Executive Secretary, G.R. No. 160756, March 9, 2010).
Q: What is the purpose of MCIT? (2001 Bar)
NOTE: No authority yet has been given by the
President. Thus, the optional gross income tax is
still not implemented.
A: The imposition of the MCIT is designed to
forestall the prevailing practice of corporations of
over claiming deductions in order to reduce their
income tax payments.
Q: What are the other conditions for the
availability of Optional Gross Income Tax? (Sec.
27 [A], NIRC)
Nature of MCIT
The MCIT is equal to 2% of the gross income of the
corporation at the end of the taxable quarter,
except income exempt from income tax and income
subject to final withholding tax.
A:
1.
2.
3.
4.
The optional tax is available only to firms
whose ratio of cost of sales/services to
gross sales/receipt does not exceed 55%:
Being a minimum income tax, a corporation should
pay the MCIT whenever its normal corporate
income tax (NCIT) is lower than the MCIT, or when
the firm reports a net loss in its tax return.
Conversely, the NCIT is paid when it is higher than
the MCIT (J.,Dimaamapo, 2015).
Cost of sales/services
<=55%
Gross sales/receipts
Sales/receipts
The election of the gross income tax option
by the corporation shall be irrevocable for
three (3) consecutive taxable years during
which the corporation is qualified under
the scheme;
Recommendation from the Secretary of
Finance; and
Approval of the Office of the President.
Therefore, the taxable due for the taxable year will
be NCIT (30% of taxable income)or MCIT (2% of
gross income), whichever is HIGHER.
Illustration:
1) A domestic corporation in its 4 th year of
operations had a gross income of ₱300,000 and net
taxable income of ₱100,000. How much is the
income tax due for the year?
NOTE: Gross income and cost of goods sold for
purposes of Optional Gross Income Tax is the same
as defined in MCIT.
Minimum Corporate Income Tax
MCIT (₱300,000 x 2%)
NCIT (₱100,000 x 30%)
Income tax due – NCIT
(whichever is higher)
Concept and rationale of MCIT
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
160
₱ 6,000
₱30,000
₱30,000
INCOME TAXATION
2) A domestic corporation in its 4th year of
operations had a gross income of ₱400,000 and net
taxable income of ₱20,000. How much is the
income tax due for the year?
MCIT (₱400,000 x 2%)
NCIT (₱20,000 x 30%)
Income tax due – MCIT
(whichever is higher)
(BIR), regardless of whether the corporation is
using the calendar year or fiscal year.
Firms which were registered with BIR in 1994 and
earlier years shall be covered by the MCIT beginning
January 1, 1998 (Sec. 27 [E][1], NIRC; RR No. 9-98;
Dimaampao, J. 2015; Manila Banking Corporation v.
CIR, G.R. No. 168118).
₱8,000
₱6,000
₱8,000
NOTE: Recognizing the birth pangs of businesses
and the reality of the need to recoup initial major
capital expenditures, MCIT commences only on the
4th taxable year.
Q: What is the gross income for purposes of
computing MCIT?
A:
1. As to sale of goods – it shall mean gross sales less
sales returns, discounts and allowances and
cost of goods sold.
2. As to sale of services – it shall mean gross
receipts less sales returns, allowances,
discounts and cost of services.
Q: When is MCIT reported and paid?
A: The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
income tax which is on a quarterly and on a yearly
basis. The taxpayer shall pay the MCIT whenever it
is greater than the regular or normal corporate
income tax.
The MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison
between the NCIT payable by the corporation and
the MCIT shall be made at the end of the taxable
year. The payable or excess payment in the Annual
Income Tax Return shall be computed taking into
consideration corporate income tax payment made
at the time of filing of quarterly corporate income
tax return, whether this be MCIT or normal income
tax (R.R. 12-2007).
Imposition of MCIT
The MCIT shall be imposed:
a. If taxable income is zero;
b. If taxable income is negative; or
c. If MCIT is greater than the NCIT due (Sec. 27
[E], NIRC).
Coverage of the MCIT (2001 Bar)
The MCIT covers domestic and resident foreign
corporations which are subject to the 30% (effective
Januray 1, 2009) normal corporate income tax;
hence, corporations which are subject to special
corporate taxes do not fall within the coverage of
the MCIT.
Q: Can MCITbe allowed as a deduction from
gross income?
A: No. Since MCIT is an estimate of the normal
income tax, it cannot be claimed as a deduction.
The minimum corporate income tax is a proxy for
the normal corporate income tax of 30%, not the
special corporate taxes paid by a corporation. For
instance, a proprietary educational institution may
be subject to a regular corporate income tax of 10%
(depending on its dominant income), but it is
exempt from the imposition of MCIT because the
latter is not intended to substitute special tax rates.
So is with PEZA enterprises, CDA enterprises etc.
Q: CREBA assails the constitutionality of MCIT on
the contention that it violates due process. Is the
imposition of MCIT unconstitutional?
A: No, the imposition of MCIT is not violative of due
process for the following reasons:
1.
Q: When shall the MCIT commence to be
imposed on a corporation?
2.
A: The MCIT is imposed beginning on the fourth
taxable year immediately following the year in
which the corporation commenced its business
operations. For purposes of the MCIT, the taxable
year in which business operations commenced shall
be the year in which the domestic corporation
registered with the Bureau of Internal Revenue
3.
161
MCIT is imposed on gross income and not on
capital. Thus, it is not arbitrary or confiscatory.
It is not an additional tax imposition but is
imposed in lieu of normal net income tax and
only if said tax is suspiciously low.
There is no legal objection to a broader tax base
or taxable income resulting from the
elimination of all deductible items and, at the
same time, reduction of the applicable tax rate.
In as much as deductions are a matter of
legislative grace, Congress has the power to
condition, limit or deny deductions from gross
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
income in order to arrive at the net that it
chooses to tax (CREBA, Inc. v. Romulo, G.R. No.
160756, March 9, 2010).
Carry-forward of the excess of MCIT
1.
Q: KKK Corp. secured its Certificate of
Incorporation from the Securities and Exchange
Commission on June 3, 2013. It commenced
business operations on August 12, 2013. In April
2014, Ms. J, an employee of KKK Corp. in charge
of preparing the annual income tax return of the
corporation for 2013, got confused on whether
she should prepare payment for the regular
corporate income tax or the minimum corporate
income tax.
2.
3.
4.
5.
As Ms. J's supervisor, what will be your
advice?
b. What are the distinctions between regular
corporate income tax and minimum
corporate income tax? (2015 Bar)
The excess of MCIT over the NCIT shall be
carried forward on an annual or quarterly
basis.
The excess shall be credited against the NCIT
due for the three (3) immediately succeeding
taxable years.
Any excess not credited in the next three years
shall be forfeited.
Carry forward (annually or quarterly) is
possible only if MCIT is greater than NCIT.
The maximum amount that can be credited is
only up to the amount of the NCIT, there can be
no negative NCIT.
a.
Illustration:
A domestic corporation had the following data on
computations of the NCIT and MCIT for five years:
A:
a. As Ms. J’s supervisor, I will advise that KKK
Corp. should prepare payment for the regular
corporate income tax and not the minimum
corporate income tax (MCIT). Under the NIRC,
MCIT is only applicable beginning the 4th
taxable year following the commencement of
business operation (Sec. 27 [e][1], NIRC).
b.
MCIT
NCIT
Excess:
YEAR
5
50k
30k
(20k)
NCIT
higher
YEAR
6
30k
40k
YEAR
7
40k
20k
(20k)
40k
YEAR
8
35k
70k
70k
Less:
Excess
of
MCIT
The distinctions between regular corporate
income tax and the minimum corporate income
tax are the following:
i. As to taxpayer: Regular corporate income
tax applies to all corporate taxpayers while
minimum corporate income tax applies to
domestic corporations and resident foreign
corporations.
ii. As to tax rate: Regular corporate income
tax is 30% while minimum corporate
income tax is 2%.
iii. As to tax base: Regular corporate income
tax is based on the net taxable income while
minimum corporate income tax is based on
gross income.
iv. As to period of applicability: Regular
corporate income tax is applicable once the
corporation commenced its business
operation, while minimum corporate
income tax is applicable beginning on the
4th
taxable
year
following
the
commencement of business operations.
v. As to imposition: The minimum corporate
income tax is imposed whenever it is
greater than the regular corporate income
tax o the corporation (Sec. 27 [A] and [E],
NIRC; RR No. 998).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
YEAR
4
80k
20k
(60k)
From
Year 4
From
Year 5
From
Year 7
Tax
Due:
(40k)
(20k)
(20k)
80k
50k
0
40k
30k
NOTE: While only 40k out of ₱60k excess MCIT in
Year 4 was used in Year 6, the unused₱20k cannot
be used because Year 8 was beyond three years from
Year 4.
Suspension of the imposition of MCIT
Since certain businesses may be incurring genuine
repeated losses, the law authorizes the Secretary of
Finance, upon recommendation of the BIR, to
suspend the imposition of MCIT if a corporation
suffers losses due to any of the following:
1.
162
Prolonged Labor Dispute – losses arising from a
strike staged by the employees which lasted for
INCOME TAXATION
2.
3.
more than 6 months within a taxable period
and which has caused the temporary shutdown
of business operations;
Force Majeure – a cause due to an irresistible
force as by ‘Act of God’ like lightning,
earthquake, storm, flood and the like, and shall
also include armed conflicts like war or
insurgency;
Legitimate Business Reverses – include
substantial losses due to fire, theft or
embezzlement or for other economic reason, as
determined by the Secretary of Finance (Sec. 27
[E][3], NIRC; RR. No. 9-98, Sec. 2.27 [E]
[4][b,c,d]).
b.
c.
Applicability of MCIT where a corporation is
governed party under NCIT and partly under a
special income tax system
In the case of a domestic corporation whose
operations or activities are partly covered by the
normal income tax system (subject to 30% NCIT)
and partly covered under a special income tax
system, the MCIT will apply only on operations
covered by the regular income tax system. For
example, if a BOI-registered enterprise has a
"registered" and an "unregistered" activity, the
MCIT shall apply to the unregistered activity (R.R. 998).
MCIT Limitations
1.
2.
4.
5.
6.
because of “force majeure”; or
because of legitimate business reverses;
MCIT does not apply on the first 3 years of
business operation of a corporation;
MCIT is not applicable to DC or RFC not subject
to NCIT;
 Domestic
proprietary
educational
institutions subject to 10% tax;
 Domestic non-profit hospital subject to
10% tax;
 Domestic depository banks under the
expanded foreign currency deposit system
otherwise known as FCDUs;
 Resident foreign international carrier
subject to tax at 2 ½% of their Gross
Philippines Billings;
 Resident foreign offshore banking units;
 Resident foreign regional operating
headquarters; and
 Firms enjoying special income tax rate
under the PEZA Law (R.A. 7916), Bases
Conversion and Development Act of 1992
(R.A. 7227) and those enjoying income tax
holiday incentives (R.R. 9-98, Sec. 2.27
[E][8])
However, the related income from
unregistered activities (or those not
covered by the tax incentives) is subject to
MCIT.
Branch Profit Remittance Tax
Any profit remitted by branch office of a
multinational corporation to its head office is
subject to 15% final tax based on total profits
applied or earmarked for remittance without
deduction for the tax component. A branch is
classified as a resident foreign corporation. As such,
it is subject to income tax at the rate of 30% on its
net income derived within the Philippines. Such
income items include interest, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages, premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received during each taxable year from all
sources within the Philippines.
For purposes of branch profit remittance, income
items which are not effectively connected with the
conduct of its trade or business in the Philippines
are not considered branch profits. To be ‘effectively
connected’, it is not necessary that the income be
derived from the actual operation of the branch’s
trade or business. It is sufficient that the income
arises from the business activity in which the
branch is engaged. The 15% final tax should
exclude profits on activities registered with PEZA
(Tabag, 2015).
For domestic corporation, whose operations
are partly covered by NCIT and partly covered
under a special income tax system, MCIT shall
apply only on operations covered by NCIT;
For resident foreign corporation, MCIT is
applicable only to gross income from sources
within the Philippines.
When, by authority of the Secretary of Finance,
the imposition of the MCIT is suspended upon
submission of proof by the applicant
corporation that the corporation sustained
substantial losses
a. on account of a prolonged labor dispute; or
Allowable Deductions
DC and RFC are allowed to claim deductions either
the OSD or itemized deductions. The election to
claim OSD or itemized deductions must be signified
in the income tax return filed for the first quarter of
the taxable year. Once the election is made, it shall
be irrevocable for the taxable year for which the
return is made.
163
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Refer to previous discussions on “Deductions from
Gross Income.”
d.
Taxation on Passive Income and Capital Gains
2. Resident Foreign Corporation
a. International carrier doing business in the
Philippines.
b. Off-shore banking units.
c. Resident depository banks (foreign
currency deposit units).
d. Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies
Refer to previous discussions on “Passive Income” and
“Dealings in Property.”
INCOME TAX ON NON-RESIDENT
FOREIGN CORPORATIONS
A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to
30% of the gross income during such taxable year
from all sources within the Philippines except
capital gains from sale of shares of stock not traded
in the stock exchange (Sec. 28 [B][1], NIRC).
Proprietary educational institution
It is any private school maintained and
administered by private individuals or groups with
an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the
Technical Education and Skills Development
Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
Outline of taxes imposed on a Non-Resident
Foreign Corporation (NRFC):
1.
2.
3.
4.
5.
6.
7.
NCIT – 30% on gross income from sources
within the Philippines (NIRC, Sec. 28 [B])
Non-resident Cinematographic Film owner,
lessor or distributor – 25% of its gross income
from all sources within the Philippines
Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4.5% of
gross rentals, lease, or charter fees
Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5% of
gross rentals or fees
Interest on foreign loans – 20% of interest
Intercorporate Dividends – 15% of dividends
received from Domestic Corporation
Capital Gains from Sale of Shares of Stock not
traded in the Stock Exchange – 5-10% of
capital gains
They are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income,
except on certain passive incomes which are subject
to final tax.
10% Preferential Rate
Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit
hospitals as charitable institutions under Section
30(E) and (G). The effect of the introduction of
Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit
hospitals, among institutions covered by Section 30,
to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under
the last paragraph of Section 30 in relation to
Section 27(A)(1).
NOTE: A casual activity in the Philippines by a
foreign corporation does not amount to engaging in
trade or business in the Philippines for income tax
purposes. For such a foreign corporation to be
considered engaged in trade or business, business
transactions must be continuous (N.V. Reederij v.
CIR, G.R. No. L-46029, June 23, 1998).
The only qualifications for hospitals are that they
must be (1) proprietary; and (2) non-profit.
“Proprietary” means private, following the
definition of a “proprietary educational institution”
as “any private school maintained and administered
by private individuals or groups” with a government
permit. “Non-profit” means no net income or asset
accrues to or benefits any member or specific
person, with all the net income or asset devoted to
the institution’s purposes and all its activities
conducted not for profit (CIR v. St. Luke’s Medical
Center, Inc., G.R. No. 195909, 195960, September 26,
2012).
INCOME TAX ON SPECIAL CORPORATIONS
The following are special corporations under the
NIRC:
1. Domestic Corporation
a. Proprietary educational institutions and
hospital
b. Non-profit hospital
c. Government-owned or controlled
corporations, agencies or instrumentalities
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Depository banks (foreign currency
deposit units).
164
INCOME TAXATION
Predominance test
3.
If
the
gross
income
from
unrelated
trade/business/other activity exceeds 50% of the
total gross income from all sources, the entire
taxable income of the proprietary educational
institution shall be subject to the regular corporate
tax rate of 30%.
Unrelated
trade/business/activity
proprietary educational institution
of
No part of its net income or asset shall belong
to or inure to the benefit of any member,
organizer, officer or any specific person.
a
The trade, business or other activity of a proprietary
educational institution is unrelated when the
conduct of which is not substantially related to the
exercise or performance by such educational
institution of its primary purpose or function.
NOTE: Related activities include auxiliary activities
such as school-owned canteen, cafeteria, dormitory
and bookstore within the school premises (BIR
Ruling 237-87, December 16, 1987).
Difference in the tax treatment between a
proprietary educational institution and a nonstock non-profit educational institution
Proprietary educational institutions which are nonprofit shall pay a tax of 10% on their taxable
income, except on certain passive incomes which
are subject to final tax: Provided, that if the gross
income from unrelated trade, business or other
activity exceeds 50% of the total gross income
derived from all sources, the entire taxable income
of the proprietary educational institution shall be
subject to the regular corporate tax rate of 30% (Sec.
27 [B], NIRC).
A non-stock non-profit educational institution is
exempt from tax on its revenues and assets
actually, directly and exclusively used for
educational purposes (Sec. 30, NIRC).
Non-Profit Hospitals
A nonstock-nonprofit hospital that is operated for
charitable and social welfare purposes is exempt
from income tax under Section 30 (E) and (G) of the
NIRC. However, as provided in St. Luke's Medical
Center, Inc. vs CIR (2011), the nonstock-nonprofit
hospital must satisfy the following requisites in
order to be entitled to the exemption from income
tax:
1.
2.
It is a nonstock corporation;
It is operated exclusively for charitable
purposes; and
165
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Tax on Proprietary Non-Profit Educational Institutions and Non-Profit Hospitals
30%
Private, non-profit hospitals and educational
institutions whose gross income from
unrelated trade, business or other activity
exceeds 50% of total gross income from all
sources.
Hospitals and educational institutions claiming
to be proprietary non-profit but do not meet
the definition thereof.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
10%
Private, non-profit hospitals
and educational institutions
whose gross income from
unrelated trade, business or
other activity does not
exceed 50% of total gross
income from all sources.
166
EXEMPT
Organized and operated
exclusively for charitable
purposes and no part of its
net income or asset shall
belong to or inure to the
benefit of any member,
organizer, officer or any
specific person.
INCOME TAXATION
Government Owned or Controlled Corporations
expanded foreign currency deposit system to
residents, shall be subject to a final income tax at
the rate of ten percent (10%) of such income.
GR: All corporations owned or controlled by the
government are taxed in the same manner that
domestic private corporations are taxed.
International Carrier Doing Business In The
Philippines
XPNs:
1. Government Service Insurance System
(GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Philippine Charity Sweepstakes Office
(PCSO)
5. Local Water District (LWD) (R.A. 10026
amending Section 27 [c] of NIRC)
An international carrier refers to foreign airline
corporation doing business in the Philippines
which has landing rights in any Philippine port to
perform international air transportation services
or flight operations anywhere in the world. They
shall be taxed at 2.5% on their Gross Philippine
Billings (GPB) unless it is subject to preferential
rate or exempt from tax on the basis of applicable
tax treaty/international agreement to which the
Philippines is a signatory or on the basis of
reciprocity, such that an international carrier,
whose home country grants income tax exemption
to Philippine carries, shall likewise be exempt from
income tax imposed under the NIRC.
Under Sec. 32 (B)(7) of the NIRC, even if the GOCC is
not one of those enumerated under Sec. 27 (C), it
may still be exempt if it is performing
governmental function. Thus, income derived from
any public utility or from the exercise of any
essential government function accruing to the
Government of the Philippines or to any political
subdivision shall be exempt from income tax.
Reciprocity may be invoked by an international
carrier as basis for GBP Tax exemption when its
Home Country grants income tax exemption to
Philippine carriers.
NOTE: PAGCOR is no longer exempt from
corporate income tax as it has been effectively
omitted from the list of GOCCs that are exempt
from the payment of the income tax. PAGCOR’s
income from gaming operations is subject only to
5% franchise tax under PD No. 1869, while its
income from other related services is subject to
corporate income tax pursuant to PD No. 1869 in
relation to RA No. 9337. SC clarified that RA No.
9337 did not repeal the tax privilege granted to
PAGCOR under PD No. 1869, with respect to its
income from gaming operations. What RA No. 9337
withdrew was PAGCOR's exemption from
corporate income tax on its income derived from
other related services, previously granted under
Section 27(C) of RA No. 8424.(PAGCOR v. BIR, G.R.
No. 215427, December 10, 2014).
The domestic law of the Home Country granting
exemption shall cover income taxes and shall not
refer to other types of taxes that may be imposed
by the relevant taxing jurisdiction. The fact that the
tax laws of the Home Country provide for
exemption from business tax, such as gross sales
tax, in respect of the operations of Philippine
carriers shall not be considered as valid and
sufficient basis for exempting an international
carrier from Philippine income tax on account of
reciprocity.
Reciprocity requires that Philippine carriers
operating in the Home Country of an international
carrier are actually enjoying the income tax
exemption (RR 15-2013).
Depository Banks (Foreign Currency Deposit
Units)
Q: What is Gross Philippine Billings? (2005 Bar)
A: It refers to the amount of gross revenue realized
from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment
of the ticket or passage document(Dimampao,
2015).
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the
BangkoSentral ng Pilipinas (BSP) to transact
business with foreign currency depository system
units and other depository banks under the
expanded foreign currency deposit system,
including interest income from foreign currency
loans granted by such depository banks under said
Off-line international carrier is subject to
corporate income tax
167
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
An off-line airline having a branch office or a sales
agent in the Philippines which sells passage
documents for compensation or commission to
cover off-line flights of its principal or head office,
or for other airlines covering flights originating
from Philippine ports or off-line flights, is not
considered engaged in business as an
international air carrier in the Philippines and
is, therefore, not subject to Gross Philippine
Billings Tax provided for in Section 28(A)(3)(a) of
the Code nor to the three percent (3%) common
carrier's tax under Section 118(A) of the same
Code. This provision is without prejudice to
classifying such taxpayer under a different category
pursuant to a separate provision of the same Code
(RR 15-2002).
Offshore Banking Units
OBU is a branch, subsidiary or affiliate or a foreign
banking corporation located in an Offshore
Financial Center which is duly authorized by the
BSP to transact offshore banking business in the
Philippines. OBUs are allowed to provide all
traditional banking services to non-residents in any
currency other than Philippine national currency.
OBUs are forbidden to make any transactions in
Philippine Peso. Banking transactions to residents
are omitted and restricted (Tabag, 2015).
Income Exempt from Tax
Income derived from
1. Nonresidents
2. Foreign currency transactions with local
commercial banks,
3. Foreign currency transactions with branches
of foreign banks authorized by the BSP
4. Foreign currency transactions with OBUs in the
Philippines
Sec. 28 (A) (3) (a) of the 1997 NIRC does not, in any
categorical term, exempt all international air
carriers from the coverage of Sec. 28 (A) (1) of the
1997 NIRC.
The general rule is that resident foreign
corporations shall be liable for a 30% income tax on
their income from within the Philippines, except for
resident foreign corporations that are international
carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating
from the Philippines" which shall be taxed at 2
1/2% of their Gross Philippine Billings. An
international carrier with no flights originating
from the Philippines, does not fall under the
exception.
Income subject to 10% Final Tax
Interest income derived from foreign currency
loans granted to residents other than OBUs or local
commercial banks (Ibid).
Resident Depository Banks (Foreign Currency
Deposit Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the BangkoSentral
ng Pilipinas (BSP) to transact business with foreign
currency depository system units and other
depository banks under the expanded foreign
currency deposit system, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be
subject to a final income tax at the rate of ten
percent (10%) of such income.
To reiterate, if an international air carrier
maintains flights to and from the Philippines, it
shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers
that do not have flights to and from the Philippines
but nonetheless earn income from other activities
in the country will be taxed at the rate of 30% of
such income (South African Airways v.
Commissioner of Internal Revenue, February 16,
2010; Air Canada v. CIR, G.R. No. 169507, January 11,
2016).
NOTE: An offline carrier is "any foreign air carrier
not certificated by the [Civil Aeronautics] Board,
but who maintains office or who has designated or
appointed agents or employees in the Philippines,
who sells or offers for sale any air transportation in
behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation,
advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such
transportation. (Civil Aeronautics Board Economic
Regulation No. 4, chap. I, sec. 2(b) cited in Air
Canada v. CIR, G.R. No. 169507, January 11, 2016)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
ROHQ and RHQ Of Multinational Companies
Income tax rate of ROHQ is 10% of net income.
ROHQ is a branch established in the Philippines
which is engaged in any of the following qualifying
services:
-
168
General administration and planning;
Business planning and coordination;
INCOME TAXATION
-
Sourcing/procurement of raw materials
and components;
Corporate finance advisory services;
Marketing control and sales promotion;
Training and personnel management;
Logistics services;
Research and development services, and
product development;
Technical support and maintenance;
Data processing and communication; and
Business development.
NOLCO deducted
Less:
Income tax paid/payable during the year
Dividends actually or constructively paid
Amount reserved for the reasonable needs
of the business
_____________________________________________________
Improperly Accumulated Earnings
x 10%
_____________________________________________________
Improperly Accumulated Earnings Tax (IAET)
RHQ is a tax exempt entity. It is a branch
established in the Philippines and which
headquarters do not earn or derived income from
the Philippines and which act as supervisory,
communications and coordinating center for its
affiliates, subsidiaries, or branches in the AsiaPacific region and other foreign markets (Tabag,
2015).
Touchstone of the liability
It is the purpose behind the accumulation of the
income and not the consequences of the
accumulation. Thus, if the failure to pay dividends
is due to some other causes, such as the use of
undistributed earnings and profits for the
reasonable needs of the business, such purpose
would not generally make the accumulated or
undistributed earnings subject to the tax. However,
if there is a determination that a corporation has
accumulated income beyond the reasonable needs of
the business, IAET shall be imposed (Dimaampao, J.,
2015).
Improperly Accumulated Earnings of
Corporation
Domestic
corporations
and
closely-held
corporations are subject to 10% improperly
accumulated earningstax on their improperly
accumulated earnings(Sec. 29 [A], NIRC).
Rationale:IAET is imposed in the nature of a penalty
to the corporation for the improper accumulation
of its earnings and as a form of deterrent to the
avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earning
distributed to them by the corporation. If the
earnings and profits were distributed, the
shareholders would be liable for tax on dividends
(Commissioner v. Ayala Securities Corp., 101 SCRA
231).
Closely-held Corporations
These are corporations, at least 50% in value of the
outstanding capital stock of which or at least 50%
of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly
by or not more than 20 individuals (R.R. 2-2001, Sec.
4).
NOTE: Corporations outside the above definition
are considered publicly-held corporations.
Q: How can the “reasonable needs” of the
business be determined in order to justify an
accumulation of earnings? (2010 Bar)
Q: What consists of “Improperly Accumulated
Earnings”?
A: IMMEDIACY TEST
A: These are the profits of a corporation that are
accumulated, instead of distributing them to its
shareholders, for the purpose of avoiding the
income tax with respect to its shareholders or the
shareholders of another corporation (R.R. 2-2001,
Sec. 2).
To determine the “reasonable needs” of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called “Immediacy Test” which
construed the words “reasonable needs of the
business” to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of
the business, and the penalty tax would apply
(Manila Wine Merchants, Inc. v CIR, G.R. No. 26145,
February 20, 1984).
Formula:
Taxable Income during the current year
Add:
Income exempt from tax
Income excluded from gross income
Income subject to final tax
169
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
Investment in bonds and other long term
securities
3. Accumulation of earnings in excess of 100% of
paid-up capital, not otherwise intended for the
reasonable needs of the business (R.R. No. 22001, Sec. 7)
Prima facie evidence to show purpose of
accumulation is Tax evasion or Tax avoidance
In order to determine whether profits are
accumulated for the reasonable needs, it must be
shown that the controlling intention of the
taxpayer is manifest at the time of accumulation,
not subsequently, which are mere afterthoughts.
Furthermore, the accumulated profits must be
used within a reasonable time after the close of the
taxable year (Cyanamid Philippines, Inc. v. CA, G.R.
No. 108067, January 20, 2000).
The fact that:
1. Any corporation is a mere:
a. Holding company – one having practically
no activities except holding property and
collecting income therefrom or investing
therein; or
b. Investment (mutual fund) company – when
activities of the company further include
or consist substantially of buying and
selling stocks, securities, real estate, or
other investment properties so that
income is derived not only from
investment yield but also from profits
upon market fluctuations.
NOTE: Once the profit has been subjected to IAET,
the same shall no longer be subjected to IAET in
later years even if not declared as dividend.
Notwithstanding the imposition of the IAET,
profits which have been subjected to IAET, when
finally declared as dividends shall nevertheless be
subject to tax on dividends imposed under the
NIRC, except in those instances where the recipient
is not subject thereto (R.R. 2-2001, Sec. 5).
Q: What constitute accumulation of earnings
for the reasonable needs of the business?
A:
1. Allowance for the increase in accumulation of
earnings up to 100% of the paid-up capital
2.
The basis of the 100% threshold of retention
(considered within the reasonable needs of the
business) shall be the paid-up capital or the
amount contributed to the corporation
representing the par value of the shares of
stock. Any excess capital over and above the
par (APIC/Premium) shall be excluded (RMC
No. 35-2011),
2.
3.
4.
5.
6.
IAET not applicable to the following:
1.
2.
3.
4.
5.
6.
7.
8.
Earnings reserved for definite corporate
expansion approved by the Board of Directors
or equivalent body
Reserved for building, plant or equipment
acquisition as approved by the Board of
Directors or equivalent body
Reserved for compliance with any loan
covenant or pre-existing obligation
Earnings required by law or applicable
regulations to be retained
In case of subsidiaries of foreign corporations
in the Philippines, all undistributed earnings
intended or reserved for investments within
the Philippines (R.R. No. 2-2001, Sec. 3)
Prima facie instances of accumulation of profits
beyond the reasonable needs of a business
1. Investment of substantial earnings and profits
of the corporation in unrelated business or in
stock or securities in unrelated business
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The earnings or profits of a corporation are
permitted to accumulate beyond the
reasonable needs of the business (R.R. No. 22001, Sec. 7).
Publicly-held corporations (Sec. 29 [B][2],
NIRC)
Banks and other non-bank financial
intermediaries
Insurance companies
Publicly-held corporations
Taxable partnerships
General professional partnerships
Non-taxable joint ventures
Enterprises duly registered with the Philippine
Economic Zone Authority under R.A. 7916, and
enterprises registered pursuant to the Bases
Conversion and Development Act of 1992
under R.A. 7227, as well as other enterprises
duly registered under special economic zones
declared by law which enjoy payment of
special tax rate on their registered operations
or activities in lieu of other taxes, national or
local (R.R. 2-2001, Sec. 4)
Exemptions from Tax on Corporations
The following organizations shall not be taxed in
respect to income received by them as such: (Sec.
30, NIRC)
170
INCOME TAXATION
1.
2.
Labor, agricultural or horticultural
organization, not organized principally for
profit;
a. Provincial fairs and like associations of a
quasi-public character designed to
encourage
development
of
better
agricultural and horticultural products
through a system of awards, prizes and
premiums, and whose income derived
from gate receipts, entry fees, donations,
etc. is used exclusively to meet necessary
expenses of upkeep and operation are thus
exempt.
b. The holding of periodical race meets by
associations, the profits from which inure
to the benefit of their stockholder are not
tax exempt. Similarly, corporations
engaged in growing agricultural or
horticultural products or raising livestock
or similar products for profits are subject
to tax (R.R. No. 2, Sec. 25).
a.
b.
St. Luke’s Medical Center, Inc. fails to meet an
indispensable requirement under Section
30(E) –operated exclusively for charitable
purposes – to be completely tax exempt from
all its income. It admitted paying patients from
which profit is derived. (CIR v. St. Luke’s
Medical Center, Inc., 682 SCRA 66)
Mutual savings banks and cooperative banks,
either domestic or foreign, provided that:
a. No capital represented by shares;
b. Earnings, less only the expenses of
operating, are distributable wholly among
the depositors;
c. It is operated for mutual purposes and
without profit
NOTE: If the deposits are made
compulsory under contract between the
bank and the depositors and is operated
for speculation rather for savings, the bank
is not qualified as a mutual savings bank.
3.
4.
5.
It is organized and operated for one or
more specified purposes;
No part of the net income inures to the
benefit of the any private stockholder or
individual
Fraternal Beneficiary Society, Order or
Association, provided that:
a. It must be operated under lodge system or
for the exclusive benefit of the members of
society,
with
parent
and
local
organizations which are active;
b. There must be an established system of
payment to its members or their
dependents of life, sick, accident or other
benefits;
c. No part of the net income inures to the
benefit of the stockholders/members
6.
Business, Chamber of Commerce, or Board of
Trade, provided that:
a. It is an association of persons having some
common business interest;
b. Its activities are limited to work for such
common interests;
c. Not engaged in a regular business for
profit;
d. No part of the net income inures to the
benefit of any private stockholder or
individual
7.
Civic league, provided that:
a. It is not organized for profit but operated
exclusively for purposes beneficial to the
community as a whole. In general,
organizations engaged in promoting the
welfare of mankind;
b. Sworn affidavit filed with the BIR showing
the following:
i. Character
of
the
league
or
organization
ii. Purpose for which it was organized
iii. Actual activities
iv. Sources of income and disposition
thereof, and
v. All facts relating to the operation of the
organization which affects it right to
exemption.
vi. The copy of articles of incorporation,
by laws and financial statements
should be attached to the sworn
affidavit
8. Non-stock, Non-Profit Educational Institutions;
9. Government Educational Institutions;
10. Mutual Fire Insurance Companies and like
Organizations;
Cemetery Companies, provided that:
a. It must be owned and operated exclusively
for the benefit of their owners;
b. It is not operated for profit.
Requisites for exemption:
a. Income
is
derived
solely
from
assessments, dues and fees collected from
members;
Religious, Charitable, Scientific, Athletic or
Cultural Corporations, provided that:
171
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
Fees collected from members are for the
sole purpose of meeting its expenses
actually, directly and exclusively used for
educational purpose, such income is exempt as
provided for in Art. XIV, Sec. 3 of the 1987
Constitution.
To be exempt from income tax, Sec. 30(E)
of the NIRC requires that a charitable
institution must be “organized and
operated exclusively” for charitable
purposes. Likewise, to be exempt from
income tax, Sec. 30 (G) requires that the
institution be “operated exclusively” for
social welfare (CIR v. St. Luke’s, G.R. Nos.
195909 and 195960, September 26, 2012).
[See further discussion under General Principles –
Constitutional Limitations]
Other corporations exempt from income tax
under Special Laws
1.
11. Farmers, Fruit Growers or like Associations;
NOTE: Since interest from any Philippine
currency bank deposit and yield or any other
monetary benefit from deposit substitutes are
paid by banks, cooperatives are not required to
withhold the corresponding tax on the interest
from savings and time deposits of their
members. Moreover, the amendment in Article
61 of R.A. 9520, specifically providing that
members of cooperatives are not subject to
final taxes on their deposits, affirms the
interpretation of the BIR that Section 24 (B)(1)
of the NIRC does not apply to cooperatives and
confirms that such ruling carries out the
legislative intent (Dumaguete Cathedral
Cooperative v. CIR, G.R. No. 182722, January 22,
2010).
Requisites for exemption:
a. Formed and organized as sales agent for
the purpose of marketing the product of its
members
b. No net income to the members
c. Proceeds of the sale shall be turned over to
them less necessary selling expenses on
the basis of the quantity of goods produced
by them
The income of whatever kind and character of
the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under the NIRC.
2.
The foregoing exempt corporations have common
requisites for exemption:
[PrInSE]
1.
2.
3.
4.
Not organized and operated principally for
profit;
No part of the net income inures to the benefit
of any member or individual;
No capital is represented by shares of stock;
and
Educational or instructive in character.
Foundations created for scientific purposes
under Sec. 24 of R.A. 2067, an Act to Integrate,
Coordinate, and Intensify Scientific and
Technological Research and Development and
to Foster Invention
Tax on General Partnerships
Classifications of partnerships for tax purposes
1. General professional partnerships
2. Business partnership
Q: Distinguish between the income tax liability
of “X”, a general professional partnership
engaged in the practice of law and “Y”, as a
general partnership engaged in a logging
concession. (1981 Bar)
The moment they invest their income or receive
income from their properties, real or personal
conducted for profit, such income derived from
those properties is subject to tax.
NOTE: If religious, charitable or social welfare
corporations derive income from their properties
or any of their activities conducted for profit,
income tax shall be imposed on said items of
income irrespective of their disposition (CIR v.
YMCA, G.R. No. 124043, October 14, 1998).
A:
GENERAL
PROFESSIONAL
PARTNERSHIP
(GPP)
Formed by persons
for the sole purpose
of exercising their
However, in case of non-stock, non-profit
educational institution, as long as the income is
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Cooperatives under R.A. 6938, the Cooperative
Code of the Philippines
172
BUSINESS
PARTNERSHIP/
GENERAL
PARTNERSHIP
Formed by persons for
the sole purpose of
INCOME TAXATION
common profession,
no part of income of
which is derived
from engaging in any
trade or business
NOT ataxable entity
The
distributive
share of the partners
in the net income is
reportable
and
taxable as part of the
partner’s
gross
income subject to the
scheduled rates
NO need to file an
income tax return
but an information
return
NOT
subject
to
double
taxation
being taxed only once
taxable year after deducting the corresponding
corporate income tax. A partner’s distributive
share is already being subjected to a final tax;
hence, it is no longer needed to be reported in each
partner’s individual tax return.
engaging in any trade or
business
Considered
as
a
corporation hence a
taxable entity and its
income is taxable as
such
The share of
an
individual
in
the
distributable net income
after tax of a general
partnership is subject to
a final tax
NOTE: In a business partnership, there is no
constructive receipt of distributive share in the net
income.
Q: Do co-heirs who own inherited properties
which produce income automatically be
considered as partners of an unregistered
corporation hence subject to income tax?
A: NO, for the following reasons:
a.
Must file an income tax
return
Taxed once on its
income and again when
the share in the profits
of the partners is
distributed; then taxed
as dividends
b.
Registration of partnership
c.
Registration of a partnership is immaterial for
income tax purposes. It is taxable as long as the
following requisites concur: [AI]
1.
2.
There is an agreement, oral or writing, to
contribute money, property, or industry to a
common fund; and
There is an intention to divide the profits.
Treatment of loss in case the partnership
resulted in a loss
The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which
the returns are derived. There must be an
unmistakable intention to form a partnership
or joint venture (Obillos, Jr. v. CIR, 139 SCRA
436).
There is no contribution or investment of
additional capital to increase or expand the
inherited properties, merely continuing the
dedication of the property to the use to which
it had been put by their forebears (Ibid.).
Persons who contribute property or funds to a
common enterprise and agree to share the
gross returns of that enterprise in proportion
to their contribution, but who severally retain
the title to their respective contribution, are
not thereby rendered partners. They have no
common stock capital, and no community of
interest as principal proprietors in the
business itself from which the proceeds were
derived (Pascual v. CIR, 166 SCRA 560).
NOTE: The income from the rental of the house,
boughtfrom the earnings of co-owned properties,
shall be treated as the income of an unregistered
partnership to be taxable as a corporation because
of the clear intention of the co-owners to join
together in a venture for making money out of
rentals.
Results of operation of a partnership shall be
treated in the same way as a corporation. In case of
loss, it will be divided as agreed upon by the
partners and shall be taken by the individual
partners in their respective returns.
NOTE: The partners shall be entitled to deduct
their respective shares in the net operating loss
from their individual gross income.
Tax on General Professional Partnerships
Distributive share of a partner in the net
income of a business partnership
GPP are not subject to income tax but are required
to file information returns for its income for the
purpose of furnishing information as to the share in
the net income of the partnership, which each
partner should include in his individual return.
GPP not subject to income tax
It is equal to each partner’s distributive share of the
net income declared by the partnership for a
173
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Partners shall be liable for income tax in their
separate and individual capacities.
if any, is the tax consequence on the part of
A, B, and C as individual partners, insofar
as the payment of income tax is concerned?
(2014 Bar)
GPP is only required to file a return for its income,
except income exempt under Sec. 32 (B) of the NIRC,
setting forth the items of gross income and of
deductions allowed, and the names, Taxpayer
Identification Numbers (TIN), addresses and
shares of each of the partners (Sec. 55, NIRC).
A:
a. The three (3) items of earnings should be
included in the computation of ABC Law Firm’s
gross income. The professional/legal fees from
various clients is included as part of gross
income being in the nature of compensation for
services (Section 32 [A][1], NIRC). The cash
prize from a religious society in recognition of
its exemplary services is also included there
being no law providing for its exclusion. This is
not a prize in recognition of any of the
achievements enumerated under the law
hence, should form part of gross income
(Section 32 [B][7][c], NIRC). The gains from sale
of excess computers and laptops should also be
included as part of the firm’s gross income
because the term gross income specifically
includes gains derived from dealings in
property (Section 32 [A][3], NIRC).
b. The law firm being formed as general
professional partnership is entitled to the same
deductions allowed to corporation (Section 26,
NIRC). Hence, the three (3) items of deductions
mentioned in the
problem are all deductible, they being in the
nature of ordinary and necessary expenses
incurred in the practice of profession (Section
34 [A], NIRC). However, the amount deductible
for representation expenses incurred by a
taxpayer engaged in sale of services, including
a law firm, is subject to a ceiling of 1% of net
revenue (RR No. 10-2002).
c. The net income having been earned by the law
firm which is formed and qualifies as a general
professional partnership, is not subject to
income tax because the earner is devoid of any
income tax personality. Each partner shall
report as gross income his distributive shares,
actuality or constructively received, in the net
income of the partnership. The partnership is
merely treated for income tax purposes as a
pass-through entity so that its net income is not
taxable at the level of the partnership bur said
net income should be attributed to the
partners, whether or not distributed to them,
and they are liable to pay the income tax based
on their respective taxable income as
individual taxpayers (Section 26, NIRC).
Partners shall nonetheless be liable for income tax
in their separate and individual capacities.
Computation of net income
For purposes of computing the distributive share
of the partners, the net income of the partnership
shall be computed in the same manner as a
corporation (Sec. 26, NIRC).
Each partner shall report his distributive share in
the net income of the partnership as gross income
in his separate return, whether actually or
constructively received.
Q: A, B, and C, all lawyers, formed a partnership
called ABC Law Firm so that they can practice
their profession as lawyers. For the year 2012,
ABC Law Firm received earnings and paid
expenses, among which are as follows:
Earnings:
1. Professional/legal fees from various
clients;
2. Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm;
3. Gains derived from sale of excess
computers and laptops
Payments:
1. Salaries of office staff;
2. Rentals for office space;
3. Representation expenses
meetings with clients
incurred
in
a.
What are the items in the above-mentioned
earnings which should be included in the
computation of ABC Law Firm’s gross
income? Explain.
b. What are the items in the above-mentioned
payments which may be considered as
deductions from the gross income of ABC
Law Firm? Explain.
c. If ABC Law Firm earns net income in 2012,
what, if any, is the tax consequence on the
part of ABC Law Firm insofar as the
payment of income tax is concerned? What,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
ESTATES AND TRUSTS
Estate
An estate refers to the mass of properties left by a
deceased person.
174
INCOME TAXATION
NOTE: The income that is subject to income
taxation is the “income received by estates of the
deceased persons during the period of
administration or settlement of the estate (Sec. 60
[A][3], NIRC).
GR: Subject to income tax in the same manner as
individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall
also apply to income of estates and trusts (Sec. 60
[A], NIRC).
Income taxation for estates
XPNs:
Distribution to the beneficiaries during the taxable
year of trust income is deductible from the taxable
income of the trust. Deduction is allowed only when
the distribution is made during the taxable year
when the income is earned (Sec. 61 [A], NIRC).
GR: Subject to income tax in the same manner as
individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall
also apply to income of estates and trusts (Sec. 60
[A], NIRC).
NOTE: However, such deduction shall be included
in computing the taxable income of the
beneficiaries, whether distributed to them or not.
XPN:
Distribution to the heirs during the taxable year of
estate income is deductible from the taxable
income of the estate (BIR Ruling 233-86).
Person required to file and to pay the income
tax
NOTE: The distributed income shall form part of
the respective heir’s taxable income. Deduction is
allowed only when the distribution is made during
the taxable year when the income is earned.
GR: If the income:
1. Is distributed
to
beneficiaries, the
beneficiaries shall file and pay the tax.
2. Is to be accumulated or held for future
distribution, the trustee or beneficiary shall
file and pay the tax.
Taxes payable under the income tax law when a
person dies
1.
2.
Income Tax for individuals from January to
the time of death (Secs. 24, 25, NIRC).
Income Tax of the estate, if the estate is under
administration or judicial settlement (Sec. 60,
NIRC).
XPNs:
1. In a revocable trust, the income of the trust will
be returned to the grantor (Sec. 63, NIRC).
2. In a trust where the income is held for the
benefit of the grantor, the income of the trust
becomes income of the grantor (Sec. 64, NIRC).
3. In a trust administered in a foreign country, the
income of the trust, administered by any
amount distributed to the beneficiaries shall be
taxed to the trustee (Sec. 61 [C], NIRC).
Trusts
A trust is a right to the property, whether real or
personal, held by one person for the benefit of
another. It is:




Q: Johnny transferred a valuable 10-door
commercial apartment to a designated trustee,
Miriam, naming in the trust instrument Santino,
Johnny's 10-year old son, as the sole
beneficiary. The trustee is instructed to
distribute the yearly rentals amounting to
P720,000.00. The trustee consults you if she has
to pay the annual income tax on the rentals
received from the commercial apartment.
A confidence given by a person, the grantor
(creator);
Reposed in one person who is called fiduciary
(trustee);
For the benefit of another who is called the
cestui que trust (beneficiary);
Regarding property given by the grantor
(creator) to the fiduciary (trustee) for the
benefit of the cestui que trust (beneficiary).
a.
What advice will you give the trustee?
Explain.
b. Will your advice be the same if the
trustee is directed to accumulate the
rental income and distribute the same
only when the beneficiary reaches the
age of majority? Why or why not? (2009
Bar)
Classifications of trust for tax purposes [TIP]
1.
2.
3.
Taxable and tax-exempt trust
Irrevocable trust and revocable trust
Trust administered in the Philippines and trust
administered in a foreign country
Income taxation for trusts
A:
175
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
I will advise Miriam that the yearly rental
income distributed annually qualifies as a
deduction in computing the net income of the
trust. And since net income is zero after such
deduction, there is nothing to be paid as annual
income tax due from the trust. (Sec. 61[A],
NIRC).
NO. The trust may now have net income
determined at the end of each year as a result
of accumulating its income instead of
distributing the same to the beneficiary. The
tax is payable by the trust, as represented by
the trustee, on the basis of such net income.
(Sec. 61[A], NIRC).
b.
c.
d.
The retirement benefit received by the
employee from the retirement fund of the trust
shall be excluded in his gross income and, thus,
exempted from the withholding tax. (Sec. 32
[B][6][a], NIRC).
The income earned by the retirement funds of
private employees held by the trustor in their
behalf shall be exempted from income tax. (Sec.
60 [B], NIRC).
The amount actually distributed to the
employee shall be taxable to him in the year in
which so distributed to the extent that it
exceeds the amount contributed by such
employee. (Sec. 60 [B], NIRC).
Employee’s trust
Pension trust
Employee’s trusts are tax-exempt, provided:
1. Employee’s trust must be part of a pension,
stock bonus or profit sharing plan of the
employer for the benefit of some or all of his
employees;
2. Contributions are made to the trust by such
employer, or such employees or both;
3. Such contributions are made for the purpose of
distributing to such employees both the
earnings and principal of the fund accumulated
by the trust; and
4. The trust instrument makes it impossible for
any part of the corpus or income to be used for
or diverted to, purposes other than the
exclusive benefit of such employees (Sec. 60[B],
NIRC).
Tax exemption is likewise to be enjoyed by the
income of the pension trust; otherwise, taxation of
those earnings would result in a diminution of
accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund
(CIR v. CA, G.R. No. 95022, March 23, 1992).
Any amount received by an employee as retirement
benefits shall be excluded from gross income
subject to conditions set forth under Sec. 32 [B] of
the NIRC.
Income of trust not subject to tax but
considered as income of grantor subject to tax
Any part of the income of a trust, which is, or in the
discretion of the grantor or of any person not
having a substantial adverse interest in the
disposition of such part of the income may be:
Q: In the case of the employee’s trust which
forms part of a pension, stock bonus or profit
sharing plan of an employer for the benefit of
some or all of his employees, wherein
contributions are made to the trust by the
employer or employees, or both, for the
purpose of distributing to such employees the
earnings and principal of the fund accumulated
by the trust in accordance with such plan, what
is the tax treatment of
1.
2.
3.
Tax on Co-Ownerships
a.
The contributions made to the trust by the
employer?
b. The retirement benefit paid to the
employee under the retirement trust?
c. The income earned by the employee’s
retirement funds which are held in trust?
d. The amount actually distributed to a nonretiring employee during the year?
As a rule, co-ownership is tax exempt. It becomes
taxable if it is converted into an unregistered
partnership. It is converted into partnership if the
properties and income are used as common fund
with the intention to produce profits. If after
partition, the shares of the heirs are held under a
single management for profit making, unregistered
partnership is formed (Ona v. CIR, 45 SCRA 74).
A:
a. The contribution made to the pension trust by
the employer may be allowed as a deduction
against his gross income. (Sec. 34 [J], NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Held or accumulated for future
distribution to the grantor;
Distributed to the grantor;
Applied to the payment of premiums upon
policies of insurance on the life of the
grantor.
A joint purchase of land, by two, does not constitute
a co-partnership in respect thereto, nor does an
agreement to share the profits and losses on the
176
INCOME TAXATION
sale of land create a partnership; the parties are
only tenants in common. Where the transactions
are isolated, in the absence of other circumstances
showing a contrary intention, the case can only give
rise to a co-ownership (Pascual v. CIR, 166 SCRA
560).
Co-heirs who own inherited properties which
produce income should not automatically be
considered as partners of an unregistered
partnership or corporation subject to income tax.
corporations (Evangelista v. Collector of Internal
Revenue, G.R. No. L-9996, October 15, 1957).
Q: Pascual and Dragon bought 2 parcels of land
from Bernardino and 3 from Roque. Thereafter,
the first two were sold to Meirenir
Development Corporation and the remaining
were sold to Reyes and Samson. They divided
the profits between the two (2) of them. The
Commissioner contended that they formed an
unregistered partnership or joint venture
taxable as a corporation under the Code and its
income is subject to the NIRC. Is there an
unregistered partnership formed?
REASONS: Sharing of gross returns does not by
itself establish a partnership; there must be an
unmistakable intention to form a partnership or
joint venture. There is no contribution or
investment of additional capital to increase or
expand the inherited properties, merely continuing
the dedication of the property to the use to which it
had not been put by their forbears (Obillos Jr. v. CIR,
139 SCRA 436).
A: NONE. The sharing of returns does not in itself
establish a partnership whether or not the sharing
therein has a joint or common right or interest in
the property (NCC, Art. 1769). There is no adequate
basis to support the proposition that they thereby
formed an unregistered partnership. The two
isolated transactions whereby they purchased
properties and sold the same few years thereafter
did not make them partners. The transactions
were isolated. The character of habituality
peculiar to business transactions for the purpose of
gain was not present (Pascual and Dragon v. CIR,
G.R. No. 78133, October 18, 1988).
Co-ownership is not taxable if the activities of the
co-owners are limited to the preservation of the
property and the collection of income. In such case,
the co-owners shall be taxed individually on their
distributive share in the income of the coownership.
Co-owners investing the income in a business
for profit
Q: On March 2, 1973, Joe Obillos Sr. transferred
his rights under contract with Ortigas Co. to his
4 children to enable them to build residences on
the lots. TCTs were issued. Instead of building
houses, after a year, Obillos children sold them
to Walled City Securities Corporation and Olga
Cruz Canda. The BIR required the children to
pay corporate income tax under the theory that
they formed an unregistered partnership or
joint venture. Are they liable for corporate
income tax?
If the co-owners invest the income in a business for
profit they would constitute themselves into a
partnership and such shall be taxable as a
corporation.
Q: Brothers A, B, and C borrowed a sum of
money from their father which amount
together with their personal monies was used
by them for the purpose of buying real
properties. The real properties they bought
were leased to various tenants. The BIR
demanded the payment of income tax on
corporations, real estate dealer’s tax, and
corporation residence tax. However, A, B. and C
seek to reverse the letter of demand and be
absolved from the payment of taxes in question.
Are they subject to tax on corporations?
A: NO. The Obillos children are co-owners. It is an
isolated act which shows no intention to form a
partnership. It appears that they decided to sell it
after they found it expensive to build houses. The
division of profits was merely incidental to the
dissolution of the co-ownership, which was in the
nature of things a temporary state (Obillos, Jr. v.
CIR, G.R. No. L-68118, October 29, 1985).
A: YES. As defined in the NIRC, the term
“corporation includes partnership, no matter how
created or organized”. This qualifying expression
clearly indicates that a joint venture need not be
taken in any of the standard form, or conformity
with the usual requirements of the law on
partnerships, in order that one could be deemed
constituted for the purposes of the tax on
Tax on Joint Ventures and Consortiums
Joint Venture is a commercial undertaking by two
or more persons, differing from a partnership in
that it relates to the disposition of a single lot of
goods or the completion of a single project. Joint
venture or consortium, in general, is taxable as
corporation (Tabag, 2015).
177
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
However, a joint venture or consortium formed for
the purpose of undertaking construction projects
is not considered as corporation under Section 22
of the NIRC provided:
CORPORATE
CO-VENTURER
The respective
share in the
joint
venture
profit
is
considered as
dividends
Taxable
income
Joint
received by a
Venture
DC from a DC.
Hence, it shall
be treated as
inter-corporate
dividend which
is tax exempt.
The respective
share in the
joint
venture
profit shall be
included in the
Noncomputation of
taxable the corporate
Joint
venturer’s
Venture taxable income
subject
to
normal
corporate
income tax of
30%.
(Tabag, 2015)
a. The joint venture was formed for the purpose
of undertaking a construction project; and
b. Should involve joining/pooling of resources by
licensed local contracts; that is, licensed as
general contactor the Philippine Contractors
Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI);
c. The local contractors are engaged in
construction business; and
d. The joint venture itself must likewise be duly
licensed as such by the Philippines Contractors
Accreditation Board (PCAB) of the Department
of trade Industry (DTI).
Joint ventures involving foreign contractors may
also be treated as a non-taxable corporation only
if the member foreign contractor is :
a. covered by a special license as contractor by the
PCAB of the DTI; and
b. the construction project is certified by the
appropriate Tendering Agency (government
office) that the project is a foreign
financed/internationally-funded project and
that international bidding is allowed under
the Bilateral Agreement entered into by and
between the Philippine Government and the
foreign/ international financing institution
pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise
known as Contractor’s License Law.
The respective
share in the joint
venture
profit
shall be subject
to
creditable
withholding tax.
Consequently,
the same be
included in the
computation of
the
individual
taxpayer’s
taxable income.
FILING OF RETURNS AND PAYMENT OF
INCOME TAX
Income Tax Return (ITR)
A report made by the taxpayer to the BIR of all gross
income received during the taxable year, the
allowable deductions including exemptions, the net
taxable income, the income tax rate, the income tax
due, the income tax withheld, if any, and the income
tax still to be paid or refundable (Domondon, 2013).
Absent any one the aforesaid requirements, the
joint venture or consortium formed for the
purpose of undertaking construction projects shall
be considered as taxable corporations.
In addition, the tax-exempt joint venture or
consortium as herein defined shall not include
those who are mere suppliers of goods, services or
capital to a construction project.
PERIOD TO FILE INCOME TAX RETURN OF
INDIVIDUALS AND CORPORATIONS
Basic Tax
The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting
and paying appropriate income taxes on their
respective share to the joint ventures profit (RR 102012).
The return of any individual required to file the
same shall be filed on or before April 15th day of
each year covering income for the preceding
taxable year.
Tax treatment of the co-venturer’s share in the
joint venture profit
However, individuals who are self-employed or in
practice of a profession are required to file and pay
estimated income tax every quarter as follows:
1.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
INDIVIDUAL
CO-VENTURER
The respective
share in the joint
venture profit is
considered
as
dividends
income received
by an individual
taxpayer from a
DC.
Consequently, it
shall be subject
to 10% final
withholding tax.
178
First Quarter return - April 15
INCOME TAXATION
2.
3.
4.
Second Quarter return - August 15
Third Quarter return - November 15
Final adjusted (annual) return - April 15 of the
succeeding year (same with 1st quarter return)
3.
DC and RFC
1.
2.
XPNS: The following individuals shall not be
required to file an income tax return:
First, Second and Third Quarter returns – 60
days after the close of each of the first 3
quarters of the taxable year
Final adjusted (annual) return – On or before
April 15 following the taxable year
1.
2.
Final Withholding Tax on Passive Income
(Manual Filing)
1.
2.
An individual whose pure compensation
income derived from sources within the
Philippines exceeds Sixty thousand pesos
(P250,000). (RMC 50-2018)
January to November – 10th day of the month
following the month the withholding was made
December – January 15 of the succeeding year
3.
4.
Capital Gains Tax
a) Shares of stock
1. Ordinary Return – 30 days after each
transaction
2. Final Consolidated Return – on or before
April 15 of the following year
b) Real Property – 30 days following each sale or
other disposition (Sec. 51 [C] [2], NIRC)
An individual whose gross income does not
exceed his total personal and additional
exemptions for dependents;
Individual
taxpayer
receiving
purely
compensation income, regardless of amount,
from only one employer in the Philippines for
the calendar year, the income tax of which has
been withheld correctly by said employer
(Substituted Filing);
An individual whose sole income has been
subjected to final withholding tax;
A minimum wage earner or an individual who
is exempt from income tax (Sec. 51, NIRC).(Sec.
51 [A] [2], NIRC)
NOTE: Individuals not required to file an income
tax return may nevertheless be required to file an
information return.(Sec. 51 [A] [3], NIRC)
Special Rules
a) ITR of married individuals
PERSONS LIABLE TO FILE INCOME TAX RETURN
Married individuals, whether citizens, resident or
non-resident aliens, who do not derive income
purely from compensation, shall file a return for the
taxable year to include the income of both spouses.
Individual TaxpayersAYERS
GR: The following individuals are required to file an
income tax return:
1.
2.
3.
4.
Where it is impracticable to file one return, each
spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau
for purposes of verification for the taxable year
(Sec. 51 [D], NIRC).
Every Filipino citizen residing in the
Philippines;
Every Filipino citizen residing outside the
Philippines, on his income from sources within
the Philippines;
Every alien residing in the Philippines, on
income derived from sources within the
Philippines; and
Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines. (Sec. 51 [A] [1], NIRC)
b) Income of unmarried minors/children
GR: The income of unmarried minors derived from
property received from a living parent shall be
included in the return of the parent.
XPNs:
1. When the donor’s tax has been paid on such
property; or
2. When the transfer of such property is exempt
from donor’s tax (Sec. 51 [E], NIRC).
The following are also required to filed ITR:
1.
2.
A citizen of the Philippines and any alien
individual engaged in business or practice of
profession within the Philippines, regardless of
the amount of gross income;
An
individual
deriving
compensation
concurrently from two or more employers at
any time during the taxable year; and
c) Filing a return for a disabled taxpayer
If the taxpayer is unable to make his own return, the
return may be made by his:
179
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
1.
2.
3.
4.
Duly authorized agent;
Representative;
Guardian; or
Other person charged with the care of his
person or property, the principal and the
representative or guardian assuming the
responsibility of making the return and
incurring penalties provided for erroneous,
false or fraudulent returns (Sec. 51 [F], NIRC).
b. Required. A resident alien is taxable only on
income derived from sources within the
Philippines (Sec. 51A [1][c], NIRC).
c. Required. A resident citizen who is earning
purely compensation income from two
employers should file income tax return. If the
compensation income is received concurrently
from two employers during the taxable year,
the employee is not qualified for substituted
filing.
d. Not required. Under the law, all minimum
wage earners in the private and public sector
shall be exempt from payment of income tax
(Sec. 51A [2][d], NIRC in relation to R.A. No.
9504).
e. Not required. Under the law, an individual
whose sole income has been subjected of final
withholding tax pursuant to Sec. 57(A), NIRC,
need not file a return. What he received is a tax
paid income (Sec. 51A [2][c], NIRC).
Substituted filing
Substituted filing applies only if all of the following
requirements are present:
1.
2.
3.
4.
5.
6.
The employee received purely compensation
income (regardless of amount) during the
taxable year;
The employee received the income from only
one employer in the Philippines during the
taxable year;
The amount of tax due from the employee at
the end of the year equals the amount of tax
withheld by the employer;
The employee’s spouse also complies with all 3
conditions stated above;
The employer files the annual information
return (BIR Form No. 1604-CF);
The employer issues BIR Form No. 2316 to
each employee.
Corporate Taxpayers
General Professional Partnership (GPP)
Every GPP shall file, in duplicate, a return of its
income, except items excluded from gross income,
setting forth the items of gross income and the
deductions allowed, and the names, TIN, addresses
and shares of each of the partners (Sec. 55, NIRC).
Q: Indicate whether each of the following
individuals is required or not required to file an
income tax return:
Corporation
Every corporation subject to tax shall render a
return which shall be filed by the president, vicepresident or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer. (Sec. 52, NIRC).
a.
Filipino citizen residing outside the
Philippines on his income from sources
outside the Philippines.
b. Resident alien on income derived from
sources within the Philippines.
c. Resident
citizen
earning
purely
compensation income from two employers
within the Philippines, whose income taxes
have been correctly withheld.
d. Resident citizen who falls under the
classification of minimum wage earners.
e. An individual whose sole income has been
subjected to final withholding tax. (2015
Bar)
Returns of Corporations
Dissolution or Reorganization
contemplating
Within thirty (30) days after the adoption of a
resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital
stock, including a corporation which has been
notified of possible involuntary dissolution by the
SEC of for its reorganization, shall render a correct
return to the CIR, verified under oath, setting forth
the items of such resolution or plan and such other
information (Sec. 52 [C], NIRC).
A:
a. Not required. The income of a non-resident
Filipino citizen is taxable only on income
sourced within the Philippines. Accordingly, his
income from sources outside the Philippines is
exempt from income tax (Sec. 51A [1][b], NIRC).
Taxable Estate and Trust
The fiduciary shall file a return if gross income is at
least P20,000 (Sec. 65, NIRC).
WHERE TO FILE INCOME TAX RETURN
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
180
INCOME TAXATION
-
Except in cases where the Commissioner otherwise
permits, the return shall be filed with any of the
following:
1.
2.
3.
4.
-
Authorized agent bank,
Revenue District Officer,
Collection Agent or
Duly authorized city of municipal
Treasurer in which such person has his
legal residence or principal place of
business, or if there be no legal residence
or principal place of business, with the
Office of the Commissioner.
b. 50% of the tax due
- Willful neglect to file the return within the
period prescribed
WITHHOLDING TAX
Concept of Withholding Taxes
For non-resident citizens, the return shall be filed
with the
1.
2.
3.
Taxes imposed or prescribed by the NIRC are to be
deducted and withheld by the payor-corporations
and/or persons for the former to pay the same
directly to the BIR. Hence, the taxes are collected
practically at the same time the transaction is made
or when the taxable transaction occurs. It is
taxation at source(Domondon, 2013).
Philippine Embassy, or
nearest Philippine Consulate, or
be mailed directly to the CIR (Sec. 51 [B], NIRC).
Confidentiality rule with respect to tax returns
filed with the BIR
The withholding tax system is embedded in the
income tax system in the Philippines to ease the
administration and collection of taxes. It is not a
“separate” kind of tax as withholding tax is simply a
way of collecting tax from the source (Ingles, 2015).
Although Sec. 71 of the NIRC provides that the tax
returns shall constitute public records, it is
necessary to know that these are confidential in
nature and may not be inquired into in
unauthorized cases, under the pain of penalty
provided for in Sec. 270 of the NIRC.
Importance of Withholding Taxes
In the operation of the withholding tax system, the
payee is the taxpayer– the person on whom the tax
is imposed, while the payor, a separate entity, acts
no more than an agent of the government for the
collection of the tax in order to ensure its payment.
NOTE: For conviction of each act or omission, the
penalty of fine of not less than ₱50,000 but not
more than ₱100,000 or imprisonment of not less
than 2 years but not more than 5 years, or both.
Instances when inquiry into the income tax
returns of taxpayers may be authorized
The duty to withhold is different from the duty to
pay income tax. Indeed, the revenue officers
generally disallow the expenses claimed as
deductions from gross income, if no withholding
tax as required by law or regulations was withheld
and remitted to the BIR within the prescribed dates
(Mamalateo, 2008).
Inquiry into the ITR of taxpayers may be had when:
1.
2.
3.
4.
Failure to file any return on the date
prescribed
Filing of return with an internal revenue
officer other than those with whom the
return is required to be filed
The inspection of the return is authorized upon
the written order of the President of the
Philippines;
The inspection is authorized under Finance
Regulation No. 33 of the Secretary of Finance;
The production of the tax return is a material
evidence in a criminal case, where the
Government is interested in the result;
The production or inspection thereof is
authorized by the taxpayer himself.
Purpose of the Withholding Tax System
1.
2.
PENALTIES FOR NON-FILING OF RETURNS
3.
4.
There shall be imposed, in addition to the tax
required to be paid, a penalty equivalent to:
a. 25% of the amount due
Provide the taxpayer a convenient manner to
meet his probable income tax liability.
Ensure the collection of the income tax which
would otherwise be lost or substantially
reduced through the failure to file the
corresponding returns.
Improve the government’s cash flow.
Minimize tax evasion, thus resulting in a more
efficient tax collection system. (CREBA vs.
Romulo, 9 March 2010)
When to withhold
181
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
It arises at the time an income payment is paid or
payable or accrued or recorded as an expense or
asset, whichever is applicable in the payor’s books,
whichever comes first (R.R. 2-98, Sec. 2.57.4, as
amended by R.R. 12-2001).
4. All government offices including GOCCs as well
as provincial, city and municipal governments
and barangay (R.R. 2-98, Sec. 2.57.3).
Withholding agent in case the employer is the
Government of the Philippines
The term “payable” refers to the date the obligation
becomes due, demandable or legally enforceable
(R.R. 2-98, Sec. 2.57.4, as amended by R.R. 12-2001).
If the employer is the Government of the
Philippines or any of its political subdivision,
agency or instrumentality thereof, the return of the
amount deducted and withheld upon any wage
shall be made by the officer or employee having
control of the payment of such wage, or by any
officer or employee duly designated for the purpose
(Sec. 82, NIRC).
Withholding agent
A withholding agent is a separate entity acting no
more than an agent of the government for the
collection of tax in order to ensure its payments.
A withholding agent is explicitly made personally
liable under Sec. 251 of the NIRC for the payment of
the tax required to be withheld, in order to compel
the withholding agent to withhold the tax under
any and all circumstances. In effect, the
responsibility for the collection of the tax as well as
the payment thereof is concentrated upon the
person over whom the Government has
jurisdiction (Filipinas Synthetic Fiber Corporation v.
CA, et al., G.R. Nos. 118498 & 124377, October 12,
1999).
Duties and Obligations of the withholding agent
1.
2.
3.
4.
NOTE: In applications for refund, the withholding
agent is considered a taxpayer because if he does
not pay, the tax shall be collected from him (CIR v.
P&G, G.R. No. L-66838, December 2, 1991).
5.
The withholding agent is liable for the correct
amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be
finally found to be less than the amount that should
have been withheld under the law. Given this
responsibility, a withholding agent can validly
claim for tax refund.
Register – To register within 10 days after
acquiring such status with the RDO having
jurisdiction over the place where the business
is located
Deduct and withhold – To deduct tax from all
money payments subject to withholding tax
Remit the tax withheld – To remit tax withheld
at the time prescribed by law and regulations
File Annual Return – To file the corresponding
Annual Information Return at the time
prescribed by law and regulations
Issue Withholding Tax Certificates – To furnish
Withholding Tax Certificates to recipient of
income payments subject to withholding
Consequences for Failure to Withhold
1.
2.
3.
Persons required to withhold taxes
Liable for surcharges and penalties;
Liable upon conviction to a penalty equal to the
total amount of the tax not withheld, or not
accounted for and remitted (Sec. 251, NIRC);
and
Any income payment which is otherwise
deductible from the payor’s gross income will
not be allowed as a deduction if it is shown that
the income tax required to be withheld is not
paid to the BIR (R.R. 18-2013, Sec. 2).
The withholding taxes shall be withheld by the
person having control over the payment and who at
the same time claims the expenses. The following
persons are constituted as withholding agents:
Q: In case of failure by the withholding agent to
perform his duty to withhold and remit tax, is
the taxpayer absolved of liability?
1. Juridical person, whether or not engaged in
trade or business;
2. Individuals, with respect to payments made in
connection with his trade or business;
3. Individual buyers, whether or not engaged in
trade or business insofar as taxable sale,
exchange or transfer of real property is
concerned; and
A: The liability of the withholding agent is
independent from that of the taxpayer. The former
cannot be made liable for the tax due because it is
the latter who earned the income subject to
withholding tax. The withholding agent is liable
only insofar as he failed to perform his duty to
withhold the tax and remit the same to the
government. The liability for the tax, however,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
182
INCOME TAXATION
remains with the taxpayer because the gain was
realized and received by him. x xx [The taxpayer]
remains liable for the payment of tax as [he] shares
the responsibility of making certain that the tax is
properly withheld by the withholding agent, so as
to avoid any penalty that may arise from the nonpayment of the withholding tax due. (RCBC vs. CIR,
G.R. No. 170257, 7 September 2011)
b. Withholding tax on compensation (WTC) –
applies to all employed individuals whether
citizens or aliens deriving income from
compensation for services rendered in the
Philippines.
The employer is considred the withholding
agent. Every employer making payments of
wages shall deduct from and withhold tax,
excep for MWEs. Employer shall be liable if he
fails to withhold and remit.
Kinds of withholding taxes
1. Final withholding tax (FWT)
- The amount of tax withheld is full and final;
- The liability for payment of the tax rests
primarily on the withholding agent as
payor;
- In case he fails to withhold, the withholding
agent will be laible for the deficiency;
- The payee is not required to file any income
tax return for the particular income;
- The finality of the withheld tax is limited on
that particular income and will not extend to
the payee’s other tax liability (Ingles, 2015).
Nature of withholding tax on the income of
government employees
The withholding tax on compensation income of
government employees is creditable in
nature. Thus, pursuant to Sec. 79 (C)(2) of the NIRC,
the amount deducted and withheld during any
calendar year, shall be allowed as a credit to the
recipient of such income against the tax imposed
under Sec. 24 (A).
Obligation of an employer required to deduct
and withhold a tax
2. Creditable withholding tax (CWT)
- Taxes withheld on certain income payments
are intended to equal or at least
approximate the tax due of the apyee on said
income;
- Creditable tax must be withheld at source,
but shoud still be included in the tax return
of the recipient;
- The liability to withhold arises upon the
accrual, not upon the actual remittance. The
purpose of the withholding tax is to compel
the agent to withhold under all
circumstances (Ingles, 2015).
An employer shall furnish to each employee in
respect of his employment during the calendar
year, on or before January 31 of the succeeding
year, or if his employment is terminated before the
close of such calendar year, on the same day of
which the last payment of wages is made, a written
statement confirming the wages paid by the
employer to such employee during the calendar
and the amount of tax deducted and withheld in
respect of such wages.
He shall also submit to the Commissioner on or
before January 31 of the succeeding year, an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied
by copies of the statement referred to in the
preceding paragraph, and such other information
as may be deemed necessary.
Three types of CWTs:
a. Expanded withholding tax (EWT) - a kind of
withholding tax which is prescribed only for
certain payors and is creditable against the
income tax due of the payee for the taxable
quarter year.
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of tax on the items of income
payable to natural or juridical persons
residing in the Philippines, by payorcorporation/persons as provided for by law, at
the rate of not less than one percent (1%)but not
more than thirty-two percent (32%), which shall
be credited against the income tax liability of
the taxpayer for the taxable year.
c. Withholding Tax on Government Money
Payments – withheld by government offices
and instrumentalities, including governmentowned or controlled corporations and local
government units, before making any payments
to
private
individuals,
corporations,
partnerships and/or associations
i. Percentage Taxes – taxes withheld by National
Government
Agencies
(NGAs)
and
instrumentalities, including government-
183
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
owned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to non-VAT-registered
taxpayers/suppliers/payees
ii. Value Added Taxes (VAT) – taxes withheld by
National Government Agencies (NGAs) and
instrumentalities, including governmentowned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to VAT-registered
taxpayers/suppliers/payees on account of
their purchases of goods and services.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
184
INCOME TAXATION
Creditable Withholding Tax vs. Final Withholding Tax
As
to
subject
system
income
of the
CWT
Compensation Income
Professional/talent fees
Rentals
Cinematographic film rentals and other
payments
Income payments to certain contractors
The income is required to be included in the
gross income in ITR.
As to whether or
not income should
be reported as
part of the gross
income
As to the effect of The tax withheld can be claimed as a tax
the tax withheld
credit or may be deducted from the tax due
or payable.
As to filing of ITR The earner is required to file an ITR.
185
FWT
Passive incomes
Fringe benefits
The recipient may not report the said
income in his gross income because
the tax withheld constitutes final and
full settlement of the tax liability.
The tax withheld cannot be claimed as
tax credit.
If the only source of income is subject
to final tax, the earner may no longer
file an ITR. However, with the new
income tax forms (R.R. 2-2014),
taxpayers need to declare those
income subjected to final tax in their
ITR.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Filing of Withholding Tax Return
Taxes deducted and withheld by withholding
agents shall be covered by a return and paid to,
except in cases where the Commissioner otherwise
permits, an authorized agent bank, revenue district
officer, collection agent or duly authorized
Treasurer of the city or municipality where the
withholding agent has his legal residence or
principal place of business, or where the
withholding agent is a corporation, where the
principal office is located.
The taxes deducted and withheld by the
withholding agent shall be held as a special fund in
trust for the government until paid to the collecting
officers.
The return for final withholding tax shall be filed
and the payment made within 25 days from the
close of each calendar quarter, while the return for
creditable withholding taxes shall be filed and the
payment made not later than the last day of the
month following the close of the quarter during
which withholding was made: Provided, that the
Commissioner, with the approval of the Secretary
of Finance, may require these withholding agents to
pay or deposit the taxes deducted or withheld at
more frequent intervals when necessary to protect
the interest of the government (Sec. 58 [A], NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
186
TRANSFER TAX – ESTATE TAX
TRANSFER TAX
Kinds of Transfer Taxes under the NIRC
These are taxes imposed upon the privilege of
passing ownership of property without any
valuable consideration (Domondon, 2014).
1. Estate tax
2. Donor’s tax
Transfer Tax vs. Income Tax
Upon What
Imposed
Rates Applicable
Exemptions
TRANSFER TAX
Privilege to transfer property
INCOME TAX
Privilege to earn income
Rates are lower:
 Estate tax – 6%
 Donor’s Tax
– 6% in excess of 250,000 pesos
Lesser exemptions
Rates are higher:
 Individual income – 20% to 35%
More exemptions
Estate Tax vs. Donor’s Tax
Nature of transfer
Amount exempt
Rate of tax
Grant of exemption
ESTATE TAX
 Upon death of decedent (mortis causa)
 Transfer takes place between natural
persons only
No more exemption; Repealed by the
TRAIN Law
6% uniform tax rate
Sec. 87, NIRC
Sec. 86, NIRC
6% uniform tax rate
Sec. 101, NIRC
GR: None
XPN: Encumbrance on the property
donated, if assumed by the donee and
amount specifically provided by the
donor as a diminution of the property
donated may be claimed as deduction
GR: Notice of donation is not required
Grant of deductions
Notice requirement
DONOR’S TAX
 During the lifetime of the donor (inter
vivos)
 Transfer takes place between natural
and juridical persons
250,000
Notice of death to the Commissioner not
required anymore as repealed by TRAIN
Law
XPNs:
1. Donations to NGO worth at least
P50,000. Provided, not more than
30% of which will be used for
administration purposes.
2. Donation to any candidate, political
party, or coalition of parties
NOTE: Notice is required in the given
exceptions in order for the donation to be
exempt from donor’s tax and to claim full
deduction of the donation given to
qualified donee.
Notice, when filed
Filing of return
Notice of death to the Commissioner, not
required
1. A transfer subject to estate tax
2. Estate consists of registered or
registrable property, regardless of
value of gross estate
187
A transfer subject to donor’s tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Contents of return
Time of filing
Return
Payment of tax due
ESTATE TAX
1. Value of the gross estate
2. Deductions under Sec. 86, NIRC
3. Other pertinent information
If Gross Estate exceeds P5M, certified by
a CPA as to assets, deductions, tax due,
whether paid or not
Within 1 year from death of decedent,
except in meritorious cases where an
extension not exceeding 30 days is
granted by the Commissioner. (Sec. 90,
NIRC)
Pay as you file
GR: Extension of payment is not allowed
XPN: When it would impose undue
hardship upon the estate or any of the
heirs, extension may be allowed but not to
exceed 5 years in case of judicial
settlement or 2 years in case of extrajudicial settlement.
Extension of
payment
Requirement for
grant of extension
of payment
Payment by Installment – if the available
cash of the estate is insufficient to pay the
tax due, payment by installment shall be
allowed within two (2) years from when it
should be paid without penalty and
interest.
XPNs to the XPN: When taxpayer is guilty
of:
1. Negligence
2. Intentional disregard of rules and
regulation
4. Fraud
Bond not exceeding double the amount of
the tax and with such sureties as the
Commissioner deems necessary
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
188
DONOR’S TAX
1. Each gift made during the calendar
year which is to be included in
computing net gifts
2. The deductions claimed and
allowable
3. Any previous net gifts made during
the same calendar year
4. The name of the donee
Such further information as may be
required by rules and regulations made
pursuant to law.
Within 30 days after donation was
made. No extension allowed.
Pay as you file
None
TRANSFER TAX – ESTATE TAX
Q: Are donations inter vivos and donations
mortis causa subject to estate tax? (1994 Bar)
A: YES, it is in the nature of a tax exemption. Settled
is the rule that the power to tax includes the power
to grant an exemption.
A: GR: Donations inter vivos are subject to donor's
tax while donations mortis causa are subject to
estate tax.
NATURE, PURPOSE AND OBJECT
Nature of estate tax
XPN: If the transferor's control over the
property donated inter vivos extends up to the
death of the donor, such transfers in
contemplation of death, revocable transfers, are
subject to estate taxes.
It is not a tax on property because their imposition
does not rest upon general ownership but rather
they are privilege tax since they are imposed on the
act of passing ownership of property (Domondon,
2009).
ESTATE TAX
Characteristics of estate tax [TANG-DEP]
BASIC PRINCIPLES, CONCEPT AND DEFINITION
1.
2.
3.
4.
5.
6.
Estate tax is an excise tax imposed upon the
privilege of transmitting property at the time of
death and on the privilege that a person is given in
controlling to a certain extent the disposition of his
property to take effect upon death. Estate tax laws
rest in their essence upon the principle that death
is the generating source from which the taxing
power takes its being, and that it is the power to
transmit or the transmission from the dead to the
living on which the tax is more immediately based
(Lorenzo v. Posadas, 64 Phil 353).
It is a transfer tax.
It is an ad valorem tax.
It is a national tax.
It is a general tax.
It is a direct tax.
It is an excise tax.
Requisites for imposition of estate tax [DAD]
1. Death of decedent
2. Successor is alive at the time of decedent’s
death
3. Successor is not disqualified to inherit
Inheritance tax is a tax imposed on the legal right
or privilege to succeed to, receive or take property
by or under a will, intestacy law, or deed, grant or
gift becoming operative at or after the death
(Lorenzo vs. Posadas, 64 Phil. 353).
Purpose and object of estate tax
1. To generate additional revenue for the
government
2. To compensate the government for the
protection given to the decedent that enabled
him to prosper and accumulate wealth.
3. Remove the disparity in the tax treatment of a
sale and transfer by death.
NOTE: Presently, there is no inheritance tax
imposed by law. P.D. No. 69 passed on November
24, 1972, effective January 1, 1973, abolished the
inheritance tax for failure to meet one of the
requisites of a sound tax system, which is
administrative feasibility.
NOTE: Generally, the purpose of the estate tax is to
tax the shifting of economic benefits and enjoyment
of property from the dead to the living.
Estate planning is the manner by which a person
takes step to conserve the property to be
transmitted to his heirs by decreasing the amount
of estate taxes to be paid upon his death.
Theories on the purposes of estate tax
It is considered as lawful because, “the legal right of
a taxpayer to decrease the amount of what
otherwise would be his taxes or altogether avoid
them by means which the law permits, cannot be
doubted” (Delpher Trades Corporation v. IAC, et al.
G.R. No. 73584, January 28, 1988).
Benefitsprotection
Privilege or
Statepartnership
Q: A law was passed by Congress abolishing
estate tax. Is the law valid?
Ability to Pay
189
It is based on the power of the
State to demand and receive taxes
on the reciprocal duties of support
and protection.
The State, as a passive and silent
partner in the privilege of
accumulating property, has the
right to collect the share which is
properly due it.
The receipt of inheritance is in the
nature of unearned wealth which
creates the ability to pay the tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Redistributio
n of wealth
or intangible, wherever situated: Provided,
however, That in the case of a nonresident
decedent who at the time of his death was not a
citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines
shall be included in his taxable estate (Sec. 86,
TRAIN Law).
The receipt of inheritance
contributes to the widening
inequalities in wealth. Through
estate tax, the value received by
the successor is reduced and
brings said value into the coffers
of the government.
Gross estate based on citizenship and residency
TIME AND TRANSFER OF PROPERTIES
The properties and rights are transferred to the
successors at the time of death(Art. 777, Civil Code).
Decedent

RC, RA
The statute in force at the time of death of the
decedent governs the imposition of the estate tax.

Estate tax accrues at the time of death of decedent.
As such, succession takes place and the right of the
state to tax vests instantly. The tax is to be
measured by the value of the estate as it stood at
the time of the decedent’s death regardless of any
postponement of actual possession or any
subsequent increase or decrease in value (Lorenzo
v. Posadas, 64 Phil 353).
NRA
NRC
Individuals liable to pay estate tax:
1. Resident citizens (RC)
2. Non-resident citizens (NRC)
3. Resident alien (RA)
4. Non-resident alien (NRA)
 All properties, real or personal
situated in the Philippines
 Tangible personal property
located in the Philippines
 Intangible personal property
situated in the Philippines (Sec.
86, R.A. 10963)
(R.A. 10963)
Q: Is there a need to disclose properties outside
the Philippines?
NOTE: Only natural persons can be held liable for
estate tax. Domestic and foreign corporations
cannot be liable because they are not capable of
death.
A: YES, whether resident or non-resident. A
resident decedent is taxed on properties within or
without. On the other hand, while a non-resident
decedent is taxed only on properties within the
Philippines, it is a requirement that his estate tax
return should disclose the value of his gross estate
outside the Philippines in order to avail of the
allowable deductions (Sec. 86 (D), NIRC).
GROSS ESTATE AND NET ESTATE
Net Estate
The value of the gross
estate since it is taxed
at a flat rate.
Intangible personal property deemed situated
in the Philippines
1.
2.
DETERMINATION OF GROSS AND NET ESTATE
3.
Determination of gross estate
The value of the gross estate of the decedent shall
be determined by including the value at the time of
his death of all property, real or personal, tangible
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES


CLASSIFICATION OF DECEDENT
Gross Estate
The total value of all
property, real or
personal, tangible or
intangible, the actual
and beneficial
ownership of which
was in the decedent at
the time of his death
(Sec. 85, NIRC).

Gross Estate
All properties, real or personal,
wherever situated
Intangible personal property
wherever situated
Real property situated in the
Philippines
Tangible personal property
situated in the Philippines
Intangible personal property
4.
190
Franchise which must be exercised in the
Philippines;
Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance
with its laws; (domestic corporation)
Shares, obligations or bonds by any foreign
corporation 85% of its business is located in
the Philippines;
Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations
TRANSFER TAX – ESTATE TAX
5.
or bonds have acquired a business situs in the
Philippines;
Shares or rights in any partnership, business or
industry established in the Philippines (Sec.
104, NIRC).
GR: The situs of an intangible property is
determined by the domicile or residence of the
owner. This is known as the principle of “mobilia
sequuntur personam.”
XPN: The principle is not controlling
a) when it is inconsistent with the express
provisions of statute, or
b) When justice does not demand that it should
be, as when the property has in fact a situs
elsewhere (Mamalateo, 2014).
NOTE: These intangible personal properties are in
effect exceptions to the Latin maxim of mobilia
sequuntur personam.
This enumeration is
significant only for non-resident alien because they
are the only set of taxpayers where the situs of the
property is considered in determining whether
their property shall form part of the gross estate or
not.
Q: Will shares of stock issued by a foreign
corporation in favor of a non-resident form part
of the gross estate?
Q: When shall intangible personal properties of
a nonresident alien be excluded from the gross
estate?
A: YES, if 85% of the business of the foreign
corporation who issued the stocks is located in the
Philippines or if it is considered to have obtained
business situs in the Philippines (Section 104,
NIRC).
A: Said properties shall be excluded on the basis of
reciprocity. No donor’s or estate tax shall be
collected in respect of intangible personal
property:
1.
2.
Instances where amount of the gross estate is
significant
Total exemption
– If the decedent at the time of his death or the
donor at the time of the donation was a citizen
and resident of a foreign country which at the
time of his death or donation did not impose a
transfer tax of any character, in respect of
intangible personal property of citizens of the
Philippines not residing in that foreign country,
or
1. Estate tax returns showing a gross value
exceeding Two million pesos (P5,000,000) shall
be supported with a statement duly certified to
by a Certified Public Accountant containing the
following:
a. Itemized assets of the decedent with their
corresponding gross value at the time of his
death, or in the case of a nonresident, not a
citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
b. Itemized deductions from gross estate
allowed in Section 86; and
c. The amount of tax due whether paid or still
due and outstanding (Sec. 90 [A], NIRC).
2. The value of the gross estate not situated in the
Philippines of a decedent who is a nonresident
alien must be included in the estate tax return
in order to be allowed to claim deductions
(Sec.86[D], NIRC).
Partial exemption
– If the laws of the foreign country of which the
decedent or donor was a citizen and resident at
the time of his death or donation allows a
similar exemption from transfer or death taxes
of every character or description in respect of
intangible personal property owned by citizens
of the Philippines not residing in that foreign
country (Sec. 104, NIRC).
NOTE: Reciprocity in exemption does not require
the “foreign country” to possess international
personality in the traditional sense (i.e., compliance
with the requisites of statehood). Thus, Tangier,
Morocco (Collector v. Campos-Rueda, 42 SCRA 23)
and California, a state in the American Union
(Collector v. de Lara, 102 Phil 813) were held to be
foreign countries within the meaning of Section
104.
Basis for the valuation of gross estate
Real
property
Q: For purposes of estate and donor’s tax, do we
adhere to mobilias equuntur personam?
PROPERTY VALUATION
Whichever is higher between the:
1. Fair market value as determined
by the Commissioner (zonal
value) or
2. Fair market value as shown in the
schedule of values fixed by the
provincial and city assessors
If there is an improvement, the value
of improvement is the construction
A: NO.
191
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
for expenses, losses, indebtedness, and taxes,
property previously taxed, transfers for public
use, and the share of his surviving spouse in
their conjugal partnership amounted to P15
billion. Tong's gross estate for Philippine estate
tax purposes is? (2011 Bar)
cost per building permit or the fair
market value per latest tax
declaration
Fair market values is the price at
which any seller will sell and any
buyer will buy both willingly without
any force or intimidation. It is the
price which a property will bring
when it is offered by one who desires
to buy and one who is not compelled
to sell.
Personal
property
Shares of
stock
Right to
usufruct,
use or
habitation,
as well as
that of
annuity
A: P20 billion. Being a non-resident alien, the estate
tax to be paid will be based on his properties
situated in the Philippines. The deductions are not
included since the question pertains to gross estate,
not the net estate.
NOTE: Gross estate tax isadding all those included
and deducting the exclusions while net estate is
arrived at after subtracting the allowable
deductions from the gross estate.
Whether tangible or intangible,
appraised at FMV. “Sentimental
value” is practically disregarded.
Unlisted
1. Unlisted common - book value
2. Unlisted preferred - par value
Estate tax formula:
Listed – Closing rate AT THE TIME of
death. If none is available, the FMV is
the arithmetic mean between the
highest and lowest quotation at a date
nearest the date of death.
In determining the book value of
common shares, the following shall
not be considered:
1 . Appraisal surplus
2 . The value assigned to preferred
shares, if there is any
Shall be taken into account the
probable life of the beneficiary in
accordance with the latest basic
standard mortality table, to be
approved by the Secretary of Finance,
upon recommendation of the
Insurance Commissioner.
Determination of net estate
Q: How is the net estate determined?
ITEMS TO BE INCLUDED IN THE GROSS ESTATE
[DIGRI-PLS]
1. Decedent's interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property under general power of
appointment
5. Proceeds of life insurance
6. Prior interests
7. Transfers for insufficient consideration
8. Share of the Surviving Spouse (Sec 85,
NIRC)
NOTE: Nos. 2, 3, 4 and 7are properties not
physically in the estate (these have already been
transferred during the lifetime of the decedent but
are still subject to payment of estate tax). Although
these properties are inter vivos in form, they are
treated as mortis causa in substance. Note that
transfers made for a bona fide consideration shall
not be included in the gross estate.
A: The same rule as the gross estate and afterwards
subtracting the allowable deductions from the
gross estate.
NOTE: Before you can arrive at the value of the net
estate, you have to determine first the value of
gross estate.
Q: Tong Siok, a Chinese billionaire and a
Canadian resident, died and left assets in China
valued at P80 billion and in the Philippines
assets valued at P20 billion. For Philippine
estate tax purposes the allowable deductions
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
GROSS ESTATE
(Less)
1. Deductions
2. Net share of surviving spouse
__________________________________________________________
NET ESTATE
(Multiply) Tax rate
__________________________________________________________
ESTATE TAX DUE
(Less)
Tax credit, if any
ESTATE TAX DUE AND PAYABLE
Items above are discussed in detail below.
Decedent’s interest
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TRANSFER TAX – ESTATE TAX
This refers to the extent of equity or ownership
participation of the decedent on any property
physically existing and present in the gross estate,
whether or not in his possession, control or
dominion. It also refers to the value of any interest
in property owned or possessed by the decedent at
the time of his death (Tabag, 2015).
It is a transfer motivated by the thought of an
impending death regardless of whether or not
death is imminent.
This takes place:
1. When the decedent has, at any time, made a
transfer in contemplation of or intended to take
effect in possession or enjoyment at or after
death; or
2. When decedent has, at any time, made a transfer
under which he has retained for his life or for a
period not ascertainable without reference to
his death or any period which does not in fact
end before his death:
a. Possession, enjoyment or right to income
from the property; or
b. The right, either alone or in conjunction with
any other person, to designate the person
who will possess or enjoy the property or
income therefrom.
The decedent’s interest includes any interest
including its fruits, having value or capable of being
valued, transferred by the decedent at his death.
Rental income from buildings and dividends from
investments, interest on bank deposits which have
accrued at the time of his death qualify as
decedent’s interest which should be included in the
gross estate.
Q: Jose Ortiz owns 100 hectares of agricultural
land planted with coconut trees. He died on May
30, 1994. Prior to his death, the government, by
operation of law, acquired under the
Comprehensive Agrarian Reform Law all his
agricultural lands except 5 hectares. Upon the
death of Ortiz, his widow asked you how she will
consider the 100 hectares of agricultural land
in the preparation of the estate tax return. What
advice will you give her? (1994 Bar)
XPN: In case of a bona fide sale for an adequate and
full consideration in money or money’s worth.
NOTE: The concept of transfer does not constitute
any transfers made by a dying person. It is not the
mere transfer that constitutes a transfer in
contemplation of death but the retention of some
type of control over the property transferred. In
effect, there is no full transfer of all interests in the
property inter vivos.
A: The 100 hectares of land that Jose Ortiz owned
but which prior to his death on May 30, 1994 were
acquired by the government under CARP are no
longer part of his taxable gross estate, with the
exception of the remaining 5 hectares which under
Sec. 78(a) of the NIRC still forms part of "decedent's
interest".
5 instances which constitutes transfer in
contemplation of death according to Prof.
Thomas Matic
Q: Is 13th month pay included in the gross
estate? How about Christmas bonus?
1. Secondary Life Estate – Retention by the grantor
for life of the right to enjoy the income or the
fruits of the property transferred in trust
constitute what is called reservation of a
primary life estate. There is no question in this
case that the property would be included in the
gross estate of the grantor upon his death.
A: Both 13th month pay and Christmas bonus are
not included in the gross estate as these are subject
to income tax. Moreover, these are not income of
the estate as they were earned while the decedent
was still alive.
Illustration:
A creates a trust to pay the income to himself for
life, remainder to B or his estate.
Q: If the decedent is a partner in a partnership,
will his interest in the partnership considered
as part of his gross estate?
Since enjoyment of the property remains, in A,
the transferor, throughout his lifetime, the value
of the entire property is included in A’s estate at
death.
A: YES. The decedent’s interest in the partnership
at the time of his death shall form as part of his
gross estate. His contributions and his share in the
partnership’s profits and surplus shall be included
in his gross estate.
2. Interests Analogous to Life Estates – where the
decedent had transferred certain shares of stock
to his daughter “subject to your giving me the
first dividends on these P15,000,” and part of
the P15,000 was still unpaid when the decedent
Transfer in contemplation of death
193
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
died, it was held that the entire value of the
securities was properly included in the
decedent’s gross estate since he had retained
the income for a period which did not in fact end
before his death.
3. Discharging Legal obligation to transferor – a
transfer with the right retained to have the
income used to discharge a legal obligation of
the transferor or otherwise for his pecuniary
benefit is equivalent to a reservation of the right
to the income. Thus, where a man created a trust
with the provision that the income should be
paid to his life for her “support and
maintenance”, remainder to their children, it
was held that the property was includible in his
gross estate. But there is no inclusion required if
the grantor’s dependent is free to use the
income for any purpose without restriction, the
reason being that inclusion is required only
where the transfer relieves the grantor of his
duty to support.
4. Right Retained Alone or with another to
designate who shall enjoy property or income
therefrom
–
The situation contemplated here usually occurs
when the settlor or grantor designates himself
as trustee or co-trustee with another.
5. Retention of Power to distribute or accumulate
trust income – where the grantor, either alone
as trustee or as co-trustee with others, reserved
the power to accumulate or distribute income
and exercised such power by accumulating and
adding income to principal and this power he
held until the moment of his death with respect
to both the original principal as well as the
accumulated income, this requires the inclusion
in the decedent settlor’s gross estate.
fide sale for an adequate and full consideration in
money. Therefore, the house and lot which Mr.
Agustin sold to his son for a valuable and sufficient
consideration should not be considered as forming
part of Mr. Agustin’s gross estate.
Q: A, aged 90 years and suffering from incurable
cancer, on August 1, 2001 wrote a will and, on
the same day, made several inter-vivos gifts to
his children. Ten days later, he died. In your
opinion, are the inter-vivos gifts considered
transfers in contemplation of death for
purposes of determining properties to be
included in his gross estate? (2001 Bar)
A: Yes. When the donor makes his will within a
short time of, or simultaneously with, the making of
gifts, the gifts are considered as having been made
in contemplation of death (Roces v. Posadas, 58 Phil.
108). Obviously, the intention of the donor in
making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees
are likewise his forced heirs who are called upon to
inherit, it will create a presumption juris tantum
that said donations were made mortis causa, hence,
the properties donated shall be included as part of
A's gross estate.
Circumstances to consider in determining that
the transfer is in contemplation of death:
1.
Age of the decedent at the time the transfers
were made
2. Decedent’s health, as he knew it at or before the
time of the transfers
3. The interval between the transfers and the
decedent’s death
4. The amount of property transferred in
proportion to the amount of property retained
5. The nature and disposition of the decedent
6. The existence of a general testamentary
scheme of which the transfers were a part
7. The relationship of the donee(s) to the
decedent
8. The existence of a desire on the part of the
decedent to escape the burden of managing
property by transferring the property to others
9. The existence of a long established gift-making
policy on the part of the decedent
10. The existence of a desire on the part of the
decedent to vicariously enjoy the enjoyment of
the donees for the property transferred
11. The existence of the desire by the decedent of
avoiding estate taxes by means of making inter
vivos transfers of property (Estate of Oliver
Johnson v. Commissioner, 10 T.C. 680)
NOTE: A bona fide sale for an adequate and full
consideration in money or in money’s worth is a
transfer not considered in contemplation of death
and not part of the gross estate.
Q: Mr. Agustin, 75 years old and suffering from
an incurable disease, decided to sell for
valuable and sufficient consideration a house
and lot to his son. He died one year later.
In the settlement of Mr. Agustin's estate, the BIR
argued that the house and lot were transferred
in contemplation of death and should therefore
form part of the gross estate for estate tax
purposes. Is the BIR correct? (2013 Bar)
A: The BIR is not correct. Pursuant to Section
85(B) of the NIRC, properties that are transferred
in contemplation of death form part of the gross
estate of the decedent. An exception to this is a bona
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
194
TRANSFER TAX – ESTATE TAX
12. Concurrent making of will or making a will
within a short time after the transfer (Roces v.
Posadas, 58 Phil. 108).
Motives which negate transfer in contemplation
of death:
January, 1926, and that the donees were instituted
legatees in the donor's will which was admitted to
probate. It is from these allegations, especially the
last, that we infer a presumption juris tantum that
said donations were made mortis causa(Roces v.
Posadas, 58 Phil. 108).
1.
Revocable transfer
2.
3.
4.
5.
6.
7.
To relieve the donor from the burden of
management
To save income taxes or property taxes
To settle family litigated and unlitigated
disputes
To provide independent income for
dependents
To see the children enjoy the property while
while the donor is alive
To protect family from hazards of business
operations
To reward services rendered
It is a transfer by trust or otherwise, where the
enjoyment thereof was subject at the date of his
death to any change through the exercise of a power
to alter or amend or revoke or terminate such
transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other
person (without regard to when or from what
source the decedent acquired such power), to
alter, amend, revoke or terminate; or
3. Where any such power is relinquished in
contemplation of the decedent’s death other
than a bone fide sale for an adequate and full
consideration in money or money’s worth
(Sec. 85(C)(1), NIRC).
Q: On April 9, 1928, Felix Dison made a gift inter
vivos, transferring 22 tracts of land, in favor of
his son Luis Dizon. Luis formally accepted the
donation in writing on April 17 and such
acceptance was acknowledged before a notary
public on April 20, 1928. On April 21, 1928,
Felix Dison died. Is the donation inter vivosor
mortis causa?
Power to alter, amend or revoke considered to
exist on the date of decedent’s death even
though:
A: The transfer is inter vivos in form but mortis
causa in substance; it is a transfer in contemplation
of death (Dison v. Posadas, 57 Phil. 465).
1.
2.
Q: On March 10 and 12, 1925, Esperanza
Tuazon, by means of public documents, donated
certain parcels of land situated in Manila to
Concepcion and Elvira, who accepted the same.
On January 5, 1926, the donor died without any
forced heir and in her will which was admitted
to probate, she bequeathed to each of the said
donees the sum of P5,000. After the estate had
been distributed among the instituted legatees
and before delivery of their respective shares,
the appellee herein, as CIR, ruled that the
appellants, as donees and legatees, should pay
as deficiency inheritance tax.
Are these
donations mortis causa, thus should be
included as part of the gross estate?
The exercise of the power is subject to a
precedent giving of notice; or
The alteration, amendment or revocation
takes effect only on the expiration of a stated
period for the exercise of the power, whether
or not on or before the date of the decedent’s
death
a. Notice has been given
b. The power has been exercised.
In such cases, proper adjustment shall be made
representing the interest which would have been
excluded from the power if the decedent had lived,
and for such purpose if notice has not been given or
the power has not been exercised on or before the
date of his death, such notice shall be considered to
have been given, or the power exercised on the date
of his death (Sec. 85(C)(2), NIRC).
A: YES. These donations are inter vivosbut made in
contemplation of death, thus, considered as
donation mortis causa. The concurrent making of a
will or making a will within a short time after the
transfer shows clearly the intention of the donor in
making the said donations inter vivos in order to
avoid imposition of estate tax. We refer to the
allegations that such transmissions were effected
in the month of March, 1925, that the donor died in
NOTE: Revocable transfer is part of the gross estate
of the decedent because the transferor can revoke
the transfer any time, such person wields
tremendous amount of power such that he can
revoke the transfer as if none was actually made.
Q: Is it necessary that the decedent should have
exercised such right?
195
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: GR: No. It is sufficient that the decedent has the
power to revoke, though he did not exercise such
power.
General Power of Appointment (GPA) vs.
Special Power of Appointment (SPA)
GPA
XPN: In case of a bona fide sale for an adequate and
full consideration in money and money’s worth.
As to
nature
Transfer not revocable, thereby not subject to
estate tax when:
1.
2.
3.
4.
The decedent’s power could only be exercised
with the consent of all parties having an
interest in the transferred property and if the
power adds nothing to the rights the parties
possess under local law (Lober v. United States,
346 US 335).
When the decedent has been completely
divested of the power at the time of his death
(ibid.)
Where the exercise of the power by the
decedent was subject to a contingency beyond
the decedent’s control which did not occur
before his death (Hurd v. Commissioner
160F(2)610).
The mere right to name trustees. Neither is the
grantor’s limited power to appoint himself as
trustee under conditions which did not exist at
his death (24 Am Jur. 2d, p 790).
As to
tax
implica
-tions
As to
effects
Makes appointed
property, for all
intents,
the
property of the
donee; thus, forms
part of the gross
estate
Donee holds the
appointed property
with
all
the
attributes
of
ownership under
the concept of an
owner
Not includible in
the gross estate of
the donee when he
dies
Donee holds the
appointed
property in trust
or
under
the
concept
of
a
trustee
Properties passing under a GPA forms part of
decedent’s estate through:
Q: Mr. Mayuga donated his residential house
and lot to his son and duly paid the donor's tax.
In the Deed of Donation, Mr. Mayuga expressly
reserved for himself the usufruct over the
property for as long as he lived. Describe the
donated
property
from
the
taxation
perspective. (2013 Bar)
1.
2.
3.
A: The property will form part of Mr. Mayuga's
gross estate when he dies. Applying Section
85(B)(1) of the NIRC, the donated property will still
form part of the gross estate of the decedent when
in the deed of donation, the donor “has retained for
his life or for any period which does not in fact end
before his death the possession or enjoyment of, or
the right to the income from the property.”
Therefore, the property will form part of Mr.
Mayuga’s gross estate when he dies because he
donated the property in contemplation of death.
Will
Deed executed in contemplation of death, or
intended to take effect in possession or
enjoyment at, or after his death
Deed under which he has retained for his life or
for any period not ascertainable without
reference to his death or for any period which
does not in fact end before his death:
a. The possession, enjoyment or right to
income from the property; or
b. The right to designate the person who will
possess or enjoy the property or income
therefrom (Sec. 85[D], NIRC).
Q: What is the reason for inclusion of the said
property in the donee’s gross estate?
A: The power of the donee to dispose the said
property through power of appointment is
equivalent to an act of dominion, which is an
essential attribute of ownership.
Property under General Power of Attorney
It is the right to designate by will or deed, without
restrictions, the persons who shall succeed to the
property of the prior decedent. The appointment
could be in favor of anybody, including himself, his
estate, his creditors, or the creditors of his estate.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Donee has the
power to appoint
any person he
chooses or enjoy
the
property
without restriction
SPA
Donee appoints
successor to the
property within a
limited group or
class of persons
according to the
will of the donor
Q: What properties passing under GPA are not
included as part of a decedent’s gross estate?
A: Those properties transferred under a bona fide
sale for an adequate and full consideration in
money or money’s worth.
196
TRANSFER TAX – ESTATE TAX
Q: In his last will and testament, X bequeathed a
painting to his only son, Z. The will also granted
Z the power to appoint his wife, W, as successor
to the painting in the event of Z’s death. Z died
and W succeeded to the property. Should the
painting be included in the gross estate of Z and
thus be subject to estate tax? (2009 Bar)
b.
c.
A: NO. Only property passing under a general
power of appointment is included in the gross
estate of the decedent. In this case, the painting has
to be transferred by Z only to his wife, W, based on
the will of his father, X. Since the power of
appointment is specific (i.e., only to his wife), such
property should not be included in his gross estate.
d.
e.
f.
g.
Transfer in contemplation of death vs. property
passing under general power of attorney
TRANSFER IN
CONTEMPLATION OF DEATH
Effecti
-vity
Means
At or after death
By
trust
otherwise
or
estate, executor or administrator) AND that the
said beneficiary is designated as irrevocable;
Where the life insurance was not taken by the
decedent upon his own life even though the
beneficiary is the decedent’s estate, executor, or
administrator;
Accident insurance proceeds. NIRC specifically
mentions only life insurance policies;
Proceeds of a group insurance policy taken out
by a company for its employees;
Proceeds of insurance policies issued by the
GSIS to government officials and employees are
exempt from all taxes;
Benefits accruing from SSS law;
Proceeds of life insurance payable to heirs of
deceased members of military personnel.
To determine the conjugal or separate
character of proceeds, the following factors are
considered:
GENERAL POWER
OF APPOINTMENT
For his life or any
period
not
ascertainable
w/o
reference to his death
or for any period
which does not in fact
end before his death
Property
passed
under GPA and by
will or by deed
1.
Policy taken before marriage
– Source of funds determines ownership of the
proceeds of life insurance
2.
Policy taken during marriage
a. Beneficiary is estate of the insured
– Proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is
not taxable
b.
Proceeds of life insurance
Beneficiary is third person
– Proceeds are payable to beneficiary even
in premiums were paid out of the conjugal
Proceeds of life insurance forms part of the gross
estate when the beneficiary is:
Q: What if the beneficiary who was irrevocably
designated caused the death of the insured?
1. The estate of the decedent, his executor or
administrator taken out by the decedentupon
his own life regardless of whether the
designation is revocable or irrevocable; or
2. A third person, other than the decedent’s
estate, executor, or administrator provided
that the designation is not irrevocable
A: It is considered revocable unless he acted in selfdefense.
NOTE: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of
the insured. In such a case, the share forfeited shall
pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries,
the proceeds shall be paid in accordance with the
policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured
(Sec. 12, Insurance Code as amended by R.A. 10607,
August 15, 2013).
NOTE: Under the Insurance Code, in the absence of
an express designation, the presumption is that the
beneficiary
is
revocably
designated.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable (Sec. 11, R.A. 10607).
Q: Suppose an employer takes a life insurance
policy on the life of an employee where the
employer is designated as the beneficiary, what
are its tax implications?
Not part of the gross estate when:
a. Proceeds from a life insurance policy is
receivable by a 3rd person (NOT the decedent’s
197
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: The premiums paid by the employer will not be
deductible from its employer’s gross income (Sec.
36 [A][4], NIRC). On the part of the employee, it will
not be included in his/her gross income of the
based on Sec. 32(B)(1), NIRC. However, the life
insurance proceeds will form part of the gross
estate of the decedent employee if his designation
is revocable. Conversely, if the designation is
irrevocable, it will not form part of his gross estate.
Q: If the property insured was destroyed after
the taxpayer’s death, will insurance money still
form part of the gross estate?
A: NO, it will be considered as a receivable of the
estate.
Q: Antonia Santos, 30 years old, gainfully
employed, is the sister of Eduardo Santos. She
died in an airplane crash. Edgardo is a lawyer
and he negotiated with the airline company and
insurance company and they were able to agree
to settlement of P10 million. This is what
Antonia would have earned as somebody who
was gainfully employed. Edgardo was her only
heir.
Q: Ralph Donald, an American citizen, was a top
executive of a U.S company in the Philippines
until he retired in 1999. He came to like the
Philippines so much that following his
retirement, he decided to spend the rest of his
life in the country. He applied for and was
granted permanent resident status the
following year. In the spring of 2004, while
vacationing in Orlando Florida USA, he suffered
a heart attack and died. At the time of his death
he left the following properties:
a. Is the P10 million subject to estate tax?
b. Should Edgardo report the 10 million as
his income being Antonia’s only heir?
(2007 Bar)
a.
Bank deposits with Citibank Makati and
Citibank Orlando Florida;
b. Rest house in Orlando, Florida;
c. A condominium unit in Makati;
d. Shares of stock in the Phil subsidiary of the
U.S company where he worked;
e. Shares of stock in San Miguel Corporation
and PLDT
f. Shares of stock in Disney World in Florida
g. U.S treasury bonds
h. Proceeds from a life insurance policy
issued by a US corporation.
A:
a. NO. The estate tax is a tax on the privilege
enjoyed by an individual in controlling the
disposition of her properties to take effect
upon her death. The P10 million is not a
property existing at the time of the decedent’s
death; hence it cannot be said that she
exercised control over its disposition. Since the
privilege to transmit property is not exercised
by the decedent, the estate tax cannot be
imposed thereon.
b. NO. The amount received in a settlement
agreement with the airline company and
insurance company is an amount received from
the accident insurance covering the passenger
of the airline company and is in the nature of
compensation for personal injuries and for
damages sustained on account of such injuries,
which is excluded from the gross income of the
recipient.
Which of the foregoing assets shall be included
in the taxable gross estate in the Philippines?
Explain. (2005 Bar)
A: All of the properties enumerated except (h), the
proceeds from life insurance, are included in the
taxable gross estate in the Philippines. Ralph
Donald is considered a resident alien for tax
purposes since he is an American citizen and was a
permanent resident of the Philippines at the time of
his death. The value of the gross estate of a resident
alien decedent shall be determined by including the
value at the time of his death of all property, real or
personal, tangible or intangible, wherever situated
(Sec. 85, NIRC).
Q: On June 30, 2000, X took out a life insurance
policy on his own life in the amount of
P2,000,000. He designated his wife, Y, as
irrevocable beneficiary to P1,000,000 and his
son Z, to the balance of P1,000,000, but in the
latter designation, reserving his right to
substitute him for another.
The other item, (h) proceeds from a life insurance
policy, may be included in his gross estate only
when it was Ralph Donald who took out the
insurance upon his own life, payable upon his death
to his estate, or when the beneficiary is a third
person other than his estate who is not designated
as an irrevocable beneficiary (Sec. 85[E], NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
On September 1, 2003 X died and his wife and
son went to the insurer to collect the proceeds
of X’s life insurance policy.
a.
198
Are the proceeds of the insurance subject to
income tax on the part of Y and Z for their
respective shares? Explain.
TRANSFER TAX – ESTATE TAX
b. Are the proceeds of the insurance to form
part of the gross estate of X? Explain. (2003
Bar)
the considerationreceived shall be included in the
gross estate.
This is applicable to:
A:
a. NO. The law explicitly provides that the
proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the
insured are excluded from gross income and is
exempt from taxation. The proceeds of life
insurance received upon the death of the
insured constitute a compensation for the loss
of life, hence a return of capital, which is
beyond the scope of income taxation (Sec. 32 B
(1), NIRC)
b. Only the proceeds of 1M given to the son, Z,
shall form part of the Gross Estate of X. Under
the NIRC, proceeds of life insurance shall form
part of the gross estate of the decedent to the
extent of the amount receivable by the
beneficiary designated in the policy of the
insurance except when it is expressly
stipulated that the designation of the
beneficiary is irrevocable. As stated in the
problem, only the designation of Y is
irrevocable while the insured/decedent
reserved the right to substitute Z as beneficiary
for another person. Accordingly, the proceeds
received by Y shall be excluded while the
proceeds received by Z shall be included in the
gross estate of X (Sec. 85(E), NIRC).
1.
2.
3.
NOTE: The above transfers should be made for a
consideration in money/money’s worth but is not
abona fide sale for an adequate and full
consideration in money and money’s worth.
It is also subject to donor’s tax if there is no
reference to:
1.
2.
3.
Revocable transfer
Contemplation of death
General power of appointment.
NOTE: It is subject to estate tax if the 3 instances
mentioned are present (Sec. 100 in rel. to Sec 85[B],
NIRC).
Q: What is the amount to be included in the
gross estate of the decedent? How about in net
gift in case of transfers for insufficient
consideration subject to donor’s tax?
A: Only the amount in excess of the fair market
value at the time of death over the consideration
received at the time of transfer. In case of transfers
for insufficient consideration subject to donor’s tax,
the amount of the net gift shall be the excess of the
fair market value at the time of transaction over the
consideration received.
Prior interest
Prior Interest areall transfers, trusts, estates,
interests, rights, powers and relinquishment of
powers made, created, arising existing, exercised or
relinquished before or after the effectivity of the
NIRC (Sec. 85, NIRC).
Q: Mr. A knows that he is dying, therefore he
sold his car worth P500,000 to his only son for
P300,000. Mr. A died and at the time of his
death, the fair market value of his car is
P550,000. How much is to be included as part
of the gross estate? What if he is not dying and
indeed he is very much alive and kicking?
Coverage of prior interest
1.
2.
3.
Transfers in contemplation of death
Revocable transfers
Transfers under GPA
Transfers in contemplation of death
Revocable transfers
Life insurance proceeds to the extent of the
amount receivable by the estate of the
deceased, executor or administrator under
policies taken out by the decedent upon his
own life or to the extent of the amount
receivable by any beneficiary not expressly
designated as irrevocable
A: P250,000. This represents the excess of the
FMV at the time of his death which is P550,000 over
the consideration received on the amount of
P300,000.
On the second scenario, the insufficient
consideration shall not be considered as part of the
gross estate because the transfer does not fall
under any of the following: transfer in
contemplation of death, revocable transfer, or
property passing under general power of
Transfers for insufficient consideration
When a transfer is for insufficient consideration,
only the excess of the fair market value of the
property at the time of the decedent’s death over
199
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
appointment. Hence, the difference of P200,000
(P500K-300K) is subject to gift tax.
Q: Can you apply Sec. 85 in separation of
property?
Share of the surviving spouse
A: No, in that case, there will be no division.
DEDUCTIONS FROM ESTATE
Q: Is the capital of the surviving spouse
considered part of the gross estate?
The deductions from the gross estate are:
1. Ordinary deductions [VETS]
a. Expenses, losses, indebtedness, taxes, etc.
(ELIT)[JEF-TULI]
i. Claims against the estate
ii. Claims against insolvent persons
iii. Unpaid mortgage or indebtedness on
property
iv. Taxes
v. Losses
A: NO. The capital or paraphernal property of the
surviving spouse is not included in the computation
of the gross estate; it is actually a deduction from
the decedent’s gross estate in order to arrive at the
net estate.
Under Section 85 (H) of the NIRC capital pertains to
the property of the spouses brought into the
marriage. Under the Civil Law capital means
property brought by the husband to the marriage
while the properties brought into the marriage by
the wife is called paraphernal property.
b.
c.
d.
Exclusive properties under the system of
absolute community of properties (ACP):
1.
2.
3.
2. Special deductions [FAMS]
a. Family home
b. Standard deduction
c. Amount received by heir under RA 4917
Property acquired during the marriage by
gratuitous title by either spouse, and the
fruits as well as the income thereof, if any,
unless it is expressly provided by the
donor, testator or grantor that they shall
form part of the community property;
Property for personal and exclusive use of
either spouse. However, jewelry shall form
part of the community property;
Property acquired before the marriage by
either spouse who has legitimate
descendants by a former marriage, and the
fruits as well as the income, if any, of such
property.
NOTE: NRA cannot avail of the special deductions.
Q: When is deduction not allowed from the
gross estate of NRA?
A: No deduction shall be allowed in the case of a
non- resident decedent not a citizen of the
Philippines, unless the executor, administrator, or
anyone of the heirs, as the case may be, includes in
the return required to be filed under Section 90 of
the Code the value at the time of the decedent’s
death of that part of his gross estate NOT situated
in the Philippines (Sec. 86 (D), NIRC; Sec 7, RR 22003).
Exclusive properties under the system of
conjugal partnership of gains (CPG):
1.
2.
3.
4.
That which is brought to the marriage as
his or her own;
That which each acquires during the
marriage by gratuitous title (note that the
fruits and income of those acquired by
gratuitous title during marriage shall be
community property);
That which is acquired by right of
redemption, by barter or by exchange with
property belonging to only one of the
spouses; and
That which is purchased with exclusive
money of the wife or the husband. (Art.
109, Family Code).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Vanishing deduction
Transfer for public use
Net share of the surviving spouse in the
community or conjugal property
Enumerated deductions are discussed in detail
below.
Ordinary deductions
Expenses, losses, indebtedness and taxes (ELIT)
The difference in the treatment of ELIT as
deduction allowed to nonresident decedents is that
in the case of a nonresident not a citizen of the
Philippines, ELIT is allowed such proportion of the
deduction allowed to resident decedents which the
value of such part bears to the value of his entire
gross estate wherever situated
200
TRANSFER TAX – ESTATE TAX
Formula for computing ELIT deductible from
the gross estate of NRA decedent
Philippine GE
World GE
X
World
ELIT
*GE=gross
estate
=
A: YES. Under the date-of-death valuation rule,
claims existing at the time of death should be made
the basis of the determination of allowable
deductions. Thus, post-death developments, such
as condonotion in this case, are not material in
determining the amount of the deduction (Dizon, et.
al v. CA, G.R. No. 140944, April 30, 2008).
Deductible
ELIT from
Gross
Estate
Who can avail this deduction:
This may be claimed as a deduction by a RC, NRC or
RA decedent provided that:
Claims against the estate
Claims are debts or demands of pecuniary nature
which could have been enforced against the
deceased in his lifetime and could have been
reduced to simple money judgments.
1.
2.
Sources of claims:[CTO]
At the time the indebtedness was incurred the
debt instrument was duly notarized; and
If the loan was contracted within 3 years before
the death of the decedent, the administrator or
executor shall submit a statement showing the
disposition of the proceeds of the loan (Sec
86[A][1][c], NIRC).
1. Contract
2. Tort
3. Operation of law
Claims against insolvent persons
Requisites for deductibility:
Requisites for deductibility:
1. It must be a personal obligation of the deceased
existing at the time of his death except those
incurred incident to his death such as unpaid
funeral expenses and unpaid medical expenses
2. The liability was contracted in good faith and for
adequate and full consideration in money or
money’s worth
3. Debt or claim must be valid and enforceable in
court;
4. Indebtedness notcondoned by the creditor or
the action to collect from the decedent must not
have prescribed (R.R. 2-2003)
5. It must be duly substantiated
1. The full amount of the receivables be included
first in the gross estate
2. The incapacity of the debtors to pay their
obligation is proven not merely alleged
NOTE: Judicial declaration of insolvency is not
necessary. It is enough that the debtor’s liabilities
exceeded his assets.
Unpaid mortgage or indebtedness on property
Requisites for deductibility:
NOTE: Unpaid taxes such as income and real estate
taxes that have accrued after the death of the
decedent are not deductible from gross estate as
they are properly chargeable to the income of the
estate (Dela Vina v. Collector, 65 Phil. 620).
1. The value of the property to the extent of the
decedent’s interest therein, undiminished by
such mortgage or indebtedness is included in
the gross estate
2. The mortgage indebtedness was contracted in
good faith and for an adequate and full
consideration in money or money’s worth
Q: BIR issued an Estate Tax Assessment Notice
demanding payment of the deficiency estate tax
against
Jose
Fernandez’s
estate.
The
administrator claims that in as much as the
valid claims of creditors against the estate are
in excess of the gross estate, no estate tax was
due.
NOTE: In case unpaid mortgage payable is being
claimed by the estate, and the loan is found to be
merely an accommodation loan where the loan
proceeds went to another person, the value of the
unpaid loan, to the extent of the decedent’s interest
therein must be included as a receivable of the
estate.
May the actual claims of the creditors be fully
allowed as deductions from the gross estate of
Jose despite the fact that the claims were
reduced or condoned through compromise
agreements entered into by the estate with its
creditors?
If there is a legal impediment to recognize the same
as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed
as a deduction from the gross estate (Section
86(A)(1))(e), NIRC).
201
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Where the decedent owned only one-half of the
property mortgaged so that only one-half of its
value was included in his estate, only one-half of the
mortgage debt was deductible, even though the
executor paid the entire debt, the liability of the
decedent being solidary, inasmuch as the executor
would be subrogated to the rights of the mortgagee
as against the co-owner and co-mortagagor(Parrot
v. Commissioner, 279 U.S. 870).
Requisites for deductibility:
A. Allowed as deductions from the gross estate of
RC, NRC and RA decedent provided that they:
[DACIP]
1. Were incurred during the settlement of the
estate
2. Arise from fire, storm, shipwreck, or other
casualties, or from robbery, theft or
embezzlement
3. Not compensable (no insurance)
4. Not claimed as a deduction from income tax
5. Incurred not later than the last day or any
extension thereof for payment of the estate
tax
Q: During his lifetime, Mr. Sakitin obtained a
loan amounting to P10 million from Bangko
Uno for the purchase of a parcel of land located
in Makati City, using such property as collateral
for the loan. The loan was evidenced by a duly
notarized promissory note. Subsequently, Mr.
Sakitin died. At the time of his death, the unpaid
balance of the loan amounted to P2 million. The
heirs of Mr. Sakitin deducted the amount of P2
million from the gross estate, as part of the
"Claims against the Estate." Such deduction was
disallowed by the Bureau of Internal Revenue
(BIR) Examiner, claiming that the mortgaged
property was not included in the computation
of the gross estate. Do you agree with the BIR?
Explain. (2014 Bar)
B. Allowed as deductions from the gross estate
ofNRA decedent:
The same items herein shall be allowed as
deduction but only the proportion of such
deductions which the value of his gross estate
in the Philippines bears to the value of his
entire gross estate, wherever situated shall be
deducted.
Judicial expenses vs. losses
A: YES. Unpaid mortgages upon, or any
indebtedness with respect to property are
deductible from the gross estate only if the value of
the decedent’s interest in said property,
undiminished by such mortgage or indebtedness, is
included in the gross estate (Section 86(A)(1)(e)).
JUDICIAL EXPENSES
Allowed deductions
include only those
incurred not later
than the last day
prescribed by law or
any extension thereof
for the filingof the
return
6 months extendible
to 30 days
In the instant case, the interest of the decedent in
the property purchased from the loan where the
said property was used as collateral, was not
included in the gross estate. Accordingly, the
unpaid balance of the loan at the time of Mr.
Sakitin’s death is not deductible as “claims against
the estate.”
Taxes
Requisites for deductibility:
6 months extendible
to:
 2 years
(extrajudicial
settlement)
 5 years (judicial
settlement)
NOTE: Casualty loss can be allowed as deduction in
one instance only, either for income tax purposes
or estate tax purposes.
1. Taxes which have accrued as of or before the
death of the decedent
2. Unpaid as of the time of his death
Vanishing deduction
Taxes NOT deductible:
Vanishing deduction is the deduction allowed on
the property left behind by the decedent which was
previously subject to donor’s or estate taxes.
1. Income tax on income received after death
2. Property tax not accrued before death
3. Estate tax due from the transmission of his
estate
In property previously taxed, there are two (2)
transfers of property. Within a period of 5 years,
the same property has been transferred from the
Losses
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
LOSSES
Allowed deductions
include those incurred
up to the last day
prescribed by law or
any extension thereof
for the payment of
estate tax
202
TRANSFER TAX – ESTATE TAX
first to the second decedent or from a donor to the
decedent. In such case, the first transfer has been
subject to a transfer tax. The second transfer would
now be subject to a vanishing deduction.
Vanishing deduction
Rules in vanishing deductions:
1. The deduction allowed is only in the amount
finally determined as value of property in
determining the value of the gift, or the gross
estate of prior decedent
2. Only to the extent that the value of such
property is included in decedent’s gross estate
3. Only if in determining the value of the estate of
the prior decedent, no deduction was allowed
for property previously taxed in respect of the
property of properties given in exchange
therefore
4. Where a deduction was allowed of any mortgage
or lien in determining the gift tax, or the estate
tax of the prior decedent, which were paid in
whole or in part prior to the decedent’s death,
then the deduction allowable for property
previously taxed shall be reduced by the amount
so paid
5. Such deduction allowable shall be reduced by an
amount which bears the same ratio to the
amounts allowable as deductions for expenses,
losses, indebtedness, taxes and transfers for
public use as the amount otherwise deductible
for property previously taxed bears to the value
of the decedent’s estate
6. Where the property referred to consists of two
or more items, the aggregate value of such items
shall be used for the purpose of computing the
deduction
Purpose
To lessen the harsh effects of double taxation
Requisites for deductibility:[VIPED]
1. Present decedent died within 5 years from
receipt of property from a prior decedent or
donor
2. The property formed part of the gross estate
situated in the Philippines of the prior decedent
or was a taxable gift of the donor
3. The estate tax on the prior succession or donor’s
tax must have been paid
4. The property must be identified as the one
received or acquired
5. No vanishing deduction was allowed on the
same property on the prior decedent’s estate
Rate of deduction
This depends on the period reckoned from date of
transfer to death of the decedent enumerated
below:
PERIOD
1 day to 1 year
1 year and 1 day to 2 years
2 years and 1 day to 3 years
3 years and 1 day to 4 years
4 years and 1 day to 5 years
More than 5 years
DEDUCTION
100%
80%
60%
40%
20%
No deduction
allowed
Transfer for public use
The amount of all bequests, legacies, devises or
transfers to or for the use of the Government of the
Republic of the Philippines, or any political
subdivision thereof, for exclusively public
purposes.
Formula for computing vanishing deduction:
Initial Basis (Value of property previously taxed)
LESS: Mortgage debt paid, if any (first deductions)
-------------------------------------------------------------New Initial basis
Requisites for deductibility:
1. The disposition is in a last will and testament
2. To take effect after death
3. In favor of the government of the Philippines or
any political subdivision thereof
4. For exclusive public purposes
5. The value of the property given is included in
the gross estate
New Initial Basis x (ELIT + Transfers for Public
Use)
Gross Estate
--------------------------------------------------------------Second deduction
New Initial basis
LESS: Second deduction
------------------------------------Basis for Vanishing Deduction
Multiplied by 100%, 80%, etc. (as the case may be)
-------------------------------------------------
NOTE: In case of a NRA decedent, the property
transferred must be located within the Philippines
and included in the gross estate.
Government of Republic of the Philippines vs.
National Government
203
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
GOVERNMENT OF THE
PHILIPPINES
Refers to the corporate
governmental
entity
through
which
the
functions of government
are exercised throughout
the Philippines, including,
save as the contrary
appears from the context,
the various arms through
which political authority is
made effective in the
Philippines,
whether
pertaining
to
the
autonomous regions, the
provincial, city, municipal,
or barangay subdivisions,
or other forms of local
government.
NOTE: Actual occupancy for the house and lot as
the family residence shall not be considered
interrupted or abandoned in such cases as the
temporary absence from the constituted family
home due to travel or studies or work abroad, etc.
The family home is generally characterized by
permanency, that is, the place to which, whenever
absent for business or pleasure, one still intends to
return (R.R. No. 2-2003).
NATIONAL
GOVERNMENT
Refers to the entire
machinery of the
central government,
as
distinguished
from the different
forms
of
local
governments. The
National
Government then is
composed of the
three
great
departments:
the
executive, legislative
and judicial (Mactan
Cebu v. Marcos, G.R.
No.
120082,
September 11, 1996).
Requisites for deductibility:
1. The family home must be the actual residential
home of the decedent and his family at the time
of his death, as certified by the Barangay Captain
of the locality where the family home is situated
2. The total value of the family home must be
included as part of the gross estate
3. Allowable deduction must be in the amount
equivalent to:
a. The current FMV of the family home as
declared or included in the gross estate, or
b. The extent of the decedent’s interest
(whether conjugal/community or exclusive
property), whichever is lower
Sec. 86(A)(3) vs. Sec. 87(D) of the NIRC:
SEC. 86(A)(3)
It contemplates transfers
by a citizen or resident of
the Philippines in favor
of the Government of the
Philippines
or
any
political
subdivision
thereof,
for
public
purpose
which
are
deducted from the gross
estate
SEC. 87(D)
It
contemplates
transfers to social
welfare, cultural and
charitable institutions
which
are
exemptedfrom estate
tax.
4. The deduction does not exceed P10,000,000
NOTE: NRA decedents are not allowed to avail
family home deduction because they are expressly
prohibited by the Constitution from acquiring
lands.
For purposes of availing this deduction, a person
may constitute only one family home.
Net share of the surviving spouse
Standard deduction
The net share of the surviving spouse in the
conjugal partnership property as diminished by the
obligations properly chargeable to such property
shall be deducted from the net estate of the
decedent (Sec. 86[C]).
The standard deduction shall be P5,000,000
without need of any substantiation (Sec. 86 (A)(1),
R.A. 10963).
Standard deduction (SD) vs. optional standard
deduction (OSD)
Special deductions
Family home
It is the dwelling house, including the land where it
is situated where the married person or an
unmarried head of the family and his family resides
(Art. 152, Family Code).
As to
nature
It is deemed constituted on the house and lot from
the time that it is constituted as a family residence
and is considered as such so long as any of the
beneficiaries actually resides therein (Art. 153,
Family Code).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
As to
amount of
deduction
204
SD in
ESTATE TAX
(Sec. 86
[A][5])
Deduction in
addition to
the other
deductions
Fixed at
P5,000,000
OSD in
INCOME TAX
(Sec. 34 [L])
Deduction in
lieu of itemized
deductions
40% of gross
income or gross
sales/receipts
as the case may
be
TRANSFER TAX – ESTATE TAX
As to
availability
Available to
RC, NRC and
RA
Applies to all
individual
taxpayers
except NRA, and
NFC
Transfers for
public use
Vanishing
deduction
Amount received under RA 4917
Family home
Standard
deduction
Medical
expenses
Any amount received by heirs from the decedent’s
employer as a consequence of the death of the
decedent-employee in accordance with RA No.
4917 (An Act Providing That Retirement Benefits
Of Employees Of Private Firms Shall Not Be Subject
To Attachment, Levy, Execution, Or Any Tax
Whatsoever)shall be allowed as a deduction from
the gross estate.
Requisites for deductibility:
Amounts
received
under RA
4917
1. Amounts received by heirs from decedent’s
employer;
2. Received as a consequence of death of the
decedent-employee; and
3. Amount is included in the gross estate of the
decedent (Sec. 86[A][7], NIRC).
Time
Up to the
time of
interment
Judicial
expenses
Claims
against the
estate
Unpaid taxes
Unpaid
mortgage
Six months
Claims
against
insolvent
persons
Receivable
existing at
the death of
the decedent
Casualty
losses
Not later than
the last day
or any
extension
thereof for
payment of
the estate tax
Incurred
before the
death of the
decedent
No limit
Two
transfers
must not be
more than
five years
apart
No limit
No limit
100% down to
20%
depending on
time interval
between two
transfers
P1,000,000
P1,000,000
Incurred
(paid or
unpaid)
within one
year before
the death of
the decedent
No limit
P500,000
No limit
Summary of Deductions as to Applicability to
Taxpayers
Summary of Deductions with Limits as to Time
and Amount
Deduction
Funeral
expenses
No limit
Deduction
Funeral
expenses
Judicial
expenses
Claims
against the
estate
Unpaid taxes
Unpaid
mortgage
Claims
against
insolvent
persons
Casualty
losses
Transfers for
public use
Vanishing
deduction
Family home
Standard
deduction
Medical
expenses
Amounts
received
under RA
4917
Amount
P200,000, 5%
of gross estate,
or actual
amount
whichever is
the lowest
No limit
No limit – only
the unpaid
portion at the
time of death.
Ignore postdeath
developments.
No limit –
entire
uncollectible
portion may
be claimed.
No limit – only
uninsured
portion may
be deductible
205
Resident or
Citizen
Fully
deductible
Non-resident
Alien
Ratable/
proportionate
deduction
only.
(Proportion of
gross estate in
the Philippines
over the
worldwide
gross estate)
Fully
deductible
Fully
deductible
Fully
deductible
No deduction
allowed
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
EXCLUSIONS FROM ESTATE
Limitations in estate tax credit:
Excluded from gross estate are those provided for
under NIRC (Sections 85, 86 and 87) and under
special laws.
1. Per country basis: The amount of the credit in
respect to the tax paid to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the decedent’s
net estate situated within such country taxable
under the NIRC bears to his entire net estate;
and
2. Overall basis: The total amount of the credit
shall not exceed the same proportion of the tax
against which such credit is taken, which the
decedent’s net estate situated outside the
Philippines taxable under the NIRC bears to his
entire net estate.
Exclusions under Sec. 85 and 86 NIRC:
1. Exclusive property (capital/paraphernal) of
surviving spouse (Sec. 85 [H], NIRC);
2. Property outside Philippines of NRA decedent;
3. Intangible personal property in the Philippines
of NRA decedent provided there is reciprocity.
Exclusions under Sec. 87 NIRC:
1. The merger of the usufruct in the owner of the
naked title
2. The transmission or the delivery of the
inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor
4. All the bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, provided no part of the net income
of which inures to the benefit of any individual
and that not more than 30% of the value given
is used for administrative purposes.
EXEMPTION OF CERTAIN
ACQUISITIONS AND TRANSMISSIONS
Transmissions exempted from payment of
estate tax:
1. The merger of usufruct in the owner of the
naked title
E.g. Y died leaving a condominium unit, the
naked title belongs to W and usufruct to F for a
period of 5 years, then F died after two years.
Upon the death of F, the usufruct will merge into
the owner of the naked title W who shall become
the absolute owner of the said condominium
unit. The transfer from F to W is exempt from
estate tax.
Exclusions from estate under special laws:
1. Benefits received by members from the
Government Service Insurance System (PD
1146) and the Social Security System (RA 1161,
as amended) by reason of death
2. Amounts received from the Philippine and
United States governments for damages
suffered during the last war (RA 227)
3. Benefits received by beneficiaries residing in
the Philippines under laws administered by the
U.S. Veterans Administration (RA 360)
4. Grants and donations to the Intramuros
Administration (PD 1616) (Mamalateo, 2014).
2. The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary
E.g. X dies and leaves in his will a lot to his
brother, Y, who is entrusted with the obligation
to transfer the lot to Z, a son of X, when Z reaches
legal age. Y is the fiduciary heir and Z is the
fideicommissary. The transfer from X to Y is
subject to estate tax. But the transmission or
delivery to Z upon reaching legal age shall be
exempt from estate tax.
TAX CREDIT FOR ESTATE TAXES
PAID IN A FOREIGN COUNTRY
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, provided that no part of the net
income of which inures to the benefit of any
individual and not more than thirty percent
(30%) of the said bequests, devises, legacies or
transfers shall be used for administration
purposes (Sec. 87, NIRC).
Estate tax credit is a remedy against international
double taxation to minimize the onerous effect of
taxing the same property twice.
Who may avail:
Only the estate of a citizen or a resident alien at the
time of death can claim tax credit for any estate
taxes paid in a foreign country.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
206
TRANSFER TAX – ESTATE TAX
NOTE: Bequests, devises, legacies or transfers
made to educational institutions are not included.
The taxpayer must pay the estate tax upon filing,
under the “Pay as you file system.” Extension to pay
estate tax may be granted if the Commissioner finds
that such payment would impose undue hardships
upon the estate or any heir and shall:
ESTATE TAX RETURN
All cases with regard to TRAIN Law must be filed
1.
When estate tax return is filed:
2.
It is filed within 1 year from the decedent’s death.
Extension to file an estate tax return is allowed in
meritorious cases but not to exceed 30 days (Sec.
90, NIRC).
3.
Requisites for granting extension to pay estate
tax:
Who files estate tax return:
1.
2.
3.
Executor
Administrator
Any legal heir
1.
2.
Where estate tax return is filed:
1.
2.
If resident decedent
– To an authorized agent bank, RDO, Collection
Officer, or duly authorized Treasurer in the city
or municipality where the decedent was
domiciled at the time of his death, or to the
Office of the CIR.
3.
4.
If non-resident decedent
– To the RDO or to the Office of the CIR (Sec.
90[D], NIRC).
The request for extension must be filed before
the expiration of the original period to pay
which is within 6 months from death
There must be a finding that the payment on
the due date of the estate tax would impose
undue hardship upon the estate or any of the
heirs
The extension must be for a period not
exceeding 5 years if the estate is settled
judicially or 2 years if settled extra-judicially
The Commissioner may require the posting of
a bond in an amount not exceeding double the
amount of tax to secure the payment thereof
Q: Remedios, a resident citizen, died on
November 10, 2006. She died leaving three
condominium units in Quezon City valued at
P5M each. Rodolfo was her only heir. He
reported her death on December 6, 2006 and
filed the estate tax return on March 30, 2007.
Because she needed to sell one unit of the
condominium to pay for the estate tax she asked
the CIR to give her one year to pay the estate tax
due. The CIR approved the request of extension
of time provided that the estate tax be
computed on the basis of the value of property
at the time of payment of tax.
Contents of estate tax return:
Must be under oath and shall contain the following:
1. The value of the gross state of the decent at the
time of his death or in case of a non-resident,
not a citizen of the Philippines, the part of his
gross estate situated in the Philippines;
2. The deductions allowed from the gross estate
in determining the estate;
3. Such part of the information as may at the time
be ascertainable and such supplemental data
as may be necessary to establish the correct
taxes (Sec. 90[A], NIRC).
a.
Does CIR have the power to extend the
payment of estate tax?
b. Does the condition that the basis of the
estate tax will be the value at the time of
the payment have legal basis? (2007 Bar)
NOTE: If the estate tax return shows a gross value
exceeding P5 million, the return shall be supported
with a statement duly certified by a CPA containing
the following:
1.
2.
3.
Not exceed 5 years in case of judicial
settlement;
Not exceed 2 years in case of extrajudicial
settlement.
Payment by installment if and only if the
available cash of the estate is insufficient
A:
a. YES. The CIR may allow an extension of time to
pay the estate tax if the payment on the due
date would impose undue hardship upon the
estate or any of the heirs. The extension in any
case, will not exceed 2 years if the estate is not
under judicial settlement of 5 years if it is
under judicial settlement. The CIR may require
Itemized assets at the time of his death;
Itemized deductions to the gross estate; and
Amount of tax due, whether paid or still
outstanding.
207
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
the posting of a bond to secure the payment of
the tax (Sec. 91[B], NIRC).
NO. The valuation of properties comprising the
estate of a decedent is the fair market value as
of the time of death. No other valuation date is
allowed by law (Sec. 88, NIRC).
4.
5.
Effects for granting extension to pay estate
taxes:
1.
2.
3.
The amount shall be paid on or before
expiration of the extension and running of the
statute of limitations for assessment shall be
suspended for the period of any of such
extension.
The CIR may require a bond not exceeding
double the amount of the tax and with such
sureties as the CIR deems necessary when the
extension of payment is granted.
Any amount paid after the statutory due date of
the tax, but within the extension period, shall
be subject to interest but not to surcharge (Sec.
91[B]).
6.
7.
8.
Instances where request for extension of time
to pay estate tax should be denied:
1.
2.
3.
Certification not required in the following:
Negligence
Intentional disregard of rules and regulations
Fraud
In cases when withdrawal of bank deposit:
1. Has been authorized by the Commissioner;
and
2. The amount does not exceed P20,000.
Who shall pay the estate tax:
1.
2.
Liability of a co-depositor who was able to
withdraw funds from the account of a deceased
depositor without paying the estate tax
The executor or administrator, before
delivery to any beneficiary of his distributive
share.
The beneficiary, to the extent of his
distributive share in the estate, shall be
subsidiarily liable for the payment of such
portion of the estate tax as his distributive
share bears to the value of the total net estate.
They shall be held liable for perjury because all
withdrawal slips contain a statement to the effect
that their co-depositors are still living at the time of
the withdrawal by any one of the joint depositors
and such statements are deemed under oath.
Instances when Certificate of Payment of Tax
from the Commissioner is required:
1.
2.
3.
Distribution of the estate be made
Upon payment of the estate tax, the administrator
shall deliver the distributive share in the
inheritance to any heir or beneficiary. The estate
clearance tax issued by the CIR or the RDO having
jurisdiction over the estate will serve as the
authority to distribute the remaining/distributive
properties/share in the inheritance of the heir or
beneficiary. In case of installment payments, the
clearance shall be released only with respect to the
property the corresponding tax of which has been
paid (Section 94, NIRC).
Before a judge shall authorize the executor or
judicial administrator to deliver a distributive
share to any party interested in the estate
Before the Register of Deeds shall register in
the Registry of Property any document
transferring real property or real rights therein
or any chattel mortgage, by way of gifts inter
vivos or mortiscausa, legacy or inheritance
When a lawyer, by reason of his official duties,
intervenes
in
the
preparation
or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
When a notary public, by reason of his official
duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
When a government officer, by reason of his
official duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
Before a debtor of the deceased pay his debts
to the heirs, legatee, executor or administrator
of his creditor
Before a transfer to any new owner in the
books of any corporation,sociedadanonima,
partnership, business, or industry organized or
established in the Philippines any share,
obligation, bond or right by way of gift inter
vivos or mortis causa, legacy or inheritance
Before a bank, which has knowledge of the
death of a person who maintained a bank
deposit account alone, or jointly with another,
shall allow any withdrawal from the said
deposit account
The estate tax can be paid in installment in case the
available cash of the estate is not sufficient to pay
208
TRANSFER TAX – ESTATE TAX
the total estate tax liability and the clearance shall
be released with respect to the property the
corresponding/computed tax on which has been
paid.
NOTE: There shall, therefore, be as many
clearances (Certificates Authorizing Registration)
as there are many properties releases because they
have been paid for by the installment payments of
the estate tax. The computation of the estate tax,
however, shall always be on the cumulative amount
of the net taxable estate. Any amount paid after the
statutory due date is approved by the
Commissioner
or
his
duly
authorized
representative, the imposable penalty thereon shall
only be an interest. Nothing in this paragraph,
however, prevents the Commissioner from
executing enforcement action against the estate
after the due date of the estate tax provided that all
the applicable laws and required procedures are
followed/observed (R.R. No. 2-2003).
Rule on restitution of tax upon satisfaction of
outstanding obligations:
If after the payment of the estate tax, new
obligations of the decedent shall appear, and the
persons interested shall have satisfied them by
order of the court, they shall have a right to the
restitution of the proportional part of the tax paid.
Q: A tax refund was filed by a taxpayer. Pending
said action, taxpayer died. Will the tax refund
form part of his gross estate?
A: It depends. If there is a legal and factual basis, it
will. Otherwise, it will not be included.
Deficiency estate tax
Three situations when deficiency occurs:
1. A return was filed but paid less than the
amount of tax due;
2. A return was filed but did not pay any tax;
3. No return was filed, therefore, no tax was
paid.
Deficiency estate tax vs. delinquency estate tax
Deficiency (Sec. 39, NIRC) arises when tax paid is
less than the amount due while delinquency (Title
X, NIRC) arises when there is either failure to pay
amount due or refusal to pay the tax due.
209
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Law governing imposition of donor’s tax
DONOR’S TAX
The law in force at the time of the
perfection/completion of the donation governs the
imposition of donor’s tax (Sec. 11, R.R. 2-2003).
BASIC PRINCIPLES, CONCEPT AND DEFINITION
Donation is an act of liberality whereby a person
(donor) disposes gratuitously of a thing or right in
favor of another (donee) who accepts it (Art. 725,
Civil Code).
Kinds of donations:
1.
Donor’s tax is an excise tax imposed on the
privilege of transferring property by way of a gift
inter vivos based on pure act of liberality without
any or less than adequate consideration and
without any legal compulsion to give.
2.
Donation inter vivos
A donation made between living persons. Its
perfection is at the moment when the donor
knows the acceptance of the donee. It is subject
to donor’s tax.
Donation mortis causa
A donation which takes effect upon the death of
the donor. It is subject to estate tax
Donation inter vivosvs. donation mortis causa
As to
consideration
DONATION INTER VIVOS
It is not made out of the donor’s
generosity, although the subject matter is
not delivered at once, or the delivery is to
be made post mortem, which is a simple
matter of form and does not change the
nature of the act.
It is perfected upon knowledge of the
donor of the acceptance of the donee.
Such contract is consensual in nature.
DONATION MORTIS CAUSA
It is made in consideration of death, without the
donor’s intention to lose the thing conveyed or
its free disposal in case of survival.
Being testamentary in nature, it should be
embodied in a last will and testament (Art. 728,
Civil Code).
As to form
As to
effectivity
 Personal property
a. oral but in writing if value exceeds
P5,000
 Real property
– must be in a public instrument
The effect is produced while the donor is
still alive.
The transfer is irrevocable.
As to
irrevocability
As to
Acceptance is a requirement.
acceptance
(Mamalateo, 2014)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
210
The transfer conveys no title or ownership to the
transferee before the death of the transferor, or
the transferor retains the ownership, full or
naked, of the property conveyed; it is the donor’s
death that determines the acquisition of or the
right to the property.
The transfer is revocable before the transferor’s
death and revocability may be provided
indirectly by means of a reserved power in the
donor to dispose of the property conveyed.
Being in the form of a will, it is never accepted by
the donee during the donor’s lifetime.
TRANSFER TAX – DONOR’S TAX
Transfers subject to donor’s tax:
But the renunciation of the wife’s share in the
inheritance from her deceased husband is not a
taxable gift, considering that the property is
automatically transferred to the other heirs by
operation of law due to her repudiation of her
inheritance.
Transfer in trust or otherwise, whether the gift is
direct or indirect and whether the property is real
or personal, tangible or intangible;
1.
2.
3.
4.
Include not only the transfer of ownership in
the fullest sense but also the transfer of any
right or interest in property, but less than title;
Where property, other than real property
subject to capital gains tax, is transferred for
less than an adequate and full consideration in
money or money’s worth, then the amount by
which the FMV of the property exceeded the
value of the consideration shall, for the
purpose of the donor’s tax, be deemed a gift,
and shall be included in computing the amount
of gifts made during the calendar year.
Renunciation by the surviving spouse of
his/her share in the conjugal partnership or
absolute community after the dissolution of the
marriage in favor of the heirs of the deceased
spouse or any other person/s is subject to
donor’s tax;
However, general renunciation by an heir,
including the surviving spouse, of his/her
share in the hereditary estate left by the
decedent is not subject to donor’s tax, unless
specifically and categorically done in favor of
identified heir/s to the exclusion or
disadvantage of the other co-heirs in the
hereditary estate.
Q: A is indebted to B while B is indebted to C. A
paid the debt of B to C. Is this subject to donor’s
tax?
A: YES. This is considered as an indirect donation
in favor of B.
Instances when there is neither a sale,
exchange nor donation:
1.
2.
3.
Reason: In general renunciation, there is no
donation since the renouncer has never
become the owner of the property/share
renounced.
5.
Transfers of any right or interest. Transfers
subject to donor’s tax not only include
transactions where there is a transfer of
ownership, but also where there is a transfer
less than title.
4.
Q: In the settlement of the estate of Mr. Barbera
who died intestate, his wife renounced her
inheritance and her share of the conjugal
property in favor of their children. The BIR
determined that there was a taxable gift and
thus assessed Mrs. Barbera as a donor. Was the
BIR correct? (2013 Bar)
5.
A: The BIR is correct that there was a taxable gift
but only insofar as the renunciation of the share of
the wife in the conjugal property is concerned. This
is a transfer of property without consideration,
which takes effect during the lifetime of the wife.
211
The transfer of stocks in a corporation
organized as a mutual benefit association, to its
members, which transfer is merely a
conversion
of
the
owner-member
contributions to shares of stocks is not subject
to capital gains tax or donor’s tax because it is
neither a sale, exchange nor donation (BIR
Ruling No. 207, July 15, 1987).
Similarly, the transfer of property (lands) from
a non-stock, non-profit community association
to its member-beneficiaries, who actually
bought the property, is not subject to donor’s
tax, since the transfer, while without
consideration, is a mere formality to finally
effect the transfer of said property to its real
owners (BIR Ruling No. 412-05, October 4,
2005).
Spouses P & Q established a revocable inter
vivos trust (PQ Family trust, represented by P &
Q as its trustee) which holds title to all the
spouses’ real properties, shares of stock and
securities. The transfer of title involves no
actual transfer of ownership from the trustor
to the trustee and is then not subject to donor’s
tax (BIR Ruling No. 416-05, October 6, 2005).
The transfer of conjugal properties in favor of
the children pursuant to a court order arising
from the declaration of nullity of marriage of
the parents is not subject to donor’s tax since
there is no donative intent on the part of the
spouses, because the transfer is only in
compliance with the court order. Neither is the
transfer subject to capital gains tax and
documentary stamp tax as the transfer is
considered a delivery of presumptive legitime
(BIR Ruling No. DA-414-06, July 4, 2006.).
A company’s act of extending its credit line to
its sister company for the latter’s bank loan, is
not considered a transfer of property by gift
because there is no intention on the part of the
company to donate anything of value, the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
transaction being purely loan accommodation
and for a legitimate purpose which is to
support the sister company. Furthermore, the
company has the right to be indemnified by its
sister company in the event the latter fails to
pay the loan obligation (BIR Ruling No. DA-71006, Dec. 14, 2006.) (Paras, pp. 761-762).
The donor’s capacity shall be determined as of
the time of the making of the donation (Art.
737, NCC).
2.
Donative intent
Donative intent is necessary only in cases of
direct gift. If the gift is indirectly taking place by
way of sale, exchange or other transfer of
property as contemplated in cases of transfers
for less than adequate and full consideration
(Sec. 100, NIRC), not always essential to
constitute a gift.
NATURE, PURPOSE AND OBJECT
Nature
It is an excise tax on the privilege of the donor to
give or on the transfer of property by way of gift
inter vivos. It is not a property tax (Lladoc v. CIR, 14
SCRA 292).
3.
Actual or constructive delivery of gift
There is delivery if the subject matter is within
the dominion and control of the donee.
Q: Your bachelor client, a Filipino residing in
Quezon City, wants to give his sister a gift of
P200,000. He seeks your advice, for purposes of
reducing if not eliminating the donor's tax on
the gift, on whether it is better for him to give all
of the P200,000.00 on Christmas 2001 or to give
P100,000.00 on Christmas 2001 and the other
P100,000.00 on January 1, 2002. Please explain
your advice. (2001 Bar)
4.
Acceptance by the donee
Acceptance is necessary because nobody is
obliged to receive a gift against his will (Osorio
v. Osorio, 14 Phil. 531).
5.
Form prescribed by law
a. In case of real property, donation must be
in a public instrument.
b. If personal property, it may be made:
i. Orally
ii. If the value exceeds P5,000, donation
must be made and accepted in writing
(Art. 748, NCC).
A: I would advise him to split the donation. Giving
the P200,000 as a one-time donation would mean
that it will be subject to a higher tax bracket under
the graduated tax structure thereby necessitating
the payment of donor's tax. On the other hand,
splitting the donation into two equal amounts of
P100,000 given on two different years will totally
relieve the donor from the donor’s tax because the
first Pl00, 000 donation in the graduated brackets
is exempt (Sec. 99, NIRC). While the donor’s tax is
computed on the cumulative donations, the
aggregation of all donations made by a donor is
allowed only over one calendar year.
NOTE: The donor’s tax shall not apply unless and
until there is a completed gift. The transfer of
property by gift is perfected from the moment the
donor knows of the acceptance by the donee; it is
completed by the delivery, either actually or
constructively, of the donated property to the
donee(Sec. 11, RR 2-2003).
Purpose or object
Two-fold purpose of donor’s tax:
1. To supplement estate tax
2. To prevent avoidance of income tax through
the device of splitting income among
numerous donees who are usually members
of a family or into many trusts, with the donor
thereby escaping the effect of the progressive
rates of income taxation
A transfer becomes complete and taxable only
when, the donor has divested himself of all
beneficial interests in the property transferred and
has no power to recover any such interest in
himself or his estate.
REQUISITES OF A VALID DONATION
Husband and wife are considered as separate and
distinct taxpayers for purposes of the donor’s tax.
Tax treatment in case of donations made by
spouses
[CIDAF]
1. Capacity of donor to donate
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
However, if what was donated is a conjugal or
community property and only the husband signed
the deed of donation, there is only one donor for
212
TRANSFER TAX – DONOR’S TAX
donor’s tax purposes, without prejudice to the right
of the wife to question the validity of the donation
without her consent (Par. 1., Sec. 12, RR 2-2003).
1.
2.
3.
Q: When does an incomplete gift become a
complete one, subject to donor’s tax?
Sale/exchange/transfer of property for
insufficient consideration
Condonation/remission of debt
Transfer for less than adequate and full
consideration
Condonation/remission of debt
A: A gift that is incomplete because of reserved
powers becomes complete when either:
1. The donor renounces the power to recover; or
2. His right to exercise the reserved power ceases
because of the happening of some event or
contingency or the fulfillment of some
condition, other than because of the donor’s
death (Ibid).
Rule regarding condonation/remission of debt:
If the creditor condones the indebtedness of the
debtor the following rules apply:
1.
2.
Elements of remunerative donation:
A person gives to another a thing or right;
1. On account of the latter’s merit or services
rendered by him to the donor; and
2. The giving does not constitute a
demandable debt or when the gift imposes
upon the donee a burden which is less than
the value of the thing given.
On account of debtor’s services to the creditor
the same is in taxable income to the debtor.
If no services were rendered but the creditor
simply condones the debt, it is taxable gift and
not a taxable income.
Q: Creditors X, Y, and Z condoned the debt of
ABC Corporation pursuant to a court-approved
restructuring. Are the creditors liable for
donor’s tax?
A: NO. The transaction is not subject to donor’s tax
since the condonation was not implemented with a
donative intent but only for business consideration.
The restructuring was not a result of the mutual
agreement of the debtors and creditors. It was
through court action that the debt rehabilitation
plan was approved and implemented (BIR Ruling
DA 028-2005, Jan. 24, 2005).
NOTE: Donations made by a corporation to its
deceased officer out of gratitude for past services
are subject to donor’s tax. Past services rendered
without relying on a promise, express or implied,
that such services would be paid for in the future do
not constitute a demandable debt. Thus, the
amount given by the corporation to the heirs of the
deceased officer of the corporation as gratitude for
past services rendered by the officer is subject to
donor’s tax.
Q: Juan died leaving his only heirs, his surviving
spouse Maria, and three minor children, Luz,
Vis and Minda. Maria renounced her hereditary
share in the estate of Juan. Is Maria’s
renunciation subject to donor’s tax?
Q: Are onerous donations subject to donor’s
tax?
A: NO. The general renunciation by an heir is not
subject to donor’s tax. This is so because the
general renunciation of Maria was not specifically
and categorically done in favor of identified heir/s
to the exclusion or disadvantage of the other coheirs in the hereditary estate (Sec. 11, RR 2-2003).
A: GR:NO, since there is no gratuitous disposal.
XPNs:
1. Where the transfer is for less than an
adequate and full consideration in money or
money’s worth; or
2. The gift imposes upon the donee a burden
which is less than the value of the thing
given.
Q: With the given set of facts, what happens
when Maria renounced her share in favor of
Minda who is a special child? Is the
renunciation subject to donor’s tax?
NOTE: The excess of the fair market value of the
property over the actual value of the consideration
shall be subject to donor’s tax.
A: YES, the renunciation was specifically and
categorically done in favor of Minda to the
exclusion of Luz and Vis, the other co-heirs in the
estate of Juan (Sec. 11, RR 2-2003).
TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
Transfers for less than adequate and full
consideration
[ICL]
213
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Rule regarding transfer for less than adequate
and full consideration:
Explain if the above transactions are subject to
donor's tax. (1999 Bar)
GR: Where a property is transferred for less than
adequate and full consideration in money or
money’s worth, the amount by which the FMV
exceeds the consideration shall be deemed a gift
and be included in computing the amount of gifts
made during the calendar year. It is as if the
property was donated but in order to avoid paying
donor’s tax, the donor opted to transfer the
property for inadequate consideration.
A: The first transaction where a lot was sold by A to
her sister-in-law for a price below its fair market
value will not be subject to donor's tax if the lot
qualifies as a capital asset. The transfer for less than
adequate and full consideration, which gives rise to
a deemed gift, does not apply to a sale of property
subject to capital gains tax (Sec. 100, NIRC).
However, if the lot sold is an ordinary asset, the
excess of the fair market value over the
consideration received shall be considered as a gift
subject to the donor's tax.
XPN:


The sale of shares of stock below the fair market
value thereof is subject to the donor's tax pursuant
to the provisions of Section 100 of the NIRC. The
excess of the fair market value over the selling price
is a deemed gift.
Q: In 2011, Mr. Vicente Tagle, a retiree, bought
10,000 CDA shares that are unlisted in the local
stock exchange for P10 per share. In 2015, the
said shares had a book value per share of P60.
In view of a car accident in 2015, Mr. Tagle had
to sell his CDA shares but he could sell the same
only for P50 per share. The sale is subject to tax
as follows: (2012 Bar)
Where the sale, exchange, or transfer is
made in the ordinary course of
business which is:
- Bona fide
- Made at arm’s length
- Free from any donative intent
Where property transferred is real
property located in the Philippines
considered as capital asset, the transfer is
not subject to donor’s tax but to a capital
gains tax, which is a final income tax of 6%
of the fair market value or gross selling
price, whichever is higher, and therefore,
there can be no instance where the seller
can avoid any tax by selling his capital
assets below its FMV.
A: 5%/10% capital gains tax on the capital gain
from sale of P40 per share (P50 selling price less
P10 cost) plus donor’s tax on the excess of the fair
market value of the shares over the consideration.
NOTE:
CLASSIFICATION OF DONOR
Arm’s length transactions are described as
those dealings wherein both parties are
independent of each other has no relationship
with the other dealing party. They are acting in
their own self-interest
Liable to pay donor’s tax:
Q: A, an individual, sold to B, her sister-in-law,
his lot with a market value of P1,000,000 for
P600,000. A's cost in the lot is P100,000. B is
financially capable of buying the lot. A also
owns X Co., which has a fast growing business.
A sold some of her shares of stock in X Co. to her
key executives in X Co. These executives are not
related to A. The selling price is P3, 000,000,
which is the book value of the shares sold but
with a market value of P5, 000,000. A's cost in
the shares sold is P1, 000,000. The purpose of A
in selling the shares is to enable her key
executives to acquire a proprietary interest in
the business and have a personal stake in its
business.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
Resident
a. Resident citizen (RC)
b. Non-resident citizen (NRC)
c. Resident alien (RA)
d. Domestic corporation (DC)
2.
Non-resident
a. Non-resident alien (NRA)
b. Foreign corporation (FC)
NOTE: A corporation, domestic or foreign, cannot
be made liable to pay estate tax, but may be liable
to pay donor’s tax.
DETERMINATION OF GROSS GIFT
GROSS GIFT
All property, real or
personal, tangible or
intangible, that was
214
NET GIFT
The net economic
benefit from the
TRANSFER TAX – DONOR’S TAX
given by the donor to
the donee by way of
gift, without the
benefit of any
deduction (Sec. 104,
NIRC).
b.
transfer that accrues
to the donee.
c.
NOTE: If a mortgaged property is transferred as a
gift, but imposing upon the donee the obligation to
pay the mortgage liability, then the net gift is
measured by deducting from the fair market value
of the property the amount of mortgage assumed.
Q: Kenneth Yusoph owns a commercial lot
which she bought many years ago for P1 Million.
It is now worth P20 Million although the zonal
value is only P15 Million. She donates one-half
pro-indiviso interest in the land to her son Dino
on 31 December 1994, and the other one-half
pro-indiviso interest to the same son on 2
January 1995.
d.
a.
How much is the value of the gifts in 1994
and 1995 for purposes of computing the gift
tax? Explain.
b. The Revenue District Officer questions the
splitting of the donations into 1994 and
1995. He says that since there were only
two (2) days separating the two donations
they should be treated as one, having been
made within one year. Is he correct?
Explain.
c. Dino subsequently sold the land to a buyer
for P 20 Million. How much did Dino gain on
the sale? Explain.
d. Suppose, instead of receiving the lot by way
of donation, Dino received it by inheritance.
What would be his gain on the sale of the lot
for P20 Million? Explain. (1995 Bar)
NO, because the computation of the gift tax is
cumulative but only insofar as gifts made
within the same calendar year. There is no legal
justification for treating two gifts effected in
two separate calendar years as one gift.
Dino gained an income of 19 million from the
sale. Dino acquires a carry-over basis which is
the basis of the property in the hands of the
donor or P1 million. The gain from the sale or
other disposition of property shall be the
excess of the amount realized therefrom over
the basis or adjusted basis for determining gain
[Sec. 34(a), NIRC]. Since the property was
acquired by gift, the basis for determining gain
shall be the same as if it would be in the hands
of the donor or the last preceding owner by
whom the property was not acquired by gift.
Hence, the gain is computed by deducting the
basis of P1 million from the amount realized
which is P20 million.
If the commercial lot was received by
inheritance, the gain from the sale for P20
million is P5 million because the basis is the
fair market value as of the date of acquisition.
The stepped-up basis of P15 million which is
the value for estate tax purposes is the basis for
determining the gain (Sec. 34(b)(2), NIRC).
COMPOSITION OF GROSS GIFT
DONOR
RC, NC and RA
NRA
GROSS GIFT
All real properties, tangible
and intangible personal
properties wherever located
All real properties, tangible,
and intangible properties
located in the Philippines
unless the reciprocity applies
(See previous discussion on intangible properties
deemed situated in the Philippines and the rule on
reciprocity under Estate Tax.)
A:
a. The value of the gifts for purposes of
computing the gift tax shall be P7.5million in
1994 and P7.5million in 1995. In valuing a real
property for gift tax purposes the property
should be appraised at the higher of two values
as of the time of donation which are (a) the fair
market value as determined by the
Commissioner (which is the zonal value fixed
pursuant to Section 16(e) of the NIRC), or (b)
the fair market value as shown in the schedule
of values fixed by the Provincial and City
Assessors. The fact that the property is worth
P20 million as of the time of donation is
immaterial unless it can be shown that this
value is one of the two values mentioned as
provided under Sec. 81 now 88(B) of the NIRC.
VALUATION OF GIFTS MADE IN PROPERTY
1.
Personal property
- The fair market value of the property given
at the time of the gift shall be the value of
the gross gift.
2.
Real property
- The fair market value as determined by the
CIR (zonal value) at the time of donation or
the value fixed by the assessor (assessed
value), whichever is higher (Sec. 102).
If there is no zonal value, the taxable base is the
fair market value that appears in the latest tax
215
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
declaration. If there is an improvement, the
value of the improvement is the construction
cost per building permit and or occupancy
permit plus 10% per year after year of
construction, or the market value per latest tax
declaration.
Philippines taxable under the NIRC bears to his
entire net estate.
Formula in computing the donor’s tax credit:
Lower of actual tax paid and the amounts derived
by computing the tax limits as follows:
Q: Mr. L owned several parcels of land and he
donated a parcel each to his two children. Mr. L
acquired both parcels of land in 1975 for
112,000,000.00. At the time of donation, the fair
market value of the two parcels of land, as
determined by the CIR, was 112,300,000.00;
while the fair market value of the same
properties as shown in the schedule of values
prepared by the City Assessors was
112,500,000.00. What is the proper valuation of
Mr. L's gifts to his children for purposes of
computing donor's tax? (2015 Bar)
Limitation A (per country):
Net gifts (foreign country) X Phil. Donor’s tax
Net gifts (world)
Limitation B (by total):
Net gifts (outside Philippines) X Phil. Donor’s tax
Net gifts (world)
NOTE: If there’s only one foreign country, the tax
credit shall be the lower between actual tax paid
and Limitation A. If there are donations in more
than one country, the tax credit shall be the lower
between (a) actual tax paid and (b) lower between
Limitation A and Limitation B.
A: The valuation of Mr. L’s gift to his children is the
fair market value (FMV) of the property at the time
of donation. It is the higher of the FMV as
determined by the Commissioner or the FMV as
shown in the schedule of values fixed by the
provincial or city assessors. In this case, for the
purpose of computing donor’s tax, the proper
valuation is the value prepared by the City
Assessors amounting to P12,500,00.00 because it is
higher than the FMV determined by the CIR.
EXEMPTIONS OF GIFTS FROM DONOR’S TAX
Transactions exempt from donor’s tax:
1.
TAX CREDIT FOR DONOR’S TAXES
PAID TO A FOREIGN COUNTRY
2.
3.
The donor’s tax imposed by the NIRC upon a donor
who was a citizen or a resident at the time of
donation shall be credited with the amount of any
donor’s taxes of any character and description
imposed by the authority of a foreign country.
4.
5.
6.
Who may avail:
7.
Only donors who are citizens or residents at the
time of the donation are entitled to claim tax credit.
Gifts made by RC, NRC, RA considered exempt
from donor’s tax:
Limitations in estate tax credit:
1.
2.
1.
Per country basis: The amount of the credit in
respect to the tax paid to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the
decedent’s net estate situated within such
country taxable under the NIRC bears to his
entire net estate; and
Overall basis: The total amount of the credit
shall not exceed the same proportion of the tax
against which such credit is taken, which the
decedent’s net estate situated outside the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Donation for political campaign purposes (Sec.
99[C], NIRC)
Certain gifts made by residents (Sec. 101[A],
NIRC)
Certain gifts made by non-resident aliens Sec.
101[B], NIRC)
Donation of intangibles subject to reciprocity
(Sec. 104, NIRC)
Donation for athlete’s prizes and awards (RA
7549)
Donation under the “Adopt-a-School Program”
(RA 8525)
Exemption under other special laws
2.
4.
Specific exemption - net gifts of the amount of
P100,000 or less are exempt
Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to
any political subdivision of the said
Government
Gifts in favor of: [CARTER-CuPS]
a.
b.
c.
216
Charitable
Accredited NGOs
Religious
TRANSFER TAX – DONOR’S TAX
d.
e.
f.
g.
h.
i.
Trust foundations
Educational institutions
Research institutions
Cultural foundations
Philanthropic organizations
Social welfare corporations
4.
5.
NOTE: In order to be exempt from donor’s tax and
to claim full deduction of the donation given to
qualified donee institution duly accredited by the
Philippine Council for NGO Certification, Inc.
(PCNC), the donor engaged in business shall give a
notice of donation on every donation worth at least
50,000 to the RDO which has jurisdiction over his
place of business within 30 days after the receipt of
the qualified donee institution’s duly issued
Certificate of Donation, which shall be attached to
the said Notice of Donation, stating that not more
than 30% of said donations/gifts for the taxable
year shall be used by such accredited non-stock,
non-profit corporation/NGO institution for
administration purposes (Domondon, 2008).
Q: In May 2010, Mr. And Mrs. Melencio Antonio
donated a house and lot with a fair market value
of P10 Million to their sob, Roberto, who is to be
married during the same year to Josefina
Angeles. Which statement below is incorrect?
(2012 Bar)
a.
There are four (4) donations made – two (2)
donations are made by Mr. Melencio
Antonio to Roberto and Josefina, and two
(2) donations are made by Mrs. Antonio;
b. The four (4) donations are made by the
Spouses Antonio to members of the family,
hence, subject to the graduated donor’s tax
rates (2%-15%);
c. Two (2) donations are made by the spouses
to members of the family, while two (2)
other donations are made to strangers;
d. Two (2) donations made by the spouses to
Roberto are entitled to deduction from the
gross gift as donation proper nuptias.
Requisites for exemption of dowries
1.
2.
3.
4.
5.
The gift is given on account of marriage;
The gift is given before the celebration of
marriage or within 1 year thereafter;
Donor is the parent or both parents;
Donee is the legitimate, recognized natural or
legally adopted child of the donor; and
Maximum amount of the exemption is P10,000
for each child that may be claimed by each
parent.
A: d. Two (2) donations made by the spouses to
Roberto are entitled to deduction from the gross
gift as donation proper nuptias (Sec. 101, NIRC;
Tang Ho v. Court of Appeals).
NOTE: Both parents may give dowries and gifts on
account of marriage. Each parent is entitled to the
exemption. This has the effect of splitting the value
of the gift into half for both spouses so each spouse
can claim the exemption. Both spouses must file
separate returns because the husband and the wife
are considered as distinct entities for purposes of
donor’s tax (Sec. 12, RR 2003). However where
there is failure to prove that the donation was
actually made by both spouses, the donation is
taxable as the exclusive act of the husband, without
prejudice to the right of the wife to question the
validity of the donation without her consent
pursuant to the provisions of the Civil Code.
Q: The spouses Helena and Federico wanted to
donate a parcel of land to their son Dondon who
is getting married in December, 2015. The
parcel of land has a zonal valuation of
P420,000.00. What is the most efficient mode of
donating the property? (2011 Bar)
A: The spouses should each donate a P110,000.00
portion of the value of the property in 2015 then
each should donate P100,000.00 in 2016.
Q: The Congregation of Mary Immaculate
donated a parcel of land and a dormitory
building located along España St. in favor of
Sisters of the Holy Cross, a group of nuns
operating a free clinic and high school teaching
basic spiritual values. Is the donation subject to
donor’s tax? (2007 Bar)
Requisites for the exemption of gifts made to
the CARTER-CuPS
1.
2.
3.
Donee devotes all its income, whether
students' fees or gifts, donation, subsidies or
other forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation; and
Not more than 30% of the donation is used for
administrative purposes (Sec. 101, NIRC).
Donee is incorporated as a non-stock, nonprofit entity, paying no dividends;
Governed by trustees;
Trustees receive no compensation;
A: NO. Gifts in favor of educational and/or
charitable, religious, social welfare corporation or
cultural institution, accredited non-government
217
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
organization, trust or philanthropic organization or
research institution or organization are exempt
from donor’s tax, provided, that, no more than 30%
of the gifts are used for administration purposes.
The donation being in the nature of real property
complies with the utilization requirement (Sec.
101[A][3], NIRC).
b.
Gifts made by NRA exempt from donor’s tax:
1.
2.
3.
Specific exemption - net gifts of the amount of
P100,000 or less are exempt
Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to
any political subdivision of the said
Government.
Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research
institution or organization: Provided, however,
That not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes (Sec. 101[B], NIRC).
Q: Are donations for political campaign
purposes exempted from donor’s tax?
A: YES. Any contribution in cash or in kind to any
candidate, political party, or coalition of parties for
campaign purposes, reported to COMELEC shall not
be subject to payment of any gift tax (Sec. 99[C],
NIRC; RR 2-2003).
Q: Mr. De Sarapen is a candidate in the
upcoming Senatorial elections. Mr. De Almacen,
believing in the sincerity and ability of Mr. De
Sarapen to introduce much needed reforms in
the country, contributed P500,000.00 in cash to
the campaign chest of Mr. De Sarapen. In
addition, Mr. De Almacen purchased tarpaulins,
t-shirts, umbrellas, caps and other campaign
materials that he also donated to Mr. De
Sarapen for use in his campaign. Is the
contribution of cash and campaign materials
subject to donor’s tax? (2014 Bar)
Rule on donation of intangible personal
properties
Under Sec. 104, the following intangible properties
shall be considered as situated in the Philippines
for estate and donor’s tax purposes:
1.
2.
3.
4.
5.
Franchise which must be exercised in the
Philippines;
Shares, obligations or bonds issued by any
corporation or sociedadanonimaorganized or
constituted in the Philippines in accordance
with its laws; (domestic corporation)
Shares, obligations or bonds by any foreign
corporation 85% of its business is located in
the Philippines;
Shares, obligations or bonds issued by any
Foreign corporation if such shares, obligations
or bonds have acquired a business situs in the
Philippines;
Shares or rights in any partnership, business or
industry established in the Philippines (Sec.
104, NIRC).
A: The answer must be qualified. Section 99(C) of
the NIRC explicitly provides that any contribution
in cash or in kind to any candidate, political party
or coalition of parties for campaign purposes shall
be governed by the Election Code, as amended. On
the other hand, Section 13 of the Republic Act No.
7166 specifically states that any provision of law to
the contrary notwithstanding, any contribution in
cash or kind to any candidate or political party or
coalition of parties for campaign purposes, duly
reports to the Commission on Elections
(COMELEC) shall not be subject to the payment of
any gift tax.
Thus, if Mr. De Almacen reported his campaign
contributions of Php 500,000.00 in cash, tarpaulins,
t-shirts, umbrellas, caps, and other campaign
materials to the COMELEC, then the BIR cannot
impose donor’s tax on such contributions.
Conversely, if Mr. De Almacen failed to report these
campaign contributions to the COMELEC, such
contributions would be subject to donor’s tax.
However, no tax shall be collected with respect to
donation of intangible personal property
(Reciprocity Rule):
a.
If the donor at the time of the donation was a
citizen and resident of a foreign country which
at the time of the donation did not impose a
transfer tax of any character, in respect of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
intangible personal property of citizens of the
Philippines not residing in that foreign country,
or
If the laws of the foreign country of which the
donor was a citizen and resident at the time of
the donation allows a similar exemption from
transfer of every character or description in
respect of intangible personal property owned
by citizens of the Philippines not residing in
that foreign country.
Requirements for exemption from donor’s tax
of athlete’s prizes and awards:
218
TRANSFER TAX – DONOR’S TAX
1.
2.
3.
The donation must be prizes and awards given
to athletes in local and international
tournaments and competitions;
Held in the Philippines or abroad; and
Sanctioned by their respective sports
association (Sec. 1, RA 7549).
11. RA 3062 - Donation to the Philippine American
Cultural Foundation
12. Donation to Task Force on Human Settlement
on the donation of equipment, materials, and
services
13. RA 2067 – Donation to Scientific and
Technological Research and Development
14. RA 1606 – Donation to Philippine Government
for Scientific, Engineering and Technological
Research, Invention and Development
15. RA 6847 – Donation to Philippine Sports
Commission
Q: Levox Corporation wanted to donate P5
million as prize money for the world
professional billiard championship to be held in
the Philippines. Since the Billiard Sports
Confederation of the Philippines does not
recognize the event, it was held under the
auspices of the International Professional
Billiards Association, Inc. Is Levox subject to the
donor's tax on its donation? (2011 Bar)
Q:A non-stock, non-profit school always had
cash flow problems, resulting in failure to
recruit well- trained administrative personnel
to effectively manage the school. In 2010, Don
Leon donated P100 million pesos to the school,
provided the money shall be used solely for
paying the salaries, wages, and benefits of
administrative personnel. The donation
represents less than 10% of Don Leon's taxable
income for the year. Is he subject to donor's
taxes? (2011 Bar)
A: Yes, since the national sports association for
billiards does not sanction the event.
Exemption provided under adopt-a-school
program
Under RA 8525, any aid, help, contribution or
donation provided by an adopting private entity to
a government school, whether elementary,
secondary or tertiary are exempt from donor’s
taxes. The assistance may be in the form of, but not
limited to infrastructure, teaching, and skills
development, learning, support, computer and
science laboratories and food and nutrition.
A: Yes, because the donation is to be wholly used
for administration purposes.
PERSON LIABLE
Any person making a donation is required to file
donor’s tax return unless the donation is
specifically exempted under NIRC or other special
laws. He is required for every donation to
accomplish under oath a donor’s tax return in
duplicate (Sec. 98, NIRC).
Exempted from donor’s tax under other special
laws:
1.
RA 2707 - Donation to International Rice
Research Institute (IRRI)
2. RA 3676 - Donation to Ramon Magsaysay
Award Foundation (RMAF)
3. RA 3850 - Donation to Philippines Inventors
Convention (PIC)
4. PD 181 - Donation to Integrated Bar of the
Philippines (IBP)
5. PD 205 - Donation to the Development
Academy of the Philippines
6. Donation to social welfare, cultural or
charitable institution, no part of the net income
of which inures to the benefit of any individual,
if not more than 30% of the donation shall be
used by the donee for administration purposes
7. PD 292 - Donation to Aquaculture Department
of the Southeast Asian Fisheries Development
Center of the Philippines
8. RA 8492 - Donation to the National Museum
9. RA 1006 - Donation to the National Library
10. PD 294 - Donation to the National Social Action
Council (NSAC)
Time of filing donor’s tax return
Donor’s tax return is filed within 30 days after the
date the donation or gift is made.
Formula in computing taxable donation:
219
1.
On the first donation of the year
Gross Gift
Less: deductions/exemption
-----------------------------------------Net gift
x Tax rate
-----------------------------------------Donor’s tax
2.
On subsequent donation during the year
Gross gift
Less: Deductions/exemptions
------------------------------------------Net gift
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Add: Prior net gifts
----------------------Aggregate net gifts
x Applicable tax rate
-----------------------------Donor’s tax on aggregate gifts
Less: prior donor’s tax paid
-------------------------------------------Donor’s tax payable on this date
For strangers, whether the method to be used is
cumulative or splitting, it is immaterial since any
donation made to them is subject to a fixed rate of
30%.
Contents of donor’s tax return
The donor’s tax return, which shall be made under
oath, in duplicate, shall set forth the following:
1.
2.
3.
4.
5.
6.
Each gift made during the calendar year
which is to be included in computing net
gifts;
The deductions claimed and allowable;
Any previous net gifts made during the
same calendar year;
The name of the donee;
Relationship of the donor to the donee; and
Such further information as the
Commissioner may require (Sec. 103(A),
NIRC).
Cumulative vs. splitting method
CUMULATIVE
SPLITTING
When the donor makes
two or more donations
within the same calendar
year, it is required that
the said donations be
included in the return for
the last donation. It will
not amount to double
taxation because the tax
paid for the previous
methods
will
be
considered as tax credit
for succeeding donations.
The donor makes
two
or
more
donations during
different calendar
years.
Significance of the two methods mentioned
The significance is in relation to donees. For
relatives, the graduated tax rates are applicable
over a period of one year. Hence, by splitting the
donation into different calendar year, the tax base
will be lowered, and hence, the donor’s tax will also
be lower.
When the amount of donation is P10,000,000 or
above, the cumulative method is no longer relevant
since in that case, the rate applicable is 15%, hence,
it is as if the rate is fixed.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
220
VALUE ADDED TAX
4. Higher governmental revenues
VAT law is non-violative of the administrative
feasibility principle
VALUE-ADDED TAX
CONCEPT
The VAT law is principally aimed to rationalize the
system of taxes on goods and services. Thus,
simplifying tax administration and making the
system more equitable to enable the country to
attain economic recovery
(Kapatiran ng
MgaNaglilingkodsaPamahalaan
v.
Tan,
G.R.No.81311, June 30, 1988).
Value Added Tax (VAT) is a business tax imposed
and collected on every (a) sale, barter, or exchange
of goods or properties (real or personal), (b) lease
of goods or properties (real or personal) or (c)
rendition of services, all in the course of trade or
business, and (d) importation of goods (whether or
not in the course of trade or business). It is an
indirect tax, thus, it can be shifted or passed on to
the buyer, transferee or lessee of goods, properties
or services (Sec. 105, NIRC).
CHARACTERICTICS OF VAT
1.
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and
services in the Philippines and on importation of
goods into the Philippines. The seller is the one
statutorily liable for the payment of the tax but the
amount of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services. 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.
However, in the case of importation, the importer is
the one liable for the VAT (RR 16-05).
2.
The current VAT rate is 12% in lieu of R.A. 10963.
3.
Who is liable to pay the VAT?
GR: The seller is the one statutorily liable for the
payment of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or
lessee of goods, properties or services.
4.
XPN: In case of importation, the importer is the one
liable for VAT (Sec. 4.105-2, R.R. 16-2005).
If the seller is VAT exempt, there is no need to pay
VAT on his sales. He will have to shoulder the
burden of the VAT passed to him by his suppliers for
his purchases (Ingles, 2015).
5.
Classification of transactions under the VAT
system
1.
2.
6.
VAT- taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
Exempt transactions
7.
Advantages in imposing VAT
1.
2.
3.
Economic growth
Simplified tax administration
Promote honesty
8.
221
Value added - It is a tax on value added of a
taxpayer arising from the sales of goods,
properties or services during the quarter.
“Value added” is the difference between the
total sales of the taxpayer for the taxable
quarter subject to VAT and his total purchases
for the same period subject also to value added
tax (Mamalateo, 2014).
Tax credit or Invoice method - It is collected
through the tax credit method or invoice
method. The input taxes shifted by the sellers to
the buyer are credited against the buyer’s
output taxes when he in turn sells the taxable
goods, properties or services (Sec. 105 and 110
[A], NIRC).
Sales tax – VAT is a tax on the taxable sale,
barter or exchange of goods, properties or
services. A barter or exchange has the same tax
consequence as a sale. A sale may be an actual
or deemed sale, or an export sale or local sale
(Mamalateo, 2014). The buyer is informed that
the price includes VAT and the computation is
shown in the official receipt/sales invoice.
Broad-based tax on consumption in the
Philippines – It is broad-based because every
sale of goods, properties or services at the levels
of manufacturers or producers and distributors
is subject to VAT. However, the tax burden rests
on the final consumers (Mamalateo, 2014).
Excise tax based on consumption – It is a tax
on the privilege of engaging in the business of
selling goods or services, or the importation of
goods.
Indirect tax - Tax shifting is always presumed.
It may be shifted or passed on to the buyers,
transferee, or lessee of the goods, properties or
services as part of the purchase price.
Ad valorem tax - The amount is based on the
gross selling price or gross value in money of
the goods or properties sold, bartered or
exchangedor on the gross receipts derived from
the sale or exchange of services, including the
use or lease of properties
Not a cascading tax. - Tax cascading means that
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
an item is taxed more than once as it makes its
way from production to final retail sale. VAT is
not a cascading tax because it is merely added
as part of the purchase price and not as a tax
because the burden is merely shifted. Thus,
there can be no tax on the tax itself.
9. National tax - Imposed by the national
government.
10. Revenue or general tax
11. Regressive tax – By its very nature, VAT is
regressive tax.
The following elements must be present in order for
a transaction to be subjected to 12% VAT:
1.
2.
3.
Unlike a direct tax, such as the income tax, which
primarily taxes an individual's ability to pay based
on his income or net wealth, an indirect tax, such as
the VAT, is a tax on consumption of goods, services,
or certain transactions involving the same. The VAT,
thus, forms a substantial portion of consumer
expenditures.
The principle of progressive taxation has no
relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods
bought or services enjoyed is the same regardless
of income. In other words, the VAT paid eats the
same portion of an income, whether big or small.
The disparity lies in the income earned by a person
or profit margin marked by a business, such that the
higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by
VAT. A converso, the lower the income or profit
margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower
income group or businesses with low-profit
margins that is always hardest hit (ABAKADA Guro
v. Ermita, G.R. No. 168056, September 1, 2005).
In the course of trade or business (Rule of
Regularity)
It means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to
members or their guests), or government entity
(Sec. 105, NIRC).
Q: Does the Constitution prohibit regressive
taxes?
This includes incidental transactions. Thus, the
sale of a VAT taxpayer (engaged in catering
business) of its delivery van or vehicle, while an
isolated event, is considered an incidental
transaction in the course of trade or business. In the
course of its business, MKI bought and eventually
sold its delivery van. Prior to the sale, the van was
part of MKI’s property, plant, and equipment
(Mindanao II Geothermal Partnership v. CIR, G.R. No.
193301, March 11, 2013).
A: NO, what the Constitution simply provides is that
Congress shall evolve a progressive system of
taxation. The constitutional provision has been
interpreted to mean simply that "direct taxes are to
be preferred and as much as possible, indirect taxes
should be minimized.” The mandate of Congress is
not to prescribe but to evolve a progressive tax
system. This is a mere directive upon Congress, not
a justiciable right or a legally enforceable one. We
cannot avoid regressive taxes but only minimize
them (Tolentino et.al. v. Secretary of Finance, G.R. No.
115455, Oct. 30, 1995).
However, the involuntary sale of vessels by a
taxpayer not engaged in the sale of vessels pursuant
to the government policy of privatization is NOT
subject to VAT because the sale was not made the
course of trade or business (CIR v. Magsaysay Lines
Inc., G.R. No. 146984, July 28, 2006).
Q: How is the regressive effect of VAT
minimized?
A: The law minimizes the regressive effects of this
imposition by providing for zero rating of certain
transactions while granting exemptions to other
transactions. The transactions which are subject to
VAT are those which involve goods and services
which are used or availed of mainly by higher
income groups.
Two conditions of “in the ordinary course of
trade or business” (CR)
There should be:
1. Commercial or economic activity - It implies
that a transaction is conducted for profit; and
2. Regularity or habituality in the action Regularity involves more than one isolated
ELEMENTS OF VAT-TAXABLE TRANSACTIONS
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
It must be done in the ordinary course of trade
or business;
There must be a sale, barter, exchange, lease of
properties, or rendering of service in the
Philippines; and
It is not VAT-exempt or VAT zero-rated (Ingles,
2015).
222
VALUE ADDED TAX
transaction and involves repetition
continuity of action (Ingles, 2015).
and
by condominium corporations from its member
condominium-unit owners. The RMC’s validity is
challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor
General, counsel for BIR, claims that association
dues, membership fees, and other assessment/
charges
collected
by
a
condominium
corporation are subject to VAT since they
constitute income payments or compensation
for the beneficial services it provides to its
members and tenants. On the other hand, the
lawyer of the condominium corporations argues
that such dues and fees are merely held in trust
by the condominium corporations exclusively
for their members and used solely for
administrative expenses in implementing the
condominium
corporations’
purposes.
Accordingly, the condominium corporations, do
not actually render services for a fee subject to
VAT. Whose argument is correct? Decide. (2014
Bar)
XPNs to regularity:
1. Non-resident alien who perform services in the
Philippines are deemed to be making sales in the
course of trade or business, even if the
performance of services is not regular (Sec.
4.105-3, RR 16-2005).
2. Importations are subject to VAT whether in the
course of trade or business or not.
3. Any business where the gross sales or receipts
do not exceed P100,000 during the 12-month
period shall be considered principally for
subsistence or livelihood and not in the course of
trade or business.
Sale, barter, exchange, lease of goods or
properties, or rendering of service in the
Philippines
A: The lawyer of the condominium corporations is
correct. The association dues, membership fees, and
other assessment/charges do not constitute income
payments because they were collected for the
benefit of the unit owners and the condominium
corporation is not created as a business entity. The
collection is the money of the unit owners pooled
together and will be spent exclusively for the
purpose of maintaining and preserving the building
and its premises which they themselves own and
possess (First e-Bank Tower Condominium Corp., v.
BIR, Special Civil Action No. 121236, RTC Br. 146,
Makati City).
When there is no sale, barter or exchange of goods
or properties, then no VAT should be imposed.
Thus, when an affiliate provides funds to a taxpayer
who then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was no
sale, barter, or exchange between the affiliate and
the taxpayer. The money was simply given as a doleout (CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010).
However, if a taxpayer renders service to an affiliate
for a fee (even if the fee is merely to reimburse
costs), the service is subject to VAT. Thus, the
collection of condominium corporations of
association dues and membership fees from its
member condominium-unit owners are subject to
VAT even if receives payments for services rendered
to its affiliates in trust and on reimbursement-ofcost basis only, without realizing profit (CIR v. CA
and COMASERCO, G.R. No. 125355, March 30, 2000).
Profit element not required for VAT to be
imposed
VAT is a tax on trasaction, there is no need for a
taxable gain, unlike in the income tax. It is not
required either by law or jurisprudence (Ingles,
2015).
NOTE: If the transaction is outside the Philippines,
then it is not subject to VAT.
VAT is a tax on transactions imposed at every stage
of the distribution process on the sale, barter,
exchange of goods or property, and on the
performance of services, even in the absence of profit
attributable thereto. The term “in the course of trade
or business” applies to all transactions. Even a nonstock, non-profit corporation or government entity is
liable to pay VAT for the sale of goods and services
(CIR v. COMASERCO, March 30, 2000).
Q: The Bureau of Internal Revenue (BIR) issued
Rvenue Memorandum Circular (RMC) No. 652012 imposing Value-Added Tax (VAT) on
association dues and membership fees collected
Q:Commonwealth Management and Services
Corporation (COMASERCO) is an affiliate of
Philippine American Life Insurance Co.
(Philamlife), organized by the latter to perform
Also, the fees collected by toll operators are subject
to VAT as they are engaged in rendering service of
constructing,
maintaining
and
operating
expressways (Diaz v. Secretary of Finance, G.R. No.
193007, July 19, 2011).
223
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
collection, consultative and other technical
services, including functioning as an internal
auditor of Philamlife and its other affiliates.
COMASERCO rendered service to its affiliates
and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was
paid the cost or expense that it incurred
although without profit. Is COMASERCO liable to
pay VAT?
pays it to
government.
If a special law merely exempts a party as a seller
from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from
its indirect burden of the VAT shifted to it by its
VAT-registered suppliers, the purchase transaction
is not exempt. It is because VAT is a tax on
consumption, the amount of which may be shifted
or passed on by the seller to the purchaser of the
goods, properties or services (CIR v. Seagate
Technology, G.R. No. 153866, February 11, 2005).
Q: Is VAT a withholding tax?
A: NO. Indirect taxes, like VAT and excise tax, are
different from withholding taxes. To distinguish, in
indirect taxes, the incidence of taxation falls on one
person but the burden thereof can be shifted or
passed on to another person. On the other hand, in
withholding taxes, the incidence and burden of
taxation fall on the same entity, the statutory
taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by
withholding, the tax due from income payments to
entities arising from certain transactions and remits
the same to the government (Asia International
Auctioneers, Inc., v. CIR, G.R. No. 179115, September
26, 2012).
IMPACT AND INCIDENCE OF TAX
VAT as an Indirect Tax
The amount of VAT payable may be passed on by the
seller, transferor, or lessor to the buyer, transferee
or lessee. When passed on, the amount of VAT due
forms part of the purchase price of goods or
services. As a result, it is the buyer who bears the
burden of tax, although the one liable to pay it is the
seller.
The VAT, thus, forms a substantial portion of
consumer expenditures as part of the cost of goods
or services purchased. What is transferred in such
instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the
selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the
tax (Contex v. CIR, GR No. 151135, July 2, 2004).
INCIDENCE (Burden)
The one who bears the
economic
burden
(payment) of tax (VAT),
the place at which the
tax comes to rest.
The
seller
upon
whom the tax has
been imposed. He
collects the tax and
The tax is shifted to the
final consumer or the
buyer of the goods,
properties, or services
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
as part of the purchase
price.
Effect of VAT being an indirect tax on
Exemptions
A: YES, services rendered for a fee even on
reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. It is
immaterial whether the primary purpose of a
corporation indicates that it receives payments for
services rendered to its affiliates on a
reimbursement-oncost basis only, without realizing
profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides
service for a fee, remuneration or consideration,
then the service rendered is subject to VAT. (CIR v.
COMASERCO, March 30, 2000).
IMPACT (Liability)
The one statutorily
liable for the payment
of tax, thus, the one
who can avail of a tax
refund.
the
Q: Lily’s Fashion Inc. is registered as a Subic Bay
Freeport Enterprise under R.A. 7227 and a nonVAT taxpayer. As such, it is exempt from
payment of all local and national internal
revenue taxes. During its operations, it
purchased various supplies and materials
necessary in the conduct of its manufacturing
business. The supplier of these goods shifted to
Lily’s Fashion, Inc. the 10% (now 12%) VAT on
the purchased items amounting to P500,000.
Lily’s Fashion Inc. filed with the BIR a claim for
refund for the input tax shifted to it by the
suppliers. If you were the CIR will you allow the
refund? (2006 Bar)
A: NO. The exemption of Lily’s Fashion Inc. is only
for taxes for which it is directly liable, hence, it
cannot claim exemption for tax shifted to it, which is
not at all considered a tax to the buyer but part of
the purchase price. Lily’s Fashion Inc. is not a
taxpayer in so far as the passed-on tax is concerned
and therefore, it cannot claim for a refund of a tax
224
VALUE ADDED TAX
merely shifted to it. Only taxpayers are allowed to
file a claim for refund.
provided in the above formula.
DESTINATION PRINCIPLE /
CROSS BORDER DOCTRINE
TAX CREDIT METHOD
The input tax shifted by the seller to the buyer is
credited or deducted against the buyer’s output
taxes when he in turn sells the taxable goods,
properties or services.
Under the VAT method of taxation, which is invoicebased, an entity can subtract from the VAT charged
on its sales or outputs the VAT it paid on its
purchases, inputs and imports (CIR v. Seagate, G.R.
No. 153866, Feb. 11, 2005).
Formula:
Goods and services are taxed only in the country
where they are consumed. Thus, exports are zerorated, while imports are taxed (Domondon, 2014).
Under the Destination Principle, the goods and
services are taxed only in the country where these
are consumed, and in connection with the said
principle, the Cross Border Doctrine mandates
that NO VAT shall be imposed to form part of the
cost of the goods destined for consumption
OUTSIDE the territorial border of the taxing
authority. Thus, exports are zero-rated, while
imports are taxed.
Output Tax –Input Tax = Net VAT Payable or
Excess Input Tax
Net VAT Payable = Output Tax > Input Tax
Excess Input Tax = Output tax < Input Tax
Export processing zones are to be managed as a
separate customs territory from the rest of the
Philippines and, thus, for tax purposes, are
effectively considered as foreign territory. For this
reason, sales by persons from the Philippine
Customs Territory to those inside the export
processing zones are already taxed as exports.
(Atlas Consolidated Mining and Development
Corporation v. CIR, G.R. No. 141104 & 148763, June 8,
2007).
Illustration: For the month of January 2017, Mr. A
sells to Mr. B steel cabinets for P112,000. Within the
same month, Mr. A purchased steel plates and other
materials to make these cabinets for P56,000.
Determine Mr. A’s VAT payable.
To compute for the output tax from
sale:
Total selling price (equivalent to
112%)
Vatable gross sales or receipts
(112,000/1.12 to get 100%)
Output VAT (12% of P100,000)
P112,000
Exception to the destination principle
Our VAT law clearly provides for an exception to the
destination principle; that is, for a zero percent
VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP (Commissioner of Internal
Revenue v. American Express International, Inc., G.R.
No. 152609, June 29, 2005).
100,000
P 12,000
To compute for the input tax from purchases:
Domestic purchase of good
P 56,000
(equivalent to 112%)
Vatable gross purchases
(56,000/1.12 to get 100%)
50,000
Input VAT (12% of P50,000)
P 6,000
To compute for the VAT payable:
Output VAT
Less: Input VAT
P 12,000
6,000
VAT payable
P 6,000
Consistent with the destination principle, the
purchases of goods and services destined for
consumption within an ECOZONE should be free of
VAT; hence, no input VAT should then be paid on
such purchases. With no input VAT paid, there is
nothing to be refunded or credited under Sec. 112 of
the NIRC. (Coral Bay Nickel Corp. v. CIR, G.R No.
190506, June 13, 2016)
In the same example, if Mr. B is a trader of steel
cabinets, he now has an input tax of P12,000 from
the purchase of steel cabinets from Mr. A. If Mr. B
sells it for P168,000, he would be liable to pay the
output tax of P18,000. He could reduce the output
tax by deducting or crediting his input tax, arriving
at a VAT payable of P6,000 (P18,000 less P12,000).
Q: XYZ Law Offices, a law partnership in the
Philippines and a VAT-registered taxpayer,
received a query by e-mail from Gainsburg
Corporation, a corporation organized under the
laws of Delaware, but the e-mail came from
California where Gainsburg has an office.
Gainsburg has no office in the Philippines and
does no business in the Philippines.
Refer to discussion on Output and Input Tax as
225
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
XYZ Law Offices rendered its opinion on the
query and billed Gainsburg US$1,000 for the
opinion.
Moreover, under Section 108 (B)(3), of the 1997
NIRC as amended, services rendered to persons or
entities whose exemption under special laws
effectively subjects the supply of such services to
zero percent (0%) rate are considered zero-rated.
Considering the law does not provide for any
additional qualification or disqualification, the BIR
cannot deny the application on the ground that HP
International already enjoys income tax holiday.
Gainsburg remitted its payment through
Citibank which converted the remitted US$1,
000 to pesos and deposited the converted
amount in the XYZ Law Offices account. What are
the tax implications of the payment to XYZ Law
Offices in terms of VAT?
A: Yes. The payment is subject to VAT but at a zerorate. The zero-rating applies because the services
were rendered to a non-resident person who is
engaged in business outside the Philippines,
theconsideration forwhich was paid for in
acceptable foreign currency and accounted for in
accordance with the BSP rules. Consequently, the
law office is entitled to claim the input tax
attributable to such zero-rated sale as a credit
against its output tax or, at its option, apply for
refund or issuance of a tax credit certificate to the
extent that such input tax was not utilized as a credit
against output tax. (Sections 108(B)(2), 110(A)(1)
and 112, NIRC; See also Accenture, Inc. vs. CIR, G.R.
No. 190102, July 11, 2012)
An administrative agency may not enlarge, alter or
restrict a provision of law. It cannot add to the
requirements provided by law. To do so constitutes
lawmaking, which is generally reserved for
Congress. (Soriano v. Secretary of Finance, et al., G.R.
No. 184450, 184508, 184538, 185234, January 24,
2017)
PERSONS LIABLE
Persons liable to pay VAT, in general
1.
Q: SMZ, Inc., is a VAT-registered enterprise
engaged in the general construction business.
HP International contracts the services of SMZ,
Inc. to construct HP International’s factory
building located in the Laguna Techno Park, a
special economic zone. HP International is
registered with the Philippine Economic Zone
Authority (PEZA) as an ecozone export
enterprise, and, as such, enjoys income tax
holiday pursuant to the Special Economic Zone
Act of 1995.
2.
"Person" refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative
or association.
"Taxable person" refers to any person liable for the
payment of VAT, whether registered or registrable
in accordance with Sec. 236 of the NIRC.
SMZ, Inc., files an application with the Bureau of
Internal Revenue (BIR) for the VAT zero-rating
of its sale of services to HP International.
However, the BIR denies SMZ, Inc.’s application
on the ground that HP International already
enjoys income tax holiday.
"VAT-registered person" refers to any person who
is registered as a VAT taxpayer under Sec. 236 of the
NIRC. His status as a VAT-registered person shall
continue until the cancellation of such registration
(RR 16-05).
NOTE: Inimportation, it shall be the importer who
shall pay VAT upon release of the goods from the
customs territory. This is an exception to the
general rule requiring a sale before VAT shall be
incurred.
Is the BIR correct in denying SMZ, Inc.’s
application? Explain your answer. (2017 Bar)
A: NO. All sales of goods, properties, and services
made by a VATregistered supplier from the Customs
Territory to an ecozone enterprise shall be subject
to VAT, at zero percent (0%) rate, regardless of the
latter’s type or class of PEZA registration. (Coral Bay
Nickel Corporation v. CIR, G.R. No. 190506, June 13,
2016, citing Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G.R. No.
350154, August 9, 2005, 466 SCRA 221)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Any person who, in the course of trade or
business,
a. sells, barters, exchanges or leases goods or
properties, or
b. renders services; and
Any person who imports goods, whether or not
made in the course of his trade or business
Special considerations to the following persons:
1.
2.
3.
226
Husband and wife – for VAT purposes, shall be
treated as separate taxpayers.
Joint ventures – although exempt from income
tax, is liable to value added tax.
Government – subject to VAT if they sell goods,
properties or services in the course of trade or
VALUE ADDED TAX
4.
business or when they perform proprietary
functions. In case of transactions essential for
governmental functions, such are exempt from
VAT.
Non-stock, non-profit association – generally,
receipts from association dues or special
assessments from members is not subject to
VAT.
3.
He should register as a non-VAT taxpayer
unless he opts to become VAT registered under
Section 109(2) of NIRC.
NOTE: A VAT-registered person, regardless
whether his gross sales or gross receipts
exceeds P1,919,500 or not, shall be liable for
VAT. Once VAT-registered, he shall be liable for
VAT on sale of goods or services, regardless of
the amount. If a person is VAT-registered, his
gross sales or gross receipt shall always be
subject to VAT whether or not it exceeds the
P1,919,500 threshold, unless he cancels his
registration.
Any person who is not required to register for
VAT (those whose annual VATable gross sales
or gross receipts do not exceed P1,919,500)
may elect to register for VAT by registering with
the Revenue District Office that has a
jurisdiction over the head office of that person.
Any person who elects to register based on the
above provision shall not be entitled to cancel
his registration for the next three (3) years.
(Sec. 236(H), NIRC)
However, the moment the non-stock, non-profit
association engages in any taxable sale of goods
or services, it is liable to VAT where the amount
of its gross sales and/or gross receipts exceeds
P1,919,500, or subject to the 3% percentage tax,
if gross sales and/or gross receipts is
P1,919,500 or less.
Taxable persons must register for VAT
purposes
Any person who, in the course of trade or business,
sells, barters, or exchanges goods or properties, or
engages in the sale or exchange of services, shall be
liable to register for VAT if:
1.
Gross sales or gross receipts for the past 12
months have exceeded P1,919,500, other than
those that are exempt under Sec. 109 (A) to (V);
or
2.
There are reasonable grounds to believe that
his gross receipts or gross sales in the next 12
months shall exceed P1,919,500, other than
those that are exempt under Sec. 109 (A) to (V)
(Sec. 236(G), NIRC).
4.
Failure to register as VAT taxpayer
BUSINESS
Gross sales
exceed
P1,919,500
Gross sales
exceed P100,000,
but do not exceed
P1,919,500.
Persons NOT LIABLE to pay VAT
2.
In VAT-exempt transactions under Section
109(1) (A) to (V) of NIRC, regardless of their
annual gross sales.
Summary of Rules for VAT registration
He shall be held liable to pay the tax as if he is a VAT
registered person but he cannot avail of the input
tax credit for the period that he has not properly
registered (Sec. 236(G), NIRC).
1.
from payment of VAT or any OPT (RMC No. 72014).
In transactions subject to VAT but became not
subject from VAT because his annual gross sales
do not exceed P1,919,500 (Sec. 109(1)(V),
NIRC). Though not subject from VAT, he shall
pay percentage tax under Section 116.
A Non-VAT registered person whose annual
gross sales or receipts do not exceed
P1,919,500 shall not be liable to VAT, instead,
he shall be liable for 3% percentage tax (Sec.
116, NIRC).
An individual who is a Marginal Income Earner
(MIE) not deriving compensation as employee
under an Er-Ee relationship, self-employed and
deriving gross sales or receipts not exceeding
P100,000 in any 12-month period, and where
the activities of such MIE is principally for
subsistence or livelihood, he shall be exempt
Gross sales do not
exceed P100,000
(marginal income
earners
EFFECT
Mandatory VAT
registration. Generally
liable to pay 12% VAT.
Subject to optional VAT
registration
If VAT-registered: generally
liable to pay 12% VAT.
If non-VAT registered:
generally liable to pay 3%
percentage tax
Subject to optional VAT
registration
If VAT-registered: generally
liable to pay 12% VAT.
If non-VAT registered:
exempted from VAT and
percentage tax.
IMPOSITION OF VAT
227
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
When it comes to normal VAT transactons, or those
subject to 12%, we have three categories:
real property tax declaration or the consideration,
whichever is higher. If the gross selling price is
based on the zonal value or market value of the
property, the zonal or market value shall be deemed
inclusive of VAT. If the VAT is not billed separately,
the selling price stated in the sales document shall
be deemed to be inclusive of VAT.
NATURE OF
TAX BASE
TRANSACTION
1. Sale of goods or
Gross Selling Price
properties
2. Importation of
Total landed cost
goods
3. Sale of services and
Gross receipts
use or lease of
properties
The above are discussed in details below.
Allowable deductions from gross selling price
In computing the taxable base during the month or
quarter, the following shall be allowed as
deductions from gross selling price:
a. Discounts
- determined and granted at the time of sale,
- which are expressly indicated in the invoice,
- the amount thereof forming part of the gross
sales duly recorded in the books of accounts,
- the grant of which is not dependent upon the
happening of a future event
VAT ON SALE OF GOODS OR PROPERTIES
VAT is imposed and collected on
1.
2.
every sale, barter or exchange, or
transactions "deemed sale"
of taxable goods or properties at the rate of 12% 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 (R.R. 16-2005).
b.
NOTE: A transaction is outside the scope of VAT
unless it is made for a valuable consideration.
Transfer
of
property
without
valuable
consideration (e.g. gift) is exempt from VAT
(Mamalateo, 2014).
NOTE: Senior citizens are entitled to a 20%
discount under R.A. 9257 or the Expanded Senior
Citizens Act of 2003. The tax base thereof shall be
the net sales after the deducting the 20% discount
without requiring the indication of buyer-senior
citzen’s TIN (RR No. 1-2007).
Gross Selling Price
It means the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding VAT.
The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
Goods or properties
It refers to all tangible and intangible objects which
are capable of pecuniary estimation and shall
include, among others:
1. Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
2. The right or the privilege to use patent,
copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or
other like property or right;
3. The right or the privilege to use any industrial
commercial or scientific equipment;
4. The right or the privilege to use motion picture
films, films, tapes and discs;
5. Radio, television, satellite transmission and
cable television time.
Gross selling price in case of sale or exchange of
real property
It is the consideration stated in the sales document
or the fair market value whichever is higher.
The term "fair market value" shall mean
whichever is the higher of:
1.
2.
The fair market value as determined by the
Commissioner (zonal value), or
The fair market value as shown in schedule of
values of the Provincial and City Assessors
(real property tax declaration).
Note: The above is NOT an exclusive list.
However, in the absence of zonal value, gross selling
price refers to the market value shown in the latest
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Sales returns and allowances for which a
proper credit or refund was made during the
month or quarter to the buyer for sales
previously recorded as taxable sales (R.R. 162005).
The VAT accrues upon the consummation of sale of
goods or properties, regardless of the terms of
228
VALUE ADDED TAX
payment between the contracting parties (Sec. 106
in relation to Secs. 113 and 237 of NIRC). Thus as
soon as the seller issues a VAT invoice, whether the
sale is for cash or on credit, he becomes liable to VAT
on such sale (Mamalateo, 2014).
Only persons engaged in real estate business either
as a real estate dealer, developer or lessors, are
subject to VAT.
Sale of Real Properties
Sale of real properties held primarily for sale to
customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to
VAT.
Sale of residential lot with gross selling price
exceeding P1,919,500, residential house and lot
or other residential dwellings with gross selling
price exceeding P3,199,200, where the instrument
of sale (whether the instrument is nominated as a
deed of absolute sale, deed of conditional sale or
otherwise) is executed on or after July 1, 2012, shall
be subject to 12% VAT (R.R. 16-2005, as amended by
RR 16-2011 and RR 03-2012).
This includes sale, transfer or disposal within a 12month period of two or more adjacent residential
lots, house and lots or other residential
dwellingsin favor of one buyer from the same
seller, for the purpose of utilizing the lots, house
and lots or other residential dwellings as one
residential area wherein the aggregate value of the
adjacent properties exceeds P1,919,500, for
residential lots and P3,199,200 for residential house
and lots or other residential dwellings. Adjacent
residential lots, house and lots or other residential
dwellings although covered by separate titles
and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether
covered by one or separate Deed/s of Conveyance,
shall be presumed as a sale of one residential lot,
house and lot or residential dwelling.
This however, does not include the sale of parking
lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a
condominium is a separate and distinct transaction
and is not covered by the rules on threshold amount
not being a residential lot, house & lot or a
residential dwelling, thus, should be subject to VAT
regardless of amount of selling price (RR 13-12).
NOTE: It is only the sale of real properties primarily
held for sale to customers or held for lease in the
ordinary course of trade or business of the seller
which shall be subject to VAT. As such, transactions
involving real properties held as capital asset of
individuals are not subject to VAT. However, it may
give rise to capital gains tax liability.
229
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Summary of Rules on Sale of Real Properties
TRANSACTION
Real properties held primarily for sale to customers, in general
Residential lot with gross selling price exceeding P1,919,500 (seller is a
real estate dealer or developer)
Residential lot with gross selling price not exceeding P1,919,500
(seller is a real estate dealer or developer)
Residential house and lot or other residential dwellings exceeding
P3,199,200 (seller is a real estate dealer or developer)
Residential house and lot or other residential dwellings not exceeding
P3,199,200 (seller is a real estate dealer or developer)
Residential house and/or lot by a seller not engaged in business
Commercial place or lot (seller uses property in business)
Real property used in business, taxpayer is not engaged in dealing with
real estate
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
230
TAX TREATMENT
12% VAT
12% VAT
VAT-exempt, not subject to
percentage tax
12% VAT
VAT-exempt, not subject to
percentage tax
Not subject to VAT or OPT.
May be subject to CGT, except sale
of principal residence, which may
be exempt subject to certain
conditions
12% VAT
12% VAT (incidental transaction)
VALUE ADDED TAX
Elements of VAT-taxable sale of goods or properties:
SALE OF GOODS AND PERSONAL PROPERTIES
1. There is an actual or deemed sale, barter or
exchange of goods or personal properties for
valuable consideration;
2. Undertaken in the course of trade or business;
3. For use or consumption in the Philippines; and
4. Not exempt from VAT under Section 109 of
NIRC, special law or international agreement
binding upon the government of the Philippines.
NOTE: Absence of any of the above requisites
exempts the transaction from VAT. However,
percentage taxes may apply (Sec. 116, NIRC).
1.
2.
3.
4.
5.
6.
SALE OR EXCHANGE OF REAL PROPERTY
The seller executes a deed of sale, including
dacionenpago, barter or exchange, assignment,
transfer, or conveyance, or merely contracts to
sell involving real property;
The real property is located within the
Philippines;
The seller or transferor is engaged in real estate
business either as a real estate dealer, developer,
or lessor;
The real property is an ordinary asset held
primarily for sale or for lease in the ordinary
course of business;
The sale is not exempt from VAT under Section
109 of NIRC, special law, or international
agreement binding upon the government of the
Philippines;
The threshold amount set by law should be met.
NOTE: Absence of any of the above requisites
exempts the transaction from VAT. However,
percentage taxes may apply under Section 116 of
NIRC.
231
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The sale of real property subject to VAT shall either
be in (1) cash basis, (2) installment basis, or (3)
deferred payment basis.
Distinctions between sale on installment plan
and sale on a deferred payment basis
INSTALLMENT PLAN
Initial payments do
not exceed 25% of the
gross selling price
Seller shall be subject
to output VAT on the
installment payments
received, including the
interests and penalties
for late payment,
actually
and/or
constructively
received.
The buyer of the
property can claim the
input tax in the same
period as the seller
recognized the output
tax.
Sale on installment plan
It means sale of real property by a real estate dealer,
the initial payments of which in the year of sale do
not exceed 25% of the gross selling price.
In this case, the real estate dealer shall be subject to
VAT on the installment payments, including interest
and penalties, actually and/or constructively
received by the seller.
Correspondingly, the buyer of the property can
claim the input tax in the same period as the seller
recognized the output tax.
Sale on a deferred payment basis
It means sale of real property, the initial payments
of which in the year of sale exceed 25% of the gross
selling price.
Payments that are
subsequent to “initial
payments” shall be
subject to output VAT
In this case, the transaction shall be treated as cash
sale which makes the entire selling price taxable in
month of sale(R.R. 16-2005).
DEFERRED PLAN
Initial
payments
exceed 25% of the
gross selling price
Transaction shall be
treated as cash sale
which makes the
entire selling price
taxable in the month
of sale.
Output tax shall be
recognized by the
seller and input tax
shall accrue to the
buyer at the time of
the execution of the
instrument of sale.
Payments that are
subsequent to “initial
payments” shall no
longer be subject to
output VAT
Output tax shall be recognized by the seller and
input tax shall accrue to the buyer at the time of the
execution of the instrument of sale. Payments that
are subsequent to “initial payments” shall no longer
be subject to output VAT (R.R. 4-2007).
NOTE: Real estate dealer includes any person
engaged in the business of buying, developing,
selling, exchanging real properties as principal and
holding himself out as a full or part-time dealer in
real estate.
Initial payments
Transmission of property to a trustee shall not be
subject to VAT if the property is to be merely held in
trust for the trustor and/or beneficiary. However, if
the property transferred is one for sale, lease or use
in the ordinary course of trade or business and the
transfer constitutes a completed gift, the transfer is
subject to VAT as a deemed sale transaction. The
transfer is a completed gift if the transferor divests
himself absolutely of control over the property, i.e.,
irrevocable transfer of corpus and/or irrevocable
designation of beneficiary.
It means payment or payments which the seller
receives before or upon execution of the instrument
of sale and payments which he expects or is
scheduled to receive in cash or property (other than
evidence of indebtedness of the purchaser) during
the year when the sale or disposition of the real
property was made. It covers any down payment
made and includes all payments actually or
constructively received during the year of sale, the
aggregate of which determines the limit set by law.
Sale of scrap materials
Initial payments do not include the amount of
mortgage on the real property sold except when
such mortgage exceeds the cost or other basis of the
property to the seller, in which case, the excess shall
be considered part of the initial payments.
Sale of scrap materials by a VAT-registered person
such as empty drums, plastic bags, cartons, and
wood crates; obsolete inventories and fullydepreciated fixed assets sold at minimal prices or
lower than purchase price are subject to VAT (VAT
Ruling No. 25-92, March 11, 1992).
Also excluded from initial payments are notes or
other evidence of indebtedness issued by the
purchaser to the seller at the time of the sale.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
VAT ON IMPORTATION OF GOODS
232
VALUE ADDED TAX
Importation is an act of bringing goods and
merchandise into a country (Philippines) from a
foreign country.
when the goods have legally left the jurisdiction of
the Bureau (Sec. 103, CMTA).
Transfer of goods by tax-exempt persons
VAT is imposed on goods brought into the
Philippines, whether for use in business or not,
except those specifically exempted under Section
109(1) of the NIRC.
Consequence if a tax exempt person would
transfer imported goods to a non-exempt
person
Purpose: This is to protect our local or domestic
goods or articles and to regulate the entry or
introduction of foreign articles to our local market.
The purchaser or transferee shall be considered as
an importer and shall be held liable for VAT and
other internal revenue tax due on such importation
(Sec. 107[B], NIRC).
Tax base of VAT on importation
The tax due on such importation shall constitute a
lien on the goods, superior to all charges/or liens,
irrespective of the possessor of said goods.
GR: The tax base shall be based on the total value
used by the BOC in determining tariff and customs
duties plus customs duties, excise taxes, if any, and
other charges to be paid by the importer prior to the
release of such goods from customs custody.
(Transaction value)
Q: Anshari, an alien employee of Asian
Development Bank (ADB) who is retiring soon
has offered to sell his car to you, which he
imported tax-free for his personal use. The
privilege of exemption from tax is recognized by
tax authorities. If you decide to purchase the car,
is the sale subject to tax? Explain. (2005 Bar)
A: YES. The sale is subject to tax. Sec. 107 (B) of the
NIRC provides that “In case of tax-free importation
of goods into the Philippines by persons, entities or
agencies exempt from tax, where the goods are
subsequently, sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be
considered a the importer thereof, who shall be
liable for any internal revenue tax on such
importation.
XPN: In case the valuation used by the BOC in
computing customs duties is based on volume or
quantity of the imported goods, the landed cost shall
be the basis for computing VAT.
Landed cost consists of the invoice amount,
customs duties, freight, insurance and other
charges. If the goods imported are subject to excise
tax, the excise tax shall form part of the tax base.
The same rule applies to technical importation of
goods sold by a person located in a Special Economic
Zone to a customer located in a customs territory
(Sec. 4.107-1, R.R. 16-2005).
VAT ON SALE OF SERVICE AND USE OR LEASE OF
PROPERTIES
Payment of tax on imported goods
The VAT on importation shall be paid by the
importer prior to the release of such goods from
customs custody.
Sale or exchange of services, as well as the use or
lease of properties, shall be subject to VAT,
equivalent to 12% of the gross receipts (excluding
VAT) (RR 16-2005).
Importer refers to any person who brings goods into
the Philippines, whether or not made in the course
of his trade or business. It includes non-exempt
persons or entities who acquire tax-free imported
goods from exempt persons, entities or agencies.
Sale or exchange of services
It means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including
those performed or rendered by the following:
Beginning and end of importation
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
intention to unload therein. Importation is deemed
terminated when the duties, taxes and other charges
due upon the goods have been paid or secured to be
paid at the port of entry or in case the goods are
deemed free of duties, taxes and other charges,
1.
2.
3.
4.
233
Construction and service contractors;
Stock, real estate, commercial, customs and
immigration brokers;
Lessors of property, whether personal or real;
Transmission of electricity by electric
cooperatives
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Lease of property shall be subject to VAT
regardless of the place where the contract of
lease or licensing agreement was executed if the
property leased or used is located in the
Philippines.
9.
Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
10. Dealers in securities;
11. Lending investors;
12. Transportation contractors on their transport
of goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land relative to
their transport of goods or cargoes;
13. Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from
one place in the Philippines to another place in
the Philippines;
14. Sales of electricity by generation, transmission,
and/or distribution companies;
NOTE: That sale of power or fuel generated
through renewable sources of energy such as,
but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and
other emerging energy sources using
technologies such as fuel cells and hydrogen
fuels shall be subject to 0% VAT.
15. Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other franchise
grantees, except franchise grantees of radio
and/or television broadcasting whose annual
gross receipts of the preceding year do not
exceed P10,000,000, and franchise grantees of
gas and water utilities;
Franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the
preceding year do not exceed P10,000,000,
shall have an option to be registered as a VAT
taxpayer and pay the tax due thereon. Once the
option is exercised, said option shall not be
irrevocable. (Sec. 119, NIRC)
16. Non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity and bonding companies;and
17. Similar services regardless of whether or not
the performance thereof calls for the exercise or
use of the physical or mental faculties.
This shall likewise include: (LE4SU4)
1. The lease or the use of or the right or privilege to
use any copyright, patent, design or model plan,
secret formula or process, goodwill, trademark,
trade brand or other like property or right;
2. The lease or the use of, or the right to use of any
industrial, commercial or, scientific equipment;
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of
enabling the application or enjoyment of any
such property, or right as is mentioned in
subparagraph (2) or any such knowledge or
VAT on rental and/or royalties payable to nonresident foreign corporations or owners for the
sale of services and use or lease of properties in
the Philippines shall be based on the contract
price agreed upon by the licensor and the
licensee. The licensee shall be responsible for
the payment of VAT on such rentals and/or
royalties in behalf of the non-resident foreign
corporation or owner.
Non-resident lessor/owner refers to any
person, natural or juridical, an alien, or a citizen
who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of
his physical presence abroad with a definite
intention to reside therein, and who
owns/leases properties, real or personal,
whether tangible or intangible, located in the
Philippines.
Rules on advance payments made by lessee
In a lease contract, the advance payment by the
lessee may be: (LOSP)
a.
b.
c.
d.
A loan to the lessor from the lessee, or
An option money for the property, or
A security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor, or
Pre-paid rental.
If the advance payment is either (1), (2), or (3)
of the above, such advance payment is not
subject to VAT. However, a security deposit that
is applied to rental shall be subject to VAT at the
time of its application.
If the advance payment constitutes a pre-paid
rental, then such payment is taxable to the
lessor in the month when received, irrespective
of the accounting method employed by the
lessor.
5.
6.
7.
8.
Persons engaged in warehousing services;
Lessors or distributors of cinematographic
films;
Persons engaged in milling, processing,
manufacturing or repacking goods for others;
Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
234
VALUE ADDED TAX
5.
6.
7.
8.
information as is mentioned in subparagraph
(3);
The supply of services by a non-resident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person;
The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme;
The lease of motion picture films, films, tapes
and discs; and
The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time.(RR 16-2005).
A payment is a payment to a third (3rd) party if
the same is made to settle an obligation of another
person. Such obligation should be evidenced by the
sales invoice/ official receipt issued by the said third
party to the customer/client of the service provider.
An advance payment is an advance payment on
behalf of another if the same is paid to a third (3rd)
party for a present or future obligation of said
customer/client which obligation is evidenced by a
sales invoice/official receipt issued by the creditor
(3rd party) to the customer/client (the
aforementioned another party) for the sale of goods
or services by the former to the latter.
For this purpose, ‘unrelated party’ shall not
include taxpayer’s employees, partners, affiliates
(parent, subsidiary and other related companies),
relatives by consanguinity or affinity within the
fourth (4th) civil degree, and trust fund where the
taxpayer is the trustor, trustee or beneficiary, even
if covered by an agreement to the contrary (Sec. 11,
R.R. 04-2007).
NOTE: The above list is not exclusive.
Requisites for the taxability of sale or exchange
of services or lease or use of property
(SPaCeVaN)
1.
2.
3.
4.
5.
Constructive receipt
There is a sale or exchange of service or lease or
use of property enumerated in the law or other
similar services;
The service is performed or to be performed in
the Philippines;
The service is in the course of trade of
taxpayer’s trade or business or profession;
The service is for a valuable consideration
actually or constructively received; and
The service is not exempt under the NIRC,
special law or international agreement.
It occurs when the money consideration or its
equivalent is placed at the control of the person who
rendered the service without restrictions by the
payor.
Examples of constructive receipts:
1. Deposit in banks which are made available to
the seller without restrictions.
2. Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered.
3. Transfer of the amounts retained by the payor
to the account of the contractor. (RR 16-2005)
NOTE: Absence of any of the requisites renders the
transaction exempt from VAT but may be subject to
other percentage tax under Title V of the NIRC.
Q: Are non-stock, non-profit entities liable to pay
VAT for sale of goods and services?
Gross receipts
It pertains to the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced
payments
(1)actually
or
(2)constructivelyreceived during the taxable
quarter for the services performed or to be
performed for another person, excluding VAT,
except those amounts earmarked for payment to
unrelated third (3rd) party or received as
reimbursement for advance payment on behalf of
another which do not redound to the benefit of the
payor (service provider).
A: YES. As long as the entity provides service for a
fee, remuneration or consideration, then the service
rendered is subject to VAT (Commissioner v. CA, G.R.
No. 125355, March 30, 2000).
Q: Are toll fees collected by tollway operators
are subject to VAT?
A: YES. First, VAT is imposed on “all kinds of
services” When a tollway operator takes a toll fee
from a motorist, the fee is in effect for the latter’s use
of the tollway facilities over which the operator
enjoys private proprietary rights.
235
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Second, VAT is imposed on “franchise grantees”.
The word “franchise” broadly covers government
grants of a special right to do an act or series of acts
of public concern, and is not limited to legislative
franchises. Tollway operators are, owing to the
nature and object of their business, “franchise
grantees.” The construction, operation, and
maintenance of toll facilities on public
improvements are activities of public consequence
that necessarily require a special grant of authority
from the state.
The “lease of motion picture films, films, tapes and
discs” under Sec. 108 of the NIRC is not the same as
the showing or exhibition of motion pictures or
films. “Exhibition” is defined as “to show or to
display. x xx To produce anything in public so that it
may be taken in possession”. On the other hand,
“lease” is defined as “a contract by which one
owning such property grants to another the right to
possess, use and enjoy it on specified period of time
in exchange for periodic payment of a stipulated
price, referred as rent.” Thus, the legislature never
intended to include cinema/theater operator
operators or proprietors in the coverage of VAT (CIR
v. SM Prime Holdings, Inc., G.R. No. 183505, February
26, 2010).
Third, the public nature of the services rendered by
tollway operators does not exclude such services
from the VATable services. In specifically including
by way of example electric utilities, telephone,
telegraph, and broadcasting companies in its list of
VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the
imposition of VAT.
TRANSACTIONS DEEMED SALE
There is no actual sale of goods took place but such
transactions are subject to VAT.
Fourth, on the argument that toll fee is a “user’s tax”
and to impose VAT on toll fees is tantamount to
taxing a tax, it is established that tollway fees are not
taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the
government. Toll fees are collected by private
tollway operators as reimbursement for the costs
and expenses incurred in the construction,
maintenance and operation of the tollways, as well
as to assure them a reasonable margin of income.
(Diaz v. Sec. of Finance, G.R. No. 193007, July 19,
2011).
In a transaction deemed sale, the input VAT was
already used by the seller as a credit against output
VAT. However, since there was no actual sale, no
output VAT is actually charged to customers.
Consequently, the State will be deprived of its right
to collect the output VAT. To avoid the situation
where a VAT registered taxpayer avail of input VAT
credit without being liable for corresponding output
VAT, certain transactions should be considered
sales even in the absence of actual sale (Tabag,
2015).
The following are transactions deemed sale and
therefore subject to VAT: [CORD]
Q: Are gross receipts derived from sales of
admission tickets in showing motion pictures
subject to VAT?
A: NO. The legislative intent is not to impose VAT on
persons already covered by the amusement tax. The
repeal by the LGC of 1991 of the Local Tax Code
transferring the power to impose amusement tax on
cinema/theater operators or proprietors to the
local government did not grant nor restore the said
power to the national government nor did it expand
the coverage of VAT. Since the imposition of a tax is
a burden on the taxpayer, it cannot be presumed nor
can it be extended by implication. As it is, the power
to impose amusement tax on cinema/theater
operators or proprietors remains with the local
government.
Transfer, use or consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business (i.e., when a VAT-registered person
withdraws goods from his business for his
personal use)
2.
Distribution or transfer to:
a. Shareholders or investors as share in the
profits of the VAT-registered persons
NOTE:
Property
dividends
which
constitute stocks in trade or properties
primarily held for sale or lease declared out
of retained earnings on or after January 1,
1996 and distributed by the company to its
shareholders shall be subject to VAT based
on the zonal value or fair market value at
the time of distribution, whichever is
applicable (Sec. 106.7, R.R. 16-2005).
A contrary ruling will subject cinema/theater
operators or proprietors to a total of 40% tax, the
10% (now 12%) VAT being on top of the 30%
amusement tax imposed by the Local Government
Code of 1991, thereby killing the “[goose] that lays
the golden egg[s].”
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
b.
236
Creditors in payment of debt
VALUE ADDED TAX
3.
Consignment of goods if actual sale is not made
within sixty (60) days following the date such
goods were consigned.
occurrence of the transactions enumerated above in
numbers 1, 2, and 3.
However, in the case of retirement or cessation of
business, the tax base shall be the acquisition cost or
the current market price of the goods or properties,
whichever is lower.
NOTE: Consigned good returned by the
consignee within the 60-day period are not
deemed sold.
4.
Retirement from or cessation of business with
respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as
of the date of such retirement or cessation,
whether or not the business is continued by the
new owner or successor (Sec. 106 (B) NIRC).
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base (Sec. 4 1067, R.R. 16-2005).
Nonetheless, if one of the parties in the transaction
is the government as defined and contemplated
under the Administrative Code, the output VAT on
the transaction shall be based on the actual selling
price (Sec. 7, R.R. 4-2007).
Transactions that are considered retirement or
cessation of business
1.
2.
Change of ownership of the business. There is
change in the ownership of the business when a
single proprietorship incorporates; or the
proprietor of a single proprietorship sells his
entire business.
Dissolution of a partnership and creation of a
new partnership which takes over the business
(Sec. 4.106-7, R.R. 16-2005).
Consideration in determining
transaction is “deemed sale”
whether
Inventory used for promotions and office
supplies
Goods given for free in the course of trade or
business in order to promote sales efforts are not
considered deemed sale transactions (VAT Ruling
No. 109-88, April 25, 1988).
a
CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON
Before considering whether the transaction is
“deemed sale”, it must first be determined whether
the sale was in the ordinary course of trade or
business or not. Even if the transaction was
“deemed sale” if it was not done in the ordinary
course of trade or business or was not originally
intended for sale in the ordinary course of business,
the transaction is not subject to VAT (CIR v.
Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006).
The following change in or cessation of status of
a VAT registered person are subject to VAT:
1.
2.
3.
Tax base of transactions deemed sale
In cases where a transaction is a deemed sale, barter
or exchange of goods or where the selling price is
unreasonably lower than the actual market value,
the Commissioner shall determine the appropriate
tax base.
4.
NOTE: The gross selling price is unreasonably lower
than the actual market value if it is lower by more
than 30% of the actual market value of the same
goods of the same quantity and quality sold in the
immediate locality on or nearest the date of sale
(Sec. 4 106-7, R.R. 16-2005).
Change of business activity from VAT taxable
status to VAT-exempt status.
Approval of a request for cancellation of
registration due to reversion to exempt status.
Approval of a request for cancellation of
registration due to a desire to revert to exempt
status after the lapse of 3 consecutive years
from the time of registration by a person who
voluntarily registered despite being exempt
under Sec 109 (2) of the NIRC.
Approval of a request for cancellation of
registration of one who commenced business
with the expectation of gross sales or receipt
exceeding P1,919,500 but who failed to exceed
this amount during the first 12 months of
operations.
The following change in or cessation of status of
a VAT registered person are NOT subject to
Output Tax
1.
The output tax shall be based on the market value of
the goods deemed sold as of the time of the
237
Change of control in the corporation of as
corporation by the acquisition of
controlling interest of the corporation by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
another stockholder or group of
stockholders.
supply of services. The
output tax rate is set at
zero. When applied to the
tax base, such rate
obviously results in no tax
chargeable against the
purchaser.
The goods or properties used in the business or
those comprising the stock-in-trade of the
corporation will not be considered sold,
bartered or exchanged despite the change in the
ownership interest. However, the exchange of
real estate properties held for sale or for lease,
for shares of stocks, whether resulting to
corporate control or not, is subject to VAT,
subject to exceptions provided under Section
4.106-3 (Sale of real properties) hereof. On the
other hand, if the transferee of the transferred
real property by a real estate dealer is another
real estate dealer, in an exchange where the
transferor gains control of the transfereecorporation, no output VAT is imposable on the
said transfer (Sec. 8, R.R. 4-2007).
2.
3.
The seller of such
transactions charges no
output tax but can claim a
refund or tax credit
certificate for the VAT
previously charged by
suppliers(AT&T
Communications Services
Phils., Inc. v. CIR, G.R. No.
182364, August 3, 2010).
No VAT shall be shifted or
passed-on
by
VATregistered sellers or
suppliers
from
the
Customs Territory on
their sale, barter or
exchange
of
goods,
properties or services to
the subject registered
Freeport
Zone
enterprises.
Change in the trade or corporate name of
the business.
Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed by the
surviving or new corporation.
ZERO-RATED SALES
Zero-rated sale by a VAT-registered person is a
taxable transaction for VAT purposes but the sale
does not result in any output tax. However, the input
tax on the purchases of goods, properties or services
related to such zero-rated sale shall be available as
tax credit or refund.
E.g.:
The zero-rated seller becomes internationally
competitive by allowing the refund or credit of input
taxes that are attributable to export sales (CIR v.
Seagate Technology (Phil.), G.R. No. 153866, Feb. 11,
2005).
Zero-rated vs. VAT-exempt transactions
VAT- EXEMPT
In
VAT-exempt
sales,
the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
This non-crediting
of input taxes is
exempt
transactions is the
underlying reason
why the NIRC
adopted the rule on
apportionment of
tax credits under
Section
104(A)
whenever a VATregistered taxpayer
engages in other
VAT taxable and
non-VAT taxable
sales (CIR v. Eastern
Telecomm. Phils.,
Inc.,
G.R.
No.
163835, July 7,
2010).
Simply put, the difference lies in the input tax. In
VAT-exempt transactions there is no input tax credit
allowed. In the case of 0% rated transaction of a VAT
registered person, the sale of goods or properties is
multiplied by 0% thus his output tax is P 0.00. If the
person is VAT registered, he may claim such input tax
as tax credit or refund.
To be subject to zero tax-rate, however, the seller
must be a VAT-registered person because if he is not
VAT registered, the transactions entered into by him
are exempt from the tax.
Purpose: To exempt the transaction completely
from VAT previously collected since input taxes
passes to him may be recovered as refund or credits
(Ingles, 2015).
ZERO-RATED
It generally refers to the
export sale of good and
taxpayer/seller
shall not bill any
output tax on his
sales
to
his
customers
and
corollarily, is not
allowed any credit
or refund of the
input taxes he paid
on his purchases.
238
Output tax
Less: Input tax
Excess input tax
BASIS
Nature
of
transac
-tion
EXEMPT
Not taxable;
removes VAT at
the exempt stage
By
whom
made
Input
tax
Need not be a
VAT-registered
person
Not subject to
output tax, thus
cannot claim
input tax credit.
P
P
0.00
5,000.00
5, 000.00
ZERO-RATED
Transaction is
taxable for VAT
purposes
although the tax
levied is 0%
Made by a VATregistered person
May claim input
tax credit
although the
transaction
VALUE ADDED TAX
Tax
Credit/
Refund
Cannot avail of
tax credit or
refund. Thus,
may result in
increased prices
(Partial Relief)
Enhanced VAT Refund System
resulted to zero
output tax.
Can claim or
enjoy tax
credit/refund
(Total Relief)
Sales of raw materials to nonresident buyer under
the aforementioned, sale of raw materials to exportoriented enterprise whose export sales exceed 70%
of total annual production, and those under the
Omnibus Investments Code shall be under 12% VAT
and no longer be considered as export sales subject
to 0% VAT rate upon the following:
ZERO-RATED SALE OF GOODS
a.
[FEE]
1. Export sales
2. Foreign currency denominated sale
3. Effectively zero-rated sales
b.
EXPORT SALES
“Considered export sales under EO 226”
shall mean the Philippine port F.O.B. value
determined from invoices, bills of lading,
inward letters of credit, landing certificates,
and other commercial documents, of export
products exported directly by a registered
export producer, or the net selling price of
export products sold by a registered export
producer to another export producer, or to an
export trader that subsequently export the
same; Provided, that sales of export products
to another producer or to an export trader
shall only be deemed export sales when
actually exported by the latter, as evidenced by
landing certificates or similar commercial
documents.
The term export sales means: [FINE GO]
1. The sale and actual shipment of goods from the
Philippines to a Foreign country:
a. irrespective of any shipping arrangement;
and
b. paid for in acceptable foreign currency or
its equivalent in goods or services and
accounted for in accordance with the rules
and regulations of BSP.
2.
3.
4.
5.
6.
7.
8.
Successful establishment of VAT refund
system which grants refunds of creditable
input tax within ninety (90) days
Pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by
December 31, 2019
Sale of raw materials or packaging materials by
a VAT-registered entity to a Non-resident
buyer:
a. for delivery to a resident local exportoriented enterprise;
b. used in the manufacturing, processing,
packing, repacking in the Philippines of the
said buyer’s goods;
c. paid for in acceptable foreign currency and
accounted in accordance with the rules of
BSP.
Constructive exports
a.
b.
c.
Registered enterprises within separate custom
territory as provided by special laws
Registered enterprises within tourism
enterprise zones as approved by TIEZA
International shipping or internatinoal air
transport operations, PROVIDED that:
a. Goods, supplies, equipment, and
fuel shall be used
b. For international shipping or air
transport operations
d.
e.
Sale of raw material or packaging materials to
Export oriented enterprise whose export sales
exceed 70% of total annual production
Sale of Gold to BSP
Those considered as export sales under the
Omnibus Investment Code of 1987(E.O. 226)
9.
239
Sales to bonded manufacturing warehouses
of export-oriented manufacturers
Sales to export processing zones
Sales to enterprises duly registered and
accredited with the Subic Bay Metropolitan
Authority pursuant to R.A. 7227
Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products under guidelines to be set by the
Board in consultation with the BIR and the
BOC.
Sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products whether
paid for in foreign currency or not (Sec.
4.106-5, RR 16-2005).
The sale of goods, supplies, equipment and fuel
to persons engaged in International shipping
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
or international air transport operations (Sec.
106[A][2][a], NIRC as amended by RA 9337).
A: NO. Royal Mining’s claim is bereft of merit. It is
the sale of gold (and not silver) to the BSP that is
considered as export sale subject to zero-rated VAT.
Rationale for zero-rating exports sale
FOREIGN CURRENCY DENOMINATED SALE
The Philippine VAT system adheres to the cross
border doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined
for consumption outside of the territorial border of
the taxing authority.
The phrase 'foreign currency denominated sale'
means sale to a nonresident of goods, except those
mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a
resident in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP) (Sec. 106[A][2][b], NIRC).
Export sale, when exempt and when zero-rated
RULES ON EXPORT SALES
By a Non-VAT registered VAT exempt
By a VAT registered
NOTE: Section 149 refers to excise tax on
automobiles. Section 150 refers to excise tax on nonessential goods.
VATable at 0% (zero
rated)
Q: Is the sale of goods to ecozone, such as PEZA,
considered as export sale?
Requisites:
1.
2.
A: YES. While an ecozone is geographically within
the Philippines, it is deemed a separate customs
territory and is regarded in law as foreign soil. Sales
by suppliers from outside the borders of the
ecozone to this separate customs territory are
deemed as exports and treated as export sales.
These sales are zero-rated or subject to a tax rate of
zero percent (CIR v. Sekisui Jushi Philippines, Inc., G.R.
No. 149671, July 21, 2006).
3.
4.
EFFECTIVELY ZERO-RATED TRANSACTION
An ecozone or a Special Economic Zone has been
described as selected areas with highly developed
or which have the potential to be developed into
agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial
centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An
ecozone may contain any or all of the following:
industrial estates (IEs), export processing zones
(EPZs), free trade zones and tourist/recreational
centers. The national territory of the Philippines
outside of the proclaimed borders of the ecozone
shall be referred to as the Customs Territory (CIR v.
Toshiba Information Equipment (Phils.), Inc., G.R.. No.
150154, August 9, 2005).
The term “effectively zero-rated sale of goods and
properties” shall refer to the local sale of goods and
properties by a VAT-registered person to a person
or entity who was granted indirect tax exemption
under special laws or international agreement.
Since the buyer is exempt from indirect tax, the
seller cannot pass on the VAT and therefore, the
exemption enjoyed by the buyer shall extend to the
seller, making the sale effectively zero-rated (R.M.C.
50-2007).
Effectively Zero-rated vs. Automatic Zero-rated
transaction
BASIS
Q: Royal Mining is a VAT-registered domestic
mining entity. One of its products is silver being
sold to Bangko Sentral ng Pilipinas. It filed a
claim with the BIR for tax refund in the ground
that under Section 106 of the NIRC, sales of
precious metals to Bangko Sentral are
considered export sales subject to zero-rated
VAT. (2006 Bar)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The buyer must be a non-resident;
The goods sold must be assembled or
manufactured in the Philippines;
Goods sold are to be delivered to a resident of
the Philippines; and
Paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP.
Nature
240
EFFECTIVELY
ZERO-RATED
TRANSACTION
Refers to sales
to persons or
entities whose
exemption
under special
laws
or
international
agreements to
AUTOMATIC
ZERO-RATED
TRANSACTION
Refers to export
sales and foreign
currency
denominated
sales
VALUE ADDED TAX
BASIS
Need to
apply for
zerorating
For
whose
benefit is
it
intended
Stamping
of “zerorated” on
VAT
invoice
or receipt
Effect
EFFECTIVELY
ZERO-RATED
TRANSACTION
which
the
Philippines is a
signatory
AUTOMATIC
ZERO-RATED
TRANSACTION
An application
for zero-rating
must be filed
and the BIR
approval
is
necessary
before
the
transaction
may
be
considered
effectively
zero-rated.
Intended
to
benefit
the
purchaser who,
not
being
directly
and
legally liable for
the payment of
the VAT, will
ultimately bear
the burden of
the tax shifted
by
the
suppliers.
No need to file an
application form
and to secure BIR
approval before
the
sale
is
considered zerorated.
enterprises doing business in the Mactan Export
Processing Zone. Inasmuch as both sales are
considered export sales subject to VAT at 0%
rate under the National Internal Revenue Code,
as amended, it filed an application for tax
credit/refund of VAT paid for the said period
representing excess VAT input payments. The
CIR belies the claim for refund. Is the grant of a
refund representing unutilized input VAT to
Cebu Toyo proper?
A: YES. Cebu Toyo is engaged in taxable rather than
exempt transactions. Taxable transactions are those
transactions which are subject to VAT either at the
rate of 12% or 0%. In taxable transactions, the seller
shall be entitled to tax credit for the VAT paid on
purchases and leases of goods, properties or
services. An exemption means that the sale of goods,
properties or services and the use or lease of
properties is not subject to VAT (output tax) and the
seller is not allowed any tax credit on VAT (input
tax) previously paid. A VAT-registered purchaser of
goods, properties or services that are VAT exempt,
is not entitled to any input tax on such purchases
despite the issuance of a VAT invoice or receipt.
Under the system, a zero rated sale by a VATregistered person, which is a taxable transaction for
VAT purposes, shall not result in any output tax, but
the input tax on his purchase of goods, properties or
services related to such zero-rated sale shall be
available as tax credit or refund (CIR v. Cebu Toyo
Corporation, G.R. No. 149073, February 16, 2005).
Primarily
intended to be
enjoyed by the
seller who is
directly
and
legally liable for
the VAT, making
such
seller
internationally
competitive by
allowing
the
refund or credit
of input taxes that
are attributable
to export sales.
Not required. The
buyer, as shown
by his address in
the sales invoice
and
shipping
documents,
is
located outside
the Philippines.
Q: SEAGATE is registered with the PEZA to
engage in the manufacture of recording
components primarily used in computers for
export. SEAGATE is a VAT-registered entity. An
administrative claim for refund of VAT input
taxes with supporting documents was filed with
Revenue District Office in Cebu. The
administrative claim for refund was not acted
upon by the petitioner prompting the
respondent to elevate the case to the CTA. The
CIR contended that since ‘taxes are presumed to
have been collected in accordance with laws and
regulations, Seagate has the burden of proof that
the taxes sought to be refunded were
erroneously
or
illegally
collected.
Unfortunately, Seagate failed to do so. Is Seagate
entitled to the refund or issuance of Tax Credit
Certificate representing alleged unutilized input
VAT paid on capital goods purchased?
Required. The
buyer,
as
shown by his
address in the
sales
invoice
and shipping
documents, is
located outside
the Philippines
merely
by
fiction of law.
Results in no tax chargeable against
the purchaser.
The seller can claim a refund or a tax
credit certificate for the VAT
previously charged by suppliers.
Q: Cebu Toyo Corp., an export enterprise, duly
registered with the Philippine Economic Zone
Authority pursuant to PD 66 and is also
registered with the BIR as a VAT taxpayer. It
sells 80% of its products to its mother
corporation, and the rest are sold to various
A: YES. As a PEZA-registered enterprise within a
special economic zone, it is entitled to the fiscal
incentives and benefits provided for in either PD 66
or EO 226 which would not subject Seagate to
internal revenue laws and regulations, among
241
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
others. Thus, Seagate enjoys preferential tax
treatment. The VAT on capital goods is an internal
revenue tax from which the entity is exempt.
Although the transactions involving such tax are not
exempt, Seagate as a VAT-registered person,
however, is entitled to their credits.
special laws or international agreements to which
the Philippines is a signatory effectively subjects
such sales to zero-rate. (CIR v. Acesite (Philippines)
Hotel Corporation, G.R. No. 147295, February 16,
2007)
Related case: The payments made by PAGCOR to its
catering service contractor are subject to zero-rated
(0%) VAT (CIR v. Secretary of Justice, G.R. No.
177387, November 9, 2016)
Since the purchases of Seagate are not exempt from
the VAT, the rate to be applied is zero. Its exemption
under both P.D. 66 and R.A. 7916 effectively subjects
such transactions to a zero rate, because the
ecozone within which it is registered is managed
and operated by the PEZA as a separate customs
territory. This means that in such zone is created the
legal fiction of foreign territory. Under the crossborder principle of the VAT system being enforced
by the BIR, no VAT shall be imposed to form part of
the cost of goods destined for consumption outside
of the territorial border of the taxing authority. If
exports of goods and services from the Philippines
to a foreign country are free of the VAT, then the
same rule holds for such exports from the national
territory – except specifically declared areas – to an
ecozone (CIR v. Seagate Technology (Phil.), G.R. No.
153866, Feb. 11, 2005).
Q: A contractor constructed an office building
for the World Health Organization (WHO). BIR
assessed the contractor of VAT, contending that,
although WHO is exempt, the tax is being
assessed on the contractor, and not on WHO. Is
the BIR correct?
A: NO. As an international organization, WHO
enjoys privileges and immunities such as exemption
from all direct and indirect taxes. The contention of
BIR should be rejected. In context, direct taxes are
those that are demanded from the very person who,
it is intended or desired, should pay them; while
indirect taxes are those that are demanded in the
first instance from one person in the expectation
and intention that he can shift the burden to
someone else. The VAT is of course payable by the
contractor but in the last analysis it is the owner of
the building that shoulders the burden of the tax
because the same is shifted by the contractor to the
owner as a matter of selfpreservation. Thus, it is an
indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the contractor, the
latter can shift its burden on the WHO. (CIR v. John
Gotamco& Sons, Inc., G.R. No. L-31092, February
27,1987, [Modified])
Q: Acesite is the owner and operator of the
Holiday Inn Manila. It leases a portion of its
hotel’s premises to PAGCOR for casino
operations. Acesite passed VAT on rental
income to PAGCOR, but PAGCOR refused to pay
the passed-on VAT, invoking its franchise which
exempts PAGCOR from tax. Acesite still paid VAT
on the rental income from PAGCOR to the BIR as
it feared the legal consequences of non-payment
of the tax. Acesite belatedly arrived at the
conclusion that its transaction with PAGCOR was
subject to zero rate as it was rendered to a taxexempt entity. Acesite filed for a claim for
refund. Should the claim for refund be granted?
ZERO-RATED SALE OF SERVICE
The following services performed in the Philippines
by VAT- registered persons shall be subject to zero
percent (0%) rate.
A: YES. PAGCOR is exempted from “tax of any kind
or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether
National or Local”. The exemptions granted in the
franchise for earnings derived from the operations
conducted under the franchise shall inure to the
benefit of and extend to corporations or individual
with whom the Corporation or operator has any
contractual relationship in connection with the
operations of the casinos authorized to be
conducted under PAGCOR’s Franchise. PAGCOR’s
franchise goes one step further by granting tax
exempt status to persons dealing with PAGCOR in
casino operations. By this extension, the legislature
clearly granted exemption also from indirect taxes.
Section 106(A)(2)(c) of the NIRC specifies that sales
to persons or entities whose exemption under
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
2.
242
Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP;
Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or to a nonresident person not
engaged in business who is outside the
Philippines when the services are performed,
the consideration for which is paid for in
VALUE ADDED TAX
3.
4.
5.
6.
7.
8.
9.
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP i.e. recruitment;
Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply of such
services to 0% rate;
Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof; shall only be
exclusively used for international shipping
or air transport operations
Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed 70% of total annual
production;
Transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign
country; and
Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel
cells and hydrogen fuels (Sec. 108, NIRC as
amended by R.A. 9337).
Registered enterprises within a separate
customs territory as provided for by special
laws
Registered
enterprises
within
tourism
enterprise zones as declared by TIEZA
acceptable foreign currency inwardly remitted and
accounted for in conformity with BSP rules and
regulations.
In Accenture Inc. vs CIR (2012), the Court ruled that
the recipient of the service must be doing business
outside the Philippines for the transaction to qualify
for zero-rating under Section 108 (B) of the NIRC. To
come within the purview of Section 108 (B) (2), it is
not enough that the recipient of the service be
proven to be a foreign corporation; rather, it must
be specifically proven to be a nonresident foreign
corporation.
Services rendered to persons engaged in
international shipping or international air
transport operations
In order to qualify for zero-rating, the services
rendered by a VAT-registered person to a person
engaged in international air transport operations
must pertain to or must be attributable to the
transport of goods and passengers from a port in the
Philippines directly to a foreign port without
docking or stopping at any port in the Philippines.
Accordingly, the services provided by hotels to their
clients engaged in international air transport
operations pertaining to room accommodations and
food and beverage services should be subject to the
12% VAT. As they are rendered within the hotel's
premises, they have no direct connection with the
transport of goods or passengers, and as such, they
cannot be considered as services directly
attributable to the transport of goods and
passengers from a Philippine port directly to a
foreign port entitled to zero-rating (RMC No. 03111).
Services other than processing manufacturing,
or repacking of goods (Sec 108 (B)(2)
Requirements to qualify for zero-rating
1.
2.
3.
Q: Are the following transactions subject to VAT?
If yes, what is the applicable rate for each
transaction. State the relevant authority/ies for
your answer.
The services other than “processing,
manufacturing or repacking of goods” must be
performed in the Philippines,
That the payment for such services be in
acceptable foreign currency accounted for
in accordance with BSP rules, and that
The recipient of such services is doing
business outside of the Philippines.
a.
In CIR vs. American Express International, Inc.,
(2005), the Court ruled that the Legislature does not
intend to impose the condition of being "consumed
abroad" in order for services performed in the
Philippines by a VAT-registered person to be zerorated. In this case, the taxpayer renders services in
the Philippines and facilitates the collection and
payment of receivables belonging to its nonresident foreign client, for which it gets paid in
c.
Construction by XYZ Construction Co. of
concrete
barriers
for
the
Asian
Development Bank in Ortigas Center to
prevent car bombs from ramming the ADB
gates along ADB Avenue in Mandaluyong
City.
Call Center operated by a domestic
enterprise in Makati that handles
exclusively the reservations of a hotel chain
which are all located in North America. The
services are paid for in US$ and duly
accounted for with the BangkoSentral ng
Pilipinas. (2010 Bar)
A:
243
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
The transaction is subject to VAT at the rate of
zero percent (0%). ADB is exempt from direct
and indirect taxes under a special law, thereby
making the sale of services to it by a VATregistered construction company effectively
zero-rated (Sec. 108[B][3], NIRC).
The sale of services subject to VAT at zero
percent (0%). Zero-rated sale of services
includes services rendered to a person engaged
in business outside the Philippines and
consideration is paid in acceptable foreign
currency duly accounted for by the
BangkoSentral
ng
Pilipinas
(Sec.
103[B][2]NIRC).
input tax credit. Thus a VAT-registered person may
choose to be subjected to rather than exempt from
payment of VAT.
Exempt transactions, enumerated
a. Sale or importation of
i. agricultural and marine food products in
their original state,
ii. livestock and poultry of
a. a kind generally used as, or yielding
or producing foods for human
consumption; and
b. breeding
stock
and
genetic
materials therefor
VAT-EXEMPT TRANSACTIONS
These refer to the sale of goods or properties and/or
services and the use or lease of properties that is not
subject to VAT (output tax) and the seller is not
allowed any tax credit of VAT (input tax) on
purchases.
Livestock shall include cows, bulls and calves, pigs,
sheep, goats and rabbits. Poultry shall include
fowls, ducks, geese and turkey. Livestock or poultry
does not include fighting cocks, race horses, zoo
animals and other animals generally considered as
pets.
The person making the exempt sale of goods,
properties or services shall not bill any output tax to
his customers because the said transaction is not
subject to VAT (Sec 4.109-1, R.R. No. 16-2005).
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and
clams.
Exempt Party vs. Exempt Transaction
Meat, fruit, fish, vegetables and other agricultural
and marine food products classified under this
paragraph shall be considered in their original date
even if they have undergone the simple processes of
preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking
or stripping, including those using advanced
technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack,
and other similar packaging methods.
EXEMPT PARTY
A person or entity
granted VAT exemption
under the NIRC, special
law or international
agreement to which RP
is a signatory, and by
virtue of which its
taxable
transactions
become exempt from
the VAT.
Such party is not
subject to the VAT, but
may be allowed a tax
refund or credit of input
tax paid, depending on
its registration as a VAT
or non-VAT taxpayer.
EXEMPT
TRANSACTION
Involves goods or
services which, by
their nature are
specifically listed in
and
expressly
exempted from the
VAT under the NIRC,
without regard to the
tax status of the
parties
in
the
transactions.
Transaction is not
subject to VAT, but
the seller is not
allowed
any
tax
refund or credit for
any input taxes paid.
Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt and copra shall be
considered as agricultural food products in their
original state.
Sugar whose content of sucrose by weight, in the dry
state, has a polarimeter reading of 99.5º and above
are presumed to be refined sugar.
Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be
refined sugar:
Reason for electing VAT registration
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill
accredited by the BIR to be producing and/or
capable of producing sugar with polarimeter
reading of 99.5o and above, and for which the
A VAT-registered person who opted to be subject to
VAT may avail of the input tax credit. The input tax
is deducted from the output tax thereby reducing
his tax liabilities but a VAT-registered person who
opted to be exempt therefrom cannot avail of the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
244
VALUE ADDED TAX
quedan issued therefor, and verified by the Sugar
Regulatory Administration, identifies the same to be
of a polarimeter reading of 99.5º and above.
a.
Bagasse is not included in the exemption provided
for under this section (Sec. 4.109-1(B)(1)(a), R.R.
16-2005).
b.
Refined sugar subject to VAT
c.
Raw Sugar refers to sugar produced by simple
process of conversion of sugar cane without a need
of any of mechanical or similar device such as
muscovado. For this purpose, raw sugar refers only
to muscovado sugar.
d.
Centrifugal process of producing sugar is not in
itself a simple process. Therefore, any type of sugar
produced therefrom is not exempt from VAT (R.R.
No. 13-2013).
1. Amount in excess of the above threshold shall
be subject to tax.
b. Sale or importation of
2. fertilizers;
3. seeds, seedlings and fingerlings;
4. fish, prawn, livestock and poultry feeds,
including ingredients, whether locally
produced or imported, used in the
manufacture of finished feeds
a.
except specialty feeds for race
horses, fighting cocks, aquarium fish,
zoo animals and other animals generally
considered as pets)
d. Importation of
1. professional
instruments
and
implements,
2. wearing apparel,
3. domestic animals, and
4. personal household effects (except any
vehicle, vessel, aircraft, machinery and
other goods for use in the manufacture
and merchandise of any kind in
commercial quantity)
5. belonging to persons coming to settle in
the Philippines or their families and
descendants who are now residents or
citizens of other countries, such as
OVERSEAS FILIPINO
6. inquantities and of the class suitable to
the profession, rank, or position
7. for their own use and
8. not for sale, barter or exchange,
9. accompanying such persons, or arriving
within a reasonable time
10. upon the production of evidence
satisfactory to the Commissioner of
Internal Revenue, that such persons are
actually coming to settle in the
Philippines and that the change of
residence is bonafide;
Specialty feeds refers to non-agricultural feeds or
food for race horses, fighting cocks, aquarium fish,
zoo animals and other animals generally considered
as pets.
c. Importation of personal and household
effects belonging to
1. residents of the Philippines returning
from abroad, and
2. non-resident citizens coming to resettle
in the Philippines;
Provided, that such goods are exempt from
customs duties under the Tariff and Customs
Code of the Philippines
Requisites under Sec. 800 of
Modernization and Tariff Act of 2016
1.
P350,000 – for those who have stayed in a
foreign country for at least 10 yrs, and has
not availed of this privilege within 10 years
prior to arrival
P250,000 – for those who have stayed for at
least 5 but not more than 10 yrs and has not
availed of this privilege within 5 years prior
to arrival
P150,000 – for those who have stayed for a
period of less than 5 yrs and has not availed
of this privilege within 6 months prior to
arrival;
P150,000 – in case of returning OFWs. This
privilege is available once in a given
calendar year.
NOTE: Prior to the amendment of the
Tariff and Customs Code, the ceiling
amount is P10,000.
Customs
e. Services subject to percentage tax
Refer to discussion on percentage tax.
That the personal and household effects of
returning residents shall neither be in
commercial quantities nor intended for barter,
sale or hire and that the total dutiable value of
which shall not exceed:
f. Services by
1. agricultural contract growers, and
2. milling for others of
a. palay into rice,
b. corn into grits, and
245
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
c. sugar cane into raw sugar
engaged in the performance of medical, dental,
hospital and veterinary services except those
rendered by professionals. PHILHEALTH is not
actually rendering medical service but merely
acting as a conduit between the members and their
accredited and recognized hospitals and clinics. It
merely provides and arranges for the provision of
pre-need health care services to its members for a
fixed prepaid fee for a specified period of time; that
it then contracts the services of physicians, medical
and dental practitioners, clinics and hospitals to
perform such services to its enrolled members; and
that it enters into contract with clinics, hospitals,
medical professionals and then negotiates with
them regarding payment schemes, financing and
other procedures in the delivery of health
services (CIR v. Philippine Health Care Providers Inc.,
G.R. No. 168129, April 24, 2007).
Agricultural contract growers refer to those persons
producing for others poultry, livestock or other
agricultural and marine food products in their
original state.
g. Medical, dental, hospital and veterinary
services, except those rendered by
professionals
Laboratory services are exempted. If the hospital or
clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
Q: PHILHEALTH, operates a health care delivery
system or a health maintenance organization to
take care of the sick and disabled persons
enrolled in the health care plan, inquired before
the CIR whether the services it provided to the
participants in its health care program were
exempt from the payment of VAT. The
Commissioner issued VAT Ruling
231-88
stating that PHILHEALTH, as a provider of
medical services, was exempt from the VAT
coverage.
h. Educational services
1. rendered
by
private
educational
institutions duly accredited by the
a. Department of Education (DepED),
b. the Commission on Higher Education
(CHED), and
c. the Technical Education and Skills
Development Authority (TESDA)
Meanwhile, R.A. 7716 (E-VAT Law) took effect,
amending
further
the NIRC of
1977.
Subsequently, R.A. 8424 (NIRC of 1997) took
effect, substantially adopting and reproducing
the provisions of E.O. 273 on VAT and the E-VAT
law. With the passage of these laws, the BIR sent
PHILHEALTH a Preliminary Assessment Notice
for deficiency in its payment of the VAT and
documentary stamp taxes (DST) for taxable
years 1996 and 1997 and a letter demanding
payment of “deficiency VAT” and DST for taxable
years 1996 to 1997.
2. and those rendered by government
educational institutions;
Educational services shall refer to academic,
technical or vocational education provided by
private educational institutions duly accredited by
the DepED, the CHED and TESDA and those
rendered by government educational institutions
and it does not include seminars, in-service training,
review classes and other similar services rendered
by persons who are not accredited by the DepED,
the CHED and/or the TESDA.
PHILHEALTH filed a protest with the
Commissioner but the latter did not take action
on its protest. Consequently, PHILHEALTH
brought the matter to the CTA. The CTA
declared that VAT Ruling 231-88 is void and
without force and effect and ordered it to pay
the VAT deficiency, but canceling the payment
of DST.
After a Motion for Partial
Reconsideration, CTA overruled its decision
with respect to the payment of deficiency VAT
and held that PHILHEALTH was entitled to the
benefit of non-retroactivity of rulings
guaranteed under Section 246 of the NIRC, in the
absence of showing of bad faith on its part. Are
the services of PHILHEALTH subject to VAT?
i. Services rendered by individuals pursuant to
an employer-employee relationship
j. Services rendered
b. by regional or area headquarters
established in the Philippines by
multinational corporations
c. which act as
1. supervisory,
2. communications and
3. coordinating centers for their
a. affiliates,
b. subsidiaries or
c. branches
in the Asia Pacific Region, and
A: YES, PHILHEALTH’s services are not VATexempt. Those exempted from VAT are those
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
246
VALUE ADDED TAX
d. do not earn or derive income from the
Philippines
 From lending
activities
 From non-lending
activities
Electric cooperatives
k. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws except those granted under PD No. 529
which refers to
Petroleum Exploration
Concessionaires under the Petroleum Act of
1949
Rules on Export Sales
By a Non-VAT registered
By a VAT registered
VAT*
VAT exempt
VATable at 0% (zero
rated)
1. Sale of real properties not primarily held
for sale to customers or held for lease in
the ordinary course of trade or business.
2. Sale of real properties utilized for lowcost housing as defined by RA No. 7279,
otherwise known as the "Urban
Development and Housing Act of 1992"
and other related laws, such as RA No.
7835 and RA No. 8763.
To/From
NonMembers
Exempt
VAT
p. Sales of real properties, namely:
Summary rules on cooperatives
Exempt
VAT
If he is a VAT-registered person, his export sales are
zero-rated.
Importation by non-agricultural, non-electric and
non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be used
by them are subject to VAT.
Exempt
VAT
NOTE: The reason is to encourage exporters of
goods to register as a VAT-registered person with
the BIR to be able to claim unused input tax in the
form of refund or tax credit.
n. Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered with
and in good standing with the CDA; Provided,
That the share capital contribution of each
member does not exceed Fifteen Thousand
Pesos (P15,000.00) and regardless of the
aggregate capital and net surplus ratably
distributed among the members.
Agricutural
Cooperatives
 Own produce
(processed or at its
origial state)
 Other that own
produce (i.e. from
traders)
Credit or
Multipurpose
Cooperatives
VAT
o. Export sales by persons who are not VATregistered
m. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered and in good standing with the
Cooperative Development Authority
To/From
Members
Exempt
Non-agricultral, nonlending and
multipurpose, nonelectric
Exempt
Exempt
 Contribution per
member < P15K
VAT
VAT
 Contribution per
member > P15K
*Exempt if referring to agricultural food product at
its original state.
(Tabag, 2015)
l. Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA) to
their members, as well as sale of their
produce, whether in its original state or
processed form, to non-members; their
importation
of direct farm
inputs,
machineries and equipment, including spare
parts thereof, to be used directly and
exclusively in the production and/or
processing of their produce
Sales/Gross Receipts
by
Exempt
"Low-cost housing" refers to housing projects
intended for homeless low-income family
beneficiaries, undertaken by the Government or
private developers, which may either be a
subdivision or a condominium registered and
licensed by the Housing and Land Use Regulatory
Board/Housing (HLURB) under BP Blg. 220, PD No.
957 or any other similar law, wherein the unit
selling price is within the selling price ceiling per
unit of P750,000.00 under RA No. 7279, otherwise
known as the "Urban Development and Housing Act
247
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
of 1992" and other laws, such as RA No. 7835 and
RA No. 8763.
residential dwelling, thus, should be subject to VAT
regardless of amount of selling price.
3. Sale of real properties utilized for
socialized housing as defined under RA
No. 7279, and other related laws, such as
RA No. 7835 and RA No. 8763, wherein the
price ceiling per unit is P225,000.00 or as
may from time to time be determined by
the HUDCC and the NEDA and other
related laws.
SUMMARY RULES ON SALES OF REAL
PROPERTIES
Sale not in the ordinary course of
trade or business
VAT exempt
 In general
Sale of residential lot by a real
estate dealer
VAT exempt
 Selling price < P1,919,500*
VAT
 Selling price > P1,919,500
Sale of residential lot by a nondealer
VAT
 Use in business (incidental
transaction)
 Not use in business (regardless 6% CGT
of amount)
Sale of residential house & lot
and other residential dwellings
by a real estate dealer
 Selling price < P3,199,200**
VAT exempt
 Selling price > P3,199,200
VAT
Sale of residential house & lot
and other residential dwellings
by a non-dealer
VAT
 Use in business (incidental
transaction)
 Not use in business (regardless 6% CGT
of amount)
Sale of real property classified as VAT exempt
low cost housing
"Socialized housing" refers to housing programs
and projects covering houses and lots or home lots
only undertaken by the Government or the private
sector for the underprivileged and homeless
citizens which shall include sites and services
development, long-term financing, liberated terms
on interest payments, and such other benefits in
accordance with the provisions of RA No. 7279,
otherwise known as the "Urban Development and
Housing Act of 1992" and RA No. 7835 and RA No.
8763. "Socialized housing" shall also refer to
projects intended for the underprivileged and
homeless wherein the housing package selling price
is within the lowest interest rates under the Unified
Home Lending Program (UHLP) or any equivalent
housing program of the Government, the private
sector or non-government organizations.
4. Sale of residential lot valued of up to
2,000,000 pesos beginning January 1,
2021
Sale of real property classified as
socialized housing
If two or more adjacent residential lots, house and
lots or other residential dwellings are sold or
disposed in favor of one buyer from the same seller,
for the purpose of utilizing the lots, house and lots
or other residential dwellings as one residential
area, the sale shall be exempt from VAT only if the
aggregate value of the said properties do not exceed
P1,919,500.00
for
residential
lots,
and
P3,199,200.00 for residential house and lots or
other residential dwellings. Adjacent residential
lots, house and lots or other residential dwellings
although covered by separate titles and/or separate
tax declarations, when sold or disposed to one and
the same buyer, whether covered by one or separate
Deed/s of Conveyance, shall be presumed as a sale
of one residential lot, house and lot or residential
dwelling.
* Apply rules on adjacent lots
** Apply rules on adjacent house and lots and other
residential dwellings
(Tabag, 2015)
q. Lease of residential units with a monthly
rental per unit not exceeding fifteen
thousand pesos (15,000), regardless of the
amount of aggregate rentals received by the
lessor during the year
Every 3 years thereafter, the amount shall be
adjusted to its present value using the Consumer
Price Index, as published by the Philippine Statistic
Authority. Such adjustment shall be published
through revenue regulations to be issued not later
than March 31 of each year.
This however, does not include the sale of parking
lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a
condominium is a separate and distinct transaction
and is not covered by the rules on threshold amount
not being a residential lot, house & lot or a
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
VAT exempt
The foregoing notwithstanding, lease of residential
units where the monthly rental per unit exceeds
P12,800 but the aggregate of such rentals of the
lessor during the year do not exceed P1,919,500
248
VALUE ADDED TAX
shall likewise be exempt from VAT, however, the
same shall be subjected to 3% percentage tax.
Q: X operates a dormitory beside the school
compound. Student bed-spacers are charged
Php 2,500 each per month. X has an average of
40 students every month. Since “Lease” is
VATable, can X pass the 12% VAT to the
students? Why?
In cases where a lessor has several residential units
for lease, some are leased out for a monthly rental
per unit of not exceeding P12,800 while others are
leased out for more than P12,800 per unit, his tax
liability will be as follows:
A: The lease is VAT exempt because the monthly
rental per student is less than P12,800 regardless of
the total annual aggregate income of X received
during the year.
1. The gross receipts from rentals not exceeding
P12,800 per month per unit shall be exempt
from VAT regardless of the aggregate annual
gross receipts.
NOTE: If the rent of an apartment is more than
P12,800 per unit but the aggregate rent income of
the lessor does not exceed P1,919,500, the lessor is
not VATable, but he is subject to the 3% direct
percentage tax (Lim, 2014).
2. The gross receipts from rentals exceeding
P12,800 per month per unit shall be subject to
VAT if the aggregate annual gross receipts from
said units only (not including the gross receipts
from units leased for not more than P12,800)
exceeds P1,919,500. Otherwise, the gross
receipts will be subject to the 3% tax imposed
under Section 116 of the NIRC.
r. Sale, importation, printing or publication of
books and any newspaper, magazine, review,
or bulletin which appears at regular intervals
with fixed prices for subscription and sale
and which is not devoted principally to the
publication of paid advertisements
The term 'residential units' shall refer to
apartments and houses & lots used for residential
purposes, and buildings or parts or units thereof
used solely as dwelling places (e.g., dormitories,
rooms and bed spaces) except motels, motel rooms,
hotels, hotel rooms, lodging houses, inns and
pension houses.
A newspaper, magazine, review or bulletin must be:
(1) printed or published at regular intervals;
(2) available for subscription and sale at fixed
prices; and
(3) are not principally devoted to the publication of
paid advertisements.
The term 'unit' shall mean:
- an apartment unit in the case of apartments,
- house in the case of residential houses,
- per person in the case of dormitories, boarding
houses and bed spaces; and
- per room in case of rooms for rent (RR 16-11).
The terms "book", "newspaper", "magazine",
"review" and "bulletin" as used in the provision
refer to printed materials in hard copies. They do
not include those in digital or electronic format or
computerized versions, including but not limited to:
e-books, e-journals, electronic copies, online library
sources, CDs and software (RMC No. 57-2012).
s. Transport of passengers by international
carriers
Summary of rules on lease of residential units:
Monthly rental
P12,800 or less
regardless of annual
gross sales
Monthly rental above
P12,800 but annual
gross sales do not
exceed P1,919,500
Monthly rental above
P12,800 and annual
gross sales exceed
P1,919,500
VAT exempt and no
percentage tax
The transport of cargo by international carriers
doing business in the Philippines shall be exempt
from VAT as the same is subject to Common
Carrier's Tax (Percentage Tax on International
Carriers). International carriers exempt under
Sections 109(1)(S) and 109(1)(E) of the NIRC, as
amended, shall not be allowed to register for VAT
purposes (RR No. 15-15).
VAT-exempt under
Sec. 109 (W) but
shall pay 3%
percentage tax under
Section 116 of NIRC
Subject to VAT
Summary of rules for transport of passengers or
cargoes
NOTE: Lease of commercial units, regardless of the
amount of monthly rental is subject to VAT unless
the lessor is non-VAT registered and annual gross
receipts < P1,919,500 (Tabag, 2015).
12% VAT
Domestic
transport of
249
0% VAT
International
transport of
EXEMPT
Transport of
passengers
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
passengers or
cargoes by air
and sea
passengers or
cargoes by air
or sea
NOTE: If
domestic
transport of
passengers or
cargoes by
land, the
common
carrier is
liable to
percentage
tax on
common
carriers
by
international
air and
shipping
carriers
NOTE:
Transport
should be
done by
domestic
carriers with
international
flightssuch as
PAL, Cebu
Pacific, etc.,
otherwise,
exempt
NOTE: In
case of
transport of
cargoes, the
international
air or
shipping
carrier shall
be subject to
3%
percentage
tax on
international
carriers
fuel, goods and supplies shall be subject to 12%
VAT.
Fuel, When exempt from VAT and when zerorated
Fuel is exempt if imported by persons engaged in
international shipping or air transport operations.
On the other hand, fuel is zero-rated when sold to
persons engaged in international shipping or
international air transport operations without
docking or stopping at any other port in the
Philippines.
v. Services of
1. banks,
2. non-bank
financial
intermediaries
performing quasi-banking functions, and
3. other non-bank financial intermediaries
subject to percentage tax under Secs. 121
and 122 of the NIRC, such as money
changers and pawnshops
In Tambunting Pawnshop, Inc. vs. CIR, G.R. No.
179085 (2010), since the taxpayer (pawnshop) is a
non-bank intermediary, it is subject to 10% (now
12%) VAT for the tax years 1996-2002; however,
with the levy, assessment and collection of VAT
from non-bank intermediaries being specifically
deferred by law, then taxpayer is not liable for VAT
during these tax years. But with the full
implementation of the VAT system on non-bank
financial intermediaries starting January 1, 2003,
taxpayer is liable for 10% VAT for the said tax year.
And beginning 2004 up to the present, by virtue of
R.A. no. 9238, taxpayer is no longer liable for VAT
but it is subject to percentage tax on gross receipts
from 0% to 5% as the case may be.
t. Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic
or
international
transport
operations
Provided, that the exemption from VAT on the
importation and local purchase of passenger and/or
cargo vessels shall be limited to those of one
hundred fifty (150) tons and above, including
engine and spare parts of said vessels; Provided,
further, that the vessels to be imported shall comply
with the age limit requirement, at the time of
acquisition counted from the date of the vessel's
original commissioning, as follows: (i) for passenger
and/or cargo vessels, the age limit is fifteen (15)
years old, (ii) for tankers, the age limit is ten (10)
years old, and (iii) For high-speed passenger crafts,
the age limit is five (5) years old; Provided, finally,
that exemption shall be subject to the provisions of
Section 4 of Republic Act No. 9295, otherwise
known as "The Domestic Shipping Development Act
of 2004";
Pawnshops are not liable to pay VAT
Pawnshops are not classified as lending investors
and therefore, they are not subject to VAT. They are
subject to percentage tax as imposed on Section 122
of NIRC (Tambunting Pawnshop, Inc., v CIR, G.R. No.
179085, January 21, 2010; R.A. 9238; RMC 74-2005).
w. Sale or lease of goods and services to senior
citizens and persons with disability
x. Transfer of property pursuant to Sec. 40(c) of
R.A. 10963
y. Association dues, membership fees, and
other assessments and charges collected by
homeowners associations and condominium
corporations;
z. Sale of gold to the Bangko Sentral ng Pilipinas
aa. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019
u. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations
Provided, that the said fuel, goods and supplies shall
be used exclusively or shall pertain to the transport
of goods and/or passenger from a port in the
Philippines directly to a foreign port without
stopping at any other port in the Philippines;
Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than
that mentioned in this paragraph, such portion of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
250
VALUE ADDED TAX
bb.Sale or lease of
services other
mentioned above
sales or receips
pesos.
goods or properties or
than the transactions
wherein the gross annual
do not exeed 3,000,000
(Sec. 108[B][3], NIRC).
VAT at 12%. Tractors and other agricultural
implements fall under the definition of goods
which include all tangible objects which are
capable of pecuniary estimation (Sec. 106[A][1],
NIRC).
4. This is subject to VAT at 12%. This transaction
also falls under the definition of goods which
include all tangible objects which are capable of
pecuniary estimation (Sec. 106[A][1], NIRC).
5. VAT Exempt. The monthly fee paid by each
student falls under the lease of residential units
with a monthly rental per unit not exceeding
P12,800 (R.R. 16-2011), which is exempt from
VAT regardless of the amount of aggregate
rentals received by the lessor during the year
(Sec. 109[Q], NIRC, as amended by R.R. 16-2011).
The term unit shall mean per person in the case
of dormitories, boarding houses and bed spaces
(Sec. 4.103-1, R.R. No. 7-95).
3.
Every three (3) years thereafter, the amount shall be
adjusted to its present value using the Consumer
Price Index, as published by the NSO. Such
adjustment shall be published through revenue
regulations to be issued not later than March 31 of
each year.
For purposes of the threshold of P1,919,500, the
husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional,
aside from the practice of his profession, also
derives revenue from other lines of business which
are otherwise subject to VAT, the same shall be
combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt
sales shall not be included in determining the
threshold.
OUTPUT AND INPUT TAX
Output Tax
Q: State whether the following transactions are:
a) VAT Exempt, b) subject to VAT at 12%; or c)
subject to VAT at 0%:
It means the value-added tax due on the sale or
lease of taxable goods or properties or services by
(1) any person registered or (2) required to register
under Sec. 236 of the NIRC (Sec. 110[A][3], NIRC).
1. Sale of fresh vegetables by AlingIning at the
Pamilihang Bayan ng Trece Martirez.
2. Services rendered by Jake's Construction
Company, a contractor to the World Health
Organization in the renovation of its offices
in Manila.
3. Sale of tractors and other agricultural
implements by Bungkal Incorporated to
local farmers.
4. Sale of RTW by Cely's Boutique, a Filipino
dress designer, in her dress shop and other
outlets.
5. Fees for lodging paid by students to BahayBahayan Dormitory, a private entity
operating a student dormitory (monthly fee
P1,500). (1998 Bar)
Output tax is what the taxpayer-seller passes on to
the purchases. Note that what is output tax for the
seller is input tax to the purchaser(Ingles, 2015).
Output tax may come from:
i. Actual sale
ii. Transaction deemed sales
Input Tax
It means the value-added tax due on or paid by a
VAT-registered person on importation of goods or
local purchase of goods, properties or services,
including lease or use of properties, in the course of
his trade or business. It shall also include the
transitional input tax and the presumptive input tax
determined in accordance with Section 111 of the
NIRC (Sec. 110[A][3], NIRC).
A:
1. VAT exempt. Sale of agricultural products, such
as fresh vegetables, in their original state, of a
kind generally used as, or producing foods for
human consumption is exempt from VAT (Sec.
109[A], NIRC).
2. VAT at 0%. Since Jake's Construction Company
has rendered services to the World Health
Organization, which is an entity exempted from
taxation under international agreements to
which the Philippines is a signatory, the supply
of services is subject to zero percent (0%) rate
It includes input taxes which can be
1. directly attributed to transactions subject to the
VAT, plus
2. a ratable portion of any input tax which cannot
be directly attributed to either the taxable or
exempt activity (R.R. 16-2005).
251
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Input tax is what is passed on to the
purchaser/taxpayer by the seller. If the purchaser
is VAT-registered person, then he can use the input
tax as credit to the output taxes that he is liable to
remit to the BIR (Ingles, 2015).
Final withholding tax credit(Sec.
114[C], NIRC) – is based on the
amount paid to the supplier of
goods or services by the
government and is required to be
withheld by the government to the
BIR (refer to withholding of final
tax on sales to government).
Excess input tax credit(refer to
discussion on application on tax
refund or tax credit certificate)
Input VAT or input tax represents the actual
payments, costs and expenses incurred by a VATregistered taxpayer in connection with his purchase
of goods and services. On the other hand, when that
person or entity sells his/its products or services,
the VAT-registered taxpayer generally becomes
liable for 10% (now 12%) of the selling price as
Output VAT or output tax (CIR v. Benguet
Corporation, G.R. No. 145559, July 14,2006).
Any input tax evidenced by a VAT invoice or official
receipt issued in accordance with Section 113 of the
NIRC on the following transactions shall be
creditable against the output tax:
VAT exempt transactions cannot be credited for
input tax. However, a transaction which cannot be
directly attributed in either the taxable or exempt
activity, a ratable portion of the input tax may be
credited.
1. Purchase or importation of goods:
a.
b.
Input tax not a property right under the Due
Process Clause
c.
d.
A VAT-registered person’s entitlement to the
creditable input tax is a mere statutory privilege
which may be limited or removed by law.
e.
Categories of input tax
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
NA
Sources of Creditable Input Tax
Effect of VAT exempt purchases to input tax
TYPE OF INPUT TAX
Input tax on importation of
goods and local purchases of
goods, properties and
services(Sec. 110, NIRC)
Presumptive input tax
credit(Sec. 111[B], NIRC) – may be
calimed by persons engaged in the
business of processing ssardines,
mackerel and milk; manufacturing
refined sugard and cooking oil; and
noodle based instant meals; all of
which are substantially produced
from primary agricultural and
marine food producs, the supply of
which is exempt from VAT
Transitional input tax credit(Sec.
111 [A], NIRC) – may be claimed by
persons who become liable to VAT
for the first time and such
represent input tax on inventories
goodsw, materials and supplies
existing on the date of
commencement of a person’s
status as a taxable person
5%
RATE
12%
standard
or 0%
For sale; or
For conversion into or intended to form
part of a finished product for sale including
packaging materials; or
For use as supplies in the course of
business; or
For use as materials supplied in the sale of
service; or
For use in trade or business for which
deduction for depreciation or amortization
is allowed under NIRC, except automobiles,
aircraft and yachts. (Capital Goods)
2. Purchases of real properties for which a VAT
has actually been paid;
3. Purchases of services in which a VAT has
actually been paid (Sec. 110, NIRC);
4. Transactions “deemed sales”;
5. Presumptive input tax;
6. Transitional input tax credits allowed under
4%
the transitory and other provisions (Sec. 4.1101 R.R. 16-2005).
Capital goods (depreciable goods)
Capital goods are those goods or properties
a. with an estimated useful life of more than one
year;
b. which are treated as depreciable under the
income tax law;
c. and used directly or indirectly in the production
or sale of taxable goods or services (Ingles,
2015).
2%
transition
al or 12%
actual
input tax
rate
Input tax on capital goods
Aggregate cost exceeds P1M - Where aVAT
registered person purchases or imports capital
252
VALUE ADDED TAX
goods, which are depreciable assets for income tax
purposes, the aggregate acquisition cost of which
(exclusive of VAT) in a calendar month exceeds
P1,000,000, regardless of the acquisition cost of
each capital good, shall be claimed as credit against
output tax in the following manner:
NOTE: When an asset with unamortized input tax is
retired from business, the unamortized input tax
will be closed against the output taxes during the
month or quarter when the sale/disposal is made.
a. If the estimated useful life of a capital good
is five (5) years or more – Input tax shall be
spread evenly over a period of 60 months and
the claim for input tax credit will commence in
the calendar month when the capital good is
acquired.
b. If the estimated useful life of a capital good
is less than five (5) years – Input tax shall be
spread evenly on a monthly basis by dividing
the input tax by the actual number of months
comprising the estimated useful life of the
capital good. Such claim for input tax credit
shall commence in the calendar month that the
capital goods were acquired.
It is an input tax credit allowed to persons or firms
engaged in the: [SMM-RCN]
Presumptive input tax
1.
2.
processing of:
a. sardines
b. mackerel
c. milk
manufacturing of:
a. refined sugar
b. cooking oil
c. packed noodle based instant meals
The allowed input tax shall be equivalent to four
percent (4%) of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production (Sec. 111 [B],
NIRC).
Aggregate cost does not exceed P1M - Where the
aggregate acquisition cost (exclusive of VAT) of the
existing or finished depreciable capital goods
purchased or imported during any calendar month
does not exceed P 1,000,000, the total input taxes
will be allowable as credit against output tax in the
month of acquisition.
They are given this 4% presumptive input tax
because the goods used in the said enumeration are
VAT-exempt (Ingles, 2015).
NOTE: The term 'processing' shall mean
pasteurization, canning and activities which
through physical or chemical process alter the
exterior texture or form or inner substance of a
product in such manner as to prepare it for special
use to which it could not have been put in its original
form or condition.
Aggregate cost exceeds P1M but acquired in
installment payments - The aggregate acquisition
cost of a depreciable asset in any calendar month
refers to the total price agreed upon for one or more
assets acquired and not on the payments actually
made during the calendar month. Thus, an asset
acquired in installment for an acquisition cost of
more than P 1,000,000.00 will be subject to the
amortization of input tax despite the fact that the
monthly payments/installments may not exceed
P1,000,000.00 (Sec 4.110-3 R.R. No. 16-2005).
Transitional input tax
Transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their
beginning inventory of goods, materials, and
supplies. During that period of transition from nonVAT to VAT status, the transitional input tax credit
serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of
the income it derived from its sales as output VAT.
The transitional input tax credit mitigates this initial
diminution of the taxpayer’s income by affording
the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage
when the person is yet unable to credit input VAT
payments (Fort Bonifacio Development Corporation
v. CIR, 583 SCRA 168).
SUMMARY RULES ON RECOGNITION
OF INPUT VAT FOR CAPITAL GOODS
Aggregate acquisition for the month > P1M,
exclusive of VAT, and:
 Life > 5 years
Input tax shall be spread evenly over such
usefule lfe but not to exceed 60 months.
 Life < 5 years
Not a capital asset. Input tax is not allocated.
Aggregate acquisition for the month < P1M,
exclusive of VAT (regardless of useful life):
The related input VAT is not allocated.
Consequently, the total amount of input VAT
shall be treated as tax credit against output VAT
in the month of acquisition.
(Tabag, 2015)
253
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
These can be availed by taxpayers who become VAT
registered persons upon:
1.
2.
A: YES. Under Sec. 105 of the old NIRC (now Sec.
111[A]), the beginning inventory of “goods” forms
part of the valuation of the transitional input tax
credit. Goods, as commonly understood in the
business sense, refer to the product which the VATregistered person offers for sale to the public. With
respect to real estate dealers, it is the real properties
themselves which constitute their “goods”. Such real
properties are the operating assets of the real estate
dealer (Ibid.).
Exceeding the minimum turnover of
P1,919,500 in any 12 month period, or
Who voluntarily register even if they do not
reach the threshold, except for franchise
grantees of radio and TV broadcasting whose
threshold is P10,000,000)
The said taxpayers shall be entitled to a transitional
input tax on the inventory on hand as of the
effectivity of their VAT registration on the following:
1.
2.
3.
4.
5.
PERSONS WHO CAN AVAIL OF
INPUT TAX CREDIT
Goods purchased for resale in the present
condition;
Raw materials - Materials purchased for
further processing but which have not yet
undergone processing;
Manufactured goods
Goods in process for sale; or
Goods and supplies for use in the course of
the taxpayer’s trade or business as a VATregistered person (Sec. 4. 110-1(a.), R.R 162005).
The input tax credit on importation of goods or local
purchases of goods, properties or services by a VATregistered person shall be creditable:
1.
2.
3.
The allowed input tax shall be whichever is higher
between:
1.
2.
As long as the invoices from the suppliers are issued
in the name of the taxpayer and expenses were
actually incurred by the taxpayer, then the input tax
pertaining to such expenses must be credited to the
taxpayer. Where the money came from to pay these
expenses is another matter all together but it does
not change the fact that input tax has been incurred
(CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010).
2% of the value of the taxpayer’s beginning
inventory of goods, materials and supplies; or
The actual value-added tax paid on such goods
(Sec.111[A], NIRC).
NOTE: Transitional input tax credit may only be
availed once. It may be carried over to the next
taxing period, until fully utilized.
Prior payment of taxes is not necessary before a
taxpayer could avail of transitional input tax credit.
All that is required from the taxpayer is to file a
beginning inventory with BIR.
DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS
Determination of output tax
A transitional input tax credit is not a tax refund per
se but a tax credit. Section 112 of the NIRC does not
prohibit cash refund or tax credit of transitional
input tax. The grant of a refund or issuance of tax
credit certificate in this case would not contravene
the above provision. The refund or tax credit would
not be unconstitutional because it is precisely
pursuant to section 105 of the old NIRC which
allows refund/tax credit
(Fort Bonifacio
Development Corporation vs. CIR, G.R. No. 173425,
January 22, 2013).
In a sale of goods or properties, the output tax is
computed by multiplying the gross selling price by
the regular rate of VAT. For sellers of services, the
output tax is computed by multiplying the gross
receipts by the regular rate of VAT.
In all cases where the basis for computing the
output tax is either the gross selling price or the
gross receipts, but the amount of VAT is erroneously
billed in the invoice, the total invoice amount shall
be presumed to be comprised of the gross selling
price/gross receipts plus the correct amount of VAT.
Hence, the output tax shall be computed by
multiplying the total invoice amount by a fraction
using the rate of VAT as numerator and one hundred
Q: Is Transitional Input Tax Credit applicable to
real property?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
To the importer upon payment of the VAT
prior to the release of the goods from the
customs custody;
To the purchaser of the domestic goods or
properties upon consummation of the sale; or
To the purchaser of the services or the lessee
or the licenses upon payment of the
compensation, rental, royalty or fee (R.R. 162005).
254
VALUE ADDED TAX
percent (100%) plus rate of VAT as the
denominator. Accordingly, the input tax that can be
claimed by the buyer shall be the corrected amount
of VAT computed in accordance with the formula
herein prescribed.
There shall be allowed as a deduction from the
output tax the amount of input tax deductible to
arrive at VAT payable on the monthly VAT
declaration and the quarterly VAT returns (RR 162005).
Net VAT payable = Output tax >
Input tax
Excess tax credits = Output tax <
Input tax
NOTE: VAT-exempt transactions do not result to
any output or input taxes.
Allocation of input tax on mixed transactions
Determination of input tax creditable
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to
VAT as follows:
The amount of input taxes creditable during a
month or quarter shall be determined by adding all
creditable input taxes arising from the transactions
enumerated under “Sources of input tax” in page
during the month or quarter plus any amount of
input tax carried-over from the preceding month or
quarter, reduced by the amount of claim for VAT
refund or tax credit certificate (whether filed with
the BIR, the Department of Finance, the Board of
Investments or the BOC) and other adjustments,
such as purchases returns or allowances, input tax
attributable to exempt sales and input tax
attributable to sales subject to final VAT
withholding.
1.
2.
The succeeding table illustrates the computation of
output tax, creditable input tax and the resulting net
VAT payable or excess of tax credits:
BASIS
Output Vatable
tax
gross
sales or
receipts
(amount
exclusive
VAT)
c
VAT rate
(12% or
0%)
Input
Vatable
tax
purchases
(amount
exclusive
of VAT) x
applicable
VAT rate
EXAMPLE
Sale
of
hanky for
total price of
P112 VATEx.
Amt:
P100
(P112/1.12)
Output tax:
P100*12%
Purchase of
materials
for
total
price of P56
AMOUNT
P12.00
Input tax attributable to VAT-exempt sales shall not
be allowed as credit against the output tax but
should be treated as part of cost of goods sold.
For persons engaged in both zero-rated sales and
non-zero-rated sales, the aggregate input taxes shall
be allocated ratably between the zero-rated and
non-zero-rated sales (R.R. No. 16-2005).
Determination of VAT payable or excess tax
credits
6.00
The resulting computation of output tax and
crediting of input tax shall result to either the net
VAT payable or excess tax credits.
VAT-ExAmt:
P50
(P56/1.12)
Input tax:
P50*12%
Net VAT Payable or Excess tax
credits
(Output tax less Input Tax)
All the input taxes that can be directly
attributed to transactions subject to VAT may
be recognized for input tax credit: Provided,
that input taxes which are directly attributable
to VAT taxable sales of goods and services from
the Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall not be credited against
output taxes arising from sales to nongovernment entities, and
If any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to
the VAT taxable and VAT-exempt transactions;
only the ratable portion pertaining to
transactions subject to VAT may be recognized
for input tax credit.
Net VAT Payable (NVP) – if at the end of any
taxable quarter the output tax exceeds the input tax,
the excess shall be paid by the VAT-registered
person.
Excess Tax Credits (ETC) – If the input tax
inclusive of input tax carried over from the previous
quarter exceeds the output tax, the excess input tax
6.00
255
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
shall be carried over to the succeeding quarter or
quarters.
-
-
TRANSACTIONS
Provided, that any input tax attributable to
zero-rated sales by a VAT-registered person
may at his option be refunded or applied for a
tax credit certificate which may be used in the
payment of internal revenue taxes
Thus, input tax, attributable to zero-rated sales
may be:
1. Refunded, or
2. Credited against other internal revenue taxes
of the VAT taxpayer (e.g. income tax)
b. Installment basis
Input
tax
on
domestic
purchases
of
service
Transitional input
tax
Illustration:
PERIOD
Jan.
Feb.
Mar.
Q1
OUTPUT
TAX
P 12 M
6M
6M
P24 M
INPUT
TAX
P6M
18 M
18 M
P 42 M
Input
tax
on
“deemed
sale
transaction”
Input tax from
payments made to
non-residents
(such
as
for
services, rentals, or
royalties)
NVP OR ETC
NVP P6M
ETC (P12M)
ETC (P12M)
ETC (P18M)
For the months of January and February, only the
monthly taxes are computed. However, for the
month of March, the accumulated taxes for the first
quarter will be aggregated to determine the NVP or
ETC.
Advance VAT on
sugar
In the example, the excess tax credit of P18 can be
refunded or credited against the other internal
revenue taxes of the taxpayer after the application
and approval from the BIR Commissioner.
Input taxes on
domestic
purchases of goods
or properties made
in the course of
trade or business
Input
tax
on
purchases of real
property
a. Cash/deferred
basis
REQUIRED SUPPORT
Import entry or other
equivalent
document
showing actual payment
of VAT on imported goods
Invoice
showing
information
required
under Section 113 and
237 of the NIRC
Monthly
Remittance
Return of Value Added
Tax Withheld (BIR Form
1600) filed by the
resident payor in behalf of
the
non-resident
evidencing remittance of
VAT due which was
withheld by the payor.
Payment order showing
payment of the advance
VAT
REFUND OR TAX CREDIT OF EXCESS INPUT TAX
Who may claim for refund/apply for issuance of
Tax Credit Certificate (TCC):
The following can avail of refund or tax credit:
1.
2.
Public instrument (i.e.,
deed of absolute sale,
deed of conditional sale,
contract/agreement
to
sell, etc.) together with
the VAT invoice for the
entire selling price and
non-VAT Official Receipt
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Public instrument and
VAT Official Receipt for
every payment
Official receipt showing
the information required
in Sec. 113 and 237 of the
NIRC
Inventory of goods as
shown in a detailed list to
be submitted to the BIR
Required invoices
NOTE: Cash register machine tape issued to a
registered buyer constitute valid proof of official
receipt. All purchases covered by invoices/receipts
other than VAT Invoice/VAT Official Receipt shall
not give rise to any input tax. (Sec. 4.113-1(A), R.R.
16-2005).
SUBSTANTIATION OF INPUT TAX CREDITS
TRANSACTIONS
Importation
of
goods
REQUIRED SUPPORT
for the initial and
succeeding payments
Zero-rated and effectively zero-rated sales Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated (Sec. 112
[A]).
Cessation of business or VAT status - A
person whose registration has been cancelled
due to retirement from or cessation of
business, or due to changes in or cessation of
status under Section 106(C) of NIRC (Sec.
112[B]).
Requirements to claim for VAT refund
1.
256
The taxpayer is VAT-registered;
VALUE ADDED TAX
2.
3.
4.
5.
6.
7.
8.
9.
The taxpayer is engaged in zero-rated or
effectively zero-rated sales;
The input taxes are due or paid;
The input taxes are not transitional input taxes
as it cannot be claimed as a refund or credit;
The input taxes have not been applied against
output taxes during and in the succeeding
quarters;
The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
For
zero-rated
sales
under
Section
106(A)(2)(1) and (2); 106(B); and 108(B)(1)
and (2), the acceptable foreign currency
exchange proceeds have been duly accounted
for in accordance with the rules and regulations
of the BSP;
Where there are both zero-rated or effectively
zero- rated sales and taxable or exempt sales,
and the input taxes cannot be directly and
entirely attributable to any of these sales, the
input taxes shall be proportionately allocated
on the basis of sales volume; and
The claim is filed within two years after the
close of the taxable quarter when such sales
were made (Luzon Hydro Corporation v. CIR, G.R.
No. 188260, November 13, 2013, penned by
Justice Bersamin).
requirements provides sufficient ground to deny a
claim for tax refund or tax credit (J. R. A. Philippines,
Inc. v. CIR, G.R. No. 171307, August 28, 2013).
Substantiation requirements to be entitled to refund
or tax credit under Sec. 112, NIRC. The claimant’s
duties are two-fold: (a) prove payment of input VAT
to supplier; and (b) prove zero-rated sales to
purchasers. The documents required are VAT
receipt for sale of services or lease of property and
VAT invoice for sale of goods. The words ‘zerorated’ must also be stated in the VAT receipt or
invoice. (Western Mindanao Power Corporation v.
CIR, G.R No. 181136, June 13, 2012).
The VAT invoice and VAT receipt should not be
confused as referring to one and the same thing; the
law did not intend the two to be used alternatively.
The taxpayer tried to substantiate its input VAT on
purchases of goods with official receipts and on
purchases of services with invoices. Claim denied.
(KEPCO v. CIR, G.R No. 181858 November 24, 2010).
In one case, the claim for refund/tax credit was
denied because the proof for the zero-rated sale
consisted of secondary evidence like financial
statements. (Luzon Hydro Corp. v. CIR G.R. No.
188260, November 13, 2013).
The taxpayer must prove the following for a tax
refund to prosper:
1.
2.
In another case, the proofs for zero-rated sales of
services were sales invoices. The claim was denied.
(Takenaka Corp.-Philippine Branch v. CIR, G.R No.
193321, October 19, 2016).
That it is a VAT-registered entity;
It must substantiate the input VAT paid by
purchase invoices or official receipts
(Commissioner v. Manila Mining Corporation,
G.R. No. 153204, August 31, 2005).
Q: Are sales invoices sufficient as evidence to
prove zero-rated sale of services by a taxpayer
thereby entitling him to claim the refund of its
excess input VAT?
Failure to comply with the invoicing
requirements is a ground to deny a claim for tax
refund or tax credit
A: NO. The claim for refund must be denied on the
ground that the taxpayer had not established its
zero-rated sales of services through the
presentation of official receipts.
In a claim for tax refund or tax credit, the applicant
must prove not only entitlement to the claim but
also compliance with all the documentary and
evidentiary
requirement
(Eastern
Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
March 25, 2015).
As evidence of an administrative claim for tax
refund or tax credit, there is a certain distinction
between a receipt and an invoice.
Section 110(A)(1) of the NIRC provides that
creditable input taxes must be evidenced by a VAT
invoice or official receipt, which must, in turn,
comply with Sections 237 and 238 of the same law,
as well as Section 4.108.1 of RR 7-95. The foregoing
provisions require, inter alia, that an invoice must
reflect, as required by law: (a) the BIR Permit to
Print; (b) the TIN-V of the purchaser; and (c) the
word "zero-rated" imprinted thereon. In this
relation, failure to comply with the said invoicing
Section 113 of the NIRC of 1997 provides that a VAT
invoice is necessary for every sale, barter or
exchange of goods or properties, while a VAT official
receipt properly pertains to every lease of goods or
properties, as well as to every sale, barter or
exchange of services.
A "sales or commercial invoice" is a written account
of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name
257
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement
to sell or transfer goods and services.
adherence to the Cross Border Doctrine and
Destination Principle, the VAT implications are that
"no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority"
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods,
debtor or creditor, or person rendering services and
client or customer.
As such, the purchases of goods and services by the
taxpayer that were destined for consumption within
the ECOZONE should be free of VAT; hence, no input
VAT should then be paid on such purchases,
rendering the taxpayer not entitled to claim a tax
refund or credit.
The taxpayer submitted sales invoices, not official
receipts, to support its claim for refund. In light of
the aforestated distinction between a receipt and an
invoice, the submissions were inadequate to comply
with the substantiation requirements for
administrative claims for tax refund or tax credit
(Takenaka Corporation – Philippine Branch vs. CIR,
G.R. No. 193321, October 19, 2016, penned by Justice
Bersamin).
Verily, if the taxpayer had paid the input VAT, the
proper recourse is not against the Government but
against the seller who had shifted to it the output
VAT (Coral Bay Nickel Corp. vs. CIR, G.R. No. 190506,
June 13, 2016).
Q: May a taxpayer who has pending claims for
VAT input credit or refund, set off said claims
against his other tax liabilities? Explain your
answer. (2001 Bar)
Q: Is a taxpayer located within an ECOZONE,
entitled to the refund of its unutilized input
taxes incurred before it became a PEZAregistered entity?
A: NO. Set-off is available only if both obligations are
liquidated and demandable. Liquidated debts are
those where the exact amounts have already been
determined. In the instant case, a claim of the
taxpayer for VAT refund is still pending and the
amount has still to be determined.
A: NO. With the issuance of RMC 74-99, the
distinction under the old rule was disregarded and
the new circular took into consideration the two
important principles of the Philippine VAT system:
the Cross Border Doctrine and the Destination
Principle.
A fortiori, the liquidated obligation of the taxpayer
to the government cannot, therefore, be set-off
against the unliquidated claim which the taxpayer
conceived to exist in his favor (Philex Mining Corp. v.
CIR, 294 SCRA 687).
The old VAT rule for PEZA-registered enterprises
was based on their choice of fiscal incentives: (1) If
the PEZA-registered enterprise chose the five
percent (5%) preferential tax on its gross income, in
lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the
PEZA-registered enterprise availed of the income
tax holiday under Exec. Order No. 226, as amended,
it shall be subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods,
properties, and services made by a VAT-registered
supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT, at zero percent
(0%) rate, regardless of the latter's type or class of
PEZA registration.
Q: Petitioner X Cola, Inc. (X Cola) failed to
declare certain input taxes in its VAT return for
the 3rd and 4th quarters of 2007. X Cola alleged
overpayment of VAT for the said taxable periods
since the undeclared input taxes were not
credited against output tax.
Since X Cola could not amend its VAT returns
due to the issuance of a BIR Letter of Authority
for 2007, it filed with the BIR claims for refund
of alleged overpaid VAT for the 3rd and 4th
quarters of 2007. The BIR failed to act on the
claims so X Cola filed a Petition for Review with
the CTA. Is X Cola entitled to its claims for
refund?
Furthermore, Section 8 of R.A. No. 7916 mandates
that PEZA shall manage and operate the ECOZONE
as a separate customs territory. The provision
thereby establishes the fiction that an ECOZONE is a
foreign territory separate and distinct from the
customs territory. Accordingly, the sales made by
suppliers from a customs territory to a purchaser
located within an ECOZONE will be considered as
exportations. Following the Philippine VAT system's
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A: NO. X Cola is not entitled to the refunds as the
amounts claimed represent undeclared input taxes,
not erroneously paid taxes, as contemplated under
Section 229 of the NIRC. Section 229 of the NIRC
allows recovery of any national internal revenue tax
258
VALUE ADDED TAX
(including VAT) which was erroneously or illegally
assessed or collected.
credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes (Sec. 112(B), NIRC).
X Cola’s input taxes for the 3rd and 4th quarters of
2007 should have been declared in its quarterly VAT
returns so that these could be creditable against the
output tax for the same taxable periods. Since it
failed to report the input taxes in its VAT returns, it
could not offset the undeclared input taxes against
the output VAT. Under RR No. 16-2005, input taxes
must be substantiated and reported in the VAT
returns to be able to claim credit against the output
tax. While X Cola was able to substantiate a portion
of its claims, the input taxes were not reported in its
VAT Returns (Coca-cola Bottlers Phils., Inc. v. CIR,
CTA Case Nos. 7986 & 8028, June 14, 2013).
SUMMARY OF RULES ON PRESCRIPTIVE
PERIODS FOR CLAIMING REFUND
OR CREDIT OF INPUT TAX
Administrative Claim: Two-Year Prescriptive
Period
Only the administrative claim that must be
filed within the period
GR: The reckoning date is the close of the
taxable quarter when the relevant sales were
made
XPN: From June 8, 2007 to September 12, 2008
the two-year prescriptive period for filing a
claim for tax refund or credit should be counted
from the date of filing of the VAT return and
payment of the tax (Atlas Consolidated Mining
and Dev. Corp v CIR, G.R. No. 141104, June 8,
2007).
Judicial Claim: 120+30 Day Period
Two ways of filing an appeal to the CTA:
a. Within 30 days after the CIR denies
the claim within the 120-day period,
or
b. Within 30 days from the expiration of
the 120-day period if the CIR does not
act within the 120-day period.
Period to file claim for refund/apply issuance of
tax credit certificate
The claim, which must be in writing, for both cases,
must be filed within 2 years after the close of the
taxable quarter when the sales were made.
Reckoning point for the Two (2)-year period
1.
Zero-rated or effectively zero rated sales –
Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may,
within two (2) years after the close of the
taxable quarter when the sales were made
(Sec. 112(A), NIRC).
GR: The 30-day period to appeal always applies
as it is both mandatory and jurisdictional
The two-year period should be reckoned from
the close of the taxable quarter when the
relevant sales were made pertaining to the
input VAT regardless of whether said tax was
paid or not(CIR vs. Mirant Pagbilao Corporation,
GR 172129, September 12, 2008).
XPN: As an exception, premature filing is
allowed only if filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA489-03 was still in force
Thus, when a zero-rated VAT taxpayer pays its
input VAT for the purchase from its supplier a
year after the pertinent transaction of its sale to
its purchaser, the said taxpayer only has a year
to file claim for refund or tax credit of the
unutilized creditable input VAT (Ingles, 2015).
2.
NOTE: Late filing is absolutely prohibited.
In case the taxpayer is engaged in zero-rated
and also in taxable or exempt sale, and the
amount of creditable input tax due or paid
cannot be directly and entirely attributed to any
one of the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
(Commissioner of Internal Revenue v. Mindanao II
Geothermal Partnership, G.R. No. 191498, January
15, 2014)
NOTE: The rule on a claim for refund or credit of
an erroneously or illegally collected tax under
Section 229 of the NIRC is different. Under such,
both the administrative and judicial claim must
be filed within the two (2)-year prescriptive
period from the date of payment. The claim for
refund or credit and the appeal to CTA may
occur simultaneously.
Cessation of business or VAT status - The
person may, within two (2) years from the date
of cancellation, apply for the issuance of a tax
Period within which BIR Commissioner grants
Tax Credit Certificates/refund for creditable
input taxes
259
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The Commissioner may grant TCC/ refund for
creditable input taxes within 120 days from the day
of submission of the complete documents in support
of the application filed (Sec. 112, NIRC; RMC 542014).
only is he entitled under substantive law to his claim
for refund or tax credit, but also that he satisfied all
the documentary and evidentiary requirements for
an administrative claim. It is, thus, crucial for a
taxpayer in a judicial claim for refund or tax credit
to show that its administrative claim should have
been granted in the first place.
The application for VAT refund/tax credit must be
accompanied by complete supporting documents.
In addition, the taxpayer shall attach a statement
under oath attesting to the completeness of the
submitted documents. Upon submission of the
administrative claim and its supporting documents,
the claim shall be processed and no other
documents shall be accepted/required from the
taxpayer in the course of its evaluation. The CIR
shall render a decision based only on the documents
submitted by the taxpayer. The application for tax
refund/tax credit shall be denied where the
taxpayer/claimant failed to submit the complete
supporting documents (RMC 54-2014).
Consequently, a taxpayer cannot cure its failure to
submit a document requested by the BIR at the
administrative level by filing the said document
before the CTA (Pilipinas Total Gas, Inc. v. CIR, G.R.
No. 207112, December 8, 2015).
Taxpayer must await the lapse of the 120-day
period before taxpayer can appeal to CTA
The second paragraph of Section 112(D) of the NIRC
envisions two scenarios: (1) when a decision is
issued by the CIR before the lapse of the 120-day
period; and (2) when no decision is made after the
120-day period. In both instances, the taxpayer has
30 days within which to file an appeal with the CTA.
As we see it then, the 120-day period is crucial in
filing an appeal with the CTA (CIR v. Aichi Forging
Company of Asia, Inc., GR 184823, October 6, 2010).
Note that the 120-day period begins to run from the
submission of complete documents supporting the
administrative claim. If there is no evidence
showing that the taxpayer was required to submit –
or actually submitted – additional documents after
the filing of the administrative claim, it is presumed
that the complete documents accompanied the
claim when it was filed (Silicon Philippines, Inc., v.
CIR, G.R. No. 182737, March 2, 2016).
Failure to comply with the 120-day waiting period
violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies
and renders the petition premature and thus
without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the
taxpayer's petition.
If the claim for VAT is not acted upon by the
Commissioner within 120-day period as required
by law, such inaction shall be deemed a denial of the
application for tax refund or credit.
One of the conditions for a judicial claim of refund
or credit under the VAT System is compliance with
the 120+30 day mandatory and jurisdictional
periods. Thus, strict compliance with the 120+30
day periods is necessary for such a claim to prosper,
whether before, during or after the effectivity of the
Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on December
10, 2003 to October 6, 2010 when the Aichi doctrine
was adopted, which again reinstated the 120+30
day periods as mandatory and jurisdictional (CIR v.
Mirant Pagbilao Corp., G.R. No. 180434, January 20,
2016).
Effect of failure to submit complete supporting
documents to judicial claim of refund in the CTA
A distinction must be made between administrative
cases appealed due to:
1.
2.
Inaction of the CIR or the Commissioner
Failure of the taxpayer to submit supporting
documents – If the CIR dismissed
an
administrative claim due to the taxpayer's
failure to submit complete documents despite
notice/request, then the judicial claim before
the CTA would be dismissible, not for lack of
jurisdiction, but for the taxpayer's failure to
substantiate the claim at the administrative
level.
Exception to the mandatory and jurisdictional
nature of the 120+30 day period (BIR Ruling No.
DA-489-03 dated December 10, 2003)
When a judicial claim for refund or tax credit in the
CTA is an appeal of an unsuccessful administrative
claim, the taxpayer has to convince the CTA that the
CIR had no reason to deny its claim. It, thus, becomes
imperative for the taxpayer to show the CTA that not
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
During the effectivity of BIR Ruling No. DA-48903
2. BIR Specific Ruling which misleads a particular
taxpayer to prematurely file a judicial clam with
the CTA;
260
VALUE ADDED TAX
As an exception to the mandatory and jurisdictional
120+30 day period, it was emphasized that from the
time of issuance of BIR Ruling No. DA-489-03 on
December 10, 2003 up to its reversal by the Supreme
Court in the Aichi case on October 6, 2010,
taxpayers/claimant need not wait for the lapse of
120-day period before it could seek judicial relief
with the CTA by way of Petition for Review (RMC 542014).
tax refund relative to the input VAT of GC for the
first quarter of 2012, reasoning that the claim
was filed beyond the two-year period prescribed
under Section 112(A) of the National Internal
Revenue Code (NIRC).
a. Is the CTA correct?
b. Assuming that GC filed its claim before the
CTA on February 22, 2014, would your
answer be the same? (2014 Bar)
Before and after the aforementioned period (i.e.,
December 10, 2003 to October 6, 2010), the
observance of the 120-day period is mandatory
and jurisdictional to the filing of judicial claim for
refund of excess input VAT (CE Luzon Geothermal
Power Co., Inc. v. CIR, G.R. No. 200841-42, August 26,
2015).
A:
a. NO. The CTA is not correct. The two-year period
to file a claim for refund refers to the
administrative claim and does not refer to the
period within which to elevate the claim to the
CTA. The filing of the administrative claim for
refund was timely done because it is made
within two years from the end of the quarter
when the zero-rated transaction took place
(Section112 (A), NIRC). When GC decided to
elevate its claim to the CTA on April 22, 2014, it
was after the lapse of 120 days from the filing of
the claim for refund with the BIR, hence, the
appeal is seasonably filed. The rule on VAT
refunds is two years to file the claim with the
BIR, plus 120 for the Commissioner to act and
inaction after 120 days is a deemed adverse
decision on the claim, appealable to the CTA
within thirty (30) days from the lapse of the
120-day period (CIR v. Aichi Forging Company of
Asia, Inc., G.R. No. 184823, October 6, 2010).
b. YES. The two-year prescriptive period to file a
claim for refund refers to the administrative
claim with the BIR and not the period to elevate
the claim to the CTA. Hence, the CTA cannot
deny the refund for reasons that the first
quarter claim was filed beyond the two-year
period prescribed by law. However, when the
claim is made before the CTA on February 24,
there is definitely no appealable decision as yet
because the 120-day period for the
Commissioner to act on the claim for refund has
not yet lapsed. Hence, the act of the taxpayer in
elevation the claim to the CTA is premature and
the CTA has no jurisdiction to rile thereon (CIR
v. Aichi Forging Company of Asia, Inc., G.R. No.
184823, October 6, 2010).
There is no need for a taxpayer to specifically invoke
BIR Ruling No. DA-489-03 to benefit from the same.
As long as the judicial claim was filed between
December 10, 2003 and October 6, 2010, then the
taxpayer would not be required to wait for the lapse
of 120-day period (CIR v. Air Liquide Phils. Inc., G.R.
No. 210646, July 29, 2015).
Remedy in case of CIR’s inaction within 120-day
period or CTA’s denial of claim for TCC/ tax
refund
1.
2.
CIR’s inaction - The taxpayer may also appeal
to the CTA within 30 days after the lapse of 120
days from the submission of the complete
documents, if no action has been taken by the
Commissioner.
CTA’s denial -The taxpayer may appeal the full
or partial denial of the claim to the Court of Tax
Appeal (CTA) within 30 days from the receipt of
said denial, otherwise the decision shall become
final.
Q: Gangwam Corporation (GC) filed its quarterly
tax returns for the calendar year 2012 as
follows:
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
Q: For calendar year 2011, FFF, Inc., a VATregistered corporation, reported unutilized
excess input VAT in the amount of Pl ,000,000.00
attributable to its zero-rated sales. Hoping to
impress his boss, Mr. G, the accountant of FFF,
Inc., filed with the BIR on January 31, 2013 a
claim for tax refund/credit. Not having received
any communication from the BIR, Mr. G filed a
Petition for Review with the CTA on March 15,
On December 22, 2013, GC filed with the Bureau
of Internal Revenue (BIR) an administrative
claim for refund of its unutilized input ValueAdded Tax (VAT) for the calendar year 2012.
After several months of inaction by the BIR on its
claim for refund, GC decided to elevate its claim
directly to the Court of Tax Appeals (CTA) on
April 22, 2014. In due time, the CTA denied the
261
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2013, praying for the tax refund/credit of the
Pl,000,000.00 unutilized excess input VAT of
FFF, Inc. for 2011.
Q: X Corporation enjoys a blanket tax exemption
under PD 1869 (the Charter creating PAGCOR).
X rents a building from Y where it operates its
casino activities. Y passes to X the VAT on lease
as required by law. X refused to pay invoking its
blanket tax exemption. Y paid the subject taxes
for fear of the legal consequences of nonpayment of the tax to the BIR. Thereafter, albeit
belatedly Y realized it should not have paid
because the transactions it had with X is subject
to “zero-rated” VAT. Immediately, Y filed an
administrative claim for tax refund with the CIR,
but the latter failed to resolve in favor of Y. Is the
refusal of the CIR on Y’s claim for refund valid?
Reason.
a.
Did the CTA acquire jurisdiction over the
Petition of FFF, Inc.?
b. Discuss the proper procedure and
applicable time periods for administrative
and judicial claims for refund/credit of
unutilized excess input VAT. (2015 Bar)
A:
a. NO. The CTA has not acquired jurisdiction over
the Petition of FFF, Inc. because the juridical
claim has been prematurely filed on March 15,
2013. The Supreme Court ruled that the 30-day
period after the expiration of the 120-day
period fixed by law for the Commissioner of
Internal Revenue to act on the claim for refund
is jurisdictional and failure to comply would bar
the appeal and deprive the CTA of its
jurisdiction to entertain the appeal.
A: NO. The blanket tax exemption of X under PD
1869 applies to both direct and indirect taxes that
extend to entities and individuals dealing with it in
its casino operations. Considering that Y paid the tax
under a mistake of fact and was not aware at the
time of payment that the transactions it has with X
is “zero-rated”, the invalid payment can be
recovered or refunded. The principle of solutio
indebiti applies to the Government as well, the basis
thereto is grounded upon the right of recovery of
money paid through misapprehensions of facts
belongs in equity and in good conscience to the
person who paid it and the government cannot
enrich itself at the expense of another (CIR v Acecite
(Phils.) Hotel Corporation, 516 SCRA 93).
In this case, Mr. G filed the administrative claim
on January 31, 2013. The petition for review
should have been should have been filed on
June 30, 2013. Filing the judicial claim on March
15, 2013 is premature, thus the CTA did not
acquire jurisdiction.
b.
The administrative claim must be filed with the
CIR within the two-year prescriptive period.
The proper reckoning period date for the twoyear prescriptive period is the close of the
taxable quarter when the relevant sales were
made. However, as an exception, are claims
applied only from June 8, 2007 to September 12,
2008, wherein the two-year prescriptive period
for filing a claim for tax refund or credit of
unutilized input VAT payments should be
counted from the date of filing of the VAT return
and payment of the tax.
Difference between Sec. 112 on refund for VAT
and Sec. 229 on refund of other taxes
SEC. 112 (VAT)
Period is 2 years after the
close of the taxable quarter
when the sales were made
The taxpayer can file a judicial claim in one of
two ways: (1) file the judicial claim within thirty
days after the Commissioner of Internal
Revenue denies the claim within the 120-day
period, or (2) file the judicial claim within 30
days from the expiration of the 120-day period
if the Commissioner does not act within the
120-day period.
The 30-day period of appeal
to the CTA need not
necessarily fall within the
two-year prescriptive period,
as long as the
administrative claim before
the CIR is filed within the
two-year prescriptive
period. This is because Sec.
112 (D) of the 1997 NIRC
mandates that a taxpayer can
file the judicial claim: (1) only
within thirty days after the
Commissioner partially or
fully denies the claim within
As a general rule, the 30-day period to appeal is
both mandatory and jurisdictional. As an
exception, premature filing is allowed only if
filed between December 10, 2003 and October
5, 2010, when the BIR Ruling No. DA-489-03
was still in force.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
262
SEC. 229
(OTHER
TAXES)
Period is 2
years from the
date of
payment of
the tax
Period to file an
administrative
claim before
the CIR AND
judicial claim
with the CTA
must fall within
the 2 year
prescriptive
period
VALUE ADDED TAX
1.
the 120-day period, or
(2) only within thirty days
from the expiration of the
120-day period if the
Commissioner does not act
within the 120-day period
(CIR v. San Roque Power
Corporation, G.R. Nos. 187485,
196113, 197156, February 12,
2013)
2.
A VAT invoice for every sale, barter or exchange
of goods or properties; and
A VAT official receipt for every lease of goods or
properties, and for every sale, barter or
exchange of services.
Only VAT-registered persons are required to print
their TIN followed by the word "VAT" in their
invoice or official receipts. Said documents shall be
considered as a "VAT Invoice" or VAT
Information required to be indicated on the
VAT invoice or VAT official receipts
Manner of Giving Refund
Refund shall be made upon warrants drawn by the
Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of Commission on
Audit (COA). Refund shall be subject to post audit by
COA (Sec 112(D) NIRC).
1.
2.
Summary of Rules
A statement that the seller is a VAT-registered
person, and the taxpayer's identification
number (TIN);
The total amount which the purchaser pays or
is obligated to pay to the seller with the
indication that such amount includes the VAT:
Provided that:
a.
Any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not
been applied against output tax, with the appropriate
BIR Office-Large Taxpayer or RDO having jursidiction
over the principal place of business of the taxpayer.
The amount of the tax shall be shown as a
separate item in the invoice or receipt;
NOTE: Under R.R. 18-2011 (November 21,
2011), in case of failure to indicate the VAT
as a separate item in the sales invoice or
official receipt, a fine of not less than P1,000
but not more than P50,000 shall, upon
conviction, be collected for each act or
omission in addition to imprisonment of
not less than 2 years but not more than 4
years.
b.
Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of
submission of compete documents in support of the
application
c.
d.
In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals
INVOICING REQUIREMENTS
Invoicing requirements, in general
3.
A VAT-registered person shall issue:
263
If the sale is exempt from value-added tax,
the term "VAT-exempt sale" shall be written
or printed prominently on the invoice or
receipt;
If the sale is subject to 0% VAT, the term
"zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VATexempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the sale
shall be shown on the invoice or receipt:
"Provided, That the seller may issue
separate invoices or receipts for the
taxable,
exempt,
and
zero-rated
components of the sale.
The date of transaction, quantity, unit cost and
description of the goods or properties or nature
of the service; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
4.
In the case of sales in the amount of P1,000 or
more where the sale or transfer is made to a
VAT-registered person, the name, business
style, if any, address and taxpayer identification
number (TIN) of the purchaser, customer or
client (Sec. 113[B], NIRC).
An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry into
the subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the
inventory, but it must show the total amount. It is
sufficient to just make a reference to the inventory
regarding the description of the goods. However,
the sales invoice number should be indicated in the
inventory filed and a copy thereof shall form part of
this invoice. If the business is to be continued by
the new owners or successors, the entire amount
of output tax on the amount deemed sold shall be
allowed as input taxes. If the business is to be
liquidated and the goods in the inventory are
sold or disposed of to VAT-registered buyers, an
invoice or instrument of sale or transfer shall to
prepared citing the invoice number wherein the tax
was imposed on the deemed sale. At the same time
the tax paid corresponding to the goods sold should
be separately indicated in the instrument of sale
(Sec. 4.113-2, R.R. 16-2005).
NOTE: The appearance of the word “zero rated” on
the face of invoices covering zero rated sales
prevents buyers from falsely claiming input VAT
from their purchases when no VAT was actually
paid. If, absent such word, a successful claim for
input VAT is made, the government would be
refunding money it did not collect. Further, the
printing of the word “zero-rated” on the invoice
helps segregate sales that are subject to 12% VAT
from those sales that are zero-rated. Unable to
submit the proper invoices, taxpayer has been
unable to substantiate its claim for refund (Eastern
Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
March 25, 2015).
The failure to print the word “zero-rated” in the
invoice/receipts is fatal to a claim for credit/refund
of input VAT on zero rated sales (JRA Philippines, Inc.
v. CIR, G.R. No. 177127, October 11, 2010).
Consequences of issuing erroneous VAT invoice
or VAT official receipt
1. In case of non-VAT registered person who issues
a VAT invoice/receipt shall be held liable for:
a. Payment of percentage tax if applicable;
b. Payment of VAT without input tax;
c. 50% surcharge on tax due as provided for
under Sec. 248(B); and
Invoicing requirements in deemed sale
transactions
In the case of Sec. 106, (B)(1) [transfer, use or
consumption not in the ordinary course of business of
goods or properties originally intended for sale or for
use in the ordinary course of business],
a
memorandum entry in the subsidiary sales journal
to record withdrawal of goods for personal use is
required.
The purchaser shall be allowed to recognize an
input tax credit provided that the
invoice/official receipt contains the required
information under Sec. 110 on Tax Credits.
2. In case a VAT-registered who issues a VAT
invoice/official receipt for a VAT-exempt sale
without the words “VAT Exempt Sale,” the
transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser
shall be entitled to claim an input tax credit on
his purchase.
In the case of Sec. 106 (B)(2), [distribution or
transfer to shareholders or creditors] and Sec. 106
(B)(3) [consignment of goods if actual sale is made
within 60 days after the date of such consignment],an
invoice shall be prepared at the time of the
occurrence of the transaction, which should include,
all the information prescribed in Sec. 113-1. The
data appearing in the invoice shall be duly recorded
in the subsidiary sales journal. The total amount of
“deemed sale” shall be included in the return to be
filed for the month or quarter.
FILING OF RETURN AND PAYMENT
Persons required to file a VAT Return
1.
In the case of Sec. 106(B)(4), [retirement or
cessation of business], an inventory shall be
prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place of
business not later than 30 days after retirement or
cessation from business.
2.
3.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
264
Every person or entity who in the course of
trade or business, sells or leases goods,
properties, and services subject to VAT, if the
aggregate amount of actual gross sales or
receipts exceed P1,919,500 for any 12- month
period
A person required to register as VAT taxpayer
but failed to register
Any person who imports goods
VALUE ADDED TAX
4.
Professional practitioners whose gross fees
exceed P1,919,500 for any 12-month period.
1.
Filing of return
Every taxable person is required to account for and
pay VAT by reference to each accounting period
consisting of three months, referred to as a taxable
quarter.
-
NOTE: Under Section 236 of NIRC, a VAT –
registered person may cancel his registration
for VAT if:
A VAT declaration for the month (form 2550M)
must be filed within 20 days after the end of the
month concerned
A VAT return covering the amount of his gross
sales or receipts and purchases for the
prescribed taxable quarter (for 2550Q) must be
filed by the taxable person within 25 days
following the close of the quarter to which it
relates (Sec. 114, NIRC)
a. He makes written application and can
demonstrate to the commissioner’s satisfaction
that his gross sales or receipts for the following
twelve (12) months, other than those that are
exempt under Section 109(A) to (U), will not
exceed P1,919,500 or
b. He has ceased to carry on his trade or
business, and does not expect to recommence
any trade or business within the next twelve
(12) months.
Only one consolidated return shall be filed by the
taxpayer for his principal place of business or head
office and all branches (Sec. 114[A], NIRC).
The cancellation of registration will be effective
from the first day of the following month (Sec.
236 (F), NIRC).
Payment of VAT
VAT must be paid every month.
Scope
FORM 2550M
Monthly sales
and/or
receipts
within 20
days following
the end of
month.
Accomplished
only for each
of the first 2
months of
each taxable
quarter.
Deadline
20th day of
following
month
Cancellation of VAT registration - Any
person, whose registration has been cancelled
in accordance with Section 236, shall file and
pay a return within 25 days from the date of
cancellation of registration;
2. VAT on sale of refined sugar- payable in
advance by the owner/seller to the BIR through
the sugar refinery. The advance payment must
be made prior to or upon the issuance of the
refined sugar release order or similar
instruments. However, the owner-seller may
withdraw his refined sugar from the sugar mill
or refinery warehouse with advance payment of
the tax if it will not be locally sold but rather for
use exclusively as raw material in the
manufacture of sugar-based food products
intended for zero-rated export (VAT Ruling No.
198-90, September 14, 1990).
3. VAT on sale of flour – The VAT on the sale of
flour milled from imported wheat shall be paid
in advance prior to the withdrawal of the
imported wheat from customs custody based
on the formulate prescribed in the regulation
(Rev. Regs. No. 29-2003, October 30, 2003).
Purchases by flour millers of imported wheat
from traders shall also be subjected to advance
VAT and shall be paid by the flour miller prior
to delivery (Sec. 4.114-1 (B) (2), Rev. Regs. No. 1605).
FORM 2550-Q
Quarterly sales
and/or receipts
within 25 days
after the close of
each taxable
quarter.
The VAT payable
for each calendar
quarter shall be
reduced by the
total amount of
taxes previously
paid for the
preceding 2
months and/or the
sum of the
allowance excess
input tax carried
over and the VAT
withheld by the
government.
25th day of
following calendar
quarter
Where to File the Return and Pay the Tax
GR: It shall be filed with and the tax paid to
1. An Authorized Agent Bank (AAB);
2. Revenue Collection Officer (RCO); or
3. Duly authorized city or municipal
Treasurer, where such Treasurer is
Other special transactions:
265
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
Within the Philippines; and
Located within the revenue district
where the taxpayer is registered or
required to register (Sec. 114[B]).
2.
3.
Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and
Other services rendered in the Philippines by
non-residents.
XPN: As the Commissioner otherwise permits.
VAT withheld and paid for the non-resident
recipient (remitted using BIR Form No. 1600),
which VAT is passed on to the resident withholding
agent by the non-resident recipient of the income,
may be claimed as input tax by said VAT-registered
withholding agent upon filing his own VAT Return,
subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales. The
duly filed BIR Form No. 1600 is the proof or
documentary substantiation for the claimed input
tax or input VAT.
WITHHOLDING OF FINAL VAT
ON SALES TO GOVERNMENT
Rule regarding the withholding of Final VAT on
sales to government
The Government or any of its political subdivisions,
instrumentalities
or
agencies,
including
government owned or controlled corporations
(GOCCs) shall, before making payment on account of
its purchase of goods and/or services taxed at 12%
shall deduct and withhold a final VAT of 5% of the
gross payment. The payment for lease or use of
properties or property rights to nonresident owners
shall be subject to 12% withholding tax at the time
of payment. For purposes of this section, the payor
or person in control of the payment shall be
considered as the withholding agent (Sec. 114(C),
NIRC).
Nonetheless, if the resident withholding agent is a
non-VAT taxpayer, said passed-on VAT by the nonresident recipient of the income, evidenced by the
duly filed BIR Form No. 1600, shall form part of the
cost of purchased services, which may be treated
either as an "asset" or "expense", whichever is
applicable, of the resident withholding agent.
NOTE: The five percent (5%) final VAT withholding
rate shall represent the net VAT payable to the seller
The VAT withheld shall be remitted within 10 days
following the end of the month the withholding was
made (Sec. 4.114-2, RR. 16-2005).
The remaining seven percent (7%) effectively
accounts for the standard input VAT for sales of
goods or services to government or any of its
political subdivisions, instrumentalities or agencies
including GOCCs, in lieu of the actual Input VAT
directly attributable or ratably apportioned to such
sales.
NOTE:
It was held in the case of
AbakadaGuroPartylist v. Ermita, G.R. No. 168056,
September 1, 2005, that the since it has not been
shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed,
there is no reason to invalidate the provision. It
applies to all those who deal with the government.
Should actual input VAT attributable to sale to
government exceed seven percent (7%) of gross
payments, the excess may form part of the seller’s
expense or cost.
If actual input VAT attributable to sale to
government is less than 7% of gross payment, the
difference must be closed to expense or cost.
The government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, as
well as private corporations, individuals, estates
and trusts, whether large or non-large taxpayers,
shall withhold ten percent (12%) VAT with respect
to the following payments:
1.
Lease or use of properties or property rights
owned by non-residents;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
266
PERCENTAGE TAX
PERCENTAGE TAXES (CONCEPT AND NATURE)
Percentage tax is a tax imposed on sale, barter,
exchange or importation of goods, or sale of services
based upon gross sales, value in money of receipts
derived by the manufacturer, producer, importer or
seller measured by certain percentage of the gross
selling price or receipts. If the transaction is subject
to OPT, it is no longer subject to VAT. Nonetheless,
OPT as well as VAT may be imposed together with
excise taxes (Tabag, 2015).
As a rule, VAT is imposed on every sale, barter, or
exchange of goods or services and on importations.
However, there are instances where the same does
not apply because the transaction is subject to other
percentage taxes (OPT) as required by the NIRC.
Tax Rates
COVERAGE
Persons exempt from VAT under
Section 109 (W)
Domestic carriers and keepers of
garages
International Carriers:
International air/shipping carriers
doing business in the Philippines
Franchise Grantees:
Gas and water utilities
Radio and television broadcasting
companies whose annual gross
receipts of the preceding year do
not exceed P10,000,000 and did
not opt to register as VAT taxpayer
Overseas dispatch, message or
conversation originating from the
Philippines
Banks and non-bank financing
intermediaries performing quasibanking functions
Other non-bank financial
intermediaries
BASIS
Gross Receipts on sale or lease of goods, properties
or services
Gross Receipts on transport of passengers by land
(except those thru animal drawn two-wheeled
vehicles)
TAX RATE
3%
Gross Receipts from transport of cargo from the
Philippines to another country
3%
Gross Receipts
Gross Receipts
2%
3%
Gross Receipts
10%
3%
On interest, commissions and discounts from lending activities as well
as income from financial leasing, on the basis of remaining maturities
of instruments maturities of instruments from which receipts are
derived:
• Maturity period is five years or less
5%
• Maturity period is more than five years
1%
On dividends and equity shares and net income of
0%
subsidiaries
On royalties, rentals of property, real or personal,
7%
profits from exchange and all other items treated
as gross income under Sec. 32 of the NIRC, as
amended
On net trading gains within the taxable year of
7%
foreign currency, debt securities, derivatives and
other similar financial instruments
Interest, commissions and discounts and all other
5%
items treated as gross income under the NIRC, as
amended
Interest, commissions and discounts from lending activities, as well as
income from financial leasing on the basis of remaining maturities of
instruments:
• Maturity period is five years or less
5%
• Maturity period is more than five years
1%
Total premiums collected
2%
Life Insurance Companies (except
purely cooperative companies or
associations)
Agents of foreign insurance companies (except reinsurance premium):
267
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
COVERAGE
BASIS
TAX RATE
Insurance agents authorized under Total premiums collected
4%
the Insurance Code to procure
policies of insurance for companies
not authorized to transact business
in the Philippines
Owners of property obtaining
Total premiums paid
5%
insurance directly with foreign
insurance companies
Proprietor, lessee or operator of the following:
Cockpits
Gross receipts
18%
Cabarets, Night or Day Clubs
Gross receipts
18%
videoke bars, karaoke bars,
karaoke televisions, karaoke boxes
and music lounges
Boxing exhibitions
Gross receipts
10%
Professional basketball games
Gross receipts
15%
Jai-alai and race track (operators
Gross receipts
30%
shall withheld tax on winnings)
Winnings on horse races
10%
 Winnings or 'dividends'
4%
 Winnings from double forecast/quinella
and trifecta bets
10%
 Prizes of owners of winning race horses
Sale, Barter, Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or Through
Initial Public Offering
Sale, barter, exchange or other
Gross selling price or gross value in money
.60% of gross
disposition of shares of stock listed
selling price or
and traded through the Local Stock
6/10 of 1%
Exchange other than the sale by a
dealer of securities [Sec. 127 (A)]
Gross selling price or gross value in money
Sale, barter or exchange or other
disposition through initial public
offering (IPO) of shares of stock in
Proportion of disposed shares to total outstanding shares after the
closely-held corporations [Sec. 127 listing in the local stock exchange:
(B)]
4%
 Up to 25%
2%
 Over 25% but not over 33 1/3%
1%
 Over 33 1/3%
(www.bir.gov.ph)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
268
EXCISE TAXes and Documentary Stamp Tax
EXCISE TAX (CONCEPT AND NATURE)
manufacture or importation of the taxable goods
and the intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner. This is
the reason why the accrual and liability for the
payment of the excise tax are imposed directly on
the manufacturer or producer of the taxable goods,
and arise before the removal of the goods from the
place of their production (Separate opinion of J.
Bersamin in CIR v. Pilipinas Shell Petroleum Corp.,
G.R. No. 188497, 2014)
Excise tax is essentially a tax on goods, products
or articles
The term "excise tax" under Title VI of the 1997
NIRC relates to taxes applied to goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014).
Major classification of excisable articles and
related codal section
Kinds of excise taxes
1. Specific tax - imposed and based on weight or
volume capacity or any other physical unit of
measurement
2. Ad valorem tax - imposed and based on the
selling price or other specified value of the
goods
Two concepts of ‘excise’ tax. As used in the NIRC,
excise taxes refer to taxes applicable to certain
specified goods or articles manufactured or
produced in the Philippines for domestic sale or
con