TAXATION LAW
2017 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
The UST GOLDEN NOTES is the annual student-edited bar review
material of the University of Santo Tomas, Faculty of Civil Law.
Communications regarding the Notes should be addressed to the
Academics Committee of the Team: Bar-Ops.
Address:
Academics Committee
UST Bar Operations
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
Tel. No:
(02) 731-4027
(02) 406-1611 loc. 8578
Academics Committee
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical
and Royal University of Santo Tomas, the Catholic University of the Philippines.
2017 Edition.
No portion of this material may be copied or reproduced in books, pamphlets, outlines or
notes, whether printed, mimeographed, typewritten, copied in different electronic devises
or in any other form, for distribution or sale, without a written permission.
A copy of this material without the corresponding code either proceeds from an illegal
source or is in possession of one who has no authority to dispose the same.
No. ____________
Printed in the Philippines June 2017.
ACADEMIC YEAR 2017-2018
CIVIL LAW STUDENT COUNCIL
JONATHAN SANTOS
MA. JASMIN A. LABACO
NIÑO JOSEPH B. PIO RODA
KARIZZA KAMILLE M. CRUZ
PRESIDENT
INTERNAL VICE PRESIDENT
EXTERNAL VICE PRESIDENT
SECRETARY
TEAM: BAR-OPS
NIKKI MEI Q. KO
RHOSE AZCELLE L. MAGAOAY
JANN PATRICIA M. TORRES
JERREMIAH KRIZIAH B. BATALLER
NELLE FRANCESE DELA PAZ
ALEXANDER MARA J. VINLUAN
DENZ CHRISTIAN A. RESENTES
CLARICE ANGELINE V. QUESTIN
KAIRA MARIE B. CARLOS
CLARA LOUISSE J. YUMANG
EMMANUEL A. LANDAYAN
JOHN AL-NAIR SIMONE L. JUMAMIL
PATRICIA MAE D. GUILLERMO
NIÑO JOSEPH B. PIO RODA
JOCHRIS DANIEL Z. GUADES
BERYLL ANDRÉ Y. BARCENAS
MON FRANCIS A. TOLENTINO
MICHAEL EARVIN R. SABADO
CHAIRPERSON
VICE-CHAIRPERSON
SECRETARY
ASST. SECRETARY
ASST. SECRETARY
HEAD, PUBLIC RELATIONS OFFICER
ASST. HEAD PUBLIC RELATIONS OFFICER
HEAD, FINANCE COMMITTEE
ASST. HEAD, FINANCE COMMITTEE
HEAD, HOTEL ACCOMMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
ATTY. AL CONRAD B. ESPALDON
ADVISER
ACADEMICS COMMITTEE
CAMILLE ANGELICA B. GONZALES
EMNIE VALERIE B. DURAN
IRVIN L. PALANCA
MARIELLA A. MARASIGAN
LARA NICOLE T. GONZALES
CAMILLE ANGELICA B. GONZALES
CIARI T. MENDOZA
SECRETARY GENERAL
DEPUTY SECRETARY GENERAL
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTEE
LAYOUT ARTISTS
COVER DESIGN ARTIS
TAXATION LAW COMMITTEE
DARDECS N. VILLANUEVA
TAXATION LAW COMMITTEE HEAD
CLEA CONSTANTINA FERNANDEZ
KARMELA KATE SALVADOR
ASST. HEAD, NATIONAL TAXATION (BIR,
INCOME TAX) AND JUDICIAL REMEDIES
ASST. HEAD, NATIONAL TAXATION (TRANSFER
TAX)
ASST. HEAD, NATIONAL TAXATION (VAT) AND
NIRC REMEDIES
ASST. HEAD, LOCAL TAXATION
LARA NICOLE GONZALES
ASST. HEAD, TARIFF AND CUSTOMS LAW
STEPHANIE RUBI
JOYCE ANN MENDOZA
MEMBERS
KRISTINA FABON
REALYN CANCINO
ELAINE CARINGAL
ATTY. ARTHUR B. CATABONA
ATTY. RONN ROBBY D. ROSALES
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. VIRGINIA JEANNIE P. LIM
ATTY. PRUDENCE ANGELITA A. KASALA
ATTY. BENEDICTA DU-BALADAD
For being our guideposts in understanding the intricate sphere of Taxation Law.
-Academics Committee 2017
Foreword for 2017 Golden Notes
Dean Nilo T. Divina
It is with pleasure that I introduce to you the 2017 Golden Notes - a product of the
concerted and dedicated efforts of our students, faculty and staff to ensure that our Bar
candidates are armed with the most comprehensive, updated and easy to digest reviewer
as their companion in the review process. This will provide key concepts, updated
jurisprudence, relevant comparisons and notable changes in the law, if any, right at your
fingertips.
With the aid of selected lawyers, Golden Notes remains at the forefront of providing legal
insights raised from past bar questions and current events that could be part of the
discussion in the bar examinations.
Notably, the editors of this book signified their intention to serve in assisting our aspiring
lawyers to develop the kind of mentality needed in justifying answers supported by facts
and relevant provisions of laws during the Bar examinations, through the publication’s
logical sequence and meticulous presentation of even the most difficult legal concepts.
With the aim of increasing the candidate’s confidence and ensuring the efficient use of
his/her time in pouring through all eight (8) Bar subjects, we have enlisted the expertise of
some of the most senior practitioners in the different fields of law, including noted jurists
and esteemed bar reviewers. The diversity of the publication's roster of consultants and
editors ensures that it remains relevant and essential. Indeed, with contributions from
different people mentioned above, this issue of the Golden Notes marks an important new
step in the direction of the UST Faculty of Civil Law.
Let these notes, however, not detract you from the true goal. There is no substitute for hard
work, and there is no shortcut to excellence. Persevere. Strive. Keep the faith. You will
make it.
“Courage and perseverance have a magical talisman, before which difficulties disappear and
obstacles vanish into air.”
- John Quincy Adams
TABLE OF CONTENTS
*based on the 2017 Bar syllabus
PART I. GENERAL PRINCIPLES OF TAXATION
A. Definition, Concept and Purpose of Taxation........................................................................................... 1
B. Nature and Characteristics of Taxation .................................................................................................... 1
C. Power of Taxation as distinguished from Police Power and Power of Eminent Domain ......................... 3
D. Theory and Basis of Taxation .................................................................................................................... 5
E. Principles of a Sound Tax System .............................................................................................................. 5
F. Scope and Limitations of Taxation ............................................................................................................ 6
1. Inherent limitations .............................................................................................................................. 7
2. Constitutional limitations.................................................................................................................... 11
G. Stages or Aspects of Taxation................................................................................................................. 21
H. Definition, Nature and Characteristics of Taxes ..................................................................................... 22
I. Requisites of a Valid Tax .......................................................................................................................... 22
J. Tax as distinguished from other forms of exactions................................................................................ 22
K. Kinds of Taxes ......................................................................................................................................... 24
L. Situs of Taxation ...................................................................................................................................... 25
M. Construction and Interpretation of ....................................................................................................... 26
1. Tax Laws .............................................................................................................................................. 26
2. Tax Exemption and Exclusion .............................................................................................................. 26
3. Tax Rules and Regulations .................................................................................................................. 26
4. Penal provisions of Tax Laws............................................................................................................... 26
5. Non-retroactive application to Taxpayers .......................................................................................... 27
N. Sources of Tax Laws ................................................................................................................................ 27
O. Doctrines in Taxation.............................................................................................................................. 27
1. Prospectivity of Tax Laws .................................................................................................................... 27
2. Imprescriptibility of Taxes ................................................................................................................... 28
3. Double Taxation .................................................................................................................................. 28
4. Power to Tax involves Power to Destroy ............................................................................................ 30
5. Escape from Taxation .......................................................................................................................... 31
a. Shifting of Tax Burden ..................................................................................................................... 31
b. Tax Avoidance ................................................................................................................................. 31
c. Tax Evasion ...................................................................................................................................... 32
6. Exemption from Taxation.................................................................................................................... 33
7. Doctrine of Equitable Recoupment..................................................................................................... 35
8. Compensation and Set-off .................................................................................................................. 35
9. Compromise and Tax Amnesty ........................................................................................................... 36
10. Taxpayer’s Suit .................................................................................................................................. 37
a. Nature and Concept ........................................................................................................................ 37
b. As distinguished from a citizen’s suit .............................................................................................. 37
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 importace and ripeness for judicial
determination ..................................................................................................................................... 38
PART II. NATIONAL TAXATION
A. Organization and Functions of the Bureau of Internal Revenue ............................................................ 39
1. Rule-making authority of the Secretary of Finance ............................................................................ 39
a. Authority of the Secretary of Finance to promulgate rules and regulations .................................. 39
b. Specific provisions to be contained in rules and regulations ......................................................... 39
2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue ................................... 40
a. Powers and duties of the Bureau of Internal Revenue ................................................................... 40
b. Power of the Commissioner to interpret tax laws and to decide tax cases ................................... 41
c. Non-retroactivity of rulings ............................................................................................................. 41
B. National Internal Revenue Code (NIRC) of 1997, as amended ............................................................... 43
1. Income taxation .................................................................................................................................. 43
a. Definition, Nature and General Principles ...................................................................................... 43
a.1 Income Tax systems – Global, Schedular and Semi-schedular or Semi-Global Taxpayer’s income
............................................................................................................................................................ 43
a.2 Features of the Philippine Income Tax Law .................................................................................. 43
a.3 Criteria in imposing Philippine income tax ................................................................................... 43
a.4 Types of Philippine income tax ..................................................................................................... 43
a.5 Taxable period ............................................................................................................................... 43
a.6 Kinds of taxpayers ......................................................................................................................... 44
b. Income Tax ...................................................................................................................................... 44
b.1 Definition, Nature and General principles .................................................................................... 45
b.2 Income .......................................................................................................................................... 45
b.2.1 Definition and nature ................................................................................................................. 45
b.2.2 When income is taxable ............................................................................................................. 45
i. Existence of income ......................................................................................................................... 45
ii. Realization of income ...................................................................................................................... 46
iii. Recognition of income ................................................................................................................... 46
iv. Cash method of accounting versus Accual method of accounting ................................................ 46
b.2.3 Tests in determining whether income is earned for tax purposes ............................................ 47
i. Realization test ................................................................................................................................. 47
ii. Claim of right doctrine or doctrine of ownership, command or control ........................................ 47
iii. Economic benefit test, doctrine of proprietary interest ................................................................ 47
iv. Severance test ................................................................................................................................ 47
v. All events test .................................................................................................................................. 47
b.2.4 Classification of income ............................................................................................................. 47
b.2.5 Situs of Income Taxation ............................................................................................................ 47
b.3 Gross Income ................................................................................................................................ 48
b.3.1 Definition ................................................................................................................................... 48
b.3.2 Concept of income from whatever source derived ................................................................... 48
b.3.3 Gross income vis-a-vis net income vis-a-vis taxable income ..................................................... 49
b.3.4 Sources of income subject to tax ............................................................................................... 49
b.3.5 Classification of income subject to tax ...................................................................................... 50
i. Compensation income ..................................................................................................................... 50
ii. Fringe benefits................................................................................................................................. 51
iii. Professional income ....................................................................................................................... 51
iv. Income from business .................................................................................................................... 51
v. Income from dealings in property ................................................................................................... 51
vi. Passive investment income ............................................................................................................ 60
vii. Annuities, proceeds from life insurance or other types of insurance ........................................... 68
viii. Prizes and awards ......................................................................................................................... 67
ix. Pensions, retirement benefit or separation pay ............................................................................ 69
x. Income from any source whatever ................................................................................................. 69
b.3.6 Exclusions from gross income .................................................................................................... 71
i. Rationale for the exclusions ............................................................................................................. 71
ii. Taxpayers who may avail of the exclusions .................................................................................... 72
iii. Exclusions distinguished from deductions and tax credit .............................................................. 72
iv. Exclusions under the Constitution ................................................................................................. 72
v. Exclusions under the Tax Code........................................................................................................ 72
vi. Exclusions under special laws......................................................................................................... 82
b.4 Deductions from gross income ..................................................................................................... 82
b.4.1 General rules .............................................................................................................................. 83
b.4.2 Return or capital ........................................................................................................................ 84
b.4.3 Itemized deductions................................................................................................................... 84
b.4.5 Optional Standard Deduction .................................................................................................. 103
b.4.6 Personal and Additional Exemptions ....................................................................................... 114
b.4.7 Items not deductible ................................................................................................................ 105
c. Income Tax on Individuals ............................................................................................................. 105
c.1 Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens ........................... 107
c.1.1 Coverage – Income from all sources within and without the Philippines; exception.............. 107
c.1.2 Taxation on compensation income .......................................................................................... 108
i. Inclusions – monetary and non-monetary compensation ............................................................. 108
ii. Exclusions – Fringe benefit subject to tax; De Minimis benefits and payments specifically excluded
from taxable compensation income ................................................................................................. 108
iii. Deductions – Personal and additional exemptions; Health and hospitalization insurance ......... 114
c.1.3 Taxation of business income/income from practice of profession .......................................... 118
c.1.4 Taxation of Passive Income ...................................................................................................... 126
c.1.5 Taxation of capital gains ........................................................................................................... 126
c.2 Income Tax on Non-Resident Aliens Engaged in Trade or Business............................................ 118
c.3 Income Tax on Non-Resident Aliens Not Engaged in Trade or Business..................................... 118
c.4 Individual Taxpayers Exempt from Income Tax .......................................................................... 118
c.4.1 Senior citizens........................................................................................................................... 118
c.4.2 Minimum wage earners ........................................................................................................... 119
c.4.3 Exemptions granted under international agreements............................................................. 120
d. Income Tax on Corporations ......................................................................................................... 120
d.1 Income Tax on Domestic Corporations and Resident Foreign Corporations.............................. 122
d.1.1 Regular tax ............................................................................................................................... 122
d.1.2 Minimum Corporate Income Tax (MCIT) ................................................................................. 123
d.1.3 Branch Profit Remittance Tax .................................................................................................. 125
d.1.4 Allowable deductions............................................................................................................... 126
i. Itemized deductions ......................................................................................................................... 84
ii. Optional Standard Deductions ...................................................................................................... 103
d.1.5 Taxation of Passive Income ...................................................................................................... 126
d.1.6 Taxation of capital gains .......................................................................................................... 126
d.2 Income Tax on Non-Resident Foreign Corporations ................................................................... 126
d.3 Income Tax on Special Corporations........................................................................................... 126
d.3.1 Domestic Corporations ............................................................................................................ 126
i. Proprietary educational institutions and hospitals ........................................................................ 126
ii. Non-profit hospitals ...................................................................................................................... 127
iii. Government-owned or controlled corporations, agencies or instrumentalities ......................... 127
iv. Depository banks (foreign currency deposit units) ...................................................................... 128
d.3.2 Resident Foreign Corporations ................................................................................................ 128
i. International carrier doing business in the Philippines.................................................................. 128
ii. Off-shore banking units ................................................................................................................. 128
iii. Resident depository banks (foreign currency deposit units) ....................................................... 129
iv. Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies......................................................................................................................................... 129
d.4 Improperly Accumulated Earnings Tax ....................................................................................... 129
d.5 Exemption from Tax on Corporations ......................................................................................... 130
d.6 Tax on General Partnerships, General Professional Partnerships, Co-ownerships, Joint Ventures
and Consortiums ............................................................................................................................... 132
e. Filing of Returns and Payment of Income Tax .............................................................................. 136
e.1 Definition of a Tax Return and Information Return .................................................................... 136
e.2 Period to file Income Tax Return of Individuals and Corporations ............................................. 137
e.3 Persons liable to file Income Tax Returns ................................................................................... 137
e.3.1 Individual taxpayers ................................................................................................................. 137
i. General rule and exceptions .......................................................................................................... 137
ii. Substituted filing ........................................................................................................................... 138
e.3.2 Corporate taxpayers................................................................................................................. 138
e.4 Where to file Income Tax Returns .............................................................................................. 138
e.5 Penalties for Non-filing of Returns.............................................................................................. 139
f. Withholding of taxes ...................................................................................................................... 139
f.1 Concept of withholding taxes ...................................................................................................... 139
f.2 Kinds of Withholding Taxes ......................................................................................................... 140
2. Transfer Tax....................................................................................................................................... 141
a. Estate Tax ...................................................................................................................................... 143
a.1 Basic principles, concept and definition ..................................................................................... 143
a.2 Nature, purpose and object ........................................................................................................ 143
a.3 Time and transfer of properties .................................................................................................. 144
a.4 Classification of decedent ........................................................................................................... 144
a.5 Gross estate and net estate ........................................................................................................ 144
a.6 Determination of gross and net estate ....................................................................................... 145
a.7 Items to be included in the gross estate ..................................................................................... 147
a.8 Deductions and exclusions from estate ...................................................................................... 153
a.9 Tax credit for estate taxes paid in a foreign country .................................................................. 159
a.10 Exemption of certain acquisitions and transmissions ............................................................... 159
a.11 Filing of notice of death ............................................................................................................ 160
a.12 Estate tax return ....................................................................................................................... 160
b. Donor’s Tax ................................................................................................................................... 163
b.1 Basic principles, concept and definition ..................................................................................... 163
b.2 Nature, purpose and object ........................................................................................................ 165
b.3 Time and transfer of properties .................................................................................................. 144
b.4 Requisites of a valid donation ..................................................................................................... 165
b.5 Transfers which may be constituted as donation ....................................................................... 166
b.5.1 Sale/exchange/transfer of property for insufficient consideration......................................... 152
b.5.2 Condonation/remission of debt............................................................................................... 166
b.6 Transfer for less than adequate and full consideration .............................................................. 166
b.7 Classification of donor ................................................................................................................ 166
b.8 Determination of gross gift ......................................................................................................... 167
b.9 Composition of gross gift ............................................................................................................ 167
b.10 Valuation of gifts made in property .......................................................................................... 167
b.11 Tax credit for donor’s taxes paid in a foreign country .............................................................. 168
b.12 Exemption of gifts from donor’s tax ......................................................................................... 168
b.13 Person liable.............................................................................................................................. 171
b.14 Tax basis .................................................................................................................................... 171
3. Value-Added Tax ............................................................................................................................... 172
a. Concept, characteristics/elements of VAT-taxable transactions .................................................. 172
b. Impact and incidence of tax .......................................................................................................... 174
c. Tax credit method ......................................................................................................................... 175
d. Destination Principle / Cross Border Doctrine .............................................................................. 175
e. Persons liable ................................................................................................................................ 176
f. Imposition of VAT .......................................................................................................................... 177
f.1 On sale of goods or properties .................................................................................................... 177
f.2 On importation of goods ............................................................................................................. 177
f.2.1 Transfer of goods by tax exempt persons ................................................................................ 180
f.3 On services ................................................................................................................................... 182
g. Transactions deemed sale ............................................................................................................. 182
g.1
Transfer, use or consumption not in the course of business of goods/properties originally
intended for sale or use in the course of business ........................................................................... 182
g.2
Distribution or transfer to shareholders, investors or creditors .......................................... 182
g.3
Consignment of goods if actual sale is not made within 60 days from date of consignment
182
g.4
Retirement from or cessation of business with respect to inventories on hand ................. 183
h. Change or cessation of status as VAT-registered person ............................................................. 183
h.1 Subject to VAT ............................................................................................................................. 183
h.1.1
Change of business activity from VAT taxable status to VAT-exempt status ................... 183
h.1.2
Approval of request for cancellation of a registration due to reversion to exempt status
183
h.1.3
Approval of request for cancellation of registration due to desire to revert to exempt
status after lapse of 3 consecutive years .......................................................................................... 183
h.2 Not subject to VAT ...................................................................................................................... 183
h.2.1
Change of control of a corporation................................................................................... 183
h.2.2
Change in the trade or corporate name ........................................................................... 183
h.2.3
Merger or consolidation of corporations.......................................................................... 183
i. Zero-rated and effectively zero-rated sales of goods or properties .............................................. 183
j. VAT-exempt transactions ............................................................................................................... 188
j.1 VAT exempt transactions, in general ........................................................................................... 188
j.2 Exempt transactions, enumerated............................................................................................... 188
k. Input and Output tax ..................................................................................................................... 194
k.1 Definition ..................................................................................................................................... 194
k.2 Sources of input tax..................................................................................................................... 195
k.2.1 Purchase or importation of goods ........................................................................................... 195
k.2.2 Purchase of real properties for which a VAT has actually been paid....................................... 195
k.2.3 Purchase of services in which VAT has actually been paid ...................................................... 195
k.2.4 Transactions deemed sale ........................................................................................................ 195
k.2.5 Presumptive input .................................................................................................................... 195
k.2.6 Transitional input ..................................................................................................................... 195
k.3 Persons who can avail input tax credit........................................................................................ 196
k.4 Determination of output/input tax; VAT payable; excess input tax credits ............................... 197
k.4.1 Determination of output tax .................................................................................................... 197
k.4.2 Determination of input tax creditable ..................................................................................... 197
k.4.3 Allocation of input tax on mixed transactions ......................................................................... 197
k.4.4 Determination of the output tax and VAT payable and computation of VAT payable or excess
tax credits.......................................................................................................................................... 197
l. Substantiation of input tax credits ................................................................................................. 198
m. Refund or tax credit of excess input tax ...................................................................................... 198
m.1 Who may claim for refund/apply for issuance of tax credit certificate ..................................... 198
m.2 Period to file claim/apply issuance of tax credit certificate ...................................................... 201
m.3 Manner of giving refund ............................................................................................................ 203
m.4 Destination principle/Cross-border doctrine............................................................................. 175
n. Invoicing Requirements ................................................................................................................ 204
n.1 In general .................................................................................................................................... 204
n.2 In deemed sale transactions ....................................................................................................... 204
n.3 Consequences of issuing erroneous VAT invoice or VAT official receipt .................................... 205
o. Filing of return and payment ........................................................................................................ 205
p. Withholding of final VAT on sales to government ........................................................................ 206
4. Percentage Taxes (concept and nature only) ................................................................................... 207
5. Excise Tax (concept and nature only) ............................................................................................... 208
6. Documentary Taxes (concept and nature only) ................................................................................ 209
7. Tax Remedies under the NIRC........................................................................................................... 209
a. General Concepts .......................................................................................................................... 209
a.1 Assessment.................................................................................................................................. 209
a.1.1 Definition and requisites of a valid assessment ....................................................................... 210
a.1.2 Tax delinquency as distinguished from Tax deficiency ............................................................ 213
a.1.3 Jeopardy assessment ............................................................................................................... 213
a.1.4 Prescriptive period for assessment .......................................................................................... 213
i. General rule.................................................................................................................................... 214
ii. False or fraudulent returns and non-filing of returns ................................................................... 214
iii. Suspension of running of statute of limitations ........................................................................... 219
a.1.5 Civil penalties, additions to the tax .......................................................................................... 219
i. Delinquency interest and deficiency interest ................................................................................ 221
ii. Surcharge ...................................................................................................................................... 219
iii. Compromise penalty .................................................................................................................... 221
a.1.6 Assessment process and reglementary periods ...................................................................... 221
i. Letter of Authority and Tax Audit .................................................................................................. 221
ii. Notice of Informal Conference...................................................................................................... 222
iii. Issuance of Preliminary Assessment Notice, general rule and exceptions .................................. 222
iv. Issuance of Formal Letter of Demand and Final Assessment Notice ........................................... 223
v. Disputed Assessment .................................................................................................................... 225
a.2 Collection .................................................................................................................................... 225
a.2.1 Requisites ................................................................................................................................. 225
a.2.2 Prescriptive periods; suspension of running of statue of limitations ...................................... 225
b. Taxpayer’s remedies ..................................................................................................................... 226
b.1 Protesting an assessment ........................................................................................................... 227
b.1.1 Protested assessment .............................................................................................................. 227
b.1.2 Period to file protest ................................................................................................................ 227
b.1.3 Form, content and validity of protest ...................................................................................... 227
b.1.4 Submission of supporting documents ..................................................................................... 228
b.1.5 Effect of failure to file protest.................................................................................................. 228
b.1.6 Decision of the Commissioner on the protest filed ................................................................. 229
i. Period to act upon or decide on protest filed ................................................................................ 229
ii. Remedies of the taxpayer in case the Commissioner denies the protest or fails to act on the
protest ............................................................................................................................................... 229
iii. Effect of failure to appeal ............................................................................................................. 231
b.2 Compromise and abatement of taxes ........................................................................................ 231
b.3 Recovery of Tax Erroneously or Illegally Collected ..................................................................... 236
b.3.1 Tax refund as distinguished from Tax credit ............................................................................ 236
b.3.2 Grounds, requisites and period for filing a claim for refund or issuance of tax credit certificate
.......................................................................................................................................................... 236
b.3.3 Statutory basis and proof for claim of refund or tax credit ..................................................... 239
b.3.4 Proper party to file claim for refund or tax credit ................................................................... 241
c. Government remedies .................................................................................................................. 244
c.1 Administrative remedies ............................................................................................................. 244
c.1.1 Tax lien ..................................................................................................................................... 244
c.1.2 Distraint and levy...................................................................................................................... 244
c.1.3 Forfeiture of real property ....................................................................................................... 248
c.1.4 Suspension of business operation ............................................................................................ 249
c.1.5 Non-availability of injunction to restrain collection of tax....................................................... 249
c.2 Judicial remedies – civil or criminal action .................................................................................. 249
PART III. LOCAL GOVERNMENT CODE OF 1991, as amended
A. Local government taxation ................................................................................................................... 256
1. Fundamental principles..................................................................................................................... 256
2. Nature and source of taxing power .................................................................................................. 256
a. Grant of local taxing power under the local government code .................................................... 256
b. Authority to prescribe penalties for tax violations ....................................................................... 257
c. Authority to grant local tax exemptions ....................................................................................... 257
d. Withdrawal of exemptions ........................................................................................................... 258
e. Authority to adjust local tax rates ................................................................................................. 259
f. Residual taxing power of local governments ................................................................................. 259
g. Authority to issue local tax ordinances ......................................................................................... 260
3. Local taxing authority........................................................................................................................ 260
a. Power to create revenues exercised through Local Government Units ....................................... 260
b. Procedure for approval and effectivity of tax ordinances ............................................................ 260
4. Scope of taxing power....................................................................................................................... 261
5. Specific taxing power of Local Government Units ............................................................................ 261
a. Taxing powers of provinces (Exclude: Rates) ................................................................................ 261
a.1 Tax on transfer of real property ownership ................................................................................ 264
a.2 Tax on business of printing and publication ............................................................................... 262
a.3 Franchise tax ............................................................................................................................... 262
a.4 Tax on sand, gravel and other quarry services ........................................................................... 262
a.5 Professional tax ........................................................................................................................... 262
a.6 Amusement tax ........................................................................................................................... 263
a.7 Tax on delivery truck/van............................................................................................................ 263
b. Taxing powers of cities (Exclude: Rates) ....................................................................................... 266
c. Taxing powers of municipalities (Exclude: Rates) ......................................................................... 267
c.1 Tax on various types of businesses ............................................................................................. 269
c.2 Ceiling on business tax impossible on municipalities within Metro Manila ............................... 270
c.3 Tax on retirement on business .................................................................................................... 270
c.4 Rules on payment of business tax ............................................................................................... 270
c.5 Fees and charges for regulation & licensing ............................................................................... 270
c.6 Situs of tax collected ................................................................................................................... 271
c.7 Tax on delivery truck/van ............................................................................................................ 263
d. Taxing powers of barangays (Exclude: Rates) ............................................................................... 272
e. Common revenue raising powers ................................................................................................. 272
e.1 Service fees and charges ............................................................................................................. 272
e.2 Public utility charges ................................................................................................................... 272
e.3 Toll fees or charges ..................................................................................................................... 272
f. Community tax............................................................................................................................... 273
6. Common limitations on the taxing powers of LGUs ......................................................................... 273
7. Collection of business tax ................................................................................................................. 275
a. Tax period and manner of payment.............................................................................................. 276
b. Accrual of tax ................................................................................................................................ 276
c. Time of payment ........................................................................................................................... 276
d. Penalties on unpaid taxes, fees or charges ................................................................................... 276
e. Authority of treasurer in collection and inspection of books ....................................................... 276
8. Taxpayer’s remedies ......................................................................................................................... 276
a. Periods of assessment and collection of local taxes, fees or charges........................................... 278
b. Period of assessment .................................................................................................................... 279
c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge ................ 279
9. Civil remedies by the LGU for collection of revenues ....................................................................... 280
a. Local government’s lien for delinquent taxes, fees or charges .................................................... 280
b. Civil remedies, in general .............................................................................................................. 281
b.1 Administrative action .................................................................................................................. 282
b.2 Judicial action .............................................................................................................................. 283
B. Real property taxation .......................................................................................................................... 285
1. Fundamental principles..................................................................................................................... 285
2. Nature of real property tax ............................................................................................................... 285
3. Imposition of real property tax ......................................................................................................... 286
a. Power to levy real property tax .................................................................................................... 286
b. Exemption from real property tax ................................................................................................ 288
4. Appraisal and assessment of real property tax................................................................................. 290
a. Rule on appraisal of real property tax at fair market value .......................................................... 291
b. Declaration of real property ......................................................................................................... 292
c. Listing of real property in assessment rolls ................................................................................... 292
d. Preparation of schedules of fair market value.............................................................................. 292
d.1 Authority of assessor to take evidence....................................................................................... 293
d.2 Amendment of schedule of fair market value ............................................................................ 293
e. Classes of real property................................................................................................................. 293
f. Actual use of property as basis of assessment .............................................................................. 293
g. Assessment of property ................................................................................................................ 294
g.1 General revisions of assessments and property classification.................................................... 294
g.2 Date of effectivity of assessment or reassessment .................................................................... 294
g.3 Assessment of property subject to back taxes............................................................................ 294
g.4 Notification of new or revised assessment ................................................................................. 294
5. Collection of real property tax .......................................................................................................... 295
a. Date of accrual of real property tax and special levies ................................................................. 295
b. Collection of tax ............................................................................................................................ 295
b.1 Collecting authority..................................................................................................................... 295
b.2 Duty of assessor to furnish local treasurer with assessment rolls.............................................. 295
b.3 Notice of time for collection of tax ............................................................................................. 295
c. Periods within which to collect real property tax ......................................................................... 295
d. Special rules on payment .............................................................................................................. 296
d.1 Payment of real property tax in instalments .............................................................................. 296
d.2 Interests on unpaid real property tax ......................................................................................... 296
d.3 Condonation of real property tax ............................................................................................... 296
e. Remedies of LGUs for collection of real property tax ................................................................... 297
e.1 Issuance of notice of delinquency for real property tax payment.............................................. 297
e.2 Local government’s lien .............................................................................................................. 297
e.3 Remedies in general .................................................................................................................... 297
e.4 Resale of real estate taken for taxes, fees or charges ................................................................ 298
e.5 Further levy until full payment of amount due........................................................................... 298
6. Refund or credit of real property tax ................................................................................................ 300
a. Payment under protest ................................................................................................................. 300
b. Repayment of excessive collections ............................................................................................. 301
7. Taxpayer’s remedies ......................................................................................................................... 301
a. Contesting an assessment of value of real property .................................................................... 301
a.1 Appeal to the Local Board of Assessment Appeals ..................................................................... 301
a.2 Appeal to the Central Board of Assessment Appeals ................................................................. 302
a.3 Effect of payment of tax .............................................................................................................. 302
b. Payment of real property tax under protest................................................................................. 302
b.1 File protest with local treasurer.................................................................................................. 201
b.2 Appeal to the Local Board of Assessment Appeals ..................................................................... 301
b.3 Appeal to the Central Board of Assessment Appeals ................................................................. 302
b.4 Appeal to the CTA ....................................................................................................................... 301
b.5 Appeal to the Supreme Court ..................................................................................................... 301
PART IV. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES, as amended by the
CUSTOMS MODERNIZATION AND TARIFF ACT (Republic Act No. 10863, which took
effect on June 16, 2016)
A. Tariff and duties .................................................................................................................................... 305
1. Definition .......................................................................................................................................... 305
2. Purpose for Imposition ..................................................................................................................... 305
3. Kinds or Classification of Duties ........................................................................................................ 305
a. Ordinary/regular duties ................................................................................................................ 305
a.1 Ad valorem (Exclude: Methods of Valuation) ............................................................................. 305
a.2 Specific ........................................................................................................................................ 305
b. Special duties ................................................................................................................................ 305
b.1 Dumping duties ........................................................................................................................... 306
b.2 Countervailing duties .................................................................................................................. 306
b.3 Marking duties ............................................................................................................................ 307
b.4 Retaliatory/discriminatory duties ............................................................................................... 307
b.5 Safeguard Measure ..................................................................................................................... 308
4. Flexible tariff clause .......................................................................................................................... 309
B. Requirements of importation ............................................................................................................... 309
1. Beginning and ending of importation ............................................................................................... 309
2. Obligations of importer..................................................................................................................... 310
a. Cargo manifest .............................................................................................................................. 310
b. Import entry .................................................................................................................................. 310
c. Declaration of correct weight or value.......................................................................................... 310
d. Liability for payment of duties ...................................................................................................... 311
e. Liquidation of duties ..................................................................................................................... 311
f. Keeping of records ......................................................................................................................... 311
C. Accrual and Payment of Tax and Duties ............................................................................................... 312
1. General Rule: Except as otherwise provided, all goods imported into the Philippines shall be subject
to duty upon importation, including goods previously exported from the Philippines. ...................... 312
a. Taxable Importations .................................................................................................................... 312
b. Prohibited Importations................................................................................................................ 312
c. De Minimis Importations (Small Value Importations) ................................................................... 313
d. Conditionally-Free and Duty-Exempt Importations ...................................................................... 315
d.1 Returning residents ..................................................................................................................... 315
d.2 Conditions for exemption from tax and duties ........................................................................... 315
d.3 Balikbayan box ............................................................................................................................ 316
2. Goods Declaration............................................................................................................................. 320
a. Formal entry distinguished form Informal entry .......................................................................... 310
b. Filing of Goods Declaration ........................................................................................................... 320
c. Assessment and Payment of Duties and Taxes, Interest and Surcharge ...................................... 320
d. Provisional Goods Declaration ...................................................................................................... 321
e. Relief Consignment ....................................................................................................................... 321
f. Misdeclaration, Misclassification and Undervaluation in Goods Declaration ............................... 321
f.1 Definition and distinction ............................................................................................................ 321
f.2 Imposition of Surcharge ............................................................................................................... 321
D. Unlawful Importation or Exportation (Exclude: Penalties) .................................................................. 322
1. Technical smuggling and Outright smuggling ................................................................................... 322
2. Other fraudulent practices................................................................................................................ 323
E. Remedies ............................................................................................................................................... 324
1. Government ...................................................................................................................................... 324
a. Administrative/extrajudicial.......................................................................................................... 324
a.1 Search, seizure, forfeiture, arrest ............................................................................................... 324
a.2 Authority of the Commissioner to Make Compromise ............................................................... 324
b. Judicial ........................................................................................................................................... 329
b.1 Rules on appeal including jurisdiction ........................................................................................ 329
2. Taxpayer ............................................................................................................................................ 331
a. Protest ........................................................................................................................................... 331
b. Abandonment ............................................................................................................................... 332
c. Abatement and refund .................................................................................................................. 333
PART V. JUDICIAL REMEDIES (R.A. No. 1125, as amended, and the Revised Rules of
the Court of Tax Appeals)
A. Jurisdiction of the Court of Tax Appeals ............................................................................................... 338
1. Exclusive appellate jurisdiction over civil tax cases .......................................................................... 339
a. Cases within the jurisdiction of the court en banc........................................................................ 339
b. Cases within the jurisdiction of the court in divisions .................................................................. 340
2. Criminal cases ................................................................................................................................... 341
a. Exclusive original jurisdiction ........................................................................................................ 341
b. Exclusive appellate jurisdiction in criminal cases ......................................................................... 341
B. Judicial procedures ............................................................................................................................... 342
1. Judicial action for collection of taxes ................................................................................................ 342
a. Internal revenue taxes .................................................................................................................. 342
b. Local taxes ..................................................................................................................................... 342
b.1 Prescriptive period ...................................................................................................................... 342
2. Civil cases .......................................................................................................................................... 343
a. Who may appeal, mode of appeal, effect of appeal ..................................................................... 343
a.1 Suspension of collection of tax ................................................................................................... 346
a.1.1 Injunction not available to restrain collection ......................................................................... 346
a.2 Taking of evidence ...................................................................................................................... 347
a.3 Motion for reconsideration or new trial ..................................................................................... 348
b. Appeal to the CTA, en banc ........................................................................................................... 348
c. Petition for review on certiorari to the Supreme Court ................................................................ 349
3. Criminal cases ................................................................................................................................... 349
a. Institution and prosecution of criminal actions ............................................................................ 349
a.1 Institution of civil action in criminal action ................................................................................. 349
b. Appeal and period to appeal......................................................................................................... 350
b.1 Solicitor General as counsel for the people and government officials sued in their official
capacity ............................................................................................................................................. 350
c. Petition for review on certiorari to the Supreme Court ................................................................ 350
DISCLAIMER
THE RISK OF USE OF THIS BAR
REVIEW MATERIAL SHALL BE
BORNE BY THE USER
GENERAL PRINCIPLES OF TAXATION
products, or amusement places like night clubs,
cabarets, cockpits, etc (Aban, 2001).
TAXATION LAW
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.
d.
Encourage economic growth – the grant of
incentives
or
exemptions
encourage
investment thereby stimulating economic
activity.
e.
Protectionism – Protective tariffs and customs
duties are imposed as taxes in order to protect
important sectors of the economy or local
industries, as in the case of foreign
importations.
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).
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).
NATURE AND CHARACTERISTICS OF TAXATION
In other words, taxation is:
- 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.
The nature of the State’s power to tax is two-fold. It is
both an inherent and a legislative power (1996 Bar).
I. Inherent Attribute of Sovereignty
The power to tax is an attribute of sovereignty and is
inherent in the State. It is a power emanating from
necessity because it imposes a necessary burden to
preserve the State's sovereignty (Phil. Guaranty Co. v.
Commissioner, L-22074, April 30, 1965).
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 / Sumptuary
[PR2EP]
a.
b.
It is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent
government, without being expressly conferred by the
people (Pepsi-Cola Bottling Company of the Phil. v. Mun. of
Tanauan, Leyte, 69 SCRA 460).
It does not need constitutional conferment.
Constitutional provisions do not give rise to the power to
tax but merely impose limitations on what would
otherwise be an invincible power (Churchill and Tait v.
Concepcion, 34 Phil. 969).
Promotion of general welfare – taxation may be
used as an implement of police power to
promote the general welfare of the people.
In the case of Lutz v. Araneta (G.R. No. L-7859,
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).
--Q: Why is the power to tax considered inherent in a
sovereign State? (2003 Bar)
A: It is considered inherent in a sovereign State because
it is a necessary attribute of sovereignty. Without this
power no sovereign State can exist or endure. The power
to tax proceeds upon the theory that the existence of a
government is a necessity and this power is an essential
and inherent attribute of sovereignty, belonging as a
matter of right to every independent state or
government. No sovereign state can continue to exist
without the means to pay its expenses; and that for those
means, it has the right to compel all citizens and
property within its limits to contribute, hence, the
emergence of the power to tax (51 Am. Jur., Taxation 40).
---
Regulation of activities/industries – Taxes may
also be imposed for a regulatory purpose as, for
instance, in the rehabilitation and stabilization
of a threathened industry which is affected with
public interest, like the oil industry (Caltex
Philippines, Inc. v. Commission on Audit, et al.,
G.R. No. 92585, May 8, 1992).
Taxation also has a regulatory purpose as in the
case of taxes levied on excises or privileges like
those imposed on tobacco and alcoholic
1
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
II. Legislative in Character
It is inherently legislative in nature and character in that
the power of taxation can only be exercised through the
enactment of law.
c.
d.
e.
It is legislative in nature since it involves the
promulgation of laws. The legislature determines the
coverage, object, nature, extent and situs [CONES] of the
tax to be imposed. Such power is exclusively vested in
the legislature except where the Constitution provides
otherwise (Art. VI, Sec. 28[2], Art. X, Sec. 5, Constitution)
(1 Cooley Taxation, 3rd Ed.).
f.
g.
It is based on the principle that taxes are a grant of the
people who are taxed, and the grant must be made by the
immediate representative of the people, and where the
people have laid the power, there it must remain and be
exercised (CIR v. Fortune Tobacco Corporation, 559 SCRA
160, 2008).
---
2.
The grant of tax exemptions and condonations
3.
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]
Q: May legislative bodies enact laws to raise
revenues in the absence of constitutional provisions
granting said body the power of tax? Explain. (2005
Bar)
A: YES. The constitutional provisions relating to the
power of taxation do not operate as grants of the power
of taxation to the government, but instead merely
constitute a limitation upon a power which would
otherwise be practically without limit.
Moreover, it is inherent in nature, being an attribute of
sovereignty. There is, thus, no need for a constitutional
grant for the State to exercise this power.
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.
Q: Is the grant of the power of taxation inherent for
both National and Local Government?
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)).
A: NO. It is inherent in the National Government but not
in the Local Government Unit (LGU) since the latter is
merely a State’s agency to carry out in detail the objects
of the government. The LGU can only impose taxes when
it is granted by the:
a.
b.
4.
Constitution - e.g. LGU’s taxation power outside
autonomous region (Art. X, Sec. 5, 1987 Constitution)
Legislation by Congress - e.g. LGU’s taxation power
within the autonomous region (Art. X, Sec. 20, 1987
Constitution)
---
A: It means that taxation is one that extends to every
business, trade or occupation; to every object of
industry; use or enjoyment; and to every species of
possession. It imposes a burden which, in case of failure
to discharge the same, may be followed by the seizure
and confiscation of property after the observance of due
process.
---
The determination of: [ASK-MAPS]
a.
Amount or Rate of tax
b.
Subjects of taxation (persons, property,
occupation, excises or privileges to be taxed,
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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”.
Scope of legislative power in taxation
1.
provided they are within the taxing
jurisdiction)
Kind of tax to be collected
Method of collection (This is not exclusive to
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
2
GENERAL PRINCIPLES OF TAXATION
POWER OF TAXATION COMPARED WITH OTHER POWERS OF THE STATE
Distinctions between the three inherent powers of the State
Authority who
exercises the
power
Purpose
Persons affected
Amount of
monetary
imposition
Benefits received
Non-impairment of
contracts
Test of validity
TAXATION
Government or its
subdivision
political
To raise revenue in support of
the Government. Regulation is
merely incidental.
Upon the community or class of
individuals
No ceiling except inherent
limitations
Protection
of
a
secured
organized society, benefits
received from government/ No
direct benefit
Tax laws generally do not
impair
contracts,
unless:
government is party to contract
granting exemption for a
consideration
Must not be contrary to
inherent and constitutional
limitations
Similarities between taxation, eminent domain and
police power
1.
2.
3.
4.
5.
6.
POLICE POWER
Government
or
its
political subdivision
EMINENT DOMAIN
Government or public service
companies and public utilities
Promotion of general
welfare
through
regulations
Upon community or
class of individuals
Limited to the cost of
regulation, issuance of
license or surveillance
Maintenance of healthy
economic standard of
society/
No
direct
benefit
Contracts
may
be
impaired
To facilitate the taking of private
property for public purpose
Must comply with the
tests on “lawful subjects”
and “lawful means”
Must be for public purpose and
with payment of just compensation
Contracts may be impaired
To raise revenue
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.
They presuppose equivalent compensation.
The legislature can exercise all three powers.
No limit
To
promote
public
purpose
through
regulations
Amount of Exaction
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 the received;
a
healthy
taxpayer; merely general economic standard of
benefit of protection
society is attained
Non-impairment of Contracts
Contracts may not be Contracts
may
be
impaired
impaired
--Q: Can police power and taxation co-exist in one act
of 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
stabilization of a threatened industry which is affected
with public interest as to be within the police power of
the state (Caltex Philippines, Inc. v. Commission on Audit,
208 SCRA 726). Thus, the power of taxation may be
exercised to implement police power (Tiu v. Videogram
Regulatory Board, 151 SCRA 208).
Transfer of Property Rights
Taxes paid become part of No transfer but only
public funds
restraint in its exercise
Scope
All persons, property and All persons, property,
excises
rights and privileges
--Q: Distinguish taxation power from police power.
---
A:
TAXATION
On an individual as the owner of a
particular property
No imposition, the owner is paid
the fair market value of his
property
The person receives the fair market
value of the property taken from
him/ Direct benefit results
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
POLICE POWER
Purpose
3
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
to the Social Security System (SSS) funds, which have
been declared to be not public funds but properties
of the SSS members and held merely in trust by the
government. Are the coco-levy funds in the nature of
taxes and thus, can only be used for public purpose?
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 of 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: 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 April 23, 1992, R.A. 7432 was passed into law,
granting senior citizens certain privileges, including
the 20% sales discount to certain establishments.
Such law also provides that the cost discount granted
by these establishments may be claimed as a tax
credit or reduction from tax liability. On February
26, 2004, R.A. 9257 was issued, amending R.A. 7432,
which provides that the 20% may be claimed as
deduction from the gross income, net of VAT, 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.
Petitioners challenge the constitutionality of the tax
deduction scheme under R.A. 9257 and pray that the
tax credit treatment of the 20% discount be
reinstated. Petitioners posit that the resolution of
this case lies in the determination of whether the
legally mandated 20% senior citizen discount is an
exercise of police power or eminent domain. If it is
police power, no just compensation is warranted.
But if it is eminent domain, the tax deduction scheme
is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior
citizens. Thus, it constitutes taking of private
property without payment of just compensation. Is
the tax deduction scheme an exercise of police
power or the power of eminent domain?
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).
----Q: Revenue laws R.A. 6260 and P.D. 276 were
enacted to establish the Coconut Investment Fund
and Coconut Consumers Stabilization Fund. These
imposed levy for every sale of copra. Additional laws
were enacted for the management of coconut levy
funds (coco-levy funds), including the Coconut
Industry Code, which provided that the coco-levy
funds shall be owned by the coconut farmers in their
private capacities.
In 2000, E.O. 312 was issued which established
“Sagip Niyugan Program”. It sought to establish a P1billion fund by disposing of assets acquired using
coco-levy funds or assets of entities supported by
those funds. To manage the fund, a committee was
formed which engage the services of a private
reputable auditing firm to conduct periodic audits by
the majority vote of its members.
A: 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
FDI Bank was also designated as the trustee bank. It
suggested that the coco-levy funds are closely similar
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
4
GENERAL PRINCIPLES OF TAXATION
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).
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 (Memorial Park
v. DSWD, 2013).
---
Benefits-Protection Theory
(Doctrine of Symbiotic Relationship)
It involves the power of the State to demand and receive
taxes based on the reciprocal duties of support and
protection between the State and its citizen.
THEORY AND BASIS OF TAXATION
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).
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).
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).
A: It expresses the underlying basis of taxation which is
governmental necessity, for indeed, without taxation, a
government can neither exist nor endure.
Considering that taxes are the lifeblood of the
government and in Holmes’s memorable metaphor, the
price we pay for civilization, tax laws must be faithfully
and strictly implemented (CIR v. Acosta, G.R. No. 154068,
August 3, 2007). Taxes should be collected promptly. No
court shall have the authority to grant an injunction to
restrain the collection of any internal revenue tax, fee or
charge imposed by the NIRC (Angeles City v. Angeles
Electric Cooperation, 622 SCRA 43, 2010).
--Manifestations of lifeblood theory:
1.
2.
3.
4.
5.
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.
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.
PRINCIPLES OF SOUND TAX SYSTEM
Basic principles of a sound tax system (Canons of
Taxation) [FAT]
1.
Necessity Theory
5
Fiscal adequacy
a. 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
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
January 1, 1987 thereby increasing real property
taxes by 100% to 400% on improvements, and up to
100% on land which would necessarily lead to
confiscation of property. Is the contention of the
Chavez and ROAP correct?
government would be in keeping with the
principle (Vitug, 2006).
2.
3.
Administrative feasibility
a. 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).
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).
---
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 must evolve a
progressive system of taxation.
A violation of the principle of a sound tax system
may or may not invalidate a tax law
SCOPE AND LIMITATION OF TAXATION
Inherent limitations [PITIE]
1. Public Purpose
2. Inherently Legislative
3. Territorial
4. International Comity
5. Exemption of government entities, agencies
and instrumentalities
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).
--Q: Is the VAT law violative of the administrative
feasibility principle?
Constitutional limitations
a. Provisions directly affecting taxation
i.
Prohibition against imprisonment for nonpayment of poll tax (Art. III, Sec. 20)
ii. Uniformity and equality of taxation (Art.
VI, Sec. 28)
iii. Grant by Congress of authority to the
president to impose tariff rates (Art. VI ,
Sec. 28)
iv. Prohibition against taxation of religious,
charitable entities, and educational
entities (Art. VI, Sec. 28)
v. Prohibition against taxation of non-stock,
non-profit educational institutions (Art. IX ,
Sec. 4)
vi. Majority vote of Congress for grant of tax
exemption (Art. VI , Sec. 28)
vii. Prohibition on use of tax levied for special
purpose (Art. VI, Sec. 29)
viii. President’s veto power on appropriation,
revenue, tariff bills (Art. VI, Sec. 27)
ix. Non-impairment of jurisdiction of the
Supreme Court (Art. VI, Sec. 30)
x. Grant of power to the LGUs to create its
own sources of revenue (Art. IX, Sec. 5)
xi. Origin of Revenue and Tariff Bills (Art. VI,
Sec. 24)
xii. No appropriation or use of public money
for religious purposes (Art. VI, Sec. 28)
b. Provisions indirectly affecting taxation (Art. III,
1987 Constitution)
i.
Due process (Sec. 1)
ii. Equal protection (Sec. 1)
iii. Religious freedom (Sec. 5)
iv. Non-impairment
of
obligations
of
contracts (Sec. 10)
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
6
GENERAL PRINCIPLES OF TAXATION
v.
Freedom of the press (Sec. 4)
2.
The above are discussed in details below.
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.
INHERENT LIMITATIONS
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).
1. Public Purpose
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;
3. It is designed to support the services of the
government for some of its recognized objects.
3.
An individual taxpayer need not derive direct
benefits from the tax.
4. 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.
5. 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?
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: 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.
A: NO. Taxes could be exacted only for a public purpose;
they cannot be declared private properties of individuals
although such individuals fall within a distinct group of
persons (Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagagawa sa Niyugan v. Exec. Sec.,
G.R. Nos. 147036-37, April 10, 2012).
----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?
Promotion of general welfare test - Whether the
proceeds of the tax will directly promote the welfare
of the community in equal measure. When a tax law
is only a mask to exact funds from the public when
its true intent is to give undue benefit and
advantage to a private enterprise, that law will not
satisfy the requirement of "public purpose"
(Planters Products, Inc. v. Fertiphil Corporation, G.R.
No. 166006, March 14, 2008).
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).
----Q: Is the tax imposed on the sale, lease or disposition
of videograms for a public purpose?
Determination when enacted tax law is for public
purpose
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.
NOTE: If the tax measure is not for public purpose, the
act amounts to confiscation of property.
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
Principles relative to public purpose
1.
Tax revenue must not be used for purely private
purposes or for the exclusive benefit of private
persons.
7
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
held to be its indirect beneficiaries (Tio v. Videogram
Regulatory Board, G.R. No. 75697, June 18, 1987).
---
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).
2. Inherently Legislative
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).
3.
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).
NOTE: Technically, this does not amount to a
delegation of the power to tax because the questions
which should be determined by Congress are
already answered by Congress before the tax law
leaves Congress.
--Q: In order to raise revenue for the repair and
maintenance of the newly constructed City Hall of
Makati, the City Mayor ordered the collection of
P1.00, called “elevator tax”, every time a person
rides any of the high-tech elevators in the City Hall
during the hours of 8am to 10am, and 4pm to 6pm. Is
the imposition of elevator tax valid? (2003 Bar)
Non-delegable legislative powers
1.
2.
3.
4.
5.
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
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.
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)
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).
2.
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 act (Maceda v. Macaraig, G.R. No.
88291, June 8, 1993).
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).
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)
NOTE: When Congress tasks the President or
his/her alter egos to impose safeguard measures
under the delineated conditions, the President or
the alter egos may be properly deemed as agents of
Congress to perform an act that inherently belongs
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.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
8
GENERAL PRINCIPLES OF TAXATION
income of a foreign state may not be the subject of
taxation by another State.
While it is true that the Constitution has given broad
powers of taxation to LGUs, this delegation, however, is
subject to such limitations as may be provided by law
(Art. X, Sec. 5, 1987 Constitution).
----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?
International comity as a limitation on the power to
tax
The Constitution expressly adopted the generally
accepted principles of international law as part of the
law of the land (Art. II, Sec. 2, 1987 Constitution).
Thus, a State must recognize such generally accepted
tenets of international law that limit the authority of the
government to effectively impose taxes upon a sovereign
State and its instrumentalities.
Reasons:
1. Par in parem non habet imperium. As between
equals there is no sovereign (Doctrine of Sovereign
Equality).
2. The concept that when a foreign sovereign enters
the territorial jurisdiction of another, it does not
subject itself to the jurisdiction of the other.
3. The rule of international law that a foreign
government may not be sued without its consent so
that it is useless to impose a tax which could not be
collected.
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).
---
5. 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. L-18125, May 31, 1963).
3. Territorial
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).
GR: The taxing power of a country is limited to persons
and property within and subject to its jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which could only
be exercised within a country’s territorial limits.
2. This is based on the theory that taxes are paid for
the protection and services provided by the taxing
authority which could not be provided outside the
territorial boundaries of the taxing State.
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).
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.
National Government is exempt from local taxation
If the taxing authority is the LGU, R.A. 7160 expressly
prohibits LGUs from levying tax on the National
Government, its agencies and instrumentalities and
other LGUs.
In Manila International Airport Authority v. CA, G.R. No.
155650 (2006) MIAA's Airport Lands and Buildings are
exempt from real estate tax imposed by local
governments. Being an instrumentality of the National
Government, it is exempt from local taxation. Also, the
real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax.
Refer to discussions on Situs of Taxation.
4. International Comity
It refers to the respect accorded by nations to each other
because they are sovereign equals. Thus, the property or
9
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
The reclaimed properties are not subject to real
property tax because LLL is a government
instrumentality. Under the law, real property owned
by the Republic of the Philippines is exempt from
real property tax unless the beneficial use thereof
has been granted to a taxable person (Sec. 234, LGC).
When the title of the real property is transferred to
LLL, the Republic remains the owner of the real
property. Thus, such arrangement does not result in
the loss of the tax exemption (Republic of the
Philippines, represented by The Philippine
Reclamation Authority v. City of Paranaque, 677
SCRA 246 [2012]).
b. NO. As a rule, properties owned by the Republic of
the Philippines are exempt from real property tax
except when beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person.
When LLL leased out portions of the reclaimed
properties to taxable entities, such as popular fast
food restaurants, the reclaimed properties are
subject to real property tax (Sec. 234(a), LGC; GSIS v.
City Treasurer and City Assessor of the City of Manila,
2009).
----Q: Is PEZA a government instrumentality or a GOCC?
Is it exempt from real property taxation?
Agency of the Government
a.
It refers to any of the various units of the Government,
including a department, bureau, office, instrumentality,
or government-owned or controlled corporation, or a
local government or a distinct unit therein.
Taxability of agencies of government
1.
2.
Performing governmental functions: tax exempt
unless expressly taxed
Performing proprietary functions: subject to tax
unless expressly exempted
Instrumentality of the Government
It refers to any agency of National Government, not
integrated within the department framework, vested
with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering
special funds, and enjoying operational autonomy,
usually through charter.
Taxability of instrumentalities of government
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
(o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities and
local government units.”
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.
--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.
Being an instrumentality of the national government, it
cannot be taxed by LGUs (PEZA v. Lapu-lapu City, 742
SCRA 524).
----Q: The Lucena Fishing Port Complex (LFPC) is one of
the fishery infrastructure projects undertaken by the
National Government under the Nationwide Fish
Port-Package. The Philippine Fisheries Development
Authority (PFDA) was created with functions and
powers to manage, operate, and develop the Navotas
Fishing Port Complex and such other fishing port
complexes that may be established by the Authority.
Pursuant thereto, PFDA took over the management
and operation of LFPC in February 1992. On October
26, 1999 the City Government of Lucena demanded
payment of realty taxes on the LFPC property. Is
PFDA liable for the real property tax assessed on the
Lucena Fishing Port Complex?
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.
a.
b.
Are the reclaimed properties registered in the
name of LLL subject to real property tax?
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)
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
A:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
10
GENERAL PRINCIPLES OF TAXATION
In other words, while a person may not be imprisoned
for non-payment of a cedula or poll tax, he may be
imprisoned for non-payment of other kinds of taxes
where the law so expressly provides (J. Dimaampao,
2015).
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).
--Government-owned
(GOCC)
and
controlled
2. Uniformity and equality of taxation
Basis: The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation (Art. VI, Sec. 28[1]).
corporation
It refers to to any agency:
- 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
Explain the following concepts in taxation:
1. Uniformity
2. Equitability
3. Equality
NOTE: Government instrumentality may include a GOCC
and there may be “instrumentality” that does not qualify
as GOCC.
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.
Uniformity – It means that all taxable articles or kinds of
property of the same class shall be taxed at the same
rate.
Taxability of GOCCs
Equitability – Taxation is said to be equitable when its
burden falls on those better able to pay.
GOCCs perform proprietary functions; hence they are
subject to taxation. However, certain corporations have
been granted exemption under Section 27(c) of R.A.
8424 as amended by R.A. 9337, which took effect on July
1, 2005, to wit:
1.
2.
3.
4.
Equality – It is accomplished when the burden of the tax
falls equally and impartially upon all the persons and
property subject to it.
--Q: Explain the requirement of uniformity as a
limitation in the imposition and/or collection of
taxes (1998 Bar).
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Philippine Charity Sweepstakes Office (PCSO)
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 maybe 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.
----Q: A law was passed exempting doctors and lawyers
from the operation of the value-added tax. Other
professionals complained and filed a suit
questioning the law for being 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).
CONSTITUTIONAL LIMITATIONS
Taxation, being inherent in sovereignty, need not be
clothed with any constitutional authority for it to be
exercised by the sovereign state. Instead, constitutional
provisons are meant and intended more to regulate and
define, rather than to grant, the power emanating
therefrom.
PROVISIONS DIRECTLY AFFECTING TAXATION
1. Prohibition against imprisonment for nonpayment of poll tax
Basis: No person shall be imprisoned for debt or nonpayment of a poll tax (Art. III, Sec. 20).
A poll tax is one levied on persons who are residents
within the territory of the taxing authority without
regard to their property, business or occupation. Thus,
only the basic community tax under the LGC could
qualify as a poll tax, and the non-payment of other
(additional) taxes imposed, not being in the nature of
poll taxes, may validly be subjected by law to
imprisonment (Vitug, 2006).
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
11
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
always hardest hit (ABAKADA Guro v. Ermita, G.R. No.
168056, September 1, 2005).
---
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]).
---
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]).
Flexible Tarrif Clause
This clause provides the authority given to the President
to adjust tariff rates under Sec. 401 of the Tariff and
Customs Code [now Sec. 1608 of R.A. 10863, known as
Customs Modernization and Tariff Act (CMTA) of 2016]
(Garcia v. Executive Secretary, G.R. No. 101273, July 3,
1992). This authority, however, is subject to limitations
and restrictions indicated within the law itself.
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.
Requisites on the authority of the President in
imposing tax
--Q: Does the Constitution prohibit regressive taxes?
a)
A: NO, the Constitution does not reallyprohibit the
impostion of regressive taxes. What it simply provides
is that Congress shall evolve a progressive system of
taxation.
---
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).
Meaning of “evolve” as used in the Constitution
The constitutional provision has been interpreted to
mean simply that "direct taxes are to be preferred and
as much as possible, indirect taxes should be minimized.”
The mandate of Congress is not to prescribe but to
evolve a progressive tax system. This is a mere directive
upon Congress, not a justiciable right or a legally
enforceable one. We cannot avoid regressive taxes but
only minimize them (Tolentino et.al. v. Secretary of
Finance, G.R. No. 115455, Oct. 30, 1995).
b)
--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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Delegated by Congress through a law – The
authorization granted to the President must be
embodied in a law. Hence, the justification cannot be
supplied simply by inherent executive powers.
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.
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).
12
GENERAL PRINCIPLES OF TAXATION
c)
Within the framework of national development
program.
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.
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 educational purposes shall be exempt from
taxation (Art. IV, Sec. 28 [3]).
"Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to
exclude; as enjoying a privilege exclusively." If real
property is used for one or more commercial purposes, it
is not exclusively used for the exempted purposes but is
subject to taxation.
--Q: What is the coverage of tax exemption?
The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without
doing violence to the Constitution and the law.
A: It covers real property taxes only. Accordingly, a
conveyance of such exempt property can be subject to
transfer taxes.
---
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.
Properties exempt under the Constitution from the
payment of property taxes
1.
2.
3.
4.
5.
Rules on taxation of non-stock corporations for
charitable and religious purposes
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]).
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.
Meaning of “charitable”
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).
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).
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 tax-exempt
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).
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).
b.
Meaning of “actual, direct and exclusive use of the
property for religious, charitable and educational
purposes”
It is the direct and immediate and actual application of
the property itself to the purposes for which the
charitable institution is organized. It is not the use of the
income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
Donations received by religious, charitable,
and educational institutions are considered as
income but not taxable income as they are
items of exclusion.
On the part of the donor, such donations are
deductible expense provided that no part of
the income of which inures to the benefit of
any private stockholder or individual in an
amount not exceeding 10% in case of
individual, and 5% in case of a corporation, of
the taxpayer’s taxable income derived from
trade or business or profession (Sec.34 [H],
NIRC).
NOTE: In the case of Lung Center of the Philippines v. City
Assessor of Quezon City (433 SCRA 119), the Court ruled
that under the 1987 Constitution, for "lands, buildings,
13
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
2.
To what kind of taxes does this exemption apply?
(2000 Bar)
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 bequest, devise, or legacy or transfer shall be
used for administration purposes (Secs. 87[D] and
101, NIRC).
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).
----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)
--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.
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)
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).
---
A:
a.
The Christmas gift of P100,000 given by Imelda to
her parents is not taxable because under the law
(Section 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 (Section
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.
----Q: The Constitution exempts from taxation
charitable institutions, churches, parsonages, or
convents appurtenant thereto, mosques, and nonprofit cemeteries and lands, buildings and
improvements actually, directly, and exclusively
used for religious, charitable or educational
purposes. Mercy hospital is a 100 bed hospital
organized for charity patients. Can said hospital
claim exemption from taxation under the provision?
(1996 Bar)
SUMMARY RULES ON EXEMPTION OF PROPERTIES
ACTUALLY, EXCLUSIVELY AND DIRECTLY USED FOR
RELIGIOUS, EDUCATIONAL AND CHARITABLE
PURPOSES
Coverage
of Covers real property tax only. The
income of whatever kind and
constitutional
nature from any of their
provision
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.
Requisite
to Property must be “actually,
avail of this directly and exclusively used” by
exemption
religious,
charitable
and
educational institutions.
Test for the Use of the property for such
grant of this purposes, not the ownership
exemption
thereof
A: Yes. Mercy hospital can claim exemption from
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.
----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.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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 prove that the
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY
used for the purpose of institution for the exemption to
be granted (Sababan, 2008).
5. Prohibition against taxation of non-stock, nonprofit educational institutions
14
GENERAL PRINCIPLES OF TAXATION
Basis: All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. xxx
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).
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.
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).
Under R.R. No. 6-97, once non-stock, non-profit
educational institutions engage in business, they are
subject to VAT.
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, non-profit 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, non-profit
educational institutions.
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.
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).
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).
GRANTEE
TAXES
GRANTED
ART. XIV, SEC.
4(3)
Non-stock, nonprofit educational
institution
Income
tax,
Customs duties,
Property tax
--Q: Under Art. XIV, Sec. 4(3) of the 1987 Constitution,
all revenues and assets of non-stock, 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)
ART. VI, SEC.
28(3)
Religious,
educational,
charitable
Property tax
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.
Note that a careful analysis of the last paragraph of Sec.
30 of the NIRC, as amended by R.A. 8424, would reveal
that the income of whatever kind or character derived
by non-stock and non-profit educational institutions
from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of
the disposition thereof, shall be subject to tax.
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.
However, under Art. XIV, Sec. 4(3) of the Constitution,
revenues and assets actually, directly, and exclusively
USED for educational purposes shall be exempt from
taxes and duties. Last paragraph of Sec. 30 of the NIRC
disregarded this requisite of use and instead used the
phrase: “regardless of the disposition.”
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).
---
Ergo, Sec. 30(h) in relation to the last paragraph of the
NIRC appears to be unconstitutional. NIRC should yield
to the provision of the 1987 Constitution granting tax
exemption to non-stock, non-profit educational
institutions.
The Constitution is the basic and
paramount law to which all other laws must conform (J.
Dimaampao, 2015).
Tax on Proprietary Non-Profit Educational
Institutions and Proprietary Non-Profit Hospitals
Donor’s Tax, Estate Tax, VAT and other taxes
Section 27(b) of the NIRC did not remove the exemption
from income tax of proprietary non-profit hospitals as
charitable institutions. The provision merely introduced
the preferential income tax rate of 10% for proprietary
non-profit educational institutions and proprietary non-
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 self-executing as it requires
legislative enactment providing certain conditions for
15
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
GENERAL PRINCIPLES OF TAXATION
profit hospitals (CIR v. St. Luke’s Medical Center, G.R. No.
195909, September 26, 2012).
income or asset devoted to the institution’s purposes
and its activities conducted not for profit.
Proprietary – private
Charitable institutions – one providing for free goods
and services to the public which would otherwise fall on
the shoulders of the government.
Non-Profit – no net income or asset accrues to or
benefits any member of specific person, with all the net
Tax Rates of Proprietary Non-Profit Educational Institutions and Proprietary Non-Profit Hospitals
30 %
Private, non-profit hospitals and
educational institutions whose gross
income from
unrelated trade,
business or other activity exceeds
50% of total gross income from all
sources.
10%
Private, non-profit hospitals and
educational institutions whose gross
income from
unrelated trade,
business or other activity does not
exceed 50% of total gross income
from all sources.
Exempt
Organized and operated exclusively
for charitable purposes, and no part
of its net income or asset shall belong
to or inure to the benefit of any
member, organizer, officer or any
specific purpose.
Hospitals and educational institutions
claiming to be proprietary non-profit
but do not meet the definition thereof.
6. Majority vote of Congress for grant of tax
exemption
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).
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).
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 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.
Required vote for grant of tax exemption
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).
8. President’s veto power on (1) appropriation, (2)
revenue, (3) tariff bills (ART bill)
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.
Required vote for withdrawal of such grant of tax
exemption
A relative majority or plurality of votes is sufficient, that
is, majority of a quorum.
9. Non-impairment of jurisdiction of the Supreme
Court
7. Prohibition on use of tax levied for special
purpose
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Basis: The Supreme Court shall have the power to
review, revise, reverse, modify or affirm on appeal on
16
GENERAL PRINCIPLES OF TAXATION
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 relf-reliant communities and make them
effective partners in the attainment of national goals
(Dimaampao, 2015).
certiorari as the laws or the Rules of Court may provide,
final judgments or orders of lower courts in xxx al cases
involving the legality of any tax, impost, assessment,
or toll or any penalty imposed in relation thereto
(Art. VIII, Sec. 5[2][b]).
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.”
11. Origin of Revenue and Tariff Bills
Basis: All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively
in the House of Representatives, but the Senate may
propose or concur with amendments (Art VI, Sec. 24).
The courts cannot inquire into the wisdom of a taxing
act, EXCEPT when there is an allegation of violation of
constitutional limitations or restrictions.
What is required to originate in the House of
Representatives is 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).
10. Grant of power to the LGUs to create its own
sources of revenue
Basis: Each LGU shall have the power to create its own
sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy
of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments (Art. X, Sec.
5).
Justification in the delegation of legislative taxing
power to local governments
--Q: Why must appropriation, revenue or tariff bills
originate from the Congress?
Delegation of legislative taxing power to local
governments is justified by the necessary implication
that the power to create political corporations for
purposes of local self-government carries with it the
power to confer on such local government agencies the
authority to tax.
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: 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.
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: 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 governmenr’s
exercise of the power to tax.
---
1.
2.
A:
1.
The local government’s power to tax is the most
effective instrument to raise the needed revenues.
17
Does R.A. 9337 violate Art. VI, Sec. 24 of the
Constitution on exclusive origination of revenue
bills?
Does R.A. 9337 violate Art. VI, Sec. 26(2) of the
Constitution on the “No-Amendment Rule”?
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
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
said House bills to the Senate, the Senate came out
with S.B. No. 1950 proposing amendments not only
to NIRC provisions on the VAT but also amendments
to NIRC provisions on other kinds of taxes.
1. Due Process
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.
Requirements of due process in taxation
Basis: No person shall be deprived of life, liberty, or
property without due process of law xxx (Art. III, Sec. 1).
Substantive Due Process
1. Tax must be for public purpose;
2. It must be imposed within territorial jurisdiction;
Procedural Due Process
1. 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?
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).
---
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. L49839-46 April 26, 1991).
While it is true that the Philippines as a State is not
obliged to admit aliens within its territory, once an alien
is admitted, he cannot be deprived of life without due
process of law. This guarantee includes the means of
livelihood. The shelter of protection under the due
process and equal protection clause is given to all
persons, both aliens and citizens (Villegas v. Hiu Chiong
Tsai Pao Ho, G.R. No. L-29646, Nov. 10, 1978).
---
12. No appropriation or use of public money for
religious purposes
Illustrative cases of violations of the due process
clause
Basis: No public money or property shall be
appropriated, applied, paid or employed directly or
indirectly for the use, benefit or support of any sect,
church, denomination, sectaraian institution, or system
of religion or of any priest, preacher, minister, or other
religious teacher or dignitary as such EXCEPT when
such priest, preacher, minister or dignitary is
assigned to the armed forces or to any penal
institution or government orphanage or leprosarium
(Art. VI, Sec. 29[2])
1.
2.
3.
4.
5.
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 law is in violation of inherent limitations
2. Equal Protection
This is in consonance with the inviolable principle of
separation of the Church and State.
Basis: No person shall be denied the equal protection of
the laws (Art. III, Sec. 1).
PROVISIONS INDIRECTLY AFFECTING TAXATION
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
18
GENERAL PRINCIPLES OF TAXATION
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)
Define equal protection of the law
It means that all persons subjected to such legislation
shall be treated alike, under like circumstances and
conditions, both in the privileges conferred and in the
liabilities imposed (1 Cooley 824-825; Sison Jr. v. Ancheta,
G.R. No. 59431, July 25, 1984).
The power to select subjects of taxation and apportion
the public burden among them includes the power to
make classifications. The inequalities which result in the
singling out of one particular class for taxation or
exemption infringe no Constitutional limitation (Lutz v.
Araneta, G.R. No. L-7859, Dec. 22, 1955).
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.
A: NO. The remission or condonation of taxes due and
payable to the exclusion of taxes already collected does
not constitute unfair discrimination. Each set of taxes is
a class by itself and the law would be open to attack as
class legislation only if all taxpayers belonging to one
class were not treated alike (Juan Luna Subdivision, Inc.,
v. Sarmiento, G.R. L-3538, May 28, 1952).
----Q: An E.O. was issued pursuant to law, granting tax
and duty incentives only to businesses and residents
within the “secured area” of the Subic Economic
Special Zone, and denying said incentives to those
who live within the zone but outside such “secured
area:” Is the Constitutional right to equal protection
of the law violated by the Executive Order? (2000
Bar)
--Q: Is Revenue Memorandum Circular No. 47-91
classifying copra as an agricultural non-food
product discriminatory and violative of the equal
protection clause?
A: NO. It is not violative and not discriminatory because
there is a material or substantial difference between
coconut farmers and copra producers, on one hand, and
copra traders and dealers, on the other. The former
produce and sell copra, the latter merely sells copra. The
Constitution does not forbid the differential treatment of
persons, so long as there is reasonable basis for
classifying them differently (Misamis Oriental
Association of Coco Traders Inc. v. Secretary of Finance,
G.R. No. 108524, November 10, 1994).
---
A: NO. 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
the purpose 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.
Principle of Equality
It admits of classification or distinctions as long as they
are based upon real and substantial differences between
the persons, property, or privileges and those not taxed
must bear some reasonable relation to the object or
purpose of legislation or to some permissible
government policy or legitimate end of the government.
--Q: What is the “rational basis” test? Explain briefly.
(2010 Bar)
The classification applies equally to all the resident
individuals and businesses within the “secured area.”
The residents, being in like circumstances to
contributing directly to the achievement of the end
purpose of the law, are not categorized further. Instead,
they are similarly treated, both in privileges granted and
obligations required (Tiu, et al, v. CA, et al, G.R. No.
127410, January 20, 1999).
----Q: 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
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
19
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
said Ordinance is unconstitutional for being violative
of the equal protection clause. Is the Ordinance
valid?
(Tolentino v. Secretary of Finance, G.R. No. 115873,
August 25, 1994).
---
A: NO. Equal protection clause applies only to persons or
things identically situated and does not bar a reasonable
classification of the subject of legislation. The
classification, to be reasonable, should be in terms
applicable to future conditions as well. The taxing
ordinance should not be singular and exclusive as to
exclude any substantially established sugar central, of
the same class as Ormoc Sugar Co., from the coverage of
the tax (Ormoc Sugar Industry v. City Treasurer of Ormoc
City, G.R. No. L-23794, February 17, 1968).
---
4. Non-impairment clause
Basis: No law impairing the obligation of contracts shall
be passed (Art. III, Sec. 10).
Instances when there
obligations of contract
impairment
of
the
When the law changes the terms of the contract by:
1.
2.
3.
3. Religious Freedom
Making new conditions; or
Changing conditions in the contract; or
Dispenses with the conditions expressed therein.
Rationale for the non-impairment clause in relation
to contractual tax exemption
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)
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.
--Q: Is the real property tax exemption of religious
organizations violative of the non-establishment
clause?
NOTE: This applies only where one party is the
government and the other party, a private person.
Rules regarding non-impairment of obligation and
contract with respect to the grant of tax exemptions
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?
1.
2.
3.
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: 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?
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)
In Tolentino v. Secretary of Finance, 1994, the Court ruled
that R.A. 7716 (E-VAT Law) does not violate the nonimpairment 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.
A: NO. Such imposition of license tax constitutes
curtailment of religious freedom and worship which is
guaranteed by the Constitution (American Bible Society v.
City of Manila, 101 Phil. 386).
----Q: Is VAT registration restrictive of religious and
press freedom?
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.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
is
20
GENERAL PRINCIPLES OF TAXATION
--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)
restored by administrative regulation with respect
to the circulation of income of newspapers, PPI
presses its claim because of the possibility that the
exemption may still be removed by mere revocation
of the regulation of the Secretary of Finance. Is R.A.
7716 unconstitutional for it violates the freedom of
the press under Art.III, Sec.4 of the Constitution?
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 the rights and liberty of others.
He must answer for libel. He may be punished for
contempt of court. Like others, he must pay equitable
and nondiscriminatory taxes on his business (Tolentino v.
Secretary of Finance, G.R. No. 115873, August 25, 1994).
---
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).
----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.
STAGES OF TAXATION
Stages/aspects of a system of taxation [LAPR] (2006
Bar)
1.
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)
Levy or Imposition (Tax Legislation) – This refers
to the enactment of a law by Congress authorizing
the imposition of tax. It further contemplates the
determination of the subject of taxation, purpose for
which the tax shall be levied, fixing the rate of
taxation and the rules of taxation in general.
--Q: Taxes are assessed for the purpose of generating
revenue to be used for public needs. Taxation itself is
the power by which the State raises revenue to
defray the expenses of government. A jurist said that
a tax is what we pay for civilization. In our
jurisdiction, which of the following statements may
be erroneous?:
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]).
---
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property
within the territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of the
government.
5. Taxes are assessed according to a reasonable rule
of apportionment. (2004 Bar)
A: (4) Taxes are levied by the executive branch of
government. This statement is erroneous because levy
refers to the act of imposition by the legislature which is
done through the enactment of a tax law. Levy is an
exercise of the power to tax which is exclusively
legislative in nature and character. Clearly, taxes are not
levied by the executive branch of government (NPC v.
Albay, G.R. No. 87479, June 4, 1990).
---
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: R.A. 7716 was enacted to widen the tax base of the
existing VAT system and enhance its administration
by amending the NIRC. The PPI questions the law
insofar as it has withdrawn the exemption
previously granted to the press under Sec. 103(f) of
the NIRC. Although the exemption was subsequently
2.
21
Assessment and Collection (Tax Administration)
– This is the act of administration and
implementation of the tax law by executive through
its administrative agencies.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The act of assessing and collecting taxes is
administrative in character, and therefore can be
delegated (J. Dimaampao, 2015,).
1.
2.
NOTE: The term “assessment” which here means
notice and demand for payment of a a tax liability,
should not be confused with “assessment” relative
to a real property taxation, which refers to the
listing and valuation of taxable real property.
3.
4.
5.
6.
7.
--Q: Is the approval of the court, sitting as probate or
estate settlement court, required in the enforcement
of the estate tax? (2005 Bar)
REQUISITES OF A VALID TAX
1.
2.
3.
A: NO. The approval of the court, sitting in probate, is not
a mandatory requirement in the collection of estate tax.
On the contrary, under Section 94 of the NIRC, it is the
probate or settlement court which is forbidden to
authorize the executor or judicial administrator of the
decedent’s estate, to deliver any distributive share to any
party interested in the estate, unless a certification from
the Commissioner of the Internal Revenue that the estate
tax has been paid is shown (Marcos II v. CA, G.R.
No.120880, June 5, 1997).
---
4.
It should be for a public purpose
It should be uniform
That either the person or property being taxed be
within the jurisdiction of the taxing authority
The tax must not impinge on the inherent and
constitutional limitations on the power of taxation
TAX AS DISTINGUISHED FROM
OTHER FORMS OF EXACTIONS
TAX
NOTE: Assessment and collection may be delegated but
not levy since it is exclusively conferred with the
Congress.
3.
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
Coverage
Payment – The act of compliance by the taxpayer,
including such options, schemes or remedies as may
be legally available.
GR: Tax shall be paid by the person subject thereto at the
time the return is filed (Sec. 56[A][1], NIRC).
XPN: When the tax due is in excess of P2,000, the
taxpayer other than a corporation may elect to pay the
tax in 2 equal installments in which case, the first
installment shall be paid at the time the return is filed
and the second installment, on or before July 15
following the close of the calendar year (Sec. 56[A][2],
NIRC).
Object
4.
Taxes are enforced proportional contributions from
persons and properties, levied by the State by virtue of
its sovereignty for the support of the government and for
all its public needs (1 Cooley 62).
Purpose
For the support of
the government
Authority
May be imposed
by the State only
For the use of
another’s property
Demand of
proprietorship
Amount is limited
to the cost and
maintenance of
public
improvement
May be imposed by
private individuals
or entities
NOTE: Taxes may be imposed only by the government
under its sovereign authority; toll fees may be
demanded by either the government or private
Characteristics of taxes [SLEP4]
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
TOLL
A consideration
paid for the use of
a road, bridge or
the like, of a public
nature
Amount
DEFINITION, NATURE AND CHARACTERISTICS OF
TAXES
Goods imported
or exported
TAX
Basis
Refund – The recovery of any alleged to have been
erroneously or illegaly assessed or collected, or of
any penalty claimed to have been collected without
authority, or of any sum alleged to have been
excessively, or in any manner wrongfully collected.
Only a kind of tax
therefore limited
coverage
An enforced
proportional
contribution from
persons and
property for
public purpose/s
Demand of
sovereignty
Generally, the
amount is
unlimited
Definition
NOTE: If any installment is not paid on or before the date
fixed for its payment, the whole amount of the tax unpaid
becomes due and payable, together with delinquency
penalties.
An all-embracing
term to include
various kinds of
enforced
contributions
imposed upon
persons for the
attainment of public
purpose
Persons, property,
etc.
TARIFF/
CUSTOMS
DUTIES
22
GENERAL PRINCIPLES OF TAXATION
individuals or entities, as an attribute of ownership.
TAX
VAT on tollway 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
Basis
Amount
Subject
Effect of
NonPayment
Time of
Payment
TAX
Imposed to raise
revenue
Collected under
the power of
taxation
Generally, amount
is unlimited
Imposed on
persons, property,
rights or
transaction
Non-payment does
not make the
business illegal
Normally paid
after the start of
business
Nature
Subject
LICENSE FEE
For regulation
and control
Collected under
police power
Person
Liable
Purpose
Limited to the
necessary
expenses of
regulation and
control
Imposed on the
exercise of a
right or privilege
Scope
An enforced
proportional
contribution from
persons and
property for public
purpose/s
Imposed on persons,
property rights or
transactions
A personal liability
of the taxpayer
For the support of
the government
Regular exaction
Basis
Assignability
Mode of
Payment
Non-payment
makes the
business illegal
Normally paid
before the
commencement
of the business
Set-off
Effect of nonpayment
--Q: A municipality, BB, has an ordinance which
requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed
annual fee of P20,000. Subsequently, the municipal
board proposed an ordinance imposing a sales tax
equivalent to 5% of the amount paid for the
purchase or consumption of liquor in stores,
restaurants and other establishments. The municipal
mayor, CC, refused to sign the ordinance on the
ground that it would constitute double taxation. Is
the refusal of the mayor justified? Reason briefly.
(2004 Bar)
Bears interest
only if
delinquent
Prescription
Governed by
the special
prescriptive
periods
provided for in
the NIRC
Purpose
Authority
23
Not assignable
Payable in
money or in
kind
Not subject to
set-off
May result in
imprisonment
Interest
Definition
A: No. The refusal of the mayor is not justified. The
impositions are of different nature and character. The
fixed annual fee is in the nature of a license fee imposed
through the exercise of police power while the 5% tax on
purchase or consumption is a local tax imposed through
the exercise of taxing powers. Both a license fee and a tax
may be imposed on the same business or occupation, or
for selling the same article and this is not in violation of
the rule against double taxation (Campania General de
Tabacos de Filipinos v. City of Manila, 8 SCRA 367 [1963]).
---
TAX
Obligation
created by law
SPECIAL
ASSESSMENT
An enforced
proportional
contribution from
owners of lands
especially those
who are peculiarly
benefited by public
improvements
Levied only on land
Not a personal
liability of the
person assessed
Contribution to the
cost of public
improvement
Exceptional as to
time and locality
DEBT
Obligation based on
contract, express or
implied
Assignable
Payable in kind or in
money
Subject to set-off
No imprisonment
(except when debt
arises from crime)
Interest depends
upon the written
stipulation of the
parties
Governed by the
ordinary periods of
prescription
TAX
An enforced
proportional
contribution
from persons
and property
for public
purpose/s
PENALTY
Sanction imposed as
a punishment for a
violation of the law
or acts deemed
injurious; violation
of tax laws may give
rise to imposition of
penalty
To raise
revenue
Maybe imposed
by the State
only
To regulate conduct
Maybe imposed by
private entities
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
KINDS OF TAXES
another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays
for it. On the other hand, in case of withholding taxes, the
incidence and burden of taxation fall on the same entity,
the statutory taxpayer. The burden of taxation is not
shifted to the withholding agent who merely collects, by
withholding, the tax due from income payments to
entities arising from certain transactions and remits the
same to the government. Due to this difference, the
deficiency VAT and excise tax cannot be “deemed” as
withholding taxes merely because they constitute
indirect taxes (Asia International Auctioneers, Inc. v. CIR,
G.R. No. 179115, September 26, 2012).
As to object:
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 tax. E.g. Income tax,
Estate tax, Donor’s tax, VAT
As to tax rates:
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.
1.
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
2.
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
As to burden or incidence:
1.
2.
Direct
Indirect
3.
--Q: Distinguish a direct from an indirect tax. Give
examples (Bar 1994, 2000, 2001, 2006).
1.
A: (1) Direct taxes are demanded from the very person
who, as intended, should pay the tax which he cannot
shift to another.
2.
As to purposes:
(2) Indirect taxes are demanded in the first instance
from one person with the expectation that he can shift
the burden to someone else, not as a tax but as a part of
the purchase price.
---
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.
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
2.
Local or Municipal – A tax levied by a local
government. E.g. Real Estate tax and Community tax
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.
NOTE: The liability for payment of the indirect taxes lies
only with the seller of the goods or services, not in the
buyer thereof. Thus, one cannot invoke one’s exemption
privilege to avoid the passing on or the shifting of the
VAT to him by the manufacturers/suppliers of the goods.
Hence, it is important to determine if the tax exemption
granted specifically includes the indirect tax, otherwise,
it is presumed that the tax exemption embraces only
those taxes for which the buyer is directly liable (CIR v.
PLDT, 478 SCRA 61).
As to graduation:
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Mixed – a choice between ad valorem and/or
specific depending on the condition attached.
24
Progressive – A tax rate which increases as the tax
base or bracket increases. E.g. Income tax, Estate tax
and Donor’s tax
2.
Regressive – The tax rate decreases as the tax base
or bracket increases.
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
GENERAL PRINCIPLES OF TAXATION
c.
SITUS OF TAXATION
d.
It is the place or authority that has the right to impose
and collect taxes (Commissioner v. Marubeni, G.R. No.
137377, December 18, 2001).
e.
Factors that determine the situs of taxation [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
f.
Application of the doctrine of mobilia sequuntur
personam not mandatory in all cases
Rules Observed in Fixing Tax Situs
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).
a. Poll/Capitation/Community Tax - Residence of
taxpayer, regardless of the source of income or
location of property of the taxpayer
b. Property Tax
Real Property - Location of the property (lex reisitae
/ lex situs), regardless of whether the owner is a
resident or non-resident
c. Excise Tax
Rationale:
Income Tax (Criteria: Place, Nationality, Residence)
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.
 Place (applied to NRA, NRFC, NRC) - From sources
of income derived within the Philippines
 Nationality (applied to RC, DC) - From sources of
income derived within and without the Philippines
 Residence (applied to RA, RFC) - From sources of
income derived within the Philippines
Personal Property
Donor’s Tax and Estate Tax (Criteria: Place,
Nationality, Residence)
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.”
 Place (applied to NRA) - Taxed on properties
situated within the Philippines
 Nationality (applied to RC, NRC) - Taxed upon
their properties wherever situated
 Residence (applied to RA) - Taxed upon their
properties wherever situated
XPN:
1. When the property has acquired a business
situs in another jurisdiction, such that it has
definite location there, accompanied by some
degree of permanency;
2. When an express provision of the statute
provides for another rule.
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).
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.
a.
b.
Organized 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.
Franchise which must be exercised in the
Philippines;
Shares, obligations or bonds issued by any
corporation or sociedad anonima;
The Documentary Stamp Tax is in the nature of an excise
tax because it is imposed upon the privilege, opportunity
25
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
or facility offered at exchanges for the transaction of the
business (CIR v. Pilipinas Shell Petroleum Corporation, G.R.
No. 192398, September 29, 2014).
XPNs:
a.
Refer to “Situs of income taxation” for further discussion.
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.
b.
CONSTRUCTION AND INTERPRETATIONS
1. Tax laws
GR: Tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer
(MCIAA v. Marcos, G.R. No. 120082 September 11, 1996).
The imposition of a tax cannot be presumed.
c.
XPN: Unless a statute imposes a tax clearly, expressly
and unambiguously, what applies is the equally wellsettled 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).
3. 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).
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.
2. Tax exemption and exclusion
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).
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).
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).
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).
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
If the grantee of the exemption is a political
subdivision or instrumentality, the rigid rule of
construction does not apply because the practical
effect of the exemption is merely to reduce the
amount of money that has to be handled by the
government in the course of its operations (MCIAA v.
Marcos, G.R. No. 120082, September 11, 1996).
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. 167274-75, July 21, 2008).
4. 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
26
GENERAL PRINCIPLES OF TAXATION
presumed in the absence of clear legislation (Lim v. CA,
G.R. No. 48134-37, October 18, 1990).
6.
7.
8.
9.
5. 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).
Tax treaties and international agreements
Special laws
Court decisions
Revenue
rules
and
regulations
and
administrative rulings and opinions (Tabag,
2015)
DOCTRINES IN TAXATION
Prospectivity of tax laws
GR: Tax laws must only be imposed prospectively.
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).
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).
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.
Ex post facto law as applied in taxation
BIR Rules and Regulations that revoke, modify or
reverse a ruling or circular
The prohibition against ex post facto laws applies only to
criminal matters and not to laws which are civil in nature.
GR: It shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial
to the taxpayers.
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.
XPN:
1)
It may be given retroactive effect even if such would
be prejudicial to the taxpayer in the following cases:
a.
b.
c.
2)
--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?
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;
Where the taxpayer acted in bad faith (Sec. 246,
NIRC).
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).
----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)
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: 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).
SOURCES OF TAX LAWS
The following may be said to be the sources of tax laws:
1.
2.
3.
4.
5.
Constitution
National Internal Revenue Code
Tariff and Customs Code
Local Government Code (Book II)
Local tax ordinances / City or municipal tax
codes
A: NO. The reversal of the ruling shall not be given a
retroactive application, if said reversal will be prejudicial
27
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Two Types:
to the taxpayer. Therefore, the BIR cannot assess DEF
Printers for back taxes because it would be violative of
the principle of non-retroactivity of rulings and doing so
would result to grave injustice to the taxpayer who
relied on the first ruling in good faith (Sec. 246, NIRC;
Commissioner v. Burroughs, Ltd., G.R. No. L-66653, June 19,
1986).
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
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).
---
Elements of Direct Double Taxation
1.
2.
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.
The same property is taxed twice when it should be
taxed only once; and
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).
All the elements must be present in order to apply
double taxation in its strict sense.
B. Indirect (Broad sense) - It is a permissible
double taxation. It is indirect when some
elements of direct double taxation are absent.
2)
Imprescriptibility of taxes
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).
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).
--Q: Differentiate between double taxation in the strict
sense and in a broad sense and give an example of
each (2015 Bar).
NOTE: Although the NIRC provides for the limitation in
the assessment and collection of taxes imposed, such
prescriptive period will only be applicable to those taxes
that were returnable. The prescriptive period shall start
from the time the taxpayer files the tax return and
declares his liability (Collector of Internal Revenue v.
Bisaya Land Transportation Co., Inc., G.R. Nos. L-12100 &
L-11812, May 29, 1959).
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
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
28
GENERAL PRINCIPLES OF TAXATION
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?
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: YES. All the elements of double taxation concurred
upon the City of Manila’s assessment on and collection
from the petitioners of taxes for the first quarter of 1999
pursuant to Sec. 21 of the Revenue Code of Manila.
Firstly, because Sec. 21 of the Revenue Code of Manila
imposed the tax on a person who sold goods and
services in the course of trade or business based on a
certain percentage of his gross sales or receipts in the
preceding calendar year, while Sec. 15 and Sec. 17
likewise imposed the tax on a person who sold goods
and services in the course of trade or business but only
identified such person with particularity, namely, the
wholesaler, distributor or dealer (Sec. 15), and the
retailer (Sec. 17), all the taxes — being imposed on the
privilege of doing business in the City of Manila in order
to make the taxpayers contribute to the city’s revenues
— were imposed on the same subject matter and for the
same purpose. Secondly, the taxes were imposed by the
same taxing authority (the City of Manila) and within the
same 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?
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: 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).
----Q: BB Municipality has an ordinance which requires
that all stores, restaurants, and other establishments
selling liquor should pay an annual fee of P20,000.
Subsequently, the municipal board proposed an
ordinance imposing a sales tax equivalent to 5% of
the amount paid for the purchase or consumption of
liquor
in
stores,
restaurants
and
other
establishments. The municipal mayor, CC, refused to
sign the ordinance on the ground that it would
constitute double taxation. Is the refusal of the
mayor justified? Reason briefly. (2004 Bar)
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.
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.
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).
---
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
29
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Modes of eliminating double taxation
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).
Local legislation and tax treaties may provide for:
1.
2.
3.
4.
5.
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.
Imposition of a rate lower than the normal domestic
rate
Tax treaty - The purpose is to reconcile the national
fiscal legislation of the contracting parties in order
to help the taxpayer avoid simultaneous taxation in
two different jurisdictions (international double
taxation). This is to encourage the free flow of
goods and services and the movement of capital,
technology and persons between countries,
conditions deemed vital in creating robust and
dynamic economies.
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.
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:
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).
NOTE: It is more reasonable to say that the maxim
“the power to tax is the power to destroy” is to
describe degree of vigor with which the taxing
power may be employed in order to raise revenue,
and not the purposes for which the taxing power
may be used (Cooley, 1876).
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.
---
The basic difference between the two methods
is that in the exemption method, the focus is on
the income or capital itself, whereas the credit
method focuses upon the tax (CIR v. S.C.
Johnson and Son, Inc., G.R. No. 127105, 1999).
Most-Favored Nation clause
Reconciliation of the two dicta
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
US Chief Justice Marshall dictum - The power to tax
involves the power to destroy.
30
GENERAL PRINCIPLES OF TAXATION
Onward shifting – When the tax is shifted two or
more times either forward or backward.
Marshall’s view refers to a valid tax while Holmes’ view
refers to an invalid tax.
3.
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.
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
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.
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).
NOTE: In indirect taxation, a distinction is made
between the liability for the tax and burden of the tax:
The seller who is liable for the VAT may shift or pass on
the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is transferred
is not the seller's liability but merely the burden of the
VAT (Diaz v. The Secretary of Finance, G.R. No. 193007,
July 19, 2011). Where the burden of the tax is shifted to
the purchaser, the amount passed on to it is no longer a
tax but becomes an added cost on the goods purchased,
which constitutes a part of the purchase price. The
proper party to question or seek a refund of an indirect
tax is the statutory taxpayer, the 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).
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).
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)).
Meaning of impact and incidence of taxation
Impact of Taxation
Incidence of Taxation
It is the economic cost of
tax. It is also known as
burden of taxation.
Escape from taxation
It refers to the statutory
liability to pay the tax. It
falls on the person
originally assessed with
a particular tax.
1.
It is the imposition of
tax. (Liability)
It is the payment of tax.
(Burden)
Shifting is 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.
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.
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.
2.
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. L59431, July 25, 1984).
Shifting of Tax Burden
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.
Ways of shifting the tax burden
1.
2.
Tax Avoidance / Tax Minimization
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.
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
31
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
donated ½ of his said property to a non-stock, nonprofit educational institution whose income and
assets are actually, directly, and exclusively used for
educational purposes, and therefore qualified for
tax exemption under Art. XIV, Sec. 4 (3) of the
Constitution and Sec. 3 (h) of the NIRC. Having thus
transferred a portion of his said asset, Mr. Pascual
succeeded in paying a lesser tax on the rental
income derived from his property. Is there tax
avoidance or tax evasion? Explain. (2000 Bar).
--Q: On August 31, 2014, Haelton Corporation (HC),
thru its authorized representative Ms. Pares, sold a
16-storey commercial building known as Haeltown
Building to Mr. Belly for P100 million. Mr. Belly, in
turn, sold the same property on the same day to Bell
Gates, Inc. (BGI) for P200 million. These two (2)
transactions were evidenced by two (2) separate
Deeds of Absolute Sale notarized on the same day by
the same notary public.
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.
---
Investigations by the Bureau of Internal Revenue
(BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and
BGI was notarized ahead of the sale between HC and
Mr. Belly; (2) as early as May 17, 2014, HC received
P40 million from BGI, and not from Mr. Belly; (3) the
said payment of P40 million was recorded by BGI in
its books as of June 30, 2014 as investment in
Haeltown Building; and (4) the substantial portion of
P40 million was withdrawn by Ms. Pares through the
declaration of cash dividends to all its stockholders.
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.
Based on the foregoing, the BIR sent Haeltown
Corporation a Notice of Assessment for deficiency
income tax arising from an alleged simulated sale of
the aforesaid commercial building to escape the
higher corporate income tax rate of thirty percent
(30%). What is the liability of Haeltown Corporation,
if any? (2014 Bar)
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.
A: The tax planning scheme adopted by Haeltown
Corporation constitutes tax evasion. According to CIR v.
Estate of Benigno Toda (G.R. No. 147188, September 14,
2004), a transaction where a taxpayer made it appear
that there were two sales of the property was considered
“tainted with fraud.” The sole purpose of acquiring and
transferring title of the property on the same day was to
create a tax shelter. The sale to Mr. Belly (which is
subject to individual capital gains tax) was to mislead the
BIR and avoid the higher corporate income tax.
----Q: CIC entered into an alleged simulated sale of a 16storey commercial building. CIC authorized Benigno
Toda, Jr., its President to sell the Cibeles Building
and the two parcels of land on which the building
stands. Toda purportedly sold the property for P100
million to Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI)
for P200 million evidenced by Deeds of Absolute Sale
notarized on the same day by the same notary public.
For the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of P10 million. The
BIR sent an assessed deficiency income tax arising
from the sale alleging that CIC evaded the payment of
higher corporate income tax of 35% with regard to
the resulting gain. Is the scheme perpetuated by
Toda a case of tax evasion or tax avoidance?
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 nonpayment 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
taxes
of
TAX EVASION
Illegal and subject
to criminal penalty
Almost
always
results in absence
of tax payment.
Evidence that may be used to prove tax evasion
1.
2.
Failure of taxpayer to declare for taxation purposes
his true and actual income derived from business
for two (2) consecutive years (Republic v. Gonzales,
G.R. No. L-17744, April 30, 1965);
Substantial under declaration of income in the
income tax return for four (4) consecutive years
coupled by intentional overstatement of deductions
(Perez v. CTA, G.R. No. L-10507, May 30, 1958).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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
32
GENERAL PRINCIPLES OF TAXATION
tax planning (one way of tax avoidance). Such scheme is
tainted with fraud.
It is the legislature, unless limited by a provision of the
state constitution, which has full power to exempt any
person or corporation or class of property from taxation,
its power to exempt being as broad as its power to tax.
Other than Congress, 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).
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 who is engaged in the business of
distribution of Forever Living Products, was charged
of violation of Art. 255 of the NIRC, with the
obligation to file her ITR for the year 2000 and 2001
with the BIR, to the prejudice of the government.
Petitioner Kintanar averred that she has no
personal knowledge of actual filing of said returns
because it was her husband who filed their ITRs,
through their hired accountant. Petitioner has no
record of filing of the required ITRs within the
reglementary period. Is Gloria Kintanar guilty of tax
evasion and be held liable?
Nature of tax exemption
1.
Personal in nature and covers only taxes for which
the grantee is directly liable.
NOTE: It cannot be transferred or assigned by the
person to whom it is given without the consent of
the State.
2.
3.
4.
A: YES. Supreme Court, in its resolution, affirmed the
conviction of a taxpayer for tax evasion due to non-filing
of income tax returns (ITR). The accused Gloria Kintanar
was not able to satisfactorily convince the court that she
did not deliberately and willfully neglect to file her ITR,
considering that she entrusted the filing to her husband
who caused the filing through an accountant. The court
believed that the accused was not relieved from her
criminal liability. As principal, she must assume
responsibility over the acts of her accountant (Sec. 51(f)
NIRC). The CTA doctrine on willful blindness simply
means that an individual or corporation can no longer
say that the errors on their tax returns are not their
responsibility or that it is the fault of the accountant
they hired.
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.
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).
Principles governing tax exemptions
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).
---
1.
2.
3.
4.
Tax exemptions are highly disfavored in law.
Tax exemptions are personal and non-transferable.
He who claims an exemption must justify that the
legislature intended to exempt him by words too
plain to be mistaken. He must convincingly prove
that he is exempted.
It must be strictly construed against the taxpayer.
NOTE: Deductions for income tax purposes partake
of the nature of tax exemptions, hence, they are also
be strictly construed against the taxpayer.
5.
6.
Exemption from Taxation
7.
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.
8.
33
Constitutional grants of tax exemptions are selfexecuting.
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.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
contracts within the purview of the non-impairment
clause of the constitution (Cagayan Electric Co. v.
Commissioner, G.R. No. L-601026, September 25, 1985).
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).
9.
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).
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
A tax refund may only be considered as a tax exemption
when it is based either on a tax-exemption 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.
Rationale/grounds for exemption
The inherent power of the State to impose taxes
naturally carries with it the power to grant tax
exemptions.
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.
The rationale or grounds for tax exemption are the
same as the non-revenue/special or regulatory
purposes of taxation:
a.
Kinds of tax exemption
b.
As to basis:
1.
2.
3.
4.
Constitutional – Immunities from taxation which
originate from the Constitution.
Statutory – Those which emanate from legislation.
Contractual – Agreed to by the taxing authority in
contracts lawfully entered into by them under
enabling laws.
Implied - When particular persons, properties or
excises are deemed exempt as they fall outside the
scope of the taxing provision.
c.
NOTE: There is no tax exemption based solely on the
ground of equity (Davao Gulf v. CIR, 293 SCRA 76).
NOTE: The law looks with disfavor on tax
exemptions and he who would seek to be thus
privileged must justify it by words too plain to be
mistaken and too categorical to be misinterpreted
(Western Minolco Corporation v. CIR, G.R. No. L61632, August 16, 1983).
5.
6.
--Q: The BTC Power Corporation (BTC) entered in a
Build-Operate-Transfer (BOT) agreement with
National Power Corporation (NPC), a tax-exempt
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?
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:
3. Personal – Granted directly in favor of certain
persons
4. Impersonal – Granted directly in favor of a certain
class of property
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
These exemptions must not be confused with tax
exemptions granted under franchises which are not
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
34
GENERAL PRINCIPLES OF TAXATION
deals with the fiscal constraints faced by LGUs. It widens
the tax base of LGUs to include taxes which were
prohibited by previous laws.
that may be due and collectible from him. Under this
doctrine, the taxpayer is allowed to credit such refund to
his existing tax liability.
In recent years, the increasing social challenges of the
times expanded the scope of state activity, and taxation
has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and
the protection of local industries as well as public
welfare and similar objectives. Taxation assumes even
greater significance with the ratification of the 1987
Constitution (Batangas Power Corporation v. Batangas
City, G.R. No. 152675, April 28, 2004).
---
NOTE: Equitabe recoupment is allowed only in common
countries, not in the Philippines.
Revocation of tax exemption
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).
The Supreme Court, rejected this doctrine in Collector v.
UST (G.R. No. L-11274, Nov. 28, 1958), since it may work
to tempt both parties to delay and neglect their
respective pursuits of legal action within the period set
by law.
Compensation and set-off
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).
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.
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).
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).
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).
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).
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).
--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
Doctrine of Equitable Recoupment
It is a principle which allows a taxpayer, whose claim for
refund has been barred due to prescription, to recover
said tax by setting off the prescribed refund against a tax
35
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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).
---
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).
Tax Amnesty distinguished from Tax Exemption
TAX AMNESTY
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).
Scope
of
immunity
Immunity from
all
criminal,
civil
and
administrative
obligations
arising
from
non-payment
of taxes
Grantee
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
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
The law allows the following persons to do compromise
in behalf of the government:
--Q: Does the mere filing of tax amnesty return shield
the taxpayer from immunity against prosecution?
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).
2. Collector of Customs, with respect to customs duties
limited to cases where the legitimate authority is
specifically granted such as in the remission of duties
(Sec. 709, TCC).
3. Customs Commissioner, subject to the approval of
the Secretary of Finance, in cases involving the
imposition of fines, surcharges, and forfeitures (Sec.
2316, TCC).
A: NO. 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]).
----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).
----Q: The BIR assessed Garments Co deficiencies on
taxes for non-payment of VAT on its undeclared
sales. While the case was pending before the SC,
Garment Co filed a Manifestation and Motion that it
had availed and was able to comply with the
government’s tax amnesty program under the 2007
Tax amnesty
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
TAX
EXEMPTION
Immunity
from
civil
liability only
36
GENERAL PRINCIPLES OF TAXATION
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?
In the case of a taxpayer’s suit, plaintiff is allowed to sue
where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any
improper purpose, or that there is a wastage of public
funds through the enforcement of an invalid or
unconstitutional law (Francisco, Jr. v. Nagmamalasakit na
mga Manananggol ng mga Manggagawang Pilipino, Inc.,
415 SCRA 44, G.R. No. 160262, November 10, 2003).
A: 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 wellsettled 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 19-2008 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).
---
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).
Taxpayer’s Suit
Two (2) requisites of a Taxpayer’s suit:
It is a case where the act complained of directly involves
the illegal disbursement of public funds collected
through taxation.
1.
In the case of Abaya v. Ebdane (515 SCRA 720), the
prevailing doctrine in the taxpayer’s suits is:
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).
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.
2.
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 taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that public money
is being deflected to any improper purpose, or that there
is wastage of public funds through the enforcement of an
invalid or 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).
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
37
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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: On 1982, the COA issued Circular No. 82-195,
lifting the system of pre-audit of government
financial transactions.
After the change in
administration due to the 1986 revolution, grave
irregularities and anomalies in the government’s
financial transactions were uncovered. Hence, on
March 1986, the COA issued Circular No. 86-257,
which reinstated the pre-audit of selected
government transactions. With the normalization of
the political system and the stabilization of
government operations, the COA saw it fit to issue
Circular No. 89-299, which again lifted the pre-audit
of government transactions of national government
agencies (NGAs) and government-owned or controlled corporations (GOCCs). Petitioner filed
this Petition for Certiorari under Rule 65, alleging
that the pre-audit duty on the part of the COA cannot
be lifted by a mere circular, considering that preaudit is a constitutional mandate enshrined in
Section 2 of Article IX-D of the 1987 Constitution. He
further claims that, because of the lack of pre-audit
by COA, serious irregularities in government
transactions have been committed. The petition has
been filed as taxpayer’s suit. Is he entitled to the
extraordinary writ of certiorari?
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).
NOTE: Being a mere procedural technicality, the
requirement of locus standi may be waived by the Court
in the exercise of its discretion (David v. MacapagalArroyo, G.R. No. 171396, May 3, 2006).
Doctrine of Transcendental Importance
The following determines
transcendental importance:
the
importance
of
1. The character of the funds or other assets involved
in the case;
2. The presence of a clear case of disregard of a
constitutional or statutory prohibition by the
public respondent agency or instrumentality of the
government;
3. The lack of any other party with a more direct and
specific interest in raising the questions being
raised (CREBA v. ERC, 624 SCRA 556, G.R. No.
174697, July 8, 2010).
In the exercise of its discretion, the Court may brush
aside these technicalities and take cognizance of the
petition considering the (transcendental) importance to
the public of the case and in keeping with the duty to
determine whether the other branches of the
government have kept themselves within the limits of
the Constitution (Coconut Oil Refiners Association, Inc. v.
Torres, 465 SCRA 47, G.R. No. 132527, July 29, 2005).
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)
---
Ripeness for Judicial Determination
The constitutional question is ripe for adjudication when
the government’s act being challenged has a direct
adverse effect on the individual challenging it. Personal
injury or benefit must be shown for judicial controversy
to be ripe for judicial determination.
NOTE: However, where the public interest requires the
resolution of the constitutional issues raised by the
taxpayer, the doctrine of “ripe for judicial determination”
is within the Court’s discretion to set aside (ABAKADA
Guro Partylist v. Purisima, G.R. No. 166715, August 14,
2008).
Locus Standi
This doctrine is similar to that of exhaustion of
administrative remedies except that it applies to the rule
making and to administrative action which is embodied
neither in rules and regulations nor in adjudication or
final order.
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.
It is applicable when the Interest of the plaintiff is
subjected to or imminently threatened with substantial
injury; if the statute is Self-executing; when a party is
immediately confronted with the problem of complying
or violating a statute and there is a risk of Criminal
penalties; or when plaintiff is harmed by the Vagueness
of
the
statute
[VICS].
The taxpayer must establish that:
1. He has a personal and substantial interest in the
case; and
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
38
BUREAU OF INTERNAL REVENUE
revenue stamps shall be affixed, the mode of
cancellation, the manner in which the proper books,
records, invoices and other papers shall be kept and
entries therein made by the person subject to the
tax, as well as the manner in which licenses and
stamps shall be gathered up and returned after
serving their purposes.
8. The conditions to be observed by revenue officers
respecting the enforcement of Title III imposing a
tax on estate of a decedent, and other transfers
mortis causa, as well as on gifts and such other rules
and regulations which the CIR may consider suitable
for the enforcement of the said Title III.
9. The manner tax returns, information and reports
shall be prepared and reported and the tax collected
and paid, as well as the conditions under which
evidence of payment shall be furnished the taxpayer,
and the preparation and publication of tax statistics.
10. The manner in which internal revenue taxes, such as
income tax, including withholding tax, estate and
donor's taxes, value-added tax, other percentage
taxes, excise taxes and documentary stamp taxes
shall be paid through the collection officers of the
BIR or through duly authorized agent banks which
are hereby deputized to receive payments of such
taxes and the returns, papers and statements that
may be filed by the taxpayers in connection with the
payment of the tax: Provided, however, that
notwithstanding the other provisions of the NIRC
prescribing the place of filing of returns and
payment of taxes, the CIR may, by rules and
regulations require that the tax returns, papers and
statements and taxes of large taxpayers be filed and
paid, respectively, through collection officers or
through duly authorized agent banks: Provided,
further, that the CIR can exercise this power within
6 years from the approval of R.A. 7646 or the
completion of its comprehensive computerization
program, whichever comes earlier: Provided, finally,
that separate venues for the Luzon, Visayas and
Mindanao areas may be designated for the filing of
tax returns and payment of taxes by said large
taxpayers (Sec. 245, NIRC).
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE (BIR)
RULE-MAKING AUTHORITY OF
SECRETARY OF FINANCE
The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the
provisions of NIRC (Sec. 244, NIRC).
General principles on the rule-making power
1. Rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve
weight and respect by the courts.
2. All such issuances must not override, but must
remain consistent and in harmony with, the law they
seek to apply and implement.
3. Administrative rules and regulations are intended to
carry out, neither to supplant nor to modify, the law
(CIR v. CA, G.R. No. 108358, January 20, 1995).
Specific Provisions to be Contained in Rules and
Regulations
Rules and regulations must contain provisions specifying,
prescribing, or defining:
1.
2.
3.
4.
5.
6.
7.
The time and manner in which Revenue Regional
Director shall canvass their respective Revenue
Regions to discover persons and property liable to
national internal revenue taxes, and the manner
their lists and records of taxable persons and
taxable objects shall be made and kept.
The forms of labels, brands or marks to be required
on goods subject to excise tax, and the manner how
the labeling, branding or marking shall be effected.
The condition and manner for goods intended for
export, which if not exported would be subject to an
excise tax, shall be labeled, branded or marked.
The conditions to be observed by revenue officers
respecting the institutions and conduct of legal
actions and proceedings;
The conditions under which goods intended for
storage in bonded warehouses shall be conveyed
thither, their manner of storage and method of
keeping entries and records, also the books to be
kept by Revenue Inspectors and the reports to be
made by them in connection with their supervision
of such houses.
The conditions under which denatured alcohol may
be removed and dealt in, the character and quantity
of the denaturing material to be used, 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 ort 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
Large Taxpayer
A 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.
Provided, however, that the Secretary of Finance, upon
recommendation of the CIR, may modify or add to the
above criteria for determining a large taxpayer after
39
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
considering such factors as inflation, volume of business,
wage and employment levels, and similar economic
factors.
2. Power
to
obtain
information
and
to
summon/examine and take testimony of persons
(Sec. 5, NIRC);
--Q: What are the purposes of these powers?
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).
A:
1.
2.
3.
To ascertain correctness of the return;
To make a return when none has been made;
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?
JURISDICTION, POWER AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
Powers and duties of the BIR [AEJ-AdR]
1.
2.
3.
4.
5.
Assessment and collection of all national internal
revenue taxes, fees and charges;
Enforcement of all forfeitures, penalties and fines;
Execution of judgments in all cases decided in its
favor (by the CTA and regular courts);
Give effect and administer the supervisory and
police powers conferred to it by the NIRC and other
laws;
Recommend to the Secretary of Finance all needful
rules and regulations for the effective enforcement
of the provision of the NIRC.
A:
1.
2.
3.
Chief Officials of the BIR
The BIR is headed by the CIR and 6 Deputy
Commissioners, who lead the following divisions:
1. Operations group
2. Legal Inspection Group
3. Resource and Management Group
4. Information Systems Group
5. Prosecution Group
6. Special Concerns Group
To examine any book, paper, record or other
data which may be relevant or material to such
inquiry;
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;
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.
---
3. Power to make assessments and prescribe additional
requirements
for
tax
administration
and
enforcement (Sec. 6, NIRC);
4. Power to assign internal revenue officers and other
employees (Secs. 16 and 17, NIRC);
5. Power to suspend the business operations of a
taxpayer for vialations of VAT rules (Sec. 115, NIRC);
--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)
--Q: When can the CIR suspend the business
operation of a taxpayer?
A: YES, the BIR is authorized to collect estate tax
deficiency through the summary remedy of levying upon
and sale of real properties of a decedent without the
cognition and authority of the court sitting in probate
over the supposed will of the deceased because of the
collection of estate tax is executive in character. As such
the estate tax is exempted from the application of the
statute of non-claims, and this is justified by the
necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government
(Marcos v. CIR, G.R. No. 120880, June 5, 1997).
---
1.
2.
A:
In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
a. Failure to file a VAT return as required under
Sec. 114; or
b. Understatement of taxable sales or receipts by
30% or more of his correct taxable sales or
receipts for the taxable quarter.
Failure of any person to register as required under
Sec. 236:
Powers of the Commissioner
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
1. Power to interpret tax laws and to decide cases (Sec.
4, NIRC);
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
40
BUREAU OF INTERNAL REVENUE
requirements prescribed by the CIR in the closure
order (Sec. 115 NIRC).
---
A: GR: Errors or mistakes of administrative officials
(including the BIR) should never be allowed to
jeopardize the financial position of the government.
The CIR is also authorized:
1. To terminate taxable period for reasons provided in
the NIRC;
2. 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;
4. To prescribe any additional requirements for the
submission or preparation of financial statements
accompanying tax returns;
5. 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;
6. 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.
7. To prescribe real property values;
8. 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;
9. To register tax agents.
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).
NOTE: In the Citytrust case, which involves a claim for
refund, the error or neglect was the failure of the
Solicitor General to present its evidence, as counsel for
the CIR, due to the unavailability of the necessary
records from BIR, prompting the Solicitor to submit the
case for decision without presenting any evidence.
While in Goodrich, the error committed refers to the
neglect of the BIR to make assessment within the 3-year
period as required in Sec. 203, NIRC.
--Powers of the Commissioner to interpret tax laws
and to decide tax cases
The power to interpret the provisions of NIRC and
other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by
the Secretary of Finance.
--Q: What are the powers of the BIR which cannot be
delegated?
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: [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;
Power to interpret
a) the NIRC, and
b) other tax laws.
XPN: The Regional Evaluation Board may
compromise assessments involving deficiency
taxes of P500,000 or less and minor crime
violations.
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.
To Assign or reassign internal revenue officers
to establishments where articles subject to
excise tax are kept.
----Q: Will errors or mistakes of administrative officials
bind the government as to the collection of taxes?
4.
Non-retroactivity of Rulings
41
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
NIRC provides for retroactive effect in the following
cases:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. 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).
----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)
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.
2.
3.
Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
Where the facts subsequently gathered by the BIR
are materially different from the facts on which
the ruling is based; or
Where the taxpayer acted in bad faith (Sec. 246,
NIRC).
NOTE: If the revocation is due to the fact that the
regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as to affect
past transactions, because a wrong construction of the
law cannot give rise to a vested right that can be invoked
by a taxpayer.
--Q: XYZ Corporation, an export oriented company,
was able to secure a BIR Ruling in June 2005 that
exempts from tax the importation some of its raw
materials. The ruling is of first impression, which
means the interpretation made by the Commissioner
of Internal Revenue 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.
a) What is the 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)
c. 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 non-retroactivity 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:
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).
a. A BIR ruling of first impression, to be a valid ruling,
must be issued within the scope of authority granted
to the Commissioner of Internal Revenue, and not
contravene any law or decision of the Supreme Court
(CIR v. Michel Lhuillier Pawnshop, Inc., G.R. No. 150947,
July 15, 2003; Sec. 7, NIRC).
b. A BIR ruling cannot be given retroactive effect if it
would be prejudicial to the taxpayer. Sec. 246 of the
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
42
Income Taxation
INCOME TAXATION
2.
DEFINITION, NATURE AND
GENERAL PRINCIPLES
3.
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).
Criteria in imposing Philippine income tax
1.
Income tax systems
1.
2.
3.
Global Tax System – system employed where the tax
system views indifferently the tax base and
generally treats in common all categories of taxable
income of the individual (Tan v. Del Rosario, Jr., 237
SCRA 324, 331).
2.
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 Philippine source income, if he
qualifies as a non-resident citizen.
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 non-resident alien or nonresident 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).
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).
3.
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 (individual) or normal
corporate
income
tax
rate
(corporation)
(Mamalateo, 2014).
Types of Philippine income tax [MC2F3 – BINGS]
Minimum corporate income tax (MCIT)
Capital gains tax on sale or exchange of unlisted
shares of stock of a domestic corporation classified
as a capital asset
3. Capital gains tax on sale or exchange of real
property located in the Philippines classified as
capital asset
4. Final withholding tax on certain passive investment
incomes
5. Final withholding tax on income payments made to
non-residents (individual or corporation)
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
11. Special income tax on certain corporations
1.
2.
Schedular Treatment vs. Global treatment (1994
Bar)
SCHEDULAR
TREATMENT
Different tax rates
Different categories
taxable income
GLOBAL TREATMENT
Unitary or single tax rate
of
No need for classification
as all taxpayers are
subjected to a single rate
Usually used in the income
taxation of individuals
Applied to corporations
(Business
income,
professional
income,
passive income, illegal
income)
You cannot add all of them
together.
(Business
income,
professional
income,
passive income, illegal
income)
All of them will be added
together and be subjected
to one tax rate.
Taxable Period
Taxable period is the calendar year or the fiscal year
ending during such calendar year, upon the basis of
which the net income is computed for income tax
purposes.
Kinds of taxable periods
Features of the Philippines Income Tax Law
1.
the expectation and intention that he can shift the
burden to someone else.
Progressive Tax – Tax base increases as the tax rate
increases. It is founded on the “ability to pay”
principle.
Comprehensive – It adopted the citizenship principle,
the residence principle and the source principle.
Semi-schedular or semi- global tax system
(Mamalateo, 2014).
1.
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, while indirect tax is a tax
demanded in the first instance from one person in
Calendar period
The twelve (12) consecutive months starting on January
1 and ending on December 31.
43
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Instances when calendar year shall be the basis for
computing net income
1.
2.
3.
4.
4.
5.
6.
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
Importance of knowing the classification of
taxpayers
In order to determine the applicable [GREED]
1. Gross income
2. Income tax Rates
3. Exclusions from gross income
4. Exemptions
5. Deductions
NOTE: Taxpayers other than a corporation are required
to use only the calendar year.
2.
General Professional Partnerships
Estates and Trust
Co-ownerships
Fiscal period
It is a period of twelve (12) months ending on the last
day of any month other than December (NIRC, Sec. 22
[Q]).
INCOME TAX
Income tax is a tax on all yearly profits arising from
property, profession, trade or business, or a tax on
person’s income, emoluments, profits and the like (Fisher
v. Trinidad, G.R. No. L-19030, October 20, 1922).
NOTE: The final adjustment return shall be filed on
or before the fifteenth (15th) day of April, or on or
before the fifteenth (15th) day of the fourth (4th)
month following the close of the fiscal year, as the
case may be.
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.
Short period
GR: The taxable period, whether it is a calendar year or
fiscal year always consists of twelve (12) months.
Purposes of income tax
1.
2.
3.
XPN: Instances when the taxpayer may have a taxable
period of less than twelve (12) months:
1.
2.
3.
4.
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
To provide large amounts of revenue
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).
State Partnership Theory
Kinds of Taxpayers:
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 & L-21434, July 31, 1964).
1.
Income Tax vs. Property Tax
5.
2.
3.
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 (NRAETB)
(2) Not Engaged in Trade or Business
(NRA- NETB)
iii.
Special Aliens
c. Special class of individual employees
i.
Minimum wage earner
Corporations
a. Domestic
b. Foreign
i.
Resident foreign corporation (RFC)
ii.
Non-resident
foreign
corporation
(NRFC)
c. Joint venture and consortium
Partnerships
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
BASIS
Incidence
Who pays
the tax
How
measured
Frequency
of taxation
44
INCOME TAX
The incidence of
an income tax
falls
on
the
earner.
The earner pays
income tax.
Income tax is
measured by the
amount
of
income received
over a period of
time.
Income is taxed
only once.
PROPERTY TAX
The incidence of
a property tax is
on the property
itself.
The owner of the
property
pays
the property tax.
Property tax is
measured by the
value
of
the
property at a
particular date.
Property may be
taxed
on
a
recurrent basis.
Income Taxation
General Principles
A: NO, because income is other than a mere return of
capital.
----Q: Is payment by mistake considered income for tax
purposes?
Except when otherwise provided in the NIRC:
1. A RC is taxable on all income derived from sources
within and without;
2. A NRC is taxable only on income derived from
sources within;
3. 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;
4. An alien, (RA or NRA), is taxable only on income
within;
5. A domestic corporation (DC) is taxable on all
income derived within and without;
6. A foreign corporation, (engaged or not in trade or
business in the Philippines), is taxable only on
income derived from sources within.
A: As a general rule, payment by mistake is not taxable
except if the recipient received material benefit out of the
erroneous payment (CIR v. Javier, G.R. No. 78953, July 31,
1991).
NOTE: In CIR v. Javier the issue raised was the imposition
of the 50% fraud penalty and not the income taxation of
money received through mistake.
--Income held in trust for another
INCOME
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).
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).
When income is taxable
An income is an amount of money coming to a person or
corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless
otherwise specified, income means cash or its equivalent
(Conwi v. CIR, G.R. No. 48532, August 31, 1992).
The following are important considerations to discover
whether or not there is income for tax purposes:
1. Existence of income
2. Realization of income
3. Recognition of income
4. Methods of accounting
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).
The above considerations are discussed in details below.
1. Existence of income
Income vs. Capital (1995 Bar)
CAPITAL
Constitutes
the
investment which is the
source of income
A primary consideration in income taxation is that there
must be income before there could be income taxation.
(Domondon, 2013)
INCOME
Any wealth which flows
into the taxpayer other
than a mere return of
capital
Is the service of wealth
Is the fruit
Flow
Income is subject to
income tax
Receipts not considered as income
a. Advance payments or deposits for payments;
Advances are not revenue of the period in
which they are received but as revenue of the
ftre 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 distributionl;
f. Money earmarked for some other persons not
included in gross income;
g. Money or property borrowed;
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.
Is the wealth
Is the tree
Fund
Return or recovery of
capital is not subject to
income tax
(Madrigal v. Rafferty, 38 Phil. 414)
Objects being taxed in income taxation
1.
2.
3.
Fruit of Capital
Fruit of Labor
Fruit of Labor and Capital combined
--Q: Assuming Mr. R withdraws money from his bank
account, is it income?
45
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The increase in the net worth of a taxpayer is taxable if it
is the result of the receipt by him 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 be duly paid, they are not taxable.
h. Increase in net worth resulting from adjusting
entries (Domondon, 2013)
--Q: Mr. X borrowed P10,000 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 P10,000 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)
NOTE: If and when there are substantial limitations or
conditions under which payment is to be made, such
does not constitute constructively realized.
3. Recognition of income
A: NO. Mr. X did not derive 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.
---
When income considered received for Philippines
income tax purposes:
a. If actually or physically received by taxpayer; or
b. If constructively received by taxpayer
Actual vis-a-vis constructive receipt
1.
Security advances and security deposits paid by a
lessee to a lessor
2.
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).
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.
2. Realization of income
Under the realization principle, revenue is generally
recognized when both of the following conditions are
met:
a) The earning process is complete or virtually
complete
b) An exchange has taken place (Manila Mandarin
Hotels, Inc. v. CIR, CTA Case No. 5046, March 24,
1997).
Examples of income constructively received:
a. Deposit in banks which are made available to
the seller of services without restrictions
b. Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered
c. Transfer of the amounts retained by the payor
to the account of the contractor
d. Interest coupons that have matured and are
payable but have not been encashed
e. Undistributed share of a partner in the profits
of a general partnership
NOTE: Mere increase in the value of property is not
considered as income since it is an unrealized increase in
capital.
--Q: Mr. Castillo is a resident Filipino citizen. He
purchased a parcel of land in Makati in 1970 at a
consideration of P1 million. In 2011, the land had a
fair market value of P20 million. Mr. Ayala offered to
buy the same for P20 million. Is Mr. Castillo liable to
pay for income tax in 2011 based on the offer to buy
by Mr. Ayala? (2011 Bar)
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:
a. The taxpayer does not employ a method for
computing income, or
b. The taxpayer’s method for accounting does not
clearly refect the income (Domondon, 205, citing
Sec. 43 of NIRC).
A: NO. Mr. Castillo is not liable for income tax in 2011
because no income is realized by him during that year.
Tax liability for income tax attaches only if there is a gain
realized resulting from a closed and complete
transaction (Madrigal v. Rafferty, G.R. No. L12287, August
7, 1918).
--Increase in the net worth of a taxpayer
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Actual receipt – income may be actual receipt or
physical receipt.
Constructive receipt – occurs when money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restriction by the payor (Sec. 4.108-4, R.R.
16-2005).
46
Income Taxation
Cash method versus accrual method of accounting
to do so bars it from claiming said expenses as
deduction for the taxable year 1986. Decide.
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.
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.
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 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 (CIR v. Isabela
Cultural Corp., G.R. No. 172231, 2007).
The all-events test requires the right to income or
liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.
However, the test does not demand that the amount of
income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary
to compute the amount with reasonable accuracy. The
amount of liability does not have to be determined
exactly; it must be determined with "reasonable
accuracy."
Tests in determining whether income is earned for
tax purposes
1.
2.
3.
4.
5.
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,
2007).
---
Realization test – There is no taxable income unless
income is deemed realized. Revenue is generally
recognized when both conditions are met:
a. The earning process is complete or virtually
complete; and
b. An exchange has taken place (Manila Mandarin
Hotels, Inc. v. CIR, CTA Case No. 5046, March 24,
1997).
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.
Economic - Benefit test / Doctrine of Proprietary
Interest – Taking into consideration the pertinent
provisions of law, income realized is taxable only to
the extent that the taxpayer is economically
benefited.
Severance test – Income is recognized when there
is separation of something which is of exchangeable
value (Eisner v. Macomber, 252 US 189).
All Events test
Requisites:
c. Fixing of a right to income or liability to pay;
and
d. Availability of the reasonable accurate
determination of such income or liability.
Classification of income
As to source:
1. Gross income and taxable income from sources
within the Philippines
2. Gross income and taxable income from sources
without the Philippines
3. Income partly within or partly without the
Philippines
--Q: Isabela Cultural Corporation (ICC) incurred
professional fees for legal and auditing 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, the expenses for the
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
Refer to discsussions on “Classification of income subject
to tax.”
Situs of income taxation
Income from sources within the Philippines
1.
47
Interests derived
Philippines
from
sources
within
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
the
LAW ON TAXATION
2.
3.
4.
5.
6.
7.
Dividends from domestic and foreign corporations,
if more than 50% of its gross income for the threeyear 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
Rentals and royalties from properties located in the
Philippines or any interest in such property
including rentals or royalties for the use of or for
the privilege of using within the Philippines
intellectual property rights such as trademarks,
copyrights, patents, etc.
Gains on sale of real property located in the
Philippines
Gains on sale of personal property other than
shares of stock within the Philippines
Gains on sale of shares of stock in a domestic
corporation
a. Produced in whole
within and sold
within
b. Produced in whole
without and sold
without
c. Produced within and
sold without
d. Produced
without
and sold within
Dividend income from:
a. Domestic
Corporation
b. Foreign Corporation
– If for the 3-year
period preceding the
declation
of
dividend, the ratio of
such corporation’s
Phil income to the
world (total) was:
Less than 50%
50% to 85%
More than 85%
Income from sources without the Philippines
1.
2.
3.
Interest and dividends derived from sources other
than those within the Philippines
Compensation for services performed outside the
Philippines
Rentals and royalties from properties located
outside the Philippines or any interest in such
property including rentals or royalties for the use of
or for the privilege of using outside the Philippines
intellectual property rights such as trademarks,
copyrights, patents, etc.
Income within
Entirely without
Proportionate*
Entirely within
Except when otherwise provided, gross income means
all income derived from whatever source, including
but not limited to the following items: [CG2I- R2DAP3]
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]).
1.
Summary rules on determination of situs according
to kinds of income
Tax situs
Place of performance of
service
Location of property (real
or personal)
Place of use of intangibles
Place of sale
Place of sale
The above enumeration of gross income under NIRC is
NOT exclusive.
Location of property
Location of the mines
Place of farming activities
Income
within
the
Philippines
Residence of the debtor
Place of activity that
produces the income
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Income partly within and
and partly without
Income partly within and
and partly without
GROSS INCOME
Gains, profits, or incomes other than those enumerated
above shall be allocated or apportioned to sources
within or without the Philippines
Royalties
Merchandising
Gain on sale of personal
property
Gain on sale of real
property
Mining income
Farming income
Gain on sale of domestic
stock
Interest
Gain on sale of transport
document
Manufacturing:
Income purely without
*Formula (Proportianate)
Phil. Gross Income x Dividend received = Income within
Entire Gross Income
Income derived partly within and partly without the
Philippines
Kinds of income
Service or compensation
income
Rent
Income purely within
Concept of income from whatever source derived
Under Sec. 32 (A) of the NIRC, gross income means all
income derived from whatever source.
“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
48
Income Taxation
1.
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. Treasure fund;
2. Punitive damages representing profit lost;
3. Amount received by mistake;
4. Cancellation or condonation of the taxpayer’s
indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction subsequently
refunded;
8. Bad debt recovery.
2.
--Q: Is money received under payment by mistake,
income subject to income tax?
3.
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 (Guttierez 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)
4.
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.
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 receive 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.
2.
3.
4.
5.
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).
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).
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 taxed
refunded were not originally claimed as deductions.
Taxable under the tax benefit rule. Recovery of bad
debts previously allowed as deduction in the
preceding years shall be included as part of the
gross income in the year of recovery to the extent of
the income tax benefit of said deduction (NIRC, Sec.
34 E [1]). This is sometimes referred as the
Recapture Rule.
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.
Income from jueteng;
Gain arising from expropriation of property;
Taxes paid and subsequently refunded
Recovery of bad debts previously charged off;
Gain on the sale of a car used for personal
purposes. (2005 Bar)
Distinguish gross income from net income
BASIS
As to deductions
A:
49
GROSS INCOME
Allows no
NET INCOME
Allows
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
As to exemptions
As to tax base
Advantages/
Disadvantages
deductions
Grants no
exemptions
Gross Income
Simplifies the
income tax
system
Substantial
reduction in
corruption and
tax evasion as
the exercise of
discretion, to
allow or
disallow
deductions, is
dispensed with
More
administratively
feasible
Does away with
wastage of
manpower and
supplies
deductions
Grants
exemptions
Net Income
Confusing and
complex
process of
filing income
tax return
Vulnerable to
corruption on
account of
margin of
discretion in
the grant of
deductions
c.
Money found may or may not be taxable. If the founder
knows the owner, it is not taxable because there is
obligation to return. If founder does not know the owner,
it is taxable subject to special discount or deduction
when it is subsequently returned because the owner is
known already.
Provides
equitable
reliefs in the
form of
deductions,
exemptions
and tax credit
Tax audit
minimizes
fraud
Post-dated checks are not taxable except when it is
subject to discounting.
The tax implication when there is exchange of services
without compensation is that both parties are taxable
as if both each sold their services.
--Q: Lao is a big-time swindler. In one year he was able
to earn ₱1 Million from his swindling activities.
When the CIR discovered his income from swindling,
the CIR assessed him a deficiency income tax for such
income. The lawyer of Lao protested the assessment
on the following grounds:
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.
b.
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. Compensation income
2. Fringe benefits
3. Professional income
4. Income from business
5. Income from dealings in propery
6. Passive investment income
7. 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
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.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
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
his 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 above listing is based on 2017 Bar Tax syllabus which
is 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. 2-98,
Sec. 2.78.1).
50
Income Taxation
Refer to “Taxation on compensation income” for further
discussion.
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]).
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:
Cost of goods sold
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market rate
and the actual rate granted
6. Membership fees, dues and other expenses athletic
clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
what the law allows (NIRC, Sec. 33 [B]; R.R. 3-98, Sec.
2.33 [B]).
It includes all business expenses directly incurred to
produce the merchandise to bring them to their present
location and use such as invoice cost of the 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
Refer to “Taxation on compensation income” for further
discussion.
1.
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.
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
d) Real property used in trade or business of the
taxpayer
The existence or nonexistence of employer-employee
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.
Examples of ordinary assets
a) The condominium building owned by a realty
company, the units of which are for rent or for
sale
b) Machinery and equipment of a manufacturing
concern subject to depreciation
c) The motor vehicles of a person engaged in
transportation business
NOTE: 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.
2.
NOTE: Business is any activity that entails time and
effort of an individual or group of individuals for
purposes of livelihood or profit.
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
51
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON 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 in securities
being used in the trade or
business, shall be considered
as ordinary assets.
Taxpayers
habitually engaged
in the real estate
business
Taxpayers not
engaged in the real
estate business
Construction and interpretation of capital assets
The general rule has been laid down that the codal
definition of a capital asset must be narrowly construed
while the exclusions from such definitions must be
interpreted broadly (Tuazon v. Lingad, 58 SCRA 176).
--Q: Distinguish “capital asset” from “ordinary asset”
(2003 Bar)
Taxpayer changing
business from real
estate to non-real
estate business
Taxpayers
originally
registered to be
engaged in the real
estate business but
failed to
subsequently
operate
Abandoned and idle
real property
Real property
subject of
involuntary transfer
(including
expropriation or
foreclosure sale)
A: “Capital assets” includes 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 properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year;
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or
business;
3. property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in Sec. 34 (F) of the NIRC; or
4. real property used in trade or business of the
taxpayer.
--GUIDELINES IN DETERMINING WHETHER A REAL
PROPERTY IS A CAPITAL ASSET OR ORDINARY
ASSET
Real estate dealer
All real properties acquired
are ordinary assets.
Real estate
All real properties which are:
developer
- Acquired
whether
developed
or
undeveloped;
- Held by the real estate
developer primarily for
sale or for lease in the
ordinary course of trade or
business or which would
be
included
in
the
inventory of the taxpayer
if on hand at the close of
the taxable year; and
- Used in trade or business,
whether in the form of
land,
building,
or
improvements shall be
considered as ordinary
assets
Real estate lessor
All real properties whether
land
and/or
other
improvements, which are for
lease/rent or being offered
for lease/rent, or for use or
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
All real properties acquired in
the course of trade or
business shall be considered
as ordinary assets.
Real properties whether land,
building,
or
other
improvements, which are
used or being used or have
been previously used in the
trade or business shall be
considered
as
ordinary
assets.
It will not result in the
reclassification
of
real
property from ordinary to
capital asset.
All real properties originally
acquired by it shall continue
to be treated as ordinary
assets.
It shall continue to be treated
as ordinary assets.
No effect on the classification
of the property in the hands
of the involuntary seller.
Significance in 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 transactions, to wit:
1.
2.
3.
Holding period rule
Capital loss limitation
Net capital loss carry-over (NELCO)
--Q: State with reason the tax treatment of the
following in the preparation of annual income tax
returns: Income realized from sale of:
a. Capital assets; and
b. Ordinary assets. (2005 Bar)
A:
a.
52
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.
Income Taxation
It includes the gain
derived from the sale or
exchange of an asset not
connected with the trade
or business.
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?
Capital loss may not
exceed capital gains
when
used
as
a
deduction to income.
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 one-half 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)
Ordinary Gain vs. Capital Gain
ORDINARY GAIN
A gain derived from
the sale or exchange
of ordinary assets
such as SOUR
ACTUAL GAIN
Excess of the selling
price over the cost of
the asset
BASIS
Availability of
holding period
Gains derived from dealings in property means all
income derived from the disposition of property
whether real, personal or mixed for:
1. Money, in case of sale
2. Property, in case of exchange
3. Combination of both sales and exchange, which
results in gain
Extent of
Recognition
(Taxability)
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
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.
Deductibility of
capital losses
Capital Gain vs. Capital Loss
CAPITAL GAIN
PRESUMED GAIN
The law presumes that the
seller of real property
classified as capital asset
realized gains, which is
taxed at 6% of the selling
price or fair market value,
whichever is higher.
Difference between treatment of capital gains and
losses between individuals and corporations
Computation of the amount of Gain or Loss
ORDINARY LOSS
CAPITAL GAIN
A gain derived from the
sale or exchange of capital
assets
or
property
whether or not connected
with the trade or business
of the tax payer other
than SOUR
Actual Gain vs. Presumed Gain
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).
---
ORDINARY INCOME
The loss that may be
sustained from the sale
or exchange of an asset
not connected with the
trade or business.
INDIVIDUAL
Holding
period
available
The
percentages of
gain or loss to
be taken into
account shall
be the ff.:
100% - if the
capital assets
have
been
held for 12
mos. or less;
and
50% - if the
capital asset
has been held
for more than
12 months
Nondeductibility
of Net Capital
losses
Capital losses
are
allowed
CAPITAL LOSS
53
CORPORATION
No holding period
Capital gains and
losses are taxable
to the extent of
100%
Non-deductibility of
Net Capital losses
XPN:
If
any
domestic bank or
trust company, a
substantial part of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
only to the
extent of the
capital gains;
hence, the net
capital loss is
not deductible.
Availability of
NELCO
NELCO
allowed
NOTE: Holding period does not find application in the
case of disposition of:
1. shares of stock and
2. real property considered as capital asset, whether
the seller is an individual, trust, estate or a private
corporation.
whose business is
the
receipt
of
deposits, sells any
bond,
debenture,
note or certificate
or other evidence of
indebtedness
issued
by
any
corporation
(including
one
issued
by
a
government
or
political
subdivision)
NELCO not allowed
Only individual taxpayers can avail of the holding
period rule. It is not allowed to corporations.
Net Capital Gain and Net Capital Loss
Net capital gain is the excess of the gains from sales or
exchanges of capital assets over the losses from such
sales or exchanges. Net capital loss is the excess of the
losses from sales or exchanges of capital assets over the
gains from such sales or exchanges.
Capital gains subject to final tax vs. capital gains
reported in the income tax return
BASIS
As to
deductions
As to actual
gains
As to holding
period
As to Net Loss
Carry Over
SUBJECT TO
FINAL TAX
There is a fixed
rate for the tax
GR: It does not
matter whether or
not capital gains
are actually earned
(presumed gains)
XPN: Disposition
of
shares
not
traded in the stock
exchange or thru
initial
public
offering
GR: Holding period
is immaterial
XPN: Disposition
of
shares
not
traded in the stock
exchange or thru
initial
public
offering
Not allowed
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.
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
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.
Holding period
is considered.
“No gain, no 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.
--Q: When is gain or loss not recognized in cases of
transfer of shares of stock of corporation in
exchange of property?
Could be availed
A: The requisites for the non-recognition of gain or loss
are as follows:
a. The transferee is a corporation;
b. The transferee exchanges its shares of stock for
property/ies of the transferor;
c. The transfer is made by a person, acting alone or
together with others, not exceeding four persons;
and
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
Holding Period Rule (Long Term Capital Gain Vis-ÀVis Short Term Capital Gain)
Where the taxpayer held the capital asset sold for more
than 12 months, the gain derived therefrom is taxable
only to the extent of 50%. Consequently, if the taxpayer
held the capital asset sold for a year or less, the whole
gain shall be taxable. The same also applies to capital
loss. It is a form of tax avoidance since the taxpayer can
exploit it in order to reduce his tax due (NIRC, Sec. 39
[B]).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
54
Income Taxation
Development Corporation, G.R. Nos. 163653 and
167689, July 19, 2011).
---
Rule on Matching Cost
Under this rule, only ordinary and necessary expense
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.
Merger or consolidation for purposes of taxation
Merger or consolidation means:
1. Ordinary merger or consolidation, or
2. The acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock provided that:
a. 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
b. 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
Net Loss Carry Over (NELCO)
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 NELCO
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
1.
2.
Capital Loss Limitation Rule
3.
Losses from sale or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or
exchanges (NIRC, Sec. 39 (C)).
4.
NELCO 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.
NELCO vs Net Operating Loss Caryy Over (NOLCO)
Thus, under this capital loss limitation rule, capital loss
is deductible only 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.
BASIS
As to
source
Rationale: To allow the deduction of non-business
(capital) losses from business (ordinary) income or gain
could mean the reduction or even elimination of taxable
income of the taxpayer through personal, non-business
related expense, resulting in substantial losses of
revenue to the government (Mamalateo, 2014).
As to who
can avail
As to
period of
carry-over
Where the capital loss limitation rule will not apply:
- If a bank or trust company incorporated under the
laws of the Philippines,
- a substantial part of whose business is the receipt of
deposits,
- sells any bond, debenture, note or certificate or other
evidence of indebtedness issued by any corporation,
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]).
NELCO
Arises
from
capital
transactions
meaning
involving capital
asset
Can be availed of
by
individual
taxpayer only
May be carried
over only in the
next succeeding
taxable year
NOLCO
Arises from ordinary
transactions meaning
involving
ordinary
asset
Can be availed of by
individual
and
corporate taxpayer
Allows carryover of
operating loss in 3
succeeding taxable
years or in case of
mining companies 5
years
Tax treatment of capital gains and losses
1.
--Q: Can you deduct ordinary loss from ordinary gain
and from capital gain?
2.
A: Yes for both cases.
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.
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.
---
55
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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.
5.
Gains from sale to the government of real
property classified as capital asset
The taxpayer has the option to either:
a. Include as part of gross income subject
allowable deductions and personal exemptions,
then subject to the schedular tax; or
NOTE: This is not available to a corporate
taxpayer.
b. Subject to final tax of 6% on capital gains (Sec.
24 [D], NIRC).
3.
6.
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 5 - 32% for
individuals and the normal corporate income tax of
30% for corporations, and not subject to capital
gains tax.
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
Capital gains from sale of shares of stock not traded
in the stock exchange
1.
The holding period notwithstanding, a final tax at the
rates prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the
sale, barter or exchange or other disposition of shares
of stock in a domestic corporation which are not
traded in the stock exchange (NIRC, Sec. 24 [C]).
2.
Not over ₱100K …..……………….………..……5%
On any amount in excess of ₱100K ……10%
3.
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).
4.
Persons liable to pay capital gains tax on the sale of
shares of stock not traded in the stock exchange
1.
2.
3.
2.
3.
4.
Individuals – both citizens and aliens
Corporations – both domestic and foreign
Estates and Trusts
A short sale is any sale of a security which the seller
does not own or any sale which is consummated by the
delivery of a security borrowed by, or for the account of
the seller.
Ownership of a security
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
No capital loss carry-over for capital losses
sustained during the year (not listed and traded in a
local stock exchange) shall be allowed but capital
losses may be deducted on the same taxable year
only.
The entire amount of capital gains and capital loss
(not listed and traded in a local stock exchange)
shall be considered without taking into account the
holding period irrespective of the type/kind of
taxpayer.
Non-deductibility of losses on wash sales and short
sales.
Gain from sale of shares of stock in a foreign
corporation are 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.
“Short sale”
Rules in determining the selling price of the shares
disposed
1.
and the FMV of the property, shall be deemed a gift
subject to the donor’s tax (R.R. 6-2008).
In the case of shares of stock not listed and traded
in the local stock exchanges, 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).
A person shall be deemed the owner of a security if he:
1. (Or his agent) has title to it;
2. Has purchased or entered into an unconditional
contract binding on both parties thereto, to
purchase it and has not yet received it;
3. Owns a security convertible into or exchangeable
for it and has tendered such security for conversion
or exchange;
4. Has an option to purchase or acquire it and has
exercised such option; and
5. Has rights or warrant to subscribe to it and has
exercised such rights or warrants provided
56
Income Taxation
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 5% for a net capital gain not
exceeding ₱100,000 and 10% for any excess. The
tax due would be ₱15,000.
----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 his 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)
however, that a person shall be deemed to own
securities only to the extent he has a net long
position in such securities.
b.
--Q: As to tax implication, distinguish shares of stocks
not listed and traded through stock exchange from
those listed and traded through stock exchange
(2008, 2011 Bar)
A:
As to nature
As to kind of
tax
As to rate
As to tax
base
NOT listed and
traded
Income
Capital gains tax
Listed and
traded
Business
Percentage tax
Not over ₱100,000
= 5%
In excess of
₱100,000 = 10%
½ of 1%
Net capital gain
Gross selling
price
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]).
---
----Q: What is the effect if the sale is made by a dealer in
securities?
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: 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 after, he
sold the shares of stock through his favorite Makati
stockbroker at a gain of ₱200,000.
a.
b.
A:
a.
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 only speaks of
land and/or building with respect to domestic
corporations.
Is John subject to Philippine income tax on the
sale of his shares through his stockbroker? Is he
liable for any other tax?
If John directly sold the shares to his best friend,
a US citizen residing in Makati, at a gain of
₱200,000, is he liable for Philippine income tax?
If so what is the tax base and rate?
NOTE: The above discussion of CGT 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.
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]).
Tax treatment if property is not located in the
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.
However, the seller is subject to the percentage tax
of ½ of 1% of the gross selling price (NIRC, Sec. 127
[A]).
57
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a. No. The BIR officer’s tax assessment is wrong for two
reasons. First, the rate of income tax used is the
corporate income tax although the taxpayer is an
individual. Second, the computation of the gain
recognized from the sale did not consider the holding
period of the asset. The capital asset having been for
more than 12 months, only 50% of the gain is
recognized (Sec. 39B, NIRC).
Such income may be exempt in case of non-resident
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]).
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 tax it should be credited against the income tax
assessment on the ground of equity. Once the final
assessment is made, I will advise him to protest within
30 days from receipt, invoking the holding period and
the wrong tax rate used.
----Q: 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)
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. 499; Supreme Transliner, Inc. v. BPI Family Savings Bank,
Inc. G.R. No. 165617, February 25, 2011).
----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: P5 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: 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 but also 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. Is the BIR officer’s tax assessment correct? Explain.
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: 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]).
A:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
58
Income Taxation
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.
Actual gain is not required for the imposition of the tax
but it is the gain by fiction of law which is taxable.
----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 one-half 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.
b.
c.
Sale of principal residence by an individual
A sale of principal residence by an individual is exempt
from capital gains tax provided the following requisites
are present:
1. Sale or disposition of the old actual principal
residence;
2. By a citizen or resident alien;
3. 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;
4. 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;
5. Can be availed of once every 10 years;
6. The historical cost or adjusted basis of his old
principal residence shall be carried over to the cost
basis of his new principal residence;
7. If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject to
capital gains tax; and
8. 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).
What is the nature of real properties exchanged
for tax purposes – capital asset or ordinary
asset? Explain.
Is Juan Gonzales subject to income tax on the
exchange of property? If so, what is the tax based
and rate? Explain.
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).
--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)
b. YES. The tax base in a taxable disposition of a real
property classified as a capital asset is the higher
between two values; the fair market value of the
property received in exchange and the fair market value
of the property exchanged. Since the fair market value of
these two properties is the same, the said fair market
value should be taken as the tax base which is P10
Million. The income tax rate is 6 % (Sec. 24D (1) NIRC).
c. YES. The gain from the exchange constitutes an item
of gross income, and being a business income, it must be
reported in the annual income tax return of Alpha
Corporation. From the pertinent items of gross income,
deductions allowed by law from gross income can be
claimed to arrive at the net income which is the tax base
for the corporate income tax rate of 30% (Sec. 27 A and
Sec. 31 NIRC).
---
A: 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
constructing new principal residence within
eighteen (18) calendar months from the date of
sale or disposition;
2) 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;
3) The Commissioner has been duly notified,
through a prescribed return, within thirty (30)
days from the date of sale or disposition of the
person’s intention to avail of the tax exemption;
and
4) Exemption was availed only once every ten (10)
years.
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).
59
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Q: If the taxpayer constructed a new residence and
then sold his old house, is the transaction subject to
capital gains tax?
Classifications of passive income
Passive income may either be:
1. Subject to schedular rates, or
2. Subject to final 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 a new
principal residence. Thus, the old residence should first
be sold before acquiring or constructing the new
residence.
---
--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.
---
PASSIVE INVESTMENT INCOME
Passive income refers to income derived from any
activity in which the taxpayer has no active participation
or involvement.
Summary rules on the tax treatment of certain passive income as applied to individuals
Sources Of Income
RC
NRC
RA
NRAETB
NRA –
NETB
Within
and
without
Within
Within
Within
Within
NATURE OF INCOME
TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary
benefits from deposit substitutes, trust funds & 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.
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
governments, 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)
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 coventurer
ROYALTY INCOME
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
60
20%
20%
20%
20%
25%
7.5%
Exempt
7.5%
Exempt
Exempt
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%
10%
10%
10%
20%
25%
25%
Income Taxation
Royalties on books, literary works and musical composition
10%
10%
10%
10%
25%
Other royalties (e.g. patents and franchises)
20%
20%
20%
20%
25%
PRIZES AND WINNINGS
Prizes exceeding P10,000
20%
20%
20%
20%
25%
Winnings
20%
20%
20%
20%
25%
Winnings from Philippines Charity sweepstakes and lotto winnings
Exempt
Exempt
Exempt
Exempt
Exempt
Summary rules on the tax treatment of certain passive income as applied to corporations (NIRC, Sec. 27 [D])
NATURE OF INCOME
Interests from any currency bank deposits, yield, or any
other monetary benefits from deposit substitutes and from
trust fund and similar arrangement and Royalties derived
from sources within the Philippines
DC
20%
RFC
20%
NRFC
Shall be considered as
part of gross income
subject to 30% NCIT.
7.5%
7.5%
Exempt
10%
10%
Exempt
-
-
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.
Interest Income derived under expanded foreign currency
deposit system
Interest derived by depositary bank under the expanded
foreign currency deposit system from foreign currency loans
granted to residents other than offshore banking units (OBUs)
NOTE: If granted to nonresidents, OBUs, local commercial
banks or branches foreign banks authorized by BSP to transact
business – EXEMPT
Interest received by NRFC on foreign loans (NIRC, Sec. 28
[5a])
Dividends received from Domestic Corporation (Intercorporate Dividend)
INTEREST INCOME
Long-term deposits or investments
Tax-exempt interest income [FIL2D]
2.
3.
4.
5.
6.
15% (subject to tax credit
sparing rule)
foreign corporation. Otherwise, it is subject to final tax
of 7 ½ %.
It is the amount of compensation paid for the use of
money or forbearance from such use.
1.
20%
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 Php10,000 and other
denominations as may be prescribed by the BSP (NIRC,
Sec. 22 [FF]).
From bank Deposits. The recipient must be any
following tax exempts recipients:
a. Foreign government;
b. Financing institutions owned, controlled or
financed by foreign government
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.
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 their own needs or the needs of their agent or
dealer (NIRC, Sec. 22 [Y]).
NOTE: In order to avail exemption under item no. 4, the
recipient must be a non-resident alien or non-resident
In order for an instrument to qualify as a deposit
substitute, the borrowing must be made from twenty
61
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
20% FWT ON
INTEREST INCOME
It is an income tax under
Title II of the NIRC (Tax on
Income).
(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 nineteen (19) or less
individual or corporate lenders at any one time (R.R. 142012).
Foreign Currency Deposit System
FWT is imposed on the
gross interest income
realized in a taxable year.
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.
FWT
is
subject
withholding.
to
5% GROSS RECEIPTS
TAX ON BANKS
It is a business tax
(percentage tax) under
Title
V
(Other
Percentage Taxes).
Gross Receipts Tax
(GRT) is measured by a
certain percentage on
the gross receipts or
earnings.
GRT is not subject to
withholding.
Interest income subject to 7.5% final tax
NOTE: The 20% final tax withheld on a bank’s passive
income should be included in the computation of GRT
(China Banking Corporation v. CIR, G.R. No. 175108,
February 27, 2013).
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 7.5% of such
income (NIRC, Sec. 24 [B][1]).
--Q: Maribel, a retired public school teacher, relies on
her pension from the GSIS and the Interest Income
from a time deposit of P500,000 with ABC Bank. Is
Maribel liable to pay any tax on her income?
Nonresident citizen and Nonresident alien are exempt
from payment of the 7.5% final tax on interest income
under the expanded foreign currency deposit system.
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.
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.
---
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 P10,000 on the peso deposit and USS1,000
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)
Q: Is the interest income of a NRFC under EFCDS
subject to final income tax of 7.5%? (2008 Bar)
A: NO. Any interest income derived by nonresidents,
whether individuals or corporations, from transactions
with depository banks under the expanded foreign
currency deposit system shall be exempt from income
tax (NIRC, Sec. 27 [d][3], as amended by R.A. No. 9294).
---
A:
a.
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 foreign
banks authorized by the BSP to transact business, it shall
be EXEMPT.
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.
“Interest Income subject to Final Withholding Tax
(20%)” vs. “Income subject to Gross Receipts Tax
(5%) on banks”
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
62
Income Taxation
b.
A:
a.
b.
A local offshore banking unit of a foreign bank?
(2005 Bar)
interest in the net assets of the corporation (RR No.
2, Sec. 252).
4) Scrip Dividend – one that is paid in the form or
promissory notes
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% (NIRC, Sec. 24 [B][1]).
5) Indirect Dividend – one made through the exercise
of right or other means of payment, e.g. cancellation
orcondonation of indebtedness
Both interests are not to be declared as part of gross
income in the income tax return.
---
6) Liquidating Dividend – one resulting from the
distribution by a corporation of all its property or assets
in compete liquidation or dissolution. It is generally a
return of capital, and hence, it is not income. However,
it is taxable income with respect to the excess of amount
received over cost of the shares urrendered
(Dimaampao, 2015).
DIVIDEND INCOME
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.
Inter-corporate dividends
NOTE: If dividends (whether cash or stock) are given to
shareholders not as a return on investment but in
payment of services rendered, then they are taxable as
part of compensation income, or income derived from
self-employment or exercise of profession NOT as
passive income (Domondon, 2013).
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:
Kinds of dividends
1.
1) Cash Dividend – paid in given sum of money
Dividends received from DC
a.
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.
Dividends received by a DC and RFC from 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.
3) Stock Dividend – one paid by a coporation with its
own stock.
b.
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).
Dividends received by a NRFC from 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, that the
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 deemed paid or (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%.
XPNs:
1. Change in the stockholder’s equity, right/interest in
the net assets of the corporation;
2. Recipient is other than the shareholder;
3. Cancellation or redemption of shares of stock;
4. Distribution treasury shares;
5. Dividends declared in the guise of treasury stock
dividend to avoid the effects of income taxation; and
6. Different classes of stock were issued.
The phrase “deemed paid” “tax credit” does not
mean tax credit actually granted by the foreign
country. There is no statutory provision or
revenue regulation requiring “actual grant”.
The 15% represents the difference between the
NCIT of 30% on corporations and the 15% tax
on dividends.
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
2.
63
Dividends received from a foreign corporation:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
Dividends received by a DC from a foreign
corporation shall be subject to 30% NCIT;
b.
Dividends received by RFC and NRFC from 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.
Recipient
3. More than 85%
to
Subject to final
tax
Exempt
tax
from
Source of Income
RC, NRC, RA
10%
NRA – ETB
NRA – NETB
NRFC
20%
25%
15% subject to allowance of tax
credit
--Q: Does tax on income and dividends amount to
double taxation?
Entirely without
Proportionate
(partly
within;
partly without)
Entirely within
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)
1) Dividends
from
foreign
corporation
2) Share in the income of a GPP
1) 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
2) Inter-corporate
dividends
received
from
domestic
corporation by non-resident
foreign corporation
3) Share of an individual in the
distributable net income after
tax of a partnership (other than
a GPP) which he is a partner
4) Share of an individual in the
next income (after tax) of an
association, joint account, or a
joint venture or consortium
taxable as corporation for
which he is a member or coventurer
Inter-corporate dividends received
from domestic corporation by
another domestic corporation and
resident foreign corporation
A: Disguised dividends are those income payments
made by a domestic corporation, which is a subsidiary of
a non-resident foreign corporation, to the latter
ostensibly for services rendered by the latter to the
former, but which payments are disproportionately
larger than the actual value of the services rendered. In
such case, the amount over and above the true value of
the service rendered shall be treated as a dividend, and
shall be subjected to the corresponding tax on Philippine
sourced gross income. E.g. Royalty payments under a
corresponding licensing agreement.
----Q: Suppose the creditor is a corporation and the
debtor is its stockholder, what is the tax implication
in case the debt is condoned by the corporation?
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
(Tabag, 2015)
Summary of tax treatment of dividend received from
DOMESTIC Corporation
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Tax exempt
Dividend received from foreign corporation is subject to
Philippine income tax if at least 50% of the world (total)
income of the foreign corporation must be derived from
the Philippines for three years preceding the declaration
of such dividend (Dimaampao, 2015).
TAX TREATMENT OF DIVIDEND INCOME
Subject
basic tax
DC / RFC
Dividend received from FOREIGN Corporation
In determining whether income is derived from
sources within or without the Philippines, the ratio
of the foreign corporation’s Philippine gross income
to the world gross income within the 3-year period
preceding the declaration of such dividend should
be considered.
Philippine Gross Income = %
World Gross Income
1. Less than 50%
2. 50 - 85%
Taxable (Tax Rate) / Exempt
64
Income Taxation
tax treatment of the cash dividends received from
BBB, Inc. by the following stockholders: (2015 Bar)
a. A resident citizen
b. Non-resident alien engaged in trade or business
c. Non-resident alien not engaged in trade or
business
d. Domestic corporation
e. Non-resident foreign corporation
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. L21186, February 27, 1924).
----Q: The JV was tasked to develop and manage FDC’s
50% ownership of its PBCom Office Tower Project
“the Project”. FDC paid its subscription by executing
a Deed of Assignment of its rights and interests in the
Project worth ₱5.7M in favor of the JV. The BIR
assessed deficiency income tax on the gain on the
supposed dilution and/or increase in the value of
FDC’s shareholdings in FAC. Did the BIR properly
impute deficiency income taxes to FDC which was
supposedly incurred by it as a consequence of the
dilution of its shares in FAC?
A: 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).
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).
----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?
d. Dividends received by a domestic corporation from
another domestic corporation, such as BBB, Inc., shall
not be subject to tax (Sec. 27(d)(4), NIRC).
e. Dividends received by a non-resident foreign
corporation from a domestic corporation are generally
subject to an income tax of 30% to be withheld at source
(Sec. 28 (b)(1), NIRC).
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 nonresident 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.
----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: YES. The general rule states that a stock dividend
representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation
cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of
earnings or profits accumulated.
The redemption converts into money the stock dividends
which become a realized profit or gain and consequently,
the stockholder’s separate property. Profits derived
from the capital invested cannot escape income tax. As
realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless
of the existence of any business purpose for the
redemption (CIR v. CA, G.R. No. 108576, January 20, 1999).
---
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
ROYALTY INCOME
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).
65
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Morever, in Universal Food Corporation vs. CA, 1970, it
was defined to be the compensation for the use of a
patented invention.
1.
Tax treatment of royalty income
Subject to Royalties on books, other literary works
10% final and musical composition from sources
tax
within the Philippines.
Subject to Royalties derived from sources within the
20% final Philippines other than royalties subject to
tax
10% to final tax.
Subject to Royalties derived by RC and DC from
basic tax
sources without the Philippines.
(Tabag, 2015)
2.
Lease of personal property
Rental income on the lease of personal property located
in the Philippines and paid to a non-resident taxpayer
shall be taxed as follows:
Rent vs. Royalty
BASIS
As
reporting
to
As to tax rate
RENT
Must be reported
as part of gross
income
Regular
progressive tax if
individual
ROYALTY
Need not be
reported since
subject to final
tax.
Final tax
Vessel
Aircraft, machineries
and other equipment
Other assets
25%
25%
30%
25%
Where the lease contract provides that the lessee will
erect a permanent improvement on the rented property
and after the term of the lease, the improvement shall
become the property of the lessor, the lessor may, at his
option, report the income therefrom upon either of the
following methods:
1. Outright Method - the fair market value of the
building or improvement shall be reported as
additional rent income at the time when such
building or improvements are completed; and
2. 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.
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.
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.
Rent is subject to special rate
--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:
c. Outright method
d. Spread out method
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:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
NRA
4.5%
7.5%
Recognized methods in reporting the value of
permanent improvement
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.
2.
NRC
Tax treatment of leasehold improvements by lessee
RENTAL INCOME
1.
Obligations of Lessors to 3rd parties assumed by the
lessee:
a. Real estate taxes on leased premises
b. Insurance premiums paid by lessee on property
c. Dividends paid by lessee to stock-holders of
lessor-corporation
d. 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
66
Income Taxation
A:
d.
e.
Prepaid rental
without
restriction as to
its use
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
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
Divide by: Lease term
---
It refers to amount of money in cash or in kind received
by chance or through luck and are generally taxable
except if specifically mentioned under the exclusion from
computation of gross income under Sec. 32[B] of NIRC.
Tax treatment for prizes and winnings
Generally, prizes exceeding ₱10,000 and other winnings
from sources within the Philippines shall be subject to
20% final withholding tax, if received by a citizen,
resident alien or non-resident engaged in trade or
business in the Philippines. If the recipient is a nonresident 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.
₱400,000
600,000
₱1,000,000
Tax treatment of advance rental/long term lease
If the advance payment by the lessee is really a loan to
the lessor, or anoption money for the property or a
security deposit for the faithful performance of certain
obligations of the lessee, the lessor realizes no taxable
income in the year the advance payment is received. If
the advance payment is, in fact, a prepaid rental, there is
taxable income to the lessor whether the latter is using
the cash or accrual method of accounting.
FORMS OF
ADVANCE
PAYMENT
A loan to the
lessor from the
lessee
An option money
for the property
A security
deposit to insure
the faithful
performance of
the lease
A security
deposit which
restricts the
lessor as to its
use
TAX TREATMENT
RECIPIENTS
Citizen, resident alien or nonresident engaged in trade or
business in the Philippines
Non-resident alien not engaged in
trade or business in the
Philippines
Corporation (domestic or foreign)
WHEN
TAXABLE
G.R.: Non-taxable
1.
2.
XPN: If the lessee
violates the terms
of the contract
G.R.: Non-taxable
XPN: Security
deposit applied to
rental shall be
subject tom VAT at
the time of its
TAX RATES
Subject to 20%
final withholding
tax
Subject to 25%
final withholding
tax
Subject to 30%
corporate income
tax
Prizes and winning subject to income tax
XPN: If the lessee
violates the terms
of the contract
G.R. Non-taxable
XPN: If the lessee
violates the terms
of the contract
G.R.: Non-taxable
In the year it
is received
irrespective
of the
accounting
method
employed by
the lessor
PRIZES AND AWARDS
10
Annual income of X on
the improvement
Regular rental income
Total annual rental income
application
Taxable
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.
Taxable at
the time it is
applied
67
Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic,
literary, or civic achievement provided, the
following conditions are met:
a. The recipient was selected without any action
on his part to enter the contest or proceeding;
and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
(Tabag, 2015)
The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
--ANNUITIES, PROCEEDS FROM LIFE INSURANCE AND
OTHER TYPES OF INSURANCE
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
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 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).
The portion representing return of premium is not
taxable while that portion that represents interest is
taxable.
NOTE: The portion of annuity net of premiums is taxable
being interest or earnings of the premium and not return
of capital.
--Q: X purchased a life annuity for ₱100,000 which
will pay him ₱10,000 a year. The life expectancy of X
is 12 years. How much is excluded from the gross
income of X?
Summary of tax treatment of prizes and other
winnings
Exempt
from tax
Subject to
basic tax
Subject to
20% final
tax
Subject to
25% final
tax
1) Prizes and award made primally in
recognition of
•Religious, charitable;
•Scientific;
•Educational artistic, literary; or
•Civic achievement.
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.
---
Provided the recipient was:
a) Selected without any action on his part
to enter the contest or proceeding (not
constituting gains from labor); and
b) Not required to render substantial
future services as a condition to receive
the prize/award.
2) All prizes and awards granted to
athletes in local and international sports
competitions and tournaments, whether
held in the Philippines or abroad and
sanctioned by their respective national
sports association
3) PCSO/Lotto winnings (except NRANETB)
1) Prizes and Other winnings derived by
resident citizens and domestic corporation
from sources without the Philippines.
2) Prizes and Winnings received by
corporation from sources within the
Philippines
3) Prices received by individuals from
sources within the Philippines amounting
to P10,000 or less
1) Prizes received by individuals (except
NRA-NETB)
from
sources
within
Philippines exceeding P10,00
2) Other winnings from sources within the
Philippines regardless of amount (Other
than PCSO and Lotto winnings)
Prizes and other winnings (including PCSO
and Lotto winnings) received by NRANETB
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Proceeds of life insurance
GR: Amounts received under a life insurance,
endowment, or annuity contact, whether in a single sum
or in installments, paid to the beneficiaries upon the
death of the insured are excluded from the gross income
of the beneficiary.
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 subsequently paid by the transferee are
exempt from taxation.
2.
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: 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.
68
Income Taxation
b.
Any policy loans or borrowings made on the policy shall
be deducted as advances from the life insurance
proceeds received upon death.
Recipients of non-taxable life insurance proceeds
Proceeds of life insurance policies paid to individual
beneficiaries upon the death of the insured are exempt.
Also, it has also 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).
Difference between the tax treatment of life
insurance proceeds under income and estate
taxation
PENSIONS, RETIREMENT BENEFIT
OR SEPARATION PAY
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.
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]).
NOTE: Under the Insurance Code, the insured shall have
the right to change the beneficiary he designated in the
policy, unless he has expressly waived this right in said
policy. Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed irrevocable
(R.A. 10607, Sec. 11).
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
On the other hand, in income taxation, there is no need
for the determination of revocability or irrevocability of
the beneficiary for purposes of exclusion of such
proceeds from the gross income. They are non-taxable
regardless of who the recipient is.
“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.
--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.
b.
A:
a.
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.
---
Examples of “income from whatever source derived”
which form part of the taxable income of the
taxpayer
1.
Do the proceeds form part of the taxable income
of the recipients?
Are the proceeds part of the taxable estate of the
deceased?
2.
3.
4.
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.
5.
6.
69
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.
In stock options, the difference between the fair
market value of the shares at the time the option is
exercised and the option price constitutes
additional compensation income to the employee
(Commissioner v. Smith, 324 U.S. 177).
Money received under solutio indebiti
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
7.
---
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.
Condonation of indebtedness for 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 its net assets, and thus realizes taxable
income.
Recovery of accounts previously written off - when
taxable/when not taxable
“Tax Benefit Rule” or Equitable Doctrine of Tax
Benefit
Forgiveness of indebtedness
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 to the extent that it was previously deducted.
Tax treatment for forgiveness of indebtedness
Two instances where Tax benefit rule applies
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).
1.
2.
Recovery of bad debts
Receipt of tax refund or credit
Recovery of bad debts
The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be
included as part of the taxpayer’s gross income in the
year of such recovery to the extent of the income tax
benefit of said deduction.
If the taxpayer did not benefit from deduction of the bad
debt written-off because it did not result in any
reduction of his income tax in the year of such deduction
as in the case where the result of the taxpayer’s business
operation was a net loss even without deduction of the
bad debts written-off, his subsequent recovery thereof
shall be treated as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable income.
Receipt of tax refunds 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.
--Q: Mr. Gipit borrowed from Mr. Maunawain
P100,000.00, payable in five (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
P75,000.00. 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)
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
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 Php 75,000.00 gave
rise to compensation income subject to income tax,
since Mr. Maunawain condoned such amount as
consideration for the general cleaning services rendered
by Mr. Gipit.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Borrowed money is not part of taxable income 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
70
Income Taxation
part of the gross income since the embezzler or thief has
no intention of repaying the money.
b.
Proceeds of stolen or embezzled property are
taxable
c.
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”.
Refer to previous discussion on “Situs of Income Taxation.”
Source rules in determining income from within and
without
--Q: ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-resident
foreign corporation based in the U.S. Under the
agreement which the parties forged in the U.S., XYZ
granted ABC the right to use a computer system
program and to avail of technical know-how relative
to such program. In consideration for such rights,
ABC agreed to pay 5% of the revenues it receives
from customers who will use and apply the program
in the Philippines. Discuss the tax implication of the
transaction. (2010 Bar)
The following are considered as income from sources
within the Philippines:
1.
2.
3.
4.
5.
6.
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.
Shares of stock in a domestic corporation – Gain,
profit, or income is treated as derived entirely
from sources within the Philippines, regardless
of where said shares are sold (Mamalateo,
2014).
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.
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 know-how 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 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).
--EXCLUSIONS FROM GROSS INCOME
Exclusions from gross income refer to the flow of wealth
to the taxpayers which are not considered part of gross
income for purposes of computing the taxpayer’s taxable
income due to the following:
1. It is exempted by the fundamental law or by
statute;
2. It does not come within the the definition of
income.
The exlcusion of income should not be confused with the
reduction of gross income by application of allowable
deductions. Exclusions are not taken into account in
determining gross income, however, deductions are
subtracted from the gross income (Tabag, 2015).
Construction of exclusions
Exclusions are in the nature of tax exemptions, thus they
must be strictly construed against the taxpayer and
liberally in favor of the Government. It behooves upon
the taxpayer to establish them convincingly.
Rationale for the exclusions
71
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
There are exclusions from the gross income either
because they:
1. Represent return of capital;
2. Are not income, gain or profit; or
3. Are subject to another kind of internal revenue tax;
4. Are income, gain or profit that is expressly exempt
from income tax under the Constitution, Tax treaty,
NIRC, or general or a special law.
Incomes received
or earned but are
not taxable
because of
exemption by
virtue of a law or
treaty; hence, not
included in the
computation of
gross income.
Taxpayers who may avail of exclusions
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
arrive at the
tax due and
payable
All kinds of taxpayers – individuals, estates, trusts and
corporations, whether citizens, aliens, whether residents
or non-residents may avail of the exclusions.
EXCLUSIONS UNDER THE CONSTITUTION
Rationale: The excluded receipts are not considered as
income for tax purposes (Domondon, 2013).
Income derived by the Government or its political
subdivisions from the exercise of any essential
government function
Exclusions distinguised from deductions and tax
credit
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.
“Exclusion from Gross Income” vs. “Deductions from
Gross Income”
EXCLUSIONS UNDER THE NIRC
EXCLUSION FROM
GROSS INCOME
It refers to a flow of wealth to
the taxpayer which are not
treated as part of gross income,
for purposes of computing the
taxpayer’s taxable income, due
to the following reasons:
a. It is expressly exempted
from income tax by the
fundamental
law
or
statute;
b. It is subject to another
kind of internal revenue
tax; and
c. It does not come within
the definition of income
as when the amount
received
represents
return of capital.
Pertains to the computation of
gross income
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
DEDUCTION FROM
GROSS INCOME
It refers to amounts
which the law allows
to be deducted from
gross
income
in
order to arrive at net
income.
Items that are excluded in gross income and exempt
from gross income taxation [GLAM-RIC]
1.
2.
3.
4.
5.
6.
7.
Pertains
to
the
computation of net
income
Something spent or
paid in earning gross
income
Example
of
a
deduction is business
rental
The above exclusions are discussed in detail below.
GIFTS, BEQUESTS AND DEVISES
The value of property acquired by gift, bequest, devise or
descent
is
excluded
from
gross
income.
Provided, however, that income from such property, as
well as gift, bequest, devise or descent of income from
any property, in cases of transfers of divided interest,
shall be included in gross income.
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.
Difference between Exclusions, Deductions and Tax
Credit
EXCLUSIONS
DEDUCTIONS
“Gift” is any transfer not in the ordinary course of
business which is not made for full and adequate
TAX CREDIT
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Gifts, bequests and devises
Life insurance proceeds
Amount received by insured as return of premium
Retirement benefits, pensions, gratuities, etc.
Income exempt under treaty
Compensation for injuries or sickness
Miscellaneous items. (13P2IG3)
a. 13thmonth pay and other Benefits;
b. Prizes and awards
c. Prizes and awards in sports competitions
d. Income derived by foreign government
e. Income derived by the government or its
political subdivisions
f. GSIS, SSS, Medicare and other contributions
g. Gains from the sale of bonds, debentures or
other certificate of indebtedness
h. Gains from redemption of shares in mutual
fund (NIRC, Sec. 32 [B])
72
Income Taxation
consideration in money or money’s worth. The giver is
called the donor and the recipient is called the donee.
it was excluded from income because (a) it was a
retirement pay, and (b) it was a gift.
--Q: If Mr. Generous gave a gift to Ms. Gorgeous what
are the tax implications?
Is Quiroz correct in claiming that the additional ₱1
Million was gift and therefore excluded from
income?
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.
---
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?
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.
Tax implications of a Bequest and Devise
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?
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]).
Donation inter vivos and mortis causa
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?
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
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.
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)
--Q: Quiroz worked as chief accountant of a hospital
for 45 years. When he retired at 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
73
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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.
---
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.
LIFE INSURANCE PROCEEDS
--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?
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.
3.
4.
Proceeds of life insurance policies;
Paid to the Heirs or beneficiaries;
Upon the Death of the insured;
Whether in a single Sum or otherwise.
Rationale for the exclusion of the proceeds from life
insurance
A:
a.
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.
b.
Exceptions to the rule that the amount of the
proceeds of life insurance should be excluded from
the gross income [ASV-PPC]
1.
2.
3.
4.
5.
6.
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.
c. It shall be considered as revocably designated.
However, if the insured fail to exercise his right to
change the beneficiary during his lifetime, then the
designation shall be deemed irrevocable. Under Sec.
11 of the Insurance Code of the Philippines, as
amended by R.A. 10607, the insured has the right to
change the beneficiary he designated in the policy,
unless he has expressly waived this right in said
policy. Notwithstanding the foregoing, in the event
the insured does not change the beneficiary during
his lifetime, the designation shall be deemed
irrevocable.
----Q: On 30 June 2000, X took out a life insurance policy
on his own life in the amount of P2,000,000.00. He
designated his wife, Y, as irrevocable beneficiary to
P1,000,000.00 and his son, Z, to the balance of
P1,000,000.00 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)
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 is the one taxable but
not the principal amount (NIRC, Sec. 32 B [1]).
Where the life insurance policy is used to Secure a
money obligation
Where the life insurance policy was transferred for
a Valuable consideration
The recipient of the insurance proceeds is a
business Partner of the deceased and the insurance
was taken to compensate the partner-beneficiary
for any loss in income that may result as the death
of the insured partner
The recipient of the insurance proceeds is a
Partnership in which the insured is a partner and
the insurance was taken to compensate the
partnership for any loss in income that may result
from the dissolution of the partnership caused by
the death of the insured partner
The recipient of the life insurance proceeds is a
Corporation in which the insured was an employee
or officer (R.R. No. 2, Sec. 62).
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]).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
YES. The manner of designation or the name of the
beneficiary is immaterial. The amount of the
proceeds is excluded from the gross income.
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.
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
74
Income Taxation
and is exempt from taxation. The proceeds of life
insurance received upon the death of the insured
constitute a compensation for the loss of life, hence a
return of capital, which is beyond the scope of income
taxation (Section 32(B)(1), NIRC).
----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)
endowment insurance policy, for which he was
paying an annual premium of ₱1,520 since 1965, also
matured. He was then paid the face value of his
insurance policy in the amount of ₱50,000. Is his
₱50,000 insurance proceeds exempt from income
taxation?
A: NO. The proceeds of life insurance policies are paid to
the heirs or beneficiaries upon the death of the insured
are not included as part of the gross income of the
recipient. There is no income realized because nothing
flows to Noel’s parents other than a mere return of
capital, the capital being the life of the insured (Sec. 32
[B][1], NIRC).
---
RETURN OF PREMIUM PAID
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).
---
Conditions for the exclusion of the return of
premium paid from gross income
1.
2.
3.
Amounts received under life insurance contracts
under life insurance endowment or annuity
contracts
4.
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.
Amount received by insured;
As a return of premium paid by him;
Under a life insurance, endowment or annuity
contract;
Either :
a. During the term;
b. At the maturity of the term mentioned in the
contract; or
c. Upon surrender of the contract.
NOTE: The amount returned is not income but mere
return of capital.
Treatment of proceeds received under endowment
policies
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.
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.
RETIREMENT BENEFITS, PENSIONS,
GRATUITIES, ETC.
Retirement benefits, pensions, gratuities, etc. that
are excluded from gross income [7FRUGS2]
--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?
1.
2.
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.
---
3.
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
4.
5.
6.
7.
75
Retirement benefits under R.A. 7641
Social security benefits, retirement gratuities,
pensions and other similar benefits received by
resident or non-resident citizens or resident alien
from Foreign government agencies and other
institutions, private or public
Retirement received by officials and employees of
private firms, whether individual or corporate, in
accordance with a Reasonable private benefit plan
maintained by the employer
Benefits from the US Veterans Administration
GSIS benefits
SSS
Separation pay
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
Salient features of R.A. 7641, amending the Labor
Code with regard to the retirement pay of qualified
employees in the absence of any retirement plan
1.
2.
4.
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.
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.
NOTE: Once the benefits under the RPBP have been
availed of, the retiree can no longer avail of the same
exemption for the second time under another RPBP but
can avail exemption under another ground such as SSS
or GSIS benefits.
In 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.
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).
In the absence of a reasonable private benefit plan or
agreement providing for retirement benefits of
employees in the establishment
a. Optional – the conditions are:
i.
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).
--Q: Ma. Isabel Santos was the Human Resource
Manager of Servier Philippines, Inc. (Servier) since
1991. In 1998, Santos suffered a sudden attack of
“alimentary allergy”. She fell into coma and was
confined in the hospital. After a year of medical
treatment, evaluation disclosed that she has not
recovered mentally and physically. Servier was
constrained to terminate the services of Santos
effective 31 August 1999. Servier paid disability
retirement benefits but withheld a portion for
taxation purposes. Under the retirement plan of
Servier, employees are barred from claiming from
additional benefits on top on that provided for in the
Plan. Santos was 41 years of age at the time of her
termination. Under the circumstances, was the
withholding of a portion of the retirement benefits
proper?
A: YES. Pursuant to the NIRC provisions on exclusion,
retirement benefits received in accordance with a
reasonable private benefit plan maintained by the
employer (under R.A. No. 4917) are exempted provided
that the retiring official or employee has been in the
serviceof the same employer for at least ten (10) years
and is not less than 50 years of age at the time of his
retirement.
Reasonable Private Benefit Plan (RPBP)
Pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all
his officials or employees, wherein contributions are
made by such employer for the officials or employees, or
both, for the purpose of distributing the earnings and
principal of the fund thus accumulated, any part of which
shall not be used or diverted to any purpose other than
for the exclusive benefit of the said officials and
employees (NIRC, Sec. 32 B [6]a).
Conditions in order to avail the exemption under a
RPBP [Approved-10-50-once]
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 eight (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).
---
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;
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
1.
2.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
76
Income Taxation
b.
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).
Causes beyond the control of the employee
1.
2.
3.
A:
1.
2.
In case of death, the estate unless there is a
designated beneficiary.
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).
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?
Terminal leave pay
Terminal leave pay is the amount received arising from
the accumulation of sick leave or vacation leave credits.
(Commutation of leave credits)
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?
--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: 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).
----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
P500.000.00. Is said amount subject to tax? Explain.
(1996 Bar)
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
2.
3.
Retrenchment
Cessation of business
Redundancy (R.R. 2-98, Sec. 2 b [2])
--Q: Who will be the recipient of separation pay if the
cause of separation is death, physical disability or
sickness? (2007 Bar)
--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?
1.
For any cause beyond the control of the official
or employee (NIRC, Sec 32 B [6] b).
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
77
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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
238-91 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. 906-015-SC, October 18, 1990).
----Q: Assuming it does not form part of the terminal
leave pay, as when it is given annually to the
employee, wherein the vacation or sick leave may be
converted into cash. What is the tax treatment of the
cash equivalent of such vacation leave credits?
control of the said official or employee (NIRC, Sec
28).
b. NO. Because his separation from employment is due
to causes beyond his control. The separation was
involuntary as it was a consequence of the closure of
various unprofitable departments pursuant to the
redundancy program.
----Q: Z, a Filipino immigrant living in the United States
for more than 10 years. He is retired and came back
to the Philippines a balikbayan. Every time he comes
to the Philippines, he stays here for about a month.
He regularly receives a pension from his former
employer in the United 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: It depends.
1. For private employees – vacation leaves are exempt
from tax up to 10 days while sick leaves are always
taxable.
2. For government employees – both vacation and sick
leaves are tax exempt irrespective of the number of
days.
--Tax treatment of sick leave credits
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:
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 month’s basic salary for every year of service.
Jacobo accepted the offer and received ₱400,000 as
separation pay under the program.
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.
b.
A:
a.
1.
Did Jacobo derive income when he received his
separation pay?
Did Kintanar derive income when he received
his separation pay? (1995 Bar)
2.
YES. Because his separation from employment was
voluntary on his part in view of his offer to resign.
What is excluded from gross income is any amount
receivedby an official or employee as a consequence
of separation of such official or employee from the
service of the employer for any cause beyond the
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Employees who are at least 50 years of age and
has at 10 years of service at the time of
termination of employment.
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
78
Income Taxation
these payments to WT. Explain your advice. (1999
Bar)
1.
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).
2.
Amounts received through accident or health
insurance or Workmen’s Compensation Act as
compensation for personal injuries or sickness
Amounts of any damages received whether by suit
or agreement on account of such injuries or sickness
(NIRC, Sec. 32 B [4]).
NOTE: They are mere compensation for injuries or
sickness suffered and not income. It is intended to make
the injured party whole as before the injury.
--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)
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
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]).
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.
2.
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?
Reciprocity
To lessen the rigors of international juridical double
taxation
Examples of tax treaties entered into by the
Philippines
1.
2.
3.
4.
5.
RP-Japan Tax Treaty
RP-US Tax Treaty
RP-France Tax Treaty
RP-Switzerland Tax Treaty
RP-Netherlands Tax Treaty
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.
----Q: In the problem above, If the salary actualized is
given by the employer, is it taxable?
Most Favored Nation Clause
This grants to the contracting party treatment not less
favorable than which has been or may be granted to the
most favored among other countries. It allows the
taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country 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. SC
Johnson and Son Inc., G.R. No. 127105, June 25, 1999).
A: If it is given by the employer as backwages, it is
taxable.
Q: What is the income tax implication in the
following insurances?
a. Life Insurance
b. Fire Insurance
c. Accident Insurance
COMPENSATION FOR INJURIES OR SICKNESS
Kinds of compensation for injuries or sickness that
may be excluded from gross income
A:
79
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
c.
Life Insurance – beneficiaries are not liable for
income tax
Fire insurance is not taxable because it is a mere
return of capital.
Accident insurance is not taxable because it is
considered compensation for injuries sustained.
---
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)
Profit actualized
Profit actualized is always taxable as compared to salary
actualized wherein we need to qualify who paid the
salary.
MISCELLANEOUS ITEMS
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.
13th Month Pay and other benefits
Gross benefits received by officials and employees 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).
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.
NOTE: The amount of P30,000, specifically referring to
the general amount of 13th month pay and other benefits
as one of the exclusions from gross compensation
income received by an employee, is increased to
P82,000 (R.A. No. 10653, implemented by R.R.3-201).
Accordingly, the amount of P82,000 shall ONLY apply to
the 13th 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).
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.
---
Prizes and awards including those in sports
competition
Requisites for the exclusion of prizes and awards in
sports competition from gross income [PATS]
Requisites in order for prizes and awards be
exempted from tax
1.
2.
3.
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.
4.
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: 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)
--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 P300,000,000.
A: NO. It is not included. It is subject to a final tax of 20%
for the amount is in excess of P10,000, otherwise it
would be included in his gross income and subjected to a
80cheduler rate (NIRC, Sec. 24 B [1]).
a.
b.
NOTE: The prize constitutes a taxable income for it was
made primarily in recognition of his artistic achievement
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
All Prizes and awards;
Granted to Athletes;
In local and international sports Tournaments and
competitions; and
Sanctioned by their national sports associations
(NIRC, Sec. 32 B [7] d).
80
Is the prize money paid to and received by Mr. A
in the US taxable in the Philippines? Why?
May Mr. A's prize money qualify as an exclusion
from his gross income? Why?
Income Taxation
c.
The US already imposed and withheld income
taxes from Mr. A's prize money. How may Mr. A
use or apply the income taxes he paid on his
prize money to the US when he computes his
income tax liability in the Philippines for 2013?
(2015 Bar)
For an income derived by foreign government from
investments in the Philippines be exempted from tax:
1.
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]).
2.
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 the deduction.
----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.
3.
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)
GOCCs performing:
1. Governmental Function:
GR: Government agencies performing governmental
functions are tax exempt
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 and controlled corporations
(GOCC)
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.
3.
4.
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.”
Government Service Insurance System
Social Security System
Philippine Health Insurance Corporation
Philippines Charity Sweepstakes Office
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 five (5) years.
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.”
---
Gains from redemption of shares in a mutual fund
company
Mutual fund company means an open-end and close-end
investment company as defined under the Investment
Company Act (NIRC, Sec.22 [BB]).
Income derived by foreign government
81
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
EXCLUSIONS UNDER SPECIAL LAWS
Statutory income tax exemptions
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.
1.
Requirement for tax-exemption
PD 87, Oil Exploration and Development Act, as
amended by PD 1354
2. EO 226, The Omnibus Investment Code of 1987, as
amended
3. 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
The concerned Regulatory Authority must first approve
the product before being granted tax-exempt privileges
by the BIR.
Income earned from investments and reinvestments
of the PERA
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
CONTRIBUTORS
If the contributor
is single
Personal equity and retirement account (PERA)
If the contributor
is married
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).
OFW
Contributors
MAXIMUM ANNUAL PERA
CONTRIBUTIONS
P100,000 or its equivalent in any
convertible foreign currency at
the prevailing rate at the time of
the actual contribution
Each of the spouses shall be
entitled to make a maximum
contribution of One hundred
thousand pesos (₱100,000) or its
equivalent in any convertible
foreign currency.
Double the allowable maximum
amount
DEDUCTIONS FROM GROSS INCOME
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.
These refer to items or amounts authorized by law to be
subtracted from pertinent items of gross income to
arrive at the taxable income.
PERA Investment Products
Nature of deductions
It may be a unit investment bust fund, mutual fund,
annuity contract, insurance pension products, pre-need
pension plan, shares of stock and other securities listed
and traded in a local exchange, exchange-traded bonds
or any other investment product or outlet which the
concerned Regulatory Authority may allow for PERA
purposes.
The 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.
Regulatory Authority
1.
Requisites before deductions are allowed
It refers to the Bangko Sentral ng Pilipinas (BSP) as
regards banks, other supervised financial institutions
and trust entities, the Securities and Exchange
Commission (SEC) for investment companies,
investment houses stockbrokerages and pre-need plan
companies, and the Office of the Insurance Commission
(OIC) for insurance companies.
2.
3.
Requirement in order to qualify as PERA investment
product
4.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
82
There must be specific provision of law allowing the
deductions, since deductions do not exist by
implication.
The requirements of deductibility must be met
(Refer to discussions on itemized deductions for the
requirements of each deduction).
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.
The deductions must not have been waived.
Income Taxation
5.
deductions except for 1) personal exemption and 2)
premium payments on health and/or hospitalization
insurance.
The withholding and payment of tax required must
be shown (Domondon, 2013).
General rules in claiming deductions
Exemption vs. Allowable Deduction
1.
Deductions must be paid or incurred in connection
with the taxpayer’s trade, business or profession.
ALLOWABLE
DEDUCTION
EXEMPTION
Matching concept of deductibility
An immunity or privilege,
a freedom from a charge
or burden to which others
are subjected
Generally receipts which
are excluded from taxable
income
This posits that the deductions must, as a general
rule, “match” the income, i.e. helped earn the income
(Domondon, 2013).
Ordinary and necessary expenses must have been
paid or incurred during the taxable year for it to be
deductible from gross income.
Further, the
deduction shall be taken for the taxable year in
which 'paid or accrued' or 'paid or incurred.'
Otherwise, the expenses are barred as deductions in
subsequent years (CIR v. Isabela Cultural
Corporation, G.R. No. 172231, February 12, 2007).
2.
3.
Personal exemptions are
theoretical
personal,
family and living expenses
of an individual
Deductions must be supported by adequate receipts
or invoices (except standard deduction).
The withholding and payment of tax required must
be shown.
A subtraction from gross
income
Not receipts, but are
expenditures which are
permitted
to
be
subtracted from income
to determine the amount
subject to tax
Reduction
of
wealth
which helped earn the
income subject to tax,
such as ordinary and
necessary expense
Allowable Deductions vs. Personal Exemptions
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 298).
As to nature
As to
purpose
Where no withholding made but still deductible
A deduction will also be allowed in the following cases
where no withholding of tax was made:
a. 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;
b. 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;
c. 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
83
ALLOWABLE
DEDUCTIONS
In the nature of
business
expenses
To recover or
recoup the cost
of
doing
business
As to
claimant
May be claimed
by
individual
and corporate
taxpayers
XPN:
1. NRA- NETB
2. NRFC
As to
amount
The
actual
expenses paid or
incurred in the
conduct of trade,
business
or
profession
As to kinds
of
deductions
or
exemptions
Classified into:
Itemized
deductions;
Optional
Standard
Deductions:
Individual - 40%
of gross sales or
receipts
Corporation
-
PERSONAL
EXEMPTIONS
In the nature of
personal, living or
family expenses
To
recover
the
personal, living and
family expenses paid
or incurred during
the taxable year
Granted
only
to
individual taxpayers
XPN:
1. NRAETB without
reciprocity
clause
with
respect
to
additional
exemptions only; and
2. NRANETB, with
respect to both basic
PE and additional PE.
Arbitrary
amounts
granted
to
approximate
the
personal
expenses
that may be incurred
by
individual
taxpayer
Exemption may be
classified into:
Basic
personal
exemption;
Additional personal
exemption
of
P25,000 for every
qualified dependent,
legitimate,
recognized
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
40% of
income
gross
or warehouse. The term may be used interchangeably
with "cost of goods manufactured and sold".
illegitimate child or
children not more
than 4
Cost of services (COS)
COS means all direct costs and expenses necessarily
incurred to provide the services required by the
customers and clients including:
Deductions that can be claimed by an individual
1.
With gross compensation income from employeremployee relationship ONLY:
a. Personal and additional exemptions;
b. Premium payments on health and/or
hospitalization insurance (PHHI)
2.
With gross income from business or practice of
profession:
a. OSD or itemized deductions
b. Personal and additional exemptions
c. PHHI
a. salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service, and
b. cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment
used and cost of supplies.
NOTE: COS shall not include interest expense except in
the case of banks and other financial institutions (RR
16-08).
ITEMIZED DEDUCTIONS
Refer to “Income Tax on Individuals” for further discussion
on deductions of individual taxpayers.
Itemized Deductions under NIRC (Sec. 34)
Deductions that can be claimed by a corporation
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. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of Oil and Gas Wells and Mines
8. Charitable and other Contributions
9. Research and Development
10. Contributions to Pension Trusts
Domestic
Corporations
and
Resident
Foreign
Corporation may opt between the OSD OR the Itemized
Deductions, except Non-Resident Foreign Corporation
which is subject to final tax on its gross income from
sources within the Philippines.
Return of Capital (Cost of sales or services)
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).
The itemized deductions are discussed in detail below.
EXPENSES
There shall be allowed as deduction from gross income
1. all the ordinary and necessary expenses
2. paid or incurred during the taxable year
3. 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
(Section 34 (A), NIRC).
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.
Requisites for deductibility of expenses (in general)
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
[D-STROWN]
1. Paid or incurred During the taxable year;
2. The expense must be Substantiated by proof;
(Substantiation Rule)
84
Income Taxation
3.
4.
5.
6.
7.
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.
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).
--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).
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).
It is the use of estimates or approximations of the
amount of cash and other assets where the taxpayer
lacks adequate records.
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.).
NOTE: If there is showing that expenses have been
incurred but the exact amount thereof cannot be
ascertained due to the absence of receipts and vouchers
of the expenditures involved, the BIR will make an
estimate of deduction that may be allowable in
computing the taxpayer's taxable income bearing heavily
against the taxpayer whose inexactitude is of his own
making. That disallowance of 50% of the taxpayer’s
claimed deduction is valid (RMC 23-2000).
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
business of the taxpayer, or in the exercise of the
taxpayer’s profession, including:
1. Reasonable allowances for salaries, wages and
other compensation for personal services actually
rendered, including gross monetary value of fringe
benefits;
2. Travel expenses in pursuit of trade or business;
3. Rental and other payments for the continued use or
possession of property, for the purpose of trade,
business or profession; and
4. Entertainment,
amusement
and
recreation
expenses during the taxable year.
Examples of ordinary and necessary expenses
1.
2.
3.
4.
5.
6.
7.
Ordinary expenses versus capital expenditures
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?
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.
Substantiation rule
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
The taxpayer shall substantiate the expense being
deducted with sufficient evidence such as official
receipts or other adequate records showing:
1. The amount of the expense being deducted; and
2. 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?
85
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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)
----Q: How can the taxpayer prove that the expense has
been paid or incurred during the taxable year?
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.
----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)
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: 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).
----Q: When is “all-events” test applicable?
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
secrets. May Freezy Corporaton claim the payment to
the officer as deduction from its gross income?
Explain. (2014 Bar)
A: It is applicable when:
a. A person who uses the cash method where all sales
have been fully paid by the buyers thereof;
b. 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;
c. 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;
d. A person who uses the completed method, whereby
the construction project has been completed during
the year the contract was signed.
---
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).
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
Also, the law will not allow the deduction of bribes,
kickbacks and other similar payments. Applying the
principle of ejusdem generis, payment made by Freezy
Corporation would fall under “other similar payments”
which are not allowed as deduction from gross income
(Section 34(A)(l)(c), NIRC).
Requisites before an employer can
compensation payments to employees
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
1.
2.
86
deduct
The payments must be reasonable.
They are, in fact, payments for personal services
rendered (Rev. Reg. 2, Sec. 70).
Income Taxation
--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)
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
1.
2.
3.
4.
Wages, salaries, commissions, professional fees,
vacation-leave pay, retirement pay, and other
compensation
Bonuses in good faith
Pensions and compensation for injuries if not
compensated for by insurance or otherwise
Grossed-up monetary value of fringe benefit
provided for, as long as the final tax imposed has
been paid. The fringe benefit must have been
granted to managerial and supervisory employees,
otherwise it cannot be availed as deduction.
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?
--Q: What are the requisites for deductibility of
bonus? (2006 Bar)
A:
1.
2.
3.
The payment of the bonus is made in good faith for
additional compensation;
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.
---
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]).
---
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).
Travelling/Transportation Expenses
Bonuses given to corporate officers out of sale of
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).
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 (R.R. No. 2).
“Away from home”
The following conditions may be taken into
consideration:
1. The payment made in good faith
2. 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
3. The size of the particular business
4. The employees’ qualification and contributions to
the business venture
5. General economic conditions (C.M. Hoskins & Co., Inc.
v. CIR, G.R. No. L-24059, November 28, 1969)
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.
87
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.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
3.
4.
Deductions to be claimed by the employer for the
allowance which are pre-computed by the
employer on a daily basis, or reimbursement for the
cost of meals and lodging in foreign trips by the
employee for the pursuit of employer’s trade or
business may not exceed;
a. $150 per day for trips to US, Australia, Canada,
Europe, Middle East and Japan;
b. $100 per day for other places.
Reimbursement for travel taxes, airport fees and
other charges, if duly receipted or substantiated,
may be deducted by the employer as business
expenses.
Subject to the above rules, expenses incurred in
attending two foreign professional conventions a
year shall constitute a deductible expense.
4.
Inclusions in rental expense
1.
2.
3.
Aliquot part of the amount used to acquire
leasehold over the number of years the lease will
run
Taxes and other obligations of the lessor paid by
the lessee
Annual depreciation of the cost of the leasehold
improvements introduced by the lessee over the
remaining period of the lease, or over the life of the
improvements, whichever period is shorter.
NOTE: It is NOT the cost of the leasehold improvements
but only its annual depreciation that is considered as
rental 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).
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.
Costs of materials
Materials and supplies are deductible only to the
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.
Expenses under lease agreements
Methods utilized to determine materials used
1.
2.
The withholding tax must have been withheld and
paid.
Expenses under the lease agreement which may be
allowed as deductions by the lessor
Actual consumption method or inventory method
Direct purchase method
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 (R.R.
No. 19-86, Sec. 2.01).
--Q: Assuming the taxpayer purchases materials but
has no record of consumption, is it deductible?
A: YES, provided the net income is clearly reflected by
direct purchase method.
Among such deductions may be cost of repairs and
maintenance, salaries and wages of employees attendant
to such lease, interest payment, property taxes, etc.
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, R.R. 2).
---
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.
Rentals and/or other payments for use or
possession of property
The cost of leasehold improvements are NOT considered
business expenses since they are capital investments.
Requisites for its deductibility
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
1.
2.
3.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
88
Income Taxation
improvements made, this deduction shall take the form
of an allowance for depreciation (Section 74, R.R. 2).
1.
Expenses for professionals
2.
Examples of expenses for professionals
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
3.
Apportionment Formula:
Net sales/net revenue
x
Total Net sales and revenue
A: They include representation expenses and/or
depreciation or rental or public order; expense relating
to entertainment facilities.
---
Entertainment/representation expenses
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.
Requisites to avail of this deduction
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
If the taxpayer is the registered member of a country,
golf, or sports club, the presumption is that the expenses
are fringe benefits subject to the FBT unless the
taxpayer can prove these are actually representation
expenses (Ingles, 2015).
“Entertainment facilities” shall refer to a yacht, vacation
home or condominium; and any other similar item of
real or personal property used by the taxpayer primarily
for the entertainment, amusement, or recreation of
guests or employees (R.R. 10-2002, Sec. 2).
--Q: Who may claim Entertainment, amusement and
recreation expenses?
A:
1.
2.
3.
4.
5.
Actual Expense
--Q: What are included as entertainment, amusement
and recreation expenses?
NOTE: Those of a permanent character are not
allowable as deductions.
1.
2.
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).
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.
Individuals engaged in business, including taxable
estates and trusts
Individuals engaged in practice of profession
Domestic corporation
Resident foreign corporation
General professional partnerships, including its
members
---
A yacht is considered an entertainment facility if its use
is not restricted to specified officers or employees. If the
yacht is restricted to them, it would be a fringe benefit,
subject to the FBT.
Ceiling or limitation on the amount allowed as
entertainment, amusement and recreation expense
Expenses that are not considered entertainment,
amusement and recreation expenses
Entertainment, amusement and recreation expense shall
be allowed as a deduction from gross income but in no
case shall exceed:
1.
89
Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
3.
4.
5.
6.
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 (R.R. 10-2002, Sec.
3)
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).
---
Advertising and Promotional Expenses
Political Campaign Expenses
Requisites for the deductibility of advertising and
promotional expenses [Sub-pro-ser]
Rule on deduction and withholding of campaign
expenditures
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 knowhow must be subjected to withholding tax.
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. 82009).
1.
2.
3.
Kinds of advertising and their deductibility
1.
2.
3.
NOTE: A creditable income tax at the rate of 5% shall be
withheld on income payments made by political parties
and candidates of local and national elections of all their
campaign expenditures, and income payments made by
individuals or juridical persons for their purchases of
goods and services intended to be given as campaign
contribution to political parties and candidates (R.R. No.
8-2009).
Advertising to stimulate the CURRENT sale of
merchandise or use of services are deductible as
business expenses, provided the amount incurred is
reasonable.
Advertising designed to stimulate the FUTURE sale
of merchandise or use of services must be spread
over a reasonable period of time that it help earn
the income
Ratio: Matching concept of deductibility
Advertising to promote the sales of SHARES OF
STOCK or to create a corporate image is not
deductible as an advertisement (Domondon, 2009).
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 (R.A. No. 6071, Sec. 7[2]; RMC No. 102-90, Sec. 1).
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).
Other business expenses allowed by special laws as
deductions
--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?
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
1.
2.
3.
4.
90
Discounts granted by establishments for senior
citizens and PWDs (R.R. 8-2010 and R.R. 5-2017);
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 (R.A. 10028);
Expenses incurred in training schemes pursuant to
the Jewelry Industry Development Act of 1998 –
additional 50% of actual amount incurred (R.A.
8502);
Expenses incurred for adopting a school based on
the Adopt-a-School program – additional 50% of
actual amount incurred (R.A. 8525);
Income Taxation
5.
the legal or equitable owner, even though it is not
directly liable for the indebtedness
---
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 (R.A. 9999).
Non-deductible Interest Expense
1.
2.
3.
4.
INTEREST
The amount of interest
1. paid or incurred
2. within a taxable year
3. on indebtedness
4. in connection with the taxpayer's profession,
trade or business
shall be allowed as deduction from gross income (Sec 34
(B), NIRC).
5.
6.
7.
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.
Requirements under the NIRC for interest to be
deductible
1.
2.
3.
4.
5.
6.
7.
Interest on preferred stock, which in reality is
dividend
Interest on unpaid salaries and bonuses
Interest calculated for cost keeping
Interest paid where parties provide no stipulation
in writing to pay interest
If the indebtedness is incurred to finance petroleum
exploration
Interest paid on indebtedness between related
taxpayers
Interest on indebtedness paid in advance through
discount or otherwise and the taxpayer reports
income on cash basis
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).
Related Taxpayers
1.
2.
3.
--Q: How is interest as a deduction from gross income
defined? (1992 Bar)
4.
5.
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?
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
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.
Theoretical interest is not deductible
A: Interest:
1. On taxes, such as those paid for deficiency or
delinquency,
since
taxes
are
considered
indebtedness (provided that the tax is a deductible
tax.) However, fines, penalties, and surcharges on
account of taxes are not deductible. The interest on
unpaid business tax shall not be subjected to the
limitation on deduction
2. Paid by a corporation on scrip dividends
3. On deposits paid by authorized banks of the BSP to
depositors, if shown that the tax on such interest
was withheld
4. Paid by a corporate taxpayer, liable on a mortgage
upon real property of which the said corporation is
It is not deductible because:
1. It is not paid or incurred for it is merely computed
or calculated;
2. It does not arise from interest bearing obligation
(PICOP v. CA, G.R. Nos. 106949-50;84-85, December 1,
1995).
--Q: Does the CIR have the power to impute
theoretical interest?
91
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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 R.R. 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).
---
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.
Interest paid in advance
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%.
Interest paid in advance through discount or otherwise
in case of cash basis taxpayer is allowed as deduction in
the year the debt is paid.
Optional treatment of interest expense on capital
expenditure
Tax arbitrage
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 (NIRC, Sec. 34 B [2]).
It is a strategy which takes advantage of the difference in
tax rates or tax systems as the basis for profit.
TAXES
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.
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).
Examples of taxes which are deductible
Interest periodically amortized
1.
2.
3.
If indebtedness is payable in periodic amortizations,
interest is deducted in proportion to the amount of the
principal paid.
Interest expense incurred to acquire property for
use in trade / business / profession
--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?
Q: Is the interest on loans used to acquire capital
equipment or machinery deductible from gross
income? (1999 Bar)
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
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.
---
The taxpayer’s otherwise allowable deduction for
interest expense shall be reduced by an amount equal to
33% of the interest income subject to final tax (NIRC, Sec.
34 B [1]).
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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
Limitation on the deduction
92
Income Taxation
In the case of non-resident alien individual engaged in
trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes shall be
allowed only if and to the extent that they are connected
with income from sources within the Philippines (NIRC,
Sec. 34 C [2]).
ordinary and necessary in the conduct of trade, business
or profession.
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.
Requisites for deductibility of taxes
Tax Credit vis-a-vis Deduction
1.
2.
3.
4.
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.
Treatment to income taxes paid in foreign countries
The taxpayer may either claim it as:
1. Foreign tax credits against Philippine income tax due
of citizens and domestic corporations; or
2. A deduction from gross income of citizens and
domestic corporations.
When to claim deductions for taxes
Foreign tax credit
GR: Taxes may be deducted only on the year it was paid
or incurred.
It is the right of an income taxpayer to deduct from
income tax payable the foreign income tax he has paid to
a foreign country subject to certain limitations. This is to
avoid the rigors of indirect double taxation, although not
prohibited by the Constitution for being violative of the
due process, results to a tax being paid twice on the same
subject matter or transaction.
XPN: In the case of contingent tax liability, the obligation
to deduct arises only when the liability is finally
determined.
Non-deductible taxes
Tax Credit vs. Tax Deduction
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
TAX CREDIT
Subtracted
from
Reduces
XPN: When the taxpayer does not signify in his
return his desire to avail of the tax credit.
3.
4.
5.
6.
7.
8.
Estate tax and donor’s taxes
Special assessments - taxes assessed against local
benefits of a kind tending to increase the value of
property assessed.
Stock transaction tax - Taxes on sale, barter,
exchange of shares of stock listed and traded
through the local stock exchange or through initial
public offering.
Final taxes
Presumed capital gains tax
VAT
Tax due
The taxpayer’s
tax liability
peso for peso
TAX
DEDUCTION
Income before
tax
Income upon
which tax liability
is computed
Persons entitled to claim tax credit
1.
2.
3.
4.
Resident citizens
Domestic corporations (NIRC, Sec. 34 C [3][a])
Members of a GPP
Beneficiary of an estate or trust (NIRC, Sec. 34 C
[3][b])
Persons not entitled to claim tax credit
1.
2.
Treatments of Surcharges / Interests / Fines for
delinquency
3.
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).
Alien individuals, whether resident or non-residents
Foreign corporation, whether resident or nonresidents
Non-resident citizen including overseas contracted
workers and seamen
Limitations when claiming tax credit
1.
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
2.
93
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
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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 (NIRC, Sec.
34 C [4]).
--Q: Are taxes paid and subsequently refunded taxable
or non-taxable? (2005 Bar)
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.
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.
---
Measurement of casualty loss
a) Total Loss – Actual loss is the book value of the asset.
b) 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).
LOSSES
--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)
Losses
(1) actually sustained during the taxable year, and
(2) not compensated for by insurance or other forms of
indemnity
shall be allowed as deductions:
a) If incurred in trade, profession or business;
b) Of property connected with the trade, business or
profession, if the loss arises from ฀res, storms,
shipwreck, or other casualties, or from robbery, theft
or embezzlement (Sec. 34 (D), NIRC).
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.
Requisites for deductibility
The requisites for deductibility of a loss are:
[TAE-TIE-C45]
1. Loss belongs to the Taxpayer
2. Actually sustained and charged off during the
taxable year
3. Evidenced by a closed and completed transaction
4. Not compensated by Insurance or other forms of
indemnity
5. Not claimed as a deduction for Estate tax purposes
in case of individual taxpayers
6. 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
7. If it is Casualty loss, it is evidenced by a declaration
of loss file within 45 days with the BIR
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.
This refers top the excess of allowable deduction over
gross income of the business in a taxable year. The net
operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction
from gross income for the next three (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.
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.
NOTE: NOLCO is on a first-in first-out basis.
Casualty Losses – The loss is of property connected
with trade, business or profession arisinhg from fire,
storm, shipwreck or other casualty, or from robbery,
theft or embezzlement.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Net Operating Loss Carry-over (NOLCO)
“Substantial change in ownership of the business or
enterprise”
94
Income Taxation
The 75% equity rule (or ownership or interest rule) shall
only apply to transfer or assignment of the taxpayer’s net
operating losses as a result of or arising from the said
taxpayer’s merger or consolidation or business
combination with another person.
b) Enterprise registered with the BOI enjoying the
Income Tax Holiday Incentive
c) PEZA-registered enterprise
d) SBMA-registered enterprise
e) Foreign corporations engaged in international
shipping or air carriage business in the Philippines
f) Any person, natural or juridical, enjoying exemption
from income tax (R.R. 14-2001)
The transferee or assignee shall not be entitled to claim
the same as a deduction from gross income except when
as a result of the said merger, consolidation or
combination, the shareholders of the transferor/assignor,
or the transferor gains control of:
1. At least 75% or more in nominal value of the
outstanding issued shares or paid up capital of
the transferee/assignee, if a corporation
2. At least 75% or more interest in the business of
the transferee/assignee, if not a corporation
(75% equity rule) (R.R. 14-2001, Sec. 2.4).
4.
--Q: What is the rationale for the rule prohibiting the
deduction of capital losses from ordinary gains?
Explain. (2003 Bar)
Determination of whether or not there is substantial
change in ownership
A: It is to insure that only costs or expenses incurred in
earning the income shall be deductible for income tax
purposes consonant with the requirement of the law that
only necessary expenses are allowed as deductions from
gross income. The term “necessary expenses”
presupposes that in order to be allowed as deduction,
the expense must be business connected, which is not
the case insofar as capital losses are concerned. This is
also the reason why all nonbusiness connected expenses
like personal, living and family expenses, are not allowed
as deduction from gross income (Section 36(A)(1) of the
1997 NIRC).
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 (R.R. 14-2001,
Sec. 5.1).
--Q: In case of mines other than oil and gas wells,
NOLCO shall be allowed for what period?
Refer to discussions on “Dealings in property” for further
discussion.
---
A: A net operating loss during the first ten years of
operation shall be allowed as NOLCO for the next 5 years.
---
Securities becoming worthless
Persons entitled to deduct NOLCO from Gross Income
1.
2.
3.
Capital Losses - Losses from sale or exchange of
capital assets. It is deductible to the extent of capital
gains only.
If securities become worthless during the taxable year
and are capital assets, the loss resulting therefrom shall
be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets (Section 34
(D), NIRC).
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
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).
Effect of NOLCO when the corporate taxpayer is
subject to MCIT
The running of the three-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 three-year period. However, such corporation
cannot enjoy the benefit of NOLCO for as long as it is
subject to MCIT in any taxable period.
An individual who claims the 40% OSD cannot claim
deduction of NOLCO simultaneously. Even if NOLCO was
not claimed, the three-year period shall continue to run
(R.R. 14-2001).
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).
Who are not qualified to avail NOLCO?
--Q: Are worthless securities deductible from gross
income for income tax purposes? (1999 Bar)
a) OBUs for a foreign banking corporation and FCDU of
a domestic banking corporations
95
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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 (NIRC, Sec. 34 D [4], E [2]).
--5.
Abandonment
losses
in
petroleum
operations
Special Losses
a. Wagering losses – deductible only to the extent of
gain or winnings deemed to only apply to individuals
(NIRC, Sec. 34 D [6])
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.
Note: If such abandoned well is reentered 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.
G.R.: Losses from wash sale are not deductible since
these are considered as artificial loss.
XPN: When taxpayer is a dealer in securities, and the
transaction from which the loss resulted was made in
the ordinary course of business of such dealer, the loss is
deductible in full.
LOSSES
Ordinary losses
Capital losses
Securities
becoming
worthless
Losses on wash
sales of stocks /
securities
Wagering
losses
NOLCO
Non-deductible losses
1.
RULES ON DEDUCTIBILITY
Deductible, net of indemnity
N.B. May be deducted from capital
gains
Deductible to the extent of capital
gains only
Deductible – if worthless securities
are capital assets (except where the
taxpayer is a bank or trust company)
2.
3.
4.
5.
Non-deductible - If worthless
securities are ordinary assets
G.R. Losses from wash sale are not
deductible
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).
Marcelo Doctrine
XPN. When taxpayer is a dealer in
securities, and the transaction from
which the loss resulted was made in
the ordinary course of business of
such dealer, the loss is deductible in
full.
Deductible only to the extent of
wagering gains.
Deductible for the next 3 consecutive
years following the year of such loss.
Provided that:
i.
The taxpayer was not
exempt from income tax in
the year of such net
operating loss; and
ii. There
has
been
no
substantial change in the
ownership of the business
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
or enterprise.
N.B. A net operating loss during the
first ten years of operation shall be
allowed as NOLCO for the next 5
years in case of mines other than oil
and gas wells,
i. When a contract area where
petroleum
operations
are
undertaken is partially or wholly
abandoned, all accumulated
exploration and development
expenditures pertaining thereto
shall be allowed as a deduction.
ii. When a producing well is
subsequently abandoned, the
unamortized costs thereof, as
well as the undepreciated costs of
equipment directly used therein,
shall be allowed as a deduction in
the year of abandonment.
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).
BAD DEBTS
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. Not connected with trade, business or
profession; and
2. Between related taxpayers (Sec 35 (E), NIRC).
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
96
Income Taxation
money lent or from uncollectible amounts of income
from goods sold or services rendered (R.R. 5-99, Sec. 2).
4.
5.
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.
6.
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
NOTE: Relatives by affinity and collateral relatives
other than brothers and sisters are not considered
related parties.
Bad Debt Theory
--Q: What factors will determine whether or not the
debts are bad debts? (2004 Bar)
Absence of creditor is not bad debt.
Requisites for deductibility [UST-CAR]
1.
A: The factors to be considered include, but are not
limited to, the following:
1. The debtor has no property or visible income;
2. The debtor has been adjudged bankrupt or
insolvent;
3. 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;
4. The debt can no longer be collected even in the
future; and
5. Collateral shares have become worthless.
The debts are Uncollectible despite diligent effort
exerted by the taxpayer;
To prove that the taxpayer exerted diligent efforts
to collect the debts:
1. Sending of statement of accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer for collection;
and
4. Filing a collection case in court.
2.
3.
4.
5.
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: "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:
a. Ascertain the debt to be worthless in the year
for which the deduction is sought; and
b. 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).
---
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 (R.R. 51999).
Testimony of a CPA as substantial evidence for the
deductibility of a claimed worthless debt
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 (R.R. 5-1999).
6.
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
Must not be sustained in a transaction entered into
between Related parties.
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
(NIRC, Sec. 34 [E]).
Related parties
1.
2.
3.
Members of the same family (brothers and sisters,
whether whole or half-blood; spouse, ancestors,
and lineal descendants)
An individual and a corporation more than fifty
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual
Two corporations more than fifty percent (50%) in
value of the outstanding stock of each of which is
owned, directly or indirectly, by or for the same
individual
Effect of recovery of bad debts
That recovery of bad debts previously allowed as
deduction in the preceding years shall be included as
part of the gross income in the year of recovery to the
extent of the income tax benefit of said deduction (NIRC,
Sec. 34 [E]). This is also known as the tax benefit rule.
DEPRECIATION
97
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
g.
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 (NIRC, Sec.
34 [F]).
--Q: Is depreciation of goodwill deductible from gross
income? (1999 Bar)
A: Goodwill may or may not be subject to
depreciation.
Depreciation is the gradual diminution in the useful
value of tangible property resulting from exhaustion,
wear and tear and obsolescence (Domondon, 2013).
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.
Requisites for deductibility
1.
2.
3.
4.
5.
The property subject to depreciation must be
property with life of more than one 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.
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.
---
Person entitled to claim depreciation expense
Methods for computing Depreciation Allowance
under NIRC
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 (NIRC, Sec. 34 [F]).
1.
2.
Depreciable and non-depreciable assets for tax
purposes
1.
2.
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 one year and do
not form part of the stock in trade that are part
of the inventory;
c. All kinds of intangible property (other than
shares of stock) with life of more than one
year;
d. Subject to exhaustion within a determinable
period of time, that is it has a limited useful life.
3.
4.
Straight line method – The annual depreciation
charge is calculated by allocating the amount to be
depreciated equally over the number of years of the
estimated useful life of the tangible. It results in a
constant charge over the useful life;
Declining balance method – accelerated method of
depreciation which writes off a relatively larger
amount of the asset’s cost nearer the start of its
useful life than that of the straight line;
Sum of the years digit method – accelerated method
of depreciation expense in the earlier years and
lower charges in the later years;
Any other method which may be prescribed by
Department of Finance upon recommendation of
the CIR.
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.
Non-depreciable Assets:
a. Land, apart from the improvements of physical
development added to it, cannot be
depreciated;
b. Inventories or stock in trade;
c. Personal effects or clothings, except customes
used in theatrical business;
d. Bodies of minerals subject to depletion;
e. Automobiles
and
other
transportation
equipment used solely by the taxpayer for
pleasure;
f. Building used solely by the taxpayer as his
residence, and the furniture or furnishing used
in said building;
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Intangibles, the use in trade, business or
exercise of profession is not of limited duration.
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.
98
Income Taxation
NOTE: If the property is not directly related to
production, depreciation is for 5 years using straight
line method (NIRC, Sec. 34 F[4]).
Annual depletion deductions are allowed only to mining
entities which own an economic interest in mineral
deposits (R.R. 5-76, Sec. 3).
Method to be used in depreciation of properties
used in mining operations other than petroleum
operations
Economic interest
1.
2.
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.
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.
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. ten percent (10%) in the case of an individual,
and
b. five percent (5%) in the case of a corporation, of
the taxpayer's taxable income derived from trade,
business or profession (Sec 34 (H), NIRC).
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]
----Q: Z purchased fully depreciated machineries and
entered the machineries in his books at ₱120,000.
Based on the independent appraisal and
engineering report, Z assigned to the machineries an
economic life of 5 years. Adopting the straight-line
method, Z claimed a depreciation deduction of
₱24,000 in his 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)
Requisites for deductibility [AW-SEA]
1.
2.
3.
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
(NIRC, Sec. 34 [F]) .
---
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]
DEPLETION OF OIL AND GAS WELLS
AND MINES
1.
Depeletion 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.
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]
a.
b.
c.
d.
e.
f.
Persons who may avail deduction for depletion
99
Culture
Health
Economic Development
Education
Science
Human Settlement
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
g.
2.
3.
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 (R.A. 9521).
Donations to Foreign institutions and international
organizations in compliance with treaties and
agreements with the Government.
Donations to Accredited NGO’s
a. Exclusively for: [C2HES2Y-RC]
i.
Cultural
ii. Charitable
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.
4.
Youth and Sports development
Donations that are subject to limitation
1.
2.
3.
4.
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.
Limitations on deductions
Amount deductible shall not exceed:
a. For individuals - 10% of taxable income before
contributions
b. For corporations - 5% of taxable income before
contributions (NIRC, Sec. 34 H [1])
Donations of prizes and awards to Athletes (R.A.
7549, Sec. 1)
Donations that are deductible in FULL under special
laws
RESEARCH AND DEVELOPMENT EXPENDITURE
Donations to:
1. The Integrated Bar of the Philippines (IBP) (P.D. 81)
2. Development Academy of the Philippines (P.D. 205)
3. Aquaculture Department of the Southeast Asian
Fisheries and Development Center (SEAFDEC) (PD
292)
4. National Social Action Council (P.D. 294)
5. National Museum, Library and Archives (P.D. 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 (R.A. 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 (R.A.
3589)
14. Ministry of Youth & Sports Development (P.D. 604)
15. Social Welfare, Cultural & Charitable Institution (P.D.
507)
16. Museum of Philippine Costumes (P.D. 1388)
17. Intramuros Administration (P.D. 1616)
18. Lungod ng Kabataan (P.D. 1631)
19. Foster child agencies (R.A. 10165)
a) Taxpayer may treat research or development
expenditures,
b) which are paid or incurred by him during the taxable
year
c) in connection with his trade, business or profession
as:
1. 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
2. deferred expenses
- Paid or incurred by the taxpayer in
connection with his trade, business or
profession;
- Not treated as ordinary expenses; and
- Chargeable to capital account but not
chargeable to property of a character which
is subject to depreciation or depletion (Sec
34 (I), NIRC).
Period for amortizing the deferred research and
development expenditures
In computing taxable income,
- such deferred expenses shall be allowed as
deduction,
- ratably distributed over a period of not less than
sixty (60) months (beginning with the month in
which the taxpayer first realizes benefits from such
expenditures).
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 (R.A. 9500).
UNIVERSITY OF SANTO TOMAS
2017 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
100
Income Taxation
Research and development expenditures that are
not deductible
allowable PERA contribution of an employee (R.R. 201117, with R.A. 9505).
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 (NIRC,
Sec. 34 I [3]).
--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)
PENSION TRUSTS
a. An employer establishing or maintaining a pension
trust
b. to provide for the payment of reasonable pensions to
his employees
c. 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)
d. a reasonable amount transferred or paid into such
trust during the taxable year in excess of such
contributions,
e. but only if such amount:
1. has not theretofore been allowed as a deduction,
and
2. is apportioned in equal parts over a period of ten
(10) consecutive years beginning with the year in
which the transfer or payment is made (Sec 34 (J),
NIRC).
A:
a.
Yes. Under No. 27 RAMO 1-87 subject to the
condition that the contribution does not exceed ½
month’s basic salary of all the employees. It is part
of the ordinary and necessary expenses.
b. No, part of the net income of the university inures
to the benefit of its private stockholders (NIRC, Sec.
34 [H]).
c. No, for the beneficiary is the employer (NIRC, Sec.
36 A [4]).
d. No, contributions to a newspaper fund for needy
families are not deductible for the reason that the
income inures to the benefit of the private
stockholder of the printing company.
----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.
Requisites for deductibility [P-FRANC]
1.
2.
3.
4.
5.
6.
The employer must have established a Pension or
retirement plan to provide for the payment of
reasonable pensions to his employees
It must be Funded by the employer
The pension plan is Reasonable and actuarially
sound
The deduction is Apportioned in equal parts over a
period of 10 consecutive years beginning 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
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)
Deductible payment to pension trusts
a.
b.
Employer’s current liability – amount contributed
during the taxable year shall be treated as an
ordinary and necessary expense
Employer’s liability for past services – 1/10 of
the reasonable amount paid to cover pension
liability applicable to the preceding 10 years
A: NO. Donations and/or contributions made to
qualified 101 one 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 (NIRC, Sec. 34 [H]).
----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
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
101
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
son of X is in the hospital as one of its patients. X
wants to exclude both the ₱100,000 and the ₱,000
from his gross income. Discuss. (1993 Bar)
Non-Life
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 102one
institution. If not, then no deduction is allowed.
Mutual marine
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
(NIRC, Sec. 34 H [1]).
----Q: On the part of the contributor, are contributions
to a candidate in an election allowable as a
deduction from gross income? (1998 Bar)
Mutual
insurance
–
mutual
fire
and
mutual
employer’s
liability
and
mutual
workmen’s
compensation
and
mutual
casualty
insurance
Assessment
Insurance
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.
--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 (Section [34] [K],
NIRC).
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
SPECIAL DEDUCTIONS
Special deductions allowable under the NIRC
2.
3.
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 (NIRC, Sec. 34 A [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
(NIRC, Sec. 61).
Insurance Companies can Deduct:
TYPE OF
INSURANCE
Free Legal Assistance Act of 2010
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.
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.
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
SPECIAL DEDUCTIONS
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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]).
Deductions under Special Laws
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 (R.R. 122013).
1.
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 (NIRC, Sec. 3 [A]).
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 date of its
payment (NIRC, Sec. 37 [B]).
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 (NIRC, Sec. 37 [C]).
102
Income Taxation
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.
4.
6. Deductions udner 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.
5.
6.
Tax treatment of senior citizens’ discount
7.
With the effectivity of RA 9257 on 21 March 2004, there
is now a new tax treatment for senior citizens' discount
granted by all covered establishments. This discount
should be considered as a deductible expense from gross
income and no longer as tax credit (CIR v. Central Luzon
Drug Corp., G.R. No. 159610, 2008).
Additional deduction from gross income of private
establishments for compensation paid to senior
citizens
Persons who could avail of the deduction for the
20% senior citizens’ discount
1.
2.
Private establishments employing senior citizens shall be
entitled to additional deduction from their gross income
equivalent to 15% of the total amount paid as salaries
and wages to senior citizens provided the following are
present:
1. Employment shall have to continue for a period of at
least 6 months;
2. Annual taxable income of the senior citizen does not
exceed the poverty level as may be determined by the
NEDA thru the National Statistical Coordination
Board (NSCB). For this purpose, the senior citizen
shall submit to his employer a sworn certification
that his annual taxable income does not exceed the
poverty level (R.R. 7-2010, Sec. 12).
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
OPTIONAL STANDARD DEDUCTION
OSD is a fixed percentage deduction which is allowed to
certain taxpayers without regard to any expenditure.
This is in lieu of the itemized deduction.
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
(NIRC, Sec. 34 [L]).
Conditions in order for establishments to avail the
20% sales discounts as deduction from gross income
1.
2.
3.
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 (R.R. 7-2010, Sec.
7).
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.
Only that portion of the gross sales exclusively 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
Gross Sales
Rental Income
TOTAL REVENUE
Less: Sales Returns
Cost of goods
sold
103
OSD
1,000,000
275,000
1,275,000
25,000
600,000
ITEMIZED
1,000,000
275,000
1,275,000
25,000
600,000
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
GROSS INCOME
Less: Deductions
OSD (650k x
40%)
Itemized
TAXABLE INCOME
Rate of Taxos
INCOME TAX DUE
650,000
650,000
1.
260,000
2.
390,000
30%
117,000
200,000
450,000
30%
135,000
Following the new income tax forms as prescribed in R.R.
2-2014, the following are not entitled to avail the OSD:
1.
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 R.A. 9504 (R.R. 16-2008).
Itemized Deductions as distinguished from OSD
Itemized Deductions must be substantiated by receipts;
while OSD 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.
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.
A: Dr. K may opt to use the optional standard deduction
(OSD) in lieu of the itemized deduction. OSD is a
maximum of forty percent (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.
---
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.
Persons who may avail of the OSD under the NIRC
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
Determination of OSD allowed for individuals,
corporations, and GPPs
INDIVIDUAL
It depends on the accounting method used by the
taxpayer in recognizing income and deductions:
a.) Accrual basis – the OSD shall be based on the gross
sales during taxable year.
b.) 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
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.
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 (R.R. 16-2008).
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Corporation, partnerships and other nonindividuals:
a. Exempt under the NIRC and other special laws,
with no other taxable income;
b. With income subject to special or preferential
tax rates;
c. 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;
d. Juridical entities whose taxable base is gross
revenue or receipts (e.g. special resident foreign
corporations; non-resident 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)
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.
1.
Non-resident aliens, (NRA) whether or not engaged
in trade or business in the Philippines; and
Non- resident foreign corporations (NRFC)
104
Income Taxation
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
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 (R.R. 2-2010).
5.
6.
7.
INCOME TAX ON INDIVIDUALS
Classes of Individual Taxpayers:
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 Aliens
c. Special class of individual employees
i.
Minimum wage earner
CITIZENS
RC
A citizen of the
Philippines who
stays
in
the
Philippines
without
the
intention
of
transferring
his
physical presence
abroad whether to
stay permanently
or temporarily as
an
overseas
contract worker
ITEMS NOT DEDUCTIBLE
In computing net income, no deduction shall in any
case be allowed in respect to:
1.
2.
Interest expense, bad debts, and losses from sales of
property between related parties
Bribes, kickbacks and other similar payments
Items where the requisites for deductibility are not
met
Personal, living or family expenses – these are
personal expenses and not related to the conduct of
trade or business.
Any amount paid out for new buildings of for
permanent improvements, or betterments made to
increase the value of any property or estate – these
are capital expenditures added to the cost of the
property and the periodic depreciation is the
amount that is considered as deductible expense.
NOTE: Shall not apply to intangible drilling and
development costs incurred in petroleum
operations which are deductible under Subsection
(G) (1) of Sec. 34 of the NIRC.
3.
4.
Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made (Major Repairs)
Premiums paid on any life insurance policy covering
the life of any officer or employee, or of any person
financially interested in any trade or business
carried on by the taxpayer, individual or corporate,
when the taxpayer is directly or indirectly a
beneficiary under such policy (NIRC, Sec. 36 [A])
NRC
A citizen of the Philippines who:
a. Establishes to the satisfaction
of the CIR the fact of his
physical presence abroad with
a definite intention to reside
therein;
b. Leaves the Philippines during
the taxable year to reside
abroad, either as an immigrant
or for employment on a
permanent basis;
c. Works and derives income
from abroad and whose
employment thereat requires
him to be physically present
abroad most of the time during
the taxable year;
d. Has
been
previously
considered as a nonresident
citizen and who arrives in the
Philippines at any time during
the taxable year to reside
permanently in the Philippines.
(Note: Treated as NRC with
respect to income derived from
sources abroad until the date of
his arrival)
NOTE: Taxpayer shall submit proof
to the CIR to show his intention of
leaving the Philippines to reside
permanently abroad or to return to
and reside in the Philippines (NIRC,
Sec. 22(E)).
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.
ALIENS
RA
An
individual
whose residence is
within
the
105
NRA
An individual whose residence is
not within the Philippines and who
is not a citizen thereof (NIRC, Sec.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Philippines
but
who is not a
citizen
thereof
(NIRC, Sec. 22 [F])
Special classes of aliens under NIRC
22 [G])
Special aliens are individuals with managerial/highly
technical positions working in: [ROP]
1. Regional or area headquarters and regional
operating headquarters of multinational companies
established in the Philippines
2. Offshore banking units (OBU) established in the
Philippines. OBUs are foreign banks allowed to
operate in the Philippines and to conduct foreign
currency transactions
3. Petroleum service contractors and sub-contractors
in the Philippines
Engaged in
NOT engaged
trade or
in trade or
business
business
An alien who An alien who
stays in the stays in the
Philippines for Philippines for
an
aggregate 180 days or
period of more less (NIRC, Sec.
than 180 days 25 [B])
(NIRC, Sec. 25
[A])
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.
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
Significance of classifying an alien as a resident or a
non-resident
BASIS
Tax
treatment
Personal
exemption
Additional
exemption
RA
5-32%
schedular
rate
Entitled
Entitled
1.
2.
NRA
ETB
NETB
5-32%
25% of
schedular
gross
rate
income
Entitled
Not
subject to entitled
the rule on
reciprocity
Not entitled Not
entitled
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); or
2. Apply the 5-32% tax rate with deduction (NIT).
General Principles and Applicable Tax Rates
INCOME DERIVED FROM
SOURCES
GROSS OR NET
RATE
INDIVIDUAL TAXPAYER IS A:
Within the
Philippines
Outside the
Philippines
Gross Income Taxation (GIT)
or Net Income Taxation (NIT)
RC
√
√
Employee: GIT ; Businessman:
NIT/GIT, if he availed of the
OSD
5-32%
NRC
√
X
NIT
5-32%
OCW/Seaman
√
X
NIT
5-32%
RA
√
X
Employee: GIT Businessman:
GIT
5-32%
NRA-EBT
√
X
NIT
5-32%
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
106
Income Taxation
NRA-NEBT
GIT
25%
√
X
Special Alien
√
X
GIT
15%
Estate Under Judicial Settlement
√
√
NIT
5-32%
Irrevocable Trust
√
√
NIT
5-32%
Co-owners
√
√
NIT
5-32%
Meaning of seamen as contemplated in the law
TAXATION OF RESIDENT CITIZENS, NON-RESIDENT
CITIZENS AND RESIDENT ALIENS
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.
Coverage:
1. A citizen of the Philippines residing therein is
taxable on all income derived from sources within
and without the Philippines;
2. A nonresident citizen is taxable only on income
derived from sources within the Philippines;
3. 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;
4. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines (NIRC, Sec. 23).
Formula in determining taxable income
Gross Compensation Income
Less: Personal exemptions
Premium payment on health
and/or hospitalization
insurance
Net Compensation Income
Add: Net business income or
Net professional income
Other income
Taxable income subject to
graduated rates
xxx
(xxx)
(xxx)
xxx
xxx
xxx
xxx
xxx
Graduated rates applicable to the income of
individuals
INCOME BRACKET
Not over ₱10,000
Over
₱10,000
but
not
over
₱30,000
Over
₱30,000
but
not
over
₱70,000
Over
₱70,000
but
not
over
₱140,000
Over
₱140,00
0
but
not
over
₱250,000
Over
₱250,00
0
but
not
over
₱500,000
Over ₱500,000
(NIRC, Sec. 24 [A] [2])
The general rule is that resident citizens are taxable on
income from all sources within and without the
Philippines. Whereas, nonresident citizens, overseas
contract workers, seamen who are members of the
complement of a vessel engaged exclusively in
international trade, resident aliens, and nonresident
aliens are taxable only on income from sources within
the Philippines.
APPLICABLE TAX RATE
5%
+ 10% of the
excess
₱500
+
over
₱10,000
15% of the
excess
₱2,500
+
over
₱30,000
20% of the
excess
₱8,500
+
over
₱70,000
25% of the
excess
₱22,500
+
over
₱140,000
30% of the
excess
₱50,000
+
over
₱250,000
₱125,000 + 32%
--Q: Ms. C, a resident citizen, bought ready-to-wear
goods from Ms. B, a nonresident citizen.
a.
b.
A:
a.
107
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.
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)
YES. The income of Ms. B from the sale of ready-towear 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 Philippinesourced income is taxable in the Philippines.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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.
---
b.
c.
d.
2. Non-monetary compensation
a. Fringe benefit not subject to tax
TAXATION ON COMPENSATION INCOME
Exclusions from compensation income:
Compensation income includes all remuneration for
services rendered by an employee for his employer
unless specifically excluded under the NIRC (R.R. 2-98,
Sec. 2.78.1).
1.
2.
3.
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. 298, Sec. 2.78.1).
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 rank and file employee, such as but not limited
to:
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market rate
and the actual rate granted
6. Membership fees, dues and other expenses 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 (NIRC, Sec. 33 [B]; R.R. 3-98,
Sec. 2.33 [B])
Requisites for taxability of compensation income
[SAR]
1. Personal services Actually rendered
2. Payment is for such Services rendered
3. Payment is Reasonable
rendered
by
Fringe benefit subject to tax
De minimis benefit
13th month pay and other benefits and payments
specifically excluded from taxable compensation
income
The above exlcusions are discussed in detail below
The test is whether such income is received by virtue of
an employer-employee relationship.
Payment for the services
independent contractor
Separation
pay/retirement
benefit
not
otherwise exempt
Bonuses, 13th month pay, and other benefits not
exempt
Director’s fees
an
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.
Tax treatment for fringe benefits
If the benefit is not tax-exempt and the recipient is:
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.
---
1.
2.
Inclusions in compensation income:
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.
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 (NIRC, Sec. 33).
1. Monetary compensation
a.
Difference between Managerial, Supervisory and
Rank-and-File Employees
Regular salary/wage
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
108
Income Taxation
Managerial
employees
Supervisory
employees
Rank-andfile
employees
2.
Employees who are given powers or
prerogatives to lay down and execute
management policies and/or to hire,
transfer, suspend, lay-off, recall,
discharge, assign or discipline
employees.
Employees
who
effectively
recommend such managerial actions,
if the exercise of such authority is not
merely routinary or clerical in nature
but requires the use of independent
judgment.
Employees who are holding neither
managerial nor supervisory position.
3.
Property other than money and ownership is
transferred to the employee – the value of the fringe
benefit shall be equal to the fair market value of the
property as determined in accordance with the
authority of the Commissioner to prescribe real
property values (zonal valuation);
Property other than money BUT ownership is NOT
transferred to the employee – the value of the fringe
benefit is equal to the depreciation value of the
property (R.R. 3-98, Sec 2.33).
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.
Nature of a fringe benefit tax (FBT)
Purpose behind Fringe Benefit Tax
FBT is a final withholding tax imposed on the grossedup 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]).
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).
Grossed-up Monetary Value
This represents the whole amount of income realized by
the employee, which includes the net amount of money
or net monetary value of property which has been
received, plus the amount of fringe benefit tax thereon
otherwise due from the employee but paid by the
employer for and in behalf of his employee (R.R. 3-98,
Sec. 2.33).
--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.
---
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:
EMPLOYEE
Citizen, RA, NRA-EBT
NRA-NEBT
Special alien and any
Filipino employees who
are employed and
occupying the same
position
as
those
occupied or held by the
special alien employees.
Employees in special
economic zones (Clark
Special Economic Zone
and
Subic
Special
Economic and Free
Trade Zone)
GROSSED-UP
DIVISOR
68%
75%
85%
FBT
RATE
32%
25%
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 self-declaration of the individual
(Dimaampao, 2011).
15%
Fringe Benefit Tax as a deductible expense
75%/ 85%
25%/
15%
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.
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;
Salaries and wages of managerial or supervisory
employee, not subject to FBT
109
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
4.
Basic salary of managerial or supervisory employee is
excluded and not subject to FBT because it is part of his
compensation income.
5.
Compensation Income vs. Fringe Benefit
6.
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 nonpayment, can be
legally
demanded
to
pay the tax.
As to taxpayers
covered
As to treatment
COMPENSATION
INCOME
Part of the gross
income
of
an
employee
The employee is
liable to pay the
tax on his income
earned.
FRINGE
BENEFIT
GR:
Not
reported
as
part of the
gross income of
an employee
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.
Convenience of the Employer Rule
XPN:
Fringe
benefits given
to a rank-andfile employee
are included in
his
gross
income
The employer
pays the fringe
benefit tax on
behalf of the
employee.
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 the convenience
of the employer rule where the employer furnished
living quarters
Such shall not be considered as part of the employee’s
gross compensation income if:
a.
b.
2.
3.
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).
Requirements for the application of the convenience
of the employer rule in case of free meals
Managerial,
supervisory, and
rank-and-file
employees
Subject
to
creditable
withholding tax –
the
employer
withholds the tax
upon the payment
of
the
compensation
income.
Such shall not be considered as part of the employee’s
gross income if:
Managerial and
supervisory
employees
a.
b.
Subject to final
withholding tax
1.
2.
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)
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
Benefits which are considered necessary to the
business of the employer or are granted for the
convenience of the employer
Fringe benefits exempt from fringe benefits tax
1.
De minimis benefits, whether given to rank and file
employees or to supervisory or managerial
employees
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) (NIRC, Sec.
32; R.R. 3-98, Sec. 2.33 [C])
3.
4.
5.
110
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
Income Taxation
6.
7.
8.
9.
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)
NOTE: A housing unit is considered adjacent to the
premises if it is located within the maximum 50
meters from the perimeter of the business premises.
3.
Expenses treated as taxable fringe benefits
1.
2.
3.
--Q: X was hired by Y to watch over Y’s fishponds with
a salary of ₱10,000. To enable him to perform his
duties well, he was also provided a small hut, which
he could use as his residence in the fishponds. Is the
fair market value of the use of the small hut by X a
“fringe benefit” that is subject to the 32% tax
imposed by Sec. 33 of the NIRC? (2001 Bar)
4.
A: NO. X is neither a managerial nor a supervisory
employee. Only managerial or supervisory employees
are entitled to a fringe benefit subject to the FBT. Even
assuming that he is a managerial or supervisory
employee, the small hut is provided for the convenience
of the employer, hence does not constitute a taxable
fringe benefit (NIRC, Sec. 3).
---
2.
3.
4.
5.
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
Expenses treated as non-taxable fringe benefits
1.
Housing privilege subject to FBT
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]).
2.
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.
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).
Housing privilege exempt from FBT
Motor vehicle subject to fringe benefit tax
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 (NIRC, Sec. 2.33 [D] [1] [f]);
A motor vehicle shall be subjected to fringe benefits tax
whenever the employer:
1. Purchases vehicle in employee’s name, regardless
of usage of vehicle;
2. Provides employee cash for vehicle purchase;
3. Purchases car on installment in the name of the
employee;
4. Shoulders a portion of the purchase price;
5. Owns and maintains a fleet of motor vehicle for the
use of the business and employees;
6. Leases and maintains a fleet of motor vehicles for
the use of the business and employees.
NOTE: Benefit to said officials shall not be treated
as taxable fringe benefit in accordance with the
existing doctrine that the State shall provide its
soldiers with necessary quarters which are within
or accessible from the military camp so that they
can readily be on call to meet the exigencies of their
military service.
2.
A housing unit which is situated inside or adjacent
to the premises of a business or factory;
111
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON 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.
1.
2.
Interest on loan at less than market rate
3.
If the employer lends money to his employees free of
interest or at a rate lower than 12%, such interest
foregone by the employer or the difference of the
interest assumed by the employee and the rate of 12%
shall be treated as fringe benefit.
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
GR: The cost of life or health insurance and other nonlife insurance premiums borne by the employer are
taxable fringe benefits.
The rule shall apply to installment payments or loans
with interest rate lower than 12% (R.R. 3-98, Sec. 2.33
[D] [5]).
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. 3-98, Sec.
2.33 [D] [10]).
Expenses for foreign travel
GR: Fixed and variable transportation, representation
and other allowances 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:
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.
1. Ordinary and necessary in the pursuit of employer’s
business and paid or incurred by employee; and
2. Liquidated or substantiated by receipts or other
adequate documentation (R.R. 3-98, Sec. 2.33 [D] [7] [c]).
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.
Educational assistance to the employee or his
dependents
DE MINIMIS BENEFITS
GR: The cost of the educational assistance to the
employee which is borne by the employer shall be
treated as taxable fringe benefit.
These are facilities or privileges furnished or offered by
an employer to his employees 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.
XPN: A scholarship grant shall not be treated as taxable
fringe benefit if:
De minimis fringe benefits and their respective ceiling amounts
As per R.R. 2-98 and 3-98, as amended by R.R. 5-2008, 5-2011, 5-2011, 8-2012, and 1-2015, de minimis benefits include:
Monetized unused vacation leave credits of employees
Medical cash allowance to dependents of employees
Rice subsidy
Uniforms and clothing allowances
Actual medical assistance, e.g. medical allowance to
cover medical and healthcare needs, annual
medical/executive check up, maternity assistance, and
routine consultations
Laundry allowance
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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 exempt
regardless of the number of days.
Not exceeding ₱750 per semester or ₱125 per month
₱1,500 or one sack of 50-kg rice per month
amounting to not more than P1,500
Not exceeding ₱5,000 per annum (R.R. 8-2012)
Not exceeding ₱10,000 per annum
Not exceeding ₱300 per month
112
Income Taxation
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)
In the form of tangible personal property other than
cash or gift certificate with an annual monetary value
not exceeding ₱10,000
Gifts given during Christmas and major anniversary
celebrations
Not exceeding ₱5,000 per employee per annum
Daily meal allowance for overtime work
Benefits received by virtue of Collective Bargaining
Agreement (CBA) and productivity incentive scheme
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)
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).
All other benefits given by employers, which are not
included in the above enumeration shall NOT be
considered as de minimis benefits, and hence, shall be
subject to income tax, as well as to withholding tax on
compensation income. The benefits provided in the
Regulations shall apply to income earned starting the
year 2011 (R.R. 5-2011)
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).
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.
The threshold amount of P82,000 shall apply to the
13th-month pay and other benefits which covers
only the following:
De minimis benefits in excess of respective ceilings
1.
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.
2.
13TH MONTH PAY AND OTHER BENEFITS
Thirteenth-month pay equivalent to the mandatory
one month basic salary of officials and employees of
the government, (whether national or local),
including government-owned or -controlled
corporations, and or private offices received after
the 12th-month pay; and
Other benefits, such as Christmas bonus,
productivity-incentive bonus, loyalty award, 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. 32015).
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 (NIRC, Sec. 32 [B] [7] [e]).
Summary of tax implications of employees
SALARY
SICK
LEAVE/
VACATION
LEAVE/SERVICE
INCENTIVE
LEAVE
(SIL)
 Fixed salary – Taxable
 Other Benefits (ECOLA, 13th month pay, Christmas Bonus, Transportation/Representation
allowances, tips, etc) – the 1st ₱82,000.00 is exempted from income tax, any excess is
taxable.
 Transportation/Representation allowances
o If there is liquidation, not taxable.
o If there is no liquidation, taxable.
 If paid or availed of as salary of an employee who is on vacation or on sick leave
notwithstanding his absence from work, it constitutes taxable compensation. (R.R. 6-82)
Monetized value of unutilized vacation leave credits of private employees (RR 2-98)
 10 days or below – not taxable
 Any excess over 10 days is taxable
Sick leave credits of private employees - Always taxable
113
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Vacation and sick leave credits of government employees - Always tax-exempt
Service Incentive Leave - Not taxable
SEPARATION PAY
 It is only taxable if voluntarily availed of by the employee.
 If due to any cause beyond the control of the official or employee, it is not taxable.
 The phrase “for any cause beyond the control of the said official or employee” connotes
involuntariness on his/her part.
 Examples of involuntary separation:
a. Death
b. Sickness
c. Disability
d. Reorganization
e. Company at the brink of bankruptcy
 2nd, 3rd, 4th ad infinitum separation pay is not taxable as long as the employee is not at
fault.
 Any payment received on account of dismissal constitutes compensation regardless of
whether the employer is legally bound by contract, statute, or otherwise, to make such
payment. (Sec. 2.78.1(B)(1)(b), R.R. 2-98)
 Financial assistance with the condition that you have to leave the company – that amount
is taxable.
Taxable because it is income actually given by the employer
BACKWAGES
 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
RETIREMENT
BENEFITS
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
PAYMENTS
LEAVE
They are not taxable regardless of whether the recipient is a government or private
employee.
Kinds of personal exemptions
DEDUCTIONS FROM COMPENSATION INCOME
1.
The following are allowed as deductions from gross
compensation income:
1.
2.
Basic personal exemptions
exemptions, and
Premium
payments
on
hospitalization insurance.
and
health
Under the NIRC, as amended by R.A. 9504, there shall be
allowed a basic personal exemption amounting to
₱50,000 for each individual taxpayer regardless of
whether he is single, head of the family or married.
additional
and/or
In case of married individuals where only one of the
spouses is deriving gross income, only such spouse shall
be allowed the personal exemption (NIRC, Sec. 35 [A]).
The above deductions are discussed in detail below.
PERSONAL EXEMPTIONS
Wisconsin Plan
These are arbitrary amounts allowed as deductions from
gross income of an individual, representing personal,
living and family expenses of the taxpayer.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Basic Personal Exemption
It is a system which allows the deduction from gross
income of arbitrary amounts for personal, living or
family expenses of the taxpayer.
114
Income Taxation
2.
Additional Exemptions
Individual taxpayers not entitled to personal and
additional exemptions
There shall be allowed an additional exemption
amounting to ₱25,000 for each “qualified dependent”
not exceeding four (4).
1.
The additional exemption for dependent shall be claimed
by only one of the spouses in the case of married
individuals (NIRC, Sec. 35 [B]).
2.
Qualified dependents for purposes of additional
exemption
a.
b.
c.
d.
Legitimate, illegitimate or legally adopted child;
Chiefly dependent upon and living with the
taxpayer;
If such dependent is:
i. Not more than 21 years old;
ii. Unmarried;
iii. Not gainfully employed or
If such dependent:
i. Regardless of age;
ii. Is incapable of self-support, because of mental
or physical defect (R.R. 2-98, as amended by R.R.
10-2008, Sec. 2.79(I) (1) (B); NIRC, Sec. 35(B)).
Non-resident alien not engaged in business (NRANETB)
Resident aliens and Filipinos employed by and who
receive compensation from:
a. Regional or area headquarter or regional
operating headquarters of multinational
corporation established in the Philippines
b. Offshore banking units established in the
Philippines
c. Petroleum
service
contractors
and
subcontractors in the Philippines
NOTE: The above individual taxpayers are not allowed
to enjoy personal exemptions since they are taxed based
on gross incomes. Only individual taxpayers are
entitled to personal and additional exemptions.
Corporations are not entitled to such exemptions.
Summary of Rules
Taxpayer
Personal
Exemption

Additional
Exemption

NOTE: Parents, as well as brothers or sisters and other
collateral relatives, are not qualified dependents for
purposes of additional exemptions under R.A. 9504.
Resident citizen
Non-resident citizen


A foster child who has lived with his/her foster parents
for more than one year and who complies with all the
other requirements of a “dependent” is now considered
a dependent for claiming additional exemptions (R.A.
10165, Section 22[b]).
Resident alien


Non-resident
alien
engaged in trade or
business
Non-resident
alien
not engaged in trade
or business




“Living with the taxpayer”
Living with the person giving support does not
necessarily mean actual and physical dwelling together
at all times and under all circumstances. Thus, the
additional exemption applies even if a child or other
dependent is away at school or on a visit.
--Q: On 17 June 2008, R.A. 9504 was approved and
signed into law. The law increased the basic personal
exemption from P20,000 for a single individual,
P25,000 for the head of the family, and P32,000 for a
married individual to P50,000 for each individual. It
also increased the additional exemption for each
dependent not exceeding four from P8,000 to
P25,000. Are the increased personal and additional
exemptions applicable to the entire taxable year
2008 or prorated, considering that R.A. 9504 took
effect only on 6 July 2008?
Individual taxpayers who are entitled to personal
and additional exemptions
1.
2.
3.
Resident citizen
Non-resident citizen
Resident alien
Exemptions claimed by non-resident aliens
A: The increased personal and additional exemptions
should be applied to the entire taxable year 2008.
GR: A non-resident alien engaged in trade, business, or in
the exercise of a profession in the Philippines (NRA-ETB)
is not entitled to personal and additional exemptions.
Nothing expressly provides or even suggests a prorated
application of the exemptions for taxable year 2008.
Thus, there’s no reason to make any distinction between
the income earned prior to the effectivity of the
amendment (from 1 January 2008 to 5 July 2008) and
that earned thereafter (from 6 July 2008 to 31 December
2008) as none is indicated in the law. The principle that
the courts should not distinguish when the law itself
does not distinguish squarely applies to this case.
XPN: He can be entitled to personal and additional
exemption, subject to the rule on reciprocity:
1. His foreign country allows personal exemptions to
citizens of the Philippines not residing therein;
2. File an accurate return of his income from all
sources within the Philippines on time; and
3. Amount allowable is not to exceed our maximum
allowable personal exemption.
115
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
----Q: In January 2012, H and W were legally separated
by court order. H was awarded the custody of their
minor son, Rolly, and W, the custody of their minor
daughter, Shirley. To preserve somehow the ties
between the parent and the child living separately,
the court ordered H to shoulder the 60% of the
financial support for Shirley, and W, to shoulder
60% of the financial support for Rolly.
Moreover, the legislative policy of full taxable year
treatment of the personal and additional exemptions
has been in our jurisdiction as established, not by the
amendments introduced by R.A. 9504, but by the
provisions of Section 35 the 1997 NIRC. Said provision
does not allow the prorating of the personal and
additional exemptions even in case a status-changing
event occurs during the taxable year. Rather, it allows
the taxpayer the maximum exemptions that can be
availed, notwithstanding the fact that the latter's actual
status would qualify only for a lower exemption if
prorating were employed (Soriano v. Secretary of Finance,
G.R. Nos. 184450, 184508, 184538 & 185234, January 24,
2017).
----Q: Mr. E and Ms. F are both employees of AAA Corp.
They got married on February 14, 2011. On
December 29, 2011, the couple gave birth to triplets.
On June 25, 2013, they had twins. What were the
personal exemptions/deductions which Mr. E and Ms.
F could claim in the following taxable years (a) 2010,
(b) 2011, and (c) 2013? (2015 Bar)
In their respective tax returns for their 2012 income,
how much personal and additional exemptions
would H and W be separately entitled to, assuming
that each of them earned ₱600,000 in 2012?
A: H and W shall be entitled to only ₱50,000 each, the
basic personal exemption granted to individual
taxpayers regardless of their marital status. Neither H
nor W is entitled to any additional exemption because
neither Rolly nor Shirley is a qualified dependent. Rolly,
while living with H, is not dependent upon W for his
chief support. The same holds true for W with respect to
Shirley (Domondon, 2009).
----Q: May a senior citizen still qualify as a dependent
by a taxpayer/benefactor?
A:
f.
Both Mr. E and Ms. F can claim for personal
exemption up to P50,000.00.
g. Either Mr. E or Ms. F can claim for additional
exemption of P25,000.00 each for their children.
This is in addition to the personal exemption of
P50,000.00 which they can respectively claim.
According to the NIRC, only one of the spouses can
claim for additional exemption for every dependent.
h. Mr. E and Ms. F can claim for personal exemptions,
respectively. In addition, any one of them,
exclusively, can claim for the additional exemptions
in relation to their four dependents amounting to
P25,000.00 each. Under the NIRC, an individual may
claim up to four additional exemptions in
connection with his/her dependents.
----Q: In case of married individuals who are both
working, who is entitled to additional exemptions?
A: NO. A senior citizen even if not gainfully employed,
living with and dependent upon his benefactor for his
chief support, although treated as a dependent under the
Act, will NOT entitle the benefactor to claim additional
personal exemption of ₱25,000 (R.R. 7-2010, Sec. 11).
----Q: Charlie, a widower, has two sons by his previous
marriage. Charlie lives with Jane who is legally
married to Mario. They have a child named Jill. The
children are all minors and not gainfully employed.
a. How much personal exemption can Charlie
claim?
b. How much additional exemption can Charlie
claim? (2006 Bar)
A:
a. Charlie may claim the basic personal exemption of
₱50,000. Under R.A. 9504, an individual taxpayer may
claim the BPE irrespective of status.
A: Additional exemption for dependents shall only be
allowed to one of the spouses. The husband shall be the
proper claimant unless he explicitly waives his right in
favor of the wife in the Application for Registration
(NIRC, Sec. 35 [B]).
b. His children from his previous marriage who are
legitimate children and his illegitimate child with Jane
will all entitle him to additional personal exemption of
₱25,000 for each dependent, if apart from being minor
and not gainfully employed, they are unmarried, living
with and dependent upon Charlie for their chief support.
---
NOTE: Where the spouse is a non-resident citizen
deriving income from foreign sources, the employed
spouse within the Philippines shall be automatically
entitled to claim the additional exemptions for their
children.
----Q: In case of legally separated spouses, who is
entitled to additional exemptions?
STATUS AT THE END OF THE YEAR RULE
Rules in case of change of status during the taxable
year
A: Additional exemptions may be claimed only by the
spouse who has custody of the child or children (NIRC,
Sec. 35 [B]). The dependents must also be chiefly
dependent upon the claimant.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
If the taxpayer should have additional dependent during
the taxable year, he may claim the corresponding
116
Income Taxation
1.
additional exemptions, as the case may be, in full for
such year.
If any of the dependents dies or if any of such
dependents marries, becomes 21 years old, or becomes
gainfully employed during the taxable year, the taxpayer
may still claim the same exemptions as if the dependent
died, married, became 21 years old or became gainfully
employed at the close of such year.
2.
3.
If the taxpayer dies during the taxable year, his estate
may claim the personal and additional exemptions for
himself and his dependents, as if he died at the close of
such year.
4.
NOTE: If the spouses are qualified under “substituted
filing,” they need not file Income Tax Returns.
Summary of Rules:
CHANGE OF
STATUS
Death of the
taxpayer
Death of spouse
Marriage
Dependent
In case of married individuals who are still required to
file returns or in those instances not covered by the
substituted filing of returns, only one return for the
taxable year shall be filed by either spouse to cover the
income of the spouses, which return shall be signed by
the husband and wife, unless it is physically impossible
to do so, in which case, signature of one of the spouses
would suffice.
TREATMENT
Death of the
dependent
Additional
dependent
Dependent
becoming more
than 21 years of
age
Marriage of the
taxpayer
of
Gainful
employment of
dependent
Their marriage in 1990 had no effect on their
entitlement to the basic personal exemption of
₱50,000 which may be enjoyed irrespective of the
individual taxpayer’s status;
Their employment in 1991 by the same company
will make them liable to the income tax imposed on
gross compensation income;
Birth of their first child in 1992 would give rise to an
additional exemption of ₱25,000 for taxable year
1992;
Birth of their second child in 1993 would likewise
give rise to an additional exemption of ₱25,000 for
1993.
Estate may claim the personal
exemption of ₱50,000. Under R.A.
9504,
the
Basic
Personal
Exemption is fixed at ₱50,000
irrespective of status of the
taxpayer.
Taxpayer is still entitled to
additional exemption.
Taxpayer is still entitled to
additional exemption.
Taxpayer can still claim him or her
as dependent during the year the
dependent reach the age of 21.
For individuals receiving purely compensation income
from a single employer, although the income of which
has been correctly withheld, but whose spouse is not
entitled to substituted filing, the spouses are required to
file income tax returns.
PREMIUM PAYMENTS ON HEALTH AND/OR
HOSPITALIZATION INSURANCE OF AN INDIVIDUAL
TAXPAYER
Taxpayer is entitled to full
exemption for the particular
taxable year.
Surviving spouse may still claim the
full amount of ₱50,000.
Taxpayer can still claim him or her
as dependent for the particular
taxable year.
Taxpayer can still claim him or her
as dependent for the particular
taxable year.
The amount of premiums not to exceed ₱2,400 per
family or ₱200 a month paid during the taxable year for
health and/or hospitalization insurance taken by the
taxpayer for himself, including his family, shall be
allowed as deduction from gross income . Provided, that
sad family has a gross income of not more than
P250,000.00 for the taxable year.
In the case of married taxpayers, only the spouse
claiming the additional exemption for dependents shall
be entitled to this deduction (NIRC, Sec. 34 [M]).
--Q: Mar and Joy got married in 1990. A week before
their marriage, Joy received, by way of donation, a
condominium unit worth ₱750,000 from her parents.
After the marriage, some renovations were made at a
cost of ₱150,000. The spouses were both employed
in 1991 by the same company. On 30 Dec. 1992, their
first child was born, and a second child was born on
November 7, 1993. In 1994, they sold the
condominium unit and bought a new unit.
Only an individual taxpayer may claim health and
hospitalization insurance expenses as deduction.
Individual
taxpayers
whether
earning
purely
compensation income during the year or earning
business income or in practice of his profession, whether
availing of itemized or optional standard deductions
during the year.
Conditions in order to avail said deduction
1.
Under the foregoing facts, what were the events in
the life of the spouses that had income tax incidence?
(1997 Bar)
2.
A: The events in the life of spouses, Mar and Joy, which
had income tax incidence, are:
The health and/or hospitalization was taken by the
taxpayer for himself, including his family; and
Said family has a gross income of not more than
₱250,000 for the taxable year.
NOTE: For taxation of (1) Business Income/Income from
Practice of Profession, (2) Passive Income, and (3)
117
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: From the taxable income of ₱300,000, the income tax
payable is ₱65,000.
Capital Gains, refer to previous discussions under
“Classification of income subject to tax.”
Over ₱250,000 but
not over P500,000
₱50,000+30% of the excess
over ₱250,000
----Q: Assume that X is a non-resident alien not engaged
in trade or business. He earned gross income in the
amount of ₱1.5 million from his one-night concert in
the Philippines. How much will he pay for his income
tax?
TAXATION OF NON-RESIDENT ALIENS ENGAGED IN
TRADE OR BUSINESS
Non-Resident Aliens Engaged in Trade or Business are
taxed on their income derived from all sources within
the Philippines in the same manner as an individual
citizen or a resident alien individual, subject to the
schedule rate of 5-32% and are granted Personal and
Additional Exemptions, subject to the rule of reciprocity.
A: X 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.
---
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 alien doing
business in the Philippines.
TAXATION OF NON-RESIDENT ALIENS NOT ENGAGED
IN TRADE OR BUSINESS
INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
Non-Resident Aliens Not Engaged in Trade or Business
are taxed on their income received from all sources
within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed
or determinable annual or periodic or casual gains,
profits, and income, and capital gains, a tax equal to
twenty-five percent (25%) of such income.
The following individuals are exempt from income tax:
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. 7-2010).
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.”
Income tax of senior citizens
--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?
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: X’s taxable income for the year 2009 is ₱300,000
computed as follows:
Gross Income (₱25,000 x 12)
Less:
Basic Personal exemption
Additional Exemption (25K x 4)
PHHI
Net Compensation Income
Add: Net business income
Taxable income
₱300,000
(50,000)
(100,000)
--------150,000
150,000
₱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?
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
a.
118
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
Income Taxation
b.
c.



d.
e.
f.
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) (NIRC, Sec.
24[B][1]);
The 7.5% final withholding tax on interest
income from a depository bank under the
expanded foreign currency deposit system
(NIRC, Sec. 24[B][1]);
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%
3.
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 (NIRC, as amended by
R.A. 9504, Sec. 22 [HH]).
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 (NIRC, as amended
by R.A. 9504, Sec. 24 [A] [2]).
However, minimum wage earners receiving “other
benefits” exceeding P82,000 limit shall be taxable on the
excess benefits,
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
(NIRC, Sec. 24[B][2]);
Statutory Minimum Wage
It refers to the rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment (DOLE) (NIRC, as
amended by R.A. 9504, Sec. 22 [GG]).
NOTE: Effective June 2, 2016, the daily minimum wage
rate in NCR for non-agricultural sector is P491 (P481.00
basic wage+ P10.00 COLA) (National Wages and
Productivity Commission Per Wage Order No. NCR-20).
--Q: R.A. 9504 was approved and took effect on 6 July
2008. The law granted MWEs exemption from
payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay
and hazard. On 24 September 2008, the BIR issued
RR 10-2008 implementing the provisions of R.A.
9504. Decide the following:
a) Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only;
b) Whether an MWE who becomes non-MWE during
the year still qualifies for the exemption;
c) Whether they are entitled to basic personal
exemption;
d) 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 P82,000) is no
longer entitled to the exemption provided by R.A.
9504.
Capital gains tax from sales of shares of stock
not traded in the stock exchange (NIRC, Sec. 24
[C]; 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 (NIRC, Sec.
24 [D]).
Requirements in order for senior citizen to avail tax
exemption
1.
2.
If qualified, his name shall be recorded by the RDO
in the Master List of Tax-Exempt Senior Citizens for
that particular year, which the RDO is mandatorily
required to keep.
He must be qualified as such by the CIR or RDO of
the place of his residence;
He must file a Sworn Statement on or before January
31 of every year that his annual taxable income for
the previous year does not exceed the poverty level
as determined by the National Economic and
Development Authority (NEDA) thru the National
Statistical Coordinating Board (NSCB);
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
119
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Those employed by Foreign Embassies/Diplomatic
Missions
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.
Only the following shall be exempt from Philippine
income tax:
(1) Diplomatic agents who are not nationals or
permanent residents of the Philippines;
(2) Members of family of the diplomatic agent forming
part of his/her household who are not Philippine
nationals;
(3) 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;
(4) Members of the service staff of the mission who are
not nationals or permanent residents of the
Philippines; and
(5) 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).
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.
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) One who ceases to be an MWE is still entitled to the
personal and additional exemptions. The MWE
exemption is separate and distinct from the personal
and additional exemptions. One's status as an MWE
does not preclude enjoyment of the personal and
additional exemptions.
INCOME TAX ON CORPORATIONS
A corporation for income tax purposes shall:
Thus, when one is an MWE during a part of the year
and later earns higher than the minimum wage and
becomes a non-MWE, only earnings for that period
when one is a non-MWE is subject to tax. It also
necessarily follows that such an employee is entitled
to the personal and additional exemptions that any
individual taxpayer with taxable gross income is
entitled.
1.
Include:
a. Partnerships
b. Joint stock companies
c. Joint accounts (cuentas en participacion)
d. Associations, or
e. Insurance companies
2.
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.
d) 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.
b.
R.A. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards,
including the corresponding holiday, overtime, night
differential and hazard pays. The minimum wage
exempted by R.A. 9504 is distinct and different from
other payments including allowances, honoraria,
commissions, allowances or benefits that an
employer may pay or provide an employee.
Kinds of corporation under the NIRC
The treatment of bonuses and other benefits that an
employee receives from the employer in excess of the
P30,000 (now at 82,000) is taxable. The treatment of
this excess cannot operate to disenfranchise the
MWE from enjoying the exemption explicitly granted
by R.A. 9504 (Soriano v. Secretary of Finance, G.R. Nos.
184450, 184508, 184538 & 185234, January 24, 2017).
---
1.
2.
3.
3. Persons
exempted
agreement
under
international
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
A joint venture or consortium formed for
purposes of undertaking construction
projects or engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating or consortium
agreement under a service contract with the
government (NIRC, Sec. 22 [B]).
120
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 (NIRC, Sec. 22 [C])
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
Income Taxation
4.
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. 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
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 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 (cuentas en participacion), 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).
---
--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
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
4. Exempt
government
institutions
Special Resident Foreign Corporation
1. International carrier
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
TAXABILITY OF INCOME
DERIVED FROM SOURCES
Within the
Outside the
Philippines
Philippines
√
√
√
X
√
X
√
√
TAX BASE
Net taxable income
Net taxable income
GROSS income
Net taxable income
RATE
30%
30%
30%
10%
10%
30%
Tax-exempt
√
X
GROSS income
2 ½% of Philippine
gross billings
10% of gross income
15% of remittances
Tax-exempt
10%
2.
3.
4.
5.
√
X
GROSS income
25% of gross income
7 ½% of gross income
121
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
Lessor of vessels chartered by
Philippine nationals
4 1/2 % of gross
income
INCOME TAX ON DC AND RFC
Illustration:
Gross Sales
Less: Sales Returns/Allowances/Discounts
Cost of Goods Sold/Cost of Services
Gross Income
Less: Allowable Deductions________________
Taxable Income
x 30%________________________________________
NCIT due
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 (NIRC, Sec. 22 [C]).
Outline of taxes imposed on DC
1.
2.
3.
4.
5.
Normal corporate income tax (NCIT) - 30% of
taxable income from all sources within and without
the Philippines
Minimum corporate income tax (MCIT) - 2% of
gross income, if MCIT applies
Gross income tax (Optional corporate income tax) 15% of gross income, if qualified
Improperly Accumulated Earnings Tax - 10% of
improperly accumulated earnings
Final tax on passive income
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. 12-2007).
Cost of Goods Sold (COGs) in general
RFC is a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade
or business within the Philippines (NIRC, Sec. 28 [A][1]).
It includes all business expenses directly incurred to
produce the merchandise and bring them to their
present location and use.
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.
Cost of Goods
Merchandising
2.
3.
4.
5.
6.
7.
8.
9.
(COGs)
for
Trading
or
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.
Outline of taxes imposed on RFC
1.
Sold
NCIT – 30% of taxable income from sources within
the Philippines (NIRC, Sec. 28 [A])
MCIT – 2% of gross income, if MCIT applies
GIT (Optional corporate income Tax) - 15% of gross
income, if qualified
Final tax on passive income
Interest from deposits and yields and royalties
Capital gains from sale of shares not traded in the
stock exchange
Income derived under the Expanded Foreign
Currency Deposit System
Inter-corporate dividends
Branch profit remittance tax
Cost of Goods Sold (COGs) for a Manufacturing
Concern
This shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
Cost of Goods Sold (COGs) for a Service Concern (Cost
of Services)
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.
REGULAR TAX
Normal corporate income tax (NCIT) or Regular Tax
An income tax of thirty percent (30%) shall be imposed
upon the taxable income derived during the tacxable
year from all sources within and without the Philippines
for DC while from all sources within the Philippines for
RFC.
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;
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
122
Income Taxation
2.
3.
4.
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.
---
A ratio of 40% of income tax collection to total tax
revenue;
A VAT tax effort of 4% of GNP;
A 0.9% ratio of Consolidated Public Sector Financial
Position to GNP.
Nature of MCIT
NOTE: No authority yet has been given by the President.
Thus, the optional gross income tax is still not
implemented.
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.
--Q: What are the other conditions for the availability
of Optional Gross Income Tax? (NIRC, Sec. 27 [A])
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).
A:
2.
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
Gross sales/receipts
Sales/receipts
3.
4.
5.
Therefore, the taxable due for the taxable year will be
NCIT (30% of taxable income) or MCIT (2% of gross
income), whichever is HIGHER.
<=55%
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?
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.
---
MCIT (₱300,000 x 2%)
NCIT (₱100,000 x 30%)
Income tax due – NCIT
(whichever is higher)
NOTE: Gross income and cost of goods sold for purposes
of Optional Gross Income Tax is the same as defined in
MCIT.
₱ 6,000
₱30,000
₱30,000
2) A domestic corporation in its 4th year of operations
had a gross income of ₱400,000 and net taxable income
of ₱20,000. How much is the income tax due for the
year?
MINIMUM CORPORATE INCOME TAX
Concept and rationale of MCIT
MCIT (₱400,000 x 2%)
NCIT (₱20,000 x 30%)
Income tax due – MCIT
(whichever is higher)
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 self-assessment system
in capturing the true income of corporations.
₱8,000
₱6,000
₱8,000
--Q: What is the gross income for purposes of
computing MCIT?
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 underdeclaration of income or over-deduction of expenses
otherwise called tax shelters. The MCIT serves to put a
cap on such tax shelters.
A:
1.
2.
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).
As to sale of goods – it shall mean gross sales less
sales returns, discounts and allowances and cost of
goods sold.
As to sale of services – it shall mean gross receipts
less sales returns, allowances, discounts and cost of
services.
---
Imposition of MCIT
The MCIT shall be imposed:
b. If taxable income is zero;
c. If taxable income is negative; or
d. If MCIT is greater than the NCIT due (NIRC, Sec. 27
[E]).
--Q: What is the purpose of MCIT? (2001 Bar)
Coverage of the MCIT (2001 Bar)
123
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A: No. Since MCIT is an estimate of the normal income
tax, it cannot be claimed as a deduction.
----Q: CREBA assails the constitutionality of MCIT on the
contention that it violates due process. Is the
imposition of MCIT unconstitutional?
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.
A: No, the imposition of MCIT is not violative of due
process for the following reasons:
1.
MCIT is imposed on gross income and not on capital.
Thus, it is not arbitrary or confiscatory.
2. 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.
3. There is no legal objection to a broader tax base or
taxable income resulting from the elimination of all
deductible items and, at the same time, reduction of
the applicable tax rate. In as much as deductions are
a matter of legislative grace, Congress has the power
to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses
to tax (CREBA, Inc. v. Romulo, G.R. No. 160756, March
9, 2010).
----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.
--Q: When shall the MCIT commence to be imposed on
a corporation?
A: The MCIT is imposed beginning on the fourth taxable
year immediately following the year in which the
corporation commenced its business operations. For
purposes of the MCIT, the taxable year in which business
operations commenced shall be the year in which the
domestic corporation registered with the Bureau of
Internal Revenue (BIR), regardless of whether the
corporation is using the calendar year or fiscal year.
Firms which were registered with BIR in 1994 and
earlier years shall be covered by the MCIT beginning
January 1, 1998 (NIRC, Sec. 27 [E][1]; RR No. 9-98;
Dimaampao, J. 2015; Manila Banking Corporation v. CIR,
G.R. No. 168118).
--NOTE: Recognizing the birth pangs of businesses and the
reality of the need to recoup initial major capital
expenditures, MCIT commences only on the 4th taxable
year.
----Q: When is MCIT reported and paid?
a.
b.
A:
a.
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).
----Q: Can MCIT be allowed as a deduction from gross
income?
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
b.
124
As Ms. J's supervisor, what will be your advice?
What are the distinctions between regular
corporate income tax and minimum corporate
income tax? (2015 Bar)
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).
The distinctions between regular corporate income
tax and the minimum corporate income tax are the
following: 1. 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.
2. As to tax rate: Regular corporate income tax is
30% while minimum corporate income tax is 2%.
3. As to tax base: Regular corporate income tax is
based on the net taxable income while minimum
corporate income tax is based on gross income.
4. As to period of applicability: Regular corporate
income tax is applicable once the corporation
commenced its business operation, while minimum
Income Taxation
corporate income tax is applicable beginning on the
4th taxable year following the commencement of
business operations.
5. 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).
2.
3.
Carry-forward of the excess of MCIT
1.
2.
3.
4.
5.
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.
MCIT Limitations
1.
2.
Illustration:
A domestic corporation had the following data on
computations of the NCIT and MCIT for five years:
MCIT
NCIT
YEAR
4
80k
20k
YEAR
5
50k
30k
Excess:
(60k)
(20k)
YEAR
6
30k
40k
YEAR 7
YEAR 8
40k
20k
35k
70k
(20k)
40k
NCIT
higher
70k
Less:
Excess
of
MCIT
From
Year 4
From
Year 5
From
Year 7
Tax
Due:
4.
(40k)
5.
(20k)
(20k)
80k
50k
0
40k
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.
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.
Applicability of MCIT where a corporation is
governed party under NCIT and partly under a
special income tax system
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.
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. 9-98).
Suspension of the imposition of MCIT
Since certain businesses may be incurring genuine
repeated losses, the law authorizes the Secretary of
Finance, upon recommendation of the BIR, to suspend
the imposition of MCIT if a corporation suffers losses due
to any of the following:
1.
more than 6 months within a taxable period and
which has caused the temporary shutdown of
business operations;
Force Majeure – a cause due to an irresistible force
as by ‘Act of God’ like lightning, earthquake, storm,
flood and the like, and shall also include armed
conflicts like war or insurgency;
Legitimate Business Reverses – include substantial
losses due to fire, theft or embezzlement or for
other economic reason, as determined by the
Secretary of Finance (NIRC, Sec. 27 [E][3]; RR. No. 998, Sec. 2.27 [E] [4][b,c,d]).
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
Prolonged Labor Dispute – losses arising from a
strike staged by the employees which lasted for
125
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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.
6.
7.
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
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).
For purposes of branch profit remittance, income items
which are not effectively connected with the conduct of
its trade or business in the Philippines are not
considered branch profits. To be ‘effectively connected’,
it is not necessary that the income be derived from the
actual operation of the branch’s trade or business. It is
sufficient that the income arises from the business
activity in which the branch is engaged. The 15% final
tax should exclude profits on activities registered with
PEZA (Tabag, 2015).
INCOME TAX ON SPECIAL CORPORATIONS
The following are special corporations under the NIRC:
1. Domestic Corporation
i. Proprietary educational institutions and
hospital
ii. Non-profit hospital
iii. Government-owned or controlled corporations,
agencies or instrumentalities
iv. Depository banks (foreign currency deposit
units).
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.
2. Resident Foreign Corporation
i. International carrier doing business in the
Philippines.
ii. Off-shore banking units.
iii. Resident depository banks (foreign currency
deposit units).
iv. Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
Refer to previous discussions on “Deductions from Gross
Income.”
TAXATION ON PASSIVE INCOME AND CAPITAL GAINS
Refer to previous discussions on “Passive Income” and
“Dealings in Property.”
The above corporations are discussed in detail below.
PROPRIETARY EDUCATIONAL INSTITUTIONS AND
HOSPITALS
INCOME TAX ON NON-RESIDENT
FOREIGN CORPORATIONS
Propreitary 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 (NIRC,
Sec. 28 [B][1]).
It is any private school maintained and administered by
private individuals or groups with an issued permit to
operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
Outline of taxes imposed on a Non-Resident Foreign
Corporation (NRFC):
1.
2.
3.
4.
5.
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.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
10% preferential rate
Section 27(B) of the NIRC does not remove the income
tax exemption of proprietary non-profit hospitals as
charitable institutions under Section 30(E) and (G). The
effect of the introduction of Section 27(B) is to subject
the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and
proprietary non-profit hospitals, among institutions
covered by Section 30, to the 10% preferential rate
126
Income Taxation
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).
Difference in the tax treatment between a
proprietary educational institution and a non-stock
non-profit educational institution
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).
Proprietary educational institutions which are non-profit
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% (NIRC,
Sec. 27 [B]).
Predominance test
A non-stock non-profit educational institution is exempt
from tax on its revenues and assets actually, directly and
exclusively used for educational purposes (NIRC, Sec. 30).
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%.
NON-PROFIT HOSPITALS
A nonstock-nonprofit hospital that is operated for
charitable and social welfare purposes is exempt from
income tax under Section 30 (E) and (G) of the NIRC.
However, as provided in St. Luke's Medical Center, Inc.
vs CIR (2011), the nonstock-nonprofit hospital must
satisfy the following requisites in order to be entitled to
the exemption from income tax:
Unrelated trade/business/activity of a proprietary
educational institution
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.
1) It is a nonstock corporation;
2) It is operated exclusively for charitable purposes;
and
3) 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.
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).
Tax on Proprietary Non-Profit Educational Institutions and Non-Profit Hospitals
30%
Private, non-profit hospitals and
educational institutions whose gross
income from unrelated trade, business
or other activity exceeds 50% of total
gross income from all sources.
10%
Private, non-profit hospitals and
educational institutions whose gross
income from unrelated trade, business
or other activity does not exceed 50%
of total gross income from all sources.
EXEMPT
Organized and operated exclusively for
charitable purposes and no part of its
net income or asset shall belong to or
inure to the benefit of any member,
organizer, officer or any specific
person.
Hospitals and educational institutions
claiming to be proprietary non-profit
but do not meet the definition thereof.
GOVERNMENT OWNED OR
CONTROLLED CORPORATIONS
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.
GR: All corporations owned or controlled by the
government are taxed in the same manner that domestic
private corporations are taxed.
XPNs:
2. Government Service Insurance System (GSIS)
3. Social Security System (SSS)
4. Philippine Health Insurance Corporation (PHIC)
5. Philippine Charity Sweepstakes Office (PCSO)
6. Local Water District (LWD) (R.A. 10026 amending
Section 27[c] of NIRC)
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. Nevertheless, PAGCOR’s tax privilege of
paying five percent (5%) franchise tax in lieu of all other
127
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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, J., 2015).
---
taxes with respect to its income from gaming operations,
pursuant to P.D. 1869, as amended, is not repealed or
amended by Section 1(c) of R.A. No. 9337. Also,
PAGCOR’S income from gaming operations is subject to
the five percent (5%) franchise tax only and its income
from other related services is subject to corporate
income tax (PAGCOR v. BIR, G.R. No. 215427, December 10,
2014).
Off-line international carrier is subject to corporate
income tax
DEPOSITORY BANKS (FOREIGN CURRENCY DEPOSIT
UNITS)
An off-line airline having a branch office or a sales agent
in the Philippines which sells passage documents for
compensation or commission to cover off-line flights of
its principal or head office, or for other airlines covering
flights originating from Philippine ports or off-line flights,
is not considered engaged in business as an
international air carrier in the Philippines and is,
therefore, not subject to Gross Philippine Billings
Tax provided for in Section 28(A)(3)(a) of the Code nor
to the three percent (3%) common carrier's tax under
Section 118(A) of the same Code. This provision is
without prejudice to classifying such taxpayer under a
different category pursuant to a separate provision of
the same Code (RR 15-2002).
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 Bangko Sentral 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.
INTERNATIONAL CARRIER DOING BUSINESS IN THE
PHILIPPINES
Sec. 28 (A) (3) (a) of the 1997 NIRC does not, in any
categorical term, exempt all international air carriers
from the coverage of Sec. 28 (A) (1) of the 1997 NIRC.
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 subect to preferential rate or exempt from tax
on the basis of applicable tax treaty/international
agreement to ehich 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.
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.
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).
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.
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 BSPto transact
offshore baking business in the Philippines. OBUs are
allowed to provide all traditional banking services to
non-residents in any currency other than hilippine
national urrency. OBUs are forebidden to make any
transactions in Philippine Peso. Banking transactions to
residents are oimited and restricted (Tabag, 2015).
Reciprocity requires that Philippine carriers operating in
the Home Country of an international carrier are actually
enjoying the income tax exemption (RR 15-2013).
--Q: What is Gross Philippine Billings? (2005 Bar)
Income Exempt from Tax
Income derived from
1) Nonresidents
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
128
Income Taxation
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
These are corporations, at least 50% in value of the
outstanding capital stock of which or at least 50% of the
total combined voting power of all classes of stock
entitled to vote is owned directly or indirectly by or not
more than 20 individuals (R.R. 2-2001, Sec. 4).
NOTE: Corporations outside the above definition are
considered publicly-held corporations.
Income subject to 10% Final Tax
Interest income derived from foreign currency loans
granted to residents other han OBUs or local commercial
banks (Ibid).
--Q: What consists of “Improperly Accumulated
Earnings”?
RESIDENT DEPOSITORY BANKS (FOREIGN CURRENCY
DEPOSIT UNITS)
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).
---
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 Bangko Sentral 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.
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)
ROHQ AND RHQ OF MULTINATIONAL COMPANIES
Income tax rate of ROHQ is 10% of net income. ROHQ
is a branch established in the Philippines which is
engaged in any of the following qualifying services:
- 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.
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).
RHQ is a tax exempt entity. It is a branch establsihed in
the Phiippines 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
CORPORATIONS
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).
Domestic corporations and closely-held corporations are
subject to 10% improperly accumulated earnings tax
on their improperly accumulated earnings (NIRC, Sec. 29
[A]).
--Q: How can the “reasonable needs” of the business be
determined in order to justify an accumulation of
earnings? (2010 Bar)
Closely-held Corporations
A: IMMEDIACY TEST
129
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Prima facie instances of accumulation of profits
beyond the reasonable needs of a business
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).
1.
2.
3.
Investment of substantial earnings and profits of
the corporation in unrelated business or in stock or
securities in unrelated business
Investment in bonds and other long term securities
Accumulation of earnings in excess of 100% of paidup capital, not otherwise intended for the
reasonable needs of the business (R.R. No. 2-2001,
Sec. 7)
Prima facie evidence to show purpose
accumulation is Tax evasion or Tax avoidance
In order to determine whether profits are accumulated
for the reasonable needs, it must be shown that the
controlling intention of the taxpayer is manifest at the
time of accumulation, not subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits
must be used within a reasonable time after the close of
the taxable year (Cyanamid Philippines, Inc. v. CA, G.R. No.
108067, January 20, 2000).
of
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.
2. The earnings or profits of a corporation are
permitted to accumulate beyond the reasonable
needs of the business (R.R. No. 2-2001, Sec. 7).
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).
IAET not applicable to the following:
--Q: What constitute accumulation of earnings for the
reasonable needs of the business?
A:
1.
1.
2.
3.
4.
5.
6.
7.
8.
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.
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)
---
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Publicly-held corporations (NIRC, Sec. 29 [B][2])
Banks and other non-bank financial intermediaries
Insurance companies
Publicly-held corporations
Taxable partnerships
General professional partnerships
Non-taxable joint ventures
Enterprises duly registered with the Philippine
Economic Zone Authority under R.A. 7916, and
enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under R.A.
7227, as well as other enterprises duly registered
under special economic zones declared by law
which enjoy payment of special tax rate on their
registered operations or activities in lieu of other
taxes, national or local (R.R. 2-2001, Sec. 4)
EXEMPTIONS FROM TAX ON CORPORATIONS
The following organizations shall not be taxed in
respect to income received by them as such: (NIRC, Sec.
30)
1.
130
Labor, agricultural or horticultural organization, not
organized principally for profit;
a. Provincial fairs and like associations of a quasipublic 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,
Income Taxation
d.
donations, etc. is used exclusively to meet
necessary expenses of upkeep and operation
are thus exempt.
7.
b.
2.
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).
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
8. Non-stock, Non-Profit Educational Institutions;
9. Government Educational Institutions;
10. Mutual Fire Insurance Companies and like
Organizations;
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
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
Requisites for exemption:
a. Income is derived solely from assessments,
dues and fees collected from members;
b. Fees collected from members are for the 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).
11. Farmers, Fruit Growers or like Associations;
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
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)
6.
Civic league, provided that:
a. It is not organized for profit but operated
exclusively for purposes beneficial to the
community as a whole. In general,
organizations engaged in promoting the
welfare of mankind;
b. Sworn affidavit filed with the BIR showing the
following:
i. Character of the league or organization
ii. Purpose for which it was organized
iii. Actual activities
iv. Sources of income and disposition thereof,
and
v. All facts relating to the operation of the
organization which affects it right to
exemption.
vi. The copy of articles of incorporation, by
laws and financial statements should be
attached to the sworn affidavit
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.
No part of the net income inures to the benefit
of any private stockholder or individual
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.
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;
The foregoing exempt corporations have common
requisites for exemption:
131
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
A:
[PrInSE]
1. Not organized and operated principally for Profit;
2. No part of the net income Inures to the benefit of
any member or individual;
3. No capital is represented by Shares of stock; and
4. Educational or instructive in character.
GENERAL
PROFESSIONAL
PARTNERSHIP (GPP)
Formed by persons for
the sole purpose of
exercising their common
profession, no part of
income of which is
derived from engaging in
any trade or business
NOT a taxable entity
The moment they invest their income or receive income
from their properties, real or personal conducted for
profit, such income derived from those properties is
subject to tax.
NOTE: If religious, charitable or social welfare
corporations derive income from their properties or any
of their activities conducted for profit, income tax shall
be imposed on said items of income irrespective of their
disposition (CIR v. YMCA, G.R. No. 124043, October 14,
1998).
The distributive share of
the partners in the net
income is reportable and
taxable as part of the
partner’s gross income
subject to the scheduled
rates
NO need to file an income
tax
return
but
an
information return
NOT subject to double
taxation being taxed only
once
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.
Other corporations exempt from income tax under
Special Laws
1.
Cooperatives under R.A. 6938, the Cooperative Code
of the Philippines
Taxed once on its income
and again when the share
in the profits of the
partners is distributed;
then taxed as dividends
Registration of a partnership is immaterial for income
tax purposes. It is taxable as long as the following
requisites concur: [AI]
1. There is an Agreement, oral or writing, to contribute
money, property, or industry to a common fund; and
2. There is an Intention to divide the profits.
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.
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
NOTE: The partners shall be entitled to deduct their
respective shares in the net operating loss from their
individual gross income.
Classifications of partnerships for tax purposes
Distributive share of a partner in the net income of a
business partnership
General professional partnerships
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.
--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)
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Must file an income tax
return
Registration of partnership
TAX ON GENERAL PARTNERSHIPS
1.
2.
Considered
as
a
corporation
hence
a
taxable entity and its
income is taxable as such
The share of an individual
in the distributable net
income after tax of a
general partnership is
subject to a final tax
---
NOTE: 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).
2.
BUSINESS
PARTNERSHIP/
GENERAL PARTNERSHIP
Formed by persons for the
sole purpose of engaging
in any trade or business
132
Income Taxation
NOTE: In a business partnership, there is no constructive
receipt of distributive share in the 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 (NIRC,
Sec. 26).
--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?
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.
A: No, for the following reasons:
a.
b.
c.
--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:
The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common right or
interest in any property from which the returns are
derived. There must be an unmistakable intention to
form a partnership or joint venture (Obillos, Jr. v. CIR,
139 SCRA 436).
There is no contribution or investment of additional
capital to increase or expand the inherited
properties, merely continuing the dedication of the
property to the use to which it had been put by their
forebears (Ibid.).
Persons who contribute property or funds to a
common enterprise and agree to share the gross
returns of that enterprise in proportion to their
contribution, but who severally retain the title to
their respective contribution, are not thereby
rendered partners. They have no common stock
capital, and no community of interest as principal
proprietors in the business itself from which the
proceeds were derived (Pascual v. CIR, 166 SCRA
560).
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 incurred in meetings
with clients
a.
NOTE: The income from the rental of the house, bought
from 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.
---
b.
c.
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. Partners shall be liable for income
tax in their separate and individual capacities.
A:
a.
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 (NIRC, Sec. 55).
Partners shall nonetheless be liable for income tax in
their separate and individual capacities.
Computation of net income
133
What are the items in the above mentioned
earnings which should be included in the
computation of ABC Law Firm’s gross income?
Explain.
What are the items in the above-mentioned
payments which may be considered as
deductions from the gross income of ABC Law
Firm? Explain.
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)
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).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
b.
c.
Trusts
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).
The net income having been earned by the law firm
which is formed and qualifies as a general
professional partnership, is not subject to income
tax because the earner is devoid of any income tax
personality. Each partner shall report as gross
income his distributive shares, actuality or
constructively received, in the net income of the
partnership. The partnership is merely treated for
income tax purposes as a pass-through entity so
that its net income is not taxable at the level of the
partnership bur said net income should be
attributed to the partners, whether or not
distributed to them, and they are liable to pay the
income tax based on their respective taxable income
as individual taxpayers (Section 26, NIRC).
A trust is a right to the property, whether real or
personal, held by one person for the benefit of another.
It is:
 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).
Classifications of trust for tax purposes [TIP]
1.
2.
3.
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 (NIRC, Sec. 60 [A]).
ESTATES AND TRUSTS
XPNs:
1. Personal exemption is limited to only ₱20,000 (NIRC,
Sec. 62).
2. No additional exemption is allowed.
3. 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 (NIRC, Sec. 61 [A]).
Estate
An estate refers to the mass of properties left by a
deceased person.
NOTE: The income that is subject to income taxation is
the “income received by estates of the deceased persons
during the period of administration or settlement of the
estate (NIRC, Sec. 60(A)(3)).
NOTE: However, such deduction shall be included in
computing the taxable income of the beneficiaries,
whether distributed to them or not.
Income taxation for estates
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 (NIRC, Sec. 60 [A]).
Person required to file and to pay the income tax
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.
XPN:
1. Personal exemption is limited only to P20,000.
2. No additional exemption is allowed.
3. Distribution to the heirs during the taxable year of
estate income is deductible from the taxable income
of the estate (BIR Ruling 233-86).
XPN:
1. In a revocable trust, the income of the trust will be
returned to the grantor (NIRC, Sec. 63).
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 (NIRC, Sec. 64).
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 (NIRC, Sec. 61 [C]).
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.
Taxes payable under the income tax law when a
person dies
1.
2.
Income Tax for individuals from January to the time
of death (NIRC, Secs. 24, 25).
Income Tax of the estate, if the estate is under
administration or judicial settlement (NIRC, Sec. 60).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Taxable and tax-exempt trust
Irrevocable trust and revocable trust
Trust administered in the Philippines and trust
administered in a foreign country
134
Income Taxation
Employee’s trust
partners of an unregistered partnership or corporation
subject to income tax. 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).
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 (NIRC, See 60[B]).
Co-ownership is not taxable if the activities of the coowners 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 co-ownership.
Co-owners investing the income in a business for
profit
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).
If the co-owners invest the income in a business for
profit they would constitute themselves into a
partnership and such shall be taxable as a corporation.
--Q: Brothers A, B, and C borrowed a sum of money
from their father which amount together with their
personal monies was used by them for the purpose
of buying real properties. The real properties they
bought were leased to various tenants. The BIR
demanded the payment of income tax on
corporations, real estate dealer’s tax, and
corporation residence tax. However, A, B. and C seek
to reverse the letter of demand and be absolved from
the payment of taxes in question. Are they subject to
tax on corporations?
Any amount received by an employee as retirement
benefits shall be excluded from gross income subject to
conditions set forth under Sec. 32 [B] of the NIRC.
Income of trust not subject to tax but considered as
income of grantor subject to tax
Any part of the income of a trust, which is, or in the
discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such
part of the income may be:
1. Held or accumulated for future distribution to the
grantor;
2. Distributed to the grantor;
3. Applied to the payment of premiums upon policies of
insurance on the life of the grantor.
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?
TAX ON CO-OWNERSHIPS
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 copartnership 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).
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
Co-heirs who own inherited properties which produce
income should not automatically be considered as
135
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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).
----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?
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.
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).
---
The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting and
paying appropriate income taxes on their respective
share to the joint ventures profit (RR 10-2012).
Tax treatment of the co-venturer’s share in the joint
venture profit
TAX ON JOINT VENTURES AND CONSORTIUMS
Taxable
Joint
Venture
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).
However, a joint venture or consortium formed for the
purpose of undertaking construction projects is not
considered as corporation under Section 22 of the NIRC
provided:
Nontaxable
Joint
Venture
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).
The
respective
share in the joint
venture profit shall
be included in the
computation of the
corporate
venturer’s taxable
income subject to
normal corporate
income tax of 30%.
(Tabag, 2015)
Individual coventurer
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
subject
to
creditable
withholding
tax.
Consequently, the
same be included in
the computation of
the
individual
taxpayer’s taxable
income.
FILING OF RETURNS AND PAYMENT OF INCOME TAX
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
Income Tax Return (ITR)
A report made by the taxpayer to the BIR of all gross
income received during the taxable year, the allowable
deductions including exemptions, the net taxable income,
the income tax rate, the income tax due, the income tax
withheld, if any, and the income tax still to be paid or
refundable (Domondon, 2013).
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Corporate coventurer
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 inter-corporate
dividend which is
tax exempt.
136
Income Taxation
Period to file ITR of Individuals and Corporations
2.
Basic Tax
3.
The return of any individual required to file the same
shall be filed on or before April 15th day of each year
covering income for the preceding taxable year.
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 (P60,000).
XPNS: The following individuals shall not be required to
file an income tax return:
1. An individual whose gross income does not exceed
his total personal and additional exemptions for
dependents;
2. 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);
3. An individual whose sole income has been subjected
to final withholding tax;
4. A minimum wage earner or an individual who is
exempt from income tax (NIRC, Sec. 51).
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
2. Second Quarter return - August 15
3. Third Quarter return - November 15
4. Final adjusted (annual) return - April 15 of the
succeeding year (same with 1st quarter return)
DC and RFC
1. First, Second and Third Quarter returns – 60 days
after the close of each of the first 3 quarters of the
taxable year
2. Final adjusted (annual) return – On or before April
15 following the taxable year
NOTE: Individuals not required to file an income tax
return may nevertheless be required to file an
information return.
Final Withholding Tax on Passive Income
(Manual Filing)
Special Rules
1.
2.
January to November – 10th day of the month
following the month the withholding was made
December – January 15 of the succeeding year
a)
Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to
include the income of both spouses.
Capital Gains Tax
a)
b)
ITR of married individuals
Shares of stock
1. Ordinary Return – 30 days after each
transaction
2. Final Consolidated Return – on or before
April 15 of the following year
Real Property – 30 days following each sale or other
disposition (NIRC, Sec. 51 [C] [2])
Where it is impracticable to file one return, each spouse
may file a separate return of income but the returns so
filed shall be consolidated by the Bureau for purposes of
verification for the taxable year (NIRC, Sec. 51 [D]).
b)
Income of unmarried minors/children
Persons liable to file ITR
GR: The income of unmarried minors derived from
property received from a living parent shall be included
in the return of the parent.
a. Individual Taxpayers
INDIVIDUAL TAXPAYERS
GR: The following individuals are required to file an
income tax return:
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.
XPN:
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 (NIRC, Sec. 51 [E]).
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:
1. Duly authorized agent;
The following are also required to filed ITR:
1.
2.
3.
4.
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;
137
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
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
---
incurring penalties provided for erroneous,
false or fraudulent returns (NIRC, Sec. 51 [F]).
b. Corporate Taxpayers
Substituted filing
General Professional Partnership (GPP)
Substituted filing applies only if all of the following
requirements are present:
1. The employee received purely compensation
income (regardless of amount) during the taxable
year;
2. The employee received the income from only one
employer in the Philippines during the taxable year;
3. The amount of tax due from the employee at the end
of the year equals the amount of tax withheld by the
employer;
4. The employee’s spouse also complies with all 3
conditions stated above;
5. The employer files the annual information return
(BIR Form No. 1604-CF);
6. The employer issues BIR Form No. 2316 to each
employee.
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 (NIRC, Sec. 55).
Corporation
Every corporation subject to tax shall render a return
which shall be filed by the president, vice-president or
other principal officer, and shall be sworn to by such
officer and by the treasurer or assistant treasurer.(NIRC,
Sec. 52).
Returns of Corporations contemplating Dissolution
or Reorganization
--Q: Indicate whether each of the following individuals
is required or not required to file an income tax
return:
a.
b.
c.
d.
e.
Within thirty (30) days after the adoption of a resolution
or plan for its dissolution, or for the liquidation of the
whole or any part of its capital stock, including a
corporation which has been notified of possible
involuntary dissolution by the SEC of for its
reorganization, shall render a correct return to the CIR,
verified under oath, setting forth the items of such
resolution or plan and such other information (NIRC, Sec.
52 [C]).
Filipino citizen residing outside the Philippines
on his income from sources outside the
Philippines.
Resident alien on income derived from sources
within the Philippines.
Resident citizen earning purely compensation
income from two employers within the
Philippines, whose income taxes have been
correctly withheld.
Resident citizen who falls under the
classification of minimum wage earners.
An individual whose sole income has been
subjected to final withholding tax. (2015 Bar)
c. Taxable Estate and Trust
The fiduciary shall file a return if gross income is at least
P20,000 (NIRC, Sec. 65).
Where to file ITR
Except in cases where the Commissioner otherwise
permits, the return shall be filed with any of the
following:
1. Authorized agent bank,
2. Revenue District Officer,
3. Collection Agent or
4. 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.
A:
a. Not required. The income of a non-resident Filipino
citizen is taxable only on income sourced within the
Philippines. Accordingly, his income from sources
outside the Philippines is exempt from income tax
(Sec. 51A(1)(b), NIRC).
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
For non-resident citizens, the return shall be filed with
the
1. Philippine Embassy, or
2.
3.
nearest Philippine Consulate, or
be mailed directly to the CIR (NIRC, Sec. 51 [B]).
Confidentiality rule with respect to tax returns filed
with the BIR
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
138
Income Taxation
inquired into in unauthorized cases, under the pain of
penalty provided for in Sec. 270 of the NIRC.
The duty to withhold is different from the duty to pay
income tax. Indeed, the revenue officers generally
disallow the expenses claimed as deductions from gross
income, if no withholding tax as required by law or
regulations was withheld and remitted to the BIR within
the prescribed dates (Mamalateo, 2008).
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.
Purpose of the Withholding Tax System
Instances when inquiry into the income tax returns
of taxpayers may be authorized
1.
Inquiry into the ITR of taxpayers may be had when:
2.
1.
2.
3.
4.
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.
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.
When to withhold
It arises at the time an income payment is paid or
payable or accrued or recorded as an expense or asset,
whichever is applicable in the payor’s books, whichever
comes first (R.R. 2-98, Sec. 2.57.4, as amended by R.R. 122001).
Penalties for non-filing of returns
There shall be imposed, in addition to the tax required to
be paid, a penalty equivalent to:
The term “payable” refers to the date the obligation
becomes due, demandable or legally enforceable (R.R. 298, Sec. 2.57.4, as amended by R.R. 12-2001).
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
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.
b. 50% of the tax due
- Willful neglect to file the return within the period
prescribed
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).
WITHHOLDING TAX
Concept of Withholding Taxes
Taxes imposed or prescribed by the NIRC are to be
deducted and withheld by the payor-corporations
and/or persons for the former to pay the same directly
to the BIR. Hence, the taxes are collected practically at
the same time the transaction is made or when the
taxable transaction occurs. It is taxation at source
(Domondon, 2013).
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. L66838, December 2, 1991).
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).
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.
Importance of Withholding Taxes
In the operation of the withholding tax system, the payee
is the taxpayer– the person on whom the tax is imposed,
while the payor, a separate entity, acts no more than an
agent of the government for the collection of the tax in
order to ensure its payment.
Persons required to withhold taxes
The withholding taxes shall be withheld by the person
having control over the payment and who at the same
139
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
time claims the expenses. The following persons are
constituted as withholding agents:
-
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).
2.
Three types of CWTs:
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
(NIRC, Sec. 82).
a. Expanded withholding tax (EWT) - a kind of
withholding tax which is prescribed only for certain
payors and is creditable against the income tax due
of the payee for the taxable quarter year.
The Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of tax on the items of income payable to
natural or juridical persons residing in the
Philippines, by payor-corporation/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.
Duties and Obligations of the withholding agent
2.
3.
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
b. Withholding tax on compensation (WTC) –
applies to all employed individuals whether citizens
or aliens deriving income from compensation for
services rendered in the Philippines.
The employer is considred the withholding agent.
Every employer making payments of wages shall
deduct from and withhold tax, excep for MWEs.
Employer shall be liable if he fails to withhold and
remit.
Consequences for Failure to Withhold
1.
2.
3.
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 (NIRC, Sec. 251); and
Any income payment which is otherwise deductible
from the payor’s gross income will not be allowed as
a deduction if it is shown that the income tax
required to be withheld is not paid to the BIR (R.R.
18-2013, Sec. 2).
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).
Kinds of withholding taxes
Obligation of an employer required to deduct and
withhold a tax
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;
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
-
Withholding agent in case the employer is the
Government of the Philippines
1.
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).
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 year,
140
Transfer tax
and the amount of tax deducted and withheld in respect
of such wages.
the tax
withheld
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.
As to filing
of ITR
tax credit or may be
deducted from the
tax due or payable.
The
earner
is
required to file an
ITR.
c. Withholding Tax on Government Money
Payments – withheld by government offices and
instrumentalities, including government-owned or
controlled corporations and local government units,
before making any payments to private individuals,
corporations, partnerships and/or associations
i. Percentage Taxes – taxes withheld by National
Government
Agencies
(NGAs)
and
instrumentalities, including government-owned
and controlled corporations (GOCCs) and local
government units (LGUs), before making any
payments
to
non-VAT-registered
taxpayers/suppliers/payees
ii. Value Added Taxes (VAT) – taxes withheld by
National Government Agencies (NGAs) and
instrumentalities, including government-owned
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.
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.
Creditable Withholding Tax vs. Final Withholding
Tax
As to
income
subject of
the system
As to
whether
or not
income
should be
reported
as part of
the gross
income
As to the
effect of
CWT
FWT
Compensation
Income
Professional/talent
fees
Rentals
Cinematographic
film rentals and
other payments
Income payments to
certain contractors
The
income
is
required
to
be
included in the
gross income in ITR.
Passive
incomes
Fringe benefits
The tax withheld
can be claimed as a
cannot
be
claimed as tax
credit.
If the only
source
of
income
is
subject to final
tax, the earner
may no longer
file an ITR.
However, with
the
new
income
tax
forms (R.R. 22014, effective
2014),
taxpayers need
to
declare
those income
subjected
to
final tax in
their ITR.
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 (NIRC, Sec. 58 [A]).
The recipient
may not report
the
said
income in his
gross income
because
the
tax withheld
constitutes
final and full
settlement of
the
tax
liability.
The
tax
withheld
TRANSFER TAX
These are taxes imposed upon the privilege of passing
ownership of property without any valuable
consideration (Domondon, 2014).
Kinds of Transfer Taxes under the NIRC
1.
2.
141
Estate tax
Donor’s tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Differences between transfer tax and income tax:
Upon What Imposed
Rates Applicable
Exemptions
Estate Tax vs. Donor’s Tax
TRANSFER TAX
Tax on privilege to transfer property
Rates are lower:
Estate tax - 5% to 20%
Donor’s Tax - 2% to 15% or 30% in
case of stranger
Lesser exemptions
INCOME TAX
Tax on privilege to earn income
Rates are higher
individual income - 5% to 32%
More exemptions
DONOR’S TAX
Amount exempt
ESTATE TAX
After death of decedent
Transfer takes place only between natural
persons
P200,000
Rate of tax
5-20%
Grant of exemption
Sec. 87, NIRC
2-15% if donee is a relative; 30% if donee is a
stranger
Sec. 101, NIRC
Grant of deductions
Sec 86, NIRC
GR: None
Notice of death required in the following cases:
XPN: However, encumbrance on the property
donated, if assumed by the donee and amount
specifically provided by the donor as a
diminution of the property donated may be
claimed as deduction
GR: Notice of donation is not required
Nature of transfer
Notice requirement
1. Gross estate subject to estate tax
2. Gross estate exempt from estate tax but
exceeds P20,000.
NOTE: Even if the total value of the property left
behind is less than P20,000, if among the
properties left behind is a registrable property,
Notice of Death is still required.
Notice, when filed
Filing of return
Contents of return
Time of filing Return
During the lifetime of the donor.
May take place between natural and juridical
persons
P100,000
XPNs:
1. Donations to NGO worth at least P50,000.
Provided, not more than 30% of which will be
used for administration purposes.
2. Donation to any candidate, political party,
or coalition of parties
NOTE: Notice is required in the given
exceptions in order for the donation to be
exempt from donor’s tax and to claim full
deduction of the donation given to qualified
donee.
Within 2 months after the decedent’s death or
after qualifying as executor or administrator
1. A transfer subject to estate tax
A transfer subject to donor’s tax.
2. Exempt from tax but the gross estate exceeds
P200,000
3. Estate consists of registered or registrable
property, regardless of value of gross estate
1. Value of the gross estate
1. Each gift made during the calendar year
2. Deductions under Sec. 86, NIRC
which is to be included in computing net
3. Other pertinent information
gifts
4. If Gross Estate exceeds P2M, certified by a 2. The deductions claimed and allowable
CPA as to assets, deductions, tax due, 3. Any previous net gifts made during the
whether paid or not
same calendar year
4. The name of the donee
5. Such further information as may be
required by rules and regulations made
pursuant to law.
Within 6 months from death of decedent
Within 30 days after donation was made
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
142
TRANSFER TAX – ESTATE TAX
Extension for filing
return
Payment of tax due
Extension of payment
30 days in meritorious cases
None
Pay as you file
GR: Extension of payment is not allowed
Pay as you file
None
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 2years in case of extrajudicial settlement.
XPN to the XPN: When taxpayer is guilty of:
1. Negligence
2. Intentional disregard of rules and
regulation
3. Fraud
Requirement
for Bond not exceeding double the amount of the tax
grant of extension of and with such sureties as the commissioner
payment
deems necessary
to meet one of the requisites of a sound tax system, which
--is administrative feasibility.
Q: Are donations inter vivos and donations mortis
causa subject to estate taxes? (1994 Bar)
Estate planning is the manner by which a person takes
step to conserve the property to be transmitted to his
A: The general rule is that donations inter vivos are
heirs by decreasing the amount of estate taxes to be paid
subject to donor's taxes while donations mortis causa are
upon his death.
subject to estate taxes. However, if the transferor's
control over the property donated inter vivos extends up
It is considered as lawful because, “the legal right of a
to the death of the donor, such transfers in contemplation
taxpayer to decrease the amount of what otherwise
of death, revocable transfers, then these are subject to
would be his taxes or altogether avoid them by means
estate taxes.
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.
ESTATE TAX
Is the law valid?
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.
---
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).
NATURE, PURPOSE AND OBJECT
Nature of estate tax
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).
NOTE: The Estate Tax is based on the laws in force at the
time of death notwithstanding the postponement of the
actual possession or enjoyment of the estate by the
beneficiary (R.R. 2-2003, Sec 3).
A tax imposed on the privilege to transmit property at
death.
Characteristics of Estate tax
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).
1.
2.
3.
4.
5.
6.
7.
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
It is a transfer tax.
It is an excise tax.
It is a progressive tax.
It is a national tax.
It is a direct tax.
It is an ad valorem tax.
It is a general tax.
Theories for the imposition of estate tax
143
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
1.
2.
3.
4.
NOTE: Domestic and foreign corporations are subject
only to donor’s tax and not to estate tax because it is not
capable of death but may enter into a contract of
donation.
Benefits-protection theory – based on the power of
the State to demand and receive taxes on the
reciprocal duties of support and protection i.e.
distribution of the estate of the decedent;
Privilege theory/State-partnership theory – 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
Redistribution of wealth – receipt of inheritance
contributes to the widening inequalities in wealth.
By imposing estate tax, the value received by the
successor is thereby reduced and brings said value
into the coffers of the government
GROSS ESTATE AND NET ESTATE
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
Value of the estate after all deductions have been made
against the gross estate; subject to the graduated tax
rates (Sec. 6, RR 2-2003).
Requisites for the imposition of Estate Tax [DAD]
1.
2.
3.
Death of decedent;
Successor is Alive at the time of decedent’s death;
Successor is not Disqualified to inherit.
The main distinction between the gross estate and the net
estate is that the gross estate is the totality of all the
properties in which the decedent had an interest existing
at the time of his death while the net estate is what
remains after subtracting from the gross estate the
allowable decuctions. The gross estate is not subject to
tax while the net estate is the basis for imposing the
estate tax (Domondon, 2014).
Purposes in imposing the estate tax
1.
2.
3.
To generate additional revenue for the government
To provide an avenue for the equal distribution of
wealth; to reduce the concentration of wealth
To compensate the government for the protection
given to the decedent that enabled him to prosper
and accumulate wealth
Applicable Tax Rates (Sec. 84, NIRC)
If the net estate is:
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.
Over
TIME AND TRANSFER OF PROPERTIES
200K
500K
2M
5M
10M
The properties and rights are transferred to the
successors at the time of death (Art. 777, Civil Code).
The statute in force at the time of death of the decedent
governs the imposition of the estate tax.
The following are the individuals who are liable to
pay estate tax:
5%
8%
11%
15%
20%
of excess
over
200K
500K
2M
5M
10M
xxx
(xxx)
(xxx)
Xxx
%
Xxx
(xxx)
Xxx
Instances where amount of the gross estate is
significant
Resident decedent
a. Resident citizen
b. Non-resident citizen
c. Resident alien
1.
Non-resident decedent
a. Non-resident alien
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Exempt
0
15,000
135,K
465K
1,215,000
Plus
Gross Estate (Sec. 85)
Less: (1) Decuctions (Sec. 86)
(2) Net share of the surviving spouse
Net Taxable Estate
Multiply by Tax rate (Sec. 84)
Estate tax due
Less: Tax credit (if any) (Sec. 86[E]; 110[B]
Estate Tax Due, if any
CLASSIFICATION OF DECENDENT
2.
The tax
shall be
Estate tax formula:
NOTE: The estate tax accrues as of the death of the
decedent. Upon the death of the decedent, succession
takes place and the right of the State to tax the privilege
to transmit the estate vests instantly upon death (Sec. 3,
RR 2-2003). The estate tax return shall be filed within six
(6) months from the decedent's death (Sec. 90, NIRC).
1.
But
not
over
200K
500K
2M
5M
10M
144
Where the value of the gross estate exceeds
P20,000, the executor, administrator or any legal
heirs, as the case may be, within two (2) months
after the decedent’s death, or within like period after
qualifying as such executor or administrator, shall
TRANSFER TAX – ESTATE TAX
2.
3.
4.
give a written notice thereof to the Commissioner
(Sec. 89, NIRC).
In all cases of transfers subject to the tax imposed
herein, or where, though exempt from tax, the gross
value of the estate exceeds Two hundred thousand
pesos (P200,000), or regardless of the gross value of
the estate, where the said estate consists of
registered or registrable property such as real
property, motor vehicle, shares of stock or other
similar property for which a clearance from the
Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership
thereof in the name of the transferee, the executor,
or the administrator, or any of the legal heirs, as the
case may be, shall file a return under oath in
duplicate (Sec. 90 [A], NIRC).
Estate tax returns showing a gross value exceeding
Two million pesos (P2,000,000) 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).
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).
--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. The determination of the former is not separate
from the determination of the latter.
----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 is arrived at after adding all those
included and deducting the exclusions while net estate is
arrived at after subtracting the allowable deductions
from the gross estate.
---
DETERMINATION OF GROSS AND NET ESTATE
Basis for the valuation of gross estate
The value of the gross estate of the decedent shall be
determined by including the value at the time of his death
of all property, real or personal, tangible 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. 85, NIRC).
As to real
property
Composition of Gross Estate based on citizenship and
residency
Decedent


Citizen
Resident alien
1.
2.

Nonresident alien
1.
2.
3.
Gross Estate
Property
(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 with situs in the
Philippines,
unless
excluded on the basis of
reciprocity
As to
personal
property
As to shares
of stock
PROPERTY VALUATION
Whichever is higher between the fair
market value:
1. As determined by the Commissioner
(zonal value) or
2. As shown in the schedule of values
fixed by the provincial and city
assessors (assessed value)
NOTE: If there is no zonal value, use the
FMV in the latest tax declaration.
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 quoatation at a date nearest
the date of death.
(Tabag, 2015)
145
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
As to right
to usufruct,
use or
habitation,
as well as
that of
annuity
3.
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.
4.
5.
In determining the book value of common shares, the
following shall not be considered:
1.
2.
NOTE: These intangible personal properties are in effect
exceptions to the Latin maxim of Mobilia Sequuntur
Personam. This enumeration of intangible properties are
significant only for non-resident alien and for foreign
corporation because they are the only set of taxpayers
where the situs of the property is considered in
determining whether their property shall form part of the
gross estate or not. Remember that in case of Filipino
citizens (whether resident or non-resident) and resident
aliens all of their properties whether real or personal
wherever situated shall form part of the gross estate.
Appraisal surplus
The value assigned to preferred shares, if there are
any.
If there is an improvement, the value of improvement is
the construction cost per building permit or the fair
market value per latest tax declaration.
Fair Market Value 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.
--Q: When shall the intangible properties of the
nonresident be excluded from the gross estate?
--Q: For purposes of Estate and Donor’s tax, do we
adhere to mobilia sequutur personam?
A: These shall be excluded on the basis of reciprocity. No
donor’s or estate tax shall be collected in respect of
intangible personal property:
A: NO. As a general rule, the situs of an intangible
property is determined by the domicile or residence of
the owner. This is known as the principle of “mobilia
sequentur personam.” The principle, however, is not
controlling (a) when it is inconsistent with the express
provisions of statute, or (b) when justice does not
demand that it should be, as when the property has in
fact a situs elsewhere (Mamalateo, 2014).
---
1.
2.
The maxim mobilia sequuntur personam, upon which the
rule rests, has been described as a mere "fiction of law
having its origin in consideration 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 (Fargo v. Collector, G.R. No. L-46720, June 28,
1940). Since Sec. 104 of the NIRC provides that NRA may
be imposed an estate or donor’s tax with respect to his
intangible properties which has situs in the Philippines,
we are not bound by this maxim.
FranSha4-(Organized-Established-85-Foreign situs)
2.
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)
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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, 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: Will shares of stock issued by a foreign
corporation in favor of a non-resident form part of
the gross estate?
The following are intangible properties of a nonresident alien decedent which are considered as
situated in the Philippines, hence treated as part of
the gross estate:
1.
Shares, obligations or bonds by any foreign
corporation 85% of its business is located in the
Philippines;
Shares, obligations or bonds issued by any Foreign
corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines;
Shares or rights in any partnership, business or
industry Established in the Philippines (Sec. 104,
NIRC).
A: YES, if 85% of the business of the foreign corporation
who issued the stocks is located in the Philippines or if it
is considered to have obtained business situs in the
Philippines (Section 104, NIRC).
---
146
TRANSFER TAX – ESTATE TAX
--Q: Is there a need to disclose properties outside the
Philippines?
4.
5.
6.
7.
8.
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 (NRA) 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).
----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. 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.
of
NOTE: Nos. 2, 3, 4 and 7- 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). They are transfers intervivos which are
considered part of gross estate.
The above is 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 five (5)
hectares. Upon the death of Ortiz, his widow asked
you how she will consider the 100 hectares of
agricultural land in the preparation of the estate tax
return. What advice will you give her? (1994 Bar)
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).
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
five (5) hectares which under Sec. 78{a) of the NIRC still
forms part of "decedent's interest".
----Q: Is 13th month pay included in the gross estate?
How about Christmas bonus?
The other item, (h) proceeds from a life insurance policy,
may be included in his gross estate only when it was
Ralph Donald who took out the insurance upon his own
life, payable upon his death to his estate, or when the
beneficiary is a third person other than his estate who is
not designated as an irrevocable beneficiary (Sec. 85[E],
NIRC).
---
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?
ITEMS TO BE INCLUDED IN THE GROSS ESTATE
1.
2.
3.
Property passing under general power
appointment
Proceeds of life insurance
Prior interests
Transfers of insufficient consideration
Share of the Surviving Spouse (Sec 85, NIRC)
Decedent's interest
Transfer in contemplation of death
Revocable transfer
147
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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
3.
It is a transfer motivated by the thought of impending
death although death may not be imminent:
1.
2.
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
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 alone or in conjunction with any other
person to designate the person who will possess
or enjoy the property or income there from.
4.
XPN: In case of a bona fide sale for an adequate and full
consideration in money or money’s worth.
5.
NOTE: The concept of transfer in contemplation of death
has a technical meaning. This 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.
NOTE: A bona fide sale for an adequate and full
consideration in money or in money’s worth are transfers
not considered in contemplation of death and not part of
the gross estate.
--Q: Mr. Agustin, 75 years old and suffering from an
incurable disease, decided to sell for valuable and
sufficient consideration a house and lot to his son. He
died one year later.
Other descriptions for transfer in contemplation of
death
1.
2.
Transfer equivalent to testamentary disposition
Inter vivos in form, Mortis Causa in substance
Five instances which constitutes transfer in
contemplation of death according to Prof. Thomas
Matic
1.
In the settlement of Mr. Agustin's estate, the BIR
argued that the house and lot were transferred in
contemplation of death and should therefore form
part of the gross estate for estate tax purposes. Is the
BIR correct? (2013 Bar)
Secondary Life Estate – Retention by the grantor for
life of the right to enjoy the income or the fruits of
the property transferred in trust constitute what is
called reservation of a primary life estate. There is
no question in this case that the property would be
included in the gross estate of the grantor upon his
death.
A: 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
Illustration:
A creates a trust to pay the income to himself for life,
remainder to B or his estate.
2.
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.
Interests Analogous to Life Estates – where the
decedent had transferred certain shares of stock to
his daughter “subject to your giving me the first
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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.
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.
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.
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.
148
TRANSFER TAX – ESTATE TAX
the inter-vivos gifts considered transfers in
contemplation of death for purposes of determining
properties to be included in his gross estate? (2001
Bar)
--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 vivos or
mortis causa?
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 be taken into account
determining whether the transfer is one
contemplation of death
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?
in
in
1.
Age of the decedent at the time the transfers were
made
2. Decedent’s health, as he knew it at or before the time
of the transfers
3. The interval between the transfers and the
decedent’s death
4. The amount of property transferred in proportion to
the amount of property retained
5. The nature and disposition of the decedent
6. The existence of a general testamentary scheme of
which the transfers were a part
7. The relationship of the donee(s) to the decedent
8. The existence of a desire on the part of the decedent
to escape the burden of managing property by
transferring the property to others
9. The existence of a long established gift-making
policy on the part of the decedent
10. The existence of a desire on the part of the decedent
to vicariously enjoy the enjoyment of the donees for
the property transferred
11. The existence of the desire by the decedent of
avoiding estate taxes by means of making inter vivos
transfers of property (Estate of Oliver Johnson v.
Commissioner, 10 T.C. 680)
12. Concurrent making of will or making a will within a
short time after the transfer (Roces v. Posadas, 58
Phil. 108).
A: YES. These donations are inter vivos but 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).
NOTE: Inheritance tax has long been abolished for
failure to meet the sound tax principle of administrative
feasibility.
--REVOCABLE TRANSFER
Motives which negate transfer in contemplation of
death
1.
2.
3.
4.
5.
6.
7.
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:
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.
1.
2.
3.
149
Decedent alone;
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
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).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
he lived. Describe the donated property from the
taxation perspective. (2013 Bar)
The power to alter, amend or revoke shall be
considered to exist on the date of decedent’s death
even though:
1.
2.
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 91) 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.
---
The exercise of the power is subject to a precedent
giving of notice; or
The alteration, amendment or revocation takes effect
only on the expiration of a stated period for the
exercise of the power, whether or not on or before
the date of the decedent’s death
a. Notice has been given
b. The power has been exercised.
In such cases, proper adjustment shall be made
representing the interest which would have been
excluded from the power if the decedent had lived, and
for such purpose if notice has not been given or the
power has not been exercised on or before the date of his
death, such notice shall be considered to have been given,
or the power exercised on the date of his death (Sec.
85(C)(2), NIRC).
GENERAL POWER OF APPOINTMENT (GPA)
It is the right to designate by will or deed, without
restrictions, the persons who shall succeed to the
property of the prior decedent. The appointment could be
in favor of anybody, including himself, his estate, his
creditors, or the creditors of his estate.
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.
NOTE: A power is specific if it can be exercised only in
favor of one or more designated person or classes of
persons exclusive of the decedent, his estate, his creditors
and creditors of his estate, or if it expressly not
exercisable in favor of the decedent, his estate, his
creditors, or creditors of his estate.
--Q: Is it necessary that the decedent should have
exercised such right?
General Power of Appointment vs. Special Power of
Appointment
A: GR: No. It is sufficient that the decedent has the power
to revoke, though he did not exercise such power.
GENERAL POWER
OF APPOINTMENT
XPN: In case of a bona fide sale for an adequate and full
consideration in money and money’s worth.
---
As to
nature
Transfer not revocable, thereby not subject to estate
tax when:
1.
2.
3.
4.
As to tax
implications
The decedent’s power could only be exercised with
the consent of all parties having an interest in the
transferred property and if the power adds nothing
to the rights the parties possess under local law
(Lober v. United States, 346 US 335).
When the decedent has been completely divested of
the power at the time of his death (ibid.)
Where the exercise of the power by the decedent
was subject to a contingency beyond the decedent’s
control which did not occur before his death (Hurd v.
Commissioner 160F(2)610).
The mere right to name trustees. Neither is the
grantor’s limited power to appoint himself as trustee
under conditions which did not exist at his death (24
Am Jur. 2d, p 790).
As to
effects
Makes
appointed
property, for all
intents,
the
property of the
donee; thus, forms
part of the gross
estate of the Donee
Donee holds the
appointed property
with
all
the
attributes
of
ownership
under
the concept of an
owner
Not includible in the
gross estate of the
Donee when he dies
Donee holds the
appointed property
in trust or under the
concept of a trustee
Properties passing under a GPA is includible as part
of a decedent’s estate through
--Q: Mr. Mayuga donated his residential house and lot
to his son and duly paid the donor's tax. In the Deed
of Donation, Mr. Mayuga expressly reserved for
himself the usufruct over the property for as long as
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Donee
has
the
power to appoint
any
person
he
chooses or enjoy the
property
without
restriction
SPECIAL POWER OF
APPOINTMENT
Donee appoints the
successor to the
property who is
within
a
limited
group or class of
persons according to
the will of the Donor
1.
2.
150
Will
Deed executed in contemplation of death, or
intended to take effect in possession or enjoyment at,
or after his death
TRANSFER TAX – ESTATE TAX
3.
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).
1.
--Q: What is the reason for inclusion of the said
property in the Donee’s gross estate?
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).
A: The power of the Donee to dispose the said property
through power of appointment is equivalent to an act of
dominion, which is an essential attribute of ownership.
----Q: What properties passing under GPA are not
included as part of a decedent’s gross estate?
2.
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
Effectivity
At or after death
Means
By
trust
otherwise
or
Part of the gross estate to the extent of the
amount receivable when the beneficiary in a life
insurance is:
a. The estate of the decedent, his executor or
administrator taken out by the decedent upon
his own life regardless of whether the
designation is revocable or irrevocable; OR
b. A third person, other than the decedent’s estate,
executor, or administrator provided that the
designation is not irrevocable
GENERAL POWER
OF
APPOINTMENT
For his life or any
period
not
ascertainable w/o
reference to his
death or for any
period which does
not in fact end
before his death
Property
passed
under GPA and by
will or by deed
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;
c. Accident insurance proceeds. NIRC specifically
mentions only life insurance policies;
d. Proceeds of a group insurance policy taken out
by a company for its employees;
e. Proceeds of insurance policies issued by the
GSIS to government officials and employees are
exempt from all taxes;
f. Benefits accruing from SSS law;
g. Proceeds of life insurance payable to heirs of
deceased members of military personnel.
To determine the conjugal or separate character of
proceeds, the following factors are considered:
--Q: In his last will and testament, X bequeathed a
painting to his only son, Z. The will also granted Z the
power to appoint his wife, W, as successor to the
painting in the event of Z’s death. Z died and W
succeeded to the property. Should the painting be
included in the gross estate of Z and thus be subject
to estate tax? (2009 Bar)
2.
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.
---
--Q: What if the beneficiary who was irrevocably
designated caused the death of the insured?
1.
Policy taken before marriage – Source of funds
determines ownership of the proceeds of life
insurance
Policy taken during marriage
a. Beneficiary is estate of the insured – Proceeds
are presumed conjugal; hence, one-half share of
the surviving spouse is not taxable
b. Beneficiary is third person – Proceeds are
payable to beneficiary even in premiums were
paid out of the conjugal
A: Considered revocable unless he acted in self-defense.
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
PROCEEDS OF LIFE INSURANCE
When the proceeds of an insurance policy considered
as part or not part of the gross estate:
151
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
designated his wife, Y, as irrevocable beneficiary to
P1,000,000 and his son Z, to the balance of
P1,000,000, but in the latter designation, reserving
his right to substitute him for another.
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).
----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?
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.
b.
A: The premiums paid by the employer will not be
deductible from its employer’s gross income (Sec. 36
[A][4], NIRC). On the part of the employee, it will not be
included in his/her gross income of the based on Sec.
32(B)(1), NIRC. However, the life insurance proceeds will
form part of the gross estate of the decedent employee if
his designation is revocable. Conversely, if the
designation is irrevocable, it will not form part of his
gross estate.
----Q: If the property insured was destroyed after the
taxpayer’s death, will it still form part of the gross
estate?
A:
a.
b.
A: NO, it will be considered as a receivable of the estate.
Q: Antonia Santos, 30 years old, gainfully employed,
is the sister of Eduardo Santos. She died in an
airplane crash. Edgardo is a lawyer and he negotiated
with the airline company and insurance company and
they were able to agree to settlement of P10 million.
This is what Antonia would have earned as somebody
who was gainfully employed. Edgardo was her only
heir.
a.
b.
Is the P10 million subject to estate tax?
Should Edgardo report the 10 million as his
income being Antonia’s only heir? (2007 Bar)
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)
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 are all 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).
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Are the proceeds of the insurance subject to
income tax on the part of Y and Z for their
respective shares? Explain.
Are the proceeds of the insurance to form part of
the gross estate of X? Explain. (2003 Bar)
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 consideration received
shall be included in the gross estate.
152
TRANSFER TAX – ESTATE TAX
the gross estate; it is actually a deduction from the
decedent’s gross estate in order to arrive at the net estate.
This is applicable to:
1.
2.
3.
Transfers in contemplation of death
Revocable transfers
Transfers under general power of appointment
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.
---
NOTE: The above transfers should be made/exercised for
a consideration in money/money’s worth but is not a
bona fide sale for an adequate and full consideration in
money and money’s worth.
Exclusive properties under the system of absolute
community of properties (ACP):
It is also subject to Donor’s Tax if there is no
reference to:
1.
2.
c.
The following are the three exclusive properties under the
system of absolute community:
Revocable transfer
Contemplation of death
General power of appointment.
1.
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?
2.
3.
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 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?
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):
Art. 109 of the Family Code provides that the following
shall be the exclusive property of each spouse:
1.
2.
3.
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.
4.
On the second scenario, the insufficient consideration
shall not be considered as part of the gross estate because
the transfer does not fall under any of the following:
transfer in contemplation of death, revocable transfer, or
property passing under general power of appointment.
Hence, the difference of P200,000 (P500K-300K) is
subject to gift tax.
---
That which is brought to the marriage as his or her
own;
That which each acquires during the marriage by
gratuitous title (note that the fruits and income of
those acquired by gratuitous title during marriage
shall be community property);
That which is acquired by right of redemption, by
barter or by exchange with property belonging to
only one of the spouses; and
That which is purchased with exclusive money of the
wife or the husband.
--Q: Can you apply Sec. 85 in separation of property?
A: No, in that case, there will be no division.
--DEDUCTIONS FROM ESTATE
SHARE OF THE SURVIVING SPOUSE
RC, NRC or RA (EPTranFS-MAN)
1. Expenses,
losses,
indebtedness,
and
taxes (ELIT): FJC2ULT
a. Funeral expenses
b. Judicial expenses
for testamentary
or
intestate
--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
153
NRA (EPTraN)
1. Expenses,
losses,
indebtedness, and taxes
(ELIT):
a. Funeral expenses
b. Judicial expenses for
testamentary
or
intestate proceeding
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
proceedings
c. Claims against the
estate
d. Claims
against
insolvent persons
included in the
gross estate
e. Unpaid mortgages
or indebtedness
upon the property
f. Unpaid Taxes
g. Losses
incurred
during
the
settlement of the
estate
2. Property
previously taxed
3. Transfers
for
public use
4. The Family home
5. Standard
deduction
6. Medical expenses
7. Amount received
by heirs under R.A.
No. 4917 (Death
Benefits
from
Employer
of
decedent)
8. Net share of the
surviving spouse
in the conjugal or
community
property.
c. Claims against the
estate
d. Claims
against
insolvent persons
included in the
gross estate
e. Unpaid mortgages
or
indebtedness
upon the property
f. Unpaid taxes
g. Losses
incurred
during
the
settlement of the
estate
2. Property Previously
Taxed
3. Transfers for Public
Use
4. Net share of the
surviving spouse in
the
conjugal
or
community property.
Formula for computing ELIT deductible from the
gross estate of a NRA decedent
Philippine GE
World GE
X
World
ELIT
*GE=gross
estate
=
Deductible
ELIT from
Gross Estate
FUNERAL EXPENSES
If Filipino decedent (whether resident or non-resident) or
of a resident alien decedent:
The amount deductible is the lower between:
1. actual funeral expenses (paid or unpaid) or
2. 5% of the gross estate
**But not exceeding P200,000.
If the decedent is a Non-Resident Alien (NRA):
Amount of funeral expenses deductible from the gross
estate is the proportion which, actual funeral expenses or
amount equal to 5% of the gross estate whichever is
lower but not to exceed P200,000, bears to the value of
the entire gross estate wherever situated.
Illustration:
Gross Estate Philippines = P2M (20%)
Gross Estate Abroad
= P8M (80%)
WORLD GE
= P10M (100%)
Actual Funeral expenses (world) = P400K
The funeral expense deductible shall be the lower
between:
NOTE: The following expenses are not allowed as
deductions to non-resident aliens:
1. Family home
3. Medical expenses
2. Standard deduction
4. Death benefits
1.
(Phil. GE/World GE) x Actual F.E. World =
(2M/10M) x 400K =
20% x 400K
= P80K(lower)
2.
5% x Phil. GE =
5% x P2M = P100K
--Q: When is deduction not allowed from the gross
estate of NRA?
Since the lower between P80K and P100K is P80K, AND
because it did not exceed the P200K limit, P80K is the
deductible funeral expense. Note, the formula in #1
above is the same for the computation of the other
deductible ELIT.
A: No deduction shall be allowed in the case of a nonresident 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).
---
Funeral Expenses include:
1.
2.
3.
4.
EXPENSES, LOSSES, INDEBTEDNESS,
AND TAXES (ELIT)
5.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
6.
154
Mourning apparel of the surviving spouse and
unmarried minor children of the deceased, bought
and used in the occasion of the burial;
Expenses of the wake preceding the burial including
food and drinks;
Publication charges for death notices;
Telecommunication expenses in informing relatives
of the deceased;
Cost of burial plot, tombstone monument or
mausoleum but not their upkeep. In case deceased
owns a family estate or several burial lots, only the
value corresponding to the plot where he is buried is
deductible;
Interment and/or cremation fees and charges;
TRANSFER TAX – ESTATE TAX
7.
the extrajudicial settlement is clearly deductible expense
since such settlement effected the distribution of estate
to lawful heirs. Similarly, the attorney's fees paid to the
guardian of property of the deceased during his lifetime
should also be considered as a deductible administration
expense (CIR v. CA, G.R No. 123206, Mar. 22, 2000).
---
All other expenses incurred for the performance of
the ritual and ceremonies incident to the interment.
NOTE: Expenses incurred after the interment are not
deductible. Any portion of the funeral and burial expenses
borne or defrayed by relatives and friends of the deceased
are not deductible.
Items not included as judicial expenses of the
testamentary and judicial proceedings:
Medical expenses as of the last illness will not form part
of funeral expense but should be claimed as Medical
expenses.
1.
The expenses must be duly supported by receipts or
invoices or other evidence to show that they were
actually incurred. Any unpaid portion of the funeral
expenses incurred in excess of the P200,000 threshold is
not allowed to be claimed as a deduction under “claims
against the estate” (R.R.-2-2003).
2.
3.
JUDICIAL EXPENSES OF
TESTAMENTARY OR INTESTATE PROCEEDINGS
Expenses allowed as deduction under this category are
those incurred in the:
1.
2.
3.
4.
4.
Inventory-taking of assets comprising the gross
estate;
Administration;
Payment of debts of the estate;
Distribution of the estate among the heirs.
CLAIMS AGAINST THE ESTATE
Claims are debts or demands of a pecuniary nature which
could have been enforced against the deceased in his
lifetime and could have been reduced to simple money
judgments.
NOTE: These deductible items are expenses incurred
during the settlement of the estate but not beyond the
last day prescribed by law, or the extension thereof, for
the filing of the estate tax return.
Sources of claims (CTO):
1. Contract
2. Tort
3. By Operation of law
Examples of judicial expenses:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Expenditures incurred for the individual benefit of
the heirs, devisees, legatees
Compensation paid to a trustee of the decedent’s
estate when it appeared that such trustee was
appointed for the purpose of managing the
decedent’s real property for the benefit of the
testamentary heir
Premiums paid on the bond filed by the
administrator as an expense of administration since
the giving of a bond is in the nature of a qualification
for the office and not necessary for the settlement of
the estate
Attorney’s fees incident to litigation incurred by the
heirs in asserting their respective rights (ibid).
Claims against the estate may be claimed as a deduction
by a Filipino citizen, whether resident or not, or of a
resident alien decedent provided that:
Fees of executor or administrator
Attorney’s fees
Court fees
Accountant’s fees
Appraiser’s fees
Clerk hire
Costs of preserving and distributing the estate
Costs of storing or maintaining property of the estate
Brokerage fees for selling property of the estate (Sec.
6[A][2], R.R. 2-2003)
1.
2.
NOTE: The above list is not exclusive. Expenses, as long
as it qualifies as judicial cost, may be deducted. E.g. Cost
of publication in probate of will
At the time the indebtedness was incurred the debt
instrument was duly notarized; and
If the loan was contracted within three (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 its deductibility (2015 Bar)
[TiG-VaCS]
1.
--Q: May the notarial fee paid for the extrajudicial
settlement and the attorney's fees in the
guardianship proceedings be allowed as deductions
from the gross estate of decedent in order to arrive at
the value of the net estate?
2.
A: YES. Administration expenses, as an allowable
deduction from the gross estate of the decedent for
purposes of arriving at the value of the net estate, have
been construed to include all expenses essential to the
proper settlement of the estate. The notarial fee paid for
3.
155
The liability represents a personal obligation of the
deceased existing at the Time of his death except
unpaid obligations incurred incident to his death
such as unpaid funeral expenses and unpaid medical
expenses;
The liability was contracted in Good faith and for
adequate and full consideration in money or money’s
worth;
Must be a debt or claim must be Valid and
enforceable in court;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Indebtedness must not have been Condoned by the
creditor or the action to collect from the decedent
must not have prescribed (R.R. 2-2003); and
It must be duly Substantiated.
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).
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).
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).
4.
5.
--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.
--Q: During his lifetime, Mr. Sakitin obtained a loan
amounting to P10 million from Bangko Uno for the
purchase of a parcel of land located in Makati City,
using such property as collateral for the loan. The
loan was evidenced by a duly notarized promissory
note. Subsequently, Mr. Sakitin died. At the time of
his death, the unpaid balance of the loan amounted to
P2 million. The heirs of Mr. Sakitin deducted the
amount of P2 million from the gross estate, as part of
the "Claims against the Estate." Such deduction was
disallowed by the Bureau of Internal Revenue (BIR)
Examiner, claiming that the mortgaged property was
not included in the computation of the gross estate.
Do you agree with the BIR? Explain. (2014 Bar)
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, postdeath 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).
---
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)).
CLAIMS OF DECEASED AGAINST INSOLVENT
Requisites for deductibility:
1.
2.
The full amount of the receivables be included first
in the gross estate; and
The incapacity of the debtors to pay their obligation
is proven not merely alleged.
In the instant case, the interest of the decedent in the
property purchased from the loan where the said
property was used as the 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.”
---
NOTE: Judicial declaration of insolvency is not necessary.
It is enough that the debtor’s liabilities exceeded his
assets.
TAXES
UNPAID MORTGAGE
Taxes which have accrued as of the death of the decedent
which were unpaid as of the time of death are deductible.
Requisites for its deductibility:
1.
2.
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; and
The mortgage indebtedness was contracted in good
faith and for an adequate and full consideration in
money or money’s worth.
Taxes not deductible are those accruing after death, such
as:
1.
2.
3.
LOSSES
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.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Income tax on income received after death
Property tax not accrued before death
Estate tax due from the transmission of his estate
Requisites for its deductibility:
Losses are allowed as deductions from the gross estate of
a Filipino citizen whether resident or non-resident and
resident alien are allowed provided that they:
156
TRANSFER TAX – ESTATE TAX
1.
2.
3.
4.
5.
Were incurred during the settlement of the estate;
Arise from fire, storm, shipwreck, or other casualties,
or robbery, theft or embezzlement;
Are not compensated by insurance or otherwise;
Not claimed as a deduction from Income Tax; and
Occur not later than the last day prescribed by law or
any extension thereof for payment of the estate tax.
1.
2.
3.
4.
NOTE: Judicial expenses allowed as deductions include
only those incurred not later than the last day prescribed
by law or any extension thereof for the filing of the
return (6 months extendible to 30 days) while in losses,
the period is up to the last day prescribed by law or any
extension thereof for the payment of estate tax (6
months extendible to 2 years for extrajudicial settlement
while extendible for 5 years for judicial settlement).
5.
6.
The present decedent died within 5 years from
receipt of the property from the prior decedent or
donor;
The property on which vanishing deduction is being
claimed is located within the Philippines;
The property formed Part of the taxable estate of the
prior decedent or of the taxable gift of the donor;
The estate Tax on the prior succession or donor’s tax
on the gift must have been finally determined and
paid;
The property on which the vanishing deduction is
taken must be Identified as the one received or
acquired; and
No vanishing deduction was allowed on the same
property on the prior decedent’s estate.
Formula for computing the vanishing deductions:
Losses are allowed as deductions from the gross estate of
non-resident alien decedent:
Initial Basis (Value of property previously taxed)
LESS: Mortgage debt paid, if any (first deductions)
-------------------------------------------------------------New Initial basis
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.
New Initial Basis x (ELIT+Transfers for Public Use)
Gross Estate
--------------------------------------------------------------Second deduction
NOTE: Casualty loss can be allowed as deduction in one
instance only, either for income tax purposes or estate
tax purposes.
New Initial basis
LESS: Second deduction
------------------------------------Basis for Vanishing Deduction
Multiplied by 100%, 80%, etc. (as the case may be)
------------------------------------------------Vanishing deduction
PROPERTY PREVIOUSLY TAXED
(VANISHING DEDUCTIONS)
Vanishing Deduction is the deduction allowed from the
gross estate of citizens, resident aliens and non-resident
estates for properties which were previously subject to
donors or estate taxes.
Rules in vanishing deductions:
NOTE: The purpose of vanishing deduction is to lessen
the harsh effects of double taxation.
1.
The rate of deduction depends on the period from the
date of transfer to the death of the decedent, as follows:
PERIOD
1 day to 1 year
1 year and 1 day to 2 years
2 years and 1 day to 3 years
100%
80%
60%
3 years and 1 day to 4 years
4 years and 1 day to 5 years
40%
More than 5 years
2.
DEDUCTION
3.
4.
20%
No deduction
allowed
5.
NOTE: 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 subject to a transfer tax.
The second transfer would now be subject to a vanishing
deduction as provided in the code.
6.
Requisites for its deductibility: [5-P2INT]
157
The deduction allowed is only in the amount finally
determined as the value of such property in
determining the value of the gift, or the gross estate
of such prior decedent;
Only to the extent that the value of such property is
included in the decedent’s gross estate;
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;
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;
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; and
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.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
TRANSFER FOR PUBLIC USE
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).
Requisites for deductibility: [WIG-PD]
1.
2.
3.
4.
5.
The disposition is in a last Will and testament;
To take effect after Death;
In favor of the Government of the Philippines or any
political subdivision thereof;
For exclusive Public purposes; and
The value of the property given is Included in the
gross estate.
Requisites for its deductibility
1.
In case of a non-resident alien decedent, the property
transferred must be located within the Philippines and
included in the gross estate.
2.
Government of the Republic of the Philippines v.
National Government
GOVERNMENT OF THE
PHILIPPINES
Refers to the corporate
governmental entity through
which the functions of
government are exercised
throughout the Philippines,
including, save as the
contrary appears from the
context, the various arms
through
which
political
authority is made effective in
the Philippines, whether
pertaining to the autonomous
regions, the provincial, city,
municipal,
or
barangay
subdivisions, or other forms
of local government.
3.
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,
the
legislative and the
judicial (Mactan Cebu
v. Marcos, G.R. No.
120082, September 11,
1996).
NOTE: The estates of non-resident decedents are not
allowed to avail the family home deduction because
they do not have a family home in the Philippines
since aliens are expressly prohibited by the
Constitution from acquiring lands. For purposes of
availing the family home deduction to the extent
allowable a person may constitute only one family
home.
STANDARD DEDUCTION
P1 Million, without need of any substantiation (Sec. 86
(A)(5)).
Difference of Sec. 86(A)(3) and Sec. 87(D) of the NIRC
SEC. 86(A)(3)
It contemplates transfers
by a citizen or resident of
the Philippines in favor of
the Government of the
Philippines or any political
subdivision thereof, for
public purpose which are
deducted from the gross
estate
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;
The total value of the family home must be included
as part of the gross estate of the decedent; and
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, but not exceeding P1,
000,000.
NOTE: Nonresident (NRA) decedents are not entitled to
standard deduction because it is not among those
enumerated under Sec. 86 (b) of the NIRC.
SEC. 87(D)
It contemplates transfers
to social welfare, cultural
and
charitable
institutions which are
exempted from estate tax.
STANDARD
DEDUCTION in
ESTATE TAX
(Sec. 86 [A][5])
As to nature
FAMILY HOME
As to
amount of
deduction
Family home (maximum: P1,000,000)
As to
availability
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.
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.
Deduction
in
addition to the
other deductions
Fixed at P1,000,000
Available
to
resident citizens,
non-resident
citizens
and
resident aliens
OPTIONAL
STANDARD
DEDUCTION in
INCOME TAX
(Sec. 34 [L])
Deduction in lieu
of
itemized
deductions
40%
of
gross
income or gross
sales/receipts as
the case may be
Applies
to
all
individual
taxpayers except
non-resident
aliens, and non
resident
foreign
corporations
MEDICAL EXPENSES
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
158
TRANSFER TAX – ESTATE TAX
1.
All medical expenses (cost of medicine, hospital bills,
doctors’ fees, etc.) incurred (whether paid or unpaid),
but should not exceed P500,000
2.
Requisites for deductibility:
3.
1.
2.
4.
3.
4.
Medical expenses incurred by the decedent;
Incurred within one (1) year prior to the decedent’s
death;
Must be substantiated with receipts; and
Shall not exceed 500,000 whether paid or unpaid.
NOTE: Any amount of medical expenses incurred within
1 year prior to the decedent’s death in excess of P500,000
shall no longer be allowed as a deduction. Neither can
any unpaid amount thereof in excess of the P500,000
threshold nor any unpaid amount for medical expenses
incurred prior to the 1 year period from date of death
shall be allowed to be deducted from the gross estate as
claim against the estate (Sec. 86 (A)(6)).
Exclusions from estate under special laws:
1.
2.
--Q: State the conditions for allowing medical expense
as a deduction from the gross estate of a citizen or
resident alien for the purpose of imposing estate tax.
(2015 Bar)
3.
4.
A: All medical expenses incurred within one (1) year
before the death of the decedent which are duly
substantiated with receipts, provided that the total
amount thereof, whether paid or unpaid, does not exceed
Five Hundred Pesos (P500,000.00).
---
Estate Tax Credit is a remedy against international
double taxation to minimize the onerous effect of taxing
the same property twice.
Any amount received by the heirs from the decedent’s
employer as a consequence of the death of the decedentemployee in accordance with RA No. 4917 shall be
allowed as a deduction from the gross estate
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:
Requisites for deductibility:
2.
3.
1.
Amounts received by the heirs from the decedent’s
employer;
Received as a consequence of the death of the
decedent-employee; and
Amount is included in the gross estate of the decedent
(Sec. 86[A][7], NIRC).
2.
EXCLUSIONS FROM ESTATE
Exclusions from estate under Sec. 85 and 86 NIRC:
1.
2.
3.
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
Amounts received from the Philippine and United
States governments for damages suffered during the
last war (RA 227)
Benefits received by beneficiaries residing in the
Philippines under laws administered by the U.S.
Veterans Administration (RA 360)
Grants and donations to the Intramuros
Administration (PD 1616) (Mamalateo, 2014).
TAX CREDIT FOR ESTATE TAXES PAID IN A
FOREIGN COUNTRY
AMOUNTS RECEIVED UNDER RA 4917
1.
The Merger of the usufruct in the owner of the naked
title
The transmission or the delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
Fideicommissary
The transmission from the first heir, legatee or
donee in favor of Another beneficiary, in accordance
with the desire of the predecessor
All the bequests, devises, legacies or transfers to
social welfare, cultural and charitable Institutions no
part of the net income of which inures to the benefit
of any individual: provided that not more than 30%
of the value given is used for administrative
purposes (Sec. 87, NIRC).
Exclusive
Property
(capital/paraphernal)
of
surviving spouse (Sec. 85 (H), NIRC);
Property outside the Philippines of a non-resident
alien decedent;
Intangible personal property in the Philippines of a
non-resident alien if there is reciprocity.
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
(per country basis); and
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 (overall basis).
EXEMPTION OF CERTAIN ACQUISITIONS AND
TRANSMISSIONS
Transmissions exempted from the payment of estate
tax
1.
Exclusions from estate under Sec. 87 NIRC
[FAMI-30%]
159
The merger of usufruct in the owner of the naked
title
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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.
them is thus NOT EXEMPT form estate tax. However, it
should be noted that Sec. 101(a)(3) has declared that
these donations are EXEMPT. Therefore, donation to
non-stock, non-profit educational institution is EXEMPT
from donor’s tax.
--FILING OF NOTICE OF DEATH
2.
The transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary, Provided that:
a.
b.
Notice of death required when:
1. Transfers subject to tax; or
2. Even if exempt from tax, if gross value of estate
exceeds P20,000 (Sec. 89, NIRC).
The substitution must not go beyond one degree
from the heir originally instituted
The fiduciary or the first heir must be both
living at the time of death of the testator.
It is filed within 2 months (60 days) after the decedent’s
death or within the same period after qualifying as
executor or administrator.
e.g. X dies and leaves in his will a lot to his
brother, Y, who is entrusted with the obligation
to transfer the lot to Z, a son of X, when Z
reaches legal age. Y is the fiduciary heir and Z is
the fideicommissary. The transfer from X to Y is
subject to estate tax. But the transmission or
delivery to Z upon reaching legal age shall be
exempt from estate tax.
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:
It is filed by the executor, administrator, or any legal heir.
It is filed to the CIR in order to inform him that the estate
of the decedent is subject to tax.
ESTATE TAX RETURN
Estate tax return required in cases of:
1. Transfers subject to tax; or
2. Even if exempt from estate tax but the gross value of
estate exceeds P200,000; or
3. Regardless of the gross value of the estate, where the
said estate consists of registered or registrable
property (Sec. 90[A], NIRC).
It is filed within 6 months from the decedent’s death (Sec.
90[B], NIRC). Extension to file an estate tax return is
allowed in meritorious cases but not to exceed 30 days
(Sec. 90[C], NIRC).
i. no part of the net income of which inures to the
benefit of any individual; and
ii. Not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be
used by such institutions for administration
purposes (Sec. 87, NIRC).
The following shall file the estate tax return:
1.
2.
3.
--Q: What is the rationale for the exemption of
donation mortis causa to social welfare, cultural, and
charitable institutions?
Executor
Administrator
Any legal heir
Filing of estate tax return
If it is a 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.
2. If it is a non-resident decedent - To the RDO or to the
Office of the CIR (Sec. 90[D], NIRC).
1.
A: The law encourages donation mortis causa to social
welfare, cultural, and charitable institutions because of
the belief that the loss of revenue may be compensated
by the shifting of burden of ministrant function to these
institutions.
----Q: Is a donation mortis causa to non-stock, non-profit
educational institutions exempt from estate tax?
Contents of estate tax return
Must be under oath and shall contain the following:
1. The value of the gross state of the decent at the time
of his death or in case of a non-resident, not a citizen
of the Philippines, the part of his gross estate
situated in the Philippines.
2. The deductions allowed from the gross estate in
determining the estate.
3. Such part of the information as may at the time be
ascertainable and such supplemental data as may be
A: NO.
Although Art. XIV, Section 4(4) of the
Constitution provides that all grants, endowments,
donations, or contributions used actually, directly, and
exclusively for educational purposes shall be exempt from
tax, the foregoing Constitutional provision is not selfexecuting as it requires legislative enactment providing
certain conditions for exemption. Since Sec. 87 of NIRC
does not include non-stock, non-profit educational
institutions in the list of exempt institutions, donation to
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
160
TRANSFER TAX – ESTATE TAX
necessary to establish the correct taxes (Sec. 90[A],
NIRC).
2.
Requisites for the granting of extension to pay the
estate tax:
NOTE: If the estate tax return shows a gross value
exceeding P2M, the return shall be supported with a
statement duly certified by a CPA containing (a) itemized
assets at the time of his death, (b) itemized deductions to
the gross estate, and (c) amount of tax due, whether paid
or still outstanding.
1.
2.
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.
3.
4.
Not exceed 5 years in case of judicial settlement;
NOTICE OF DEATH
Conditions
1. In all cases of transfers subject
required for its
to tax; or
application
2. Where though exempt from
tax, the gross value of the
estate exceeds P20,000.
d. Who files
1.
2.
3.
Not exceed 2 years in case of extrajudicial settlement.
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; and
The Commissioner may require the posting of a bond
in an amount not exceeding double the amount of tax
to secure the payment thereof.
ESTATE TAX RETURNS (ETR)
1. Transfers subject to tax; or
2. Even if exempt but where gross value of estate exceeds
P200,000; or
3. Where estate consists of registered or registrable property.
Executor
Administrator
Any of the legal heirs
Where to file
Commissioner
Revenue
Internal
1. Resident decedent
a. Authorize agent bank
b. Revenue District Officer
c. Duly authorized City or Municipal treasurer of the place of
the decedent’s domicile at the time of his death or any
other place where the CIR permits the estate tax return to
be filed (Sec 90 D of the NIRC)
2. Non-Resident decedent- with the Commissioner of Internal
Revenue:
a. In case of non-resident citizen or non-resident alien with
executor or administrator in the Phil the ETR together
with TIN is filed with the RDO;
b. In case the executor or administrator is not registered the
ETR together with TIN filed with the RDO having
jurisdiction over the executor or administrator’s legal
residence;
c. In the absence of an executor or administrator in the Phil
the ETR together with the TIN shall be filed before RDO
No. 39-South Quezon City;
d. Any other place where the CIR permits the estate tax
return to be filed (Sec 90[D], NIRC).
Period of filing
Within 2 months (60 days) after
the decedent’s death or within
the same period after qualifying
as executor or administrator.
Within 6 months from the decedent’s death, except in
meritorious cases where the Commissioner may grant
reasonable extension not exceeding 30 days.
of
161
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
--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.
distributive share bears to the value of the total net
estate.
Instances when a Certificate of Payment of Tax from
the Commissioner is required:
1.
2.
3.
a.
b.
A:
a.
b.
Does CIR have the power to extend the payment
of estate tax?
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)
4.
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 the posting of a bond to secure the
payment of the tax (Sec. 91[B], NIRC).
NO. The valuation of properties comprising the
estate of a decedent is the fair market value as of the
time of death. No other valuation date is allowed by
law (Sec. 88, NIRC).
---
5.
6.
7.
Effects for granting an extension of time to pay estate
taxes:
8.
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)).
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
Instances where the request for extension of time to
pay estate tax should be denied
1.
2.
3.
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 mortis causa,
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 inter vivos 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 inter vivos 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 inter vivos 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, sociedad anonima, 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.
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.
Negligence
Intentional disregard of rules and regulations
Fraud.
The following shall pay the estate tax:
Distribution of the estate be made
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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
162
TRANSFER TAX – DONOR’S TAX
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).
3.
--Q: Differentiate deficiency estate tax (Sec. 93) from
delinquency estate tax (Title X).
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.
A: Deficiency arises when tax paid is less than the
amount due while delinquency arises when there is
either failure to pay amount due or refusal to pay the tax
due.
---
NOTE: There shall, therefore, be as many clearances
(Certificates Authorizing Registration) as there are many
properties releases because they have been paid for by
the installment payments of the estate tax. The
computation of the estate tax, however, shall always be
on the cumulative amount of the net taxable estate. Any
amount paid after the statutory due date is approved by
the Commissioner or his duly authorized representative,
the imposable penalty thereon shall only be an interest.
Nothing in this paragraph, however, prevents the
Commissioner from executing enforcement action
against the estate after the due date of the estate tax
provided that all the applicable laws and required
procedures are followed/observed (R.R. No. 2-2003).
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.
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.
Subject of donor’s tax:
The subject of donor’s tax is the gift or donation. Article
725 of the Civil Code defines a gift or donation as “an act
of liberality whereby a person disposes gratuitously of a
thing or right in favor of another who accepts it.”
--Q: A tax refund was filed by a taxpayer. Pending said
action, taxpayer died. Will the tax refund form part
of his gross estate?
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).
A: It depends. If there is a legal and factual basis, it will.
Otherwise, it will not be included.
---
Kinds of donations:
1.
Three situations when deficiency occurs:
1.
2.
No return was filed, therefore, no tax was paid.
A return was filed but paid less than the amount of
tax due;
A return was filed but did not pay any tax;
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.
Distinctions between Donation inter vivos and Donation mortis causa (Mamalateo, 2014)
As to consideration
As to form
DONATION INTER VIVOS
It is not made out of the donor’s generosity,
although the subject matter is not delivered at
once, or the delivery is to be made post mortem,
which is a simple matter of form and does not
change the nature of the act.
It is perfected upon knowledge of the donor of
the acceptance of the donee. Such contract is
consensual in nature.
163
DONATION MORTIS CAUSA
It is made in consideration of death, without
the donor’s intention to lose the thing
conveyed or its free disposal in case of
survival.
Being testamentary in nature, it should be
embodied in a last will and testament (Art.
728, Civil Code).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
As to effectivity
Personal property – oral or in writing
If value exeeds 5K, the donation and
acceptance must be in writing
Real property – must be in a public instrument
The effect is produced while the donor is still
alive.
As to irrevocability
The transfer is irrevocable.
As to acceptance
Acceptance is a requirement.
Transfers subject to donor’s tax:
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;
3.
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.
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;
5.
6.
taxable gift and thus assessed Mrs. Barbera as a
donor. Was the BIR correct? (2013 Bar)
Transfer in trust or otherwise, whether the gift is
direct or indirect and whether the property is real
or personal, tangible or intangible;
2.
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:
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.
1.
(Reason: In general renunciation, there is no
donation since the renouncer has never become the
owner of the property/share renounced.)
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.
2.
--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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
The transfer conveys no title or ownership to
the transferee before the death of the
transferor, or the transferor retains the
ownership, full or naked, of the property
conveyed; it is the donor’s death that
determines the acquisition of or the right to
the property.
The transfer is revocable before the
transferor’s death and revocability may be
provided indirectly by means of a reserved
power in the donor to dispose of the
property conveyed.
Being in the form of a will, it is never
accepted by the donee during the donor’s
lifetime.
3.
164
The transfer of stocks in a corporation organized as
a mutual benefit association, to its members, which
transfer is merely a conversion of the ownermember 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
TRANSFER TAX – DONOR’S TAX
4.
5.
ownership from the trustor to the trustee and is
then not subject to donor’s tax (BIR Ruling No. 41605, October 6, 2005).
The transfer of conjugal properties in favor of the
children pursuant to a court order arising from the
declaration of nullity of marriage of the parents is
not subject to donor’s tax since there is no donative
intent on the part of the spouses, because the
transfer is only in compliance with the court order.
Neither is the transfer subject to capital gains tax
and documentary stamp tax as the transfer is
considered a delivery of presumptive legitime (BIR
Ruling No. DA-414-06, July 4, 2006.).
A company’s act of extending its credit line to its
sister company for the latter’s bank loan, is not
considered a transfer of property by gift because
there is no intention on the part of the company to
donate anything of value, the transaction being
purely loan accommodation and for a legitimate
purpose which is to support the sister company.
Furthermore, the company has the right to be
indemnified by its sister company in the event the
latter fails to pay the loan obligation (BIR Ruling No.
DA-710-06, Dec. 14, 2006.) (Paras, pp. 761-762).
Requisites for a gift to be taxable [ADIC]
1.
The donor’s capacity shall be determined as of the
time of the making of the donation (Art. 737, NCC).
2.
Donative Intent
NOTE: 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.
3.
4.
Acceptance by the donee
Actual or constructive Delivery of gift
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
pursuant to the pertinent provisions of the Civil Code of
the Philippines and the Family Code of the Philippines
(Par. 1., Sec. 12, R.R. 2-2003).
NATURE, PURPOSE AND OBJECT
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.
--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)
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, R.R. 2-2003).
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.
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.
---
--Q: When does an incomplete gift become a complete
one, subject to donor’s tax?
A: A gift that is incomplete because of reserved powers
becomes complete when either:
1.
2.
Two-Fold Purpose of Donor’s tax:
1.
2.
Capacity of donor to donate
To supplement estate tax
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
The donor renounces the power to recover; or
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).
---
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
REQUISITES OF VALID DONATION
165
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
2.
A sold some of her shares of stock in X Co. to her key
executives in X Co. These executives are not related
to A. The selling price is P3, 000,000, which is the
book value of the shares sold but with a market
value of P5, 000,000. A's cost in the shares sold is P1,
000,000. The purpose of A in selling the shares is to
enable her key executives to acquire a proprietary
interest in the business and have a personal stake in
its business.
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.
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.
--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.
---
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: 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
Sale/exchange/transfer of property for insufficient
consideration
Rule regarding transfer for less than adequate and
full consideration:
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.
---
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.
Condonation/remission of debt
Rule
regarding
indebtedness:
forgiveness/condonation
of
XPN: 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.
If the creditor condones the indebtedness of the debtor
the following rules apply:
1. On account of debtor’s services to the creditor the
same is in taxable income to the debtor.
2. If no services were rendered but the creditor simply
condones the debt, it is taxable gift and not a taxable
income.
--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.
CLASSIFICATION OF DONOR
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Liable to pay donor’s tax:
1.
166
Resident
a. Resident citizen
b. Non-resident citizen
c. Resident alien
TRANSFER TAX – DONOR’S TAX
d.
2.
Domestic corporation
b.
Non-resident
a. Non-resident aliens
b. Foreign corporation
NOTE: A corporation, domestic or foreign, cannot be
made liable to pay estate tax, but may be liable to pay
donor’s tax.
c.
DETERMINATION OF GROSS GIFT
Gross gifts – All property, real or personal, tangible or
intangible, that was given by the donor to the donee by
way of gift, without the benefit of any deduction (Sec. 104,
NIRC).
Net gift is the net economic benefit from the transfer
that accrues to the donee.
NOTE: If a mortgaged property is transferred as a gift,
but imposing upon the donee the obligation to pay the
mortgage liability, then the net gift is measured by
deducting from the fair market value of the property the
amount of mortgage assumed.
d.
--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.
COMPOSITION OF GROSS GIFT
Included in the gross gifts:
1.
a.
b.
c.
d.
A:
a.
that this value is one of the two values mentioned as
provided under Sec. 81 now 88(B) of the NIRC.
NO, because the computation of the gift tax is
cumulative but only insofar as gifts made within the
same calendar year. There is no legal justification
for treating two gifts effected in two separate
calendar years as one gift.
Dino gained an income of 19 million from the sale.
Dino acquires a carry-over basis which is the basis
of the property in the hands of the donor or P1
million. The gain from the sale or other disposition
of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis
for determining gain [Sec. 34(a), NIRC]. Since the
property was acquired by gift, the basis for
determining gain shall be the same as if it would be
in the hands of the donor or the last preceding
owner by whom the property was not acquired by
gift. Hence, the gain is computed by deducting the
basis of P1 million from the amount realized which
is P20 million.
If the commercial lot was received by inheritance,
the gain from the sale for P20 million is P5 million
because the basis is the fair market value as of the
date of acquisition. The stepped-up basis of P15
million which is the value for estate tax purposes is
the basis for determining the gain (Sec. 34(b)(2),
NIRC).
---
How much is the value of the gifts in 1994 and
1995 for purposes of computing the gift tax?
Explain.
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.
Dino subsequently sold the land to a buyer for P
20 Million. How much did Dino gain on the sale?
Explain.
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)
2.
For resident (RC, NRC, RA)
a. Real property wherever situated (within &
without the Philippines);
b. Personal property wherever situated, tangible
or intangible.
For non-resident (NRA);
a. Real property situated within the Philippines;
b. Personal property:
i. Tangible property situated within the
Philippines
ii. Intangible personal property with situs in the
Philippines unless exempted on the basis of
reciprocity
VALUATION OF GIFTS MADE IN PROPERTY
1.
2.
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
Personal property - the fair market value of the
property given at the time of the gift shall be the
value of the gross gift.
Real property - the fair market value as determined
by the CIR (zonal value) at the time of donation or
the value fixed by the assessor (assessed value),
whichever is higher (Sec. 102).
If there is no zonal value, the taxable base is the fair
market value that appears in the latest tax
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.
167
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
--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)
NOTE: If there’s only one foreign country, the tax credit
shall be the lower between actual tax paid and Limitation
A. If there are donations in more than one country, the
tax credit shall be the lower between (a) actual tax paid
and (b) lower between Limitation A and Limitation B.
A: The valuation of Mr. L’s gift to his children is the fair
market value (FMV) of the property at the time of
donation. It is the higher of the FMV as determined by
the Commissioner or the FMV as shown in the schedule
of values fixed by the provincial or city assessors. In this
case, for the purpose of computing donor’s tax, the
proper valuation is the value prepared by the City
Assessors amounting to P12,500,00.00 because it is
higher than the FMV determined by the CIR.
---
2.
3.
EXEMPTIONS OF GIFTS FROM DONOR’S TAX
Transactions exempt from donor’s tax:
1.
4.
5.
6.
7.
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 (R.A. 7549)
Donation under the “Adopt-a-School Program” (R.A.
8525)
Exemption under other special laws.
Gifts made by a resident (RC, NRC, RA) that are
considered exempt from donor’s tax:
TAX CREDIT FOR DONOR’S TAXES PAID IN A
FOREIGN COUNTRY
1.
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.
2.
Only donors who are citizens or residents at the time of
the donation are entitled to claim tax credit.
3.
Limitations on tax credit:
Specific exemption - net gifts of the amount of
P100,000 or less are exempt
Dowries or gifts made on account of marriage and
before its celebration or made within one year
thereafter by parents to each of their legitimate,
recognized natural, or adopted children to the
extent of the first Ten thousand pesos (P10,000)
each parent
Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to any
political subdivision of the said Government
Gifts in favor of: [CARTER-CuPS]
The following are the limitations to the tax credit:
1. The amount of credit shall not exceed the same
proportion of the tax against such credit is taken,
which the net gifts situated within such country
taxable under Philippine laws bears to the entire net
gifts (Per country basis)
2. The amount of the tax credit shall not exceed the
same proportion of the tax against which such credit
is taken, which the donor’s net gifts situated outside
the Philippines taxable under Philippine laws bears
to his entire net gifts (Overall basis)
4.
Formula in computing the donor’s tax credit:
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 Philippline
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.).
a.
b.
c.
d.
e.
f.
g.
h.
i.
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):
Net gifts (outside Philippines) X Phil. Donor’s tax
Net gifts (world)
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
168
Charitable
Accredited NGOs
Religious
Trust foundations
Educational institutions
Research institutions
Cultural foundations
Philanthropic organizations
Social welfare corporations
TRANSFER TAX – DONOR’S TAX
proper nuptias (Section 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)
Requisites for exemption of dowries
1.
2.
3.
4.
5.
The gift is given on account of marriage;
The gift is given before the celebration of marriage
or within 1 year thereafter;
Donor is the parent or both parents;
Donee is the legitimate, recognized natural or legally
adopted child of the donor; and
Maximum amount of the exemption is P10,000 for
each child that may be claimed by each parent.
A: The spouses should each donate a P110,000.00
portion of the value of the property in 2015 then each
should donate P100,000.00 in 2016.
----Q: The Congregation of Mary Immaculate donated a
parcel of land and a dormitory building located along
Espana 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)
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, R.R.
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.
A: NO. Gifts in favor of educational and/or 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).
---
Requisites for the exemption of gifts made to the
CARTER-CuPS (Sec. 101, NIRC)
1.
2.
3.
4.
5.
Donee is incorporated as a non-stock, non-profit
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.
Gifts made by a non-resident (NRA) which are
exempt from donor’s tax
1.
2.
--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.
b.
c.
d.
3.
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;
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%);
Two (2) donations are made by the spouses to
members of the family, while two (2) other
donations are made to strangers;
Two (2) donations made by the spouses to
Roberto are entitled to deduction from the gross
gift as donation proper nuptias.
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 personal properties
Under Sec. 104, the following intangible properties shall
be considered as situated in the Philippines for estate
and donor’s tax purposes:
1. Franchise which must be exercised in the
Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima Organized or
constituted in the Philippines in accordance with its
laws; (domestic corporation)
A: d. Two (2) donations made by the spouses to Roberto
are entitled to deduction from the gross gift as donation
169
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
3.
4.
5.
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.
---
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).
Requirements for exemption from donor’s tax of
athlete’s prizes and awards:
1.
However, no tax shall be collected with respect to
donation of intangible personal property (Reciprocity
Rule):
a.
b.
2.
3.
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.
The donation must be prizes and awards given to
athletes in local and international tournaments and
competitions;
Held in the Philippines or abroad; and
Sanctioned by their respective sports association
(Sec. 1, R.A. 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.
---
--Q: Are donations for political campaign purposes
exempted from donor’s tax?
Exemption provided under adopt-a-school program:
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; R.R.
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)
Under R.A. 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.
Exempted from donor’s tax under other special laws:
1.
RA 2707 - Donation to International Rice Research
Institute (IRRI)
2. RA 3676 - Donation to Ramon Magsaysay Award
Foundation (RMAF)
3. RA 3850 - Donation to Philippines Inventors
Convention (PIC)
4. PD 181 - Donation to Integrated Bar of the
Philippines (IBP)
5. PD 205 - Donation to the Development Academy of
the Philippines
6. Donation to social welfare, cultural or charitable
institution, no part of the net income of which
inures to the benefit of any individual, if not more
than 30% of the donation shall be used by the donee
for administration purposes
7. PD 292 - Donation to Aquaculture Department of
the Southeast Asian Fisheries Development Center
of the Philippines
8. RA 8492 - Donation to the National Museum
9. RA 1006 - Donation to the National Library
10. PD 294 - Donation to the National Social Action
Council
(NSAC)
A: The answer must be qualified. Section 99(C) of the
NIRC explicitly provides that any contribution in cash or
in kind to any candidate, political party or coalition of
parties for campaign purposes shall be governed by the
Election Code, as amended. On the other hand, Section 13
of the Republic Act No. 7166 specifically states that any
provision of law to the contrary notwithstanding, any
contribution in cash or kind to any candidate or political
party or coalition of parties for campaign purposes, duly
reports to the Commission on Elections (COMELEC) shall
not be subject to the payment of any gift tax.
Thus, if Mr. De Almacen reported his campaign
contributions of Php 500,000.00 in cash, tarpaulins, tshirts, umbrellas, caps, and other campaign materials to
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
170
VALUE-ADDED TAX
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 welltrained 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)
Contents of the Donor’s Tax Return, which shall be made
under oath, in duplicate (Sec. 103(A), NIRC):
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;
5. Relationship of the donor to the donee;
6. Such further information as the Commissioner may
require.
TAX BASIS
1.
Where the donee is a relative – The donor is taxed
according to graduated tax rates in Section 99 (A),
NIRC. Under said section, the tax for each calendar
year shall be computed on the basis of the total net
gifts made during the calendar year in accordance
with the following schedule:
100K
200K
But not
over
100K
200K
500K
500K
1M
1M
3M
5M
3M
5M
10M
Over
A: Yes, because the donation is to be wholly used for
administration purposes.
--PERSON LIABLE
Any person making a donation is required to file donor’s
tax return unless the donation is specifically exempted
under NIRC or other special laws. He is required for
every donation to accomplish under oath a donor’s tax
return in duplicate (Sec. 98, NIRC).
10M
Donor’s tax return is filed within thirty (30) days after
the date the donation or gift is made.
2.
Formula in computing taxable donation:
The tax
shall be
Exempt
0
2,000
Plus
of excess
over
2%
4%
100K
200K
14,000
6%
500K
44,000
204,000
404,000
8%
10%
12%
1M
3M
5M
1,004,000
15%
10M
When the donee or beneficiary is stranger - the tax
payable by the donor shall be thirty percent (30%) of
the net gifts.
--Q: When the donee or beneficiary is a stranger, the
tax payable by the donor shall be 30% of the net gifts.
For purposes of this tax, who is a stranger? (2000
Bar)
1. On the first donation of the year
Gross Gift
Less: deductions/exemption
-----------------------------------------Net gift
x Tax rate
-----------------------------------------Donor’s tax
A: A stranger is one who is not a brother, sister, spouse,
ancestor and lineal descendant, or a relative by
consanguinity in the collateral line within the 4th civil
degree of the donee. A donation is also considered made
to a stranger when it is between business organizations
or between an individual and a business organization
(Sec 10B, R.R. 02-03).
---
2. On subsequent donation during the year
Gross gift
Less: Deductions/exemptions
------------------------------------------Net gift
Add: Prior net gifts
----------------------Aggregate net gifts
x Applicable tax rate
-----------------------------Donor’s tax on aggregate gifts
Less: prior donor’s tax paid
-------------------------------------------Donor’s tax payable on this date
Difference between cumulative and splitting method:
Donor’s Tax Return
171
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
The donor makes two
or more donations
during
different
calendar years.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
shifted or passed on to the buyer, transferee or lessee of
goods, properties or services.
amount to double taxation
because the tax paid for the
previous methods will be
considered as tax credit for
succeeding donations.
XPN: In case of importation, the importer is the one
liable for VAT (Sec. 4.105-2, R.R. 16-2005).
Significance of the two methods mentioned
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).
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.
Classification of transactions under the VAT system
1.
XPN: 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.
2.
Advantages in imposing VAT
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%.
1.
2.
3.
4.
Economic growth
Simplified tax administration
Promote honesty
Higher governmental revenues
VAT law is non-violative of the administrative
feasibility principle
VALUE-ADDED TAX
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).
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).
CHARACTERICTICS OF VAT
1.
VAT is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in
the Philippines and on importation of goods into the
Philippines. The seller is the one statutorily liable for the
payment of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of RA
No. 9337. However, in the case of importation, the
importer is the one liable for the VAT (RR 16-05).
2.
3.
The current VAT rate is 12% (effective January 1, 2006,
VAT rate was increased from 10 to 12%).
NOTE: The Supreme Court upheld the validity of raising
the VAT rate from 10% to 12% (ABAKADA Guro v. Ermita,
G.R. No. 168056, September 1, 2005).
4.
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
VAT- taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
Exempt transactions
172
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).
VALUE-ADDED TAX
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.
6. 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.
7. Ad valorem tax - The amount is based on the gross
selling price or gross value in money of the goods or
service, including the use or lease or properties.
8. Not a cascading tax. - Tax cascading means 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.
5.
The following elements must be present in order for a
transaction to be subjected to 12% VAT:
1. It must be done in the ordinary course of trade or
business;
2. There must be a sale, barter, exchange, lease of
properties, or rendering of service in the
Philippines; and
3. It is not VAT-exempt or VAT zero-rated (Ingles,
2015).
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).
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).
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).
However, the involuntary sale of vessels by a taxpayer
not engaged in the sale of vessels pursuant to the
government policy of privatization is NOT subject to VAT
because the sale was not made the course of trade or
business (CIR v. Magsaysay Lines Inc., G.R. No. 146984,
July 28, 2006).
--Q: Does the Constitution prohibit regressive taxes?
Two conditions of “in the ordinary course of trade or
business” (CR)
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 is the regressive effect of VAT minimized?
There should be:
1. Commercial or economic activity - It implies that a
transaction is conducted for profit; and
2. Regularity or habituality in the action - Regularity
involves more than one isolated transaction and
involves repetition and continuity of action (Ingles,
2015).
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).
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.
---
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.
ELEMENTS OF VAT-TAXABLE TRANSACTIONS
173
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Sale, barter, exchange, lease of goods or properties,
or rendering of service in the Philippines
exclusively for the purpose of maintaining and
preserving the building and its premises which they
themselves own and possess (First e-Bank Tower
Condominium Corp., v. BIR, Special Civil Action No. 121236,
RTC Br. 146, Makati City).
---
When there is no sale, barter or exchange of goods or
properties, then no VAT should be imposed.
Thus, when an affiliate provides funds to a taxpayer who
then uses the funds to pay a third party, the transaction
is not subject to VAT, as there was no sale, barter, or
exchange between the affiliate and the taxpayer. The
money was simply given as a dole-out (CIR v. Sony
Philippines, Inc., G.R. No. 178697, November 17, 2010).
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).
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-of-cost basis only, without realizing
profit (CIR v. CA and COMASERCO, G.R. No. 125355, March
30, 2000).
VAT is a tax on transactions imposed at every stage of
the distribution process on the sale, barter, exchange of
goods or property, and on the performance of services,
even in the absence of profit attributable thereto. The
term “in the course of trade or business” applies to all
transactions. Even a non-stock, non-profit corporation or
government entity is liable to pay VAT for the sale of
goods and services (CIR v. COMASERCO, 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).
VAT as an Indirect Tax
IMPACT AND INCIDENCE OF TAX
The amount of VAT payable may be passed on by the
seller, transferor, or lessor to the buyer, transferee or
lessee. When passed on, the amount of VAT due forms
part of the purchase price of goods or services. As a
result, it is the buyer who bears the burden of tax,
although the one liable to pay it is the seller.
NOTE: If the transaction is outside the Philippines, then
it is not subject to VAT.
--Q: The Bureau of Internal Revenue (BIR) issued
Rvenue Memorandum Circular (RMC) No. 65-2012
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)
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).
IMPACT
The one statutorily liable
for the payment of tax,
thus, the one who can avail
of a tax refund.
The seller upon whom the
tax has been imposed. He
collects the tax and pays it
to the government.
Effect of VAT being an indirect tax on Exemptions
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
INCIDENCE
The one who bears the
economic
burden
(payment) of tax (VAT),
the place at which the tax
comes to rest.
The tax is shifted to the
final consumer or the
buyer of the goods,
properties, or services as
part of the purchase price.
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
174
VALUE-ADDED TAX
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).
which may be shifted or passed on by the seller to the
purchaser of the goods, properties or services (CIR v.
Seagate Technology, G.R. No. 153866, February 11, 2005).
--Q: Is VAT a withholding tax?
Formula:
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
transactionsand remits the same to the government
(Asia International Auctioneers, Inc., v. CIR, G.R. No.
179115, September 26, 2012).
----Q: Mr. A, a VAT-exempt retailer sells to Mr. O, a non
VAT-exempt purchaser. Is Mr. O liable to pay VAT on
the transaction?
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:
A: YES. The purchaser is subject to VAT because he is not
exempted from the indirect burden of VAT passed on to
him as part of the purchase price. The VAT is added as
part of the purchase price and not as a tax because the
burden is merely shifted. On the other hand, the seller is
still exempt because he could pass on the burden of
paying the tax to the purchaser.
----Q: Lily’s Fashion Inc. is registered as a Subic Bay
Freeport Enterprise under R.A. 7227 and a non-VAT
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)
Total selling price (equivalent to 112%)
Vatable gross sales or receipts
(112,000/1.12 to get 100%)
P112,000
Output VAT (12% of P100,000)
P 12,000
100,000
To compute for the input tax from purchases:
Domestic purchase of good
(equivalent to 112%)
Vatable gross purchases
(56,000/1.12 to get 100%)
P 56,000
Input VAT (12% of P50,000)
P 6,000
50,000
To compute for the VAT payable:
Output VAT
Less: Input VAT
P 12,000
6,000
VAT payable
P 6,000
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 ouput 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).
Refer to discussion on Output and Input Tax.
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.
---
DESTINATION PRINCIPLE / CROSS BORDER
DOCTRINE
Goods and services are taxed only in the country where
they are consumed. Thus, exports are zero-rated, 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. Hence, actual export of goods and
services from the Philippines to a foreign country must
TAX CREDIT METHOD
The input tax shifted by the seller to the buyer is credited
or deducted against the buyer’s output taxes when he in
turn sells the taxable goods, properties or services.
175
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
be free of VAT, while those destined for use or
consumption within the Philippines shall be imposed
with 10% (now 12%) VAT (Atlas Consolidated Mining
and Development Corporation v. CIR, G.R. No. 141104 &
148763, June 8, 2007).
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:
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).
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).
PERSONS LIABLE
Persons liable to pay VAT, in general
1.
2.
Failure to register as VAT taxpayer
Any person who, in the course of trade or business,
a. sells, barters, exchanges or leases goods or
properties, or
renders services; and Any person who imports
goods, whether or not made in the course of his
trade or business
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).
"Person" refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative or
association.
Persons NOT LIABLE to pay VAT
1.
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).
2.
An individual who is a Marginal Income Earner
(MIE) not deriving compensation as employee
under an Er-Ee relationship, self-employed and
deriving gross sales or receipts not exceeding
P100,000 in any 12-month period, and where the
activities of such MIE is principally for subsistence
or livelihood, he shall be exempt from payment of
VAT or any OPT (RMC No. 7-2014).
3.
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.
"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).
NOTE: In importation, 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.
Special considerations to the following persons:
1.
2.
3.
4.
Husband and wife – for VAT purposes, shall be
treated as separate taxpayers.
Joint ventures – although exempt from income tax,
is liable to value added tax.
Government – subject to VAT if they sell goods,
properties or services in the course of trade or
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.
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, he shall be liable for VAT. Once VATregistered, 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.
However, the moment the non-stock, non-profit
association engages in any taxable sale of goods or
services, it is liable to VAT where the amount of its
gross sales and/or gross receipts exceeds
P1,919,500, or subject to the 3% percentage tax, if
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
4.
176
In VAT-exempt transactions under Section 109(1)
(A to V) of NIRC, regardless of their annual gross
sales.
VALUE-ADDED TAX
IMPOSITION OF VAT
In computing the taxable base during the month or
quarter, the following shall be allowed as deductions
from gross selling price:
When it come to normal VAT transactons, or those
subject to 12%, we have three categories:
(a)
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
(b)
The above are discussed in details below.
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
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. 16-2005).
VAT ON SALE OF GOODS OR PROPERTIES
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).
VAT is imposed and collected on
1. every sale, barter or exchange, or
2. 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).
Goods or properties
It refers to all tangible and intangible objects which are
capable of pecuniary estimation and shall include, among
others:
1. Real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or
business;
2. The right or the privilege to use patent, copyright,
design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
3. The right or the privilege to use any industrial
commercial or scientific equipment;
4. The right or the privilege to use motion picture films,
films, tapes and discs;
5. Radio, television, satellite transmission and cable
television time.
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).
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.
Gross selling price in case of sale or exchange of real
property
Note: The above is NOT an exclusive list.
It is the consideration stated in the sales document or
the fair market value whichever is higher.
The VAT accrues upon the consummation of sale of
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).
The term "fair market value" shall mean whichever is
the higher of:
1. the fair market value as determined by the
Commissioner (zonal value), or
2. the fair market value as shown in schedule of
values of the Provincial and City Assessors (real
property tax declaration).
Sale of Real Properties
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.
Sale of real properties held primarily for sale to
customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to VAT.
Sale of residential lot with gross sellig price exceeding
P1,919,500, residential house and lot or other
residential dwellings with gross sellig 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).
Allowable deductions from gross selling price
177
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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).
This includes sale, transfer or disposal within a 12month period of two or more adjacent residential lots,
house and lots or other residential dwellings 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 wherein the aggregate
value of the adjacent properties exceeds P1,919,500.00,
for residential lots and P3,199,200.00 for residential
house and lots or other residential dwellings. Adjacent
residential lots, house and lots or other residential
dwellings although covered by separate titles and/or
separate tax declarations, when sold or disposed to one
and the same buyer, whether covered by one or separate
Deed/s of Conveyance, shall be presumed as a sale of one
residential lot, house and lot or residential dwelling.
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, capital transactions of
individuals are not subject to VAT. Only persons engaged
in real estate business either as a real estate dealer,
developer or lessors, are subject to VAT.
Elements of VAT-taxable sale of goods or properties:
1.
2.
3.
4.
Sale of goods and personal properties
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
Not exempt from VAT under Section 109 of NIRC,
special law or international agreement binding upon
the government of the Philippines.
1.
2.
3.
4.
NOTE: Absence of any of the above requisites exempts the
transaction from VAT. However, percentage taxes may
apply (Sec. 116, NIRC).
5.
6.
Sale or exchange of real property
The seller executes a deed of sale, including dacion en
pago, 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.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
178
VALUE-ADDED TAX
The sale of real property subject to VAT shall either be in
(1) cash basis, (2) installment basis, or (3) deferred
payment basis.
Seller shall be subject to
output
VAT
on
the
installment
payments
received, including the
interests and penalties for
late
payment,
actually
and/or
constructively
received.
The buyer of the property
can claim the input tax in
the same period as the
seller recognized the output
tax.
Sale on installment plan
It means sale of real property by a real estate dealer, the
initial payments of which in the year of sale do not
exceed twenty-five percent (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.
Payments
that
are
subsequent
to
“initial
payments” shall be subject
to output VAT
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
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
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.
It means sale of real property, the initial payments of
which in the year of sale exceed twenty-five percent
(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).
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.
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
Sale of scrap materials
It means payment or payments which the seller receives
before or upon execution of the instrument of sale and
payments which he expects or is scheduled to receive in
cash or property (other than evidence of indebtedness of
the purchaser) during the year when the sale or
disposition of the real property was made. It covers any
down payment made and includes all payments actually
or constructively received during the year of sale, the
aggregate of which determines the limit set by law.
Sale of scrap materials by a VAT-registered person such
as empty drums, plastic bags, cartons, and wood crates;
obsolete inventories and fully-depreciated 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
Importation is an act of bringing goods and
merchandise into a country (Philippines) from a foreign
country.
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.
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.
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.
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.
Distinctions between sale on installment plan and
sale on a deferred payment basis
INSTALLMENT PLAN
Initial payments do not
exceed 25% of the gross
selling price
Transaction shall be
treated as cash sale
which makes the entire
selling price taxable in
the month of sale.
Tax base of VAT on importation
DEFERRED PLAN
Initial payments exceed
25% of the gross selling
price
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
179
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
paid by the importer prior to the release of such goods
from customs custody. (Transaction value)
into the Philippines by persons, entities or agencies
exempt from tax, where the goods are subsequently, sold,
transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers, transferees
or recipients shall be considered a the importer thereof,
who shall be liable for any internal revenue tax on such
importation.
---
XPN: In case the valuation used by the BOC in computing
customs duties is based on volume or quantity of the
imported goods, the landed cost shall be the basis for
computing VAT.
Landed cost consists of the invoice amount, customs
duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall
form part of the tax base.
VAT ON SALE OF SERVICE AND USE OR LEASE OF
PROPERTIES
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).
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).
Sale or exchange of services
Payment of tax on imported goods
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:
The VAT on importation shall be paid by the importer
prior to the release of such goods from customs custody.
Importer refers to any person who brings goods into the
Philippines, whether or not made in the course of his
trade or business. It includes non-exempt persons or
entities who acquire tax-free imported goods from
exempt persons, entities or agencies.
1.
2.
3.
and
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.
Beginning and end of importation
Importation begins when the carrying vessel or aircraft
enters the Philippine territory with the intention to
unload therein. Importation is deemed terminated when
the duties, taxes and other charges due upon the goods
have been paid or secured to be paid at the port of entry
or in case the goods are deemed free of duties, taxes and
other charges, when the goods have legally left the
jurisdiction of the Bureau (Sec. 103, CMTA).
VAT on rental and/or royalties payable to nonresident foreign corporations or owners for the sale
of services and use or lease of properties in the
Philippines shall be based on the contract price
agreed upon by the licensor and the licensee. The
licensee shall be responsible for the payment of VAT
on such rentals and/or royalties in behalf of the
non-resident foreign corporation or owner.
Transfer of goods by tax-exempt persons
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.
Consequence if a tax exempt person would transfer
imported goods to a non-exempt person
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).
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.
Rules on advance payments made by lessee
In a lease contract, the advance payment by the
lessee may be:
1. a loan to the lessor from the lessee, or
2. an option money for the property, or
3. a security deposit to insure the faithful
performance of certain obligations of the lessee
to the lessor, or
4. pre-paid rental.
--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)
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
A: Yes. The sale is subject to tax. Sec. 107 (B) of the NIRC
provides that “In case of tax-free importation of goods
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Construction and service contractors;
Stock, real estate, commercial, customs
immigration brokers;
Lessors of property, whether personal or real;
180
VALUE-ADDED TAX
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.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
5.
Persons engaged in warehousing services;
Lessors or distributors of cinematographic films;
Persons
engaged
in
milling,
processing,
manufacturing or repacking goods for others;
Proprietors, operators, or keepers of hotels, motels,
rest houses, pension houses, inns, resorts, theaters,
and movie houses;
Proprietors
or
operators
of
restaurants,
refreshment parlors, cafes and other eating places,
including clubs and caterers;
Dealers in securities;
Lending investors;
Transportation contractors on their transport of
goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic
common carriers by land relative to their transport
of goods or cargoes;
Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines;
Sales of electricity by generation, transmission,
and/or distribution companies;
6.
7.
8.
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
1.
There is a sale or exchange of service or lease or use
of property enumerated in the law or other similar
services;
2. The service is performed or to be performed in the
Philippines;
3. The service is in the course of trade of taxpayer’s
trade or business or profession;
4. The service is for a valuable consideration actually
or constructively received; and
5. 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.
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.
Gross receipts
14. 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 Ten Million Pesos (P10,000,000.00),
and franchise grantees of gas and water utilities;
15. Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity
and bonding companies; and
16. Similar services regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties.
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) constructively
received 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).
This shall likewise include:
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.
1. The lease or the use of or the right or privilege to use
any copyright, patent, design or model plan, secret
formula or process, goodwill, trademark, trade brand
or other like property or right;
2. The lease or the use of, or the right to use of any
industrial, commercial or, scientific equipment;
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
An advance payment is an advance payment on behalf
of another if the same is paid to a third (3rd) party for a
present or future obligation of said customer/client
which obligation is evidenced by a sales invoice/official
receipt issued by the creditor (3rd party) to the
181
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
customer/client (the aforementioned another party) for
the sale of goods or services by the former to the latter.
VAT being on top of the 30% amusement tax imposed by
the Local Government Code of 1991, thereby killing the
“[goose] that lays the golden egg[s].”
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).
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 x x 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).
---
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. The following
are examples of constructive receipts under RR 162005:
1.
2.
3.
Deposit in banks which are made available to the
seller without restrictions.
Issuance by the debtor of a notice to offset any debt
or obligation and acceptance thereof by the seller as
payment for services rendered.
Transfer of the amounts retained by the payor to the
account of the contractor.
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).
--Q: Are non-stock, non-profit entities liable to pay
VAT for sale of goods and services?
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?
The following are transactions deemed sale and
therefore subject to VAT:
[CORD]
1. Transfer, use or consumption not in the course of
business of goods or properties Originally intended
for sale or for use in the course of business (i.e.,
when a VAT-registered person withdraws goods
from his business for his personal use)
2. Distribution or transfer to:
a. Shareholders or investors as share in the
profits of the VAT-registered persons
A: Yes, because tollway operators are not VAT
exempt franchise holders and tollway operation is
not a VAT exempt transaction. VAT is imposed on “all
kinds of services” and tollway operations who are
engaged in construction, maintaining and operating
expressways (Diaz v. Sec. of Finance, 654 SCRA 96).
----Q: Are gross receipts derived from sales of admission
tickets in showing motion pictures subject to VAT?
NOTE: Property dividends which constitute
stocks in trade or properties primarily held for
sale or lease declared out of retained earnings
on or after January 1, 1996 and distributed by
the company to its shareholders shall be
subject to VAT based on the zonal value or fair
market value at the time of distribution,
whichever is applicable (Sec. 106.7, R.R. 162005).
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.
b.
3.
A contrary ruling will subject cinema/theater operators
or proprietors to a total of 40% tax, the 10% (now 12%)
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
182
Creditors in payment of debt
Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods
were consigned.
VALUE-ADDED TAX
4.
NOTE: Consigned good returned by the consignee
within the 60-day period are not deemed sold.
shall be based on the actual selling price (Sec. 7, R.R. 42007).
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).
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).
Transactions that are considered retirement or
cessation of business
1.
2.
CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON
The following change in or cessation of status of a
VAT registered person are subject to VAT:
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. 4.1067, R.R. 16-2005).
1.
2.
3.
Consideration in determining whether a transaction
is “deemed sale”
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.
Before considering whether the transaction is “deemed
sale”, it must first be determined whether the sale was in
the ordinary course of trade or business or not. Even if
the transaction was “deemed sale” if it was not done in
the ordinary course of trade or business or was not
originally intended for sale in the ordinary course of
business, the transaction is not subject to VAT (CIR v.
Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006).
The following change in or cessation of status of a
VAT registered person are NOT subject to Output Tax
Tax base of transactions deemed sale
1.
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.
Change of control in the corporation of as
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. 4-2007).
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).
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.
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.
2.
3.
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. 4 106-7,
R.R. 16-2005).
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.
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
ZERO-RATED SALES
183
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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).
BASIS
Nature of
transaction
EXEMPT
Not taxable;
removes VAT at
the exempt
stage
By whom made
Need not be a
VAT-registered
person
Not subject to
output tax, thus
cannot claim
input tax credit.
Input tax
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).
Tax
Credit/Refund
Zero-rated vs. VAT-exempt transactions
ZERO-RATED
It generally refers to the
export sale of good and
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).
No VAT shall be shifted or
passed-on
by
VATregistered
sellers
or
suppliers from the Customs
Territory on their sale,
barter or exchange of goods,
properties or services to the
subject registered Freeport
Zone enterprises.
VAT- EXEMPT
In VAT-exempt sales,
the 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.
1.
2.
3.
Output tax
Less: Input tax
Excess input tax
The term export sales means: [FINE GO]
1.
This non-crediting of
input taxes is exempt
transactions
is
the
underlying reason why
the NIRC adopted the
rule on apportionment
of tax credits under
Section
104(A)
whenever
a
VATregistered
taxpayer
engages in other VAT
taxable and non-VAT
taxable sales (CIR v.
Eastern
Telecomm.
Phils., Inc., G.R. No.
163835, July 7, 2010).
2.
3.
4.
5.
P
P
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
ZERO-RATED SALE OF GOODS
[FEE]
Export sales
Foreign currency denominated sale
Effectively zero-rated sales
EXPORT SALES
Simply put, the difference lies in the input tax. In VATexempt 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.:
Cannot avail of
tax credit or
refund. Thus,
may result in
increased prices
(Partial Relief)
ZERO-RATED
Transaction is
taxable for VAT
purposes
although the tax
levied is 0%
Made by a VATregistered
person
May claim input
tax credit
although the
transaction
resulted to zero
output tax.
Can claim or
enjoy tax
credit/refund
(Total Relief)
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.
Sale of raw materials or packaging materials by a
VAT-registered entity to a Non-resident buyer:
a. for delivery to a resident local export-oriented
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.
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)
“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
0.00
5,000.00
5, 000.00
184
VALUE-ADDED TAX
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.
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 zerorated VAT. (2006 Bar)
Constructive exports
a)
b)
c)
d)
e)
6.
Sales to bonded manufacturing warehouses of
export-oriented manufacturers
Sales to export processing zones
Sales to enterprises duly registered and
accredited with the Subic Bay Metropolitan
Authority pursuant to R.A. 7227
Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products under guidelines to be set by the
Board in consultation with the Bureau of
Internal Revenue (BIR) and the Bureau of
Customs (BOC)
Sales to diplomatic missions and other agencies
and/or
instrumentalities
granted
tax
immunities, of locally manufactured, assembled
or repacked products whether paid for in
foreign currency or not (Sec. 4.106-5, RR 162005).
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.
--FOREIGN CURRENCY DENOMINATED SALE
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).
The sale of goods, supplies, equipment and fuel to
persons engaged in International shipping or
international air transport operations (Sec.
106[A][2][a], NIRC as amended by RA 9337).
Rationale for zero-rating exports 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.
NOTE: Section 149 refers to excise tax on automobiles.
Section 150 refers to excise tax on non-essential goods.
Export sale, when exempt and when zero-rated
1.
2.
Rules on Export Sales
By a Non-VAT registered
By a VAT registered
Requisites:
VAT exempt
3.
VATable at 0% (zero
rated)
4.
--Q: Is the sale of goods to ecozone, such as PEZA,
considered as export sale?
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.
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).
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).
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 agroindustrial, industrial, tourist, recreational, commercial,
banking, investment and financial centers whose metes
and bounds are fixed or delimited by Presidential
Effectively Zero-rated vs. Automatic Zero-rated
transaction
185
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
BASIS
Nature
Need to
apply for
zerorating
For whose
benefit is it
intended
Stamping
of “zerorated” on
VAT
invoice or
receipt
Effect
EFFECTIVELY
ZERO-RATED
TRANSACTION
Refers to sales to
persons or entities
whose exemption
under special laws
or
international
agreements
to
which
the
Philippines is a
signatory
An application for
zero-rating must
be filed and the
BIR approval is
necessary before
the
transaction
may be considered
effectively
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.
refund. Is the grant of a refund representing
unutilized input VAT to Cebu Toyo proper?
AUTOMATIC
ZERO-RATED
TRANSACTION
Refers to export
sales and foreign
currency
denominated sales
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 twelve percent (12%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for
the value-added tax 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 VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in
any output tax, but the input tax on his purchase of
goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund (CIR v. Cebu
Toyo Corporation, G.R. No. 149073, February 16, 2005).
----Q: SEAGATE is a resident foreign corporation duly
registered with the SEC to do business in the
Philippines. It is also 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 in the amount of
P28,369,226.38 with supporting documents was
filed with Revenue District Office in Cebu. The
administrative claim for refund was not acted upon
by the petitioner prompting the respondent to
elevate the case to the CTA. The CIR contended that
since ‘taxes are presumed to have been collected in
accordance with laws and regulations, Seagate has
the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected.
Unfortunately, Seagate failed to do so. Is Seagate
entitled to the refund or issuance of Tax Credit
Certificate representing alleged unutilized input VAT
paid on capital goods purchased?
No need to file an
application form
and to secure BIR
approval
before
the
sale
is
considered zerorated.
Primarily intended
to be enjoyed by
the seller who is
directly
and
legally liable for
the VAT, making
such
seller
internationally
competitive
by
allowing
the
refund or credit of
input taxes that
are attributable to
export sales.
Not required. The
buyer, as shown
by his address in
the sales invoice
and
shipping
documents,
is
located outside the
Philippines.
Required.
The
buyer, as shown by
his address in the
sales invoice and
shipping
documents,
is
located outside the
Philippines merely
by fiction of law.
Results in no tax chargeable against the
purchaser.
The seller can claim a refund or a tax
credit certificate for the VAT previously
charged by suppliers.
A: YES. As a PEZA-registered enterprise within a special
economic zone, it is entitled to the fiscal incentives and
benefits provided for in either PD 66 or EO 226 which
would not subject respondent 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.
--Q: Cebu Toyo Corp., an export enterprise, is a
subsidiary of a foreign corporation duly registered
with the Philippine Economic Zone Authority
pursuant to PD 66 and is also registered with the BIR
as a VAT taxpayer. It sells 80% of its products to its
mother corporation, and the rest are sold to various
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
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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 cross-border principle of the VAT system
186
VALUE-ADDED TAX
2.
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).
---
3.
In CIR vs. American Express International, Inc., (2005), the
Court ruled that the Legislature does not to impose the
condition of being "consumed abroad" in order for
services performed in the Philippines by a VATregistered person to be zero-rated. In this case, the
taxpayer renders services in the Philippines and
facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it
gets paid in acceptable foreign currency inwardly
remitted and accounted for in conformity with BSP rules
and regulations.
ZERO-RATED SALE OF SERVICE
The following services performed in the Philippines by
VAT- registered persons shall be subject to zero percent
(0%) rate.
1.
2.
3.
4.
5.
6.
7.
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.
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 Bangko Sentral ng
Pilipinas (BSP);
Services other than those mentioned in the
preceding paragraph rendered to a person engaged
in business conducted outside the Philippines or to
a nonresident person not engaged in business who
is outside the Philippines when the services are
performed, the consideration for which is paid for in
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
zero percent (0%) rate;
Services rendered to persons engaged in
international shipping or international air transport
operations, including leases of property for use
thereof;
Services performed by subcontractors and/or
contractors
in
processing,
converting,
or
manufacturing goods for an enterprise whose
export sales exceed seventy percent (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).
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 zerorating 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. 031-11).
--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 prevent car bombs from ramming the ADB
gates along ADB Avenue in Mandaluyong City.
Services other than processing manufacturing, or
repacking of goods (Sec 108 (B)(2)
Requirements to qualify for zero-rating
1.
b. 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 Bangko Sentral ng Pilipinas. (2010 Bar)
The services other than “processing, manufacturing
or repacking of goods” must be performed in the
Philippines,
187
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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
A:
a. 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 VAT-registered construction company
effectively zero-rated (Sec. 108(B)(3), NIRC).
b. 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 Bangko
Sentral 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.
VAT-EXEMPT TRANSACTIONS
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).
Exempt Party vs. Exempt Transaction
EXEMPT PARTY
A person or entity
granted VAT exemption
under the NIRC, special
law
or
international
agreement to which RP is
a signatory, and by virtue
of which its taxable
transactions
become
exempt from the VAT.
Such party is not subject
to the VAT, but may be
allowed a tax refund or
credit of input tax paid,
depending
on
its
registration as a VAT or
non-VAT taxpayer.
EXEMPT TRANSACTION
Involves goods or services
which, by their nature are
specifically listed in and
expressly exempted from
the VAT under the NIRC,
without regard to the tax
status of the parties in the
transactions.
Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt and copra shall be
considered as agricultural food products in their original
state.
Sugar whose content of sucrose by weight, in the dry
state, has a polarimeter reading of 99.5º and above are
presumed to be refined sugar.
Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be refined
sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill
accredited by the BIR to be producing and/or capable of
producing sugar with polarimeter reading of 99.5o and
above, and for which the quedan issued therefor, and
verified by the Sugar Regulatory Administration,
identifies the same to be of a polarimeter reading of
99.5º and above.
Transaction is not subject
to VAT, but the seller is
not allowed any tax
refund or credit for any
input taxes paid.
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.
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.
NOTE: Oil companies are not exempt from the payment
of excise tax on petroleum products manufactured and
sold by them to international carriers (CIR v. Pilipinas
Shell, G.R. no. 188497, April 25, 2012).
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).
Exempt transactions, enumerated
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
188
VALUE-ADDED TAX
belonging to persons coming to settle in the
Philippines,
1. for their own use and
2. not for sale, barter or exchange,
3. accompanying such persons, or arriving
within ninety (90) days before or after their
arrival,
4. 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;
b. Sale or importation of
1. fertilizers;
2. seeds, seedlings and fingerlings;
3. 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.
e. Services subject to percentage tax
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
f.
Refer to discussion on percentage tax.
Agricultural contract growers refer to those persons
producing for others poultry, livestock or other
agricultural and marine food products in their original
state.
Requisites under Sec. 800 of Customs Modernization and
Tariff Act of 2016
1.
g. Medical, dental, hospital and veterinary services,
except those rendered by professionals
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.
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, a corporation that establishes,
maintains, conducts and operates a prepaid group
practice 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, Republic Act 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.
NOTE: Prior to the amendment of the Tariff
and Customs Code, the ceiling amount is
P10,000.
2.
Services by
1. agricultural contract growers, and
2. milling for others of
a. palay into rice,
b. corn into grits, and
c. sugar cane into raw sugar
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)
PHILHEALTH filed a protest with the Commissioner
but the latter did not take action on its protest.
Consequently, PHILHEALTH brought the matter to
189
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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 nonretroactivity 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?
in the Asia Pacific Region, and
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.
A: YES, PHILHEALTH’s services are not VAT-exempt.
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 preneed 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).
---
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 noncredit 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.
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;
Importation by non-agricultural, non-electric and noncredit cooperatives of machineries and equipment,
including spare parts thereof, to be used by them are
subject to VAT.
Summary rules on cooperatives
Sales/Gross Receipts
by
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,
2. communications and
3. coordinating centers for their
a. affiliates,
b. subsidiaries or
c. branches
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Sales by agricultural cooperatives duly registered
and in good standing with the Cooperative
Development Authority (CDA) to their members,
as well as sale of their produce, whether in its
original state or processed form, to nonmembers; their importation of direct farm inputs,
machineries and equipment, including spare
parts thereof, to be used directly and exclusively
in the production and/or processing of their
produce
Agricutural
Cooperatives
 Own
produce
(processed or at its
origial state)
 Other
that
own
produce (i.e. from
traders)
Credit or Multipurpose
Cooperatives
 From
lending
activities
 From
non-lending
activities
Electric cooperatives
Non-agricultral,
lending
multipurpose,
electric
190
nonand
non-
To/From
Members
To/From
NonMembers
Exempt
Exempt
Exempt
VAT*
Exempt
Exempt
VAT
VAT
VAT
VAT
VALUE-ADDED TAX
Exempt
 Contribution
per Exempt
member < P15K
VAT
 Contribution
per VAT
member > P15K
*Exempt if referring to agricultural food product at its
original state.
(Tabag, 2015)
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 at P1,919,500.00
and below, or house & lot and other
residential dwellings valued at P3,199,200.00
and below
o. Export sales by persons who are not VATregistered
Rules on Export Sales
By a Non-VAT registered
By a VAT registered
If two or more adjacent residential lots, house and lots
or other residential dwellings are sold or disposed in
favor of one buyer from the same seller, for the purpose
of utilizing the lots, house and lots or other residential
dwellings as one residential area, the sale shall be
exempt from VAT only if the aggregate value of the said
properties do not exceed P1,919,500.00 for residential
lots, and P3,199,200.00 for residential house and lots or
other residential dwellings. Adjacent residential lots,
house and lots or other residential dwellings although
covered by separate titles and/or separate tax
declarations, when sold or disposed to one and the same
buyer, whether covered by one or separate Deed/s of
Conveyance, shall be presumed as a sale of one
residential lot, house and lot or residential dwelling.
VAT exempt
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 low-cost
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.
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.
"Low-cost housing" refers to housing projects intended
for homeless low-income family beneficiaries,
undertaken by the Government or private developers,
which may either be a subdivision or a condominium
registered and licensed by the Housing and Land Use
Regulatory Board/Housing (HLURB) under BP Blg. 220,
PD No. 957 or any other similar law, wherein the unit
selling price is within the selling price ceiling per unit of
P750,000.00 under RA No. 7279, otherwise known as the
"Urban Development and Housing Act of 1992" and
other laws, such as RA No. 7835 and RA No. 8763.
Summary Rules on Sales of Real Properties
Sale not in the ordinary course of
trade or business
VAT exempt
 In general
Sale of residential lot by a real
estate dealer
VAT exempt
 Selling price < P1,919,500*
VAT
 Selling price > P1,919,500
Sale of residential lot by a nondealer
 Use in business (incidental VAT
transaction)
 Not use in business (regardless of 6% CGT
amount)
Sale of residential house & lot and
other residential dwellings by a
real estate dealer
 Selling price < P3,199,200**
VAT exempt
 Selling price > P3,199,200
VAT
Sale of residential house & lot and
other residential dwellings by a
non-dealer
 Use in business (incidental VAT
transaction)
 Not use in business (regardless of 6% CGT
amount)
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
191
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Sale of real property classified as low
cost housing
VAT exempt
Sale of real property classified as
socialized housing
VAT exempt
Summary of rules on lease of residential units:
Monthly rental P12,800 VAT exempt and no
or less regardless of percentage tax
annual gross sales
Monthly rental above VAT-exempt under Sec.
P12,800 but annual 109 (W) but shall pay
gross sales do not exceed 3% percentage tax under
P1,919,500
Section 116 of NIRC
Monthly rental above Subject to VAT
P12,800 and annual
gross
sales
exceed
P1,919,500
* Apply rules on adjacent lots
** Apply rules on adjacent house and lots and other
residential dwellings
(Tabag, 2015)
q. Lease of residential units with a monthly rental
per unit not exceeding Twelve Thousand Eight
Hundred Pesos (P12,800.00), regardless of the
amount of aggregate rentals received by the
lessor during the year
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).
Provided, every three (3) years thereafter, the amount
shall be adjusted to its present value using the Consumer
Price Index, as published by the NSO; Provided, further,
that such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each
year.
--Q: X operates a dormitroy 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?
The foregoing notwithstanding, lease of residential units
where the monthly rental per unit exceeds Twelve
Thousand Eight Hundred Pesos (P12,800.00) but the
aggregate of such rentals of the lessor during the year do
not exceed One Million Nine Hundred Nineteen
Thousand Five Hundred Pesos (P1,919,500.00) shall
likewise be exempt from VAT, however, the same shall
be subjected to three percent (3%) percentage tax.
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.
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).
---
In cases where a lessor has several residential units for
lease, some are leased out for a monthly rental per unit
of not exceeding P12,800.00 while others are leased out
for more than P12,800.00 per unit, his tax liability will be
as follows:
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
1. The gross receipts from rentals not exceeding
P12,800.00 per month per unit shall be exempt from
VAT regardless of the aggregate annual gross
receipts.
2. The gross receipts from rentals exceeding
P12,800.00 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 P12,800.00) exceeds
P1,919,500.00. Otherwise, the gross receipts will be
subject to the 3% tax imposed under Section 116 of
the NIRC.
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).
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.
s. Transport of passengers by international carriers
transport of passengers by international carriers
doing business in the Philippines
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
The transport of cargo by international carriers doing
business in the Philippines shall be exempt from VAT as
the same is subject to Common Carrier's Tax (Percentage
Tax on International Carriers). International carriers
192
VALUE-ADDED TAX
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.
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
passengers or
cargoes by air
and sea
NOTE:
If
domestic
transport
of
passengers or
cargoes
by
land,
the
common
carrier is liable
to percentage
tax on common
carriers
0% VAT
International
transport
of
passengers or
cargoes by air
or sea
NOTE:
Transport
should be done
by
domestic
carriers
with
international
flightssuch as
PAL,
Cebu
Pacific,
etc.,
otherwise,
exempt
v. Services of
1. banks,
2. non-bank
financial
intermediaries
performing quasi-banking functions, and
3. other non-bank financial intermediaries
subject to percentage tax under Secs. 121
and 122 of the NIRC, such as money changers
and pawnshops
EXEMPT
Transport
of
passengers
by
international air
and
shipping
carriers
NOTE: In case of
transport
of
cargoes,
the
international air
or
shipping
carrier shall be
subject to 3%
percentage tax
on international
carriers
In Tambunting Pawnshop, Inc. vs. CIR, G.R. No. 179085
(2010), since the taxpayer (pawnshop) is a non-bank
intermediary, it is subject to 10% (now 12%) VAT for the
tax years 1996-2002; however, with the levy, assessment
and collection of VAT from non-bank intermediaries
being specifically deferred by law, then taxpayer is not
liable for VAT during these tax years. But with the full
implementation of the VAT system on non-bank financial
intermediaries starting January 1, 2003, taxpayer is
liable for 10% VAT for the said tax year. And beginning
2004 up to the present, by virtue of R.A. no. 9238,
taxpayer is no longer liable for VAT but it is subject to
percentage tax on gross receipts from 0% to 5% as the
case may be.
t. Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or
international transport operations
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).
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";
w. Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One Million
Nine Hundred Nineteen Thousand Five Hundred
Pesos (P1,919,500.00)
Provided, every three (3) years thereafter, the amount
shall be adjusted to its present value using the Consumer
Price Index, as published by the NSO; Provided, further,
that such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each
year.
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.
For purposes of the threshold of P1,919,500.00, the
husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional, aside
from the practice of his profession, also derives revenue
from other lines of business which are otherwise subject
to VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded.
Thus, the VAT-exempt sales shall not be included in
determining the threshold.
Fuel, When exempt from VAT and when zero-rated
193
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
---Q: State whether the following transactions are: a)
VAT Exempt, b) subject to VAT at 12%; or c) subject
to VAT at 0%:
Output tax may come from:
i.
Actual sale
ii.
Transaction deemed sales
Input Tax
1.
2.
3.
4.
5.
A:
1.
2.
3.
4.
5.
Sale of fresh vegetables by Aling Ining at the
Pamilihang Bayan ng Trece Martirez.
Services rendered by Jake's Construction
Company, a contractor to the World Health
Organization in the renovation of its offices in
Manila.
Sale of tractors and other agricultural
implements by Bungkal Incorporated to local
farmers.
Sale of RTW by Cely's Boutique, a Filipino dress
designer, in her dress shop and other outlets.
Fees for lodging paid by students to BahayBahayan Dormitory, a private entity operating a
student dormitory (monthly fee P1,500). (1998
Bar)
It means the value-added tax due on or paid by a VATregistered 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
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).
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).
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).
VAT at 0%. Since Jake's Construction Company has
rendered services to the World Health Organization,
which is an entity exempted from taxation under
international agreements to which the Philippines is
a signatory, the supply of services is subject to zero
percent (0%) rate (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).
---
Input VAT or input tax represents the actual payments,
costs and expenses incurred by a VAT-registered
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).
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
Type of Input Tax
Input tax on importation of goods and
local purchases of goods, properties
and services (Sec. 110, NIRC)
Presumptive input tax credit (Sec.
111[B], NIRC) – may be calimed by persons
engaged in the business of processing
ssardines,
mackerel
and
milk;
manufacturing refined sugard and cooking
oil; and noodle based instant meals; all of
which are substantially produced from
primary agricultural and marine food
producs, the supply of which is exempt
from VAT
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).
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
194
Rate
12%
standard or
0%
4%
VALUE-ADDED TAX
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
Final withholding tax credit (Sec. 114[C],
NIRC) – is based on the amount paid to the
supplier of goods or services by the
government and is required to be withheld
by the government to the BIR (refer to
withholding of final tax on sales to
government).
Excess input tax credit (refer to
discussion on application on tax refund or
tax credit certificate)
acquisition cost of each capital good, shall be claimed as
credit against output tax in the following manner:
2%
transitional
or
12%
actual input
tax rate
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 sixty (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.
5%
NA
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 1,000,000.00, the total input taxes will be allowable as
credit against output tax in the month of acquisition.
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.
2.
3.
4.
5.
6.
Aggregate cost exceeds P1M but acquired in
instalment 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).
Purchase or importation of goods:
a. For sale; or
b. 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)
Summary Rules on recognition of Input VAT for
Capital Goods
Aggregate acquisition for the month > P1M, exclusive
of VAT, and:
 Life > 1 year
Input tax shall be spread evenly over such usefule lfe
but not to exceed 60 months.
 Life < 1 year
Not a capital asset. Input tax is not allocated.
Aggregate acquisition for the month < P1M, exclusive
of VAT (regardless of useful life):
The related input VAT is not allocated. Consequently, the
total amount of input VAT shall be treated as tax credit
against output VAT in the month of acquisition.
(Tabag, 2015)
Purchases of real properties for which a VAT has
actually been paid;
Purchases of services in which a VAT has actually
been paid (Sec. 110, NIRC);
Transactions “deemed sales”;
Presumptive input tax;
Transitional input tax credits allowed under the
transitory and other provisions (Sec. 4.110-1 R.R. 162005).
Capital goods (depreciable goods)
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.
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).
Presumptive input tax
It is an input tax credit allowed to persons or firms
engaged in the: [SMM-RCN]
Input tax on capital goods
1.
Aggregate cost exceeds P1M - Where a VAT 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
2.
195
processing of:
a. sardines
b. mackerel
c. milk
manufacturing of:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
a.
b.
c.
refined sugar
cooking oil
packed noodle based instant meals
1.
2.
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).
NOTE: Transitional input tax credit may only be availed
once. It may be carried over to the next taxing period,
until fully utilized.
They are given this 4% presumptive input tax because
the goods used in the said enumeration are VAT-exempt
(Ingles, 2015).
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.
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.
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).
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 non-VAT 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).
--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 VAT-registered 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.).
---
These can be availed by taxpayers who become VAT
registered persons upon:
1. Exceeding the minimum turnover of P1,919,500 in
any 12 month period, or
2. 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)
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:
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. Goods purchased for resale in the present
condition;
2. Raw materials - Materials purchased for further
processing but which have not yet undergone
processing;
3. Manufactured goods
4. Goods in process for sale; or
5. 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).
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. 16-2005).
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).
The allowed input tax shall be whichever is higher
between:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
2% of the value of the taxpayer’s beginning inventory
of goods, materials and supplies; or
The actual value-added tax paid on such goods
(Sec.111[A], NIRC).
196
VALUE-ADDED TAX
DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS
Ouput
tax
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.
Basis
Vatable gross
sales
or
receipts
(amount
exclusive
VAT) x VAT
rate (12% or
0%)
Example
Sale of hanky
for total price
of P112
VAT-Ex. Amt:
P100
(P112/1.12)
Vatable
purchases
(amount
exclusive
VAT)
applicable
VAT rate
Purchase of
materials for
total price of
P56
Output
tax:
P100*12%
In all cases where the basis for computing the output tax
is either the gross selling price or the gross receipts, but
the amount of VAT is erroneously billed in the invoice,
the total invoice amount shall be presumed to be
comprised of the gross selling price/gross receipts plus
the correct amount of VAT. Hence, the output tax shall be
computed by multiplying the total invoice amount by a
fraction using the rate of VAT as numerator and one
hundred 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.
Input
tax
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 16-2005).
Net VAT payable = Output tax > Input tax
Excess tax credits = Output tax < Input tax
of
x
Amount
P12.00
6.00
VAT-Ex-Amt.:
P50
(P56/1.12)
Input
tax:
P50*12%
Net VAT Payable or Excess tax credits
(Output tax less Input Tax)
P6.00
NOTE: VAT-exempt transactions do not result to any
output or input taxes.
Determination of input tax creditable
Allocation of input tax on mixed transactions
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.
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.
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
2. 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.
The table below illustrates the computation of output tax,
creditable input tax and the resulting net VAT payable or
excess of tax credits:
For persons engaged in both zero-rated sales and nonzero-rated sales, the aggregate input taxes shall be
allocated ratably between the zero-rated and non-zerorated sales (R.R. No. 16-2005).
Determination of VAT payable or Excess tax credits
197
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
The resulting computation of output tax and crediting of
input tax shall result to either the net VAT payable or
excess tax credits.
Official Receipt for the
initial and succeeding
payments
b. Installment basis
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.
Input tax on domestic
purchases of service
Excess Tax Credits (ETC) – If the input tax inclusive of
input tax carried over from the previous quarter exceeds
the output tax, the excess input tax shall be carried over
to the succeeding quarter or quarters.
- Provided, that any input tax attributable to zerorated 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)
Transitional input tax
Input tax on “deemed
sale transaction”
Input tax from payments
made to non-residents
(such as for services,
rentals, or royalties)
Illustration:
Period
Jan.
Feb.
Mar.
Q1
Output
tax
P 12 M
6M
6M
P24 M
Input tax
P6M
18 M
18 M
P 42 M
NVP or ETC
Advance VAT on sugar
NVP P6M
ETC (P12M)
ETC (P12M)
ETC (P18M)
REFUND OR TAX CREDIT OF EXCESS INPUT TAX
Who may claim for refund/apply for issuance of tax
credit certificate
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.
The following can avail of refund or tax credit:
1. Zero-rated and effectively zero-rated sales - Any
VAT-registered person, whose sales are zero-rated
or effectively zero-rated (Sec. 112 [A]).
2. 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]).
SUBSTANTIATION OF INPUT TAX CREDITS
Input taxes on domestic
purchases of goods or
properties made in the
course of trade or
business
Input tax on purchases of
real property
a. Cash/deferred basis
REQUIRED SUPPORT
Import entry or other
equivalent
document
showing actual payment of
VAT on imported goods
Invoice
showing
information
required
under Section 113 and 237
of the NIRC
Requirements to claim for VAT refund
1.
2.
3.
4.
5.
Public instrument (i.e.,
deed of absolute sale, deed
of
conditional
sale,
contract/agreement to sell,
etc.) together with the VAT
invoice for the entire
selling price and non-VAT
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
Monthly
Remittance
Return of Value Added Tax
Withheld (BIR Form 1600)
filed by the resident payor
in behalf of the nonresident
evidencing
remittance of VAT due
which was withheld by the
payor.
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).
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.
TRANSACTIONS
Importation of goods
Public instrument and VAT
Official Receipt for every
payment
Official receipt showing the
information required in
Sec. 113 and 237 of the
NIRC
Inventory of goods as
shown in a detailed list to
be submitted to the BIR
Required invoices
6.
7.
198
The taxpayer is VAT-registered;
The taxpayer is engaged in zero-rated or effectively
zero-rated sales;
The input taxes are due or paid;
The input taxes are not transitional input taxes as it
cannot be claimed as a refund or credit;
The input taxes have not been applied against
output taxes during and in the succeeding quarters;
The input taxes claimed are attributable to zerorated 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
VALUE-ADDED TAX
8.
9.
presenting the VAT official receipts and VAT returns
cannot be upheld. It ought to be reminded that it could
not be permitted to substitute such vital and material
documents with secondary evidence like financial
statements.
--Q: Are sales invoices sufficient as evidence to prove
zero-rated sale of services by a taxapayer thereby
entitling him to claim the refund of its excess input
VAT?
accounted for in accordance with the rules and
regulations of the BSP;
Where there are both zero-rated or effectively zerorated 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).
A: NO. The claim for refund must be denied on the
ground that the taxpayer had not established its zerorated sales of services through the presentation of
official receipts.
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).
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 goods or properties, as well as
to every sale, barter or exchange of services.
Failure to comply with the invoicing requirements is
a ground to deny a claim for tax refund or tax credit
Case law dictates that 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).
A "sales or commercial invoice" is a written account of
goods sold or services rendered indicating the prices
charged therefor or a list by whatever name 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.
Section 110(A)(1) of the NIRC provides that creditable
input taxes must be evidenced by a VAT invoice or
official receipt, which must, in turn, comply with Sections
237 and 238 of the same law, as well as Section 4.108.1
of RR 7-95. The foregoing provisions require, inter alia,
that an invoice must reflect, as required by law: (a) the
BIR Permit to Print; (b) the TIN-V of the purchaser; and
(c) the word "zero-rated" imprinted thereon. In this
relation, failure to comply with the said invoicing
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).
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 taxapayer located within an ECOZONE,
entitled to the refund of its unutilized input taxes
incurred before it became a PEZA-registered entity?
In the case of Luzon Hydro Corporation v. CIR, G.R. No.
188260, the taxpayer-claimant did not competently
establish its claim for refund or tax credit. The Court
ruled, though Justice Bersamin, that the petitioner did
not produce evidence showing that it had zero-rated
sales for taxable year 2001. The claimant did not reflect
any zero-rated sales from its power generation in its VAT
returns, which indicated that it had not made any sale of
electricity. Had there been zero-rated sales, it would
have reported them in the returns. Indeed, it carried the
burden not only that it was entitled under the
substantive law to the allowance of its claim for refund
or tax credit but also that it met all the requirements for
evidentiary substantiation of its claim.
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 PEZAregistered 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
Although the claimant has correctly contended that the
sale of electricity by a power generation company like it
should be subject to zero-rated VAT under Republic Act
No. 9136, its assertion that it need not prove its having
actually made zero-rated sales of electricity by
199
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
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?
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 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.
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 (including VAT)
which was erroneously or illegally assessed or collected.
Furthermore, Section 8 of Republic Act 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"
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).
---
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.
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.
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,
penned by Justice Bersamin).
----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)
Reckoning point for the Two (2)-year period
1.
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).
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.
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).
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.
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.
Since X Cola could not amend its VAT returns due to
the issuance of a BIR Letter of Authority for 2007, it
filed with the BIR claims for refund of alleged
overpaid VAT for the 3rd and 4th quarters of 2007.
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
2.
200
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 credit
certificate for any unused input tax which may be
VALUE-ADDED TAX
used in payment of his other internal revenue taxes
(Sec. 112(B), NIRC).
application for tax refund/tax credit shall be denied
where the taxpayer/claimant failed to submit the
complete supporting documents (RMC 54-2014).
Summary of rules on prescriptive periods for
claiming refund or credit of input tax
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).
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 twoyear 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).
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.
Judicial Claim: 120+30 Day Period
Effect of failure to submit complete supporting
documents to judicial claim of refund in the CTA
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.
A distinction must be made between administrative
cases appealed due to:
1.
2.
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. DA-489-03 was still in force
NOTE: Late filing is absolutely prohibited
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.
When a judicial claim for refund or tax credit in the CTA
is an appeal of an unsuccessful administrative claim, the
taxpayer has to convince the CTA that the CIR had no
reason to deny its claim. It, thus, becomes imperative for
the taxpayer to show the CTA that not 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.
(Commissioner of Internal Revenue v. Mindanao II
Geothermal Partnership, G.R. No. 191498, January 15,
2014)
NOTE: The rule on a claim for refund or credit of an
erroneously or illegally collected tax under Section 229
of the NIRC is different. Under such, both the
administrative and judicial claim must be filed within the
two (2)-year prescriptive period from the date of
payment. The claim for refund or credit and the appeal to
CTA may occur simultaneously.
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).
Period within which BIR Commissioner grants Tax
Credit Certificates/refund for creditable input taxes
The Commissioner may grant TCC/ refund for creditable
input taxes within 120 days from the day of submission
of the complete documents in support of the application
filed (Sec. 112, NIRC; RMC 54-2014).
Taxpayer must await the lapse of the 120-day period
before taxpayer can appeal to CTA
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
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 120day period is crucial in filing an appeal with the CTA (CIR
v. Aichi Forging Company of Asia, Inc., GR 184823, October
6, 2010).
201
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
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.
On December 22, 2013, GC filed with the Bureau of
Internal Revenue (BIR) an administrative claim for
refund of its unutilized input Value-Added 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).
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 Bill Ruling No. DA489-03 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).
a.
b.
Exception to the mandatory and jurisdictional
nature of the 120+30 day period (BIR Ruling No. DA489-03 dated December 10, 2003)
A:
a.
As an exception to the mandatory and jurisdictional
120+30 day period, it was emphasized that from the
time of issuance of BIR Ruling No. DA-489-03 on
December 10, 2003 up to its reversal by the Supreme
Court in the Aichi case on October 6, 2010,
taxpayers/claimant need not wait for the lapse of 120day period before it could seek judicial relief with the
CTA by way of Petition for Review (RMC 54-2014).
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).
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).
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.
2.
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:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
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).
YES. The two-year prescriptive period to file a
claim for refund refers to the administrative claim
with the BIR and not the period to elevate the claim
to the CTA. Hence, the CTA cannot deny the refund
for reasons that the first quarter claim was filed
beyond the two-year period prescribed by law.
However, when the claim is made before the CTA on
February 24, there is definitely no appealable
decision as yet because the 120-day period for the
Commissioner to act on the claim for refund has not
yet lapsed. Hence, the act of the taxpayer in
elevation the claim to the CTA is premature and the
CTA has no jurisdiction to rile thereon (CIR v. Aichi
Forging Company of Asia, Inc., G.R. No. 184823,
October 6, 2010).
----Q: For calendar year 2011, FFF, Inc., a VAT-registered
corporation, reported unutilized excess input VAT in
the amount of Pl ,000,000.00 attributable to its zerorated sales. Hoping to impress his boss, Mr. G, the
accountant of FFF, Inc., filed with the BIR on January
b.
Remedy in case of CIR’s inaction within 120-day
period or CTA’s denial of claim for TCC/ tax refund
1.
Is the CTA correct?
Assuming that GC filed its claim before the CTA
on February 22, 2014, would your answer be the
same? (2014 Bar)
202
VALUE-ADDED TAX
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.
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.
b.
A:
a.
Did the CTA acquire jurisdiction over the
Petition of FFF, Inc.?
Discuss the proper procedure and applicable
time periods for administrative and judicial
claims for refund/credit of unutilized excess
input VAT. (2015 Bar)
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).
---
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.
Difference between Sec. 112 on refund for VAT and
Sec. 229 on refund of other taxes
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.
SEC. 112 (VAT)
Period is 2 years after the close of
the taxable quarter when the
sales were made
The administrative claim must be filed with the CIR
within the two-year prescriptive period. The proper
reckoning period date for the two-year 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 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 the 120day period, or (2) only within
thirty days from the expiration of
the
120-day
period if
the
Commissioner does not act within
the 120-day period (CIR v. San
Roque Power Corporation, G.R. Nos.
187485, 196113, 197156, February
12, 2013)
The taxpayer can file a judicial claim in one of two
ways: (1) file the judicial claim within thirty days
after the Commissioner of Internal Revenue denies
the claim within the 120-day period, or (2) file the
judicial claim within 30 days from the expiration of
the 120-day period if the Commissioner does not act
within the 120-day period.
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 non-payment of the tax to the
SEC. 229 (OTHER
TAXES)
Period is 2 years
from the date of
payment of the
tax
Period to file an
administrative
claim before the
CIR AND judicial
claim with the
CTA must fall
within the 2 year
prescriptive
period
Manner of Givng Refund
Refund shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative
without the necessity of being countersigned by the
Chairman of Commission on Audit (COA). Refund shall be
subject to post audit by COA (Sec 112(D) NIRC).
203
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
Summary of Rules
a.
Any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not
been applied against output tax, with the appropriate
BIR Office-Large Taxpayer or RDO having jursidiction
over the principal place of business of the taxpayer.
The amount of the tax shall be shown as a
separate item in the invoice or receipt;
NOTE: Under R.R. 18-2011 (November 21,
2011), in case of failure to indicate the VAT as a
separate item in the sales invoice or official
receipt, a fine of not less than Php 1,000 but not
more than Php 50,000 shall, upon conviction,
be collected for each act or omission in addition
to imprisonment of not less than two (2) years
but not more than four (4) years.
b.
Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of
submission of compete documents in support of the
application
In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals
3.
4.
INVOICING REQUIREMENTS
Invoicing requirements, in general
NOTE: The appearance of the word “zero rated” on the
face of invoices covering zero rated sales prevents
buyers from falsely claiming input VAT from their
purchases when no VAT was actually paid. If, absent such
word, a successful claim for input VAT is made, the
government would be refunding money it did not collect.
Further, the printing of the word “zero-rated” on the
invoice helps segregate sales that are subject to 12%
VAT from those sales that are zero-rated. Unable to
submit the proper invoices, taxpayer has been unable to
substantiate
its
claim
for
refund
(Eastern
Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
March 25, 2015).
A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of
goods or properties; and
2. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of
services.
Only VAT-registered persons are required to print their
TIN followed by the word "VAT" in their invoice or
official receipts. Said documents shall be considered as a
"VAT Invoice" or VAT
Information required to be indicated on the VAT
invoice or VAT official receipts
1.
2.
The failure to print the word “zero-rated” in the
invoice/receipts is fatal to a claim for credit/refund of
input VAT on zero rated sales (JRA Philippines, Inc. v. CIR,
G.R. No. 177127, October 11, 2010).
A statement that the seller is a VAT-registered
person, and the taxpayer's identification number
(TIN);
The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax: Provided
that:
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
If the sale is exempt from value-added tax, the
term "VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
c. If the sale is subject to zero percent (0%) valueadded tax, the term "zero-rated sale" shall be
written or printed prominently on the invoice
or receipt;
d. If the sale involves goods, properties or
services some of which are subject to and some
of which are VAT zero-rated or VAT-exempt,
the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable,
exempt and zero-rated components, and the
calculation of the value-added tax on each
portion of the sale shall be shown on the
invoice or receipt: "Provided, That the seller
may issue separate invoices or receipts for the
taxable, exempt, and zero-rated components of
the sale.
The date of transaction, quantity, unit cost and
description of the goods or properties or nature of
the service; and
In the case of sales in the amount of one thousand
pesos (P1, 000) or more where the sale or transfer
is made to a VAT-registered person, the name,
business style, if any, address and taxpayer
identification number (TIN) of the purchaser,
customer or client (Sec. 113[B], NIRC).
Invoicing requirements in deemed sale transactions
In the case of Sec. 106, (B)(1) [transfer, use or
consumption not in the ordinary course of business of
goods or properties originally intended for sale or for use
204
VALUE-ADDED TAX
FILING OF RETURN AND PAYMENT
in the ordinary course of business], a memorandum entry
in the subsidiary sales journal to record withdrawal of
goods for personal use is required.
Persons required to file a VAT Return
In the case of Sec. 106 (B)(2), [distribution or transfer to
shareholders or creditors] and Sec. 106 (B)(3)
[consignment of goods if actual sale is made within 60
days after the date of such consignment],an invoice shall
be prepared at the time of the occurrence of the
transaction, which should include, all the information
prescribed in Sec. 113-1. The data appearing in the
invoice shall be duly recorded in the subsidiary sales
journal. The total amount of “deemed sale” shall be
included in the return to be filed for the month or
quarter.
1.
2.
3.
4.
Every person or entity who in the course of trade or
business, sells or leases goods, properties, and
services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed P1,919,500 for
any twelve month period
A person required to register as VAT taxpayer but
failed to register
Any person who imports goods
Professional practitioners whose gross fees exceed
P1,919,500 for any 12-month period.
Filing of return
In the case of Sec. 106(B)(4), [retirement or cessation of
business], an inventory shall be prepared and submitted
to the RDO who has jurisdiction over the taxpayer’s
principal place of business not later than 30 days after
retirement or cessation from business.
Every taxable person is required to account for and pay
VAT by reference to each accounting period consisting of
three months, referred to as a taxable quarter.
A VAT declaration for the month (form 2550M)
must be filed within 20 days after the end of the
month concerned
A VAT return covering the amount of his gross
sales or receipts and purchases for the
prescribed taxable quarter (for 2550Q) must be
filed by the taxable person within 25 days
following the close of the quarter to which it
relates (Sec. 114, NIRC)
An invoice shall be prepared for the entire inventory,
which shall be the basis of the entry into the subsidiary
sales journal. The invoice need not enumerate the
specific items appearing in the inventory, but it must
show the total amount. It is sufficient to just make a
reference to the inventory regarding the description of
the goods. However, the sales invoice number should be
indicated in the inventory filed and a copy thereof shall
form part of this invoice. If the business is to be
continued by the new owners or successors, the
entire amount of output tax on the amount deemed sold
shall be allowed as input taxes. If the business is to be
liquidated and the goods in the inventory are sold or
disposed of to VAT-registered buyers, an invoice or
instrument of sale or transfer shall to prepared citing the
invoice number wherein the tax was imposed on the
deemed sale. At the same time the tax paid
corresponding to the goods sold should be separately
indicated in the instrument of sale (Sec. 4.113-2, R.R. 162005).
Only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office
and all branches (Sec. 114[A], NIRC).
Payment of VAT
VAT must be paid every month.
Scope
Consequences of issuing erroneous VAT invoice or
VAT official receipt
1. In case of non-VAT registered person who issues a
VAT invoice/receipt shall be held liable for:
a. Payment of percentage tax if applicable;
b. Payment of VAT without input tax;
c. 50% surcharge on tax due as provided for
under Sec. 248(B); and
Form 2550-M
Monthly
sales
and/or receipts
within 20 days
following the end
of month.
Form 2550-Q
Quarterly
sales
and/or
receipts
within 25 days after
the close of each
taxable quarter.
Accomplished
only for each of
the first 2 months
of each taxable
quarter.
The VAT payable for
each calendar quarter
shall be reduced by
the total amount of
taxes previously paid
for the preceding 2
months and/or the
sum of the allowance
excess
input
tax
carried over and the
VAT withheld by the
government.
25th day of following
calendar quarter
The purchaser shall be allowed to recognize an
input tax credit provided that the invoice/official
receipt contains the required information under Sec.
110 on Tax Credits.
Deadline
2. In case a VAT-registered who issues a VAT
invoice/official receipt for a VAT-exempt sale
without the words “VAT Exempt Sale,” the
transaction shall become taxable and the issuer shall
be liable to pay VAT thereon. The purchaser shall be
entitled to claim an input tax credit on his purchase.
20th
day
of
following month
Other special transactions:
1.
205
Cancellation of VAT registration - Any person,
whose registration has been cancelled in accordance
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
with Section 236, shall file and pay a return within
25 days from the date of cancellation of registration;
The Government or any of its political subdivisions,
instrumentalities or agencies, including government
owned or controlled corporations (GOCCs) shall, before
making payment on account of its purchase of goods
and/or services taxed at 12% shall deduct and withhold
a final VAT of 5% of the gross payment. The payment
for lease or use of properties or property rights to
nonresident owners shall be subject to 12% withholding
tax at the time of payment. For purposes of this section,
the payor or person in control of the payment shall be
considered as the withholding agent (Sec. 114(C), NIRC).
NOTE: Under Section 236 of NIRC, a VAT –
registered person may cancel his registration for
VAT if:
a. He makes written application and can
demonstrate to the commissioner’s satisfaction that
his gross sales or receipts for the following twelve
(12) months, other than those that are exempt
under Section 109(A) to (U), will not exceed
P1,919,500 or
b. He has ceased to carry on his trade or business,
and does not expect to recommence any trade or
business within the next twelve (12) months.
NOTE: The five percent (5%) final VAT withholding rate
shall represent the net VAT payable to the seller
The remaining seven percent (7%) effectively accounts
for the standard input VAT for sales of goods or services
to government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, in lieu of
the actual Input VAT directly attributable or ratably
apportioned to such sales.
The cancellation of registration will be effective
from the first day of the following month (Sec. 236
(F), NIRC).
2.
3.
VAT on sale of refined sugar- payable in advance
by the owner/seller to the BIR through the sugar
refinery. The advance payment must be made prior
to or upon the issuance of the refined sugar release
order or similar instruments. However, the ownerseller may withdraw his refined sugar from the
sugar mill or refinery warehouse with advance
payment of the tax if it will not be locally sold but
rather for use exclusively as raw material in the
manufacture of sugar-based food products intended
for zero-rated export (VAT Ruling No. 198-90,
September 14, 1990).
Should actual input VAT attributable to sale to
government exceed seven percent (7%) of gross
payments, the excess may form part of the seller’s
expense or cost.
If actual input VAT attributable to sale to government is
less than 7% of gross payment, the difference must be
closed to expense or cost.
The government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, as well as
private corporations, individuals, estates and trusts,
whether large or non-large taxpayers, shall withhold ten
percent (12%) VAT with respect to the following
payments:
(1) Lease or use of properties or property rights owned
by non-residents;
(2) Services rendered to local insurance companies, with
respect to reinsurance premiums payable to nonresidents; and
(3) Other services rendered in the Philippines by nonresidents.
VAT on sale of flour – The VAT on the sale of flour
milled from imported wheat shall be paid in
advance prior to the withdrawal of the imported
wheat from customs custody based on the formulate
prescribed in the regulation (Rev. Regs. No. 29-2003,
October 30, 2003). Purchases by flour millers of
imported wheat from traders shall also be subjected
to advance VAT and shall be paid by the flour miller
prior to delivery (Sec. 4.114-1 (B) (2), Rev. Regs. No.
16-05).
Where to File the Return and Pay the Tax
VAT withheld and paid for the non-resident recipient
(remitted using BIR Form No. 1600), which VAT is
passed on to the resident withholding agent by the nonresident recipient of the income, may be claimed as input
tax by said VAT-registered withholding agent upon filing
his own VAT Return, subject to the rule on allocation of
input tax among taxable sales, zero-rated sales and
exempt sales. The duly filed BIR Form No. 1600 is the
proof or documentary substantiation for the claimed
input tax or input VAT.
GR: It shall be filed with and the tax paid to
1. An Authorized Agent Bank (AAB);
2. Revenue Collection Officer (RCO); or
3. Duly authorized city or municipal Treasurer,
where such Treasurer is
a. Within the Philippines; and
b. Located within the revenue district where
the taxpayer is registered or required to
register (Sec. 114[B]).
XPN: As the Commissioner otherwise permits.
Nonetheless, if the resident withholding agent is a nonVAT taxpayer, said passed-on VAT by the non-resident
recipient of the income, evidenced by the duly filed BIR
Form No. 1600, shall form part of the cost of purchased
services, which may be treated either as an "asset" or
"expense", whichever is applicable, of the resident
withholding agent.
WITHHOLDING OF FINAL VAT ON SALES TO
GOVERNMENT
Rule regarding the withholding of Final VAT on sales
to government
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
206
VALUE-ADDED TAX
The VAT withheld shall be remitted within 10 days
following the end of the month the withholding was
made (Sec. 4.114-2, RR. 16-2005).
Overseas dispatch, Gross Receipts
message
or
conversation
originating
from
the Philippines
NOTE: It was held in the case of Abakada Guro Partylist v.
Ermita, G.R. No. 168056, September 1, 2005, that the since
it has not been shown that the class subject to the 5%
final withholding tax has been unreasonably narrowed,
there is no reason to invalidate the provision. It applies
to all those who deal with the government.
Banks and nonbank
financing
intermediaries
performing quasibanking functions
PERCENTAGE TAXES (CONCEPT AND NATURE)
10%
On interest, commissions and
discounts from lending activities as
well as income from financial
leasing, on the basis of remaining
maturities
of
instruments
maturities of instruments from
which recipts are derived:
As a rule, VAT is imposed on every sale, barter, or
exchange of goods or services and on importations.
However, there are instances where the same does not
apply because the transaction is subject to other
percentage taxes (OPT) as required by the NIRC.
• Maturity period is five 5%
years or less
Percentage tax is a tax imposed on sale, barter, exchange
or importraion of goods, or sale of services based upon
gross sales, vaue in money of receipts derived by the
manufacturer, producer, importer or seller measured by
certain percentage of the gross selling price or receipts.
If the transaction is subject to OPT, it is no longer subject
to VAT. Nonethelss, OPT as well as VAT may be imposed
together with excise taxes (Tabag, 2015).
On dividends and equity 0%
shares and net income of
subsidiaries
• Maturity period is 1%
more than five years
On royalties, rentals of 7%
property,
real
or
personal, profits from
exchange and all other
items treated as gross
income under Sec. 32 of
the NIRC, as amended
Tax Rates
Persons
exempt Gross Receipts on sale or 3%
from VAT under lease
of
goods,
Section 109 (W)
properties or services
On net trading gains 7%
within the taxable year
of foreign currency, debt
securities,
derivatives
and
other
similar
financial instruments
Domestic carriers Gross
Receipts
on 3%
and keepers of transport of passengers
garages
by land (except those
thru animal drawn twowheeled vehicles)
Other
non-bank Interest,
commissions 5%
financial
and discounts and all
intermediaries
other items treated as
gross income under the
NIRC, as amended
Coverage
Basis
Tax Rate
International
Carriers:
International
air/shipping
carriers
doing
business in the
Philippines
Interest,
commissions
and
discounts from lending activities,
as well as income from financial
leasing on the basis of remaining
maturities of instruments:
Gross Receipts from 3%
transpot of cargo from
the
Philippines
to
another country
• Maturity period is five 5%
years or less
Franchise Grantees:
Gas and
utilities
water Gross Receipts
Radio
and Gross Receipts
television
broadcasting
companies whose
annual
gross
receipts of the
preceding year do
not
exceed
P
10,000,000 and did
not opt to register
as VAT taxpayer
• Maturity period is 1%
more than five years
2%
3%
207
Life
Insurance Total
Companies (except collected
purely cooperative
companies
or
associations)
premiums 2%
Agents of foreign insurance
reinsurance premium):
companies
Insurance agents Total
authorized under collected
the Insurance Code
to procure policies
premiums 4%
(except
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
of insurance for
companies
not
authorized
to
transact business
in the Philippines
dealer
of
securities
[Sec. 127 (A)]
Owners
of Total premiums paid
property obtaining
insurance directly
with
foreign
insurance
companies
Sale, barter or
exchange or
other
disposition
through
initial public
offering (IPO)
of shares of
stock
in
closely-held
corporations
[Sec.
127
(B)]
5%
Proprietor, lessee or operator of the following:
Cockpits
Gross receipts
18%
Cabarets, Night or Gross receipts
Day Clubs videoke
bars, karaoke bars,
karaoke
televisions,
karaoke boxes and
music lounges
18%
Boxing exhibitions
Gross receipts
10%
Professional
basketball games
Gross receipts
15%
Winnings
'dividends'

Winnings from 4%
double
forecast/quinel
la and trifecta
bets
Prizes
owners
winning
horses

Up to 25%

Over 25% but 2%
not over 33
1/3%

Over 33 1/3%
4%
1%
EXCISE TAX (CONCEPT AND NATURE)
Excise tax is essentially a tax on goods, products or
articles
30%


Proportion of disposed shares to
total outstanding shares after the
listing in the local stock exchange:
(www.bir.gov.ph)
Jai-alai and race Gross receipts
track
(operators
shall withheld tax
on winnings)
Winnings on horse
races
Gross selling price or gross value in
money
The term "excise tax" under Title VI of the 1997 NIRC
relates to taxes applied to goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to things
imported (Separate opinion of J. Bersamin in CIR v.
Pilipinas Shell Petroleum Corp., G.R. No. 188497, 2014).
or 10%
Kinds of excise taxes
1. Specific tax - imposed and based on weight or volume
capacity or any other physical unit of measurement
2. Ad valorem tax - imposed and based on the selling
price or other specified value of the goods
The payment of excise taxes is the direct liability of
the manufacturer or producer
of 10%
of
race
The production, manufacture or importation of the
goods belonging to any of the categories enumerated in
Title VI of the NIRC (i.e., alcohol products, tobacco
products, petroleum products, automobiles and nonessential goods, mineral products) are not the sole
determinants for the proper levy of the excise tax. It is
further required that the goods be manufactured,
produced or imported for domestic sale, consumption or
any other disposition. The accrual of the tax liability is,
therefore, contingent on the production, manufacture or
importation of the taxable goods and the intention of the
manufacturer, producer or importer to have the goods
locally sold or consumed or disposed in any other
manner. This is the reason why the accrual and liability
for the payment of the excise tax are imposed directly on
the manufacturer or producer of the taxable goods, and
arise before the removal of the goods from the place of
their production (Separate opinion of J. Bersamin in CIR v.
Pilipinas Shell Petroleum Corp., G.R. No. 188497, 2014).
Sale, Barter, Exchange of Shares of Stock Listed and
Trased through the Local Stock Exchange or Through
Initial Public Offering
Sale, barter, Gross selling price or ½ of 1%
exchange or gross value in money
other
disposition of
shares
of
stock listed
and
traded
through the
Local Stock
Exchange
other than the
sale by a
UNIVERSITY OF SANTO TOMAS
2017 GOLDEN NOTES
208
TAX REMEDIES UNDER NIRC
Major classification of excisable articles and related
codal section
TAX REMEDIES UNDER NIRC
1. Alcohol Products (Sections 141-143)
a. Distilled Spirits (Section 141)
b. Wines (Section 142)
c. Fermented Liquors (Section 143)
2. Tobacco Products (Sections 144-146)
a. Tobacco Products (Section 144)
b. Cigars & Cigarettes (Section 145)
c. Inspection Fee (Section 146)
3. Petroleum Products (Section 148)
4. Miscellaneous Articles (Section 149-150)
a. Automobiles (Section 149)
b. Non-essential Goods (Section 150)
5. Mineral Products (Sections 151) (www.bir.gov.ph)
Remedies of Taxpayer
These are legal actions which a taxpayer can avail to seek
relief from the undue burden or oppressive effect of tax
laws, or as means to check possible excesses by revenue
officers in the performance of their duties.
Remedies before payment
1. Administrative remedies
a. Protest of assessment;
i. Reconsideration
ii. Reinvestigation
b. Compromise; and
c. Abatement
2. Judicial Remedies
DOCUMENYTARY TAXES (CONCEPT AND NATURE)
Nature and Persons Liable for the Tax
Remedies after payment
1. Administrative remedies
a. Tax refund
b. Tax credit
2. Judicial remedies
In General — The documentary stamp taxes under Title
VII of NIRC is a tax on certain transactions. It is imposed
against "the person making, signing, issuing, accepting,
or transferring" the document or facility evidencing the
aforesaid transactions. Thus, in general, it may be
imposed on the transaction itself or upon the document
underlying such act. Any of the parties thereto shall be
liable for the full amount of the tax due: Provided,
however, that as between themselves, the said parties
may agree on who shall be liable or how they may share
on the cost of the tax.
Remedies of the Government
These are courses of action provided or allowed in the
law to implement the tax laws or enforce tax collection.
1.
Exception — Whenever one of the parties to the taxable
transaction is exempt from the tax imposed under Title
VII of the Code, the other party thereto who is not
exempt shall be the one directly liable for the tax (RR 0900).
2.
Administrative remedies
a. Tax lien
b. Distraint and levy
c. Forfeiture of real property
d. Suspension of business operation
e. Non-availability of injunction to restrain
collection of tax
Judicial remedies
a. Ordinary civil action
b. Criminal action
ASSESSMENT
Kinds of assessments
1.
Self assessment (Section 56[A], NIRC) – When the
taxpayer computes his own liability, files his return
and pays the tax based on his computation
2.
Deficiency assessment (Section 56[B], NIRC) – this
occurs upon discovery of the BIR that the selfassessment was either deficient or when no return
was made by the taxpayer (Ingles, 2015).
--Q: Do all types of taxes require issuance of
assessment?
A:
GR: Internal Revenue Taxes are self-assessing and do not
require the issuance of an assessment notice in order to
establish the tax liability of a taxpayer (Tupaz v.Ulep, 316
SCRA 118). The NIRC follows the pay-as-you-file system
209
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
LAW ON TAXATION
be issued by the Commissioner or his duly authorized
representative. The FLD/FAN calling for payment of the
taxpayer's deficiency tax or taxes shall state the facts, the
law, rules and regulations, or jurisprudence on which the
assessment is based; otherwise, the assessment shall be
void (RR 18-13).
of taxation under which the taxpayer computes his own
tax liability, prepares the return, and pays the tax as he
files the return.
XPNs:
1. When the taxable period of a taxpayer is terminated
(Sec. 6 [D], NIRC)
2. In case of deficiency tax liability arising from a tax
audit conducted by the BIR (Sec. 56 [B], NIRC)
3. Tax lien (Sec. 219, NIRC)
4. Dissolving corporation (Sec. 52 [c], NIRC)
5. Improperly Accumulated Earnings Tax (Sec. 29,
NIRC)
---
Based on the foregoing, the requisites of a valid
assessment are as follows:
1. In writing and signed by the BIR;
2. Contains the law and the facts on which the
assessment is based;
3. Contains a demand for payment within the
prescribed period;
4. Must be served on and received by the taxpayer.
Tax Assessment (Deficiency)
Note that the old law merely required that the taxpayer
be notified of the assessment made by the CIR. This was
changed in 1998 and the taxpayer must now be informed
not only of the law but also of the facts on which the
assessment is made. Such amendment is in keeping with
the constitutional principle that no person shall be
deprived of property without due process (CIR vs. Enron
Subic Power Corporation) (emphasis supplied).
Neither the NIRC nor the revenue regulations governing
the protest of assessments provide a specific definition
or form of an assessment. However, the NIRC defines the
specific functions and effects of an assessment. An
assessment informs the taxpayer that he or she has tax
liabilities. But not all documents coming from the BIR
containing a computation of the tax liability can be
deemed assessments (CIR vs. PASCOR, 309 SCRA 402).
Thus, the advice of tax deficiency and preliminary fiveday letter given by the CIR to an employee of taxpayer
are not valid substitutes for the mandatory notice in
writing of the legal and factual bases of the assessment.
Just because the CIR issued an advice does not
necessarily mean that the taxpayer was informed of the
law and facts on which the deficiency tax assessment
was made. The law requires that the legal and factual
bases of the assessment be stated in the formal letter of
demand and assessment notice. Such cannot be
pr