TAXATION LAW 2021 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. 2021 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. Released in the Philippines. 2021 ACADEMIC YEAR 2020-2021 CIVIL LAW STUDENT COUNCIL LYODYCHIE Q. CAMARAO MARIA FRANCES FAYE R. GUTIERREZ STEPHEN FLOYD A. GOPEZ KRYSTAL GAYLE R. DIGAY NATHAN RAPHAEL D.L. AGUSTIN GIAN JUSTIN E. VERONA IRIS ABIGAIL C. PORAQUE PRESIDENT VICE PRESIDENT INTERNAL VICE PRESIDENT EXTERNAL SECRETARY TREASURER PUBLIC RELATIONS OFFICER CHIEF-OF-STAFF UST BAR-OPS KRIZA NIÑA B. MALALUAN ELISHA ELAINE D. BAYOT JOSEPHINE GRACE W. ANG MARINETTE M. SOBREVILLA SARAH ANGELA D. EVA REBECCA JOY M. MALITAO JEDIDIAH R. PADUA SABINA MARIA H. MABUTAS JOEMARI MATHEW R. AGARIN JOHN FREDERICK A. NOJARA KIER JOHN V. UY CHRISTINE JOYCE P. ANDRES ELOUISA ANN D.C. CARREON NICOLE MARIE A. CORTES PATRICIA MAE D. GUILLERMO GLENN MATTHEW C. MANLAPID CIARI T. MENDOZA MARYLOU RENZI M. OLOTEO LOUELLE JUDE B. QUE JAMES ROSS L. TAN CHAIRPERSON VICE-CHAIRPERSON INTERNAL VICE CHAIRPERSON EXTERNAL SECRETARY HEAD, PUBLIC RELATIONS OFFICER HEAD, FINANCE COMMITTEE HEAD, HOTEL ACCOMMODATIONS COMMITTEE ASST. HEAD, HOTEL ACCOMMODATIONS COMMITTEE HEAD, LOGISTICS COMMITTEE LOGISTICS COMMITTEE LOGISTICS COMMITTEE SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER SENIOR MEMBER ATTY. AL CONRAD B. ESPALDON ADVISER ACADEMICS COMMITTEE 2021 MARIA FRANCES FAYE R. GUTIERREZ NATHAN RAPHAEL D.L. AGUSTIN JOHN EDWARD F. FRONDA ANGEL ISAH M. ROMERO KIRBY ANNE C. RENIA KAREN ABBIE C. ASPIRAS JOSE CHRISTIAN ANTHONY I. PINZON MARIA FRANCES FAYE R. GUTIERREZ CIARI T. MENDOZA SECRETARY GENERAL ASST. SECRETARY GENERAL EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE LAYOUT ARTIST COVER DESIGN ARTIST TAXATION LAW COMMITTEE 2021 MA. SELYNA V. ROÑO TAXATION LAW COMMITTEE HEAD AIREI KIM P. GUANGA MARFE B. GADDI PATRICIA ANNE D. BAUTISTA ASST. HEAD INCOME TAXATION, TRANSFER TAXES ASST. HEAD GENERAL PRINCIPLES, LOCAL GOVERNMENT TAXATION ASST. HEAD TAX REMEDIES, BUSINESS TAXATION MEMBERS FRANCES GRACE L. CRUZ LESLEY YSABEL B. SUMAGPANG LOUIZE ALLAINE T. AREÑO FELIX ANGELO S. RAMOS MERVIN ANGELO V. MANALO MICHAELLA G. RAMIREZ ANTHONY LUIGI B. DE VERA ATTY. KENNETH GLENN L. MANUEL ATTY. CLARICE ANGELINE V. QUESTIN Advisers ACADEMICS COMMITTEE 2020 AYA DOMINIQUE S. CAPARAS MARIA FRANCES FAYE R. GUTIERREZ RUTH MAE G. SANVICTORES NICOLE G. AMANTE JAYSON GABRIEL R. SORIANO CARA ANGELA N. FLORES IANA CASSANDRA Y. ESMILE AYA DOMINIQUE S. CAPARAS CIARI T. MENDOZA SECRETARY GENERAL ASST. SECRETARY GENERAL EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE EXECUTIVE COMMITTE EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE LAYOUT ARTIST COVER DESIGN ARTIST TAXATION LAW COMMITTEE 2020 JOANNA MARIE REYES TAXATION LAW COMMITTEE HEAD LAUREN STAR BORROMEO ASST. HEAD, INCOME TAXATION MEMBERS ROCHELLE NIEVA CURIBA GERMAINE VIDA L. CARREON SHARMAINE ELIZA T. MACASERO LIRAH ALORRA R. CALUAG ATTY. KENNETH GLENN L. MANUEL Adviser 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. GADIANA, 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 ATTY. RIZALINA V. LUMBERA ATTY. LEAN JEFF M. MAGSOMBOL ATTY. KENNETH GLENN L. MANUEL ATTY. CLARICE ANGELINE V. QUESTIN For being our guideposts in understanding the intricate sphere of Taxation Law. -Academics Committee 2021 DISCLAIMER THE RISK OF USE OF THIS BAR REVIEW MATERIAL SHALL BE BORNE BY THE USER TABLE OF CONTENTS I. GENERAL PRINCIPLES .................................................................................................................................................. 1 A. CONCEPT AND PURPOSE OF TAXATION ................................................................................................... 1 1. Definition ...................................................................................................................................................................................1 2. Purpose .......................................................................................................................................................................................1 3. Distinguish: tax and other forms of exactions .........................................................................................................1 B. DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN ........................... 4 C. THEORY AND BASIS OF TAXATION ............................................................................................................ 6 1. Lifeblood theory .....................................................................................................................................................................6 2. Necessity theory .....................................................................................................................................................................7 3. Benefits-received theory ....................................................................................................................................................7 D. JURISDICTION OVER SUBJECT AND OBJECTS .......................................................................................... 7 E. PRINCIPLES OF A SOUND TAX SYSTEM ..................................................................................................... 7 1. Fiscal adequacy .......................................................................................................................................................................7 2. Theoretical justice .................................................................................................................................................................7 3. Administrative feasibility ..................................................................................................................................................7 F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION ..................................................... 8 G. STAGES OR ASPECTS OF TAXATION ....................................................................................................... 28 H. REQUISITES OF A VALID TAX ................................................................................................................... 30 I. KINDS OF TAXES ............................................................................................................................................ 30 J. GENERAL CONCEPTS IN TAXATION.......................................................................................................... 31 1. Prospectivity of taw laws ................................................................................................................................................ 31 2. Imprescriptibility................................................................................................................................................................ 32 3. Situs of taxation ................................................................................................................................................................... 32 4. Double taxation.................................................................................................................................................................... 34 a. Strict sense ................................................................................................................................................................... 34 b. Broad sense ................................................................................................................................................................. 34 c. Tax treaties as relief from double taxation................................................................................................... 34 5. Escape from taxation ........................................................................................................................................................ 35 a. Shifting of tax burden ............................................................................................................................................. 35 b. Distinguish: tax avoidance and tax evasion ................................................................................................. 36 6. Exemption from taxation ................................................................................................................................................ 37 7. Equitable recoupment ...................................................................................................................................................... 40 8. Prohibition on compensation and set-off ............................................................................................................... 41 9. Compromise .......................................................................................................................................................................... 42 10. Tax amnesty........................................................................................................................................................................ 42 K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGULATIONS ............... 43 II. NATIONAL TAXATION .............................................................................................................................................. 46 A. TAXING AUTHORITY ................................................................................................................................... 46 1. Jurisdiction, power, and functions of the Commissioner of Internal Revenue ..................................... 46 2. Rule-making authority of the Secretary of Finance ........................................................................................... 52 B. INCOME TAX .................................................................................................................................................. 55 1. Definition, nature and general principles ............................................................................................................... 55 a. Income tax systems .................................................................................................................................................. 55 i. Global ....................................................................................................................................................................... 55 ii. Schedular .............................................................................................................................................................. 55 iii. Others.................................................................................................................................................................... 55 b. Features of the Philippine income tax law ................................................................................................... 56 c. Criteria in imposing Philippine income tax law ......................................................................................... 56 i. Citizenship .............................................................................................................................................................56 ii. Residence ..............................................................................................................................................................56 iii. Source....................................................................................................................................................................56 d. General principles of income taxation ............................................................................................................56 e. Types of Philippine income tax ..........................................................................................................................57 f. Kinds of taxpayers .....................................................................................................................................................57 g. Taxable period ............................................................................................................................................................58 2. Concept of income ..............................................................................................................................................................59 b. When income is taxable .........................................................................................................................................59 i. Existence of income...........................................................................................................................................59 ii. Realization of income......................................................................................................................................61 iii. Recognition of income...................................................................................................................................61 c. Tests in determining whether income is earned for tax purposes ...................................................62 i. Realization test ....................................................................................................................................................62 ii. Claim of right doctrine or doctrine of ownership, command or control ................................62 iii. Economic benefit test or doctrine of proprietary interest ..........................................................62 iv. Severance test ....................................................................................................................................................62 d. Method of accounting .............................................................................................................................................63 i. Distinguish: cash and accrual method......................................................................................................63 ii. Special method: installment, deferred payment, percentage of completion (in long-term contracts) ...................................................................................................................................................................63 e. Situs of Income ...........................................................................................................................................................64 3. Gross income .........................................................................................................................................................................65 c. Sources of income subject to tax ........................................................................................................................67 i. Compensation income......................................................................................................................................67 ii. Fringe benefits....................................................................................................................................................68 iii. Professional income .......................................................................................................................................68 iv. Income from business ...................................................................................................................................69 v. Income from dealings in property ............................................................................................................69 (a) Distinguish ordinary asset and capital asset ..............................................................................70 (b) Types of gains ............................................................................................................................................72 (c) Special rules pertaining to income or loss from dealings in property classified as capital asset (loss limitation rule, loss carry-over rule, holding period rule)....................74 (d) Tax-free exchanges .................................................................................................................................83 vi. Passive investment income .........................................................................................................................83 (a) Interest ..........................................................................................................................................................84 (b) Dividend .......................................................................................................................................................86 (c) Royalty income ..........................................................................................................................................91 (d) Rental income ............................................................................................................................................91 vii. Annuities and proceeds from life insurance or other types of insurance ...........................93 viii. Prizes and awards .........................................................................................................................................94 ix. Pension, retirement benefit, or separation pay.................................................................................96 x. Income from any source ................................................................................................................................96 (a) Condonation of indebtedness ............................................................................................................96 (b) Recovery of accounts previously written off..............................................................................97 (c) Receipt of tax refunds or credit .........................................................................................................97 d. Exclusions.....................................................................................................................................................................98 i. Rationale .................................................................................................................................................................98 ii. Taxpayers who may avail..............................................................................................................................98 iii. Distinguish: exclusions, deductions, and tax credits ......................................................................99 iv. Exclusions under the Constitution ....................................................................................................... 100 Amounts received under life insurance contracts under life insurance endowment or annuity contracts.......................................................................................................................................... 104 4. Deductions .......................................................................................................................................................................... 114 a. General rule .............................................................................................................................................................. 115 b. Concept of return of capital .............................................................................................................................. 116 c. Distinguish: itemized deductions and optional standard deduction ............................................ 116 d. Requirements for deductible items .............................................................................................................. 117 e. Items not deductible............................................................................................................................................. 145 5. Income tax on individuals............................................................................................................................................ 146 a. Resident citizens, non-resident citizens, and resident aliens .......................................................... 146 i. Coverage .............................................................................................................................................................. 149 ii. Taxation on compensation income ....................................................................................................... 149 (a) Inclusions.................................................................................................................................................. 150 (b) Exclusions ................................................................................................................................................ 150 iii. Taxation of business income/income from practice of profession ...................................... 158 (a) Schedular .................................................................................................................................................. 158 (b) 8% option ................................................................................................................................................. 159 iv. Taxation of partners in a general professional partnership .................................................... 160 v. Taxation of passive income ....................................................................................................................... 160 vi. Taxation of capital gains............................................................................................................................ 160 (a) Income from sale of shares of stock of a Philippine corporation .................................. 160 (b) Income from sale of real property situated in the Philippines....................................... 160 (c) Income from sale, exchange, and other disposition of other capital assets ............. 160 b. Non-resident aliens engaged in trade or business ................................................................................ 160 c. Non-resident aliens not engaged in trade or business ........................................................................ 161 d. Aliens employed by regional headquarters, regional operating headquarters, offshore banking units, and petroleum service contractors .................................................................................... 161 e. Individual taxpayers exempt from income tax ........................................................................................ 162 i. Minimum wage earner ................................................................................................................................. 162 ii. Exemptions granted under international agreements ................................................................ 163 6. Income tax on corporations........................................................................................................................................ 163 a. Domestic Corporations ....................................................................................................................................... 165 i. Taxation – in general ..................................................................................................................................... 165 (a) Regular Corporate Income Tax (RCIT) ....................................................................................... 166 (b) Minimum Corporate Income Tax (MCIT) ................................................................................. 166 (c) Taxation of passive income .............................................................................................................. 170 (d) Taxation of capital gains ................................................................................................................... 170 (e) Improperly accumulated earnings tax ....................................................................................... 170 ii. Proprietary educational institutions and non-profit hospitals ............................................... 172 iii. Government-owned or controlled corporations, agencies, instrumentalities ............... 175 iv. Foreign currency deposit units .............................................................................................................. 175 b. Resident foreign corporations ........................................................................................................................ 175 i. Taxation – in general ..................................................................................................................................... 176 (a) Regular Corporate Income Tax (RCIT) ....................................................................................... 176 (b) Minimum Corporate Income Tax (MCIT) ................................................................................. 176 (c) Branch Profits Remittance Tax (BPRT) ...................................................................................... 176 (d) Taxation of passive income ............................................................................................................. 177 (e) Taxation of capital gains .................................................................................................................... 177 ii. Resident foreign corporations subject to preferential tax rates ............................................. 177 (a) International carriers ......................................................................................................................... 177 (b) Foreign currency deposit units and offshore banking units............................................ 178 (c) Regional or area headquarters and regional operating headquarters ....................... 179 c. Non-resident foreign corporations (NRFC) .............................................................................................. 179 i. Taxation of NRFC in general ...................................................................................................................... 179 ii. NRFCs subject to preferential tax rates .............................................................................................. 179 d. Corporations exempt from income tax ....................................................................................................... 179 e. Tax on other business entities; general partnerships, general professional partnerships, coownerships, joint ventures, and consortia ..................................................................................................... 181 7. Filing of returns and payment ................................................................................................................................... 186 a. Individual return .................................................................................................................................................... 186 i. Who are required to file; exceptions ..................................................................................................... 186 ii. Substituted filing ............................................................................................................................................ 187 iii. When and where to file ............................................................................................................................. 188 b. Corporate returns.................................................................................................................................................. 188 i. Quarterly income tax ..................................................................................................................................... 188 ii. Final adjustment return .............................................................................................................................. 188 iii. When and where to file.............................................................................................................................. 189 iv. Return of corporations contemplating dissolution or reorganization ............................... 189 c. Return on capital gains realized from sale of shares of stock and real estate .......................... 189 8. Withholding tax .............................................................................................................................................. 189 b. Final withholding tax ........................................................................................................................................... 190 c. Creditable withholding tax ................................................................................................................................ 190 i. Expanded withholding tax .......................................................................................................................... 191 ii. Withholding tax on compensation......................................................................................................... 191 d. Fringe benefits tax ................................................................................................................................................. 191 e. Duties of a withholding agent .......................................................................................................................... 191 C. ESTATE TAX................................................................................................................................................. 196 1. Basic principles, concept, and definition .............................................................................................................. 196 2. Classification of decedent ............................................................................................................................................ 197 3. Composition of gross estate ........................................................................................................................................ 197 a. Items to be included in determining gross estate .................................................................................. 200 i. Decedent’s interest ......................................................................................................................................... 200 ii. Transfers in contemplation of death .................................................................................................... 200 iii. Revocable transfers ..................................................................................................................................... 202 iv. Property passing under a general power of appointment ........................................................ 203 v. Proceeds of life insurance .......................................................................................................................... 204 vi. Prior interests................................................................................................................................................. 206 vii. Transfers for insufficient consideration........................................................................................... 206 b. Allowable deductions from gross estate .................................................................................................... 208 c. Exclusions from gross estate and exemptions of certain acquisitions and transmissions . 215 d. Tax credit for estate taxes paid to a foreign country............................................................................ 216 e. Filing of estate tax returns and payment of estate tax ......................................................................... 217 D. DONOR’S TAX.............................................................................................................................................. 221 1. Basic principles, concept, and definition .............................................................................................................. 221 2. Requisites of a valid donation .................................................................................................................................... 223 3. Transfers which may be considered as donation ............................................................................................. 224 a. Sale, exchange, or transfer of property for less than adequate and full consideration; exception ........................................................................................................................................................................ 224 b. Condonation or remission of debt ................................................................................................................. 225 c. Renunciation of inheritance; exception ...................................................................................................... 225 4. Classification of donor ................................................................................................................................................... 226 5. Determination of gross gift ......................................................................................................................................... 226 a. Composition of gross gift.................................................................................................................................... 226 b. Valuation of gifts made in property .............................................................................................................. 226 c. Exemption of certain gifts .................................................................................................................................. 227 6. Tax credit for donor’s taxes paid to a foreign country................................................................................... 231 7. Filing of return and payment ..................................................................................................................................... 231 E. VALUE-ADDED TAX ................................................................................................................................... 233 1. Nature and characteristics of value-added tax .................................................................................................. 233 a. Tax on value added ............................................................................................................................................... 233 b. Sales tax ...................................................................................................................................................................... 233 c. Tax on consumption ............................................................................................................................................. 233 d. Indirect tax; impact and incidence of tax ................................................................................................... 234 e. Tax credit method.................................................................................................................................................. 234 f. Destination principle and cross-border principle .................................................................................. 234 2. Persons liable to value-added tax ............................................................................................................................ 236 3. Imposition of value-added tax ................................................................................................................................... 236 a. On sale of goods or properties......................................................................................................................... 236 i. Tax base: gross selling price ...................................................................................................................... 237 ii. Transactions deemed sale ......................................................................................................................... 238 iii. Change or cessation of status as value-added tax-registered person ................................. 239 b. On importation of goods .................................................................................................................................... 240 c. On sale of services and use or lease of properties ................................................................................. 241 4. Zero-rated and effectively zero-rated sales of goods or properties, and services ........................... 246 5. Value-added tax-exempt transactions ................................................................................................................... 251 6. Input and output tax....................................................................................................................................................... 260 7. Refund or tax credit of excess input tax; procedure ....................................................................................... 266 8. Compliance requirements ........................................................................................................................................... 277 a. Registration .............................................................................................................................................................. 277 b. Invoicing requirements ...................................................................................................................................... 278 c. Filing of returns and payment ......................................................................................................................... 280 d. Withholding of final value-added tax on sales to government ........................................................ 281 e. Administrative and penal sanctions ............................................................................................................. 281 F. PERCENTAGE TAXES: CONCEPT AND NATURE ................................................................................... 283 G. EXCISE TAX: CONCEPT AND NATURE ................................................................................................... 285 H. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE ................................................................... 288 I. TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE ............................................ 289 1. Assessment of internal revenue taxes ................................................................................................................... 290 a. Procedural due process in tax assessments.............................................................................................. 294 i. Letter of authority and tax audit.............................................................................................................. 294 ii. Informal conference ..................................................................................................................................... 295 iii. Preliminary assessment notice .............................................................................................................. 296 iv. Formal letter of demand and final assessment notice ................................................................ 298 v. Disputed assessment .................................................................................................................................... 299 vi. Administrative decision on a disputed assessment ..................................................................... 300 vii. Appeal from an administrative decision on disputed assessment ...................................... 300 b. Requisites of a valid assessment .................................................................................................................... 303 c. Tax delinquency and tax deficiency .............................................................................................................. 303 d. Prescriptive period for assessment .............................................................................................................. 304 i. General rule........................................................................................................................................................ 305 ii. Distinguish: false returns, fraudulent returns, and non-filing of returns........................... 309 iii. Suspension of statute of limitations .................................................................................................... 311 2. Taxpayer’s remedies ...................................................................................................................................................... 311 a. Protesting an assessment .................................................................................................................................. 312 i. Period to file protest ...................................................................................................................................... 312 ii. Kinds of protest – request for reconsideration or reinvestigation ........................................ 312 iii. Submission of supporting documents ................................................................................................ 313 iv. Effect of failure to file protest ................................................................................................................. 314 v. Action of the Commissioner on the protest filed ............................................................................ 314 (a) Period to file protest............................................................................................................................ 314 (b) Remedies of the taxpayer in case of denial or inaction of the Commissioner......... 316 (c) Effect of failure to appeal .................................................................................................................. 318 b. Recovery of tax erroneously or illegally collected ................................................................................ 319 i. Grounds, requisites, and periods for filing a claim for refund or issuance of a tax credit certificate ................................................................................................................................................................ 319 ii. Proper party to file claim for refund or tax credit ii. Proper party to file claim for refund or tax credit ........................................................................................................................................................... 324 iii. Distinguish from input value-added tax refund ............................................................................ 332 c. Power of Commissioner of Internal Revenue to compromise ......................................................... 334 d. Non-retroactivity of rulings.............................................................................................................................. 340 3. Government remedies for collection of delinquent taxes ............................................................................ 340 a. Requisites .................................................................................................................................................................. 340 b. Prescriptive periods; suspension of running of statute of limitations ........................................ 341 c. Administrative remedies .................................................................................................................................... 342 i. Tax lien ................................................................................................................................................................. 342 ii. Distraint and levy .......................................................................................................................................... 343 iii. Forfeiture of real property....................................................................................................................... 348 iv. Suspension of business operation ........................................................................................................ 348 v. Judicial remedies ............................................................................................................................................ 349 d. No injunction rule; exceptions ........................................................................................................................ 349 4. Civil penalties..................................................................................................................................................................... 350 a. Delinquency interest and deficiency interest........................................................................................... 350 b. Surcharge................................................................................................................................................................... 351 c. Compromise penalty............................................................................................................................................. 352 d. Fraud penalty........................................................................................................................................................... 352 III. LOCAL TAXATION .................................................................................................................................................. 358 A. LOCAL GOVERNMENT TAXATION.......................................................................................................... 358 1. Fundamental principles ................................................................................................................................................ 358 2. Nature and source of taxing power ......................................................................................................................... 359 a. Grant of local taxing power under the Local Government Code ..................................................... 359 b. Authority to prescribe penalties for tax violations ............................................................................... 360 c. Authority to grant local tax exemptions ..................................................................................................... 361 d. Withdrawal of exemptions................................................................................................................................ 362 e. Authority to adjust local tax rates .................................................................................................................. 363 f. Residual taxing power of local governments ............................................................................................ 363 3. Scope of taxing power.................................................................................................................................................... 364 4. Specific taxing power of local government units .............................................................................................. 364 5. Common revenue raising powers ............................................................................................................................ 379 6. Community tax .................................................................................................................................................................. 379 7. Common limitations on the taxing powers of local government units .................................................. 380 8. Requirements for a valid tax ordinance ................................................................................................................ 383 9. Taxpayer’s remedies ...................................................................................................................................................... 384 a. Protest ......................................................................................................................................................................... 384 b. Refund ......................................................................................................................................................................... 384 c. Action before the Secretary of Justice .......................................................................................................... 385 10. Assessment and collection of local taxes ........................................................................................................... 386 a. Remedies of local government units ............................................................................................................ 388 b. Prescriptive period ............................................................................................................................................... 392 B. Real Property Taxation............................................................................................................................ 394 1. Fundamental principles ................................................................................................................................................ 394 2. Nature .................................................................................................................................................................................... 394 3. Imposition ........................................................................................................................................................................... 395 a. Power to levy ........................................................................................................................................................... 396 b. Exemption from real property tax................................................................................................................. 399 4. Appraisal and assessment ........................................................................................................................................... 406 a. Classes of real property ...................................................................................................................................... 407 b. Assessment based on actual use..................................................................................................................... 407 5. Collection ............................................................................................................................................................................. 410 a. Date of accrual ......................................................................................................................................................... 410 b. Periods to collect.................................................................................................................................................... 410 c. Remedies of local government units............................................................................................................. 412 6. Taxpayer’s remedies ...................................................................................................................................................... 416 a. Contesting an assessment .................................................................................................................................. 416 i. Payment under protest; exceptions ....................................................................................................... 417 ii. File protest with Treasurer ....................................................................................................................... 418 iii. Refunds or credits of real property taxes ......................................................................................... 418 b. Contesting a valuation of real property ...................................................................................................... 420 i. Appeal to the Local Board of Assessment Appeals (LBAA)......................................................... 420 ii. Appeal to the Central Board of Assessment Appeals (CBAA) ................................................... 420 iii. Effect of payment of taxes ........................................................................................................................ 421 c. Compromising real property tax assessment ........................................................................................... 421 IV. JUDICIAL REMEDIES .............................................................................................................................................. 423 A. JURISDICTION OF THE COURT OF TAX APPEALS .............................................................................. 424 1. Exclusive original and appellate jurisdiction over civil cases .................................................................... 424 2. Exclusive original and appellate jurisdiction over criminal cases ........................................................... 429 B. PROCEDURE ................................................................................................................................................ 429 1. Filing of an action for collection of taxes .............................................................................................................. 429 a. Internal revenue taxes ........................................................................................................................................ 430 b. Local taxes ................................................................................................................................................................. 430 2. Civil cases............................................................................................................................................................................. 431 a. Who may appeal, mode of appeal, and effect of appeal ...................................................................... 431 b. Suspension of collection of taxes ................................................................................................................... 436 c. Injunction not available to restrain collection ......................................................................................... 438 3. Criminal cases.................................................................................................................................................................... 438 a. Institution and prosecution of criminal action........................................................................................ 438 b. Institution of civil action in criminal action.............................................................................................. 438 c. Period to appeal ...................................................................................................................................................... 439 4. Appeal to the Court of Tax Appeals en banc ....................................................................................................... 439 5. Petition for review on certiorari to the Supreme Court................................................................................ 442 Taxation Law b. GENERAL PRINCIPLES CONCEPT AND PURPOSE OF TAXATION DEFINITION 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) Taxation also has a regulatory purpose as in the case of taxes levied on excises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc. (Aban, 2001) 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) In other words, taxation is: 1. The inherent power of the sovereign exercised through legislature 2. To impose burdens 3. Upon subjects and objects 4. Within its jurisdiction 5. For the purpose of raising revenues 6. To carry out the legitimate objects of government 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. f. To tax is two-fold. It is both inherent and legislative in nature. PURPOSE 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 (PR2EP) a. or non-revenue Regulation of activities/industries – Taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public interest, like the oil industry. (Caltex Philippines, Inc. v. Commission on Audit, et al., G.R. No. 92585, May 8, 1992) purposes DISTINGUISH: TAX AND OTHER FORMS OF EXACTIONS Promotion of general welfare – taxation may be used as an implement of police power to promote the general welfare of the people. TAX Coverage In the case of Lutz v. Araneta (G.R. No. L7859, December 22, 1955), the Supreme Court upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy – the sugar industry. (Aban, 2001) 1 An allembracing term to include various kinds of enforced contributions imposed upon persons for TARIFF/ CUSTOMS DUTIES Only a kind of tax; therefore, limited coverage. General Principles of Taxation Object Definition Basis Amount Purpose Imposing Authority the attainment of public purpose. Persons, property, privilege, or transactions TAX An enforced proportional contribution from persons and property for public purpose/s. Demand of sovereignty Generally, the amount is unlimited. For the support of the government May be imposed by the State only. TAX Goods imported exported Effect of NonPayment or TOLL A consideration paid for the use of a road, bridge or the like, of a public nature. Time of Payment Purpose Basis Amount Subject Imposed on persons, properties, rights or transactions Pre-activity imposition 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)) LICENSE FEE For regulation and control Collected under police power. TAX Limited to the necessary expenses of regulation and control. Imposed on the exercise of a right or privilege such as the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Post-activity imposition Normally paid before the commencement of the business. 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) Demand of proprietorship Amount is limited to the cost and maintenance of public improvement. For the use of another’s property May be imposed by private individuals or entities. NOTE: Taxes may be imposed only by the government under its sovereign authority; toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. TAX Imposed to raise revenue. Collected under the power of taxation. Generally, amount is unlimited. Non-payment does not make the business illegal. Normally paid after the start of business. LICENSE FEE commencement of a business or profession Non-payment makes the business illegal. Nature 2 An enforced proportional contribution from persons and property for public purpose/s. SPECIAL ASSESSMENT An enforced proportional contribution from owners of lands especially those who are peculiarly benefited by Taxation Law Subject Person Liable Imposing Authority Purpose Scope Basis Assignabili ty Mode of Payment Imposed on persons, property rights, or transactions A personal liability of the taxpayer May be imposed by national or local government For the support of the government Regular exaction TAX Obligation created by law. Effect of nonpayment Not assignable Generally payable in money; in exceptional instances, it may be satisfied in kind. Not subject to set-off May result in Imprisonmen t. Interest – stipulation requireme nt No interest unless there shall be assessed and Set-off public improvement s. Levied only on land collected on any unpaid amount of tax (deficiency interest or delinquency interest). Not a personal liability of the person assessed May only be imposed by the local government Refer to Civil Penalties for further discussion. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of double the legal interest rate for loans, or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas (BSP) from the date prescribed for payment until the amount is fully paid. Governed by the special prescriptive periods provided for in the National Internal Revenue Code (NIRC). Interest – rate to be imposed Contribution to the cost of public improvement Exceptional as to time and locality DEBT Obligation based on contract, express or implied. Assignable Payable kind or money. in in Prescriptio n Subject to setoff No imprisonment (except when debt arises from crime). No interest shall be due unless it has been 3 expressly stipulated in writing. (Article 1956, Civil Code) Interest depends upon the written stipulation of the parties. If no written stipulation, as to the rate, legal rate of interest shall be imposed. Governed by the ordinary periods of prescription. General Principles of Taxation DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN Authority who exercises the power Purpose Persons affected Amount of monetary imposition Benefits received Non-impairment of contracts TAXATION Government or political subdivision its POLICE POWER Government or political subdivision its To raise revenue in support of the Government. Regulation is merely incidental. Upon the community or class of individuals Promotion of welfare regulations. No ceiling except inherent limitations. Limited to the cost of regulation, issuance of license, or surveillance Maintenance of healthy economic standard of society, intangible altruistic feeling that he has contributed to the general welfare, no direct benefit Protection of a secured organized society, benefits received from government, no direct benefit Tax laws generally do not impair contracts unless the government is party to contract granting exemption for a consideration. Upon the community or class of individuals Contracts impaired. NOTE: Taxation is distinguishable from police power as to the means employed to implement these public good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the State yet at the same time, it has been recognized that taxation may be made the implement of the State’s police power. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) may be TAXATION No limit 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 just compensation (the fair market value of the property taken from him); direct benefit results. Contracts impaired. may be POLICE POWER Limited to the cost of regulation, issuance of the license, or surveillance Benefits Received No special or direct No direct benefit is benefit is received by received; a healthy the taxpayer; merely economic standard of general benefit of society is attained. protection. Non-impairment of Contracts Contracts may not be Contracts may be impaired. impaired. Transfer of Property Rights Taxes paid become No transfer but only part of public funds. restraint in its exercise. Scope All persons, property All persons, property, and excises rights and privileges Q: Distinguish taxation power from police power. A: TAXATION POLICE POWER Purpose To raise revenue To promote public purpose through regulations Amount of Exaction UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES general through EMINENT DOMAIN Government or public service companies and public utilities To facilitate the taking of private property for public purpose. 4 Taxation Law Q: Ordinance No. SP-2095 of the Quezon City government imposes a Socialized Housing Tax (SHT) equivalent to 0.5% on the assessed value of land in excess of Php100,000. The SHT will be used as one of the sources of funds for urban development and housing program. Can Quezon City impose such tax? 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 revenueraising. 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) A: YES. Cities are allowed to exercise such powers and discharge such functions and responsibilities as are necessary, appropriate, or incidental to efficient and effective provision of the basic services and facilities which include, among others, programs and projects for lowcost housing and other mass dwellings. The collections made accrue to its socialized housing programs and projects. The tax is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory purpose. The levy is primarily in the exercise of the police power for the general welfare of the entire city. (Ferrer, Jr. vs. Bautista, G.R. No. 210551, June 30, 2015) Q: Revenue laws R.A. 6260 and P.D. 276 were enacted to establish the Coconut Investment Fund and Coconut Consumers Stabilization Fund (coco-levy funds). These funds shall be owned by the coconut farmers in their private capacities under the Coconut Industry Code. In 2000, E.O. 313 was issued creating the Coconut Trust Fund and designating the UCPB as the trustee bank. This aimed to provide financial assistance to the coconut farmers, to the coconut industry, and to other agriculture-related programs. UCPB suggested that the coco-levy funds are closely similar to the SSS funds, which have been declared not to be 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? 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. 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) 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. The fees in the ordinance are not impositions on 5 General Principles (Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyugan v. Executive Secretary, G.R. Nos. 147036-37, April 10, 2012) Constitution affords preferential concern. (Manila Memorial Park v. DSWD, 2013) Q: On February 26, 2004, R.A. 9257 was issued, amending R.A. 7432, which provides that the 20% senior citizen discount may be claimed as a tax deduction from gross income, gross sales, or gross receipts. Petitioners challenge its constitutionality and pray that the tax credit treatment of the 20% discount be reinstated. They posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation is warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without payment of just compensation. Is the tax deduction scheme an exercise of police power or the power of eminent domain? The are: 1. 2. 3. THEORY AND BASIS OF TAXATION Lifeblood theory; Necessity theory; and Benefits-protection theory (Doctrine of symbiotic relationship). LIFEBLOOD THEORY 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 CTA, G.R. No. 106611, July 21, 1994) The government chiefly relies on taxation to obtain the means to carry on its operations. Taxes are essential to its very existence. (CIR v. Solidbank Corporation, G.R. No. 148191, November 25, 2003) Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (CIR v. Pineda, GR No. L-22734, September 15, 1967) A: POLICE POWER. The 20% discount given to senior citizens is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted. Manifestations of lifeblood theory: 1. 2. 3. 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES theories underlying the power of taxation 4. 5. Imposition even in the absence of constitutional grant. State’s right to select objects and subjects of taxation. No injunction to enjoin collection of taxes except for a period of 60 days upon application to the CTA as an incident of its appellate jurisdiction. Taxes could not be the subject of compensation and set-off, subject to certain exceptions. A valid tax may result in destruction of property. Q: Discuss the meaning and the implications of the statement: “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need”. (1991 BAR) A: It expresses the underlying basis of taxation which is governmental necessity. For indeed, 6 Taxation Law without taxation, a government can neither exist nor endure. 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) Considering that taxes are the lifeblood of the government, and in Holmes’ 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) JURISDICTION OVER SUBJECT AND OBJECTS It is the country, state or sovereign that gives protection and has the right to demand payment of taxes with which to finance activities so it could continue to give protection. Taxation is territorial because it is only within the confines of its territory that a country, state or sovereign may give protection. NECESSITY THEORY 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 well-being of the people. (Gerochi v. DOE, G.R. No. 159796, July 17, 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. (Dimaampao, 2015) PRINCIPLES OF A SOUND TAX SYSTEM 1. 2. 3. Fiscal Adequacy Administrative Feasibility Theoretical Justice FISCAL ADEQUACY Revenue raised must be sufficient to meet government/public expenditures and other public needs. (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990) Neither an excess nor a deficiency of revenue vis-à-vis the needs of government would be in keeping with the principle. (Vitug, 2006) BENEFITS-RECEIVED THEORY It involves the power of the State to demand and receive taxes based on the reciprocal duties of support and protection between the State and its citizens. THEORETICAL JUSTICE 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) Must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory) 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. ADMINISTRATIVE FEASIBILITY The tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, Special benefits to taxpayers are not required. A person cannot object to or resist the payment of 7 General Principles 2011) (ROAP), alleged that E.O. 73 providing for the collection of real property taxes as provided for under Section 21 of P.D. 464 (Real Property Tax Code) is unconstitutional because it accelerated the application of the general revision of assessments to January 1, 1987 thereby increasing real property taxes by 100% to 400% on improvements, and up to 100% on land which would necessarily lead to confiscation of property. Is the contention of the Chavez and ROAP correct? Q: True or False. A law that allows taxes to be paid either in cash or in kind is valid. A: TRUE. There is no law which requires payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation. Hence, will violate the principle of administrative feasibility. A violation of the principle of a sound tax system may or may not invalidate a tax law A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are only designated to make our tax system sound. However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (Dimaampao, 2015) A: NO. Without E.O. 73, the basis for collection of real property taxes will still be the 1978 revision of property values. Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations. (Chavez v. Ongpin, 186 SCRA 331, G.R. No. 76778, June 6, 1990) Q: Is the VAT law violative of administrative feasibility principle? NOTE: The case above was decided before the effectivity of the Local Government Code (LGU). the 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) INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION Inherent limitations (PITIE) 1. Public Purpose 2. Inherently Legislative 3. Territorial 4. International Comity 5. Exemption of government entities, agencies and instrumentalities 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) Constitutional limitations 1. Provisions directly affecting taxation a. Prohibition against imprisonment for non-payment of poll tax (Art. III, Sec. 20) b. Uniformity and equality of taxation (Art. VI, Sec. 28) c. Grant by Congress of authority to the president to impose tariff rates (Art. VI, Sec. 28) d. Prohibition against taxation of religious, charitable entities, and educational entities (Art. VI, Sec. 28) Q: Frank Chavez, as taxpayer, and Realty Owners Association of the Philippines, Inc. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 8 Taxation Law e. f. g. h. i. j. k. l. 2. Prohibition against taxation of nonstock, non-profit educational institutions (Art. IX, Sec. 4) Majority vote of Congress for grant of tax exemption (Art. VI, Sec. 28) Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29) President’s veto power on appropriation, revenue, tariff bills (Art. VI, Sec. 27) Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30) Grant of power to the LGUs to create its own sources of revenue (Art. IX, Sec. 5) Origin of Revenue and Tariff Bills (Art. VI, Sec. 24) No appropriation or use of public money for religious purposes (Art. VI, Sec. 28) 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. Provisions indirectly affecting taxation (Art. III, 1987 Constitution) a. Due process (Sec. 1) b. Equal protection (Sec. 1) c. Religious freedom (Sec. 5) d. Non-impairment of obligations of contracts (Sec. 10) e. Freedom of the press (Sec. 4) The limitations are discussed in detail below. INHERENT LIMITATIONS Determination when enacted tax law is for public purpose PUBLIC PURPOSE Determination lies in the Congress. However, this will not prevent the court from questioning the propriety of such statute on the ground that the law enacted is not for a public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax measure. The proceeds of tax must be used (a) for the support of the State; or (b) for some recognized objective of the government or to directly promote the welfare of the community. Tax is considered for public purpose if: 1. 2. 3. It is for the welfare of the nation and/or for greater portion of the population; It affects the area as a community rather than as individuals; and It is designed to support the services of the government for some of its recognized objects. NOTE: If the tax measure is not for public purpose, the act amounts to confiscation of property. Principles relative to public purpose 1. Tests in determining public purpose 1. 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) Duty test – Whether the thing to be furthered by the appropriation of public 9 Tax revenue must not be used for purely private purposes or for the exclusive benefit of private persons. General Principles 2. 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. 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) 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) 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: Is the tax imposed on the sale, lease or disposition of videograms for a public purpose? A: YES. Such tax is imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic videotapes. While the direct beneficiary of said imposition is the movie industry, the citizens are held to be its indirect beneficiaries. (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18, 1987) INHERENTLY LEGISLATIVE Only the legislature has the full discretion as to the persons, property, occupation or business to be axed provided these are all within the State’s territorial jurisdiction. It can also fully determine the amount or rate of tax, the kind of tax to be imposed and method of collection. (1 Cooley 176-184) Q: Are subsequent laws, which convert a public fund to private properties, valid? A: NO. Taxes could be exacted only for a public purpose; they cannot be declared private properties of individuals although such individuals fall within a distinct group of persons. (Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagagawa sa Niyugan v. Exec. Sec., G.R. Nos. 147036-37, April 10, 2012) GR: The power to tax is exclusively vested in the legislative body, being inherent in nature. Hence, it may not be delegated. (Delegata potestas non potest delegari) The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law, complete as to the time when it shall take effect and as to whom it shall be applicable; and to determine the expediency of its enactment. (ABAKADA Guro Party List v. Hon. Exec. Sec., G.R. No. 168056, September 1, 2005) It cannot be delegated without infringing upon the theory of separation of powers. (Pepsi-Cola Bottling Company of the Phil. v. Mun. of Tanauan, 69 SCRA 460, February 27, 1976) Q: Lutz assailed the constitutionality of Sections 2 and 3 of C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar. Lutz alleged such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. Is the tax law increasing the existing tax on the manufacture of sugar valid? A: YES. The protection and promotion of the sugar industry is a matter of public concern. The legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Legislative discretion must be allowed full play, subject only UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Non-delegable legislative powers 10 Taxation Law 1. 2. 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 for some degree of discretionary powers under sufficient standards expressed by law (Cervantes v. Auditor General, G.R. No. L4043, May 26, 1952) or implied from the policy and purpose of the act. (Maceda v. Macaraig, G.R. No. 88291, June 8, 1993) 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: 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. 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) 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 hightech 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) 3. 4. 5. 2. 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. 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) 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. NOTE: When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Phil., G.R. No. 158540, August 3, 2005) 3. 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) Delegation to administrative agencies – When the delegation relates merely to administrative implementation that may call A: The ordinance is void. The LGC only allows 11 General Principles 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. the just share in the national taxes. Sec. 6 embodies three mandates: (1) the LGUs shall have a just share in the national taxes; (2) the just share shall be determined by law; and (3) the just share shall be automatically released to the LGUs. 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) Congress has exceeded its constitutional boundary by limiting to the NIRTs the base from which to compute the just share of the LGUs. Although the power of Congress to make laws is plenary in nature, congressional lawmaking remains subject to the limitations stated in the 1987 Constitution. Thus, the phrase “national internal revenue taxes” engrafted in Sec. 284 is undoubtedly more restrictive than the term national taxes written in Sec. 6. (Congressman Hermilando I. Mandanas, et al. v. Executive Secretary Paquito N. Ochoa, Jr., et al., G.R. No. 199802/208488, April 10, 2019) 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? TERRITORIAL Taxation may be exercised only within the territorial jurisdiction, the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs.” 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) 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. Q: The Court promulgated a decision declaring the phrase “internal revenue” appearing in Sec. 284 of R.A. 7160 (Local Government Code) unconstitutional and deleted the same. The Office of the SolicitorGeneral (OSG), however, contends that the provisions of the LGC are not contrary to Sec. 6, Art. X of the Constitution. Is the OSG’s contention correct? XPNs: 1. Where tax laws operate outside territorial jurisdiction – e.g., Taxation of resident citizens on their incomes derived abroad. 2. A: NO. Sec. 6, Art. X of the 1987 Constitution textually commands the allocation to the LGUs of UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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. 12 Where tax laws do not operate within the territorial jurisdiction of the State. Taxation Law a. b. When exempted by treaty obligations; or When exempted by international comity. Q: ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income --- 30% for individual and 35% for corporate nonresident stockholders --- was deducted at source and remitted to the BIR. INTERNATIONAL COMITY It refers to the respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state may not be the subject of taxation by another State. On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RPUS Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim. This is a limitation founded on reciprocity designed to maintain harmonious and productive relationships among the various state. Under international comity, a state must recognize the generally-accepted tenets of international law, among which are the priniciples of sovereign equality among states and of their freedom from suit without their consent, that limits that authority of a government to effectively impose taxes in a sovereign state and its instrumentalities, as well as in its property held and activities undertaken in that capacity. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. International comity as a limitation on the power to tax Is the contention of ABCD Corporation correct? Why or why not? (2009 BAR) 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) A: YES. The provision of a treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle of international comity. Tax treaties are accepted limitations to the power of taxation. Thus, the CTA should apply the treaty provision so that the claim for refund representing the difference between the amount actually withheld and paid to the BIR and the amount due and payable under the treaty should be granted. (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988) 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). Principle of Pacta Sunt Servanda in Taxation 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. Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the Philippines “adopts the generally accepted principles of international law as part of the law of the land. (Art. II, Sec. 2, 1987 Constitution) 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. Pacta sunt servanda is a fundamental international law principle that requires agreeing parties to comply with their treaty 13 General Principles obligations in good faith. Hence, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. (Air Canada vs. CIR, G.R. No. 169507, January 11, 2016) office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein. 1. 2. EXEMPTION FROM TAXATION OF GOVERNMENT ENTITIES 3. GR: The government is exempt from tax. Instrumentality of the government RATIONALE: 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) 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. XPN: When it chooses to tax itself. Nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing government functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996) Taxability government of instrumentalities A government instrumentality falls Section 133(o) of the LGC, which states: Government may tax itself of under “SEC. 133.Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx Since sovereignty is absolute and taxation is an act of high sovereignty, the State if so minded could tax itself, including its political subdivisions. (Maceda v. Macaraig, G.R. No. 88291, June 8, 1993) (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units.” National government is exempt from local taxation 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. 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. In Manila International Airport Authority (MIAA) v. CA, G.R. No. 155650 (2006), MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments. Being an instrumentality of the national government, it is exempt from local taxation. Also, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of the Manila Bay, some of which were within the territorial jurisdiction of Q City. Certificates of title to the reclaimed properties in Q City were issued in the name of LLL in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of LLL based on the assessment for delinquent property taxes for the years Agency of the government It refers to any of the various units of the government, including a department, bureau, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Taxability of agencies of government Performing governmental functions: tax exempt unless expressly taxed Performing proprietary functions: subject to tax unless expressly exempted 14 Taxation Law 2010 to 2013. for real property taxes because it was not organized as a stock or non-stock corporation. a. Are the reclaimed properties registered in the name of LLL subject to real property tax? b. Will your answer be the same in (a) if from 2010 to the present time, LLL is leasing portions of the reclaimed properties for the establishment and use of popular fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 BAR) Being an instrumentality of the national government, it cannot be taxed by LGUs. (PEZA v. Lapu-lapu City, 742 SCRA 524) Q: The Philippine Fisheries Development Authority (PFDA) took over the management and operation of the Lucena Fishing Port Complex (LFPC) which is one of the fishery infrastructure projects undertaken by the National Government under the Nationwide Fish Port-Package built on a reclaimed land. The City Government of Lucena then demanded payment of realty taxes on the LFPC property. Is PFDA liable for the real property tax assessed on the Lucena Fishing Port Complex? A: a. The reclaimed properties are not subject to real property tax because LLL is a government instrumentality. Under the law, real property owned by the Republic of the Philippines is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person (Sec. 234, LGC) When the title of the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, such arrangement does not result in the loss of the tax exemption. (Republic of the Philippines, represented by The Philippine Reclamation Authority v. City of Paranaque, 677 SCRA 246, 2012) b. A: NO. The exercise of the taxing power of LGUs is subject to the limitations enumerated in Sec. 133 of the LGC. Under Sec. 133(o) of the LGC, LGUs have no power to tax instrumentalities of the national government like the PFDA. Thus, PFDA is not liable to pay real property tax except those portions which are leased to private persons or entities. Also, as property of public dominion, the Lucena Fishing Port Complex is owned by the Republic of the Philippines and thus exempt from real estate tax. (Philippine Fisheries Development Authority v. Central Board of Assessment Appeals, G.R. No. 178030, December 15, 2010) 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) Government-owned corporation (GOCC) and controlled It refers to any agency: 1. organized as a stock or non-stock corporation; 2. vested with functions relating to public needs whether governmental or proprietary in nature; and 3. 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 fiftyone (51) percent of its capital stock. Q: Is PEZA a government instrumentality or a GOCC? Is it exempt from real property taxation? A: PEZA is an instrumentality of the government. It is not integrated within the department framework but is an agency attached to the Department of Trade and Industry. PEZA is also vested with special functions or jurisdiction by law. Congress created the PEZA to operate, administer, manage, and develop special economic zones in the Philippines. Although a body corporate vested with some corporate powers, the PEZA is not a GOCC that is taxable NOTE: Government instrumentality may include a GOCC and there may be “instrumentality” that does not qualify as GOCC. Taxability of GOCCs 15 General Principles GOCCs perform proprietary functions. Hence, they are subject to taxation. 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)) 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. Q: Explain the following concepts in taxation: a. Uniformity; b. Equitability; and c. Equality. Government Service Insurance System (GSIS) Social Security System (SSS) Philippine Health Insurance Corporation (PHIC) Local Water Districts (LWDs) A: a. Uniformity – It means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. NOTE: Philippine Charity Sweepstakes Office (PCSO) were removed by TRAIN and replaced by LWDs. 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. 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 provisions are meant and intended more to regulate and define, rather than to grant, the power emanating therefrom. b. Equitability – Taxation is said to be equitable when its burden falls on those better able to pay. CONSTITUTIONAL LIMITATIONS: PROVISIONS DIRECTLY AFFECTING TAXATION c. PROHIBITION AGAINST IMPRISONMENT FOR NON-PAYMENT OF POLL TAX Q: Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. (1998 BAR) BASIS: No person shall be imprisoned for debt or non-payment of a poll tax. (Art. III, Sec. 20) 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. Concepcion, 34 Phil. 969). Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. Accordingly, singling out one particular class for taxation purposes does not infringe the requirement of uniformity. A 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) 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. (Dimaampao, 2015) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Equality – It is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it. Q: A law was passed exempting doctors and lawyers from the operation of the value16 Taxation Law 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) the current fair market value of every vehicle registered with the LTO. However, R.A. 10701 exempts owners of public utility vehicles and the Government from the coverage of the 5% transport tax. A group of private vehicle owners sue on the ground that the law is unconstitutional for contravening the Equal Protection Clause of the Constitution. A: YES, the suit is meritorious. The VAT is designed for economic efficiency. Hence, should be neutral to those who belong to the same class. Professionals are a class of taxpayers by themselves who, in compliance with the rule of equality of taxation, must be treated alike for tax purposes. Exempting lawyers and doctors from a burden to which other professionals are subjected will make the law discriminatory and violative of the equal protection clause of the Constitution. While singling out a class for taxation purposes will not infringe upon this constitutional limitation (Shell v. Vano, 94 Phil. 389 (1954)), singling out a taxpayer from a class will no doubt transgress the constitutional limitation [Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City, 22 SCRA 603 (1968)]. Treating doctors and lawyers as a different class of professionals will not comply with the requirements of a reasonable, hence valid classification, because the classification is not based upon substantial distinction which makes real differences. The classification does not comply with the requirement that it should be germane to the purpose of the law either. (PepsiCola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 (1968)) Rule on the constitutionality and validity of R.A. 10701. (2017 BAR) A: R.A. 10701 is valid and constitutional. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. (British American Tobacco v. Jose Isidro N. Camacho, G.R. No. 163583, April 15, 2009) Uniformity in taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary; (2) the categorization is germane to achieve the legislative purpose; (3) the law applies, all things being equal, to both present and future conditions; and (4) the classification applies equally well to all those belonging to the same class. (Rufino R. Tan v. Ramon R. Del Rosario, Jr., G.R. Nos. 109289, October 3, 1994, 237 SCRA 324) All of the foregoing requirements of a valid classification having been met and those which are singled out are a class in themselves, there is no violation of the “Equal Protection Clause” of the Constitution. Q: Heeding the pronouncement of the President that the worsening traffic condition in the metropolis was a sign of economic progress, the Congress enacted R.A. 10701, also known as An Act Imposing a Transport Tax on the Purchase of Private Vehicles. Q: Does the 20% Sales Discount for Senior Citizens and Persons with Disabilities violates the constitutional right of equal protection clause? Under R.A. 10701, buyers of private vehicles are required to pay a transport tax equivalent to 5% of the total purchase price per vehicle purchased. R.A. 10701 provides that the Land Transportation Office (LTO) shall not accept for registration any new vehicles without proof of payment of the 5% transport tax. R.A. 10701 further provide that existing owners of private vehicles shall be required to pay a tax equivalent to 5% of A: NO. The equal protection clause is not infringed by legislation which applies only to those falling within a specified class. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. (Southern Luzon Drug Corporation v. DSWD, G.R. No. 199669, April 25, 2017) 17 General Principles Progressive taxation 1. 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. 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) Q: Does the Constitution prohibit regressive taxes? A: NO, the Constitution does not really prohibit the imposition of regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. Meaning of Constitution “evolve” as used in the 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) 2. 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) 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)) 3. Flexible tariff clause This clause provides the authority given to the President to adjust tariff rates under Sec. 1608 of R.A. 10863, known as Customs Modernization and Tariff Act (CMTA) of 2016. This authority, however, is subject to limitations and restrictions indicated within the law itself. Within the framework development program. of national 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, Requisites on the authority of the President in imposing tax UNIVERSITY OF SANTO TOMAS 2021 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. 18 Taxation Law or educational purposes shall be exempt from taxation. (Art. IV, Sec. 28 (3)) Philippines v. City Assessor of Quezon City (433 SCRA 119), the Court ruled that under the 1987 Constitution, for “lands, buildings, and improvements” of the charitable institution to be considered exempt, the same should not only be “exclusively” used for charitable purposes; it is required that such property be used “actually” and “directly” for such purposes. Q: What is the coverage of tax exemption? A: It covers real property taxes only. Accordingly, a conveyance of such exempt property can be subject to transfer taxes. Properties exempt under the Constitution from the payment of property taxes 1. 2. 3. 4. 5. “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. 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. VI, Sec. 28(3)) The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitution and the law. Meaning of “charitable” 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. 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) Rules on taxation of non-stock corporations for charitable and religious purposes 1. 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) 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, officer, or any specific person, shall be exempt from tax. 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) Meaning of “actual, direct and exclusive use of the property for religious, charitable, and educational purposes” It is the direct, 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. 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 NOTE: In the case of Lung Center of the 19 General Principles 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) EDUCATIONAL AND CHARITABLE PURPOSES Coverage of constitutional provision Refer to “Income Taxation – Corporations exempt from Income Tax” for further discussion. b. Donations received by religious, charitable, and educational institutions are considered as income but not taxable income as they are items of exclusion. (Sec. 32(B)(3), NIRC) Requisite to avail of this exemption Test for the grant of this exemption 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: Under the 1987 Constitution, the doctrine of exemption by incidental purpose is no longer applicable. Such doctrine is only applicable to cases where the cause of action arose under the 1935 Constitution. Under the 1987 Constitution, it must be proved that the properties are ACTUALLY, DIRECTLY, and EXCLUSIVELY used for the purpose of institution for the exemption to be granted. (Sababan, 2008) Refer to “Gross Income – Exclusions” for further discussion. 2. For purposes of estate tax – Donations in favor of charitable institutions are generally not subject to tax. Provided, however, that not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such institutions for administration purposes. (Sec. 87(D), NIRC) PROHIBITION AGAINST TAXATION OF NONSTOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS 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. Refer to “Estate Tax – Exclusions from Gross Estate, and exemptions of certain acquisitions and transmissions” for further discussion. 3. 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) For purposes of donor’s tax – Donations in favor of religious and charitable institutions are generally not subject to tax provided, however, that not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such institutions for administration purposes. (Sec. 101, NIRC) Actually, directly, and exclusively used The use of the term “actually, directly, and exclusively used” referring to religious institutions cannot be applied to non-stock, nonprofit educational institutions. The provision of Article VI, Section 28(3) applies to religious, charitable, and educational institutions – while Article XIV applies solely to non-stock, nonprofit educational institutions. Refer to “Donor’s Estate – Exemption of certain gifts” for further discussion. SUMMARY OF RULES ON EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY, AND EXCLUSIVELY USED FOR RELIGIOUS, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Covers real property tax only. The income of whatever kind and nature from any of their properties, real or personal, or from any of their activities for profit regardless of the disposition made of such income shall be subject to tax. Property must be “actually, directly, and exclusively used” by religious, charitable, and educational institutions. Use of the property for such purposes, not the ownership thereof. 20 Taxation Law Grantee Tax Exemptions Granted ART. XIV, SEC. 4(3) Non-stock, non-profit educational institution All taxes and duties. discussion. ART. VI, SEC. 28(3) Religious, educational, charitable Q: UP is the registered owner of a parcel of land. UP entered into a contract of lease with ALI (Ayala Land Inc.) over the subject land on 27 October 2006. The leased property is now known as the UP-Ayala Technohub. In a Notice of Assessment addressed to ALI dated 23 August 2012, ALI was informed that the subject property has been "reclassified and assessed for taxation purposes with an assessed value of P499,500,000.00 effective 2009." For the first time and without a prior Notice of Assessment, a Statement of Delinquency dated 27 May 2014 addressed to UP was issued by the City Treasurer demanding the payment of real property tax on the subject property amounting to P106,992,990.00 for the years 2009 to 2013 and the first quarter of 2014. Is UP liable for real property tax imposed on the subject property leased by ALI? Real Property Tax 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) The last paragraph of Section 30 of the Tax Code is without force and effect with respect to nonstock, nonprofit educational institutions. Provided, that the non-stock, nonprofit educational institutions prove that its assets and revenues are used actually, directly, and exclusively for educational purposes. Moreover, the tax-exemption constitutionally granted to nonstock, nonprofit educational institutions, is not subject to limitations imposed by law. A: NO. The enactment and passage of R.A. 9500 in 2008 superseded Sections 205(d) and 234(a) of the Local Government Code. Before the passage of Republic Act No. 9500, there was a need to determine who had beneficial use of UP's property before the property may be subjected to real property tax. After the passage of R.A. 9500, there is a need to determine whether UP's property is used for educational purposes or support thereof before the property may be subjected to real property tax. The tax exemption granted by the Constitution to non-stock, nonprofit educational institutions is conditioned only on the actual, direct, and exclusive use of their assets, revenues, and income for educational purposes. A plain reading of the Constitution would show that Article XIV, Section 4(3) does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Section 22 of R.A. 9500 allows UP to lease and develop its land subject to certain conditions. The Contract of Lease between UP and ALI shows that there is an intent to develop "a prestigious and dynamic science and technology park, where research and technology-based collaborative projects between technology and the academe thrive, thereby becoming a catalyst for the development of the information technology and information technology-enabled service". The development of the subject land is clearly for an educational purpose, or at the very least, in support of an educational purpose. (University of The Philippines v. City Treasurer of Quezon City, G.R. 214044, June 19, 2019) When a non-stock, nonprofit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, value-added tax, and local business tax. On the other hand, when it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from real property tax. (CIR vs. De La Salle University, Inc., G.R. No. 196596, November 9, 2016) MAJORITY VOTE OF CONGRESS FOR GRANT OF TAX EXEMPTION Refer to “Income tax – Proprietary educational institutions and non-profit hospitals” for further BASIS: No law granting any tax exemption shall 21 General Principles be passed without the concurrence of a majority of all the members of Congress. (Section 28 (4), Art. VI) 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 PRESIDENT’S VETO POWER ON APPROPRIATION, REVENUE, TARIFF BILLS (ART BILL) Exemptions may be created: 1. 2. By the Constitution; or By statute, subject to limitations as the Constitution may provide. 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)) 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) The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after consideration 2/3 of all the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other House by which it shall likewise be considered, and if approved by 2/3 of all the members of that House, it shall become a law. (J. Dimaampao, 2015) Tax amnesties, tax condonations, and tax refunds are in the nature of tax exemptions. Such being the case, a law granting tax amnesties, tax condonations, and tax refunds requires the vote of an absolute majority of the members of the Congress. NOTE: The President can only veto particular item or items for ART Bills. The President cannot veto particular item or items with regard to non-ART Bills; he can only veto them as a whole. 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. NON-IMPAIRMENT OF JURISDICTION OF THE SUPREME COURT PROHIBITION ON USE OF TAX LEVIED FOR SPECIAL PURPOSE BASIS: The Supreme Court shall have the power to review, revise, reverse, modify, or affirm on appeal on certiorari as the laws or the Rules of Court may provide, final judgments or orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto. (Art. VIII, Sec. 5(2)(b)) BASIS: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government. (Sec. 29(3), Art. VI) NOTE: These jurisdictions are concurrent with the Regional Trial Court (RTC). Thus, the petition should generally be filed with the RTC following the hierarchy of courts. However, questions on tax laws are usually filed directly 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 NOTE: In Gaston v. Republic Planters Bank, 158 SCRA 626, the Court ruled that the “stabilization fees” collected by the State 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 22 Taxation Law increasing the appellate jurisdiction of the Supreme Court without its advice and concurrence.” most effective instrument to raise the needed revenues The right of LGUs to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of the local government and the objective of the LGC that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals. (Dimaampao, 2015) The courts cannot inquire into the wisdom of a taxing act, EXCEPT when there is an allegation of violation of constitutional limitations or restrictions. 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) 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) Justification in the delegation of legislative taxing power to local governments Delegation of legislative taxing power to local governments is justified by the necessary implication that the power to create political corporations for purposes of local selfgovernment carries with it the power to confer on such local government agencies the authority to tax. 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) Exception to non-delegation of legislative powers The general principle against the delegation of legislative powers as a consequence of the principle of separation of powers is subject to one well-established exception: legislative powers may be delegated to LGUs. Included in this grant of legislative power is the grant of local taxing power. Q: Why must appropriation, revenue, or tariff bills originate from the Congress? A: On the theory that, elected as they are from the districts, the members of the House of Representatives can be expected to be more sensitive to the local needs and problems. Q: May Congress, under the 1987 Constitution, abolish the power to tax of local governments? (2003 BAR) A: NO. The Congress cannot abolish the local government’s power to tax as it cannot abrogate what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax. Q: 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 The local government’s power to tax is the 23 General Principles recommended the approval of its report, which the Senate and the House of the Representatives did. 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) 1. Does R.A. 9337 violate Art. VI, Sec. 24 of the Constitution on exclusive origination of revenue bills? 2. Does R.A. 9337 violate Art. VI, Sec. 26(2) of the Constitution on the “NoAmendment Rule”? A: 1. NO. It was H.B. Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the VAT. Upon transmittal of said House bills to the Senate, the Senate came out with S.B. No. 1950 proposing amendments not only to NIRC provisions on the VAT but also amendments to NIRC provisions on other kinds of taxes. NO APPROPRIATION OR USE OF PUBLIC MONEY FOR RELIGIOUS PURPOSES BASIS: No public money or property shall be appropriated, applied, paid, or employed directly or indirectly for the use, benefit, or support of any sect, church, denomination, sectarian 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)) Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its Constitutional power to introduce amendments to the House bill when it included provisions in S.B. No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Art. VI, Sec. 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill. The Senate can propose amendments and in fact, the amendments made are germane to the purpose of the house bills, which is to raise revenues for the government. The sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments. 2. This is in consonance with the inviolable principle of separation of the Church and State. CONSTITUTIONAL LIMITATIONS: PROVISIONS INDIRECTLY AFFECTING TAXATION DUE PROCESS BASIS: No person shall be deprived of life, liberty, or property without due process of law x x x. (Art. III, Sec. 1) REQUIREMENTS OF DUE PROCESS IN TAXATION Substantive Due Process 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 1. 2. Tax must be for public purpose; and It must be imposed within territorial jurisdiction. Procedural Due Process No arbitrariness or oppression either in the assessment or collection. 24 Taxation Law Q: When is deprivation of life, liberty, and property by the government done in compliance with due process? privileges conferred and in the liabilities imposed. (1 Cooley 824-825; Sison Jr. v. Ancheta, G.R. No. 59431, July 25, 1984) 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). The power to select subjects of taxation and apportion the public burden among them includes the power to make classifications. The inequalities which result in the singling out of one particular class for taxation or exemption infringe no Constitutional limitation. (Lutz v. Araneta, G.R. No. L-7859, Dec. 22, 1955) Q: When may violation of due process be invoked by the taxpayer? Requisites for a valid classification (PEGS) 1. A: The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to a confiscation of property. (Reyes v. Almanzor, G.R. Nos. L-4983946 April 26, 1991) 2. 3. 4. 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) Q: Is Revenue Memorandum Circular No. 4791 classifying copra as an agricultural nonfood 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) Illustrative cases of violations of the due process clause 1. 2. 3. 4. 5. 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 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 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. EQUAL PROTECTION BASIS: No person shall be denied the equal protection of the laws. (Art. III, Sec. 1) Definition Q: What is the “rational basis” test? Explain briefly. (2010 BAR) It means that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the A: The rational basis test is applied to gauge the constitutionality of an assailed law in the face of 25 General Principles an equal protection challenge. It has been held that “in areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. (British American Tobacco v. Camacho and Parayno, GR No. 163583, April 15, 2009) 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. 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: 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) Q: The City Council of Ormoc enacted Ordinance No. 4, Series of 1964 taxing the production and exportation of only centrifugal sugar. At the time of the enactment, plaintiff Ormoc Sugar Co. was the only sugar central in Ormoc. Petitioner alleged that said Ordinance is unconstitutional for being violative of the equal protection clause. Is the Ordinance valid? A: NO. 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) 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) RELIGIOUS FREEDOM 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) A: NO. Equal protection of the law clause is subject to reasonable classification. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 26 Taxation Law Q: Is the real property tax exemption of religious organizations violative of the nonestablishment clause? 3. Dispenses with the conditions expressed therein. Rationale for the non-impairment clause in relation to contractual tax exemption 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) 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 thereof. Q: Is the imposition of fixed license fee a prior restraint on the freedom of the press and religious freedom? NOTE: This applies only where one party is the government and the other party, a private person. 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) Rules regarding non-impairment of obligation and contract with respect to the grant of tax exemptions 1. 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? 2. 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) 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) 3. Q: Is VAT registration restrictive of religious and press freedom? In Tolentino v. Secretary of Finance (1994), the Court ruled that R.A. 7716 (E-VAT Law) does not violate the non-impairment clause. The contention that the imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law would violate the constitutional provision that “No law impairing the obligation of contracts shall be passed” is without legal basis. A: NO. The VAT registration fee, although fixed in amount, is not imposed for the exercise of a privilege but only for defraying part of the cost of registration. (Tolentino v. Secretary of Finance, G.R. No. 115873, August 25, 1994) NON-IMPAIRMENT CLAUSE 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. BASIS: No law impairing the obligation of contracts shall be passed. (Art. III, Sec. 10) Instances when there is impairment of the obligations of contract When the law changes the terms of the contract by: 1. Making new conditions; 2. Changing conditions in the contract; or 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 27 General Principles been granted for a valid consideration. FREEDOM OF THE PRESS 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) 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: Is R.A. 7716 unconstitutional for it violates the freedom of the press under Art. III, Sec. 4 of the Constitution by imposing VAT on the gross receipts of newspapers from advertisements and on their acquisition of paper, ink and services for publication? A: 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) 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) Q: A law was passed granting tax exemptions to certain industries and investments for a period of 5 years. However, 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 OR ASPECTS OF TAXATION 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? (2004 BAR) 1. 2. 3. 4. (tax LEVY OR IMPOSITION (TAX LEGISLATION) A: NO. 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). UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Levy or imposition (tax legislation) Assessment and collection administration) Payment Refund 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? 28 Taxation Law 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) the Internal Revenue that the estate tax has been paid is shown. (Marcos II v. CA, G.R. No.120880, June 5, 1997) NOTE: Assessment and collection may be delegated but not levy since it is exclusively conferred with the Congress. PAYMENT The act of compliance by the taxpayer, including such options, schemes, or remedies as may be legally available. 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) 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 October 15 following the close of the calendar year. (Sec. 56(A)(2), NIRC) ASSESSMENT AND COLLECTION (TAX ADMINISTRATION) This is the act of administration and implementation of the tax law by executive through its administrative agencies. 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. The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. (Dimaampao, 2015) REFUND NOTE: The term “assessment” which here means notice and demand for payment of a tax liability, should not be confused with “assessment” relative to a real property taxation, which refers to the listing and valuation of taxable real property. The recovery of any alleged to have been erroneously or illegally 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. Q: Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement of the estate tax? (2005 BAR) Q: Is proof of remittance necessary for Philippine Airlines, Inc. to claim a refund under its charter, Presidential Decree No. 1590? 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 A: NO. Remittance need not be proven. PAL needs only to prove that taxes were withheld from its interest income. PAL is uncontestedly exempt from paying the income tax on interest earned. Considering that PAL is not liable to pay the tax on interest income from bank deposits, any payments made for that purpose are in excess of what is due from it. Thus, if PAL 29 General Principles erroneously paid for this tax, it is entitled to a refund. (PAL v. CIR, G.R. No. 206079-80, January 17, 2018) which he cannot shift to another. (2) Indirect taxes are demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a tax but as a part of the purchase price. REQUISITES OF A VALID TAX 1. 2. 3. 4. It should be for a public purpose; It should be uniform; The person or property being taxed should be within the jurisdiction of the taxing authority; and The tax must not impinge on the inherent and constitutional limitations on the power of taxation. Income tax, estate tax, 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. 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. KINDS OF TAXES AS TO OBJECT 1. Personal /poll or capitation tax – A fixed amount imposed upon all persons, or upon all persons of a certain class or 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) 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 or 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) Indirect taxes, like VAT and excise tax, are different from withholding taxes (direct 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, 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) NOTE: This is different from the excise tax under the NIRC which is a business tax imposed on items such as cigars, cigarettes, wines, liquors, frameworks, mineral products, etc. AS TO BURDEN OR INCIDENCE 1. 2. Direct Indirect Q: Distinguish a direct from an indirect tax. Give examples (1994, 2000, 2001, 2006 BAR) A: (1) Direct taxes are demanded from the very person who, as intended, should pay the tax UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES In indirect taxation, a distinction is made 30 Taxation Law 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) 2. 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) 2. AS TO GRADUATION 1. 3. 2. 3. PROSPECTIVITY OF TAW LAWS GR: Tax laws prospectively. Specific – tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement. (e.g., excise tax on cigar, cigarettes and liquors) Ad valorem – tax based on the value of the property with respect to which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of such property before the amount due can be determined. (e.g., real estate tax, income tax, donor’s tax and estate tax) Mixed – a choice between ad valorem and/or specific depending on the condition attached. 2. only be imposed Ex post facto law as applied in taxation The prohibition against ex post facto laws applies only to criminal matters and not to laws which are civil in nature. NOTE: 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. 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) 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? AS TO SCOPE OR AUTHORITY TO IMPOSE 1. must 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) AS TO PURPOSES 1. Progressive – A tax rate which increases as the tax base or bracket increases. (e.g., income tax, estate tax and donor’s tax) Regressive – The tax rate decreases as the tax base or bracket increases. Proportionate – A tax of a fixed percentage of amounts of the base (value of the property, or amount of gross receipts etc.). (e.g., VAT and other percentage taxes) GENERAL CONCEPTS IN TAXATION AS TO TAX RATES: 1. Local or municipal – Tax levied by a local government. (e.g., real estate tax and community tax) 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) A: NO. Tax laws are prospective in operation, 31 General Principles 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) 3. IMPRESCRIPTIBILITY 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: Due to uncertainty as to whether 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) 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: NO. The reversal of the ruling shall not be given a retroactive application, if said reversal will be prejudicial to the taxpayer. Therefore, the BIR cannot assess DEF Printers for back taxes because it would be violative of the principle of 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. L66653, June 19, 1986) SITUS OF TAXATION It is the place or authority that has the right to impose and collect taxes. (Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001) 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) Factors that determine the situs of taxation (ReCiNS2) 1. 2. 3. 4. 5. 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: 1. 2. Residence of the taxpayer Citizenship of the taxpayer Nature of the tax Subject matter of the tax Source of income Rules Observed in Fixing Tax Situs 1. Poll/Capitation/Community Tax – Residence of taxpayer, regardless of the source of income or location of property of the taxpayer Where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES the ruling is based; or Where the taxpayer acted in bad faith. 2. Property Tax a. 32 Real Property – Location of the Taxation Law property (lex rei sitae/lex situs), regardless of whether the owner is a resident or non-resident b. 4. Rationale: i. The taxing authority has control because of the stationary and fixed character of the property. ii. 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. Personal Property 5. Application of the doctrine of mobilia sequuntur personam not mandatory in all cases Such doctrine has been decreed as a mere "fiction of law having its origin in considerations of general convenience and public policy and cannot be applied to limit or control the right of the State to tax property within its jurisdiction," and must "yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice." (Wells Fargo Bank and Union Trust v. Collector, G.R. No. L-46720, June 28, 1940) Tangible – Location of the property Intangible – GR: Domicile of the owner, wherever it is actually kept or located, pursuant to the principle of the mobilia sequntur personam, which literally means “movable follows the person/owner.” XPN: i. When the property has acquired a business situs in another jurisdiction, such that it has definite location there, accompanied by some degree of permanency; or ii. When an express provision of the statute provides for another rule. 3. Excise Tax a. Income Tax and Donor’s Tax Criteria Place 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. 1. 2. 3. 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; and Shares or rights in any partnership, business or industry established in the Philippines. Nationality Franchise which must be exercised in the Philippines; Shares, obligations, or bonds issued by any corporation sociedad anonima organized or constituted in the Philippines in accordance with its laws; Shares, obligations, or bonds by any foreign corporation 85% of Residence 33 Income Tax (applied to NRA, NRFC, NRC) From sources of income derived within the Philippines (applied to RC, DC) Donor’s Tax (applied to NRA) Taxed on properties situated within the Philippines (applied to RC, NRC) From sources of income derived within and without the Philippines (applied to RA, RFC) Taxed upon their properties wherever situated From sources of income Taxed upon their (applied to RA) General Principles derived within the Philippines b. Double taxation in the objectionable or prohibited sense since it violates the equal protection clause of the Constitution. properties wherever situated. Elements of Direct Double Taxation 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) 1. The same property is taxed twice when it should be taxed only once; and 2. Both taxes are imposed: a. b. c. d. e. f. 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) All the elements must be present in order to apply double taxation in its strict sense. INDIRECT (BROAD) SENSE The Documentary Stamp Tax is in the nature of an excise tax because it is imposed upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business. (CIR v. Pilipinas Shell Petroleum Corporation, G.R. No. 192398, September 29, 2014) It is a permissible double taxation. It is indirect when some elements of direct double taxation are absent. Tax treaties as relief from double taxation 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. 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. 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. DOUBLE TAXATION There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform. (Villanueva v. City of Iloilo, 1968) DIRECT (STRICT SENSE) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and 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) 34 Taxation Law 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. 3. factors of distribution to the factors of production. Onward shifting – When the tax is shifted two or more times either forward or backward. NOTE: Only indirect taxes may be shifted. In case of direct taxes, the shifting of burden can only be made via contractual provision. 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; and How to determine if a tax is direct or indirect Refer to previous discussion on “Kinds of Taxes – As to burden or incidence.” Meaning of impact and incidence of taxation 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. IMPACT OF TAXATION It refers to the statutory liability to pay the tax. It falls on the person originally assessed with a particular tax. It is the imposition of tax. (Liability) It is on the seller upon whom the tax has been imposed. NOTE: 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) ESCAPE FROM TAXATION INCIDENCE OF TAXATION It is the economic cost of tax. It is also known as burden of taxation. It is the payment of tax. (Burden) It is on the final consumer, the place at which the tax comes to rest. SHIFTING OF TAX BURDEN TAX AVOIDANCE 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. A scheme where the taxpayer uses legally permissible alternative method of assessing taxable property or income, in order to avoid or reduce tax liability. 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. 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) Ways of shifting the tax burden Q: Mr. Pascual’s income from leasing his property reaches the maximum rate of tax under the law. He donated ½ of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly, and exclusively used for educational purposes, and therefore qualified for tax exemption under Art. XIV, Sec. 4 (3) of the Constitution and Sec. 3 (h) of the NIRC. Having thus transferred a portion 1. 2. 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 35 General Principles 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) of domestic corporation, which is a capital asset, is subject to a final tax of 15% on the net capital gains realized. (Sec. 24(C) NIRC) 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. Tax evasion is a scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment of a tax. Q: Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million down payment; and (b) balance, payable equally in twenty four (24) monthly consecutive instalments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stocks of MAS Corporation. A BIR ruling, confirming the taxfree exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P44,850,000 (P299 million x 15%), instead of the corporate income tax of P89,700,000 (30% on P299 million gain from sale of real property) After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Elements to be considered in determining that there is tax evasion (USE) TAX EVASION / TAX DODGING 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) 1. 2. 3. DISTINGUISH: TAX AVOIDANCE AND TAX EVASION Validity TAX AVOIDANCE Legal and not subject to criminal penalty Effect Minimization of taxes TAX EVASION Illegal and subject to criminal penalty Almost always results in absence of tax payment. Evidence that may be used to prove tax evasion 1. Is the contention of the RDO tenable? Explain. 2. A: NO. The exchange of the real state property for the shares of stocks is considered as a legitimate tax avoidance scheme. (Sec. 40 (C)(2)(b), NIRC) The sale of the shares of stocks UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Course of action is unlawful; Accompanying state of mind, which is described as being evil, in bad faith, willful, or deliberate and not accidental; and End to be achieved, i.e., payment of less than that known by the taxpayer to be legally due, or non-payment of tax when it is shown that the tax is due. 36 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) Taxation Law Q: CIC, thru its authorized representative BT, sold a 16-storey commercial building to RA for 100M who then sold it on the same day to RMI for 200M. These two transactions were evidenced by two separate Deeds of Absolute Sale notarized on the same day by the same notary public. For the sale of the property to RMI, RA paid a capital gains tax in the amount of P10M. Is the scheme perpetuated a case of tax evasion or tax avoidance? petitioner knows what her tax obligations under the law are. 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 leave entirely to her husband the filing of her ITR. Petitioner also testified that she does not know how much her tax obligations was, 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 noncompliance 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) 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 RA, and then from RA to RMI cannot be considered a legitimate tax planning (one way of tax avoidance). Such scheme is tainted with fraud. EXEMPTION FROM TAXATION 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% (presently 30%) corporate income tax. (CIR v. The Estate of Benigno Toda Jr., GR No. 147188, Sept. 14, 2004) 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. It is the legislature, unless limited by a provision of the state constitution, which has full power to exempt any person, 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) Q: Gloria Kintanar was charged of violation of Art. 255 of the NIRC for failure to make or file her ITRs. Kintanar claimed that entrusted the duty of filing the said returns to her husband who filed their ITRs, through their hired accountant. Is Gloria Kintanar guilty of tax evasion? 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. 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. Hence, the natural presumption is that the 37 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. The burden is upon the claimant to establish right to exemption beyond reasonable doubt. However, the strict interpretation does not General Principles apply in the case of exemptions running to the benefit of the government itself or its agencies. 9. 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) 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 taxexemption statute or a tax-refund statute. Tax refunds or tax credits are not founded principally on legislative grace, but on the legal principle of quasi-contracts against a person’s unjust enrichment at the expense of another. Principles governing tax exemptions 1. 2. 3. 4. 5. 6. 7. 8. Revocations are constitutional even though the corporate do not have to perform a reciprocal duty for them to avail of 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. Tax exemptions are highly disfavored in law. Tax exemptions are personal and nontransferable. He who claims an exemption must justify that the legislature intended to exempt him by words too plain to be mistaken. He must convincingly prove that he is exempted. KINDS OF TAX EXEMPTION As to basis It must be strictly construed against the taxpayer. 1. Constitutional – Immunities from taxation which originate from the Constitution. NOTE: Deductions for income tax purposes partake of the nature of tax exemptions, hence, they are also strictly construed against the taxpayer. 2. Statutory – Those which emanate from legislation. 3. Contractual – Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws. 4. Implied – When particular persons, properties or excises are deemed exempt as they fall outside the scope of the taxing provision. Constitutional grants of tax exemptions are self-executing. Tax exemption is generally revocable, unless founded on contracts which are protected by the Non-impairment clause. In order to be irrevocable, the tax exemption must be founded on a contract or granted by the Constitution. The congressional power to grant an exemption necessarily carries with it the consequent power to revoke the same. NOTE: 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. L-61632, August 16, 1983) 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) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 5. Treaty 6. Licensing ordinance As to extent 38 Taxation Law 1. 2. Total – Connotes absolute immunity Partial – One where a collection of a part of the tax is dispensed with equal distribution (Domondon, 2009) 2. Personal – Granted directly in favor of certain persons. Impersonal – Granted directly in favor of a certain class of property. 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). A: NO. The 1991 Local Government Code (LGC) repealed NPC’s exemption from all taxes under its Charter. It removed the blanket exclusion of government instrumentalities from local taxation as it expressed a general repeal of all statutes granting exemptions from local taxes. Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws. Rationale/grounds for exemption The inherent power of the State to impose taxes naturally carries with it the power to grant tax exemptions. 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, 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) The rationale or grounds for tax exemption are the same as the non-revenue/special or regulatory purposes of taxation: 2. 3. etc. 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 and 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? These exemptions must not be confused with tax exemptions granted under franchises which are not 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) 1. wealth NOTE: There is no tax exemption based solely on the ground of equity. (Davao Gulf v. CIR, 293 SCRA 76) As to object 1. of 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 Revocation of tax exemption Since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. (Mactan Cebu International Airport Authority v. Marcos et al., 261 SCRA 667) 39 General Principles 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) charter, Republic Act (RA) 7227, as amended by RA 7917. Is BCDA exempt from Creditable Withholding Tax (CWT) on the sale of its BGC properties? A: YES. Insofar as the sale of the "Expanded Big Delta Lots" is concerned, R.A. 7227 as amended by R.A. 7917 specifically exempts BCDA from taxes. R.A. 7227, as amended is a special law. The NIRC, being a general law, is not deemed to have amended or superseded the special law in the absence of an express repeal thereof in the NIRC itself. Section 8 of R.A. 7227, as amended by R.A. 7917, specifically governs BCDA's disposition of the properties enumerated therein and their sale proceeds. The law exempts these sale proceeds from all kinds of fees and taxes as the same law has already appropriated them for specific purposes and for designated beneficiaries. 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) It is settled that between a general law and a special law, the latter prevails. For a special law reveals the legislative intent more clearly than a general law does. Verily, the special law should be deemed an exception to the general law. (CIR v. BCDA, G.R. No. 217898, January 15, 2020, as penned by J. Lazaro-Javier) Q: Differentiate Tax Exemption from Tax Assumption. 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) A: A tax exemption is a grant of immunity from payment of tax, while an assumption of tax liability does not provide immunity from payment of tax as it merely allows the shifting of the burden of taxation to another entity. (BIR Ruling No. ITAD 023-2017 dated 13 July 2017) EQUITABLE RECOUPMENT It is a principle which allows a taxpayer, whose claim for refund has been barred due to prescription, to recover said tax by setting off the prescribed refund against a tax that may be due and collectible from him. Under this doctrine, the taxpayer is allowed to credit such refund to his existing tax liability. Q: BCDA was the owner of four (4) real properties in BGC collectively referred to as the "Expanded Big Delta Lots”. It entered into a contract to sell with the NET GROUP. The total purchase price was P2,032,749,327.96. NET GROUP deducted the amount of Php101,637,466.40 as CWT and issued to BCDA the corresponding certificates of creditable tax withheld at source. BCDA then wrote the BIR for refund of the amount but to no avail. BCDA claimed that it was exempt from all taxes and fees arising from or in relation to the sale, as provided under its UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES NOTE: Equitable recoupment is allowed only in common-law countries, not in the Philippines. Q: True or False. The doctrine of equitable recoupment allows a taxpayer whose claim 40 Taxation Law for refund has prescribed to offset tax liabilities with his claim of overpayment. 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) A: TRUE. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax liability arising from the same transaction on which an overpayment is made, and underpayment is due. The doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems equitable, it is not allowed in our jurisdiction. (CIR v. UST, 104 Phil 1062 (1958)) Offsetting can be allowed if the determination of the taxpayer’s liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Section 229 of the NIRC. (CIR v. Toledo Power Company, G.R. No. 196415. December 2, 2015) PROHIBITION ON COMPENSATION AND SET-OFF Compensation or set-off shall take place when two persons, in their own right, are creditors and debtors of each other. (Article 1278, Civil Code) NOTE: In CIR v. Toledo Power Company, the SC did not allow BIR to assess Toledo Power if deficiency taxes and claim compensation because the case involves a VAT refund claim under Section 112. Rules governing compensation or set-off as applied in taxation RATIONALE: To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects” and that “to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. (CIR v. CTA, G.R. No. 106611, July 21, 1994, 234 SCRA 348) GR: No set-off is admissible against the demands for taxes levied for general or local governmental purposes. Taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each other. (Philex Mining Corporation v. CIR, 356 Phil. 189, 198; 294 SCRA 687, 695 (1998), cited in CIR v. Toledo Power Company, G.R. No. 196415. December 2, 2015) 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) NOTE: The prevalent rule in our jurisdiction disfavors set-off or legal compensation of tax obligations for the following reasons: (1) taxes are of a distinct kind, essence, and nature; and these impositions cannot be so classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common to each; and (3) public policy is better subserved if the integrity and independence of taxes be maintained (lifeblood doctrine). The collection of a tax cannot await the results of a lawsuit against the government. (Republic v. Mambulao Lumber Company, 4 SCRA 622, 1962; Francia v. IAC, G.R. No. L-67649, June 28, 1988; Caltex Philippines, Inc. v. Commission on Audit, et al., G.R. No. 92585, May 8, 1992) A: NO. Taxes and debts are of different nature and character. Taxes cannot be subject to compensation for the simple reason that the Government and the taxpayers are not creditors and debtors of each other, debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. (South African Airways v. CIR, 612 SCRA 665, 2010) The taxes assessed or the obligation of the taxpayer arising from law, while the money judgment against the government is an obligation, arising from contract, whether express or implied. Inasmuch as taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal compensation. Hence, no set-off or compensation between the two different XPN: Where both the claims of the government 41 General Principles classes of obligations is allowed. (Francia v. IAC, 162 SCRA 753, 1988) 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) 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) 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) 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. Tax Amnesty Exemption 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. 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 were no actual taxes due as the person or transaction is protected by tax exemption Grantee 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) Q: Does the mere filing of tax amnesty return shield the taxpayer from immunity against prosecution? TAX AMNESTY 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) 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Tax TAX EXEMPTION Immunity from civil liability only Persons allowed to enter into compromise of tax obligations 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) from TAX AMNESTY Immunity from all criminal, civil and administrative obligations arising from non-payment of taxes Scope of immunity 1. BIR Commissioner, as expressly authorized by the NIRC, and subject to the following conditions: a. When a reasonable doubt as to validity of the claim against the taxpayer exists; or b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (Sec. 204(A), NIRC) distinguished Q: Can a taxpayer claim tax amnesty if he is a 42 Taxation Law withholding tax agent? insists that Transfield is still liable for deficiency taxes, contending that under RMC No. 19-2008, the latter is still disqualified to avail of tax amnesty because it falls under the exception of "delinquent accounts or accounts receivable considered as assets by the BIR or the Government, including selfassessed tax." Is CIR’s contention correct? A: The claim of a taxpayer under a tax amnesty shall be allowed when the liability involves the deficiency in payment of income tax. However, it must be disallowed when the taxpayer is assessed on his capacity as a withholding tax agent because the person who earned the taxable income was another person other than the withholding agent. (LG Electronics Philippines, Inc. v. CIR, G.R. No. 165451, December 3, 2014) A: NO. It remains undisputed that Transfield complied with all the requirements pertaining to its application for tax amnesty. A tax amnesty operates as 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 is an absolute forgiveness or 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. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty is akin to a tax exemption. Thus, it must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 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 maxim expressio unius est exclusio alterius. In implementing tax amnesty laws, the CIR cannot now insert an exception where there is none under the law. Indeed, a tax amnesty must be construed strictly against the taxpayer and liberally in favor of the taxing authority. However, 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 implement, and any resulting inconsistency shall be resolved in favor of the basic law. (Commissioner of Internal Revenue v. Transfield Philippines, Inc., G.R. 211449, January 16, 2019) 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 Law. However, BIR contends that Garment Co is disqualified per “BIR RMC 19-2008” or “A Basic Guide on the Tax Amnesty Act of 2007” which disqualifies taxpayers with issues and cases that were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer. Did Garment Co qualify for the tax amnesty program? A: YES. While tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. It is also a well-settled doctrine that the rule-making power of administrative agencies cannot be extended to amend or expand statutory requirements or to embrace matters not originally encompassed by the law. Administrative regulations should always be in accord with the provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in favor of the basic law. Thus, BIR RMC 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) CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGULATIONS Q: Transfield received Final Assessment Notices issued by CIR. It filed a protest, but such was not acted upon and BIR demanded immediate payment of the assessments. Transfield availed the benefits of the Tax Amnesty Program under R.A. 9480, complying with all the requirements. The CIR 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 43 General Principles September 11, 1996) The imposition of a tax cannot be presumed. 2. The exemption granted in favor of NAPOCOR must be liberally construed. It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception.” (Maceda v. Macaraig, G.R. No. 88291, May 31, 1991) 3. Erroneous payment of the tax, or absence of law for the government’s exaction. (CIR v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008) XPN: Unless a statute imposes a tax clearly, expressly, and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. Where there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. This is because taxes are burdens on the taxpayer and should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. (CIR v. The Philippine American Accident Insurance, Inc., 453 SCRA 668, G.R. No. 141658 March 18, 2005) The rule that, in case of doubt of legislative intent, the doubt must be liberally construed in favor of taxpayer does not extend to cases involving the issue of the validity of the tax law itself which, in every case, is presumed valid. TAX RULES AND REGULATIONS TAX EXEMPTION AND EXCLUSION 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. 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) 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) 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) 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) 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) XPNs: 1. If the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations. (MCIAA v. Marcos, G.R. No. 120082, September 11, 1996) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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, 44 Taxation Law G.R. No. 117982, February 6, 1997) c. PENAL PROVISIONS OF TAX LAWS 2. In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right to prosecute. They receive strict construction in favor of the Government and limitations in such cases will not be presumed in the absence of clear legislation. (Lim v. CA, G.R. No. 48134-37, October 18, 1990) Where the taxpayer acted in bad faith. (Sec. 246, NIRC) 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. (Dimaampao, 2015) NON-RETROACTIVE APPLICATION TO TAXPAYERS Tax laws, including rules and regulations operate prospectively unless otherwise legislatively intended by express terms or by necessary implication. (Gulf Air Company, Philippine Branch v. CIR, G.R. No. 182045, September 19, 2012) Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. (CIR v. Acosta, G.R. No. 154068, August 3, 2007) GR: Tax laws operate prospectively whether they enact, amend, or repeal. XPN: Tax laws may only be given retroactive application if the legislature expressly or impliedly provides that it shall be given retroactive application. BIR Rules and Regulations that revoke, modify or reverse a ruling or circular GR: It shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers. XPNs: 1. It may be given retroactive effect even if such would be prejudicial to the taxpayer in the following cases: a. Where the taxpayer deliberately misstates or omits material facts from his return, or any document required of him by the BIR; b. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or 45 National Taxation stamp taxes. It filed a Motion to Cancel Tax Assessment which was granted by the CTA. The CTA found that Apo Cement is a qualified tax amnesty applicant under Republic Act No. 9480 and fully compliant with the requirements of the law. The Commissioner of Internal Revenue filed a Motion for Reconsideration on October 19, 2009. It disputes the correctness of Apo Cement’s 2005 SALN because it allegedly did not include in its declaration of assets in the SALN the 57,500,000 shares of stocks it acquired in 1999 from its subsidiary. Does the CIR have the standing to question the SALN of Apo Cement? NATIONAL TAXATION TAXING AUTHORITY Powers and duties of the BIR (JEnAReS) 1. 2. 3. 4. 5. Assessment and collection of all national internal revenue taxes, fees, and charges; Enforcement of all forfeitures, penalties, and fines; Execution of judgments in all cases decided in its favor (by the CTA and regular courts); Give effect and administer the supervisory and police powers conferred to it by the NIRC and other laws; and Recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement of the provision of the NIRC. A: NO. Under Section 4 of Republic Act No. 9480, there is a presumption of correctness of the SALN and only parties other than the Bureau of Internal Revenue or its agents may dispute the correctness of the SALN. Even assuming that petitioner has the standing to question the SALN, Republic Act No. 9480 provides that the proceeding to challenge the SALN must be initiated within one year following the date of filing of the Tax Amnesty documents. Respondent asserts that it availed of the tax amnesty program on January 25, 2008. Hence, petitioner’s challenge made only in April 2009, was already time-barred. (CIR v. APO, G.R. No. 193381, February 8, 2017) Chief Officials of the BIR The BIR is headed by the CIR and 4 Deputy Commissioners, who lead the following divisions: 1. 2. 3. 4. Operations group; Legal Inspection Group; Resource and Management Group; and Information Systems Group. Q: Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate over the supposed will of the decedent? (1998 BAR) JURISDICTION, POWER, AND FUNCTIONS OF THE COMMISSIONER OF INTERNAL REVENUE Powers of the Commissioner 1. Power to interpret tax laws and to decide cases (Sec. 4, NIRC); and 2. Power to obtain information and to summon or examine and take testimony of persons. (Sec. 5, NIRC) A: YES. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon and sale of real properties of a decedent without the cognition and authority of the court sitting in probate over the supposed will of the deceased because of the collection of estate tax is executive in character. As such the estate tax is exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government. (Marcos v. CIR, G.R. No. 120880, June 5, 1997) Q: What are the purposes of these powers? A: 1. To ascertain correctness of the return; 2. To make a return when none has been made; 3. To determine liability of any person for any internal revenue tax; 4. To collect such liability; and 5. To evaluate tax compliance. Q: In 2008, Apo Cement availed of the tax amnesty under Republic Act No. 9480 which affects its 1999 deficiency documentary UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Q: What are the scope of such powers? 46 Taxation Law A: 1. To examine any book, paper, record, or other data which may be relevant or material to such inquiry; 2. To obtain any information (costs, volume of production, receipts, sales, gross income) on a regular basis, from any person other than the person under investigation and any office or officer of the national or local government; 3. To summon the following to produce records and to give testimony: a. The person liable for tax or required to file a return; b. Any officer or employee of such person; c. Any person having in his possession, custody, and care the books of accounts, accounting records of entries related to the business of such taxpayer. private juridical entity. (The Commission on Audit, Represented by Its Chairman, The Bureau of Internal Revenue, Represented by Its Commissioner, and The Bureau of Customs, Represented by Its Commissioner v. Hon. Silvino T. Pampilo, Jr., Et Al./Chevron Philippines, Inc. v. Hon. Silvino T. Pampilo, Jr., et al./Petron Corporation v. Hon. Silvino T. Pampilo, Jr., et al., G.R. No. 188760/189060/189333, June 30, 2020) Q: When can the CIR suspend the business operation of a taxpayer? A: 1. In the case of VAT-registered person: a. Failure to issue receipts or invoices; 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. 4. Power to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6, NIRC); 5. Power to assign internal revenue officers and other employees (Secs. 16 and 17, NIRC); and 6. Power to suspend the business operations of a taxpayer for violations of VAT rules. (Sec. 115, NIRC) 2. Failure of any person to register as required under Sec. 236: The temporary closure of the establishment shall be for the duration of not less than 5 days and shall be lifted only upon compliance with whatever requirements prescribed by the CIR in the closure order. (Sec. 115 NIRC) Q: Can a Regional Trial Court order the Commission on Audit (COA), Bureau of Internal Revenue (BIR), and the Bureau of Customs (BOC) to open and examine the books of accounts of a domestic private juridical entity? The CIR is also authorized to do the following 1. A: NO. The RTC cannot order COA to open and examine the books of accounts of a domestic private juridical entity because its audit jurisdiction generally covers public entities. On the other hand, the BIR, as allowed by law, can only to ascertain the correctness of any return, or in making a return when none was made, or in determining the liability of any person for any internal revenue tax, or in collecting such liability, or evaluating the person's tax compliance. Lastly, the BOCC is authorized to audit or examine all books, records, and documents of importers necessary or relevant for the purpose of collecting the proper duties and taxes. In consideration of the fact that there are no taxes or duties involved in this case, the BIR and the BOC likewise have no power and authority to open and examine the books of accounts of the aforementioned domestic To terminate taxable period for reasons provided in the NIRC: a. b. c. 2. 3. 4. 47 Retiring from business subject to tax; Intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property; or Performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective unless such proceedings are begun immediately. To make or amend return in case taxpayer fails to file a return or files a false or fraudulent return. To examine returns and determine tax due. To prescribe any additional requirements for the submission or preparation of National Taxation 5. financial statements accompanying returns. To inquire into bank deposits of: a. b. c. tax authority or tax administration of the requesting State under the tax treaty or convention to which the Philippines is a signatory or a party of. Decedent to determine his gross income; A taxpayer who filed application to compromise payment of tax liability by reason of financial incapacity; and 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. 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 property values. NOTE: Also known as zonal value. In case of a request from a foreign tax authority for tax information held by banks and financial institutions, the exchange of information shall be done in a secure manner to ensure confidentiality thereof under such rules and regulations as may be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. 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. The Commissioner shall accredit and register, based on their professional competence, integrity and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with or who appear before, the Bureau for taxpayers. The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if any, within sixty (60) days from receipt of the request. Q: What are the powers of the BIR which cannot be delegated? A: (RICA) 1. To Recommend promulgation of rules and regulations by the Secretary of Finance. 2. If the Commissioner is unable to obtain and provide the information within ninety (90) days from receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same, explaining the nature of the obstacles encountered or the reasons for refusal. To Issue rulings of first impression or to reverse, revoke or modify any existing rule of the BIR. GR: To Compromise or abate any tax liability. XPN: The Regional Evaluation Board may compromise assessments involving deficiency taxes of P500,000 or less and minor crime violations. 3. The term “foreign tax authority,” as used herein, shall refer to the tax UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 6. 48 To Assign or reassign internal revenue officers to establishments where articles subject to excise tax are kept. Taxation Law Q: Will errors or mistakes of administrative officials bind the government as to the collection of taxes? Power to interpret 1. The NIRC; and 2. Other tax laws. A: GR: Errors or mistakes of administrative officials (including the BIR) should never be allowed to jeopardize the financial position of the government. Power to decide on 1. Disputed assessments, 2. Refunds of internal revenue taxes, 3. Fees or other charges, and penalties imposed in relation thereto, 4. Other matters arising under the NIRC or other laws or portions thereof administered by the BIR. 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) Q: On January 27, 2017, Ramon, the comptroller of Vantage Point, Inc., executed a document entitled “Waiver of the Statute of Limitations” in connection with the BIR’s investigation of the tax liabilities of the company for 2012. 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) However, the Board of Directors of Vantage Point, Inc., did not adopt a board resolution authorizing Ramon to execute the waiver. On October 14, 2017, Vantage Point, Inc., received a preliminary assessment notice from the BIR indicating its deficiency withholding taxes for the year 2012. Vantage Point, Inc., filed its protest. On October 30, 2017, the BIR issued a formal letter of demand and final assessment notice. Vantage Point, Inc., again filed a protest. The CIR denied the protests and directed the collection of the assessed deficiency taxes. 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. Accordingly, Vantage Point, Inc., filed a petition for review in the CTA to seek the cancellation and withdrawal of the assessment on the ground of prescription. Powers of the Commissioner to interpret tax laws and to decide tax cases a. What constitutes a valid waiver of the statute of limitations for the assessment and collection of taxes? Explain your answer. b. Has the right of the Government to assess and collect deficiency taxes from Vantage Point, Inc. for the year 2012 prescribed? Explain your answer. (2017 BAR) The power to 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. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other laws or portions thereof administered by the BIR is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (Sec. 4, NIRC) A: a. Generally, a valid waiver of the statute of limitations for the assessment and collection of taxes must be executed by the taxpayer and accepted by the BIR prior to the expiration of the period which it seeks to 49 National Taxation extend. The same must also be executed by the taxpayer or his duly authorized representative, or in the case of a corporation, it must be signed by any of its responsible officers. (CIR v. Kudos Metal Corporation, G.R. No. 178087, May 5, 2010) 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. Such requirements must be met considering that a waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004) b. a. What is a BIR Ruling? b. What is required to make a BIR ruling of first impression a valid one? c. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be interpreted strictly against the taxpayer? (2007 BAR) YES, the final assessment was issued beyond the three-year prescriptive period to make an assessment. (Section 203, NIRC) The Waiver did not extend the three-year prescriptive period since it was executed after the expiration of such period. A: a. A BIR ruling is an administrative interpretation of the Revenue Law as applied and implemented by the Bureau. They can be relied upon by taxpayers and are valid until otherwise determined by the courts or modified or revoked by a subsequent ruling or opinion. They are accorded great weight and respect, but not binding on the courts. (Commission v. Ledesma, L-17509, January 30, 1970) Non-Retroactivity of Rulings The rulings of the BIR are not retroactive. Any revocation, modification, or reversal of any of the rules and regulations promulgated or any of the rulings or circulars promulgated by the CIR shall not be given retroactive application if it will be prejudicial to the taxpayers, except in the following cases: 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 CIR is one UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES b. A BIR ruling of first impression, to be a valid ruling, must be issued within the scope of authority granted to the CIR, and not contravene any law or decision of the SC. (CIR v. Michel Lhuillier Pawnshop, Inc., G.R. No. 150947, July 15, 2003; Sec. 7, NIRC) c. A BIR ruling cannot be given retroactive effect if it would be prejudicial to the taxpayer. Sec. 246 of the NIRC provides for retroactive effect in the following cases: 1. 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 are 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 50 Taxation Law 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) personnel requirements and standards of performance. 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) 5. Revenue Delegation of Authority Orders (RDAOs) - Issuances signed by the CIR which refer to functions delegated by the CIR to revenue officials in accordance with law. 6. Revenue Special Orders (RSOs) – Administrative order issued by the CIR assigning revenue officers and employees of the BIR to special duties which shall not exceed 1 year. 7. BIR Rulings – official positions of the CIR to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws. Rulings may come in different forms: a. BIR Rulings b. VAT Rulings c. Rulings issued by International Tax Affairs Division (ITAD); and d. Rulings issued thru delegated authorities or unnumbered rulings 8. Revenue Audit Memorandum Orders (RAMOs) – Declarations of audit programs of the BIR for a specific taxable year signed by the CIR. 9. Revenue Memorandum Rulings (RMRs) – Rulings, opinions, and interpretations signed by the CIR with respect to the 1997 Tax Code as amended, as applied to a specific set of facts, with or without established precedents, for guidance of taxpayers. Various Kinds of Revenue Issuances by the CIR 1. 2. 3. 4. Revenue Regulations (RRs) – Issuances signed by the Secretary of Finance (SoF), upon recommendation of the CIR, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the Tax Code. Revenue Memorandum Orders (RMOs) Issuances signed by the CIR that provide directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the BIR in all areas of operations, except auditing. 10. Revenue Bulletins (RBs) – periodic issuances, notices, and official announcements of the CIR that consolidate the BIR’s position on certain issues, for the guidance of the public signed by the CIR. Revenue Memorandum Circulars (RMCs) Issuances signed by the CIR which publish pertinent and applicable portions, as well as amplifications, of laws, rules, regulations, and precedents issued by the BIR and other agencies/offices. 11. Revenue Travel Assignment Orders (RTAOs) – issued by the CIR transferring, assigning, or re-assigning revenue officers or employees to other or special duties connected with the enforcement or administration of revenue laws as the exigencies of the services may require. Revenue Administrative Orders (RAOs)Issuances signed by the CIR that cover subject matters dealing strictly with the permanent administrative set-up of the BIR, more specifically, the organizational structure, statements of functions and/or responsibilities of BIR offices, definitions and delegations of authority, staffing and Limit: Revenue officers assigned to perform assessment or collection functions shall not remain in the same assignment for more 51 National Taxation than 3 years. 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. RULE-MAKING AUTHORITY OF THE 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) 6. The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the CIR, and the signs to be displayed in the business or by the person for whom such denaturing is done or by whom, such alcohol is dealt in; General principles on the rule-making power 1. Rules and regulations, as well as administrative opinions, and rulings, ordinarily should deserve weight and respect by the courts. 2. All such issuances must not override but must remain consistent and in harmony with the law they seek to apply and implement. 3. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law. (CIR v. CA, G.R. No. 108358, January 20, 1995) 7. The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation, the manner in which the proper books, records, invoices and other papers shall be kept, and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes. Specific Provisions to be Contained in Rules and Regulations Rules and regulations must contain provisions specifying, prescribing, or defining: 1. 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. 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. 2. 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. 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. 3. 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. 4. The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings. 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 5. The conditions under which goods intended for storage in bonded warehouses shall be UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 52 Taxation Law 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) Commissioner, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors. The penalties prescribed under Section 248 of this Code shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers. (Sec. 245, NIRC) The following taxpayers shall be automatically classified as candidate to be a Large Taxpayer and will be notified in writing as such by the CIR 1. All branches of a taxpayer under the Large Taxpayers Service; LARGE TAXPAYER 2. Subsidiaries, affiliates, and entities of conglomerates or group of companies of a large taxpayer initially listed as of the effectivity of this Regulations; A large taxpayer is anyone who satisfies any of the following criteria 3. The surviving company, in case of merger or consolidation involving a large taxpayer; 1. Value-Added Tax (VAT) – Business establishment with VAT paid or payable of at least One hundred thousand pesos (P100, 000) for any quarter of the preceding taxable year. 4. Any corporation that absorbs the operation or business in case of spin-off/s of any large taxpayer; 5. Corporations with an authorized capitalization of at least P300 million registered with the Securities and Exchange Commission (SEC); 2. Excise tax - Business establishment with excise tax paid or payable of at least One million pesos (P1, 000,000) for the preceding taxable year. 6. Multi-national enterprises (MNEs) with an authorized capitalization or assigned capital of at least P300 million; 3. Corporate Income Tax – Business establishment with annual income tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year. 7. Publicly-listed corporations; 8. Universal, Commercial, and Foreign banks: The Regular Banking Unit (RBU) and the Foreign Currency Deposit Unit (FCDU)/Offshore Banking Unit (OBU) of a bank shall be considered as one taxpayer for purposes of classifying it as a Large Taxpayer, even if the said units are assigned different Taxpayer Identification Numbers (TINs); 4. Withholding tax – Business establishment with withholding tax payment or remittance of at least One million pesos (P1,000,000) for the preceding taxable year. Provided, however, that the Secretary of Finance, upon recommendation of the 53 National Taxation 9. Taxpayers with an authorized capitalization of at least P100 million belonging to the following industries: Banks, Insurance, Telecommunication, Utilities, Petroleum, Tobacco and Alcohol; and 10. Corporate taxpayers engaged production of metallic minerals. in UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES the 54 Taxation Law INCOME TAX SYSTEMS INCOME TAX 1. 2. 3. DEFINITION, NATURE, AND GENERAL PRINCIPLES Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege, the privilege to earn yearly profits from various sources. It is a system that does not provide for the taxation of property. (Domondon, 2013) Global tax system; Schedular tax system; and Semi-schedular or semi-global tax system. Enumerated income tax systems are discussed in detail below. Global 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) 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) Schedular 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. 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) Q: GHI, Inc. is a corporation authorized to engage in the business of manufacturing ultra-high density microprocessor unit packages. After its registration on July 5, 2005, GHI, Inc. constructed buildings and purchased machineries and equipment. As of December 31, 2005, the total cost of the machineries and equipment amounted to ₱250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory was temporarily closed effective September 15, 2010. On October 1, 2010, it sold its machineries and equipment to JKL Integrated for ₱300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010. Others All compensation income, business, or professional income, capital gain, passive income, and other income not subject to final tax are added together to arrive at the gross income. After deducting the allowable deductions and exemptions from the gross income, the taxable income is subjected to one set of graduated tax rate for individual or normal corporate income tax rate for corporation. (Mamalateo, 2014) Schedular Treatment vs. Global Treatment (1994 BAR) SCHEDULAR TREATMENT Different tax rates Is the sale of the machineries and equipment to JKL Integrated subject to normal corporate income tax or capital gains tax? Explain. (2019 BAR) Different categories of taxable income A: The sale of machineries and equipment to JKL Integrated subject to normal corporate income tax. Under Sec. 27(D)(5) of the NIRC, a corporation is only subject to capital gains tax for the sale of land and buildings. In this case, GHI Inc., a corporation, sold machineries and equipment. Hence, the sale is subject to normal corporate income tax. Usually used in income taxation of individuals (Business income, professional income, passive income, illegal income) 55 GLOBAL TREATMENT Unitary or single tax rate No need for classification as all taxpayers are subjected to a single tax rate Applied to corporations (Business income, professional income, passive income, illegal income) National Taxation You cannot add all of them together, due to different tax rates. b. Only on his income from sources within the Philippines, if he qualifies as a non-resident citizen. All of them are added together and subjected to a single tax rate. 2. Residence FEATURES OF THE PHILIPPINE INCOME TAX LAW 1. 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. Direct tax Tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it (i.e., income tax, donor’s tax, estate tax). 3. Source An alien is subject to Philippine income tax because he derives income from sources within the Philippines. On the other hand, indirect tax is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else (i.e., VAT), where the seller is liable to pay the output VAT but shifts the burden to the buyer). 2. 3. 4. A non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines, despite the fact that he has not set foot in the Philippines. (Mamalateo, 2014) Progressive tax NOTE: Only resident citizens and domestic corporations are taxable on worldwide income. Tax base increases as the tax rate increases. It is founded on the “ability to pay” principle. GENERAL PRINCIPLES OF INCOME TAXATION Comprehensive Except when otherwise provided in the NIRC: It adopted the citizenship principle, the residence principle, and the source principle. 1. Semi-schedular or semi-global tax system (Mamalateo, 2014) 3. 2. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX LAW 4. 1. Citizenship 5. A citizen of the Philippines is subject to Philippine income tax: 6. a. On his worldwide income, if he resides in the Philippines; Within Without RC ✓ ✓ NRC ✓ x UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES RA ✓ x 56 A RC is taxable on all income derived from sources within and without the Philippines. An NRC is taxable only on income derived from sources within the Philippines. An individual citizen who is working and deriving income from abroad as an overseas contract worker (OCW) is taxable only on income from sources within the Philippines. An alien, (RA or NRA), is taxable only on income within the Philippines. A domestic corporation (DC) is taxable on all income derived within and without the Philippines. A foreign corporation, (engaged or not in trade or business in the Philippines), is taxable only on income derived from sources within the Philippines. NRA ✓ x DC ✓ ✓ FC ✓ x Taxation Law TYPES OF PHILIPPINE INCOME TAX A resident citizen can be (a) engaged in trade or business or in the exercise of his profession in the Philippines; (b) not engaged in trade or business or in the exercise of his profession; or (c) engaged in trade or business or in the exercise of his profession and at the same time, he derives compensation and/or other income “mixed income.” (Mamalateo, 2014) 1. 2. Minimum corporate income tax (MCIT); Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as capital asset; 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-resident individuals or corporations 6. Fringe benefit tax (FBT) 7. Branch profit remittance tax 8. Improperly accumulated earnings tax (IAET) 9. Normal corporate income tax on corporations 10. Graduated income tax on individuals, or 11. Optional income tax of 8% for individuals 12. Special income tax on certain corporations Non-resident Citizens 1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. A citizen of the Philippines who 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. 4. A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this Section. (Sec. 22(E), NIRC) KINDS OF TAXPAYERS 1. 2. 3. 4. Individuals a. Citizen i. Resident Citizen (RC) ii. Non-Resident Citizen (NRC) b. Aliens i. Resident Alien (RA) ii. Non-Resident Alien (NRA) (1) Engaged in Trade or Business (NRA-ETB) (2) Not Engaged in Trade or Business (NRA-NETB) iii. Special Alien c. Special class of individual employees i. Minimum wage earner Corporations a. Domestic b. Foreign i. Resident foreign corporation (RFC) ii. Non-resident foreign corporation (NRFC) c. Joint venture and consortium d. Partnership Resident Alien An individual whose residence is within the Philippines and who is not a citizen thereof. (Sec. 22(F), NIRC) Estates Trusts Non-resident Alien Resident Citizens An individual whose residence is not within the 57 National Taxation Philippines and who is not a citizen thereof. (Sec. 22(G), NIRC) contract worker is taxable only on income from sources within the Philippines, provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. An alien individual, whether or not a resident of the Philippines, is taxable only on income derived from sources within the Philippines. Domestic Corporation Corporations created or organized in the Philippines or under its laws. (Sec. 22(C), NIRC) Foreign Corporation A corporation which is not domestic. (Sec. 22(D), NIRC) On the other hand, a domestic corporation is taxable on all its income from sources within and without the Philippines. Resident Foreign Corporation A foreign corporation engaged in trade or business within the Philippines. (Sec. 22(H), NIRC) However, a foreign corporation, whether resident or non-resident, is taxable only on income from sources within the Philippines. (Mamalateo, 2014) Non-resident Foreign Corporation A foreign corporation not engaged in trade or business within the Philippines. (Sec. 22(I), NIRC) TAXABLE PERIOD Taxable period is a period within which the net income is computed as a whole for income tax purposes. Importance of knowing the classification of taxpayers Kinds of taxable periods In order to determine the applicable (GREED) 1. 2. 3. 4. 5. 1. Gross income Income tax Rates Exclusions from gross income Exemptions Deductions The 12 consecutive months starting from January 1 and ending December 31. Instances when calendar year shall be the basis for computing net income: It is important to know the classification of different taxpayers since tax treatments for those enumerate above varies from one taxpayer to another. a. b. c. It is important to know the tax status of a taxpayer for income tax purposes, since only resident citizens and domestic corporations are taxable on their worldwide income, while the other types of individual and corporate taxpayers are taxable only on income derived from sources within the Philippines. Thus, a citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. d. When the taxpayer is an individual; When the taxpayer does not keep books of account; When the taxpayer has no annual accounting period; or When the taxpayer is an estate or a trust. NOTE: Taxpayers other than a corporation are required to use only the calendar year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. A citizen of the Philippines who is working and deriving income from abroad as an overseas UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Calendar period Fiscal period It is a period of 12 months ending on the last day of any month other than December. (NIRC, Sec. 22 (Q)) 58 Taxation Law NOTE: The final adjustment return shall be filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year. 3. described as gains and profits, including gains derived from the sale or other disposition of capital assets. (Sec. 36, RR No. 2) 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) Short period GR: The taxable period, whether it is a calendar year or fiscal year always consists of 12 months. WHEN INCOME IS TAXABLE XPN: Instances when the taxpayer may have a taxable period of less than 12 months: 1. 2. 3. 4. 5. The following are important considerations to discover whether or not there is income for tax purposes: 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 1. 2. 3. Existence of income; Realization of income; and Recognition of income. Enumerated important discussed in detail below. considerations are Existence of income A primary consideration in income taxation is that there must be income before there could be income taxation. (Domondon, 2013) Q: Differentiate between a calendar year and a fiscal year. (2019 BAR) Receipts not considered as income A: Calendar year means an accounting period of twelve months ending on the last day of December. On the other hand, fiscal year means an accounting period of twelve months ending on the last day of any month other than the month of December. 1. Advance payments or deposits for payments; Advances are not revenues of the period in which they are received but as revenue of the period or periods in which they are earned. 2. Property received as compensation but subject to forfeiture; Q: When is the deadline for the filing of a corporation's final adjustment return for a calendar year? How about for a fiscal year? (2019 BAR) 3. Assessments for contributions; A: For a calendar year, the final return should be filed on or before the 15th day of April following the close of the taxable year. For a fiscal year, the final return is filed on or before the 15th day of the 4th month following the close of the taxable year. additional corporate 4. Increments resulting from revaluation of property; Until the revalued property is disposed of there is no income realized. CONCEPT OF INCOME 5. Parent’s share in the accumulated and current equity on subsidiaries’ net earnings prior to distribution; Income refers to all wealth which flows into the taxpayer other than as mere return of capital. It includes the forms of income specifically 6. Money earmarked for some other persons not included in gross income; 59 National Taxation 7. Money or property borrowed; A: YES. Condominium corporations are not engaged in activities that generate profit. The collection of association dues, membership fees, and other assessments/charges is purely for the benefit of the condominium owners. It is a necessary incident to the purpose of effectively overseeing, maintaining and governing the common areas of the condominium. Therefore, they are not subject to income tax because they do not constitute profit or gain. Furthermore, they are also not included as sources of gross income under Section 32 of the Tax Code. Consequently, they are not subject to VAT/Withholding tax because they neither arise from transactions involving the sale, barter, or exchange of goods or property nor are generated by the performance of services. (Bureau of Internal Revenue (BIR), as herein represented by its Commissioner Kim S. Jacinto-Henares v. First E-Bank Tower Condominium Corp. or First EBank Tower Condominium Corp. v. Bureau of Internal Revenue (BIR), as herein represented by its Commissioner Kim S. Jacinto-Henares, GR. 215801 / 218924., January 15, 2020., as penned by J. Lazaro-Javier) 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. 8. Increase in net worth resulting adjusting entries (Domondon, 2013) from Security advances and security deposits paid by a lessee to a lessor The amount received by the lessor as security advances or deposits is not considered income because it will eventually be returned to the lessee; hence the lessor did not earn, gain, or profit therefrom. (Tourist Trade and Travel v. CIR, CTA Case No. 4806, January 19, 1996) Q: Mr. X borrowed ₱10,000 from his friend Mr. Y payable in one year without interest. When the loan became due, Mr. X told Mr. Y that he (Mr. X) was unable to pay because of business reverses. Mr. Y took pity on Mr. X and condoned the loan. Mr. X was solvent at the time he borrowed the ₱10,000 and at the time the loan was condoned. Did Mr. X derive any income from the cancellation or condonation of his indebtedness? Explain. (1995 BAR) Q: Bureau of Internal Revenue (BIR) issued RMC No. 35-2012, entitled "Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes," which was addressed to all revenue officials, employees, and others concerned for their guidance regarding the income tax and Valued Added Tax (VAT) liability of the said recreational clubs. 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. On the income tax component, RMC No. 352012 states that "clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the National Internal Revenue Code (NIRC) of 1997, as amended (1997 NIRC)." Q: Petitioner condominium corporation filed a case seeking to invalidate RMC No. 65-2012, which subjects condominium association dues, membership fees and other assessments to income tax and VAT. Petitioner contends that membership fees, assessment dues, and other fees of similar nature only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive members and thus, they do not constitute profit or gain. Are the petitioners correct? UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Likewise, on the VAT component, RMC No. 35-2012 provides that "the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and service fees are subject to VAT." Association of Non-profit Clubs Inc. (ANPC), on behalf of its club members, filed a petition for declaratory relief before the RTC on September 17, 2014, seeking to declare RMC No. 35-2012 invalid, unjust, oppressive, 60 Taxation Law confiscatory, and in violation of the due process clause of the Constitution. RTC denied the petition for declaratory relief and upheld the validity and constitutionality of RMC No. 35-2012. Is the RTC correct? Realization of income Under the realization principle, revenue is generally recognized when both of the following conditions are met: A: NO. RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership fees and assessment dues are sources of income of recreational clubs from which income tax liability may accrue. Membership fees, assessment dues, and other fees of similar nature only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive members. They represent funds “held in trust” by these clubs to defray their operating and general costs and hence, only constitute infusion of capital. 1. 2. The earning process is complete or virtually complete. An exchange has taken place. (Manila Mandarin Hotels, Inc. v. CIR, CTA Case No. 5046, March 24, 1997) NOTE: Mere increase in the value of property is not considered as income for tax purposes 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 ₱1 million. In 2011, the land had a fair market value of ₱20 million. Mr. Ayala offered to buy the same for ₱20 million. Is Mr. Castillo liable to pay for income tax in 2011 based on the offer to buy by Mr. Ayala? (2011 BAR) In fine, for as long as these membership fees, assessment dues, and the like are treated as collections by recreational clubs from their members as an inherent consequence of their membership, and are, by nature, intended for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, then these fees cannot be classified as “the income of recreational clubs from whatever source” that are “subject to income tax.” Instead, they only form part of capital from which no income tax may be collected or imposed. A: NO. Mr. Castillo is not liable for income tax in 2011 was for income tax attaches only if there is a gain realized resulting from a closed and completed transaction. (Madrigal v. Rafferty, G.R. No. L12287, August 7, 1918) Increase in the net worth of a taxpayer In the same way, the Court declares as invalid the BIR's interpretation in RMC No. 35-2012 that membership fees, assessment dues, and the like are part of “the gross receipts of recreational clubs” that are “subject to VAT.” The increase in the net worth of a taxpayer is taxable if it is the result of the receipt of unreported or unexplainable tax income. However, if they are merely shown as correction of errors in its entries in its books relating to its indebtedness to certain creditor which had been erroneously overstated or listed as outstanding when they had in fact been duly paid, they are not taxable. As ANPC aptly pointed out, membership fees, assessment dues, and the like are not subject to VAT because in collecting such fees, the club is not selling its service to the members. Conversely, the members are not buying services from the club when dues are paid; hence, there is no economic or commercial activity to speak of as these dues are devoted for the operations/maintenance of the facilities of the organization. As such, there could be no “sale, barter or exchange of goods or properties, or sale of a service” to speak of, which would then be subject to VAT under the 1997 NIRC. (Association of Non-Profit Clubs, Inc. (ANPC) v. Bureau of Internal Revenue, G.R. 228539, June 26, 2019) NOTE: If and when there are substantial limitations or conditions under which payment is to be made, such does not constitute constructively realized. Recognition of income When income considered received Philippines income tax purposes: 1. 61 for If actually or physically received by taxpayer; or National Taxation 2. If constructively received by taxpayer. A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay. (CIR v. Javier, G.R. 78953) Actual vis-a-vis constructive receipt 1. 2. Actual receipt - Income may be actual receipt or physical receipt. Economic benefit test proprietary interest 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, RR 16-2005) The income is credited to the account of the taxpayer and set apart for him which he can withdraw at any time without restrictions and/or conditions although not yet actually received by him physically or reduced to his possession is already taxable to him. Examples of income received: (BITIS) 1. 2. 3. 4. 5. of Severance test Income is recognized when there is separation of something which is of exchangeable value. (Eisner v. Macomber, 252 US 189) constructively Q: Isabela Cultural Corporation (ICC) incurred professional fees for legal services that pertain to the 1984 and 1985. ICC did not claim deductions for said expenses in 1984 and 1985 since the cost of the services was not yet determinable at that time. It claimed deductions only in 1986 when ICC received the billing statements for said services. BIR, however, contends that since ICC is using the accrual method of accounting, expenses for professional services that accrued in 1984 and 1985, should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. Decide. Deposits in banks which are made available to the seller of services without restrictions Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered Transfer of the amounts retained by the payor to the account of the contractor Interest coupons that have matured and are payable but have not been encashed Undistributed share of a partner in the profits of a general professional partnership A: The expenses should have been claimed as deductions in 1984 and 1985. For a taxpayer using the accrual method, the accrual of income and expense is permitted when the all-events test has been met. Realization test There is no taxable income unless income is deemed realized. Revenue is generally recognized when both conditions are met: 2. doctrine Taking into consideration the pertinent provisions of law, income realized is taxable only to the extent that the taxpayer is economically benefited. TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES 1. or 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." The earning process is complete or virtually complete; and An exchange has taken place. (Manila Mandarin Hotels, Inc. v. CIR, CTA Case No. 5046, March 24, 1997) Claim of right doctrine or doctrine of ownership, command or control The propriety of an accrual must be judged by UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 62 Taxation Law the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long-time legal consultant. (CIR v. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007) Meanwhile, in accrual method, income is recognized in the period it is earned, regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid (Domondon, 2013). Amounts of income accrue when the right to receive them become fixed, when there is a created enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. (CIR v. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007) METHODS OF ACCOUNTING Installment basis is available to the following taxpayers: Special methods 1. 2. 3. Installment basis Gross income is recognized and reported in proportion to the collection from the installment sales. Accounting methods for tax purposes comprise a set of rules for determining how to report income and deductions. 1. 2. 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: 1. 2. Installment; Deferred payment; and Percentage of completion (in long-term contracts) 3. The taxpayer does not employ a method for computing income; or The taxpayer’s method for accounting does not clearly reflect the income. (Domondon, 205, citing Sec. 43 of NIRC) Dealers of personal property on the sale of properties they regularly sell; Dealers of real properties, only if their initial payment does not exceed 25% of the selling price Casual sale of non-dealers in property, real or personal, when their selling price exceeds P1,000 and their initial payment does not exceed 25% of the selling price. (Banggawan, 2020) Deferred payment A variant of the accrual basis and is used in reporting income when a non-interest bearing note is received as consideration in a sale. Distinguish: cash and accrual method In cash method, income is recognized only upon actual or constructive receipt of cash payments or property, but no deductions are allowed from the cash income unless actually disbursed through an actual or constructive payment in cash or property. Stated otherwise, income is earned when cash is collected, and expense is incurred when cash is disbursed. The gross income is computed based on the present value (discounted value) of a note receivable from the contract. The discount interest on the note is amortized as interest income over the installment term. (Ibid) Percentage of completion (in long-term contracts) 63 National Taxation The estimated gross income from construction is reported based on the percentage of completion of the construction project. There are several methods of estimating project completion in practice, but the output method based on engineering survey is prescribed by the NIRC. (Ibid) enumerated above shall be allocated or apportioned to sources within or without the Philippines. SUMMARY RULES ON DETERMINATION OF SITUS ACCORDING TO KINDS OF INCOME KINDS OF INCOME Service or compensation income Rent SITUS OF INCOME Income from sources within the Philippines 1. 2. 3. 4. 5. 6. 7. Interests derived from sources within the Philippines; Dividends from domestic and foreign corporations, if more than 50% of its gross income for the three-year period ending with the close of the taxable year prior to the declaration of dividends was derived from sources within the Philippines; Compensation for services performed within the Philippines; 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; and Gains on sale of shares of stock in a domestic corporation. Royalties Merchandising Gain on sale of personal property purchased and not produced Gain on sale of real property Mining income Farming income Gain on sale of domestic stock Interest Gain on sale of transport document Manufacturing: 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 3year period 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; and Rentals and royalties from properties located outside the Philippines or any interest in such property including rentals or royalties for the use of or for the privilege of using outside the Philippines intellectual property rights such as trademarks, copyrights, patents, etc. Income derived partly within and partly without the Philippines Gains, profits, or incomes other than those UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 64 TAX SITUS Place of performance of service Location of property (real or personal) Place of use of intangibles Place of sale Place of sale 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 Income purely within Income purely without Income partly within and partly without Income partly within and partly without Income within Taxation Law preceding the declaration of dividend, the ratio of such corporation’s Phil income to the world (total) was: - Less than 50% - 50% to 85% - More than 85% derived” irrespective of the voluntary or involuntary action of the taxpayer in producing income. Moreover, under the “claim of right doctrine,” the recipient even if he has the obligation to return the same has a voidable title to the money received through mistake. (Gutierrez v. CIR, CTA Case No. 65, August 31, 1955) Entirely without 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) Proportionate* Entirely within *Formula (Proportionate) GROSS INCOME A: YES. The term "Gross Receipts" is broad enough to include income constructively received by the taxpayer. The amount withheld is paid to the government on its behalf, in satisfaction of withholding taxes. The fact that it did not actually received the amount does not alter the fact that it is remitted in satisfaction of its tax obligations. Since the income withheld is an income owned by Express Transport, the same forms part of its gross receipts. (CIR v. Solidbank Corp., G.R. No. 148191, November 25, 2003) Except when otherwise provided, gross income means all income derived from whatever source, including but not limited to the following items: (CG2I- R2DAP3) 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items 2. Gross income derived from the conduct of trade or business or the exercise of a profession 3. Gains derived from dealings in property 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions and 11. Partner’s distributive share from the net income of the general professional partnership (NIRC, Sec. 32 (A)) Q: Explain briefly whether the following items are taxable or non-taxable: 1. Income from jueteng; 2. Gain arising from expropriation of property; 3. Taxes paid and subsequently refunded 4. Recovery of bad debts previously charged off; and 5. Gain on the sale of a car used for personal purposes. (2005 BAR) A: 1. Taxable. Gross income includes "all income derived from whatever source" (Sec. 32(A), NIRC), which was interpreted as all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. Thus, the income may proceed from a legal or illegal NOTE: The above enumeration of gross income under NIRC is not exclusive. Q: Is money received under payment by mistake, income subject to income tax? A: Income paid or received through mistake may be considered as “income from whatever source 65 National Taxation source such as from jueteng. Unlawful gains, gambling winnings, etc. are subject to income tax. The NIRC stands as an indifferent neutral party on the matter of where the income comes from. (CIR v. Manning, G.R. No. L-28398, August 6, 1975) 2. 3. 4. INCOME TAXABLE INCOME 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. L14532, May 26, 1965) DISTINGUISH: GROSS INCOME AND NET INCOME BASIS Taxable if the taxes were paid and subsequently claimed as deduction and which are subsequently refunded or credited. It shall be included as part of gross income in the year of the receipt to the extent of the income tax benefit of said deduction. (NIRC, Sec. 34 C (1)) However, it is not taxable if the taxes refunded were not originally claimed as deductions. As to deduction s As to exemption s As to tax base Advantag es/ Disadvant ages 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)) NET DEFINITION All income derived from whatever source. (Sec. 32(A), NIRC) Gross Income less allowable UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES NET INCOME Allows deductions Grants no exemptions Grants exemptions Gross Income Net Income Simplifies the income tax system Confusing and complex process of filing income tax return Vulnerable to corruption on account of margin of discretion in the grant of deductions Does away with wastage of manpower and supplies DISTINGUISH: GROSS INCOME, NET INCOME, AND TAXABLE INCOME BASIS GROSS INCOME GROSS INCOME Allows no deductions Substantial reduction in corruption and tax evasion since the exercise of discretion, to allow or disallow deductions, is dispensed with More administrativel y feasible 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. deductions. (Dimaampao, 2018) The pertinent items of gross income specified in this Code, less deductions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31, NIRC) Provides equitable reliefs in the form of deductions, exemptions and tax credit Tax audit minimizes fraud Net income taxation Net income taxation is a system of taxation where the income subject to tax may be reduced by allowable deductions. 66 Taxation Law Gross income 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) Gross income is equal to all income less exclusions (1980, 1983 BAR) Taxable income or net income The term “taxable income” means the pertinent items of gross income specified in this Code, less the deductions, if an, authorized for such types of income by this Code or other special laws. (Sec.31, NIRC) c. 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) The tax implication when there is exchange of services without compensation is that both parties are taxable as if both each sold their services. Self-help income is the amount saved for doing a work by the taxpayer himself instead of hiring someone to do the work. Self-help income is exempt from tax. For example, A person wants to repaint his house. Instead of hiring a painter, that person did the painting job himself to save money. SOURCES OF INCOME SUBJECT TO TAX A: a. The ground is unmeritorious. Sec. 32 of the NIRC includes within the purview of gross income all income from whatever source derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon. b. The ground is unmeritorious. The deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the privilege to earn an income. It will not necessarily be paid out of the same income that was subjected to the tax. Lao’s liability to pay the tax is based on him having realized a taxable income from his swindling activities and will not affect his obligation to make restitution. Payment of the tax is a civil obligation imposed by law while restitution is a civil liability arising from a crime. 1. 2. 3. 4. 5. 6. 7. Compensation income; Fringe benefits; Professional income; Income from business; Income from dealings in property; Passive investment income; Annuities, proceeds from life insurance or other types of insurance; 8. Prizes and awards; 9. Pensions, retirement benefit or separation pay; and 10. Income from any source whatever. The ground is unmeritorious. When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received taxable income, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged to restore its equivalent. To treat The classifications of income subject to tax are discussed in detail below. COMPENSATION INCOME 67 National Taxation Compensation income includes all remuneration for services rendered by an employee for his employer unless specifically excluded under the NIRC. (Sec. 2.78.1, RR No. 2-1998) Refer to “Taxation on compensation income” for further discussion. Q: As a way to augment the income of the employees of DEF, Inc., a private corporation, the management decided to grant a special stipend of P50,000.00 for the first vacation leave that any employee takes during a given calendar year. In addition, the senior engineers were also given housing inside the factory compound for the purpose of ensuring that there are available engineers within the premises every time there is a breakdown in the factory machineries and equipment. (2019 BAR) a. Is the special stipend part of the taxable income of the employees receiving the same? If so, what tax is applicable and what is the tax rate? Explain. b. Is the cash equivalent value of the housing facilities received by the senior engineers subject to fringe benefits tax? Explain. 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: A: a. b. FRINGE BENEFITS (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 (Sec. 33(B), NIRC; Sec. 2.33 (B), RR No. 3-1998) YES, the special stipend is part of the taxable income of the employees since the same may very well be considered income on his part. Refer to “Taxation on compensation income” for further discussion. NO. The cash equivalent value of the housing facilities received by the senior engineers is not subject to fringe benefits tax. The same is exempt from FBT since the housing is located within the Company’s premises and is generally for the convenience of the employer. PROFESSIONAL INCOME Professional income refers to the fees received by a professional from the practice of his profession, provided that there is no employeremployee relationship between him and his clients. 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) The existence or nonexistence of employeremployee relationship is material to determine whether the income is a compensation income or professional income. If the employeremployee relationship is present, then it is considered compensation income. Otherwise, it is a professional income. 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. For purposes of taxation, there is no deduction allowed against compensation income, whereas allowable deductions may be made from professional income. NOTE: Professional income shall be subject to UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 68 Taxation Law creditable withholding tax rates prescribed (RR No. 3-1998) merchandising, mining, manufacturing, and farming operations. Distinguish: Compensation professional income NOTE: Business is any activity that entails time and effort of an individual or group of individuals for purposes of livelihood or profit. Definition Entitleme nt to 8% income tax option Possibility of substitute d filing Rate/amo unt of withholdin g Compensation income All remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code. (RR No. 121998) Not entitled Yes, the employer files the income tax return of the employee. If the amount of tax is correctly withheld by the employer, the employee no longer needs to file an annual income tax return. Based on graduated withholding tax rates ranging from 0% to 35% on net taxable compensation. income and Professional income Income derived by selfemployed from trade or business (trading, manufacturing, merchandising, farming, and others), and income derived by professionals from the practice of professions. (Dimaampao, 2018) Entitled 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. (Sec. 27 (A), NIRC) Cost of goods sold It includes all business expenses directly incurred to produce the merchandise, to bring them to their present location and use such as invoice cost of the 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: None, should file quarterly income tax returns and an annual return 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. (Sec. 27(E)(4), NIRC) INCOME FROM DEALINGS IN PROPERTY Types of properties from which income may be derived None 1. Ordinary assets – refer to properties held by the taxpayer used in connection with his trade or business which includes the following: (SOUR) a. INCOME FROM BUSINESS Business income refers to income derived from 69 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; National Taxation 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; or d. 1. Stock in trade of the taxpayer or other property of a kind which would be properly included in the inventory of the taxpayer if on hand at the close of the taxable year; 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; Real property used in trade or business of the taxpayer. 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 Examples of ordinary assets a. b. c. 2. The condominium building owned by a realty company, the units of which are for rent or for sale. Machinery and equipment of a manufacturing concern subject to depreciation The motor vehicles of a person engaged in transportation business. 4. Real property used in trade or business of the taxpayer. (Sec. 31(A)(1), NIRC) GUIDELINES IN DETERMINING WHETHER A REAL PROPERTY IS A CAPITAL ASSET OR ORDINARY ASSET Real estate All real properties acquired dealer are ordinary assets. Real estate All real properties which developer are: 1. Acquired whether developed or undeveloped; 2. 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 3. Used in trade or business, whether in the form of land, building, or improvements shall be considered as ordinary assets Real estate All real properties whether lessor land and/or other improvements, which are for lease/rent or being offered for lease/rent, or for use or being used in the trade or business, shall be considered as ordinary assets. Taxpayers All real properties acquired habitually in the course of trade or engaged in the business shall be considered real estate as ordinary assets. 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. b. c. d. Jewelry not used for trade or business Residential houses and lands owned and used as such Automobiles not used in trade or business Stock and securities held by taxpayers other than dealers of securities 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) Distinguish ordinary asset and capital asset (2003 BAR) “Capital assets” include property held by the taxpayer whether or not connected with his trade or business, but the term does not include any of the following, which are consequently considered “ordinary assets”: (SOUR) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 70 Taxation Law business Taxpayers not engaged in the real estate business 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) 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. Significance of determining whether the capital asset is ordinary asset or capital asset They are subject to different rules. There are special rules that apply only to capital asset transactions, to wit: 1. 2. 3. Holding period rule Capital loss limitation Net capital loss carry-over (NCLCO) 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) All real properties originally acquired by them shall continue to be treated as ordinary assets. A: a. Generally, 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. Capital gains derived from real properties and shares of stock not traded in the stock exchange are subject to final tax (capital gains tax). Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. Provided, however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. (RR No. 7-2003) No effect on the classification of the property in the hands of the involuntary seller. b. Income realized from sale of ordinary assets is part of Gross Income, included in the Income Tax Return (Sec.32(A)(3), NIRC) Q: May capital asset be reclassified as ordinary asset? A: YES. Property initially classified as capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tends to show that the activity was in furtherance of or in the course of the taxpayer’s trade or business. Q: In January 1970, Juan bought 1 hectare of agricultural land in Laguna for ₱100,000. This property has a current fair market value of ₱10 million in view of the construction of a concrete road traversing the property. Juan agreed to exchange his agricultural lot in 71 National Taxation 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) By purchase 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. (Sec. 39, NIRC, RR No. 7-2003) Its latest inventory value (Sec. 36, RR No. 2) Types of gains By gift Gains derived from dealings in property mean all income derived from the disposition of property whether real, personal or mixed for: The same basis as if it would be in the hands of the donor or the last preceding owner by whom it was acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining the loss, the basis shall be such fair market value. (Dimaampao, 2018) 1. 2. 3. 1. 2. Included in the inventory By devise, bequest or inheritance FMV or value of such property at the time of the acquisition – death of the decedent (Sec. 139, RR No. 2) Money, in case of sale Property, in case of exchange Combination of both sales and exchange, which results in gain Acquired (other than capital assets) for less than adequate consideration in money or money’s worth NOTE: Gain is the difference between the proceeds of the sale or exchange and the acquisition value of the property disposed by the taxpayer (tax basis). Amount paid by the transferee. (Ibid) Rules on determining Adjusted basis or Cost of the property sold (tax basis) 1. 2. 3. 4. 5. 6. 7. 8. Stock or security property received if the exchange is one where gain or loss may not be recognized (1994 BAR) By purchase Included in the inventory By devise, bequest or inheritance By gift Acquired (other than capital assets) for less than adequate consideration in money or money’s worth Stock or security property received if the exchange is one where gain or loss may not be recognized (1994 BAR) Stock of security received if the exchange is one where the gain or loss may not be recognized (1985 BAR) Property transferred in the hands of the transferee if exchange is one where the gain, if any, but not the loss is to be recognized The same as the basis of the stock, or security or property given in exchange. (Ibid) Stock of security received if the exchange is one where the gain or loss may not be recognized (1985 BAR) Basis of the property, stock, or security given in exchange: Less: Cash and FMV of property given in exchange Add: Dividend and/or gain recognized Basis of stock or security received Enumerated rules are discussed in detail below. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Acquired before March 1, 1913 – FMV on such date Acquired on or after March 1, 1913 – Cost plus expenses of acquisition (Sec. 136, RR No. 2) 72 Taxation Law Property transferred in the hands of the transferee if exchange is one where the gain, if any, but not the loss is to be recognized Difference between treatment of capital gains and losses between individuals and corporations The same basis as it would be in the hands of transferor increased by the amount of the gain recognized to the transferor on the transfer. (Ibid) BASIS Availability of holding period Ordinary income vs. Ordinary loss ORDINARY INCOME It includes the gain derived from the sale or exchange of ordinary asset. ORDINARY LOSS The loss that may be sustained from the sale or exchange of ordinary asset. Extent of Recognition (Taxability) Capital gain vs. Capital loss CAPITAL GAIN It includes the gain derived from the sale or exchange of an asset not connected with the trade or business. CAPITAL LOSS The loss that may be sustained from the sale or exchange of an asset not connected with the trade or business. Nondeductibility of Net Capital losses 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 Deductibility of capital losses Actual gain vs. Presumed gain ACTUAL GAIN Excess of the selling price over the cost of the asset CORPORATION Not applicable Capital gains and losses are taxable to the extent of 100% Nondeductibility of Net Capital losses Capital loss may not exceed capital gains when used as a deduction to income. Ordinary gain vs. Capital gain ORDINARY GAIN A gain derived from the sale or exchange of ordinary assets such as SOUR 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 months or less; and 50% - if the capital asset has been held for more than 12 months 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. Availability of NCLCO 73 Capital losses are allowed only up to the extent of the capital gains; hence, the net capital loss is not deductible. NCLCO allowed for a XPN: If any domestic bank or trust company, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision) NCLCO not allowed National Taxation capital asset period of one (1) year 1. 2. 3. Capital gains subject to final tax vs. capital gains reported in the income tax return SUBJECT TO FINAL TAX BASIS As to deductions As to actual gains As holding period to As to Net Loss Carry Over 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 Loss limitation rule; Loss carry-over rule; and Holding period rule Loss limitation rule REPORTED IN THE ITR The capital gains are aggregated with other income to constitute gross income subject to deductions Losses from sale or exchanges of capital assets shall be allowed only up to the extent of the gains from such sales or exchanges. (Sec. 39(C), NIRC) Thus, under this capital loss limitation rule, capital loss is deductible only up to the extent of capital gain. The taxpayer can only deduct capital loss from capital gain. If there is no capital gain, then no deduction is allowed because you cannot deduct capital loss from ordinary gain. Rationale: To allow the deduction of nonbusiness (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) There must be actual capital gains earned Where the capital loss limitation rule will NOT apply: 1. 2. 3. 4. Holding period is considered. If a bank or trust company is incorporated under the laws of the Philippines; A business whose substantial part is the receipt of deposits; Sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation, with interest coupons or in registered form; and 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. (Sec. 39(C), NIRC) Q: Can a taxpayer deduct ordinary loss from ordinary gain and from capital gain? Could availed be A: YES, in both cases. Ordinary loss may be deducted from ordinary gain while only from certain types of capital gain may ordinary loss be deducted. Special rules pertaining to income or loss from dealings in property classified as UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Rule on Matching Cost 74 Taxation Law Under this rule, only ordinary and necessary expenses are deductible from gross income or ordinary income. Capital loss is a non-business connected expense as it can be sustained only from capital transactions. To allow that capital loss as a deduction from ordinary income would run counter to the rule on matching cost against revenue. vis-à-vis 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. (Sec. 39(B), NIRC) Loss carry-over rule/Net Capital Loss Carry Over (NCLCO) If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months. (Sec. 39(D), NIRC) NOTE: Holding period does not find application in the case of disposition of: 1. 2. Rules with regard to NCLCO 1. 2. 3. 4. NOTE: Only individual taxpayers can avail of the holding period rule. It is not allowed to corporations. NCLCO is allowed only to individuals, including estates and trusts. The net loss carry-over shall not exceed the net income for the year sustained and is deductible only for the succeeding year. The capital assets must not be real property or stocks listed and traded in the stock exchange. Capital asset must be held for not more than 12 months. 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. NCLCO vs. Net Operating Loss Carry Over (NOLCO) BASIS As to source As to who can avail As to period of carryover NCLCO Arises from capital transactions meaning involving capital asset Can be availed of by individual taxpayer only NOLCO Arises from ordinary transactions meaning involving ordinary asset May be carried over only in the next succeeding taxable year Allows carryover of operating loss in 3 succeeding taxable years or 5 years, in the case of mining companies Shares of stock of a domestic corporation held as capital asset; and Real property considered as capital asset, whether the seller is an individual, trust, estate or a private corporation. Recognition of gain or loss in exchange of property GR: Upon the sale or exchange of property, the entire amount of the gain or loss shall be recognized. XPN: Instances where no gain or loss is recognized: 1. A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation; 2. A shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation; 3. A security holder of a corporation which is party to the merger or consolidation exchanges his securities in such corporation Can be availed of by individual and corporate taxpayer Holding period rule (long-term capital gain 75 National Taxation 4. solely for stock securities in another corporation, a party to the merger or consolidation; or 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. (Sec. 40(C)(2), NIRC) transactions shall be treated as a single unit. NOTE: 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 Tax treatment of capital gains and losses 1. From Sale of Stocks of Corporations a. Stocks Traded in the Stock Exchange – subject to six-tenths of one percent (6/10 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor. (Sec. 127(A), NIRC) b. Stocks Not Traded in the Stock Exchange – subject to capital gains tax. 2. From Sale of Real Properties/Land and/or Buildings in the Philippines – capital gain derived is subject to capital gains tax but no loss is recognized because gain is presumed. NOTE: “No gain or loss shall be recognized” means that if there is a gain it shall not be subject to tax and if there is a loss it shall not be allowed as a deduction. Q: When is gain or loss not recognized in cases of transfer of shares of stock of corporation in exchange of property? A: The requisites for the non-recognition of gain or loss are as follows: 1. 2. 3. 4. The transferee is a corporation; The transferee exchanges its shares of stock for property/properties of the transferor; The transfer is made by a person, acting alone or together with others, not exceeding four persons; and As a result of the exchange, the transferor, alone or together with others, not exceeding four, gains control of the transferee. (CIR v. Filinvest Development Corporation, G.R. Nos. 163653 and 167689, July 19, 2011) 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. Gains from sale to the government of real property classified as capital asset MERGER OR CONSOLIDATION FOR PURPOSES OF TAXATION The taxpayer has the option to either: 1. Include as part of gross income subject allowable deductions and personal exemptions, then subject to the schedular tax; or Merger or consolidation means: 1. 2. Ordinary merger or consolidation; or The acquisition by one corporation of all or substantially all the properties of another corporation solely for stock provided that: a. b. NOTE: This is not available to a corporate taxpayer. A merger or consolidation must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. In determining whether a bona fide business purpose exists each and every step of the transaction shall be considered and the whole transaction or series of UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 2. 3. 76 Subject to final tax of 6% on capital gains (Sec. 24(D), NIRC) 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 0-35% for individuals and the normal corporate income tax of 30% for corporations, and not subject to capital gains tax. Taxation Law Capital gains from sale of shares of stock not traded in the stock exchange 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. A final tax at the rate of fifteen percent (15%) is imposed. (Sec. 24, NIRC as amended) 6. For RFCs and NRFCs the rates are: Not over P100,000 5% On any amount in excess of 10% P100,000 (Sec 28(A)(7)(c), Sec. 29(5)(c), NIRC) 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) 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. Persons liable to pay capital gains tax on the sale of shares of stock not traded in the stock exchange 1. 2. 3. Important features as regards capital gains from sale of shares of stock Individuals – both citizens and aliens Corporations – both domestic and foreign Estates and Trusts 1. 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. 2. 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. 3. Non-deductibility of losses on wash sales and short sales. 4. Gain from sale of shares of stock in a foreign corporation is not subject to capital gains tax but to graduated rates either as capital gain or ordinary income depending on the nature of the trade of business of the taxpayer. Rules in determining the selling price of the shares disposed 1. In case of cash sale — the selling price is the total consideration as indicated in the deed of sale. 2. 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. 3. In case of exchange — the selling price is the fair market value (FMV) of the property received. 4. If the FMV of the shares of stock disposed is higher than the amount of amount and/or fair market value of the property received, the excess of the FMV of the shares of stock disposed over the amount of money and the FMV of the property, shall be deemed a gift subject to the donor’s tax. (RR 6-2008) 5. 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 (RR No. 6-2013) Q: As to tax implication, distinguish shares of stocks not listed and traded through stock exchange from those listed and traded through stock exchange (2008, 2011 BAR) In the case of shares of stock not listed and traded in the local stock exchange, the value of the shares of stock at the time of sale shall be the FMV. In determining the value of the shares, the Adjusted Net Asset A: As to 77 NOT LISTED AND TRADED Income LISTED AND TRADED Business National Taxation natur e As to kind of tax As to rate Capital gains tax Percentage tax Before TRAIN Law: Not over ₱100,000 – 5% In excess of ₱100,000 – 10% Before TRAIN Law: ½ of 1% Under TRAIN Law: 15% final tax, if covered by the TRAIN Law As to tax base For RFCs and NRFCs under TRAIN Law: Not over ₱100,000 – 5% In excess of ₱100,000 – 10% Net capital gain b. If John directly sold the shares to his best friend, a US citizen residing in Makati, at a gain of ₱200,000, is he liable for Philippine income tax? If so what is the tax base and rate? A: a. NO. The gain on the sale or disposition of shares of stock of a domestic corporation held as capital assets will not be subjected to income tax if these shares sold are listed and traded in the stock exchange (Sec. 24 (C), NIRC) Under TRAIN Law: 6/10 of 1% However, the seller is subject to the percentage tax of ½ of 1% of the gross selling price (Sec. 127 (A), NIRC) NOTE: The current rate is b. Gross price selling Q: Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident status or green card. Should he pay Philippine income tax on the gains he derived from the sale in the New York Stock Exchange of shares of stock in PLDT, a Philippine corporation? (2011 BAR) Q: What is the effect if the sale is made by a dealer in securities? A: The shares of stock (whether listed and traded in the local stock exchange, listed but not traded in the local stock exchange, or not listed) shall be treated as ordinary assets and the ordinary gain, if any, from the sale or transfer thereof shall be subject to the graduated income tax rates in the case of an individual seller, or to the normal corporate income tax, in the case of corporate seller. It will not be subject to Stock Transaction Tax (STT), but subject to VAT. 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. (Sec. 42(E), NIRC) General rule on shares of stocks Transaction Sold by a dealer in securities 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. Is John subject to Philippine income tax on the sale of his shares through his stockbroker? Is he liable for any other tax? UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES YES. The sale of shares of stocks of a domestic corporation held as capital, not through a trading in the local stock exchange, is subject to capital gains tax based on the net capital gain during the taxable year. The tax rate is 15%. Sold by an individual non-dealer in securities Tax Treatment Treated as an ordinary asset whose ordinary gains and losses are subject to regular income tax. If sold through LSE: subject to stock transaction tax of 6/10 of 1%. If not sold through LSE: treated as a capital asset If domestic stocks were sold: 78 Taxation Law 1. 2. Subject to 15% capital gains tax based on net gain A corporation selling its own stocks Corporation selling stocks of another corporation If foreign stocks were sold: Subject to regular income tax (also subject to capital loss limitation rule, holding period rule, and net capital loss carry over) Only gain from sources within the Philippines is subject to capital gains tax. Not subject to income tax. Excess of price above par is not considered as an income. The gross selling price; or Whichever is higher between the current fair market value as determined by: a. Zonal Value – prescribed zonal value of real properties as determined by the CIR; or b. Assessed Value – the fair market value as shown in the schedule of values of the Provincial and City assessors (NIRC, Sec. 24 D (1)) Actual gain or loss is immaterial since there is a conclusive presumption of gain. As regards transactions affected by the 6% capital gain tax, the NIRC speaks of real property with respect to individual taxpayers, estate and trust but also speaks of land and/or building with respect to domestic corporations. May be subject to percentage tax on initial public offerings. If sold through LSE: subject to stock transaction tax of 50% of 1% (0.50%) If not sold through LSE: treated as a capital asset 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. If domestic stocks were sold: Subject to 15% capital gains tax Tax treatment if property is not located in the Philippines For RFCs and NRFCs: Not over ₱100,000 – 5% In excess of ₱100,000 – 10% 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 (Sec. 4(F), RR No. 7-2003) but subject to foreign tax credits. If foreign stocks were sold: Subject to regular income tax (NOT subject to capital loss limitation rule, holding period rule, and net capital loss carry over) Such income may be exempt in the case of nonresident citizens, alien individuals and foreign corporations (Sec. 4(F), RR No. 7-2003) Capital gains realized from the sale of real property/ land and/or buildings Transactions covered by the “presumed” capital gains tax on real property Treatment of sale or disposition of real property located in the Philippines treated as capital asset It covers: 1. Sale; 2. Exchange; or 3. Other disposition, including pacto de retro and other forms of conditional sales. (Sec. 24 D(1), NIRC) A final tax of 6% shall be imposed based on the higher amount between: Capital gains realized from the sale of real property/ land and/or buildings NOTE: “Sale, exchange, or other disposition” includes taking by the government through expropriation proceedings. Treatment of sale or disposition of real property located in the Philippines treated as capital asset A final tax of 6% shall be imposed based on the higher amount between: Q: Hopeful Corporation obtained a loan from 79 National Taxation 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) derive any ordinary income, no income tax return was filed by him for 2013. After the tax audit conducted in 2014, the BIR officer assessed Manalo for deficiency income tax computed as follows: ₱5 million (₱20million less ₱15 million) x 30%= ₱1.5 million, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the ₱1.2 million capital gains tax should be credited from the ₱1.5 million deficiency income tax. a. a. Is the BIR officer’s tax assessment correct? Explain. b. b. If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (2008 BAR) A: 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. (RR No. 4-1999; Supreme Transliner, Inc. v. BPI Family Savings Bank, Inc. G.R. No. 165617, February 25, 2011) A: a. NO. The BIR officer’s tax assessment is wrong for two reasons. First, the rate of income tax used is the corporate income tax although the taxpayer is an individual. Second, the computation of the gain recognized from the sale did not consider the holding period of the asset. The capital asset having been for more than 12 months, only 50% of the gain is recognized. (Sec. 39(B), NIRC) Q: The Department of Agriculture (DA), through its Secretary, executed a Deed of Assignment of a parcel of land in favor of the Bureau of Fisheries and Aquatic Resources (BFAR) without any monetary consideration. By virtue of the Deed, BFAR applied for the issuance of a land title in its own name. Is the assignment subject to CGT or regular corporate income tax? b. A: NO. While the conveyance of property by the DA in favor of the BFAR was pursuant to a Deed of Assignment, the assignment was made without monetary consideration. Hence, it is not subject to CGT. Neither is it subject to the regular corporate income tax since the DA and the BFAR, which are both government agencies exercising purely governmental functions when the Deed was executed, are exempt from such regular corporate income tax. (BIR Ruling No. 229-2017 dated 15 May 2017) 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 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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. 80 Taxation Law 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) domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for ₱9 million. a. What is the nature of real properties exchanged for tax purposes – capital asset or ordinary asset? Explain. b. Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax based and rate? Explain. c. Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (2008 BAR) A: 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 (Sec. 21(E), NIRC) Real property transactions subject to capital gains tax are not limited to sales. It also includes exchanges of property unless exempted by a specific provision of law. A: a. Q: A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for ₱1 million. The land was sold to B, his colleague and at a time when the real estate prices had gone down, for only ₱800,000 which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? (2001 BAR) A: NO. The 6% capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to have been realized from the sale, which is the fair market value or selling price thereof, whichever is higher. (Sec. 24 (D), NIRC) Actual gain is not required for the imposition of the tax, but it is the gain by fiction of law which is taxable. Thus, capital gains tax is imposed even though the sale results in net loss. Q: In 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 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, RR No. 7-2003) 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. 24(D)(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) Q: Sps. Salvador are the registered owners of a parcel of land. The Republic, represented by the DPWH, filed a Complaint before the RTC for the expropriation of a portion of said parcel of land for the construction of a highway. The RTC rendered judgment in favor of the Republic condemning the subject 81 National Taxation property. The RTC likewise directed the Republic to pay respondents consequential damages equivalent to the value of the capital gains tax and other taxes necessary for the transfer of the subject property in the Republic's name. The RTC reasoned that the payment of capital gains tax and other transfer taxes is but a consequence of the expropriation proceedings. Is the RTC correct in awarding consequential damages to the Sps. Salvador as the payment for capital gains tax? 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. (RR No. 14-2000) A: NO. It is settled that the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the NIRC, and profit from the transaction constitutes capital gain. Since capital gains tax is a tax on passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax. In fact, BIR Ruling No. 476-2013 has constituted the DPWH as a withholding agent tasked to withhold the 6% final withholding tax in the expropriation of real property for infrastructure projects. As far as the government is concerned, the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain from the sale of real property. (Republic of the Philippines, represented by the DPWH vs. Spouses Salvador, G.R. No. 205428, June 7, 2017) 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) 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. 14-2000) 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 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 30 days from the date of sale or disposition of the NOTE: The address shown in the ITR is conclusively presumed as the principal residence. If the taxpayer is not required to file a return, certification from Barangay Chairman or Building Administrator (for Condominium units) shall suffice. Sale of principal residence by an individual A sale of principal residence by an individual is UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 82 Taxation Law person’s intention to avail of the tax exemption. Exemption was availed only once every 10 years. exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. Q: If the taxpayer constructed a new residence and then sold his old house, is the transaction subject to capital gains tax? Q: B transferred his ownership over a 1,000square meter commercial land and threedoor apartment to ABC Corp., a family corporation of which B is a stockholder. The transfer was in exchange of 10,000 shares of stock of ABC Corp. As a result, B acquired 51 % ownership of ABC Corp., with all the shares of stock having the right to vote. B paid no tax on the exchange, maintaining that it is a tax avoidance scheme allowed under the law. The Bureau of Internal Revenue, on the other hand, insisted that B's alleged scheme amounted to tax evasion. Should B pay taxes on the exchange? Explain. (2019 BAR) 4. 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. Tax-free exchanges Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the NIRC of 1997 that are not subject to Income Tax, Capital Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may be. A: NO. B should not pay taxes on the said exchange. As a general rule, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. One of the accepted exceptions to the said rule is when a property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: provided, that stocks issued for services shall not be considered as issued in return for property. (Sec. 40(C)(6)(c),NIRC) Two Kinds of Tax-Free Exchanges 1. 2. Transfer to a controlled corporation; and, Merger or consolidation. Transfer to a Controlled Corporation No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation. In the case, B transferred his ownership over a 1,000-square meter commercial land and threedoor. As a result, B acquired 51% ownership of ABC Corp., with all the shares of stock having the right to vote. Merger or Consolidation No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: 1. 2. 3. PASSIVE INVESTMENT INCOME 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; 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; or A security holder of a corporation, which is a party to the merger or consolidation, Passive income refers to income derived from any activity in which the taxpayer has no active participation or involvement. Q: What is meant by “income subject to final tax?” (2001 BAR) A: Income subject to final tax refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, 83 National Taxation the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income. The recipient is no longer required to include the item of income subjected to “final tax” as part of his gross income in his income tax returns. EXAMPLE: Interest income from bank deposits. The bank (payor) deducts and/or withholds the final withholding tax from the interest income. The bank is required to remit the tax to the government. On the other hand, the taxpayer need not declare the interest income in his/her income tax return. SUMMARY RULES ON THE TAX TREATMENT OF CERTAIN PASSIVE INCOME AS APPLIED TO CORPORATIONS (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% Long term interest: 30% 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 non-residents, OBUs, local commercial banks or branches foreign banks authorized by BSP to transact business – EXEMPT Interest received by NRFC on foreign loans (NIRC, Sec. 28 (5a)) Dividends received from Domestic Corporation (Inter-corporate Dividend) Interest 2. It is the amount of compensation paid for the use of money or forbearance from such use. 3. Tax-exempt interest income: (FIL2D) 4. 1. From bank deposits. The recipient must be any following tax-exempt recipients: a. Foreign government b. Financing institutions owned, controlled, or financed by foreign government UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES RFC Short-term interest: 20% 5. NRFC Shall be considered as part of gross income subject to 30% NCIT. 15% 7.5% Exempt 10% 10% Exempt – – 20% Exempt Exempt 15% (subject to tax credit sparing rule) Regional or international financing institutions established by foreign government (Sec. 25(A)(2), NIRC); On loans extended by any of the abovementioned 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 NOTE: In order to avail exemption under item no. 4, the recipient must be a nonresident alien or non-resident foreign corporation. Otherwise, it is subject to final tax of 15%. 84 Taxation Law 6. From long term investment or deposit with a maturity period of 5 years or more. depository bank under the expanded foreign currency deposit system, it shall be subject to a final tax at the rate of 15% of such income. (Sec. 24(B)(1), NIRC) Long-term deposits or investments Certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts or other investments, with maturity of not less than 5 years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks (not by nonbank financial intermediaries and finance companies) to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP. (Sec. 22(FF), NIRC) Non-resident citizen and non-resident alien are exempt from payment of the 15% final tax on interest income under the expanded foreign currency deposit system. Meanwhile, interest income derived by a domestic corporation and resident foreign corporation from a depository bank under the expanded foreign currency deposit system (EFCDS) shall be subject to final income tax rate of 15%. Correspondingly, interest income received by RFC shall be subject to final income tax rate of 7.5%, while the NRFC shall be exempt. 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. (Sec. 22 (Y)) 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 non-residents, OBUs, or local commercial banks, including branches of foreign banks authorized by the BSP to transact business, it shall be EXEMPT. In order for an instrument to qualify as a deposit substitute, the borrowing must be made from twenty (20) or more individual or corporate lenders at any one time. The mere flotation of a debt instrument is not considered to be a public borrowing and is not deemed a deposit substitute, if there are only 19 or less individual or corporate lenders at any one time. (RR No. 14-2012) This is called the 19-lender rule. “Interest Income subject to Final Withholding Tax (20%)” vs. “Income subject to Gross Receipts Tax (5%) on banks” 20% FWT ON INTEREST INCOME It is an income tax under Title II of the NIRC (Tax on Income). FWT is imposed on the gross interest income realized in a taxable year. Foreign currency deposit system It refers to the conduct of banking transactions whereby any person whether natural or judicial may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of RA 6426, An Act Instituting a Foreign Currency Deposit System in the Philippines, and for other purposes. FWT is withholding tax. Interest income subject to 15% final tax a 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 a withholding 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 non-resident individual) from a 85 National Taxation Q: Maribel, a retired public school teacher, relies on her pension from the GSIS and the Interest Income from a time deposit of ₱500,000 with ABC Bank. Is Maribel liable to pay any tax on her income? A: YES. Maribel is exempt from tax on the pension from the GSIS (Sec. 32(B)(6)(f), NIRC). However, with her time deposit, the interest she receives thereon is subject to 20% final withholding tax. It is a passive income subject to a withholding tax rate of 20%. b. It is a passive income subject to final withholding tax rate of15% (Sec. 24(B)(1), NIRC) Both interests are not to be declared as part of gross income in the income tax return. Q: On 2004, Edison Bataan Cogeneration Corporation (EBCC) received from the CIR a Formal Letter of Demand and Final Assessment Notice assessing EBCC of deficiency Final Withholding Tax (FWT) for taxable year 2000. Upon the CIR’s inaction to the letter-protest filed by EBCC, the latter elevated the case to the CTA. The CTA Division held, among others, that EBCC was not liable for the deficiency FWT assessment on interest payments on loan agreements for taxable year 2000 since its liability for interest payment became due and demandable only on 2002. The CIR contended that EBCC was liable to pay the interest from the date of the execution of the contract on 2000, not from the date of the first payment on 2002, as the loan agreement clearly indicated that the interest was to be paid separately from the principal. The decision of the CTA Division was affirmed by the CTA en banc. Is EBCC liable for deficiency FWT for the year 2000? Q: In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in Hong Kong while Judy lives and works in Manila. During the year, the bank paid interest income of ₱10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20% of the entire interest income and remitted the same to the BIR. a. Are the interest incomes on the bank deposits of spouses Renato and Judy Garcia subject to income tax? Explain. b. Is the bank correct in withholding the 20% final tax on the entire interest income? Explain. A: a. YES. The interest income from the peso bank deposit is subject to 20% final withholding tax. The interest income from the dollar deposit is subject to 15% 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. 24(B)(1), NIRC) b. a. A: NO. EBCC's liability for interest payment became due and demandable starting 2002. The obligation of EBCC to deduct or withhold tax arises at the time an income is paid or payable, whichever comes first, and considering further that under the RR 2-98, the term "payable" refers to the date the obligation becomes due, demandable or legally enforceable, the CTA en banc correctly ruled that EBCC had no obligation to withhold any taxes on the interest payment for the year 2000 as the obligation to withhold only commenced on June 1, 2002, and thus cancelling the assessment for deficiency FWT on interest payments arising from EBCC' s loan from Ogden. (Edison (Bataan) Cogeneration Corporation vs. CIR, G.R. No. 201665 & 201668, August 30, 2017) NO. Only the interest income on a peso deposit is subject to 20%. The interest income from a dollar deposit is subject to 15% if the earner is a resident individual. (Sec. 24(B), NIRC) Q: What is the tax treatment of the following interest on deposits with: a. BPI Family Bank? b. A local offshore banking unit of a foreign bank? (2005 BAR) Dividend Dividend is any distribution made by a corporation to its shareholders out of its A: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 86 Taxation Law earnings or profits and payable to its shareholders, whether in money or in other property. 5. Kinds of dividends 6. 1. 2. 3. Cash dividend – paid in given sum of money. 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. Stock dividend – one paid by a corporation with its own stock. Inter-corporate dividends There is inter-corporate dividend when a dividend is declared by one corporation and received by another corporation which is a stockholder to the former. The following rules shall apply: Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not subject to income tax as they are nothing but enrichment through increase in value of capital investment. In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. (Commissioner v. ANSCOR, G.R. No. 108576, January 20, 1999) 1. XPNs: a. Change in the stockholder’s equity, right, or interest in the net assets of the corporation b. Recipient is other than the shareholder c. Cancellation or redemption of shares of stock d. Distribution of treasury shares e. Dividends declared in the guise of treasury stock dividend to avoid the effects of income taxation f. Different classes of stock were issued Dividends received from DC a. Dividends received by a DC and RFC from a domestic corporation shall not be subject to tax (Sec. 27(D)(4), Sec. 28(A)(7)(d), NIRC); RATIONALE: The law assumes that the dividends received will be incorporated to the capital which will eventually be taxed when the corporation gets income from its use of the capital. b. Dividends received by a NRFC from a DC shall be subject to 15% FWT. This is known as the tax sparing rule. (Sec. 28(B)(5)(b), NIRC) 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%. NOTE: A stock dividend does not constitute taxable income if the new shares did not confer new rights nor interests than those previously existing, and that the recipient owns the same proportionate interest in the net assets of the corporation. (RR No. 2, Sec. 252) 4. Indirect dividend – one made through the exercise of right or other means of payment e.g., Cancellation or condonation of indebtedness. Liquidating dividend – one resulting from the distribution by a corporation of all its property or assets in compete liquidation or dissolution. It is generally a return of capital, and hence, it is not income. However, it is taxable income with respect to the excess of amount received over cost of the shares surrendered. (Dimaampao, 2015) The phrase “deemed paid” “tax credit” does not mean tax credit actually granted by the foreign country. There is Scrip dividend – one that is paid in the form or promissory notes. 87 National Taxation no statutory provision or revenue regulation requiring “actual grant”. multinationals 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 net 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 Exempt Inter-corporate dividends from received from domestic tax corporation by another domestic corporation and resident foreign corporation (Tabag, 2015) 2. The 15% represents the difference between the NCIT of 30% on corporations and the 15% tax on dividends. 2. Dividends received from a foreign corporation: 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. In determining whether income is derived from sources within or without the Philippines, the ratio of the foreign corporation’s Philippine gross income to the world gross income within the 3-year period preceding the declaration of such dividend should be considered. PHILIPPINE GROSS INCOME = % WORLD GROSS INCOME Less than 50% 50 - 85% More than 85% SUMMARY OF TAX TREATMENT OF DIVIDEND RECEIVED FROM DOMESTIC CORPORATION RECIPIENT DC / RFC RC, NRC, RA NRA – ETB NRA – NETB NRFC SOURCE OF INCOME Entirely without Proportionate (partly within; partly without) Entirely within Dividend received from foreign corporation Dividend received from foreign corporation is subject to Philippine income tax if at least 50% of the world (total) income of the foreign corporation must be derived from the Philippines for three years preceding the declaration of such dividend. (Dimaampao, 2015) TAX TREATMENT OF DIVIDEND INCOME Subject to basic tax 1. Subject to final tax 1. 2. 3. Dividends from foreign corporation Share in the income of a GPP Share in income of an exempt joint venture Cash and/or property dividends actually or constructively received by individuals from domestic corporation or from a joint stock company, insurance or mutual fund company and regional operating headquarters of UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES TAXABLE (TAX RATE) / EXEMPT Tax exempt 10% 20% 25% 15% subject to credit sparing rule Q: Does tax on income and dividends amount to double taxation? A: NO. Tax on income is different from tax on dividend because they have different tax basis. (Afisco Insurance Companies v. CA, G.R. No. 1123675, January 25, 1999) 88 Taxation Law Q: What are disguised dividends in income taxation? (1994 BAR) A: Disguised dividends are those income payments made by a domestic corporation, which is a subsidiary of a non-resident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, but which payments are disproportionately larger than the actual value of the services rendered. In such case, the amount over and above the true value of the service rendered shall be treated as a dividend and shall be subjected to the corresponding tax on Philippine sourced gross income. E.g., Royalty payments under a corresponding licensing agreement. Q: Suppose the creditor is a corporation and the debtor is its stockholder, what is the tax 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. b. A final withholding tax of 20% shall be imposed upon cash dividends actually or constructively received by a non-resident alien engaged in trade or business from BBB, Inc. (Sec. 24(A)(2), NIRC) c. A final withholding tax equal to 25% of the entire income received from all sources within the Philippines, including the cash dividends received from BBB, Inc. (Sec. 25(B), NIRC) d. Dividends received by a domestic corporation from another domestic corporation, such as BBB, Inc., shall not be subject to tax. (Sec. 27(D)(4), NIRC) e. Dividends received by a non-resident foreign corporation from a domestic corporation are generally subject to an income tax of 30% to be withheld at source. (Sec. 28(B)(1), NIRC) However, a final withholding tax of 15% is imposed on the amount of cash dividends received from a domestic corporation like BBB, Inc. f the tax sparing rule applies (Sec. 28(B)(5)(b), NIRC). Pursuant to this rule, the lower rate of tax would apply if the country in which the non-resident foreign corporation is domiciled would allow as a tax credit against the tax due from it, taxes deemed paid in the Philippines of 15% representing the difference between the regular income tax rate and the preferential rate. Q: BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June 2015, its Board of Directors approved the distribution of cash dividends to its stockholders. BBB, Inc. has individual and corporate stockholders. What is the tax treatment of the cash dividends received from BBB, Inc. by the following stockholders? 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 (2015 BAR) Q: Fred, was a stockholder in the Philippine American Drug Company. Said corporation declared a stock dividend and that a proportionate share of stock dividend was issued to Fred. The CIR, demanded payment of income tax on the aforesaid dividends. Fred protested the assessment made against him and claimed that the stock dividends in question are not income but are capital and are, therefore, not subject to tax. Are stock dividends income? A: 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 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)) 89 National Taxation accumulated earnings and the corporation parts with nothing to its stockholder. The property represented by a stock dividend is still that of the corporation and not of the stockholder. The stockholder has received nothing but a representation of an interest in the property of the corporation and as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation. (Fisher v. Trinidad, G.R. No. L-21186, February 27, 1924) Q: Is the redemption of stocks of a corporation from its stockholders as well as the exchange of common with preferred shares considered as “essentially equivalent to the distribution of taxable dividend” making the proceeds thereof taxable? A: YES. The general rule states that a stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated. 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? 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. 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) RECIPIENT RC RA NRC SUMMARY OF RULES ON DIVIDENDS SOURCE OF DIVIDENDS DC RFC NRFC 10% final tax Regular income tax Regular income tax (0(0- 35%) 35%) 10% final tax Less than 50% of income of RFC/NRFC is from PH: Non-taxable Income from sources outside PH are not taxable for RA, NRC, NRAETB, and 10% final tax NRANETB) NRAETB 20% final tax NRANETB 25% final tax DC Exempt dividends) If 50%-85% of income of RFC/NRFC is from PH, a proportion of the income is considered as income within the Philippines, subject to regular income tax (or 25% final tax for NRANETB) (intercorporate UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES If more than 85% of income of RFC/NRFC is from PH, entire dividend income is considered as income within the Philippines, subject to regular income tax (or 25% final tax for NRANETB) Same rule for RFCs Regular corporate income and NRFCs (see tax (30%) 90 Taxation Law RFC Exempt dividends) (intercorporate NRFC 15% subject to credit sparing rule below) Less than 50% of income of RFC/NRFC is from PH: Non-taxable Income from sources outside PH are not taxable for RFC and NRFC) If 50%-85% of income of RFC/NRFC is from PH, a proportion of the income is considered as income within the Philippines, subject to regular income tax (or 30% final tax on gross income for NRFC) If more than 85% of income of RFC/NRFC is from PH, entire dividend income is considered as income within the Philippines, subject to regular income tax (or 30% final tax on gross income for NRFC) Royalty income Rental 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) 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. Moreover, in Universal Food Corporation vs. CA, 1970, it was defined to be the compensation for the use of a patented invention. 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. Tax treatment of royalty income SUBJECT TO 10% FINAL TAX Royalties on books, other literary works and musical composition from sources within the Philippines. SUBJECT TO 20% FINAL TAX Royalties derived from sources within the Philippines other than royalties subject to 10% to final tax SUBJECT TO BASIC TAX Royalties derived by RC and DC from sources without the Philippines. (Tabag, 2015) 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. Rent is subject to special rate 1. Rent vs. Royalty BASIS As to reporting As to tax rate RENT Must be reported as part of gross income Regular progressive tax if individual ROYALTY Need not be reported since subject to final tax. Final tax 2. 3. 91 Those paid to non-resident Cinematographic Film owner or lessor or distributor – 25% of its gross income from all sources within the Philippines. (Sec. 28(B)(2), NIRC) Those paid to non-resident owner or lessor of vessels chartered by Philippine national – 4.5% of gross rentals. (Sec. 28(B)(3), NIRC) Those paid to non-resident owner or lessor of aircraft, machineries, and other equipment – 7.5% of gross rental or fees. (Sec. 28(B)(4), NIRC) National Taxation Additional rent income may be grouped into 2: 1. 2. be counted for 1 rental payment unlike with the spread out method it would be distributed to the remaining term of the lease contract. 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 stockholders of lessor-corporation; and d. Interest paid by lessee to holder of bonds issued by lessor-corporation. Q: X leased his vacant lot in Binondo to Y for a term of 10 years at an annual rental of ₱600,000. The contract provides that Y will put up a building on the lot and after 10 years, the building will belong to X. The building was erected at a cost of ₱6,000,000 and has an estimated useful life of 30 years. Assuming the fair value of the completed building is the same as the construction cost, what is the total income of X if he opts to report his income on the leasehold improvements using: a. Outright method b. Spread out method Value of permanent improvement made by lessee on leased property of the lessor upon expiration of the lease Lease of personal property Rental income on the lease of personal property located in the Philippines and paid to a nonresident taxpayer shall be taxed as follows: Vessel Aircraft, machineries and other equipment Other assets NRC NRA 4.5% 7.5% 25% 25% 30% 25% A: a. FMV of the building in the year of completion Add: Annual rental Total rental income Tax treatment of leasehold improvements by lessee: Recognized methods in reporting the value of permanent improvement 2. Cost of the building Less: Accumulated depreciation at the end of lease term (₱6,000,000/30 years x 10 years) Book value of the building at the expiration of lease Divided by: Lease term Annual income of X on the improvement Regular rental income Total annual rental income Outright Method or Lumpsum-Method – the fair market value of the building or improvement shall be reported as additional rent income at the time when such building or improvements are completed; and Spread Out Method or Annual-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. 600,000 ₱ 6,600,000 ₱ 6,000,000 2,000,000 4,000,000 10 400,000 600,000 ₱ 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 an option money for the property or a security deposit for the faithful performance of certain obligations of the lessee, NOTE: With the outright method it would only UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES ₱ 6,000,000 b. If X reports his income on the improvements using the spread out method, his total rental income shall be: 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. If X reports his income on the improvements in the year it was completed, his total rental income shall be: 92 Taxation Law 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 Prepaid rental without restriction as to its use TAX TREATMENT G.R.: taxable during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. The portion representing return of premium is not taxable while that portion that represents interest is taxable. WHEN TAXABLE NOTE: The portion of annuity net of premiums is taxable being interest or earnings of the premium and not return of capital. Non- Q: X purchased a life annuity for P100,000 which will pay him P10,000 a year. The life expectancy of X is 12 years. How much is excluded from the gross income of X? XPN: If the lessee violates the terms of the contract G.R. Nontaxable A: The P100,000 is excluded from the gross income of X since it represents a return of premiums which is not income but a return of capital. XPN: If the lessee violates the terms of the contract G.R.: Nontaxable XPN: If the lessee violates the terms of the contract G.R.: Nontaxable XPN: Security deposit applied to rental shall be subject tom VAT at the time of its application Taxable 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. Taxable at the time it is applied 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. In the year it is received irrespective of the accounting method employed by the lessor 2. ANNUITIES AND PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF INSURANCE 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 It refers to the periodic installment payments of income or pension by insurance companies 93 National Taxation subject to tax up to the excess of the premiums paid. premiums. Y died. a. Do the proceeds form part of the taxable income of the recipients? b. Are the proceeds part of the taxable estate of the deceased? 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 A: a. NO. The proceeds are not part of the taxable income of the recipients. Section 32(B)(1) expressly excludes from income taxation proceeds of life insurance. This is based on the theory that such proceeds, for income tax purposes, are considered as forms of indemnity. Thus, they are non-taxable regardless of who the recipient is. Proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured are exempt. Also, it has been held that proceeds of life insurance policies taken by a corporation on the life of an executive to indemnify it against loss in case of his death do not constitute taxable income. (El Oriente Fabrica de Tabacos v. Posadas, G.R. No. 34774, September 21, 1931) b. NO. The proceeds of the two policies are excluded as part of the gross estate. For estate tax purposes, the determining factor on whether the proceeds of insurance shall be excluded in the gross estate is when the designation of the beneficiary is made irrevocable. Pursuant to the amendment introduced by R.A. 10607, 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. Difference between the tax treatment of life insurance proceeds under income and estate taxation 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. 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. (Sec. 11, R.A. No. 10607 ) PRIZES AND AWARDS It refers to amount of money in cash or in kind received by chance or through luck and is generally taxable except if specifically mentioned under the exclusion from computation of gross income under Sec. 32(B) of NIRC. 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. Tax treatment for prizes and winnings Generally, prizes exceeding P10,000 and other winnings from sources within the Philippines shall be subject to 20% final withholding tax, if received by a citizen, resident alien or nonresident engaged in trade or business in the Philippines. If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the prizes and other winnings shall be subject to 25% final withholding tax. If the recipient is a corporation (domestic or foreign), 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 94 Taxation Law the prizes and other winnings are added to the corporation’s operating income and the net income is subject to 30% corporate income tax. RECIPIENTS Citizen, resident alien or non-resident engaged in trade or business in the Philippines Non-resident alien not engaged in trade or business in the Philippines Corporation (domestic or foreign) 2. All prizes and awards granted to athletes in local and international sport competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations TAX RATES Subject to 20% final withholding tax Subject to 25% final withholding tax Subject to 30% corporate income tax NOTE: The national sports association referred to by law that should sanction said sport activity is the Philippine Olympic Committee. (Sec. 13, RA. No. 6847) 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) Prizes and winning subject to income tax 1. 2. 3. Prizes derived from sources within the Philippines not exceeding ₱10,000 are included in the gross income subject to regular income tax. SUMMARY OF TAX TREATMENT OF PRIZES AND OTHER WINNINGS Winnings derived from sources within the Philippines is subject to final tax on passive income 1. PCSO and lotto winnings is subject to final tax on passive income NOTE: Only taxable if the amount exceeds P10,000 for RC, NRC and RA. (Sec. 25(B)(1), NIRC) Always exempt for NRA-ETB. (Sec. 25(A)(2), NIRC) Always subject to tax for NRA-NETB. (Sec. 25(B), NIRC) 4. EXEMPT FROM TAX Prizes and award made primarily in recognition of: a. Religious, charitable; b. Scientific; c. Educational artistic, literary; or d. Civic achievement. Provided the recipient was: a. Selected without any action on his part to enter the contest or proceeding (not constituting gains from labor); and b. Not required to render substantial future services as a condition to receive the prize/ award. Prizes and winnings from sources outside the Philippines Prizes and awards exempt from income tax 2. 1. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement provided, the following conditions are met: a. The recipient was selected without any action on his part to enter the contest or proceeding; and b. The recipient is not required to render substantial future services as a condition to receiving the prize or award. 3. 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. PCSO/Lotto winnings. NOTE: Only exempt if the amount is P10,000 or less for RC, NRC and RA. (Sec. 25(B)(1), NIRC) Always exempt for NRA-ETB. (Sec. 25(A)(2), NIRC) Always subject to tax for NRA-NETB. (Sec. 25(B), NIRC) 95 National Taxation 1. 2. 3. 1. 2. 3. voluntary or involuntary action of the taxpayer in producing the income. The source of the income may be legal or illegal. SUBJECT TO BASIC TAX Prizes and Other winnings derived by resident citizens and domestic corporation from sources without the Philippines. Prizes and Winnings received by corporation from sources within the Philippines. Prizes received by individuals from sources within the Philippines amounting to P10,000 or less. Examples of “income from whatever source derived” which form part of the taxable income of the taxpayer 1. 2. 3. SUBJECT TO 20% FINAL TAX Prizes received by individuals (except NRA-NETB) from sources within Philippines exceeding P10,000 Other winnings from sources within the Philippines regardless of amount (Other than PCSO and Lotto winnings for NRAETB). PCSO and Lotto winnings exceeding P10,000 for RC, NRC and RA. 4. Rationale: These are taxable because title is merely voidable. 5. SUBJECT TO 25% FINAL TAX Prizes and other winnings (including PCSO and Lotto winnings) received by NRA-NETB (Tabag, 2015) 6. Pension, retirement benefit, or separation pay In stock options, the difference between the fair market value of the shares at the time the option is exercised, and the option price constitutes additional compensation income to the employee (Commissioner v. Smith, 324 U.S. 177); Money received under solutio indebiti; Rationale: Under the claim of right doctrine, the recipient, even if he has the obligation to return the same, has a voidable title to the money received through mistake. 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. 7. Pension being part of gross income is taxable to the extent of the amount received except if there is a BIR approved pension plan. (Sec. 32 B (6), NIRC) Condonation of consideration. indebtedness for a Rationale: This is because when a creditor cancels a debt as part of a business transaction, the debtor is enriched or receives financial advantages thereby increasing his net assets, and thus realizes taxable income. The amounts that do not qualify as exclusions are considered as part of income subject to tax. (Domondon, 2013) Condonation of indebtedness Refer to “Exclusions from Gross Income” for further discussion. 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. INCOME FROM ANY SOURCE “Income from whatever source derived” implies that all income not expressly exempted from the class of taxable income under our laws form part of the taxable income, irrespective of the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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.; 96 Taxation Law 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. “Tax Benefit Rule” or Equitable Doctrine of Tax Benefit It is a principle that if a taxpayer recovers a loss or expense that was deducted in a previous year, the recovery must be included in the current year's gross income up to the extent that it was previously deducted. 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. (RR No. 2, Sec. 50) Two instances where Tax benefit rule applies 1. 2. 4. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (CIR v. Gin Co. 43 F.2d 327) 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. 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) If the taxpayer did not benefit from deduction of the bad debt written-off because it did not result in any reduction of his income tax in the year of such deduction as in the case where the result of the taxpayer’s business operation was a net loss even without deduction of the bad debts written-off, his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. Q: Mr. Gipit borrowed from Mr. Maunawain ₱100,000.00, payable in 5 equal monthly installments. Before the first installment became due, Mr. Gipit rendered general cleaning services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of ₱75,000.00. Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his part which must be subject to income tax, because according to him, he did not actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (2014 BAR) Receipt of tax 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. A: NO. Section 50 of Revenue Regulations 2, otherwise known as Income Tax Regulations, provides that if a debtor performs services for a creditor who cancels the debt in consideration for such services, the debtor realizes income to that amount as compensation for his services. In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the amount of ₱75,000.00 gave rise to compensation income subject to income tax, since Mr. Maunawain condoned such amount as consideration for the general cleaning services rendered by Mr. Gipit. XPN: The foregoing principle does not apply to tax credits or refunds of the following taxes since these are not deductible from gross income: 1. 2. 3. 4. 5. Recovery of accounts previously written off 97 Income tax (except FBT); Estate tax; Donor’s tax; Special assessments; VAT; and National Taxation 6. Stock Transactions Tax. 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: General rule on taxation of debts Borrowed money is not part of taxable income because it has to be repaid by the debtor. On the other hand, the creditor does not receive any income upon payment because it is merely a return of the investment. 1. 2. James Doctrine It does not come within the definition of income; or It is exempted by the fundamental law or by statute. The exclusion 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) This doctrine provides that even though the law imposes a legal obligation upon an embezzler or thief to repay the funds, the embezzled or stolen money still forms part of the gross income since the embezzler or thief has no intention of repaying the money. Construction of exclusions Proceeds of stolen or embezzled property are taxable 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 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. 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) There are exclusions from the gross income either because they: 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). All kinds of taxpayers – individuals, estates, trusts and corporations, whether citizens, aliens, whether residents or non-residents may avail of the exclusions. 1. 2. 3. 4. Taxpayers who may avail Rationale: The excluded receipts are not considered as income for tax purposes. (Domondon, 2013) Exclusion from gross income vs. deductions from gross income EXCLUSION FROM GROSS INCOME EXCLUSIONS UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Represent return of capital; Are not income, gain or profit; Are subject to another kind of internal revenue tax; or Are income, gain or profit that is expressly exempt from income tax under the Constitution, Tax treaty, NIRC, or general or a special law. 98 DEDUCTION FROM GROSS INCOME Taxation Law It refers to a flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer’s taxable income, due to the following reasons: a. It is expressly exempted from income tax by the fundamental law or statute; b. It is subject to another kind of internal revenue tax; and c. It does not come within the definition of income as when the amount received represents return of capital. Pertains to the computation of gross income Something received or earned by the taxpayer which do not form part of gross income Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13th month pay of an employee not exceeding ₱82,000 which is an income not recognized for tax purposes It refers to amounts which the law allows to be deducted from gross income in order to arrive at net income. exemption by virtue of a law or treaty; hence, not included in the computation of gross income. Pertains to the computation of net income Something spent or paid in earning gross income Example of a deduction is business rental Distinguish: exclusions, deductions, and tax credits EXCLUSIONS Incomes received or earned but are not taxable because of DEDUCTI ONS These are included in the gross income but are later TAX CREDIT It refers to foreign taxes paid beforehand but are claimed as credits against deducted to arrive at net income Philippine income tax to arrive at the tax due and payable Other Tax Credits (as can be seen in BIR Form 1701): 1. Prior Year’s Excess Credits 2. Tax Payments for the First Three (3) Quarters 3. Creditable Tax Withheld for the First Three (3) Quarters 4. Creditable Tax Withheld per BIR Form No. 2307 for the 4th Quarter 5. Creditable Tax Withheld per BIR Form No. 2316 6. Tax Paid in Return Previously Filed, if this is an Amended Return 7. Special Tax Credits, if applicable 8. Other Tax Credits/Pay ments Q: Differentiate tax exclusions from tax deductions. (2019 BAR) 99 National Taxation A: Tax exclusions pertain to the computation of gross income while tax deductions pertains to the computation of net income. Tax exclusions are something received or earned by the taxpayer which do not form part of gross income while tax deductions are something spent or paid in earning gross income. Lastly, the former is 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: 1. 2. 3. e. f. g. h. The exclusions are discussed in detail below. It is exempted by the fundamental law; It is exempted by a statute; and It does not fall within the definition of income. 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. On the other hand, tax deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Exclusions under the Constitution 1. 2. 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. 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. All revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. (Article XIV, Sec. 4(3), 1987 Constitution) “Gift” is any transfer not in the ordinary course of business which is not made for full and adequate consideration in money or money’s worth. The giver is called the donor and the recipient is called the donee. Q: If Mr. Generous gave a gift to Ms. Gorgeous what are the tax implications? Exclusions under the NIRC A: Mr. Generous, the donor is subject to donor’s tax while Ms. Gorgeous the donee is not subject to donee’s tax. The value of the gift received by Ms. Gorgeous is not included in the computation of gross income pursuant to Sec. 32(B)(3), NIRC, gifts, bequest and devises are excluded from gross income. Items that are excluded in gross income and exempt from gross income taxation (GLAM-RIC) 1. 2. 3. 4. 5. 6. 7. 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Income derived by the government or its political subdivisions GSIS, SSS, Medicare and other contributions Gains from the sale of bonds, debentures or other certificate of indebtedness Gains from redemption of shares in mutual fund (Sec. 32(B), NIRC) 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 100 Taxation Law 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. (Sec. 32(B)(3), NIRC) educational purposes shall be exempt from taxation. To what kind of taxes does this exemption apply? (2000 BAR) 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) Donation inter vivos and mortis causa Regardless of whether the donation is inter vivos or mortis causa, it is excluded from gross income for it is not product of capital or industry. Furthermore, the property is already subject to donor’s or estate taxes as the case may be. Q: The Roman Catholic Church owns a 2hectare 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) 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: 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) Q: The Constitution exempts from taxation charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, and non-profit cemeteries and lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes. Mercy Hospital is a 100 bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the provision? (1996 BAR) Q: Due to rising liquidity problems and pressure from its concerned suppliers, P Corp. instituted a flash auction sale of its shares of stock. P Corp. was then able to sell its treasury shares to Z, Inc., an unrelated corporation, for Pl,000,000.00, which was only a little below the valuation of P Corp. 's shares based on its latest audited financial statements. In connection therewith, P Corp. sought a Bureau of Internal Revenue ruling to confirm that, notwithstanding the price difference between the selling price of the shares and their book value, the said transaction falls under one of the recognized exemptions to donor's tax under the Tax Code. (2019 BAR) a. Cite the instances under the Tax Code where gifts made are exempt from donor's tax. 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 101 National Taxation b. Does the above transaction fall under any of the exemptions? Explain. A: a. 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) The following are the instances where gifts made are exempt from donor’s tax: i. Gifts made to or for the use of the National Government or any entity created by any of its agencies which are not conducted for profit, or to any political subdivision of the said Government; and, ii. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philantrophic organization or research institution or organization, not more than 30% of said gifts shall be used by such donee for administration purposes. Q: C is a creditor of D. The debt is condoned by C. What is the tax implication of the condonation of debt? A: For D, that amount is a remuneratory donation and is subject to income tax. C should pay donor’s tax if the amount condoned is more than P250,000. 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? b. NO, the transaction does not fall under any of the exemption. However, the transaction may still be exempt from donor’s tax even when the shares of stock were sold on a selling price that is less than the fair market value of the shares provided that the sale is made in the ordinary course of business, in a transaction which is a bona fide, at arm’s length, and free from any donative intent. 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 deductible item. It is a business expense and therefore it is an allowable deduction. Q: Quiroz worked as chief accountant of a hospital for 45 years. When he retired at the age of 65, he received retirement pay equivalent to 2 months salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital’s retirement plan in view of his loyalty and invaluable services for 45 years. Hence, it resolved to pay him a gratuity of ₱1 million over and above his retirement pay. The CIR taxed the ₱1 million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay, and (b) it was a gift. Q: C lends D ₱250,000.00 but D failed to pay the debt. D is a government employee. C told D that D’s wife and daughter should work in C’s Restaurant and part of their salary will be applied to the obligation. What is the tax implication? A: The wife and daughter should pay income tax because it is fruit of labor. They are not liable for donor’s tax since the amount falls within the P250,000 exempt threshold. For C, since he pays the salary of D, it is not subject to tax; it is a deductible 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. Is Quiroz correct in claiming that the additional ₱1 million was gift and therefore excluded from income? A: NO. The amount received was UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Life insurance proceeds Life insurance is insurance on human life and insurance appertaining thereto or connected therewith. (Sec. 179, IC) in 102 Taxation Law Conditions for the exclusion of life insurance proceeds from gross income (ProHeDS) 1. 2. 3. 4. 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. (Sec. 32(B)(1), NIRC) Proceeds of life insurance policies Paid to the Heirs or beneficiaries Upon the Death of the insured Whether in a single Sum or otherwise. Designation of the beneficiary Rationale for the exclusion of the proceeds from life insurance 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. 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. 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? Exceptions to the rule that the amount of the proceeds of life insurance should be excluded from the gross income (ASV-PPC) 1. If there is an Agreement between the insured and the insurer to the effect that the amount shall be withheld by the insurer under an agreement to pay interest thereon, the interest held by the insurer pursuant to that agreement is the one taxable but not the principal amount. (Sec. 32B (1), NIRC) 2. Where the life insurance policy is used to Secure a money obligation 3. Where the life insurance policy was transferred for a Valuable consideration 4. 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. 5. 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. (Sec. 62, RR No. 2) 6. A: a. YES. The manner of designation or the name of the beneficiary is immaterial. The amount of the proceeds is excluded from the gross income. b. It depends. If the heirs, estate, administrator or executor is designated as beneficiary, the proceeds form part of the estate whether the designation is revocable or irrevocable. 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. Interest earned on the proceeds from life 103 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 National Taxation 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. annuity contracts Endowment –The insurer agrees to pay a sum certain to the insured if he outlives a designated period. If he dies before that date, the proceeds are to be paid to the designated beneficiary. Treatment of proceeds endowment policies Q: On 30 June 2000, X took out a life insurance policy on his own life in the amount of ₱2,000,000.00. He designated his wife, Y, as irrevocable beneficiary to ₱1,000,000.00 and his son, Z, to the balance of ₱1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On 01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s life insurance policy. Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective shares? Explain. (2003 BAR) under If the insured dies and the beneficiary receives the life insurance proceeds, these are not taxable income because they are excluded from gross income as proceeds from life insurance. If the insured does not die and survives the designated period, the amount pertaining to the premiums he paid are excluded from gross income, but the excess shall be considered part of his gross income. Q: Suppose A obtained an endowment policy valued at ₱1 million. He paid premiums amounting to ₱800,000. Upon maturity, he received ₱1 million, what amount is taxable? A: NO. The law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation. The proceeds of life insurance received upon the death of the insured constitute a compensation for the loss of life, hence a return of capital, which is beyond the scope of income taxation. (Section 32(B)(1), NIRC) A: The amount of ₱200,000 is taxable. The difference between the value of the insurance and the actual premiums paid forms part of A’s gross income. Q: Mario worked his way through college. After working for more than 2 years in X Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. On the day of his retirement on April 30, 1985, he received his endowment insurance policy, for which he was paying an annual premium of ₱1,520 since 1965, also matured. He was then paid the face value of his insurance policy in the amount of ₱50,000. Is his ₱50,000 insurance proceeds exempt from income taxation? Q: Noel is a bright computer science graduate. He was hired by HP. To entice him to accept the job, he was offered the arrangement that part of his compensation package would be an insurance policy with a face value of ₱20 million. The parents of Noel are made the beneficiaries of the insurance policy. Will the proceeds of the insurance form part of the income of the parents of Noel and be subject to income tax? (2007 BAR) A: NO. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are not included as part of the gross income of the recipient. There is no income realized because nothing flows to Noel’s parents other than a mere return of capital, the capital being the life of the insured. (Sec. 32(B)(1), NIRC) 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. (Sec. 28, NIRC) Amounts received under life insurance contracts under life insurance endowment or UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES received 104 Taxation Law Conditions for the exclusion of the return of premium paid from gross income 1. 2. 3. 4. 1. 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. 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. NOTE: The amount returned is not income but mere return of capital. Return of proceeds premium v. Life insurance 2. The difference lies in cases where the insured in a life insurance contract survives. In order that life insurance proceeds may be totally exempt from income taxation, the insured must die. If he survives, there is only a partial exemption, i.e., only the portion of the proceeds representing return of premiums previously paid is excluded, being a mere return of capital. Retirement benefits, pensions, gratuities, etc. that are excluded from gross income (7FRUGS2) 1. 2. 3. 4. 5. 6. 7. 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. Retirement benefits under R.A. 7641 Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident 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 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; and 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; and 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) 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 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 105 National Taxation 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. (Sec. 32(B)(6)(a), NIRC) The RPBP must be approved by the BIR; The retiree must have been in the service of same employer for at least 10 years at the time of retirement; The private employee or official must be at least 50 years old at the time of his retirement; and The benefits under the RPBP must have been availed of only once. accordance with a reasonable private benefit plan maintained by the employer (under R.A. No. 4917) are exempted provided that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement. Here, Santos was qualified for disability retirement. At the time of her retirement, she was only 41 years of age; and had been in the service for more or less 8 years. As such, the above exclusion is not applicable for failure to comply with the age and length of service requirements. Therefore, Servier cannot be faulted for deducting a portion from Santos’ total retirement benefits for taxation purposes. (Santos v. Servier Philippines, Inc., G.R. No. 166377, 28, November 2008) 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. 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 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 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) Conditions in order to avail the exemption under a RPBP (Approved-10-50-once) 1. 2. 3. 4. It means that the retiring official must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan. (BIR Ruling No. 125-98) Q: Ma. Isabel Santos was the Human Resource Manager of Servier Philippines, Inc. (Servier) since 1991. In 1998, Santos suffered a sudden attack of “alimentary allergy”. She fell into coma and was confined in the hospital. After a year of medical treatment, evaluation disclosed that she has not recovered mentally and physically. Servier was constrained to terminate the services of Santos effective 31 August 1999. Servier paid disability retirement benefits but withheld a portion for taxation purposes. Under the retirement plan of Servier, employees are barred from claiming from additional benefits on top on that provided for in the Plan. Santos was 41 years of age at the time of her termination. Under the circumstances, was the withholding of a portion of the retirement benefits proper? Q: Mel received from his first employer, ₱20,000 as retirement benefit and was subsequently employed by another employer. After rendering 10 years, Mel retired from his second employer and received ₱50,000. Payment was made under a BIR approved retirement plan. Is the said amount taxable or not? A: YES. It is taxable because the benefit of exemption can only be availed of once. A: YES. Pursuant to the NIRC provisions on exclusion, retirement benefits received in UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Q: If the second employer is a Government 106 Taxation Law entity (assuming Mel was employed by the DPWH), would your answer be the same? 1. 2. A: NO. According to R.A. 8291 (The GSIS Act of 1997), all benefits he received are tax exempt, including retirement gratuity. Tax treatment for separation pay 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? Separation pay is not taxable irrespective of the age of the employee, length of service, number of benefits received or the recipient thereof (Sec. 32 B (6) b) 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: 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. 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? Conditions in order that separation pay may be excluded from gross income 1. 2. 3. Amount received by an official, employee or by his heirs; From the employer; and As a consequence of separation of such official or employee from the service of the employer: a. b. 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) Because of death, sickness or other physical disability; or For any cause beyond the control of the official or employee (Sec 32(B)(6)(b), NIRC) Causes beyond the control of the employee 1. 2. 3. 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. Q: A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of ₱500,000.00. Is said amount subject to tax? Explain. (1996 BAR) Retrenchment Cessation of business Redundancy (Sec. 2(b)(2), RR No. 2-98) Q: Who will be the recipient of separation pay if the cause of separation is death, physical disability or sickness? (2007 BAR) A: NO. The commutation of leave credits, more commonly known as terminal leave pay, i.e., the cash equivalent of accumulated vacation and A: 107 National Taxation 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. 90-6015-SC, October 18, 1990) also received ₱400,000 as separation pay. a. Did Jacobo derive income when he received his separation pay? b. Did Kintanar derive income when he received his separation pay? (1995 BAR) A: a. YES. Because his separation from employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee. (Sec 28, NIRC) 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? b. 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. 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? NOTE: These are de minimis benefits. Tax treatment of sick leave credits For private employees: 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. For government employees: they are exempt irrespective of the number of days. 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. (Sec. 32(B)(6)(c), NIRC) Q: Jacobo worked for a manufacturing firm. Due to business reverses the firm offered voluntary redundancy program to reduce overhead expenses. Under the program an employee who offered to resign would be given separation pay equivalent to his 3 months basic salary for every year of service. Jacobo accepted the offer and received ₱400,000 as separation pay under the program. Q: X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary for one year. Is the amount considered taxable income to the widow? Why? (1996 BAR) A: NO. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee are excluded from 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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. 108 Taxation Law gross income. (Sec. 32(B)) gross income. (Section 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: Income exempt under tax treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines is exempt from tax. (Sec. 32(B)(5), NIRC) NOTE: Public policy recognizes the principles of reciprocity and comity among nations. Reasons for granting tax exemption through a treaty 1. Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. 2. Employees who do not 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. 1. 2. Reciprocity To lessen the rigors of international juridical double taxation 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) For both categories, the cash equivalent of unused vacation and sick leave credits. A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your advice. (1999 BAR) A: For category A employees, all the benefits received on account of their separation are not subject to income tax. Hence no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees’ control. (Section 32(B), NIRC) The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income. (CIR v. Court of Appeals, GR No. 96O16, October 17, 1991) Compensation for injuries or sickness Kinds of compensation for injuries or sickness that may be excluded from gross income 1. 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. (Sec. 32(B)(4), NIRC) 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. 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 Q: JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which 109 National Taxation 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) have been subject to tax if earned. (See BIR Ruling No. 26-2018) Q: Ms. A and her minor children instituted an action for damages arising from a crime. The Court awarded them with actual, consequential, moral and exemplary damages. Separately, Ms. A also instituted a civil case for the annulment of a sale of real property. The Court granted the annulment of the sale with damages and ordered the transfer of the subject property to A. Are the damages awarded by the Court classified as taxable income? (2005 BAR) 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 No. 2-98, as amended by Sec. 2.78(A)(7), RR No. 10-2000) A: It depends. Pursuant to Section 32(B)(4) of the Tax Code, compensatory damages, actual damages, moral damages, exemplary damages, attorney’s fees, and the cost of the suit are excluded from gross income. However, consequential damages representing loss of the victim’s earning capacity are not excluded from gross income. Such consequential damages are mere replacements of income which would have been subjected to tax, if earned. Thus, only the consequential damages is subject to income tax. (BIR Ruling No. 026-2018 dated 18 January 2018) 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. (Sec. 32(B)(4), NIRC) Q: What is the income tax implication in the following insurances? a. Life Insurance b. Fire Insurance c. Accident Insurance 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? A: a. Life Insurance beneficiaries are not liable for income tax. A: YES. As a general rule, compensatory damages, actual damages, moral damages, exemplary damages, attorney’s fees, and the cost of the suit, are excluded from gross income of the awarded party pursuant to Section 32(B)(4) of the Tax Code. However, consequential damages representing the loss of the victim’s earning capacity are not excluded from gross income. Such damages are merely replacement of income which would have been subject to tax if earned. (BIR Ruling No. 26-2018) b. Fire insurance is not taxable because it is a mere return of capital. c. Accident insurance is not taxable because it is considered compensation for injuries sustained. Profit actualized Profit actualized is always taxable as compared to salary actualized wherein we need to qualify who paid the salary. Q: In the problem above, If the salary actualized is given by the employer, is it taxable? 13th Month Pay and Other Benefits A: YES, consequential damages representing the loss of the victim’s earning capacity are not excluded from gross income. Such damages are merely replacement of income which would UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Gross benefits received by officials and employees of public and private entities may be excluded from gross income provided that the 110 Taxation Law total exclusion shall not exceed P90,000. The excess would be considered as part of the compensation income of the employee where it is subject on a schedular rate. (Sec. 32(B)(7)(e), NIRC) part to enter the contest or proceeding. In the second award, Q did not file any application to enter into any contest. The award was given to her in recognition for her outstanding performance in the field of sports. However, the recognition in the field of sports is not among those stated under Sec. 28 B (8) e, to wit: “Prizes and awards made primarily in recognition of religious charitable, scientific, educational, artistic, literary, or civic achievement”. Therefore, this is subject to tax and should be included in her gross income. Prizes and Awards The following are the requisites in order for prizes and awards be exempted from tax: 1. 2. 3. Primarily in recognition of Scientific, Civic, Artistic, Religious, Educational, Literary, or Charitable achievement (SCAR-CEL) The recipient was selected without any action on his part to enter the contest or proceeding; and He is not required to render substantial future services as condition to receiving the prize or award. 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. 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) Prizes and Awards in Sports Competition The following are the requisites for the exclusion of prizes and awards in sports competition from gross income: (PATS) A: NO. It is not included. It is subject to a final tax of 20% for the amount is in excess of ₱10,000, otherwise it would be included in his gross income and subjected to a scheduler rate. (Sec. 24(B)(1), NIRC) 1. 2. 3. 4. NOTE: The prize constitutes a taxable income for it was made primarily in recognition of his artistic achievement which he won due to an action on his part to enter the contest. (Sec. 32(B)(7)(c), NIRC) All Prizes and awards; Granted to Athletes; In local and international sports Tournaments and competitions; and Sanctioned by their national sports associations. (Sec. 32(B)(7)(d), NIRC) 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: 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) Q: Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing match held in 2013, he won prize money in United States (US) dollars equivalent to ₱300,000,000. a. Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why? b. May Mr. A's prize money qualify as an exclusion from his gross income? Why? c. The US already imposed and withheld income taxes from Mr. A's prize money. How may Mr. A use or apply the income 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 111 National Taxation taxes he paid on his prize money to the US when he computes his income tax liability in the Philippines for 2013? (2015 BAR) A: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. R.A. 7549 explicitly provides that “All prizes and awards granted to athletes in local and international sports tournaments and competitions in the Philippines or abroad and sanctioned by their respective national sports association shall be exempt from income tax.” 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. 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.” 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, and it would be considered as the taxpayer’s taxable and professional income. c. Income Derived by Foreign Government For an income derived by foreign government from investments in the Philippines be exempted from tax: 1. 2. Mr. A may avail of tax credit against his tax liability in the Philippines for taxes paid in foreign countries. He has to signify in his income tax return his desire to avail of the tax credit. 3. It must be an income derived from investments in the Philippines It must be derived from BOnds, Loans or other Domestic securities, Stocks or Interests on deposits in banks; (BOLDSI) The recipient of such income from investment in the Philippines must be a: a. b. 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 or contributor. c. 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. 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 Income derived by the Government or its political subdivision is exempt from gross income, if the source of the income is from any public utility or from the exercise of any essential governmental functions. Q: 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) Government Owned and Controlled Corporations (GOCCs) performing: 1. Governmental Function: GR: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES foreign government; financing institutions owned, controlled or financed by foreign government; or regional or international financing institutions established by foreign government. (Sec. 32(B)(7), NIRC) 112 Government agencies performing Taxation Law governmental functions are tax exempt Mutual fund company means an open-end and close-end investment company as defined under the Investment Company Act. (Sec.22(BB), NIRC ) XPN: Unless expressly taxed 2. Proprietary Functions Q: Mr. D, a Filipino amateur boxer, joined an Olympic qualifying tournament held in Las Vegas, USA, where he won the gold medal. Pleased with Mr. D's accomplishment, the Philippine Government, through the Philippine Olympic Committee, awarded him a cash prize amounting to ₱1,000,000.00. Upon receipt of the funds, he went to a casino in Pasay City and won the ₱30,000,000.00 jackpot in the slot machine. The next day, he went to a nearby Lotto outlet and bought a Lotto ticket which won him a cash prize of ₱5,000.00. Which of the above sums of money is/are subject to income tax? Explain. (2019 BAR) GR: Subject to tax XPN: Unless expressly exempted NOTE: Under Sec. 27 (c) of RA 8424 the following corporations have been granted exemptions: 1. Government Service Insurance System 2. Social Security System 3. Philippine Health Insurance Corporation 4. Local Water Districts Q: X Rural Bank and Y Rural Bank are the constituent banks in a Plan of Consolidation Agreement and Articles of Consolidation. The constituent banks did not previously avail of or enjoy the five-year tax exemption granted under RA No. 7353 or the Rural Banks Act of 1992. The consolidated bank, Z Rural Bank, was issued a Certificate of Authority to operate as a rural bank under RA No. 7353. Is Z Rural Bank, a bank formed through consolidation, entitled to tax exemption under RA No. 7353? A: Mr. D’s winnings from the casino in Pasay City, worth P30,000,000.00 is subject to income tax. Under the TRAIN Law, other prizes and winnings in excess of P10,000 shall be subject to a 20% final tax on the entire amount of the winnings. In this case, Mr. D’s winnings from the casino in Pasay City are more than P10,000. Hence, it shall be subject to income tax. With regard to Mr. D’s cash prize award after winning in an Olympic qualifying tournament held in Law Vegas, it is not subject to income tax. Under the NIRC, prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the PH or abroad and sanctioned by their national sports associations, which in this case is the Philippine Olympic Committee, shall not be subject to income tax. A: YES. Rural banks created and organized under the provisions of RA No. 7353 are exempt from the payment of all taxes, fees and charges (except corporate income tax and local taxes) for a period of five years from the date of commencement of operations. Rural banks formed through consolidation may still enjoy the tax exemption for the entire period of five years from the date of commencement of operations in case any or both of the constituent banks did not avail this exemption, or for the remaining period in case the tax exemption was availed. (BIR Ruling No. 2722017 dated 7 June 2017) With regard to Mr. D’s Lotto winnings, it is not subject to income tax. Under the NIRC, any winnings through the PCSO Lotto that are in the amount of P10,000 or less shall be exempt from income tax. In this case, Mr. D won P5,000 thru the PCSO Lotto. Hence, it shall not be subject to income tax. Gains from the Sale of Bonds, Debentures or Other Certificate of Indebtedness Exclusions under special laws The bonds, debentures or other certificate of indebtedness sold, exchanged or retired must be with a maturity of more than 5 years. 1. 2. Gains from Redemption of Shares in Mutual Fund 113 P.D. 87, Oil Exploration and Development Act, as amended by PD 1354 E.O. 226, The Omnibus Investment Code of 1987, as amended National Taxation R.A. 3538, the exemption of salaries paid in dollars to non-Filipino citizens for services rendered to the Ford Foundation 4. R.A. 6938, Cooperative Code of the Philippines, as amended by R.A. 1176, 8241 and 8424 5. R.A. 7482, Senior Citizens Act as amended by R.A. 9257 6. R.A. 7929, Urban Development and Housing Act of 1992 7. R.A. 8502, Jewelry Industry Development Act of 1998 8. R.A. 8282, which exempts income of the SSS form income taxation 9. R.A. 8479, An Act Deregulating the Downstrean Oil Industry and For Other Purposes 10. R.A. 9182, The Special Purpose Vehicle Act 11. R.A. 9505, PERA Act of 2008 companies. 3. Personal Equity and (PERA) Requirement in order to qualify as PERA investment product To qualify as a PERA investment product, the product must be non-speculative, readily marketable, and with a track record of regular income payments to investors. Requirement for tax-exemption The concerned Regulatory Authority must first approve the product before being granted taxexempt privileges by the BIR. Income earned from investments reinvestments of the PERA All income earned from the investments and reinvestments of the maximum amount allowed herein are tax exempt. Retirement Account Maximum annual PERA contribution allowed by this Act 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. (Sec. 3, R.A. 9505) CONTRIBUTORS Contributors If the contributor is single 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. If the contributor is married PERA Investment Products 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. OFW MAXIMUM ANNUAL PERA CONTRIBUTIONS ₱100,000 or its equivalent in any convertible foreign currency at the prevailing rate at the time of the actual contribution Each of the spouses shall be entitled to make a maximum contribution of one hundred thousand pesos (₱100,000) or its equivalent in any convertible foreign currency. Double the allowable maximum amount DEDUCTIONS These refer to items or amounts authorized by law to be subtracted from pertinent items of gross income to arrive at the taxable income. (Sec. 34, NIRC) Regulatory Authority 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES and Nature of deductions The items of amounts allowed as deductions represent the expenses (reduction of wealth) of the taxpayer (other than personal expenses and 114 Taxation Law capital expenditures) in earning the income (increase of wealth) subject to tax as well as reasonable living expenses. 2. GENERAL RULE 1. Deductions must be paid or incurred in connection with the taxpayer’s trade, business, or profession. 3. Matching concept of deductibility This posits that the deductions must, as a general rule, “match” the income, i.e., helped earn the income. (Domondon, 2013) 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. Where no deductible 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 No. 298) made but still 2. The recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax and surcharges, if applicable, at the time of the original audit and investigation; or 3. 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) still A deduction will also be allowed in the following cases where no withholding of tax was made: 1. but The payee reported the income, and the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at the time of the original audit and investigation; The withholding and payment of tax required must be shown. withholding made 1. Deductions must be supported by adequate receipts or invoices. Where no deductible withholding A deduction will also be allowed in the following cases where no withholding of tax was made: XPN: standard deduction 3. The recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax and surcharges, if applicable, at the time of the original audit and investigation; or The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the original audit and investigation. (Sec. 2.58.5, RR 2-98) Persons who are NOT ALLOWED to claim deductions from gross income 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; 1. 115 Subject to final tax on their gross income derived from sources within the Philippines, hence, no deductions allowed to them: a. NRANETB b. NRFC National Taxation 2. When their income is purely compensation income they are not entitled to deductions: a. RC b. NRC c. RA goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. The term may be used interchangeably with "cost of goods manufactured and sold". Deductions that can be claimed by a corporation 1. 2. Cost of services (COS) Domestic Corporations (DC) and Resident Foreign Corporation (RFC) may opt between the Optional Standard Deduction (OSD) or the Itemized Deductions. Non-Resident Foreign Corporation (NRFC) which is subject to final tax on its gross income from sources within the Philippines (no deduction allowed). COS means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including: 1. 2. CONCEPT OF RETURN OF CAPITAL (COST OF SALES OR SERVICES) 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 goods sold” is applied, the return of capital have different components depending upon the nature of the business being taxed. (Domondon, 2013) Salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies. NOTE: COS shall not include interest expense except in the case of banks and other financial institutions. (RR No. 16-2008) DISTINGUISH: ITEMIZED DEDUCTIONS AND OPTIONAL STANDARD DEDUCTION 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.. Definition Cost of goods purchased for resale, with proper adjustment for opening and closing inventories are deducted from gross sales in computing gross income. (Sec. 65, RR No. 2) 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. Deduction For manufacturing concern, CGS means all costs incurred in the production of the finished UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 116 ITEMIZED DEDUCTIO NS Under the itemized deductions, taxpayers list every item of business expense they claim as deductions. Deductions are strictly construed against the taxpayer. Deductible items allowed by the law OPTIONAL STANDARD DEDUCTIONS In lieu of the itemized deductions, regular or special, including NOLCO. The deduction is merely presumed as a fixed percentage of gross income for corporations and gross sales or gross receipts for individuals. Individuals: 40% of total sales/ revenues/ receipts/ fees Taxation Law Who avail? may Substantiati on of claim All taxpayers except those subject to tax on gross income (NRANETB & NRFC). It must be substantiat ed by receipts. (Banggawan, 2019) Refer to discussions on itemized deductions for the requirements of each deduction. Corporations: 40% of gross income All taxpayers who are subject to tax on taxable net income (RC, NRC, RA, NRAETB, DC, RFC) can claim deductions except the following: 1. NRA-ETB 2. Taxpayers mandate to use itemized deductions It requires no proof of expenses incurred. REQUIREMENTS FOR DEDUCTIBLE ITEMS The requirements of deductibility must be met. The deductions must not have been waived. 5. The withholding and payment of tax required must be shown. (Domondon, 2013) 6. Expenses which are ordinary and necessary for the conduct of trade or business, or profession. 7. It must be expenditure. 8. As a general rule, there is no limitation as to the amount of expense, however, it must be reasonable. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 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. 2. 4. a legitimate and legal 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: 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. There must be specific provision of law allowing the deductions, since deductions do not exist by implication. There must be proof of entitlement 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. Itemized Deductions (Sec. 34, NIRC) 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. 3. Expenses Interest Taxes Losses Bad debts Depreciation Depletion of oil and gas wells and mines Charitable and other contributions Research and development Contributions to pension trusts The itemized deductions are discussed in detail below. Expenses 117 National Taxation There shall be allowed as deduction from gross income: 1. 2. 3. 2. 3. All the ordinary and necessary expenses; Paid or incurred during the taxable year; In carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession. (Sec. 34(A)(1)(a), NIRC) 4. Ordinary expenses vs. capital expenditures Requisites for deductibility of expenses (in general) (D-STROWN) 1. 2. 3. 4. 5. 6. 7. 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 one (1) taxable year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. Paid or incurred during the taxable year; The expense must be substantiated by proof; (substantiation rule) The expense must be incurred in trade or business carried on by the taxpayer (must be directly attributable to the development, management, operation, and or conduct of trade or business of the taxpayer, or in the exercise of the taxpayer’s profession); The expense must be reasonable; The expense must be ordinary and necessary; If subject to withholding taxes, proof of payment to BIR; and Expenses must not be against public policy, public moral or law such as bribes, kickbacks, for immoral purposes. Substantiation rule The taxpayer shall substantiate the expense being deducted with sufficient evidence such as official receipts or other adequate records showing: 1. 2. Ordinary expenses – It is any expense that is normal or usual in relation to the taxpayer’s business and the surrounding circumstances. (General Electric, Inc. v. Collector, CTA Case No. 1117, July 14, 1963) A: YES. The lack of supporting vouchers, receipts, and other documentary proof however may be excused under Sec. 235 of the NIRC, the provision which requires the preservation of the books of accounts and other accounting records for a period of 3 years from the date of last entry. (Basilan Estates v. CIR, G.R. No. L-022492, September 5, 1967) Test to determine whether or not an expense is ordinary and necessary If they are directly attributable to the development, management, operation, and or conduct of trade or business of the taxpayer, or in the exercise of the taxpayer’s profession, including: 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 Reasonable allowances for salaries, wages and other compensation for personal services actually rendered, including gross monetary value of fringe benefits; UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES The amount of the expense being deducted; and The direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (Sec. 34(A)(1)(B), NIRC) Q: When there are no receipts to prove a deduction, can the taxpayer still claim it as a deduction? Necessary expenses – Appropriate and helpful in the development of taxpayer’s business and is intended to minimize losses or to increase profits (Ibid.) 1. Travel expenses in pursuit of trade or business; Rental and other payments for the continued use or possession of property, for the purpose of trade, business or profession; and Entertainment, amusement and recreation expenses during the taxable year. 118 Taxation Law that expenditure was. (Cohan v. CIR, 39 F (2d) 540) obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to ₱100,000. Is said premium deductible by ADD Computers, Inc.? (2004 BAR) It is the use of estimates or approximations of the amount of cash and other assets where the taxpayer lacks adequate records. 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 No. 23-2000) Examples expenses 1. 2. 3. 4. 5. 6. 7. of ordinary and 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) necessary 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; and Repairs. Even if the company was made the beneficiary, whether directly or indirectly, the premium is not allowed as a deduction from gross income. (Sec. 36(A)(14), NIRC) Q: Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (2009 BAR) Q: MC, a contractor who won the bid for the construction of a public highway, claims as expense, facilities fee which according to them is standard operating procedure in transactions with the government. Are these expenses allowable as deduction from gross income? A: NO. The 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. (Sec. 34(A)(1)(c), NIRC) 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: 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 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 119 National Taxation officer’s revelation of Frosty Corporation’s trade secrets. May Freezy Corporaton claim the payment to the officer as deduction from its gross income? Explain. (2014 BAR) Q: When is “all-events” test applicable? A: It is applicable when: 1. A person who uses the cash method where all sales have been fully paid by the buyers thereof; 2. A person who uses the installment sales method, where the full amount of consideration is paid in full by the buyer thereof within the year of sale; 3. A person who uses the accrual method, whereby an expense is deductible for the taxable year in which all the events had occurred which determined the fact of the liability and the amount thereof could be determined with reasonable accuracy; or 4. 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) 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)(1)(c), NIRC) Q: How can the taxpayer prove that the expense has been paid or incurred during the taxable year? 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 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. The following are the requisites before an employer can deduct compensation payments to employees: 1. 2. 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) 3. NOTE: Reasonable and true compensation is only such amount as would ordinarily be paid for services like enterprises in like circumstances. Inclusions in compensation for services which are allowed as deductions from gross income A: The accrual of income and expense is permitted when the ALL-EVENTS TEST has been met. This test requires: (1) fixing of a right to income or liability to pay, and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. (CIR v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES The payments must be reasonable; They are, in fact, payments for personal services rendered; (Sec. 70, Revenue Regulation 2) and Subjected to withholding tax. 1. 2. 3. 4. 120 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 Taxation Law imposed has been paid. The fringe benefit must have been granted to managerial and supervisory employees, otherwise it cannot be availed as deduction. 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) Q: What are the requisites for deductibility of bonus? (2006 BAR) A: 1. 2. 3. 4. The payment of the bonus is made in good faith for additional compensation; It must be for personal services actually rendered; 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; and Must be subjected to withholding tax. 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. 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. L18840, May 29, 1969) 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? 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) 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. (Sec. 36(A)(4), NIRC) 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; and 5. General economic conditions (C.M. Hoskins & Co., Inc. v. CIR, G.R. No. L-24059, November 28, 1969) Travelling/transportation expenses The following are the requisites for its deductibility: 1. 2. Q: Gold and Silver Corporation gave extra 3. 121 Reasonable and necessary expenses; Incurred or paid while away from home; and In pursuit of trade, business or profession. National Taxation NOTE: Travelling expense includes transportation, meals and lodging. (Rev. Reg. 2) is it deductible? A: YES, provided the net income is clearly reflected by direct purchase method. “Away from home” It means away from the location of the employee’s principal place of employment regardless of where the family residence is maintained. 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, Rev. Reg. 2) Rules in deducting travel expenses 1. 2. 3. 4. The employer cannot claim as a deduction the excess over the cost of a business plane ticket or its equivalent, whether paid directly by the employer to the airline company or reimbursed to the employee. Deductions to be claimed by the employer for the allowance which are pre-computed by the employer on a daily basis, or reimbursement for the cost of meals and lodging in foreign trips by the employee for the pursuit of employer’s trade or business may not exceed; 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. Rentals and/or other payments for use or possession of property The following are the requisites for its deductibility 1. 2. 3. 4. 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) Inclusions in rental expense 1. Costs of materials 2. 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. 3. Methods utilized to determine materials used 1. 2. 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; and 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. Actual consumption method or inventory method Direct purchase method 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 Q: Assuming the taxpayer purchases materials but has no record of consumption, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Payment was made as a condition to the continuous use of or possession of the property; Taxpayer has not taken or is not taking title to the property or has no equity other than that of a lessee, user or possessor; Property must be used in the trade or business; and The withholding tax must have been withheld and paid. 122 Taxation Law extraordinary repairs are capitalized and included in determining depreciation expense because they tend to prolong the life of the asset. 3. 4. 5. Expenses under lease agreements Expenses under the lease agreement which may be allowed as deductions by the lessor. 6. 7. 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. (Sec. 2.01, RR No. 19-86) 8. NOTE: Those of a permanent character are not allowable as deductions. Among such deductions may be cost of repairs and maintenance, salaries and wages of employees attendant to such lease, interest payment, property taxes, etc. Entertainment/representation expenses The following are the requisites to avail of this deduction: 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. 1. 2. 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. 3. 4. The cost of leasehold improvements are NOT considered business expenses since they are capital investments. 5. 6. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. (Section 74, RR No. 2) 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; and Withholding tax, if any, should have withheld therefrom and paid. Q: Who may claim entertainment, amusement and recreation expenses? A: 1. Individuals engaged in business, including taxable estates and trusts 2. Individuals engaged in practice of profession 3. Domestic corporation 4. Resident foreign corporation 5. General professional partnerships, including its members Expenses for professionals 1. 2. 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 Supplies expense Expenses paid in the operation and repair of transportation equipment used in making professional calls Ceiling or limitation on the amount allowed as entertainment, amusement, and recreation expense 123 National Taxation Entertainment, amusement and recreation expense shall be allowed as a deduction from gross income but in no case shall exceed: 1. 2. 3. 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. 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 No. 10-2002) 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. Expenses that are not considered entertainment, amusement, and recreation expenses 1. 2. 3. Apportionment Formula: 4. 5. Q: What are included as entertainment, amusement and recreation expenses? 6. A: They include representation expenses and/or depreciation or rental or public order; expense relating to entertainment facilities. Advertising and Promotional 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. The following are the requisites for the deductibility of advertising and promotional expenses: (Sub-pro-ser) 1. 2. 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 (Sec. 2, RR No. 10-2002) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship Expenses for charitable or fund-raising events Expenses for bona fide business meeting of stockholders, partners or directors Expenses for attending or sponsoring an employee to a business league or professional organization meeting Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions, and other similar events Other expenses of similar nature (Sec. 3, RR No. 10-2002) 3. Substantiated with sufficient evidence; All payments for the purchase of promotional giveaways, contest prizes or similar material must be properly receipted; and All payments for services such as radio and TV time, print ads, talent fees, advertising expense or know-how must be subjected to withholding tax. Kinds of advertising and their deductibility 1. 124 Advertising to stimulate the CURRENT sale of merchandise or use of services are deductible as business expenses, provided the amount incurred is reasonable. Taxation Law 2. 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. Grants for manpower training and special studies given to rank-and-file employees pursuant to a program prepared by the labormanagement 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. (Sec. 7(2), RA No. 6071; Sec. 1, RMC No. 102-90) Ratio: Matching concept of deductibility. 3. Advertising to promote the sales of SHARES OF STOCK or to create a corporate image is not deductible as an advertisement. (Domondon, 2009) 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 & Development Corporation v. CIR, G.R. No. L-26911, January 27, 1981) Other business expenses allowed by special laws as deductions 1. 2. 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? 3. 4. 5. 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) 6. 7. Training Expenses 125 Discounts granted by establishments for senior citizens and PWDs. (RR No. 8-2010 and RR No. 5-2017) Expenses incurred by a private health and non-health facility, establishment, or institution, in complying with the Expanded Breastfeeding Promotion Act of 2009 – up to twice the actual amount incurred. (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) 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) Private companies that employ PWDs as regular employee, apprentice or learner are entitled to a gross income deduction equivalent to 25 percent (25%) of the total amount paid as salaries and wages to PWDs. (IRR of R.A. 10524) Qualified business enterprises that promote green jobs are entitled to a special deduction from the taxable income equivalent to 50% of the total expense for skills training and research development expenses. (R.A. 10771) National Taxation 8. Section 42 of R.A.7916 or the PEZA Law provides that an additional deduction equivalent to half the value of training expenses incurred in developing skilled or unskilled labor or for managerial or other management development programs incurred by enterprises in the economic zone (ecozone) can be deducted from the National Government’s 3% share as provided in Section 24 of the law. 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; and 4. Paid by a corporate taxpayer, liable on a mortgage upon real property of which the said corporation is the legal or equitable owner, even though it is not directly liable for the indebtedness. Interest The amount of interest: 1. paid or incurred 2. within a taxable year 3. on indebtedness 4. in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec 34(B), NIRC) Non-deductible Interest Expense 1. Requirements under the NIRC for interest to be deductible 1. 2. 3. 4. 5. 6. 7. 2. 3. 4. 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; and The allowable deduction have been reduced by an amount equal to 33% of the interest income subject to tax. (Sec. 34(B)(1), NIRC as amended by R.A. 6337) 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. Q: How is interest as a deduction from gross income defined? (1992 BAR) Related Taxpayers 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 (Sec. 2(a), RR No. 13-2000) Q: What expenses? are the deductible 1. 2. 3. interest UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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; and Interest on indebtedness paid in advance through discount or otherwise and the taxpayer reports income on cash basis. 4. 126 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; Taxation Law 5. 6. Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor with respect to each trust; and Fiduciary of a trust and beneficiary of such trust. (Sec. 36(B), NIRC) acquire property used in trade or business is also treated the same, the taxpayer can deduct it as an outright deduction or capital expenditure. Interest periodically amortized Arm’s length interest rate If indebtedness is payable in periodic amortizations, interest is deducted in proportion to the amount of the principal paid. It is the rate of interest which was charged or would have been charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances. Interest expense incurred to acquire property for use in trade / business / profession Theoretical interest is not deductible Q: Is the interest on loans used to acquire capital equipment or machinery deductible from gross income? (1999 BAR) It is not deductible because: 1. It is not paid or incurred for it is merely computed or calculated; and 2. It does not arise from interest bearing obligation. (PICOP v. CA, G.R. Nos. 10694950;84-85, December 1, 1995) 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) Q: Does the CIR have the power to impute theoretical interest? Reduction arbitrage A: NO. CIR’s powers of distribution, apportionment, or allocation of gross income and deductions under Section 43 (now Section 50) of the NIRC and Section 179 of RR No. 2 does not include the power to impute “theoretical interests” to the controlled taxpayer’s transactions. There must be proof of actual receipt or realization of income. (CIR v. Filinvest Development Corporation, G.R. Nos. 163653 & 167689, July 19, 2011) of interest expense/interest Limitation on the amount of deductible interest expense 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. (Sec. 34(B)(1), NIRC) This is to safeguard from tax arbitrage schemes. This limitation on the deductibility of interest expense was legislated to specifically address the tax arbitrage arising from the difference between the 20% final tax on interest income and the normal corporate income tax rate under which interest expense can be claimed as a deduction. Interest paid in advance Interest paid in advance through discount or otherwise in case of cash basis, the taxpayer is allowed as deduction in the year the debt is paid. Optional treatment of interest expense on capital expenditure 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 incurred to acquire property used in trade, business or profession may be allowed either: 1. Treated as capital expenditure, i.e., it forms part of the cost of the asset; or 2. As a deduction. (Sec. 34(B)(2), NIRC) NOTE: Interest paid in advance, interest periodically amortized, and interest incurred to NOTE: The rate of interest limitation is actually 127 National Taxation 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%. Limitation on the deduction In the case of RA, NRC, NRA-ETB and RFC, the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines (Sec. 34(C)(2), NIRC) Tax arbitrage It is a strategy which takes advantage of the difference in tax rates or tax systems as the basis for profit. Requisites for deductibility of taxes 1. 2. Taxes Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction xxx (Sec 34(C), NIRC) 3. 4. Examples of taxes which are deductible 1. Import duties; 2. Business licenses, excise and stamp taxes; 3. Local government taxes such as real property taxes, license taxes, professional taxes, amusement taxes, franchise taxes and other similar impositions; 4. FBT; 5. DST; 6. Percentage taxes; and 7. Foreign Income Tax if not claimed as tax credit. When to claim deductions for taxes GR: Taxes may be deducted only on the year it was paid or incurred. XPN: In the case of contingent tax liability, the obligation to deduct arises only when the liability is finally determined. Non-deductible taxes 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? Taxes not allowed as deduction from gross income to arrive at taxable income: 1. Income tax provided under the NIRC (Philippine income tax); GR: Income taxes imposed by authority of any foreign country XPN: When the taxpayer does not signify in his return his desire to avail of the tax credit (except FBT). 2. 3. 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. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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. 4. 5. 6. 7. 128 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; and VAT. Taxation Law Treatments of surcharges / interests / fines for delinquency tax liability peso for peso 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) 1. 2. 3. 4. Special assessments are deductible as taxes where these are made for the purpose of maintenance or repair of local benefits, if the payment of such assessment is ordinary and necessary in the conduct of trade, business or profession. 1. 2. 3. 1. 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. 2. Foreign tax credit It is the right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid to a foreign country subject to certain 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. Reduces 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 under this Title (Tax on Income) bears to his entire taxable income for the same taxable year. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s income from sources without the Philippines taxable under Title II of the NIRC (Tax on Income) bears to his entire taxable income for the same taxable year. (Sec. 34(C)(4), NIRC) Q: Are taxes paid and subsequently refunded taxable or non-taxable? (2005 BAR) 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. Tax credit vs. Tax deduction The taxpayer’s Alien individuals, whether resident or nonresidents; Foreign corporation, whether resident or non-residents; and Non-resident citizen including overseas contracted workers and seamen. Limitations when claiming tax credit TAX CREDIT vis-a-vis DEDUCTION Tax due Resident citizens; Domestic corporations (Sec. 34(C)(3)(a), NIRC); Members of a GPP; and Beneficiary of an estate or trust. (Sec. 34(C)(3)(b), NIRC) Persons not entitled to claim tax credit Where the assessments are made for the purpose of constructing local benefits tending to increase the value of the property assessed, the payments are in the nature of capital expenditures that are not deductible. Subtracted from is Persons entitled to claim tax credit Treatment of special assessment TAX CREDIT liability computed TAX DEDUCTION Income before tax Income upon which tax Losses 1. 129 Actually sustained during the taxable year National Taxation 2. Not compensated for by insurance or other forms of indemnity shall be allowed as deductions: a. If incurred in trade, profession or business; b. Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. (Sec. 34(D), NIRC) BIR within 45 days after the date of event. Measurement of casualty loss 1. 2. Actual loss shall be reduced by insurance recovery or any form of indemnity. Any excess of cost to restore over the book value shall be capitalized. (Tabag, 2015) Requisites for deductibility (TAE-TIE-C45) 1. 2. 3. 4. 5. 6. 7. Loss belongs to the taxpayer Actually sustained and charged off during the taxable year Evidenced by a closed and completed transaction Not compensated by insurance or other forms of indemnity Not claimed as a deduction for estate tax purposes in case of individual taxpayers Must be connected with taxpayer’s trade, business or profession or incurred in any transaction or incurred by an individual in any transaction entered into for profit though not connected with his trade, business or profession If it is casualty loss, it is evidenced by a declaration of loss filed within 45 days with the BIR Q: X, a travelling salesman in Sulu. In the course of his travel, a band of MNLF seized his car by force and used it to kidnap a foreign missionary. The next day, the military and the MNLF band had a chance encounter which caused X’s car to be a total wreck. Can X deduct the value of his car from his income as casualty loss? (1993 BAR) A: It depends. Before the TRAIN Law 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. Under the TRAIN Law, personal and additional deductions are no longer applicable. Types of losses 1. Ordinary losses – incurred profession or business. in Total loss – Actual loss is the book value of the asset. Partial loss – Book value or cost to restore the asset to its normal operating condition, whichever is lower. trade, 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. 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) Net Operating Loss Carry-over (NOLCO) 2. Casualty losses – The loss is of property connected with trade, business or profession arising from fire, storm, shipwreck or other casualty, or from robbery, theft or embezzlement. Net operating loss refers to the excess of allowable deduction over gross income of the business in a taxable year. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss; provided that: These are 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 130 Taxation Law 1. 2. The taxpayer was not exempt from income tax in the year of such net operating loss; and There has been no substantial change in the ownership of the business or enterprise. income 1. 2. NOTE: NOLCO is on a first-in first-out basis. 3. “Substantial change in ownership of the business or enterprise” 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; and Estates and trusts. Effect of NOLCO when the corporate taxpayer is subject to MCIT 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. The running of the 3-year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such 3-year period. However, such corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable period. The transferee or assignee shall not be entitled to claim the same as a deduction from gross income except when as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor gains control of: An individual who claims the 40% OSD cannot claim deduction of NOLCO simultaneously. Even if NOLCO was not claimed, the 3-year period shall continue to run. (RR No. 14-2001) 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) (RR 14-2001, Sec. 2.4) Who are not qualified to avail NOLCO? 1. 2. 3. 4. 5. Determination of whether or not there is substantial change in ownership 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. (Sec. 5.1, RR No. 14-2001) 6. OBUs for a foreign banking corporation and FCDU of a domestic banking corporations Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive PEZA-registered enterprise SBMA-registered enterprise Foreign corporations engaged in international shipping or air carriage business in the Philippines Any person, natural or juridical, enjoying exemption from income tax (RR No. 142001) Capital losses Losses from sale or exchange of capital assets. It is deductible to the extent of capital gains only. Q: In case of mines other than oil and gas wells, NOLCO shall be allowed for what period? Q: What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain. (2003 BAR) A: A net operating loss during the first 10 years of operation shall be allowed as NOLCO for the next 5 years immediately following the year of such loss. 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 Persons entitled to deduct NOLCO from gross 131 National Taxation 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) extent of capital gains. This deduction, however, is not allowed to a bank or trust company. (Sec. 34(D)(4), Sec. 34(E)(2), NIRC) Special Losses 1. Wagering losses – deductible only to the extent of gain or winnings deemed to only apply to individuals. (Sec. 34(D)(6), NIRC) Refer to “Income on dealings in property” for further discussion. 2. 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. Securities becoming worthless If securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (Section 34(D), NIRC) GR: Losses from wash sale are not deductible since these are considered as artificial loss. 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 15% net capital gains (for individuals and DC) 5% and 10% net capital gains (for RC, NRFC) 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. 06-2008) XPN: When a 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. Non-deductible losses 1. 2. 3. 4. 5. 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. 06-2008) Q: Are worthless securities deductible from gross income for income tax purposes? (1999 BAR) A: Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, if these worthless securities are capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and therefore, deductible to the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 132 Losses not incurred in trade, profession, or business or in any transaction entered into profit; Losses from sales or exchanges of property entered into between related taxpayers are not deductible as provided under Section 36 of the NIRC but the gains are taxable; Losses from exchanges of property in a corporate readjustment; Losses from illegal transactions; and 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) Taxation Law Rules on Deductibility LOSSES Ordinary losses Capital losses Securities becoming worthless Losses on wash sales of stocks / securities Wagering losses NOLCO Abandonment losses in petroleum operations RULES ON DEDUCTIBILITY Deductible, net of indemnity N.B. May be deducted from capital gains Deductible to the extent of capital gains only Deductible – if worthless securities are capital assets (except where the taxpayer is a bank or trust company) Non-deductible - If worthless securities are ordinary assets GR Losses from wash sale are not deductible XPN When taxpayer is a dealer in securities, and the transaction from which the loss resulted was made in the ordinary course of business of such dealer, the loss is deductible in full. Deductible only to the extent of wagering gains. Deductible for the next 3 consecutive years following the year of such loss. Provided that: i. The taxpayer was not exempt from income tax in the year of such net operating loss; and ii. There has been no substantial change in the ownership of the business or enterprise. N.B. A net operating loss during the first 10 years of operation shall be allowed as NOLCO for the next 5 years in case of mines other than oil and gas wells, i. When a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction. ii. When a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year of abandonment. Note: If such abandoned well is re-entered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration. Marcelo doctrine Bad debts refer to debts resulting from the worthlessness or uncollectibility, in whole or in part, of amount due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2, RR No. 5-99) 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 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. These are debts due to the taxpayer actually ascertained to be worthless and charged off in the books of the taxpayer within the taxable year except those: 1. 2. Bad Debt Theory Not connected with trade, business or profession; and Between related taxpayers (Sec. 36(B), NIRC) Absence of creditor is not bad debt. 133 National Taxation Requisites for deductibility (UST-CAR) 1. The debts are uncollectible despite diligent effort exerted by the taxpayer. 4. 5. To prove that the taxpayer exerted diligent efforts to collect the debts: a. Sending of statement of accounts; b. Sending of collection letters; c. Giving the account to a lawyer for collection; and d. Filing a collection case in court. 2. Existing indebtedness subsisting due to the taxpayer which must be valid and legally demandable. 3. 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. 4. 5. 6. NOTE: Relatives by affinity and collateral relatives other than brothers and sisters are not considered related parties. Q: What factors will determine whether or not the debts are bad debts? (2004 BAR) 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. NOTE: In lieu of requisite No. 5, the BSP, thru its Monetary Board, shall approve the writing off of said indebtedness from the banks’ books of accounts at the end of the taxable year (RR No. 5-1999) In no case may a receivable from an insurance or surety company be written off from the taxpayer’s books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner. (RR No. 5-1999) 6. 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: 1. Must not be sustained in a transaction entered into between related parties. 2. 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES each of which is owned, directly or indirectly, by or for the same individual; The grantor and a fiduciary of any trust; The fiduciary of a trust and the fiduciary of another trust of the same person is a grantor with respect to each trust; and A fiduciary of a trust and a beneficiary of such trust. Ascertain the debt to be worthless in the year for which the deduction is sought; and Act in good faith in ascertaining the debt to be worthless. (CIR v. Goodrich International Rubber Co., G.R. No. L-22265, December 22, 1967) Testimony of a CPA as substantial evidence for the deductibility of a claimed worthless debt Mere testimony of a CPA explaining the worthlessness of said debts is seen as nothing more than as a self-serving exercise which lacks probative value. Mere allegations cannot prove the worthlessness of such debts. (Philippine Refining Co. v. CA, G.R. No. 118794, May 8, 1996) 134 Taxation Law Deductibility of “reserves for bad debts” from gross income for income tax purposes engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall be permitted only when such property is located in the Philippines. (Sec. 34(F)(6), NIRC) Bad debts must be charged off during the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will not give rise to any deduction. (Sec. 34(E), NIRC) Effect of recovery of bad debts Depreciable and non-depreciable assets for tax purposes 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. (Sec. 34(E), NIRC) This is also known as the tax benefit rule. 1. Depreciable assets: a. Only property that is used for trade, business or exercise of a profession or held for the production of income. b. All kinds of tangible property (other than land) with life of more than 1 year and do not form part of the stock in trade that are part of the inventory. c. All kinds of intangible property (other than shares of stock) with life of more than 1 year. d. Subject to exhaustion within a determinable period of time, that is it has a limited useful life. 2. Non-depreciable assets: a. Land, apart from the improvements of physical development added to it, cannot be depreciated. b. Inventories or stock in trade. c. Personal effects or clothings, except costumes used in theatrical business. d. Bodies of minerals subject to depletion. e. Automobiles and other transportation equipment used solely by the taxpayer for pleasure. f. Building used solely by the taxpayer as his residence, and the furniture or furnishing used in said building. g. Intangibles, the use in trade, business or exercise of profession is not of limited duration. Depreciation There shall be allowed as a depreciation deduction: 1. Reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) 2. Of property used in the trade or business (Sec. 34(F), NIRC) Depreciation is the gradual diminution in the useful value of tangible property resulting from exhaustion, wear and tear and obsolescence. (Domondon, 2013) Requisites for deductibility 1. 2. 3. 4. 5. The property subject to depreciation must be property with life of more than 1 year; The property depreciated must be used in trade, business, or exercise of a profession; The depreciation must have been charged off during the taxable year; The depreciation method used must be reasonable and consistent; and A depreciation schedule should be attached to the income tax return. Person entitled expense to claim Q: Is depreciation of goodwill deductible from gross income? (1999 BAR) depreciation A: Goodwill may or may not be subject to depreciation. 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. 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 In the case of a non-resident alien individual 135 National Taxation duration (Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not the case with goodwill. useful life of 5 years using the straight-line method. (Sec. 34(F)(4), NIRC) 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. Method to be used in depreciation of properties used in mining operations other than petroleum operations: Methods for computing allowance under NIRC 1. 1. depreciation 2. 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. 2. 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. 3. Sum of the years digit method – accelerated method of depreciation expense in the earlier years and lower charges in the later years. 4. Any other method which may be prescribed by DOF upon recommendation of the CIR. 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) 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. A: YES. The starting point for the computation of the deductions for depreciation is the reasonable cost of acquiring the asset and its economic life. The fact that the machineries were already depreciated by its original owner does not matter. Z is allowed a depreciation allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of the machineries which he is using in his trade or business. (Sec. 34 (F), NIRC) Method to be used in depreciation of properties used in petroleum operations It may either be straight line or declining balance method with a useful life of 10 years or shorter, as allowed by the CIR. NOTE: If the property is not directly related to production, depreciation is for an estimated UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES At the normal rate of depreciation if the expected life is less 10 years or less; or Depreciated over any number of years between 5 years and the expected life if the latter is more than 10 years and the depreciation thereon is allowed as deduction from taxable income. Depletion of oil and gas wells and mines 136 Taxation Law Depletion refers to the deduction from gross income arising from the exhaustion of natural resources like mines and oil and gas wells as a result of production or severance from such mines or wells. 2. 3. Conditions for deductibility: (COILE) 1. 2. 3. 4. 5. The method allowed under the rules and regulations prescribed by the Secretary of Finance is cost depletion method. Can be availed of by oil and gas wells and mines. The basis of cost depletion is the capital invested in the mine which is the accumulated exploration and development expenses. When the allowance shall equal the capital invested no further allowance shall be granted. In case of RFC, allowance for depletion shall be authorized only in respect to oil and gas wells and mines located in the Philippines. Persons who may depletion 4. Requisites for deductibility (AW-SEA) 1. 2. 3. avail deduction for 4. 5. Annual depletion deductions are allowed only to mining entities which own an economic interest in mineral deposits. (Sec. 3, RR No. 5-76) 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 Economic interest These are: (GAFA) 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. 1. Charitable and other contributions 1. nongovernment organizations. In accordance with rules and regulations promulgated by the secretary of finance, upon recommendation of the commissioner; No part of the net income of which inures to the benefit of any private stockholder or individual; In an amount not in excess of: a. 10% in the case of an individual, and b. 5% in the case of a corporation, of the taxpayer’s taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (Sec 34(H)(1), NIRC) 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 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. g. Culture Health Economic Development Education Science Human Settlement Youth and Sports development NOTE: NEDA determines annually which will be considered as a priority activity. 2. 137 Donations to foreign institutions and international organizations in compliance National Taxation with treaties and agreements with the Government. 3. 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. 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) 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) 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) Donation must be utilized not later than the 15th day of the 3rd month following the close of taxable year. Administrative expense must not exceed 30% of the total expenses. Upon dissolution, assets shall be transferred to another non-profit domestic corporation or to the State. Donations that are subject to limitation 1. 2. 3. Donations of prizes and awards to Athletes (Sec. 1, RA 7549) 4. Donations that are deductible in FULL under special laws 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) (P.D. 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) UNIVERSITY OF SANTO TOMAS 2021 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; and Donations to domestic corporations organized exclusively for: a. Scientific b. Educational c. Cultural d. Charitable e. Religious f. Rehabilitation of veteran g. Social welfare Limitations on deductions Amount deductible shall not exceed: 1. For individuals - 10% of taxable income before contributions 2. For corporations - 5% of taxable income before contributions (Sec. 34(H)(1), NIRC) 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. 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 138 Taxation Law BAR) A: NO. Donations and/or contributions made to qualified institutions consisting of property other than money shall be based on the acquisition cost of the property. The donor is not entitled to claim as full deduction the fair market value/zonal value of the lot donated. (Sec. 34(H), NIRC) b. Q: The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital and gave ₱100,000 to the hospital and ₱5,000 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the ₱100,000 and the ₱5,000 from his gross income. Discuss. (1993 BAR) Period for amortizing the deferred research and development expenditures In computing taxable income, 1. Such deferred expenses shall be allowed as deduction; 2. Ratably distributed over a period of not less than 60 months (beginning with the month in which the taxpayer first realizes benefits from such expenditures) 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 an institution. If not, then no deduction is allowed. Research and development expenditures that are not deductible However, he could not deduct the ₱5,000 because to qualify for exemption, the charitable contribution must be given to accredited organizations or associations. (Sec. 34(H)(1), NIRC) Any expenditure: 1. For the acquisition or improvement of land or for the improvement of property to be used in connection with research and development subject to depreciation and depletion; and 2. Paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral including oil or gas. (Sec. 34 (I)(3), NIRC) Q: On the part of the contributor, are contributions to a candidate in an election allowable as a deduction from gross income? (1998 BAR) A: The contributor is not allowed to deduct the contributions because the said expense is not directly attributable to the development, management and/or operation and/or conduct of trade or business or profession. Pension Trusts 1. Research and development expenditure 1. 2. 3. deduction during the taxable year when paid or incurred, or 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) 2. Taxpayer may treat research or development expenditures Which are paid or incurred by him during the taxable year In connection with his trade, business, or profession as: a. Ordinary and necessary expenses, which are not chargeable to capital account, and shall be allowed as 3. 4. 139 An employer establishing or maintaining a pension trust To provide for the payment of reasonable pensions to his employees Shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction for ordinary and necessary expenses) A reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, National Taxation 5. But only if such amount: a. Has not theretofore been allowed as a deduction, and b. Is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. (Sec. 34(J), NIRC) A: If the employer contributes to a private pension plan for the benefit of its employee. Q: Are the following expenses deductible from gross income: a. Employer’s contribution to the Christmas fund of his employees b. Contribution to the construction of a chapel of a university that declares dividends to its stockholders c. Premiums paid by the employer for the life insurance of his employees d. Contribution to a newspaper fund for needy families when such newspaper organizes a group of civic spirited citizens solely for charitable purposes (1968 BAR) 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 A: a. YES. Under No. 27 RAMO 1-87 subject to the condition that the contribution does not exceed ½ month’s basic salary of all the employees. It is part of the ordinary and necessary expenses. b. NO, part of the net income of the university inures to the benefit of its private stockholders (Sec. 34(H), NIRC) c. NO, for the beneficiary is the employer (Sec. 36(A)(4), NIRC) d. NO, contributions to a newspaper fund for needy families are not deductible for the reason that the income inures to the benefit of the private stockholder of the printing company. Deductible payment to pension trusts 1. Employer’s current liability or Current Service Cost. Amount contributed during the taxable year shall be treated as an ordinary and necessary expense. 2. Employer’s liability for past services or Past Service Cost. Additional requirements for deductibility 1/10 of the reasonable amount paid to cover pension liability applicable to the preceding 10 years. Taxpayers who claim deductions for expenses, the amounts of which are subject to withholding tax, must prove that said deductions were in fact subjected to proper withholding. If no withholding was made, then claimed deductions will not be allowed. (Sec. (34)(K), NIRC) NOTE: When an employer makes a contribution to his employee’s Personal Equity and Retirement Account (PERA), the employer can claim this amount as a deduction but only to the extent of the employer’s contribution that would complete the maximum allowable PERA contribution of an employee. (RR No. 17-2011, RA. No. 9505) No deductions shall be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made. (RR No. 122013) Q: When can an employer claim as deduction the payment of reasonable pension? UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Special Deductions 140 Taxation Law Special deductions allowable under the NIRC: 1. 2. 3. liability and mutual workmen’s compensation and mutual casualty insurance Private proprietary educational institutions – In addition to the expenses allowed as deduction, they have the option to treat the amount utilized for the acquisition of depreciable assets for expansion of school facilities as: a. Outright expense (the entire amount is deducted from gross income); or b. Capital asset and deduct only from the gross income an amount equivalent to its depreciation every year (Sec. 34(A)(2), NIRC) Assessment Insurance Estates and trusts can deduct the: a. Amount of income paid, credited or distributed to the heirs/beneficiaries; and b. Amount applied for the benefit of the grantor (Sec. 61, NIRC) Non-Life Mutual marine insurance Mutual insurance – mutual fire and mutual employer’s 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 1. 2. Insurance companies can deduct: TYPE OF INSURANCE the payment of losses, expenses and reinsurance reserve (Sec. 37(C), NIRC) 3. SPECIAL DEDUCTIONS 4. 1. Net additions, if any, required by law to be made within the year to reserve funds 2. Sum paid on the policy within the year and annuity contracts other than dividends, provided that the released reserve be treated as income for the year of release (Sec. 37(A), NIRC) 1. Amounts repaid to policy holders on account of premiums previously paid by them 2. Interest paid upon those amounts between the date of ascertainment and the date of its payment (Sec. 37(B), NIRC) 1. Portion of the premium deposits returned to the policy holders 2. Portion of the premium deposits retained for 5. 6. 7. Special deductions for productivity bonus and manpower training under the Productivity Incentives Act of 1990 Deductions for training expenses of qualified jewelry enterprises Deductions under the Adopt-a-School Act of 1998 Deductions under the Magna Carta for Persons with Disability Deduction under Free Legal Assistance Act of 2010 Deductions under the Expanded Senior Citizen Act of 2003 Deductions under the Sports Benefits and Incentives Act of 2001 Sales on discounts on (PWD) PWDs are entitled to claim at least 20% discount. 1. The following establishments relative to the sale of goods or services for their exclusive use or enjoyment: a. Hotels and similar lodging establishments and restaurants; b. Sports and recreation centers; c. Theatres, cinema houses, concert halls, circuses, carnivals, and other similar places of culture, leisure, and amusement; d. Drugstore regarding purchase of medicines; e. Medical and dental privileges in government facilities such as but not limited to diagnostic and laboratory fees including professional fees of attending doctors in private facilities, subject to 141 National Taxation f. g. guidelines to be issued by the DOH, in coordination with the PHIC; Domestic air and sea transportation based on the actual fare except promotional fare. If the promotional fare discount is higher than the 20% discount privilege, the PWD may choose the promotional fare and should no longer be entitled to the 20% discount privilege; and Land transportation privileges in bus fares such as ordinary, aircon fares, and on public railways such as LRT, MRT, PNR, and such other similar infrastructures that will be constructed, established, and operated by public or private entity. d. 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. Toll fees of skyways and expressways are likewise subject to 20% discount which can be availed of only by a person with disability owning the vehicle. (RR No. 1-2009) 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. Provided, however, that the foregoing privileges granted to PWDs shall not be claimed if the said PWD claims a higher discount as may be granted by the commercial establishment and/or existing laws or in combination with other discount program/s. Condition for it to be availed of as a deduction from gross income It shall be deductible provided that the actual free legal services contemplated shall be exclusive of the minimum 60-hour mandatory legal aid services rendered to indigent litigants as required under the Rule on Mandatory Legal Aid Services for Practicing Lawyers, under BAR Matter No. 2012, issued by the SC. Thus, if a PWD is also a senior citizen, he can only claim one 20% discount on a particular sales transaction. 2. Conditions for Availment by establishments of sales discounts as special deduction from gross income: a. Allowed as deduction from gross income for the same taxable year when the discount is granted; b. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the PWD shall be eligible for the deduction; c. Only the actual amount of the sales discount granted or a sales discount not exceeding 20% of the gross selling price or gross receipt can be deducted from the gross income, net of VAT, if applicable, for income tax purposes and from gross sales or receipts of the business enterprise concerned, for VAT or other percentage tax purposes and shall be subject to proper documents UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES under pertinent provisions of the tax code; and The business establishment giving sales discount to qualified person with disability is required to keep separate and accurate record of sales, which shall include the name of the PWD, ID Number, gross sales or receipts, sales discounts granted, date of transactions and invoice number for every sale transaction to PWD. Expanded Senior Citizen Act of 2003 1. 2. Deduction from gross income of private establishments for the 20% sales discount granted to senior citizens on the sale of goods and/or services Additional deduction from gross income of private establishments for compensation paid to senior citizens. Tax treatment of senior citizen’s discount 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) Persons who could avail of the deduction for the 20% senior citizen’s discount 142 Taxation Law 1. 2. Resident citizens and domestic corporations; and Non-resident citizens, aliens (whether residents or not) and foreign corporations, from their income arising from their profession, trade or business, derived from sources within the Philippines. 6. Establishments that can claim the discounts granted as deduction 1. 2. 3. 4. 5. 6. 7. 8. 9. 7. 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; and Funeral parlors and similar establishments. Additional deduction from gross income of private establishments for compensation paid to senior citizens 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; and 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. (Sec. 12, RR No. 7-2010) Conditions in order for establishments to avail the 20% sales discounts as deduction from gross income 1. 2. 3. 4. 5. of the senior citizen, OSCA ID, gross sales/receipts, sales discounts granted, dates of transaction and invoice number for every sale transaction to senior citizen. Only those establishments selling any of the qualified goods and services to a Senior Citizen where an actual discount was granted can claim the deductions. The seller must not claim the optional standard deduction during the taxable year. (Sec. 7, RR No. 7-2010) 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 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 Sports Benefits and Incentives Act of 2001 The following are the benefits and privileges for National Athletes and Coaches: 1. 2. 143 The grant of twenty percent (20%) discount from all establishments relative to the utilization of transportation services, hotels and other lodging establishments, restaurants and recreation centers, and purchase of medicine and sports equipment anywhere in the country for the actual and exclusive use or enjoyment of the national athlete and coach. Minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement for the actual and exclusive use and enjoyment of the national athlete and coach. National Taxation Such privately-owned establishments shall enjoy tax deductions equivalent to the discounts extended to the national athletes and coaches under paragraphs (a) and (b) hereof, subject to the rules and regulations to be issued by the Secretary of Finance, as recommended by the Commissioner of Internal Revenue, within ninety (90) days upon the effectivity of this Act: Provided, That the failure of the Bureau of Internal Revenue (BIR) to promulgate the rules” and regulations shall not prevent the implementation of aforementioned benefits. (Sec. 4, RA. No. 10699) “cost of service” in case of individual seller of services, is not allowed to be deducted for purposes of determining the basis of the OSD pursuant to RA 9504. (RR No. 16-2008) Persons who may avail of the OSD under the NIRC 1. 2. Optional Standard Deduction 3. 4. 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. 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. The optional standard deduction is an amount not exceeding: 1. 2. Individuals a. Resident citizens (RC) b. Non-resident citizens (NRC) c. Resident aliens (RA) Corporations a. Domestic Corporations (DC) b. Resident foreign corporations (RFC) Partnerships Estates and trusts 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. 40% of the gross sales or gross receipts of a qualified individual taxpayer; or 40% of the gross income of a qualified corporation. (Sec. 34(L), NIRC) Persons who may not avail of the OSD Illustration: 1. A corporation has gross sales of ₱1M, sales return of ₱25k, cost of goods sold of ₱600k, rental income of ₱275k and with an itemized deductions of ₱200,000. Gross Sales Rental Income TOTAL REVENUE Less: Sales Returns Cost of goods sold GROSS INCOME Less: Deductions OSD (650k x 40%) Itemized TAXABLE INCOME Rate of Tax INCOME TAX DUE 2. Following the new income tax forms as prescribed in RR 2-2014, the following are not entitled to avail the OSD: OSD 1,000,000 275,000 1,275,000 25,000 ITEMIZED 1,000,000 275,000 1,275,000 25,000 600,000 600,000 1. 650,000 650,000 2. Corporation, individuals: 3. 260,000 390,000 30% 117,000 200,000 450,000 30% 135,000 4. NOTE: It should be emphasized that the “cost of sales” in case of individual seller of goods, or the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Non-resident aliens (NRA), whether or not engaged in trade or business in the Philippines; and Non- resident foreign corporations (NRFC) partnerships and other non- Exempt under the NIRC and other special laws, with no other taxable income; With income subject to special or preferential tax rates; 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; and Juridical entities whose taxable base is gross revenue or receipts. (e.g., special RFC; NRFC; special NRFC) Q: In 2012, Dr. K decided to return to his hometown to start his own practice. At the 144 Taxation Law 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. 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. 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) 3. If the GPP avails of OSD in computing net income, the partners may no longer claim further deductions from their net distributive share, whether itemized or OSD. (RR 2-2010) A: Dr. K may opt to use the optional standard deduction (OSD) in lieu of the itemized deduction. OSD is a maximum of 40% of gross receipts during the taxable year. Proof of actual expenses is not required, but Dr. K shall keep such records pertaining to his gross receipts. Determination of OSD allowed individuals, corporations, and GPPs ITEMS NOT DEDUCTIBLE for In computing net income, no deduction shall in any case be allowed in respect to: INDIVIDUAL It depends on the accounting method used by the taxpayer in recognizing income and deductions: 1. Accrual basis – the OSD shall be based on the gross sales during taxable year. 2. Cash Basis – the OSD shall be based on the gross receipts during the taxable year. 1. Personal, living or family expenses – These are personal expenses and not related to the conduct of trade or business. 2. Any amount paid out for new buildings of for permanent improvements, or betterments made to increase the value of any property or estate. 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. These are capital expenditures added to the cost of the property and the periodic depreciation is the amount that is considered as deductible expense. 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. 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. 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. 145 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (Major Repairs). 4. Premiums paid on any life insurance policy covering the life 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 National Taxation is directly or indirectly a beneficiary under such policy. (Sec. 36(A), NIRC) 5. Interest expense, bad debts, and losses from sales of property between related parties. 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. 6. Bribes, kickbacks, payments. 7. Items where the requisites for deductibility are not met. and other similar SUMMARY OF RULES ON DEDUCTIONS WITH LIMITS Entertainment, Amusement, And Recreational Expense Interest Expense Taxes Capital Losses Wagering Losses LIMIT Engaged in sale of goods or properties – 0.50% of net sales (i.e., gross sales less sales returns or allowances and sales discounts) Engaged in sale of services, including exercise of profession and use or lease of properties – 1% of net revenue (i.e., gross revenue less discounts) The allowable deduction has been reduced by an amount equal to 33% of the interest income subject to final tax In the case of NRAETB and RFC, the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines Deductible up to the extent of capital gains Deductible only to the extent of wagering gains. 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 INCOME TAX ON INDIVIDUALS RESIDENT CITIZENS, NON-RESIDENT CITIZENS, AND RESIDENT ALIENS Classes of individual taxpayers: 1. Citizen a. Resident Citizen (RC) b. Non-Resident Citizen (NRC) i. Overseas Contract Worker (OCW) ii. Seaman 2. Aliens a. Resident Alien (RA) b. Non- Resident Alien (NRA) i. Engaged in Trade or Business (NRAETB) ii. Not Engaged in Trade or Business (NRA- NETB) c. Special Aliens 3. Special class of individual employees a. Minimum wage earner NOTE: “Most of the time during the taxable year” has been interpreted to be at least 183 days. CITIZENS RC A citizen of the NRC A citizen of the Philippines UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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 146 been previously Taxation Law considered as a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. statutory minimum wage in the agricultural sector where he is assigned. Significance of classifying an alien as a resident or a non-resident BASIS NOTE: Treated as NRC with respect to income derived from sources abroad until the date of his arrival. Tax treatm ent Person al exempt ion 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. (Sec. 22(E), NIRC) RA 0% - 35% schedular rate Entitled ETB 0% - 35% schedular rate Entitled subject to the rule on reciprocity NRA NETB 25% of gross income Not entitled Special classes of aliens under NIRC 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 subcontractors in the Philippines. ALIENS RA An individual whose residence is within the Philippines but who is not a citizen thereof (Sec. 22(F), NIRC) non- NRA An individual whose residence is not within the Philippines and who is not a citizen thereof. (Sec. 22(G), NIRC) NOTE: When a special alien leases a property, he shall be taxed under NRA-EBT and NRA-NEBT, depending on the number of stay. Engaged in trade or business NOT engaged in trade or business An alien who stays in the Philippines for 180 days or less (Sec. 25(B), NIRC) Special aliens are not required to submit ITR because the obligation to file income ITR rests upon his employer. An alien who stays in the Philippines for an aggregate period of more than 180 days (Sec. 25(A), NIRC) SPECIAL CLASS OF INDIVIDUAL EMPLOYEES: MINIMUM WAGE EARNER Refers to a worker in the private sector paid the statutory minimum wage or to an employee in the public sector with compensation income of not more than the Two instances where alternative taxation may be applied 1. 2. Filipino considered as special alien; When a taxpayer’s capital asset is sold to the Government. (Involuntary Sale or Expropriation) Meaning of seamen as contemplated in the law They should be working in a ship engaged exclusively in international trade or commerce. If engaged only in local trade or commerce, they are just considered as normal employees. 147 National Taxation Formula in determining taxable income Gross Compensation Income Net Compensation Income Add: Net business income or Net professional income Other income Taxable income subject to graduated rates The term taxable income means the pertinent items of gross income specified in this Code, less the deductions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31, NIRC) P xxx xxx xxx xxx xxx P xxx General Principles and Applicable Tax Rates INDIVIDUAL TAXPAYER IS A: INCOME DERIVED FROM SOURCES Within the Philippines Outside the Philippines GROSS OR NET RATE Gross Income Taxation (GIT) or Net Income Taxation (NIT) Employee: NIT Businessman: NIT or GIT, if he availed of the OSD RC ✓ Self-employed: NIT or 8% tax on gross sales or receipts and nonoperating income in excess of ₱250,000 ✓ 0-35% NOTE: Gross sales or gross receipts and other non-operating income do not exceed the VAT Threshold (₱3M) NRC ✓ X NIT 0-35% OCW/Seaman ✓ X NIT 0-35% Employee: GIT RA ✓ X 0-35% Businessman: GIT NIT NRA-EBT ✓ X NRA-NEBT ✓ X Special Alien ✓ X GIT 25% Estate Under ✓ ✓ NIT 0-35% 0-35% GIT UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 25% 148 Taxation Law Judicial Settlement Irrevocable Trust ✓ ✓ NIT 0-35% Co-owners ✓ ✓ NIT 0-35% Coverage 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 2. A non-resident 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. the goods to Ms. C taxable in the Philippines? Explain. (2015 BAR) A: a. YES. The income of Ms. B from the sale of ready-to-wear goods to Ms. C is taxable. A non-resident citizen is taxable only on income derived from sources within the Philippines. In line with the source rule of income taxation, since the goods are produced and sold within the Philippines, Ms. B’s Philippine-sourced income is taxable in the Philippines. (Sec. 23, NIRC) b. YES. But only a proportionate part of the income. Gains, profits and income from the sale of personal property produced by the taxpayer without and sold within the Philippines, shall be treated as derived part. (Sec. 42(E), NIRC) TAXATION ON COMPENSATION INCOME An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC) Compensation income includes all remuneration for services rendered by an employee for his employer unless specifically excluded under the NIRC. (Sec. 2.78.1, RR No. 2-1998) The general rule is that resident citizens are taxable on income from all sources within and without the Philippines. Whereas, non-resident citizens, overseas contract workers, seamen who are members of the complement of a vessel engaged exclusively in international trade, resident aliens, and non-resident aliens are taxable only on income from sources within the Philippines. 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. (Sec. 2.78.1, RR No. 2-1998) Q: Ms. C, a resident citizen, bought ready-towear goods from Ms. B, a non-resident citizen. a. If the goods were produced from Ms. B’s factory in the Philippines, is Ms. B’s income from the sale to Ms. C taxable in the Philippines? Explain. b. If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. B’s income from the sale of The test is whether such income is received by virtue of an employer-employee relationship. Requisites for taxability of compensation income (SAR) 149 National Taxation 1. 2. 3. Personal services actually rendered Payment is for such services rendered Payment is reasonable employee, such as but not limited to: (HEVHIM-HEEL) 1. 2. 3. 4. Housing Expense account Vehicle of any kind Household personnel such as maid, driver and others 5. Interest on loans at less than market rate to the extent of the difference between the market rate and the actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations 7. Holiday and vacation expenses 8. Expenses for foreign travel 9. Educational assistance to the employee or his dependents 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows (Sec. 33(B), NIRC; Sec. 2.33(B), RR No. 3-1998) Payment for the services rendered by an independent contractor Payment for the services of an independent contractor is not classified as compensation income since there is no employer-employee relationship. The income of the independent contractor is derived from the conduct of his trade or business, which is considered as business income and not compensation income. Q: Give an instance that payment is made for services rendered yet it may not qualify as compensation income. A: The share of a partner in a general professional partnership. The general partner rendered services and the payment is in the form of a share in the profits is not within the meaning of compensation income because it is derived from the exercise of profession classified as professional income. Tax treatment for fringe benefits If the benefit is not tax-exempt and the recipient is: 1. A rank-and-file employee – the value of such fringe benefit shall be considered as part of the compensation income of such employee subject to tax payable by the employee. 2. A managerial or supervisory employee – the value shall not be included in the compensation income of such employee subject to tax. The fringe benefit tax (FBT) is payable by the employer on behalf of the employee. (Sec. 33, NIRC) Inclusions 1. 2. 3. Monetary compensation a. Regular salary/wage b. Separation pay/retirement benefit not otherwise exempt c. Bonuses, 13th month pay, and other benefits not exempt d. Director’s fees Non-monetary compensation Fringe benefit not subject to tax Exclusions 1. 2. 3. Difference among Managerial, Supervisory and Rank-and-File Employees Fringe benefit subject to tax De minimis benefit 13th month pay and other benefits and payments specifically excluded from taxable compensation income MANAGERIAL EMPLOYEES Employees who are given powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. SUPERVISORY EMPLOYEES Employees who effectively recommend such managerial actions, if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. The above exclusions are discussed in detail below 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 150 Taxation Law RANK-AND-FILE EMPLOYEES Employees who are holding neither managerial nor supervisory position. 1. Money, or is directly paid for by the employer – the value is the amount granted or paid. 2. 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). 3. 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. (RR 31998, Sec 2.33) Nature of a fringe benefit tax (FBT) FBT is a final withholding tax imposed on the grossed-up monetary value (GMV) of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees. (Sec. 2.33(A), RR No. 3-1998) 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 (Sec. 2.33, RR No. 3-1998) 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. Computing for the GMV Purpose behind Fringe Benefit Tax 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. 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) EMPLOYEE Citizen, RA, NRAEBT NRA-NEBT Special alien and any Filipino employees who are employed and occupying the same position as those occupied or held by the special alien employees. Employees in special economic zones (Clark Special Economic Zone and Subic Special Economic and Free Trade Zone) GROSSEDUP DIVISOR FBT RATE 65% 35% 75% 25% 75% 25% 75% 25% Q: Who is required to pay the Fringe Benefit Tax? (2003 BAR) A: It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the employer, such that, if the tax is not paid, the legal recourse of the BIR is to go after the employer. Any amount or value received by the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is legally required to pay (same as statutory incidence as distinguished from economic incidence) is that person who, in case of non-payment, can be legally demanded to pay the tax. Reasons why the Fringe Benefit Tax is collected from the employer Thus, if the fringe benefit is granted or furnished in: 151 National Taxation 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) from his gross income. The deduction for the employer is the grossed-up monetary value of the fringe benefit. (Sec. 32(B)(3), NIRC) Salaries and wages of managerial or supervisory employee, not subject to FBT Basic salary of managerial or supervisory employee is excluded and not subject to FBT because it is part of his compensation income. Fringe Benefit Tax as a deductible expense FBT is not an additional tax on the employer. Rather, the employer can claim the fringe benefit and the FBT as a deductible expense Compensation Income vs. Fringe Benefit COMPENSATION INCOME Part of the gross income of an employee. As part of gross income of an employee As to who should pay the tax NOTE: The person who is legally required to pay is that person who, in case of non-payment, can be legally demanded to pay the tax. As to taxpayers covered As to treatment withholding tax The employee is liable to pay the tax on his income earned. Managerial, supervisory, and rank-and-file employees Subject to creditable withholding tax – the employer withholds the tax upon the payment of the compensation income. Fringe benefits exempt from fringe benefits tax 1. Fringe benefits which are authorized and exempted from tax under the NIRC or special laws. (e.g., separation benefits which are given to employees who are involuntarily separated from work) 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans. 3. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES FRINGE BENEFIT GR: Not reported as part of the gross income of an employee. XPN: Fringe benefits given to a rank-and-file employee are included in his gross income. The employer pays the fringe benefit tax on behalf of the employee. Managerial and supervisory employees Subject to final withholding tax 4. De minimis benefits, whether given to rank and file employees or to supervisory or managerial employees. (Sec 32(3), NIRC) 5. Fringe benefits granted to employee as required by the nature of, or necessary to the trade, business or profession of the employer. 6. Fringe benefits granted for the convenience of the employer. (Employer’s Convenience Rule) (Sec. 32, Sec. 33(A), NIRC; Sec. 2.33 (C), RR No. 3-1998) 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. 152 Taxation Law Convenience of the Employer Rule travel of his employee for the purpose of attending business or conventions. An exemption from taxation is granted to benefits which are given to the employee for the exclusive benefit or convenience of the employer. 6. 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. 7. Cost of premiums borne by the employer for the group insurance of his employees. 8. 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. 9. Motor vehicles used for sales, freight, delivery service and other non-personal uses. (RR No. 3-1998) 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: 1. 2. It is furnished in the employer’s business premises, and Employee is required to accept such lodging as a condition of his employment (No. 2.2, RAMO No. 1-1987) Requirements for the application of the convenience of the employer rule in case of free meals Such shall not be considered as part of the employee’s gross income if: 1. Furnished to the employee during his work day; or 2. To have the employee available for work during his meal period. (No. 2.3, RAMO No. 1-1987) Q: X was hired by Y to watch over Y’s fishponds with a salary of ₱10,000. To enable him to perform his duties well, he was also provided a small hut, which he could use as his residence in the fishponds. Is the fair market value of the use of the small hut by X a “fringe benefit” that is subject to the 35% tax imposed by Sec. 33 of the NIRC? (2001 BAR) Benefits which are considered necessary to the business of the employer or are granted for the convenience of the employer 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. 2. 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. 3. 4. 5. 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. (Sec. 3, Sec. 33, NIRC) Housing privilege subject to FBT 1. Temporary housing for an employee who stays in a housing unit for 3 months or less. 2. The use of aircraft (including helicopters) owned and maintained by the employer. 3. Reasonable business expenses which are paid for by the employer for the foreign 153 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; National Taxation 4. 5. Employee purchases a residential property and transfers ownership to the employee; or The employee provides a monthly fixed amount for the employee to pay his landlord. Expenses treated as taxable fringe benefits 1. Expenses incurred by the employee but which are paid by his employer. 2. Expenses paid for by the employee but reimbursed by his employer. 3. 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. 4. 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. Housing privilege exempt from FBT 1. Housing privilege of military officials of the Armed Forces of the Philippines consisting of officials of the Philippine Army, Philippine Navy, and Philippine Air Force. (Sec. 2.33(D)(1)(f), NIRC); NOTE: Benefit to said officials shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can readily be on call to meet the exigencies of their military service. 2. Expenses treated as non-taxable fringe benefits A housing unit which is situated inside or adjacent to the premises of a business or factory. 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. 1. Expenditures incurred by the employee and paid by his employer but are duly receipted for and in the name of the employer, and such do not partake the nature of a personal expense attributable to the said employee. 2. 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. 3. Representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of their monthly compensation income. 4. Business expenses which are paid for by the employer for foreign travel of his employees in connection with business meetings or conventions. (RR 3-1998) Temporary housing for an employee who stays in a housing unit for three (3) months or less. (Sec. 2.33(D)(1)(g), RR No. 3-98) Q: As a way to augment the income of the employees of DEF Inc., a private corporation, the senior engineers were given housing inside the factory compound for the purpose of ensuring that there are available engineers within the premises every time there is a breakdown in the factory machineries and equipment. Is the cash equivalent value of the housing facilities received by the senior engineers subject to fringe benefit tax? (2019 BAR) A: NO, the cash equivalent value of the housing facilities received by the senior engineers is not subject to fringe benefits tax. The same is exempt from FBT since the housing is located within the Company’s premises and is generally for the convenience of the employer. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Motor vehicle subject to fringe benefit tax A motor vehicle shall be subjected to fringe benefits tax whenever the employer: 1. 154 Purchases vehicle in employee’s name, regardless of usage of vehicle; Taxation Law 2. 3. 4. 5. 6. Provides employee cash for vehicle purchase; Purchases car on installment in the name of the employee; Shoulders a portion of the purchase price; Owns and maintains a fleet of motor vehicle for the use of the business and employees; or Leases and maintains a fleet of motor vehicles for the use of the business and employees. XPN: A scholarship grant shall not be treated as taxable fringe benefit if: 1. Education/study is directly connected with employer’s trade, business or profession; 2. 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 3. The educational assistance extended to the dependents of the employee was provided through a competitive scheme. (RR 3-98, Sec. 2.33 (D) (9) (b)) 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. Life or health insurance GR: The cost of life or health insurance and other non-life insurance premiums borne by the employer are taxable fringe benefits. Interest on loan at less than market rate If the employer lends money to his employees free of interest or at a rate lower than 12%, such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of 12% shall be treated as fringe benefit. 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; and 2. The cost of premiums borne by the employer for the group of insurance of employees. (Sec. 2.33(D)(10), RR No. 3-1998) The rule shall apply to installment payments or loans with interest rate lower than 12% (Sec. 2.33(D)(5), RR No. 3-1998) Stock Options Expenses for foreign travel The difference between the fair market value and the exercise price at the time of exercise of stock options are subject to FBT. GR: Fixed and variable transportation, representation and other allowances are subject to FBT. NOTE: Employees receive stock options as part of their payment for the services they rendered to their employer, which entitles them to buy their employer’s shares of stock at an agreed price. XPN: They are subject to FBT if incurred or reasonably expected to be incurred by the employee in the performance of his duties, subject to the following conditions: 1. 2. De Minimis Benefits Ordinary and necessary in the pursuit of employer’s business and paid or incurred by employee; and Liquidated or substantiated by receipts or other adequate documentation. (Sec. 2.33(D)(7)(c), RR No. 3-1998) These are facilities or privileges furnished or offered by an employer to his employees (managerial, supervisory or rank and file) that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment and efficiency of his employees. Educational assistance to the employee or his dependents Q: Mapagbigay Corporation grants all its employees (rank-and-file, supervisors, and managers) 5% discount of the purchase price of its products. During an audit investigation, the BIR assessed the company GR: The cost of the educational assistance to the employee which is borne by the employer shall be treated as taxable fringe benefit. 155 National Taxation the corresponding tax on the amount equivalent to the courtesy discount received by all the employees, contending that the courtesy discount is considered as additional compensation for the rank-and-file employees and additional fringe benefit for the supervisors and managers. In its defense, the company argues that the discount given to the rank-and-file employees is a de minimis benefit and not subject to tax. As to its managerial employees, it contends that the discount is nothing more than a privilege and its availment is restricted. and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations Not exceeding ₱10,000 per annum LAUNDRY ALLOWANCE Not exceeding ₱300 per month 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 Not exceeding 25% of the basic minimum wage on a per region basis BENEFITS RECEIVED BY VIRTUE OF COLLECTIVE BARGAINING AGREEMENT (CBA) AND PRODUCTIVITY INCENTIVE SCHEME Not exceeding ₱10,000 per employee per annum from the two items combined (RR 12015) Is the BIR assessment correct? (2016 BAR) A: YES. Items, even though of small value, if not included in the list of de minimis benefits in accordance with regulations, may be taxable. Q: What are de minimis benefits and how are these taxed? Give three (3) examples of deminimis benefits. (2015 BAR) A: De minimis fringe benefits and their respective ceiling amounts As per RR 2-98 and 3-98, as amended by RR 52008, 5-2011, 5-2011, 8-2012, 1-2015, and 112018 de minimis benefits include (see table below): 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. (RR No. 5-2011) MONETIZED UNUSED VACATION LEAVE CREDITS OF EMPLOYEES Qualify: 1. Private employees: a. Vacation leave - exempt up to 10 days b. Sick leave – always taxable 2. Government employees: Vacation and sick leave are always tax exempt regardless of the number of days. MEDICAL CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES Not exceeding ₱1,500 per semester or ₱250 per month (RR No. 11-2018) RICE SUBSIDY ₱2,000 or one sack of 50-kg rice per month amounting to not more than ₱2,000 (RR No. 11-2018) UNIFORMS AND CLOTHING ALLOWANCES Not exceeding ₱6,000 per annum (RR No. 112018) ACTUAL MEDICAL ASSISTANCE e.g., medical allowance to cover medical UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES NOTE: Flowers, fruits, books, similar items given to employees under special circumstances (e.g., on account of illness, marriage, birth of baby, etc.) are now taxable. De minimis benefits in excess of respective ceilings The amount of benefits exceeding their respective ceilings shall be considered as part of “other benefits” under Sec. 32(B)(7)(e) of the NIRC. Under Sec. 32(B)(7)(e) of the NIRC, 13th month pay and other benefits are excluded from gross 156 Taxation Law income, provided that they do not exceed P90,000 any excess thereof is considered part of the compensation income of an individual, hence, subject to income tax. SICK LEAVE/ VACATION LEAVE/SERVICE INCENTIVE LEAVE (SIL) 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. (RR No. 6-1982) 13th Month Pay and other Benefits The 13th month pay and other benefits are excluded from gross income, provided that they do not exceed P90,000. Any excess thereof is considered part of the compensation income of an individual, hence, subject to income tax (Sec. 32(B)(7)(e), NIRC) Monetized value of unutilized vacation leave credits of private employees (RR No. 2-1998) 10 days or below – not taxable Any excess over 10 days is taxable The threshold amount of ₱90,000 shall apply to the 13th-month pay and other benefits which covers only the following: 1. 2. Sick leave credits of private employees Always taxable Vacation and sick leave credits of government employees - Always taxexempt 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. 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. 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 RR No. 3-2015) Examples of involuntary separation: 1. Death 2. Sickness 3. Disability 4. Reorganization 5. Company at the brink of bankruptcy SUMMARY OF TAX IMPLICATIONS OF EMPLOYEES SALARY Fixed salary – Taxable 2nd, 3rd, 4th ad infinitum separation pay is not taxable as long as the employee is not at fault. Other Benefits (ECOLA, 13th month pay, Christmas Bonus, Transportation/Representation allowances, tips, etc.) – the 1st P90,000 is exempted from income tax, any excess is taxable. 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), RR No. 21998) Transportation/Representation allowances If there is liquidation, not taxable. If there is no liquidation, taxable. Financial assistance with the condition that you have to leave the company – that amount is taxable. 157 National Taxation the option to avail of: a. Schedular tax rate (Sec. 24(A)(2)(a) of the NIRC); or b. 8% of the gross sales/gross receipts and other non-operating income in excess of ₱250,000 (No. 22, RMC No. 50-2018) BACKWAGES Taxable because it is income actually given by the employer. RETIREMENT BENEFITS Generally, retirement benefits are tax-exempt because they are mere provisions for the person’s impending state of unemployment. 2. The following retirement benefits are taxexempt: 1. 2. SSS or GSIS retirement pays; Optional Retirement Plan - Retirement pay due to old age under R.A. 7641, subject to the following conditions: a. The retirement program is approved by the BIR Commissioner; b. It must be a reasonable benefit plan, i.e., it must be fair and equitable for the benefit of all employees. c. The retiree should have been employed for at least 10 years in the said company; d. The retiree should have been 50 years old at the time of retirement; and e. It should have been availed of for the first time. Mixed Income Earners DBP Case – Tax free means, the company will shoulder the taxes NOTE: It does not include pre-terminated annuity and gratuity programs (they are taxable except if the employee is more than 60 years old). All income from compensation – schedular tax rate (Sec. 24(A)(2)(a), NIRC) 2. All income from business or practice of profession a. If gross sales and/or gross receipts and other non-operating income does not exceed ₱3M – Shall have the option to avail of: i. Schedular tax rate (Sec. 24(A)(2)(a), NIRC); or ii. 8% of the gross sales/gross receipts and other nonoperating income NOTE: ₱250,000 shall not be deducted. (No. 22, RMC No. 50-2018) b. If gross sales and/or gross receipts and other non-operating income exceeds ₱3M – schedular tax rate (Sec. 24(A)(2)(a), NIRC) Graduated rates applicable to the income of individuals INCOME BRACKET Not over ₱250,000 TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION Purely Self-Employed and/or Professionals Self-employed individuals and/or professionals with gross sales/gross receipts and other non-operating income NOT more than ₱3M – shall have UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 1. Schedular TERMINAL LEAVE PAYMENTS They are not taxable regardless of whether the recipient is a government or private employee. 1. Self-employed individuals and/or professionals with gross sales/gross receipts and other non-operating income more than ₱3M – Schedular tax rate (Sec. 24(A)(2)(a), NIRC) only 158 Over ₱250,00 0 but not over ₱400,00 0 Over ₱400,00 0 but not over ₱800,00 APPLICABLE TAX RATE Tax exempt 20% of the excess over ₱10,000 25% of ₱30,000 + the excess Taxation Law 0 Over ₱800,00 0 but not over ₱2,000,0 00 ₱130,00 0 Over ₱2,000,0 00 but not over ₱8,000,0 00 ₱490,00 0 Over ₱8,000,0 00 ₱2,410, 000 over ₱30,000 30% of the excess + over ₱800,00 0 32% of the excess + over ₱2,000, 000 35% of the excess + over ₱8,000, 000 4. 5. 6. threshold; Taxpayers who are subject to OPT, except those under Section 116; Partners of a GPP since their distributive share from the GPP is already net of costs and expenses; and Individuals enjoying income tax exemption such as those registered under the BMBEs, etc./, since taxpayers are not allowed to avail of double or multiple tax exemptions under different laws, unless specifically provided by law. (No. 16, RMC No. 50-2018) What are the salient features of both the graduated and the 8% income tax rates? (RMC 50-2018) Particulars Applicability (Sec. 24(A)(2), TRAIN) 8% option Graduated IT rates In general, applicable to all individuals Self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of two hundred fifty thousand pesos (₱250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code. (Sec. 24(A)(2)(b), NIRC) Base Amount of the 8% income tax rate The 8% income tax rate shall be based on the gross sales/receipts and other non-operating income, net of returns and cash discounts. However, if the individual earns purely from business or practice of profession, he/she is entitled to the reduction of ₱250,000 before computing for the 8% income tax. (No. 22, RMC No. 50-2018) Those not qualified to avail of the 8% Income Tax Rate: 1. 2. 3. Purely compensation income earner; VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income; Non-VAT taxpayers whose gross sales/receipts and other non-operating income exceeded the ₱3,000,000 VAT 159 Basis of IT Net taxable income Allowed deductions Allowable itemized deductions or Optional Standard Deduction (OSD) 8% IT rates May be availed only by qualified individuals engaged in the business or practice of profession whose gross sales/receip ts and other nonoperating income does now exceed ₱3,000,000 Gross sales/receip ts, and other nonoperating income Allowed reduction of only ₱250,000 from an individual whose income comes purely from business or practice of profession National Taxation Business tax Required financial statements Percentage Tax or VAT 1. If itemize d: 1. 2. If qualified, not subject to PT If qualified, no FS required The GPP then distributes the net income to the partners. The share of each partner, actually or constructively received, is taxable income of each partner. FS – if gross is less than ₱3M; The partners cannot claim further deductions from their distributive share. The partners cannot avail of the 8% income tax rate either because the distributive share from the GPP is already net of cost and expenses. But if the partner also derives income from other sources distinct from the share in the GPP, he or she can claim either itemized deductions or OSD from the other source of income. (Ingles, 2018) Audited FS – if gross is more than ₱3M 2. TAXATION OF PASSIVE INCOME If OSD, no FS require d Refer to previous Investment Income”. discussions on “Passive TAXATION OF CAPITAL GAINS TAXATION OF PARTNERS IN A GENERAL PROFESSIONAL PARTNERSHIP Refer to previous discussions on “Special rules pertaining to income or loss from dealings in property classified as capital asset”. A general professional partnership (GPP) shall not be subject to the income tax. Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities. Income from sale of shares of stock of a Philippine corporation Refer to previous discussions on “Special rules pertaining to income or loss from dealings in property classified as capital asset”. 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. Income from sale of real property situated in the Philippines Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. (Sec. 26, NIRC) Refer to previous discussions on “Special rules pertaining to income or loss from dealings in property classified as capital asset”. A GPP is not a taxable entity for income tax purposes because it only acts as a “pass-through entity where its income is ultimately passed to the partners. (Ingles, 2018) Income from sale, exchange, and other disposition of other capital assets Refer to previous discussions on “Special rules pertaining to income or loss from dealings in property classified as capital asset”. Special Rule on GPPs and the choice of deductions NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS In computing a GPP’s distributable taxable income, the GPP may avail of the following deductions: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Itemized expenses; or 40% optional standard deduction. Non-Resident Aliens Engaged in Trade or 160 Taxation Law 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 0-35%, subject to the rule of reciprocity. property shall be subject to capital gains tax. A non-resident 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 non-resident alien doing business in the Philippines. 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? Refer to previous discussions on “Special rules pertaining to income or loss from dealings in property classified as capital asset”. Q: Patrick is a successful businessman in the United States and he is a sole proprietor of a supermarket which has a gross sales of $10 million and an annual income of $3 million. He went to the Philippines on a visit and, in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship under RA 9225, establish residence in this country, and open a supermarket in Makati City, will the BIR tax him on the income he earns from his U.S. business? If you were Atty. Agaton, what advice will you give Patrick? (2016 BAR) A: X’s taxable income for the year 2009 is ₱300,000 computed as follows: Gross Compensation Income (₱25,000 x 12) Net Compensation Income Add: Net business income Taxable income PhP300,000 300,000 150,000 PhP450,000 Q: How much is his income tax payable? A: From the taxable income of ₱300,000, the income tax payable is ₱65,000. A: I will advise Patrick that if he reacquires his Philippine citizenship and establish residence in the Philippines, he shall be considered as a resident citizen subject to tax on incomes derived from sources within or without the Philippines. (Sec. 23(A), NIRC of 1997) Consequently, the BIR could now tax him on his income derived from sources without the Philippines which is the income he earns from his U.S. business. (Domondon) Over ₱250,000 but not over P500,000 ₱50,000+30% of the excess over ₱250,000 NOTE: The tax rate used was the effective tax rate in 2009. Q: Assume that X is a non-resident alien not engaged in trade or business. He earned gross income in the amount of ₱1.5 million from his one-night concert in the Philippines. How much will he pay for his income tax? NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS Non-Resident Aliens Not Engaged in Trade or Business are taxed on their income received from all sources within the Philippines as interest, cash, and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. A: X must pay ₱375,000 as income tax (₱1,500,000 x 25%). Since X is a non-resident alien not engaged in trade or business, his gross income within the Philippines is subject to 25% final tax and is not allowed any deductions. ALIENS EMPLOYED BY REGIONAL HEADQUARTERS, REGIONAL OPERATING HEADQUARTERS, OFFSHORE BANKING UNITS, AND PETROLEUM SERVICE CONTRACTORS Capital gains realized from the sale of shares of stock in any domestic corporation and real 161 National Taxation According to RR No. 8-2010 issued by the BIR, preferential income tax rate under subsection (C), (D) and (E) of Section 25 of the Tax Code shall no longer be applicable to special aliens (like those employed by regional headquarters, regional operating headquarters, offshore banking units, and petroleum service contractors), without prejudice to preferential tax rates under existing tax treaties. As such, these special aliens are now subject to regular income tax rate. (RR No. 8-2018) 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 102008 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 nonMWE during the year still qualifies for the exemption; c. Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an MWE who receives other benefits in excess of the statutory limit of P30,000 (Now at P90,000) is no longer entitled to the exemption provided by R.A. 9504. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX 1. 2. Minimum wage earner; and Exemptions granted under international agreements. Minimum wage earner A minimum wage earner is a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. (Sec. 22(HH), NIRC, as amended by R.A. 9504) A: a. The MWE is exempt for the entire taxable year 2008. As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer. Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year to be tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable income would then cease to be determined on a yearly basis. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. (Sec. 24(A)(2), NIRC, as amended by R.A. 9504) NOTE: The above ruling that the MWE exemption is available for the entire taxable year 2008 is premised on the fact of one's status as an MWE during the entire year of 2008. However, minimum wage earners receiving “other benefits” exceeding P82,000 limit shall be taxable on the excess benefits. Statutory Minimum Wage It refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). (Sec. 22(GG), NIRC, as amended by R.A. 9504) NOTE: Effective November 22, 2018 the daily minimum wage rate in NCR for non-agricultural sector is P537.00 (P512.00 Basic Wage with COLA + Basic Wage Increase). (National Wages and Productivity Commission Per Wage Order No. NCR-22Z) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 162 b. When the wages received exceed the minimum wage anytime during the taxable year, the employee loses the MWE qualification. Therefore, wages become taxable as the employee ceased to be an MWE. But the exemption of the employee from tax on the income previously earned as an MWE remains. The improvement of one's wage cannot justly operate to make the employee liable for tax on the income earned as an MWE. c. Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by Taxation Law 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. INCOME TAX ON CORPORATIONS A corporation for income tax purposes shall: 1. 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. 2. Exemptions granted under international agreements Foreign Only the following shall be exempt from Philippine income tax: 1. 2. 3. 4. 5. Not include: a. General (GPP) Professional en Partnerships 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. The treatment of bonuses and other benefits that an employee receives from the employer in excess of the P30,000 (now at 90,000) is taxable. The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by R.A. 9504. (Soriano v. Secretary of Finance, G.R. Nos. 184450, 184508, 184538 & 185234, January 24, 2017) Those employed by Embassies/Diplomatic Missions Include: a. Partnerships; b. Joint stock companies; c. Joint accounts (cuentas participacion); d. Associations; and e. Insurance companies. Diplomatic agents who are not nationals or permanent residents of the Philippines; Members of family of the diplomatic agent forming part of his/her household who are not Philippine nationals; Members of the administrative and technical staff of the mission together with members of their families forming part of their respective households who are not nationals or permanent residents of the Philippines; Members of the service staff of the mission who are not nationals or permanent residents of the Philippines; and Private servants of members of the mission who are not nationals or permanent residents of the Philippines. (RMC No. 312013 citing Vienna Convention on Dimplomatic Relations) b. A joint venture or consortium formed for purposes of undertaking construction projects c. A joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government (Sec. 22 (B), NIRC) Kinds of corporation under the NIRC 163 1. Domestic Corporations (DC) – a corporation created or organized in the Philippines or under its laws and is liable for its income from sources within and without (Sec. 22 (C), NIRC) 2. 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 3. 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 National Taxation 4. Special Types of Corporations – those corporations subject to different tax rates a. b. subdivision and construct residential houses thereon. They agreed that they would divide the lots between them. Special RFC i. Domestic depositary banks (foreign currency deposit units) ii. International carriers iii. Offshore banking units iv. Regional or Area Headquarters and Regional Operating Headquarters of multinational companies Does the JVA entered into by and between Weber and Prime create a separate taxable entity? (2007 BAR) Kinds of corporate taxpayers and their rates (2008 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. Special NRFC i. Non-resident cinematographic film owners, lessors or distributors ii. Non-resident owners or lessors of vessels chartered by Philippine nationals iii. Non-resident lessors of aircraft, machinery and other equipment 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), NIR) Q: Weber Realty Company, which owns a 3hectare land in Antipolo entered into a JOINT VENTURE AGREEMENT (JVA) with Prime Development Company for the development of said parcel of land. Weber Realty as the owner of the land contributed the land to the Joint Venture and Prime Development agreed to develop the same into a residential TAXABILITY OF INCOME DERIVED FROM SOURCES CORPORATE TAXPAYER IS A: Outside Within the the TAX BASE Philippines Philippines DOMESTIC CORPORATION Net taxable ✓ ✓ income RESIDENT FOREIGN CORPORATION Net taxable X ✓ income NON-RESIDENT FOREIGN CORPORATION X GROSS income ✓ SPECIAL DOMESTIC CORPORATION 1. Proprietary educational institutions XPN: Those whose gross income from unrelated sources exceeds 50% of their total gross income, ✓ UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES ✓ 164 Net taxable income RATE 30% 30% 30% 10% Taxation Law which shall be subject to 30% tax on the entire taxable income 2. Non-profit hospitals 3. Government-owned or controlled corporations including the PCSO ✓ ✓ Net taxable income 10% ✓ ✓ Net taxable income 30% P; Those exempt GOCCs (GSIS, SSS, PHIC, and the local water districts) SPECIAL RESIDENT FOREIGN CORPORATION 1. International carrier ✓ X Gross revenue 2 ½% of Philippine gross billings 2. Offshore banking units ✓ X interest income 10% final tax 3. Branch profit remittances 15% of the total profits applied or earmarked for remittance Tax-exempt 4. 5. 1. 2. 3. XPN: those registered with PEZA (they have their own tax rules as incentives) Regional or area headquarters ✓ X total profits applied or earmarked for remittance ✓ X N/A Regional headquarters ✓ X taxable income operating SPECIAL NON-RESIDENT FOREIGN CORPORATION Cinematographic film X gross income ✓ owner/lessor/distributor Lessor of machinery, gross rentals equipment, aircraft and X ✓ or fees others gross rentals, Lessor of vessels chartered X lease or ✓ by Philippine nationals charter fees DOMESTIC CORPORATIONS Outline of taxes imposed on DC 2. 25% of gross income 7 ½% of gross income 4 1/2% of gross income - 2% of gross income, if MCIT applies DC is a corporation created or organized in the Philippines or under its laws and is liable for its income from sources within and without. (Sec. 22 (C), NIRC) 1. 10% Normal corporate income tax (NCIT) - 30% of taxable income from all sources within and without the Philippines 3. Gross income tax (Optional corporate income tax) - 15% of gross income, if qualified 4. Improperly Accumulated Earnings Tax - 10% of improperly accumulated earnings 5. Final tax on passive income TAXATION – IN GENERAL Minimum corporate income tax (MCIT) NORMAL CORPORATE INCOME TAX (NCIT) 165 National Taxation OR REGULAR CORPORATE INCOME TAX (RCIT) Cost of Goods Sold (COGs) for a Service Concern (Cost of Services) An income tax of thirty percent (30%) shall be imposed upon the taxable income derived during the taxable year from all sources within and without the Philippines for DC. 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. Illustration: Gross Sales Less: Ph₱ xxx Sales Returns/ Allowances/ Discounts Cost of Goods Sold/Cost of Services Gross Income Less: Allowable Deductions Taxable Income Multiply: Tax Rate NCIT due MINIMUM CORPORATE INCOME TAX (MCIT) (xxx) Concept and rationale of MCIT (xxx) 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. xxx (xxx) xxx 30% Ph₱ xxx 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. 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. (RR No. 12-2007) 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) Cost of Goods Sold (COGs) in general It includes all business expenses directly incurred to produce the merchandise and bring them to their present location and use. Cost of Goods Sold (COGS) for Trading or Merchandising Q: What is the purpose of MCIT? (2001 BAR) This shall include the invoice cost of the goods sold, plus import duties and freight in transporting the goods to the place where they are actually sold, including insurance while the goods are in transit. Cost of Goods Sold Manufacturing Concern (COGS) for 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 Nature of MCIT The MCIT is equal to 2% of the gross income of the corporation at the end of the taxable quarter, except income exempt from income tax and income subject to final withholding tax. 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. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Being a minimum income tax, a corporation should pay the MCIT whenever its normal 166 Taxation Law 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. (Dimaamapo, 2015) Therefore, the taxable due for the taxable year will be NCIT (30% of taxable income) or MCIT (2% of gross income), whichever is HIGHER. corporations which are subject to the 30% 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. Illustration: 1. A domestic corporation in its 4th year of operations had a gross income of ₱300,000 and net taxable income of ₱100,000. How much is the income tax due for the year? MCIT (₱300,000 2%) NCIT (₱100,000 30%) Income tax due NCIT (whichever higher) 2. x ₱6,000 x ₱30,000 – is ₱30,000 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 BIR, regardless of whether the corporation is using the calendar year or fiscal year. A domestic corporation in its 4th year of operations had a gross income of ₱400,000 and net taxable income of ₱20,000. How much is the income tax due for the year? MCIT (₱400,000 x 2%) NCIT (₱20,000 x 30%) Income tax due – MCIT (whichever is higher) Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. (Sec. 27(E)(1), NIRC; RR No. 9-98; Dimaampao,. 2015) ; (Manila Banking Corporation v. CIR, G.R. No. 168118) ₱8,000 ₱6,000 ₱8,000 Q: What is the gross income for purposes of computing MCIT? A: 1. As to sale of goods – it shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. 2. As to sale of services – it shall mean gross receipts less sales returns, allowances, discounts and cost of services. 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: 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. Imposition of MCIT 1. 2. 3. If taxable income is zero; If taxable income is negative; or If MCIT is greater than the NCIT due (Sec. 27(E), NIRC) 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 Coverage of the MCIT (2001 BAR) The MCIT covers domestic and resident foreign 167 National Taxation 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. (RR 12-2007) A: a. As Ms. J’s supervisor, I will advise that KKK Corp. should prepare payment for the regular corporate income tax and not the minimum corporate income tax (MCIT) Under the NIRC, MCIT is only applicable beginning the 4th taxable year following the commencement of business operation. (Sec. 27(E)(1), NIRC) Q: Can MCIT be allowed as a deduction from gross income? A: No. Since MCIT is an estimate of the normal income tax, it cannot be claimed as a deduction. b. Q: CREBA assails the constitutionality of MCIT on the contention that it violates due process. Is the imposition of MCIT unconstitutional? A: No, the imposition of MCIT is not violative of due process for the following reasons: 1. 2. 3. MCIT is imposed on gross income and not on capital. Thus, it is not arbitrary or confiscatory. It is not an additional tax imposition but is imposed in lieu of normal net income tax and only if said tax is suspiciously low. There is no legal objection to a broader tax base or taxable income resulting from the elimination of all deductible items and, at the same time, reduction of the applicable tax rate. In as much as deductions are a matter of legislative grace, Congress has the power to condition, limit or deny deductions from gross 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. The distinctions between regular corporate income tax and the minimum corporate income tax are the following: i. As to taxpayer: Regular corporate income tax applies to all corporate taxpayers while minimum corporate income tax applies to domestic corporations and resident foreign corporations. ii. As to tax rate: Regular corporate income tax is 30% while minimum corporate income tax is 2%. iii. As to tax base: Regular corporate income tax is based on the net taxable income while minimum corporate income tax is based on gross income. iv. As to period of applicability: Regular corporate income tax is applicable once the corporation commenced its business operation, while minimum corporate income tax is applicable beginning on the 4th taxable year following the commencement of business operations. v. As to imposition: The minimum corporate income tax is imposed whenever it is greater than the regular corporate income tax o the corporation. (Sec. 27 (A) and (E), NIRC; RR No. 998) Carry-forward of the excess of MCIT 1. 2. 3. a. As Ms. J's supervisor, what will be your advice? b. What are the distinctions between regular corporate income tax and minimum corporate income tax? (2015 BAR) 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. Illustration: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 168 Taxation Law A domestic corporation had the following data on computations of the NCIT and MCIT for five years: MCIT NCIT Excess: YEAR 4 80k 20k (60k) YEAR 5 50k 30k (20k) NCIT higher YEAR 6 30k 40k YEAR 7 40k 20k (20k) 40k 3. YEAR 8 35k 70k MCIT Limitations 1. 70k 2. Less: Excess of MCIT From Year 4 From Year 5 From Year 7 TAX DUE: (40k) (20k) (20k) 80k 50k 0 40k 30k NOTE: While only 40k out of ₱60k excess MCIT in Year 4 was used in Year 6, the unused ₱20k cannot be used because Year 8 was beyond three years from Year 4. Suspension of the imposition of MCIT Since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance, upon recommendation of the BIR, to suspend the imposition of MCIT if a corporation suffers losses due to any of the following: 1. 2. Legitimate Business Reverses – include substantial losses due to fire, theft or embezzlement or for other economic reason, as determined by the Secretary of Finance (Sec. 27 (E)(3), NIRC; RR No. 9-98, Sec. 2.27 (E) (4)(b,c,d)) Prolonged Labor Dispute – losses arising from a strike staged by the employees which lasted for more than 6 months within a taxable period and which has caused the temporary shutdown 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; or 169 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. a. Domestic proprietary educational institutions subject to 10% tax. b. Domestic non-profit hospital subject to 10% tax. c. Domestic depository banks under the expanded foreign currency deposit system otherwise known as FCDUs. d. Resident foreign international carrier subject to tax at 2 ½% of their Gross Philippines Billings. e. Resident foreign offshore banking units. f. Resident foreign regional operating headquarters. g. 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 (RR 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. 3. 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. 4. For resident foreign corporation, MCIT is applicable only to gross income from sources within the Philippines. 5. When, by authority of the Secretary of Finance, the imposition of the MCIT is suspended upon submission of proof by the applicant corporation that the corporation sustained substantial losses: a. on account of a prolonged labor dispute; b. because of “force majeure”; or National Taxation c. because of reverses; legitimate business Q: What consists of “Improperly Accumulated Earnings”? Applicability of MCIT where a corporation is governed party under NCIT and partly under a special income tax system 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. (RR 22001, Sec. 2) 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. 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 Taxable Income Multiply: For example, if a BOI-registered enterprise has a "registered" and an "unregistered" activity, the MCIT shall apply to the unregistered activity. (RR No. 9-1998) TAXATION OF PASSIVE INCOME Refer to previous discussions on “Passive Income” and “Dealings in Property.” Refer to previous discussions on “Passive Investment Income” and “Special rules pertaining to income or loss from dealings in property classified as capital asset”. TAXATION OF CAPITAL GAINS Refer to previous discussions on “Passive Investment Income” and “Special rules pertaining to income or loss from dealings in property classified as capital asset.” IMPROPERLY ACCUMULATED EARNINGS TAX xxx xxx xxx xxx (xxx) (xxx) (xxx) xxx 10% Improperly Accumulated Earnings Tax (IAET) Domestic corporations as defined under the Tax Code and which are classified as closely-held corporations are subject to 10% improperly accumulated earnings tax on their improperly accumulated earnings. (Sec. 29(A), NIRC) Ph₱ xxx 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., 2015) Closely-held Corporations These are corporations, at least 50% in value of the outstanding capital stock of which or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or not more than 20 individuals. (Sec. 4, RR No. 2-2001) NOTE: Corporations outside the above definition are considered publicly held corporations. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Ph₱ xxx 170 Taxation Law 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) 1. Allowance for the increase in accumulation of earnings up to 100% of the paid-up capital. The basis of the 100% threshold of retention (considered within the reasonable needs of the business) shall be the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock. Any excess capital over and above the par (APIC/Premium) shall be excluded. (RMC No. 35-2011) Q: How can the “reasonable needs” of the business be determined in order to justify an accumulation of earnings? (2010 BAR) A: 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) 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) 2. Earnings reserved for definite corporate expansion approved by the Board of Directors or equivalent body. 3. Reserved for building, plant or equipment acquisition as approved by the Board of Directors or equivalent body. 4. Reserved for compliance with any loan covenant or pre-existing obligation 5. Earnings required by law or applicable regulations to be retained. 6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines. (Sec. 3, RR No. 2-2001) Prima facie instances of accumulation of profits beyond the reasonable needs of a business 1. 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. (Sec. 5, RR No. 2-2001) 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 paid-up capital, not otherwise intended for the reasonable needs of the business .(Sec. 7, RR No. 2-2001) Prima facie evidence to show purpose of accumulation is Tax evasion or Tax avoidance Q: What constitute accumulation of earnings for the reasonable needs of the business? The fact that – A: 1. 171 Any corporation is a mere: National Taxation a. b. 2. Holding company – one having practically no activities except holding property and collecting income therefrom or investing therein; or 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. 10% Preferential Rate Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals as charitable institutions under Section 30(E) and (G) The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1) The earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business (Sec. 7, RR No. 2-2001) The only qualifications for hospitals are that they must be (1) proprietary; and (2) nonprofit. “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) IAET not applicable to the following: 1. 2. 3. 4. 5. 6. 7. 8. Publicly-held corporations (Sec. 29(B)(2), NIRC) Banks and other non-bank financial intermediaries Insurance companies Publicly-held corporations Taxable partnerships General professional partnerships Non-taxable joint ventures Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local (Sec. 4, RR No. 2-2001) Predominance test If the gross income from unrelated trade/business/other activity exceeds 50% of the total gross income from all sources, the entire taxable income of the proprietary educational institution shall be subject to the regular corporate tax rate of 30%. Unrelated trade/business/activity proprietary educational institution PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS a The trade, business or other activity of a proprietary educational institution is unrelated when the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function. It is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd) or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. They are not tax-exempt but are rather taxed at a preferential rate of 10% on their taxable income, except on certain passive incomes which are subject to final tax. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES of NOTE: Related activities include auxiliary activities such as school-owned canteen, cafeteria, dormitory and bookstore within the school premises. (BIR Ruling 237-87, December 16, 1987) Difference in the tax treatment between a 172 Taxation Law proprietary educational institution and a non-stock non-profit educational institution business or other activity exceeds 50% of total gross income from all sources. 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%. (Sec. 27 (B), NIRC) Q: De La Salle University leases out a portion of its property to private concessionaires, i.e., commercial canteens and bookstores. The lease payments were factually proven to be used for educational purposes. 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: 3. a. Is the land owned by De La Salle University subject to real property tax? b. Are the lease payments received by De La Salle University subject to income tax? c. Are the lease payments received by De La Salle University subject to VAT? (2016 BAR) It is a nonstock corporation; It is operated exclusively for charitable purposes; and No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person. A: a. TAX ON PROPRIETARY NON-PROFIT EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS 30% Private, nonprofit hospitals and proprietary educational institutions whose gross income from unrelated trade, 10% Private, nonprofit hospitals and proprietary educational institutions whose gross income from unrelated trade, 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. (Sec. 27(B), NIRC) A non-stock non-profit educational institution is exempt from tax on its revenues and assets actually, directly and exclusively used for educational purposes. (Sec. 30, NIRC) (Sec. 4(3), Art. XIV, 1987 Constitution) 1. 2. 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 YES. The leased portion of the building may be subject to real property tax. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption granted under the Constitution. There is no exemption because the asset is not used actually, directly and exclusively for educational purposes. The commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose of a university, which is to educate its students. (Abra Valley College, Inc. v. Aquino, 245 Phil. 83; 162 SCRA 106 (1988), cited in CIR vs. De La Salle University, Inc., G.R. No. 196596, November 9, 2016) b. &c. 173 National Taxation NO. If the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly and exclusively for educational purposes the revenues or income sought to be exempted. Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are incomes derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? (2000 BAR) 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. In sum, the crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and treated separately. (CIR vs. De La Salle University, Inc., G.R. No. 196596, November 9, 2016) 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. DONOR’S TAX, ESTATE TAX, VAT AND OTHER TAXES 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) 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 exemption. However, since Sec. 101(a)(3) of NIRC under Donor’s tax declared its exemption, then these donations are tax exempt. (Dimaampao, 2015) TAX ON PROPRIETARY NON-PROFIT EDUCATIONAL INSTITUTIONS AND PROPRIETARY NON-PROFIT HOSPITALS 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. Section 27(b) of the NIRC did not remove the exemption from income tax of proprietary nonprofit hospitals as charitable institutions. The provision merely introduced the preferential income tax rate of 10% for proprietary nonprofit educational institutions and proprietary non-profit hospitals. (CIR v. St. Luke’s Medical Center, G.R. No. 195909, September 26, 2012) Pursuant to Section 109(H), private educational institutions shall be exempt from VAT, provided they are duly accredited by DepEd, CHED or TESDA. However, this does not extend to other activities involving the sale of goods and services. Proprietary – private 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. (Dimaampao, 2015) Non-Profit – no net income or asset accrues to or benefits any member of specific person, with all the net income or asset devoted to the institution’s purposes and its activities conducted not for profit. Charitable institutions – one providing for free goods and services to the public which would Q: Under Art. XIV, Sec. 4(3) of the 1987 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 174 Taxation Law otherwise fall government. on the shoulders of the 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. Q: UP Los Banos, a government education institution, requested for a confirmation for its tax exemption under Section 30 (l) of the Tax Code. Is UP Los Banos exempt from income tax? NOTE: PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from the payment of the income tax. PAGCOR’s income from gaming operations is subject only to 5% franchise tax under P.D. No. 1869, while its income from other related services is subject to corporate income tax pursuant to PD No. 1869 in relation to R.A. No. 9337. SC clarified that RA No. 9337 did not repeal the tax privilege granted to PAGCOR under PD No. 1869, with respect to its income from gaming operations. What RA No. 9337 withdrew was PAGCOR's exemption from corporate income tax on its income derived from other related services, previously granted under Section 27(C) of R.A. No. 8424. (PAGCOR v. BIR, G.R. No. 215427, December 10, 2014) A: YES. Pursuant to Section 30 (l) of the Tax Code, in relation to Article XIV of the 1987 Philippine Constitution, Government education institutions are exempt from tax on income used actually, directly and exclusively for educational purposes. GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES, INSTRUMENTALITIES GOCC refers to any agency: 1. organized as a stock or non-stock corporation, 2. vested with functions relating to public needs whether governmental or proprietary in nature, and 3. 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 fiftyone (51) percent of its capital stock FOREIGN CURRENCY DEPOSIT UNITS Income derived by a foreign currency deposit unit 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 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. NOTE: Government instrumentality may include a GOCC and there may be “instrumentality” that does not qualify as GOCC. Taxability of GOCCs GR: All corporations owned or controlled by the government are taxed in the same manner that domestic private corporations are taxed. XPNs: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Local Water District (LWD) (R.A. 10026 amending Section 27(c) of NIRC) RESIDENT FOREIGN CORPORATIONS RFC is a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines. (Sec. 28 (A)(1), NIRC) NOTE: The general rule is that RFC shall be liable for a 30% income tax on their income from within the Philippines, except for: 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 1. 175 Resident foreign corporations that are international carriers which shall be National Taxation 2. 3. 4. taxed at 2 ½% on their Gross Philippine Billings. (Sec 28(A)(3), NIRC) Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with non-residents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income. Provided, however, that any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of ten percent. (10%). (Sec. 28 (A)(4), NIRC) Regional or area headquarters (Sec. 22(DD), NIRC) shall not be subject to income tax. (Sec. 28(A)(6), NIRC) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. (Sec. 28(A)(6), NIRC) during the taxable year from all sources within the Philippines for RFC. Illustration: Gross Sales Less: Sales Returns/ Allowances/ Discounts Cost of Goods Sold/Cost of Services Gross Income Less: Allowable Deductions Taxable Income Multiply: Tax Rate NCIT/RCIT due 2. 3. 4. 5. 6. 7. 8. 9. (xxx) xxx (xxx) xxx 30% ₱ xxx 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. (RR No. 12-2007) COGS Refer to previous discussion on “Domestic Corporation – NCIT or RCIT”. MINIMUM CORPORATE INCOME TAX (MCIT) Refer to previous discussions on “MCIT” under Domestic Corporations. NCIT – 30% of taxable income from sources within the Philippines (Sec. 28 (A), NIRC) 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 BRANCH PROFITS REMITTANCE TAX (BPRT) Any profit remitted by branch office of a multinational corporation to its head office is subject to 15% final tax based on total profits applied or earmarked for remittance without deduction for the tax component. A branch is classified as a resident foreign corporation. As such, it is subject to income tax at the rate of 30% on its net income derived within the Philippines. Such income items include interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received during each taxable year from all sources within the Philippines. TAXATION – IN GENERAL REGULAR CORPORATE INCOME TAX (RCIT) An income tax of thirty percent (30%) shall be imposed upon the taxable income derived UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES (xxx) Gross Income Outline of taxes imposed on RFC 1. ₱ xxx 176 Taxation Law 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) NIRC. 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. TAXATION OF PASSIVE INCOME Refer to previous discussions on “Passive Investment Income” and “Special rules pertaining to income or loss from dealings in property classified as capital asset”. Reciprocity requires that Philippine carriers operating in the Home Country of an international carrier are actually enjoying the income tax exemption. (RR No. 15-2013) TAXATION OF CAPITAL GAINS Refer to previous discussions on “Passive Investment Income” and “Special rules pertaining to income or loss from dealings in property classified as capital asset.” Q: What is Gross Philippine Billings? (2005 BAR) RESIDENT FOREIGN CORPORATIONS SUBJECT TO PREFERENTIAL TAX RATES 1. 2. 3. A: It refers to the amount of gross revenue realized from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. (Dimampao, 2015) International carries Foreign currency deposit units and offshore banking units Regional or area headquarters and regional operating headquarters Off-line international carrier is subject to corporate income tax These would be discussed in detail below. International carriers 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 No. 15-2002) An international carrier refers to foreign airline corporation doing business in the Philippines which has landing rights in any Philippine port to perform international air transportation services or flight operations anywhere in the world. They shall be taxed at 2.5% on their Gross Philippine Billings (GPB) unless it is subject to preferential rate or exempt from tax on the basis of applicable tax treaty/international agreement to which the Philippines is a signatory or on the basis of reciprocity, such that an international carrier, whose home country grants income tax exemption to Philippine carries, shall likewise be exempt from income tax imposed under the 177 National Taxation 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. associated with or caused by the undue delay in the loading and/or discharge of the latter's shipments from the containers. Assuming that demurrage and detention fees may be treated as income, these fees are taxable only if they form part of Gross Philippine Billings (GPB) and taxed at the preferential rate of 2.5%. Are the contentions of the Petitioners correct? 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. A: NO. RR 15-2013 merely sums up the rules by which international carriers may avail of preferential rates or exemption from income tax on their gross revenues derived from the carriage of persons and their excess baggage based on the principle of reciprocity or an applicable tax treaty or international agreement to which the Philippines is a signatory. Interpretative regulations are intended to interpret, clarify or explain existing statutory regulations under which the administrative body operates. Their purpose or objective is merely to construe the statute being administered and purport to do no more than interpret the statute. (Association of International Shipping Lines, Inc., APL Co., Pte Ltd., and Maersk-Filipinas, Inc. Petitioner v. Secretary of Finance and Commissioner of Internal Revenue. Respondent., G.R. No. 222239., January 15, 2020, as penned by J. Lazaro – Javier) To reiterate, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 30% of such income. (South African Airways v. Commissioner of Internal Revenue, February 16, 2010; Air Canada v. CIR, G.R. No. 169507, January 11, 2016) NOTE: An offline carrier is "any foreign air carrier not certificated by the (Civil Aeronautics) Board, but who maintains office or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation. (Civil Aeronautics Board Economic Regulation No. 4, chap. I, sec. 2(b) cited in Air Canada v. CIR, G.R. No. 169507, January 11, 2016) Foreign currency deposit units and offshore banking units OBU is a branch, subsidiary or affiliate or a foreign banking corporation located in an Offshore Financial Center which is duly authorized by the BSP to transact offshore banking business in the Philippines. OBUs are allowed to provide all traditional banking services to non-residents in any currency other than Philippine national currency. OBUs are forbidden to make any transactions in Philippine Peso. Banking transactions to residents are omitted and restricted. (Tabag, 2015) Q: Petitioners in assailing the validity of RR 15-2013 this RR subjects demurrage and detention fees collected by international shipping carriers to regular corporate income tax rate. They contend that the RR unduly widened the scope of RA 10378 by imposing additional taxes on international shipping carriers not authorized or provided by law. BThey state that demurrage and detentions fees are not income but penalties imposed by the carrier on the charterer, shipper, consignee, or receiver, to allow the carrier to recover losses or expenses UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Income Exempt from Tax Income derived from 1. Non-residents 2. Foreign currency transactions with local commercial banks, 3. Foreign currency transactions with branches of foreign banks authorized by the BSP 178 Taxation Law 4. Foreign currency transactions with OBUs in the Philippines in the Asia-Pacific region and other foreign markets. (Tabag, 2015) Income subject to 10% Final Tax NON-RESIDENT FOREIGN CORPORATIONS (NRFC) Interest income derived from foreign currency loans granted to residents other than OBUs or local commercial banks. (Ibid) Resident Depository Currency Deposit Units) Banks Taxation of NRFC in general A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% of the gross income during such taxable year from all sources within the Philippines except capital gains from sale of shares of stock not traded in the stock exchange. (Sec. 28(B)(1), NIRC) (Foreign 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 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. NRFCs subject to preferential tax rates 1. 2. 3. Regional or area headquarters and regional operating headquarters 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 CORPORATIONS EXEMPT FROM INCOME TAX 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: The following organizations shall not be taxed in respect to income received by them as such: (Sec. 30, NIRC) 1. 2. 3. General administration and planning; Business planning and coordination; Sourcing/procurement of raw materials and components; 4. Corporate finance advisory services; 5. Marketing control and sales promotion; 6. Training and personnel management; 7. Logistics services; 8. Research and development services, and product development; 9. Technical support and maintenance; 10. Data processing and communication; and 11. Business development. 1. RHQ is a tax-exempt entity. It is a branch established in the Philippines and which headquarters do not earn or derived income from the Philippines and which act as supervisory, communications and coordinating center for its affiliates, subsidiaries, or branches 179 Labor, agricultural or horticultural organization, not organized principally for profit a. Provincial fairs and like associations of a quasi-public character designed to encourage development of better agricultural and horticultural products through a system of awards, prizes and premiums, and whose income derived from gate receipts, entry fees, donations, etc. is used exclusively to meet necessary expenses of upkeep and operation are thus exempt. b. The holding of periodical race meets by associations, the profits from which inure to the benefit of their stockholder are not tax exempt. Similarly, corporations engaged in growing agricultural or horticultural products or raising livestock or similar products for National Taxation profits are subject to tax (RR No. 2, Sec. 25) 2. 6. Business, Chamber of Commerce, or Board of Trade, provided that: a. It is an association of persons having some common business interest; b. Its activities are limited to work for such common interests; c. Not engaged in a regular business for profit; and d. No part of the net income inures to the benefit of any private stockholder or individual. 7. Civic league, provided that: a. It is not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind; b. Sworn affidavit filed with the BIR showing the following: i. Character of the league or organization ii. Purpose for which it was organized iii. Actual activities iv. Sources of income and disposition thereof, and v. All facts relating to the operation of the organization which affects it right to exemption. vi. The copy of articles of incorporation, by laws and financial statements should be attached to the sworn affidavit. 8. Government Educational Institutions 9. Mutual Fire Insurance Companies and like Organizations 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; and c. It is operated for mutual purposes and without profit. NOTE: If the deposits are made compulsory under contract between the bank and the depositors and is operated for speculation rather for savings, the bank is not qualified as a mutual savings bank. 3. A 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; and 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; and 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; and 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; and 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, NOTE: 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) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 180 Taxation Law 2012) 1. Cooperatives under R.A. 6938, Cooperative Code of the Philippines 10. Farmers, Fruit Growers, or like Associations NOTE: Since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. Moreover, the amendment in Article 61 of R.A. 9520, specifically providing that members of cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section 24 (B)(1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out the legislative intent. (Dumaguete Cathedral Cooperative v. CIR, G.R. No. 182722, January 22, 2010) Requisites for exemption: a. Formed and organized as sales agent for the purpose of marketing the product of its members; b. No net income to the members; and c. Proceeds of the sale shall be turned over to them less necessary selling expenses on the basis of the quantity of goods produced by them. The income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under the NIRC. The foregoing exempt corporations have common requisites for exemption: (PrInSE) 1. 2. 3. 4. the 2. 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 Not organized and operated principally for profit; No part of the net income inures to the benefit of any member or individual; No capital is represented by shares of stock; and Educational or instructive in character. TAX ON OTHER BUSINESS ENTITIES; GENERAL PARTNERSHIPS, GENERAL PROFESSIONAL PARTNERSHIPS, COOWNERSHIPS, JOINT VENTURES, AND CONSORTIA 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. Tax on General Partnerships Classifications of partnerships for tax purposes: 1. General professional partnerships 2. Business partnership NOTE: If religious, charitable or social welfare corporations derive income from their properties 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) 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) 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. A: GENERAL PROFESSIONAL PARTNERSHIP (GPP) Formed by persons for the sole purpose of exercising their common profession, no part of income of Other corporations exempt from income tax under Special Laws 181 BUSINESS PARTNERSHIP/ GENERAL PARTNERSHIP Formed by persons for the sole purpose of engaging in any trade or business. National Taxation which is derived from engaging in any trade or business. NOT a taxable entity. The distributive share of the partners in the net income is reportable and taxable as part of the partner’s gross income subject to the scheduled rates. NO need to file an income tax return but an information return. NOT subject to double taxation being taxed only once. 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. Considered as a corporation hence a taxable entity and its income is taxable as such. The share of an individual in the distributable net income after tax of a general partnership is subject to a final tax. NOTE: In a business partnership, there is no constructive receipt of distributive share in the net income. Q: Do co-heirs who own inherited properties which produce income automatically be considered as partners of an unregistered corporation hence subject to income tax? A: NO, for the following reasons: 1. 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) 2. 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.) 3. 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) Must file an income tax return. Taxed once on its income and again when the share in the profits of the partners is distributed; then taxed as dividends. Registration of partnership 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. 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. NOTE: The partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income. Tax on General Professional Partnerships Distributive share of a partner in the net income of a business partnership GPP not subject to income tax It is equal to each partner’s distributive share of UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES GPPs are not subject to income tax but are 182 Taxation Law 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. included in the computation of ABC Law Firm’s gross income? Explain. b. What are the items in the abovementioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain. c. If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned? (2014 BAR) GPP is only required to file a return for its income, except income exempt under Sec. 32(B) of the NIRC, setting forth the items of gross income and of deductions allowed, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners. (Sec. 55, NIRC) Partners shall nonetheless be liable for income tax in their separate and individual capacities. A: 1. Computation of net income For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. (Sec. 26, NIRC) Each partner shall report his distributive share in the net income of the partnership as gross income in his separate return, whether actually or constructively received. Q: A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: Earnings: 1. Professional/legal fees from various clients; 2. Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm; and 3. Gains derived from sale of excess computers and laptops. 2. 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) 3. The net income having been earned by the law firm which is formed and qualifies as a Payments: 1. Salaries of office staff; 2. Rentals for office space; and 3. Representation expenses incurred in meetings with clients. a. What are the items in the abovementioned earnings which should be 183 The three (3) items of earnings should be included in the computation of ABC Law Firm’s gross income. The professional or legal fees from various clients are 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) National Taxation 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) the co-owners are limited to the preservation of the property and the collection of income. In such case, the co-owners shall be taxed individually on their distributive share in the income of the co-ownership. Co-owners investing the income in a business for profit If the co-owners invest the income in a business for profit, they would constitute themselves into a partnership and such shall be taxable as a corporation. 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? 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: 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) A joint purchase of land, by two, does not constitute a co-partnership in respect thereto, nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. Where the transactions are isolated, in the absence of other circumstances showing a contrary intention, the case can only give rise to a coownership. (Pascual v. CIR, 166 SCRA 560) Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered partnership or corporation subject to income tax. 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? Rationale: Sharing of gross returns does not by itself establish a partnership; there must be an unmistakable intention to form a partnership or joint venture. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had not been put by their forbears. (Obillos Jr. v. CIR, 139 SCRA 436) A: NONE. The sharing of returns does not in itself establish a partnership whether or not the sharing therein has a joint or common right or Co-ownership is not taxable if the activities of UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 184 Taxation Law interest in the property. (NCC, Art. 1769) There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same few years thereafter did not make them partners. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present. (Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988) Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); 3. The local contractors are engaged in construction business; and 4. The joint venture itself must likewise be duly licensed as such by the Philippines Contractors Accreditation Board (PCAB) of the Department of trade Industry (DTI). Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if the member foreign contractor is: 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? 1. Covered by a special license as contractor by the PCAB of the DTI; and 2. The construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign financed or internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign or international financing institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise known as Contractor’s License Law. 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 coownership, which was in the nature of things a temporary state. (Obillos, Jr. v. CIR, G.R. No. L68118, October 29, 1985) 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. Tax on Joint Ventures and Consortia 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) 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) 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: Tax treatment of the co-venturer’s share in the joint venture profit CORPORATE CO-VENTURER 1. The joint venture was formed for the purpose of undertaking a construction project; 2. Should involve joining/pooling of resources by licensed local contracts; that is, licensed as general contactor the Philippine Taxable Joint Venture 185 The respective share in the joint venture profit is considered as INDIVIDUAL COVENTURER The respective share in the joint venture profit is considered as National Taxation CORPORATE CO-VENTURER dividend income received by a DC from a DC. Hence, it shall be treated as intercorporate dividend which is tax exempt. Nontaxable Joint Venture NOTE: Taxexempt if received by a domestic corporation or a resident foreign corporation from a domestic joint venture. 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%. 4. INDIVIDUAL COVENTURER dividends income received by an individual taxpayer from a DC. Consequently, it shall be subject to 10% final withholding tax. The following are also required to file ITR: 1. 2. 3. NOTE: This applies if the venturer is a RC/ NRC/ RA. A citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippines, regardless of the amount of gross income; An individual deriving compensation concurrently from two or more employers at any time during the taxable year; and An individual whose pure compensation income derived from sources within the Philippines exceeds Two Hundred Fifty thousand pesos (P250,000). (RMC 50-2018) XPNS: The following individuals shall not be required to file an income tax return: 1. 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. 2. 3. 4. An individual whose gross income does not exceed his total personal and additional exemptions for dependents; Individual taxpayer receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by said employer (Substituted Filing); An individual whose sole income has been subjected to final withholding tax; and A minimum wage earner or an individual who is exempt from income tax. (Sec. 51(A)(2), NIRC) NOTE: Individuals not required to file an income tax return may nevertheless be required to file an information return. (Sec. 51(A)(3), NIRC) (Tabag, 2015) FILING OF RETURNS AND PAYMENT Q: Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual compensation of ₱10M, while Mr. S is a security guard in the same company earning an annual compensation of ₱200,000. Both of them source their income only from their employment with MNO Company. (2019 Bar) a. At the end of the year, is Mr. C personally required to file an annual income tax return? b. How about Mr. S? Is he personally required to file an annual income tax return? INDIVIDUAL RETURN Who are required to file; exceptions 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Every non-resident alien engaged in trade or business or in the exercise of profession in the Philippines. (Sec. 51(A)(1), NIRC) 186 Taxation Law A: 4. a. NO, individuals receiving purely compensation income from a single employer, which has been correctly withheld are no longer required to file their annual ITR. b. NO, individuals receiving purely compensation income from a single employer, which has been correctly withheld are no longer required to file their annual ITR. Substituted filing Substituted filing applies only if all of the following requirements are present: 1. Special Rules 1. 2. 3. ITR of married individuals Income of unmarried minors/children Filing a return for a disabled taxpayer 2. 3. These are discussed in detail below. ITR of married individuals 4. Married individuals, whether citizens, resident or non-resident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses. 5. 6. The employee received purely compensation income (regardless of amount) during the taxable year. The employee received the income from only one employer in the Philippines during the taxable year. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer. The employee’s spouse also complies with all 3 conditions stated above. The employer files the annual information return (BIR Form No. 1604-CF). The employer issues BIR Form No. 2316 to each employee. Q: Indicate whether each of the following individuals is required or not required to file an income tax return: Where it is impracticable to file one return, each spouse may file a separate return of income, but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (Sec. 51(D), NIRC) a. Filipino citizen residing outside the Philippines on his income from sources outside the Philippines. b. Resident alien on income derived from sources within the Philippines. c. Resident citizen earning purely compensation income from two employers within the Philippines, whose income taxes have been correctly withheld. d. Resident citizen who falls under the classification of minimum wage earners. e. An individual whose sole income has been subjected to final withholding tax. (2015 BAR) Income of unmarried minors/children GR: The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent. XPNs: 1. When the donor’s tax has been paid on such property; or 2. When the transfer of such property is exempt from donor’s tax. (Sec. 51(E), NIRC) Filing a return for a disabled taxpayer 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 If the taxpayer is unable to make his own return, the return may be made by his: 1. 2. 3. Other person charged with the care of his person or property, the principal and the representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. (Sec. 51(F), NIRC) Duly authorized agent; Representative; Guardian; or 187 National Taxation Philippines is exempt from income tax. (Sec. 51(A)(1)(b), NIRC) before January 31 of the year following the calendar year in which income payments subjected to final withholding taxes were paid or accrued. b. Required. A resident alien is taxable only on income derived from sources within the Philippines. (Sec. 51(A)(1)(c), NIRC) Where to file? 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. 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 4. Duly authroized city treasurer where he is legally residing 5. Office of the Commissioner 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. 51(A)(2)(d), NIRC in relation to R.A. No. 9504) For non-resident citizens, the return shall be filed with the 1. Philippine Embassy, or 2. nearest Philippine Consulate, or 3. be mailed directly to the CIR. (Sec. 51(B), NIRC) 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. 51(A)(2)(c), NIRC) CORPORATE RETURNS Quarterly income tax When and where to file Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters. Basic Tax 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. First, Second and Third Quarter returns – A corporation must file tax return within 60 days after the close of each of the first three (3) quarters of the taxable year. However, individuals who are self-employed or in practice of a profession are required to file and pay estimated income tax every quarter as follows: 1. First Quarter return - May 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) Final adjustment return Every corporation liable to tax under Sec. 27 of the NIRC shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. Final Withholding Tax on Passive Income (Manual Filing) 1. 2. If the sum of the quarterly return is not equal to the total tax due, the corporation shall either: Quarterly return – 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. Annual Information Return – filed on or UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 1. 2. 3. 188 Pay the balance; Carry over the excess credit perpetually; or Be credited or refunded with the excess amount. Taxation Law In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. (Sec. 76, NIRC) RETURN ON CAPITAL GAINS REALIZED FROM SALE OF SHARES OF STOCK AND REAL ESTATE 1. 2. WITHHOLDING TAX Taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payorcorporations and/or persons for the former to pay the same directly to the BIR. Hence, the taxes are collected practically at the same time the transaction is made or when the taxable transaction occurs. It is taxation at source. (Domondon, 2013) When and where to file When to file? 1. 2. For quarterly declarations: within 60 days following the close of the quarter. For final return: on or before April 15, or the 15th of the 4th month following the close of the fiscal year. 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) Where to file? Except in cases where the Commissioner otherwise permits, the return shall be filed with any of the following: 1. 2. 3. 4. Shares of stock a. Ordinary Return – 30 days after each transaction b. Final Consolidated Return – on or before April 15 of the following year Real Property – 30 days following each sale or other disposition (Sec. 51(C)(2), NIRC) Importance of Withholding Taxes In the operation of the withholding tax system, the payee is the taxpayer– the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Authorized agent bank; Revenue District Officer; Collection Agent; or Duly authorized city of municipal Treasurer in which such person has his legal residence or principal place of business, or if there be no legal residence or principal place of business, with the Office of the Commissioner. 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) Return of corporations contemplating dissolution or reorganization Within thirty (30) days after the adoption of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the SEC of for its reorganization, shall render a correct return to the CIR, verified under oath, setting forth the items of such resolution or plan and such other information. (Sec. 52(C), NIRC) Purpose of the Withholding Tax System 1. 2. 189 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. National Taxation 3. 4. Improve the government’s cash flow. Minimize tax evasion, thus resulting in a more efficient tax collection system. (CREBA vs. Romulo, 9 March 2010) 3. The payee is not required to file any income tax return for the particular income. 4. 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) 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. (RR No. 2-1998, Sec. 2.57.4, as amended by RR No. 12-2001) CREDITABLE WITHHOLDING TAX 1. The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable. (RR No. 2-1998, Sec. 2.57.4, as amended by RR 12-2001) 2. 3. FINAL WITHHOLDING TAX 1. The liability for payment of the tax rests primarily on the withholding agent as payor. 2. In case he fails to withhold, the withholding agent will be liable for the deficiency. Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. Creditable tax must be withheld at source, but should 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) Creditable Withholding Tax vs. Final Withholding Tax CWT Compensation Income Professional/talent fees Rentals Cinematographic film rentals and other payments Income payments to certain contractors As to whether The income is required to be included in the or not income gross income in ITR. should be reported as part of the gross income As to the effect The tax withheld can be claimed as a tax of the tax credit or may be deducted from the tax due withheld or payable. As to filing of The earner is required to file an ITR. ITR As to income subject of the system UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 190 FWT Passive incomes Fringe benefits The recipient may not report the said income in his gross income because the tax withheld constitutes final and full settlement of the tax liability. The tax withheld cannot be claimed as tax credit. If the only source of income is subject to final tax, the earner may no longer file an ITR. However, with the new income tax forms (RR No.. 2-2014), taxpayers need to declare those income subjected to final tax in their ITR. Taxation Law Expanded withholding tax (EWT) of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar and the amount of tax deducted and withheld in respect of such wages. EWT is a kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax due of the payee 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. for the taxable quarter year. The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of tax on the items of income payable to natural or juridical persons residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%), provided, that, beginning January 1, 2019, the rate of withholding shall not be less than one percent (1%) but not more than fifteen percent (15%) of the income payment, which shall be credited against the income tax liability of the taxpayer for the taxable year. FRINGE BENEFITS TAX Refer to previous discussion on “Income tax on individuals – Taxation on compensation income – Exclusions”. DUTIES OF A WITHHOLDING AGENT Withholding tax on compensation (WTC) 1. WTC applies to all employed individuals whether citizens or aliens deriving income from compensation for services rendered in the Philippines. 2. 3. The employer is considered the withholding agent. Every employer making payments of wages shall deduct from and withhold tax, except for MWEs. Employer shall be liable if he fails to withhold and remit. 4. Nature of withholding tax on the income of government employees 5. The withholding tax on compensation income 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). 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. 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. Obligation of an employer required to deduct and withhold a tax 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 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 191 National Taxation 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) Withheld at Source issued by the withholding agents of the government are prima facie proof of actual payment by herein respondent-payee to the government itself through said agents. (CIR vs. PNB, G.R. No. 180290, September 29, 2014, as penned by J. Leonen) NOTE: In applications for refund, the withholding agent is considered a taxpayer because if he does not pay, the tax shall be collected from him. (CIR v. P&G, G.R. No. L-66838, December 2, 1991) Persons required to withhold taxes The withholding taxes shall be withheld by the person having control over the payment and who at the same time claims the expenses. The following persons are constituted as withholding agents: 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. 1. 2. 3. Q: In several transactions including but not limited to the sale of real properties, lease and commissions, respondent allegedly earned income and paid the corresponding income taxes due which were collected and remitted by various payors as withholding agents to the BIR during the taxable year 2000. BIR denied the claim for refund because of absence of proof of actual remittance. Is the proof of actual remittance to BIR is a condition to claim for a refund of unutilized tax credits? 4. Withholding agent in case the employer is the Government of the Philippines If the employer is the Government of the Philippines or any of its political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose. (Sec. 82, NIRC) A: NO. Proof of actual remittance by the respondent is not needed in order to prove withholding and remittance of taxes to petitioner. Section 2.58.3(B) of Revenue Regulation No. 2-98 clearly provides that proof of remittance is the responsibility of the withholding agent and not of the taxpayerrefund claimant. It should be borne in mind by the petitioner that payors of withholding taxes are by themselves constituted as withholding agents of the BIR. The taxes they withhold are held in trust for the government. Moreover, pursuant to Section 57 and 58 of the NIRC of 1997, as amended, the withholding of income tax and the remittance thereof to the BIR is the responsibility of the payor and not the payee. Therefore, the respondent taxpayer-refund claimant has no control over the remittance of the taxes withheld from its income by the withholding agent or payor who is the agent of the petitioner. The Certificates of Creditable Tax UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Juridical person, whether or not engaged in trade or business; Individuals, with respect to payments made in connection with his trade or business; Individual buyers, whether or not engaged in trade or business insofar as taxable sale, exchange or transfer of real property is concerned; and All government offices including GOCCs as well as provincial, city and municipal governments and barangay (Sec. 2.57.3, RR No. 2-1998) 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 (Sec. 251, NIRC); and Any income payment which is otherwise deductible from the payor’s gross income will not be allowed as a deduction if it is shown that the income tax required to be withheld is not paid to the BIR (Sec. 2, RR No. 18-2013) Q: In case of failure by the withholding agent to perform his duty to withhold and remit 192 Taxation Law tax, is the taxpayer absolved of liability? A: The liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. xxx (The taxpayer) remains liable for the payment of tax as (he) shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the nonpayment of the withholding tax due. (RCBC vs. CIR, G.R. No. 170257, 7 September 2011) 193 National Taxation mortis causa subject to estate tax? (1994 BAR) TRANSFER TAX These are taxes imposed upon the privilege of passing ownership of property without any valuable consideration. (Domondon, 2014) A: GR: Donations inter vivos are subject to donor's tax while donations mortis causa are subject to estate tax. Kinds of Transfer Taxes under the NIRC XPN: If the transferor's control over the property donated inter vivos extends up to the death of the donor, such transfers in contemplation of death, revocable transfers, are subject to estate tax. 1. Estate tax 2. Donor’s tax Q: Are donations inter vivos and donations Transfer Tax vs. Income Tax Upon What Imposed Rates Applicable Exemptions TRANSFER TAX Privilege to transfer property Rates are lower: Estate tax – 6% Donor’s Tax – 6% in excess of 250,000 pesos Lesser exemptions INCOME TAX Privilege to earn income Rates are higher: Individual income – 20% to 35% More exemptions Estate Tax vs. Donor’s Tax ESTATE TAX Nature of transfer Amount exempt Rate of tax Grant of exemption Upon death of decedent (mortis causa) Transfer takes place between natural persons only No more exemption; Repealed by the TRAIN Law 6% uniform tax rate Sec. 87, NIRC DONOR’S TAX During the lifetime of the donor (inter vivos) Transfer takes place between natural and juridical persons 250,000 6% uniform tax rate Sec. 101, NIRC GR: None Grant of deductions Notice requireme nt XPN: Encumbrance on the property donated, if assumed by the donee and amount specifically provided by the donor as a diminution of the property donated may be claimed as deduction. GR: Notice of donation is not required. Sec. 86, NIRC Notice of death to the Commissioner not required anymore as repealed by TRAIN Law. XPNs: 1. Donations to NGO worth at least P50,000. Provided, not more than 30% of which will be used for administration purposes. 2. Donation to any candidate, political party, or coalition of parties. NOTE: Notice is required in the given exceptions in order for the donation to be UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 194 Taxation Law ESTATE TAX Notice, when filed Filing return of Contents of return Time filing return of Payment of tax due DONOR’S TAX exempt from donor’s tax and to claim full deduction of the donation given to qualified donee. Notice of death to the Commissioner, not required. 1. A transfer subject to estate tax 2. Estate consists of registered or registrable property, regardless of value of gross estate 1. 2. 3. Value of the gross estate Deductions under Sec. 86, NIRC Other pertinent information If Gross Estate exceeds P5M, certified by a CPA as to assets, deductions, tax due, whether paid or not A transfer subject to donor’s tax 1. Each gift made during the calendar year which is to be included in computing net gifts 2. The deductions claimed and allowable 3. Any previous net gifts made during the same calendar year 4. The name of the donee Such further information as may be required by rules and regulations made pursuant to law. Within 1 year from death of decedent, except in meritorious cases where an extension not exceeding 30 days is granted by the Commissioner. (Sec. 90, NIRC) Within 30 days after donation was made. No extension allowed. Pay as you file. Pay as you file. GR: Extension of payment is not allowed. XPN: When it would impose undue hardship upon the estate or any of the heirs, extension may be allowed but not to exceed 5 years in case of judicial settlement or 2 years in case of extra-judicial settlement. Extension of payment Payment by Installment – if the available cash of the estate is insufficient to pay the tax due, payment by installment shall be allowed within two (2) years from when it should be paid without penalty and interest. None XPNs to the XPN: When taxpayer is guilty of: 1. Negligence 2. Intentional disregard of rules and regulation 3. Fraud Requireme nt for grant of extension of payment Bond not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary. 195 None National Taxation since they are imposed on the act of passing ownership of property. (Domondon, 2009) ESTATE TAX BASIC PRINCIPLES, CONCEPT, AND DEFINITION Characteristics of estate tax (TANG-DEP) 1. It is a transfer tax. Estate tax is an excise tax imposed upon the privilege of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death. Estate tax laws rest in their essence upon the principle that death is the generating source from which the taxing power takes its being, and that it is the power to transmit or the transmission from the dead to the living on which the tax is more immediately based. (Lorenzo v. Posadas, 64 Phil 353) It is the tax imposed upon the privilege of passing ownership of property without any valuable consideration. 2. It is an ad valorem tax. The amount of transfer tax is dependent on the value of the properties transferred. 3. It is a national tax. It is a tax levied by the national government. 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 v. Posadas, 64 Phil. 353) 4. It is a general tax. It applies to all transfers through succession. 5. It is a direct tax. NOTE: Presently, there is no inheritance tax imposed by law. P.D. No. 69 passed on November 24, 1972, effective January 1, 1973, abolished the inheritance tax for failure to meet one of the requisites of a sound tax system, which is administrative feasibility. It cannot be shifted to another. It subjects transferor-decedent to tax. 6. It is an excise tax. It is a tax imposed on the privilege of transferring property. Estate planning is the manner by which a person takes step to conserve the property to be transmitted to his heirs by decreasing the amount of estate taxes to be paid upon his death. Requisites for imposition of estate tax (DAD) 1. Death of decedent 2. Successor is alive at the time of decedent’s death 3. Successor is not disqualified to inherit It is considered as lawful because, “the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits, cannot be doubted”. (Delpher Trades Corporation v. IAC, et al. G.R. No. 73584, January 28, 1988) Purpose and object of estate tax 1. To generate additional revenue for the government. 2. To compensate the government for the protection given to the decedent that enabled him to prosper and accumulate wealth. 3. Remove the disparity in the tax treatment of a sale and transfer by death. Q: A law was passed by Congress abolishing 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. Nature of estate tax 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. It is not a tax on property because their imposition does not rest upon general ownership but rather, they are privilege tax UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 196 Taxation Law Theories on the purposes of estate tax 3. Resident alien (RA) 4. Non-resident alien (NRA) Benefits-protection It is based on the power of the State to demand and receive taxes on the reciprocal duties of support and protection. NOTE: Only natural persons can be held liable for estate tax. Domestic and foreign corporations cannot be liable because they are not capable of death. Privilege or State-partnership 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. COMPOSITION OF GROSS ESTATE Determination of gross estate The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. (Sec. 86, TRAIN Law) 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 The receipt of inheritance contributes to the widening inequalities in wealth. Through estate tax, the value received by the successor is reduced and brings said value into the coffers of the government. Gross estate based on citizenship and residency Time and Transfer of Properties DECEDENT The properties and rights are transferred to the successors at the time of death. (Art. 777, Civil Code) Citizens and Residents (RC, NRC, RA) The statute in force at the time of death of the decedent governs the imposition of the estate tax. GROSS ESTATE 1. All properties, real or personal, wherever situated. 2. Intangible personal property wherever situated. 1. Estate tax accrues at the time of death of decedent. As such, succession takes place and the right of the state to tax vests instantly. 2. The tax is to be measured by the value of the estate as it stood at the time of the decedent’s death regardless of any postponement of actual possession or any subsequent increase or decrease in value. (Lorenzo v. Posadas, 64 Phil 353) NRA CLASSIFICATION OF DECEDENT (R.A. 10963) Individuals liable to pay estate tax: 1. Resident citizens (RC) 2. Non-resident citizens (NRC) 197 3. Real property situated in the Philippines. Tangible personal property situated in the Philippines. Intangible personal property, its inclusion is subject to the rule on reciprocity provided for under Sec. 104 of the NIRC. National Taxation SUMMARY OF RULES ON GROSS ESTATE Property location Real properties Personal properties Tangible Intangible Residents or Citizens Within Outside ✓ ✓ ✓ ✓ NRA without reciprocity Within Outside x ✓ ✓ ✓ ✓ ✓ Q: Is there a need to disclose properties outside the Philippines? 1. 2. 3. 4. 5. x x A: Said properties shall be excluded on the basis of reciprocity. No donor’s or estate tax shall be collected in respect of intangible personal property: 1. 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 deemed Franchise which must be exercised in the Philippines. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws (domestic corporation). Shares, obligations or bonds by any foreign corporation 85% of its business is located in the Philippines. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations 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) 2. 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. NOTE: These intangible personal properties are in effect exceptions to the Latin maxim of mobilia sequuntur personam. This enumeration is significant only for non-resident alien because they are the only set of taxpayers where the situs of the property is considered in determining whether their property shall form part of the gross estate or not. Q: For purposes of estate and donor’s tax, do we adhere to mobilia sequuntur personam? Q: When shall intangible personal properties of a non-resident alien be excluded from the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES ✓ x gross estate? A: YES, whether resident or non-resident. A citizen or resident decedent is taxed on properties within or without. On the other hand, while a non-resident alien decedent is taxed only on properties within the Philippines, it is a requirement that his estate tax return should disclose the value of his gross estate outside the Philippines in order to avail of the allowable deductions. (Sec. 86 (B), NIRC) Intangible personal property situated in the Philippines x x NRA with reciprocity Within Outside x ✓ A: NO. GR: The situs of an intangible property is 198 Taxation Law determined by the domicile or residence of the owner. This is known as the principle of “mobilia sequuntur personam.” 2. XPN: The principle is not controlling: 1. When it is inconsistent with the express provisions of statute; or 2. When justice does not demand that it should be, as when the property has in fact a situs elsewhere. (Mamalateo, 2014) 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. Q: Will shares of stock issued by a foreign corporation in favor of a non-resident form part of the gross estate? A: YES, if 85% of the business of the foreign corporation who issued the stocks is located in the Philippines or if it is considered to have obtained business situs in the Philippines. (Section 104, NIRC) 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. Whether tangible or intangible, appraised at FMV. “Sentimental value” is practically disregarded. Unlisted 1. Unlisted common - book value 2. Unlisted preferred - par value Instances where amount of the gross estate is significant 1. 2. value) or Fair market value as shown in the schedule of values fixed by the provincial and city assessors (fair market value that appears in the latest tax declaration) Estate tax returns showing a gross value exceeding Five million pesos (P5,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following: a. Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a non-resident, 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) Personal property Shares stock 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) of Basis for the valuation of gross estate PROPERTY VALUATION Whichever is higher between the: Real 1. Fair market value as property determined by the Commissioner (zonal Right to usufruct, use or 199 Listed – Closing rate AT THE TIME of death. If none is available, the FMV is the arithmetic mean between the highest and lowest quotation at a date nearest the date of death. In determining the book value of common shares, the following shall not be considered: 1. Appraisal surplus 2. The value assigned to preferred shares, if there is any Shall be taken into account the probable life of the beneficiary in accordance with the latest National Taxation habitation, as well as that of annuity the government, by operation of law, acquired under the Comprehensive Agrarian Reform Law all his agricultural lands except 5 hectares. Upon the death of Ortiz, his widow asked you how she will consider the 100 hectares of agricultural land in the preparation of the estate tax return. What advice will you give her? (1994 BAR) basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. ITEMS TO BE INCLUDED IN DETERMINING GROSS ESTATE A: The 100 hectares of land that Jose Ortiz owned but which prior to his death on May 30, 1994 were acquired by the government under CARP are no longer part of his taxable gross estate, with the exception of the remaining 5 hectares which under Sec. 78(a) of the NIRC still forms part of “decedent's interest” (DIGRI-PLS) 1. Decedent's interest; 2. Transfer in contemplation of death; 3. Revocable transfer; 4. Property under General Power of Appointment (GPA); 5. Proceeds of life insurance; 6. Prior interests; 7. Transfers for insufficient consideration; 8. Share of the Surviving Spouse (Sec 85, NIRC) Q: If the decedent is a partner in a partnership, will his interest in the partnership considered as part of his gross estate? NOTE: Nos. 2, 3, 4 and 7 are properties not physically in the estate (these have already been transferred during the lifetime of the decedent but are still subject to payment of estate tax) Although these properties are inter vivos in form, they are treated as mortis causa in substance. Note that transfers made for a bona fide consideration shall not be included in the gross estate. A: 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. Transfers in contemplation of death It is a transfer motivated by the thought of an impending death regardless of whether or not death is imminent. Items above are discussed in detail below. Decedent’s interest This takes place: 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. When the decedent has, at any time, made a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death; or 2. When decedent has, at any time, made a transfer under which he has retained for his life or for a period not ascertainable without reference to his death or any period which does not in fact end before his death: a. b. Q: Jose Ortiz owns 100 hectares of agricultural land planted with coconut trees. He died on May 30, 1994. Prior to his death, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 1. 200 Possession, enjoyment or right to income from the property; or The right, either alone or in conjunction with any other person, to designate the person who will possess or enjoy the property or income therefrom. Taxation Law XPN: In case of a bona fide sale for an adequate and full consideration in money or money’s worth. donations were made mortis causa, hence, the properties donated shall be included as part of A's gross estate. NOTE: The concept of transfer does not constitute any transfers made by a dying person. It is not the mere transfer that constitutes a transfer in contemplation of death but the retention of some type of control over the property transferred. In effect, there is no full transfer of all interests in the property inter vivos. Circumstances to consider in determining that the transfer is in contemplation of death 1. Age of the decedent at the time the transfers were made; 2. Decedent’s health, as he knew it at or before the time of the transfers; 3. The interval between the transfers and the decedent’s death; 4. The amount of property transferred in proportion to the amount of property retained; 5. The nature and disposition of the decedent; 6. The existence of a general testamentary scheme of which the transfers were a part; 7. The relationship of the donee(s) to the decedent; 8. The existence of a desire on the part of the decedent to escape the burden of managing property by transferring the property to others; 9. The existence of a long-established giftmaking 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); and 12. Concurrent making of will or making a will within a short time after the transfer. (Roces v. Posadas, 58 Phil. 108) Q: Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration a house and lot to his son. He died one year later. In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes. Is the BIR correct? (2013 BAR) A: NO. Pursuant to Section 85(B) of the NIRC, properties that are transferred in contemplation of death form part of the gross estate of the decedent. An exception to this is a bona fide sale for an adequate and full consideration in money. Therefore, the house and lot which Mr. Agustin sold to his son for a valuable and sufficient consideration should not be considered as forming part of Mr. Agustin’s gross estate. Q: A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter-vivos gifts to his children. Ten days later, he died. In your opinion, are the intervivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate? (2001 BAR) Motives which negate contemplation of death 1. 2. 3. 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 4. 5. 6. 7. 201 transfer in To relieve the donor from the burden of management; To save income taxes or property taxes; To settle family litigated and unlitigated disputes; To provide independent income for dependents; To see the children enjoy the property while the donor is alive; To protect family from hazards of business operations; or To reward services rendered. National Taxation 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? 1. Decedent alone; 2. By the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke or terminate; or 3. Where any such power is relinquished in contemplation of the decedent’s death other than a bone fide sale for an adequate and full consideration in money or money’s worth. (Sec. 85(C)(1), NIRC) 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) Power to alter, amend, or revoke considered to exist on the date of decedent’s death even though 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? 1. 2. The exercise of the power is subject to a precedent giving of notice; or The alteration, amendment or revocation takes effect only on the expiration of a stated period for the exercise of the power, whether or not on or before the date of the decedent’s death: a. Notice has been given b. The power has been exercised. In such cases, proper adjustment shall be made representing the interest which would have been excluded from the power if the decedent had lived, and for such purpose if notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised on the date of his death. (Sec. 85(C)(2), NIRC) A: YES. These donations are inter 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: Revocable transfer is part of the gross estate of the decedent because the transferor can revoke the transfer any time, such person wields tremendous amount of power such that he can revoke the transfer as if none was actually made. Q: Is it necessary that the decedent should have exercised such right? A: GR: No. It is sufficient that the decedent has the power to revoke, though he did not exercise such power. Revocable transfers 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: XPN: In case of a bona fide sale for an adequate and full consideration in money and money’s worth. Transfer not revocable, thereby not subject UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 202 Taxation Law to estate tax when creditors of his estate. 1. General Power of Appointment (GPA) vs. Special Power of Appointment (SPA) 2. 3. 4. The decedent’s power could only be exercised with the consent of all parties having an interest in the transferred property and if the power adds nothing to the rights the parties possess under local law. (Lober v. United States, 346 US 335) GPA When the decedent has been completely divested of the power at the time of his death. (ibid.) As to nature 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 of Internal Revenue, 160 F.2d 610 (1st Cir. 1947)) As to tax implicati ons 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 American Jurisprudence, Second Edition, p 790) Q: Mr. Mayuga donated his residential house and lot to his son and duly paid the donor's tax. In the Deed of Donation, Mr. Mayuga expressly reserved for himself the usufruct over the property for as long as he lived. Describe the donated property from the taxation perspective. (2013 BAR) As to effects A: The property will form part of Mr. Mayuga's gross estate when he dies. Applying Section 85(B)(1) of the NIRC, the donated property will still form part of the gross estate of the decedent when in the deed of donation, the donor “has retained for his life or for any period which does not in fact end before his death the possession or enjoyment of, or the right to the income from the property”. Therefore, the property will form part of Mr. Mayuga’s gross estate when he dies because he donated the property in contemplation of death. Donee has power appoint person chooses enjoy property without restriction. the to any he or the Makes appointed property, for all intents, the property of the donee; thus, forms part of the gross estate. Donee holds the appointed property with all the attributes of ownership under the concept of an owner. SPA Donee appoints successor to the property within a limited group or class of persons according to the will of the donor. Not includible in the gross estate of the donee when he dies. Donee holds the appointed property in trust or under the concept of a trustee. Properties passing under a GPA forms part of decedent’s estate through 1. 2. 3. Property passing under a general power of appointment Will Deed executed in contemplation of death, or intended to take effect in possession or enjoyment at, or after his death Deed under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death: a. b. 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 The possession, enjoyment or right to income from the property; or The right to designate the person who will possess or enjoy the property or income therefrom. (Sec. 85(D), NIRC) Q: What is the reason for inclusion of the said property in the donee’s gross estate? 203 National Taxation 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. 1. 2. Q: What properties passing under GPA are not included as part of a decedent’s gross estate? NOTE: Under the Insurance Code, in the absence of an express designation, the presumption is that the beneficiary is revocably designated. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable. (Sec. 11, R.A. 10607) A: Those properties transferred under a bona fide sale for an adequate and full consideration in money or money’s worth. 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) Not part of the gross estate when 1. 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;. 2. 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. 3. Proceeds of a group insurance policy taken out by a company for its employees. 4. Proceeds of insurance policies issued by the GSIS to government officials and employees are exempt from all taxes. 5. Benefits accruing from SSS law. 6. Proceeds of life insurance payable to heirs of deceased members of military personnel. A: NO. Only property passing under a general power of appointment is included in the gross estate of the decedent. In this case, the painting has to be transferred by Z only to his wife, W, based on the will of his father, X. Since the power of appointment is specific (i.e., only to his wife), such property should not be included in his gross estate. Transfer in contemplation of death vs. property passing under general power of attorney TRANSFER IN CONTEMPLATION OF DEATH Effectiv ity At or death Means By trust otherwise after or GENERAL POWER OF APPOINTMENT To determine the conjugal or separate character of proceeds, the following factors are considered For his life or any period not ascertainable w/o reference to his death or for any period which does not in fact end before his death. Property passed under GPA and by will or by deed 1. Policy taken before marriage – Source of funds determines ownership of the proceeds of life insurance 2. Policy taken during marriage a. Beneficiary is estate of the insured – Proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable b. Proceeds of life insurance Proceeds of life insurance forms part of the gross estate when the beneficiary is: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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 A third person, other than the decedent’s estate, executor, or administrator provided that the designation is not irrevocable. Beneficiary is third person – Proceeds are payable to beneficiary even in premiums were paid out of the conjugal Q: If the beneficiary who was irrevocably 204 Taxation Law designated caused the death of the insured, will the proceeds be included in the gross estate? f. Shares of stock in Disney World in Florida g. U.S treasury bonds; and h. Proceeds from a life insurance policy issued by a US corporation. A: YES. It is considered revocable unless he acted in self-defense. Which of the foregoing assets shall be included in the taxable gross estate in the Philippines? Explain. (2005 BAR) NOTE: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured. (Sec. 12, Insurance Code as amended by R.A. 10607, August 15, 2013) A: All of the properties enumerated except (h), the proceeds from life insurance, are included in the taxable gross estate in the Philippines. Ralph Donald is considered a resident alien for tax purposes since he is an American citizen and was a permanent resident of the Philippines at the time of his death. The value of the gross estate of a resident alien decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. (Sec. 85, NIRC) Q: 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? 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: The premiums paid by the employer will not be deductible from its employer’s gross income. (Sec. 36 (A)(4), NIRC) On the part of the employee, it will not be included in his/her gross income of the based on Sec. 32(B)(1), NIRC. However, the life insurance proceeds will form part of the gross estate of the decedent employee if his designation is revocable. Conversely, if the designation is irrevocable, it will not form part of his gross estate. Q: If the property insured was destroyed after the taxpayer’s death, will insurance money still form part of the gross estate? 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; A: NO, it will be considered as a receivable of the estate. NOTE: The value of the property prior to its destruction and at the time of the death of the decedent is included as part of the gross 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. 205 Is the P10 million subject to estate tax? National Taxation b. Should Edgardo report the 10 million as his income being Antonia’s only heir? (2007 BAR) which is beyond the scope of income taxation. (Sec. 32 B (1), NIRC) b. 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. Prior interests Prior Interest a real transfers, trusts, estates, interests, rights, powers and relinquishment of powers made, created, arising existing, exercised or relinquished before or after the effectivity of the NIRC. (Sec. 85, NIRC) Q: On June 30, 2000, X took out a life insurance policy on his own life in the amount of P2,000,000. He designated his wife, Y, as irrevocable beneficiary to P1,000,000 and his son Z, to the balance of P1,000,000, but in the latter designation, reserving his right to substitute him for another. Coverage of prior interest 1. Transfers in contemplation of death See previous discussion on “Transfers in contemplation of death.” 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. 2. Revocable transfers See previous transfers.” a. Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective shares? Explain. b. Are the proceeds of the insurance to form part of the gross estate of X? Explain. (2003 BAR) 3. A: a. NO. The law explicitly provides that the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation. The proceeds of life insurance received upon the death of the insured constitute a compensation for the loss of life, hence a return of capital, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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) discussion on “Revocable 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. See previous discussion on “Proceeds of life insurance.” Transfers for insufficient consideration When a transfer is for insufficient consideration, only the excess of the fair market value of the 206 Taxation Law property at the time of the decedent’s death over the consideration received shall be included in the gross estate. Share of the surviving spouse Q: Is the capital of the surviving spouse considered part of the gross estate? This is applicable to: 1. 2. 3. A: NO. The capital or paraphernal property of the surviving spouse is not included in the computation of the gross estate. It is actually a deduction from the decedent’s gross estate in order to arrive at the net estate. Transfers in contemplation of death Revocable transfers Transfers under GPA NOTE: The above transfers should be made for a consideration in money or money’s worth but is not a bona fide sale for an adequate and full consideration in money and money’s worth. 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. Otherwise, if not included in the three transfers enumerated above, the transfer for insufficient consideration is subject to donor’s tax. 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? Exclusive properties under the system of absolute community of properties (ACP) 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? 1. 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. 2. Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property. 3. 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) A: P250,000. This represents the excess of the FMV at the time of his death which is P550,000 over the consideration received on the amount of P300,000. On the second scenario, the insufficient consideration shall not be considered as part of the gross estate because the transfer does not fall under any of the following: transfer in contemplation of death, revocable transfer, or property passing under general power of appointment. Hence, the difference of P200,000 (P500K-300K) is subject to gift tax. 207 1. That which is brought to the marriage as his or her own. 2. 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). 3. That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and National Taxation 4. That which is purchased with exclusive money of the wife or the husband. (Art. 109, Family Code) that in the case of a non-resident 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. Q: Can you apply Sec. 85 in separation of property? Formula for computing ELIT deductible from the gross estate of NRA decedent A: NO, in that case, there will be no division. ALLOWABLE DEDUCTIONS FROM GROSS ESTATE The deductions from the gross estate are: 1. Ordinary deductions (VET) a. Expenses, losses, indebtedness, taxes, etc. (ELIT) i. Claims against the estate ii. Claims against insolvent persons iii. Unpaid mortgage or indebtedness on property iv. Taxes v. Losses b. Vanishing deduction c. Transfer for public use Claims against the estate Claims are debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Sources of claims (CTO) 1. 2. 3. Contract; Tort; and Operation of law; Requisites for deductibility: 2. Special deductions (FAS) a. Family home b. Standard deduction c. Amount received by heir under RA 4917 1. It must be a personal obligation of the deceased existing at the time of his death except those incurred incidental to his death such as unpaid funeral expenses and unpaid medical expenses. NOTE: NRA cannot avail of the special deductions except standard deduction. (Sec 86 (B)(1), NIRC) 2. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth. Q: When is deduction not allowed from the gross estate of NRA? 3. Debt or claim must be valid and enforceable in court. A: No deduction shall be allowed in the case of a non-resident decedent not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT situated in the Philippines. (Sec. 86 (D), NIRC; Sec 7, RR 2-2003) 4. Indebtedness not condoned by the creditor or the action to collect from the decedent must not have prescribed. (RR No. 2-2003) 5. It must be duly substantiated. Expenses, losses, indebtedness and taxes (ELIT) 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) The difference in the treatment of ELIT as deduction allowed to non-resident decedents is Q: BIR issued an Estate Tax Assessment Notice demanding payment of the deficiency Enumerated deductions are discussed in detail below. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 208 Taxation Law 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. liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. (Section 4(p), RA. No. 10142) Insolvent debtor's estate shall refer to the estate of the insolvent debtor, which includes all the property and assets of the debtor as of commencement date, plus the property and assets acquired by the rehabilitation receiver or liquidator after that date, as well as all other property and assets in which the debtor has an ownership interest, whether or not these property and assets are in the debtor's possession as of commencement date: provided, that trust assets and bailment, and other property and assets of a third party that are in the possession of the debtor as of commencement date, are excluded therefrom. (Section 4(q), RA. No. 10142) May the actual claims of the creditors be fully allowed as deductions from the gross estate of Jose despite the fact that the claims were reduced or condoned through compromise agreements entered into by the estate with its creditors? A: YES. Under the date-of-death valuation rule, claims existing at the time of death should be made the basis of the determination of allowable deductions. Thus, post-death developments, such as condonation 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) Unpaid mortgage property or indebtedness on Q: Who can avail this deduction? Requisites for deductibility: A: This may be claimed as a deduction by a RC, NRC or RA decedent provided that: 1. The value of the property to the extent of the decedent’s interest therein, undiminished by such mortgage or indebtedness is included in the gross estate; and 2. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or money’s worth. 1. 2. At the time the indebtedness was incurred the debt instrument was duly notarized; and If the loan was contracted within 3 years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. (Sec 86(A)(1)(c), NIRC) 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. Claims against insolvent persons Requisites for deductibility: 1. 2. The full amount of the receivables be included first in the gross estate. The incapacity of the debtors to pay their obligation is proven not merely alleged. 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: Judicial declaration of insolvency is not necessary. It is enough that the debtor’s liabilities exceeded his assets. 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 comortgagor. (Parrot v. Commissioner, 279 U.S. Definitions of Insolvent and Insolvent’s debtor’s estate under Financial Rehabilitation and Insolvency Act (FRIA) of 2010 or RA No. 10142 Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his 209 National Taxation 870) A. Allowed as deductions from the gross estate of RC, NRC and RA decedent provided that they: (DACIP) 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) 1. Were incurred during the settlement of the estate 2. Arise from fire, storm, shipwreck, or other casualties, or from robbery, theft or embezzlement 3. Not compensable (no insurance) 4. Not claimed as a deduction from income tax 5. Incurred not later than the last day or any extension thereof for payment of the estate tax B. Allowed as deductions from the gross estate of NRA decedent: The same items herein shall be allowed as deduction but only the proportion of such deductions which the value of his gross estate in the Philippines bears to the value of his entire gross estate, wherever situated shall be deducted. 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), NIRC) NOTE: Allowed deductions include those incurred up to the last day prescribed by law or any extension thereof for the payment of estate tax. For a period of 1 year extendible to: a) 2 years (extrajudicial settlement), b) 5 years (judicial settlement) In the instant case, the interest of the decedent in the property purchased from the loan where the said property was used as collateral, was not included in the gross estate. Accordingly, the unpaid balance of the loan at the time of Mr. Sakitin’s death is not deductible as “claims against the estate.” Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or estate tax purposes. Taxes Vanishing deduction Requisites for deductibility: Vanishing deduction is the deduction allowed on the property left behind by the decedent which was previously subject to donor’s or estate taxes. 1. Taxes which have accrued as of or before the death of the decedent 2. Unpaid as of the time of his death 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. Taxes NOT deductible: 1. Income tax on income received after death 2. Property tax not accrued before death 3. Estate tax due from the transmission of his estate Losses Purpose Requisites for deductibility: To lessen the harsh effects of double taxation UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 210 Taxation Law Requisites for deductibility: (VIPED) Basis for Vanishing Deduction Multiply: 100%, 80%, 60%, 40%, or 20% (as the case may be) Vanishing deductions 1. Present decedent died within 5 years from receipt of property from a prior decedent or donor. 2. The property formed part of the gross estate situated in the Philippines of the prior decedent or was a taxable gift of the donor. P xxx 1. The deduction allowed is only in the amount finally determined as value of property in determining the value of the gift, or the gross estate of prior decedent. 2. Only to the extent that the value of such property is included in decedent’s gross estate. 3. Only if in determining the value of the estate of the prior decedent, no deduction was allowed for property previously taxed in respect of the property of properties given in exchange therefore. 4. Where a deduction was allowed of any mortgage or lien in determining the gift tax, or the estate tax of the prior decedent, which were paid in whole or in part prior to the decedent’s death, then the deduction allowable for property previously taxed shall be reduced by the amount so paid. 5. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowable as deductions for expenses, losses, indebtedness, taxes and transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the decedent’s estate. 6. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. 4. The property must be identified as the one received or acquired. 5. No vanishing deduction was allowed on the same property on the prior decedent’s estate. Rate of deduction This depends on the period reckoned from date of transfer to death of the decedent enumerated below: PERIOD DEDUCTION 1 day to 1 year 100% 1 year and 1 day to 2 years 80% 2 years and 1 day to 3 60% years 3 years and 1 day to 4 40% years 4 years and 1 day to 5 20% years More than 5 years No deduction allowed Formula for computing vanishing deduction: *Initial Basis (Value of property previously taxed) **Mortgage debt paid, if any (first deductions) New Initial Basis Less: Second deduction xx% Rules in vanishing deductions: 3. The estate tax on the prior succession or donor’s tax must have been paid. ( xxx ) Transfer for public use The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. P xxx (xxx) 211 National Taxation Requisites for deductibility: 1. 2. 3. 4. 5. political subdivision thereof, for public purpose which are deducted from the gross estate 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. Family home It is the dwelling house, including the land where it is situated where the married person or an unmarried head of the family and his family resides. (Art. 152, Family Code) NOTE: In case of a NRA decedent, the property transferred must be located within the Philippines and included in the gross estate. It is deemed constituted on the house and lot from the time that it is constituted as a family residence and is considered as such so long as any of the beneficiaries actually resides therein. (Art. 153, Family Code) Government of Republic of the Philippines vs. 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. NATIONAL GOVERNMENT Refers to the entire machinery of the central government, as distinguished from the different forms of local governments. The National Government then is composed of the three great departments: the executive, legislative and judicial. (Mactan Cebu v. Marcos, G.R. No. 120082, September 11, 1996) 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. (RR No. 12-2018) Requisites for deductibility: 1. 2. 3. 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 Allowable deduction must be in the amount equivalent to: a. b. Sec. 86(A)(3) vs. Sec. 87(D) of the NIRC: SEC. 86(A)(6) It contemplates transfers by a citizen or resident of the Philippines in favor of the Government of the Philippines or any SEC. 87(D) It contemplates transfers to social welfare, cultural and charitable institutions UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES which are exempted from estate tax. 4. The current FMV of the family home as declared or included in the gross estate, or The extent of the decedent’s interest (whether conjugal/community or exclusive property), whichever is lower. The deduction P10,000,000 does not exceed NOTE: NRA decedents are not allowed to avail family home deduction because they are expressly prohibited by the Constitution from acquiring lands. 212 Taxation Law For purposes of availing this deduction, a person may constitute only one family home. SUMMARY OF DEDUCTIONS WITH LIMITS AS TO TIME AND AMOUNT Standard deduction DEDUCTION Claims against the estate Unpaid taxes Unpaid mortgage Claims against insolvent persons The standard deduction shall be P5,000,000 without need of any substantiation for citizens and residents (Sec. 86 (A)(1), R.A. 10963) For an NRA deduction in the amount of P500,000 shall be allowed without need of substantiation (Sec 86 (B)(1), R.A. 10963) Standard deduction (SD) standard deduction (OSD) As to nature As to amount of deduction As to availability SD in ESTATE TAX (Sec. 86 (A)(5)) Deduction in addition to the other deductions Fixed at P5,000,000for RC, NRC, and RA; Fixed at P500,000 for NRA Available to RC, NRC, RA, and NRA vs. optional OSD in INCOME TAX (Sec. 34 (L)) Casualty losses 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 NRA, and NFC Transfers for public use Vanishing deduction Family home Standard deduction Amount received under R.A. 4917 Any amount received by heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with R.A. 4917 (An Act Providing That Retirement Benefits of Employees of Private Firms Shall Not Be Subject to Attachment, Levy, Execution, or Any Tax Whatsoever) shall be allowed as a deduction from the gross estate. Amounts received under RA 4917 TIME Incurred before the death of the decedent Receivable existing at the death of the decedent Not later than the last day or any extension thereof for payment of the estate tax No limit Two transfers must not be more than five years apart No limit No limit No limit AMOUNT No limit – only the unpaid portion at the time of death. Ignore postdeath developments. No limit – entire uncollectible portion may be claimed. No limit – only uninsured portion may be deductible No limit 100% down to 20% depending on time interval between two transfers Not exceed P10,000,000 P5,000,000 for RC, NRC, and RA; Fixed at P500,000 for NRA No limit SUMMARY OF DEDUCTIONS AS TO APPLICABILITY TO TAXPAYERS Requisites for deductibility: 1. Amounts received by heirs from decedent’s employer; 2. Received as a consequence of death of the decedent-employee; and 3. Amount is included in the gross estate of the decedent (Sec. 86(A)(7), NIRC) Deduction Claims against estate 213 the Resident or Citizen Fully deductible Non-resident Alien Ratable/ proportionate deduction only. (Proportion of National Taxation Unpaid taxes Unpaid mortgage Claims against insolvent persons Casualty losses Transfers for public use Vanishing deduction Family home Standard deduction Amounts received under RA 4917 a. gross estate in the Philippines over the worldwide gross estate) Fully deductible Fully deductible Fully deductible No deduction allowed Estate taxation is governed by the statute in force at the time of the death of the decedent. The tax rates and procedures prescribed by RA No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Law and RR No. 12-2018 shall govern the estate of decedent who died on or after the effectivity date of the TRAIN Law which is January 1, 2018. Since the decedent died on December 2018, the operative law in force at this time is the TRAIN LAW. The said law removed funeral expenses from the list of deductible items for purposes of estate taxation. The conditions for the deductibility of family home from the gross estate of the decedent are as follows: Net share of the surviving spouse 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 net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall be deducted from the net estate of the decedent. (Sec. 86(C)) The total value of the family home must be included as part of the gross estate of the decedent; and Q: A, a resident Filipino citizen, died in December 2018. A's only assets consist of a house and lot in Alabang, where his heirs currently reside, as well as a house in Los Angeles, California, USA. In computing A's taxable net estate, his heirs only deducted: 1. ₱10,000,000.00 constituting the value of their house in Alabang as their family home; and 2. ₱200,000.00 in funeral expenses because no other expenses could be substantiated. (2019 BAR) a. Are both deductions claimed by A's heirs correct? Explain. b. May a standard deduction be claimed by A's heirs? If so, how much and what proof needs to be presented for the same to be validly made? c. In determining the gross estate of A, should the heirs include A's house in Los Angeles, California, USA? Explain. Allowable deductions must be an amount equivalent to the current fair market value of the decedent’s family home as declared or included in the gross estate; or the extent of the decedent’s interest (whether conjugal/community, or exclusive property, whichever is lower, but not exceeding ₱10,000,000. (Sec. 6(7) (7.2), RR No. 122018) Considering that all the said requisites are complied with, the 10,000,000php, the amount pertaining to the value of the decedent’s family home is deductible from the gross estate of A. b. YES, the heirs can claim a standard deduction in the amount of 5,000,000php. A: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES NO, only the amount pertaining to the value of the decedent’s family home is deductible from the gross estate, provided that the conditions for the deductibility of a family are complied with. Funeral expenses are not considered deductible items under RA No. 10963. 214 Taxation Law As provided under RR No. 12-2018, the value of the net estate of a citizen or resident alien of the Philippines shall be subject to a standard deduction. A deduction in the amount of five million pesos shall be allowed without need of a substantiation. The full amount of the five million pesos shall be allowed as deduction for the benefit of the decedent (RR No. 122018, Sec. 6(1)) Since A is a resident filipino citizen, the heirs of the said decedent can claim a standard decution in the amount of 5,000,000.00. c. 2. The transmission or the delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary. 3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor. 4. All the bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided no part of the net income of which inures to the benefit of any individual and that not more than 30% of the value given is used for administrative purposes. YES, for estate tax purposes, the heirs should include the value of the A’s house in Los Angeles, California, USA. Exclusions from estate under special laws: As provided under the TRAIN Law and RR No. 12-2018, for the purposes of computing the estate tax of a resident or a Filipino citizen, all properties, real or personal, tangible or intangible, wherever situated shall be included in determining the gross estate. Since A was a resident Filipino citizen, the properties of A within and outside the Philippines should be included in determining his or her gross estate. Hence, the heirs of A should include A’s house in Los Angeles, California, USA in determinign the latter’s gross estate. EXCLUSIONS FROM GROSS ESTATE AND EXEMPTIONS OF CERTAIN ACQUISITIONS AND TRANSMISSIONS Excluded from gross estate are those provided for under NIRC (Sections 85, 86 and 87) and under special laws. 2. 3. Benefits received by members from the Government Service Insurance System (P.D. 1146) and the Social Security System (R.A. 1161, as amended) by reason of death 2. Amounts received from the Philippine and United States governments for damages suffered during the last war (R.A. 227) 3. Benefits received by beneficiaries residing in the Philippines under laws administered by the U.S. Veterans Administration (R.A. 360) 4. Grants and donations to the Intramuros Administration (P.D. 1616) (Mamalateo, 2014) Exemption of Transmissions Exclusions under Sec. 85 and 86 NIRC: 1. 1. Certain Acquisitions and Transmissions exempted from payment of estate tax: Exclusive property (capital/paraphernal) of surviving spouse. (Sec. 85 (H), NIRC) Property outside Philippines of NRA decedent. Intangible personal property in the Philippines of NRA decedent provided there is reciprocity. 1. The merger of usufruct in the owner of the naked title. E.g., Y died leaving a condominium unit, the naked title belongs to W and usufruct to F for a period of 5 years, then F died after two years. Upon the death of F, the usufruct will merge into the owner of the naked title W who shall become the absolute owner of the said condominium unit. The transfer from F to W is exempt from estate tax. Exclusions under Sec. 87 NIRC: 1. The merger of the usufruct in the owner of the naked title. 215 National Taxation 2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary 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. 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. 4. Determination of Net Estate 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 transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor Gross Estate vs. 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) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that no part of the net income of which inures to the benefit of any individual and not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used for administration purposes. (Sec. 87, NIRC) NOTE: Bequests, devises, legacies or transfers made to educational institutions are not included. 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. TAX CREDIT FOR ESTATE TAXES PAID TO A FOREIGN COUNTRY 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) Estate tax credit is a remedy against international double taxation to minimize the onerous effect of taxing the same property twice. Q: Who may avail? A: 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. 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. Limitations in estate tax credit: 1. 2. Per country basis: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated within such country taxable under the NIRC bears to his entire net estate; and Overall basis: The total amount of the credit shall not exceed the same proportion of the UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Net Estate The net properties of the decedent after all the pertinent deductions allowable by law that is subject to tax. NOTE: Gross estate tax is adding all those included and deducting the exclusions while net estate is arrived at after subtracting the allowable deductions from the gross estate. Estate tax formula 216 Taxation Law Gross Estate PhP xxx Less: Ordinary (xxx) Deductions Special (xxx) Deductions Total Deductions (xxx) Net Estate xxx Less: Share of Surviving (xxx) Spouse Net Taxable Estate xxx Multiply: Tax Rate 6% Tax due xxx Less: Tax Credit (xxx) Tax Liability PhP xxx (Based on the illustrative examples of RR No. 12 – 2018) Must be under oath and shall contain the following: The deductions allowed from the gross estate in determining the estate; 3. Such part of the information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. (Sec. 90(A), NIRC) 3. It is filed within 1 year from the decedent’s death. Extension to file an estate tax return is allowed in meritorious cases but not to exceed 30 days. (Sec. 90, NIRC) Itemized assets at the time of his death; Itemized deductions to the gross estate; and Amount of tax due, whether paid or still outstanding. The taxpayer must pay the estate tax upon filing, under the “Pay as you file system.” Extension to pay estate tax may be granted if the Commissioner finds that such payment would impose undue hardships upon the estate or any heir and shall: Who files estate tax return: Executor Administrator Any legal heir 1. 2. Where estate tax return is filed: 3. If resident decedent Not exceed 5 years in case of judicial settlement; Not exceed 2 years in case of extrajudicial settlement; and Payment by installment if and only if the available cash of the estate is insufficient. Requisites for granting extension to pay estate tax: 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. 2. 1. 2. When estate tax return is filed: 1. The value of the gross state of the decent at the time of his death or in case of a nonresident, not a citizen of the Philippines, the part of his gross estate situated in the Philippines; NOTE: If the estate tax return shows a gross value exceeding P5 million, the return shall be supported with a statement duly certified by a CPA containing the following: FILING OF ESTATE TAX RETURNS AND PAYMENT OF ESTATE TAX 1. 2. 3. 1. 1. The request for extension must be filed before the expiration of the original period to pay which is within 6 months from death; 2. 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; If non-resident decedent To the RDO or to the Office of the CIR (Sec. 90(D), NIRC) Contents of estate tax return: 217 National Taxation 3. 4. The extension must be for a period not exceeding 5 years if the estate is settled judicially or 2 years if settled extrajudicially; and such extension. The Commissioner may require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment thereof. Q: Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium units in Quezon City valued at P5M each. Rodolfo was her only heir. He reported her death on December 6, 2006 and filed the estate tax return on March 30, 2007. Because she needed to sell one unit of the condominium to pay for the estate tax she asked the CIR to give her one year to pay the estate tax due. The CIR approved the request of extension of time provided that the estate tax be computed on the basis of the value of property at the time of payment of tax. 2. 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. 3. 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)) Instances where request for extension of time to pay estate tax should be denied: 1. 2. 3. Does CIR have the power to extend the payment of estate tax? b. Does the condition that the basis of the estate tax will be the value at the time of the payment have legal basis? (2007 BAR) A: a. YES. The CIR may allow an extension of time to pay the estate tax if the payment on the due date would impose undue hardship upon the estate or any of the heirs. The extension in any case, will not exceed 2 years if the estate is not under judicial settlement of 5 years if it is under judicial settlement. The CIR may require the posting of a bond to secure the payment of the tax. (Sec. 91(B), NIRC) rules and The executor or administrator, before delivery to any beneficiary of his distributive share. 2. The beneficiary, to the extent of his distributive share in the estate, shall be subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the value of the total net estate. Instances when Certificate of Payment of Tax from the Commissioner is required: 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) 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES of 1. 1. Before a judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate. 2. 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. 3. 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. 4. When a notary public, by reason of his official duties, intervenes in the preparation Effects for granting extension to pay estate taxes: 1. disregard Who shall pay the estate tax: a. b. Negligence Intentional regulations Fraud 218 Taxation Law or acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance. time of withdrawal; and (b) a statement that the withdrawal is subject to the final withholding tax of 6%. 5. 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. 6. Before a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor. In instances where the bank deposit accounts have been duly included in the gross estate of the decedent and the estate tax due thereon paid, the executor, administrator, or any of the legal heirs shall present the electronic Certificate Authorizing Registration (eCAR) issued for the said estate prior to withdrawing from the bank deposit account. Such withdrawal shall no longer be subject to the withholding tax imposed under this section. (RR No. 12 – 2018) 7. 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. Liability of a co-depositor who was able to withdraw funds from the account of a deceased depositor without paying the estate tax They shall be held liable for perjury because all withdrawal slips contain a statement to the effect that their co-depositors are still living at the time of the withdrawal by any one of the joint depositors and such statements are deemed under oath. Payment of Tax Antecedent to the Transfer of Shares, Bonds, or Rights and Bank Deposits Withdrawal If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall allow the withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%) of the amount to be withdrawn, provided that the withdrawal shall only be made within one year from the date of the decedent. The bank is required to file the prescribed quarterly return on the final tax withheld on or before the last day of the month following the close of the quarter during which the withholding was made. The bank shall issue the corresponding BIR Form No. 2306 certifying such withholding. In all cases, the final tax withheld shall not be refunded, or credited on the tax due on the net taxable estate of the decedent. Distribution of the estate be made Upon payment of the estate tax, the administrator shall deliver the distributive share in the inheritance to any heir or beneficiary. The estate clearance tax issued by the CIR or the RDO having jurisdiction over the estate will serve as the authority to distribute the remaining/distributive properties/share in the inheritance of the heir or beneficiary. In case of installment payments, the clearance shall be released only with respect to the property the corresponding tax of which has been paid. (Section 94, NIRC) The estate tax can be paid in installment in case the available cash of the estate is not sufficient to pay the total estate tax liability and the clearance shall be released with respect to the property the corresponding/computed tax on which has been paid. The executor, administrator, or any of the legal heirs, withdrawing from the deposit account shall provide the bank where such withdrawal shall be made, with the TIN of the estate of the decedent. For this purpose, the bank shall require prior to such withdrawal, the presentation of BIR Form No. 1904 of the estate, duly stamped received by the BIR. Further, all withdrawal slips shall contain the following terms and conditions: (a) a sworn statement by any one of the joint depositors to the effect that all of the joint depositors are still living at the NOTE: There shall, therefore, be as many clearances (Certificate 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 219 National Taxation 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 (RR No. 2-2003) Rule on restitution of tax upon satisfaction of outstanding obligations: If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. Q: A tax refund was filed by a taxpayer. Pending said action, taxpayer died. Will the tax refund form part of his gross estate? A: It depends. If there is a legal and factual basis, it will. Otherwise, it will not be included. Deficiency estate tax Three situations when deficiency occurs: 1. A return was filed but paid less than the amount of tax due; 2. A return was filed but did not pay any tax; 3. No return was filed, therefore, no tax was paid. Deficiency estate tax vs. delinquency estate tax Deficiency (Sec. 39, NIRC) arises when tax paid is less than the amount due while delinquency (Title X, NIRC) arises when there is either failure to pay amount due or refusal to pay the tax due. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 220 Taxation Law the imposition of donor’s tax. (Sec. 11, RR 22003) DONOR’S TAX BASIC PRINCIPLES, CONCEPT, AND DEFINITION Kinds of donations: 1. Donation inter vivos 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) 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. Donor’s tax is an excise tax imposed on the privilege of transferring property by way of a gift inter vivos based on pure act of liberality without any or less than adequate consideration and without any legal compulsion to give. 2. Donation mortis causa A donation which takes effect upon the death of the donor. It is subject to estate tax. Law governing imposition of donor’s tax The law in force at the time of the perfection/completion of the donation governs Donation Inter Vivos vs. Donation Mortis Causa As to consideration DONATION INTER VIVOS It is not made out of the donor’s generosity, although the subject matter is not delivered at once, or the delivery is to be made post-mortem, which is a simple matter of form and does not change the nature of the act. It is perfected upon knowledge of the donor of the acceptance of the donee. Such contract is consensual in nature. 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. 1. As to form Personal property a. Oral with simultaneous delivery if value does not exceed P5,000 b. In writing if value exceeds P5,000 2. Real property a. Both donation and acceptance must be in a public instrument DONATION MORTIS CAUSA As to effectivity The effect is produced while the donor is still alive. As to irrevocability The transfer is irrevocable. 221 Being testamentary in nature, it should be embodied in a last will and testament. (Art. 728, Civil Code) 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 National Taxation DONATION INTER VIVOS As to acceptance DONATION MORTIS CAUSA 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. Acceptance is a requirement. (Mamalateo, 2014) Nature 3. 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. 4. 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. It is an excise tax on the privilege of the donor to give or on the transfer of property by way of gift inter vivos. It is not a property tax. (Lladoc v. CIR, 14 SCRA 292) Purpose or object 1. 2. 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 Transfers subject to donor’s tax: Rationale: In general renunciation, there is no donation since the renouncer has never become the owner of the property/share renounced. Transfer in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. 1. Include not only the transfer of ownership in the fullest sense but also the transfer of any right or interest in property, but less than title. 2. Where property, other than real property subject to capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the FMV of the property exceeded the value of the consideration shall, for the purpose of the donor’s tax, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Provided, however, that a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 5. Transfers of any right or interest. Transfers subject to donor’s tax not only include transactions where there is a transfer of ownership, but also where there is a transfer less than title. Instances when there is neither a sale, exchange nor donation 222 1. The transfer of stocks in a corporation organized as a mutual benefit association, to its members, which transfer is merely a conversion of the owner-member contributions to shares of stocks is not subject to capital gains tax or donor’s tax because it is neither a sale, exchange nor donation. (BIR Ruling No. 207, July 15, 1987) 2. 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 Taxation Law 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) 3. 4. 5. 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. Spouses P & Q established a revocable inter vivos trust (PQ Family trust, represented by P & Q as its trustee) which holds title to all the spouses’ real properties, shares of stock and securities. The transfer of title involves no actual transfer of ownership from the trustor to the trustee and is then not subject to donor’s tax. (BIR Ruling No. 416-05, October 6, 2005) The transfer of conjugal properties in favor of the children pursuant to a court order arising from the declaration of nullity of marriage of the parents is not subject to donor’s tax since there is no donative intent on the part of the spouses, because the transfer is only in compliance with the court order. Neither is the transfer subject to capital gains tax and documentary stamp tax as the transfer is considered a delivery of presumptive legitime. (BIR Ruling No. DA414-06, July 4, 2006.) 4. Acceptance by the donee 5. Form prescribed by law a. In case of real property, donation must be in a public instrument. b. If personal property, it may be made: i. Oral with simultaneous delivery if value does not exceed P5,000 ii. In writing if value exceeds P5,000 (Art. 748, NCC) NOTE: The donor’s tax shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the done. It is completed by the delivery, either actually or constructively, of the donated property to the donee. (Sec. 11, RR 2-2003) 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-71006, Dec. 14, 2006.) (Paras, pp. 761-762 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. 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. Capacity of donor to donate The donor’s capacity shall be determined as of the time of the making of the donation. (Art. 737, NCC) 2. Actual or constructive delivery of gift There is delivery if the subject matter is within the dominion and control of the donee. Acceptance is necessary because nobody is obliged to receive a gift against his will. (Osorio v. Osorio, 14 Phil. 531) REQUISITES OF A VALID DONATION (CIDAF) 1. 3. However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor’s tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent. (Par. 1., Sec. 12, RR 2-2003) Donative intent Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way of sale, exchange, or other 223 National Taxation Q: When does an incomplete gift become a complete one, subject to donor’s tax? 1. 2. 3. A: A gift that is incomplete because of reserved powers becomes complete when either: 1. The donor renounces the power to recover; or 2. His right to exercise the reserved power ceases because of the happening of some event or contingency or the fulfillment of some condition, other than because of the donor’s death. (Ibid) Sale/exchange/transfer of property for insufficient consideration; Condonation/remission of debt; and Transfer for less than adequate and full consideration. SALE, EXCHANGE, OR TRANSFER OF PROPERTY FOR LESS THAN ADEQUATE AND FULL CONSIDERATION; EXCEPTION Rule regarding transfer for adequate and full consideration Elements of remunerative donation less than GR: Where a property is transferred for less than adequate and full consideration in money or money’s worth, the amount by which the FMV exceeds the consideration shall be deemed a gift and be included in computing the amount of gifts made during the calendar year. It is as if the property was donated but in order to avoid paying donor’s tax, the donor opted to transfer the property for inadequate consideration. A person gives to another a thing or right: 1. On account of the latter’s merit or services rendered by him to the donor; and 2. The giving does not constitute a demandable debt or when the gift imposes upon the donee a burden which is less than the value of the thing given. NOTE: Donations made by a corporation to its deceased officer out of gratitude for past services are subject to donor’s tax. Past services rendered without relying on a promise, express or implied, that such services would be paid for in the future do not constitute a demandable debt. Thus, the amount given by the corporation to the heirs of the deceased officer of the corporation as gratitude for past services rendered by the officer is subject to donor’s tax. XPN: 1. Where the sale, exchange, or transfer is made in the ordinary course of business which is: a. Bona fide; b. Made at arm’s length; c. Free from any donative intent 2. 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. 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. NOTE: Arm’s length transactions are described as those dealings wherein both parties are independent of each other has no relationship with the other dealing party. They are acting in their own self-interest. 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. Q: A, an individual, sold to B, her sister-inlaw, 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. TRANSFERS WHICH MAY BE CONSIDERED AS DONATION (ICL) A sold some of her shares of stock in X Co. to UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 224 Taxation Law 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. 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; or 2. If no services were rendered but the creditor simply condones the debt, it is taxable gift and not a taxable income. Explain if the above transactions are subject to donor's tax. (1999 BAR) Q: Creditors X, Y, and Z condoned the debt of ABC Corporation pursuant to a courtapproved restructuring. Are the creditors liable for donor’s tax? 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. A: NO. The transaction is not subject to donor’s tax since the condonation was not implemented with a donative intent but only for business consideration. The restructuring was not a result of the mutual agreement of the debtors and creditors. It was through court action that the debt rehabilitation plan was approved and implemented. (BIR Ruling DA 028-2005, Jan. 24, 2005) 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? 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. A: YES. This is considered as an indirect donation in favor of B. 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) RENUNCIATION OF INHERITANCE; EXCEPTION A: 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50 selling price less P10 cost) plus donor’s tax on the excess of the fair market value of the shares over the consideration. NOTE: The answer uses the prevailing rate in 2011, the current prevailing rate is 15%. CONDONATION OR REMISSION OF DEBT 1. 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. 2. 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. (RR No. 12 – 2018) 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 Rule regarding condonation/remission of debt 225 National Taxation a taxable gift and thus assessed Mrs. Barbera as a donor. Was the BIR correct? (2013 BAR) DETERMINATION OF GROSS GIFT GROSS GIFT 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) A: YES. 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. NOTE: If a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of mortgage assumed. Q: Juan died leaving his only heirs, his surviving spouse Maria, and three minor children, Luz, Vis and Minda. Maria renounced her hereditary share in the estate of Juan. Is Maria’s renunciation subject to donor’s tax? COMPOSITION OF GROSS GIFT A: NO. The general renunciation by an heir is not subject to donor’s tax. This is so because the general renunciation of Maria was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. (Sec. 11, RR 2-2003) DONOR RC, NC and RA NRA Q: With the given set of facts, what happens when Maria renounced her share in favor of Minda who is a special child? Is the renunciation subject to donor’s tax? VALUATION OF GIFTS MADE IN PROPERTY 1. CLASSIFICATION OF DONOR 2. Personal property The fair market value of the property given at the time of the gift shall be the value of the gross gift. Resident a. Resident citizen (RC) b. Non-resident citizen (NRC) c. Resident alien (RA) d. Domestic corporation (DC) Refer to previous discussion on “Estate tax – Property Valuation” 2. Non-resident a. Non-resident alien (NRA) b. Foreign corporation (FC) 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) NOTE: A corporation, domestic or foreign, cannot be made liable to pay estate tax, but may be liable to pay donor’s tax. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES GROSS GIFT All real properties, tangible and intangible personal properties wherever located All real properties, tangible, and intangible properties located in the Philippines unless the reciprocity applies Refer to previous discussion on “Estate Tax intangible properties deemed situated in the Philippines and the rule on reciprocity” A: YES, the renunciation was specifically and categorically done in favor of Minda to the exclusion of Luz and Vis, the other co-heirs in the estate of Juan. (Sec. 11, RR 2-2003) 1. NET GIFT The net economic benefit from the transfer that accrues to the donee. If there is no zonal value, the taxable base is 226 Taxation Law 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. any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code as amended. [Sec. 99(B), NIRC, Sec. 28 (B) of R.A. No. 10963 (TRAIN Law)]. 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) 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) 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. 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. EXEMPTION OF CERTAIN GIFTS 1. 2. 3. 4. 5. 6. 7. Thus, if Mr. De Almacen reported his campaign contributions of Php 500,000.00 in cash, tarpaulins, t-shirts, umbrellas, caps, and other campaign materials to the COMELEC, then the BIR cannot impose donor’s tax on such contributions. Conversely, if Mr. De Almacen failed to report these campaign contributions to the COMELEC, such contributions would be subject to donor’s tax. 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 Certain gifts may by residents 1. 2. Donation for political campaign purposes Q: Are donations for political campaign purposes exempted from donor’s tax? 4. A: YES. Any contribution in cash or in kind to 227 Specific exemption - net gifts of the amount of P250,000 or less are exempt Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government Gifts in favor of: (CARTER-CuPS) National Taxation a. b. c. d. e. f. g. h. i. Charitable Accredited NGOs Religious Trust foundations Educational institutions Research institutions Cultural foundations Philanthropic organizations Social welfare corporations 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) 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. NOTE: In order to be exempt from donor’s tax and to claim full deduction of the donation given to qualified donee institution duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC), the donor engaged in business shall give a notice of donation on every donation worth at least 50,000 to the RDO which has jurisdiction over his place of business within 30 days after the receipt of the qualified donee institution’s duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than 30% of said donations or gifts for the taxable year shall be used by such accredited non-stock, non-profit corporation/NGO institution for administration purposes. (Domondon, 2008) 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: a. The Christmas gift of P100,000 given by Imelda to her parents is not taxable because under the law (Sec. 99(A), NIRC), net gifts not exceeding P250,000 are exempt. Requisites for the exemption of gifts made to the CARTER-CuPS 1. 2. 3. 4. 5. Donee is incorporated as a non-stock, nonprofit entity, paying no dividends; Governed by trustees; Trustees receive no compensation; Donee devotes all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation; and Not more than 30% of the donation is used for administrative purposes. (Sec. 101, NIRC) The donation of P80,000.00 to the parish church even is tax exempt provided that not more than 30% of the said bequest shall be used by such institutions for administration purposes. (Sec. 101(A)(2), NIRC) c. The donation to the PUP Alumni Association does not 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: Due to the rising liquidity problems and pressure from its concerned suppliers, P. Corp instituted a flash auction sale of its shares of stock. P. Corp was then able to sell its treasury shares to Z Inc., an unrelated corporation for P1,000,000.00, which was only a little below the valuation of P. Corp.’s shares based on its latest audited financial statements. In connection therewith, P. Corp. sought a Bureau of Internal Revenue ruling to confirm that, notwithstanding the price difference between the selling price of the shares and their book value, the said Q: The Congregation of Mary Immaculate donated a parcel of land and a dormitory building located along España St. in favor of Sisters of the Holy Cross, a group of nuns operating a free clinic and high school teaching basic spiritual values. Is the donation subject to donor’s tax? (2007 BAR) A: NO. Gifts in favor of educational and/or charitable, religious, social welfare corporation or cultural institution, accredited nongovernment organization, trust or philanthropic organization or research institution or UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES b. 228 Taxation Law transaction falls under one of the recognized exemptions to donor’s tax under the Tax Code. a. Cite the instances under the Tax Code where gifts made are exempt from donor’s tax. b. Does the above transaction fall under any of the exemptions? Explain. (2019 BAR) 3. A: a. Donation of intangibles subject to reciprocity The following are the instances where gifts are made exempt from donor’s tax: i. 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; and ii. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, not more than 30% of said gifts shall be used by such done for administration purposes. 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: b. No, the transaction does not fall under any of the exemption. However, the transaction may still be exempt from donor’s tax even when the shares of stock were sold on a selling price that is less than the fair market value of the shares provided that the sale is made in the ordinary course of business, in a transaction which is bona fide, at arm’s length and free from any donative intent. NOTE: Exemption of Dowries has been removed under Republic Act No. 10963, otherwise known as TRAIN Law. Specific exemption – net gifts of the amount of P250,000 or less are exempt 2. 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. 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); 3. Shares, obligations or bonds by any foreign corporation 85% of its business is located in the Philippines; 4. Shares, obligations or bonds issued by any Foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and 5. Shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, NIRC) However, no tax shall be collected with respect to donation of intangible personal property (Reciprocity Rule): Certain gifts made by non-resident aliens 1. 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) 229 1. 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 2. If the laws of the foreign country of which the donor was a citizen and resident at the National Taxation 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. 6. 7. Donation for athlete’s prizes and awards Requirements for exemption from donor’s tax of athlete’s prizes and awards: 1. 2. 3. 8. 9. 10. 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) 11. 12. 13. 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) 14. 15. 16. 17. A: Yes, since the national sports association for billiards does not sanction the event. Donation Program” under the 18. 19. 20. “Adopt-a-School 21. 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. 22. 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) Exemption under other special laws 1. 2. 3. 4. 5. R.A. 2707 - Donation to International Rice Research Institute (IRRI) R.A. 3676 - Donation to Ramon Magsaysay Award Foundation (RMAF) R.A. 3850 - Donation to Philippines Inventors Convention (PIC) P.D. 181 - Donation to Integrated Bar of the Philippines (IBP) P.D. 205 - Donation to the Development Academy of the Philippines UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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 P.D. 292 - Donation to Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines R.A. 8492 - Donation to the National Museum R.A. 1006 - Donation to the National Library P.D. 294 - Donation to the National Social Action Council (NSAC) R.A. 3062 - Donation to the Philippine American Cultural Foundation Donation to Task Force on Human Settlement on the donation of equipment, materials, and services R.A. 2067 – Donation to Scientific and Technological Research and Development R.A. 1606 – Donation to Philippine Government for Scientific, Engineering and Technological Research, Invention and Development R.A. 6847 – Donation to Philippine Sports Commission R.A. 11358 – National Vision Screening Act R.A. 11392 – National Performing Arts Companies Act R.A. 11321 – Sagip Saka Act R.A. 11291 – Magna Carta of the Poor R.A. 11037 – Masustansyang Pagkain para sa Batang Pilipino Act R.A. 11510 – Alternative Learning System Act R.A. 11448 – Transnational Higher Education Act A: YES because the donation is to be wholly used for administration purposes. 230 Taxation Law TAX CREDIT FOR DONOR’S TAXES PAID TO A FOREIGN COUNTRY FILING OF RETURN AND PAYMENT Person Liable 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. 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) Who may avail Rate of Donor’s Tax Only donors who are citizens or residents at the time of the donation are entitled to claim tax credit. R.A. No. 10963, otherwise known as the TRAIN Law has simplified the donor’s tax schedule from an eight-bracket schedule with rates ranging from 2% to 15% to a single fixed rate of 6% of total gifts in excess of P250,000. It removed the distinction between relatives and strangers in terms of the imposition of donor’s tax, meaning regardless of whether it is a relative or stranger, it will be subject to the fixed rate of 6%. Limitations in donor’s tax credit 1. 2. Per country basis: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under the NIRC bears to his entire net gift; and Overall basis: The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated outside the Philippines taxable under the NIRC bears to his entire net gift.. Time of filing donor’s tax return Donor’s tax return is filed within 30 days after the date the donation or gift is made. Formula in computing taxable donation: 1. Gross Gift Less: Deductions/Exemptions Net Gifts Multiply: Fixed Tax Rate Tax due Less: Tax Credit Tax Liability Formula in computing the donor’s tax credit: Lower of actual tax paid and the amounts derived by computing the tax limits as follows: Limitation A (per country): ( ) ( ) Limitation B (by total): ( 2. ) ( On the first donation of the year 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. 231 (xxx) xxx 6% xxx (xxx) PhP xxx On subsequent donation during the year Gross gift Less: Deductions/Exemptions Net Gift Add: Prior Net Gifts Aggregate Net Gifts Multiply: Fixed Tax Rate Tax due on Aggregate Net Gifts ) PhP xxx PhP xxx (xxx) xxx xxx xxx 6% xxx National Taxation Less: Prior donor’s tax paid Donor’s tax due on this date Less: Tax Credit Donor’s tax payable on this date (xxx) xxx (xxx) PhP xxx Contents of donor’s tax return The donor’s tax return, which shall be made under oath, in duplicate, shall set forth the following: 1. 2. 3. 4. 5. 6. Each gift made during the calendar year which is to be included in computing net gifts; The deductions claimed and allowable; Any previous net gifts made during the same calendar year; The name of the donee; Relationship of the donor to the donee; and Such further information as the Commissioner may require (Sec. 103(A), NIRC) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 232 Taxation Law converse, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit. (ABAKADA Guro v. Ermita, G.R. No. 168056, September 1, 2005) VALUE-ADDED TAX 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). (Sec. 105, NIRC) Q: Is VAT a withholding tax? A: NO. Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person. On the other hand, in withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government (Asia International Auctioneers, Inc., v. CIR, G.R. No. 179115, September 26, 2012) It is an indirect tax, thus, it can be shifted or passed on to the buyer, transferee or lessee of goods, properties or services. (Sec. 105, NIRC) VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Sec. 4.105-2, RR No. 16 – 2005) This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of R.A. No. 7716. (Sec. 105, NIRC) However, in the case of importation, the importer is the one liable for the VAT. (Sec. 107, NIRC) TAX ON 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) Classification of transactions under the VAT system 1. 2. VAT-taxable transactions a. Subject to 12% VAT rate b. Zero-rated transactions Exempt transactions 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 it is shown in the official receipt/sales invoice. NATURE AND CHARACTERISTICS OF VALUEADDED TAX 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 TAX ON CONSUMPTION 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) INDIRECT TAX; IMPACT AND 233 National Taxation INCIDENCE OF TAX month, Mr. A purchased steel plates and other materials to make these cabinets for P56,000. Determine Mr. A’s VAT payable. An indirect tax is a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. The impact of taxation is on the seller upon whom the tax has been imposed, while the incidence of tax is on the final consumer, the place at which the tax comes to rest. (Mamalateo, 2014) To compute for the output tax from sale: Total selling price (equivalent to 112%) Vatable gross sales or receipts (112,000/1.12 to get 100%) Output VAT (12% of P100,000) VAT on toll way operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. The seller remains directly and legally liable for the payment of VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. (Renato V. Diaz and Aurora Ma. F. Timbol v. Secretary of Finance and CIR, G.R. No. 193007, July 19, 2011) Ph₱ 112,000 (100,000) Ph₱ 12,000 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%) Input VAT (12% of P50,000) Ph₱ 56,000 (50,000) Ph₱ 6,000 To compute for the VAT payable: Output VAT Less: Input VAT VAT payable TAX CREDIT METHOD Tax credit is collected through the tax credit 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) Ph₱ 12,000 6,000 Ph₱ 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 output tax of P18,000. He could reduce the output tax by deducting or crediting his input tax, arriving at a VAT payable of P6,000 (P18,000 less P12,000). 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. Refer to discussion on “Output and Input Tax”. Under the VAT method of taxation, which is invoice-based, 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) DESTINATION PRINCIPLE AND CROSS-BORDER PRINCIPLE Net VAT Payable = Output Tax > Input Tax Excess Input Tax = Output tax < Input Tax The destination of the goods determines taxation or exemption from tax. Export sales of goods are subject to zero percent (0%) rate while imports of goods are subject to 12% value added tax. Exports are zero-rated because the consumption of such goods will be made outside of the Philippines, while imports of goods are subject to 12% value added tax because they are for consumption within the Philippines. (Mamalateo, 2014) Illustration: Q: Is the destination principle absolute? For the month of January 2017, Mr. A sells to Mr. B steel cabinets for P112,000. Within the same A: NO. The law clearly provides for an Formula: UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 234 Taxation Law exemption to the destination principle; that is, for a zero percent (0%) VAT rate for services that are performed in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules of BSP. (Sec. 108(B)(2) as cited in Commissioner of Internal Revenue v. American Express International, Inc., G.R. No. 152609, June 29, 2005) Q: SMZ Inc., is a VAT-registered enterprise engaged in the general construction business. HP International contracts the services of SMZ, Inc. to construct HP International’s factory building located in the Laguna Techno Park, a special economic zone. HP International is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the Special Economic Zone Act of 1995. Consistent with the destination principle, the purchases of goods and services destined for consumption within an ECOZONE should be free of VAT; hence, no input VAT should then be paid on such purchases. With no input VAT paid, there is nothing to be refunded or credited under Sec. 112 of the NIRC. (Coral Bay Nickel Corp. v. CIR, G.R No. 190506, June 13, 2016) SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zerorating of its sale of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP International already enjoys income tax holiday. Q: XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines. Is the BIR correct in denying SMZ, Inc.’s application? Explain your answer. (2017 BAR) A: NO. All sales of goods, properties, and services made by a VAT registered supplier from the Customs Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration. (Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R. No. 350154, August 9, 2005, 466 SCRA 221) XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1,000 to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implications of the payment to XYZ Law Offices in terms of VAT? Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or entities whose exemption under special laws effectively subjects the supply of such services to zero percent (0%) rate are considered zerorated. Considering the law does not provide for any additional qualification or disqualification, the BIR cannot deny the application on the ground that HP International already enjoys income tax holiday. A: The payment is subject to VAT but at a zerorate. The zero-rating applies because the services were rendered to a non-resident person who is engaged in business outside the Philippines, the consideration for which was paid for in acceptable foreign currency and accounted for in accordance with the BSP rules. Consequently, the law office is entitled to claim the input tax attributable to such zero-rated sale as a credit against its output tax or, at its option, apply for refund or issuance of a tax credit certificate to the extent that such input tax was not utilized as a credit against output tax. (Sections 108(B)(2), 110(A)(1) and 112, NIRC; See also Accenture, Inc. vs. CIR, G.R. No. 190102, July 11, 2012) An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress. (Soriano v. Secretary of Finance, et al., G.R. No. 184450, 184508, 184538, 185234, January 24, 2017) 235 National Taxation CIR will you allow the refund? (2006 BAR) PERSONS LIABLE TO VALUE-ADDED TAX 1. 2. 3. 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. Sells, barters, or exchanges goods or properties in the course of trade or business; Sells services in the course of trade or business; or Imports goods, whether or not in the course of trade or business. (Ingles, 2018) GR: The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services. IMPOSITION OF VALUE-ADDED TAX ON SALE OF GOODS OR PROPERTIES XPN: In case of importation, the importer is the one liable for VAT. (Sec. 107, NIRC) 1. 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 2. 3. Those held for sale to customers in the ordinary course of trade or business; Those held for lease in the ordinary course of trade or business; and Those used in the trade or business of the seller (as it is incidental to the taxpayer’s main business). (RR No. 4–2007) 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 (at the time of consummation of sale) Payments that are subsequent to “initial payments” shall no longer be subject to output VAT. (RR No. 4–2007) SUMMARY OF RULES ON SALE OF REAL PROPERTIES TRANSACTION Real properties held primarily for sale to customers, in general Residential lot with gross selling price exceeding *₱1,500,000(seller is a real estate dealer or developer) Residential lot with gross selling price not exceeding *₱1,500,000(seller is a real estate dealer or developer) Residential house and lot or other residential dwellings exceeding *₱2,500,000(seller is a real estate dealer or developer) Residential house and lot or other residential dwellings not exceeding *₱2,500,000 (seller is a real estate dealer or developer) Residential house and/or lot by a seller not engaged in business Commercial place or lot (seller uses property in business) Real property used in business, taxpayer is not engaged in dealing with real estate UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 236 TAX TREATMENT 12% VAT 12% VAT VAT-exempt, percentage tax 12% VAT not subject to VAT-exempt, percentage tax not subject to Not subject to VAT or OPT. May be subject to CGT, except sale of principal residence, which may be exempt subject to certain conditions 12% VAT 12% VAT (incidental transaction) Taxation Law *RR No. 13-2018 clarified that the thresholds to be used until December 31, 2020 are the thresholds as adjusted in 2011 using the 2010 Consumer 2. Price Index values: Section Amount in Pesos (2005) Sec. 109(P) 1,500,000 Sec. 109(P) 2,500,000 (RR No. 16-2011) The fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declaration) 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. Adjusted threshold amounts 1,919,500 3,199,200 Allowable deductions from gross selling price In computing the taxable base during the month or quarter, the following shall be allowed as deductions from gross selling price: NOTE: Beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (₱2,000,000). (Sec. 109(P), NIRC) 1. Discounts a. Determined and granted at the time of sale b. Which are expressly indicated in the invoice; c. The amount thereof forming part of the gross sales duly recorded in the books of accounts; d. The grant of which is not dependent upon the happening of a future event; and 2. 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. (Sec. 106(D), NIRC) Tax base: gross selling price The value-added tax rate is 12% on the gross selling price or gross value in money of the good or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. (Sec. 106(A), NIRC) Gross selling price “In the course of trade or business” 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 goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. (Sec. 106(A)(1), NIRC) The phrase “in the course of trade or business” 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(par.3), NIRC) Gross selling price in case of sale or exchange of real property It is the consideration stated in the sales document or the fair market value whichever is higher. Transaction that are undertaken incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. (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 Two conditions of “in the ordinary course of 237 National Taxation trade or business” (CR) Transactions deemed sale There should be: There is no actual sale of goods took place but such transactions are subject to VAT. 1. 2. Commercial or economic activity – It implies that a transaction is conducted for profit; and 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) Regularity or habituality in the action – Regularity involves more than one isolated transaction and involves repetition and continuity of action. (Ingles, 2018) XPNs to regularity: a. Non-resident aliens 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 No. 16 – 2005) b. In transactions deemed sale, the seller is also the buyer and no valuable consideration is thus paid. (Mamalateo, 2014) For example, if the owner withdraws goods for personal use from his inventory, he derives a tax advantage from the input tax, which he has already credited at the time of purchase against his output tax. Since the withdrawal or tranfer of goods results in the use or cosumption of such goods by a person (seller himself) who is effectively the final consumer, such withdrawal or tranfer is deemed a sale subject to value added tax. The rationale of the transaction deemed sale provision recapture the value added tax that was claimed as input tax at the time of purchase. Importations are subject to VAT whether in the course of trade or business or not. Q: Masarap Kumain, Inc. (MKI) is a ValueAdded Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? The following are transactions deemed sale and therefore subject to VAT: (CORD) A: YES. For VAT purposes, a transaction “in the course of trade or business” includes “transactions incidental thereto.” In the course of business, MKI bought and eventually sold the delivery van. Prior to the sale, the motor vehicle was used as part of MKI’s property, plat, and equipment. Therefore, the sale of the delivery van is an incidental transaction made in the course of MKI’s business which should be liable for VAT regardless of the fact that there was no profit realized from the sale. (2014 BAR) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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 VATregistered person withdraws goods from his business for his personal use). 2. Distribution or transfer to: a. Shareholders or investors as share in the profits of the VAT-registered persons NOTE: Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings on or after January 1, 1996 and 238 Taxation Law 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, RR 16-2005) price is unreasonably lower than the actual market value, the Commissioner shall determine the appropriate tax base. NOTE: The gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale. (Sec. 4.106-7, RR No. 16 – 2005) b. Creditors in payment of debt 3. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. 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. NOTE: Consigned goods returned by the consignee within the 60-day period are not deemed sold. 4. 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. 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(A)(2)(B), NIRC) In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. (Sec. 4.106-7, RR No. 16 – 2005) Transactions that are considered retirement or cessation of business 1. 2. Nonetheless, if one of the parties in the transaction is the government as defined and contemplated under the Administrative Code, the output VAT on the transaction shall be based on the actual selling price. (Sec. 7, RR No. 4 – 2007) Change of ownership of the business – There is change in the ownership of the business when a single proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business. Dissolution of a partnership and creation of a new partnership which takes over the business (Sec. 4.106-7, RR 16-2005) 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) Consideration in determining whether a transaction is “deemed sale” 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) Change or cessation of status as value-added tax-registered person Tax base of transactions deemed sale The 12% vat rate in Sec. 106(A) shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated. (Sec. 106(A)(2)(C), NIRC) In cases where a transaction is a deemed sale, barter or exchange of goods or where the selling The following change in or cessation of status of a VAT registered person are subject to 239 National Taxation VAT: 1. 2. 3. 4. NOTE: 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. 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. ON IMPORTATION OF GOODS Importation is an act of bringing goods and merchandise into a country (Philippines) from a foreign country. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to twelve percent (12%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, that where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. (Sec. 107(A), NIRC) The following change in or cessation of status of a VAT registered person are NOT subject to Output Tax 1. 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. Every importation of goods shall be subject to the VAT, whether for use in business or not. (Ingles, 2018) 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. NOTE: The goods or properties used in the business or those comprising the stock-intrade 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 transferee-corporation, no output VAT is imposable on the said transfer. (Sec. 8, RR No. 4 – 2007) 2. Change in the trade or corporate name of the business. 3. Merger or consolidation of corporations. 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. Tax base of VAT on importation GR: The tax base shall be based on the total value used by the BOC in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges to be paid by the importer prior to the release of such goods from customs custody. (Transaction value) XPN: In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 240 Taxation Law 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. recognized by tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (2005 BAR) A: YES. The sale is subject to tax. Sec. 107 (B) of the NIRC provides that “In case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax, where the goods are subsequently, sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such importation. 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, RR No. 16 – 2005) Payment of tax on imported goods The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody. ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES Importer refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business. It includes nonexempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies. Q: Power Sectors Assets and Liabilities Management (PSALM), a government-owned and controlled corporation is mandated to manage the orderly sale, disposition, and privatization of the National Power Corporation (NPC) generation assets, real estate and other disposable assets, and Independent Power Producer contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner. (BIR) issued a Final Assessment Notice (FAN) covered by Assessment No. VT-08-00072 alleging that, for taxable year ending 31 December 2008, PSALM is liable to pay a deficiency VAT amounting to ₱10,103,158,715.06, inclusive of penalties and interests. PSALM filed its administrative protest against the FAN, alleging that the privatization of NPC assets is an original mandate of PSALM and not subject to VAT. The CIR held that the sale of electricity is subject to VAT under R.A. 9337 and the real properties sold by PSALM are regarded as real properties used in trade or business. Is the CIR correct? 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) 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) A: NO. Applying our ruling in G.R. No. 198146 involving the same parties and similar issues, the sale of the generating assets - the Masinloc, Ambuklao-Binga and Pantabangan power plants - in the present case is likewise not subject to VAT, since the sale was pursuant to the mandate of PSALM under the EPIRA to privatize NPC assets. The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function mandated by law to privatize NPC generation assets. The sale of the The tax due on such importation shall constitute a lien on the goods, superior to all charges/or liens, irrespective of the possessor of said goods. Q: Anshari, an alien employee of Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you, which he imported tax-free for his personal use. The privilege of exemption from tax is 241 National Taxation power plants is clearly not the same as the sale of electricity by generation companies, transmission, and distribution companies, which is subject to VAT under Section 108 of the NIRC. Thus, we do not find any merit in the arguments raised by the CIR. Under the EPIRA, PSALM, as the conservator of NPC assets, operates and maintains NPC assets and manages its liabilities in trust for the national government, until the NPC assets could be sold or disposed of. Thus, during its corporate life, PSALM has powers relating to the management of its personnel and leasing of its properties as may be necessary to discharge its mandate. (Power Sector Assets and Liabilities Management Corporation v. Commissioner of Internal Revenue, G.R. 226556, July 3, 2019) 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. If the advance payment constitutes a prepaid 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. Tax base: Gross receipts The value-added tax rate is twelve precent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. (Sec. 108 (A), NIRC) 8. 9. The phrase “sale or exchange of sevices” broadly embraces the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, regardless of whether the performance thereof calls for the exercise of the physical or mental faculties and is not expressly exempt from value added tax under the Tax Code or special law. (Mamalateo, 2014) 10. 11. 12. 13. Sale of services in the course of trade or business includes those performed or rendered by: 14. 1. 2. 3. Construction and service contractors; Stock, real estate, commercial, customs and immigration brokers; Lessors of property, whether personal or real; 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. NOTE: 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. 15. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual gross receipts VAT on rental and/or royalties payable to non-resident 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Transmission of electricity by electric cooperatives; 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; 242 Taxation Law of the preceding year do not exceed P10,000,000, and franchise grantees of gas and water utilities; 8. NOTE: Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10,000,000, shall have an option to be registered as a VAT taxpayer and pay the tax due thereon. Once the option is exercised, said option shall not be irrevocable. (Sec. 119, NIRC) NOTE: The above list is not exclusive. Requisites for the taxability of sale or exchange of services or lease or use of property (SPaCeVaN) 1. 16. Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and 17. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. 2. 3. 4. 5. This shall likewise include: (LE4SU4) 1. 2. 3. 4. 5. 6. 7. The lease or the use of or the right to use radio, television, satellite transmission and cable television time. (RR 16-2005) There is a sale or exchange of service or lease or use of property enumerated in the law or other similar services; The service is performed or to be performed in the Philippines; The service is in the course of trade of taxpayer’s trade or business or profession; The service is for a valuable consideration actually or constructively received; and The service is not exempt under the NIRC, special law or international agreement. NOTE: Absence of any of the requisites renders the transaction exempt from VAT but may be subject to other percentage tax under Title V of the NIRC. 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; The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment; The supply of scientific, technical, industrial or commercial knowledge or information; The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or 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 non-resident 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 Gross receipts It pertains to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments (1) actually or (2) 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). A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person. Such obligation should be evidenced by the sales invoice/official receipt issued by the said third party to the customer/client of the service provider. An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said customer or client which obligation is 243 National Taxation evidenced by a sales invoice or official receipt issued by the creditor (3rd party) to the customer or client (the aforementioned another party) for the sale of goods or services by the former to the latter. government grants of a special right to do an act or series of acts of public concern and is not limited to legislative franchises. Tollway operators are, owing to the nature and object of their business, “franchise grantees.” The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. 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, RR No. 042007) Third, the public nature of the services rendered by tollway operators does not exclude such services from the vatable services. In specifically including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering public service for a fee to the imposition of VAT. 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. Fourth, on the argument that toll fee is a “user’s tax” and to impose VAT on toll fees is tantamount to taxing a tax, it is established that tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government. Toll fees are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. (Diaz v. Sec. of Finance, G.R. No. 193007, July 19, 2011) Examples of constructive receipts: 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. (RR No. 16 – 2005) Q: Are gross receipts derived from sales of admission tickets in showing motion pictures subject to VAT? Q: Are non-stock, non-profit entities liable to pay VAT for sale of goods and services? A: NO. The legislative intent is not to impose VAT on persons already covered by the amusement tax. The repeal by the LGC of 1991 of the Local Tax Code transferring the power to impose amusement tax on cinema/theater operators or proprietors to the local government did not grant nor restore the said power to the national government nor did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. As it is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government. A: YES. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. (Commissioner v. CA, G.R. No. 125355, March 30, 2000) Q: Are toll fees collected by tollway operators are subject to VAT? A: YES. First, VAT is imposed on “all kinds of services” When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the tollway facilities over which the operator enjoys private proprietary rights. A contrary ruling will subject cinema/theater operators or proprietors to a total of 40% tax, the 10% (now 12%) VAT being on top of the 30% amusement tax imposed by the Local Government Code of 1991, thereby killing the Second, VAT is imposed on “franchise grantees”. The word “franchise” broadly covers UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 244 Taxation Law “(goose) that lays the golden egg(s).” spent exclusively for the purpose of maintaining and preserving the building and its premises which they themselves own and possess. (First e-Bank Tower Condominium Corp., v. BIR, Special Civil Action No. 121236, RTC Br. 146, Makati City) The “lease of motion picture films, films, tapes and discs” under Sec. 108 of the NIRC is not the same as the showing or exhibition of motion pictures or films. “Exhibition” is defined as “to show or to display. x xx To produce anything in public so that it may be taken in possession”. On the other hand, “lease” is defined as “a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price, referred as rent.” Thus, the legislature never intended to include cinema/theater operator operators or proprietors in the coverage of VAT. (CIR v. SM Prime Holdings, Inc., G.R. No. 183505, February 26, 2010) 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) However, if a taxpayer renders service to an affiliate for a fee (even if the fee is merely to reimburse costs), the service is subject to VAT. Thus, the collection of condominium corporations of association dues and membership fees from its member condominium-unit owners are subject to VAT even if receives payments for services rendered to its affiliates in trust and on reimbursement-ofcost basis only, without realizing profit. 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) Q: All the homeowners belonging to ABC Village Homeowners' Association elected a new set of members of the Board of Trustees for the Association effective January 2019. The first thing that the Board looked into is the need to increase the prevailing association dues. Mr. X, one of the trustees, proposed an increase of 100% to account for the payment of the 12% value-added tax (VAT) on the association dues which were being collected for services allegedly rendered "in the course of trade or business" by ABC Village Homeowners' Association. Is Mr. X correct in stating that the association dues are subject to VAT? A: Yes, Mr. X is correct in stating that the association dues are subject to VAT. Association dues, membership fees, and other assessments and charges are exempt from VAT but only to the extent of those collected on a purely reimbursement basis by homeowners’ associations. In this case, the association dues were being collected for services allegedly rendered “in the course of trade or business”. Thus, the association dues collected by ABC Village Homeowners’ association are subject to VAT. 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 245 National Taxation ZERO-RATED AND EFFECTIVELY ZERORATED SALES OF GOODS OR PROPERTIES, AND SERVICES 3. Sale of raw materials or packaging materials by a VAT-registered entity to a Non-resident buyer: a. For delivery to a resident local exportoriented enterprise; b. Used in the manufacturing, processing, packing, repacking in the Philippines of the said buyer’s goods; c. Paid for in acceptable foreign currency and accounted in accordance with the rules of BSP. 4. Sale of raw material or packaging materials to Export oriented enterprise whose export sales exceed 70% of total annual production; 5. Those considered as export sales under the Omnibus Investment Code of 1987 (E.O. No. 226); 6. The sale of goods, supplies, equipment and fuel to persons engaged in International shipping or international air transport operations, provided that: a. Goods, supplies, equipment, and fuel shall be used; and b. For international shipping or air transport operations. (Sec. 106(A)(2)(a), NIRC) 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, 2018) The zero-rated seller becomes internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales. (CIR v. Seagate Technology (Phil.), G.R. No. 153866, Feb. 11, 2005) ZERO-RATED SALE OF GOODS 1. 2. Export sales Effectively zero-rated sales Enhanced VAT refund system Export sales Sales of raw materials to non-resident buyer under the aforementioned, sale of raw materials to export-oriented enterprise whose export sales exceed 70% of total annual production, and those under the Omnibus Investments Code shall be under 12% VAT and no longer be considered as export sales subject to 0% VAT rate upon the following: The term export sales means: (FINE GO) 1. 2. 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. 1. Sale and deliver of goods to: a. Registered enterprises within separate custom territory as provided by special laws; and b. Registered enterprises within tourism enterprise zones as declared by Tourism Infrastracture and Enterprise Authority (TIEZA) subject to the provisions under R.A. 9593 or the Tourism Act of 2009. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 2. Successful establishment of VAT refund system which grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau; and Pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019. “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 246 Taxation Law commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently export the same; Provided, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents. territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent. (CIR v. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21, 2006) An ecozone or a Special Economic Zone has been described as selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ecozone may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers. The national territory of the Philippines outside of the proclaimed borders of the ecozone shall be referred to as the Customs Territory. (CIR v. Toshiba Information Equipment (Phils.), Inc., G.R.. No. 150154, August 9, 2005) Constructive exports 1. 2. 3. 4. Sales to bonded manufacturing warehouses of export-oriented manufacturers; Sales to export processing zones; Sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the BIR and the BOC; Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. (Sec. 4.106-5, RR No. 13 – 2018) EFFECTIVELY ZERO-RATED TRANSACTIONS Rationale for zero-rating exports sale 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. 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. 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) Export sale, when exempt and when zerorated Effectively Zero-rated vs. Automatic Zerorated transaction RULES ON EXPORT SALES By a Non-VAT VAT exempt registered By a VAT registered VATable at 0% (zero rated) BASIS Q: Is the sale of goods to ecozone, such as PEZA, considered as export sale? Nature 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 247 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 AUTOMATIC ZERO-RATED TRANSACTION Refers to export sales and foreign currency denominated sales National Taxation BASIS Need to apply for zerorating For whose benefit is it intended Stamping of “zerorated” on VAT invoice or receipt Effect EFFECTIVELY ZERO-RATED TRANSACTION An application for zero-rating must be filed and the BIR approval is necessary before the transaction may be considered effectively zero-rated. Intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers. corporation, and the rest are sold to various enterprises doing business in the Mactan Export Processing Zone. Inasmuch as both sales are considered export sales subject to VAT at 0% rate under the National Internal Revenue Code, as amended, it filed an application for tax credit/refund of VAT paid for the said period representing excess VAT input payments. The CIR belies the claim for refund. Is the grant of a refund representing unutilized input VAT to Cebu Toyo proper? AUTOMATIC ZERO-RATED TRANSACTION No need to file an application form and to secure BIR approval before the sale is considered zero-rated. A: YES. Cebu Toyo is engaged in taxable rather than exempt transactions. Taxable transactions are those transactions which are subject to VAT either at the rate of 12% or 0%. In taxable transactions, the seller shall be entitled to tax credit for the VAT paid on purchases and leases of goods, properties or services. An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. A VAT-registered purchaser of goods, properties or services that are VAT exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt. Under the system, a zero-rated sale by a 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) 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. Q: SEAGATE is registered with the PEZA to engage in the manufacture of recording components primarily used in computers for export. SEAGATE is a VAT-registered entity. An administrative claim for refund of VAT input taxes with supporting documents was filed with Revenue District Office in Cebu. The administrative claim for refund was not acted upon by the petitioner prompting the respondent to elevate the case to the CTA. The CIR contended that since ‘taxes are presumed to have been collected in accordance with laws and regulations, Seagate has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected. Unfortunately, Seagate failed to do so. Is Seagate entitled to the refund or issuance of Tax Credit Certificate representing alleged unutilized input VAT paid on capital goods The seller can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. Q: Cebu Toyo Corp., an export enterprise, duly registered with the Philippine Economic Zone Authority pursuant to PD 66 and is also registered with the BIR as a VAT taxpayer. It sells 80% of its products to its mother UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 248 Taxation Law purchased? same is shifted by the contractor to the owner as a matter of selfpreservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the contractor, the latter can shift its burden on the WHO. (CIR v. John Gotamco & Sons, Inc., G.R. No. L-31092, February 27,1987, (Modified)) A: YES. As a PEZA-registered enterprise within a special economic zone, it is entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226 which would not subject Seagate to internal revenue laws and regulations, among 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 VATregistered person, however, is entitled to their credits. ZERO-RATED SALES OF SERVICES The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: Since the purchases of Seagate are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 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 being enforced by the BIR, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory – except specifically declared areas – to an ecozone. (CIR v. Seagate Technology (Phil.), G.R. No. 153866, Feb. 11, 2005) Q: A contractor constructed an office building for the World Health Organization (WHO) BIR assessed the contractor of VAT, contending that, although WHO is exempt, the tax is being assessed on the contractor, and not on WHO. Is the BIR correct? A: NO. As an international organization, WHO enjoys privileges and immunities such as exemption from all direct and indirect taxes. The contention of BIR should be rejected. In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. The VAT is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the 249 1. Processing, manufacturing, or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; 2. Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a non-resident 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; 3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate; 4. Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; provided, that these services shall be exclusive for international shipping or air transport operations; 5. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production; National Taxation 6. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country; 7. 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; and 8. specifically proven to be a non-resident 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. Services rendered to: a. Registered enterprises within a separate customs territory as provided for by special law; and b. Registered enterprises within tourism enterprise zones as declared by TIEZA. (Sec. 108(B), NIRC) 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) Services other than processing, manufacturing, or repacking of goods; requirements to qualify for zero-rating 1. 2. 3. The services other than “processing, manufacturing or repacking of goods” must be performed in the Philippines; That the payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules; and That the recipient of such services is doing business outside of the Philippines. 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. 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 BangkoSentral ng Pilipinas. (2010 BAR) In CIR vs. American Express International, Inc., (2005), the Court ruled that the Legislature does not intend to impose the condition of being "consumed abroad" in order for services performed in the Philippines by a 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. In Accenture Inc. vs CIR (2012), the Court ruled that the recipient of the service must be doing business outside the Philippines for the transaction to qualify for zero-rating under Section 108 (B) of the NIRC. To come within the purview of Section 108 (B) (2), it is not enough that the recipient of the service be proven to be a foreign corporation; rather, it must be UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES A: 250 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- Taxation Law rated. (Sec. 108(B)(3), NIRC) considered as pets. 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 BangkoSentral ng Pilipinas. (Sec. 103(B)(2)NIRC) Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels, and clams. 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. VALUE-ADDED TAX-EXEMPT TRANSACTIONS 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. Transaction is not subject to VAT, but the seller is not allowed any tax refund or credit for any input taxes paid. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural food products in their original state. Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5º and above are presumed to be refined sugar. Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar: 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. Exempt transactions, enumerated A. Sale or importation of 1. Agricultural and marine food products in their original state, 2. 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. Bagasse is not included in the exemption provided for under this section. (Sec. 4.1091(B)(1)(a), RR No. 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. 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 251 National Taxation Centrifugal process of producing sugar is not in itself a simple process. Therefore, any type of sugar produced therefrom is not exempt from VAT. (RR. No. 13 – 2013) 4. Accompanying such persons, or arriving within a reasonable time, 5. Provided, that the Bureau of Customs may exempt such goods from payment of duties and taxes a. Upon the production of satisfactory evidence that i. Such persons are actually coming to settle in the Philippines, and ii. The goods are brought from their former place of abode; 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; E. Services subject to percentage tax; Refer to discussion on percentage tax. F. Specialty feeds refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets. C. Importation of personal and household effects 1. Belonging to a. Residents of the Philippines returning from abroad, and b. Non-resident citizens coming to resettly in thte Philippines, 2. Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; Agricultural contract growers refer to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state. G. Medical, dental hospital and veterinary services, except those rendered by professionals; Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. D. Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and 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 1. Belonging to a. Persons coming to settle in the Philippines, or b. Their families and descendants who are now residents or citizens of other countries (overseas Filipinos), 2. In quantities and of the class suitable to the profession, rank or position of the persons importing said items, 3. For their own use and not for barter or sale, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 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; Q: PHILHEALTH, operates a health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan, inquired before the CIR whether the services it provided to the participants in its health care program were exempt from the payment of VAT. The Commissioner issued VAT Ruling 231-88 stating that PHILHEALTH, as a provider of medical services, was exempt from the VAT coverage. Meanwhile, R.A. 7716 (E-VAT Law) took effect, amending further the NIRC of 1977. Subsequently, R.A. 8424 (NIRC of 1997) took effect, substantially adopting and reproducing the provisions of E.O. 273 on VAT and the E-VAT law. With the passage of these laws, the BIR sent PHILHEALTH a 252 Taxation Law 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. b. Technical Education and Skills Development Authority (TESDA), and 2. Government educational institutions; Educational services shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, inservice training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA. PHILHEALTH filed a protest with the Commissioner but the latter did not take action on its protest. Consequently, PHILHEALTH brought the matter to the CTA. The CTA declared that VAT Ruling 231-88 is void and without force and effect and ordered it to pay the VAT deficiency, but canceling the payment of DST. After a Motion for Partial Reconsideration, CTA overruled its decision with respect to the payment of deficiency VAT and held that PHILHEALTH was entitled to the benefit of 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? A: YES, PHILHEALTH’s services are not VATexempt. Those exempted from VAT are those engaged in the performance of medical, dental, hospital and veterinary services except those rendered by professionals. PHILHEALTH is not actually rendering medical service but merely acting as a conduit between the members and their accredited and recognized hospitals and clinics. It merely provides and arranges for the provision of pre-need health care services to its members for a fixed prepaid fee for a specified period of time; that it then contracts the services of physicians, medical and dental practitioners, clinics and hospitals to perform such services to its enrolled members; and that it enters into contract with clinics, hospitals, medical professionals and then negotiates with them regarding payment schemes, financing and other procedures in the delivery of health services. (CIR v. Philippine Health Care Providers Inc., G.R. No. 168129, April 24, 2007) I. Services rendered by individuals pursuant to an employer-employee relationship; J. Services rendered 1. By regional or area headquarters established in the Philippines by multinational corporations, 2. Which act as a. Supervisory, b. Communications, and c. Coordinating centers in the Asia Pacific Region for their i. Affiliates, ii. Subsidiaries, or iii. Branches, and 3. 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. H. Educational services rendered by a. Private educational institutions duly accredited by the i. Department of Education (DepED), a. Commission on Higher Education (CHED), 253 Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members, as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; National Taxation M. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority; VATable at 0% (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 However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s business. SUMMARY RULES ON COOPERATIVES To/From NonMembers Agricutural Cooperatives Own produce (processed or at its Exempt Exempt origial state) 2. Sale of real properties utilized for low-cost housing as defined by R.A. No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws Other that own produce (i.e., from Exempt *VAT traders) Credit or Multipurpose Cooperatives From lending Exempt Exempt activities From non-lending VAT VAT activities Electric cooperatives In general VAT VAT Non-agricultral, non-lending and multipurpose, non-electric Contribution per Exempt Exempt member < P15K Contribution per VAT VAT member > P15K *Exempt if referring to agricultural food product at its original state. (Tabag, 2015) “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 as set by the Housing and Urban Development Coordinating Council (HUDCC) pursuant to R.A. No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other laws. 3. Sale of real properties utilized for socialized housing as defined under R.A. No. 7279, and other related laws, such as R.A. No. 7835 and R.A. No. 8763, wherein the price ceiling per unit is P450,000 or as may from time to time be determined by the HUDCC and the NEDA and other related laws, O. Export sales by persons who are not VATregistered; Rules on Export Sales UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES By a VAT registered If he is a VAT-registered person, his export sales are zero-rated. Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. To/From Members VAT exempt NOTE: The reason is to encourage exporters of goods to register as a VAT-registered person with the BIR to be able to claim unused input tax in the form of refund or tax credit. N. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with the CDA; Provided, That the share capital contribution of each member does not exceed Fifteen Thousand Pesos (P15,000.00) and regardless of the aggregate capital and net surplus ratably distributed among the members; Sales/Gross Receipts by By a Non-VAT registered 254 Taxation Law "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 R.A. No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and R.A. No. 7835 and R.A. No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or nongovernment organizations. Sale not in the ordinary course of trade or business VAT In general exempt Sale of residential lot by a real estate dealer VAT Selling price < *₱1,500,00 exempt Selling price > *₱1,500,00 VAT Sale of residential lot by a non-dealer Use in business (incidental VAT transaction) Not use in business (regardless 6% CGT of amount) Sale of residential house & lot and other residential dwellings by a real estate dealer VAT Selling price < *₱2,500,000 exempt Selling price > *₱2,500,000 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 6% CGT of amount) Sale of real property classified as low cost housing VAT In general exempt Sale of real property classified as socialized housing VAT In general exempt *RR No. 13-2018 clarified that the thresholds to be used until December 31, 2020 are the thresholds as adjusted in 2011 using the 2010 Consumer Price Index values: 4. Sale of residential lot valued at P1, 500, 000 and below or house and lot, and other residential dwellings valued at P2,500,000 and below, as adjusted in 2011 using the 2010 Consumer Price Index Values. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000. Adjacent residential lots, although civered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether coveered by one or separate deed of Conveyance, shall be presumed as a sale of one residential unit. Provided, that beginning January 2021, the VAT exemption shall only apply to : a. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, b. Sale of real property utilized for socialized housing as defined by R.A. 7229, c. Sale of house and lot, and other residential dwelling with selling price of not more than P2, 000,000. (Sec. 109(P), NIRC) Section Amount in Pesos (2005) Sec. 109(P) 1,500,000 Sec. 109(P) 2,500,000 (RR No. 16-2011) Adjusted threshold amounts 1,919,500 3,199,200 NOTE: Beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (₱2,000,000). SUMMARY RULES ON SALES OF REAL PROPERTIES 255 National Taxation (Sec. 109(P), NIRC) Unit Q. Lease of residential units with a monthly rental per unit not exceeding fifteen thousand pesos (15,000), regardless of the amount of aggregate rentals received by the lessor during the year; 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. Every 3 years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as published by the Philippine Statistic Authority. Such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. Illustration 1: A lessor rents his 15 residential units for ₱14,500 per month. During the taxable year, his accumulated gross receipts amounted to ₱2,610,000. He is not subject to VAT since the monthly rent per unit does not exceed ₱15,000. He is also not subject to 3% Percentage Tax. Using the same example, assuming he has 20 residential units with the same monthly rent per unit and his accumulated gross receipts during the taxable year amounted to ₱3,480,000, he is still not subject to VAT even if the accumulated earnings exceeded ₱3,000,000 since the monthly rent per unit does not exceed ₱15,000. He is also not subject to 3% Percentage Tax. The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds ₱15,000 but the aggregate of such rentals of the lessor during the year do not exceed ₱3,000,000 shall likewise be exempt from VAT, however, the same shall be subjected to 3% percentage tax. In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding ₱15,000 while others are leased out for more than ₱15,000 per unit, his tax liability will be as follows: 1. The gross receipts from rentals not exceeding ₱15,000 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. 2. The gross receipts from rentals exceeding ₱15,000 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only exceeds ₱3,000,000. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the NIRC. (RR No. 13–2018) In case of mixed transactions, abovementioned rule should be observed. Illustration 2: A lessor rents his 15 residential units for ₱15,500 per month. During the taxable year, his accumulated gross receipts amounted to ₱2,790,000. He is not subject to VAT since his accumulated gross receipts did not exceed ₱3,000,000. He is, however, subject to 3% Percentage Tax since the monthly rent per unit is more than ₱15,000.00. Using the same example, assuming he has 20 residential units with the same monthly rent per unit and his accumulated gross receipts during the taxable year amounted to ₱3,720,000, he is already subject to VAT since the accumulated earnings exceeded ₱3,000,000 and the monthly rent per unit is more than ₱15,000.00. Illustration 3: A lessor rents his 2 commercial and 10 residential units for monthly rent of ₱60,000 and ₱15,000 per unit, respectively. During the taxable year, his accumulated gross receipts amounted to ₱3,240,000 (₱1,440,000 from commercial units and ₱1,800,000 from residential units) The ₱1,440,000 from commercial units is not subject to VAT since it did not exceed ₱3,000,000. It is, however, subject to 3% Percentage Tax. On the other hand, the ₱1,800,000 accumulated receipts from the residential units are not subject to Percentage Tax and exempt from VAT since the monthly rent is not more than ₱15,000. Using the same example, assuming the lessor has 5 commercial units and his accumulated gross receipts during the taxable year amounted to the Residential unit 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 and hotel rooms, lodging houses, inns and pension houses. (RR No. 13–2018) UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 256 Taxation Law ₱5,400,000 (₱3,600,000 from commercial units and ₱1,800,000 from residential units), he is subject to VAT with respect to ₱3,600,000 since it exceeded P3,000,000. The ₱1,800,000 accumulated receipts from residential units are not subject to Percentage Tax and exempt from VAT since the monthly rent is not more than ₱15,000. regardless of the total annual aggregate income of X received during the year. Illustration 4: A lessor rents his 5 commercial and 10 residential units for monthly rent of ₱60,000 and ₱15,500 per unit, respectively. During the taxable year, his accumulated gross receipts amounting to ₱5,460,0000 (₱3,600,000 from commercial units and ₱1,860,000 from residential units) shall be subject to VAT since it exceeded the ₱3,000,000 threshold and the monthly rent of residential units is more than ₱15,000. 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; NOTE: If the rent of an apartment is more than ₱15,000 per unit but the aggregate rent income of the lessor does not exceed ₱3,000,00, the lessor is not VATable, but he is subject to the 3% direct percentage tax. (Lim, 2014) 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. SUMMARY OF RULES ON LEASE OF RESIDENTIAL UNITS: AMOUNT OF MONTHLY RENTALS Monthly rental ₱15,000 or less regardless of annual gross sales Monthly rental above ₱15,0000 but annual gross sales do not exceed ₱3,000,000 Monthly rental above ₱15,000 and annual gross sales exceed ₱3,000,000 SUBJECT TO VAT? 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) VAT exempt and no percentage tax VAT-exempt under Sec. 109 (W) but shall pay 3% percentage tax under Section 116 of NIRC Subject to VAT S. Transport of passengers by international carriers; The transport of cargo by international carriers doing business in the Philippines shall be exempt from VAT as the same is subject to Common Carrier's Tax (Percentage Tax on International Carriers) International carriers exempt under Sections 109(1)(S) and 109(1)(E) of the NIRC, as amended, shall not be allowed to register for VAT purposes. (RR No. 15 – 2015) 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 < ₱3,000,000. (Tabag, 2015) Q: X operates a dormitory beside the school compound. Student bed-spacers are charged ₱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? SUMMARY OF RULES FOR TRANSPORT OF PASSENGERS OR CARGOES 12% VAT Domestic transport of passengers or cargoes by air A: The lease is VAT exempt because the monthly rental per student is less than ₱15,000 257 0% VAT International transport of passengers or cargoes by air EXEMPT Transport of passengers by international National Taxation and sea or sea NOTE: If domestic transport of passengers or cargoes by land, the common carrier is liable to percentage tax on common carriers NOTE: Transport should be done by domestic carriers with international flightssuch as PAL, Cebu Pacific, etc., otherwise, exempt subject to twelve percent (12%) VAT. air and shipping carriers Fuel, when exempt from VAT and when zerorated NOTE: In case of transport of cargoes, the international air or shipping carrier shall be subject to 3% percentage tax on international carriers Fuel is exempt if imported by persons engaged in international shipping or air transport operations. On the other hand, fuel is zero-rated when sold to persons engaged in international shipping or international air transport operations without docking or stopping at any other port in the Philippines. V. Services of 1. Banks, 2. Non-bank financial intermediaries performing quasi-banking functions, and 3. Other non-bank financial intermediaries such as money changers and pawnshops, subject to percentage tax under Secs. 121 and 122 of the NIRC; 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; 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. Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel retirement program of Maritime Industry Authority (MARINA). U. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the fuel, goods and supplies shall be used for international shipping or air transport operations. Pawnshops are not liable to pay VAT Thus, 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, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad. Pawnshops are not classified as lending investors and therefore, they are not subject to VAT. They are subject to percentage tax as imposed on Section 122 of NIRC. (Tambunting Pawnshop, Inc., v CIR, G.R. No. 179085, January 21, 2010; R.A. 9238; RMC 74-2005) W. Sale or lease of goods and services to senior citizens and persons with disability; 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 UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES As provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 258 Taxation Law 10754 (An Act Expanding the Benefits and Privileges of Persons with Disability), respectively. 1. Sale of fresh vegetables by AlingIning at the Pamilihang Bayan ng Trece Martirez. 2. Services rendered by Jake's Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila. 3. Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers. 4. Sale of RTW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets. 5. Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity operating a student dormitory (monthly fee P1,500). (1998 BAR) X. Transfer of property pursuant to Sec. 40(C)(2) of the NIRC, as amended; Y. Association dues, membership fees, and other assessments and charges collected on a purely reimbursement basis by homeowners associations and condominium corporations; As established under Republic Act No. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and Republic Act No. 4726 (The Condominium Act), respectively. Z. A 1. VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind generally used as, or producing foods for human consumption is exempt from VAT. (Sec. 109(A), NIRC) Sale of gold to the Bangko Sentral ng Pilipinas; AA. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019 as determined by Department of Health; 2. VAT at 0%. Since Jake's Construction Company has rendered services to the World Health Organization, which is an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate. (Sec. 108(B)(3), NIRC) BB. Sale or lease of goods or properties or services other than the transactions mentioned above wherein the gross annual sales or receips do not exeed 3,000,000 pesos. Every three (3) years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as published by the NSO. Such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. 3. 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) For purposes of the threshold of ₱1,919,500, the husband and the wife shall be considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold. 4. VAT at 12%. This transaction also falls under the definition of goods which include all tangible objects which are capable of pecuniary estimation. (Sec. 106(A)(1), NIRC) 5. VAT Exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding P15,000, which is exempt from VAT regardless of the amount of aggregate rentals received by the lessor during the year. (RR No. 13 – 2018) The term unit shall mean per person in the case of dormitories, boarding houses and bed spaces. (Sec. 4.103-1, RR No. 7-95) Q: State whether the following transactions are: (a) VAT Exempt, (b) subject to VAT at 12%; or (c) subject to VAT at 0%: 259 National Taxation 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 corollary, is not allowed any credit or refund of the input taxes he paid on his purchases. This non-crediting of input taxes is exempt transactions is the underlying reason why the NIRC adopted the rule on apportionment of 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) BASIS Nature Not EXEMPT taxable; By whom made Need not be a VAT-registered person Input tax Not subject to output tax, thus cannot claim input tax credit. Tax Credit/ Refund Cannot avail of tax credit or refund. Thus, may result in increased prices (Partial Relief) 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) Output Tax It means the value-added tax due on the sale or lease of taxable goods or properties or services by (1) any person registered or (2) required to register under Sec. 236 of the NIRC. (Sec. 110(A)(3), NIRC) Output tax is what the taxpayer-seller passes on to the purchases. Note that what is output tax for the seller is input tax to the purchaser. (Ingles, 2015) Output tax may come from: 1. Actual sale 2. Transaction deemed sales Input Tax It means the value-added tax due on or paid by a VAT-registered person on importation of goods or local purchase of goods, properties or services, including lease or use of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptive input tax determined in accordance with Section 111 of the NIRC. (Sec. 110(A)(3), NIRC) Ph₱ 0 (5,000) Ph₱ 5,000 ZERO-RATED Transaction is UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES removes VAT at the exempt stage INPUT AND OUTPUT TAX Simply put, the difference lies in the input tax. In VAT-exempt transactions there is no input tax credit allowed. In the case of 0% rated transaction of a VAT registered person, the sale of goods or properties is multiplied by 0% thus his output tax is P 0.00. If the person is VAT registered, he may claim such input tax as tax credit or refund. E.g. Output tax Less: Input tax Excess input tax of transac -tion 260 Taxation Law 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. (RR No. 16 – 2005) from primary agricultural and marine food producs, the supply of which is exempt from VAT Transitional input tax credit(Sec. 111 (A), NIRC) – may be claimed by persons who become liable to VAT for the first time and such represent input tax on inventories goodsw, materials and supplies existing on the date of commencement of a person’s status as a taxable person Final withholding tax credit(Sec. 114(C), NIRC) – is based on the amount paid to the supplier of goods or services by the government and is required to be withheld by the government to the BIR (refer to withholding of final tax on sales to government) Excess input tax credit(refer to discussion on application on tax refund or tax credit certificate) Input tax is what is passed on to the purchaser/taxpayer by the seller. If the purchaser is VAT-registered person, then he can use the input tax as credit to the output taxes that he is liable to remit to the BIR. (Ingles, 2015) Input VAT or input tax represents the actual payments, costs and expenses incurred by a 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) 5% NA Sources of Creditable Input Tax Effect of VAT exempt purchases to 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: VAT exempt transactions cannot be credited for input tax. However, a transaction which cannot be directly attributed in either the taxable or exempt activity, a ratable portion of the input tax may be credited. 1. 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 2% transitio nal or 12% actual input tax rate RATE 12% standar d or 0% 2. 4% 3. 4. 5. 6. 261 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) 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, RR No. 16 – 2005) National Taxation Presumptive input tax exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto, so much so that even a non-stock, non-profit organization or government entity, is liable to pay VAT on the sale of goods or services. There are, however, certain transactions exempt from VAT such as the sale of agricultural products in their original state, including those which underwent simple processes of preparation or preservation for the market, such as raw cane sugar. It is an input tax credit allowed to persons or firms engaged in the: (SMM-RCN) 1. 2. Processing of: a. Sardines b. Mackerel c. Milk Manufacturing of: a. Refined sugar b. Cooking oil c. Packed noodle based instant meals For an agricultural cooperative to be exempted from the payment of advance VAT on refined sugar, it must be (a) a cooperative in good standing duly accredited and registered with the CDA; and (b) the producer of the sugar. Having established that COFA is a cooperative in good standing and duly registered with the CDA and is the-producer of the sugar, its sale then of refined sugar whether sold to members or nonmembers, following the express provisions of Section 109(L) of R.A. 8424, as amended, is exempt from VAT. As a logical and necessary consequence then of its established VAT exemption, COFA is likewise exempted from the payment of advance VAT required under RR No. 13-2008. (Commissioner of Internal Revenue v. Negros Consolidated Farmers Multi-Purpose Cooperative, G.R. 212735, December 5, 2018) The allowed input tax shall be equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. (Sec. 111 (B), NIRC) They are given this 4% presumptive input tax because the goods used in the said enumeration are VAT-exempt. (Ingles, 2015) NOTE: The term “processing” shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. Transitional input tax Q: COFA is a multi-purpose agricultural cooperative. Its farmer-members deliver sugarcane to be milled and processed in COFA’s name with the sugar mill. An Authorization from BIR is required before the refined sugar is released. In several instances, BIR issued the Authorization without requiring COFA to pay advanced VAT, pursuant to the latter’s tax exemption under the law. Later on, BIR required payment of advance VAT for the issuance of the Authorization. COFA paid under protest. Later, COFA filed an administrative claim for refund. Is COFA’s claim with merit? 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 VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments. (Fort Bonifacio Development Corporation v. CIR, 583 SCRA 168) A: YES. COFA is a VAT-exempt agricultural cooperative. Exemption from the payment of VAT on sales made by the agricultural cooperatives to members or to non-members necessarily includes exemption from the payment of "advance VAT" upon the withdrawal of the refined sugar from the sugar mill. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES These can be availed by taxpayers who become VAT registered persons upon: 262 Taxation Law 1. 2. Exceeding the minimum turnover of P1,919,500 in any 12-month period; or Who voluntarily register even if they do not reach the threshold, except for franchise grantees of radio and TV broadcasting whose threshold is P10,000,000. 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.) 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; and 5. Goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. (Sec. 4.110-1(a.), RR No. 16 – 2005) DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS Determination of output tax In a sale of goods or properties, the output tax is computed by multiplying the gross selling price by the regular rate of VAT. For sellers of services, the output tax is computed by multiplying the gross receipts by the regular rate of VAT. The allowed input tax shall be whichever is higher between: 1. 2% of the value of the taxpayer’s beginning inventory of goods, materials and supplies; or 2. The actual value-added tax paid on such goods. (Sec.111(A), NIRC) 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. NOTE: Transitional input tax credit may only be availed once. It may be carried over to the next taxing period, until fully utilized. Prior payment of taxes is not necessary before a taxpayer could avail of transitional input tax credit. All that is required from the taxpayer is to file a beginning inventory with BIR. A transitional input tax credit is not a tax refund per se but a tax credit. Section 112 of the NIRC does not prohibit cash refund or tax credit of transitional input tax. The grant of a refund or issuance of tax credit certificate in this case would not contravene the above provision. The refund or tax credit would not be unconstitutional because it is precisely pursuant to section 105 of the old NIRC which allows refund/tax credit. (Fort Bonifacio Development Corporation vs. CIR, G.R. No. 173425, January 22, 2013) 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 No. 16 – 2005) Determination of input tax creditable The amount of input taxes creditable during a month or quarter shall be determined by adding all creditable input taxes arising from the transactions enumerated under “Sources of input tax” in page during the month or quarter plus any amount of input tax carried-over from Q: Is Transitional Input Tax Credit applicable 263 National Taxation 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. 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 non-government entities, and The succeeding table illustrates the computation of output tax, creditable input tax and the resulting net VAT payable or excess of tax credits: BASIS Output tax Input tax Vatable gross sales or receipts (amount exclusive VAT) c VAT rate (12% or 0%) Vatable purchases (amount exclusive of VAT) x applicable VAT rate EXAMPLE Sale of hanky for total price of ₱112 VAT-Ex. Amt: P100 (₱112/1.12) Output tax: ₱100*12% Purchase of materials for total price of P56 2. AMOUN T ₱12.00 Input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost of goods sold. ₱6.00 For persons engaged in both zero-rated sales and non-zero-rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated and non-zero-rated sales (RR No. 16 – 2005) VAT-ExAmt: ₱50 (₱56/1.12) Input tax: ₱50*12% Net VAT Payable or Excess tax credits (Output tax less Input Tax) If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall be pro-rated to the VAT taxable and VATexempt transactions; only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit. Determination of VAT payable or excess tax credits The resulting computation of output tax and crediting of input tax shall result to either the net VAT payable or excess tax credits. ₱6.00 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. Net VAT payable = Output tax > Input tax Excess tax credits = Output tax < Input tax Excess Tax Credits (ETC) NOTE: VAT-exempt transactions do not result to any output or input taxes. 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. Allocation of input tax on mixed transactions A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Provided, that any input tax attributable to zerorated sales by a VAT-registered person may at 264 Taxation Law his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes TRANSACTIONS 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) PERIOD Jan. Feb. Mar. Q1 OUTPUT TAX ₱12 M 6M 6M ₱24 M INPUT TAX ₱6 M 18 M 18 M ₱ 42 M b. Installment basis Input tax on domestic purchases of service Transitional input tax NVP OR ETC NVP ₱6M ETC (12M) ETC (12M) ETC (₱18M) Input tax on “deemed sale transaction” Input tax from payments made to nonresidents (such as for services, rentals, or royalties) For the months of January and February, only the monthly taxes are computed. However, for the month of March, the accumulated taxes for the first quarter will be aggregated to determine the NVP or ETC. In the example, the excess tax credit of P18 can be refunded or credited against the other internal revenue taxes of the taxpayer after the application and approval from the BIR Commissioner. Advance on sugar Substantiation of input tax credits TRANSACTIONS Importation of goods 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 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 Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor. Payment order showing payment of the advance VAT 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), RR No. 16 – 2005) 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 VAT-registered person shall be creditable: 1. 2. Public instrument deed of absolute deed of conditional contract/agreement sell, etc.) together VAT REQUIRED SUPPORT the VAT invoice for the entire selling price and non-VAT Official Receipt for the initial and succeeding payments (i.e., sale, sale, to with 3. 265 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 National Taxation compensation, rental, royalty or fee (RR No. 16 – 2005) zero-rated sales can be claimed for refund or issuance of a tax credit certificate. As long as the invoices from the suppliers are issued in the name of the taxpayer and expenses were actually incurred by the taxpayer, then the input tax pertaining to such expenses must be credited to the taxpayer. Where the money came from to pay these expenses is another matter all together but it does not change the fact that input tax has been incurred. (CIR v. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010) 2. Cancellation of VAT registration A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106 (C) of the Tax Code may, within two (2) years from the date of cancellation, apply for the issuance of tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes. REFUND OR TAX CREDIT OF EXCESS INPUT TAX; PROCEDURE Provided, however, that he shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. Who may claim for refund/apply for issuance of Tax Credit Certificate (TCC) Provided, further, that the date of cancellation being referred hereto is the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities relative to cessation of business or change of status of the concerned taxpayer. 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), NIRC) Provided, finally, that the filing of the claim shall be made only after completion of the mandatory audit of all internal revenue tax liabilities covering the immediately preceding year and the short period return and the issuance of the applicable tax clearance/s by the appropriate BIR Office which has jurisdiction over the taxpayer. A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance of a tax refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when such sales were made. Requirements to claim for VAT refund 1. 2. In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and (2) of the Tax Code, the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the BSP rules and regulations. 3. 4. Where the taxpayer is engaged in both zerorated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or effectively 6. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 5. 7. 266 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 zero-rated or effectively zero-rated sales; For zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the rules and regulations of the BSP; Taxation Law 8. 9. Where there are both zero-rated or effectively zero- rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and The claim is filed within two years after the close of the taxable quarter when such sales were made. (Luzon Hydro Corporation v. CIR, G.R. No. 188260, November 13, 2013) receipts and on purchases of services with invoices. Claim denied. (KEPCO v. CIR, G.R No. 181858 November 24, 2010) In one case, the claim for refund/tax credit was denied because the proof for the zero-rated sale consisted of secondary evidence like financial statements. (Luzon Hydro Corp. v. CIR G.R. No. 188260, November 13, 2013) In another case, the proofs for zero-rated sales of services were sales invoices. The claim was denied. (Takenaka Corp.-Philippine Branch v. CIR, G.R No. 193321, October 19, 2016) The taxpayer must prove the following for a tax refund to prosper: 1. 2. That it is a VAT-registered entity; and It must substantiate the input VAT paid by purchase invoices or official receipts. (Commissioner v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005) Q: Are sales invoices sufficient as evidence to prove zero-rated sale of services by a taxpayer thereby entitling him to claim the refund of its excess input VAT? A: NO. The claim for refund must be denied on the ground that the taxpayer had not established its zero-rated sales of services through the presentation of official receipts. Failure to comply with the invoicing requirements is a ground to deny a claim for tax refund or tax credit As evidence of an administrative claim for tax refund or tax credit, there is a certain distinction between a receipt and an invoice. In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the claim but also compliance with all the documentary and evidentiary requirement. (Eastern Telecommunication Phils. Inc. v. CIR, G.R. No. 183531, March 25, 2015) Section 113 of the R.A. 10963 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. 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 Section 113 of RA. 10963. 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. Substantiation requirements to be entitled to refund or tax credit under Sec. 112, NIRC. The claimant’s duties are two-fold: (a) prove payment of input VAT to supplier; and (b) prove zero-rated sales to purchasers. The documents required are VAT receipt for sale of services or lease of property and VAT invoice for sale of goods. The words ‘zero-rated’ must also be stated in the VAT receipt or invoice. (Western Mindanao Power Corporation v. CIR, G.R No. 181136, June 13, 2012) 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 VAT invoice and VAT receipt should not be confused as referring to one and the same thing; the law did not intend the two to be used alternatively. The taxpayer tried to substantiate its input VAT on purchases of goods with official 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 267 National Taxation 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) 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) Q: May a taxpayer who has pending claims for VAT input credit or refund, set off said claims against his other tax liabilities? Explain your answer. (2001 BAR) Q: AWSPI is the Philippine branch of a multinational company organized and existing under and by virtue of the laws of Australia. It rendered qualifying services to its foreign affiliates-clients, from which it generated service revenues. As a valueadded tax (VAT)-registered enterprise, can AWSPI file for an Application for Tax Refund/Credit with the Philippine Tax Authorities? A: NO. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. In the instant case, a claim of the taxpayer for VAT refund is still pending and the amount has still to be determined. A fortiori, the liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor. (Philex Mining Corp. v. CIR, 294 SCRA 687) A: YES. AWSPI may file for an application for tax refund provided that it follows the requisites under Section 4.112-1 (a) of Revenue Regulations No. (RR) 16-05, otherwise known as the Consolidated VAT Regulations of 2005, in relation to Section 112 of the Tax Code, which states that a claimant's entitlement to a tax refund or credit of excess input VAT attributable to zero-rated sales hinges upon the following requisites: (1) the taxpayer must be VATregistered; (2) the taxpayer must be engaged in sales which are zero-rated or effectively zerorated; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; and (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax. Q: Petitioner X Cola, Inc. (X Cola) failed to declare certain input taxes in its VAT return for the 3rd and 4th quarters of 2007. X Cola alleged overpayment of VAT for the said taxable periods since the undeclared input taxes were not credited against output tax. Since X Cola could not amend its VAT returns due to the issuance of a BIR Letter of Authority for 2007, it filed with the BIR claims for refund of alleged overpaid VAT for the 3rd and 4th quarters of 2007. The BIR failed to act on the claims, so X Cola filed a Petition for Review with the CTA. Is X Cola entitled to its claims for refund? It is worth noting that for purposes of zerorating under Section 108 (B) (2) of the Tax Code, the claimant must establish the two components of a client's NRFC status, viz.: (1) that their client was established under the laws of a country not the Philippines or, simply, is not a domestic corporation; and (2) that it is not engaged in trade or business in the Philippines. To be sure, there must be sufficient proof of both of these components: showing not only that the clients are foreign corporations, but also are not doing business in the Philippines. Such proof must be especially required from ROHQs such as AWSPI. (Commissioner of Internal Revenue v. Deutsche Knowledge Services Pte. Ltd., G.R. No. 234445, July 15, 2020) 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. 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. UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 268 Taxation Law Q: Team Energy filed with the BIR its Quarterly VAT Returns and its Monthly VAT Declaration. CIR thereafter filed an administrative claim for cash refund or issuance of tax credit certificate corresponding to the input VAT reported in its Quarterly VAT Returns. Due to CIR’s inaction on its claim, Team Energy filed a Petition for Review. However, in its Answer, the CIR argued that the alleged claim for refund is still subject to administrative investigation/examination and that Team Energy failed to prove compliance with the requirements. Is the CIR’s contention correct? sales for the four quarters of taxable year 2004 was not fully substantiated by proper documents. CTA Division denied the latter's claim for failure to submit the required VAT official receipts as proof of zero-rated sales. In its appeal before the CTA En Banc, XYZ Company alleged that it had fully complied with the invoicing requirements when it submitted sales invoices to support its claim of zero-rated sales. XYZ Company argued that there is nothing in the tax laws and regulations that requires the sale of goods or properties to be supported only by sales invoices, or the sale of services by official receipts only. Is XYZ Company's contention correct? A: NO. Respondent's failure to submit a Certificate of Compliance issued by the Energy Regulatory Commission does not disqualify it from claiming a tax refund or tax credit. Given that respondent in this case likewise anchors its claim for tax refund or tax credit under Section 108(B)(3) of the Tax Code, it cannot be required to comply with the requirements under the EPIRA before its sale of generated power to NPC should qualify for VAT zero-rating. Section 108(B)(3) of the Tax Code in relation to Section 13 of the NPC Charter, clearly provide that sale of electricity to NPC is effectively zero-rated for VAT purposes. A: NO. Sales invoices and documents other than official receipts are not proper in substantiating zero-rated sales of services in connection with a claim for refund. VAT official receipts are indispensable to prove sales of services by a VAT-registered taxpayer. When a VAT-taxpayer claims to have zero-rated sales of services, it must substantiate the same through valid VAT official receipts, not any other document, not even a sales invoice which properly pertains to a sale of goods or properties. 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, and for every sale, barter or exchange of services. Thus, a VAT invoice and a VAT receipt should not be confused as referring to one and the same thing; the law did not intend the two to be used alternatively. The basis for the VAT zero-rated treatment of the supplier is the tax exemption of the purchaser of services, and not the qualification of the supplier itself, in order to relieve the taxexempt purchaser from tax burden considering that it may not be able to offset or utilize any input tax passed on by its supplier of services, had the services it purchased been subject to VAT of 12%. (Commissioner of Internal Revenue v. Team Energy Corporation, G.R. No. 230412, March 27, 2019) In this case, the documentary proofs presented by XYZ Company to substantiate its zero-rated sales of services consisted of sales invoices and other secondary evidence like transfer slips, credit memos, cargo manifests, and credit notes. It is very clear that these are inadequate to support the petitioner's sales of services. (Nippon Express (Philippines) Corporation v. Commissioner of Internal Revenue, G.R. 191495, July 23, 2018) Q: On March 30, 2005, XYZ Company filed an application for tax credit of its excess/unused input taxes attributable to zero-rated sales for the taxable year 2004 in the total amount of ₱27,828,748.95. By reason of the inaction by the BIR, XYZ Company filed a Petition for Review before the CTA on March 31, 2006. In its Answer, respondent CIR interposed the defense, among others, that XYZ Company’s excess input VAT paid for its domestic purchases of goods and services attributable to zero-rated 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 269 National Taxation made. seek the refund or issuance of the tax credit certificate of the VAT; and 2. the jurisdiction of the CTA over the case. Reckoning point for the two (2) year period Zero-rated or effectively zero-rated sales A: 1. The Court in Mirant held that "the reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid," applying Section 112(A) of the NIRC and no other provisions that pertained to erroneous tax payments. (Kepco Ilijan Corporarion v. Commissioner of Internal Revenue, G.R. No. 205185, September 26, 2018) 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) 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) 2. In San Roque, the Court acknowledged an instance when a premature filing in the CTA was allowed. The mandatory and jurisdictional nature of the 120-30 period rule did not apply to claims for refund that were prematurely filed during the interim period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 to October 6, 2010. The CTA could still take cognizance of the claims because they were filed within the period exempted from the mandatory and jurisdictional 120-30 period rule. (Ibid) Thus, when a zero-rated VAT taxpayer pays its input VAT for the purchase from its supplier a year after the pertinent transaction of its sale to its purchaser, the said taxpayer only has a year to file claim for refund or tax credit of the unutilized creditable input VAT. (Ingles, 2015) In case the taxpayer is engaged in zero-rated and also in taxable or exempt sale, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. 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 used in payment of his other internal revenue taxes. (Sec. 112(B), NIRC) Q: Kepco Ilijan Corporation, a duly registered domestic corporation, claimed a refund or issuance of the tax credit certificate for P74,000,000.00 for the VAT incurred in taxable year 2002. It filed its quarterly VAT returns for the four quarters of taxable year 2002. On April 13, 2004, it brought its administrative claim for refund with RDO of the BIR, claiming excess input VAT amounting to P74,000,000.00 for taxable year 2002. Nine days after filing the administrative claim, the petitioner filed its petition for review with the CTA. CTA dismissed the petition on the ground that it did not acquire jurisdiction for Kepco’s failure to observe the 120-30 day period in filing administrative and judicial claims. Rule on the following: 1. the proper reckoning of the periods under Section 112(A) and Section 112(C) of the NIRC for bringing the administrative and judicial claims to UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF INPUT TAX Administrative Claim: Two-Year Prescriptive Period Only the administrative claim that must be filed within the period GR: The reckoning date is the close of the taxable quarter when the relevant sales were made XPN: From June 8, 2007 to September 12, 2008 the two-year prescriptive period for filing a claim for tax refund or credit should be counted from the date of filing of the VAT return and payment of the tax. 270 Taxation Law 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) (Atlas Consolidated Mining and Dev. Corp v CIR, G.R. No. 141104, June 8, 2007) Judicial Claim: 90 +30 Day Period Two ways of filing an appeal to the CTA: a. Within 30 days after the CIR denies the claim within the 90day period, or b. Within 30 days from the expiration of the 90-day period if the CIR does not act within the 90day period. If the claim for VAT is not acted upon by the Commissioner within 90-day period as required by law, such inaction shall be deemed a denial of the application for tax refund or credit. Q: Team Sual Corporation (TSC) is a domestic corporation principally engaged in the business of power generation and sale to National Power Corporation (NPC) under a Build, Operate, and Transfer scheme. GR: The 30-day period to appeal always applies as it is both mandatory and jurisdictional. TSC applied for zero-rating VAT registration for its sale of power generation services to NPC for the taxable year 2001. For the first, second, third, and fourth quarters of 2001, TSC reported excess input VAT amounting to P37,985,009.25, P29,298,556.12, P32,869,835.40, and P66,566,967.02, respectively. The total excess input VAT claimed by TSC for the taxable year amounted to P166,720,367.79. 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. (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. On March 20, 2003, TSC filed with the BIR an administrative claim for refund for the aggregate amount of its unutilized input VAT for the taxable year 2001. On March 31, 2003, it filed with the CTA Division a petition for review praying for the refund or issuance of tax credit certificates for its unutilized input VAT for the first quarter of taxable year 2001. On July 23, 2003, TSC filed another petition for review praying for the refund or issuance of tax credit certificates for its unutilized input VAT for the second, third, and fourth quarters of taxable year 2001. 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 90 days from the day of submission of the complete documents in support of the application filed Provided, That, should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial. (Sec. 112, NIRC; RR No. 13 – 2018) The CTA En Banc rendered a Consolidated Decision granting petitioner's claim for refund of input VAT for the second, third, and fourth quarters of taxable year 2001 amounting to P123,110,001.68. Insofar as the refund of the input VAT for the first quarter of taxable year 2001 is concerned, the CTA En Banc ruled that the CTA did not acquire jurisdiction over it as it had been filed prematurely. Is the ruling of the CTA En Banc correct? Note that the 90-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 – A: YES. In order for the CTA to acquire 271 National Taxation jurisdiction over a judicial claim for refund or tax credit arising from unutilized input VAT, the said claim must first comply with the mandatory 120+30-day waiting period. Any judicial claim for refund or tax credit filed in contravention of said period is rendered premature, depriving the CTA of jurisdiction to act on it. office and granted revenue officers access thereto. This notwithstanding, the CIR failed to apprise Company A of the completeness and adequacy of its supporting documents within the 120-day period under Section 112 (C) of the NIRC. Can Company A file a petition for review with the CTA Division after the lapse of the 120-day period without any action from the CIR? The CIR is then given a period of 120-days from the submission of complete documents in support of the application to either grant or deny the claim. If the claim is denied by the CIR or the latter has not acted on it within the 120day period, the taxpayer-claimant is then given a period of 30 days to file a judicial claim via petition for review with the CTA. A: YES. Section 112 of the Tax Code, as amended, provides the periods relative to the filing of a claim for VAT refunds. Preliminarily, the law allows the taxpayer to file an administrative claim for refund with the BIR within two years after the close of the taxable quarter when the purchase was made (for the input tax paid on capital goods) or after the close of the taxable quarter when the zero-rated or effectively zerorated sale was made (for input tax attributable to zero-rated sale). The CIR must then act on the claim within 120 days from the submission of complete documents in support of the application. In the event of an adverse decision, the taxpayer may elevate the matter to the CTA by way of a petition for review within 30 days from the receipt of the CIR's decision. If, on the other hand, the 120-day period lapses without any action from the CIR, the taxpayer may validly treat the inaction as denial and file a petition for review before the CTA within 30 days from the expiration of the 120-day period. An appeal taken prior to the expiration of the 120-day period without a decision or action of the CIR is premature, without a cause of action, and, therefore, dismissible on the ground of lack of jurisdiction. (Commissioner of Internal Revenue v. Chevron Holdings, Inc., [Formerly Caltex (Asia) Limited, G.R. No. 233301, February 17, 2020) TSC filed its administrative claim for refund for taxable year 2001 on March 20, 2003, well within the two-year period provided for by law. TSC then filed two separate judicial claims for refund: one on March 31, 2003 for the first quarter of 2001, and the other on July 23, 2003 for the second, third, and fourth quarters of the same year. Given the fact that TSC's administrative claim was filed on March 20, 2003, the CIR had 120 days or until July 18, 2003 to act on it. Thus, the first judicial claim covering the first quarter of 2001 was premature because TSC filed it a mere 11 days after filing its administrative claim. On the other hand, the second judicial claim filed by TSC was filed on time because it was filed on July 23, 2003 or five days after the lapse of the 120-day period. Accordingly, it is clear that the second judicial claim complied with the mandatory waiting period of 120 days and was filed within the prescriptive period of 30 days from the CIR's action or inaction. Therefore, the CTA division only acquired jurisdiction over TSC's second judicial claim for refund covering its second, third, and fourth quarters of taxable year 2001. (Team Sual Corporation v. Commissioner of Internal Revenue, G.R. 20122526, April 18, 2018) Effect of failure to submit complete supporting documents to judicial claim of refund in the CTA A distinction must be made administrative cases appealed due to: Q: Company A filed an administrative claim for refund with the BIR for its excess and unutilized input VAT credits. In support of its application for refund, the company submitted documents it deemed necessary for the grant of its refund claim. It even authorized the examination of voluminous supporting documents which were kept in its UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 1. 2. between 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 272 Taxation Law 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. No. DA-489-03 on December 10, 2003 to October 6, 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 (90+30 day period under TRAIN LAW) day periods as mandatory and jurisdictional. (CIR v. Mirant Pagbilao Corp., G.R. No. 180434, January 20, 2016) When a judicial claim for refund or tax credit in the CTA is an appeal of an unsuccessful administrative 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. Exception to the mandatory and jurisdictional nature of the 90+30 day period (BIR Ruling No. DA-489-03 dated December 10, 2003) 1. 2. 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) During the effectivity of BIR Ruling No. DA489-03, BIR Specific Ruling which misleads a particular taxpayer to prematurely file a judicial clam with the CTA. As an exception to the mandatory and jurisdictional 90+30 day period, it was emphasized that from the time of issuance of BIR Ruling No. DA-489-03 on December 10, 2003 up to its reversal by the Supreme Court in the Aichi case on October 6, 2010, taxpayers/claimant need not wait for the lapse of 120-day period (90-day period under TRAIN LAW, RA. 10963) before it could seek judicial relief with the CTA by way of Petition for Review. (RMC 54-2014) Taxpayer must await the lapse of the 90-day period before taxpayer can appeal to CTA The second paragraph of Section 112(C) of the R.A. NO.10963 envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 90-day period; and (2) when no decision is made after the 90-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 90-day period is crucial in filing an appeal with the CTA. (CIR v. Aichi Forging Company of Asia, Inc., GR 184823, October 6, 2010) Before and after the aforementioned period (i.e., December 10, 2003 to October 6, 2010), the observance of the 120-day period (90day period under TRAIN LAW, RA. 10963) 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) Failure to comply with the 90-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. 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) One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 90+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 90+30 day periods is necessary for such a claim to prosper, whether before, during or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling Q: Y Company is a VAT-registered taxpayer which was granted by the BIR a zero-rating on its sales of electricity to National Power Corporation. On 22 December 2005 and 27 February 2006, they filed two separate administrative claims for refund of its 273 National Taxation alleged unutilized input tax for the period January 2004 up to March 2004, and April 2004 up to December 2004, respectively. Due to the inaction of respondent CIR, Y Company filed petitions for review before the CTA. The CTA Division partially granted the refund claim of the petitioner. The CIR moved for reconsideration but to no avail. Thus, the CIR filed a petition for review with the CTA En Banc sided with the CIR in ruling that the judicial claims of Y Company were prematurely filed in violation of the 120-day and 30- day periods prescribed in Section 112 (D) of the NIRC. The court held that by reason of prematurity of its petitions for review, Y Company failed to exhaust administrative remedies which is fatal to its invocation of the court's power of review. Is the court correct? The taxpayer may also appeal to the CTA within 30 days after the lapse of 90 days from the submission of the complete documents, if no action has been taken by the Commissioner. CTA’s denial The taxpayer may appeal the full or partial denial of the claim to the Court of Tax Appeal (CTA) within 30 days from the receipt of said denial, otherwise the decision shall become final. Q: Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows: First quarter - April 25, 2012 Second quarter - July 23, 2012 Third quarter - October 25, 2012 Fourth quarter - January 27, 2013 A: NO. The 120-day and 30-day periods are mandatory and jurisdictional. Thus, noncompliance with the mandatory 120+30-day period renders the petition before the CTA void. However, it is to be noted that BIR Ruling No. DA-489-03 provides, “A taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review.” 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) It is a general interpretative rule issued by the CIR pursuant to its power under Section 4 of the NIRC, hence, applicable to all taxpayers. Thus, taxpayers can rely on this ruling from the time of its issuance on 10 December 2003. In other words, the 120+30-day period is generally mandatory and jurisdictional from the effectivity of the 1997 NIRC on 1 January 1998, up to the present. By way of an exception, judicial claims filed during the window period from 10 December 2003 to 6 October 2010, need not wait for the exhaustion of the 120-day period. In this case, the two judicial claims filed by the petitioner fell within the window period, thus, the CTA can take cognizance over them. (San Roque Power Corporation v. Commissioner of Internal Revenue, G.R. 203249, July 23, 2018) a. Is the CTA correct? b. Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the same? (2014 BAR) A: a. NO. The CTA is not correct. The two-year period to file a claim for refund refers to the administrative claim and does not refer to the period within which to elevate the claim to the CTA. The filing of the administrative claim for refund was timely done because it is made within two years from the end of the quarter when the zero-rated transaction took place (Section112 (A), NIRC) When GC decided to elevate its claim to the CTA on April 22, 2014, it was after the lapse of 120 days (90-day period under TRAIN LAW, RA. 10963) from the filing of the claim for Remedy in case of CIR’s inaction within 90day period or CTA’s denial of claim for TCC/ tax refund CIR’s inaction UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES 274 Taxation Law 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 (90-day period under TRAIN LAW, RA. 10963) for the Commissioner to act and inaction after 120 days (90 days) is a deemed adverse decision on the claim, appealable to the CTA within thirty (30) days from the lapse of the 120-day (90-day) period. (CIR v. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010) registered corporation, reported unutilized excess input VAT in the amount of Pl ,000,000.00 attributable to its zero-rated sales. Hoping to impress his boss, Mr. G, the accountant of FFF, Inc., filed with the BIR on January 31, 2013 a claim for tax refund/credit. Not having received any communication from the BIR, Mr. G filed a Petition for Review with the CTA on March 15, 2013, praying for the tax refund/credit of the Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. b. YES. The two-year prescriptive period to file a claim for refund refers to the administrative claim with the BIR and not the period to elevate the claim to the CTA. Hence, the CTA cannot deny the refund for reasons that the first quarter claim was filed beyond the two-year period prescribed by law. However, when the claim is made before the CTA on February 24, there is definitely no appealable decision as yet because the 120-day (90-day under TRAIN LAW, RA. 10963) 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) a. Did the CTA acquire jurisdiction over the Petition of FFF, Inc.? b. Discuss the proper procedure and applicable time periods for administrative and judicial claims for refund/credit of unutilized excess input VAT. (2015 BAR) A: a. NO. The CTA has not acquired jurisdiction over the Petition of FFF, Inc. because the juridical claim has been prematurely filed on March 15, 2013. The Supreme Court ruled that the 30-day period after the expiration of the 120-day period (90-day period under TRAIN LAW, RA. 10963) 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. Q: Is Team Energy's (A VAT-registered entity) failure to comply with the 120 + 30 day prescriptive period is fatal to its claim? 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. A: YES. A claim for input VAT refund or credit is construed strictly against the taxpayer. Accordingly, there must be strict compliance with the prescriptive periods and substantive requirements set by law before a claim for tax refund or credit may prosper. The mere fact that Team Energy has proved its excess input VAT does not entitle it as a matter of right to a tax refund or credit. The 120+30day periods (90 + 30 day periods under TRAIN LAW) in Section 112 is not a mere procedural technicality that can be set aside if the claim is otherwise meritorious. It is a mandatory and jurisdictional condition imposed by law. Team Energy's failure to comply with the prescriptive periods is, thus, fatal to its claim. (Team Energy v. CIR, G.R. No. 197663, March 14, 2018) b. 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. Q: For calendar year 2011, FFF, Inc., a VAT- 275 National Taxation 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. of Internal Revenue to decide whether to grant or deny its application for tax refund or credit. Section 112(A) of the Tax Code, as amended, provides that the reckoning period in filing an administrative claim is from the close of the taxable quarter when the sales were made and not from the date of filing of the return and payment of the tax due. (CBK Power V. CIR, G.R. No. 202066, September 30, 2014) 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: On September 26, 2007, CE Casecnan filed before the Bureau of Internal Revenue an administrative claim for refund or issuance of tax credit certificate for the excess or unutilized input VAT in the total amount of ₱ 26,066,286.96. Q: On March 26, 2009, petitioner filed an administrative claim with the Bureau of Internal Revenue Laguna Regional District Office for the issuance of a tax credit certificate. This amount represented "unutilized input taxes on its local purchases and/or importation of goods and services, capital goods and payments for services rendered by non-residents, which were all attributable to petitioner’s zero-rated sales for the period of January 1, 2007 to December 31, 2007, pursuant to Section 112 (A) of the Tax Code of 1997, as amended. On March 14, 2008, CE Casecnan filed its Petition for Review, docketed as CTA Case No. 7739, due to the inaction of the Commissioner of Internal Revenue on its administrative claim. On December 2, 2010, the Court of Tax Appeals Former Second Division denied CE Casecnan's judicial claim. Did CTA En Banc erred in denying CE Casecnan claim for refund due to prescription? The next day, March 27, 2009, petitioner filed a petition for review with the Court of Tax Appeals since respondent had not yet issued a final decision on its administrative claim. BIR raised prematurity of judicial claim as one of its defenses in its answer. Did the petitioner timely filed its judicial claim for the issuance of tax credit certificate. If yes, when is the reckoning period for the 90 day period to file an administrative claim for refund/credit of input VAT. A: NO. Resort to an appeal before the Court of Tax Appeals should be made only within thirty (30) days either from receipt of the decision denying the claim or the expiration of the one hundred twenty (120)-day period given to the Commissioner to decide the claim. The thirty (30)-day period provided in Section 112 of the 1997 National Internal Revenue Code to appeal the decision of the Commissioner of Internal Revenue or its inaction is statutorily provided. Failure to comply is a jurisdictional error. The window of exemption created in Commissioner of Internal Revenue v. San Roque Power Corporation is limited to premature filing of the judicial remedy. It does not cure lack of jurisdiction due to late filing. (CE Casecnan v. CIR, G.R. No. 203928, July 22, 2015) A: Compliance with the 120-day and the 30-day periods under Section 112 of the Tax Code, save for those Value-added Tax refund cases that were prematurely (i.e., before the lapse of the 120-day period) filed with the Court of Tax Appeals between December 10, 2003 (when the Bureau of Internal Revenue Ruling No. DA- 48903 was issued) and October 6, 2010,is mandatory and jurisdictional. Petitioner filed its judicial claim on March 27, 2009, only a day after it had filed its administrative claim on March 26, 2009. Clearly, petitioner failed to comply with the 120-day waiting period, the time expressly given by law to the Commissioner UNIVERSITY OF SANTO TOMAS 2021 GOLDEN NOTES Difference between Sec. 112 on refund for VAT and Sec. 229 on refund of other taxes SEC. 112 (VAT) 276 SEC. 229 (OTHER Taxation Law Period is 2 years after the close of the taxable quarter when the sales were made. 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 (C) 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 120-day period(90-day period under TRAIN LAW, RA. 10963) , or (2) only within thirty days from the expiration of the 120-day (90-day period under TRAIN LAW, RA. 10963) period if the Commissioner does not act within the 120-day period (90-day period). (CIR v. San Roque Power Corporation, G.R. Nos. 187485, 196113, 197156, February 12, 2013) REGISTRATION TAXES) Period is 2 years from the date of payment of the tax. Persons required to register for value-added tax Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, ore engages in the sale or exchange of services, shall be liable to register for valueadded tax if: Period to file an administrative claim before the CIR AND judicial claim with the CTA must fall within the 2-year prescriptive period. 1. His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109(A) to (BB), have exceeded three million pesos (₱3,000,000); or 2. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Section 109(A) to (BB), will exceed three million pesos (₱3,000,000). Every person who becomes liable to be registered under paragraph (1) of this subsection shall register with the Revenue District Office which has jurisdiction over the head office or branch of that person. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered. (Sec. 236, NIRC) Optional registration for value-added tax of exempt person. – 1. Any person who is not required to register for value-added tax under Subsection (G) hereof may elect to register for value-added tax by registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in Subsection (B) hereof; or 2. Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2) for the next three (3) years. Manner of Giving Refund Refund shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman of Commission on Audit (COA) the provision of the Revised Administrative Code to the contrary notwithstanding: Provided, that refunds under this paragraph shall be subject to post audit by the COA. Provided that any person taxed under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC who elected to pay the eight percent (8%) tax on COMPLIANCE REQUIREMENTS 277 National Taxation gross sales or receipts shall not be allowed to avail of this option. (Sec. 236, NIRC) SUMMARY OF RULES 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. Failure to register as VAT taxpayer He shall be held liable to pay the tax as if he is a VAT registered person but he cannot avail of the input tax credit for the period that he has not properly registered. (Sec. 236(G), NIRC) Summary of Rules for VAT registration BUSINESS Gross sales exceed P3,000,000 Gross sales do not exceed. ₱ 3,000,000 EFFECT Mandatory VAT registration. Generally liable to pay 12% VAT. Subject to optional VAT registration If VAT-registered: generally liable to pay 12% VAT. If non-VAT registered: generally liable to pay 3% percentage tax Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (90) days from the date of submission of compete documents in support of the application. 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 No. 13 – 2012) 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 w