TAXATION LAW
2021 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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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
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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
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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
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SECRETARY
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HEAD, FINANCE COMMITTEE
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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
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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
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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
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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
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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
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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;
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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
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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 within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
INVOICING REQUIREMENTS
Invoicing requirements, in general
NOTE: It is only the sale of real properties
primarily held for sale to customers or held for
lease in the ordinary course of trade or business
of the seller which shall be subject to VAT. As
such, transactions involving real properties held
as capital asset of individuals are not subject to
VAT. However, it may give rise to capital gains
tax liability.
A VAT-registered person shall issue:
1.
2.
Only persons engaged in real estate business
either as a real estate dealer, developer or
lessors, are subject to VAT.
A VAT invoice for every sale, barter or
exchange of goods or properties; and
A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services. (Sec. 113
NIRC)
Only VAT-registered persons are required to
print their TIN followed by the word "VAT" in
their invoice or official receipts. Said documents
shall be considered as a "VAT Invoice" or VAT.
Information required to be indicated on the
VAT invoice or VAT official receipts
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
278
Taxation Law
1.
2.
A statement that the seller is a VATregistered person, and the taxpayer's
identification number (TIN);
The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT. Provided that:
a.
business style, if any, address and taxpayer
identification number (TIN) of the
purchaser, customer or client. (Sec. 113(B),
NIRC)
NOTE: The appearance of the word “zero rated”
on the face of invoices covering zero rated sales
prevents buyers from falsely claiming input VAT
from their purchases when no VAT was actually
paid. If, absent such word, a successful claim for
input VAT is made, the government would be
refunding money it did not collect. Further, the
printing of the word “zero-rated” on the invoice
helps segregate sales that are subject to 12%
VAT from those sales that are zero-rated. Unable
to submit the proper invoices, taxpayer has been
unable to substantiate its claim for refund.
(Eastern Telecommunication Phils. Inc. v. CIR, G.R.
No. 183531, March 25, 2015)
The amount of the tax shall be shown
as a separate item in the invoice or
receipt;
NOTE: Under RR 18-2011 (November
21, 2011), in case of failure to indicate
the VAT as a separate item in the sales
invoice or official receipt, a fine of not
less than P1,000 but not more than
P50,000 shall, upon conviction, be
collected for each act or omission in
addition to imprisonment of not less
than 2 years but not more than 4
years.
b.
c.
d.
3.
4.
The failure to print the word “zero-rated” in the
invoice/receipts is fatal to a claim for
credit/refund of input VAT on zero rated sales.
(JRA Philippines, Inc. v. CIR, G.R. No. 177127,
October 11, 2010)
If the sale is exempt from value-added
tax, the term "VAT-exempt sale" shall
be written or printed prominently on
the invoice or receipt;
Invoicing requirements in deemed sale
transactions
If the sale is subject to 0% VAT, the
term "zero-rated sale" shall be written
or printed prominently on the invoice
or receipt; or
In the case of Sec. 106(B)(1) (transfer, use or
consumption not in the ordinary course of
business of goods or properties originally
intended for sale or for use in the ordinary course
of business), a memorandum entry in the
subsidiary sales journal to record withdrawal of
goods for personal use is required.
If the sale involves goods, properties
or services some of which are subject
to and some of which are VAT zerorated or VAT-exempt, the invoice or
receipt shall clearly indicate the
breakdown of the sale price between
its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the
sale shall be shown on the invoice or
receipt: "Provided, That the seller may
issue separate invoices or receipts for
the taxable, exempt, and zero-rated
components of the sale.
In the case of Sec. 106(B)(2), (distribution or
transfer to shareholders or creditors) and Sec.
106 (B)(3) (consignment of goods if actual sale is
made within 60 days after the date of such
consignment),an invoice shall be prepared at the
time of the occurrence of the transaction, which
should include, all the information prescribed in
Sec. 113-1. The data appearing in the invoice
shall be duly recorded in the subsidiary sales
journal. The total amount of “deemed sale” shall
be included in the return to be filed for the
month or quarter.
The date of transaction, quantity, unit cost
and description of the goods or properties
or nature of the service; and
In the case of Sec. 106(B)(4), (retirement or
cessation of business), an inventory shall be
prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place
of business not later than 30 days after
In the case of sales in the amount of P1,000
or more where the sale or transfer is made
to a VAT-registered person, the name,
279
National Taxation
retirement or cessation from business.
the close of each taxable quarter prescribed for
each taxpayer:
An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry
into the subsidiary sales journal. The invoice
need not enumerate the specific items appearing
in the inventory, but it must show the total
amount. It is sufficient to just make a reference
to the inventory regarding the description of the
goods. However, the sales invoice number
should be indicated in the inventory filed and a
copy thereof shall form part of this invoice.
Provided, however, That VAT-registered persons
shall pay the value-added tax on a monthly
basis: provided, finally. that beginning January 1,
2023, the filing and payment required under
this Subsection shall be done within twenty-five
(25) days following the close of each taxable
quarter. (Sec. 114 of NIRC)
Payment of VAT
If the business is to be continued by the new
owners or successors, the entire amount of
output tax on the amount deemed sold shall be
allowed as input taxes.
VAT must be paid every month.
FORM
2550-M
Monthly sales
and/or
receipts
within
20
days following
the end of
month.
Scope
If the business is to be liquidated and the
goods in the inventory are sold or disposed
of to VAT-registered buyers, an invoice or
instrument of sale or transfer shall to prepared
citing the invoice number wherein the tax was
imposed on the deemed sale. At the same time
the tax paid corresponding to the goods sold
should be separately indicated in the instrument
of sale. (Sec. 4.113-2, RR No. 16-2005)
Accomplished
only for each
of the first 2
months
of
each taxable
quarter.
Consequences of issuing erroneous VAT
invoice or VAT official receipt
1.
In case of non-VAT registered person who
issues a VAT invoice/receipt shall be held
liable for:
a. Payment of percentage tax if
applicable;
b. Payment of VAT without input tax;
c. 50% surcharge on tax due as provided
for under Sec. 248(B); and
2.
In case a VAT-registered who issues a VAT
invoice/official receipt for a VAT-exempt
sale without the words “VAT Exempt Sale,”
the transaction shall become taxable and
the issuer shall be liable to pay VAT
thereon. The purchaser shall be entitled to
claim an input tax credit on his purchase.
Deadline
of
The VAT payable
for each calendar
quarter shall be
reduced by the
total amount of
taxes previously
paid
for
the
preceding
2
months and/or
the sum of the
allowance excess
input tax carried
over and the VAT
withheld by the
government.
25th
day
of
following
calendar quarter
Where to file the return and pay the Tax
GR: It shall be filed with and the tax paid to
1.
2.
3.
FILING OF RETURNS AND PAYMENT
Filing of return
Every person liable to pay the value-added tax
imposed under this Title shall file a quarterly
return of the amount of his gross sales or
receipts within twenty-five (25) days following
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
20th day
following
month
FORM
2550-Q
Quarterly sales
and/or receipts
within 25 days
after the close of
each
taxable
quarter.
An Authorized Agent Bank (AAB);
Revenue Collection Officer (RCO); or
Duly authorized city or municipal
Treasurer, where such Treasurer is
a.
b.
280
Within the Philippines; and
Located within the revenue district
where the taxpayer is registered or
Taxation Law
required to register. (Sec. 114(B),
NIRC)
payments:
1.
XPN: As the Commissioner otherwise permits.
2.
WITHHOLDING OF FINAL VALUE-ADDED TAX
ON SALES TO GOVERNMENT
3.
Rule regarding the withholding of final VAT
on sales to government
Lease or use of properties or property
rights owned by non-residents;
Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and
Other services rendered in the Philippines
by non-residents.
VAT withheld and paid for the non-resident
recipient (remitted using BIR Form No. 1600),
which VAT is passed on to the resident
withholding agent by the non-resident recipient
of the income, may be claimed as input tax by
said VAT-registered withholding agent upon
filing his own VAT Return, subject to the rule on
allocation of input tax among taxable sales, zerorated sales and exempt sales. The duly filed BIR
Form No. 1600 is the proof or documentary
substantiation for the claimed input tax or input
VAT.
The Government or any of its political
subdivisions, instrumentalities or agencies,
including government owned or controlled
corporations (GOCCs) shall, before making
payment on account of its purchase of goods
and/or services taxed at 12% shall deduct and
withhold a final VAT of 5% of the gross
payment.
The payment for lease or use of properties or
property rights to non-resident owners shall be
subject to 12% withholding tax at the time of
payment. For purposes of this section, the payor
or person in control of the payment shall be
considered as the withholding agent. (Sec.
114(C), NIRC)
Nonetheless, if the resident withholding agent is
a non-VAT taxpayer, said passed-on VAT by the
non-resident recipient of the income, evidenced
by the duly filed BIR Form No. 1600, shall form
part of the cost of purchased services, which
may be treated either as an "asset" or "expense",
whichever is applicable, of the resident
withholding agent.
NOTE: The five percent (5%) final VAT
withholding rate shall represent the net VAT
payable to the seller.
The remaining seven percent (7%) effectively
accounts for the standard input VAT for sales of
goods or services to government or any of its
political subdivisions, instrumentalities or
agencies including GOCCs, in lieu of the actual
Input VAT directly attributable or ratably
apportioned to such sales.
The VAT withheld shall be remitted within 10
days following the end of the month the
withholding was made. (Sec. 4.114-2, RR No. 162005)
NOTE: It was held in the case of Abakada Guro
Partylist v. Ermita, G.R. No. 168056, September 1,
2005, that since it has not been shown that the
class subject to the 5% final withholding tax has
been unreasonably narrowed, there is no reason
to invalidate the provision. It applies to all those
who deal with the government.
Should actual input VAT attributable to sale to
government exceed seven percent (7%) of gross
payments, the excess may form part of the
seller’s expense or cost.
If actual input VAT attributable to sale to
government is less than 7% of gross payment,
the difference must be closed to expense or cost.
ADMINISTRATIVE AND PENAL SANCTIONS
Power of Commissioner to suspend the
business operations of taxpayer
The government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs, as well as private corporations,
individuals, estates and trusts, whether large or
non-large taxpayers, shall withhold ten percent
(12%) VAT with respect to the following
The
Commissioner
or
his
authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment for any of the following
violations:
281
National Taxation
1.
In case of a VAT-registered person
a. Failure to issue receipts or invoices,
b. Failure to file a value-added tax return
as required under Section 114, or
c. Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter;
2.
Failure of any person to register as
required under Section 236
The temporary closer of the establishment shall
be for the duration of not less than five (5) days
and shall be lifted only upon compliance with
whatever requirements prescribed by the
Commissioner in the closure order. (Sec. 115,
NIRC)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
282
Taxation Law
exchange or importation of goods, or sale of
services based upon gross sales, value in money
of receipts derived by the manufacturer,
producer, importer or seller measured by
certain percentage of the gross selling price or
receipts. If the transaction is subject to OPT, it is
no longer subject to VAT. Nonetheless, OPT as
well as VAT may be imposed together with
excise taxes. (Tabag, 2015)
PERCENTAGE TAXES: CONCEPT AND NATURE
As a rule, VAT is imposed on every sale, barter,
or exchange of goods or services and on
importations. However, there are instances
where the same does not apply because the
transaction is subject to other percentage taxes
(OPT) as required by the NIRC.
Percentage tax is a tax imposed on sale, barter,
Tax Rates
COVERAGE
Persons exempt from VAT
under Section 109 (W)
Domestic carriers and keepers
of garages
International
air/shipping
carriers doing business in the
Philippines
Gas and water utilities
Radio
and
television
broadcasting
companies
whose annual gross receipts
of the preceding year do not
exceed P10,000,000 and did
not opt to register as VAT
taxpayer
Overseas dispatch, message or
conversation originating from
the Philippines
Banks and non-bank financing
intermediaries
performing
quasi-banking functions
Other non-bank
intermediaries
financial
BASIS
Gross Receipts on sale or lease of goods, properties
or services
Gross Receipts on transport of passengers by land
(except those thru animals drawn two-wheeled
vehicles)
International Carriers:
Gross Receipts from transport of cargo from the
Philippines to another country
TAX RATE
3%
3%
3%
Franchise Grantees:
Gross Receipts
Gross Receipts
2%
3%
Gross Receipts
10%
On interest, commissions and discounts from lending activities as
well as income from financial leasing, on the basis of remaining
maturities of instruments maturities of instruments from which
receipts are derived:
•Maturity period is five years or less
5%
•Maturity period is more than five years
1%
On dividends and equity shares and net income of 0%
subsidiaries
On royalties, rentals of property, real or personal, 7%
profits from exchange and all other items treated as
gross income under Sec. 32 of the NIRC, as amended
On net trading gains within the taxable year of 7%
foreign currency, debt securities, derivatives and
other similar financial instruments
Interest, commissions and discounts and all other 5%
items treated as gross income under the NIRC, as
amended
Interest, commissions and discounts from lending activities, as well
as income from financial leasing on the basis of remaining
283
National Taxation
COVERAGE
BASIS
maturities of instruments:
•Maturity period is more than five years
Total premiums collected
TAX RATE
1%
Life Insurance Companies
2%
(except purely cooperative
companies or associations)
Agents of foreign insurance companies (except reinsurance premium):
Insurance agents authorized Total premiums collected
4%
under the Insurance Code to
procure policies of insurance
for companies not authorized
to transact business in the
Philippines
Owners of property obtaining Total premiums paid
5%
insurance
directly
with
foreign insurance companies
Proprietor, lessee or operator of the following:
Cockpits
Gross receipts
18%
Cabarets, Night or Day Clubs Gross receipts
18%
videoke bars, karaoke bars,
karaoke televisions, karaoke
boxes and music lounges
Boxing exhibitions
Gross receipts
10%
Professional basketball games Gross receipts
15%
Jai-alai
and
race
track Gross receipts
30%
(operators shall withheld tax
on winnings)
Winnings on horse races
10%
 Winnings or 'dividends'
 Winnings from double forecast/quinella and 4%
trifecta bets
10%
 Prizes of owners of winning race horses
Sale, Barter, Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or
Through Initial Public Offering
Sale, barter, exchange or other Gross selling price or gross value in money
.60% of gross
disposition of shares of stock
selling price
listed and traded through the
or 6/10 of
Local Stock Exchange other
1%
than the sale by a dealer of
securities (Sec. 127 (A))
Sale, barter or exchange or Gross selling price or gross value in money
other disposition through
initial public offering (IPO) of Proportion of disposed shares to total outstanding shares after the
shares of stock in closely-held listing in the local stock exchange:
corporations (Sec. 127 (B))
4%
 Up to 25%
2%
 Over 25% but not over 33 1/3%
1%
 Over 33 1/3%
(www.bir.gov.ph)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
284
Taxation Law
required that the goods be manufactured,
produced or imported for domestic sale,
consumption or any other disposition. The
accrual of the tax liability is, therefore,
contingent on the production, manufacture or
importation of the taxable goods and the
intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner. This
is the reason why the accrual and liability for the
payment of the excise tax are imposed directly
on the manufacturer or producer of the taxable
goods and arise before the removal of the goods
from the place of their production. (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014)
EXCISE TAX: CONCEPT AND NATURE
Excise tax is essentially a tax on goods,
products or articles
The term "excise tax" under Title VI of the 1997
NIRC relates to taxes applied to goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported. (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014)
Kinds of excise taxes
1.
2.
Specific tax – imposed and based on
weight or volume capacity or any other
physical unit of measurement.
Ad valorem tax – imposed and based on
the selling price or other specified value of
the goods.
Major classification of excisable articles
1.
Two concepts of ‘excise’ tax
2.
As used in the NIRC, excise taxes refer to taxes
applicable to certain specified goods or articles
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported into the
Philippines. Excise tax is essentially a tax on
property. (Sec. 129, NIRC; Chevron Philippines,
Inc. v. CIR, G.R No. 210836 September 1, 2015)
3.
4.
As used in classifying taxes according to tax
base, excise tax is “a tax upon the performance,
carrying on, or exercise of some right, privilege,
activity, calling or occupation. This is derived
from American Jurisprudence. Examples are
income tax, transfer tax, VAT, percentage tax and
documentary stamp tax. The meaning of “excise
tax” has undergone a transformation, morphing
from the Am Jur definition to its current
signification in the NIRC which is a tax on certain
specified goods or articles.
5.
Alcohol Products (Secs. 141 – 143, NIRC)
a. Distilled Spirits (Sec. 141, NIRC)
b. Wines (Sec. 142, NIRC)
c. Fermented Liquors (Sec. 143, NIRC)
Tobacco Products (Secs. 144 – 146, NIRC)
a. Tobacco Products (Sec. 144, NIRC)
b. Cigars and Cigarettes (Sec. 145,
NIRC)
c. Inspection Fee (Sec. 146, NIRC)
Petroleum Products (Sec. 148, NIRC)
Miscalleneous Articles (Secs. 149 – 150,
NIRC)
a. Automobiles (Sec. 149, NIRC)
b. Non-Essential Goods (Sec. 150,
NIRC)
Mineral Products (Sec. 151, NIRC)
The payment of excise taxes is the direct
liability of the manufacturer or producer
NOTE: Oil companies are exempt from the
payment of excise tax on petroleum products
manufactured and sold by them to international
carriers. Section 135 (a), in fulfillment of
international agreement and practice to exempt
aviation fuel from excise tax and other
impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum
products from local manufacturers/sellers. (CIR
v. Pilipinas Shell Petroleum Corporation, G.R. No.
188497. February 19, 2014)*
The production, manufacture or importation of
the goods belonging to any of the categories
enumerated in Tit