TAXATION LAW
2019 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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should be addressed to the Academics Committee of the Team: Bar-Ops.
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Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
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Academics Committee
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
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No. ____________
Printed in the Philippines, September 2019.
ACADEMIC
2020 CIVIL
STUDENT
YEAR 2019LAW
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
RAFAEL JEROME MENDOZA
ASST. HEAD, INCOME TAXATION
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. Definition and Concept
.......................................................................................................................................... 1 B. Purpose of
Taxation ............................................................................................................................................... 1 C.
Nature and Characteristics of Taxation
......................................................................................................... 2
D. Power of Taxation as distinguished from Police Power and Power of Eminent Domain ...
4
E. Theory
and
Basis
of
Taxation
............................................................................................................................. 6 F. Principles of a Sound
Tax System ..................................................................................................................... 7
G. Scope and Limitations of Taxation .................................................................................................................
8
1. Inherent
limitations
........................................................................................................................................ 9
2. Constitutional
limitations
......................................................................................................................... 14
H. Summary Rules on Exemption of Properties Actually, Exclusively and Directly Used for
Religious, Educational and Charitable Purposes ..................................................................................
19
I. Stages or Aspects of Taxation ..........................................................................................................................
28
J.
Definition,
Nature
and
Characteristics
of
Taxes
.................................................................................... 28 K. Requisites of a Valid Tax
....................................................................................................................................
29
L.
Tax
as
distinguished from other forms of exactions ........................................................................... 29
M. Kinds of Taxes ..........................................................................................................................................................
30 N. Situs of Taxation
..................................................................................................................................................... 31
O. 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
P. Sources of Tax Laws .............................................................................................................................................
34
Q. 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. Governmentowned or controlled corporations, agencies or
instrumentalities ...............................................................................................................
167 iv. Depository banks (foreign currency deposit units) ........................................
167
(2) Resident Foreign Corporations ..........................................................................................
167
i. International carriers doing business in the Philippines .............................167
ii. Off-shore banking units .................................................................................................. 168
iii. Resident depository banks (foreign currency deposit units) ..................... 168
iv. 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.
187
Transfer Taxes ..........................................................................................................
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.
221
Value-Added Tax (VAT) ...........................................................................................
1. Concept of VAT-taxable transactions ...............................................................................................
221
2. Characteristics of VAT-taxable transactions ................................................................................
221
3. Elements of VAT-taxable transactions ............................................................................................
222
4. Impact and incidence of tax ..................................................................................................................
224
5. Tax credit method ......................................................................................................................................
225
6. Destination Principle / Cross Border Doctrine ...........................................................................
225
7. Persons liable ...............................................................................................................................................
226
8. Imposition of VAT ......................................................................................................................................
227 a) On sale of goods or properties ...................................................................................................
228
b) On importation of goods ................................................................................................................. 232
c) On services............................................................................................................................................. 233
9. Transactions deemed sale......................................................................................................................
236
10. Change or cessation of status as VAT-registered person ..................................................... 237
11. Zero-rated and effectively zero-rated sales of goods or properties................................. 238
12. VAT-exempt transactions .......................................................................................................................
244 a) VAT exempt transactions; in general; enumeration ........................................................
244
13. 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
14. 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)
15. 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
16. Filing of returns and payment .............................................................................................................
264
17. Withholding of final VAT on sales to government.....................................................................
266
E.
Percentage Taxes (concept and nature only) ....................................................
267 F. Excise Tax (concept and nature only) .................................................................
269 G. Documentary Stamp Taxes (concept and nature only) ..................................
270
H. 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
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
3. 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
4. Scope of taxing power ..............................................................................................................................
332
5. Specific taxing power of LGUs ..............................................................................................................
332
6. 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
7. Taxing powers of cities (Exclude: Rates) .......................................................................................
339
8. 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
9. Taxing powers of barangays (Exclude: Rates) ............................................................................
345
10. Common revenue raising powers ......................................................................................................
347
a)
Service
fees
and
charges
................................................................................................................. 347
b) Public utility charges ........................................................................................................................
347
c) Toll fees or charges ...........................................................................................................................
347
11. Community tax .............................................................................................................................................
347
12. Common limitations on the taxing powers of LGUs .................................................................
348
13. 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
14. 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
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
N. 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
O. Refund or credit of real property taxes ................................................................................................... 381
1. Payment under protest ............................................................................................................................ 381
2. Repayment of excessive collections .................................................................................................. 382
P. 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
Q. 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
TAXATION
PRINCIPLES OF
counterproductive to the policy of
promoting general welfare via
increasing economic activity through
trade and commerce.
GENERAL PRINCIPLES
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).
3.
Provide social protection and all the needs
under its jurisdiction
-
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).
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)
In other words, taxation is:
PURPOSE OF TAXATION
-
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]
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
a.
STATE POLICY OF TAXATON In Re: TRAIN LAW
1.
Promoting sustainable growth and
inclusive
economic
growth
by
rationalization of Philippine internal
revenue system
-
2.
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).
To rationalize means to enact policies
for the betterment of the tax system
that would benefit the government,
and trickle down to the constituents.
b.
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.
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
1
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).
UNIVERSITY OF SANTO TOMAS
F ACULTY OF
C IVIL L AW
LAW ON TAXATION
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).
c.
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.
ENERAL
TAXATION
d.
E
3
UNIVERSITY OF SANTO TOMAS
F ACULTY OF
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ON TAXATION
ncourage economic growth – the grant of 2. Legislative in character incentives
or
exemptions
encourage It is inherently legislative in nature and investment thereby
stimulating economic character in that the power of taxation can only activity. be exercised through the
enactment of law. It is legislative in nature since it involves the e. Protectionism – Protective tariffs and
promulgation of
laws. The
legislature customs duties are imposed as taxes in
determines the coverage, object, nature, extent order to protect important sectors of the and situs
[CONES] of the tax to be imposed. economy or local industries, as in the case Such power is exclusively
vested in the of foreign importations. legislature except where the Constitution provides otherwise (Art.
VI, Sec. 28[2], Art. X,
NATURE AND CHARACTERISTICS OF TAXATION Sec. 5, Constitution)(1 Cooley Taxation, 3rd Ed.).
Nature of taxation It is based on the principle that taxes are a
grant of the people who are taxed, and the
The nature of the State’s power to tax is two-fold. grant must be made by the immediate It is both an inherent
and a legislative power representative of the people, and where the
(1996 Bar). people have laid the power, there it must remain and be exercised (CIR v. Fortune
1. Inherent attribute of sovereignty Tobacco Corporation, 559 SCRA 160, 2008). The power to tax is an
attribute of sovereignty
and is inherent in the State. It is a power Q: May legislative bodies enact laws to raise emanating from
necessity because it imposes a revenues in the absence of constitutional necessary burden to preserve
the State's provisions granting said body the power of tax?
sovereignty
(Phil.
Guaranty
Co.
v. Explain. (2005 Bar)
Commissioner, L-22074, April 30, 1965).
A: YES. The constitutional provisions relating to the
It is an essential and inherent attribute of power of taxation do not operate as grants of the sovereignty,
belonging as a matter of right to power of taxation to the government, but instead every independent
government, without being merely constitute a limitation upon a power which expressly conferred by the
people (Pepsi-Cola would otherwise be practically without limit. Bottling Company of the Phil. v. Mun. of
Moreover, it is inherent in nature, being an Tanauan, Leyte, 69 SCRA 460). attribute of sovereignty. There is,
thus, no need for a constitutional grant for the State to exercise this
It does not need constitutional conferment. power. Constitutional provisions do not give rise to the power
to tax but merely impose limitations on Q: Is the grant of the power of taxation inherent what would
otherwise be an invincible power for both National and Local Government?
(Churchill and Tait v. Concepcion, 34 Phil. 969).
A: NO. It is inherent in the National Government but
Q: Why is the power to tax considered inherent not in the Local Government Unit (LGU) since the in a
sovereign State? (2003 Bar) latter is merely a State’s agency to carry out in detail the objects of the
government. The LGU can
A: It is considered inherent in a sovereign State only impose taxes when it is granted by the: because it is a
necessary attribute of sovereignty.
Without this power no sovereign State can exist or a. Constitution
endure. The power to tax proceeds upon the theory e.g. LGU’s taxation power outside autonomous that the
existence of a government is a necessity region (Art. X, Sec. 5, 1987 Constitution)
and this power is an essential and inherent b. Legislation by Congress attribute of sovereignty, belonging as a
matter of e.g. LGU’s taxation power within the right to every independent state or government. No autonomous
region (Art. X, Sec. 20, 1987 sovereign state can continue to exist without the Constitution) means to pay its
expenses; and that for those means, it has the right to compel all citizens and Scope of legislative power in
taxation property within its limits to contribute, hence, the emergence of the power to tax (51 Am. Jur., 1. The
determination of: [ASK-MAPS]
Taxation 40).
ENERAL
TAXATION
a. Amount or Rate of tax U N I V E R S I T Y
OF
SANTO TOMAS
2
2 01 9 GOLDEN NOTES
PRINCIPLES OF
5
UNIVERSITY OF SANTO TOMAS
F ACULTY OF
C IVIL L AW
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ON TAXATION
b.
c.
d.
e.
f.
g.
2.
3.
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
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).
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
followed by the seizure and confiscation of
property after the observance of due process.
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.
Q: Can police power and taxation co-exist in one
actof the government?
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 stabiliz ation 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).
ENERAL
TAXATION
possession. It imposes a burden which, in case of failure to discharge the same, may be DISTINCTIONS
AMONG THE THREE INHERENT POWERS OF THE STATE
Authority who
exercises the
power
Purpose
Persons affected
Amount of
monetary
imposition
TAXATION
Government or its political
subdivision
To raise revenue in Promotion of
support of the
welfare through
Government. Regulation is regulations
merely incidental
EMINENT DOMAIN
Government or public
service companies and
public utilities
general To facilitate the taking of
private property for public
purpose
Upon the community or
class of individuals
Upon the community or
class of individuals
On an individual as the
owner of a particular
property
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
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
Benefits received
Protection of a secured
organized society, benefits
received
from
government/no direct
benefit
Non-impairment
of contracts
Tax laws generally do not
impair contracts, unless
the government is party to
contract
granting
exemption for a
consideration
Test of validity
POLICE POWER
Government or its political
subdivision
Contracts may be impaired Contracts may be impaired
Must not be contrary to Must comply with the tests
inherent
and
on “lawful subjects” and
constitutional limitations
“lawful means”
7
Must be for public purpose
and with payment of just
compensation
UNIVERSITY OF SANTO TOMAS
F ACULTY OF
C IVIL L AW
LAW
ON TAXATION
UNIVERSITY
4
2 01 9 GOLDEN NOTES
OF
SANTO TOMAS
GENERAL PRINCIPLES OF TAXATION
TAXATION
POLICE POWER
Purpose
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
To raise revenue
9
UNIVERSITY OF SANTO TOMAS
F ACULTYOFC IVILL AW
LAW ON TAXATION
Q: Ordinance No. SP-2095 of he Quezon City
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1
0
GENERAL PRINCIPLES OF TAXATION
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?
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: Distinguish taxation power from police
power.
A:
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 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).
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?
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).
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).
11
UNIVERSITY OF SANTO TOMAS
F ACULTYOFC IVILL AW
LAW ON TAXATION
Q: Revenue laws R.A. 6260 and P.D. 276 were
enacted to establish the Coconut Investment Fund
and Coconut Consumers Stabilization Fund (cocolevy funds). These funds shall be owned by the
coconut farmers in their private capacities under
the Coconut Industry Code.
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 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 cocolevy funds in the nature of taxes and thus, can only
be used for public purpose?
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).
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%
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1
2
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?
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 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).
THEORY AND BASIS OF TAXATION
The theories underlying the power of taxation are:
1. Lifeblood theory
2. Necessity theory
3. Benefits-protection theory (doctrine of symbiotic
relationship)
4. Jurisdiction over subject and objects
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,
GENERAL PRINCIPLES OF TAXATION
without taxation, a government can neither
exist nor endure.
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).
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
Lifeblood theory
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)
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.
Necessity theory
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).
Benefits-protection theory
(doctrine of symbiotic relationship)
13
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).
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.
PRINCIPLES OF A SOUND TAX SYSTEM
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
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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).
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.
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).
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Q: True or False. A law that allows taxes to be
paid either in cash or in kind is valid.
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.
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
GENERAL PRINCIPLES OF TAXATION
must evolve a progressive system of
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taxation.
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).
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?
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).
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).
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
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SCOPE AND LIMITATION OF TAXATION
Inherent limitations [PITIE]
1.
2.
3.
4.
5.
Public Purpose
Inherently Legislative
Territorial
International Comity
Exemption of government entities, agencies
and instrumentalities
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)
GENERAL PRINCIPLES OF TAXATION
h.
i.
j.
k.
l.
2.
President’s veto power on appropriation,
revenue, tariff bills (Art. VI, Sec. 27)
Non-impairment of jurisdiction of the
Supreme Court (Art. VI, Sec. 30)
Grant of power to the LGUs to create its
own sources of revenue (Art. IX, Sec. 5)
Origin of Revenue and Tariff Bills (Art. VI,
Sec. 24)
No appropriation or use of public money
for religious purposes (Art. VI, Sec. 28)
Provisions indirectly affecting taxation (Art. III,
1987 Constitution)
a. Due process (Sec. 1)
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b.
Equal protection (Sec. 1)
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c.
d.
e.
Religious freedom (Sec. 5)
Non-impairment of obligations
contracts (Sec. 10)
Freedom of the press (Sec. 4)
enterprise, that law will not satisfy the
requirement of "public purpose" (Planters
Products, Inc. v. Fertiphil Corporation, G.R. No.
166006, March 14, 2008).
Determination when enacted tax law is for
public purpose
of
The limitations are discussed in detail below.
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.
INHERENT LIMITATIONS
Public purpose
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.
NOTE: If the tax measure is not for public purpose,
the act amounts to confiscation of property.
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.
Principles relative to public purpose
1.
2.
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.
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).
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.
3.
4.
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?
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
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
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Niyugan v. Exec. Sec., G.R. Nos. 147036-37, April 10,
2012).
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).
Non-delegable legislative powers
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
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?
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).
1.
2.
3.
4.
5.
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
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).
2.
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).
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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
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
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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).
3.
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
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act (Maceda v. Macaraig, G.R. No. 88291, June 8,
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GENERAL PRINCIPLES OF TAXATION
1993).
however, is subject to such limitations as may be
provided by law (Art. X, Sec. 5, 1987 Constitution).
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: 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?
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.”
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)
GR: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.
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.
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
While it is true that the Constitution has given broad
powers of taxation to LGUs, this delegation,
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outside the territorial boundaries of the taxing
State.
3.
XPNs:
1. Where tax laws operate outside territorial
jurisdiction –
i.e. Taxation of resident citizens on their
incomes derived abroad.
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.
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 income --- 30% for individual
and
35%
for
corporate
non-resident
stockholders --- was deducted at source and
remitted to the BIR.
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.
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.
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)
International comity as a limitation on the
power to tax
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).
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.
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
UNIVERSITY OF SANTO TOMAS
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does not subject itself to the jurisdiction of the
other.
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.
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
2
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GENERAL PRINCIPLES OF TAXATION
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)
Exemption from taxation of government entities
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).
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administering special funds, and enjoying
operational autonomy, usually through charter.
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).
Taxability of instrumentalities of government
A government instrumentality falls under Section
133(o) of the LGC, which states:
“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
Government may tax itself
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).
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities and local government units.”
National government is exempt from local
taxation
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.
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
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.
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)
Taxability of agencies of government
1.
2.
Performing governmental functions: tax
exempt unless expressly taxed
Performing proprietary functions: subject to
tax unless expressly exempted
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
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,
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GENERAL PRINCIPLES OF TAXATION
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]).
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b.
NO. As a rule, properties owned by the Republic
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GENERAL PRINCIPLES OF TAXATION
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).
Government-owned and controlled corporation
(GOCC)
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?
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.
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
NOTE: Government instrumentality may include a
GOCC and there may be “instrumentality” that does
not qualify as GOCC.
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:
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?
1.
2.
3.
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.
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).
Provisions directly affecting taxation
1. Prohibition against imprisonment
nonpayment of poll tax
for
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
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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).
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In other words, while a person may not be
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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).
tax. Other professionals complained and filed a
suit
questioning
the
law
for
being
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
Basis:The rule of taxation shall beuniform and
equitable. The Congress shall evolve a
progressive system of taxation (Art. VI, Sec.
28[1]).
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]).
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.
Equality – It is accomplished when the
burden of the tax falls equally and
impartially upon all the persons and
property subject to it.
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.
Q: Explain the requirement of uniformity as a
limitation in the imposition and/or collection of
taxes (1998 Bar).
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.
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
Q: A law was passed exempting doctors and
lawyers from the operation of the value-added
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5% transport tax.
A group of private vehicle owners sue on the
ground that the law is unconstitutional for
contravening the Equal Protection Clause of
theConstitution.
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Rule on the constitutionality and validity of RA
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10701. (Bar 2017)
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.
Meaning of “evolve” as used in the Constitution
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).
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).
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?
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).
3. Grant by Congress of authority to the
president to impose tariff rates
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
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.
Flexible tariff clause
Q: Does the Constitution prohibit regressive
taxes?
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
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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.
Requisites on the authority of the President
in imposing tax
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a.
Delegated by Congress through a law – The
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authorization granted to the President
must be embodied in a law. Hence, the
justification cannot be supplied simply by
inherent executive powers.
educational purposes shall be exempt from
taxation (Art. IV, Sec. 28 [3]).
Q: What is the coverage of tax exemption?
A: It covers real property taxes only. Accordingly, a
conveyance of such exempt property can be subject
to transfer 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.
Properties exempt under the Constitution from
the payment of property taxes
1.
2.
3.
4.
5.
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.
Meaning of “charitable”
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).
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
national
development program.
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).
Meaning of “actual, direct and exclusive use of
the property for religious, charitable and
educational purposes”
of
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.
4. Prohibition against taxation of religious,
charitable entities, and educational entities
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
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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]).
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
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GENERAL PRINCIPLES OF TAXATION
"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.
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"Exclusive" is defined as possessed and enjoyed to
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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.
any private stockholder or individual in an
amount not exceeding 10% in case of
individual, and 5% in case of a corporation,
of the taxpayer’s taxable income derived
from trade or business or profession
(Sec.34 [H], NIRC).
The words "dominant use" or "principal use" cannot
be substituted for the words "used exclusively"
without doing violence to the Constitution and the
law.
2.
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.
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.
Rules on taxation of non-stock corporations for
charitable and religious purposes
1.
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.
a.
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)
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).
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.
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.
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).
Donations received by religious, charitable,
and educational institutions are considered
as income but not taxable income as they
are items of exclusion.
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
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
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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)
Coverage
of
constitutional
provision
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.
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A: YES. Mercy hospital can claim exemption from
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taxation under the provision of the Constitution, but
only with respect to real property taxes provided
that such real properties are used actually, directly,
and exclusively for charitable purposes.
Test for the
grant of this
exemption
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).
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)
5. Prohibition against taxation of non-stock,
non-profit educational institutions
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).
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
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.
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).
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
Requisite to
avail of this
exemption
Property must be “actually,
directly, and exclusively used”
by religious, charitable and
educational institutions.
UNIVERSITY OF SANTO TOMAS
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Use of the property for such
purposes, not the ownership
thereof
Grantee
4
4
ART. XIV, SEC.
ART. VI, SEC.
4(3)
28(3)
Non-stock, non- Religious,
profit educational educational,
institution
charitable
GENERAL PRINCIPLES OF TAXATION
Taxes
Granted
Income
tax, Property tax
Customs
duties,
Property tax
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The last paragraph of Section 30 of the Tax Code is
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GENERAL PRINCIPLES OF TAXATION
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.
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 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).
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.
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.
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).
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).
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.
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)
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:
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
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.
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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).
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.
Charitable institutions – one providing for free
goods and services to the public which would
otherwise fall on the shoulders of the government.
Q: Under Art. XIV, Sec. 4(3) of the 1987
Constitution, all revenues and assets of
nonstock, non-profit educational institutions,
used 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)
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?
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.
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.
Tax rates of proprietary non-profit educational
institutions
and
proprietary
non-profit
hospitals
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).
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).
30 %
10%
Exempt
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.
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.
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.
Hospitals and
educational
institutions
claiming to be
proprietary
non-profit but
do not meet
the definition
thereof.
Proprietary – private
6. Majority vote of Congress for grant of tax
exemption
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GENERAL PRINCIPLES OF TAXATION
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).
The inherent power of the State to impose taxes
carries with it the power to grant tax
exemptions.
Granting of exemptions
Exemptions may be created:
1. By the Constitution; or
2. By statute, subject to limitations as the
Constitution may provide.
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Required vote for grant of tax exemption
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GENERAL PRINCIPLES OF TAXATION
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).
Basis:The President shall have the power to veto
any particular item or items in an
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]).
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.
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).
Reason for the separate vote for Senate and
Congress: Because the sheer number of
Congressmen would dilute the vote of the
Senators.
9. Non-impairment
of
the
Supreme Court
Required vote for withdrawal of such grant of
tax exemption
of
jurisdiction
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]).
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
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: 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.”
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,
8. President’s veto power on (1) appropriation,
(2) revenue, (3) tariff bills
(ART bill)
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consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments (Art.
X, Sec. 5).
Justification in the delegation of legislative
taxing power to local governments
UNIVERSITY OF SANTO TOMAS
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GENERAL PRINCIPLES OF TAXATION
Delegation of legislative taxing power to local
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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.
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
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?
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.
Q: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
(2003 Bar)
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.
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.
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”?
11.Origin of Revenue and Tariff Bills
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
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).
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GENERAL PRINCIPLES OF TAXATION
VAT but also amendments to NIRC provisions
on other kinds of taxes.
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]).
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
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.
2.
This is in consonance with the inviolable
principle of separation of the Church and State.
Provisions indirectly affecting taxation
1.
Due Process Basis:No
person shall be deprived of
life, liberty, or property
without due process of law
xxx (Art.
III, Sec. 1).
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;
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).
B. Procedural Due Process
No arbitrariness or oppression either in the
assessment or collection.
Q: When is deprivation of life, liberty and
property by the government done in compliance
with due process?
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).
12.No appropriation or use of public money for
religious purposes
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,
While it is true that the Philippines as a State is not
obliged to admit aliens within its territory, once an
55
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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).
5.
2. Equal Protection
Basis:No person shall be denied the equal
protection of the laws (Art. III, Sec. 1).
Illustrative cases of violations of the due
process clause
1.
2.
3.
4.
The law is in violation of inherent
limitations
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).
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
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).
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).
Principle of Equality
It admits of classification or distinctions as long as
they are based upon real and substantial differences
UNIVERSITY OF SANTO TOMAS
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GENERAL PRINCIPLES OF TAXATION
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
permissible government policy or legitimate end of
the government.
Economic Special Zone, and denying said
incentives to those who live within the zone but
outside such “secured area:” Is the
Q: What is the “rational basis” test? Explain
briefly. (2010 Bar)
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).
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)
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
57
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Constitutional right to equal protection of the
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GENERAL PRINCIPLES OF TAXATION
law violated by the Executive Order? (2000 Bar)
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.
Q: Is the real property tax exemption of religious
organizations violative of the nonestablishment
clause?
A: NO. Neither the purpose nor the effect of the
exemption is the advancement or the inhibition of
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?
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).
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).
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?
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?
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).
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).
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).
4. Non-impairment clause
3. Religious Freedom
Basis: No law impairing the obligation of contracts
shall be passed (Art. III, Sec. 10).
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).
Instances when there is impairment of the
obligations of contract
When the law changes the terms of the contract by:
1.
2.
59
Making new conditions; or
Changing conditions in the contract; or
UNIVERSITY OF SANTO TOMAS
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3.
Dispenses with
the
expressed therein.
conditions
Rationale for the non-impairment clause in
relation to contractual tax exemption
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.
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GENERAL PRINCIPLES OF TAXATION
NOTE: This applies only where one party is the
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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
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).
government and the other party, a private person.
Rules regarding non-impairment of obligation
and contract with respect to the grant of tax
exemptions
1.
2.
3.
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)
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.
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.
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.
5. Freedom of the Press
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)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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
6
2
GENERAL PRINCIPLES OF TAXATION
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
63
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ent” which here
payment of a tax
confused with
real property
the listing and
erty.
tting as probate
equired in the
2005 Bar)
itting in probate,
n the collection of
Section 94 of the
nt court which is
cutor or judicial
estate, to deliver
interested in the
he Commissioner
tate tax has been
. No.120880, June
may be delegated
onferred with the
e by the taxpayer,
es or remedies as
e person subject
urn is filed (Sec.
excess of P2,000,
oration may elect
llments in which
all be paid at the
e second
15 following the
. 56[A][2], NIRC).
not paid on or
yment, the whole
ecomes due and
uency penalties.
y alleged to have
aly assessed or
claimed to have
ity, or of any sum
sively, or in any
E AND
TAXES
UNIVERSITY OF SANTO TOMAS
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GENERAL PRINCIPLES OF TAXATION
TAX
TOLL
Definition
An
enforced
proportional
contribution
from persons
and
property
for public
purpose/s
A consideration
paid for the use
of a road, bridge
or the like, of a
public nature
Basis
Demand
sovereignty
1.
2.
3.
4.
5.
6.
7.
of Demand
of
proprietorship
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
REQUISITES OF A VALID TAX
1.
2.
3.
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.
4. The tax must not impinge on the inherent and
constitutional limitations on the
power of
TARIFF/
taxation.
TAX
CUSTOMS
DUTIES
TAX AS DISTINGUISHED FROM
Coverag An all-embracing Only a kind of
OTHER
OF EXACTIONS
term FORMS
to include
e
tax therefore
various kinds of
limited
enforced
coverage
contributions
imposed
upon
persons for the
attainment of
public purpose
Object
Persons, property,
etc.
Goods
imported
or
exported
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Taxes are enforced proportional contributions from
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GENERAL PRINCIPLES OF TAXATION
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).
Basis
Characteristics of taxes [SLEP4]
Amount
TAX
Generally,
amount is
unlimited
Collected
Collected
under
the
under
power of
police power
taxation
Generally,
amount
unlimited
is
TOLL
the Amount
Amount
is
limited to
the cost
and
maintenance
of public
improvement
Purpose
For the support For the use of
of
the
another’s
government
property
Authority
May be imposed May be imposed
private
by the State only by
individuals or
entities
Subject
Imposed
on
persons,
property,
rights
or
transaction
Limited to
the
necessary
expenses
of
regulation and
control
Imposed on the
exercise of a
right
or
privilege
Non-payment Non-payment
does not make makes
the
Effect of
the
business illegal
busin
NonPayment
ess
illegal
Time of
Payment
Normally
paid
after the start
of business
Normally paid
before the
commencement
of the business
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.
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).
Purpose
TAX
Imposed to
raise revenue
LICENSE FEE
For
regulati
on and control
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TAX
DEBT
Basis
Obligation
created by law
Obligation
based
on
contract,
express
or
implied
Assignability
Not assignable
Assignable
Nature
Subject
TAX
SPECIAL
ASSESSMENT
An
enforced
proportional
contribution
from
person
s and
proper
ty for public
purpose/s
An
enforced
proportional
contribution from
owners of lands
especially
those
who are peculiarly
benefited by public
improvements
Imposed
on Levied only on land
persons,
property rights
or transactions
A
Not a personal
liability of
the
person assessed
Person
Liable
person
al liability of
the taxpayer
Purpose
For
the
support of the
government
Contribution to the
cost
of
public
improvement
Regular
exaction
Exceptional as to
time and locality
Scope
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GENERAL PRINCIPLES OF TAXATION
Q: A municipality, BB, has an ordinance which
69
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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)
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]).
Mode of
Payment
Payable
in Payable
money or in
kind or
kind
money
Set-off
Not subject to
set-off
Subject to
setoff
Effect of
nonpayment
May result in
imprisonment
No
imprisonment
(except when
debt
arises
from crime)
Interest
Bears interest Interest
only
if
depends upon
delinquent
the
writte
n stipulation of
the parties
Prescription
Governed
by
the special
prescriptive
periods
provided for in
the NIRC
PENALTY
An enforced
proportional
contribution
from persons
and property
for
public
purpose/s
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
Purpose
To
raise To regulate conduct
revenue
Authority
Maybe
Maybe imposed by
imposed
by private entities
the State only
KINDS OF TAXES
As to object:
in
in
Governed by
the ordinary
periods of
prescription
UNIVERSITY OF SANTO TOMAS
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TAX
Definitio
n
7
0
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,
71
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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
indirect taxes (Asia International Auctioneers, Inc. v.
CIR, G.R. No. 179115, September 26, 2012).
VAT)
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 burden or incidence:
As to tax rates:
1.
2.
Direct
Indirect
1.
Q: Distinguish a direct from an indirect tax. Give
examples (Bar 1994, 2000, 2001, 2006).
2.
A:(1) Direct taxes are demanded from the very
person who, as intended, should pay the tax which
he cannot shift to another.
(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.
3.
As to purposes:
1.
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).
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)
As to scope or authority to impose:
1.
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
UNIVERSITY OF SANTO TOMAS
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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.
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:
1.
2.
7
2
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.
GENERAL PRINCIPLES OF TAXATION
3.
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).
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Factors that determine the situs of taxation
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GENERAL PRINCIPLES OF TAXATION
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
country grants exemption or does not impose
taxes on intangible properties to Filipino
citizens (F-SOB3-SR).
[ReCiNS2]
1.
2.
3.
4.
5.
Residence of the taxpayer
Citizenship of the taxpayer
Nature of the tax
Subject matter of the tax
Source of income
Rules Observed in Fixing Tax Situs
a.
a. Poll/Capitation/Community Tax -Residence
of taxpayer, regardless of the source of income
or location of property of the taxpayer
b.
b. Property Tax
i. Real Property - Location of the property
(lex reisitae / lex situs), regardless of
whether the owner is a resident or nonresident
c.
d.
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.
e.
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.
Application of the doctrine of mobilia
sequuntur personam not mandatory in all
cases
Personal Property
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).
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.”
XPN:
c. Excise Tax
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.
i. Income Tax (Criteria: Place, Nationality,
Residence)
• Place (applied to NRA, NRFC, NRC) From sources of income derived within
the Philippines
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•
•
iii.
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
Donor’s Tax and Estate Tax (Criteria:
Place, Nationality, Residence)
• Place (applied to NRA) - Taxed on
properties situated
within
the
Philippines
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GENERAL PRINCIPLES OF TAXATION
•
Nationality (applied to RC, NRC) -
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•
iv.
Taxed upon their properties wherever
situated
Residence (applied to RA) - Taxed
upon their properties wherever
situated.
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
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).
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).
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).
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
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).
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).
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.
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).
CONSTRUCTION AND INTERPRETATIONS
Tax laws
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
GR: Tax statutes must be construed strictly against
the government and liberally in favor of the
taxpayer (MCIAA v. Marcos, G.R. No. 120082
UNIVERSITY OF SANTO TOMAS
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GENERAL PRINCIPLES OF TAXATION
2.
3.
handled by the government in the course of its
operations (MCIAA v. Marcos, G.R. No. 120082,
September 11, 1996).
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).
Erroneous payment of the tax, or absence of
law for the government’s exaction (CIR v.
Fortune Tobacco Corporation, G.R. Nos. 16727475, July 21, 2008).
Tax rules and regulations
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.
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).
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).
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).
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).
Non-retroactive application to taxpayers
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).
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).
GR: Tax laws operate prospectively whether they
enact, amend or repeal.
XPN: Tax laws may only be given retroactive
application if the legislature expressly or impliedly
provides that it shall be given retroactive
application.
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;
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c.
2.
Where the taxpayer acted in bad faith (Sec.
246, NIRC).
The prohibition against ex post facto laws applies
only to criminal matters and not to laws which are
civil in nature.
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.
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.
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).
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?
SOURCES OF TAX LAWS
The following may be said to be the sources of tax
laws:
1.
2.
3.
4.
5.
6.
7.
8.
9.
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).
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
Special laws
Court decisions
Revenue
rules
and
regulations
and
administrative rulings and opinions (Tabag,
2015)
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
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
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).
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;
Ex post facto law as applied in taxation
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Commissioner v. Burroughs, Ltd., G.R. No. L-66653,
June 19, 1986).
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).
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:
(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.
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.
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).
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NOTE: Although the NIRC provides for the
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GENERAL PRINCIPLES OF TAXATION
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 & L11812, May 29, 1959).
Double taxation (duplicate 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.
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).
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
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).
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.
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?
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.
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A: YES. All the elements of double taxation
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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
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).
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?
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).
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?
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
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)
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.
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).
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.
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
municipal
CC,
85establishments. UThe
NIVER
S I T Y O F S A Nmayor,
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F ACULTYOFC IVILL AW
LAW ON TAXATION
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)
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).
Modes of eliminating double taxation
Local legislation and tax treaties may provide for:
1.
2.
3.
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.
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GENERAL PRINCIPLES OF TAXATION
4.
Imposition of a rate lower than the normal
87
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5.
the tax (CIR v. S.C. Johnson and Son, Inc., G.R.
No. 127105, 1999).
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.
Most-favored nation clause
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. US Chief Justice Marshall dictum - The power to
tax involves the power to destroy.
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.
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).
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).
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
UNIVERSITY OF SANTO TOMAS
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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
8
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GENERAL PRINCIPLES OF TAXATION
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).
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
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.
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)).
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
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.
Reconciliation of the two dicta
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.
Marshall’s view refers to a valid tax while Holmes’
view refers to an invalid tax.
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.
Ways of shifting the tax burden
1.
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).
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).
2.
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.
How to determine if a tax is direct or
indirect
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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.
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)
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 seller
upon whom the tax
has been imposed.
It is on the final
consumer,
the
place at which the
tax comes to rest.
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NOTE: In indirect taxation, a distinction is
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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
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).
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: 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.
Meaning of impact and incidence of taxation
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.
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).
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
UNIVERSITY OF SANTO TOMAS
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GENERAL PRINCIPLES OF TAXATION
Is the contention of the RDO tenable? Or was it
tax avoidance that Maria Suerte had resorted
to? Explain.
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).
Elements to be considered in determining
that there is tax evasion [USE]
1.
2.
3.
Course of action is unlawful;
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.
Distinguish tax avoidance from tax evasion
Validity
Effect
TAX
AVOIDANCE
Legal and not
subject to
criminal penalty
Minimization of
taxes
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.
Failure of taxpayer to declare for taxation
purposes his true and actual income derived
from business for two (2) consecutive years
2.
(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).
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?
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.
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).
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?
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
93responsibility overUthe
N I Vacts
E R S Iof
T Yher
O F accountant
S A N T O T O M(Sec.
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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.
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).
Tax exemption
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.
UNIVERSITY OF SANTO TOMAS
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It is the legislature, unless limited by a provision of
95
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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,
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).
4.
Nature of tax exemption
6.
1.
NOTE: Deductions for income tax purposes
partake of the nature of tax exemptions, hence,
they are also be strictly construed against the
taxpayer.
5.
Personal in nature and covers only taxes for
which the grantee is directly liable.
7.
NOTE: It cannot be transferred or assigned by
the person to whom it is given without the
consent of the State.
2.
3.
4.
8.
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.
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.
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
Principles governing tax exemptions
3.
Constitutional grants of tax exemptions are
self-executing.
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: 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: 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.
It must be strictly construed against the
taxpayer.
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.
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GENERAL PRINCIPLES OF TAXATION
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.
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NOTE: The law looks with disfavor on tax
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GENERAL PRINCIPLES OF TAXATION
exemptions and he who would seek to be thus
privileged must justify it by words too plain to
be mistaken and too categorical to be
misinterpreted (Western Minolco Corporation
v.
CIR, G.R. No. L-61632, August 16, 1983).
5.
6.
Treaty
Licensing ordinance
As to extent:
1. Total – Connotes absolute immunity
2. Partial – One where a collection of a part of the
tax is dispensed with
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. L601026, September 25, 1985).
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).
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.
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
social justice provisions of the Constitution
through the progressive system of taxation,
which would result to equal distribution of
wealth etc. (Domondon, 2009).
NOTE: There is no tax exemption based solely on
the ground of equity (Davao Gulf v. CIR, 293 SCRA
76).
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?
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.
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.
greater
99Taxation assumesUeven
NIVER
S I T Y O Fsignificance
S A N T O T O Mwith
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the ratification of the 1987 Constitution (Batangas
Power Corporation v. Batangas City, G.R. No. 152675,
April 28, 2004).
Q: Differentiate
Tax
Exemption
from Tax Assumption.
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).
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).
Doctrine of equitable recoupment
By granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
Thus, in withdrawing the exemption of the press
(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).
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.
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.
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).
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)).
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).
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).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Rules governing compensation or set-off as
applied in taxation
GR: No set-off is admissible against the demands
for taxes levied for general or local governmental
purposes.
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GENERAL PRINCIPLES OF TAXATION
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.)
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).
XPN: Where both the claims of the government
and the taxpayer against each other have already
become due, demandable, and fully liquidated,
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).
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)
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.
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).
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)
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).
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).
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.
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.
Persons allowed to enter into compromise of tax
obligations
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Immunity from
all
criminal,
civil and
administrative
obligations
arising
from
non-payment of
taxes
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
The law allows the following persons to do
compromise in behalf of the government:
Scope of
immunity
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).
Grantee
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).
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).
Q: Does the mere filing of tax amnesty return
shield the taxpayer from immunity against
prosecution?
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]).
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
International Auctioneers, Inc. v. CIR, G.R. No.
179115, September 26, 2012).
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).
Tax Amnesty distinguished from Tax
Exemption
TAX AMNESTY
TAX
EXEMPTION
Q: The BIR assessed Garments Co deficiencies
on taxes for non-payment of VAT on its
undeclared sales. While the case was pending
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GENERAL PRINCIPLES OF TAXATION
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?
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.
In the case of Abaya v. Ebdane (515 SCRA 720), the
prevailing doctrine in the taxpayer’s suits is:
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.
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A taxpayer is allowed to sue where there is a claim
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GENERAL PRINCIPLES OF TAXATION
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
unconstitutional law (Land Bank of the Philippines
v. Cacayuran, 696 SCRA 861, G.R. No. 191667, April
17, 2013).
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).
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).
Two requisites of a taxpayer’s suit:
1.
2.
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
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).
The petitioner is directly affected by the alleged
act.
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: 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).
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
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lifted by a mere circular, considering that the
pre-audit is a constitutional mandate. He
further claims that, because of the lack of preaudit by COA, serious irregularities in
government transactions have been committed.
Is he entitled to the extraordinary writ of
certiorari?
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
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)
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ORGANIZATION AND FUNCTIONS OF THE
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BUREAU OF INTERNAL REVENUE (BIR)
6.
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).
7.
Specific Provisions to be Contained in Rules and
Regulations
8.
Rules and regulations must contain provisions
specifying, prescribing, or defining: (SLE2D
RIDES)
1.
2.
3.
4.
5.
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
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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,
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.
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.
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.
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.
BUREAU OF INTERNAL REVENUE
10. The manner in which internal revenue taxes,
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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 payment of taxes by said large taxpayers
(Sec.
245, NIRC).
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.
5.
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.
6.
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.
7.
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.
c.
Various Kinds of Revenue Issuances by the CIR
1.
2.
3.
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.
d.
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.
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.
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.
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.
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BIR Rulings
VAT Rulings
Rulings issued by International Tax Affairs
Division (ITAD); and
Rulings issued thru delegated authorities
or unnumbered rulings
11. Revenue Travel Assignment Orders (RTAOs) –
issued by the CIR transferring, assigning or
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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.
Limit: Revenue officers assigned to perform
assessment or collection functions shall not
remain in the same assignment for more than
3 years.
Large Taxpayer
A large taxpayer is anyone who satisfies any of the
following criteria:
1.
2.
3.
4.
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.
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The Secretary of Finance, upon recommendation of
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the CIR, may modify or add to the above criteria for
determining a large taxpayer after considering
such 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).
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 government
(Marcos v. CIR, G.R. No. 120880, June 5, 1997).
Powers of the Commissioner
Powers and duties of the BIR [JEnAReS]
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);
1.
Q: What are the purposes of these powers?
JURISDICTION, POWER AND FUNCTIONS OF
THE COMMISSIONER OF INTERNAL REVENUE
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.
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.
Q: What is the scope of such powers? [SOAss2Sex]
Chief Officials of the BIR
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.
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)
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
4.
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Power to make assessments and prescribe
additional
requirements
for
tax
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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)
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;
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a.
Failure to file a VAT return as required
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b.
2.
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.
Q: What are the powers of the BIR which cannot
be delegated?
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:
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).
XPN: The Regional Evaluation Board may
compromise
assessments
involving
deficiency taxes of P500,000 or less and
minor crime violations.
The CIR is also authorized: (TInDER PRIM)
1.
2.
3.
4.
5.
6.
7.
8.
9.
4.
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?
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).
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.
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To Assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are kept.
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
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error committed refers to the neglect of the BIR to
make assessment within the 3-year period as
required in Sec. 203, NIRC.
Powers of the Commissioner to interpret tax
laws and to decide tax cases
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The power to interpret the provisions of NIRC and
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other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
and collection of taxes? Explain your
answer.
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.
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.
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).
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.
b.
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
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.
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:
1.
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.
2.
What constitutes a valid waiver of the
statute of limitations for the assessment
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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
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3.
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.
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Q: XYZ Corporation, an export oriented
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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.
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
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.
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 3.
Where the taxpayer acted in bad faith (Sec.
246, NIRC).
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INCOME TAXATION
SCHEDULAR
TREATMENT
GLOBAL TREATMENT
Different tax rates
Unitary or single tax rate
Different categories of No need for classification
taxable income
as all taxpayers are
subjected to a single tax
rate
Usually
used
in
income taxation of
individuals
Applied to corporations
(Business
income,
professional income,
passive income,
illegal income)
You cannot add all of
them together, due to
different tax rates.
(Business
income,
professional
income,
passive income, illegal
income)
All of them are added
together and subjected to
a single tax rate.
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DEFINITION,
NATURE
AND GENERAL
INCOME
TAXATION
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INCOME TAXATION
PRINCIPLES
4.
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.
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).
Schedular Treatment vs. Global Treatment (1994
Bar)
1.
2.
3.
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.
taxsystem
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.
Note:
Only resident citizens and domestic
corporations are taxable on worldwide
income.
Types of Philippine income tax [MC2F3 –
BINGOS]
1.
2.
Features of the Philippine Income Tax Law
semi-global
Criteria in imposing Philippine income tax
Income tax systems
1.
Semi-schedular or
(Mamalateo, 2014).
3.
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
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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
XPN: Instances when the taxpayer may have a
taxable period of less than 12 months:
1.
2.
3.
4.
Taxable Period
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 is a period within which the net
income is computed as a whole for income tax
purposes.
Kinds of Taxpayers:
Kinds of taxable periods
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
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.
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INCOME TAXATION
INCOME TAX
BASIS
INCOME TAX
PROPERTY
TAX
The incidence
of a property
tax is on the
property itself.
Incidence
The incidence of
an income tax
falls on the
earner.
Who pays
the tax
The earner pays The owner of
income tax.
the
property
pays
the
property tax.
How
measured
Income tax is
measured
by the
amount of
income
received over a
period of time.
Frequency
of taxation
Income is taxed Property may
only once.
be taxed on a
recurring basis.
Property tax is
measured
by
the value of the
property at a
specific date.
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Income tax is a tax on all yearly profits arising from
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INCOME TAXATION
property, profession, trade, or business, or a tax on
person’s income, emoluments, profits and the like
(Fisher v. Trinidad, G.R. No. L-19030, October 20,
1922).
1.
2.
3.
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.
4.
Purposes of income tax
1.
2.
3.
5.
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).
6.
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
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.
Income
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 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).
Income tax vs. Property tax
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 vs. Capital (1995 Bar)
CAPITAL
INCOME
Constitutes
the
investment which
is the source of
income
Any wealth which flows
into the taxpayer other
than a mere return of
capital
Is the wealth
Is the service of wealth
Is the tree
Is the fruit
Fund
Flow
General Principles
Return or recovery Income is
subject
of capital is not
to income tax
subject to income
tax
(Madrigal v. Rafferty, 38 Phil. 414)
Except when otherwise provided in the NIRC:
Objects being taxed in income taxation
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1.
2.
3.
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).
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?
When income is taxable
A: NO, because income is other than a mere return of
capital.
The following are important considerations to
discover whether or not there is income for tax
purposes:
Income held in trust for another
1.
2.
3.
4.
Existence of income
Realization of income
Recognition of income
Methods of accounting
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).
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.
b. Property received as compensation but
subject to forfeiture;
c. Assessments
for
additional
corporate contributions;
d. Increments resulting from revaluation of
property;
Until the revalued property is disposed of
there is no income realized.
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;
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INCOME TAXATION
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.
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)
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)
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.
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).
2. Realization of income
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
a.
b.
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).
NOTE: Mere increase in the value of property is not
considered as income for tax purposessince it is an
unrealized increase in capital.
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A: NO. Mr. Castillo is not liable for income tax in 2011
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INCOME TAXATION
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).
b.
c.
Increase in the net worth of a taxpayer
d.
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.
NOTE: If and when there are substantial
limitations or conditions under which payment is
to be made, such does not constitute
constructively realized.
e.
Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for services
rendered
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
4. Methods of accounting
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:
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.
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).
Cash method
accounting
versus
accrual method of
Actual vis-a-vis constructive receipt
1.
Actual receipt – income may be actual receipt
or physical receipt.
2. 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).
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.
Deposits in banks which are made available
to the seller of services without restrictions
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.
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).
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Tests in determining whether income is
earned for tax purposes
1.
Realization test – There is no taxable income
unless income is deemed realized. Revenue is
generally recognized when both conditions
are met:
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INCOME TAXATION
a.
The earning process is complete or
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b.
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
accuracy. The amount of liability does not have to be
determined exactly; it must be determined with
"reasonable accuracy."
virtually complete; and
An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997).
2.
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)
3. 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.
4. Severance test – Income is recognized when
there is separation of something which is of
exchangeable value (Eisner v. Macomber, 252
US 189).
5. All Events test
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).
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
As to source:
1.
2.
3.
Refer to discsussions on “Classification of income
subject to tax.”
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.
Situs of income taxation
Income from sources within the Philippines
The all-events test requires the right to income or
liability be fixed, and the amount of such income or
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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
1.
13
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Interests derived from sources within the
Philippines
INCOME TAXATION
2.
3.
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
KINDS OF INCOME
TAX SITUS
Service
or Place of performance of
compensation
service
income
Rent
Location of property (real
or personal)
Royalties
Place of use of intangibles
Merchandising
Place of sale
Gain on sale of
personal
property
purchased and not
produced
Place of sale
Gain on sale of real
property
Location of property
Mining income
Location of the mines
Farming income
Place of farming activities
Gain on sale
domestic stock
Interest
of Income
within
Philippines
the
Residence of the debtor
Gain on sale of Place of activity that
transport document
produces the income
Manufacturing:
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4.
Rentals and royalties from properties located in
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INCOME TAXATION
5.
6.
7.
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
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.
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 within
Entirely without
Proportionate*
Entirely within
*Formula (Proportionate)
Phil. Gross Income
Income within
Entire Gross Income
x Dividend received =
Income derived partly within and partly without
the Philippines
GROSS INCOME
Gains, profits, or incomes other than those
enumerated above shall be allocated or apportioned
to sources within or without the Philippines
Except when otherwise provided, gross income
means all income derived from whatever source,
including but not limited to the following items:
[CG2I- R2DAP3]
Summary rules on determination of situs
according to kinds of income
1.
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
Income purely within
Income purely without
Income partly within and
and
partly
without
Income partly within and
and partly without
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])
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NOTE: The above enumeration of gross income
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under NIRC is NOT exclusive.
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).
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.
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)
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
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).
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)
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
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extent of the income tax benefit of said
deduction (NIRC, Sec. 34 E [1]). This is
sometimes referred as the Recapture Rule.
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
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.
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INCOME TAXATION
Distinguish gross income from net income
BASIS
GROSS INCOME
NET INCOME
As to
deductions
Allows no deductions
Allows deductions
As to
exemptions
Grants no exemptions
Grants exemptions
As to tax base
Gross Income
Net Income
Advantages/
Disadvantages
Simplifies the income tax system
Confusing and complex process of filing
income tax return
Substantial reduction in corruption and tax
evasion since the exercise of discretion, to
allow or disallow deductions, is dispensed
with
Vulnerable to corruption on account of
margin of discretion in the grant of
deductions
More administratively feasible
Provides equitable reliefs in the form of
deductions, exemptions and tax credit
Does away with wastage of manpower and
supplies
Tax audit minimizes fraud
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Q: Lao is a big-time swindler. In one year he was able
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INCOME TAXATION
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:
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)
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 tax implication when there is exchange of services
without compensation is that both parties are taxable
as if both each sold their services.
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
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
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
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5.
6.
7.
8.
Interest on loans at less than market rate to the
extent of the difference between the market rate and
the actual rate granted
Membership fees, dues and other expenses athletic
clubs or other similar organizations
Expenses for foreign travel
Holiday and vacation expenses
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INCOME TAXATION
9.
Educational assistance to the employee or his
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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])
Refer to “Taxation on compensation income” for further
discussion.
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.
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.
For purposes of taxation, there is no deduction allowed
against compensation income, whereas allowable
deductions may be made from professional income.
NOTE: Professional income shall be subject to creditable
withholding tax rates prescribed (R.R. No.
2-98).
Income from business
Business income refers to income derived from
merchandising, mining, manufacturing, and farming
operations.
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]).
Cost of goods sold
It includes all business expenses directly incurred to
produce the merchandise, to bring them to their present
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location and use such as invoice cost of the 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:
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]).
Income from dealings in property
Types of properties from which income may be
derived
1. Ordinary assets – refer to properties held by the
taxpayer used in connection with his trade or
business which includes the following: [SOUR]
a. 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;
b. Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or
business;
c. Property used in the trade or business of a character
which is subject to the allowance for depreciation
provided in the nirc; and
d. Real property used in trade or business of the
taxpayer.
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.
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
INCOME TAXATION
b.
c.
d.
Residential houses and lands owned and used as
such
Automobiles not used in trade or business
Stock and securities held by taxpayers other
than dealers of securities
business, shall be considered
as ordinary assets.
GUIDELINES IN DETERMINING WHETHER A
REAL PROPERTY IS A CAPITAL ASSET OR
ORDINARY ASSET
Real estate
All real properties acquired
dealer
are ordinary assets.
Taxpayers
habitually
engaged in the
real estate
business
All real properties acquired in
the course of trade or
business shall be considered
as ordinary assets.
Taxpayers not
engaged in the
real estate
business
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.
Taxpayer
changing
business from
real estate to nonreal estate
business
It will not result in the
reclassification
of
real
property from ordinary to
capital asset.
Taxpayers
originally
registered to be
engaged in the
real estate
business but
failed to
subsequently
operate
All real properties originally
acquired by them shall
continue to be treated as
ordinary assets.
Abandoned and
idle real property
It shall continue to be treated
as ordinary assets.
Real property
subject of
involuntary
transfer
(including
expropriation or
foreclosure sale)
No effect on the classification
of the property in the hands of
the involuntary seller.
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Real estate
developer
All real properties which are:
- 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
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Construction and interpretation of capital assets
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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).
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”:
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.
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:
3.
1. Holding period rule
2. 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. Capital assets; and
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INCOME TAXATION
b. Ordinary assets. (2005 Bar)
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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]).
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.
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)
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).
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:
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1.
2.
3.
Money, in case of sale
Property, in case of exchange
Combination of both sales and exchange, which
results in gain
NOTE: Gain is the difference between the proceeds
of the sale or exchange and the acquisition value of
the property disposed by the taxpayer.
Ordinary income vs. Ordinary loss
ORDINARY INCOME
ORDINARY LOSS
It includes the gain
derived from the sale
or
exchange
of
ordinary asset.
The loss that may be
sustained from the sale
or exchange of ordinary
asset.
Capital gain vs. Capital loss
CAPITAL GAIN
CAPITAL LOSS
It includes the
gain derived from
the
sale
or
exchange of an
asset
not
connected with
the trade or
business.
The loss that may be
sustained from the sale or
exchange of an asset not
connected with the trade or
business.
Capital loss may not exceed
capital gains when used as a
deduction to income.
Ordinary gain vs. Capital gain
ORDINARY
GAIN
CAPITAL GAIN
A gain derived
from the sale or
exchange
of
ordinary assets
such as SOUR
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
PRESUMED GAIN
Excess of
the
selling price
over the cost of
the asset
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.
Extent of
Recog
-nition
(Taxabi
-lity)
Deductibi
-lity of
capital
losses
INCOME TAXATION
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
BASIS
As to
deductions
NonNondeductibility of deductibility of
Net
Capital Net Capital losses
losses
XPN:
If
any
Capital losses domestic bank or
are
allowed trust company, a
only up to the substantial part
whose
extent of the of
business
is
the
capital gains;
receipt
of
hence, the net
deposits,
sells
capital loss is any
bond,
not deductible. debenture, note
or certificate or
other evidence of
indebtedness
issued by any
corporation
(including one
issued
by
a
government or
political
subdivision)
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
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
Availability NCLCO
NCLCO
not
of NCLCO
allowed
allowed
Difference between treatment of capital gains
and losses between individuals and corporations
BASIS
INDIVIDUAL
Availability
of holding
period
Holding period
available
No
period
CORPORATION
The
percentages of
gain or loss to
be taken into
Capital gains and
losses are taxable
to the extent of
100%
holding
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Capital gains subject to final tax vs. capital gains
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INCOME TAXATION
2.
reported in the income tax return
actually
earned
(presumed
gains)
Only individual taxpayers can avail of the holding
period rule. It is not allowed to corporations.
Net Capital Gain and Net Capital Loss
XPN:
Disposition of
shares not
traded in the
stock
exchange or
thru initial
public
offering
As to holding
period
GR: Holding
period is
immaterial
Real property considered as capital asset,
whether the seller is an individual, trust, estate
or a private corporation.
Holding
period is
considered.
XPN:
Disposition of
shares
not
traded in the
stock
exchange or
thru initial
public
offering
As to Net Loss
Carry Over
Not allowed
Could
availed
be
Holding period rule (long term capital gain visàvis 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]).
NOTE: Holding period does not find application in
the case of disposition of:
1.
Shares of stock; and
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Net capital gain is the excess of the gains from sales
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INCOME TAXATION
or exchanges of capital assets over the losses from
such sales or exchanges. Net capital loss is the excess
of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
Recognition of gain or loss in exchange of
property
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.
d.
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:
1.
2.
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.
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
“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.
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)).
Q: When is gain or loss not recognized in cases of
transfer of shares of stock of corporation in
exchange of property?
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.
A: The requisites for the non-recognition of gain or
loss are as follows:
a.
b.
c.
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
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
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substantial losses of revenue to the government
(Mamalateo, 2014).
Where the capital loss limitation rule will not
apply:
-
-
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]).
BASIS
NCLCO
NOLCO
As to
source
Arises from
capital
transactions
meaning
involving capital
asset
As to who
can avail
Can be availed of Can be availed of
by individual
by individual and
taxpayer only
corporate
taxpayer
As to
May be carried
period of over only in the
carryover next succeeding
taxable year
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Arises from
ordinary
transactions
meaning involving
ordinary asset
Allows carryover
of operating loss
in 3 succeeding
taxable years or 5
years, in the case
of
mining
companies
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Q: Can you deduct ordinary loss from ordinary
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gain and from capital gain?
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.
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.
Gains from sale to the government of real
property classified as capital asset
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.
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
NOTE: This is not available to a
corporate taxpayer.
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]).
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.
NCLCO vs Net Operating Loss Carry Over
(NOLCO)
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.
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.
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b.
Subject to final tax of 6% on capital gains
(Sec. 24 [D], NIRC).
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.
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).
Persons liable to pay capital gains tax on the sale
of shares of stock not traded in the stock
exchange
1.
Individuals – both citizens and aliens
INCOME TAXATION
2.
Corporations – both domestic and foreign
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3.
Estates and Trusts
Rules in determining the selling price of the
shares disposed
3.
4.
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).
NOTE: The basis of determining the Capital Gains
Tax (CGT) is the capital gain and not the fair market
value.
The above rules apply to DC, RFC, and NRFC.
Important features as regards capital gains from
sale of shares of stock
1.
2.
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
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into account the holding period irrespective of
the type/kind of taxpayer.
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.
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:
NOT LISTED
AND TRADED
LISTED AND
TRADED
As to
nature
Income
Business
As to kind
of tax
Capital gains tax
Percentage tax
As to rate
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
As to tax
base
Net capital gain
6/10 of 1%
Gross selling
price
Q: What is the effect if the sale is made by a dealer
in securities?
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.
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
INCOME TAXATION
after, he sold the shares of stock through his
favorite Makati stockbroker at a gain of
₱200,000.
a.
Is John subject to Philippine income tax on
the sale of his shares through his
stockbroker? Is he liable for any other tax?
Transaction
Sold by a
dealer in
securities
Tax Treatment
Treated as an ordinary asset
whose ordinary gains and losses
are subject to regular income tax.
Sold by an
individual
non-dealer
in securities
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
based on net gain
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
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b. If John directly sold the shares to his best
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INCOME TAXATION
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?
stocks of
another
corporation
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]).
However, the seller is subject to the percentage
tax of ½ of 1% of the gross selling price (NIRC,
Sec. 127 [A]).
b.
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%.
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)
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]).
General rule on shares of stocks
from
sources
within
the
Philippines is subject to capital
gains tax.
A
corporation
selling its
own stocks
Not subject to income tax. Excess
of price above par is not
considered as an income.
Corporation
selling
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
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)
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:
1.
2.
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.
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.
May be subject to percentage tax
on initial public offerings.
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Tax treatment if property is not located in the
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Philippines
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.
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
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: 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).
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
own name. Is the assignment subject to CGT or
regular corporate income tax?
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).
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.
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
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the corporate income tax although the taxpayer
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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).
b.
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
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INCOME TAXATION
tax it should be credited against the income tax
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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: 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: 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]).
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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.
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.
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
INCOME TAXATION
tax base for the corporate income tax rate of
30% (Sec. 27 A and Sec. 31 NIRC).
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Q: Sps. Salvador are the registered owners of a
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INCOME TAXATION
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
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?
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.
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
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).
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.
Sale of principal residence by an individual
Asale of principal residence by an individual is
exempt from capital gains tax provided the following
requisites are present:
1.
2.
3.
4.
5.
6.
7.
8.
Sale or disposition of the old actual principal
residence;
By a citizen or resident alien;
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).
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)
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:
1.
proceeds of the sale of the principal residence
have
been fully utilized in acquiring or
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2.
3.
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
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4.
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?
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
INCOME TAXATION
a new principal residence. Thus, the old residence should first be sold before acquiring or constructing the new
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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.
Summary rules on the tax treatment of certain passive income as applied to individuals
RC
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NRC
RA
NRAETB
NRA –
NETB
INCOME TAXATION
Within
and
Within
without
Sources Of Income
NATURE OF INCOME
Within
Within
Within
TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary
benefits from deposit substitutes, trust funds and similar
arrangements
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.
20%
20%
20%
20%
25%
15%
Exempt
15%
Exempt
Exempt
Interest income under the Expanded Foreign Currency Deposit
System
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
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the BSP (RR. 14-2012)
Held for:
5 years or more – exempt
4 years to less than 5 years – 5%
3 years to less than 4 years – 12%
Less than 3 years – 20%
Exempt
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
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
10%
10%
10%
20%
20%
Royalties on books, literary works and musical composition
10%
10%
10%
10%
10%
Other royalties (e.g. patents and franchises)
20%
20%
20%
20%
25%
ROYALTY INCOME
PRIZES AND WINNINGS
Prizes exceeding ₱10,000
20%
20%
20%
20%
25%
Winnings
20%
20%
20%
20%
25%
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Winnings from Philippines Charity sweepstakes and lotto
winnings which are less than 10,000 pesos
Exempt
Exempt
Exempt
Exempt
Exempt
Otherwise, follow 20%
Summary rules on the tax treatment of certain passive income as applied to corporations(NIRC, Sec. 27 [D])
NATURE OF INCOME
DC
RFC
NRFC
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
20%
20%
Shall be considered
as
part
of
gross
income subject to
35% NCIT.
Interest Income derived under expanded foreign currency
deposit system
15%
15%
Exempt
Interestderived by depositary bank under the expanded foreign
currency deposit system from foreign currency loans granted to
residents other than offshore banking units (OBUs)
10%
10%
Exempt
Interest received by NRFC on foreign loans(NIRC, Sec. 28 [5a])
–
–
Dividends received from Domestic Corporation (Inter-corporate
Dividend)
Exempt
Exempt
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.
NOTE: If granted to nonresidents, OBUs, local commercial banks
or branches foreign banks authorized by BSP to transact business
– EXEMPT
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20%
15% (subject to tax
credit sparing rule)
INCOME TAXATION
Interest income
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It is the amount of compensation paid for the use of
money or forbearance from such use.
Tax-exempt interest income
[FIL2D]
1.
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
2.
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.
3.
4.
5.
6.
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%.
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]).
Deposit substitute
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
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their own needs or the needs of their agent or
dealer (NIRC, Sec. 22 [Y]).
In order for an instrument to qualify as a deposit
substitute, the borrowing must be made from
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).
Foreign currency deposit system
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.
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.
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.
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.
NOTE: If the loan is granted to nonresidents, OBUs,
or local commercial banks, including branches of
INCOME TAXATION
foreign banks authorized by the BSP to transact
business, it shall be EXEMPT.
“Interest Income subject to Final Withholding
Tax (20%)” vs. “Income subject to Gross
Receipts Tax (5%) on banks”
20% FWT ON
INTEREST INCOME
5% GROSS
RECEIPTS
TAX ON BANKS
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It is an income tax
under Title II of the
NIRC (Tax on Income).
It is a business tax
(percentage
tax)
under Title V (Other
Percentage Taxes).
FWT is imposed on the
gross interest income
realized in a taxable
year.
Gross Receipts Tax
(GRT) is measured by
a certain percentage
on the gross receipts
or earnings.
FWT is a withholding
tax.
GRT
is
not
a withholding
tax.
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INCOME TAXATION
NOTE: The 20% final tax withheld on a bank’s passive
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income should be included in the computation of GRT
(China Banking Corporation v.
CIR, G.R. No. 175108, February 27, 2013).
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?
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:
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 dollar
deposit is subject to 7.5% if the earner is a resident
individual (Sec. 24B NIRC).
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:
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a.
b.
It is a passive income subject to a withholding tax
rate of 20%.
It is a passive income subject to final withholding
tax rate of 7.5% (Sec. 24 [B][1], NIRC).
Both interests are not to be declared as part of gross
income in the income tax return.
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: 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.)
INCOME TAXATION
Dividend income
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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.
4.
Scrip dividend – one that is paid in the form or
promissory notes
5. Indirect dividend – one made through the
exercise of right or other means of payment, e.g.
Cancellation orcondonation of indebtedness
Kinds of dividends
6.
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.
3.
Stock dividend – one paid by a coporation with its
own stock.
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).
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.
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).
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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).
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.
The following rules shall apply:
1. 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]);
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.
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%.
The phrase “deemed paid” “tax credit” does
not mean tax credit actually granted by the
foreign country. There is no statutory
INCOME TAXATION
provision or revenue regulation requiring
“actual grant”.
TAX TREATMENT OF DIVIDEND INCOME
Subject
to basic
tax
Subject
to
fi
nal tax
1.
2.
1.
2.
3.
4.
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
PHILIPPINE GROSS
INCOME = % WORLD
GROSS INCOME
SOURCE OF
INCOME
Less than 50%
Entirely without
50 - 85%
Proportionate
(partly within;
partly without)
More than 85%
Entirely within
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The 15% represents the difference between
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INCOME TAXATION
the NCIT of 30% on corporations and the 15%
tax on dividends.
2. Dividends
received
from a
foreign corporation:
a.
b.
derived from the Philippines for three years preceding
the declaration of such dividend (Dimaampao, 2015).
Q: Does tax on income and dividends amount to
double taxation?
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.
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).
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.
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 3year period preceding the declaration of such
dividend should be considered.
joint venture or consortium
taxable as corporation for which
he is a member or co-venturer
Exempt
from tax
Inter-corporate dividends received
from domestic corporation by
another domestic corporation and
resident foreign corporation
(Tabag, 2015)
Summary of tax treatment of dividend received
from domestic corporation
RECIPIENT
TAXABLE (TAX RATE) /
EXEMPT
DC / RFC
Tax exempt
RC, NRC, RA
10%
NRA – ETB
20%
NRA
NETB
NRFC
– 25%
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
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Q: Suppose the creditor is a corporation and the
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INCOME TAXATION
debtor is its stockholder, what is the tax
implication in case the debt is condoned by the
corporation?
generally subject to an income tax of 30% to be
withheld at source (Sec. 28 (b)(1), NIRC).
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: 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)
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?
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
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?
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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 value of FDC’s
shareholdings in FAC (CIR v. Filinvest
Development Corporation, G.R. Nos. 163653 & 167689,
July 19, 2011).
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.
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?
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).
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
Summary of Rules on Dividends
RECIPIENT
SOURCE OF DIVIDENDS
RFC
DC
RC
10% final tax
RA
10% final tax
NRC
10% final tax
NRAETB
20% final tax
NRANETB
25% final tax
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).
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).
DC
Exempt (intercorporate
dividends)
Same rule for RFCs and
NRFCs (see below)
Regular corporate income
tax (30%)
RFC
Exempt (intercorporate
dividends)
Less than 50% of income of RFC/NRFC is from PH:
Nontaxable Income from sources outside PH are not taxable
for RFC and NRFC)
NRFC
30% subject
treaty tax rate
If 50%-85% of income of RFC/NRFC is from PH, a proportion
preferential 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).
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INCOME TAXATION
Subject to
10% final
tax
Royalties on books, other literary
works and musical composition
from sources within the
Philippines.
Subject to
20% final
tax
Royalties derived from sources
within the Philippines other than
royalties subject to 10% to final
tax.
Subject to
basic tax
Royalties derived by RC and DC
from sources without the
Philippines.
BASIS
RENT
As
to Must be
reporting
reported
as
part of gross
income
As to tax rate Regular
progressive
tax
if
individual
ROYALTY
Need not be
reported
since subject
to final tax.
Final tax
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Royalty income
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2019 GOLDEN NOTES
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INCOME TAXATION
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).
Morever, in Universal Food Corporation vs. CA,
1970, it was defined to be the compensation for the
use of a patented invention.
Tax treatment of royalty income
(Tabag, 2015)
Rent is subject to special rate
1.
2.
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])
Items considered as additional rent income
Additional rent income may be grouped into 2:
1. Obligations of Lessors to 3rd parties assumed by
the lessee:
a.
b.
Rent vs. Royalty
c.
d.
2.
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.
Prepaid rent
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
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.
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:
NRC
NRA
Vessel
4.5%
25%
Aircraft,
machineries and
other equipment
7.5%
25%
Other assets
30%
25%
Tax treatment of leasehold improvements by
lessee
Recognized methods in reporting the value of
permanent improvement
Where the lease contract provides that the lessee
will erect a permanent improvement on the rented
property and
ofT Othe
the
U Nafter
I V E R Sthe
I T Y term
OF SAN
T O lease,
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improvement shall become the property of the
lessor, the lessor may, at his option, report the
income therefrom upon either of the following
methods:
UNIVERSITY OF SANTO TOMAS
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INCOME TAXATION
1.
Outright Method – the fair market value of
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2.
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.
Divided by: Lease term
Annual income of X on
the improvement
₱400,000
Regular rental income
600,000
Total
annual
rental
income
₱1,000,000
Tax treatment of advance rental/long term
lease
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.
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.
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.
FORMS OF
ADVANCE
PAYMENT
TAX
TREATMENT
A loan to the G.R.:
Nonlessor from
taxable
the lessee
XPN:
If the
lessee violates
the terms of
the contract
Outright method
Spread out method
An
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
optio
n money for
the property
A
security
deposit
to
insure the
faithful
performance
of the lease
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
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2019 GOLDEN NOTES
10
20
0
G.R.
taxable
Non-
XPN:
If the
lessee violates
the terms of
the contract
G.R.:
taxable
Non-
XPN:
If the
lessee violates
the terms of
the contract
WHEN
TAXABLE
INCOME TAXATION
A
security
deposit which
restricts the
lessor as to its
use
G.R.:
taxable
Non- Taxable at the
time it is
applied
XPN: Security
deposit applied
to rental shall
be subject tom
VAT at the time
of
its
application
Prepaid rental
without
restriction as
to its use
Taxable
In the year it
is
received
irrespective
of
the
accounting
method
employed by
the lessor
Prizes and awards
RECIPIENTS
TAX RATES
Citizen, resident alien or nonresident engaged in trade or
business in the Philippines
Subject to 20%
final
withholding tax
Non-resident alien not
engaged in trade or business
in the Philippines
Corporation (domestic or
foreign)
Subject to 25%
final
withholding tax
Subject to 30%
corporate
income tax
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It refers to amount of money in cash or in kind
UNIVERSITY OF SANTO TOMAS
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20
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INCOME TAXATION
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.
achievement provided, the following conditions
are met:
a.
Tax treatment for prizes and winnings
b.
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.
The recipient was selected without any
action on his part to enter the contest or
proceeding; and
The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
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
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).
Summary of tax treatment of prizes and other
winnings
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
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Exemp
t from
tax
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)
3) Prizes received by individuals from
sources within the Philippines
amounting to P10,000 or more
Subjec
t to
20%
final
tax
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)
Subjec
t to
25%
final
tax
Prizes and other winnings (including
PCSO and Lotto winnings) received by
NRA-NETB
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1) Prizes and award made primarily in
recognition of
•Religious, charitable;
•Scientific;
•Educational artistic, literary; or
•Civic achievement.
Subjec
t to
basic
tax
20
4
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
INCOME TAXATION
(Tabag, 2015)
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subsequently paid by the transferee are
exempt from taxation.
Annuities, proceeds from life insurance and
other types of insurance
2.
Annuity
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.
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.
The portion representing return of premium is not
taxable while that portion that represents interest
is taxable.
Any policy loans or borrowings made on the policy
shall be deducted as advances from the life
insurance proceeds received upon death.
NOTE: The portion of annuity net of premiums is
taxable being interest or earnings of the premium
and not return of capital.
Recipients
proceeds
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?
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).
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.
Proceeds of life insurance
Difference between the tax treatment of life
insurance proceeds under income and estate
taxation
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.
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.
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.
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
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.
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.
20
6
INCOME TAXATION
10607, Sec. 11).
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On the other hand, in income taxation, there is no
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INCOME TAXATION
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.
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.
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?
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.
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.
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]).
The amounts that do not qualify as exclusions are
considered as part of income subject to tax
(Domondon, 2013).
Refer to “Exclusions from Gross Income” for further
discussion.
Income from any whatever source
“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.
Examples of “income from whatever source
derived” which form part of the taxable income
of the taxpayer
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.
1.
2.
3.
4.
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.
Pensions, retirement benefit or separation pay
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.
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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.
7.
Condonation
for
of
indebtedness
a consideration.
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.
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INCOME TAXATION
Condonation of indebtedness
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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.
Tax treatment for condonation of indebtedness
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).
Recovery of accounts previously written off when taxable/when not taxable
“Tax Benefit Rule” or Equitable Doctrine of Tax
Benefit
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.
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)
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.
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Recovery of bad debts
Receipt of tax refund or credit
21
2
INCOME TAXATION
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
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Borrowed money is not part of taxable income
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INCOME TAXATION
because it 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 the investment.
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.
3.
4.
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”.
5.
6.
Source rules in determining income from
within and without
The following are considered as income from
sources within the Philippines:
1.
2.
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
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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
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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”
DEDUCTION
EXCLUSION FROM
Exclusions from gross income
FROM GROSS
GROSS INCOME
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.
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.
Taxpayers who may avail of exclusions
All kinds of taxpayers – individuals, estates, trusts
and corporations, whether citizens, aliens,
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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
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
It refers to amounts
which the law
allows
to
be
deducted
from
gross income in
order to arrive at
net income.
Pertains to the
computation of net
income
Something spent or
paid in
earning
gross income
Example
of
deduction is
business rental
a
Difference among exclusions, deductions and
tax credit
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computation of
gross income.
arrive at the
tax due and
payable
whether residents or non-residents may avail of
the exclusions.
Rationale: The excluded receipts are not
considered as income for tax purposes (Domondon,
2013).
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Incomes
received or
earned but are
not taxable
because of
exemption by
virtue of a law
or treaty; hence,
not included in
the
These are
included in
the gross
income but
are later
deducted to
arrive at net
income
It refers to
foreign taxes
paid
beforehand
but are
claimed as
credits
against
Philippine
income tax to
INCOME TAXATION
Exclusions under the constitution
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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.
“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.
Income derived by the Government or its political
subdivisions from the exercise of any essential
government function
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.
Q: If Mr. Generous gave a gift to Ms. Gorgeous
what are the tax implications?
Exclusions under the NIRC
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.
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 and Devise
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.
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])
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]).
The exclusions are discussed in detail below.
GIFTS, BEQUESTS AND DEVISES
Donation inter vivos and mortis causa
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.
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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.
Gift Tax Test
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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.
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Q: Quiroz worked as chief accountant of a
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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
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.
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).
Q: C is a creditor of D. The debt is condoned by
C. What is the tax implication of the
condonation of debt?
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.
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?
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.
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?
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)
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).
Conditions for the exclusion of life insurance
proceeds from gross income [ProHeDS]
1.
2.
Proceeds of life insurance policies;
Paid to the Heirs or beneficiaries;
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3.
Upon the Death of the insured; 4. Whether in a
single Sum or otherwise.
Rationale for the exclusion of the proceeds from
life insurance
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.
Exceptions to the rule that the amount of the
proceeds of life insurance should be excluded
from the gross income [ASV-PPC]
1.
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
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is the one taxable but not the principal amount
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2.
3.
4.
5.
6.
(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).
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.
b. 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.
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]).
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: 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)
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.
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?
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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.
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
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compensation for the loss of life, hence a return of
capital, which is beyond the scope of income
taxation (Section 32(B)(1), NIRC).
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)
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A: NO. The proceeds of life insurance policies paid
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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).
Amounts
received
under life
insurance
contracts
under
life
insurance endowment or
annuity contracts
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
₱50,000. Is his ₱50,000 insurance proceeds
exempt from income taxation?
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
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
under
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.
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.
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
1.
2.
3.
4.
Amount received by insured;
As a return of premium paid by him;
Under a life insurance, endowment or annuity
contract;
Either:
a.
b.
c.
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.
Retirement Benefits, Pensions, Gratuities, etc.
Retirement benefits, pensions, gratuities, etc.
that are excluded from gross income [7FRUGS2]
1.
Retirement benefits under R.A. 7641
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2.
3.
4.
5.
6.
7.
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
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Salient features of R.A. 7641, amending the
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Labor Code with regard to the retirement pay of
qualified employees in the absence of any
retirement plan
1.
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
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]
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.
1.
2.
3.
In the absence of a reasonable private
benefit plan or agreement providing for
retirement benefits of employees in the
establishment
4.
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.
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).
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
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
Reasonable Private Benefit Plan (RPBP)
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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.
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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?
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A: YES. Pursuant to the NIRC provisions on
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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
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).
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
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).
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?
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?
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,
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.
Conditions in order that separation pay may be
excluded from gross income
1.
2.
3.
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:
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.
Retrenchment
Cessation of business
Redundancy (R.R. 2-98, Sec. 2 b
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[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.
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).
Terminal leave pay
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Terminal leave pay is the amount received arising
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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?
from the accumulation of sick leave or vacation
leave credits. (Commutation of leave credits)
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?
A: It depends.
1.
2.
Tax treatment of sick leave credits
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).
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.
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)
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.
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.
Did Jacobo derive income when he
received his separation pay?
b. Did Kintanar derive income when he
received his separation pay? (1995 Bar)
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
Q: Assuming it does not form part of the
terminal leave pay, as when it is given annually
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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.
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INCOME TAXATION
b.
or employee from the service of the employer
for any cause beyond the control of the said
official or employee (NIRC, Sec 28).
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.
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Q: Z, a Filipino immigrant living in the United
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INCOME TAXATION
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
States, amounting US$1,000 a month. Does the
US$1,000 pension become taxable because he is
now residing in the Philippines?
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)
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).
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:
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:
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.
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
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).
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).
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]).
NOTE: Public policy recognizes the principles of
reciprocity and comity among nations.
Reasons for granting tax exemption through a
treaty
1.
Reciprocity
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2.
To lessen the rigors of international juridical
double taxation
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
Most Favored Nation Clause
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This grants to the contracting party treatment not
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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
Son Inc., G.R. No. 127105, June 25, 1999).
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]).
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?
Compensation for injuries or sickness
Kinds of compensation for injuries or sickness
that may be excluded from gross income
1.
2.
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.
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]).
Q: In the problem above, If the salary actualized
is given by the employer, is it taxable?
A: If it is given by the employer as backwages, it is
taxable.
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.
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?
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)
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).
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]).
Q: What is the income tax implication in the
following insurances?
a.
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Life Insurance
INCOME TAXATION
b. Fire Insurance
c. Accident Insurance
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.
Profit actualized
Profit actualized is always taxable as compared to
salary actualized wherein we need to qualify who
paid the salary.
Miscellaneous items
13th month pay and other benefits
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Gross benefits received by officials and employees
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of public and private entities may be excluded from
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).
NOTE: The amount of ₱30,000, specifically
referring to the general amount of 13 th 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.
Prizes and awards including those in sports
competition
Requisites in order for prizes and awards be
exempted from tax
1.
2.
3.
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.
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)
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: 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: 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
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)
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.
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.
Requisites for the exclusion of prizes and
awards in sports competition from gross
income [PATS]
1.
2.
All Prizes and awards;
Granted to Athletes;
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3.
4.
In local and international sports Tournaments
and competitions; and
Sanctioned by their national sports
associations (NIRC, Sec. 32 B [7] d).
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.
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.
a.
Is the prize money paid to and received by
Mr. A in the US taxable in the Philippines?
Why?
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INCOME TAXATION
b. May Mr. A's prize money qualify as an
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c.
exclusion from his gross income? Why?
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)
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.”
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.”
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.
Income derived by foreign government
For an income derived by foreign government from
investments in the Philippines be exempted from
tax:
1.
2.
3.
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.
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)
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.
Income derived by the government or its
political subdivisions from the exercise of any
essential government function
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.
Government
Owned
Corporations (GOCC)
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and
Controlled
INCOME TAXATION
GOCCs performing:
1. Governmental Function:
GR:
Government
agencies
performing
governmental functions are tax exempt
XPN: Unless expressly taxed
2. Proprietary Functions: subject to tax XPN:
Unless expressly exempted
NOTE: Under Sec. 27 (c) of RA 8424 the following
corporations have been granted exemptions:
1.
2.
Government Service Insurance System
Social Security System
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3.
Philippine Health Insurance Corporation
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4.
Philippines Charity Sweepstakes Office
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?
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).
Gains from the sale of bonds, debentures or
other certificate of indebtedness
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
RA 3538, the exemption of salaries paid in
dollars to non-Filipino citizens for services
rendered to the Ford Foundation
4. RA 6938, Cooperative Code of the Philippines,
as amended by RA 1176, 8241 and 8424
5. RA 7482, Senior Citizens Act as amended by RA
9257
6. 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
3.
Personal Equity and Retirement Account
(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).
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
Exclusions under special laws
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.
Statutory income tax exemptions
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]).
1.
2.
PD 87, Oil Exploration and Development Act, as
amended by PD 1354
EO 226, The Omnibus Investment Code of
1987, as amended
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
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companies, investment houses stockbrokerages
and pre-need plan companies, and the Office of the
Insurance Commission (OIC) for insurance
companies.
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
CONTRIBUTORS
If the contributor
is single
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
If the contributor
is married
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.
OFW
Double the allowable
maximum amount
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The concerned Regulatory Authority must first
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approve the product before being granted
taxexempt privileges by the BIR.
Income earned from investments
reinvestments of the PERA
Refer to discussions on itemized deductions for
the requirements of each deduction.
and
3.
There must be proof of entitement to the
deductions. The burden of proof to establish
the validity of claimed deduction is on the
taxpayer. This is consistent with the rule that
tax exemptions must be strictly construed
against the taxpayer and liberally in favor of
the State.
4.
5.
The deductions must not have been waived.
The withholding and payment of tax required
must be shown (Domondon, 2013).
All income earned from the investments and
reinvestments of the maximum amount allowed
herein are tax exempt.
Maximum annual PERA contribution allowed by
this Act
General rules in claiming deductions
1.
Deductions must be paid or incurred in
connection with the taxpayer’s trade, business,
or profession.
Matching concept of deductibility
This posits that the deductions must, as a
general rule, “match” the income, i.e. helped
earn the income (Domondon, 2013).
DEDUCTIONS FROM GROSS INCOME
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).
These refer to items or amounts authorized by law
to be subtracted from pertinent items of gross
income to arrive at the taxable income.
Nature of deductions
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.
3.
Requisites before deductions are allowed
1.
2.
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).
There must be specific provision of law
allowing the deductions, since deductions do
not exist by implication.
The requirements of deductibility must be met.
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Deductions must be supported by adequate
receipts or invoices (XPN: standard
deduction).
The withholding and payment of tax required
must be shown.
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Where no withholding made but still deductible
A deduction will also be allowed in the following
cases where no withholding of tax was made:
1.
2.
3.
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
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).
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.
NOTE: A RC, NRC, and RA whose income is purely
compensation income are also not entitled to such
deductions.
Deductions that
corporation
can
be
claimed
by
a
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.
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).
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).
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.
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".
Cost of services (COS)
COS means all direct costs and expenses
necessarily incurred to provide the services
required by the customers and clients including:
1.
2.
Return of capital (cost of sales or services)
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
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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).
Itemized Deductions under TRAIN (Sec. 34)
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:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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.
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EXPENSES
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business of the taxpayer, or in the exercise of the
taxpayer’s profession, including:
There shall be allowed as deduction from gross
income
1.
1.
2.
3.
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).
2.
3.
4.
Requisites for deductibility of expenses (in
general)
[D-STROWN]
1.
2.
3.
4.
5.
6.
7.
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.
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.
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).
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?
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.).
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).
Test to determine whether or not an expense is
ordinary and necessary
If they are directly attributable to the development,
management, operation, and or conduct of trade or
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Reasonable allowances for salaries, wages and
other compensation for personal services
actually rendered, including gross monetary
value of fringe benefits;
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.
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Cohan rule
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).
It is the use of estimates or approximations of the
amount of cash and other assets where the
taxpayer lacks adequate records.
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NOTE: If there is showing that expenses have been
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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).
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
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 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: 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. 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
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).
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)
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).
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
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secrets. May Freezy Corporaton claim the
payment to the officer as deduction from its
gross income? Explain. (2014 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).
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Also, the law will not allow the deduction of bribes,
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kickbacks and other similar payments. Applying
the principle of ejusdem generis, payment made by
Freezy Corporation would fall under “other similar
payments” which are not allowed as deduction
from gross income (Section 34(A)(l)(c), NIRC).
3.
Q: How can the taxpayer prove that the expense
has been paid or incurred during the taxable
year?
4.
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.
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
Requisites before an employer can deduct
compensation payments to employees
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)
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.
Inclusions in compensation for services which
are allowed as deductions from gross income
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).
1.
Wages,
salaries,
commissions,
professional fees, vacation-leave pay,
retirement pay, and other compensation 2.
Bonuses in good faith
3. Pensions and compensation for injuries if
not compensated for by insurance or
otherwise
4. 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: 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;
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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;
A person who uses the completed method,
whereby the construction project has been
completed during the year the contract
was signed.
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;
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2.
3.
It must be for personal services actually
rendered; and
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.
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).
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Bonuses given to corporate officers out of sale of
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corporate land are not deductible as an ordinary
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).
The following conditions may be taken into
consideration:
1.
2.
3.
4.
5.
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)
Q: Gold and Silver Corporation gave extra 14th
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)
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.
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?
A: YES, the premiums paid are ordinary and
necessary business expenses of the company. They
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]).
Travelling/transportation expenses
Requisites for its deductibility
1. Reasonable and necessary expenses; 2.
Incurred or paid while away from home; and
3. In pursuit of trade, business or profession.
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.
Rules in deducting travel expenses
1.
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.
2. 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.
3. Reimbursement for travel taxes, airport fees
and other charges, if duly receipted or
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4.
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
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Materials and supplies are deductible only to the
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amount actually consumed or used in the 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.
1.
Aliquot part of the amount used to acquire
leasehold over the number of years the
lease will run
2. Taxes and other obligations of the lessor
paid by the lessee
3. 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.
NOTE: It is NOT the cost of the leasehold
improvements but only its annual depreciation that
is considered as rental expense.
Methods utilized to determine materials used
1.
2.
Actual
consumption
inventory method
Direct purchase method
method
or
Q: Assuming the taxpayer purchases materials
but has no record of consumption, is it
deductible?
Repairs and maintenance
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.
A: YES, provided the net income is clearly reflected
by direct purchase method.
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).
EXPENSES UNDER LEASE AGREEMENTS
Expenses under the lease agreement which
may be allowed as deductions by the lessor
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).
Rentals and/or other payments for use or
possession of property
Among such deductions may be cost of repairs and
maintenance, salaries and wages of employees
attendant to such lease, interest payment, property
taxes, etc.
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.
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.
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.
Inclusions in rental expense
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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).
Expenses for professionals
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Examples of expenses for professionals
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1.
2.
3.
4.
5.
6.
7.
8.
Supplies expense
Expenses paid in the operation and repair of
transportation equipment used in making
professional calls
Membership dues to professional associations
or societies and subscriptions to journals
Office rentals
Utilities expense for water and electricity
consumed in connection with the exercise of
the profession
Communication expense
Expenses for hiring employees or office
assistants
Expenses incurred for books, furniture and
professional instruments and equipment with
short useful life
NOTE: Those of a permanent character are not
allowable as deductions.
Ceiling or limitation on the amount allowed as
entertainment, amusement and recreation
expense
Entertainment, amusement and recreation expense
shall be allowed as a deduction from gross income
but in no case shall exceed:
1.
2.
3.
Entertainment/representation expenses
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: Who may claim Entertainment, amusement
and recreation expenses?
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
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).
Apportionment Formula:
Net sales/net revenue
x
Total Net sales and revenue
Actual Expense
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.
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
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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).
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.
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A yacht is considered an entertainment facility if its
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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.
3.
Expenses
that
are
not
considered
entertainment, amusement and recreation
expenses
1.
2.
3.
4.
5.
6.
Expenses paid to advertising firms to promote sale
of capital stock for acquisition of additional capital
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 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)
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?
Advertising and Promotional Expenses
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.
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).
Kinds of advertising and their deductibility
1.
2.
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
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Advertising to promote the sales of SHARES OF
STOCK or to create a corporate image is not
deductible as an advertisement (Domondon,
2009).
Political Campaign Expenses
Rule on deduction and withholding of campaign
expenditures
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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).
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NOTE: A creditable income tax at the rate of 5%
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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
campaign contribution to political parties and
candidates (R.R. No. 8-2009).
Training Expenses
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).
Other business expenses allowed by special
laws as deductions
1.
2.
3.
4.
5.
Discounts granted by establishments for senior
citizens and PWDs (RR 8-2010 and RR 52017);
Expenses incurred by a private health and nonhealth 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).
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
shall be allowed as deduction from gross income
(Sec 34 (B), NIRC).
Requirements under the NIRC for interest to be
deductible
1.
2.
3.
4.
5.
6.
7.
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).
Q: How is interest as a deduction from gross
income defined? (1992 Bar)
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
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2.
3.
4.
surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation on
deduction
Paid by a corporation on scrip dividends
On deposits paid by authorized banks of the
BSP to depositors, if shown that the tax on such
interest was withheld
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
Non-deductible Interest Expense
1.
2.
3.
Interest on preferred stock, which in reality is
dividend
Interest on unpaid salaries and bonuses
Interest calculated for cost keeping
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4.
Interest paid where parties provide no
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5.
6.
7.
2.
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
It does not arise from interest bearing
obligation (PICOP v. CA, G.R. Nos. 10694950;8485, December 1, 1995).
Q: Does the CIR have the power to impute
theoretical interest?
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.
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).
Related Taxpayers
Interest paid in advance
1.
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.
2.
3.
4.
5.
6.
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
Optional treatment of interest expense on
capital expenditure
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).
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.
Arm’s length interest rate
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.
Interest periodically amortized
If indebtedness is payable in periodic
amortizations, interest is deducted in proportion to
the amount of the principal paid.
Theoretical interest is not deductible
It is not deductible because:
1.
Interest expense incurred to acquire property
for use in trade / business / profession
It is not paid or incurred for it is merely
computed or calculated;
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Q: Is the interest on loans used to acquire
capital equipment or machinery deductible
from gross income? (1999 Bar)
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INCOME TAXATION
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).
Reduction
of
interest
expense/interest arbitrage
Limitation on the amount of deductible interest
expense
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The taxpayer’s otherwise allowable deduction for
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interest expense shall be reduced by an amount
equal to 33% of the interest income subject to final
tax (Sec. 34 [B][1], NIRC).
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.
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.
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%.
Tax arbitrage
It is a strategy which takes advantage of the
difference in tax rates or tax systems as the basis
for profit.
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).
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.
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?
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.
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).
Requisites for deductibility of taxes
1.
2.
3.
4.
Examples of taxes which are deductible
1.
2.
3.
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
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
GR: Taxes may be deducted only on the year it was
paid or incurred.
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XPN: In the case of contingent tax liability, the
obligation to deduct arises only when the liability
is finally determined.
Non-deductible taxes
Taxes not allowed as deduction from gross income
to arrive at taxable income:
1. Income
tax provided under the NIRC
(Philippine income tax)
2.
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.
Estate tax and donor’s taxes
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4.
Special assessments - taxes assessed against
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5.
6.
7.
8.
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
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.
Tax credit vs. Tax deduction
TAX CREDIT
Treatments of surcharges / interests / fines for
delinquency
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).
TAX
DEDUCTION
Subtracted
from
Tax due
Income
tax
before
Reduces
The taxpayer’s
tax
liability
peso for peso
Income upon
which tax
liability is
computed
Persons entitled to claim tax credit
1.
2.
3.
4.
Treatment of special assessment
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.
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
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.
2.
3.
Alien individuals, whether resident or
nonresidents
Foreign corporation, whether resident or
nonresidents
Non-resident citizen including overseas
contracted workers and seamen
Tax credit vis-a-vis deduction
Limitations when claiming tax credit
Treatment to income taxes paid in foreign
countries
1.
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.
2.
Foreign tax credit
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
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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).
INCOME TAXATION
Q: Are taxes paid and subsequently refunded
taxable or non-taxable? (2005 Bar)
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.
LOSSES
1.
Actually sustained during the taxable year, and
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2.
Not compensated for by insurance or other
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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).
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).
A declaration of loss must be filed with the BIR
within 45 days after the date of event.
Measurement of casualty loss
Requisites for deductibility
The requisites for deductibility of a loss are:
[TAE-TIE-C45]
1.
2.
1.
2.
3.
4.
5.
6.
7.
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
Types of losses
1.
Ordinary losses – incurred in trade, profession
or business.
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.
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.
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.
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).
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)
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.
3. 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
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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:
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.
“Substantial change in ownership of the
business or enterprise”
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The 75% equity rule (or ownership or interest
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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.
Effect of NOLCO when the corporate
taxpayer is subject to MCIT
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.
However, such corporation cannot enjoy the
benefit of NOLCO for as long as it is subject to
MCIT in any taxable period.
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).
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).
Who are not qualified to avail NOLCO?
1.
Determination of whether or not there is
substantial change in ownership
2.
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).
3.
4.
5.
6.
Q: In case of mines other than oil and gas wells,
NOLCO shall be allowed for what period?
4. Capital losses - Losses from sale or exchange of
capital assets. It is deductible to the extent of
capital gains only.
A: A net operating loss during the first 10 years of
operation shall be allowed as NOLCO for the next 5
years.
Q: What is the rationale for the rule prohibiting
the deduction of capital losses from ordinary
gains? Explain. (2003 Bar)
Persons entitled to deduct NOLCO from
gross income
1.
2.
3.
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
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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)
29
6
INCOME TAXATION
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).
Refer to discussions on “Dealings in property”
for further discussion.
sale or exchange, on the last day of such
taxable year, of capital assets (Section 34 (D),
NIRC).
Securities becoming worthless
If securities become worthless during the taxable
year and are capital assets, the loss resulting
therefrom shall be considered as a loss from the
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).
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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.
LOSSES
RULES ON D
Ordinary losses
Deductible, net of indemnity
N.B. May be deducted from capital gain
Capital losses
Deductible to the extent of capital gains
Securities becoming
worthless
Deductible – if worthless securities ar
a bank or trust company)
Non-deductible - If worthless securitie
GR Losses from wash sale are not dedu
Losses on wash sales
XPN When taxpayer is a dealer in secur
of stocks / securities
resulted was made in the ordinary co
deductible in full.
Wagering losses
NOLCO
Deductible only to the extent of wageri
Deductible for the next 3 consecutive ye
that:
i. The taxpayer was not exempt from
operating loss; and
ii. There has been no substantial cha
enterprise.
N.B. A net operating loss during the firs
NOLCO for the next 5 years in case of m
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
29
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INCOME TAXATION
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
Abandonment losses
thereof, as well as the undepreciated costs of equipment directly used therein,
in petroleum
shall be allowed as a deduction in the year of abandonment.
operations
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.
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Non-deductible losses
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0
INCOME TAXATION
Absence of creditor is not bad debt.
1.
2.
3.
4.
5.
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).
Requisites for deductibility [UST-CAR]
1.
To prove that the taxpayer exerted diligent
efforts to collect the debts:
a.
b.
c.
d.
Marcelo doctrine
2.
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).
3.
BAD DEBTS
5.
4.
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:
1.
2.
Sending of statement of accounts;
Sending of collection letters;
Giving the account to a lawyer for
collection; and
Filing a collection case in court.
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).
Not connected with trade, business or
profession; and
Between related taxpayers (Sec 35 (E),
NIRC).
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).
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).
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.
The debts are uncollectible despite diligent
effort exerted by the taxpayer;
6.
Must not be sustained in a transaction entered
into between related parties.
Related parties
1.
Bad Debt Theory
Members of the same family (brothers and
sisters, whether whole or half-blood; spouse,
ancestors, and lineal descendants)
UNIVERSITY
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2.
3.
4.
5.
6.
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
30
2
INCOME TAXATION
NOTE: Relatives by affinity and collateral relatives
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other than brothers and sisters are not considered
related parties.
as part of the gross income in the year of recovery
to the extent of the income tax benefit of said
deduction (Sec. 34 [E], NIRC). This is also known as
the tax benefit rule.
Q: What factors will determine whether or not
the debts are bad debts? (2004 Bar)
DEPRECIATION
A: The factors to be considered include, but are not
limited to, the following:
1.
2.
3.
4.
5.
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).
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).
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:
Requisites for deductibility
a.
3.
b.
1.
2.
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).
4.
5.
Testimony of a CPA as substantial evidence for
the deductibility of a claimed worthless debt
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).
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).
Deductibility of “reserves for bad debts” from
gross income for income tax purposes
Depreciable and non-depreciable assets for tax
purposes
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).
1.
Effect of recovery of bad debts
That recovery of bad debts previously allowed as
deduction in the preceding years shall be included
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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.
304
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;
INCOME TAXATION
c.
d.
All kinds of intangible property (other than
shares of stock) with life of more than 1
year;
Subject
to
exhaustion
within
a
determinable period of time, that is it has a
limited useful life.
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2.
Non-depreciable assets:
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INCOME TAXATION
a.
b.
c.
d.
e.
f.
g.
Land, apart from the improvements of
physical development added to it, cannot
be depreciated;
Inventories or stock in trade;
Personal effects or clothings, except
customes used in theatrical business;
Bodies of minerals subject to depletion;
Automobiles and other transportation
equipment used solely by the taxpayer for
pleasure;
Building used solely by the taxpayer as his
residence, and the furniture or furnishing
used in said building;
Intangibles, the use in trade, business or
exercise of profession is not of limited
duration.
Q: Is depreciation of goodwill deductible from
gross income? (1999 Bar)
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.
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.
Methods for computing depreciation allowance
under NIRC
1.
2.
3.
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;
4.
Any other method which may be prescribed by
Department of Finance upon recommendation
of the CIR.
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.
NOTE: If the property is not directly related to
production, depreciation is for 5 years using
straight line method (Sec. 34 F[4], NIRC).
Method to be used in depreciation of properties
used in mining operations other than petroleum
operations
1.
2.
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.
Provided, that the contractor notifies the CIR at the
beginning of the depreciation period which
depreciation rate allowed will be used.
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?
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]
UNIVERSITY
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Q: Z purchased fully depreciated machineries
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
308
INCOME TAXATION
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 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)
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 OF OIL AND GAS WELLS AND MINES
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.
Conditions for deductibility: (COILE)
The method allowed under the rules and
regulations prescribed by the Secretary of
Finance is cost depletion method;
b. Can be availed of by oil and gas wells and mines;
c. The basis of cost depletion is the capital
invested in the mine which is the accumulated
exploration and development expenses;
d. When the allowance shall equal the capital
invested no further allowance shall be granted;
e. In case of RFC, allowance for depletion shall be
authorized only in respect to oil and gas wells
and mines located in the Philippines.
a.
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).
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.
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
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
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).
Requisites for deductibility [AW-SEA]
1.
2.
3.
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]
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a.
b.
c.
d.
e.
f.
g.
2.
3.
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]
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INCOME TAXATION
i. Cultural ii.
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Charitable iii.
Health
iv.
Educational v.
Scientific vi.
Social welfare
vii. Character building &youth and sports
Development viii.
Research
ix. Any combination of the above
b.
c.
d.
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
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).
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.
Donations that are subject to limitation
1.
2.
4.
Donations of prizes and awards to Athletes (RA
7549, Sec. 1)
3.
Donations that are deductible in FULL under
special laws
4.
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)
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.
312
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
INCOME TAXATION
-
-
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).
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Period for amortizing the deferred research and
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INCOME TAXATION
development expenditures
3.
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).
4.
Research and development expenditures that
are not deductible
PENSION TRUSTS
2.
3.
4.
5.
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).
Requisites for deductibility [P-FRANC]
1.
2.
6.
Deductible payment to pension trusts
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).
1.
5.
The pension plan is reasonable and actuarially
sound
The deduction is apportioned in equal parts
over a period of 10 consecutive years beginning
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
1.
Employer’s current liability – amount
contributed during the taxable year shall be
treated as an ordinary and necessary expense
2. 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).
Q: When can an employer claim as deduction the
payment of reasonable pension?
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
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b.
c.
½ month’s basic salary of all the employees. It
is part of the ordinary and necessary expenses.
NO, part of the net income of the university
inures to the benefit of its private stockholders
(Sec. 34 [H], NIRC).
NO, for the beneficiary is the employer (Sec. 36
[A][4], NIRC).
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INCOME TAXATION
d.
NO, contributions to a newspaper fund for
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needy families are not deductible for the reason
that the income inures to the benefit of the
private stockholder of the printing company.
Additional requirements for deductibility
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.
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).
Q: On the part of the contributor, are
contributions to a candidate in an election
allowable as a deduction from gross income?
(1998 Bar)
Non-Life
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.
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318
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).
INCOME TAXATION
date of its payment (Sec. 37
[B], NIRC).
Mutual
insurance –
mutual fire
and mutual
employer’s
liability and
mutual
workmen’s
compensation
and mutual
casualty
insurance
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).
Deductions under special laws
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
Free Legal Assistance Act of 2010
Assessment
Insurance
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]).
Mutual
marine
insurance
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
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.
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.
Condition for it to be availed of as a 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
Aid Services for Practicing Lawyers, under BAR
Matter No. 2012, issued by the SC.
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
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
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expense from gross income and no longer as tax
credit (CIR v. Central Luzon Drug Corp., G.R. No.
159610, 2008).
Persons who could avail of the deduction for the
20% senior citizens discount
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
1.
2.
3.
4.
5.
6.
7.
8.
9.
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
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INCOME TAXATION
1.
Only that portion of the gross sales exclusively
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2.
3.
4.
5.
6.
7.
used, consumed or enjoyed by the senior citizen
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).
Sales on discounts on (PWD)
PWDs are entitled to claim at least 20% discount.
1. 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.
Additional deduction from gross income of
private establishments for compensation paid
to senior citizens
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).
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:
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.
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).
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Thus, if a PWD is also a senior citizen, he can
only claim one 20% discount on a particular
sales transaction.
2.
322
Conditions for Availment by establishments of
sales discounts as special deduction from gross
income:
INCOME TAXATION
a.
b.
Allowed as deduction from gross income
for the same taxable year when the
discount is granted;
Only that portion of the gross sales
exclusively used, consumed, or enjoyed by
the PWD shall be eligible for the deduction
Less: Sales Returns
Cost of goods sold
25,000
600,000
25,000
600,000
GROSS INCOME
Less: Deductions
OSD (650k x
40%)
Itemized
TAXABLE INCOME
Rate of Taxos
INCOME TAX DUE
650,000
650,000
260,000
390,000
30%
117,000
200,000
450,000
30%
135,000
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c.
Only the actual amount of the sales
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INCOME TAXATION
d.
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.
Optional Standard Deduction
ITEMIZED
DEDUCTIONS
It must be
substantiated
by receipts.
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
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.
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.
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
Gross Sales
Rental Income
TOTAL REVENUE
OSD
1,000,000
275,000
1,275,000
ITEMIZED
1,000,000
275,000
1,275,000
NOTE: It should be emphasized that the “cost of
sales” in case of individual seller of goods, or the
“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).
Persons who may avail of the OSD under the
NIRC
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.
Itemized Deductions vs. OSD
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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.
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.
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
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.
GENERAL PROFESSIONAL PARTNERSHIP
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INCOME TAXATION
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.
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.
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).
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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.
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)
Following the new income tax forms as prescribed in RR 2-2014, the following are not entitled to avail the OSD:
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).
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)
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.
Determination of OSD allowed for individuals, corporations, and GPPs
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.
Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or
has been made (Major Repairs)
4.
Premiums paid on any life insurance policy covering the life
INDIVIDUAL
of any officer or employee, or of any person financially interested in
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INCOME TAXATION
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. Interest expense, bad debts, and losses from sales of property between related parties
6. Bribes, kickbacks and other similar payments
7. Items where the requisites for deductibility are not met
SUMMARY OF RULES ON DEDUCTIONS WITH LIMITS
LIMIT
Transportation
Cost of the plane ticket. Any excess is disallowed
Travel Allowance
$150 per day for trips to US, Australia, Canada, Europe, Middle East and Japan; $100
per day for other places.
Entertainment,
Amusement, And
Recreational
Expense
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)
Interest Expense
The allowable deduction have been reduced by an amount equal to 33% of the
interest income subject to tax
Taxes
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
Capital Losses
Deductible up to the extent of capital gains
Wageriing Losses
Deductible only to the extent of wagering gains.
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permanently abroad or to
return to and reside in the
Philippines (Sec. 22 [E], NIRC).
ALIENS
CITIZENS
RC
NRC
RA
NRA
An individual
whose
residence
is
within the
Philippines
but who is not
a
citizen
thereof (Sec.
22 [F], NIRC)
An individual whose residence
is not within the Philippines
and who is not a citizen thereof
(Sec. 22 [G], NIRC)
Engaged in
trade or
business
NOT engaged
in trade or
business
An alien who
stays in the
Philippines
for
an
aggregate
period
of
more than
180
days(Sec. 25
[A], NIRC)
An alien who
stays in the
Philippines for
days or less
(Sec. 25
[B], 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.
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INCOME TAXATION
A citizen of the
Philippines
who stays in
the Philippines
without the
intention
of
transferring
his
physic
al presence
abroad
whether
to
stay
permanently
or temporarily
as an overseas
contract
worker
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)
NOTE: Taxpayer shall submit
proof to the CIR to show his
intention of leaving the
Philippines to reside
BASIS
Tax
treatment
Personal
exemption
RA
NRA
ETB
NETB
0% 35%
schedular
rate
50%35%
schedular
rate
25% of
gross
income
Entitled
Entitled
subject to
the rule on
reciprocity
Not
entitled
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INCO
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INCOME TAXATION
ME 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
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
3. Special class of individual employees
Minimum wage earner
Significance of classifying an alien as a resident or a non-resident
Special classes of aliens under NIRC
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Special
aliens
are
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individuals
with managerial/highly technical positions working in:
[ROP]
334
INCOME TAXATION
1.
Regional or area headquarters and regional
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2.
3.
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
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,
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NIRC)
Gross Compensation Income
xxx
Less: Personal exemptions
(xxx)
Premium payment on health
and/or hospitalization insurance
(xxx)
__________ Net Compensation
Income xxx
Add: Net business income or
xxx
Net professional income
xxx
Other income
xxx
__________
Taxable income subject to
graduated rates
xxx
INCOME TAXATION
General Principles and Applicable Tax Rates
GROSS OR NET
INCOME DERIVED FROM
SOURCES
INDIVIDUAL TAXPAYER IS A:
Within the
Philippines
Outside the
Philippines
RC
√
√
RATE
Gross Income Taxation
(GIT) or Net Income
Taxation (NIT)
Employee:
NIT
;
Businessman: NIT/GIT, if he
availed of the OSD
0-35%
NRC
X
NIT
0-35%
OCW/Seaman
X
NIT
0-35%
Employee: GIT
Businessman: GIT
0-35%
RA
√
X
NRA-EBT
√
X
NIT
0-35%
GIT
NRA-NEBT
√
X
Special Alien
√
X
Estate Under Judicial
Settlement
√
√
Irrevocable Trust
√
Co-owners
√
25%
GIT
15%
NIT
0-35%
√
NIT
0-35%
√
NIT
0-35%
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INCOME BRACKET
APPLICABLE TAX
RATE
Not over ₱250,000
+
Tax
exempt
Over
₱250,00
0
but not
over
₱400,00
0
20% of
the
+ excess
over
₱10,000
Over
₱400,00
0
but not
over
₱800,00
0
₱30,000
25% of
the
+ excess
over
₱30,000
Over
₱800,00
0
but not
over
₱2,000,0
00
₱130,00
0
30% of
the
excess
+
over
₱800,00
0
Over
₱2,000,0
00
but not
over
₱8,000,0
00
₱490,00
0
32% of
the
excess
+
over
₱2,000,
000
₱2,410,
000
35% of
the
excess
+
over
₱8,000,
000
Over
₱8,000,0
00
Particulars
Graduated
IT rates
Applicability
In
general,
applicable to
all individuals
UNIVERSITY OF SANTO
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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
AS
TOM
income does
noe exceed
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INCOME TAXATION
Graduated rates applicable to the income of
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individuals
Allowed
deductions
Allowable
itemized
deductions or
Optional
Standard
Deduction
(OSD)
Allowed
reduction
of only
250,00
0 pesos from
an individual
whose income
comes purely
from business
or practice of
profession
Business tax
Percentage
Tax or VAT
If qualified, not
subject to PT
Required
financial
statements
1 . If
itemized:
FS – if gross
is less than
3 million
pesos;
Audited FS
– if gross is
more than 3
million
If qualified, no
FS required
2 . If OSD, no
FS required
INCOME TAX ON RESIDENT CITIZENS,
NONRESIDENT CITIZENS AND RESIDENT ALIENS
Coverage
(Sec. 24 [A] [2], TRAIN)
1.
What are the salient features of both the graduated
and the 8% income tax rates? (RMC
50-2018)
2.
3.
3,000,000
pesos
Basis of IT
Net
Gross
taxabl sales/receipts,
e income
and other
nonoperating
income
4.
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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
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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.
Q: Ms. C, a resident citizen, bought ready-towear
goods from Ms. B, a nonresident citizen.
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)
A:
a. YES. The income of Ms. B from the sale of readytowear 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).
The test is whether such income is received by virtue of
an employer-employee relationship.
Requisites for taxability of compensation
income [SAR]
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
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.
Q: Give an instance that payment is made for
services rendered yet it may not qualify as
compensation income.
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.
Taxation on 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).
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).
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2.
Monetary compensation
a. Regular salary/wage
b. Separation pay/retirement benefit
otherwise exempt
c. Bonuses, 13th month pay, and other
benefits not exempt
d. Director’s fees
not
Non-monetary compensation
Fringe benefit not subject to tax
Exclusions from Compensation Income
1.
2.
3.
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
INCOME TAXATION
Deductions from Compensation Income
1.
2.
Personal exemptions
Additional exemptions
Fringe Benefits
Managerial
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.
Supervisory
employees
Employees who effectively
recommend such managerial
actions, if the exercise of such
authority is not merely
routinary or clerical in nature
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Fringe benefit is any good, service or other benefit
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INCOME TAXATION
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:
Nature of a fringe benefit tax (FBT)
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]).
[HEV-HIM-HEEL]
1.
2.
3.
4.
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. 398, 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.
Thus:
Tax treatment for fringe benefits
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).
FBT
RATE
65%
35%
NRA-NEBT
75%
25%
Special alien and any
Filipino employees
who are employed
and occupying the
same position as
those occupied or
held by the special
alien employees.
85%
15%
Employees in special
economic
zones
(Clark
Special
Economic Zone and
Subic Special
Economic and Free
Trade Zone)
75%/ 85%
25%/
15%
Citizen, RA, NRAEBT
Difference among Managerial, Supervisory and
Rank-and-File Employees
but
requires
the
use
of independent
judgment.
Rank-andfile
employees
GROSSEDUP
DIVISOR
EMPLOYEE
Employees who are holding
neither managerial
nor
supervisory position.
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If the fringe benefit is granted or furnished in:
1.
Money, or is directly paid for by the employer – the
value is the amount granted or paid;
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INCOME TAXATION
2.
Property other than money and ownership is
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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)
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.
Basic salary of managerial or supervisory employee is
excluded and not subject to FBT because it is part of his
compensation income.
3.
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
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Salaries and wages of managerial
supervisory employee, not subject to FBT
or
INCOME TAXATION
Compensation Income vs. Fringe Benefit
COMPENSATION INCOME
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.
FRINGE BENEFIT
GR: Not reported as part of the
gross income of an employee
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 employee is liable to pay the tax
on his income earned.
As to taxpayers covered
Managerial,
supervisory,
rankand-file employees
As to treatment
Subject to creditable withholding
tax – the employer withholds the tax
upon the payment of the
compensation income.
The employer pays the fringe
benefit tax on behalf of the
employee.
and Managerial
and
supervisory employees
Subject to final withholding tax
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Fringe benefits exempt from fringe benefits tax
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INCOME TAXATION
meals
1.
2.
3.
4.
5.
6.
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)
Such shall not be considered as part of the employee’s
gross income if:
a.
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])
Benefits which are considered necessary to the
business of the employer or are granted for the
convenience of the employer
1.
2.
3.
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.
4.
5.
Convenience of the Employer Rule
6.
An exemption from taxation is granted to benefits
which are given to the employee for the exclusive benefit
or convenience of the employer.
Requirements for the application of
convenience of the employer rule where the
employer furnished living quarters
the
7.
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).
8.
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. 187).
9.
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
Requirements for the application of the
convenience of the employer rule in case of free
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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)
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INCOME TAXATION
A: NO. X is neither a managerial nor a supervisory
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employee. Only managerial or supervisory employees
are entitled to a fringe benefit subject to the FBT. Even
assuming that he is a managerial or 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)
1.
2.
3.
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.
4.
Expenses treated as non-taxable fringe benefits
1.
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);
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.
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, 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
2.
3.
4.
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).
A housing unit which is situated inside or adjacent
to the premises of a business or
factory;
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.
1.
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]).
Expenses treated as taxable fringe benefits
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A motor vehicle shall be subjected to fringe benefits tax
whenever the employer:
2.
3.
4.
5.
6.
354
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.
INCOME TAXATION
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.
Interest on loan at less than market rate
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If the employer lends money to his employees free of
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INCOME TAXATION
interest or at a rate lower than 12%, such interest
foregone by the employer or the difference of the
interest assumed by the employee and the rate of 12%
shall be treated as fringe benefit.
GR: The cost of life or health insurance and other nonlife
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;
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]).
Expenses for foreign travel
GR: Fixed and variable transportation, representation
and other allowances are subject to FBT.
Stock Options
The difference between the fair market value and the
exercise price at the time of exercise of stock options are
subject to FBT.
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.
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.
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]).
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.
Educational assistance to the employee or his
dependents
GR: The cost of the educational assistance to the
employee which is borne by the employer shall be
treated as taxable fringe benefit.
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.
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]).
Life or health insurance
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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).
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, 52011, 5-2011, 8-2012, and 1-2015, de minimis benefits
include:
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Monetized unused vacation leave credits of
employees
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.
Medical cash allowance to dependents of
employees
Not exceeding ₱750 per semester or ₱125 per
month
Rice subsidy
₱1,500 or one sack of 50-kg rice per month
amounting to not more than P1,500
Uniforms and clothing allowances
Not exceeding ₱5,000 per annum (R.R. 8-2012)
Actual medical assistance, e.g. medical allowance
to cover medical and healthcare needs, annual
medical/executive check up, maternity
assistance, and routine consultations
Not exceeding ₱10,000 per annum
Not exceeding ₱300 per month
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
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)
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All other benefits given by employers, which are
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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. 52011).
1.
2.
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
Thirteenth-month pay equivalent to the
mandatory one month basic salary of officials
and employees of the government, (whether
national or local), including governmentowned 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,
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).
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:
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Summary of tax implications of employees
SALARY
• 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)
SICK LEAVE/
VACATION
LEAVE/SERVICE
INCENTIVE LEAVE
(SIL)
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
BACKWAGES
• 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.
Taxable because it is income actually given by the employer
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INCOME TAXATION
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.
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.
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INCOME TAXATION
INCOME TAX ON NON-RESIDENT ALIENS ENGAGED
IN TRADE OR BUSINESS
casual gains, profits, and income, and capital gains, a
tax equal to twenty-five percent (25%) of such income.
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.
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 previous
discussions
on
capital gains
under
“Dealings in Property.”
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?
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.
A: X’s taxable income for the year 2009 is ₱300,000
computed as follows:
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)
Gross Income (₱25,000 x 12)
Less:
Basic Personal exemption
Additional Exemption (25K x 4)
PHHI
₱300,000
(50,000)
(100,000)
--------____________
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).
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.
Q: How much is his income tax payable?
INCOME TAX ON NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS
A: From the taxable income of ₱300,000, the income tax
payable is ₱65,000.
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
Over
but
₱250,000
not
over
P500,000
₱50,000+30% of the
excess over ₱250,000
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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?
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
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INCOME TAXATION
The following individuals are exempt from income tax:
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c.
If the senior citizen will pre-terminate his 5year long-term deposit or investment in the
form of savings, common or individual trust
funds,
deposit
substitutes,
investment
management accounts and other investments
evidenced by certificates in such form
prescribed by the Bangko Sentral
ng Pilipinas 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%
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).
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);
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.
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);
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f.
Requirements in order for senior citizen to avail
tax exemption
1.
He must be qualified as such by the CIR or RDO of
the place of his residence;
INCOME TAXATION
2.
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);
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3.
If qualified, his name shall be recorded by the RDO
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INCOME TAXATION
in the Master List of Tax-Exempt Senior Citizens for
that particular year, which the RDO is mandatorily
required to keep.
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
of the statutory limit of P30,000 (Now at
P90,000) is no longer entitled to the exemption
provided by R.A. 9504.
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).
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.
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,
Statutory Minimum Wage
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.
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. NCR20).
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.
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
Whether an MWE is exempt for the entire
taxable year 2008 or from 6 July 2008 only;
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allowances, honoraria, commissions, allowances or
benefits that an employer may pay or provide an
employee.
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
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INCOME TAXATION
R.A. 9504(Soriano v. Secretary of Finance, G.R. Nos.
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184450, 184508, 184538 & 185234, January 24,
2017).
3. Persons exempted
agreement
under
international
Those
employed
by
Embassies/Diplomatic Missions
Foreign
c.
Kinds of corporation under the NIRC
1.
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).
INCOME TAX ON CORPORATIONS
2.
Include:
a. Partnerships
b. Joint stock companies
c. Joint accounts (cuentasen participacion)
d. Associations, or
e. Insurance companies
Not include:
a. General Professional Partnerships (GPP)
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.
b.
A joint venture or consortium formed for
purposes of undertaking construction projects
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2.
3.
4.
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
2.
A corporation for income tax purposes shall:
1.
or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating or consortium agreement under
a service contract with the government
(Sec. 22 [B], NIRC).
374
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 3- hectare
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.
Does the JVA entered into by and between Weber
and Prime create a separate taxable
INCOME TAXATION
entity? (2007 Bar)
A: NO. Since the arrangement between Weber Realty Co.
and Prime Development Co. is for the purpose of
undertaking a construction project, 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).
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Kinds of corporate taxpayers and their rates (2008 Bar)
CORPORATE TAXPAYER IS A:
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
TAXABILITY OF INCOME
DERIVED FROM SOURCES
Within the
Philippines
Outside the
Philippines
√
√
Net taxable
income
30%
√
X
Net taxable
income
30%
√
X
GROSS income
30%
Net taxable
income
10%
√
5.
Offshore banking units
Branch profit remittances
Regional area
headquarters
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
(Sec 27 and 28, NIRC)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
RATE
√
10%
30%
Tax-exempt
Special
Resident
Foreign
Corporation
1. International carrier
2.
3.
4.
TAX BASE
GROSS income
√
X
gross
2 ½% of Philippine
of
gross billings
10%
of
income
15%
remittances
Tax-exempt
10%
GROSS income
25% of
income
√
X
7 ½% of
income
gross
4 1/2 % of
income
376
gross
gross
INCOME TAXATION
INCOME TAX ON DC AND RFC
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6.
Capital gains from sale of shares not traded in
the stock exchange
7. Income derived under the Expanded Foreign
Currency Deposit System
8. Inter-corporate dividends
9. Branch profit remittance tax
Regular
Tax 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).
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.
Improperly Accumulated Earnings Tax
- 10% of improperly accumulated earnings
5.
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.
Illustration:
Final tax on passive income
Gross Sales
Less:
Sales Returns/Allowances/Discounts
Cost of Goods Sold/Cost of Services
___________________________________________
Gross 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).
Less:
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).
Taxable Income
x 35%
___________________________________________
NCIT due
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.
Final tax on passive income
Interest from deposits and yields and royalties
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Allowable Deductions
___________________________________________
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).
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.
Cost of Goods Sold (COGs) for Trading or
378
INCOME TAXATION
Merchandising
A:
1.
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.
The optional tax is available only to firms
whose ratio of cost of sales/services to
gross sales/receipt does not exceed 55%:
Cost of sales/services
Cost of Goods Sold (COGs) for a Manufacturing
Concern
2.
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.
3.
Cost of Goods Sold (COGs) for a Service Concern
(Cost of Services)
4.
<=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.
NOTE: Gross income and cost of goods sold for
purposes of Optional Gross Income Tax is the same
as defined in MCIT.
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.
Minimum Corporate Income Tax
Concept and rationale of MCIT
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.
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.
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.
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).
NOTE: No authority yet has been given by the
President. Thus, the optional gross income tax is
still not implemented.
Q: What are the other conditions for the
availability of Optional Gross Income Tax? (Sec.
27 [A], NIRC)
Q: What is the purpose of MCIT? (2001 Bar)
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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.
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.
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).
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 4th 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?
MCIT (₱300,000 x 2%)
NCIT (₱100,000 x 30%)
Income tax due – NCIT
(whichever is higher)
₱ 6,000
₱30,000
₱30,000
MCIT (₱400,000 x 2%)
NCIT (₱20,000 x 30%)
Income tax due – MCIT
₱8,000
₱6,000
₱8,000
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INCOME TAXATION
2)
A domestic corporation in its 4th year of
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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?
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
(BIR), regardless of whether the corporation is
using the calendar year or fiscal year.
(whichever is higher)
Q: What is the gross income for purposes of
computing MCIT?
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).
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.
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.
Imposition of MCIT
Q: When is MCIT reported and paid?
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).
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).
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.
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: 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.
Q: When shall the MCIT commence to be
imposed on a corporation?
Q: CREBA assails the constitutionality of MCIT
on the contention that it violates due process. Is
the imposition of MCIT unconstitutional?
A: The MCIT is imposed beginning on the fourth
taxable year immediately following the year in
which the corporation commenced its business
A: No, the imposition of MCIT is not violative of due
process for the following reasons:
UNIVERSITY OF SANTO TOMAS
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INCOME TAXATION
1.
2.
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.
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3.
There is no legal objection to a broader tax base
UNIVERSITY OF SANTO TOMAS
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INCOME TAXATION
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
income in order to arrive at the net that it
chooses to tax (CREBA, Inc. v. Romulo, G.R. No.
160756, March 9, 2010).
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).
Carry-forward of the excess of MCIT
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.
1.
2.
a.
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)
3.
4.
5.
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.
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.
Illustration:
A domestic corporation had the following data on
computations of the NCIT and MCIT for five years:
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
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1.
MCIT
NCIT
Excess:
YEAR
4
80k
20k
YEAR
5
50k
30k
YEAR
6
30k
40k
YEAR
7
40k
20k
(20k)
YEAR
8
35k
70k
2.
NCIT
higher
40k
70k
Less:
Excess
of
MCIT
3.
From
Year 4
From
Year 5
From
(40k)
(20k)
1.
Year 7
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:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
(60k) (20k)
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]).
MCIT Limitations
(20k)
2.
Tax
Due:
Prolonged Labor Dispute – losses arising from a
strike staged by the employees which lasted for
more than 6 months within a taxable period
and which has caused the temporary shutdown
386
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.
INCOME TAXATION
4.
5.
6.
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
b. because of “force majeure”; or
c. because of legitimate business reverses;
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).
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.
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).
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
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Refer to previous discussions on “Deductions from
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INCOME TAXATION
Gross Income.”
1. Domestic Corporation
a. Proprietary educational institutions and
hospital
b. Non-profit hospital
c. Government-owned or controlled
corporations, agencies or instrumentalities
d. Depository banks (foreign currency
deposit units).
Taxation on Passive Income and Capital Gains
Refer to previous discussions on “Passive Income” and
“Dealings in Property.”
INCOME TAX ON NON-RESIDENT FOREIGN
CORPORATIONS
Outline of taxes imposed on a Non-Resident
Foreign Corporation (NRFC):
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
1.
Proprietary educational institution
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).
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
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.
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 nonprofit educational institutions and proprietary nonprofit 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).
INCOME TAX ON SPECIAL CORPORATIONS
The following are special corporations under the
NIRC:
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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).
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INCOME TAXATION
Predominance test
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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:
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
1.
2.
a
3.
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
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It is a nonstock corporation;
It is 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
Tax on Proprietary Non-Profit Educational Institutions and Non-Profit Hospitals
30%
10%
EXEMPT
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.
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.
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.
Hospitals and educational institutions claiming
to be proprietary non-profit but do not meet
the definition thereof.
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Government Owned or Controlled Corporations
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INCOME TAXATION
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.
GR: All corporations owned or controlled by the
government are taxed in the same manner that
domestic private corporations are taxed.
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)
International Carrier Doing Business In The
Philippines
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.
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).
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.
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.
Depository Banks (Foreign Currency Deposit
Units)
Reciprocity requires that Philippine carriers
operating in the Home Country of an international
carrier are actually enjoying the income tax
exemption (RR 15-2013).
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
Q: What is Gross Philippine Billings? (2005 Bar)
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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).
Off-line international carrier is subject to
corporate income tax
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INCOME TAXATION
An off-line airline having a branch office or a sales
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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).
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)
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).
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 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
Income subject to 10% Final Tax
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).
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,
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
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INCOME TAXATION
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.
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.
ROHQ and RHQ Of Multinational Companies
Q: What consists of “Improperly Accumulated
Earnings”?
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:
-
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).
General administration and planning;
Business planning and coordination;
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.
Formula:
Taxable Income during the current year
Add:
Income exempt from tax
Income excluded from gross income
Income subject to final tax
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).
Improperly Accumulated Earnings of
Corporation
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).
Domestic
corporations
and
closelyheld corporations are subject to 10% improperly
accumulated earningstax on their improperly
accumulated earnings(Sec. 29 [A], NIRC).
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
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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).
Q: How can the “reasonable needs” of the
business be determined in order to justify an
accumulation of earnings? (2010 Bar)
A: IMMEDIACY TEST
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).
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INCOME TAXATION
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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).
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
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
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).
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.
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
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.
2.
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)
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The earnings or profits of a corporation are
permitted to accumulate beyond the
reasonable needs of the business (R.R. No.
22001, Sec. 7).
IAET not applicable to the following:
1.
2.
3.
4.
5.
6.
7.
8.
402
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
INCOME TAXATION
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)
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1.
Labor,
agricultural
or
horticultural
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INCOME TAXATION
2.
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).
4.
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.
5.
Religious, Charitable, Scientific, Athletic or
Cultural Corporations, provided that:
a. It is organized and operated for one or
more specified purposes;
b. No part of the net income inures to the
benefit of the any private stockholder or
individual
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
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
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)
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.
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
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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;
Requisites for exemption:
a. Income
is
derived
solely
from
assessments, dues and fees collected from
members;
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INCOME TAXATION
b.
Fees collected from members are for the
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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).
sole purpose of meeting its expenses
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).
However, in case of non-stock, non-profit
educational institution, as long as the income is
actually, directly and exclusively used for
educational purpose, such income is exempt as
provided for in Art. XIV, Sec. 3 of the 1987
Constitution.
11. Farmers, Fruit Growers or like Associations;
[See further discussion under General Principles –
Constitutional Limitations]
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
Other corporations exempt from income tax
under Special Laws
1.
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).
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.
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.
2.
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.
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
NOTE: If religious, charitable or social welfare
corporations derive income from their properties
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Cooperatives under R.A. 6938, the Cooperative
Code of the Philippines
408
common profession,
no part of income of
which is derived
from engaging in any
trade or business
INCOME
TAXATION
engaging in any trade
or
business
NOT ataxable entity
Considered
as
a
corporation hence a
taxable entity and its
income is taxable as
such
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
The share of
an
individual
in
the
distributable net income
after tax of a general
partnership is subject to
a final tax
NO need to file an
income tax return
but an information
return
Must file an income tax
return
NOT
subject
to
double
taxation
being taxed only once
Taxed once on its
income and again when
the share in the profits
of the partners is
distributed; then taxed
as dividends
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)
A:
GENERAL
PROFESSIONAL
PARTNERSHIP
(GPP)
BUSINESS
PARTNERSHIP/
GENERAL
PARTNERSHIP
Formed by persons
for the sole purpose
of exercising their
Formed by persons for
the sole purpose of
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Registration of partnership
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INCOME TAXATION
Registration of a partnership is immaterial for
income tax purposes. It is taxable as long as the
following requisites concur: [AI]
1.
2.
b.
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.
c.
Treatment of loss in case the partnership
resulted in a loss
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.
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.
NOTE: The partners shall be entitled to deduct
their respective shares in the net operating loss
from their individual gross income.
Distributive share of a partner in the net
income of a business partnership
It is equal to each partner’s distributive share of the
net income declared by the partnership for a
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.
Tax on General Professional Partnerships
GPP not subject to income tax
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.
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.
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
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Partners shall be liable for income tax in their
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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,
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)
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
separate and individual capacities.
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).
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
a.
incurred
in
What are the items in the above-mentioned
earnings which should be included in the
computation of ABC Law Firm’s gross
income? Explain.
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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).
ESTATES AND TRUSTS
Estate
An estate refers to the mass of properties left by a
deceased person.
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NOTE:
The income that is subject to income
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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).
1.
2.
3.
Income taxation for estates
Income taxation for trusts
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).
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).
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).
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).
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.
NOTE: However, such deduction shall be included
in computing the taxable income of the
beneficiaries, whether distributed to them or not.
Taxes payable under the income tax law when a
person dies
1.
2.
Person required to file and to pay the income
tax
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).
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.
Trusts
A trust is a right to the property, whether real or
personal, held by one person for the benefit of
another. It is:
•
•
•
•
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).
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).
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
Classifications of trust for tax purposes [TIP]
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Taxable and tax-exempt trust
Irrevocable trust and revocable trust
Trust administered in the Philippines and trust
administered in a foreign country
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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.
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)
A:
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a.
I will advise Miriam that the yearly rental
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b.
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).
retiring employee during the year?
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).
b. 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).
c. 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).
d. 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
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).
Pension trust
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.
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
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:
1.
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 non-
2.
3.
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.
Tax on Co-Ownerships
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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?
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 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
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.
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
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).
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.
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-owners investing the income in a business
for profit
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.
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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?
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).
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).
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However, a joint venture or consortium formed
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for the purpose of undertaking construction
projects is not considered as corporation under
Section 22 of the NIRC provided:
respective share to the joint ventures profit (RR
102012).
Tax treatment of the co-venturer’s share in the
joint venture profit
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).
CORPORATE
COVENTURER
INDIVIDUAL
CO-VENTURER
The
respective
share in the
joint venture
profit
is
considered as
dividends
income
received by a
DC from a DC.
Hence, it shall
be treated as
intercorporate
dividend
which is tax
exempt.
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.
The
respective
share in the
joint venture
profit shall be
included
in
the
Nontaxable computation
of
the
Joint
corporate
Venture
venturer’s
taxable income
subject to
normal
corporate
income tax of
30%.
(Tabag, 2015)
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.
Taxable
Joint
Venture
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.
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.
FILING OF RETURNS AND PAYMENT OF
INCOME TAX
The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting
and paying appropriate income taxes on their
Income Tax Return (ITR)
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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).
PERIOD TO FILE INCOME TAX RETURN OF
INDIVIDUALS AND CORPORATIONS
Basic Tax
The return of any individual required to file the
same shall be filed on or before April 15 th day of
each year covering income for the preceding
taxable year.
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.
First Quarter return - April 15
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2.
Second Quarter return - August 15
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3.
4.
Third Quarter return - November 15
Final adjusted (annual) return - April 15 of the
succeeding year (same with 1st quarter return)
The following are also required to filed ITR:
1.
DC and RFC
1.
2.
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
2.
3.
Final Withholding Tax on Passive Income
(Manual Filing)
1.
2.
XPNS: The following individuals shall not be
required to file an income tax return:
January to November – 10th day of the month
following the month the withholding was
made
December – January 15 of the succeeding year
1.
Capital Gains Tax
2.
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)
3.
4.
PERSONS LIABLE TO FILE INCOME TAX
RETURN
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)
Individual TaxpayersAYERS
GR: The following individuals are required to file
an income tax return:
Special Rules
1.
Every
Filipino citizen residing
in
the
Philippines;
2. Every Filipino citizen residing outside the
Philippines, on his income from sources within
the Philippines;
3. Every alien residing in the Philippines, on
income derived from sources within the
Philippines; and
4. Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines. (Sec. 51 [A] [1], NIRC)
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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
An individual whose pure compensation
income derived from sources within the
Philippines exceeds Sixty thousand pesos
(P250,000). (RMC 50-2018)
a) ITR of married individuals
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.
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
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INCOME TAXATION
for purposes of verification for the taxable year
(Sec. 51 [D], 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).
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:
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1.
Duly authorized agent;
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2.
3.
4.
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).
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).
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).
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)
Q: Indicate whether each of the following
individuals is required or not required to file
an income tax return:
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).
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)
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).
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
A:
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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).
Taxable Estate and Trust
The fiduciary shall file a return if gross income is at
least P20,000 (Sec. 65, NIRC).
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WHERE TO FILE INCOME TAX RETURN
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Except in cases where the Commissioner otherwise
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permits, the return shall be filed with any of the
following:
1.
2.
3.
4.
PENALTIES FOR NON-FILING OF RETURNS
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.
There shall be imposed, in addition to the tax
required to be paid, a penalty equivalent to:
For non-resident citizens, the return shall be filed
with the
b. 50% of the tax due
- Willful neglect to file the return within the
period prescribed
1.
2.
3.
a. 25% of the amount due
- 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
Philippine Embassy, or
nearest Philippine Consulate, or
be mailed directly to the CIR (Sec. 51 [B], NIRC).
WITHHOLDING TAX
Concept of Withholding Taxes
Confidentiality rule with respect to tax returns
filed with the BIR
Taxes imposed or prescribed by the NIRC are to
be deducted and withheld by the payorcorporations 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).
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.
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.
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).
Instances when inquiry into the income tax
returns of taxpayers may be authorized
Importance of Withholding Taxes
Inquiry into the ITR of taxpayers may be had when:
1.
2.
3.
4.
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.
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.
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
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tax as required by law or regulations was
withheld and remitted to the BIR within the
prescribed dates (Mamalateo, 2008).
Purpose of the Withholding Tax System
1.
2.
3.
4.
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
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INCOME TAXATION
It arises at the time an income payment is paid or
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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).
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
4. All government offices including GOCCs as well
as provincial, city and municipal governments
and barangay (R.R. 2-98, Sec. 2.57.3).
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).
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.
Withholding agent in case the employer is the
Government of the Philippines
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).
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.
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).
2.
3.
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.
4.
5.
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
Persons required to withhold taxes
1.
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:
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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
INCOME TAXATION
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).
Q: In case of failure by the withholding agent to
perform his duty to withhold and remit tax, is
the taxpayer absolved of liability?
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A: The liability of the withholding agent is
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INCOME TAXATION
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,
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)
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.
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.
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).
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.
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).
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).
Obligation of an employer required to deduct
and withhold a tax
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.
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
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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.
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
governmentowned 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.
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INCOME TAXATION
Creditable Withholding Tax vs. Final Withholding Tax
CWT
FWT
As
to
income Compensation Income
subject of the
Professional/talent fees
system
Rentals
Cinematographic film rentals and other
payments
Income payments to certain contractors
Passive incomes
Fringe benefits
As to whether or The income is required to be included in the The recipient may not report the said
not income should gross income in ITR.
income in his gross income because
be reported as
the tax withheld constitutes final and
part of the gross
full settlement of the tax liability.
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.
The tax withheld cannot be claimed as
tax credit.
As to filing of ITR
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.
The earner is required to file an ITR.
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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).
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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 1. Estate tax valuable consideration (Domondon, 2014). 2. Donor’s tax
Transfer Tax vs. Income Tax
TRANSFER TAX
Upon What
Imposed
Rates Applicable
Exemptions
INCOME TAX
Privilege to transfer property
Privilege to earn income
Rates are lower:
• Estate tax – 6%
• Donor’s Tax
– 6% in excess of 250,000 pesos
Rates are higher:
Individual income – 20% to 35%
Lesser exemptions
More exemptions
Estate Tax vs. Donor’s Tax
ESTATE TAX
DONOR’S TAX
• Upon death of decedent (mortis causa)
• Transfer takes place between natural
persons only
• During the lifetime of the donor (inter
vivos)
• Transfer takes place between natural
and juridical persons
Amount exempt
No more exemption; Repealed by the
TRAIN Law
250,000
Rate of tax
6% uniform tax rate
6% uniform tax rate
Grant of exemption
Sec. 87, NIRC
Sec. 101, NIRC
Sec. 86, NIRC
GR: None
Nature of transfer
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
Grant of deductions
GR: Notice of donation is not required
Notice requirement
XPNs:
1. Donations to NGO worth at least
P50,000. Provided, not more than
Notice of death to the Commissioner not
30% of which will be used for
required anymore as repealed by TRAIN
administration purposes.
Law
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.
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Notice, when filed
Notice of death to the Commissioner, not
required
Filing of return
1. A transfer subject to estate tax
2. Estate consists of registered or
registrable property, regardless of
value of gross estate
A transfer subject to donor’s tax
ESTATE TAX
DONOR’S 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
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.
Time of filing
Return
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)
Within 30 days after donation was
made. No extension allowed.
Payment of tax due
Pay as you file
Pay as you file
GR: Extension of payment is not allowed
None
Contents of return
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
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
Requirement for
grant of extension
of payment
Bond not exceeding double the amount of
the tax and with such sureties as the
Commissioner deems necessary
Q: Are donations inter vivos and donations mortis
causa subject to estate tax? (1994 Bar)
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A: GR: Donations inter vivos are subject to donor's tax
while donations mortis causa are subject to 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.
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.
NATURE, PURPOSE AND OBJECT
Nature of estate tax
ESTATE TAX
BASIC PRINCIPLES, CONCEPT AND DEFINITION
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).
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).
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.
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.
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).
Q: A law was passed by Congress abolishing estate
tax. Is the law valid?
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).
Characteristics of estate tax [TANG-DEP]
1.
2.
3.
4.
5.
6.
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
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: 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.
Theories on the purposes of estate tax
It is based on the power of
Benefitsprotection the State to demand and
receive taxes on the
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Redistributio
n of wealth
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.
reciprocal duties of support
and protection.
Privilege or
Statepartnership
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.
Ability to Pay
The receipt of inheritance is
in the nature of unearned
wealth which creates the
ability to pay the tax
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).
Net Estate
The value of the gross
estate since it is taxed
at a flat rate.
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TRANSFER TAX – ESTATE TAX
TIME AND TRANSFER OF PROPERTIES
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The properties and rights are transferred to the
successors at the time of death(Art. 777, Civil Code).
Gross estate based on citizenship and residency
Decedent
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).
RC, RA
NRA
CLASSIFICATION OF DECEDENT
Individuals liable to pay estate tax:
1. Resident citizens (RC)
2. Non-resident citizens (NRC)
3. Resident alien (RA)
4. Non-resident alien (NRA)
NRC
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.
GROSS ESTATE AND NET ESTATE
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
• 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?
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).
Intangible personal property deemed situated
in the Philippines
DETERMINATION OF GROSS AND NET ESTATE
1.
Determination of gross estate
2.
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 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).
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3.
4.
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 – EGR:
STATE
or bonds have acquired a business situs
in the
TheTAX
situs of an intangible property is
Philippines;
determined by the domicile or residence of the
owner. This is known as the principle of “mobilia
Shares or rights in any partnership, business or
sequuntur personam.”
industry established in the Philippines (Sec.
104, NIRC).
XPN: The principle is not controlling
NOTE: These intangible personal properties are in
a) when it is inconsistent with the express
effect exceptions to the Latin maxim of mobilia
provisions of statute, or
sequuntur personam.
This enumeration is
b) When justice does not demand that it should
significant only for non-resident alien because they
be, as when the property has in fact a situs
are the only set of taxpayers where the situs of the
elsewhere (Mamalateo, 2014).
property is considered in determining whether
their property shall form part of the gross estate or
Q: Will shares of stock issued by a foreign
not.
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
A: YES, if 85% of the business of the foreign
estate?
corporation who issued the stocks is located in the
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:
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
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,
Philippines or if it is considered to have obtained
business situs in the Philippines (Section 104,
NIRC).
Instances where amount of the gross estate is
significant
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).
Basis for the valuation of gross estate
PROPERTY VALUATION
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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.
Q: For purposes of estate and donor’s tax, do we
adhere to mobilias equuntur personam?
If there is an improvement, the value
of improvement is the construction
A: NO.
5.
A:
1.
2.
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Real
property
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
450
cost per building permit or the T
fair
RANSFER TAX – ESTATE TAX
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
Whether tangible or intangible,
appraised at FMV. “Sentimental
value” is practically disregarded.
Unlisted
1. Unlisted common - book value
2. Unlisted preferred - par value
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
Right to
usufruct,
use or
habitation,
as well as
that of
annuity
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.
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Determination of net estate
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TRANSFER TAX – ESTATE TAX
ITEMS TO BE INCLUDED IN THE GROSS ESTATE
Q: How is the net estate determined?
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
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)
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.
Estate tax formula:
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
[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.
Items above are discussed in detail below.
Decedent’s interest
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).
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.
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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.
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".
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.
Q: Is 13th month pay included in the gross
estate? How about Christmas bonus?
5 instances which constitutes transfer in
contemplation of death according to Prof.
Thomas Matic
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.
Q: If the decedent is a partner in a partnership,
will his interest in the partnership considered
as part of his gross estate?
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.
Transfer in contemplation of death
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
UNIVERSITY OF SANTO TOMAS
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454
who will possess or enjoy the property or
income therefrom.
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.
Illustration:
A creates a trust to pay the income to himself for
life, remainder to B or his 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.
TRANSFER TAX – ESTATE TAX
2. Interests Analogous to Life Estates – where the
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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 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.
in contemplation of death and should therefore
form part of the gross estate for estate tax
purposes. Is the BIR correct? (2013 Bar)
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.
2.
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
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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 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.
3.
4.
5.
6.
7.
Age of the decedent at the time the transfers
were made
Decedent’s health, as he knew it at or before
the time of the transfers
The interval between the transfers and the
decedent’s death
The amount of property transferred in
proportion to the amount of property retained
The nature and disposition of the decedent
The existence of a general testamentary
scheme of which the transfers were a part
The relationship of the donee(s) to the
decedent
TRANSFER TAX – ESTATE TAX
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)
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12. Concurrent making of will or making a will
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TRANSFER TAX – ESTATE TAX
within a short time after the transfer (Roces v.
Posadas, 58 Phil. 108).
Motives
which
negate
contemplation of death:
1.
2.
3.
4.
5.
6.
7.
transfer
in
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
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?
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).
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?
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
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).
Revocable transfer
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).
Power to alter, amend or revoke considered to
exist on the date of decedent’s death even
though:
1.
2.
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
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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).
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?
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TRANSFER TAX – ESTATE TAX
A: GR: No. It is sufficient that the decedent has the
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power to revoke, though he did not exercise such
power.
could be in favor of anybody, including himself, his
estate, his creditors, or the creditors of his estate.
XPN: In case of a bona fide sale for an adequate and
full consideration in money and money’s worth.
General Power of Appointment (GPA) vs.
Special Power of Appointment (SPA)
Transfer not revocable, thereby not subject to
estate tax when:
GPA
SPA
Donee has the
power to appoint
any person he
chooses or enjoy
the property
without restriction
Donee appoints
successor to the
property within a
limited group or
class of persons
according to the
will of the donor
Makes appointed
property, for all
intents,
the
property of the
donee; thus, forms
part of the gross
estate
Not includible in
the gross estate of
the donee when he
dies
Donee holds the
appointed property
with
all
the
attributes
of
ownership
under the
concept of an
owner
Donee holds the
appointed
property in trust
or
under
the
concept of
a
trustee
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).
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)
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.
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
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As to
nature
As to
tax
implica
-tions
As to
effects
Properties passing under a GPA forms part of
decedent’s estate through:
1.
2.
3.
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
TRANSFER TAX – ESTATE TAX
equivalent to an act of dominion, which is an
essential attribute of ownership.
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.
TRANSFER IN
CONTEMPLATION
OF DEATH
GENERAL POWER
OF APPOINTMENT
Effecti
-vity
At or after death
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
Means
By
trust
otherwise
Property
passed
under GPA and by
will or by deed
or
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Q: In his last will and testament, X bequeathed
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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)
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.
Transfer in contemplation of death vs. property
passing under general power of attorney
Proceeds of life insurance
c.
d.
e.
f.
g.
To determine the conjugal or separate
character of proceeds, the following factors
are considered:
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
Proceeds of life insurance forms part of the gross
estate when the beneficiary is:
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
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).
Not part of the gross estate when:
a. Proceeds from a life insurance policy is
receivable by a 3rd person (NOT the decedent’s
estate, executor or administrator) AND that the
said beneficiary is designated as irrevocable;
b. 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.
b.
Beneficiary is third person – Proceeds
are payable to beneficiary even
in premiums were paid out of the conjugal
Q: What if the beneficiary who was irrevocably
designated caused the death of the insured?
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).
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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?
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A: The premiums paid by the employer will not be
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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.
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).
Q: If the property insured was destroyed after
the taxpayer’s death, will insurance money still
form part of the gross estate?
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: NO, it will be considered as a receivable of the
estate.
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.
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.
a.
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).
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
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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:
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.
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
TRANSFER TAX – ESTATE TAX
latter designation, reserving his right to
substitute him for another.
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.
Are the proceeds of the insurance subject to
income tax on the part of Y and Z for their
respective shares? Explain.
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b. Are the proceeds of the insurance to form
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part of the gross estate of X? Explain. (2003
Bar)
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).
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).
Coverage of prior interest
1.
2.
3.
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
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
the considerationreceived shall be included in the
gross estate.
This is applicable to:
1.
2.
3.
Transfers in contemplation of death
Revocable transfers
Transfers under GPA
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.
Revocable transfer
Contemplation of death
power of appointment.
3. General
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.
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
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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?
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.
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On
the
second
scenario,
the
insufficient
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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
appointment. Hence, the difference of P200,000
(P500K-300K) is subject to gift tax.
Share of the surviving spouse
Q: Is the capital of the surviving spouse
considered part of the gross estate?
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.
Exclusive properties under the system of
absolute community of properties (ACP):
1.
2.
3.
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.
Exclusive properties under the system of
conjugal partnership of gains (CPG):
1.
2.
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
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gratuitous title during marriage shall be
community property);
3. That which is acquired by right of
redemption, by barter or by exchange with
property belonging to only one of the
spouses; and
4. That which is purchased with exclusive
money of the wife or the husband. (Art.
109, Family Code).
Q: Can you apply Sec. 85 in separation of
property?
A: No, in that case, there will be no division.
DEDUCTIONS FROM 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
b.
c.
d.
Vanishing deduction
Transfer for public use
Net share of the surviving spouse in the
community or conjugal property
2. Special deductions [FAMS]
a. Family home
b. Standard deduction
c. Amount received by heir under RA 4917
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).
TRANSFER TAX – ESTATE TAX
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
Formula for computing ELIT deductible from
the gross estate of NRA decedent
Philippine GE
World GE
X
World
ELIT
*GE=gross
estate
=
Deductible
ELIT from
Gross
Estate
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.
Sources of claims:[CTO]
1. Contract
2. Tort
3. Operation of law
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
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).
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.
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?
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).
Who can avail this deduction: This may be
claimed as a deduction by a RC, NRC or RA
decedent provided that:
1.
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).
Requisites for deductibility:
2.
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;
Claims against insolvent persons
Requisites for deductibility:
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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:
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
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.
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).
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).
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
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"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)
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)).
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:
1. Taxes which have accrued as of or before the
death of the decedent
2. Unpaid as of the time of his death
Taxes NOT deductible:
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
Losses
Requis
ites
for
deduct
ibility:
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
TRANSFER TAX – ESTATE TAX
5. Incurred not later than the last day or any
extension thereof for payment of the estate
tax
subject to a transfer tax. The second transfer would
now be subject to a vanishing deduction.
Purpose
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
JUDICIAL EXPENSES
LOSSES
Allowed deductions
include only those
incurred not later
than the last day
prescribed by law or
any extension thereof
for the filingof the
return
Allowed deductions
include those incurred
up to the last day
prescribed by law or
any extension thereof
for the payment of
estate tax
6 months extendible
to 30 days
6 months extendible
to:
• 2 years
(extrajudicial
settlement)
• 5 years (judicial
settlement)
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
DEDUCTION
1 day to 1 year
100%
1 year and 1 day to 2 years
80%
2 years and 1 day to 3
years
60%
NOTE: Casualty loss can be allowed as deduction in
one instance only, either for income tax purposes
or estate tax purposes.
3 years and 1 day to 4
years
40%
20%
Vanishing deduction
4 years and 1 day to 5
years
More than 5 years
Vanishing deduction is the deduction allowed on
the property left behind by the decedent which was
previously subject to donor’s or estate taxes.
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
first to the second decedent or from a donor to the
decedent. In such case, the first transfer has been
No deduction
allowed
Formula for computing vanishing deduction:
Initial Basis (Value of property previously taxed)
LESS: Mortgage debt paid, if any (first deductions)
-------------------------------------------------------------New Initial basis
New Initial Basis x (ELIT + Transfers for Public
Use)
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Gross Estate
--------------------------------------------------------------Second deduction
New Initial basis
LESS: Second deduction
------------------------------------Basis for Vanishing Deduction
Multiplied by 100%, 80%, etc. (as the case may be)
------------------------------------------------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
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.
Requisites for deductibility:
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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.
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).
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
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
SEC. 86(A)(3)
SEC. 87(D)
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
It
contemplates
transfers
to
social welfare,
cultural and charitable
institutions which
are
exemptedfrom estate
tax.
TRANSFER TAX – ESTATE TAX
Sec. 86(A)(3) vs. Sec. 87(D) of the NIRC:
Family home
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NOTE: NRA decedents are not allowed to avail
family home deduction because they are expressly
prohibited by the Constitution from acquiring
lands.
Net share of the surviving spouse
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]).
For purposes of availing this deduction, a person
may constitute only one family home.
Standard deduction
Special deductions
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).
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)
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).
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).
As to
availability
SD in
ESTATE TAX
(Sec. 86
[A][5])
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
4. The deduction does not exceed P10,000,000
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Available to
RC, NRC and
RA
Applies to all
individual
taxpayers
except NRA, and
NFC
OSD in
INCOME TAX
(Sec. 34 [L])
As to
nature
Deduction in
addition to
the other
deductions
Deduction in
lieu of itemized
deductions
As to
amount of
deduction
Fixed at
P5,000,000
40% of gross
income or gross
sales/receipts
as the case may
be
TRANSFER TAX – ESTATE TAX
Deduction
Funeral
expenses
Time
Up to the
time of
interment
Amount
P200,000, 5%
of gross estate,
or
actual
amount
whichever is
the lowest
Judicial
expenses
Six months
No limit
Claims
against the
estate
Incurred
before the
death of the
decedent
No limit – only
the unpaid
portion at the
time of death.
Ignore
postdeath
developments.
Claims
against
insolvent
persons
Receivable
existing at
the death of
the decedent
No limit –
entire
uncollectible
portion may
be claimed.
Casualty
losses
Not later than
the last day
or any
extension
thereof for
payment of
the estate tax
No limit – only
uninsured
portion may
be deductible
Unpaid taxes
Unpaid
mortgage
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Amount received under RA 4917
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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:
Deduction
Funeral
expenses
Resident or
Citizen
Non-resident
Alien
Fully
deductible
Ratable/
proportionate
deduction
only.
(Proportion of
gross estate in
the Philippines
over the
worldwide
gross estate)
Judicial
expenses
Claims
against the
estate
Unpaid taxes
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).
Summary of Deductions with Limits as to Time
and Amount
Unpaid
mortgage
Claims
against
insolvent
persons
Casualty
losses
Transfers for Fully
public use
deductible
Transfers for
public use
No limit
No limit
Vanishing
deduction
Vanishing
deduction
Two
transfers
must not be
more than
five years
apart
100% down to
20%
depending on
time interval
between two
transfers
Family home
Family home
No limit
P1,000,000
Standard
deduction
No limit
P1,000,000
Medical
expenses
Incurred
(paid or
unpaid)
within one
year before
the death of
the decedent
P500,000
Amounts
received
under RA
4917
Amounts
received
under RA
4917
No limit
No limit
Standard
deduction
Fully
deductible
Fully
deductible
No deduction
allowed
Medical
expenses
Summary of Deductions as to Applicability to
Taxpayers
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EXCLUSIONS FROM ESTATE
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TRANSFER TAX – ESTATE TAX
Excluded from gross estate are those provided for
under NIRC (Sections 85, 86 and 87) and under
special laws.
Estate tax credit is a remedy against international
double taxation to minimize the onerous effect of
taxing the same property twice.
Who may avail:
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.
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.
Limitations in estate tax credit:
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.
EXEMPTION OF CERTAIN ACQUISITIONS AND
TRANSMISSIONS
Transmissions exempted from payment of
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).
TAX CREDIT FOR ESTATE TAXES PAID IN A
FOREIGN COUNTRY
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.
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
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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.
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).
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NOTE: Bequests, devises, legacies or transfers
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made to educational institutions are not included.
2.
3.
ESTATE TAX RETURN
All cases with regard to TRAIN Law must be
filed
When estate tax return is filed:
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).
Itemized deductions to the gross estate; and
Amount of tax due, whether paid or still
outstanding.
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:
1.
2.
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
Who files estate tax return:
3.
1.
2.
3.
Requisites for granting extension to pay estate
tax:
Executor
Administrator
Any legal heir
1.
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.
If non-resident decedent
– To the RDO or to the Office of the CIR (Sec.
90[D], NIRC).
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).
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.
Itemized assets at the time of his death;
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2.
3.
4.
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.
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)
TRANSFER TAX – ESTATE TAX
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
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the posting of a bond to secure the payment of
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TRANSFER TAX – ESTATE TAX
b.
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).
3.
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]).
4.
5.
6.
7.
Instances where request for extension of time
to pay estate tax should be denied:
1.
2.
3.
Negligence
Intentional disregard of rules and regulations
Fraud
8.
Who shall pay the estate tax:
1.
2.
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.
Instances when Certificate of Payment of Tax
from the Commissioner is required:
1.
2.
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
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
Certification not required in the following:
In cases when withdrawal of bank deposit:
1. Has been authorized by the Commissioner; and
2. The amount does not exceed P20,000.
Liability of a co-depositor who was able to
withdraw funds from the account of a deceased
depositor without paying the estate tax
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.
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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).
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).
The estate tax can be paid in installment in case the
available cash of the estate is not sufficient to pay
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
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.
DONOR’S TAX
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).
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.
Law governing imposition of donor’s tax
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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).
Kinds of donations:
1.
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
TRANSFER TAX – ESTATE TAX
Donation inter vivosvs. donation mortis causa
As to
consideration
DONATION INTER VIVOS
DONATION MORTIS CAUSA
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 made in consideration of death, without the
donor’s intention to lose the thing conveyed or
its free disposal in case of survival.
It is perfected upon knowledge of the Being testamentary in nature, it should be
donor of the acceptance of the donee.
embodied in a last will and testament (Art. 728,
Such contract is consensual in nature.
Civil Code).
As to form
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 The transfer conveys no title or ownership to the
still alive.
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.
As to
effectivity
The transfer is irrevocable.
As to
irrevocability
As to
Acceptance is a requirement.
acceptance
(Mamalateo, 2014)
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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.
LAW ON TAXATION
Transfers subject to donor’s tax:
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TRANSFER TAX – DONOR’S TAX
Transfer in trust or otherwise, whether the gift is
direct or indirect and whether the property is real
or personal, tangible or intangible;
1.
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;
2.
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.
3.
4.
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.
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.
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.
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.
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.
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)
3.
4.
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
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5.
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
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. DA71006, Dec. 14, 2006.) (Paras, pp. 761-762).
2.
REQUISITES OF A VALID DONATION
[CIDAF]
1. Capacity of donor to donate
The donor’s capacity shall be determined as of
the time of the making of the donation (Art.
737, NCC).
2.
NATURE, PURPOSE AND OBJECT
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
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).
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)
3.
Actual or constructive delivery of gift
There is delivery if the subject matter is within
the dominion and control of the donee.
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).
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.
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).
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
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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
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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.
Q: Are onerous donations subject to donor’s
tax?
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.
Tax treatment in case of donations made by
spouses
Husband and wife are considered as separate and
distinct taxpayers for purposes of the donor’s tax.
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
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 22003).
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.
TRANSFERS WHICH MAY BE CONSTITUTED AS
DONATION
Q: When does an incomplete gift become a
complete one, subject to donor’s tax?
[ICL]
1.
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).
2.
3.
Sale/exchange/transfer of property for
insufficient consideration
Condonation/remission of debt
Transfer for less than adequate and full
consideration
Condonation/remission of debt
Rule regarding condonation/remission of debt:
If the creditor condones the indebtedness of the
debtor the following rules apply:
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.
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.
1.
2.
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
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implemented (BIR Ruling DA 028-2005, Jan. 24,
2005).
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?
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 22003).
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?
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 for less than adequate and full
consideration
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Rule regarding transfer for less than adequate
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the business and have a personal stake in its
business.
and full consideration:
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.
Explain if the above transactions are subject to
donor's tax. (1999 Bar)
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:
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.
•
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)
NOTE:
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.
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
CLASSIFICATION OF DONOR
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.
1. Resident
a. Resident citizen (RC)
b. Non-resident citizen (NRC)
c. Resident alien (RA)
d. Domestic corporation (DC)
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
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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.
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given by the donor to
transfer that accrues
the donee by way of
to the donee.
gift, without the
benefit of any
deduction (Sec. 104,
NIRC).
DETERMINATION OF GROSS GIFT
GROSS GIFT
All property, real or
personal, tangible or
intangible, that was
NET GIFT
The net economic
benefit from the
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NOTE: If a mortgaged property is transferred as a
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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.
c.
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.
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)
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.
b. NO, because the computation of the gift tax is
cumulative but only insofar as gifts made
within the same calendar year. There is no
d.
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
GROSS GIFT
RC, NC and A
R
NRA
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.)
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).
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If there is no zonal value, the taxable base is the
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fair market value that appears in the latest tax
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.
2.
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)
Formula in computing the donor’s tax credit:
Lower of actual tax paid and the amounts derived
by computing the tax limits as follows:
Limitation A (per country):
Net gifts (foreign country) X Phil. Donor’s tax
Net gifts (world)
Limitation B (by total):
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.
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.
EXEMPTIONS OF GIFTS FROM DONOR’S TAX
TAX CREDIT FOR DONOR’S TAXES PAID TO A
FOREIGN COUNTRY
Transactions exempt from donor’s tax:
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.
1.
2.
3.
Who may avail:
4.
Only donors who are citizens or residents at the
time of the donation are entitled to claim tax credit.
5.
6.
Limitations in estate tax credit:
1.
7.
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
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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
Philippines taxable under the NIRC bears to his
entire net estate.
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
Gifts made by RC, NRC, RA considered exempt
from donor’s tax:
1.
506
Specific exemption - net gifts of the amount of
P100,000 or less are exempt
TRANSFER TAX – DONOR’S TAX
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
4. Gifts in favor of: [CARTER-CuPS]
2.
a.
b.
c.
Charitable
Accredited NGOs
Religious
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d.
Trust foundations
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e.
f.
g.
h.
i.
Educational institutions
Research institutions
Cultural foundations
Philanthropic organizations
Social welfare corporations
1.
2.
3.
4.
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).
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.
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.
5.
Donee is incorporated as a non-stock,
nonprofit entity, paying no dividends;
Governed by trustees;
Trustees receive no compensation;
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).
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.
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).
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.
Requisites for the exemption of gifts made to
the CARTER-CuPS
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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)
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A: NO. Gifts in favor of educational and/or
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charitable, religious, social welfare corporation or
cultural institution, accredited non-government
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).
However, no tax shall be collected with respect to
donation of intangible personal property
(Reciprocity Rule):
a.
Gifts made by NRA exempt from donor’s tax:
b.
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).
Rule on donation of intangible
properties
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)
personal
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).
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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
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.
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.
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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.
Requirements for exemption from donor’s tax
of athlete’s prizes and awards:
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1.
The donation must be prizes and awards given
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2.
3.
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).
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)
A: Yes, since the national sports association for
billiards does not sanction the event.
Exemption
provided
a-school program
under adopt-
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.
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)
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: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, because the donation is to be wholly used
for administration purposes.
PERSON LIABLE
Exempted from donor’s tax under other special
laws:
1.
2.
3.
4.
5.
6.
7.
RA 2707 - Donation to International Rice
Research Institute (IRRI)
RA 3676 - Donation to Ramon Magsaysay
Award Foundation (RMAF)
RA 3850 - Donation to Philippines Inventors
Convention (PIC)
PD 181 - Donation to Integrated Bar of the
Philippines (IBP)
PD 205 - Donation to the Development
Academy of the Philippines
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
PD 292 - Donation to Aquaculture Department
of the Southeast Asian Fisheries Development
Center of the Philippines
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).
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:
1.
On the first donation of the year Gross Gift
Less: deductions/exemption
-----------------------------------------Net gift
x Tax rate
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-----------------------------------------Donor’s tax
2.
On subsequent donation during the year
Gross gift
Less: Deductions/exemptions
------------------------------------------Net gift
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.
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Add: Prior net gifts
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----------------------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
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.
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
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.
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VALUE ADDED TAX
VALUE-ADDED TAX
Advantages in imposing VAT
CONCEPT
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).
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).
The current VAT rate is 12% in lieu of R.A. 10963.
1. Economic growth
2. Simplified tax administration
3. Promote honesty
4. Higher governmental revenues
VAT law is non-violative of the administrative
feasibility principle
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).
CHARACTERICTICS OF VAT
1.
2.
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.
3.
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).
4.
Classification of transactions under the VAT
system
1.
2.
VAT- taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
Exempt transactions
5.
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.
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6.
7.
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
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8.
Not a cascading tax. - Tax cascading means
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that 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.
ELEMENTS OF VAT-TAXABLE TRANSACTIONS
The following elements must be present in order
for a transaction to be subjected to 12% VAT:
1.
2.
3.
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).
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.
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?
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).
Q:
How
effect
is
of
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).
the
regressive
VAT minimized?
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).
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.
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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).
Two conditions of “in the ordinary course of
trade or business” (CR)
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VALUE ADDED TAX
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 -
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Regularity involves more than one isolated
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transaction and involves repetition and
continuity of action (Ingles, 2015).
NOTE: If the transaction is outside the Philippines,
then it is not subject to VAT.
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).
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
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)
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
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).
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).
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).
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).
VAT is a tax on transactions imposed at every stage
of the distribution process on the sale, barter,
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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:Commonwealth Management and Services
Corporation (COMASERCO) is an affiliate of
IMPACT (Liability)
INCIDENCE (Burden)
The one statutorily
liable for the payment
of tax, thus, the one
who can avail of a tax
refund.
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
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Philippine
American
Life
Insurance
Co.
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(Philamlife), organized by the latter to perform
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?
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).
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).
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
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)
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).
pays
it
to
government.
the
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
merely shifted to it. Only taxpayers are allowed to
file a claim for refund.
as part of the purchase
price.
Effect of VAT being an indirect tax
Exemptions
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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:
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
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
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
Refer to discussion on Output and Input Tax as
provided in the above formula.
DESTINATION PRINCIPLE / CROSS BORDER
DOCTRINE
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.
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).
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).
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).
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)
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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.
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VALUE ADDED TAX
XYZ Law Offices rendered its opinion on the
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query and billed Gainsburg US$1,000 for the
opinion.
of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G.R. No.
350154, August 9, 2005, 466 SCRA 221)
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)
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.
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
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.
1.
2.
"Person" refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative
or association.
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.
"Taxable person" refers to any person liable for
the payment of VAT, whether registered or
registrable in accordance with Sec. 236 of the NIRC.
"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).
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
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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
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.
532
VALUE ADDED TAX
Special considerations to the following persons:
1.
2.
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.
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3.
Government – subject to VAT if they sell goods,
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VALUE ADDED TAX
4.
properties or services in the course of trade or
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.
However, the moment the non-stock, nonprofit 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).
Failure to register as VAT taxpayer
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).
Persons NOT LIABLE to pay VAT
1.
2.
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
3.
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
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.
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)
4. 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
BUSINESS
EFFECT
Gross sales
exceed
P1,919,500
Mandatory VAT
registration. Generally liable
to pay 12% VAT.
Gross sales
exceed P100,000,
but do not exceed
P1,919,500.
Subject to optional VAT
registration
If VAT-registered: generally
liable to pay 12% VAT.
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If non-VAT registered:
generally liable to pay 3%
percentage tax
Gross sales do not
exceed P100,000
(marginal income
earners
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
NATURE OF
TRANSACTION
1. Sale of goods or
properties
2. Importation of
goods
3. Sale of services and
use or lease of
properties
TAX BASE
Gross Selling Price
Total landed cost
Gross receipts
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VALUE ADDED TAX
When it comes to normal VAT transactons, or those
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subject to 12%, we have three categories:
However, in the absence of zonal value, gross selling
price refers to the market value shown in the latest
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.
The above are discussed in details below.
Allowable deductions from gross selling price
VAT ON SALE OF GOODS OR PROPERTIES
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 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. 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).
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:
Gross selling price in case of sale or exchange of
real property
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.
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).
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VALUE ADDED TAX
Note: The above is NOT an exclusive list.
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The VAT accrues upon the consummation of sale of
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VALUE ADDED TAX
goods or properties, regardless of the terms of
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).
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.
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.
Only persons engaged in real estate business either
as a real estate dealer, developer or lessors, are
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).
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Summary of Rules on Sale of Real Properties
TRANSACTION
TAX TREATMENT
Real properties held primarily for sale to customers, in general
12% VAT
Residential lot with gross selling price exceeding P1,919,500 (seller is a
real estate dealer or developer)
12% VAT
Residential lot with gross selling price not exceeding P1,919,500
(seller is a real estate dealer or developer)
VAT-exempt, not subject to
percentage tax
Residential house and lot or other residential dwellings exceeding
P3,199,200 (seller is a real estate dealer or developer)
12% VAT
Residential house and lot or other residential dwellings not exceeding
P3,199,200 (seller is a real estate dealer or developer)
VAT-exempt, not subject to
percentage tax
Residential house and/or lot by a seller not engaged in business
Not subject to VAT or OPT.
May be subject to CGT, except sale
of principal residence, which may
be exempt subject to certain
conditions
Commercial place or lot (seller uses property in business)
12% VAT
Real property used in business, taxpayer is not engaged in dealing with
real estate
12% VAT (incidental transaction)
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VALUE ADDED TAX
Elements of VAT-taxable sale of goods or properties:
SALE OF GOODS AND PERSONAL PROPERTIES
1.
2.
3.
There is an actual or deemed sale, barter or
exchange of goods or personal properties for
valuable consideration;
Undertaken in the course of trade or business;
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).
SALE OR EXCHANGE OF REAL PROPERTY
1.
2.
3.
4.
5.
6.
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.
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The sale of real property subject to VAT shall either
be in (1) cash basis, (2) installment basis, or (3)
deferred payment basis.
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.
Sale on installment plan
Distinctions between sale on installment plan
and sale on a deferred payment basis
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.
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).
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).
Initial payments
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.
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.
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INSTALLMENT PLAN
Initial payments do
not exceed 25% of the
gross selling price
DEFERRED PLAN
Initial
payments
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.
Transaction shall be
treated as cash sale
which makes the
entire selling price
taxable in the month
of sale.
The buyer of the
property can claim the
input tax in the same
period as the seller
recognized the output
tax.
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 be
subject to output VAT
Payments that are
subsequent to “initial
payments” shall no
longer be subject to
output VAT
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.
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.
Sale of scrap materials
VALUE ADDED TAX
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).
VAT ON IMPORTATION OF GOODS
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Importation is an act of bringing goods and
merchandise into a country (Philippines) from a
foreign country.
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, when the goods have legally left the
jurisdiction of the Bureau (Sec. 103, CMTA).
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.
Transfer of goods by tax-exempt persons
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.
Consequence if a tax exempt person would
transfer imported goods to a non-exempt
person
Tax base of VAT on importation
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).
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)
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).
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.
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.
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.
VAT ON SALE OF SERVICE AND USE OR LEASE
OF PROPERTIES
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 nonexempt persons or entities who acquire tax-free
imported goods from exempt persons, entities or
agencies.
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).
Beginning and end of importation
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:
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
intention to unload therein. Importation is deemed
UNIVERSITY OF SANTO TOMAS
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Sale or exchange of services
VALUE ADDED TAX
1.
2.
3.
4.
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
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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.
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 nonresident 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.
Persons engaged in warehousing services;
Lessors or distributors of cinematographic
films;
Persons engaged in milling, processing,
manufacturing or repacking goods for others;
UNIVERSITY OF SANTO TOMAS
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8.
Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
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;
VALUE ADDED TAX
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
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4. The supply of any assistance that is ancillary and
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VALUE ADDED TAX
5.
6.
7.
8.
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
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).
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.
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.
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.
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 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 (3 rd)
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).
Constructive receipt
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)
Q: Are non-stock, non-profit entities liable to
pay VAT for sale of goods and services?
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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.
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.
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.
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).
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.
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%
UNIVERSITY OF SANTO TOMAS
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VALUE ADDED TAX
amusement tax imposed by the Local Government
Code of 1991, thereby killing the “[goose] that lays
the golden egg[s].”
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).
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).
b.
Creditors in payment of debt
TRANSACTIONS DEEMED SALE
There is no actual sale of goods took place but such
transactions are subject to VAT.
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]
1.
2.
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)
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
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3.
Consignment of goods if actual sale is not made
within sixty (60) days following the date such
goods were consigned.
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).
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
a
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).
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.
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).
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).
CHANGE OR CESSATION OF STATUS AS VATREGISTERED PERSON
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.
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).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The output tax shall be based on the market value of
the goods deemed sold as of the time of the
occurrence of the transactions enumerated above
in numbers 1, 2, and 3.
554
4.
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
VALUE ADDED TAX
UNIVE
RSITY
ZERO-RATED
VAT- EXEMPT
It generally refers to the In
VAT-exempt
export sale of good and
sales, the
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1.
Change of control in the corporation of as
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VALUE ADDED TAX
corporation by the acquisition of
controlling interest of the corporation by
another stockholder or group of
stockholders.
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. 42007).
2.
3.
Change in the trade or corporate name of
the business.
Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed by the
surviving or new corporation.
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.
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).
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
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 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).
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.
This non-crediting
of input taxes is
exempt
transactions is the
underlying reason
why the NIRC
adopted the rule on
apportionment of
No VAT shall be shifted or tax credits under
104(A)
passed-on
by
VAT- Section
whenever
a
VATregistered sellers or
registered taxpayer
suppliers
from
the
engages in other
Customs Territory on
VAT taxable and
their sale, barter or non-VAT taxable
exchange
of
goods, sales (CIR v. Eastern
properties or services to Telecomm. Phils.,
the subject registered Inc.,
G.R.
No.
Freeport
Zone 163835, July 7,
2010).
enterprises.
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.
E.g.:
Output tax
Less: Input tax
Excess input tax
BASIS
EXEMPT
P
0.00
5,000.00
P
5,
000.00
ZERO-RATED
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resulted to zero
output tax.
Tax
Credit/
Refund
Cannot avail of
tax credit or
refund. Thus,
may result in
increased prices
(Partial Relief)
Can claim or
enjoy tax
credit/refund
(Total Relief)
Nature
of
transac
-tion
Not
taxable;
removes VAT at
the exempt stage
Transaction is
taxable for VAT
purposes
although the tax
levied is 0%
By
whom
made
Need not be a
VAT-registered
person
Made by a
VATregistered
person
Input
tax
Not subject to
output tax, thus
cannot claim
input tax credit.
May claim input
tax credit
although the
transaction
UNIVERSITY OF SANTO TOMAS
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VALUE ADDED TAX
ZERO-RATED SALE OF GOODS
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under 12% VAT and no longer be considered as
export sales subject to 0% VAT rate upon the
following:
[FEE]
1. Export sales
2. Foreign currency denominated sale
3. Effectively zero-rated sales
a.
EXPORT SALES
b.
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.
“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.
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.
Sales
to
bonded
manufacturing
warehouses
of export-oriented manufacturers
b. Sales to export processing zones
c. Sales to enterprises duly registered and
accredited with the Subic Bay Metropolitan
Authority pursuant to R.A. 7227
d. 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.
e. 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).
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
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)
Enhanced VAT Refund System
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
UNIVERSITY OF SANTO TOMAS
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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
9.
The sale of goods, supplies, equipment and fuel
to persons engaged in International shipping
VALUE ADDED TAX
RULES ON EXPORT SALES
By a Non-VAT registered
VAT exempt
By a VAT registered
VATable at 0% (zero
rated)
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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.
Export sale, when exempt and when zero-rated
Q: Is the sale of goods to ecozone, such as PEZA,
considered as export sale?
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).
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).
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
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562
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).
NOTE: Section 149 refers to excise tax on
automobiles. Section 150 refers to excise tax on
nonessential goods.
Requisites:
1.
2.
3.
4.
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.
EFFECTIVELY ZERO-RATED TRANSACTION
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
EFFECTIVELY
ZERO-RATED
TRANSACTION
AUTOMATIC
ZERO-RATED
TRANSACTION
VALUE ADDED TAX
Nature
Refers to sales
to persons or
entities whose
exemption
under special
laws
or
international
agreements to
Refers to export
sales and foreign
currency
denominated
sales
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BASIS
Need to
apply for
zerorating
For whose
benefit is
it
intended
Stamping
of
“zerorated”
on VAT
invoice or
receipt
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.
No need to file
an application
form and to
secure
BIR
approval before
the sale is
considered
zerorated.
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.
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.
Required. The Not
required.
buyer,
as The buyer, as
shown by his shown by his
address in the address in the
sales invoice sales invoice and
and shipping shipping
documents, is documents,
is
located
located outside
outside
the the Philippines.
Philippines
merely
by
fiction of law.
Results in no tax chargeable
against the purchaser.
Effect
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
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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
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 zerorated sale shall be available as tax credit or refund
(CIR v. Cebu Toyo Corporation, G.R. No. 149073,
February 16, 2005).
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
VALUE ADDED TAX
Certificate representing alleged unutilized
input VAT paid on capital goods purchased?
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A: YES. As a PEZA-registered enterprise within a
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VALUE ADDED TAX
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
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.
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: 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?
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
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)
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])
ZERO-RATED SALE OF SERVICE
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The following services performed in the Philippines
by VAT- registered persons shall be subject to zero
percent (0%) rate.
1.
Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP;
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VALUE ADDED TAX
2.
Services other than those mentioned in the
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3.
4.
5.
6.
7.
8.
9.
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
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
Services other than processing manufacturing,
or repacking of goods (Sec 108 (B)(2)
Requirements to qualify for zero-rating
1.
2.
3.
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.
UNIVERSITY OF SANTO TOMAS
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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 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).
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.
a. Construction by XYZ Construction Co. of
concrete
barriers
for
the
Asian
Development Bank in Ortigas Center to
VALUE ADDED TAX
prevent car bombs from ramming the ADB
gates along ADB Avenue in Mandaluyong
City.
c. 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:
EXEMPT PARTY
EXEMPT
TRANSACTION
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.
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.
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.
Transaction is not
subject to VAT, but
the seller is not
allowed
any
tax
refund or credit for
any input taxes paid.
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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).
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.
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and
clams.
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.
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.
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).
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.
Exempt Party vs. Exempt Transaction
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.
VAT-EXEMPT TRANSACTIONS
Reason for electing VAT registration
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
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
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Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be
refined sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
VALUE ADDED TAX
(3) product of a production line of a sugar mill
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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
quedan issued therefor, and verified by the
Sugar Regulatory Administration, identifies the
same to be of a polarimeter reading of 99.5º and
above.
Bagasse is not included in the exemption provided
for under this section (Sec. 4.109-1(B)(1)(a), R.R.
16-2005).
Refined sugar subject to VAT
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.
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).
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)
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
UNIVERSITY OF SANTO TOMAS
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574
1. 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:
a. 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
b. 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
c. 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;
d. 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.
1. Amount in excess of the above threshold shall be
subject to tax.
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;
VALUE ADDED TAX
e. Services subject to percentage tax
Refer to discussion on percentage tax.
f. Services by
1. agricultural contract growers, and
2. milling for others of
a. palay into rice,
b. corn into grits, and
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c. sugar cane into raw sugar
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.
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.
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?
UNIVERSITY OF SANTO TOMAS
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A: YES, PHILHEALTH’s services are not
VATexempt. Those exempted from VAT are those
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).
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)
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.
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,
VALUE ADDED TAX
2. communications and
3. coordinating centers for their
a. affiliates,
b. subsidiaries or
c. branches
in the Asia Pacific Region, and
Sales/Gross
Receipts by
Agricutural
Cooperatives
• Own produce
(processed or at
its origial state)
• Other that own
produce (i.e.
from traders)
To/From
Members
To/From
NonMembers
Exempt
Exempt
Exempt
VAT*
Credit or
Multipurpose
Cooperatives
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d. do not earn or derive income from the
Philippines
k. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws except those granted under PD No. 529
which refers to Petroleum Exploration
Concessionaires under the Petroleum Act of
1949
l. Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA)
to their members, as well as sale of their
produce, whether in its original state or
processed form, to 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
m. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered and in good standing with the
Cooperative Development Authority
n. Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered with
and in good standing with the 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.
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.
Summary rules on cooperatives
• From lending
activities
• From non-lending
activities
Exempt
Exempt
VAT
VAT
Electric cooperatives
VAT
VAT
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2019 GOLDEN NOTES
578
Non-agricultral,
nonlending and
multipurpose,
nonelectric
• Contribution
per Exempt
Exempt
member < P15K
• Contribution
per VAT
VAT
member > P15K
*Exempt if referring to agricultural food product at
its original state.
(Tabag, 2015)
o. Export sales by persons who are not VATregistered
Rules on Export Sales
By a Non-VAT registered
VAT exempt
By a VAT registered
VATable at 0% (zero
rated)
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.
If he is a VAT-registered person, his export sales are
zero-rated.
p. Sales of real properties, namely:
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.
VALUE ADDED TAX
"Low-cost housing" refers to housing projects
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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
of 1992" and other laws, such as RA No. 7835 and
RA No. 8763.
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.
"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
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
580
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.
SUMMARY RULES ON SALES OF REAL
PROPERTIES
Sale not in the ordinary course of
trade or business In general
VAT exempt
Sale of residential lot by a real
estate dealer
• Selling price < P1,919,500*
VAT exempt
• Selling price > P1,919,500
VAT
Sale of residential lot by a
nondealer
• Use in business (incidental
VAT
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**
• Selling price > P3,199,200
Sale of residential house & lot
and other residential dwellings
by a non-dealer
• Use in business (incidental
transaction)
• Not use in business (regardless
of amount)
VAT exempt
VAT
VAT
6% CGT
Sale of real property classified as VAT exempt
low cost housing
Sale of real property classified as VAT exempt
socialized housing
* Apply rules on adjacent lots
** Apply rules on adjacent house and lots and other
residential dwellings
(Tabag, 2015)
VALUE ADDED TAX
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.
Monthly rental
P12,800 or less
regardless of annual
gross sales
VAT exempt and no
percentage tax
Monthly rental above
P12,800 but annual
gross sales do not
exceed P1,919,500
VAT-exempt under
Sec. 109 (W) but shall
pay 3% percentage
tax under Section
116 of NIRC
Monthly rental above
P12,800 and annual
gross sales exceed
P1,919,500
Subject to VAT
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The foregoing notwithstanding, lease of residential
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VALUE ADDED TAX
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
shall likewise be exempt from VAT, however, the
same shall be subjected to 3% percentage tax.
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:
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).
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?
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.
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.
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.
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).
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.
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).
Summary of rules on lease of residential units:
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
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 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
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
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passengers or
cargoes by air
and sea
passengers or
cargoes by air
or sea
by
international
air and
shipping
carriers
NOTE: If
domestic
transport of
passengers or
cargoes by
land, the
common
carrier is
liable to
percentage
tax on
common
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
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).
Summary of rules for transport of passengers or
cargoes
12% VAT
Domestic
transport of
0% VAT
International
transport of
EXEMPT
Transport of
passengers
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";
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
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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VALUE ADDED TAX
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.
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
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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
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 VATexempt sales shall not be included in determining
the threshold.
Q: State whether the following transactions are:
a) VAT Exempt, b) subject to VAT at 12%; or c)
subject to VAT at 0%:
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)
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
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
586
4.
5.
taxation under international agreements to
which the Philippines is a signatory, the supply
of services is subject to zero percent (0%) rate
(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).
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).
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).
OUTPUT AND INPUT TAX
Output Tax
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).
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).
It includes input taxes which can be
VALUE ADDED TAX
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).
TYPE OF INPUT TAX
Input tax on importation of
goods and local purchases of
goods, properties and
services(Sec. 110, NIRC)
RATE
12%
standard
or 0%
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
4%
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
2%
transition
al or 12%
actual
input tax
rate
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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).
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).
a.
b.
For sale; or
For conversion into or intended to form
part of a finished product for sale including
packaging materials; or
c. For use as supplies in the course of
business; or
d. For use as materials supplied in the sale of
service; or
e. 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);
Effect of VAT exempt purchases to input 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.
Input tax not a property right under the Due
Process Clause
A VAT-registered person’s entitlement to the
creditable input tax is a mere statutory privilege
which may be limited or removed by law.
Categories of input tax
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).
5%
Excess input tax credit(refer to
discussion on application on tax
refund or tax credit certificate)
NA
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).
Input tax on capital goods
SUMMARY RULES ON RECOGNITION OF
INPUT VAT FOR CAPITAL GOODS
Sources of Creditable Input Tax
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:
1. Purchase or importation of goods:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
4. Transactions “deemed sales”;
5. Presumptive input tax;
6. Transitional input tax credits allowed under
588
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.
VALUE ADDED TAX
Aggregate cost exceeds P1M - Where aVAT
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registered person purchases or imports capital
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:
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.
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.
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).
(Tabag, 2015)
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.
Presumptive input tax
It is an input tax credit allowed to persons or firms
engaged in the: [SMM-RCN]
1.
processing of:
UNIVERSITY OF SANTO TOMAS
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2.
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).
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.
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 VATregistered 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).
VALUE ADDED TAX
These can be availed by taxpayers who become VAT
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registered persons upon:
1.
2.
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.
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 allowed input tax shall be whichever is higher
between:
1. 2% of the value of the taxpayer’s beginning
inventory of goods, materials and supplies; or 2. 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.
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).
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Q: Is Transitional Input Tax Credit applicable to
real property?
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.).
PERSONS WHO CAN AVAIL OF INPUT TAX
CREDIT
The input tax credit on importation of goods or local
purchases of goods, properties or services by a
VATregistered person shall be creditable:
1.
2.
3.
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).
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).
DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS
Determination of output tax
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.
VALUE ADDED TAX
BASIS
Output Vatable
gross
tax
sales
or
receipts
(amount
exclusive
VAT)
c
VAT rate
(12% or
0%)
EXAMPLE AMOUNT
Sale
of P12.00
hanky for
total price of
P112 VATEx.
Amt:
P100
(P112/1.12)
Input
tax
Purchase of 6.00
materials
for
total
price of P56
Vatable
purchases
(amount
exclusive
of VAT) x
applicable
VAT rate
Output tax:
P100*12%
VAT-ExAmt:
P50
(P56/1.12)
Input tax:
P50*12%
Net VAT Payable or Excess tax
credits
(Output tax less Input Tax)
6.00
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In all cases where the basis for computing the
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VALUE ADDED TAX
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 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).
Determination of input tax creditable
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.
The succeeding table illustrates the computation of
output tax, creditable input tax and the resulting
net VAT payable or excess of tax credits:
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
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:
1.
2.
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.
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
The resulting computation of output tax and
crediting of input tax shall result to either the net
VAT payable or excess tax credits.
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.
PERIOD
OUTPUT
TAX
INPUT
TAX
Jan.
P 12 M
P6M
NVP P6M
Feb.
6M
18 M
ETC (P12M)
Mar.
6M
18 M
ETC (P12M)
P24 M
P 42 M
ETC (P18M)
Q1
NVP OR ETC
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TRANSACTIONS
Importation
goods
REQUIRED SUPPORT
of
Import entry or other
equivalent
document
showing actual payment
of VAT on imported goods
Input taxes on
domestic
purchases of goods
or properties made
in the course of
trade or business
Invoice
showing
information
required
under Section 113 and
237 of the NIRC
Input
tax
on
purchases of real
property
Public instrument (i.e.,
a.
Cash/deferred deed of absolute sale,
basis
deed of conditional sale,
contract/agreement
to
sell, etc.) together with
the VAT invoice for the
entire selling price and
non-VAT Official Receipt
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VALUE ADDED TAX
Excess Tax Credits (ETC) – If the input tax
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inclusive of input tax carried over from the previous
quarter exceeds the output tax, the excess input tax
shall be carried over to the succeeding quarter or
quarters.
-
-
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)
Illustration:
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.
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
tax
from
payments made to
non-residents
(such
as
for
services, rentals, or
royalties)
Advance VAT
sugar
REQUIRED SUPPORT
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.
for
the
initial
and
succeeding payments
b. Installment basis
Input
tax
domestic
purchases
service
on Official receipt showing
the information required
of in Sec. 113 and 237 of the
NIRC
Transitional input
tax
Input
tax
“deemed sale
transaction”
Public instrument and
VAT Official Receipt for
every payment
Inventory of goods as
shown in a detailed list to
be submitted to the BIR
on Required invoices
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on Payment order showing
payment of the advance
VAT
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
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.
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.
The taxpayer is VAT-registered;
VALUE ADDED TAX
2.
The taxpayer is engaged in zero-rated or
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3.
4.
5.
6.
7.
8.
9.
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).
The taxpayer must prove the following for a tax
refund to prosper:
1.
2.
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).
Failure to comply with the invoicing
requirements is a ground to deny a claim for tax
refund or tax credit
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).
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
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word "zero-rated" imprinted thereon. In this
relation, failure to comply with the said invoicing
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).
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).
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?
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.
As evidence of an administrative claim for tax
refund or tax credit, there is a certain distinction
between a receipt and an invoice.
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
VALUE ADDED TAX
goods or properties, as well as to every sale, barter
or exchange of services.
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A "sales or commercial invoice" is a written account
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VALUE ADDED TAX
of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name
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.
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.
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).
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. 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.
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.
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 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"
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.
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)
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 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).
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
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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?
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
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VALUE ADDED TAX
including VAT) which was erroneously or illegally
assessed or collected.
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).
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
credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes (Sec. 112(B), NIRC).
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
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).
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.
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).
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).
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.
GR: The 30-day period to appeal always applies
as it is both mandatory and jurisdictional
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
NOTE: Late filing is absolutely prohibited.
(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
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(
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
refund or credit and the appeal to CTA may
occur simultaneously.
Period within which BIR Commissioner grants
Tax Credit Certificates/refund for creditable
input taxes
1.
2.
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VALUE ADDED TAX
The Commissioner may grant TCC/ refund for
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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).
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).
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 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.
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
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).
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).
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.
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.
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:
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.
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).
When a judicial claim for refund or tax credit in the
CTA is an appeal of an unsuccessful administrative
Exception to the mandatory and jurisdictional
nature of the 120+30 day period (BIR Ruling No.
1.
2.
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DA-489-03 dated December 10, 2003)
1.
2.
During the effectivity of BIR Ruling No. DA48903
BIR Specific Ruling which misleads a particular
taxpayer to prematurely file a judicial clam with
the CTA;
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As an exception to the mandatory and jurisdictional
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VALUE ADDED TAX
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).
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 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).
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. 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)
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).
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
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
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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).
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Q: For calendar year 2011, FFF, Inc., a
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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,
2013, praying for the tax refund/credit of the
Pl,000,000.00 unutilized excess input VAT of
FFF, Inc. for 2011.
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.
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.
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
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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.
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.
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: 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).
Difference between Sec. 112 on refund for VAT
and Sec. 229 on refund of other taxes
SEC. 112 (VAT)
SEC. 229
(OTHER
TAXES)
VALUE ADDED TAX
Period is 2 years after the
close of the taxable quarter
when the sales were made
Period is 2
years from the
date of
payment of
the tax
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
Period to file an
administrative
claim before
the CIR AND
judicial claim
with the CTA
must fall within
the 2 year