J9JC9B0M
TAX MADE LESS TAXING:
A REVIEWER WITH CODALS
AND CASES
THIRD EDITION
2021
IGNATIUS MICHAEL D. INGLES
p
s
4-
I
..
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PREFACE TO THE THIRD EDITION
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This third edition includes Supreme Court decisions and relevant
BIR issuances up to September 2020. It also incorporates the TRAIN
amendments into the main text of the book, finally putting to rest all
the questions I've happily received for the past two years of "Kasama
na po ba yung TRAIN?" I'm pleased to say, "Yes! Kasama na\" It also
adds suggested answers to Bar Exam questions from 2017 to 2019.
I've also added some Quick Hits Notes on Percentage Tax, Excise Tax,
and Documentary Stamp Tax for lagniappe.
Updating the book in the middle of the pandemic has been a
weird and surreal experience. Hopefully, by the time this book comes
out, we've flattened the curve, saved as many lives as we could've,
and learned a thing or two about effective leadership in turbulent
times.
Pasig City
September 2020
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ACKNOWLEDGMENT FOR
THE THIRD EDITION
Tax Made Less Taxing: Threepeat would not have been possible
without the help and support of the following:
•
My tax support group, Attys. Adan Delamide, Alex
Ner, T.J. Rocamora, Paolo Santos, Camille Lim-Go, and
Gia Geraldez-Abarquez, who are ever so kind to reply to
my messages on Facebook or WhatsApp;
•
Dean Lily K. Gruba and Atty. Michael Snoops Montero, my
tax idols and frequent ka-kwento about basketball and
volleyball;
•
Everyone who used the Second Edition and the TRAIN
Supplement, for the continued patronage that has made
this book a viable business option for my publisher;
•
Rex Book Store, Inc., for the belief and the Investment in
a young lawyer;
•
My students in the Ateneo Law School, for constantly
pushing me to be better—and for asking really hard
questions and reading the originals;
•
The Law Firm of Ingles, Laurel, and Calderon, for the
Invaluable support and flexibility;
•
My minions, Fabio, Elton, Sassy, and Elfie, and particularly
Elvis and Pierre, whom we miss dearly;
•
My parents and my brother, for the unconditional love and
support;
•
My wife and my son, who are just the absolute best people
In the world—one of the silver linings of the pandemic has
been being stuck at home with them; and
•
God.
f
Ad majorem Dei gloriam.
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PREFACE TO THE SECOND EDITION
For those who like to keep count, this second edition includes
Supreme Court decisions and relevant BIR issuances up to June
2017, adds suggested answers to Bar Exam questions from 2014
to 2016, incorporates updates from new laws like R.A. 10653,
corrects annoying typographical errors (which I apologize for), and
revamps the chapter on Tariffs and Customs with the new Customs
Modernization and Tariffs Act (R.A. 10863).
Makati City
November 2017
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ACKNOWLEDGMENT FOR
THE SECOND EDITION
Tax Made Less Taxing: Episode Two (as I'd like to call it.) would
not have been possible without the help and support of the following:
•
Attys. Michael Snoops Montero, Adan Delamide, Raymond
Roque, Alex Ner, T.J. Rocamora, Paolo Santos, Camille Lim,
and Gia Geraldez-Abarquez, who were all kind enough to
entertain my tax and customs questions while making this
book;
•
The Ateneo de Manila University and Ateneo School of Law
for selecting me as the recipient of the Nippon Foundation
Professorial Chair for 2016-2017—this updated edition is
the result of the generous grant;
•
Everyone, especially the students, who bought and used
the first edition—this second edition would literally not be
possible if the first edition had not sold and had turned out
to be a magnificent dud;
•
Rex Book Store, Inc. which gave this reviewer a home;
•
Mang Nats of the Ateneo School of Law Rex Book Store
branch;
•
Folks on Facebook and on Twitter, who kept me pleasantly
distracted with words of affirmation and funny gifs',
•
The Law Firm of Ingles, Laurel, and Calderon, for giving
me the valuable resources of time and flexibility (not to
mention access to an online legal database);
•
My minions, who now include Sassy the rescued pitbull;
•
My parents and my brother, for their love and encouragement;
•
My wife, for her unending patience and support and the
amazing dakgalbi that she can whip up at a moment's
notice; and
•
God.
Ad majorem Dei gloriam.
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PREFACE TO THE FIRST EDITION
This work was and is the child of necessity. When I was a law
student in the Ateneo de Manila College of Law studying taxation law,
the biggest challenge I faced was finding study materials that had
everything. By everything, I mean the codal provisions, relevant BIR
issuances, and Supreme Court doctrines. As a student who absolutely
detested studying in a desk with gazillions of paper strewn in front
of him, I knew I had to compile everything into one study material,
lest a) coffee shop baristas shoo me away for making a total mess on
their small tables and b) I go crazy come exam time.
What you are holding right now is the "new and improved"
version of the notes I made and used as a student, a bar candidate,
and a tax practitioner. As "Tax Made Less Taxing" is the combined
work of a nerdy student, a nervous bar candidate, and a newbie
practitioner, I believe it will likewise be helpful for the law students,
the bar candidates, and the tax practitioners. "Tax Made Less Taxing"
will appeal to law students who need examples to thresh out mindboggling tax concepts. It will appeal to bar candidates who need a
comprehensive reviewer with on-point doctrines and enumerations.
And it will (hopefully) appeal to tax practitioners as an adequate
research material.
But as the name suggests, this work Is a reviewer. It is not
a treatise on taxation; it will not include groundbreaking analysis
of tax concepts and problems. It will also not include documentary
stamp and percentages taxes (which are excluded in the Bar Exams).
I suggest readers supplement their curiosity and interest with other
textbooks. I likewise suggest readers — specifically, the law students
who are studying tax for the first time — to read the original texts
of the Supreme Court cases. As I have repeatedly told my students,
there is no substitute for reading the "originals"; the pain that comes
with pouring over the words of the Court often leads to a deeper
understanding and easier memorization. More importantly, it leads
to critical analysis, which, in turn, leads to creative thinking and
Innovation.
The goal of this book Is to make tax easier to digest. People find
it difficult to understand tax and that is completely understandable.
Tax is not the most exciting of subjects, and paying tax is neither
exciting. Hence, I have endeavored to break down the codal provisions
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and concepts without sacrificing the essence of the law and to include
fun examples to lighten the mood.
Anyway, enough of this babble, get those highlighters out and
start reading. Do not be scared of tax; try it out. Hopefully, after a
few readings, tax will be less taxing for you. Who knows? It might
even be fun.
Pasig City and Boston, Massachusetts
November 2014
xil
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ACKNOWLEDGMENT FOR THE FIRST EDITION
This book would not have been possible were it not for the help
and guidance of the following:
•
Atty. Michael Snoops Montero, my tax professor who made
tax less taxing for everyone (OBF1);
•
Atty. Serafin U. Salvador, Jr., my boss, the Jedi Master of
tax;
•
Dean Lily K. Gruba, who I worked with for the Ateneo Bar
Operations for Tax;
•
My officemates from Salvador and Associates, who
continue to teach me the ropes and are repositories of tax
knowledge;
•
My friends, blockmates, and batchmates in Ateneo Law
School, who encouraged me to make the reviewers in
the first place (the encouragement increased as exams
neared) and whose kind words of affirmation I still look
back upon today;
•
Elvis, Fabio, Pierre, and Elton, my minions, who make me
happy;
•
My parents, for showing me anything is possible since
1984;
•
My wife, whose wonderful name Is overshadowed only by
her beauty, support, love, and patience; and
•
Jesus Christ, my Lord and Savior, for I am able to do
all things through Him who strengthens me (Philippians
4:13).
Ad majorem Del gloriam.
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DEDICATION
For my loving parents, my lovely wife, my lovable son.
For Elvis and Pierre.
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CONTENTS
General Principles of Taxation
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
Definition
Nature and Characteristics of Taxation and Taxes...
Attributes of a Sound Taxation System
Tax as Distinguished from Other Exactions
Impact and Incidence of Taxation (Direct and
Indirect Taxes)
Inherent Limitations on the Power of Taxation
Constitutional Limitations on the Power of Taxation
Double Taxation
Forms of Escape from Taxation
Exemption from Taxation
Other Doctrines
1
1
3
4
7
8
11
21
23
26
29
Income Tax
Income Tax Systems
B. Income, In General
C. General Principles of Income Taxation
D. Situs of Taxation
E. Income Tax on Individuals
F. Partnerships
G. Corporations
H. Estates and Trusts
I. Taxable Income
.
J. Gross Income
K. Deductions
.
Capital Gains and Losses (Sale or Exchange
of Property)
........................................
M. Determination of Gain or Loss from Sale or
Transfer of Property
N. Fringe Benefits Tax
O. Withholding Tax
Returns and Payments of Tax
P.
A.
32
33
35
36
46
80
84
125
131
132
157
206
217
227
236
253
Estate Tax
A.
B.
Principles and Definition
Rates and Value
271
271
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I
C.
D.
E.
F.
G.
H.
I.
J.
Gross Estate
Computation for the Net Estate
Net State Computation of Married Persons
Gross Estate
Exemption from Estate Tax
Estate Tax Returns.......................................
Payment of Tax
Miscellaneous Provisions
272
283
296
298
300
302
304
Donor's Tax
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
In General
Gross Gifts
Transfer for Insufficient Consideration
Cancellation of Indebtedness
Value of the Gifts
Deductions from Gross Gifts
Resident or Citizen Donors
Deductions from the Gross Gifts by Husband
and Wife
Deductions for a Nonresident, Not Citizen Donor
Other Deductions
Exemptions Under Special Laws
Tax Rates Payable by Donor
Donor's Tax Return
Donor's Tax Credit
307
309
311
312
312
313
316
317
317
318
319
320
Value-Added Tax
A. In General
B. Normal VAT Transactions (12%)
C. Zero-rated/Effectively Zero-rated Transactions
D. Exempt Transactions
E. Input VAT
F. Transitional and Presumptive Input Tax Credits
and Withholding VAT
.
G. VAT Refunds or Tax Credits
H. VAT on Real Properties
I. Administrative Provisions
323
329
342
350
362
369
372
380
384
Quick Hits Notes
A.
B.
Percentage Tax and Excise Tax
Documentary Stamp Tax
393
396
Government's Remedies
398
411
A. Powers of the BIR
B. Tax Assessment...
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C.
D.
E.
Imposition of Penalties
Criminal Action and Other Penalties
Power of Collection
426
437
456
Taxpayer's Remedies
A.
B.
481
496
Protesting an Assessment
Claiming a Refund
Court of Tax Appeals
(R.A. 1125, as amended and Revised Rules of Court
of the CTA, A.M. No. 05-11-07-CTA, as amended)
A.
B.
Jurisdiction of the CTA
Procedure in Civil and Criminal Cases
509
518
Local Government Taxation
A. Principles, Definitions, and Limitations
B. Taxing Powers of LGUs
C. Situs of Local Taxes
D. Collection of Local Taxes
E. Retirement of Business
F. Remedies for Collection of Local Taxes
G. Exemption from Local Tax
H. Prescriptive Periods and Taxpayer's Remedies
in Local Taxation
526
539
557
562
564
565
572
575
Real Property Taxation
A. General Principles and Definitions
B. Real Property and Machinery
C. Appraisal and Assessment
D. Imposition of Real Property Tax and Special Levies
E. Exemption from Real Property Tax
F. Collection of RPT and LGL) Remedies for Collection,
..............................................
G. Taxpayer's Remedies
H. Disposition and Allotment of Local Taxes
584
587
590
601
605
614
621
627
Tariff and Customs Code of 1978,
As Amended by the Customs Modernization
and Tariff Act (R.A. 10863 or the CMTA)
A. Tariff and Duties
B. Requirements of Importation
C. Accrual and Payment of Tax and Duties
D. Unlawful Importation or Exportation ....
E. Remedies
xix
634
645
652
672
680
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GENERAL PRINCIPLES OF TAXATION
A.
Definition
•
Taxation is an enforced proportional contribution, imposed by the
State in its sovereign capacity, to support the government.
•
Three elements of taxation:
1.
It is an enforced proportional contribution from persons and
properties.
2.
It is imposed by the State by virtue of its sovereignty.
3.
It is levied for the support of the government. (PCGG v.
Cojuangco, G.R. No. 147062, December 14, 2001)
Moreover, a tax is a pecuniary burden.
XYZ Corporation manufactures glass panels and is almost at the point
of insolvency. It has no more cash and all it has are unsold glass
panels. It received an assessment from the BIR for deficiency Income
taxes. It wants to pay but due to lack of cash, it seeks permission to
pay in kind with glass panels. Can it do so? (2013 Bar Exam)
Suggested answer: Of course not. Tax is generally a pecuniary
burden. You can't pay with glass panels.
B.
Nature and Characteristics of Taxation and Taxes
The power of taxation is inherent to the State (along with the
power of eminent domain and police power); hence, the right of
the State to impose taxes exists apart from the Constitution.
o
The State Is free to select the subjects of taxation, and the
Court has repeatedly held that inequalities which result from
a singling out of one particular class for taxation or exemption
Infringe no constitutional limitation. (Lutz v. Araneta, G.R.
No. L-7859, December 22, 1955)
o
As the State has the power to determine the subjects of
taxation, it Is also free to select those who will be exempt
from taxation. (Gomez v. Palomar, G.R. No. L-23645, October
29, 1968)
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
2
Lifeblood theory: Taxes are the lifeblood of the State, through
which the government and its agencies continue to operate and
with which the State effects its functions for the welfare of its
constituents. (Commissioner of Internal Revenue [CIR] v. Court
of Tax Appeals, G.R. No. 106611, July 21, 1994)
O
Taxes are what we pay for a civilized society. Without taxes,
the State would be paralyzed. (CIR v. Algue, G.R. No.
L-28896, February 17, 1988)
Hence, because of the lifeblood theory...
O
Injunction generally does not lie against the collection of taxes
(CIR v. Cebu Portland Cement Company, G.R. No. L-29059,
December 15, 1987);
O
The State is not estopped from collecting taxes by the
mistakes or errors of its agents (Philippine Guaranty Co., Inc.
v. CIR, G.R. No. L-22074, April 30, 1965);
■
O
The no-estoppel rule is not absolute. Hence, when the
taxpayer only raises the defense of prescription only on
appeal and the State does not question the timeliness
of the defense, the State can be bound by the acts of
its agents. (China Banking Corporation v. CIR, G.R. No.
172509, February 4, 2015, where it also took the BIR
more than 12 years to collect the tax,)
Laws exempting subjects from taxation are strictly construed
against the taxpayer.
However, even with the lifeblood theory, the power of taxation
must still be exercised reasonably and in accordance with the law
and prescribed procedure. (CIR v. Algue, G.R. L-28896, February
17, 1988)
O
Moreover, while the State has the power to make a reasonable
classification for taxation purposes, it must not be prompted
by a spirit of hostility, or at the very least discrimination
that has no reasonable basis. (Reyes v. Almanzor, G.R. Nos.
L-49839-46, April 26, 1991)
O
The power of taxation is sometimes also called the power
to destroy. Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg." (Philippine Health
Care Providers, Inc. v. CIR, G.R. No. 167330, September 18,
2009)
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GENERAL PRINCIPLES OF TAXATION
•
3
Taxes are not political in nature and as such are continued in
force during the period of enemy occupation. Such tax laws are
deemed to be the laws of the occupied territory and not of the
occupying enemy.
O
Hence, tax laws were considered effective during the Japanese
occupation. (Hiiado v. CIR, G.R. No. L-9408, October 31,
1956)
Briefly explain the following doctrines: lifeblood doctrine; necessity
theory; benefits received principle; and, doctrine of symbiotic
relationship. (2016 Bar Exam)
Suggested answer: The lifeblood doctrine states that taxes are the
lifeblood of the state; without taxes, the government will not operate.
The necessity theory states that the government cannot continue to
operate without taxes to pay for expenses; hence, it can compel its
citizens to pay up. The benefits received principle states that taxes
are what we pay for a civilized society—we pay, the government
protects. The symbiotic relationship doctrine states that taxpayers
and the government have reciprocal obligations: the taxpayer to pay
taxes and the government to provide protection and benefits.
c.
Attributes of a Sound Taxation System
The attributes of a sound taxation system are:
o
Fiscal adequacy
•
O
o
The sources of revenue should be adequate to meet
government expenditures and their variations. (Chavez
v. Ongpin, G.R. No. 76778, June 6, 1990)
Administrative Feasibility
•
The tax system should be capable of being effectively
administered and enforced with the least inconvenience
to the taxpayer.
•
However, even If the imposition is burdensome to the
taxpayer, the tax imposition Is not necessarily invalid
unless some aspect of it is shown to violate any law or
the Constitution. (Diaz v. Secretary of Finance, G.R. No.
193007, July 19, 2011, where the VAT on toll way fees
was questioned as burdensome)
Theoretical Justice
The tax system should be fair to the average taxpayer
and based upon the ability to pay.
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
4
Explain the principles of a sound tax system. (2015 Bar Exam)
Suggested answer: A sound tax system is FAT. There are three
principles of a sound tax system. First is fiscal adequacy, meaning
the sources of revenue must be adequate to cover government
expenditures. Second is administrative feasibility, meaning the
system should at least be capable of being effectively administered.
Third is theoretical justice; it should be fair and be based on a
taxpayer's ability to pay.
Tax as Distinguished from Other Exactions
D.
It is important to differentiate taxes from other exactions,
especially when it comes to problems and issues on double
taxation, tax exemptions, the jurisdiction of the Court of Tax
Appeals, and taxpayer remedies such as refund claims.
o
Simply, if an exaction is not a tax, then the defense of a
taxpayer of double taxation will necessarily fail.
o
In the same manner, a tax-exempt individual or corporation
Is generally only exempt from paying taxes; hence, if the
exaction is not a tax, then the individual or corporation must
still pay the exaction.
As against llcense/regulatory fees
Source
Purpose
Object
As to the
amount
___________ TAX________
______ LICENSE FEE_______
Taxing power_________
Raise revenue________
Persons, property and
privilege______________
No limit
Police power of the State
Regulation____________ _____
Right to exercise a
privilege____________________
Only necessary to carry
out regulation
If generating 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 revenue is incidentally obtained
does not make it a tax.
o
For example, the Universal Charge imposed through the
Electric Power Industry Reform Act (EPIRA) was held to be a
regulatory fee as it was imposed to ensure the viability of the
Philippines' electric power industry. (Gerochi v. Department
of Energy, G.R. No. 159796, July 17, 2007)
o
Fees for the construction of special projects such as cell sites
were held as regulatory fees because the main purpose of
the ordinance imposing such fees was to regulate certain
J9JC9B0M
GENERAL PRINCIPLES OF TAXATION
5
construction activities like telecommunication towers and
telephone lines. (Smart Communications v. Municipality of
Malvar, Batangas, G.R. No. 204429, February 18, 2014,
reiterated in Cagayan de Oro v. Cagayan Electric Power and
Light Co., G.R. No. 224825, October 17, 2018)
The power of taxation can be used as an implement of police
power (i.e., it can also be used to regulate certain industries such
as the sugar industry or power industry); however, if the purpose
is primarily revenue, or if revenue is at least one of the real and
substantial purposes, then the exaction is properly called a tax.
(Planters Products, Inc. v. Fertiphi! Corporation, G.R. No. 166066,
March 14, 2008)
O
The Socialized Housing Tax (SHT) imposed by Quezon City
is an example of a tax that is used to implement the state's
police power. (Ferrer v. City Mayor Bautista, G.R. No. 210551,
June 30, 2015, where the SC upheld the validity of the SHT
which it found to serve the regulatory purpose of removing
slum areas in QC)
To be considered a license fee, the imposition must relate to
an occupation or activity that so engages the public interest in
health, morals, safety, and development as to require regulation
for the protection and promotion of such public Interest.
o
The fee imposed by a city on liquor vendors for the privilege
of selling liquor is a license fee. It is not a tax; hence, the
liquor vendors cannot state that they are subject to double
taxation. (Compania General de Tabacos de Filipinas v. City
of Manila, G.R. No. L-16619, June 29, 1963)
o
Building fees are not taxes or impositions upon property, but
regulatory fees imposed by a city for the activity of building
or repairing a structure. Hence, a foundation which is exempt
from taxes cannot claim that It is exempt from the payment
of building fees, as these are not taxes in the first place.
(Angeles University Foundation v. City of Angeles, G.R. No.
189999, June 27, 2012)
The Imposition must also bear a reasonable relation to the
probable expenses of regulation, taking into account not only the
costs of direct regulation but also its incidental consequences as
well.
o
A charge of a fixed sum which bears no relation at all to the
cost of inspection and regulation may well be considered a
tax. (Progressive Development Corporation v. Quezon City,
G.R. No. L-36081, April 24, 1989)
J9JC9B0M
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
6
•
O
Hence, exacting a certain amount of money as employee's fees
from aliens who have already been cleared for employment
has no justification as a regulatory measure and is actually a
tax under the guise of regulation. (Villegas v. Hiu Chiong Tsai
Po Ho, G.R. No. L-29646, November 10, 1978)
o
Fees imposed on a per liter basis on fuel entering the Clark
Special Economic Zone were held to be regulatory fees
because there was a reasonable relation between the high
volume of fuel brought into the zone and the greater extent
of supervision and inspection needed to monitor the fuel.
(Chevron Philippines, Inc. v. Bases Conversion Development
Authority, G.R. No. 173863, September 15, 2010)
Exactions which are collected by agencies other than the Bureau
of Internal Revenue can still be considered taxes if the law
specifically states that these exactions are taxes. (Agusan Wood
Industries v. DENR, G.R. No. 234531, July 10, 2019, where the
taxpayer filed a refund claim for forest charges with the collecting
agency DENR, which the SC stated was the wrong agency to file
with as the forest charges were in fact taxes,)
As against special assessments
TAX
SPECIAL ASSESSMENT
Imposed on
Persons, properties,
etc.
Only on land
Why imposed
Regardless
of public
improvement
Public improvement
benefits the land and
increases its value
Purpose
Support of
government
Contribution to cost of
public improvement
When imposed
Regular exaction
Exceptional as to time
and locality
Basis
Necessity
Benefits obtained
Under the Local Government Code, local government units may
impose a special levy on lands specially benefited by public works
projects or improvements funded by the local government unit.
The purpose of special levies/assessments is to finance the
improvement of particular properties, with the benefits of the
improvement accruing or inuring to the owners thereof who, after
all, pay the assessment. (Republic of the Philippines v. BacolodMurcia Milling Co., G.R. No. L-19824, July 9, 1966)
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GENERAL PRINCIPLES OF TAXATION
7
As against toll fees
TAX
TOLL FEES
Imposed by
State
Private persons______________
Purpose
Raise revenues
Reimbursement of costs and
expenses incurred in the
construction of toll
ways, and to assure
reasonable margin of income
Basis
State's sovereign
power
Attribute of ownership
Fees paid by the public to toll way operators for the use of toll
ways are not taxes. These are exactions which end up as earnings
of toll way operators, not the government. (Diaz v. Secretary of
Finance, G.R. No. 193007, July 19, 2011)
E.
Impact and Incidence of Taxation (Direct and Indirect
Taxes)
Impact of taxation: point where the tax is originally Imposed
or the one on whom the tax is formally assessed (the statutory
taxpayer in most cases)
Incidence of taxation: point on whom the tax burden finally rests
It is essential to know where the impact of taxation lies because
it generally determines:
o
The proper party to claim a refund of erroneously imposed
indirect taxes, and
o
Whether the indirect taxes can be passed on to an exempt
buyer.
Based on the possibility of shifting the incidence of taxation,
taxes may be classified into direct and indirect taxes. (CIR v.
PLOT, G.R. No. 140230, December 15, 2005)
o
Direct taxes are those that are exacted from the very person
who should pay them.
•
They are impositions for which a taxpayer Is directly liable
on the transaction or business he is engaged in.
•
Example: income tax, transfer taxes (estate tax and
donor's tax), residence tax (cedula)
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Indirect taxes are those that are demanded in the first
instance from or are paid by one person, with the expectation
and intention that he can shift the burden to someone else.
O
•
Indirect taxes are taxes wherein the liability for the
payment of the tax 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.
•
When the seller passes on the tax to his buyer, he, in
effect, shifts the tax burden, not the liability to pay it,
to the purchaser as part of the price of goods sold or
services rendered.
•
Hence, the tax-exempt status of a buyer will not affect
the liability of a seller for the indirect tax as the seller is
the taxpayer statutorily liable for the payment of the tax.
■
Example: VAT, percentage taxes
F.
Inherent Limitations on the Power of Taxation
•
While the power of taxation is inherent to a State, such power is
still subject to limitations. If no limitations were imposed on the
power, then the State would be dangerous, rampant in wielding
such power. Let's begin with the inherent limitations on the power
of taxation.
1.
Taxes must be exacted for a PUBLIC PURPOSE.
•
Money raised by taxation can be spent only for public purposes
and not for the advantage of private individuals. (Pascua! v.
Secretary of Public Works, G.R. No. L-10405, December 29,
1960)
•
Public purpose may legally exist even if the motive which impelled
the legislature to impose the tax was to favor one industry over
another. (Tio v. Videogram Regulatory Board, G.R. No. 75697,
June 19,1987, where the favored industry was the video industry)
2.
The power to tax is INHERENTLY LEGISTLATIVE in nature.
General rule: The power to tax is purely legislative and cannot
be delegated to other branches of the government. (Pepsi-Cola
Bottling Company v. Municipality of Tanauan, G.R. No. L-31156,
February 27, 1976)
o
EXCEPT:
•
Delegation to local governments (as local governments
are granted the autonomous authority to create their own
sources of revenue and levy taxes)
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Delegation to the President (such as the grant to the
President to impose tariff rates within the bounds
sanctioned by the Customs and Tariffs Modernization Act)
Delegation to administrative authorities (such as the
authority to fix rates within limits specified by the law)
3.
GOVERNMENT entities, agencies,
generally exempt from taxation.
and
instrumentalities
are
There is no point in national and local government taxing each
other, unless a sound and compelling policy requires such transfer
of public funds from one government pocket to another.
o
4.
Note, however, that while government instrumentalities are
exempt from real property taxes, government-owned or
controlled corporations are not exempt from real property
taxes. {Manila International Airport Authority [MIAA] v. City
of Paranaque, G.R. No. 15560, July 20, 2006, where the
MIAA was considered a government instrumentality and thus
exempt from the payment of real property taxes imposed by
Paranaque)
INTERNATIONAL COMITY
Tax treaties are entered into to minimize the harshness of
international double taxation.
O
Laws and Issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties entitled thereto.
The obligation to comply with a tax treaty must take precedence
over an administrative issuance. An administrative issuance such
as a Revenue Memorandum Order (RMO) should not operate to
divest entitlement to a relief granted by a tax treaty.
O
The denial of a relief based on a tax treaty due to the failure
of a taxpayer to comply with a RMO would Impair the value
of the tax treaty and the State's duty to comply in good faith
with the tax treaty. {Deutsche Bank AG Manila v. CIR, G.R.
No. 188550, August 19, 2013, where the SC held that the
non-compliance of the taxpayer of a period prescribed by the
RMO should not divest it of its relief based on the RP-Germany
Tax Treaty; reiterated in CBK Power Company Limited v. CIR,
G.R. No. 193383, January 14, 2015)
However, tax exemptions based on International agreements
are still subject to the rule "laws granting taxing exemption are
construed strictly against the taxpayer." {Sea-Land Services, Inc.
v. Court of Appeals, G.R. No. 122605, April 30, 2001, where the
Court held that the transport of household goods of US military
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personnel was not included in the tax exemptions granted by the
RP-US Military Bases Agreement)
•
An Exchange of Notes is considered an executive agreement
binding on states. Hence, an Exchange of Notes between the
Philippines and Japan which states that the Philippine Government
will assume taxes initially to be paid by Japanese firms should
be respected. (Mitsubishi Corporation-Manila Branch v. CIR, G.R.
No. 175772, June 5, 2017)
5.
Taxes are limited to the State's TERRITORIAL JURISDICTION
•
The power to tax is limited to the territorial jurisdiction of the
State.
o
EXCEPT where privity of relationship exists between the State
and the taxpayer. In these cases, the State can exercise its
taxing powers over the taxpayer even outside its territory
(such as the taxation of resident citizens for income from
sources worldwide).
•
As the State can exercise its power to tax within its territorial
jurisdiction, it can tax sales within foreign military zones as these
military zones are not considered foreign territory. (Reagan v.
CIR, G.R. No. L-26379, December 27, 1969)
•
The State can tax a transaction if substantial elements of the
contract are situated in the Philippines. (Manila Electric Company
v. Yatco, G.R. No. 45697, November 1, 1939)
•
In CIR v. Marubeni (G.R. No. 137377, December 18, 2001),
involved were turnkey contracts relating to the installation of
a wharf complex and an ammonia storage complex in Leyte.
Marubeni Corporation was a resident foreign corporation. The
Supreme Court held that the turnkey contracts were actually
divisible contracts which each had different stages, with each
stage having a different tax implication.
o
For the stages involving the design, engineering, and
procurement of equipment and supplies, these were all
considered outside the hands of the Philippine taxing authority
as these were all done in Japan.
o
For the stages involving the actual installation and
construction, these were all considered within the jurisdiction
of the Philippine taxing authority as the construction and
installation of works were done within the Philippines.
o
The implication here is that if you can argue that the contract
is divisible, you can also argue that some stages of the
contract were not sourced here in the Philippines, and thus
beyond the taxing jurisdiction of the Philippines.
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O
11
This would be huge, considering that if the contract were
considered indivisible, then everything would be considered
situated here in the Philippines and thus the whole contract
would be fully taxed.
Jennifer is the only daughter of Janina who was a resident in Los
Angeles, California, U.S.A. Janina died in the U.S. leaving to Jennifer
one million shares of Sun Life (Philippines), Inc., a corporation
organized and existing under the laws of the Republic of the
Philippines. Said shares were held in trust for Janina by the Corporate
Secretary of Sun Life and the latter can vote the shares and receive
dividends for Janina. The Internal Revenue Service (IRS) of the U.S.
taxed the shares on the ground that Janina was domiciled in the U.S.
at the time of her death.
a)
Can the CIR of the Philippines also tax the same shares? Explain.
b)
Explain the concept of double taxation. (2016 Bar Exam)
Suggested answer:
a) Yes, the CIR can also tax the shares. Generally, the state has the
power to tax subjects within its territorial jurisdiction. An example of
this power is how the Tax Code states that a decedent's gross estate
subject to estate tax includes properties located in the Philippines,
whether the decedent is a citizen, a resident alien, or a non-resident
alien. Properties In the Philippines include shares in corporations
organized here, such as Sun Life (Philippines), Inc. Hence, the CIR
can tax these shares.
b) There are two kinds of double taxation. The first Is double
taxation in the broad sense or indirect double taxation; this occurs
when a pecuniary burden is imposed on the same subject matter by
two different taxing authorities. The problem above Is an example
of indirect double taxation, as the tax is imposed by two different
taxing authorities (the US and the Philippines).
The second Is double taxation in the strict sense or direct double
taxation; this occurs when the same property Is taxed twice by
the same taxing authority for the same purpose within the same
jurisdiction during the same taxing period, with the two taxes of the
same kind of character. This is prohibited.
G.
Constitutional Limitations on the Power of Taxation
The State's power of taxation is also limited by the Constitution.
Let's go through the limitations one by one.
1.
Due Process
Article III, Section 1. No person shall be deprived of life,
liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.
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•
Tax laws and their enforcement must comply with substantive
and procedural due process.
O
0
Substantive: the law must be reasonable and must be for a
public purpose
Procedural: there must be no arbitrariness in the assessment
and collection; the prescribed rules must be followed before
assessment and collection
2.
Equal Protection of Laws
•
There is valid discrimination when the classification:
0
Rests on substantial distinctions;
o
Is germane to the purpose of the law;
o
Not limited to existing conditions only; and
0
Applies equally to all members of the same class.
•
Equal protection guarantee does not require territorial uniformity
of laws. As long as there are actual and material differences
between territories, there is no violation of the constitutional
clause. (Tiu v. Court of Appeals, G.R. No. 127410, January 20,
1999, where the Court said that there are substantial differences
between businesses located within a fenced-in area of special
economic zone and those located without)
•
Tax exemptions have never violated the equal protection clause,
as the Legislature has the inherent power not only to select the
subjects of taxation but to grant exemptions. (CIR v. Lingayen
Gulf Electric Power Co., Inc., G.R. No. L-23771, August 4, 1988)
The municipality of San Isidro passed an ordinance imposing a tax on
Installation managers. At that time, there was only one installation
manager in the municipality; thus, only he would be liable for the
tax. Is this constitutional? (2013 Bar Exam)
Suggested answer: Yes, it is constitutional. It complies with the
requisites of equal protection. It is not limited to existing conditions
only, as future Installation managers will be subject to the tax. (Shell
v. Vano, G.R. No. L-6093, February 24, 1954)
Heeding the pronouncement of the President that the worsening
traffic condition in the metropolis was a sign of economic progress,
the Congress enacted Republic Act No. 10701 (RA 10701), also
known as An Act Imposing a Transport Tax on the Purchase of
Private Vehicles.
Under RA 10701, buyers of private vehicles are required to pay a
transport tax equivalent to 5% of the total purchase price per vehicle
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13
purchased. RA 10701 provides that the Land Transportation Office
(LTO) shall not accept for registration any new vehicles without proof
of payment of the 5°/o transport tax. RA 10701 further provides that
existing owners of private vehicles shall be required to pay a tax
equivalent to 5% of the current fair market value of every vehicle
registered with the LTO. However, RA 10701 exempts owners of
public utility vehicles and the Government from the coverage of the
5°/o 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.
Rule on the constitutionality and validity of RA 10701. (2017 Bar
Exam)
Suggested answer: This is constitutional. It complies with the
requisites of equal protection. There is a substantial distinction
between private vehicles vs. public utility vehicles and government
vehicles. Further, taxing private vehicles and not PUVs is germane
to the purpose of the law to alleviate traffic because it'll incentivize
the use of PUVs which can carry more people per vehicle compared
to private vehicles.
3.
Religious Freedom
Article III, Section S. 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.
The constitutional guaranty of the free exercise and enjoyment
of religious profession and worship carries with It the right to
disseminate religious information.
o
Any restraints of such right can only be justified like other
restraints of freedom of expression on the grounds that there
is a clear and present danger of any substantive evil which
the State has the right to prevent.
o
Hence, a tax imposed on the distribution and sale of bibles
and other religious literature is invalid. (American Bible
Society v. City of Manila, G.R. No. L-9637, April 30, 1957)
Note, however, that under Section 30, National Internal Revenue
Code of the Philippines (NIRC), income of religious organizations
from activities conducted for profit or from any of their property
(regardless of disposition of such income) Is subject to income
tax.
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Non-impairment of Contracts
4.
Article III, Section 10. No law impairing the obligation of contracts
shall be passed.
The tax exemptions protected by the non-impairment clause are
contractual tax exemptions, not those granted by franchises or
licenses.
•
•
o
A license conferring a tax exemption can be revoked at
any time since it does not confer an absolute right, even if
these were granted as inducements to invest in the country.
(Republic v. Caguioa, G.R. No. 168584, October 15, 2007)
o
A franchise is likewise subject to amendment, alteration,
or repeal by Congress when the public interest so requires;
hence, any exemption based on a franchise is not protected
by the non-impairment clause. (Cagayan Electric Power and
Light Co., Inc. v. CIR, G.R. No. L-60126, September 25,
1985)
Contractual tax exemptions are:
o
Those entered into by the taxing authority,
o
Lawfully entered into them under enabling laws,
o
Wherein the government acts in its private capacity and
sheds its cloak of authority and immunity. (Manila Electric
Co. v. Province of Laguna, G.R. No. 131359, May 5, 1999)
Examples of contractual tax exemptions which are protected by
the non-impairment clause:
•
o 1 Government bonds or debentures
o
5.
Perfected mining concession granted by the Spanish
Government. (Casanovas v. Hord, G.R. No. 3473, March 22,
1907)
Prohibition Against Imprisonment for Non-payment of Poll Tax
Article III, Section 20. No person shall be imprisoned for debt or
non-payment of a poll tax.
•
In the Philippines, poll tax refers to the cedula or residence tax.
o
The Constitutional protection only applies to poll taxes;
hence, people can still be imprisoned for non-payment of
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15
other kinds of taxes where the law so expressly provides (like
for tax evasion cases).
6.
Uniformity and Equality of Taxation and Progressive System of
Taxation
Article VI, Section 28. (1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.
Equality and uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be taxed at the same
rate. (City of Baguio v. de Leon, G.R. No. L-24756, October 31,
1968)
o
Uniformity does not call for perfect uniformity or perfect
equality; reasonable classifications do not violate the
uniformity and equality of taxation. (Sison v. Ancheta, G.R.
No. L-59431, July 25, 1984)
o
The Constitution is also not violated when a certain tax is not
imposed in other jurisdictions, for the Constitution does not
require that taxes for the same purpose should be Imposed in
different territorial subdivisions at the same time. (Villanueva
v. City of Iloilo, G.R. No. L-26521, December 28, 1968)
o
Congress is free to determine the subjects of taxation; hence,
the tax is still valid when some classes are subject to tax while
some are not subject to tax. (Eastern Theatrical v. Alfonso,
G.R. L-1104, May 31, 1949)
•
However, the classification must still be valid and
reasonable, according to the rules on equal protection.
If the classification is unreasonable, then the rule on
uniformity will be violated. (Pepsi-Cola Bottling v. City of
Butuan, G.R. No. L-22814, August 28, 1968)
•
A BIR Issuance which unwittingly imposes different tax
rates to the same class of products violates the rule on
uniformity. (CIR v. Fortune Tobacco Corporation, G.R.
No. 180006, September 28, 2011)
Note: a classification freeze provision which imposes a different
tax base depending on the date of Introduction of a product in
the market has been held to be valid because it simplified tax
administration and eliminated potential abuse and corruption in
tax collection. (British American Tobacco v. Camacho, G.R. No.
163583, April 15, 2009)
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Taxation is progressive when its rate goes up depending on the
resources of the person affected.
•
o
7.
VAT is admittedly regressive, because it is imposed on
persons regardless of income. However, it is still valid as
the Constitution's mandate is simply to evolve a progressive
system of taxation. In any case, the VAT system minimizes
the regressive effects by providing zero-rated transactions.
(Abakada Guro Party List v. Ermita, G.R. No. 168056,
September 1, 2005)
Delegated Authority to the President to Impose Tariff Rates
Article VI, Section 28. (2) The Congress may, by law, authorize the
President to fix within specified limits, and subject to such limitations
and restrictions as 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.
Prohibition Against Taxation of Real Property of Charitable
Institutions, Churches, Parsonages or Convents, Mosques and
Non-profit Cemeteries
8.
Article VI, Section 28. (3) 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.
•
The exemption only applies to real property tax. (Lladoc v. CIR,
G.R. No. L-19201, June 16, 1965)
•
"Actual, direct and exclusive use of the property" is the direct
and immediate and actual application of the property itself to the
purposes for which the institution is organized. (Lung Center v.
Quezon City, G.R. No. 144104, June 29, 2004)
o
"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. (Lung
Center v. Quezon City, G.R. No. 144104, June 29, 2004)
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O
17
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; it is the actual use of the property.
•
Hence, when portions of a hospital and portions of the
land are leased to private entities, those portions are
no longer exempt from real property taxes as the actual
use of the property is no longer for charitable purposes.
(Lung Center v. Quezon City, G.R. No. 144104, June 29,
2004)
Before the 1973 and 1987 Constitutions, the phrase did not
include "actual" and "direct"; the mere qualification was for
"exclusive" use. Hence, cases stated that the exemption extends
to facilities which are incidental to and reasonably necessary for
the accomplishment of said purposes. (Herrera v. Quezon City
Board of Assessment Appeals, G.R. No. L-15270, September 30,
1961)
O
Hence, a hospital, a school devoted to the hospital, and garage
necessary for the school were considered exempt from real
property tax. (Herrera v. Quezon City Board of Assessment
Appeals, G.R. No. L-15270, September 30, 1961)
o
A lodging house for people who participate in religious
activities and a vegetable garden used by a priest, both of
which were adjacent to a church were held to be incidental
and necessary for religious purposes and were considered
exempt from real property tax. (Bishop of Nueva Segovia v.
Provincial Board of Ilocos Norte, G.R. No. L-27588, December
31, 1927)
o
The use by the Director of a school of a floor for residential
purposes was held as incidental to educational purposes.
(Abra Valley College, Inc. v. Aquino, G.R. No. L-39086, June
15, 1988)
•
However, the lease of a floor of a school to a marketing
company was not Incidental to educational purposes and,
thus, not exempt from real property tax. (Abra Valley
College, Inc. v. Aquino, G.R. No. L-39086, June 15, 1988)
•
Note, however, that the Herrera, Nueva Segovia, and
Abra cases were not decided under the more restrictive
wording of the 1973 and 1987 Constitutions. Abra
v. Hernando (G.R. No. L-49336, August 31, 1981)
clarified that there must now be proof of actual and
direct use of the land, buildings, and Improvements
for religious, charitable, or educational purposes. This
was reiterated by Justice Callejo in the Lung Center
case.
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Prohibition Against Taxation of Non-stock, Non-profit Educational
Institutions
9.
Article XIV, Section 4. (3) 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. Upon the dissolution or cessation of the corporate existence
of such institutions, their assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by lav/, including restrictions on dividends and
provisions for reinvestment.
The constitutional provision covers non-stock, non-profit (NSNP)
educational institutions and exempts them from income tax,
real property tax, donor's tax, and customs duties because the
provision speaks of "all revenues and assets."
Revenues consist of the amounts earned from the conduct of
business operations.
O
•
Assets are tangible and intangible properties of the taxpayer.
o
•
Revenue is the component of the tax base in income tax,
VAT, and local business tax. (CIR v. DLSU, G.R. No. 196596,
November 9, 2016)
The fair market value (FMV) of real property is the tax base
for real property tax. (CIR v. DLSU)
The revenues and the assets must be used actually, directly, and
exclusively for educational purposes.
0
The test to determine exemption is the use of both the
revenues and assets.
0
Hence, when the revenues are actually, directly, and
exclusively used for educational purposes, the NSNP
educational institution shall be exempt from income tax,
VAT, and local business tax. The revenues do not need to
come from educational activities, as long as it is used for
educational purposes. (La Sallian Educational Innovators
Foundation v. CIR, G.R. No. 202792, February 27, 2019)
O
And when the assets are actually, directly, and exclusively used
for educational purposes, the NSNP educational institution
shall be exempt from real property tax. (CIR v. DLSU, where
the Court said that if a university leases a portion of a school
building to a bookstore or canteen, the leased portion is no
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longer used for educational purposes and thus subject to real
property tax, even if it caters to students. I don't agree and
would argue that a bookstore and canteen are reasonably
covered under a school's "educational purpose.")
O
Income from cafeterias, canteens and bookstores are also
exempt if they are owned and operated by the educational
institution and are located within the school premises.
(Revenue Memorandum Circular [RMC] 76-2003)
Distinguish from tax treatment of:
(10%
under Section
O
Proprietary educational
27[B], NIRC)
O
Government educational institutions (Exempt under Section
30, NIRC)
institutions
San Juan University is a nonstock, non-profit educational institution.
It owns a piece of land in Caloocan City on which its three 2-storey
school buildings stood. Two of the buildings are devoted to classrooms,
laboratories, a canteen, a bookstore and administrative offices. The
third building Is reserved as dormitory for student athletes who are
granted scholarships for a given academic year.
In 2017, San Juan University earned income from tuition fees and
from leasing a portion of its premises to various concessionaires of
food, books, and school supplies.
a) Can the City Treasurer of Caloocan City collect real property
taxes on the land and building of San Juan University? Explain your
answer.
b) Is the income earned by San Juan University for the year 2017
subject to income tax? Explain your answer. (2017 Bar Exam)
Suggested answer:
a)
i
■
b)
The City Treasurer may not collect real property taxes for the
non-leased out portions. The Constitution states that all assets of
nonstock, non-profit educational institutions actually, directly,
and exclusively used for educational purposes are exempt from
all taxes. In this case, San Juan University is a nonstock,
non-profit educational institution. Its land and two buildings
are actually, directly, and exclusively used for educational
purposes. However, the portions leased out to concessionaries
may be subject to real property taxes, as the lease constitutes
commercial use and thus are no longer actually, directly, and
exclusively used for educational purposes.
It depends. If the Income is factually proven to be actually,
directly, and exclusively used for educational purposes, it will
be exempt, as the Constitution states that all revenues of non-
!
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stock, non-profit educational institutions actually, directly, and
exclusively used for educational purposes are exempt from all
taxes. However, if SJU is not able to prove such, then the income
will be subject to income tax.
10. Majority Vote of Congress for Grants of Tax Exemptions
Article VI, Section 28. (4) No law granting any tax exemption shall
be passed without the concurrence of a majority of all the Members
of the Congress.
•
Hence, an exemption granted by a Presidential Proclamation and
not by law is invalid. (John Hay Peoples Alternative Coalition v.
Lim, G.R. No. 119775, October 24, 2003)
•
This includes the grant of tax amnesties.
o
A 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, partakes of an absolute forgiveness or waiver by
the Government of its right to collect what otherwise would
be due it, and in this sense, prejudicial thereto, particularly
to give tax evaders, who wish to relent and are willing to
reform a chance to do so and thereby become a part of the
new society with a clean slate. (Republic v. Intermediate
Appellate Court, G.R. No. L-69344, April 26, 1991)
11. Prohibition on Use of Tax Levied for Special Purpose
Article VI, Section 29. (3) 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.
12. Tax Bills Should
Representatives
Originate
Exclusively
in
the
House
Article VI, Section 24. 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.
of
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13. President's Veto Power on Appropriation, Revenue, and Tariff Bills
Article VI, Section 27. (2) 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 to which he
does not object.
The President has the power to "item-veto" when it comes to
appropriation, revenue, or tariff bills.
14. Judicial Power to Review Legality of Tax
Article VIII, Section S. The Supreme Court shall have the following
powers:
xxx
(2) Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:
xxx
(b) All cases involving the legality of any tax, Impost,
assessment, or toll, or any penalty imposed in relation thereto.
15. Grant of Power to the Local Government Units to Create Its Own
Sources of Revenue
Article X, Section 5. Each local government unit 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.
Note that the power of local government units Is subject to
limitations as Congress may provide, i.e., the Local Government
Code.
H.
Double Taxation
•
There are two kinds of double taxation:
o
Direct double taxation, and
o
Indirect double taxation.
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
It is direct double taxation which is prohibited. To constitute direct
double taxation, the following requisites must be present:
o
The same property must be taxed twice;
0
Both taxes must be imposed:
■
On the same property or subject matter,
•
For the same purpose,
■
By the same State, Government, or taxing authority,
Within the same jurisdiction,
During the same taxing period, and
The two taxes are of the same kind or character.
(Villanueva v. City of Iloilo, G.R. No. L-26251, December
28, 1968)
•
Imposition of a penalty and a tax on one taxpayer does not amount
to double taxation. (Republic Bank v. Court of Tax Appeals, G.R.
No. 62554, September 2, 1992)
•
Indirect double taxation simply means that there are two or more
pecuniary impositions on a subject matter. It is not prohibited by
the Constitution.
Mr. Alas sells shoes in Makati through a retail store. He pays the VAT
on his gross sales to the SIR and the municipal license tax based
on the same gross sales to the City of Makati. He comes to you for
advice because he thinks he is being subjected to double taxation.
(2013 Bar Exam)
Suggested answer: Sorry, that's not prohibited double taxation, Mr.
Atas. Best you pay, lest in court you'll spend your day. Double taxation
is allowed where one tax is imposed by the national government and
the other by the local government. (Note: Rhyming answers are not
given extra credit in the Bar exam)
Differentiate between double taxation in the strict sense and in a
broad sense and give an example of each. (2015 Bar Exam)
Suggested answer: Double taxation in the strict sense is direct double
taxation. It means that the same property or subject matter is taxed
twice, for the same purpose, by the same taxing authority, within
the same jurisdiction, during the same tax period, with the two taxes
of the same kind or character. An example would be taxing gross
income twice in the same year. This is prohibited. Double taxation in
the broad sense is indirect double taxation. It means there are two
or more pecuniary impositions on a subject matter. For example, a
business is required to pay income tax to the national government
and local business tax to the local government. This is allowed.
I
J9JC9B0M
GENERAL PRINCIPLES OF TAXATION
23
Upon his retirement, Alfredo transferred his savings derived from his
salary as a marketing assistant to a time deposit with AAB Bank. The
bank regularly deducted 20% final withholding tax on the interest
income from the time deposit. Alfredo contends that the 20% final
tax on the interest income constituted double taxation because his
salary had been already subjected to withholding tax. Is Alfredo's
contention correct? Explain your answer. (2017 Bar Exam)
Suggested answer: Alfredo's wrong. There's no double taxation
here because two distinct subject matters are actually being taxed—
Alfredo's salary and Alfredo's interest income from his time deposit.
As there is no identity in subject matter, then this does not constitute
direct double taxation.
I.
Forms of Escape from Taxation
Tax avoidance and tax evasion are the common devices wherein
the taxpayer can escape the effects of taxation.
Tax avoidance is legal. It involves saving on taxes using legal
means.
O
Estate planning is a legal manner to minimize taxes. (Delpher
Trades Corporation v. Intermediate Appellate Court, G.R. No.
L-69259, January 26, 1988)
Tax evasion is illegal and can land you in jail. It Involves the use
of forbidden and illegal devices to lessen and minimize tax.
O
It connotes the integration of three factors:
•
The end to be achieved, i.e., payment of less than that
known by the taxpayer to be legally due, or the nonpayment of tax when it is shown that a tax is due,
•
State of mind which is "evil," in "bad faith," "willful," or
"deliberate and not accidental," and
•
Course of action or failure of action that is unlawful. (CIR
v. Estate of Benigno Toda, G.R. No. 147188, September
14, 2004)
Willful blindness doctrine: A taxpayer can no longer raise
the defense that the errors on their tax returns are not their
responsibility or that it is the fault of the accountants they hired.
o
Intent to defraud need not be shown for a conviction of tax
evasion.
o
The only thing that needs to be proven is that the taxpayer
was aware of his obligation to file the tax return but he
nevertheless voluntarily, knowingly, and intentionally failed
J9JC9B0M
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
to file the required returns. (People v. Kintanar, C.T.A. E.B.
No. 006, December 3, 2010, affirmed by the Supreme Court
in G.R. No. 196340)
Prior to the VAT law, sales of cars were subject to a sales tax but
the tax applied only to the original or the first sale; the second
and subsequent sales were not subject to tax. Deltoid Motors, Inc.
(Deltoid) hit on the idea of setting up a wholly-owned subsidiary,
Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars
to Gonmad at a low price so it would pay a lower tax on the first
sale. Gonmad would then sell the cars to the public at a higher price
without paying any sales tax on this subsequent sale. Characterize
the arrangement. (2013 Bar Exam)
Suggested answer: The plan is improper and similar to the case of
Benigno Toda; the veil of corporate fiction can be pierced so that the
two transactions can be collapsed and taxed accordingly.
You are the retained tax counsel of ABC Corp. Your client informed
you that they have been directly approached with a proposal by a
BIR insider (i.e., a middle rank BIR official) on the tax matter they
have referred to you for handling. The BIR insider's proposal is to
settle the matter by significandy reducing the assessment, but he
will get 50% of the savings arising from the reduced assessment.
(2012 Bar Exam)
What tax, criminal and ethical considerations will you take into
account In giving your advice? Explain the relevance of each of these
considerations.
Suggested answer: I will advise my client not to accept the BIR
insider's proposal. Don't do it!!! Even if the assessment is significantly
reduced, this will open my client to the risk of tax evasion and
surcharges. There will be tax evasion as there is an intent to defraud
the government coupled with an act that reduces the tax liability.
Moreover, as a lawyer, I am duty bound to uphold the law — to
allow my client to go “under the table" will be a terrible (yet sadly
common) affront to the Constitution and the laws that I swore to
uphold and protect.
On August 31, 2014, Haelton Corporation (HC), thru its authorized
representative Ms. Pares, sold a 16-storey commercial building
known as Haeltown Building to Mr. Belly for Pl 00 million. Mr. Belly,
in turn, sold the same property on the same day to Bell Gates, Inc.
(BGI) forP200 million. These two (2) transactions were evidenced by
two (2) separate Deeds of Absolute Sale notarized on the same day
by the same notary public.
Investigations by the Bureau of Internal Revenue (BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and BGI was
notarized ahead of the sale between HC and Mr. Belly; (2) as early
J9JC9B0M
GENERAL PRINCIPLES OF TAXATION
25
as May 17, 2014, HC received P40 million from BGI, and not from Mr.
Belly; (3) the said payment of P40 million was recorded by BGI in its
books as of June 30, 2014 as investment in Haeltown Building; and
(4) the substantial portion of P40 million was withdrawn by Ms. Pares
through the declaration of cash dividends to all its stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a Notice
of Assessment for deficiency income tax arising from an alleged
simulated sale of the aforesaid commercial building to escape the
higher corporate income tax rate of thirty percent (30%). What is
the liability of Haeltown Corporation, if any? (2014 Bar Exam)
Suggested answer: Haeltown Corporation is liable for tax evasion
and the penalty shall be imposed on the company officer or employee
responsible for the violation. Tax evasion is the use of illegal means
to evade the payment of taxes. It involves the end to be achieved
(less taxes), an "evil" state of mind, and the unlawful course of
action. This case, similar to the scheme in the Benigno Toda case,
has all three elements of tax evasion. A scheme was employed to
escape the higher corporate income tax rate.
Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000
square meter lot in the City of Makati. It sold the lot and building
to Rainier for P80 million. One month after. Rainier sold the lot and
building to Healthy Smoke Company (HSC) for P200 million. Lucky
filed its annual tax return and declared its gain from the sale of the
lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that two months
prior to the sale of the properties to Rainier, Lucky received P40
million from HSC and not from Rainier. Said amount of P40 million
was debited by HSC and reflected in its trial balance as "other inv.
- Lucky Bldg. “ The month after, another P40 million was reflected In
HSC's trial balance as “other inv. — Lucky Bldg. “ The BIR concluded
that there is tax evasion since the real buyer of the properties of
Lucky is HSC and not Rainier. It issued an assessment for deficiency
income tax in the amount of P79 million against Lucky. Lucky argues
that it resorted to tax avoidance or a tax saving device, which Is
allowed by the NIRC and BIR rules since It paid the correct taxes
based on its sale to Rainier. On the other hand, Rainier and HSC also
paid the prescribed taxes arising from the sale by Rainier to HSC.
Is the BIR correct in assessing taxes on Lucky? Explain. (2016 Bar
Exam)
Suggested answer: The BIR Is correct. The parties here used Illegal
means to pay less taxes than what was actually due. It used a ruse In
order to reflect a simulated transaction—the sale to and from Rainier.
This is tax evasion; there was an end to be achieved (lower taxes), a
state of mind that was fraught with bad faith, and the use of a course
of action to achieve the end. Again, this Is like the Benigno Toda
case, where the Supreme Court collapsed the transactions to reflect
the true transaction and the proper tax liability.
I
J9JC9B0M
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
J-
Exemption from Taxation
•
The essence of tax exemption is the immunity or freedom from a
charge or burden to which others are subjected. It is a waiver of
the government s right to collect what would have been otherwise
collectible. (Secretary of Finance v. Lazatin, G.R. No 210588,
November 29, 2016)
o
It is the freedom from the imposition and payment of a
particular tax.
Hence, a Revenue Regulation that requires tax-exempt
entities to pay taxes with the possibility of a subsequent
refund is invalid. The tax-exempt entities shouldn't be
required to pay in the first place. (Secretary of Finance v.
c*airn f°r tax exemption should be strictly construed against
the taxpayer. fLuzon Stevedoring Corp. v. Court of Tax Appeals,
G.R. No. L-30232, July 29, 1988)
*
o
He who claims an exemption must be able to point to some
positive and specific provision of law creating such right; it
cannot be allowed to exist upon a mere vague implication
or inference. (Manila Electric Corporation v. Vera, G.R. No.
L-29987, October 22, 1975)
Hence, if there is nothing in a law that points that the
word exemption" refers to taxes, the implication would
be that the term would be an “exemption" of something
else, such as regulatory or reporting requirements. (PLDT
v. City of Davao, G.R. No. 143867, August 22, 2001)
Once the taxpayer proves he is entitled to the tax
exemption, then the tax exemption must necessarily
^CIR V' Robertson‘ G R- No- 70116, August 12,
•
O
Tax refunds are in the nature of tax exemptions and are
likewise strictly construed against the taxpayer. (Davao Gulf
Lumber Corp. v. C1R, G.R. No. 117359, July 23, 1998)
O
Tax exclusions (removal of otherwise taxable items from the
^ac ° ^axa^,on) are likewise strictly construed against the
taxpayer fSmart Commun/cat/ons, Inc. v. City of Davao, G.R.
No. 155491, September 16, 2008)
Note the following rules on construction:
o
A tax cannot be imposed unless it is supported by the clear
^c5Xp,\ess language of a statute. A tax statute is strictly
construed against the government.
I
J9JC9B0M
GENERAL PRINCIPLES OF TAXATION
T7
Hence, it is the burden of the State to first prove that
a taxpayer is in fact covered by a tax statute. (CIR v.
Court of Appeals and Ateneo de Manila University, G.R.
No. 115349, April 18, 1997)
■
•
If an entity is not covered by a tax imposition in the
first place, it is illogical for it to prove its entitlement
to tax exemption before fully enjoying the same.
(Secretary of Finance v. Lazatin, G.R. No. 210588,
November 29, 2016, where the SC invalidated a R.R.
that imposed an administrative requirement on taxexempt entities in order for them to get a refund for
taxes they weren't supposed to pay in the first place)
Moreover, the State is estopped from collecting the
difference between the deficiency tax assessment and
the amount already paid by the taxpayer pursuant to a
tax amnesty. (Republic v. Intermediate Appellate Court,
G.R. No. L-69344, April 26, 1991)
•
•
However, once the tax is found to cover the taxpayer,
a claim of exemption must be strictly construed
against the taxpayer. The burden then shifts to the
taxpayer to prove that he is exempt. (Davao Gulf
Lumber Corp. v. CIR, G.R. No. 117359, July 23,
1998)
The strict construction against tax exemptions also mandates
withholding agents to strictly observe the proper procedure to
withhold tax when obligated to do so. (National Development
Company v. CIR, G.R. No. L-53961, June 30, 1987)
Certain franchises were given tax incentives wherein the
franchises were obligated to pay a special tax rate "In lieu of all
taxes." What does this phrase mean? Does it apply to all taxes?
O
The "in lieu of all taxes" clause only applies to national taxes
and does not apply to local taxes. (Smart Communications,
Inc. v. City of Davao, G.R. No. 155491, September 16, 2008)
For indirect taxes, the tax exemption of the buyer (or whoever
the burden of tax falls to) does not exempt him from the payment
of indirect taxes, because such person is not the one statutorily
liable for the payment of the tax (that's the seller) in the first
place. (Philippine Acetylene Co., Inc. v. CIR, G.R. No. L-19707,
August 17, 1967)
o
EXCEPT:
•
When the buyer (whoever the burden of tax falls to)
is specifically exempted from the payment of "indirect
J9JC9B0M
TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
28
taxes." (CIR v. Gotamco & Sons, Inc., G.R. No. L-31092,
February 27, 1987, where the World Health Organization,
the purchaser, was held exempt from indirect taxes as
well)
•
If the buyer is exempt from indirect taxes, who bears
the economic burden of the tax (since it cannot be
passed on to them anymore)?
O
The seller will have to absorb the economic
burden of the tax. (Maceda v. Macaraig, G.R. No.
88291, June 8, 1993)
•
Can the seller claim a refund?
•
If there are international law and public
policy considerations, it seems the seller
can claim for a refund. (CIR v. Pilipinas
Shell Petroleum Corporation, G.R. No.
188497, February 19, 2014, which
involved excise taxes on petroleum
products; see also the Separate Opinion
of Justice Bersamin)
•
For indirect taxes, the proper party to question or seek a refund
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[Singapore] Ptd. Ltd. v. CIR, G.R. No. 173594,
February 6, 2008)
•
Hence, the buyer is not the proper party to seek a refund as
the buyer is not the statutory taxpayer; he merely absorbs the
burden of the tax. (Silkair [Singapore] Ptd. Ltd. v. CIR, G.R. No.
173594, February 6, 2008)
0
EXCEPT:
■
When the law clearly grants the party to which the
economic burden is shifted an exemption from both direct
and indirect taxes. In these cases, the buyer is deemed a
proper party to seek a refund. (Philippine Airlines, Inc. v.
CIR, G.R. No. 198759, July 1, 2013; compared to Silkair,
PAL was granted a legislative franchise which exempted
it from direct and indirect taxes)
Pursuant to Sec. 11 of the "Host Agreement" between the United
Nations and the Philippine government, it was provided that the
World Health Organization (WHO), “its assets, income and other
properties shall be: a) exempt from all direct and indirect taxes. “
Precision Construction Corporation (PCC) was hired to construct the
J9JC9B0M
29
GENERAL PRINCIPLES OF TAXATION
WHO Medical Center in Manila. Upon completion of the building, the
BIR assessed a 12% VAT on the gross receipts of PCC derived from
the construction of the WHO building. The BIR contends that the
12% VAT is not a direct nor an indirect tax on the WHO but a tax
that is primarily due from the contractor and is therefore not covered
by the Host Agreement. The WHO argues that the VAT is deemed an
indirect tax as PCC can shift the tax burden to it. Is the BIR correct?
Explain. (2016 Bar Exam)
Suggested answer: The BIR is w-r-o-n-g. VAT is an indirect tax, as
the liability for the payment of the tax falls on one person, but the
burden thereof can be shifted or passed on to another. In this case,
the liability to pay VAT is with PCC, with the economic burden falling
on the shoulders of WHO. But with WHO explicitly exempt from both
direct and indirect taxes, it should not shoulder the burden of the
VAT.
K.
Other Doctrines
Prospectivity of tax laws
•
Tax laws must be
provision of law.
•
Accordingly, exemption statutes are not retroactive. (Pansacola
v. CIR, G.R. No. 159991, November 16, 2006)
applied
prospectively,
except
by
express
Non-retroactivity of rulings
NIRC, Sec. 246. Non-retroactivity of rulings. — Any revocation,
modification, or reversal of any rules and regulations promulgated In
accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner of Internal Revenue shall not be
given retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the Bureau of
Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling Is
based; or
c)
where the taxpayer acted in bad faith.
Rulings, circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue should have no retroactive
application if applying them would prejudice the taxpayers. (CIR
v. Court of Appeals, G.R. No. 117982, February 6, 1997)
J9JC9B0M
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TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
30
o
•
However, when the ruling, circular, or rules and regulations
was nullified by a court (and not by the CIR), then the
non-retroactivity rule does not apply. {Philippine Bank of
Communications v. CIR, G.R. No. 112024, January 28, 1999,
wherein the SC declared that a taxpayer cannot rely on a
RMC which extended the period to claim a refund beyond the
period given by law and which was subsequently declared
invalid by the lower courts)
A general interpretative rule issued by the CIR may be relied upon
by taxpayers from the time the rule is issued up to its reversal
by the Commissioner or this Court. {CIR v. San Roque, G.R. No.
187485, February 12, 2013, where a BIR Ruling issued upon
inquiry of the Department of Finance was held to be a general
interpretative rule)
Set-off of taxes
There can be no off-setting of taxes against the claims that the
taxpayer may have against the government.
o
A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than
e tax being collected. The collection of a tax cannot await
e results of a lawsuit against the government. (Francia v.
1aoa'?ed‘ate APPellate Court, G.R. No. L-67649, June 28,
1 JOOj
0
Taxes are not in the nature of contracts between the party and
e government; taxes grow out of a duty to the government.
axes ►,positlve acts of the government; the personal
lnc*,v*<^ua* taxpayers is not required for the making
en orcement of taxes. (Republic v. Mambulao Lumber
Company, G.R. No. L-17725, February 28, 1962)
o
^Xpayer cannot take the “lav/ into its own hands," and
cm F°Tpensation because it has a pending refund with the
28,1993jeX Mln'n9 C°rP‘ V’ C1R' G.R. No. 125704, August
Note, however, that when both the claims of the
AiroeLnrri5nt and the taxpayer against each other have
And3t-/ °ecome due, demandable and fully liquidated,
ann
6 amount due the taxpayer has already been
nr i=>\?.P/^ted by law' compensation will follow by operation
1963) (D°mingo v- Garlitos, G.R. No. L-18994, June 29,
As a rule, taxes cannot be subject to compensation because the
government and the taxpayer are not creditors and debtors of
J9JC9B0M
GENERAL PRINCIPLES OF TAXATION
31
each other. However, there are some cases where the court has
allowed the determination of a taxpayer's liability in a case for
refund, thereby allowing the offsetting of taxes. Note that these
are all refund cases where the court allowed the offsetting of
taxes, because it would have been absurd to grant a refund after
finding out that the taxpayer owed the government in the first
place.
O
In these cases, the Court allowed offsetting only because 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, NIRC.
o
Also, the offsetting will not be allowed if the period to assess
deficiency taxes in the excess of the amount claimed for refund
has already prescribed. (CIR v. Toledo Power Company, G.R.
No. 196415, December 2, 2015)
Taxpayer suit
•
To constitute a taxpayer's suit, the following requisites must be
present:
o
Public funds are disbursed by a political subdivision or
instrumentality, and in doing so, a law is violated or irregularity
committed, and
o
The petitioner Is directly affected by the act. (Anti-Graft
League of the Philippines v. SanJuan, G.R. No. 97787, August
1, 1996)
•
Hence, when the disposition is of alleged public property
(like paintings and silverware of the Marcoses) and not
of public funds, a taxpayer's suit is improper. (Joya v.
Presidential Commission on Good Government, G.R. No.
96541, August 24, 1993)
•
Similarly, when no public funds were disbursed or spent
(such as when Special Elections were not held, and thus,
nothing was spent), a taxpayer's suit is improper. (Lozada
v. COMELEC, G.R. No. L-59068, January 27, 1983)
•
But when what is questioned is a contract entered Into by
a government-owned or -controlled corporation (GOCC)
wherein public funds will be used, then a taxpayer's suit
is proper. (Abaya v. Ebdane, G.R. No. 167919, February
14, 2007)
J9JC9B0M
INCOME TAX
A. Income Tax Systems
•
There are three kinds of income tax systems:
o
Global (unitary) tax system
o
•
Here, all items of gross income, deductions, personal and
additional exemptions are reported in one income tax
return (ITR) and a single tax is imposed on all income
received or earned, regardless of the activities which
produced the income.
•
It is akin to putting all income into one basket and taxing
the entire basket.
Schedular tax system
•
o
Here, different types of activities are subjected to
different types of tax rates. The tax rates depend on the
classification of the taxable income and the activities
which produced the income.
Semi-global, semi-schedular system
■
Certain passive income and capital gains are subject to
final taxes while other income are added to arrive at the
gross income (where deductions are used to arrive at the
taxable income).
■
We follow the semi-global/semi-schedular system in the
Philippines.
■
Schedular can also mean that tax rates will differ based
on the tax base.
•
For instance, global is usually applied to corporations,
as corporations are taxed at a single rate, regardless
of the tax base; while the schedular system is applied
to individuals as they are subjected to different tax
rates based on their tax bracket.
32
1
J9JC9B0M
INCOME TAX
33
B. Income, In General
Taxable Income
•
The essential difference between capital and income is that capital
is a fund and income is a flow. Capital is wealth, while income is
the service of wealth.
o
Property is a tree, income is the fruit. Labor is a tree, income
is the fruit. Capital is a tree, income is the fruit.
O
Income means profits or gains. (Madrigal v. Rafferty, G.R.
No. L-12287, August 7, 1918)
Income may be defined as the amount of money coming to a
person or corporation within a specified time, whether as payment
for services, interest or profit from investment.
o
A mere advance in the value of property of a person or a
corporation in no sense constitutes the "income" specified in
the law. Such advance constitutes and can be treated merely
as an increase in capital.
•
Hence, cash dividends are taxed as income because they
have been realized/received, while stock dividends are
not taxed as income because they are merely inchoate
as they are mere anticipation of income (they become
income once you sell the shares).
•
Cash dividends are actual receipt of profits; stock
dividends are the receipt of a representation of the
increased value of the assets of a corporation. (Fisher v.
Trinidad, G.R. No. L-17518, October 30, 1922)
For income to be taxable, the following requisites must be met:
o
There must be gain,
o
The gain must be realized or received, and
o
The gain must not be excluded by law or treaty from taxation.
(CIR v. Benedicto, G.R. No. 191999, July 30, 2014, where the
unfreezing of deposits was not considered income because
there was no gain realized and was nothing more than a
return of capital)
When dealing with money or property, the questions you should
ask are:
o
Is this capital or is this income?
o
Has it been realized/received or is it merely inchoate?
TAX MADE LESS TAXING:
A REVIEWER WITH CODALS AND CASES
34
Some helpful principles to determine if money or property can
be considered income:
1.
Realization Principle
Income is recognized when both of the following conditions are
met:
I
J9JC9B0M
0
The earning is complete or virtually complete; and
0
An exchange has taken place.
Claim of Right Doctrine
2.
If the taxpayer receives earnings under a claim of right and
without restriction as to its disposition, such earnings are
considered income.
Economic Benefit Theory
3.
Anything that benefits a person materially or economically in
whatever way is taxable under the law.
o
However, note that under this jurisdiction, mere increase
in the value of property without actual realization (such as
through sale or disposition) is not taxable.
4.
Severance Test Theory
•
Income is recognized when there is separation of something
which is of exchangeable value.
o
Hence, the increase in the value of an asset is not income as
it has not yet been exchanged or transferred for something
else. Once the asset is exchanged, then a severance of the
gain from its original value takes place, resulting into taxable
income.
5.
All-Events Test
•
The accrual of income and expenses is permitted when the
following are met:
o
Fixing of a right to income or liability to pay;
o
The availability of the reasonable accurate determination of
such income or liability.
Mr. Jose Castillo is a resident Filipino Citizen. He purchased a parcel
of land in Makati City in 1970 at a consideration of Pl Million. In
2011, the land, which remained undeveloped and idle, had a fair
market value of P20 Million. Mr. Antonio Ayala, another Filipino
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35
citizen, is very much interested in the property and he offered to buy
the same for P20 Million. The Assessor of Makati City re-assessed in
2011 the property at PIO Million.
Is Mr. Castillo liable for income tax in 2011 based on the offer to buy
by Mr. Ayala? Explain your answer. (2012 Bar Exam)
Suggested answer: NO! There was no realization of income yet. The
offer is nothing but an offer. There has yet to be an exchange or sale
which produces any profit; hence, no income yet.
C.
General Principles of Income Taxation
Sec. 23.1
General Principles of Income Taxation in the
Philippines. — Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from
sources within the Philippines;
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker 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;
(D) An alien individual, whether a resident or not of the Philippines, Is
taxable only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not In trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines.
Who are taxable on income derived from all sources, whether
within or outside the Philippines? (Taxed from sources worldwide!)
1.
Resident citizens.
2.
Domestic corporations.
The other kinds of taxpayers are subject to tax only on income
derived from Philippine sources.
‘Unless otherwise indicated, codals refer to the National Internal Revenue
Code (NIRC), as amended.
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Taxable Income
Taxable Income
Inside RP
Outside RP
Resident Citizen
Yes
Yes
Non resident Citizen_______
Yes
No
Overseas Contract Worker
Yes
No
Resident Alien_____________
Yes
No
Nonresident Alien_________
Yes
No
Domestic Corp.____________
Yes
Yes
Foreign Corp.
Yes
No
Citizenship & Residency
Patrick is a successful businessman in the United States and he is a
sole proprietor of a supermarket which has a gross sales of$l 0 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 Exam)
Suggested answer: If I were Atty. Agaton, I will tell him not to. If
Patrick reacquires his Philippine citizenship and establishes residence
here, he will be taxed for his income from his US business. The
Tax Code states that resident citizens are taxable for income from
sources worldwide. This will expose Patrick to more tax liability.
Likewise, if I were Atty. Agaton, I wouldn't boast being a tax expert,
as pride comes before the fall.
••
D.
Situs of Taxation
Now that we know that only resident citizens and domestic
corporations are taxed from income sources worldwide, it Is
important to determine whether such income is realized in the
Philippines or abroad. This brings us to Section 42.
Sec. 42. Income from Sources Within the Philippines. —
(A) Gross Income From Sources Within the Philippines. —
The following items of gross income shall be treated as gross income
from sources within the Philippines:
(1) Interests. — Interests derived from sources within the
Philippines, and interests on bonds, notes or other interest-bearing
obligation of residents, corporate or otherwise;
(2) Dividends. — The amount received as dividends:
(a) from a domestic corporation; and
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(b) from a foreign corporation, unless less than fifty percent
(50%) of the gross income of such foreign corporation for the threeyear period ending with the close of its taxable year preceding the
declaration of such dividends (or for such part of such period as the
corporation has been in existence) was derived from sources within
the Philippines as determined under the provisions of this Section;
but only in an amount which bears the same ration to such dividends
as the gross income of the corporation for such period derived from
sources within the Philippines bears to its gross income from all
sources.
(3) Services. — Compensation for labor or personal services
performed in the Philippines;
(4) Rentals and Royalties. — Rentals and royalties from property
located in the Philippines or from any interest in such property,
including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines
any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or
right;
(b) The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial
knowledge or information;
(d) 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 paragraph
(a), any such equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned In paragraph (c);
(e) The supply of services by a nonresident person or his
employee In connection with the use of property or rights belonging
to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered In
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme; and
(g) The use of or the right to use:
(i)
Motion picture films;
(ii)
Films or video tapes for use in connection with television;
and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. — Gains, profits and income from the
sale of real property located in the Philippines; and
37
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(6) Sale of Personal Property. — Gains; profits and income from
the sale of personal property, as determined in Subsection (E) of this
Section.
(B) Taxable Income from Sources Within the Philippines. —
(1) General Rule. — From the items of gross income specified in
Subsection (A) of this Section, there shall be deducted the expenses,
losses and other deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within
the Philippines which cannot definitely be allocated to some items or
class of gross income: Provided, That such items of deductions shall
be allowed only if fully substantiated by all the information necessary
for its calculation. The remainder, if any, shall be treated in full as
taxable income from sources within the Philippines.
(2) Exception. — No deductions for interest paid or incurred
abroad shall be allowed from the item of gross income specified in
subsection (A) unless indebtedness was actually incurred to provide
funds for use in connection with the conduct or operation of trade or
business In the Philippines.
•
This section Is NOT relevant to domestic corporations and resident
citizens because they are taxed worldwide anyway. This section
comes into play when it comes to problems related to the income
sources of taxpayers who are only taxed for income sourced
within the Philippines.
•
The following are treated as gross income from sources within the
Philippines (Sections 152-165, Revenue Regulations No. [“R.R.“]
2-1940):
1.
2.
Interests — including interests on bonds, notes and other
interest bearing obligations:
a.
The loan was used here in the Philippines, or
b.
The debtor is in the Philippines
Dividends —
a.
from a domestic corporation; and
b.
a foreign corporation, unless less than 50% of the gross
income of the foreign corporation was derived from the
Philippines for the three-year period ending with the
close of its taxable year preceding the declaration of such
dividends (the amount will be based on the same ratio
to dividends as the gross income for such period derived
from sources within Philippines to its gross income from
all sources).
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INCOME TAX
i.
For example, SugaStans, Inc. a Korean corporation,
derives more than 50% of its gross income in the
Philippines from the sale of BTS merchandise for
the past three years. If it declares dividends to a
nonresident Filipino, the dividend income will be
considered sourced within the Philippines.
3.
Services — compensation for labor or personal services
performed in the Philinninp^.
4.
Rentals and Royalties — from property located
Philippines or from any interest in such property for:
in
the
a.
the use of any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade
brand or other similar stuff
b.
the use of
equipment
c.
the supply of scientific, technical, industrial or commercial
knowledge or info
d.
the supply of services by a nonresident person in
connection with those of property or rights, or the
installation or operation of any brand, machinery, or
other apparatus purchased from such nonresident person
e.
technical advice, assistance or services rendered in
connection with technical management of any scientific,
industrial or commercial undertaking
f.
the use of motion picture films, films for TV, tapes for
radio broadcast
any
industrial,
commercial
or
scientific
5.
Sale of real property — the gains, profits and income from
sale of real property located in the Philippines.
6.
Sale of personal property — gains, profits and Income from
sale of personal property, determined by subsection (E).
The place of the signing of a contract is NEVER an issue or a
factor for determining the source of income.
Do not forget the "turnkey contract" case of CIR v. Marubeni
(G.R. No. 137377, December 18, 2001), when it comes to situs
problems.
Expenses of a multinational corporation directly related to the
production of Philippine-derived income can be deducted from
gross income in the Philippines without need of apportionment,
but overhead expenses of its parent company belong to a different
category.
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These are items that cannot be definitely allocated or
identified with the operations of the Philippine branch. So,
the company can claim as its deductible share a ratable part
of such expenses based upon the ratio of the local branch's
gross income to the total gross income, worldwide, of the
multinational corporation. (CIR v. CTA and Smith KHne &
French Overseas Co., G.R. No. L-54108, January 17, 1984)
0
•
The source of income is the property, activity, or service that
produced the income.
It is the place of activity creating the income which is
controlling, and not the place of business or residence of a
corporation.
O
■
■
Hence, reinsurance premiums ceded to foreign reinsurers
are considered income from Philippine sources. (Howden
& Co., Ltd. V. CIR, G.R. No. L-19392, April 14, 1965)
•
Also, the sale of airline tickets through a general sales
agent in the Philippines is considered income from
Philippine sources, even if the tickets pertain to an airline
company which does not maintain any flights to and
from the Philippines. (CIR v. British Overseas Airways
Corporation [BOAC], G.R. No. L-65773, April 30, 1987,
wherein the Court considered the sale of the tickets as
the source of income, and not the activity of actually
transporting passengers)
When the sale is consummated within the Philippines (as
In the title to the property was transferred in the country),
the situs of the sale is in the Philippines and is therefore
taxable here. (A. Soriano Y Cia v. CIR, G.R. No. L-5896,
August 31, 1955)
___________ Income
Interest Income
Test of Source of Income
Residence of DEBTOR
Dividend Income:
1)
From domestic corporation
Income within
2)
From foreign corporation
Income within, if 50% or more of the
gross income of the foreign company
(for the past 3 years) was derived from
sources within the Philippines
Income without, if less than 50% of the
gross income of the foreign company
(for the past 3 years) was derived from
sources within the Philippines
Service Income
Place of performance
!
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Rent income
Location of property
Royalty income
Place of use of intangible
Gain on sale of real property
Location of property
Gain on sale of personal property
Place of sale
Gain on sale of domestic shares
of stock
Income within
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 S°/o 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 Exam)
|
Suggested answer: The transaction will subject XYZ Corporation to
income tax liability in the Philippines. The Tax Code states that the
income derived from the use of technical knowledge or know-how
within the Philippines (royalties) is considered income sourced within
the Philippines. Further, the Tax Code imposes a 30°/o Income tax
on a non-resident foreign corporation's gross income from sources
within the Philippines. In this case, the use of the technical know-how
is within the Philippines; the place of the execution of the contract is
irrelevant. Hence, XYZ Corporation will have to pay 30°/o income tax
on its royalty income from ABC.
Triple Star, a domestic corporation, entered Into a Management
Service Contract with Single Star, a non-resident foreign corporation
with no property in the Philippines. Under the contract, Single Star
shall provide managerial services for Triple Star's Hong Kong branch.
All said services shall be performed in Hong Kong.
Is the compensation for the services of Single Star taxable as Income
from sources within the Philippines? Explain. (2014 Bar Exam)
Suggested answer: No, the compensation for services are not taxable
in the Philippines. According to our trusty Tax Code, the test to
determine the situs of taxation for services is where the services are
performed. If the services are performed in the Philippines, then the
income is taxable in the Philippines; if performed abroad, then the
income is not taxable in the Philippines. In this case, the services are
performed in Hong Kong and therefore not taxable In the Philippines.
41
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Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a
nonresident citizen.
a) If the goods were produced from Ms. B's factory in the Philippines,
is Ms. B's income from the sale to Ms. C taxable in the Philippines?
Explain.
b) If Ms. B is an alien individual and the goods were produced in
her factory in China, is Ms. B's income from the sale of the goods to
Ms. C taxable in the Philippines? Explain. (2015 Bar Exam)
Suggested answer:
a) Assuming the goods are sold in the Philippines, Ms. B's income
will be fully taxable in the Philippines. As the production and the sale
of the goods are completely in the Philippines, then the situs of the
sale are within the Philippines and thus taxable in the Philippines.
b) Assuming the goods are sold in the Philippines, Ms. B's income
will be partly taxable in the Philippines. Income from the sate of
personal property produced abroad but sold within the Philippines
are treated as derived partly from sources within and partly from
sources outside the Philippines. Hence, Ms. B, a non-resident citizen,
will be taxed partly for the sate to Ms C
Sure Arrival Airways (SAA) is a foreign corporation, organized under
the laws of the Republic of Nigeria. Its commercial airplanes do not
operate within Philippine territory, or service passengers embarking
from Philippine airports. The firm is represented in the Philippines by
Its general agent, Narotel.
SAA sells airplane tickets through Narotel, and these tickets are
serviced by SAA airplanes outside the Philippines. The total sales
of airplane tickets transacted by Narotel for SAA tn 2012 amounted
to PIO,000,000.00. The Commissioner of Internal Revenue (C1R)
assessed SAA deficiency income taxes at the rate of 30u/o on its
taxable Income, finding that SAA's airline ticket sales constituted
income derived from sources within the Philippines.
SAA filed a protest on the ground that the alleged deficiency income
taxes should be considered as income derived exclusively from
sources outside the Philippines since SAA only serviced passengers
outside Philippine territory. It, thus, asserted that the imposition of
such income taxes violated the principle of territoriality in taxation.
Is the theory of SAA tenable? Explain. (2016 Bar Exam)
Suggested answer: The theory of SAA is untenable. The Supreme
Court has previously held that the sale of airline tickets through
a general sales agent in the Philippines is considered income
from Philippine sources, even if an airline company only services
passengers outside Philippine territory.
1
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XYZ Air, a 100°/o foreign-owned airline company based and registered
in Netherlands, is engaged in the international airline business and
is a member signatory of the International Air Transport Association.
Its commercial airplanes neither operate within the Philippine
territory nor are its service passengers embarking from Philippine
airports. Nevertheless, XYZ Air is able to sell its airplane tickets in the
Philippines through ABC Agency, its general agent in the Philippines.
As XYZ Air's ticket sales, sold through ABC Agency for the year 2013,
amounted to P5,000,000.00, the Bureau of Internal Revenue (BIR)
assessed XYZ Air deficiency income taxes on the ground that the
income from the said sales constituted income derived from sources
within the Philippines.
Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident
foreign corporation, it should only be taxed for income derived
from sources within the Philippines. However, since it only serviced
passengers outside the Philippine territory, the situs of the income
from its ticket sales should be considered outside the Philippines.
Hence, no income tax should be imposed on the same.
Is XYZ Air's protest meritorious? Explain. (2019 Bar Exam)
Suggested answer: The protest is not meritorious. The Supreme Court
has previously held that the sale of airline tickets through a general
sales agent in the Philippines is considered income from Philippine
sources, even if an airline company only services passengers outside
Philippine territory. (This is eerily similar to the BOAC case. Cue
Twilight Zone, X-FUes, or Unsolved Mysteries theme, depending on
your age bracket.)
Gross income from sources outside (without) the Philippines
Sec. 42. (C) Gross Income From Sources Without the
Philippines. — The following items of gross income shall be treated
as income from sources without the Philippines:
(1) Interests other than
Philippines as provided in
Section;
those derived from sources within the
paragraph (1) of Subsection (A) of this
(2) Dividends other than
Philippines as provided in
Section;
those derived from sources within the
paragraph (2) of Subsection (A) of this
(3) Compensation for labor or personal services performed without
the Philippines;
(4) Rentals or royalties from property located without the Philippines
or from any interest in such property including rentals or royalties for
the use of or for the privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill, trademarks,
trade brands, franchises and other like properties; and
(5) Gains, profits and Income from the sale of real property located
without the Philippines.
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1.
Interests other than those derived from sources within
2.
Dividends other than those derived from sources within
3.
Compensation for labor or personal services performed outside
the Philippines
4.
Rentals or royalties from property located outside the Philippines
or any interest in such property
5.
Gains, profits, income from sale of real property located outside
the Philippines
Income from sources partly within and partly without the Philippines
Sec. 42. (D) Taxable Income From Sources Without the
Philippines. — From the items of gross income specified in Subsection
(C) of this Section there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction which cannot
definitely be allocated to some items or classes of gross income.
The remainder, if any, shall be treated in full as taxable income from
sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without
the Philippines. — Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and (C) of
this Section, shall be allocated or apportioned to sources within or
without the Philippines, under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
Where items of gross income are separately allocated to sources
within the Philippines, there shall be deducted (for the purpose of
computing the taxable income therefrom) the expenses, losses and
other deductions properly apportioned or allocated thereto and a
ratable part of other expenses, losses or other deductions which cannot
definitely be allocated to some items or classes of gross income. The
remainder, if any, shall be included in full as taxable income from
sources within the Philippines. In the case of gross income derived
from sources partly within and partly without the Philippines, the
taxable income may first be computed by deducting the expenses,
losses or other deductions apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction which cannot
definitely be allocated to some items or classes of gross income; and
the portion of such taxable income attributable to sources within the
Philippines may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance. Gains, profits
and income from the sale of personal property produced (in whole or
in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within
the Philippines, shall be treated as derived partly from sources within
and partly from sources without the Philippines.
■
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Gains, profits and income derived from the purchase of personal
property within and its sale without the Philippines, or from the
purchase of personal property without and its sale within the
Philippines shall be treated as derived entirely from sources within
the country in which sold: Provided, however, That 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. The transfer by a nonresident alien
or a foreign corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in its book unless:
(1) the transferor has filed with the Commissioner a bond conditioned
upon the future payment by him of any income tax that may be due
on the gains derived from such transfer, or (2) the Commissioner has
certified that the taxes, if any, imposed in this Title and due on the
gain realized from such sale or transfer have been paid. It shall be the
duty of the transferor and the corporation the shares of which are sold
or transferred, to advise the transferee of this requirement.
(F) Definitions. — As used in this Section the words "sale" or "sold"
include "exchange"or "exchanged"; and the word "produced" Includes
"created," "fabricated," "manufactured," "extracted," "processed,"
"cured" or "aged."
For the gross income items allocated to sources partly within and
partly without the Philippines,
O
there shall be deducted the expenses, losses and other
deductions properly apportioned, and
o
a ratable part of other expenses, losses and deductions which
cannot properly be allocated to some item of gross income.
If there is any remainder, it shall be included In full as taxable
income from sources within the Philippines
Situs of sale of personal property
•
Gains, profits and income derived from purchase of personal
property within and sold without, or from purchase without and
sale within, are treated as derived entirely from sources with the
country in which it is SOLD.
Situs of sale of stocks in a domestic corporation
•
Gains from sale of shares of stock in a domestic corporation are
treated as DERIVED ENTIRELY from sources within the Philippines
regardless of where the said shares are sold.
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E.
Income Tax on Individuals
Now that we know how to determine where income is sourced,
it is time to focus on the different kinds of taxpayers. Let us begin
with individual taxpayers.
Individual taxpayers are classified into:
1.
2.
Citizens, who are divided into:
•
Resident citizens — those citizens whose residence is
within the Philippines; and
•
Nonresident citizens — those citizens whose residence is
not within the Philippines.
Aliens, who are divided into:
•
Resident aliens — those individuals whose residence is
within the Philippines and are not citizens thereof; and
•
Nonresident aliens — those individuals whose residence
is not within the Philippines but are temporarily in the
country and are not citizens thereof. They are:
•
Those engaged in trade or business
Philippines; and
■
Those who are not so engaged. (See N1RC, Sections
23-25)
within the
It Is Important to know the definition of each kind of
individual taxpayer because the tax liability of each differs
(as we shall see later).
Nonresident citizens
Sec. 22. (£) The term "nonresident citizen" means:
(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 nonresident
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 nonresident 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.
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(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 purpose
of this Section.
Meaning of nonresident citizen:
1.
Citizen who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite
intention to reside therein;
2.
Citizen who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on
a permanent basis;
3.
Citizen who works and derives from abroad and whose
employment thereat requires him to be physically present
abroad most of the time during the taxable year;
4.
Citizen who has been previously considered as nonresident
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 nonresident 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.
Who are nonresident citizens? (R.R. 1-1979)
1.
Immigrant — one who leaves the Philippines to reside abroad
as an immigrant for which a foreign visa has been secured.
2.
Permanent employee — one who leaves the Philippines to
reside abroad for employment on a more or less permanent
basis.
3.
Contract worker — one who leaves the Philippines on account
of a contract of employment which is renewed from time
to time under such circumstance as to require him to be
physically present abroad most of the time (not less than 183
days).
Nonresident citizens who are exempt from tax with respect to
income derived from sources outside the Philippines shall no
longer be required to file information returns from sources outside
the Philippines beginning 2001. (R.R. 5-2001)
The phrase "most of the time" shall mean that the said citizen
shall have stayed abroad for at least 183 days in a taxable year.
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O
However, citizens who work outside of the Philippines for at
least 183 days in a taxable year due to a contract of employment
with a Philippine employer (such as employees seconded to
a foreign country) are not considered nonresident citizens
because they are not considered employed abroad. They do
not fall within Section 22(E)(3) because their employment
remains with the Philippine employer. (BIR Ruling 116-12)
The wage or income of an OFW/OCW which is earned from outside
the Philippines is exempt from income tax.
O
An OCW is a Filipino citizen who:
-
holds a job outside the Philippines;
-
is physically present in that foreign country where the job
is;
•
is registered with the POEA;
•
has a valid overseas employment certificate;
■
their salaries and wages are paid by an employer abroad
and is not borne by any entity or person in the Philippines.
(R.R. 1-2011)
JKL-PhiHppines Is a domestic corporation affiliated with JKL-Japan, a
Japan-based information technology company with affiliates across
the world. Mr. F is a Filipino engineer employed by JKL-Phitippines.
In 2018, Mr. F was sent to the Tokyo branch of JKL-Japan based on
a contract entered into between the two (2) companies. Under the
said contract, Mr. F would be compensated by JKL-Phiiippines for the
months spent in the Philippines, and by JKL-Japan for months spent
in Japan. For the entirety of 2018, Mr. F spent ten (1O) months in
the Tokyo branch.
On the other hand, Mr. J, a Japanese engineer employed by JKLJapan, was sent to Manila to work with JKL-Phiiippines as a technical
consultant. Based on the contract between the two (2) companies, Mr.
J's annual compensation would still be paid by JKL-Japan. However,
he would be paid additional compensation by JKL-Phiiippines tor the
months spent working as a consultant. For 2018, Mr. J stayed in the
Philippines for five (5) months.
j
{
J9JC9B0M
In 2019, the Bureau of Internal Revenue (BIR) assessed JKLPhiiippines for deficiency withholding taxes for both Mr. F and
Mr. J for the year 2018. As to Mr. F, the BIR argued that he is
a resident citizen; hence, his income tax should be based on his
worldwide income. As to Mr. J, the BIR argued that he is a resident
alien; hence, his income tax should be based on his income from
sources within the Philippines at the scheduler rate under Section
24 (A) (2) of the Tax Code, as amended by Republic Act No.
10963, or the “Tax Reform for Acceleration and Inclusion" Law.
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INCOME TAX
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a) Is the BIR correct in basing its income tax assessment on Mr. F's
worldwide income? Explain.
b) Is the BIR correct in basing its income tax assessment on Mr. J's
income within the Philippines at the schedular rate? Explain. (2019
Bar Exam)
Suggested answer:
a)
b)
The BIR is correct. Under the Tax Code, a non-resident citizen is
one who works and derives from abroad and whose employment
thereat requires him to be physically present abroad most of the
time during the taxable year. Mr. F is not a non-resident citizen
because he is still employed by a Philippine firm (JKL-Philippines)
and is therefore not "employed thereat" (abroad). Hence, he is a
resident citizen who is taxable based on his worldwide income.
I
I
The BIR is correct. Mr. J is a resident alien as his work as a
technical consultant in the Philippines does not make him a
mere transient or sojourner. Therefore, under the Tax Code and
jurisprudence, he is a resident alien. As resident aliens are taxed
in a similar manner as resident citizens for their income earned
within the Philippines, Mr. J will also be subject to the schedular
rates under TRAIN.
Resident aliens
Sec. 22. (F) The term “resident alien" means an Individual whose
residence is within the Philippines and who Is not a citizen thereof.
A resident alien is an individual:
1.
Whose residence is within the Philippines, and
2.
Who is not a citizen
Mere physical or body presence Is enough, not Intention to make
the country one's abode. (Garrison v. CA, G.R. No. L-44501, July
19, 1990)
An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident of the Philippines for purposes
of income tax. Whether he is a transient or not is determined
by his intentions with regard to the length and nature of his
stay.
o
A mere floating intention indefinite as to time, to return to
another country is not sufficient to constitute him a transient.
o
If he lives in the Philippines and has no definite intention as
to his stay, he is a resident. One who comes to the Philippines
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for a definite purpose which in its nature may be promptly
accomplished is a transient.
But if his purpose is of such a nature that an extended stay
may be necessary for its accomplishment, and to that end
the alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all
times to return to his domicile abroad when the purpose for
which he came has been consummated or abandoned. (R.R.
2-1940)
O
The BIR has ruled that there is intention on the part of an alien to
stay in the Philippines indefinitely when the alien:
O
Had a Special Resident Retiree's Visa;
o
Acquired real property and is actually present most of the
time in the Philippines; and
o
Registered as a taxpayer with the BIR. (BIR Ruling 252-11)
Nonresident aliens engaged in business in the Philippines
Sec. 22. (G) The term "nonresident alien' means an individual whose
residence is not within the Philippines and who is not a citizen thereof.
Who are nonresident aliens?
1.
An individual whose residence is not within the Philippines,
and
2.
Not a citizen of the Philippines
One who comes to the Philippines for a definite purpose which
in its nature may be promptly accomplished is a transient or
nonresident. (R.R. 2-1940)
Nonresident aliens are either:
o
o
Engaged in trade or business, such as:
■
One who actually derives income in the Philippines, or
•
Stays in the Philippines for more than 180 days during
any calendar year (deemed to be a nonresident alien
engaged in the Philippines, Section 25[AJ)
Not engaged in trade or business.
Loss of residence by alien
o
An alien who has acquired residence in the Philippines retains
his status until he abandons the same and actually departs
from the Philippines.
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O
A mere intention to change his residence does not change
his status from resident alien to nonresident alien. An alien
who has acquired a residence is taxable as a resident for
the remainder of his stay in the Philippines. (Section 6, R.R.
2-1940)
Minimum wage earner
Sec. 22. (GG) The term 'statutory minimum wage' earner shall refer
to rate fixed by the Regional Tripartite Wage and Productivity Board,
as defined by the Bureau of Labor and Employment Statistics (BLES)
of the DOLE.
(HH) The term 'minimum wage earner' shall refer to a worker in the
private sector paid the statutory minimum wage; or to an employee
in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he/she
is assigned.
The minimum wage is fixed by the Regional Tripartite Wage and
Productivity Board.
Minimum wage earner:
o
Private sector — paid the statutory minimum wage
o
Public sector — not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned
Senior citizens
Senior citizens are
o
Resident citizens of the Philippines, and
o
Who are at least 60 years old
•
They are not exempt from income taxes unless they are
considered minimum wage earners. (R.A. 9994)
Senior citizens
establishments.
o
are
granted
a
20%
discount
from
select
Sales of goods and services by select establishments to senior
citizens are also exempt from VAT. (R.R. 7-2010)
Discounts for senior citizens are now treated as tax deductions
for businesses, as per The Expanded Senior Citizens Act of 2003
(R.A. 9257). This can be very bad for the taxpayer because he
doesn't get the "peso for peso" benefit which he would have
gotten if it were considered a tax credit as before. (Manila
Memorial Park, Inc. v. Secretary of Department of Social Welfare
and Development, G.R. No. 175356, December 3, 2013)
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Persons with disability
Persons with disability (PWD) are:
•
O
Individuals suffering from restriction or different abilities,
0
As a result of mental, physical or sensory impairment to
perform an activity in a manner or within the range considered
normal for human beings.
PWD are granted a 20% discount from selected establishments.
0
These discounts can likewise be claimed as a deduction for
businesses. (R.R. 1-2009)
O
The grant of discount and the corresponding deduction for
businesses have been held as valid and constitutional as a
proper exercise of police power. (Drugstores Association of
the Philippines v. National Council of Disability Affairs, C.R.
No. 194561, September 14, 2016)
National athletes and coaches
National athletes are Filipino athletes (including PWDs) who are:
•
0
Members of the national training pool, and
O
Recognized and accredited by the Philippine Olympic
Committee (POC) and the Philippine Sports Commission
(PSC) (for athletes with disabilities, they should be accredited
by the National Paralympics Committee [NPC] and the PSC).
National coaches are Filipino coaches who are:
O
Coaches of national athletes,
O
Members of the national coaches training pool, and
o
Recognized and accredited by the POC and the PSC, or the
NPC and the PSC, as the case may be.
National athletes and coaches are granted a 20% discount from
selected establishments under RA 10699.
o
These discounts can likewise be claimed as a deduction for
businesses. (R.R. 13-2020)
Congress issued a law allowing a 20% discount on the purchases of
senior citizens from, among others, recreation centers. This 20%
discount can then be used by the sellers as a “tax credit." At the
initiative of BIR, however, Republic Act No. (RA) 9257 was enacted
amending the treatment of the 20% discount as a "tax deduction."
Equity Cinema filed a petition with the RTC claiming that RA 9257 is
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INCOME TAX
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unconstitutional as it forcibly deprives sellers a part of the price
without Just compensation.
a) What is the effect of converting the 20°/o discount from a "tax
credit" to a "tax deduction"?
b) If you are the judge, how will you decide the case? Briefly
explain your answer. (2016 Bar Exam)
Suggested answer:
a) The effect of converting the 20°/o discount from tax credit to
a tax deduction is that taxpayers who deal with senior citizens
won't get the "peso for peso" benefit. Since they are now treated as
deductions, they only benefit to the extent of 30°/o (the corporate
income tax rate). They are now used to determine taxable income,
which will be subject to the corporate tax rate, as compared to before
when the credit can be used to decrease the actual tax liability of the
corporation.
b) If I were the court. I'd dismiss the case. The Supreme Court has
previously held that RA 9257 was a valid exercise of police power to
improve the welfare of senior citizens; it's not an exercise of eminent
domain. The shift from a credit system to a deduction system is not
discriminatory, arbitrary, or confiscatory.
Kinds of income and income tax of individuals
Before we get into the smallest details of the tax liabilities of
each kind of individual, let's set down some basic rules which will be
helpful to remember:
•
Only resident citizens (and domestic corporations as we shall
see later) are taxed on income derived from abroad. Worldwide
taxable!
•
For income received from sources within the Philippines and
which are not subject to final withholding tax (like passive income
to be discussed below), a resident citizen, a nonresident citizen, a
resident alien, and a nonresident alien individual engaged in trade
or business in the Philippines are all subject to the graduated
income tax rates in Section 24.
O
But what about nonresident aliens not engaged In trade or
business?
•
For nonresident aliens not so engaged, the tax rate is:
•
25% of the entire or gross income received from
sources within the Philippines or
•
For special aliens (like those employed by regional
headquarters [RHQs], offshore banking units [OBUs],
or foreign petroleum service contractors), the BIR
has stated that the preferential income tax rate is no
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longer applicable because of TRAIN, without prejudice
to preferential rates under existing tax treaties. So,
as it stands, these special aliens are now subject to
the regular income tax rate. (R.R. 8-2018)
Income tax formula for individuals
It is important to note the basic formula to determine the taxable
income of an individual. Think of it as a road map where the different
provisions of the code will plug into. The basic formula to determine
the taxable income of an individual is as follows:
Gross Income
Less: Deductions (either itemized or optional standard deduction)
Taxable Income
x Tax Rate
Tax Due
Deductions
•
Individuals, except those who earn purely compensation income,
can claim deductions in two ways:
o
Itemized deductions (which we will discuss in more detail), or
O
belo'w)9
0ptl0nal star,dard deduction (which is discussed
Optional Standard Deduction
dPd,’,?pWena/ s^dard Deduction (OSD). — In lieu of the
siihiaC<IO?S a^owed under the preceding Subsections, an individual
mav C| t taX un<^er Section 24, other than a nonresident alien,
nercf?t'fAno stanbard deduction in an amount not exceeding forty
be irTth 40 /o) °f h,s 9ross sales or gross receipts, as the case may
and 2R(A\fC^e- °f a corPorat*on subject to tax under Sections 27(A)
Avrnod
r '
may e*ect
standard deduction in an amount not
Ser-tinn"1?? eX Percent (40%) of its gross income as defined in
his inr
°' ^'S (*obe- Unless the taxpayer signifies in his return
rnnciHen l°n
e*ect the optional standard deduction, he shall be
thp nra^ri- aS bavin9 availed himself of the deductions allowed in
ch 11 . ce ln9 Subsections. Such election when made in the return
Prni/iH«JrrTK°^able fOr the taxable year for which the return is made:
nriH_. i ' a at an individual who is entitled to and claimed for the
optfonal standard deduction shall not be required to submit with his
financial
taxH return such fi
r
nanc*al statements otherwise required under this
the
^u^er' That a general professional partnership and
p
ners comprising such partnership may avail of the optional
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55
standard deduction only once, either by the general professional
partnership or the partners comprising the partnership: Provided,
finally, That except when the Commissioner otherwise permits, the
said individual shall keep such records pertaining to his gross sales
or gross receipts, or the said corporation shall keep such records
pertaining to his gross income as defined in Section 32 of this Code
during the taxable year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon recommendation of
the Commissioner. (Amended by TRAIN)
Optional standard deduction is the deduction which an individual
other than a nonresident alien, subject to income tax, may elect
in an amount not exceeding 40% of his gross sales or gross
receipts, as the case may be, or a corporation, in an amount not
exceeding 40% of its gross income, in lieu of taking itemized
deductions.
Note that the codal states that a general professional partnership
(GPP) (like a law firm) and the partners comprising such
partnership may only use OSD once, either by the GPP itself or
the partners comprising the partnership. (Reconcile this with R.R.
8-2018)
More on OSD in the section of Deductions.
Persona! and additional exemptions and premium payments on
health and/or hospitalization insurance
•
If you're wondering what happened to personal exemptions and
health/hospitalization insurance, well, they've gone the way of
the dodo and are gone now. TRAIN repealed Section 35, NIRC,
which granted personal exemptions for taxpayers and additional
exemptions for their dependents, and Section 34 (M), which
allowed deductions for health and hospitalization premiums.
Now that we have a working Idea of how to arrive at an
individual's taxable income, let's focus on the different tax rates per
individual and the treatment of their passive Income.
Citizens (resident and nonresident) and resident aliens
Sec. 24. Income Tax Rates. —
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines. —
(1) An income tax is hereby imposed:
(a) On the taxable income defined In Section 31 of this Code,
other than income subject to tax under Subsections (B), (C), and
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(D) of this Section, derived for each taxable year from all sources
within and without the Philippines by every individual citizen of the
Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C), and
(D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers
referred to in Subsection (C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C), and
(D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of the
Philippines.
(2) Rates of Tax on Taxable Income of Individuals. — The tax shall
be computed in accordance with and at the rates established in the
following schedule:
(a) Tax Schedule Effective January 1, 2018 until December 31,
2022:
Not over P250,000
0%
Over P250,000 but not over P400,000
20% of the excess over
P250,000
Over P400,000 but not over P800.000
P30,000 + 25% of the
excess over P400,000
Over P800,000 but not over P2,000,000
P130.000 + 30% of the
excess over P800.000
Over P2,000,000 but not over P8,000,000
P490,000 + 32% of the
excess over P2,000,000
Over P8,000,000
P2,410,000 + 35% of
the excess over
P8,000,000
Tax Schedule Effective January 1, 2023 and onwards:
Not over P250,000
0%
Over P250,000 but not over P400,000
15% of the excess over
P250,000
Over P400,000 but not over P800,000
P22,500 + 20% of the
excess over P400,000
Over P800,000 but not over P2,000,000
P102,500 + 25% of the
excess over P800,000
Over P2,000,000 but not over P8,000,000
P402,500 + 30% of the
excess over P2,000,000
Over P8,000,000
P2,202,500 + 35% of
the excess over
P8,000,000
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For married individuals, the husband and wife, subject to the provision
of Section 51(D) hereof, shall compute separately their individual
income tax based on their respective total taxable income: Provided,
That if any income cannot be definitely attributed to or identified as
income exclusively earned or realized by either of the spouses, the
same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined in Section 22(HH)
of this Code shall be exempt from the payment of income tax on their
taxable income: Provided, further. That the holiday pay, overtime pay,
night shift differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.
(b) Rate of Tax on Income of Purely Self-employed Individuals
and/or Professionals Whose Gross Sales or Gross Receipts and Other
Non-operating Income Does Not Exceed the Value-added Tax (VAT)
Threshold as Provided in Section 109(BB). — 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 (P250,000) 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.
(c) Rate of Tax for Mixed Income Earners. — Taxpayers earning
both compensation income and income from business or practice of
profession shall be subject to the following taxes:
(1) All Income from Compensation — The rates prescribed under
Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession —
(a) If Total Gross Sales and/or Gross Receipts and Other Nonoperating Income Do Not Exceed the VAT Threshold as Provided In
Section 109(BB) of this Code. — The rates prescribed under Subsection
(A)(2)(a) of this Section on taxable income, or eight percent (8%)
income tax based on gross sales or gross receipts and other nonoperating income 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.
(b) If Total Gross Sales and/or Gross Receipts and Other Nonoperating Income Exceeds the VAT Threshold as Provided in Section
109(BB) of this Code. — The rates prescribed under Subsection (A)(2)
(a) or this Section.
Income tax is imposed upon taxable compensation or employment
income, business income, and income derived from the practice
of professions derived by citizens and resident aliens.
Married individuals shall compute separately their Individual
income tax based on their respective total taxable income.
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If any income cannot be definitely attributed to, or identified
as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between them for
the purpose of determining their respective taxable income.
O
Minimum wage earners are exempt from the payment of income
tax on their taxable income. Holiday pay, overtime pay, night shift
differential pay, and hazard pay received by them are likewise
exempt from income tax.
o
The SC has declared R.R. 10-2008 unconstitutional. The R.R.
stated that a minimum wage earner (MWE) loses his/her
exempt status and is thus taxable on his/her entire income
if the MWE receives other benefits in excess of the statutory
limit (in this case, the previous P30,000 limit under exclusions
form gross income). (Soriano v. Secretary of Finance, G.R.
No. 184450, January 24, 2017)
•
The R.R. added a requirement not found in R.A. 9504.
It effectively changed the definition of a MWE. A R.R.
cannot expand a law. In fact, this particular R.R. didn't
even clarify the law.
•
Hence, the proper rules are as follows:
•
A MWE who receives taxable income in excess of the
minimum wage will be taxed on the excess, but the
MWE will not lose his/her status as such. Workers
who receive the statutory minimum wage as their
basic pay remain MWEs.
•
Also, the receipt of other income during the year does
not disqualify them as MWEs. But the taxable income
they receive other than as MWEs may be subjected to
appropriate taxes.
•
Hence, bonuses and other benefits received above
the present statutory limit (now P90,000 because of
TRAIN) are taxable. (Soriano v. Secretary of Finance)
The amendment to Section 24(A) is one of the biggest changes
rought by TRAIN. In summary, it changed the following:
O
The tax brackets for individuals, most notably
P250,000 the cut-off for 0% income tax; and
O
The tax treatment of the following taxpayers:
making
Individuals earning purely compensation income;
Self-employed individuals earning income purely from
self-employment or practice of profession; and
J
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Mixed income earners, or those individuals who earn
income both from compensation and self-employment or
practice of profession.
■
Let's go through the rules of each kind of individual taxpayer and
how TRAIN taxes each.
O
Individuals earning purely
under the graduated rates
income:
taxed
First, compensation income is all remuneration for
services performed by an employee for his employer
under an employer-employee relationship.
•
•
•
This includes salaries, wages, emoluments, and
honoraria, allowances, commissions, director's fees
where the director is also an employee. (R.R. 8-2018)
•
So, as long as there's an employer-employee relationship, remuneration arising from it will be considered compensation income.
If an individual earns purely compensation income, then
he or she will be taxed according to his or her taxable
income and tax bracket, i.e., the graduated rates.
•
o
compensation
Taxable income is the individual's gross compensation
less
income
income/benefits
like
non-taxable
13th-month pay and other benefits like de minimis
benefits and employee's share in the Social Security
System (SSS), Government Service Insurance System
(GSIS), Philippine Health Insurance Corporation
(PHIC), Pag-IBIG contributions and union dues. (R.R.
8-2018)
Self-employed individuals earning income purely from selfemployment or practice of profession whose gross sales/
receipts and other non-operating Income do not exceed
P3,000,000, a.k.a. the VAT threshold: given two choices—
either a) under the graduated rates or b) 8% income tax rate
•
A self-employed individual is a sole proprietor or an
independent contractor who reports income earned from
self-employment.
•
A professional is a person formally certified by a
professional body belonging to a specific profession (like a
lawyer or a doctor). It also refers to a person who engages
in some art or sport for money as a means of livelihood,
rather than as a hobby (like a professional boxer or a
professional artist). An insurance agent, management
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and technical consultant, and recipients of professional
and talent fees are also considered professionals. (R.R.
8-2018)
So, self-employed individuals and professionals have a
choice to avail of:
•
The graduated rates; or
•
An 8% tax on gross sales/receipts and other nonoperating income in excess of P250,000 in lieu of the
graduated income tax rates and the percentage tax
under Section 116, NIRC.
Rules on availing the 8% tax rate:
The first P250,000 is not subject to tax, since what is
taxed is anything in excess of P250,000.
•
0
Note that this P250,000 "bonus" is not available
to mixed income earners (the third kind of
individual taxpayer)
•
If you choose the 8% tax rate, then you won't be
liable for the 3% percentage tax under Section
116 because the 8% tax rate is in lieu of said 3%
percentage tax.
•
The taxpayer must signify his or her intention to use
the 8% tax rate in the 1st quarter of the percentage/
income tax return. If not, he or she is deemed
considered to have chosen the graduated rates.
•
The 8% tax rate option is not available to the
following:
o
Purely compensation income earners (since they
have to use the graduated rates);
o
VAT-registered taxpayers, regardless of their
gross sales/receipts and other non-operating
income;
o
Non-VAT taxpayers whose gross sales/receipts
and other non-operating income exceeded the
P3,000,000 VAT threshold;
o
Taxpayers subject to Other Percentage Taxes
(except those under Section 116, NIRC);
o
Partners of a general professional partnership
since their distributive share from the GPP is
already net of costs and expenses; and
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O
•
■
What happens if your gross sales/receipts and other nonoperating income exceed the P3,000,000 VAT threshold?
•
You are automatically subject to the graduated rates
and can no longer use the 8% income tax rate.
•
You will also be subject to other business taxes, if
any.
Take note of the different tax base for computing the
graduated rates and the 8% income tax rate.
•
Graduated rates: taxable income
•
8% income tax rate: gross sales/receipts and other
non-operating income to be reduced by P250,000
o
o
Individuals enjoying income tax exemption (like
those registered as Barangay Micro Business
Enterprises). (RMC 50-2018)
Gross receipts include all kinds of deposits.
However, returnable deposits or deposits held in
trust and recorded as liability are excluded. (RMC
50-2018)
Mixed income earners, or those who earn Income from both
compensation and from self-employment: taxed under the
graduated rates for their compensation income and for their
self-employment income, it will depend on VAT threshold
•
The treatment of mixed income earners may seem
complicated, but it's basically just a combination of the
rules.
Mixed income earners are taxed in this way:
•
For compensation
graduated rates;
•
For income from business or practice of profession, It'll
depend whether their gross sales/receipts and other
non-operating income exceed the VAT threshold:
income,
straight out use the
o
If it exceeds the VAT threshold, then straight out
use the graduated rates for that too.
o
If it does not exceed the VAT threshold, then the
taxpayer has a choice to use either:
•
the graduated rates; or
•
8% income tax based on gross sales/receipts
and other non-operating income in lieu of the
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graduated rates and percentage tax under
Section 116.
•
The total income tax liability of the mixed income
earner is the sum of the liability for compensation
income and liability for the income from business or
practice of profession.
For individuals who earn solely from business/profession
and mixed income earners, the rules on availing the 8%
rate are basically the same, except for one thing:
•
Mixed income earners are not entitled to the P250,000
reduction because this has already been applied in
computing the income tax on compensation. (RMC
50-2018)
Final Income tax — interests, royalties, awards, dividends, capital
gains on sale of shares, realty
Note that passive income is usually subject to final tax. In other
words, the income from these passive sources is not used in computing
the gross income to determine the tax bracket of the individual. The
tax liabilities from these passive income are withheld with finality by
the income payor; hence, their nature as "final" taxes.
Sec. 24. (B) Rate of Tax on Certain Passive Income: —
(1) Interests, Royalties, Prizes, and Other Winnings. — A final tax at
the rate of twenty percent (20%) is hereby imposed upon the amount
of Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements; royalties, except on books, as well as other
literary works and musical composiuons, which shall be imposed
a final tax of ten percent (10%); prizes (except prizes amounting
to Ten thousand pesos (PIO,000) or less which shall be subject to
tax under Subsection (A) of Section 24; and other winnings (except
winnings amounting to Ten thousand pesos (P10,000) or less from
Philippine Charity Sweepstakes and Lotto which shall be exempt),
derived from sources within the Philippines: Provided, however,
That interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax
at the rate of fifteen percent (15%) of such interest income: Provided,
further, That interest income from long-term deposit or investment
in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally. That should the holder of the
J9JC9B0M
INCOME TAX
63
certificate pre-terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends. — A final tax at the rate of
ten percent (10%) shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual from
a domestic corporation or from a joint stock company, insurance
or mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the
distributable net income after tax of a partnership (except a general
professional partnership) of which he is a partner, or on the share
of an individual in the net income after tax of an association, a joint
account, or a joint venture or consortium taxable as a corporation of
which he is a member or co-venturer.
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. — The provisions of Section 39(B) notwithstanding,
a final tax at the rate of fifteen percent (15%) is hereby imposed upon
the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock
exchange. (As amended by TRAIN)
(D) Capital Gains from Sale of Real Property. —
(1) In General. — The provisions of Section 39(B) notwithstanding,
a final tax of six percent (6%) based on the gross selling price or
current fair market value as determined in accordance with Section
6(E) of this Code, whichever is higher, is hereby imposed upon capital
gains presumed to have been realized from the sale, exchange, or
other disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided,
That tfie tax liability, if any, on gains from sales or other dispositions
of real property to the government or any of its political subdivisions
or agencies or to government-owned or controlled corporations shall
be determined either under Section 24(A) or under this Subsection,
at the option of the taxpayer.
(2) Exception. — The provisions of paragraph (1) of this Subsection
to the contrary notwithstanding, capital gains presumed to have been
realized from the sale or disposition of their principal residence by
natural persons, the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen (18) calendar
months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the
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historical cost or adjusted basis of the real property sold or disposed
shall be carried over to the new principal residence built or acquired:
Provided, further. That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his intention to avail of
the tax exemption herein mentioned: Provided, still further. That the
said tax exemption can only be availed of once every ten (10) years:
Provided, finally, that if there is no full utilization of the proceeds of
sale or disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital gains
tax. For this purpose, the gross selling price or fair market value at
the time of sale, whichever is higher, shall be multiplied by a fraction
which the unutilized amount bears to the gross selling price in order to
determine the taxable portion and the tax prescribed under paragraph
(1) of this Subsection shall be imposed thereon.
Tax Rate on Certain Passive Income on
Citizens and Resident Aliens
Final Tax
1.
Interest under the expanded foreign currency
deposit (FCD) system (see R.R. 10-98 below)
Nonresident citizens: exempt
15% (vs. exempt
for nonresident
aliens engaged in
trade/business)
2.
Royalties from books, literary works, and musical
compositions
10%
3.
Royalties other than above
20%
4.
Interest on any current bank deposit, yield or
other monetary benefits from deposit substitute,
trust fund and similar arrangement
20%
5.
Prizes exceeding P10,000 (prizes amounting to
P10,000 or less shall be taxed under Section
24[A])
20%
6.
Winnings (except PCSO and Lotto winnings
amounting to P10,000 or less, which shall be
exempt)
20%
7.
Dividend from a domestic corporation, or from
a joint stock company, insurance or mutual fund
company, and regional operating headquarters of
multinational company or share in the distributive
net income after tax of a partnership (except a
general professional partnership), joint stock
or joint venture or consortium taxable as a
corporation
10% (vs. 20% for
nonresident aliens
engaged in trade/
business)
8.
Interest on long-term deposit or investment in
banks (with maturity of five years or more)
exempt
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INCOME TAX
65
The income sources referred to above are those derived within
the Philippines.
So, what happens if passive income is sourced abroad?
O
For nonresident citizens and aliens, the passive income from
abroad is not taxable in the Philippines. Royalties and other
income must come from within the Philippines since these
taxpayers are only taxed from sources within the Philippines.
However, note that dividends from a foreign corporation may
be considered sourced within the Philippines under Section
42. If these dividends can be grounded locally, the income
here enters into the computation of taxable income under
Section 24(A).
O
For resident citizens, passive income that come from outside
the Philippines goes into their gross income (and thus subject
to the graduated rates under Section 24[A]) because resident
citizens are taxed from income sourced worldwide.
A note on interest income from foreign currency deposits
While R.R. 10-98 in the table below has yet to be amended, I
imagine that the tax treatment of foreign currency deposits of
OCWs will still be treated as exempt.
•
O
Same would go with bank accounts in the joint names
of an OCW and his or her resident spouse: 50% shall be
exempt/50% shall be subject to the now 15% final withholding
tax for interest income from foreign currency deposits
Tax Rate on Interest Income from Foreign Currency Deposit
_______________________ (R.R. 10-1998)_________
1.
Interest income actually received by a resident
citizen or resident alien from FCD
7.5% final
withholding tax
(should be 15%
under TRAIN)
2.
If it was deposited by an OCW or seaman or
nonresident citizen
Exempt
3.
If it was in a bank account in the joint names of an
OCW and his spouse (who is a resident)
50% exempt/
50% final
withholding tax
of 7.5% (should
be 15% under
TRAIN)________
4.
Interest income actually received by a domestic
corporation or resident foreign corporation from
FCD
7.5% final
withholding tax
(should be 15%
under TRAIN)
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66
A note on deposit substitutes
Sec. 22. (Y). The term "deposit substitutes" sha\\ mean an alternative
form of obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate lenders at
anyone time) otherthan deposits, through the issuance, endorsement,
or acceptance of debt instruments for the borrowers own account,
for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent
or dealer. These instruments may include, but need not be limited
to bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between
the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments
with recourse: Provided, however, That debt instruments issued for
interbank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as
deposit substitute debt instruments.
A deposit substitute is
o
a means of borrowing money from the public (20 or more
individual or corporate lenders)
o
other than by way of deposit with banks through the issuance
of debt instruments (like banker's acceptances, promissory
notes, repurchase agreements, certificates of assignment or
participation).
Nineteen (19)-lender rule: The mere flotation of a debt instrument
is not considered to be public (and therefore not a deposit
substitute) if there are only 19 or less lenders at any one time.
•
o
But what does "at any one time" mean?
•
It means every transaction executed in the primary
or secondary market in connection with the purchase
or sale of securities.
•
Hence, when funds are simultaneously obtained
from more than 20 lenders/investors — whether in
the primary or secondary market — the instrument
is deemed a deposit substitute. (Banco de Oro v.
Republic of the Philippines, G.R. No. 198756, January
13, 2015, where the issue of the PEACE Bonds was
finally resolved; the interpretation was upheld but
applied prospectively upon reconsideration, Banco de
Oro v. Republic, G.R. No. 198756, August 16, 2016)
When it comes to bonds, the investor has two avenues for income:
o
The interest paid by the borrower to the lender/investor; or
J9JC9B0M
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INCOME TAX
O
The gain if the bond is traded before maturity or when
redeemed at maturity.
O
Banco de Oro, 2016 outlined it, but everything's better with a
table, right? So let's have a table!
Tax Rate_____
Type of income
Basis
Interest Income
Interest or yield
from deposit
substitute
20% (Final Withholding)
Section 24(B)(1);
Section 25(A)(2)
Interest income
from long-term
deposits or
placements with
banks
Exempt
Section 24 (B)(1);
Section 25 (A)(2)
Interest income
if preterminated
5%, 12%, 20% (Final
Withholding, depending
on remaining maturity)
Section 24(B)(1);
Section 25(A)(2)
!
Gains from the Sale or Trade
Long-term bonds
(Instrument has
maturity of more
than 5 years)
Exempt
Section 32(B)(7)
(9)
Shortterm bonds
(Instrument has
maturity of less
than 5 years)
Subject to regular income
tax rates (scheduler for
individuals, 30% for
corporations)
Section 32
Capital Gains Tax (CGT)
•
Capital gains tax only applies to the sale or disposition of the
following:
o
Shares of stock of a domestic corporation not traded through
the local stock exchange, and
o
Sale of real property In the Philippines which is held as a
capital asset.
For the sale or disposition of other capital assets, you must refer
to Section 39, NIRC (to be discussed later).
I
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TAX MADE LESS TAXING:
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Tax Rate on Capital Gains
1.
On sale of shares of stock of a domestic
corporation not traded through a local
stock exchange held as a capita! asset
15% of the
gains
2.
On sale of real property in the Philippines
held as a capita! asset (see R.R. 8-1998)
6% of the gross selling
current
price,
or
the
market value at the time
of sale.
whichever is
higher
net capital
Capita! Gains on Sate or Disposition of Shares of Stock
Tax Rate on Income from Sale, Barter, Exchange or other
Disposition of Shares of Stock of Domestic Corporations
If shares of stock are listed and traded through j 6/10 of 1% of the gross
the local stock exchange
- !
| se i rg once or gross
! value in money of the
shares of stock
If shares not traded through the local stock
exchange
15% of the net
gams
capital
Implications on shares of stock listed and traded in the stock
exchange from those that are not (applies also to corporations):
o
Those listed and traded is subject to the final percentage
tax of 6/10 of 1% on the GROSS SELLING PRICE. (Stock
Transaction Tax)
Hence, imposed whether there was a gain or not.
•
o
Those NOT traded, the net capital gam is subject to the final
capital gains tax of 15%.
Subject to tax only if it results into a gain.
•
Who are liable for capital gains tax?
1.
Individual taxpayer, whether citizen or alien;
2.
Corporate taxpayer, whether domestic or foreign;
3.
Other taxpayers not falling under (1) and (2) above, such as
estate, trust, trust funds and pension funds, among others.
(R.R. 6-2008, as amended)
J
r~*
-----
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INCOME TAX
Who are exempt from capital gains tax?
1.
Dealers in securities (in terms of CGT for shares of stock)
2.
Investors in shares of stock in a mutual fund company, as
defined in Section 22(BB), and Section 2(s) of R.R. 6-2008,
in connection with the gains realized by said investor upon
redemption of said shares of stock in a mutual fund company,
and
3.
All other persons, whether natural or juridical, who are
specifically exempt from national internal revenue taxes
under existing investment incentives and other special laws.
(R.R. 6-2008)
A loan of shares to another party without any consideration falls
under the "disposition" of shares of stock which Is subject to
capital gains tax. (CIR v. Oder, G.R. No. 192023, November 21,
2018)
How to determine the tax base of
disposition of stock (R.R. 6-2008)
Fair Market Value
Sales of stock listed and traded through
the LSE
FMV is the actual selling price
Sales of stock listed but not traded
through the LSE
FMV is the closing price on the
dav when the shares were sold,
transferred, or exchanged (If no
sale was made on that day In
the LSE, then the closing price
on the day nearest to the date
of sale, transfer, or exchange of
the said shares)
Sales of stock not listed and not traded
through the LSE
For common shares, the book
value based on the latest AFS
prior to the date of the sale but
not earlier than the immediately
preceding year.
For
preferred
shares,
the
liquidation value, which is
equal to the redemption price
of the preferred shares as of
the balance sheet nearest the
transaction
date,
including
any premium and cumulative
preferred dividends In arrears.
In case there are both common
and preferred, deduct the
liquidation value of the preferrec
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TAX MADE LESS TAXING:
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shares from the total equity first
and then divide the result by the
number of outstanding common
shares as of the balance sheet
nearest the transaction date.
The values no longer need to be
adjusted to include the appraisal
surplus from any property of the
corporation. The latest AFS are
the shares. (R.R. 20-2020)
)
::
Spouses Konstantino and Karina are Filipino citizens and are principal
shareholders of a restaurant chain. Karma's, Inc. The restaurant's
principal office is In Makati City, Philippines.
Korina's became so popular as a Filipino restaurant that the owners
decided to expand its operations overseas. During the period 20102015 alone, it opened ten (IO) stores throughout North America
and five (5) stores in various parts of Europe where there were
large Filipino communities. Each store abroad was in the name of a
corporation organized under the laws of the state or country in which
the store was located. AU stores had identical capital structures: 60%
of the outstanding capital stock was owned by Karina's, Inc., while
the remaining 40% was owned directly by the spouses Konstantino
and Korina.
Beginning 2017, in light of the immigration policy enunciated by US
President Donald Trump, many Filipinos nave since returned to the
Philippines and the number of Filipino immigrants m the US dropped
significantly. On account of these developments, Konstantino
and Karina decided to sell their shares of stock in the five (5) US
corporations that were doing poorly in gross sates. The spouses'
lawyer-friend advised them that they will be taxed 5% on the first
PhPlOO,OOO net capital gain, and 1O% on the net capita! gain in
excess of PhPl 00, OOO.
i
I
i
••
i
i
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Is the lawyer correct? If not, how should the spouses Konstantino
and Karina be taxed on the sale of their shares? (20IB Bar Exam)
Suggested answer: The lawyer is wrong. The capital gams tax
rule that the lawyer refers to is limited to the sale of shares of
domestic corporations. In this case, the sale are of shares of foreign
corporations, so the capita! gains tax rule does not apply. However,
since Konstantino and Karina are resident citizens, they will still
be taxed from the sale of the foreign shares as they are taxed for
income sources worldwide. Whatever income they do get from the
sale will be included in their gross income which will be subject to
the schedular tax rate. (Note that this question still uses the old
5°/o/10°/o capita! gains tax under the pre-TRAIN regime. In any case,
the answer is the same since we're not talking about rates, but the
issue on the sale of foreign shares.)
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INCOME TAX
Capital Gains on Sales, Exchanges, or Transfers of Real Properties
(Capital Assets)
Final Tax Rate on Sales, Exchanges, or Transfers of Real
Properties Classified as Capital Assets (R.R. 8-1998)
Sale of real property in the Philippines
6% of the gross selling price,
or the current market value at
the time of sale, whichever is
higher
If sale was made to the government or
to GOCCs
Either 6% of the gross selling
price/current market value or
under the normal income tax
rate, taxpayer's option
The transfer of property through expropriation is a sale or
exchange that is subject to capital gains tax. (Republic v. Spouses
Salvador, G.R. No. 205428, June 7, 2017)
The transfer of property due to the dissolution of community
property is not subject to capital gains tax as such transfer is
equivalent to a conveyance without monetary consideration and
made merely in accordance with a court decision. (BIR Ruling DA
029-08)
The transfer of real property based on a compromise agreement
duly approved by a court is subject to capital gains tax, as this is
covered by the clause "other disposition of real property" under
Section 24(D)(1). (BIR Ruling 423-16, December 7, 2016)
The termination, liquidation, and reversion of property held
in trust back to the trustor from the trustee is not subject to
income tax, capital gains tax, and withholding tax because the
conveyance is not motivated by valuable consideration and merely
confirms and consolidates the legal title and beneficial ownership
over the property in the name of the trustor. (BIR Ruling 445-16,
December 19, 2016)
Payment of capital gains tax on foreclosure of mortgaged property
O
If the mortgagor exercises his right of redemption within
one year, no capital gains tax shall be imposed because no
capital gains have been derived and no transfer of property
was realized. (Supreme Transliner, Inc. v. BPI Family Savings
Bank, Inc., G.R. No. 165617, February 23, 2011)
o
In caseof non-redemption, the buyer of the property is deemed
to have withheld the CGT (or the creditable withholding tax
[CWT], as the case may be) and must remit the said tax to
TAX MADE LESS TAXING:
A REVIEWER. WITH CODALS AND CASES
72
the BIR. The CGT (or the CWT) shall be based on whichever
is higher between the bid price of the highest bidder or the
FMV or the zonal value under Section 6(E). (R.R. 9-2012)
Hopeful Corporation obtained a loan from Generous Bank and
executed a mortgage on its real property to secure the loan.
When Hopeful Corporation failed to pay the loan. Generous Bank
extrajudicially foreclosed the mortgage on the property and acquired
the same as the highest bidder. A month after the foreclosure.
Hopeful Corporation exercised its right of redemption and was able
to redeem the property. Is Generous Bank liable to pay capital gains
tax as a result of the foreclosure sale? Explain. (201-4 Bar Exam)
Suggested answer: No, Generous Bank is not liable to pay capital
gains tax as a result of the foreclosure sale. According to the Supreme
Court, there is no actual transfer of the mortgaged property until
after the expiration of the one-year redempt.cn period. Likewise,
the rules state that in case the mortgagor exercises his/her right to
redeem, then no capital gains tax shall be imposed. Here, Hopeful
Corporation exercised its right of redemption; hence, there was no
transfer of property and no capita! gams tax should be imposed on
Generous Bank.
Creditable Withholding Tax on Rea! Properties (Ordinary Assets)
Creditable Withholding Tax on Sales, Exchanges or
Transfers of Real Properties classified as Ordinary Assets
(R.R. 8-1998, as amended by R.R. 11-2018)
1.
If the seller is habitually engaged j
in the real estate business
o
Selling price
P500,000
o
Selling price is P500,000 to
P2M
o
Selling price is above P2M
is
less
than
2.
If the iseller
engagedI
in
business
3.
If the seller is exempt from
creditable withholding tax as per
R.R. 2-1998
J9JC9B0M
is not habitually
the
real
estate
1.5%
3%
5% of gross selling price/current
market value, whichever is higher
6% of gross selling price/current
market value, whichever is higher
Exempt
Conditions to be exempt from capital gains tax of 6% on the sale,
exchange, or disposition of a principal residence
O
The proceeds from the sale, exchange, or disposition of
his principal residence must be fully utilized in acquiring or
J9JC9B0M
INCOME TAX
73
construing a new principal residence within 18 months. There
must be proof;
O
This can only be availed of ONLY ONCE every 10 years;
O
The historical cost of his old principal residence shall be
carried over to the cost basis of his new residence;
O
If there is no full utilization, he shall be liable for the deficiency
capital gains tax of the utilized portion;
O
If the principal residence is disposed in exchange for a condo,
and if it is used as his new residence, then he is exempt;
O
The 6% capital gains tax otherwise due must be deposited
in escrow with an authorized agent bank, and can only be
released when sufficient proof is shown that the proceeds
have been fully utilized within 18 months. (R.R. 13-1999)
What is the principal residence anyway?
O
It is the dwelling house, where the husband or wife or
unmarried individual resides; actual occupancy is not
interrupted or abandoned by temporary absence due to
travel, studies, or work abroad.
O
If the ownership of the land and the dwelling house belong to
different persons, only the dwelling house shall be treated as
principal residence.
O
It is not necessarily the "family home." (R.R. 14-2000)
i
Mr. Jose Castillo is a resident Filipino Citizen. He purchased a parcel
of land in Makati City in 1970 at a consideration of Pl Million. In
2011, the land, which remained undeveloped and idle, had a fair
market value of P20 Million. Mr. Antonio Ayala, another Filipino
citizen, is very much interested in the property and he offered to buy
the same for P20 Million. The Assessor of Makati City re-assessed In
2011 the property at PIO Million.
i
Should Mr. Castillo agree to sell the land to Mr. Ayala In 2012 for P20
Million, subject to the condition as stated In The Deed of Sale that
the buyer shall assume the capital gains tax thereon, how much is
the income tax due on the transaction and when must the tax return
be filed and the tax be paid by the taxpayer? Explain your answer.
(2012 Bar Exam)
Suggested answer: The income tax due will be Pl20,000. For the
sale of real property held as capital assets, the capital gains tax is
6% of the gross selling price or the current FMV, whichever is higher.
In this case, the gross selling price (P2,000,000) is higher than the
current FMV. Hence, the tax base is P2,000,000; 6% of which Is
Pl 20,000. The tax return must be filed 30 days following the sale.
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In 2000, Mr. Belen bought a residential house and lot for Pl, 000,000.
He used the property as his and his family's principal residence. It
is now year 2013 and he is thinking of selling the property to buy a
new one. He seeks your advice on how much income tax he would
pay if he sells the property. The total zonal value of the property
is P5,000,000 and the fair market value per the tax declaration is
P2,500,000. He intends to sell it for P6,000,000.
What material considerations will you take into account in computing
the income tax? Please explain the legal relevance of each of these
considerations. (2013 Bar Exam)
Suggested answer: Mr. Belen can use Section 25(D)(2) to exempt
himself from the payment of capita! gains tax on the sale of his family
home. He must however prove that the proceeds of the sale was fully
utilized in acquiring or constructing a new principal residence within
18 calendar months from the sale of the house and lot. He must
also file a return showing his intention to avail of the tax exemption
within 30 days from the sale. He must also show that the exemption
will only be availed of once every 10 years. If he fails to do so, he
will be liable to pay P360,000 or 6% of the gross selling price, which
is higher than the fair market value.
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 gams tax and the conditions
they must comply with to avail themselves of said exemption. How
will you respond? (2015 Bar Exam)
Suggested answer: I will tell Mr. H that he can get an exemption
from capital gains tax for the sale of his family home. The proceeds
from the sale must be used to buy a new residence within the next
18 months—and he must prove this fact as well. He snould also hie
a return showing his intention to avail of the tax exemption. The
would-be capital gains tax must be deposited in escrow with a bank,
and will only be released upon sufficient proof that the proceeds
were used to buy a new family home. I will tell him also that he can
only avail of this exemption once every 10 years.
Tax on nonresident aliens
Nonresident aliens engaged in business in the Philippines
Sec. 25. Tax on Nonresident Alien Individual. —
(A) Nonresident Alien Engaged in trade or Business Within the
Philippines. —
(1) In General. — A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual,
J9JC9B0M
INCOME TAX
75
on taxable income received from all sources within the Philippines.
A nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident
alien doing business in the Philippines'. Section 22(G) of this Code
notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation
or Joint Stock Company, or Insurance or Mutual Fund Company or
Regional Operating Headquarters or Multinational Company, or Share
in the Distributable Net Income of a Partnership (Except a General
Professional Partnership), Joint Account, Joint Venture Taxable
as a Corporation or Association, Interests, Royalties, Prizes, and
Other Winnings. — Cash and/or property dividends from a domestic
corporation, or from a joint stock company, or from an insurance or
mutual fund company or from a regional operating headquarters of
multinational company, or the share of a nonresident alien individual
in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share
of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation
of which he is a member or a co-venturer; interests; royalties (in any
form); and prizes (except prizes amounting to Ten thousand pesos
(PIO,000) or less which shall be subject to tax under Subsection
(B)(1) of Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an Income
tax of twenty percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other literary works, and
royalties on musical compositions shall be subject to a final tax of ten
percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment In the form
of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other Investments evidenced
by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax Imposed under this
Subsection: Provided, finally, that should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted
and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years — 5%
Three (3) years to less than four (4) years — 12%; and
Less than three (3) years — 20%
(3) Capital Gains. — Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not traded
through the local stock exchange, and real properties shall be subject
to the tax prescribed under Subsections (C) and (D) of Section 24.
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•
A nonresident alien engaged in trade or business (NRAETB) in
the Philippines is subject to the same income tax rate as citizens
and resident aliens, on taxable income received from all sources
within the Philippines.
•
A nonresident alien who stays in the Philippines for an aggregate
period of more than 180 days shall be deemed a nonresident
alien doing business in the Philippines.
•
TRAIN did not seem to amend the passive income rates of
nonresident aliens engaged in trade, business, or exercising a
profession in the Philippines. The only change would be on the
capital gains tax on the sale of shares of domestic corporations
not traded through the local stock exchange.
Tax Rate on Certain Passive Income on Nonresident
Final Tax
Aliens Engaged in Trade. Business or Exercising a
Profession
Interest under the expanded foreign currency deposit
system
exempt
Royalties from books, literary works, and musical
compositions
10%
3.
Royalties other than above
20%
4.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust fund
and similar arrangement
20%
5.
Prize exceeding PIO,000
20%
6.
Other winnings, except Phil. Charity Sweepstakes and
Lotto
20%
7.
Dividend from a domestic corp., or from a joint stock
company, insurance or mutual fund company, and
regional operating headquarters of multinational
company or share in the distributive net income after
tax o a partnership (except a general professional
partnership), joint stock or joint venture or consortium
taxable as a corporation
20%
(compare
with citizens
and resident
aliens)
8.
Gross income from cinematographic films and similar
works
25%
9.
Interest on long-term deposit or investment in banks
(with maturity of five years or more)
exempt
1.
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INCOME TAX
Tax Rate on Capital Gains (same with residents, and nonresident
aliens not engaged in business)
1.
2.
On sale of shares of stock of a domestic
corporation NOT traded through a local
stock exchange held as a capital asset
On sale of real property in
Philippines held as a capital asset
the
15% of the net capital gains
6% of the gross selling
price, or the current market
value at the time of sale,
whichever is higher
Nonresident aliens not engaged in business in the Philippines
Sec. 25. (B) Nonresident Alien Individual Not Engaged in Trade
or Business Within the Philippines. — There shall be levied,
collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every nonresident
alien individual not engaged in trade or business 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. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the
sale of shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections (C)
and (D) of Section 24.
Nonresident aliens not engaged in business are taxed 25% of
their entire income within the Philippines.
That means they have no deductions.
Their capital gains tax liabilities are the same with nonresident
aliens engaged in business (see table above).
Special aliens
Sec. 25. (C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies. — There shall be levied, collected and paid
for each taxable year upon the gross income received by every alien
individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational
companies as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, from such
regional or area headquarters and regional operating headquarters,
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a tax equal to fifteen percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to Filipinos employed
and occupying the same position as those of aliens employed by
these multinational companies. For purposes of this Chapter, the term
'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in
the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units.
— There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual employed
by offshore banking units established in the Philippines as
salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such off-shore
banking units, a tax equal to fifteen percent (15%) of such gross
income: Provided, however, That the same tax treatment shall apply
to Filipinos employed and occupying the same positions as those of
aliens employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor
and Subcontractor. — An Alien individual who is a permanent
resident of a foreign country but who is employed and assigned in
the Philippines by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines
shall be liable to a tax of fifteen percent (15%) of the salaries, wages,
annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, received from such contractor or
subcontractor: Provided, however, That the same tax treatment shall
apply to a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by
the alien employees referred to under Subsections (C), (D) and (E)
hereof shall be subject to the pertinent income tax, as the case may
be, imposed under this Code.
Sec. 25. (F) The preferential tax treatment provided in Subsections
(C), (D), and (E) of this Section shall not be applicable to regional
headquarters (RHQs), regional operating headquarters (ROHQs),
offshore banking units (OBUs) or petroleum service contractors
and subcontractors registering with the Securities and Exchange
Commission (SEC) after January 1, 2018: Provided, however, That
existing RHQs/ROHQs, OBUs or petroleum service contractors and
subcontractors presently availing of preferential tax rates for qualified
employees shall continue to be entitled to avail of the preferential
tax rate for present and future qualified employees. (TRAIN added
Section 25 (F), but the President subsequently vetoed this addition)
When the President vetoed Section 25(F) of TRAIN, it led to some
confusion whether those who had already been employed by
RHQs, ROHQs, OBUs, and petroleum service contractors before
TRAIN would lose their preferential status.
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In any case, the BIR has stated that the preferential income
tax rate for these special aliens is no longer applicable, without
prejudice to preferential rates under existing tax treaties.
0
So, as it stands, these special aliens are now subject to the
regular income tax rate. (R.R. 8-2018)
O
Does this mean they aren't special anymore? Their feelings
though...
Tips on answering problems regarding taxable income of individuals
Questions to ask yourself in answering problems:
1.
Is this income? If not, then it's not really an income tax problem.
2.
Who's the taxpayer? And what's the source of income? Refer to
Sections 23 and 42.
3.
What's the specific rate? See Sections 24 to 25.
What is the tax rate on income derived from royalties from
foreign sources for i) Resident citizens, ii) Resident aliens, and iii)
Nonresident aliens engaged in trade or business?
1.
2.
3.
Resident citizens
a.
Yes, it is income.
b.
The source is outside the Philippines. Are they liable for
sources from outside the Philippines? Yes, Resident citizens
are taxed worldwide.
c.
What is the specific tax rate? Since it is not in any of the
passive income charts, but they still have to be taxed, then
the income they derive from royalties from foreign sources
will be considered in computing the tax rate based on the tax
calendar of Section 24(A).
Resident aliens
a.
Yes, it is income.
b.
The source is outside the Philippines. Are they liable for
sources from outside the Philippines? No. They aren't taxed
worldwide.
Nonresident aliens engaged in trade or business
a.
Yes, it is income.
b.
The source is outside the Philippines. Are they liable for
source from outside the Philippines? No, they aren't taxed
worldwide either.
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80
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 (2015 Bar
Exam)
Suggested answer:
Cash dividends to a resident citizen are subject to 10% final tax.
a)
b) Cash dividends to a non-resident alien engaged in trade or
business are subject to 20% final tax.
c) Cash dividends to a non-resident alien not engaged in trade or
business will enter the taxpayer's gross income which is subject to
25% tax on the entire income.
F.
Partnerships
Sec. 26. Tax Liability of Members of General Professional
Partnerships. — A general professional partnership as such shall
not be subject to the income tax imposed under this Chapter.
Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and
individual capacities.
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.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
Sec. 73. (D) Net Income ofa Partnership Deemed Constructively
Received by Partners. — The taxable income declared by a
partnership for a taxable year which is subject to tax under Section
27(A) of this Code, after deducting the corporate income tax imposed
therein, shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed
to them in their individual capacity, whether actually distributed or
not.
•
For income tax purposes, there are two kinds of partnerships:
o
Partnerships NOT subject to income tax; these are
■
General professional partnership (like your regular law
firm)
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Joint venture or consortium agreement formed for the
purpose of
•
undertaking construction projects, or
•
engaging in petroleum, coal, geothermal and other
energy operations
O
O
pursuant to an operating or consortium agreement
under a service contract with the government
Partnerships subject to tax
Usually, those whose income is derived from trade or
business (these are considered "corporations" under
Section 22[B] of the Tax Code — more on this in the next
Section)
■
Differences
NONTAXABLE Partnership
TAXABLE business partnership
With regard to DISTRIBUTIVE SHARE
o
Distributive share is a partner's computed and ascertained share in the
net profits of the partnership,
Whether actually distributed to the partners or not
Will form part of partner's gross
income in the ITR subject to the
graduated income tax rates
Will be subjected to a creditable
withholding tax of 15% (if income
payments exceed P720,000 for the
current year) or 10% (if income
payments do NOT exceed P720,000
for the current year) to be withheld
and paid by the partnership to the
BIR
Partner's distributive share in the
net income is subject to a final tax of
10% (resident citizens, nonresident
citizens, OCWs, or resident aliens)
or 20% (for NRAETB)
With regard to PARTNER'S SHARE IN NET LOSS OF THE PARTNERSHIP
May be claimed as a deductible
expense in his personal income tax
return
Not deductible since subject to final
tax
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82
With regard to HOW THE PARTNERSHIP is TAXED
Still required to file an annual
information return on their incomes
and expenses for the purpose of
ascertaining the partners' taxable
shares
Deemed and treated as corporations
subject to the corporate income tax
rate
For taxable partnerships (considered "corporations"), remember
the definition of a partnership under Article 1767, Civil Code — By
the contract of partnership two or more persons bind themselves
to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
O
Hence, when heirs use the inheritance or the incomes derived
therefrom as a common fund to produce profits forthemselves,
the heirs are taxable as an unregistered partnership. (Ona v.
CIR, G.R. No. L-19342, May 25, 1972)
O
However, not all co-ownerships are unregistered partnerships.
There must bean unmistakable intention to form a partnership.
■
Hence, when children sold land acquired from their
father in an isolated transaction, the Court considered
this a mere co-ownership and not a taxable unregistered
partnership. (Obillos v. CIR, G.R. No. L-68118, October
29, 1985)
On joint ventures
In order that a joint venture or consortium formed to undertake
a construction project not to be considered a taxable corporation,
the joint venture should be:
•
o
o
O
o
For the undertaking of a construction project;
Should involve joining or pooling of resources by licensed
local contracts (/.e., those licensed as general contractor by
the Philippine Contractors Accreditation Board ["PCAB"] of
the DTI);
The contractors are engaged in construction business;
The joint venture itself must be licensed under the PCAB.
(R.R. 10-2012)
When two corporations enter into a Joint Development Agreement
for the formation of a joint venture wherein one will contribute
property and the other will contribute project development
services, the resulting joint venture is not taxable as a joint
venture "for the purpose of undertaking construction projects."
o
The allocation of units between the corporations is likewise
not taxable as no income is realized by either corporation.
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The allocation of units between them is a mere return of their
capital.
-
It is the resulting sale of the allocated units which will
give rise to a taxable event. (BIR Ruling 108-2010)
Special Rule on GPPs and the choice of deductions (itemized or OSD)
•
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.
•
In computing a GPP's distributable taxable income, the GPP may
avail of the following deductions:
O
Itemized expenses; or
o
The 40% OSD.
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.
O
The partners cannot claim further deductions from their
distributive share.
O
The partners cannot avail of the 8% income tax rate either.
•
Why can't the partners claim further deductions and use
the 8% income tax rate? 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. (R.R. 8-2018)
Atty. Gambino Is a partner in a general professional partnership.
The partnership computes its gross revenues, claims deductions
allowed under the Tax Code, and distributes the net income to the
partners, including Atty. Gambino, in accordance with its articles of
partnership.
In filing his own Income tax return, Atty. Gambino claimed deductions
that the partnership did not claim, such as purchase of law books,
entertainment expenses, car insurance and car depreciation. The
BIR disallowed the deductions.
Was the BIR correct? (2013 Bar Exam)
Suggested answer: The BIR is right. Undercurrent BIR rules, partners
can no longer claim further deductions from their distributive share.
(Note: the suggested answer has been updated to reflect TRAIN
amendments. It's not like I went back in time to the 2013 Bar Exam,
lol.)
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84
G. Corporations
Definition of corporations
Sec. 22. (B) The term "corporation" shall include partnerships, no
matter how created or organized, joint-stock companies, joint accounts
(cuentas en participation), 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. "General professional
partnerships" are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business.
Corporations include:
•
O
Partnerships, no matter how created or organized;
0
Joint-stock companies;
0
Joint accounts;
O
Associations; and
O
Insurance companies
It does not include:
0
General professional partnerships;
O
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 or consortium agreement under a service
contract with the government. (Note: The JV should NOT be
incorporated.)
Corporations are classified into the following:
1.
Domestic Corporations — those which are incorporated in the
Philippines
2.
Foreign Corporations
a.
Resident foreign corporations — those which are incorporated
abroad but have a license to do business in the Philippines
b.
Nonresident foreign corporations
Like our treatment of persons, it is important to know the
definition of each kind of corporation because the tax liability of each
differs. Let's start with domestic corporations.
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Income Tax Rates of Domestic Corporations
Sec. 27. Rates of Income tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this Title as a corporation,
organized in, or existing under the laws of the Philippines: Provided,
That effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
In the case of corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific
date when specific sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be deemed to have
been earned and spent equally for each month of the period.
The corporate income tax rates shall be applied on the amount
computed by multiplying the number of months covered by the new
rates within the fiscal year by the taxable income of the corporation
for the period, divided by twelve.
Provided, further, That the President, upon the recommendation
of the Secretary of Finance, may effective January 1, 2000, allow
corporations the option to be taxed at fifteen percent (15%) of gross
income as defined herein, after the following conditions have been
satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National
Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to
total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available
only to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation
shall be irrevocable for three (3) consecutive taxable years during
which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived
from business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods" sold shall
include the invoice cost of the goods sold, plus import duties, freight
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86
in transporting the goods to the place where the goods are actually
sold, including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and
sold" 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.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances and
discounts.
Tax rate of Domestic
Corporations
•
30% of taxable income from all sources within
and outside the Philippines, or
2% of gross income if MCIT applies, or
15% of gross income if the following conditions
are met:
1.
tax effort ratio of 20% of GNP
2.
ratio of 40% of income tax collection to total
tax revenues
3.
VAT tax effort of 4% of GNP; and
4.
0.9% ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP (this last
one has yet to be implemented)
Option to be taxed based on gross income shall be available only
to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed 55%
O
Election of the gross income tax option by the corporation
shall be irrevocable for three consecutive taxable years
Domestic corporations are subject to any or some of the following:
O
Capital gains tax;
O
Final tax on passive income;
O
Normal tax;
O
Minimum corporate income tax (MCIT);
O
Gross income tax (GIT);
0
Improperly accumulated earnings tax (IAET).
■
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Gross Income Computation
Gross Sales
Less: Sales Returns
Discounts
Allowances
Cost of Goods Sold (CoGS) (all business expenses directly incurred to
produce the merchandise and bring them to their present location or use)
Total Gross Income
CoGS for a Trading or Merchandise Concern
Invoice cost of goods sold
Import duties
Freight in transporting the goods to the place where the goods are actually
sold
Insurance while the goods are in transit
CoGS for a Manufacturing Concern
All costs of production of finished goods such as raw materials, direct labor
and manufacturing overhead
Freight cost
Insurance premiums
Other costs incurred to bring the raw materials to the factory or warehouse
Gross Income Computation for a Service Concern
Gross Receipts
Less: Sales Returns
Discounts
Allowances
Cost of Services (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
Cost of facilities directly utilized in providing the service such as depreciation
or rental of equipment use and cost of supplies)
Total Gross Income of a service concern
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Special Rule on Proprietary Educational Institutions and Hospitals
(B) Proprietary Educational Institutions and Hospitals. —
Proprietary educational institutions and hospitals which are nonprofit
shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or performance
by such educational institution or hospital of its primary purpose or
function. A "[Proprietary educational institution" is any private school
maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED),
or the Technical Education and Skills Development Authority (TESDA),
as the case may be, in accordance with existing laws and regulations.
A proprietary educational institution is:
o
Any private school maintained and administered by private
individuals or groups
o
With an issued permit to operate from the DECS or CHED or
TESDA.
A proprietary hospital is also given a special tax rate.
o
Proprietary likewise means "private." (CIR v. St. Luke's
Medical Center, Inc., G.R. No. 195909, September 26, 2012)
o
"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, September 26, 2012)
Hospitals and educational institutions that fail to meet the above
definition of "proprietary" and "non-profit" shall be taxed as a
regular corporation. (RMC 67-2012)
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89
10% on their taxable income (except for
passive income), or
30% on their entire taxable income if
the gross income from unrelated trade,
business or other activity exceeds 50% of
the total gross income of the institution
•
In computing this 30% on the entire
taxable income scenario, include:
o
Income subject to tax
o
Income which are exempt
Unrelated trade, business or other activity means
O
Any trade, business or other activity
O
The conduct of which is not substantially related to the
exercise or performance by such institution of its primary
purpose or function.
The gross income from unrelated trade, business or activity
should not exceed 50% of the total gross income. If it exceeds
50%, the proprietary educational institution or hospital which is
nonprofit will be taxed like a normal corporation, i.e., 30% of
entire taxable income.
Summary of rules on educational institutions
•
For private educational institutions, they are entitled to the
reduced rate of 10% corporate income tax, if:
O
The proprietary educational institution is non-profit; and
O
Its gross income from unrelated trade, business, or activity
does not exceed 50% of its total gross income. (CIR v. DLSU,
G.R. No. 196596, November 9, 2016)
•
It seems the SC is equating proprietary with stock
corporations. If that's the case, how can a proprietary
educational institution be considered non-profit (since
stock corporations are for-profit because of the ability to
give dividends)?
•
Well, because "non-profit" also means no part of
its 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. (RMC 51-14,
quoting CIR v. St. Luke's)
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•
So, it's possible for a private (stock) educational
institution to be non-profit and get the reduced
rate of 10% if no profit inures for the benefits of its
members.
[Tax rant coming, no need to read this: This is
weird. I submit that the phrase "for profit" only
qualifies hospitals, not educational institutions. The
Constitution (Article XIV, Section 4[3]) wanted to
reward proprietary educational institutions with
incentives limited by law. We value education, that's
why we want to give tax incentives to educational
institutions, whether they're for profit or not, private
or not. But with the current interpretation by both the
SC and the BIR that the net income must not inure to
the benefit of the stockholders, the incentive of the
10% reduced rate is gone, and would-be educatorstockholders will be discouraged to put up schools.
Case in point: if you're someone who wants to put up
a school to earn some money (like a law school) and
then learn you can't actually earn because receiving
dividends will make your school lose the 10% tax
incentive, wouldn't you be discouraged? If the school
gave you dividends, then you'll be sitting in the
same boat as non-incentivized normal corporations.
The interpretation goes against the spirit of the
Constitution. Whatever, I could be wrong.]
O
However, income derived from trade, business or other
activity is still taxable.
O
Their bank deposits and foreign currency deposits are exempt
from withholding taxes but they must show proof that such
income is used to fund proposed projects for their institution's
improvement.
O
They shall also be the withholding agents for their employee's
compensation income subject to withholding tax. (R.MC 762003)
For non-stock, non-profit educational institutions, all revenues
(and assets) used actually, directly and exclusively for educational
purposes are exempt. (Article XIV, Section 4[3], 1987 Philippine
Constitution)
O
Income from cafeterias, canteens and bookstores are also
exempt if they are owned and operated by the educational
institution and are located within the school premises. (RMC
76-2003)
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O
Note that the exemption of non-stock, non-profit educational
institutions is granted by none other than the 1987
Constitution, and not merely by the NIRC. Hence, the profit of
non-stock, non-profit educational institutions, even if through
the lease of properties (as stated in Section 30, NIRC), are
tax-exempt if the profits are used actually, directly, and
exclusively for educational purposes. (CIR v. DLSU, G.R. No.
196596, November 9, 2016)
O
Just because a non-profit institution generates profits doesn't
automatically make it a for-profit institution. It still has to
be run as a responsible organization, which means having
the necessary profits to survive. (La Sallian Educational
Innovators Foundation v. CIR, G.R. No. 202792, February 27,
2019)
■
Segue to real property tax: assets used actually, directly,
and exclusively for educational purposes are likewise
exempt.
For non-stock, non-profit corporations who are exempt under
Section 30 (more on this later), they are still liable for taxes on:
O
Income derived from any of their real properties (such as
rental payment from their building premises)
O
Any activity conducted from profit regardless of disposition
thereof
O
Interest income from any bank deposits or yield on deposit
substitutes (final tax of 20%)
o
If it's foreign currency deposit (FCD), final tax of 15% (TRAIN)
o
They shall also be withholding agents for their employee's
compensation income subject to withholding tax (RMC 762003)
Special Rule on GOCCs, Agencies or Instrumentalities
Sec. 27. (C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities. — The provisions of existing special
or general laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall
pay such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in a similar
business, industry, or activity.
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•
GOCCs, agencies or instrumentalities shall pay the same rate
upon their taxable income upon corporations or associations
engaged in similar business, industry, or activity.
0
EXCEPT for the following exempt GOCCs:
■
GSIS
•
SSS
•
PHIC
•
PCSO
•
As per R.A. 9337, PAGCOR was deleted from the
list of exempt GOCCs. (Philippine Amusement and
Gaming Corporation v. BIR, G.R. No. 172807, March
15, 2011)
•
PAGCOR's income derived from gaming operations is
subject to 5% franchise tax. For income derived from
the operation of other related services, it is subject to
normal corporate income tax. (PAGCOR v. BIR, G.R.
No. 215427, December 10, 2014)
•
PAGCOR's contractees and licensees are subject to
the same rule. (Bloomberry Resorts and Hotels, Inc.
v. BIR, G.R. No. 212530, August 10, 2016)
Passive Income of Domestic Corporations
Sec. 27. (D) Rates of Tax on Certain Passive Incomes. —
(1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and Similar
Arrangements, and Royalties. — A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements
received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system shall be subject
o a final income tax at the rate of fifteen percent (15%) of such
interest Income.
Gams from the Sale of Shares of Stock Not Traded In the
stock Exchange. - A final tax at the rate of fifteen percent (15%)
prescribed below shall be imposed on net capital gains realized
during the taxable year from the sale, exchange or other disposition
or shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange.
■
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(3) Tax on Income Derived under the Expanded Foreign Currency
Deposit System. — Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency
transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit system shall
be exempt from all taxes, except net income from such transactions as
may be specified by the Secretary of Finance, upon recommendation
by the Monetary Board to be subject to the regular income tax
payable by banks: Provided, however. That interest income from
foreign currency loans granted by such depository banks under said
expanded system to residents other than offshore banking units in
the Philippines or other depository banks under the expanded system
shall be subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations,
from transactions with depository banks under the expanded system
shall be exempt from income tax
(4) Intercorporate Dividends. — Dividends received by a domestic
corporation from another domestic corporation shall not be subject
to tax.
(5) Capita! Gains Realized from the Sale, Exchange or Disposition of
Lands and/or Buildings. — A final tax of six percent (6%) is hereby
imposed on the gain presumed to have been realized on the sale,
exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as
capital assets, based on the gross selling price of fair market value as
determined in accordance with Section 6(E) of this Code, whichever
is higher, of such lands and/or buildings. (As amended by TRAIN)
Tax Rate on Passive Income of Domestic
Corporations
Final Tax
1.
Interest under the expanded foreign currency deposit
system
15%
2.
Royalty of all types within the Philippines
20%
o
Royalty from abroad? Enters the taxable income
30% tax rate
3.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust fund
and similar arrangement
20%
4.
Dividend from domestic corporations (intercorporate
dividend)
exempt
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A note on banks and income derived under the expanded foreign
currency deposit system
Tax Rate of BANKS on Income Derived under the
Expanded FCD System
Final Tax
1.
Income derived by a depository bank from foreign
currency transactions with nonresidents, OBUs, etc.
exempt
2.
Interest income from foreign currency loans granted by
a bank to residents other than OBUs
10%
Income of nonresidents (individuals or corporations) from
transactions with depository bank under the expanded FCD
system are exempt.
Intercorporate dividends
•
Dividends received by a domestic corporation from
domestic corporation shall not be subject to tax.
O
another
Why? Law assumes that the dividends received will be
injected to the capital, which will eventually be taxed when
the corporation gets income from the use of the capital.
Capital gains
The capital gains treatment is similar to that of individuals. Refer
to the section on individuals for a more in-depth discussion.
Tax Rate on Capital Gains
1.
On sale of shares of stock of
a domestic corporation NOT
traded through a local stock
exchange held as a capita! asset
15% of the net capital gains
2.
On sale of real property in the
Philippines held as a capital
asset (only applies to lands and/
or buildings)
6% of the gross selling price, or the
current market value at the time of
sale, whichever is higher
Capita! Gains on Sale or Disposition of Shares of Stock
Tax Rate on Income from Sale, Barter, Exchange or other
Disposition of Shares of Stock (R.R. 6-2008, as amended)
If shares of stock are listed and
traded through the local stock
exchange
6/10 of 1% (or 0.005%) of the gross
selling price or gross value in money
of the shares of stock
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INCOME TAX
If shares not traded through the
local stock exchange
How to determine the tax
base of disposition of stock
(R.R. 6-2008, as amended)
15% of the net capital gains
Fair Market Value
Sales of stock listed and traded
through the LSE
FMV is the actual selling price
Sales of stock listed but not traded
through the LSE
FMV is the closing price on the
day when the shares were sold,
transferred, or exchanged (if no
sale was made on that day in the
LSE, then the closing price on the
day nearest to the date of sale,
transfer, or exchange of the said
shares)
Sales of stock not listed and not
traded through the LSE
For common shares, the book
value based on the latest available
financial statements (AFS) prior to
the date of the sale but not earlier
than the immediately preceding
year.
For
preferred
shares,
the
liquidation value, which is equal
to the redemption price of the
preferred shares as of the balance
sheet
nearest
the
transaction
date, including any premium and
cumulative preferred dividends in
arrears.
In case there are both common and
preferred, deduct the liquidation
value of the preferred shares from
the total equity first and then
divide the result by the number
of outstanding common shares as
of the balance sheet nearest the
transaction date.
The values no longer need to be
adjusted to include the appraisal
surplus from any property of the
corporation. The latest AFS are
enough to determine the FMV of the
shares. (R.R. 20-2020)
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Capita! Gains on Sale, Exchange, or Transfer of Rea! Property
Classified as Capital Assets
Final Tax Rate on Sales, Exchanges, or Transfers of Real Properties
Classified as Capital Assets (R.R. 8-1998)
Sale of real property in the Philippines
(Note: only applies to lands and/or
buildings)
6% of the gross selling price, or the
current market value at the time of
sale, whichever is higher
Payment of capital gains tax on foreclosure of mortgaged property
O
If the mortgagor exercises his right of redemption within
one year, no capital gains tax shall be imposed because no
capital gains have been derived and no transfer of property
was realized. (Supreme Transliner, Inc. v. BPI Family Savings
Bank, Inc., G.R. No. 165617, February 23, 2011)
o
In case of non-redemption, the buyer of the property is
deemed to have withheld the CGT (or the CWT, as the case
may be) and must remit the said tax to the BIR. The CGT (or
the CWT) shall be based on whichever is higher between the
bid price of the highest bidder or the FMV or the zonal value
as determined by Section 6(E). (R.R. 9-2012)
Tax Treatment of Sales, Exchanges, or Transfers of Rea! Properties
Classified as Ordinary Assets
Creditable Withholding Tax on Sales, Exchanges or Transfers of
Real Properties classified as Ordinary Assets (R.R. 8-1998)
1.
2.
If the seller is habitually engaged
in the real estate business
o
Selling price Is less than
P500,000
1.5%
o
Selling price is P500,000 to
P2M
3%
o
Selling price is above P2M
5% of gross selling price/current
market value, whichever is higher
If the seller is not habitually
engaged in the real estate
business
6% of gross selling price/current
market value, whichever is higher
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INCOME TAX
3.
If the seller Is exempt from
creditable withholding tax as
per R.R. 2-1998
Exempt
Minimum Corporate Income Tax (MCIT)
Sec. 27. (E) Minimum Corporate Income Tax on Domestic
Corporations. —
(1) Imposition of Tax. — A minimum corporate income tax of two
percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. — Any excess of the
minimum corporate income tax over the normal income tax as
computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Retief from the Minimum Corporate Income Tax Under Certain
Conditions. — The Secretary of Finance is hereby authorized to
suspend the imposition of the minimum corporate income tax on
any corporation which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulation that shall define the terms and conditions under which he
may suspend the imposition of the minimum corporate income tax in
a meritorious case.
(4) Gross Income Defined. — For purposes of applying the minimum
corporate income tax provided under Subsection (E) hereof, the term
'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include
all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold" shall
include the Invoice cost of the goods sold, plus import duties, freight
In transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold"
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.
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In the case of taxpayers engaged in the sale of service, 'gross income'
means gross receipts less sales returns, allowances, discounts and
cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the
customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, "cost of services" shall
include interest expense.
Beginning with the fourth year of operations, a domestic
corporation (or resident foreign corporation) is taxed by whichever
is higher:
•
o
Normal tax of 30%, or
o
Minimum corporate income tax of 2%
The MCIT is 2% of gross income (compare with the normal tax
which has taxable income as its tax base).
•
o
•
Is MCIT constitutional?
o
•
Gross income includes all items of gross income enumerated
under Section 32(A), except those income exempt from
income tax and income subject to final withholding tax.
Yes, it is. The MCIT is NOT a tax on capital. It is imposed
on gross income which is arrived at by deducting the capital
spent by a corporation in the sale of its goods, i.e., the cost
of goods and other direct expenses from gross sales. Clearly,
the capital is not being taxed. Thus, MCIT is constitutional.
(Chamber of Real Estate and Builders' Associations, Inc. v.
Romulo, G.R. No. 160756, March 9, 2010)
Any excess of the MCIT over the normal tax of a year shall be
carried forward and credited against the normal tax for the three
iran]
--------ediatelv
J ‘ 1
succeeding taxable years.
O
For the carry forward to apply, the normal tax should be
higher than the minimum corporate income tax.
o
So, you usually compute both first; then apply either the
MCIT or normal tax rate, whichever is higher.
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INCOME TAX
Example
Year 4
Year 5
Year 6
Year 7
MCIT
Normal
200
100
400
200
100
300
100
200
Tax Payable
Excess MCIT
200
(100)
400
(100)
(200)
0
0
0
200
0
0
MCIT is implemented on domestic and resident foreign corporations
whenever they have zero or negative taxable income, or when the
MCIT is greater than the normal income tax due. (R.R. 9-1998)
The following are exempted from the MCIT:
o
Resident foreign corporations engaged in business
international carriers (see below for more discussion)
o
Resident foreign corporations engaged in business as offshore
banking units
o
Resident foreign corporations engaged in business as regional
operating headquarters
o
Firms that are taxed under a special income tax regime (like
those under PEZA or other economic zones)
o
Proprietary Education Institutions
o
Non-profit hospitals
o
Depositary banks under the foreign currency deposit unit
(FCDU)
o
REIT (Real Estate Investment Trusts) (R.A. 9856)
o
Nonresident foreign corporations
as
When can you apply for relief from the MCIT?
o
Losses on account of prolonged labor dispute
•
o
Losses arising from a strike staged by employees which
lasted for more than six months within a taxable period
and which has caused the temporary shutdown of
business operations
Force majeure
■
Any cause due to an irresistible force as by "act of God"
•
What about an irresistible force such as an act of
love? No, the law does not talk of love.
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•
o
Also includes armed conflict such as war or insurgency.
Legitimate business reverses
•
Includes substantial losses due to fire, robbery, theft or
embezzlement, or other economic reasons
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.
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 Exam)
Suggested answer:
a) I will tell Ms. J to prepare payment for the regular corporate
income tax. MCIT will not apply yet because it only applies beginning
the 4th year of operations of the domestic corporation. In this case,
KKK Corp, has not yet reached the 4th year of its operations.
b) MCIT is 2°/o of a corporation's gross income and only applies
beginning the 4th year of its operations. Regular corporate income
tax is 30°/o of a corporation's taxable income and applies immediately.
Income Tax on Resident Foreign Corporations
Sec. 28. (A) Tax on Resident Foreign Corporations. —
(1) In General. — Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent
(35%) of the taxable income derived in the preceding taxable year
from all sources within the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific
date when sales, purchases and other transactions occur. Their income
and expenses for the fiscal year shall be deemed to have been earned
and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the
amount computed by multiplying the number of months covered by
the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
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Provided, however, That a resident foreign corporation shall be
granted the option to be taxed at fifteen percent (15%) on gross
income under the same conditions, as provided in Section 27(A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations.
— A minimum corporate income tax of two percent (2%) of gross
income, as prescribed under Section 27(E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection.
A foreign corporation is one which is not organized or incorporated
in the Philippines.
o
It may be a resident or nonresident corporation.
A resident foreign corporation is a foreign corporation engaged in
business in the Philippines.
O
A foreign corporation can engage in business in the Philippines
only after it had registered with, and had been allowed by, the
regulatory agencies of the Philippine government to engage
in business in the Philippines.
O
However, even without the license, if the facts show that
the foreign corporation actually engages in business in the
Philippines, then it will be considered a resident foreign
corporation.
Tax Rate of Foreign Resident
Corporations
30% of taxable income from all sources
within the Philippines, or
2% of gross income if MCIT applies, or
15% of gross income (again, the GIT
has yet to be implemented)
Passive Income of Foreign Resident Corporations
Sec. 28. (A) (7) Taxon Certain Incomes Received by a Resident
Foreign Corporation. — (a) Interest from Deposits and Yield or
any other Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties — Interest from
any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements
and royalties derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty percent (20%)
of such interest: Provided, however, That interest income derived
by a resident foreign corporation from a depository bank under the
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expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.
(b) Income Derived under the Expanded Foreign Currency
Deposit System. — Income derived by a depository bank under
the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit system
units, 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 often percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations,
from transactions with depository banks under the expanded system
shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in
the Stock Exchange. — A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000 ..............................
5%
On any amount in excess of P100,000
10%
(d) Intercorporate Dividends. — Dividends received by a resident
foreign corporation from a domestic corporation liable to tax under
this Code shall not be subject to tax under this Title.
Tax Rate on Passive Income of Foreign Resident
Corporations
Final Tax
Interest under the expanded foreign currency deposit
system
7.5%
Royalty of all types within the Philippines
20%
o
Royalty from abroad? Exempt. (Remember, only
taxed from sources within the Philippines)
3.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust fund
and similar arrangement
20%
4.
Dividend from domestic corporations (inter-corporate
dividend)
exempt
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TRAIN did not amend Section 28, NIRC, which talks about the tax
treatment of resident and nonresident foreign corporations. So,
foreign corporations are still taxed the same, which means:
O
Their capital gains tax on the sale of shares of domestic
corporations by foreign corporations are still subject to the
old 5%/10% of the net capital gains regime.
Capita! gains
Tax Rate on Capital Gains
1.
2.
On sale of shares of stock of a domestic
corporation NOT traded through a local
stock exchange held as a capital asset,
o
Capital gains not over P100,000
5% of the net capital gains
o
Capital gains in excess of P100,000
10% of the net capital gains
On sale of
Philippines
real
property
in
the
No provision for capital gains
for sale of realty. Hence, it
will be subject to the regular
corporate income tax rate.
Special Rule on International Carriers
Sec. 28 (A)
(3) International Carrier. — An international carrier doing
business in the Philippines shall pay a tax of two and one-half percent
(2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross Philippine Billings' refers
to the amount of gross revenue derived 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: Provided, That tickets revalidated, exchanged and/
or Indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point
in the Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes place at
any part outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
(b) International Shipping. — 'Gross Philippine Billings' means gross
revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.
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Provided, That international carriers doing business in the Philippines
may avail of a preferential rate or exemption from the tax herein
imposed on their gross revenue derived from the carriage of persons
and their excess baggage on the basis of an applicable tax treaty or
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 carriers,
shall likewise be exempt from the tax imposed under this provision.
(As amended by R. A. 10378)
Tax rate for international carriers is 2.5% of Gross Philippine
Billings (GPB)
O
Note that under R.A. 10378, international carriers doing
business in the Philippines may avail of a preferential rate or
exemption from tax based on:
•
A treaty or international agreement to which our beloved
Philippines is a signatory, or
•
The basis of reciprocity.
Gross Philippine Billings refers to
excess
o
Gross revenue derived from carriage of persons,
baggage, cargo and mail
o
Originating from the
uninterrupted flight
o
Irrespective of the place of sale or issue and the place of
payment of the ticket or passage document
Philippines
in
a
continuous
and
An off-line carrier refers to an international air carrier having no
flight operations to and from the Philippines. (R.R. 15-2002)
An on-line carrier refers to an international air carrier having or
maintaining flight operations to and from the Philippines. (R.R.
15-2002)
Off-line flights refer to flight operations between ports or points
outside the territorial jurisdiction of the Philippines, without
touching a port of point situated in the Philippines, except when
in distress or due to force majeure.
o
What if it lands in the Spratlys?
Remember the CIR v. BOAC (G.R. No. L-65773, April 30, 1987)
case! British Overseas Airways did not have any landing rights
nor did they have license to operate here. They also did not carry
passengers or cargo to or from the Philippines. They did, however,
have a general sales agent which sold BOAC tickets. They were
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taxed for the sale of the tickets (because of the situs of taxation
principle), even if the service to be rendered was outside the
Philippines. They were not liable for carrier's tax though.
o
Doing business has no specific criterion. As long as there was
a continuity of conduct and intention to establish a continuous
business and not one of a temporary character, then you are
doing business in the Philippines.
An offline airline which has a branch/agent in the Philippines and
sells passage documents to cover offline flights of its principal
or other airlines is NOT considered engaged in business as an
international air carrier in the country and is NOT subject to the
GPB.
If the airline has flights which originate from any point in the
Philippines, it is subject to the 2.5% GPB tax unless it is subject
to a different tax rate under a tax treaty to which the Philippines
is a signatory.
In a nutshell, if an international air carrier maintains flights to
and from the Philippines, it shall be taxed at the rate of 2.5%
GPB 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 normal corporate
income tax rate of such income. (South African Airways v. CIR,
G.R. No. 180356, February 16, 2010)
What is included in computing the GPB for international air
carriers?
O
Gross revenue from passage of persons (actual amount as
reflected in the tax coupon part of the plane ticket)
o
Excess baggage
o
Cargo and mail originating from the Philippines in a continuous and uninterrupted flight
o
To compute the GPB: (monthly average net fare of all the tax
coupons of plane tickets per point of final destination, per
class of passage, per classification of passenger) MULTIPLIED
by the (total number of passengers flown for the month as
declared in the flight manifest)
In case of passengers' flights from any point in the Philippines
and back, that portion of revenue pertaining to the return trip to
the Philippines is NOT included as part of the GPB. (R.R. 15-2002)
For international shippers, demurrage and detention fees are not
included in GPB.
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0
Demurrage fees are in the nature of rent for the use of
property of the carrier in the Philippines. It's considered
income from Philippine sources and is subject to income tax
under the regular rate as the other types of income of the online carrier. (Association of International Shipping Lines, Inc.
v. Secretary of Finance, G.R. No. 222239, January 15, 2020)
0
Detention fees and other charges relating to outbound
cargoes and inbound cargoes are all considered Philippinesourced income of international sea carriers as they are
,ected fortbe use of property or rendition of services in the
Philippines. These are subject to the Philippine income tax
un er e regular rate. (Association of International Shipping
k X
SecretarY of Finance, G.R. No. 222239, January
Special Rule for Offshore Banking Units
(4) Offshore Banking Units. — The provisions of any law to the
contrary notwithstanding, income derived by offshore banking units
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units, including any interest income
derived from foreign currency loans granted to residents, shall be
subject to a final income tax at the rate of ten percent (10%) of such
income.
Any income of nonresidents, whether individuals or corporations,
from transactions with said offshore banking units shall be exempt
from income tax.
•
Tax rate of offshore banking units authorized by the BSP (including
any interest income foreign currency loans granted to residents)
is 10% final tax.
Income of nonresidents (individuals or corporations)
transactions with OBUs shall be exempt from income tax.
from
An offshore banking unit is a branch of a foreign bank which is
the Phi'Hppinesthe BSP t0 transact offshore banking business in
A foreign currency deposit unit is a department of a local bank or
in an existing local branch of a foreign bank which is authorized
by the BSP to operated under the expanded foreign currency
deposit system.
•
Gross onshore income covers all income arising from transactions
allowed by the BSP conducted by and between an offshore bank
with another offshore bank or with an FCDU or with a nonresident.
(R.R. 10-1976)
J
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The following are included in computing the gross onshore income
of OBUs and FCDUs:
O
Gross interest income arising from foreign currency loans and
advances and investments with residents
O
Fees, commissions and other charges which are integral parts
of the income from foreign currency loan transactions are
EXEMPT. They are not to be included in computing the final
tax. (R.R. 14-1977)
Special Rule on Profits Remitted by a Branch (Branch Profit Remittance
Tax [BPRT])
(5) Tax on Branch Profits Remittances. — Any profit remitted
by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or earmarked
for remittance without any deduction for the tax component thereof
(except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code: Provided,
that interests, 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 by a foreign corporation during
each taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively connected
with the conduct of its trade or business in the Philippines.
Any profit remitted by a branch to its head office shall be subject
to a tax of 15% of the total profits applied or earmarked for
remittance without any deduction for the tax component
O
Except those registered with PEZA (they have their own tax
rules as incentives)
What is the base for the BPRT?
o
It Is the total profits applied for remittance or earmarked for
remittance without any deduction for the tax component, not
the profit actually remitted abroad.
o
The following are not treated as branch profits:
■
Interests
•
Dividends
-
Rents
■
Royalties
■
Payment for technical services
-
Salaries and wage premiums
!
I
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•
Annuities, emoluments, or other fixed or determinable
casual gains
•
Profits, income and capital gains
•
•
Except if the above are connected with the conduct
of a foreign corporation's trade or business in the
Philippines.
Passive income is not included in computing for the BPRT. It is
subject to a final tax. (Compania General de Tabacos de Filipinos
v. CIR, CTA Case No. 4141, August 23, 1993)
0
Except when it arises from business activity in which the
corporation is engaged or connected with the conduct of its
business in the Philippines.
Kria, Inc., a Korean corporation engaged in the business of
manufacturing electric vehicles, established a branch office in
the Philippines in 2010. The Philippine branch constructed a
manufacturing plant in Kabuyao, Laguna, and the construction lasted
three (3) years. Commercial operations in the Laguna plant began
in 2014.
In just two (2) years of operation, the Philippine branch had remittable
profits in an amount exceeding 175% of its capital. However, the
head office in Korea instructed the branch not to remit the profits to
the Korean head office until instructed otherwise. The branch chief
finance officer Is concerned that the BIR might hold the Philippine
branch liable for the 10% improperly accumulated earnings tax
(IAET) for permitting its profits to accumulate beyond reasonable
business needs.
Is it subject to 15% branch profit remittance tax (BPRT)? (2018 Bar
Exam)
Suggested answer: No, It is not subject to BPRT. BPRT is imposed on
any profit remitted by the branch to its head office. In this case, the
profits were not remitted yet. Hence, BPRT may not be imposed yet.
Special Rule on Regional or Area Headquarters (RAHQs) and Regional
Operating Headquarters (ROHQs)
Sec. 22. (DD) The term "regional or area headquarters" shall mean a
branch established in the Philippines by multinational companies and
which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.
(EE) The term "regional operating headquarters"shall mean a branch
established in the Philippines by multinational companies which are
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engaged in any of the following services: general administration
and planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training
and personnel management; logistic services; research and
development services and product development; technical support
and maintenance; data processing and communications; and business
development.
Sec. 28. (A) (6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. — (a)
Regional or area headquarters as defined in Section 22(DD) shall not
be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE)
shall pay a tax of ten percent (10%) of their taxable income.
Regional or Area Headquarters is a branch established in the
Philippines by multi-nationals and which headquarters:
O
Do NOT earn or derive income from the Philippines, and
O
Which act as supervisory, communications and coordinating
center fortheir affiliates, subsidiaries or branches in the AsiaPacific Regions.
They are EXEMPT from income tax.
•
Regional Operating Headquarters is a branch established in the
Philippines by multi-nationals which are engaged in any of the
following sendees:
O
General admin and planning;
O
Business planning and coordination;
O
Sourcing and procurement of raw materials and components;
O
Corporate finance advisory services;
O
Marketing control and sales promotion;
O
Training and personnel management;
O
Logistic services;
O
Research and development services and product development;
O
Technical support and maintenance;
O
Data processing and communications; and
O
Business development.
•
They are taxed 10% on taxable income.
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Income Tax on Nonresident Foreign Corporations
In General
(B) Tax on Nonresident Foreign Corporation. —
(1) In General. — Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the Philippines
shall pay a tax equal to thirty-five percent (35%) of the gross
income received during each taxable year from all sources within the
Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax
under subparagraph 5(c) Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%).
•
Nonresident foreign corporations are subject to 30% income tax
on the gross income derived during each taxable year from all
sources within the Philippines only
o
Special corporations (discussed below) are subject to a
different tax rate
•
When the foreign corporation transacts business in the
Philippines independently of its branch in the country, the
principal-agent relationship (between the foreign corporation and
the branch) is set aside. The transaction becomes that of the
foreign corporation, not of the branch; hence, the corporation is
considered a nonresident foreign corporation for that isolated and
independent transaction. (Marubeni Corporation v. CIR, G.R. No.
76573, September 14, 1989)
•
A casual activity in the Philippines by a foreign corporation does
not amount to engaging in trade or business in the Philippines
for income tax purposes. In order that a foreign corporation
may be considered engaged in trade or business, its business
transactions must be continuous. (N.V. Reederij "Amsterdam"
and Royal Interocean Lines v. CIR, G.R. No. L-46029, June 23,
1988)
Special nonresident foreign corporations
(2) Nonresident Cinematographic Film Owner, Lessor or
Distributor. — A cinematographic film owner, lessor, or distributor
shall pay a tax of twenty-five percent (25%) of its gross income from
all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by
Philippine Nationals. — A nonresident owner or lessor of vessels
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shall be subject to a tax of four and one-half percent (4 1/2%) of
gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry
Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and
Other Equipment. — Rentals, charters and other fees derived by a
nonresident lessor of aircraft, machineries and other equipment shall
be subject to a tax of seven and one-half percent (7 1/2%) of gross
rentals or fees.
Tax rate on certain incomes of nonresident foreign corporations
(5) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation. —
(a) Interest on Foreign Loans. — A final withholding tax at the
rate of twenty percent (20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. — A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the amount of
cash and/or property dividends received from a domestic corporation,
which shall be collected and paid as provided in Section 57(A) of
this Code, subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit
against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty
percent (20%), which represents the difference between the regular
income tax of 35% and the 15% tax on dividends as provided in this
subparagraph: Provided, that effective January 1, 2009, the credit
against the tax due shall be equivalent to 15%, which represents the
difference between the regular income tax of 30% and the 15% tax
on dividends. (As amended by R.A. 9337)
(c) Exchange. — A final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock
in a domestic corporation, except shares sold, or disposed of through
the stock exchange:
Not over P100,000
5%
On any amount in excess of P100,000
10%
Tax Rate on Passive Income of Foreign Nonresident
Corporations
1.
Interest on foreign loans (i.e., foreign nonresident
lends to a domestic corporation)
Final Tax
20%
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112
Dividend from domestic corporations (inter-corporate
dividend)
15%
This is subject to the condition that the country in which
the nonresident foreign corporation is domiciled allows a
credit against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the
Philippines equivalent to 15%. If they don't, the dividends
will be taxed at 30% of gross income.
Tax Rate on Capital Gains
(same as foreign resident corporations)
On sale of shares of stock of a domestic
corporation NOT traded through a local
stock exchange held as a capital asset,
1.
o
Capital gains not over P100,000
5% of the net capital gains
0
Capital gains in excess of P100,000
10% of the
gains
On sale of real property in the Philippines
2.
net capital
No provision for capital
gains for sale of realty.
Hence, it will be subject to
regular corporate income
tax of 30% of gross income.
On inter-corporate dividends
•
The ordinary 30% tax rate applicable to dividend remittances to
nonresident corporate stockholders of a Philippine corporation,
goes down to 15% if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a
tax credit for "taxes deemed paid in the Philippines," applicable
against the tax payable to the domiciliary country by the foreign
stockholder corporation.
0
The RP-US Tax Treaty created a treaty obligation on the part
of the US that it "shall allow" to a US parent corporation
receiving dividends from its Philippine subsidiary "a tax credit
for the appropriate amount of taxes paid or accrued to the
Philippines by the said Philippine subsidiary. The US allowed
a "deemed paid" tax credit to US corporations on dividends
received from foreign corporation based on Section 902 of the
US Internal Revenue Code. Hence, the 15% preferential rate
applies. (Commissioner of Internal Revenue v. Interpublic
Group of Companies, Inc., G.R. No. 207039, August 14,
2019)
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When the domicile of the nonresident foreign corporation does
not impose any tax on dividends received from foreign sources,
the preferential 15% tax on intercorporate dividends will apply.
(BIR Ruling DA-145-07)
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)
Domestic corporation
b)
Non-resident foreign corporation (2015 Bar Exam)
Suggested answer:
a)
Cash dividends to a domestic corporation is exempt.
b) Cash dividends to a non-resident foreign corporation will be
subject to 15% final tax, if the domicile of such corporation allows
a credit against the tax due from the corporation taxes deemed to
have been in the Philippines equivalent to 15%. If the domicile does
not, then it will be included in the corporation's gross income from
sources in the Philippines to be taxed 30%.
Income covered by tax treaties
•
In negotiating tax treaties, the underlying rationale for reducing
the tax rate is that the Philippines will give up a part of the
tax in the expectation that the tax given up for this particular
investment is not taxed by the other country. There would be
some incentives on the part of the foreigners to invest in the
Philippines because the rates of tax are lowered and at the same
time, they are credited against the domestic tax abroad a figure
higher than what was collected in the Philippines.
o
Thus, if the rates of tax are lowered here, there should be a
concomitant commitment on the part of the state of residence
(of the foreign corporation) to grant some form of tax relief,
whether this be in the form of a tax credit or exemption.
Otherwise, the tax which would have been collected here will
simply be collected by another state, defeating the object of
the tax treaty since the tax burden imposed would remain
unrelieved.
o
The purpose of the most favored nation clause is to establish
the principle of equality of international treatment by
providing that citizens of the contracting nations may enjoy
the privileges accorded by either party to those of the most
favored nation. This allows the taxpayer in one state to avail of
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114
more liberal provisions granted to another tax treaty to which
his country or residence is also a party. However, the use of
the most favored nation clause is subject to the rationale of
tax treaties and will only apply if the taxes imposed under
both treaties are paid under similar circumstances.
O
If the state of residence does not grant some form of tax
relief to the investor (the foreign nonresident corporation),
no benefit would redound to the Philippines. (CIR v. SC
Johnson and Son, G.R. No. 127105, June 25, 1999, wherein
the issue was with the payment of taxes on royalties. SC
Johnson wanted tax credit based on the US-RP tax treaty
which had a "most favored nation clause." The Germany-RP
treaty was more beneficial because it allowed a 10% rate
on royalties. However, the Germany-RP treaty also allowed
for 20% matching credit for royalties. The US-RP tax treaty
did NOT have this 20% matching credit. So the SC said that
since the RP-US Tax Treaty does not give a matching tax
credit of 20% for the taxes paid to the Philippines on royalties
as allowed under the RP-Germany Tax Treaty, SC Johnson
cannot be deemed entitled to the 10% rate granted under
the latter treaty because there is no payment of taxes on
royalties under similar circumstances.)
•
Based on RMC 46-2002 (affirmed by Golden Arches Development
Corporation v. CIR, CTA Case 6862, 2007), the 10% rate of
withholding tax on royalties remitted to residents of the US may
now be availed of because of the RP-China tax treaty which has
basically the same provisions of the RP-US tax treaty. So, the
(MFN) of the RP-US tax treaty can refer to the RP-China tax treaty
(as compared to the RP-Germany treaty which was essentially
different).
•
The failure of a taxpayer to comply with a BIR issuance on
availing tax treaty benefits should not divest the taxpayer of the
benefit of lower tax treaty rates. To allow such would make a local
administrative regulation trump a treaty, which shouldn't be the
case. (Deutsche Bank AG Manila v. CIR, G.R. No. 188550, August
19, 2013)
Summary of the Tax Rates on Special Corporations
SPECIAL CORPORATIONS
Tax Rate
Nonresident owner of lessor of
vessel
4.5%
Tax Base
Gross rentals, lease and
charter fees from the
Philippines
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Nonresident cinematographic film
owner, lessor, or distributor
25%
Gross income
Philippines
Nonresident lessor of aircraft,
machinery and other equipment
7.5%
Gross rentals, charges and
other fees from Philippines
sources
Proprietary educational institution
and non-profit hospital
10%
Taxable income from all
sources
Resident international carrier
2.5%
Gross Philippine billings
Regional operating headquarters
of multinational corporation
10%
Philippine taxable income
from
the
There's no MCIT for special corporations.
Improperly Accumulated Earnings Tax (IAET)
Sec. 29. Imposition of Improperly Accumulated Earnings
Tax. —
(A) In General. — In addition to other taxes imposed by this Title,
there is hereby imposed for each taxable year on the improperly
accumulated taxable income of each corporation described in
Subsection B hereof, an improperly accumulated earnings tax equal
to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated
Earnings Tax. —
(1) In General. — The improperly accumulated earnings tax imposed
in the preceding Section shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to
its shareholders or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided
or distributed.
(2) Exceptions. — The improperly accumulated earnings tax as
provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial Intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. —
(1) Prlma Facie Evidence. — the fact that any corporation is a mere
holding company or investment company shall be prima facie evidence
of a purpose to avoid the tax upon its shareholders or members.
(2) Evidence Determinative of Purpose. — The fact that the earnings
or profits of a corporation are permitted to accumulate beyond the
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reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless
the corporation, by the clear preponderance of evidence, shall prove
to the contrary.
(D) Improperly Accumulated Taxable Income. — For purposes
of this Section, the term 'improperly accumulated taxable income'
means 'taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year
basis, the accumulated earnings under tax shall not apply on
improperly accumulated income as of December 31, 1997. In the
case of corporations adopting the fiscal year accounting period,
the improperly accumulated income not subject to this tax, shall
be reckoned, as of the end of the month comprising the twelve
(12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. — For purposes of this
Section, the term 'reasonable needs of the business' includes the
reasonably anticipated needs of the business.
•
An improperly accumulated earnings tax of 10% of improperly
accumulated taxable income is imposed on corporations that
permit earnings and profits to accumulate instead of being divided
or distributed.
•
The tax on improper accumulation of surplus is designed to compel
corporations to distribute earnings so that the said earnings by
shareholders, could, in turn, be taxed. When corporations do not
declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. (Cyanamid Philippines,
Inc. V. CTA, G.R. No. 108067, January 20, 2000)
•
Who are covered?
0
All domestic corporations which are classified as closely held
corporations
O
A closely-held corporation is one where at least 50% in value
of the outstanding capital stock or at least 50% of the total
combined voting power of all classes of stock is owned directly
or indirectly by not more than 20 individuals. (R.R.. 2-2001)
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117
How do you determine if a corporation is a closely-held
one? Look at stock-ownership.
•
If stock not owned by individuals, it will be considered
to be owned proportionately by its shareholders.
•
If it is a family and partnership ownership, an
individual shall be considered to own the stock for his
family members or partners.
•
If there is an option to acquire stocks, it shall be
considered as being owned by the person with the
option. (BIR Ruling 25-02)
Who are not covered by IAET?
O
Publicly-held corporations
O
Banks and other financial institutions
O
Insurance companies
o
Taxable partnerships
o
General professional partnerships
o
Non-taxable joint ventures
o
A branch of a foreign corporation
o
Enterprises registered with PEZA or with the BCDA or with
other special economic zones (R.R. 2-2001)
"Reasonable needs" means the immediate needs of the business.
If the corporation cannot prove this, then it is not an immediate
need. In order to determine whether profits are accumulated for
the reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that
which is manifested at the time of accumulation, not subsequently
declared intentions which are merely the product of afterthought.
(Manila Wine Merchants v. CIR, G.R. No. L-26145, February 20,
1984)
o
Immediacy test: The reasonable needs means the immediate
needs of the business including reasonably anticipated needs.
The burden of proof is with the corporation. (R.R. 2-2001)
What are considered reasonable?
o
Allowance for the increase of accumulated earnings up to
100% of the paid-up capital;
o
Earnings reserved for building, plant, or equipment
acquisitions as approved by the Board of Directors (expansion,
improvement, and repairs);
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O
Earnings reserved for compliance with any loan or obligation
established under a legitimate business agreement (debt
retirement);
o
In case of subsidiaries of foreign corporations in the
Philippines, all undistributed earnings intended or reserved
for investments in the Philippines; and
o
Earnings required by law to be retained. (R.R. 2-2001)
What are examples of prima facie evidence of IAE?
o
The fact that any corporation is a mere holding company or
investment company
o
The fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the
business
o
Investment of substantial earnings in unrelated business or in
stock or securities of an unrelated business
o
Investment in bonds and other long term securities
o
Accumulation of earnings in excess of 100% of paid up capital
The touchstone of liability is the purpose behind the accumulation
of the income and not the consequences of the accumulation. So,
if the failure to pay dividends were for the purpose of using the
undistributed earnings and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the
statute. (CIR v. Tuason, G.R. No. 85749, May 15, 1989)
I
I
i
I
Kria, Inc., a Korean corporation engaged In the business of
manufacturing electric vehicles, established a branch office in
the Philippines in 2010. The Philippine branch constructed a
manufacturing plant In Kabuyao, Laguna, and the construction lasted
three (3) years. Commercial operations in the Laguna plant began
in 2014.
In just two (2) years of operation, the Philippine branch had remittable
profits in an amount exceeding 175°/o of its capital. However, the
head office In Korea instructed the branch not to remit the profits to
the Korean head office until instructed otherwise. The branch chief
finance officer Is concerned that the BIR might hold the Philippine
branch Hable for the 10°/o improperly accumulated earnings tax
(MET) for permitting Its profits to accumulate beyond reasonable
business needs.
Is the Philippine branch of Kria subject to the 10°/o IAET under the
circumstances stated above? (2018 Bar Exam)
Suggested answer: No, the Philippine branch is not subject to IAET.
The Tax Code and its rules and regulations state that the IAET does
not apply to a branch of a foreign corporation.
I
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Tax-exempt Corporations
Sec. 30. Exemptions from Tax on Corporations. — The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
(A) Labor, agricultural or horticultural organization not organized
principally for profit;
(B) Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inures to the benefit of any member,
organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures to
the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I)
Government educational institution;
(J) Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income
of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers, fruit growers, or like association organized and operated
as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce
finished by them;
Notwithstanding the provisions in the preceding paragraphs, 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 this Code.
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The following organizations are INCOME tax-exempt, provided
they are not organized for profit:
•
1. Labor, agricultural and horticultural organizations
2. Mutual savings bank without capital stock represented by
shares and cooperative banks without capital stock
3. A beneficiary society, order or association operating for
the exclusive benefit of the members (like a frat operating
under the lodge system, a mutual aid association, a nonstock corporation organized by employees providing for the
payment of life, sickness, or other benefits exclusive to its
members)
4. Cemetery company owned and operated exclusively for the
benefit of its members
5. Non-stock corporations or associations organized and
operated exclusively for religious, charitable, scientific,
athletic or cultural purposes or for the rehab of veterans, no
part of its net income or asset shall belong to or inures to the
benefit of any member or specific person
6. Business league chamber of commerce or board of trade, no
part of its income inures to any individual
7. Civic league or organization operated exclusively for the
promotion of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution
10. Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organizations or a purely local
character, the income of which consists solely of dues,
assessments and fees collected from members for the sole
purpose of meeting its expenses
11. Farmers', fruit growers' or like associations organized and
operated as sales agent for the purpose of marketing the
products of its members and turning back to them the
proceeds less expenses
•
They are not subject to income tax on income received by them
from undertakings which are essential to or necessarily connected
with the purposes for which they were organized and operated.
o
But they are subject to income tax on income of whatever
kind and character from:
•
any of their properties (real or personal), or
1
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INCOME TAX
from any of their activities (unrelated) conducted for
profit, regardless of the disposition made of such income.
■
However, this does not apply to non-stock. non-profit
educational institutions, because the Constitution
clearly states that its revenues, as long as actually,
directly, and exclusively used for educational
purposes, are exempt. (CIR v. DLSU, G.R. No.
196596, November 9, 2016, which stated that
the last paragraph of Section 30 does not qualify
the Constitution. Hence, no matter the source of
the revenue, as long as its actually, directly, and
exclusively used for educational purposes, it will be
exempt from income tax.)
•
O
121
If a charitable institution engages in activities conducted for
profit, what happens?
It does not lose its tax exempt status for its not-for-profit
activities. The only consequence is that the "income of
whatever kind and character" of a charitable institution
"from any of its activities conducted for profit, regardless
of the disposition made of such income," shall be subject
to tax. (CIR v. St. Luke's, G.R. No. 195909, September
26, 2012, wherein the SC held that the profit from St.
Luke's paying patients do not form part of its exempted
charitable activities and were taxed the special rate of
10% for proprietary hospitals; the same applies to
proprietary non-profit educational institutions for the
same or similar services [RMC 67-2012])
■
For non-stock corporations or associations organized and operated
exclusively for charitable purposes (Section 30[E])
O
What does "charitable" mean?
■
O
Charitable institutions provide free goods and services to
the public which would otherwise fall on the shoulders
of the government. (CIR v. St. Luke's, G.R. No. 195909,
September 26, 2012; RMC 67-2012)
What does "exclusively" mean?
■
It means it must be both organized and operated
exclusively for charitable purposes.
•
"Organized" refers to its corporate form, as shown by
its articles of incorporation, by-laws, etc.
•
"Operations" refer to its regular activities which must
be exclusively for charity.
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O
St. Luke s was considered organized exclusively
for charitable purposes; however, it was not
operated exclusively for charitable purposes
insofar as its revenues from paying patients were
concerned.
The exclusivity test likewise applies to civic league or
organization operated exclusively for the promotion of
social welfare. (RMC 67-2012)
O
What does "non-stock" mean?
It means no part of its income is distributable as dividends
o i s members, trustees, or officers and that any profit
o ained as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the
purposes for which the corporation was organized. (RMC
51-14, quoting Section 87 of the Corporation Code/
o
What does "non-profit" mean?
It means no part of its 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. (RMC 51-14,
quoting CIR v. St. Luke's)
o
I?
a non-stock and/or non-profit corporation/
association/organization to be exempt based on Section
(. ), its earnings or assets shall not inure to the benefit
any o its trustees, organizers, officers, members or any
specific person.
o
So, what are considered inurements?
Payment of compensation, salaries, or honorarium to its
organizers;
However, limited emoluments subject to liquidation
given to trustees to attend board meetings are not
considered inurements that will remove the exempt
status of the non-profit corporation. (DOF Opinion
No. 005-19, January 29, 2019)
sa .—
—
■
its employees;
nt
or unreasonable compensation to
Provision of welfare aid and financial assistance to its
members.
•
An organization is not exempt from income tax if
its principal activity is to receive and manage funds
1
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associated with savings or investment programs,
including pension or retirement programs.
This does not cover a society, order, association,
or non-stock corporation under Section 30(C),
providing for the payment of life, sickness, accident
and other benefits exclusively to its members or their
dependents;
•
Donation to any person or entity
•
•
except donations made to other entities formed for
the purpose/purposes similar to its own;
■
The purchase of goods or services for amounts in excess
of the FMV of such goods or value of such services from
an entity in which one or more of its trustees, officers or
fiduciaries has an interest;
-
When upon dissolution and satisfaction of all liabilities,
its remaining assets are distributed to its trustees,
organizers, officers or members.
•
Its assets must be dedicated to its exempt purpose.
•
Accordingly,
its constitutive documents must
expressly provide that in the event of dissolution, its
assets shall be distributed to one or more entities
formed for the purpose/purposes similar to its own,
or to the Philippine government for public purpose.
(RMC 51-14)
Clubs which are organized and operated exclusively for pleasure,
recreation, and other non-profit purposes are subject to income
tax. (RMC 35-2012)
Tax-exempt under Special Laws
•
Barangay Micro Business Enterprises (BMBEs) (R.A. 9178)
O
BMBE refers to any business entity or enterprise engaged in
the production, processing or manufacturing of products or
commodities, including agro-processing, trading and services,
whose total assets including those arising from loans but
exclusive of the land on which the particular business entity's
office, plant and equipment are situated, shall not be more
than P3,000,000.
O
BMBEs are exempt from tax for income arising from the
operations of the enterprise.
■
But not from final taxes on deposits, interest income,
capital gains tax, royalties, etc.
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•
Tourism Enterprise Zone (TEZ) Operators (R.A. 9593)
o
TEZ Operators are given an income tax holiday of six years.
•
Foster child agencies are exempt from income tax (R.A. 10165)
•
The association dues and income derived from rentals of the
homeowners' association's properties are exempt from income
tax, provided:
O
The homeowners' association must be a duly constituted
"association" under Section 3(B), R.A. 9904;
O
The LGU having jurisdiction over the homeowners' association
must issue a certification identifying the basic services
provided by the association, and stating its lack of resources
to provide such basic services;
O
The homeowners' association must present proof that the
income and dues are used for the cleanliness, safety, security
and other basic services needed by the members. (RMC
9-2013)
A group of philanthropists organized a nonstock, non-profit hospital
for charitable purposes to provide medical services to the poor. The
hospital also accepted paying patients although none of its income
accrued to any private individual; all income were plowed back for
the hospital's use and not more than 30°/o of its funds were used for
administrative purposes.
Is the hospital subject to tax on its income? If it is, at what rate?
(2013 Bar Exam)
Suggested answer: The hospital is subject to tax on its income
for its for-profit activities at the rate of 10°/o under the Tax Code
provision on proprietary non-profit hospitals. The hospital fails to
meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains
a proprietary non-profit hospital under Section 27(B) of the NIRC
as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes.
This is similar to the case of St. Luke's, wherein the Court ruled
that St. Luke's, as a proprietary non-profit hospital, Is entitled to
the preferential tax rate of 10°/o on its net income from its for-profit
activities.
Kilusang Krus, Inc. (KKI) is a nonstock, non-profit religious
organization which owns a vast tract of land in Kaiinga.
KKI has devoted 1/2 of the land for various uses: a church with a
cemetery exclusive for deceased priests and nuns, a school providing
K to 12 education, and a hospital which admits both paying and
charity patients. The remaining 1/2 portion has remained idle.
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The KKI Board of Trustees decided to lease the remaining 1/2 portion
to a real estate developer which constructed a community mall over
the property.
Since the rental income from the lease of the property was substantial,
the KKI decided to use the amount to finance (1) the medical expenses
of the charity patients in the KKI Hospital and (2) the purchase of
books and other educational materials for the students of KKI School.
Is KKI's income from the rental fees subject to income tax? (2018
Bar Exam)
Suggested answer: It is subject to income tax. The Tax Code states
that income of whatever kind or character from a tax-exempt
corporation's properties are subject to income tax. In this case, while
KKI is a tax-exempt corporation, it earns income from its properties.
Hence, the rental fees are subject to income tax.
H.
Estates and Trusts
Sec. 60. Imposition of Tax. —
(A) Application of Tax. — The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind of
property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the terms of
the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which
is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the
period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
(B) Exception. — The tax imposed by this Title shall not apply
to employee's trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or all of
his employees (1) if contributions are made to the trust by such
employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund accumulated
by the trust in accordance with such plan, and (2) if under the trust
instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of
the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive benefit
of his employees: Provided, That any amount actually distributed
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to any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
(C) Computation and Payment. —
(1) In General. — The tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor). (2) Consolidation
of Income of Two or More Trusts. — Where, in the case of two or more
trusts, the creator of the trust in each instance is the same person,
and the beneficiary in each instance is the same, the taxable income
of all the trusts shall be consolidated and the tax provided in this
Section computed on such consolidated income, and such proportion
of said tax shall be assessed and collected from each trustee which
the taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
Sec. 61. Taxable Income. — The taxable income of the estate or
trust shall be computed in the same manner and on the same basis
as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate
or trust for the taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the income collected
by a guardian of an infant which is to be held or distributed as the
court may direct, but the amount so allowed as a deduction shall be
included in computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction under
this Subsection shall not be allowed as a deduction under Subsection
(B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons
during the period of administration or settlement of the estate, and
in the case of income which, in the discretion of the fiduciary, may
be either distributed to the beneficiary or accumulated, there shall be
allowed as an additional deduction in computing the taxable income
of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such
year to any legatee, heir or beneficiary but the amount so allowed as
a deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered In a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall
not be allowed: Provided, That the amount of any income included in
the return of said trust shall not be included in computing the income
of the beneficiaries.
Sec. 62. (Repealed!)
Sec. 63. Revocable trusts. — Where at any time the power to
revest in the grantor title to any part of the corpus of the trust is
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127
vested (1) in the grantor either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom, or (2) in any person
not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, the income of such part
of the trust shall be included in computing the taxable income of the
grantor.
Sec. 64. Income for Benefit of Grantor. —
(A) Where any part of the income of a trust (1) is, or in the discretion
of the grantor or of any person not having a substantial adverse
interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or (2) may, or in
the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be
distributed to the grantor, or (3) is, or in the discretion of the grantor
or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment
of premiums upon policies of insurance on the life of the grantor, such
part of the income of the trust shall be included in computing the
taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor'
means in the discretion of the grantor, either alone or in conjunction
with any person not having a substantial adverse interest in the
disposition of the part of the Income in question.
Sec. 65. Fiduciary Returns. — Guardians, trustees, executors,
administrators, receivers, conservators and all persons or corporations,
acting in any fiduciary capacity, shall render, in duplicate, a return of
the income of the person, trust or estate for whom or which they
act, and be subject to all the provisions of this Title, which apply to
individuals in case such person, estate or trust has a gross income
of Twenty thousand pesos (P20,000) or over during the taxable year.
Such fiduciary or person filing the return for him or it, shall take oath
that he has sufficient knowledge of the affairs of such person, trust
or estate to enable him to make such return and that the same is, to
the best of his knowledge and belief, true and correct, and be subject
to all the provisions of this Title which apply to individuals: Provided,
That a return made by or for one or two or more joint fiduciaries filed
in the province where such fiduciaries reside; under such rules and
regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with
the requirements of this Section.
Sec. 66. Fiduciaries Indemnified Against Claims for Taxes
Paid. — Trustees, executors, administrators and other fiduciaries are
indemnified against the claims or demands of every beneficiary for
all payments of taxes which they shall be required to make under the
provisions of this Title, and they shall have credit for the amount of
such payments against the beneficiary or principal in any accounting
which they make as such trustees or other fiduciaries.
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128
A trust is a legal arrangement where the owner of the property
(trustor) transfers ownership to a person (trustee) to hold and
control the property for the benefit of another person (beneficiary).
An estate is created by operation of law when an individual dies,
leaving properties to heirs.
Taxable estates and trusts are taxed in the same manner and on
the same basis as in the case of an individual.
The following are allowed deductions for the estate and trust:
O
amount distributed to the beneficiaries, or
O
amount collected by a guardian of an infant which is to be
held or distributed as the court may direct
•
in both these cases, the amount allowed shall be included
in computing the taxable income of the beneficiaries
whether distributed to them or not
Rule for income received by estates of deceased persons during
the period of administration or settlement of the estate, and in the
case of income, which may be either distributed to the beneficiary
or accumulated: the amount paid or credited to any legatee, heir
or beneficiary shall be allowed as a deduction
o
Provided that the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heir
or beneficiary
TRAIN has repealed Section 62, NIRC, which had previously
granted a P20,000 exemption for estates and trusts. So, right
now, at this very moment that you are reading this book (and
getting super sleepy in the process), estates and trusts do not
have exemptions.
The income of a trust will be taxed to the:
o
Trustor, if revocable trust
o
Trustee, if irrevocable trust
When this provision will NOT apply: The income tax is NOT
imposed on employees' trust which forms part of a pension, stock
bonus or profit sharing plan of an employer for the benefit of
some or all of his employees
o
If contributions are made to the trust by such employer, or
employees, or both, for the purpose of distributing to such
employees the earnings and principal of the fund accumulated
by the trust in accordance with such plan; and
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If under the trust instrument it is impossible, at any time prior
to the satisfaction of all liabilities with respect to employees
under the trust, for part of the corpus or income to (within the
taxable year or thereafter) used for, or diverted to, purposes
other than for the exclusive benefit of the employees.
Any amount, however, actually distributed to any employee
or distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed
by such employee or distributee.
Income for the benefit of the grantor:
O
Rules on revocable trust will apply for income for the benefit
of the grantor.
•
The following will be included in the taxable income of the
grantor:
•
Where any part of the income of a trust is, or in the
discretion of the grantor or of any person not having
a substantial adverse interest in the disposition of
such part of the income
O
may be held or accumulated for future distribution
to the grantor; or
O
may, or in the discretion of the grantor or of any
person not having a substantial adverse interest
in the disposition of such part of the income, be
distributed to the grantor; or
O
is, or in the discretion of the grantor or of any
person not having a substantial adverse interest
in the disposition of such part of the income may
be applied to the payment of the premiums upon
policies of insurance on the life of the grantor
For easy reference, please see chart below.
Estate
Definition
Trust
whereby
the
Mass of property, rights, Arrangement
and obligations left behind trustor grants the control of
by the decedent upon his certain property in the person of
the trustee for the benefit of the
death.
beneficiary.
For purposes of income tax,
an estate may be under Trusts subject to Income tax:
judicial administration or Income...
one that is not.
a) accumulated for the benefit
of unborn or unascertained
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person or persons
contingent interest
with
b)
accumulated or held for
future distribution
under
the terms of the trust
c)
is to be distributed currently
by the fiduciary to the
beneficiaries
d)
collected by a guardian of an
infant is held or distributed
as the court may direct
e)
income, in the discretion of
the fiduciary, may either be
distributed to the beneficiaries or accumulated
Exempt taxable trust: "employee's trust"
Who files
the ITR
pertaining
to the
taxable
income of
an estate
What gross
income
consists of
Estate
Trust
If under judicial admin:
executor or admin shall file
the return and pay the tax
on the net income of the
estate
If irrevocable trust:
trustee
(fiduciary) is the one who will
file the return and pay the tax
thereon for a trust
If NOT under judicial
admin: heirs shall include
in their respective returns
their distributive shares
in the net income of the
estate
If revocable trust: income of
such part of the trust shall
be included in computing the
taxable income of the GRANTOR
Revocable trust is one where at
any time the power to revest in
the grantor title to any part of
the corpus of the trust is vested:
a)
In the grantor alone or In
conjunction with a person
not
having
substantial
adverse interest on the
corpus
b)
In any person not having a
substantial adverse interest
in the disposition of such
part of the corpus or the
income therefrom
Same as that of an individual taxpayer
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Estate
Deductible
expenses
a)
Trust
Same as an individual
taxpayer
a)
Amount of income b)
of the estate that is
paid or credited to
any legatee, heir, or
beneficiary
c)
Note:
cash
advances
given to surviving spouse
or heir NOT deductible
b)
Same as
taxpayer
an
individual
Amount of income
of
the trust which is to be
distributed currently to the
beneficiaries
Amount of the income
collected by the guardian of
an infant which is to be held
or distributed as the court
may direct
Note: cash advances given to
surviving spouse or heir NOT
deductible
Accounting
period
Miscellaneous notes
Calendar year
Excess of sales proceeds
over the appraised value of
the property is recognized
as taxable gain
If two or more trusts are created
by the SAME grantor in favor
of the SAME beneficiary, the
taxable income of all trusts
shall be CONSOLIDATED for
the purpose of computing the
income tax thereon and each
trustee shall proportionately
bear the taxes.
In this case, the personal
exemption of P20,000 shall be
availed of ONLY ONCE by being
deducted from the consolidated
net income.
I.
Taxable Income
Now that we've tackled the different types of taxpayers, it's time
to learn how to compute their taxable income. It is important to keep
the formula In mind when solving problems as the formula will serve
as a helpful guide or mental map, especially when we start with the
fine details of deductions.
Sec. 31. Taxable Income Defined. — 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. (As amended by TRAIN)
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Gross Income
Less: deductions
Taxable income
Gross Income
Let's begin with gross income.
Sec. 32. Gross Income. —
(A) General Definition. — Except when otherwise provided in this
Title, gross income means all income derived from whatever source,
including (but not limited to) the following items:
(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.
Gross income means ALL INCOME derived from WHATEVER
SOURCE. This includes, but is not limited to, the enumeration in
the codal.
o
However, gross receipts (and thus, gross income) do not
include monies or receipts entrusted to the taxpayer which
do not belong to them and do not redound to the taxpayer's
benefit; and it is not necessary that there must be a law
or regulation which would exempt such monies and receipts
within the meaning of gross receipts under the Tax Code.
(CIR v. Tours Specialists, Inc., G.R. No. L-66416, March 21,
1990)
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O
Condominium association dues, membership fees, and other
assessments/charges are not subject to income tax because
they do not constitute profit or gain. These are collected
purely for the benefit of the condominium owners and are
the incidental consequence of a condominium corporation's
responsibility to effectively oversee, maintain, or even
improve the common areas of the condominium as well as
its governance. (BIR v. First E-Bank Tower Condominium
Corp., G.R. Nos. 215801 & 218924, 15 January 2020, which
invalidated the controversial RMC 65-2012/
O
Membership fees, assessment dues, and other fees of similar
nature of recreational clubs are not subject to income tax.
These only constitute contributions to and/or replenishment of
the funds for the maintenance and operations of the facilities
offered by the clubs to their exclusive members. (Association
of Non-Profit Clubs v. BIR, G.R. No. 228539, June 26, 2019)
■
As long as these membership fees, dues, and the like
are treated as collections as inherent consequences
of membership and are, by nature, intended for the
maintenance, preservation, and upkeep of the recreational
clubs' general operations and facilities, these cannot
be classified as income. It only forms part of capital.
(Association of Non-Profit Clubs v. BIR, G.R. No. 228539,
June 26, 2019)
In answering problems, the first thing you should ask is "Is this
gross income?", and then you ask "is this excludible?" (that's the
thought process to follow!)
Compensation
•
Compensation for services in whatever form paid, including, but
not limited to:
O
fees,
O
salaries,
O
wages,
O
commissions, AND
similar Items.
Compensation earners are not allowed to deduct any other
deductions from their salary
O
O
but they may have deductions applied to income earned from
other sources
Taek, a high-ranking executive in Taek Got Game, Inc. was given
an apartment where he would host parties for the clients of his
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company. He would also travel abroad with his wife, Deok Sun, to
go on meetings. Are these rental allowances and travel allowances
part of the gross income?
o
NO.
O
Convenience of the employer rule: No part of these
redounded to the Taek's personal benefit, nor were such
amounts retained by him. These bills were paid directly by
the employer-corporation. These expenses are COMPANY
EXPENSES, not income by employees which are subject to
tax. (Collector v. Henderson, G.R. No. L-12954, February 28,
1961)
Personal and Equity Retirement Account (PERA)
•
PERA refers to the voluntary retirement account established by
and for the exclusive use and benefit of the Contributor for the
purpose of being invested solely in PERA investment products
in the Philippines. The Contributor shall retain the ownership,
whether legal or beneficial, of funds placed therein, including all
earnings of such funds.
•
PERA contributions from an employer to an employee do NOT
form part of his gross income. (R.R. 17-2011 and R.A. 9505)
Representation and Transportation Allowance (RATA)
•
RATA of private employees is generally taxable as part of gross
compensation.
o
•
■
Expenses are ordinary and necessary in pursuit of trade
or business, and
■
Employee must account for the expenses and liquidate
with receipts and other documents.
RATA of gov't officials is considered reimbursement of expenses
and are therefore exempt.
o
•
However, it is exempt if:
No need to substantiate or liquidate
Additional compensation allowance (ACA) of gov't officials is
considered as "other benefits" under Section 32(B). Hence, only
the excess of P90,000 is subject to the tax. (TRAIN has increased
the amount of nontaxabie benefits to P9O,OOO! Yeay!)
Business income
•
Business income is the gross income derived from the conduct of
trade or business or the exercise of a profession.
j
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In the case of manufacturing, merchandising or other business,
gross income means:
Total Sales
Less: cost of goods sold
Add: all income from incidental and outside sources
Gross Income
Gains
•
Gains derived from dealings in property
•
Gain or loss on sale or exchange of property is recognized when
the property received in exchange is essentially different from the
property disposed and the property received has market value.
•
In sale or exchange of real or personal property, distinguish first
between ordinary versus capital assets because capital assets
have special rules governing them. (We'll discuss these later on.)
■
Interests
•
t
Income from interest income are also to be included in computing
for the gross income.
O
But note that interest income which are already subject to
final tax (such as those in the passive income charts) need
not be included in the computation for gross income for a
taxpayer's annual income tax return.
Rents
•
Rents are included in gross income.
•
Rents deposited by tenants in a bank account because the lessor
refused to accept the same are considered income of the lessor.
The lessor is deemed to have constructively received the rents.
(Llmpan Investment Corporation v. CIR, G.R. No. L-21570, July
26, 1966)
•
But what about improvements by lessees? (Section 49, R.R.
2-1940)
o
When a lessee erects a building or makes improvements per
agreement with the lessor, the lessor may report the income
therefrom upon either of the following, at his option:
•
At the time when such building or improvements are
completed, the fair market value of such building or
improvement (outright method)
i
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■
The lessor may spread over the life of the lease
the estimated depreciated value of such building or
improvement at the termination of the lease and report
the income for each of the adequate part (spread out
method)
If the lease is terminated, and it is not through purchase
by the lessor, so that the lessor comes into possession of
the property prior to the time originally fixed, the lessor is
considered to receive additional income for that year (if the
value of the building exceeds the amount already reported as
income).
O
•
No appreciation value due to causes other than premature
termination of the lease shall be included.
O
If the building is destroyed before the expiration of the lease,
the lessor is entitled to deduct as loss for the year when
such destruction occurred the amount previously reported as
income, less any salvage value to the extent that such loss
was not compensated by insurance.
O
If useful life is less than remaining term of lease, lessor will
not repost any income, since he'll get it fully depreciated
anyway.
Note the different treatment for leases and conditional sales:
(R.R. 19-1986)
o
Lease: the amount paid for the lease shall be considered part
of gross income
■
O
Prepaid leases are reported as taxable income in the year
when the prepayment is received.
Conditional sales (rent-to-own schemes, etc.): this will be
treated as a sale; hence, the rules on gains from the sale of
assets will apply and these gains will be treated as income
Royalties
•
Royalties are any payment of any kind received as consideration
for the use of or right toj use:
o
Any patent, trademark, design or model;
O
Secret formula or process;
O
Industrial, commercial or scientific equipment;
O
Information concerning industrial, commercial or scientific
experience.
1
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Dividends
Sec. 73. Distribution of dividends or Assets by Corporations. —
(A) Definition of Dividends. — The term "dividends" when
used in this Title means any distribution made by a corporation
to its shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation
or dissolution, the gain realized or loss sustained by the stockholder,
whether individual or corporate, is a taxable income or a deductible
loss, as the case may be.
(B) Stock Dividend. — 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 that it represents a distribution of earnings or
profits.
(C) Dividends Distributed are Deemed Made from Most
Recently Accumulated Profits. — Any distribution made to the
shareholders or members of a corporation shall be deemed to have
been made from the most recently accumulated profits or surplus,
and shall constitute a part of the annual income of the distributee for
the year in which received.
(D) Net Income of a Partnership Deemed Constructively
Received by Partners. — The taxable income declared by a
partnership for a taxable year which is subject to tax under Section
27(A) of this Code, after deducting the corporate income tax imposed
therein, shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed
to them in their individual capacity, whether actually distributed or
not.
Dividends are any distribution whether in cash or in other
property In the ordinary course of business even if extraordinary
in amount, made by:
o
A domestic or resident foreign corporation
o
A joint stock corporation
o
A partnership
o
A joint account
o
An association
o
An insurance company
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•
To the shareholders or members out of its earnings or
profits.
The definition of dividends was the main issue in CIR v. Goodyear
Philippines, Inc. (G.R. No. 216130, August 3, 2016), where the
SC held that the cash amounts given by a domestic corporation
to a foreign shareholder for the redemption of shares were not
dividends as these were not distributed out of its earnings or
profits.
When the corporation receives dividends, which are tax-free (like
intercorporate dividends), it becomes taxable as dividends when
it distributes the same to its shareholders.
General rule: Cash and property dividends are taxable. Stock
dividends are not taxable.
Property dividends (or securities other than
taxable (Section 251, R.R. 2-1940)
its own stock):
o
These are considered income in the amount of the full market
value as when received by the stockholder.
O
They are taxed 10% (or 20% if NRAETB).
O
If it was paid in stock of another corporation, it is not
considered a stock dividend. It is still considered property
dividend.
O
The valuation is the market value at the time the dividend
becomes payable. (For shares of stock of another corporation
given as dividends, it is the market value when the shares of
stock are received)
Stock dividends: not taxable.
O
EXCEPT when the stock dividend causes change in the
corporate Identity or a change in the nature of the shares
issued whereby the proportional interest of the stockholders
after the distribution is essentially different from his former
interest. (Section 252, R.R. 2-1940)
•
A stock dividend constitutes income if it gives the
shareholder an interest different from that which his
former stock represented.
■
When a stockholder receives a stock dividend which is
taxable income, the measure of income is the fair market
value of the shares of stock received.
Sale of stock received as dividends
o
Once the recipient sells the stock dividend, he may realize
gain or loss. This gain or loss is treated as arising from
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the sale or exchange of a capital asset. (Section 253, R.R.
2-1940)
Stock declaration and subsequent redemption
O
If after the stock dividend declaration, a corporation
cancels or redeems the same in such time and manner as
to make the distribution/redemption essentially equivalent
to a distribution of a taxable dividend, the amount received
shall be considered as a taxable dividend (10% final tax for
individuals). (Section 254, R.R. 2-1940)
Why do corporations do this?
■
•
So that the shareholder will avoid paying tax.
Remember, stock dividends are not taxable, but
cash dividends are subject to 10% final tax for
individuals (remember your passive income charts!).
So corporations declare stock dividends, and then
redeem them (by giving their shareholders cash)
to go around the tax. But because of the law, their
subsequent redemptions are now taxable.
•
Hence, when the 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 that it represents a distribution of earnings
or profits. (CIR v. CA, G.R. No. 108576, January 20,
1999)
Liquidating dividends: taxable
O
When a corporation distributes all its properties or assets in
complete liquidation, the gain realized from this is taxable.
O
Computation is based on Section 39(B) or (C) of the Tax Code
«
When a corporation distributes all of its assets in complete
dissolution and liquidation, there is no dividend income to
the shareholder receiving the liquidating dividend. There
is, instead, a sale or exchange of property. Any gain
realized or loss sustained by the stockholder, whether
individual or corporate, is taxable income or deductible
loss, as the case may be. (Section 256, R.R. 2-1940)
■
When a corporation was dissolved and in process of
complete liquidation and its shareholders surrendered
their stock to it and it paid the sums in question to them
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in exchange, a transaction took place, which was no
different in its essence from a sale of the same stock to
a third party who paid therefore. (Wise v. Meer, G.R. No.
48231, June 30, 1947)
•
In other words, the gain or loss one incurs when a
corporation liquidates goes into your ordinary income
(schedular rate for individuals, 30% for resident
corporations).
O
•
The 12-month 50%/100% of gains threshold
applies (see rules on capital gains)
That's the difference between redeemed shares
(taxed at 10%) and liquidating shares (schedular
rate for individuals, or 30% for resident corporations)
For a trading company that is in the process of liquidation,
and whose shareholders are to receive liquidating dividends in
excess of their investment, the gain is taxable (on the side of the
shareholders) because the shareholders will realize capital gain
or loss.
O
Such gain is the difference between the fair market value
of the liquidating dividends and the adjusted cost to the
stockholders of their respective shareholdings.
*
If the shareholder held his shares for more than 12
months, only 50% of the capital gains is taxable.
•
If less than 12 months, the entire 100% of the capital
gains is taxable. (BIR Ruling 322-87)
On the side of the liquidating corporation, it is not liable for
income tax on either the transfer of its assets to its stockholders,
or on its receipt of the shares surrendered by its stockholders.
(BIR Ruling 039-02)
•
Annuities
•
An annuity is a sum of money payable yearly or at regular
intervals.
•
Note: life insurance annuities are excluded from gross income.
(Section 32[B][1 ])
Prizes and Winnings
•
Prizes and winnings are generally taxable (they are similar to
gains derived from labor)
o
EXCEPT: (these are not taxable,
exclusions from gross income)
based
on
Sec.
32(B)
i
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If the recipient was selected without any action on his part
to enter the contest and he was not required to render
substantial future services as a condition for receiving the
prize or award;
Those granted to athletes in local and international sports
competitions sanctioned by their respective national
sports associations are exempt; and
Those that are in the nature of gifts.
Pensions
•
A pension is a gratuity granted as a favor or reward or one paid
. under given conditions to a person following retirement from
service or to surviving dependents.
•
Note: Pensions and retirement benefits under R.A. 7641 are
excluded from gross income. (Section 32[B][5][a])
Share in GPP's Income
Sec. 26. Tax Liability of Members of General Professional
Partnerships. — A general professional partnership as such shall
not be subject to the income tax imposed under this Chapter. Persons
engaging in business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual
capacities.
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.
Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership.
The GPP Is tax-exempt, but the income of the individual partners
is subject to tax.
o
Professional partnerships of real estate brokers are included
in this exemption. (Ruling 294-88, July 5, 1988)
Each partner shall report as gross income his distributive share in
the net income of the partnership.
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
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142
(2) Cash prize received from a religious society in recognition of the
exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with clients
a) What are the items in the above mentioned earnings which
should be included in the computation of ABC Law Firm's gross
income? Explain.
b) What are the items in the above-mentioned payments which may
be considered as deductions from the gross income of ABC Law Firm?
Explain.
c) If ABC Law Firm earns net income in 2012, what, if any, is the
tax consequence on the part of ABC Law Firm insofar as the payment
of income tax is concerned? What, 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 Exam)
[tip: for long questions like this, take a deep breath first to avoid
panic attacks, and then dive in]
Suggested answer:
a) Professional and legal fees from various clients should be included
in the gross income of the taw firm, as these are income derived from
the conduct of the exercise of a profession which is included in gross
income, as per the Tax Code.
The cash prize should not be included because prizes In recognition of
services are excluded from gross income If the recipient was selected
without any action on his part and is not required to render substantial
future services as a condition to receiving the prize. I assume these
conditions are not present in the case of the law firm.
The gains from the sale of excess computers shall likewise be Included
in the gross income because gross income Includes all Income derived
whatever source. It doesn't matter if they'll be considered capital or
ordinary assets, since they'll all fall into the gross income computation
anyway because these aren't real properties (which, if considered
capital assets, is subject to final tax).
b) The salaries, rentals, and representation expenses may be
considered deductions from gross income. The Tax Code allows
ordinary and necessary professional expenses as deductions, as
long as there is proper documentation and a direct connection to the
operation of a profession. Assuming there is proper documentation
for these expenses, these are proper deductions, as they are directly
connected to the operation of a law firm.
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c) ABC Law Firm will not pay income tax because the Tax Code
states that general professional partnerships, such as a law firm, are
not subject to income tax. The net income of GPPs are computed in
the same manner as corporations, but the individual partners will be
subject to income tax because the Tax Code states that the individual
partners will be liable in their individual capacities. Their income tax
liability will be based on their distributive share of the net income of
the general professional partnership.
From whatever source
Cancellation or forgiveness of debt may amount to
o
Payment of income — that's taxable, (a person performs
service for a creditor who cancels his debt)
o
A payment of dividends — that's taxable, (a corporation
forgives the debt of a stockholder, that's like paying dividends)
o
A gift — that's exempt, (a creditor merely wants to benefit
a debtor by canceling the debt without any consideration)
(Section 50, R.R. 2-1940)
Acquisitipn by the Government of private properties through
expropriation, said properties being JUSTLY compensated, is
embraced within the meaning of the term "sale" "disposition
of property," and the proceeds should be included in the gross
compensation. (Gutierrez v. Collector, G.R. No. L-9378, May 31,
1957)
o
Note, however, the doctrine of involuntary dealings.
•
This doctrine states that if property (as a result of its
destruction, in whole or in part, theft or seizure, or an
exercise of the power of requisition or condemnation
or the threat or imminence thereof) is compulsorily
or involuntarily converted into property similar to the
property so converted, or into money, which is forthwith in
good faith expended in the acquisition of other property,
or in the establishment of a replacement fund, no gain
or loss shall be recognized. If any part of the money is
not so expended, the gain shall be recognized, but in an
amount not in excess of the money so expended.
Damages may or may not be considered taxable
depending on the nature of the damages:
o
income,
Compensation for loss of income and exemplary damages
which represent loss of capital: taxable
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Moral damages, reimbursement for hospital bills, return of
capital/property: not taxable
O
■
•
But see Murphy v. Internal Revenue Service, 493 F3rd
170, US Court of Appeals, which held that moral damages
which are not on account of physical injuries should not
be excluded from gross income; (note that the US IRC
upon which the case was decided was similar worded to
Section 32[B][4]), and hence, there is authority to state
that moral damages not arising from physical injuries is
considered taxable as income
When a company pays for the tax liability of one of its officers,
the payment is considered income on the part of the officer. (Old
Colony Trust Co. v. CIR, 279 US 716, June 3, 1929)
Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five
(5) equal monthly installments. Before the first installment became
due, Mr. Gipit rendered general cleaning services in the entire
office building of Mr. Maunawain, and as compensation therefor,
Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the
amount of P75,000.00. Mr. Gipit claims that the cancellation of his
indebtedness cannot be considered as gain on his part which must be
subject to income tax, because according to him, he did not actually
receive payment from Mr. Maunawain for the general cleaning
services. Is Mr. Gipit correct? Explain. (2014 Bar Exam)
Suggested answer: Mr. Gipit is wrong. Gross income means all income
derived from whatever source. The cancellation or forgiveness of
debt is considered taxable income when the debtor performs some
service to the creditor who, in return, cancels the debt. In this case,
the debtor, Mr. Gipit, performed general cleaning services for Mr.
Maunawain who, in return, cancelled the indebtedness (up to the
amount of P75,000.00). Hence, this amount forms part of Mr. Gipit's
gross income.
Refunds
Sec. 34. (C) Taxes. — (1) In General. — Taxes paid or Incurred
within the taxable year in connection with the taxpayer's profession,
trade or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country;
but this deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the
benefits of paragraph (3) of this subsection (relating to credits for
taxes of foreign countries);
(c) Estate and donor's taxes; and
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(d) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed. Provided, That taxes
allowed under this Subsection, 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.
Taxes which were previously claimed and allowed as deductions
but were subsequently refunded or granted as tax credit should
be declared as part of the gross income of that year. The purpose
of this is to put you back in equilibrium — to bring your gross
income back up.
O
EXCEPT:
•
Estate and donor's tax
Income, war-profit and excess profit taxes imposed by a
foreign country
Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed
Stock transaction tax
Taxes which are not allowable as deductions under the
law
When refunded, they are not declarable as gross
income because they are not allowable as deductions.
Dona Evelina, a rich widow engaged in the business of currency
exchange, was assessed a considerable amount of local business
taxes by the City Government of Bagnet by virtue of Tax Ordinance
No. 24. Despite her objections thereto, Doha Evelina paid the taxes.
Nevertheless, unsatisfied with said Tax Ordinance, Doha Evelina,
through her counsel Atty. ELP, filed a written claim for recovery of
said local business taxes and contested the assessment. Her claim
was denied, and so Atty. ELP elevated her case to the Regional Trial
Court (RTC).
The RTC declared Tax Ordinance No. 24 null and void and without
legal effect for having been enacted in violation of the publication
requirement of tax ordinances and revenue measures under the
Local Government Code (LGC) and on the ground of double taxation.
On appeal, the Court of Tax Appeals (CTA) affirmed the decision of
the RTC. No motion for reconsideration was filed and the decision
became final and executory.
If Doha Evelina eventually recovers the local business taxes, must the
same be considered as income taxable by the national government?
(2014 Bar Exam)
'•
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Suggested answer: Yes. The Tax Code states that taxes paid or
incurred within the taxable year in connection with the taxpayer's
business shall be allowed as a deduction. However, if these taxes
that had been previously considered as deductions are refunded or
credited, they shall form part of the gross income in the year of
receipt to the extent of the income tax benefit of the deduction.
Hence, assuming the Doha previously claimed it as a deduction, the
refund must be included in her gross income to the extent of the
income tax benefit of the deduction.
•
Cash deposits or advances received by taxpayers other than GPP
from clients and customers shall be booked as income and shall
form part of the taxpayer's gross receipts.
o
It will also be subject to VAT or percentage tax, if applicable.
O
An official receipt shall be issued for every deposit and
advance. (RMC 16-2013)
•
•
Note, however, the case of CIR v. Tours Specialists,
Inc. (G.R. No. L-66416, March 21, 1990) and Medicard
Philippines, Inc. v. CIR (G.R. No. 222743, April 5, 2017)
which, in principle and logic, seem to run counter to RMC
16-2013.
Any income or gain derived by employees from the exercise
of stock options (under a stock option plan) is considered as
additional compensation subject to income tax.
o
Under the plan, employees were given the right to shares o
a foreign corporation at a fixed price regardless of the stoc
future market price.
o
The additional compensation was the difference of the book
value or fair market value of the share (whichever is higher;
at the time of the exercise of the stock option and the price
fixed on the grant date.
o
Thereafter, the subsequent sale of the shares will be subject
to capital gains tax, stock transaction tax, or ordinary income
tax, as the case may be. (RMC 88-2012)
In 2010, Mr. Platon sent his sister Helen $1,000 via a telegraphic
transfer through the Bank of PI. The bank's remittance clerk made
a mistake and credited Helen with $1,000,000 which she promptly
withdrew. The bank demanded the return of the mistakenly
credited excess, but Helen refused. The BIR entered the picture and
investigated Helen.
Would the BIR be correct if it determines that Helen earned taxable
income under these facts? (2013 Bar Exam)
Suggested answer: Yes, income is income from whatever source.
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A note on transfer pricing
Sec. 50. Allocation of Income and Deductions. — In the case
of two or more organizations, trades or businesses (whether or
not incorporated and whether or not organized in the Philippines)
owned or controlled directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or
business, if he determined that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly
to reflect the income of any such organization, trade or business.
When two or more organizations, trades or businesses are owned
or controlled directly or indirectly by the same interests, the CIR
can distribute, apportion or allocate gross income or deductions
between or among such organizations, trades or businesses, in
order to prevent tax evasion.
On the basis of Section 50, the CIR issued R.R. 2-2013 or the
Transfer Pricing Regulations.
Transfer pricing is defined as the pricing of cross-border, intra-firm
transactions between related parties or associated enterprises.
o
A transfer price occurs between a taxpayer of a country with
high income taxes and a related or associated enterprise of a
country with low income taxes.
o
Transfer pricing can also occur in domestic transactions; such
as when an associated enterprise with income tax exemptions
is being used to allocate income away from a company subject
to regular income taxes.
Associated enterprises mean two or more enterprises wherein
o
one participates directly or indirectly in the management,
control, or capital of the other, or
o
if the same persons participate directly or indirectly in the
management, control, or capital of the enterprises.
•
The arm's length principle requires the transaction with a related/
associated party to be made under comparable conditions and
circumstances as a transaction with an independent party.
•
The Commissioner is authorized to make transfer pricing
adjustments to ensure that taxpayers clearly reflect income
attributable to controlled transactions and to prevent the
avoidance of taxes with respect to such transactions.
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Note, however, that even with Section 50, the CIR still cannot
impose interest rates on its own. (CIR v. FHinvest Development
Corporation, G.R. No. 163653, July 19, 2011)
O
Despite the seemingly broad power of the CIR to distribute,
apportion and allocate gross income under Section 50 of the
Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers'
transactions. This is true even if the CIR is able to prove that
interest expense (on FDC's own loans) was in fact claimed by
FDC.
O
The term in the definition of gross income that even those
income "from whatever source derived" is covered still
requires that there must be actual or at least probable
receipt or realization of the item of gross income sought to be
apportioned, distributed, or allocated.
O
Finally, the rule under the Civil Code that "no interest shall be
due unless expressly stipulated in writing" was also applied in
this case.
O
The Court also ruled that the instructional letters, cash and
journal vouchers qualify as loan agreements that are subject
to documentary stamp tax (DST).
Exclusions from Gross Income
Sec. 32. (B) Exclusions from Gross Income. — The following
items shall not be included in gross income and shall be exempt from
taxation under this title:
(1) Life Insurance. — The proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments
shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. — The
amount received by the Insured, as a return of premiums paid by him
under life insurance, endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.
(3) Gifts, Bequests, and Devises. — The value of property acquired
by gift, bequest, devise, or descent: 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.
(4) Compensation for Injuries or Sickness. — Amounts received,
through Accident or Health Insurance or under Workmen's
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Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
(5) Income Exempt underTreaty. — Income of any kind, to the extent
required by any treaty obligation binding upon the Government of
the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc. —
(a) Retirement benefits received under Republic Act No. 7641 and
those received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age
at the time of his retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by an official
or employee only once. For purposes of this Subsection, the term
'reasonable private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an employer for the benefit
of some or all of his officials or employees, wherein contributions
are made by such employer for the officials or employees, or both,
for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein its
is provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees.
(b) 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.
(c) The provisions of any existing law to the contrary notwithstanding,
social security benefits, retirement gratuities, pensions and other
similar benefits received by resident or nonresident citizens of
the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions,
private or public.
(d) Payments of benefits due or to become due to any person residing
in the Philippines under the laws of the United States administered
by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials and
employees.
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7)
Miscellaneous Items. —
(a) Income Derived by Foreign Government. — Income derived
from investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the
Philippines by
(i)
foreign governments,
(ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and
(iii) international
or
regional
established by foreign governments.
financial
institutions
(b) Income Derived by the Government or its Political Subdivisions.
— Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
(c) Prizes and Awards. — Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(i) The recipient was selected without any action on his
part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial
future services as a condition to receiving the prize or award.
(d) Prizes and Awards in Sports Competition. — 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 national sports associations.
(e) 13th-Month Pay and Other Benefits. — Gross benefits received
by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall
not exceed ninety thousand pesos (P90,000) which shall cover: (As
amended by TRAIN)
(I) Benefits received by officials and employees of the
national and local government pursuant to Republic Act No.
6686;
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986;
(iii) Benefits received by officials and employees not covered
by Presidential decree No. 851, as amended by Memorandum
Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That every three (3) years
after the effectivity of this Act, the President of the Philippines
shall adjust the amount herein stated to its present value using
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the Consumer Price Index (CPI), as published by the National
Statistics Office (NSO). (R.A. 10653)
(f) GSIS, SSS, Medicare and Other Contributions. — GSIS, SSS,
Medicare and Pag-Ibig contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate
of Indebtedness. — Gains realized from the same or exchange or
retirement of bonds, debentures or other certificate of indebtedness
with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. — Gains
realized by the investor upon redemption of shares of stock in a
mutual fund company as defined in Section 22(BB) of this Code.
(I) Income Derived from the Sale of Gold Pursuant to Republic Act
No. 7076 — Income derived from the following transactions pursuant
to R.A. No. 7076, otherwise known as the "People's Small-scale Mining Act of
1991":
(i) The sale of gold to the Bangko Sentral ng Pilipinas by
registered small-scale miners, as defined under Republic Act No.
7076, and accredited traders; and
(ii) The sale of gold by registered small-scale miners to
accredited traders for eventual sale to the Bangko Sentral ng
Pilipinas. (As amended by R.A. 11256)
The following are tax-exempt and are NOT included in gross
Income:
1.
Life insurance (except if the proceeds are held by the insurer
under an agreement to pay interest thereon. Only the interest
payments are included in the gross income)
2.
Amount received by insured as return of premium
3.
Gifts, bequests, devises or descents (but the income from
such property shall be included in gross income)
4.
Compensation for personal injuries or sickness (plus the
amounts of any damages received on account of such)
5.
Income exempt under any treaty
6.
Benefits received from the US Veterans Administration
7.
Retirement benefits under either a) R.A. 7641 (retirement age
of at least 60 years old, with at least 5 years in the service of
the employer) or b) a reasonable retirement plan maintained
by the employer (retirement age of at least 50 years old, with
at least 10 years in the service of the employer). This can
only be availed of once.
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Separation pay caused by death, sickness, or other disability,
or separation pay for any cause beyond the control of the
official or employee
8.
Like the Authorized Causes under the Labor Code
If fault or conduct of employee is to blame, it's taxable and
not exempted (like the Just Causes under the Labor Code)
Social security benefits, retirement gratuities, pensions and
similar benefits from foreign government agencies
9.
10. SSS benefits
11. GSIS benefits
Miscellaneous tax-exempt items:
1.
Income earned by foreign governments in the Philippines
from deposits/investments
•
For it to be exempt, the income should be received by:
i.
Foreign governments
ii.
Financing institutions owned, controlled or enjoying
re-financing from foreign governments
iii. International
financial
or regional
established by foreign governments
institutions
2.
Income earned by the Phil, government or its
subdivisions (like public utilities)
3.
Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievement — but only if he was selected without any action
on his part to enter the contest and he is not required to
render substantial future services as a condition to receiving
the prize or award
4.
Prizes and awards in sports competitions sanctioned by the
national sports associations
5.
13th-month pay, Christmas bonus, productivity incentive
bonus, loyalty award, gifts in cash or in kind, and other
benefits of similar nature received by officials and employees
of both government and private offices
•
6.
political
But exemptions apply only to the first P90,000.
GSIS, SSS, Medicare,
contributions
Pag-IBIG
union
dues
and
other
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7.
•
These cover only the mandatory/compulsory contributions
of the concerned employees to SSS, GSIS, PHIC, and
HDMF.
•
Voluntary contributions in excess to what the law allows
to these institutions are not excludible from the gross
income of the taxpayer and not exempt from income tax
and withholding tax. (RMC 27-2011)
Gains from sale of bonds, debentures or other certificate of
indebtedness with maturities of more than five years
•
Differentiate with gains from sale of bonds, debentures,
or other certificates of indebtedness with maturities of
less than 5 years—these are subject to regular income
tax rates (Banco de Oro v. Republic, G.R. No. 198756,
August 16, 2016)
8.
Gains from redemption of shares in mutual funds
9.
Interest received by a nonresident individual or a nonresident
corporation from deposits with depository banks under the
expanded FCDU
10.
Intercompany dividends (resident/domestic
from domestic corporations)
11.
De minimis benefits received by employees
12.
Philippine Charity Sweepstakes and Lotto winnings are now
only exempt up to PIO,000. Any winnings above PIO,000 are
subject to 20% final tax.
13.
Sale of gold to the BSP by registered small-scale miners and
accredited traders and sale of gold by registered small-scale
miners to accredited traders for eventual sale to the BSP.
(R.R. 04-2020)
14.
Personal Equity and Retirement Account (PERA) contribution
•
corporations
PERA shall refer to a Contributor's voluntary retirement
account established under R.A. 9505
i.
A Qualified Employer's Contribution to his/its
employee's PERA shall not from part of the employee's
gross income; hence, it is exempt from withholding
tax
ii.
The employer can claim the actual amount of his/
its Qualified Employer's Contribution as a deduction
from his/its gross income, but only to the extent
of the employer's contribution that would complete
the maximum allowable PERA contribution of an
employee. (R.R. 17-2011)
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•
Minimum wage earners shall be exempt from the payment of
income tax too. Holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum wage earners
shall likewise be exempt from income tax.
O
However, bonuses and other benefits exceeding the statutory
limit (now P90,000) are taxable. (Soriano v. Secretary of
Finance, G.R. No. 184450, January 24, 2017, note that the
MWE does not lose his/her MWE-status because of other
benefits. But when these bonuses and other benefits exceed
the statutory limit, the MWE can be taxed on the excess.}
•
Income from employees' trusts is exempt from ALL kinds of taxes,
including final withholding tax on interest income. (CIR v. CA and
GCL Retirement Plan, G.R. No. 95022, March 23, 1992)
•
Terminal leave pay received by a government official or employee
on the occasion of his compulsory retirement is not part of gross
salary. It is a retirement benefit and is tax exempt. (CIR v. CA &
Castaneda, G.R. No. 96016, October 17, 1991; and Re: Request
of Atty. Zialcita, A.M. No. 90-6-015-SC, October 18, 1990)
Mr. A, a citizen and resident of the Philippines, is a professional boxer.
In a professional boxing match held in 2013, he won prize money in
United States (US) dollars equivalent to P300,000,000.
May Mr. A'sprize money qualify as an exclusion from his gross income?
Why? (2015 Bar Exam)
Suggested answer: His prize money may qualify as an exclusion from
gross income. However, the boxing match must have been sanctioned
by the national sports association (NSA) for boxing. The Tax Code
excludes prizes and awards in sports competitions, whether local and
International, If these are sanctioned by the respective national sports
association.
(Note: As per R.A. 7549 and BIR Ruling No. 026-00, the NSA must
be duty accredited by the Philippine Olympic Committee. The current
NSA for boxing is the Association of Boxing Alliances in the Philippines,
Inc. which covers amateur boxing. So, an alternative answer Is that
the prize money may not qualify as an exclusion because the NSA
does not sanction professional boxing and therefor the provision on
exclusions does not apply. To know more about sports law, order Laws
for Sports and the Sporty now!)
The Board of Directors of Sumo Corporation, a company primarily
engaged in the business of marketing and distributing pest control
products, approved the partial cessation of its commercial operations,
resulting in the separation of 32 regular employees. Only half of the
affected employees were notified of the board resolution. Rule on the
taxability of the separation pay and indemnity that will be received
1
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by the affected employees as the result of their separation from
service. Explain your answer. (2017 Bar Exam)
Suggested answer: The separation pay and indemnity will not be
taxable. Under the Tax Code, any amount received by an employee
from the employer as a consequence of separation for any cause
beyond the control of the employee is excluded from gross income.
Here, the partial cessation of commercial operations is not the fault
of the affected employees. Hence, the separation pay and indemnity
will not be taxable.
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was
seconded to various KSI-affiliated corporations:
1.
from 1999 to 2004 as Vice President of K-Gold Inc.,
2.
from 2004 to 2007 as Vice President of KPB Bank;
from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim
served as CEO for seven years until his retirement last December 12,
2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common
by the Koh family and covered by a BIR-qualified multiemployeremployee retirement plan (MEE RP), under which the employees
may be moved around within the controlled group (i.e., from one
KSI subsidiary or affiliate to another) without loss of seniority rights
or break in the tenure. Kim was well-loved by his employer and
colleagues, so upon retirement, and on his last day in office, KSI
gave him a Mercedes Benz car worth PhP 5 million as a surprise, with
a streamer that reads: "You'll be missed. Good luck, Sir Kim."
a) Are the retirement benefits paid to Kim pursuant to the MEERP
taxable?
b) Which internal revenue tax, If any, will apply to the
grant of the car to Kim by the company? (2018 Bar Exam)
Suggested answer:
a) The retirement benefits are not taxable. Under the Tax Code,
benefits from BIR-qualified retirement plans are excluded from gross
Income. In this case, the retirement plan was approved by the BIR
and It seems Mr. Kim got his benefits from it.
b) Either income tax or donor's tax. Income tax Is applicable
because the car can be seen as remuneration for past services. In
the alternative, donor's tax can apply because it seems to have been
given out of goodwill. (If I were Mr. Kim, I hope the answer is donor's
tax so the company is liable for the tax, not me. Lelz)
i
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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 Pl,000,000.00. Upon receipt of the funds, he went to a
casino in Pasay City and won the P30,000,000.00 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 P5,000.00.
Which of the above sums of money is/are subject to income tax?
Explain. (2019 Bar Exam)
Suggested answer: The cash prize is arguably tax exempt, as prizes
granted to athletes in tournaments sanctioned by the respective
national sports association (NSA) is exempt from tax. Here, as
Mr. D is an amateur boxer, the Olympic qualifying tournament is
necessarily sanctioned by the NSA for boxing (segue to sports law:
NSAs must be accredited by the POC in order for the national athletes
under such NSA to join Olympic qualifier events). Hence, the award
given to him by the Philippine government is arguably tax exempt. (I
say arguably, because an alternative answer is that the cash prize is
taxable, as the prize was not awarded in the tournament—because
it did not come from the organizers, but the government—and
therefore not "prizes and awards in sports competitions, "as required
by the Tax Code)
The P30,000,000.00 slot machine jackpot is subject to income tax,
as gross income includes income from all sources, including gambling
winnings.
The P5,000.00 Lotto cash prize is exempt, as Lotto winnings are only
taxable if the winnings exceed PIO,000.00.
i
j
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.
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. (2019 Bar Exam)
-i
!
Suggested answer: The special stipend is not taxable and excluded
from the taxable income of the employees. Under the Tax Code,
benefits given to employees which do not exceed POO,000.00 in a
year are excluded from gross income. The special stipend here can
be considered a benefit. As it is below the P90,000.00 threshold, it
is not taxable. (It is also not a fringe benefit because it seems to be
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given to all employees. If you want to be super nuanced about it,
the P50,000.00 stipend for the non-rank-and-file employees will be
subject to fringe benefit tax, as travel expenses to non-rank-and-file
employees are subject to FBT.)
K.
Deductions
Sec. 34. Deductions from Gross Income. — Except for taxpayers
earning compensation income arising from personal services rendered
under an employer-employee relationship where no deductions shall
be allowed under this Section, in computing taxable income subject to
income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and
28(A)(1), there shall be allowed the following deductions from gross
income: (As amended by TRAIN)
Deductions are amounts allowed by law to reduce the gross
income to taxable income.
These amounts are allowed to taxpayers by legislative grace
and the taxpayer claiming them must prove compliance with the
provisions of the law authorizing the deductions.
o
In other words, taxpayers love deductions.
Deductions and exclusions both reduce actual gross income
although exclusions are not included in the income tax return.
Taxpayers earning compensation under an employer-employee
relationship are not allowed to use any deductions. (It's right
there in the codal!)
Individuals with gross Income from business or the practice of
profession and corporations can either use the optional standard
deduction (OSD) or itemized deductions.
Itemized deductions are generally expenses and losses related to
trade or business or the practice of a profession. That's the entire
focus of Section 34.
The following are the itemized deductions:
1.
Expenses
2.
Interest
3.
Taxes
4.
Losses
5.
Bad debts
6.
Depreciation
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7.
Depletion
8.
Charitable and other contributions
9.
Research and development
10.
Pension trusts
Differentiate tax exclusions from tax deductions. (2019 Bar Exam)
Suggested answer: While both deductions and exclusions reduce
actual gross income, exclusions need not be included in the tax return
as these are not included in computing the taxpayer's gross income.
Deductions must be included in the tax return as these reduce the
taxpayer's gross income to arrive at his/her/its taxable income.
Expenses, in general
Sec. 34. (A) Expenses. —
(1) Ordinary and Necessary Trade, Business or Professional
Expenses. —
(a) In General. — There shall be allowed as deduction from gross
income 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, including:
(i) A reasonable allowance for salaries, wages, and other forms
of compensation for personal services actually rendered, including the
grossed-up monetary value of fringe benefit furnished or granted by
the employer to the employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad,
while away from home in the pursuit of trade, business or profession;
(Hi) A reasonable allowance for rentals and/or other payments
which are required as a condition for the continued use or possession,
for purposes of the trade, business or profession, of property to which
the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement
and recreation expenses during the taxable year, that are directly
connected to the development, management and operation of the
trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade, business
or exercise of a profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into account the needs
as well as the special circumstances, nature and character of the
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industry, trade, business, or profession of the taxpayer: Provided, That
any expense incurred for entertainment, amusement or recreation
that is contrary to law, morals public policy or public order shall in no
case be allowed as a deduction.
(b) Substantiation Requirements. — No deduction from gross income
shall be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other
adequate records:
(i)
the amount of the expense being deducted, and
(ii) 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.
(c) Bribes, Kickbacks and Other Similar Payments. — No deduction
from gross income shall be allowed under Subsection (A) hereof for
any payment made, directly or indirectly, to an official or employee
of the national government, or to an official or employee of any local
government unit, or to an official or employee of a governmentowned or -controlled corporation, or to an official or employee or
representative of a foreign government, or to a private corporation,
general professional partnership, or a similar entity, if the payment
constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions.
— In addition to the expenses allowable as deductions under this
Chapter, a private educational institution, referred to under Section
27(B) of this Code, may at its option elect either: (a) to deduct
expenditures otherwise considered as capital outlays of depreciable
assets Incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under
Subsection (F) hereof.
The codal considers as deductions all ordinary and necessary
expenses In carrying on the development, management,
and operation of a trade, business, or profession, including a
reasonable allowance for:
1.
Salaries, wages, and other forms of compensation including
fringe benefits (provided the tax thereof has been paid)
2.
Travel expenses, here and abroad, in pursuit of trade and
business
3.
Rentals and others which are required for the continued use
of property
4.
Entertainment, amusement and recreation expenses that are
directly connected to the trade, business, or profession (but
should not be contrary to law, morals, etc.)
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These are the requirements for deductible claims:
Sufficient evidence (like official receipts or other adequate
records)
1.
2. A direct connection of the expense to the development,
management, operation, and/or conduct of the trade,
business or profession
•
Payments of bribes and kickbacks, whether given
government or a private person, are not deductible.
•
Payment for police protection is illegal as it is compensation given
by the petitioner to the police for the performance by the latter of
the functions required of them to be rendered by law. (Calanoc v.
CIR, G.R. No. L-15922, November 29, 1961)
•
Jurisprudence expounded on the requirements with the following
requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses:
1.
to the
Expense must be ordinary and necessary
Must have been paid or incurred during the taxable year
•
3.
Must have been paid or incurred in carrying on the trade/
business
4.
Must be supported by receipts, records or other pertinent
papers (CIR v. Isabela Cultural Corporation, G.R. No. 172231,
February 12, 2007)
For a taxpayer using the accrual method, the accrual of income
and expense is permitted when the all-events test has been met.
The all-events test requires:
o
The fixing of a right to income or liability to pay; and
o
The availability of the reasonable accurate determination of
such income or liability.
*
"Reasonable accuracy" implies something less than an
exact or completely accurate amount. The propriety of
an accrual must be judged by the facts that a taxpayer
knew, or could reasonably be expected to have known,
at the closing of its books for the taxable year. (CIR v.
Isabela Cultural Corporation)
A taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so
cannot deduct the same for the next year.
It is ordinary when it is normal in relation to the business of the
taxpayer. It need not be recurring.
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It is necessary when it is appropriate and helpful in the
development of the taxpayer's business. See if it is intended to
minimize losses or to maximize profits.
Regarding advertising expenses (CIR v. General Foods [Phils.],
Inc., G.R. No. 143672, April 24, 2003):
O
Advertising is generally of two kinds:
1.
To stimulate the current sale of merchandise or use of
services
2.
To stimulate the future sale of merchandise or use of
services
o
The second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for the
taxpayer's trade or business or for the industry or profession
of which the taxpayer is a member.
o
If it is the first kind, it is definitely deductible as a business
expense, the only question to be answered is if it is reasonable
or not.
o
If it is the second kind, normally they should be spread out
over a reasonable time.
■
o
In the case, the amount was not only huge (hence,
unreasonable), but was also used to protect the brand
franchise. The Supreme Court said that it was analogous
to the maintenance of goodwill or title to one's property.
Thus, it was a capital expenditure which should have
been spread out over a reasonable period of time. It was
akin to the acquisition of capital assets and therefore
expenses related thereto were not to be considered as
business expenses but as capital expenditures.
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)
Litigation expenses incurred in defense of title to property are
capital in nature and not deductible. (Atlas Consolidated Mining &
Development Corporation v. CIR, G.R. No. L-26911, January 27,
1981)
Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees
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are deductible, provided such payments, when added to the
stipulated salaries, do not exceed a reasonable compensation for
the services rendered. (Kuenzie & Streiff, Inc. v. CIR, G.R. No.
L-18840, May 29, 1969)
o
Bgn.us.es given to corporate officers out of the sale of corporate
land are not deductible as an ordinary business expense 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)
O
For income tax purposes, the employer cannot legally claim
bonuses as deductible expenses unless they are shown to
be reasonable. The conditions precedent to the deduction of
bonuses are:
The payment of the bonuses is in fact compensation;
It must be for personal services actually rendered; and
The bonuses, when added to the salaries, are reasonable
when measured by the amount and quality of the services
performed with relation the business of the taxpayer.
(C.M. Hoskins & Co., Inc. v. CIR, G.R. L-24059, November
28, 1969)
•
For cost of materials, taxpayers carrying materials and supplies
on hand should include in expenses the charges of materials and
supplies only to the amount that they are actually consumed and
used in operation during the year for which the return is made,
provided that the cost of such materials and supplies has not
been deducted in determining the net income for any previous
year.
°
If a taxPay.er carries incidental materials or supplies on
hand for which no record of consumption is kept or of which
physical inventories at the beginning and end of the year are
not taken, it will be permissible for the taxpayer to include
in his expenses and deduct from gross income the total cost
of such supplies and materials as were purchased during the
year for which the return is made, provided the net income is
clearly reflected by this method. (Section 67, R.R. 2)
the COSt
Incidenta| repairs which neither materially
add to the value of the property nor appreciably prolong its life,
but keep it in an ordinarily efficient operating condition, may be
deducted as^expense, provided the plant or property account is
i
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Repairs in the nature of replacement, to the extent that they
arrest deterioration and appreciably prolong the life of the
property, should be charged against the depreciation reserves
if such account is kept. (Section 68, R.R. 2)
For lease agreement expenses, the following are allowed
deductions (Section 74, R.R. 2):
o
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;
o
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.
o
The cost of leasehold improvements are NOT considered
business expenses since they are capital investments.
In order to return to such taxpayer his investment
of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such
improvements divided by the number of years remaining
of the term of the lease, and such deduction shall be
in lieu of a deduction for depreciation. If the remainder
of the term of lease is greater than the probable life
of the building erected, or of the improvements made,
this deduction shall take the form of an allowance for
depreciation.
•
For professional expenses, the following are allowed deductions
(Section 69, R.R. 2):
o
Cost of supplies
o
Expenses paid in the operation and repair of transportation
equipment used in making professional class
o
Due to professional societies and subscriptions to professional
journals
■
So bar review tuition fees and bar examination fees are
not deductible
o
Rent paid for offices
o
Expenses for utilities on offices
o
Expenses for hiring of office assistants
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164
O
Books, furniture, and professional instruments and equipment
with a SHORT useful life
■
Those with a permanent character are NOT allowable
Note: Private educational institutions have special deductibles:
•
They are allowed to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred for the expansion of
school facilities, or
•
They are allowed to capitalize the
deduction by way of depreciation.
expenditure,
and
claim
Representation, amusement, recreation expenses and entertainment
facilities (R.R. 10-2002)
•
Representation expenses are expenses incurred in connection
with the conduct of one's trade, business or profession in:
recreation to, or
o
Entertaining, providing amusement and
meeting with guests
o
At a dining place, place of amusement, country club, theater,
concert, play, sporting event and similar places
If the taxpayer is the registered member of a country/ golf/ °r
sports club, the presumption is that the expenses are fringe
benefits subject to the fringe benefits tax unless the taxpayer
can prove that these are actually representation expenses.
Entertainment facilities refer to a yacht, vacation home or
condominium and similar items of real or personal property used
by the taxpayer primarily for entertainment, amusement, or
recreation of guests or employees.
o
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.
o
A yacht is considered an entertainment facility if its use is not
restricted to specified officers or employees. If the yacht were
restricted to them, it would be a fringe benefit, subject to the
FBT.
The following are not considered entertainment, amusement and
recreation expenses:
1.
Those that are treated as compensation or fringe benefits;
2.
Expenses for charitable and fund-raising events;
3.
Expenses for bona fide meeting of stockholders, partners, or
directors;
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INCOME TAX
4.
Expenses for attending or sponsoring an employee to a
business league or professional organization meeting;
5.
Expenses for events organized for promotion, marketing
and advertising including concerts, conferences, seminars,
workshops, conventions, etc.;
6.
Other expenses of a similar nature
o
BUT! These may still qualify as deductions under other
provisions of Section 34.
Requisites of deductibility for entertainment, amusement,
and recreational expenses:
1.
Paid or incurred during the taxable year
2.
Must be directly connected to the development, management
and operation of the trade, business or profession of the
taxpayer; or directly related to or in furtherance of, his or its
trade, business or exercise of profession
3.
Not be contrary to law, public morals, etc.
4.
Not been paid to an official of the government or to a private
individual, corporation or GPP, as a bribe or kickback
5.
Must be substantiated by adequate proof (the official receipts,
invoices should be in the name of the taxpayer claiming the
deduction)
6.
Taxes must been withheld, if applicable, and paid to the BIR,
if subject to final tax
Ceiling for Representation, Entertainment
and Amusement Expenses
Taxpayers engaged in sale of goods or properties
0.5% of net sales
Taxpayers engaged in sale of services, including
exercise of profession and use or lease of properties
1% of net revenue
Other business expenses allowed by special laws as deductions
•
Discounts granted by establishments for senior citizens and PWDS
(R.R. 1-2009 and R.R. 7-2010);
•
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);
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•
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 Adopta-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 the gross income, the amount
that could have been collected for the actual free legal services
rendered or up to ten percent (10%) of the gross income derived
from the actual performance of the legal profession, whichever is
lower. (R.A. 9999)
Freezy Corporation, a domestic corporation engaged in the
manufacture and sale of ice cream, made payments to an officer
of Frosty Corporation, a competitor in the ice cream business, in
exchange for said officer's revelation of Frosty Corporation's trade
secrets.
May Freezy Corporation claim the payment to the officer as deduction
from its gross income? Explain. (2014 Bar Exam)
Suggested answer: No, it may not, thank you very much. The
payment to an officer of a private corporation to reveal trade secrets
may be considered a bribe. The Tax Code does not allow bribes, even
those to a private corporation, to be considered deductions.
(Just to clarify though, the codal does not list 'payments to an official
or employee of a private corporation' as a possible bribe; it does
list 'payments to private corporations' though. But I humbly submit
that payments to officials or employees of a private corporation be
treated in the same manner.)
I
Peter is the Vice-President for Sales of Golden Dragon Realty
Conglomerate, Inc. (Golden Dragon). A group of five (5) foreign
investors visited the country for possible investment in the
condominium units and subdivision tots of Golden Dragon. After a
tour of the properties for sale, the investors were wined and dined
by Peter at the posh Conrad's Hotel at the cost of P150,000.00.
Afterward, the investors were brought to a party in a videoke dub
which cost the company P200,000.00 for food and drinks, and
the amount of P80,000.00 as tips for business promotion officers.
Expenses at Conrad's Hotel and the videoke club were receipted
and submitted to support the deduction for representation and
entertainment expenses. Decide if all the representation and
entertainment expenses claimed by Golden Dragon are deductible.
Explain. (2016 Bar Exam)
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Suggested answer: I would argue that the dinner and the videoke
party are deductible as entertainment, recreation, and amusement
expenses. The Tax Code and its rules allow businesses to deduct
expenses incurred in connection with one's business in entertaining
and providing amusement to its guests. As long as it is directly
connected to the development of the business, not contrary to law
or morals, and substantiated by proof, then it should be allowed as a
deduction. In this case, it is arguable that the dinner and the videoke
party (assuming it was a real videoke party and not a "videoke"
party in some seedy bar with half-naked women grinding about) are
amusement expenses of Golden Dragon incurred to sell or entice its
would-be buyers to buy some units.
However, the P80,000 tip should not be allowed. These are arguably
bribes. The Tax Code and its rules state that bribes or kickbacks,
whether given to the government or private parties, should not be
allowed as deductions. They weren't substantiated with receipts
either—which is obvious, given the shady nature of the transaction.
(Note: while it can also be argued that these were capital expenses
and therefore not allowed as deductions [given that these were for
possible "investments."], the counterargument would be that the
business of Golden Dragon involves the sale of condo units, hence,
making the expenses used to attract would-be buyers deductible
business expenses.)
i
Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file)
of Sta. Portia Realty Corporation (SPRC). He invited the Regional
Director of the Housing and Land Use Regulatory Board (HLURB)
to lunch at the Sulo Hotel in Quezon City to discuss the approval
of SPRC's application for a development permit in connection with
its subdivision development project in Pasig City. At breakfast the
following day, Calvin met a prospective client interested to enter
into a joint venture with SPRC for the construction of a residential
condominium unit in Cainta, Rizai.
Calvin Incurred expenses for the lunch and breakfast meetings he
had with the Regional Director of HLURB and the prospective client,
respectively. The expenses were duly supported by official receipts
issued In his name. At month's end, he requested the reimbursement
of his expenses, and SPRC granted his request.
a)
Can SPRC claim an allowable deduction for the expenses Incurred
by Calvin? Explain your answer.
b)
Is the reimbursement received by Calvin from SPRC subject to
tax? Explain your answer. (2017 Bar Exam)
Suggest answer:
a)
The expense for the lunch meeting is not allowed, as this is a
bribe which the Tax Code states are not allowed as deductions,
whether the bribe is direct or indirect. The expense for the
■
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168
breakfast is also not allowed, as this is arguably a capita!
expenditure.
The reimbursement by Calvin is subject to tax. Generally,
representation and transportation allowance of employees are
generally taxable. The exception is if these are reimbursements
for expenses incurred for the ordinary and necessary pursuit
of trade or business. As the expenses are not ordinary and
necessary (as these were incurred as a bribe and capita!
expenditure), then the exception does not apply. Hence, the
reimbursement is taxable.
b)
Interest
Sec. 34. (B) Interest. —
(1) In General. — The amount of interest paid or incurred within
a taxable year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise allowable
deduction for interest expense shall be reduced by 42% of the interest
income subject to final tax: Provided, That effective January 1, 2009,
the percentage shall be 33%.
(2) Exceptions. — No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income
on the cash basis incurs an indebtedness on which an interest is
paid in advance through discount or otherwise: Provided, That such
interest shall be allowed a deduction in the year the indebtedness
is paid: Provided, further, That 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;
(b) If both the taxpayer and the person to whom the payment has
been made or is to be made are persons specified under Section
36(B); or
(c) If the indebtedness Is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. — At the option
of the taxpayer, interest incurred to acquire property used in trade
business or exercise of a profession may be allowed as a deduction or
treated as a capital expenditure.
Interests paid on debts are allowed as deductions but:
o
These must be incurred in connection with the taxpayer's
profession, trade or business
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The allowable deduction is reduced by 33% of the interest
income subject to final tax. (more on this below)
Requisites for deductibility of interest expense (R.R. 13-2000):
1.
There must be an indebtedness
2.
There should be an interest expense paid or incurred upon
the indebtedness (incurred meaning that it was due and
demandable)
3.
The indebtedness must be that of the taxpayer
4.
It must be connected with the taxpayer's trade, business or
profession
5.
The interest expense must have been paid or incurred during
the taxable year
6.
The interest must have been stipulated in writing
7.
The interest must be legally due
8.
The interest payment arrangement must not be between
related taxpayers
9.
The interest must not be incurred to finance petroleum
operations
!
10. In case the interest was incurred to acquire property used
in trade, business or profession, it was not treated as capital
expenditure.
a.
In cases like this, the taxpayer has the option to treat the
interest expenses as either
Interest expense deductible in full or
ii.
As a capital expenditure and claim as deduction only
the periodic amortization/depreciation.
o
But he can only choose one, or else that's double
deduction and that ain't allowed.
The law effectively cancelled out the tax arbitrage advantage.
Corporations before would borrow money and use the interest they
had to pay on the loan as a deduction, even if they reinvested the
money elsewhere and got interest income from their investment.
o
For example, Capitan Ri, a businessman who buys and sells
tomato plants, borrowed money from his favorite local bank,
Banko ng mga Gwapo. It had an interest expense of P8,000.
He then deposited the money that he borrowed with Banko
ng mga Kyot, and it had an interest income on it of P9,000,
i
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170
the final tax of which had been withheld by the bank. How
much is his deducible interest expense?
Interest expense, unadjusted
Less: Adjustment for interest
Income subject to final tax
(33% of P9,000)
Adjusted balance, deduction for interest
expense
P8,000
2.970
P5,030
But interest paid or accrued on taxes related to business or
practice of profession can be deducted in full (it is not subject to
this rule on downward adjustment).
Note that as long as there is interest expense incurred and interest
income earned (which had been subjected to final withholding
tax), the limitation shall apply regardless of:
o
whether or not a tax arbitrage scheme was entered into by
the taxpayer; or
o
the date when the investment was made.
The limitation will only apply if there is interest income subject to
final tax. If none, then you can deduct in full.
Interest is not deductible if:
o
o
Both the taxpayer and the person to whom interest was paid
are related taxpayers, meaning:
•
Members of a family;
•
An individual and a corporation where more than 50% of
the outstanding stock of the corporation is owned by the
individual;
•
Two corporations where more than 50% of the outstanding
stock of each is owned by the other or by the same
individual;
•
Between grantor and fiduciary of any trust;
■
Between fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each
trust; or
■
Between fiduciary of a trust and the beneficiary.
The indebtedness is incurred to finance petroleum operations;
and
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If an individual is on the cash basis of accounting and the
interest is paid in advance, through discount or otherwise.
«
If so, the interest expense shall be allowed as deduction
not in the year that the interest was paid in advance, but
in the year that the indebtedness was paid.
•
But if the indebtedness is payable in periodic amortization,
the amount of the interest which corresponds to the
amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.
Late payment of tax is considered a debt, and therefore interest
on taxes is interest on indebtedness and is thus deductible. (CIR
v. Vda. de Prieto, G.R. No. L-13912, September 30, 1960)
o
But surcharges or penalties are NOT deductible.
Taxes
Sec. 34. (C) Taxes. —
(1) In General. — Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or business, shall be
allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have
to any extent the benefits of paragraph (3) of this subsection
(relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, 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.
(2) Limitations on Deductions. — In the case of a nonresident
alien Individual engaged in trade or business in the Philippines and
a resident foreign corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed only if and to the
extent that they are connected with income from sources within the
Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. — If the
taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with:
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(a) Citizen and Domestic Corporation. — In the case of
a citizen of the Philippines and of a domestic corporation, the
amount of income taxes paid or incurred during the taxable year
to any foreign country; and
(b) Partnerships and Estates. — In the case of any such
individual who is a member of a general professional partnership
or a beneficiary of an estate or trust, his proportionate share of
such taxes of the general professional partnership or the estate
or trust paid or incurred during the taxable year to a foreign
country, if his distributive share of the income of such partnership
or trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the
credits against the tax for the taxes of foreign countries allowed under
this paragraph.
(4) Limitations on Credit. — The amount of the credit taken under
this Section shall be subject to each of the following limitations:
(a) 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
bears to his entire taxable income for the same taxable year; and
(b) 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 taxable income from sources without the Philippines
taxable under this Title bears to his entire taxable income for the
same taxable year.
(5)Adjustments on Payment of Incurred Taxes. — If accrued
taxes when paid differ from the amounts claimed as credits by the
taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer
shall notify the Commissioner; who shall predetermine the amount of
the tax for the year or years affected, and the amount of tax due upon
such redetermination, if any, shall be paid by the taxpayer upon notice
and demand by the Commissioner, or the amount of tax overpaid, if
any, shall be credited or refunded to the taxpayer. In the case of
such a tax incurred but not paid, the Commissioner as a condition
precedent to the allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be approved by the
Commissioner in such sum as he may require, conditioned upon the
payment by the taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed shall contain such
further conditions as the Commissioner may require.
6) Year in Which Credit Taken. — The credits provided for in
Subsection (C)(3) of this Section may, at the option of the taxpayer
and irrespective of the method of accounting employed in keeping his
books, be taken in the year which the taxes of the foreign country
were incurred, subject, however, to the conditions prescribed in
Subsection (C)(5) of this Section. If the taxpayer elects to take such
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173
credits in the year in which the taxes of the foreign country accrued,
the credits for all subsequent years shall be taken upon the same
basis and no portion of any such taxes shall be allowed as a deduction
in the same or any succeeding year.
(7) Proof of Credits. — The credits provided in Subsection (C)
(3) hereof shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources
without the Philippines;
(b) The amount of income derived from each country,
the tax paid or incurred to which is claimed as a credit under
said paragraph, such amount to be determined under rules and
regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and
computation of such credits.
Taxes paid or accrued within the taxable year in connection with
the taxpayer's trade or business or exercise of a profession are
deductible from gross income.
O
EXCEPT: (Sections 82-83, R.R. 2)
■
Philippine income tax (but the grossed-up monetary
value of the fringe benefit tax can be deducted)
•
Estate tax
Donor's tax
Special assessments
Income tax imposed by a foreign country for income
sourced outside the Philippines (but it shall be allowed
if the taxpayer does not signify his desire to enjoy
any benefits of the tax credit for taxes paid to foreign
countries)
Stock transaction tax
VAT
Income, war-profits, and excess-profits taxes imposed
by the authority of a foreign country (including the
United States and possessions thereof) are allowed as
deductions only if the taxpayer does not signify in his
return his desire to have to any extent the benefits of the
provisions of law allowing credits against the tax for taxes
of foreign countries. (Section 82, R.R. 2-1940)
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As to tax credits, only resident citizens and domestic corporations
are affected by this, because they are the only ones taxed
worldwide.
O
Members of the GPP and beneficiaries of estates/trusts can
also avail of tax credits.
O
Alien individuals and foreign corporations are not allowed to
avail of tax credits.
When a taxpayer is qualified for a credit, he has the option of
either:
O
Deducting the foreign income tax from his gross income, or
o
Claiming the tax credit.
How do we determine the amount of tax to be credited? Just
follow the formulas below, and choose which of them is lower.
1.
Net income from foreign country
x Tax Due (Total)
Net income worldwide
2.
Foreign income tax paid
Example:
Seri's Choice, Inc. had taxable income from the Philippines of
P300,000 and from South Korea of P100,000. Income tax of P40,000
was paid to South Korea. If Seri's Choice, Inc. chose to take a tax
credit for the income tax paid to South Korea, how much tax does the
corporation have to pay the Philippine government after the tax credit
would have been computed?
Taxable income before tax credit, Korea
Taxable income before tax credit, Phil.
P100,000
P300.000
Taxable income, worldwide
P400.000
Corporate income tax of 30%
P120,000
Less: Tax credit for foreign tax
Plug in the values!
(100,000/400,000) X 120,000
= P30,000
Foreign income tax paid
= P40,000
Choose what's lower! Allowed tax credit
P 30.000
Philippine income tax still due
P 90,000
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What would Seri's Choice, Inc. bring home if they chose to do
the tax credit?
Taxable income, worldwide
Tax liability in the Philippines
Less: Foreign Tax credit
P400,000
P120,000
P30.000
Tax liability after credit
Income after tax (what Seri's
P 90.000
P310,000
Choice takes home)
If Seri's Choice, Inc. chose to deduct, this is what would have
happened:
Taxable income worldwide
Deduction for foreign income tax paid
Taxable income
Income tax at 30%
Income after tax (what Seri's Choice
takes home)
P400,000
40,000
P360,000
P108.000
P252,000
It is preferred that you should go for a tax credit. You end up with
more cash at the end of the day. For tax credits, you get 100%
benefit, as compared to deductions where all expenses benefit to
the extent only of 30% (for corporations). Tax credit? That's the
right choice. That's Seri's Choice.
Can you deduct fines and penalties paid to the BIR because of
late payment of taxes? No. These are not taxes but penalties.
In 2009, Caruso, a resident Filipino citizen, received dividend
Income from a U.S.-based corporation which owns a chain of Filipino
restaurants In the West Coast, U.S.A. The dividend remitted to
Caruso Is subject to U.S. withholding tax with respect to a nonresident alien like Caruso.
a) What will be your advice to Caruso in order to lessen the impact
of possible double taxation on the same Income?
b) Would your answer in A. be the same if Caruso became a
U.S. Immigrant in 2008 and had become a non-resident Filipino
citizen? Explain the difference in treatment for Philippine income tax
purposes. (2010 Bar Exam)
Suggested answer:
a) In order to lessen the impact of possible double taxation on the
dividend income, I will advices Caruso that he can either claim the
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taxes which he paid to the US as deduction from his gross income or
claim it as a tax credit. The Tax Code allows resident citizens to claim
taxes paid to a foreign country to be deducted or claimed as a tax
credit. As a resident citizen, Caruso can avail of either.
b) My answer would be different because as a non-resident citizen,
the Philippine taxing authorities can only tax income sources within
the Philippines. As the income is sourced from outside the Philippines,
it cannot be taxed here. Hence, he need not worry about any impact
of double taxation.
Mr. A, a citizen and resident of the Philippines, is a professional
boxer. In a professional boxing match held in 2013, he won prize
money in United States (US) dollars equivalent to P300,000,000.
a) Is the prize money paid to and received by Mr. A in the US
taxable in the Philippines? Why?
b) The US already imposed and withheld income taxes from Mr.
A's prize money. How may Mr. A use or apply the income taxes he
paid on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (2015 Bar Exam)
Suggested answer:
a) Yes, the prize money paid to and received by Mr. A in the US is
taxable In the Philippines. As a resident citizen, he is taxable for his
income worldwide.
b) Mr. A has the option of either deducting the tax he paid in the
US or claiming It as a tax credit. Resident citizens, such as Mr. A,
are allowed to either deduct the taxes he paid abroad from his gross
income or claim them as tax credits.
Losses
Sec. 34. (D) Losses. —
(1) In General. — Losses actually sustained during the taxable year
and 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.
The Secretary of Finance, upon recommendation of the Commissioner,
is hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from robbery,
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theft or embezzlement during the taxable year: Provided, however,
That the time limit to be so prescribed in the rules and regulations
shall not be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, such loss has
been claimed as a deduction for estate tax purposes in the estate
tax return.
(2) Proof of Loss. — In the case of a nonresident alien individual
or foreign corporation, the losses deductible shall be those actually
sustained during the year incurred in business, trade or exercise of
a profession conducted within the Philippines, when such losses are
not compensated for by insurance or other forms of indemnity. The
Secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided, That the
time to be so prescribed in the rules and regulations shall not be less
than thirty (30) days nor more than ninety (90) days from the date
of discovery of the casualty or robbery, theft or embezzlement giving
rise to the loss; and
Losses actually sustained during the taxable year and not
compensated by insurance or other form of indemnity are
deductible from gross income:
O
If incurred in trade, business or profession;
O
Of property connected with trade, business or profession, if
the loss arises from fire, storm, shipwreck or other casualty,
or from robbery, theft or embezzlement.
Declaration of loss is needed within 45 days from time of loss
(R.R. 12-1977, reiterated in RMO 31-2009)
O
If the taxpayer fails to submit a Sworn Declaration of Loss,
the deduction for casualty loss will not be allowed. The SDL
is needed to forewarn the BIR the extent of the loss and to
conduct its own investigation of the incident leading to the
loss. (H. Tambunting Pawnshop v. CIR, G.R. No. 173373, July
29, 2013)
«
If a team blows a 3-28 lead with two minutes left in the
3rd quarter of the Super Bowl, does it need to submit a
sworn declaration of loss? No need, the internet trolls will
handle that. (Patriots v. Falcons, Superbowl LI)
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For nonresident individuals and foreign corporations, the losses
should be those actually sustained during the taxable year,
incurred in trade, business or profession conducted within the
Philippines.
If the loss has already been claimed as deduction for estate tax
purposes, it is no longer deductible from gross income.
Casualty means the complete or partial destruction of property
resulting from an identifiable event of a sudden, unexpected or
unusual nature.
It denotes accident, some sudden invasion by hostile agency,
and excludes progressive deterioration through steadily
operating cause.
O
•
Theft means the criminal appropriation of another's property for
the use of the taker.
•
Embezzlement is the fraudulent appropriation of another's
property by a person to whom it has been entrusted or into whose
hands it has lawfully come. (R.R. 12-1977)
•
The taxpayer bears the burden of proof.
•
Special rules on losses:
Voluntary removal of buildings (Section 97, R.R. 2-40):
0
O
•
Loss due to the voluntary removal or demolition of old
buildings, the scrapping of old machinery, equipment,
etc., incident to renewals and replacements will be
deductible from gross income (demolition for practical
reasons life safety).
•
When a taxpayer buys real estate upon which is located
a building, which he proceeds to raze with a view to
erecting thereon another building, It will be considered
that the taxpayer has sustained no deductible expense on
account of the cost of such removal, the value of the real
estate, exclusive of old improvements, being presumably
equal to the purchase price of the land and building plus
the cost of removing the useless building (demolition with
intention to construct a new building).
Loss of useful value of assets (Section 98, R.R. 2-40):
•
When through some change in business conditions, the
usefulness in the business of some or all of the capital
assets is suddenly terminated, so that the taxpayer
discontinues the business or discards such assets
permanently from use of such business, he may claim as
deduction the actual loss sustained.
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In determining the amount of the loss, adjustment must
be made, however, for improvements, depreciation and
the salvage value of the property.
This exception to the rule requiring a sale or other
disposition of property in order to establish a loss
requires proof of some unforeseen cause by reason of
which the property has been prematurely discarded, as,
for example, where an increase in the cost or change in
the manufacture of any product makes it necessary to
abandon such manufacture, to which special machinery
is exclusively devoted, or where new legislation directly
or indirectly makes the continued profitable use of the
property impossible.
•
This exception does NOT extend to a case where the
useful life of property terminates solely as a result
of those gradual processes for which depreciation
allowance are authorized. It does not apply to
inventories or to other than capital assets. The
exception applies to buildings only when they are
permanently abandoned or permanently devoted
to a radically different use, and to machinery only
when its use as such is permanently abandoned. Any
loss to be deductible under this exception must be
charged off in the books and fully explained in returns
of income.
A Is a travelling salesman working full time for Nu Skin Products.
He receives a monthly salary plus 3°/o commission on his sales in a
Southern province where he Is based. He regularly uses his own car
to maximize his visits even to far flung areas. One fine day a group
of militants seized his car. He was notified the following day by the
police that the marines and the militants had a bloody encounter and
his car was completely destroyed after a grenade hit it.
A wants to file a claim for casualty loss. Explain the legal basis of
your tax advice. (2010 Bar Exam)
Suggested answer: A will not be allowed to claim the loss of the car for
deduction purposes. Deductions are not allowed for taxpayers earning
compensation income under an employer-emp/oyee relationship. As
he works full-time for Nu Skin Products, he is a taxpayer earning
compensation income under an employer-employee relationship.
Hence, he will not be allowed to claim the loss for deductions. There
will be no need to file a claim for casualty loss.
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Net Operating Loss Carry Over (NOLCO)
(3) Net Operating Loss Carry-Over. — The net operating loss of
the business or enterprise for any taxable year immediately preceding
the current taxable year, which had not been previously offset as
deduction from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That
any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction under
this Subsection: Provided, further, That a net operating loss carryover shall be allowed only if there has been no substantial change in
the ownership of the business or enterprise in that —
(i) Not less than seventy-five percent (75%) in nominal value
of outstanding issued shares, if the business is in the name of a
corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital
of the corporation, if the business is in the name of a corporation, is
held by or on behalf of the same persons.
For purposes of this subsection, the term "not operating loss" shall
mean the excess of allowable deduction over gross income of the
business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating
loss without the benefit of incentives provided for under Executive
Order No. 226, as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the first ten (10) years
of operation may be carried over as a deduction from taxable income
for the next five (5) years immediately following the year of such
loss. The entire amount of the loss shall be carried over to the first
of the five (5) taxable years following the loss, and any portion of
such loss which exceeds, the taxable income of such first year shall
be deducted in like manner from the taxable income of the next
remaining four (4) years.
Net operating loss is the excess of allowable deduction over gross
income of the business in a taxable year.
NOLCO: The net operating loss of the business which has not
been previously offset as deduction shall be carried over as
deduction from gross income for the next three consecutive years
immediately following the year of such loss.
This is allowed if there has been
ownership of the business, meaning
o
no substantial
change in
Where not less than 75% of outstanding shares in the
business is in the name of a corporation held by the same
persons, or
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Where not less than 75% of the paid-up capital of the
corporation is held by the same persons
For mines other than oil and gas wells, a net operating loss
without the benefit of incentives provided for by the Omnibus
Investments Code may be carried over as deduction for the next
five years immediately following the year of loss.
Congress decided to limit the transfer of NOLCO because to allow
the indiscriminate transfer thereof would allow corporations to
simply buy and benefit from the operating losses of another
corporation. (Paper Industries Corporation of the Philippines v.
CA, G.R. No. 106949, December 1, 1995)
In case the transfer or assignment of NOLCO arises from a merger,
consolidation, or combination with another person, the transferee
or assignee shall not be entitled to claim the same as deduction.
o
EXCEPT when as a result of the said merger, consolidation,
or combination, the shareholders of the transferor/assignor
gains control of
■
at least 75% or more of the outstanding issued shares or
paid up capital of the transferee/assignee, or
■
75% or more interest in the business of the transferee/
assignee. (R.R. 14-2001)
An individual who claims the 40% optional standard deduction
cannot claim deduction of NOLCO simultaneously. Even if the
NOLCO was not claimed, the three-year period shall continue to
run. (R.R. 14-2001)
O
If the taxpayer paid its income tax under the MCIT
computation, the three-year period still runs. (R.R. 14-2001)
NOLCO shall be availed of on a "first-in, first-out" basis. (R.R. 142001)
Who are not qualified to NOLCO?
1.
OBUs for a foreign banking corporation and FCDU of a
domestic banking corporations
2.
Enterprise registered with the BOI enjoying the Income Tax
Holiday Incentive
3.
PEZA-registered enterprise
4.
5.
SBMA-registered enterprise
6.
Any person, natural or juridical, enjoying exemption from
income tax (R.R. 14-2001)
Foreign corporations engaged in international shipping or air
carriage business in the Philippines
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Example of NOLCO
Gross Income
Less: deductions
Net loss
2016
300
900
600
2017
700
600
100
Net income
2018
800
850
50
2019
800
720
2020
800
450
80
350
Less:
Nolco
100
From 2016
80
From 2018
Taxable income
0
0
0
0
300
Capital Losses
(4) Capital Losses. —
(a) Limitation. — Loss from sales or Exchanges of capital assets
shall be allowed only to the extent provided in Section 39.
(b) Securities Becoming Worthless. — If securities as defined in
Section 22(T) become worthless during the taxable year and are
capital assets, the loss resulting therefrom shall, for purposes of this
Title, be considered as a loss from the sale or exchange, on the last
day of such taxable year, of capital assets.
See discussion on Section 39.
Losses from Wash Sales of Stocks or Securities
(5) Losses From Wash Sales of Stock or Securities. — Losses
from "wash sales" of stock or securities as provided in Section 38.
Sec. 38. Losses from Wash Sales of Stock or Securities. —
(A) In the case of any loss claimed to have been sustained from
any sale or other disposition of shares of stock or securities where
it appears that within a period beginning thirty (30) days before the
date of such sale or disposition and ending thirty (30) days after
such date, the taxpayer has acquired (by purchase or by exchange
upon which the entire amount of gain or loss was recognized by law),
or has entered into a contact or option so to acquire, substantially
identical stock or securities, then no deduction for the loss shall be
allowed under Section 34 unless the claim is made by a dealer in
stock or securities and with respect to a transaction made in the
ordinary course of the business of such dealer.
j
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(B) If the amount of stock or securities acquired (or covered by the
contract or option to acquire) is less than the amount of stock or
securities sold or otherwise disposed of, then the particular shares of
stock or securities, the loss form the sale or other disposition of which
is not deductible, shall be determined under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the
contract or option to acquire which) resulted in the non-deductibility
of the loss, shall be determined under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
Losses are not allowed to be claimed in sales of stock or securities
if
O
Within a period of 30 days before the sale, and 30 days after
the sale (61 days total)
O
The taxpayer acquires or enters into an option to purchase
substantially the same/identical stocks or securities.
Losses are allowed only if the taxpayer is a stockbroker and the
sale/purchase was made in the regular course of business.
The important thing to remember is the 61-day period. (Section
131, R.R. 2)
O
Example: Laseng Gera Ajumma buys shares in Seri's Choice,
Inc. She sells the shares at a loss. Twenty days from the sale,
she buys shares in Seri's Choice, Inc. again. The loss will not
be allowed as a deduction.
Wagering Losses
Sec. 34. (D) (6) Wagering Losses. — Losses from wagering
transactions shall be allowed only to the extent of the gains from such
transactions.
Wagering losses are allowed only to the extent of gains from such
transactions.
Abandonment Losses
(7) Abandonment Losses. —
(a) In the event a contract area where petroleum operations
are undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures pertaining thereto shall
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be allowed as a deduction: Provided, That accumulated expenditures
incurred in that area prior to January 1, 1979 shall be allowed as
a deduction only from any income derived from the same contract
area. In all cases, notices of abandonment shall be filed with the
Commissioner.
(b) In case 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 such well, equipment or facility is abandoned by the contractor:
Provided, That if such abandoned well is reentered and production
is resumed, or if such equipment or facility is restored into service,
the said costs shall be included as part of gross income in the year of
resumption or restoration and shall be amortized or depreciated, as
the case may be.
•
When a petroleum operation is partially or wholly abandoned,
all accumulated exploration and development expenses shall be
allowed as a deduction
Forex losses
•
When foreign currency is acquired in connection with the
regular course of business, ordinary gain or loss results from
the fluctuations, such loss is deductible only in the year that it
is sustained. But if the loans have not vet actually been paid,
the losses therefrom have not yet been realized and are not
deductible yet. (BIR Ruling 206-90)
•
Foreign exchange losses sustained as a result of devaluation of the
peso, but which remittance of scheduled amortization consisting
of principal and interests payments on a foreign loan has not
actually been made are not deductible because the increase has
not yet been realized (no closed and completed transaction yet).
(BIR Ruling 144-85)
Bad debts
Sec. 34. (E) Bad Debts. —
(1) In General. — Debts due to the taxpayer actually ascertained to
be worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in
a transaction entered into between parties mentioned under Section
36(B) of this Code: Provided, 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.
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(2) Securities Becoming Worthless. — If securities, as defined in
Section 22(T), are ascertained to be worthless and charged off within
the taxable year and are capital assets, the loss resulting therefrom
shall, in the case of a taxpayer other than a bank or trust company
incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this
Title, be considered as a loss from the sale or exchange, on the last
day of such taxable year, of capital assets.
Bad debts are amounts borrowed from the taxpayer which have
become worthless or uncollectible.
O
These receivables may come from money actually extended
as a loan or from uncollectible payments of goods sold or
services rendered by the taxpayer.
Bad debts are deductible provided that:
O
There is an existing indebtedness due to the taxpayer
which is valid and legally demandable (and not losses from
investments, as in Philex Mining Corporation v. CIR, G.R. No.
148187, April 16, 2008);
O
They are connected with trade, business or profession of the
taxpayer;
O
They are actually ascertained to be worthless, uncollectible,
and charged off within the taxable year;
o
The taxpayer must show that it its uncollectible even in the
future (Phil. Refining Company v. CTA, G.R. No. 118794, May
8, 1996);
o
They are not sustained between related parties; and
o
If they are recovered, they should be included as part of gross
income in the year of recovery (this is the tax benefit rule).
•
Losses or bad debts must be ascertained to be so and written off
during the taxable year. They are therefore deductible in full or
not at all. There's no partial deductions. (Hermanos v. CIR, G.R.
No. L-21551, September 30, 1969)
•
Its worthlessness depends on the particular facts of each case. It
can't be considered worthless just because of its doubtful value
or difficulty to collect.
•
To prove worthlessness, the taxpayer must prove that he exerted
diligent efforts to collect, such as:
o
Sending of statement of accounts;
o
Sending of collection letters;
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O
Giving the account to a lawyer for collection;
O
Filing a collection case. (Phil. Refining Company v. CTA, G.R.
No. 118794, May 8, 1996)
Illustration of the tax benefit rule for bad debts
2019 taxable income before bad debts:
Bad debts in 2020:
Bad debts recovered in 2019:
P100,000
P170,000
P130,000
How much do I report in 2020 as gross income, i.e., how much
did I benefit from the bad debt I recorded as a deduction in 2019?
P100,000. That's how much I benefited from the debts being
written off. I benefited from it because I didn't have to pay the
P100,000 since the bad debt as a deduction covered it fully. (It
would be a different amount if the bad debts were less than the
taxable income before bad debts.) So, I have to include this
amount in the computation in the gross income.
What happens to the P30,000? (Uh-oh. Recit question.)
In case of banks, the BSP will ascertain the worthlessness and
uncollectibility of the bad debts and it shall approve the writingoff of the said debt from the bank's books of accounts at the end
of the taxable year. (R.R. 5-1999)
For an insurance or surety company, a receivable may be written
off from the taxpayer's books of accounts and claimed as bad
debt only if such company has been closed due to insolvency or
for any such similar reason by the Insurance Commissioner. (R.R.
5-1999)
Worthless debts arising from unpaid wages, salaries, rents, and
similar items of TAXABLE INCOME can only be deducted if these
amounts were included in the ITR as INCOME for the year when
such bad debt was sought, or the previous year.
Rakham operates the tending company that made a loan to Alfonso In
the amount of P20,000.00 subject of a promissory note which is due
within one (1) year from the note's issuance. Three years after the
loan became due and upon information that Alfonso is nowhere to
be found, Rakham asks you for advice on how to treat the obligation
as "bad debt. "Discuss the requisites for deductibility of a "bad debt"
(2016 Bar Exam)
Suggested answer: For bad debts to be considered deductible, the
following must concur:
•
There is an existing debt due to the taxpayer which is valid and
legally demandable;
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The debts are connected to the trade, business or profession of
the taxpayer;
They are actually ascertained to be worthless, uncollectible and
charged off within the taxable year;
The taxpayer must show that it is uncollectible even in the
future;
The debts are not between related parties; and
If ever these are recovered, they should be included in the year
of recovery.
Securities becoming worthless
•
Securities becoming worthless are considered to be a loss from
sale of capital assets on the last day of the taxable year except
for a bank or trust company.
•
Feelings becoming worthless are considered to be a loss that may
or may not be recovered from on the last day of the taxable year.
Depreciation
Sec. 34. (F) Depreciation. —
(1) General Rule. — There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear and
tear (including reasonable allowance for obsolescence) of property
used in the trade or business. In the case of property held by one
person for life with remainder to another person, the deduction
shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant. In the case of
property held in trust, the allowable deduction shall be apportioned
between the Income beneficiaries and the trustees in accordance with
the pertinent provisions of the instrument creating the trust, or in the
absence of such provisions, on the basis of the trust income allowable
to each.
(2) Use of Certain Methods and Rates. — The term "reasonable
allowance" as used in the preceding paragraph shall include, but
not limited to, an allowance computed in accordance with rules
and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following
methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding
twice the rate which would have been used had the annual
allowance been computed under the method described In
Subsection (F)(1);
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(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the
Secretary of Finance upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate
is Based. — Where under rules and regulations prescribed by the
Secretary of Finance upon recommendation of the Commissioner, the
taxpayer and the Commissioner have entered into an agreement in
writing specifically dealing with the useful life and rate of depreciation
of any property, the rate so agreed upon shall be binding on both
the taxpayer and the national Government in the absence of facts
and circumstances not taken into consideration during the adoption
of such agreement. The responsibility of establishing the existence
of such facts and circumstances shall rest with the party initiating
the modification. Any change in the agreed rate and useful life of
the depreciable property as specified in the agreement shall not be
effective for taxable years prior to the taxable year in which notice
in writing by certified mail or registered mail is served by the party
initiating such change to the other party to the agreement:
Provided, however, That where the taxpayer has adopted such
useful life and depreciation rate for any depreciable and claimed the
depreciation expenses as deduction from his gross income, without
any written objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and depreciation
rate so adopted by the taxpayer for the aforesaid depreciable asset
shall be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations.
— An allowance for depreciation in respect of all properties directly
related to production of petroleum initially placed in service in a
taxable year shall be allowed under the straight-line or decliningbalance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance
method, it may at any subsequent date, shift to the straight-line
method.
The useful life of properties used In or related to production of
petroleum shall be ten (10) years of such shorter life as may be
permitted by the Commissioner.
Properties not used directly in the production of petroleum shall
be depreciated under the straight-line method on the basis of an
estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. — An
allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as
follows:
(a) At the normal rate of depreciation if the expected life is
ten (10) years or less; or
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(b) Depreciated over any number of years between five
(5) years and the expected life if the latter is more than ten
(10) years, and the depreciation thereon allowed as deduction
from taxable income: Provided, That the contractor notifies the
Commissioner at the beginning of the depreciation period which
depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged
in Trade or Business or Resident Foreign Corporations. —
In the case of a nonresident alien individual 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.
Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescence.
A reasonable allowance for depreciation is deductible.
Some methods to determine reasonable allowance are seen in
the codal.
O
If the taxpayer and the CIR come to an agreement of the
useful life on which depreciation will be based, this agreement
will be considered binding.
Depreciation is allowed on tangible property and intangible
property.
A company has the right to claim depreciation, but the law
does not allow depreciation beyond its acquisition cost. (Basilan
Estates, Inc. v. CIR, G.R. No. L-22492, Septembers, 1967)
For vehicles, only one vehicle for land transport is allowed for
the use of an official or employee, the value of which should
not exceed P2,400,000. No deduction shall be allowed unless the
taxpayer substantiates the purchase with sufficient evidence.
(R.R. 12-2012)
O
No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicles which exceed the
threshold amount, UNLESS the taxpayer's line of business
is transport operations or lease of transportation equipment
and the vehicles purchased are use in said operations. (R.R.
12-2012)
Amortization of intangibles is the periodic process of allocating
cost of an intangible (goodwill, right of lease, patent, trademark,
zombie rights) and is deductible.
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Certain cases of depreciation
Properties used directly in production
of petroleum
10 years (straight-line/declining
method)
Properties used indirectly in production
of petroleum
5 years (straight-line)
Properties used in mining operations
If expected life is 10 years or
less, normal rate of depreciation
If expected life is more than 10
years, notify the CIR
For nonresident aliens engaged in
trade, or business here, or resident
foreign corporations
A reasonable rate is allowed
only on properties located in the
Philippines
Depletion
Sec. 34. (G) Depletion of OH and Gas Wells and Mines. —
(1) In General. — In the case of oil and gas wells or mines, a
reasonable allowance for depletion or amortization computed in
accordance with the cost-depletion method shall be granted under
rules and regulations to be prescribed by the Secretary of finance,
upon recommendation of the Commissioner: Provided, That when
the allowance for depletion shall equal the capital invested no further
allowance shall be granted: Provided, further, That after production in
commercial quantities has commenced, certain intangible exploration
and development drilling costs: (a) shall be deductible in the year
incurred if such expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the year paid or
incurred or at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing wells and/
or mines in the same contract area.
"Intangible costs in petroleum operations" refers to any cost incurred
in petroleum operations which in itself has no salvage value and which
is incidental to and necessary for the drilling of wells and preparation
of wells for the production of petroleum: Provided, That said costs
shall not pertain to the acquisition or improvement of property of
a character subject to the allowance for depreciation except that
the allowances for depreciation on such property shall be deductible
under this Subsection.
Any intangible exploration, drilling and development expenses allowed
as a deduction in computing taxable income during the year shall not
be taken into consideration in computing the adjusted cost basis for
the purpose of computing allowable cost depletion.
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(2) Election to Deduct Exploration and Development Expenditures. — In computing taxable income from mining operations,
the taxpayer may at his option, deduct exploration and development
expenditures accumulated as cost or adjusted basis for cost depletion
as of date of prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year: Provided, That
the amount deductible for exploration and development expenditures
shall not exceed twenty-five percent (25%) of the net income from
mining operations computed without the benefit of any tax incentives
under existing laws. The actual exploration and development
expenditures minus twenty-five percent (25%) of the net income
from mining shall be carried forward to the succeeding years until
fully deducted.
The election by the taxpayer to deduct the exploration and development
expenditures is irrevocable and shall be binding in succeeding taxable
years.
"Net income from mining operations," as used in this Subsection,
shall mean gross income from operations less "allowable deductions"
which are necessary or related to mining operations. "Allowable
deductions" shall include mining, milling and marketing expenses,
and depreciation of properties directly used in the mining operations.
This paragraph shall not apply to expenditures for the acquisition
or improvement of property of a character which is subject to the
allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or
incurred for the exploration and development of oil and gas.
The term "exploration expenditures" means expenditures paid or
Incurred for the purpose of ascertaining the existence, location, extent
or quality of any deposit of ore or other mineral, and paid or incurred
before the beginning of the development stage of the mine or deposit.
The term "development expenditures" means expenditures paid or
incurred during the development stage of the mine or other natural
deposits. The development stage of a mine or other natural deposit
shall begin at the time when deposits of ore or other minerals are
shown to exist in sufficient commercial quantity and quality and shall
end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a
Nonresident Alien individual or Foreign Corporation. — In the
case of a nonresident alien individual engaged in trade or business
in the Philippines or a resident foreign corporation, allowance for
depletion of oil and gas wells or mines under paragraph (1) of this
Subsection shall be authorized only in respect to oil and gas wells or
mines located within the Philippines.
•
Oil and gas wells or mines are allowed a reasonable allowance
for depletion or amortization computed using the cost-depletion
method.
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When the allowance for depletion equals the capital invested, no
further allowance shall be granted.
After production in commercial quantities has started, certain
intangible exploration and drilling costs will be deducted in the
year incurred if such were incurred for non-producing wells or
mines, or these may be capitalized and amortized if such were
incurred for producing wells or mines in same contract area.
If it was a nonresident alien or a resident foreign corporation,
the allowance for depletion is limited to oil wells and mines in the
Philippines.
The formula for rate of depletion is (cost of mine property)/
(estimated ore deposit) (Consolidated Mines, Inc. v. CTA, G.R.
No. L-18843, August 29, 1974)
Buzzword: cost of a WASTING ASSET
Charitable and Other Contributions
(H) Charitable and Other Contributions. —
(I) In General. — Contributions or gifts actually paid or made
within the taxable year 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 corporation
or associations organized and operated exclusively for religious,
charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to
social welfare institutions, or to non-government 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 often percent (10%) in the case
of an individual, and five percent (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.
(2) Contributions Deductible in Full. — Notwithstanding the
provisions of the preceding subparagraph, donations to the following
institutions or entities shall be deductible in full;
(a) Donations to the Government. — Donations to the Government
of the Philippines or to any of its agencies or political subdivisions,
including fully-owned government corporations, exclusively to finance,
to provide for, or to be used in undertaking priority activities in
education, health, youth and sports development, human settlements,
science and culture, and in economic development according to
a National Priority Plan determined by the National Economic and
Development Authority (NEDA), in consultation with appropriate
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government agencies, including its regional development councils and
private philanthrophic persons and institutions: Provided, That any
donation which is made to the Government or to any of its agencies
or political subdivisions not in accordance with the said annual priority
plan shall be subject to the limitations prescribed in paragraph (1) of
this Subsection;
(b) Donations to Certain Foreign Institutions or International
Organizations. — Donations to foreign institutions or international
organizations which are fully deductible in pursuance of or in
compliance with agreements, treaties, or commitments entered into
by the Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. — The
term "nongovernment organization" means a non profit domestic
corporation:
(1) Organized and operated exclusively for scientific,
research, educational, character-building and youth and sports
development, health, social welfare, cultural or charitable
purposes, or a combination thereof, no part of the net income
of which inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month
after the close of the accredited nongovernment organizations
taxable year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the
purpose or function for which it is organized and operated, unless
an extended period is granted by the Secretary of Finance in
accordance with the rules and regulations to be promulgated,
upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on
an annual basis, conform with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed thirty percent (30%)
of the total expenses; and
(4) The assets of which, in the even of dissolution, would be
distributed to another nonprofit domestic corporation organized
for similar purpose or purposes, or to the state for public purpose,
or would be distributed by a court to another organization to
be used In such manner as in the judgment of said court shall
best accomplish the general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be prescribed by the
Secretary of Finance, the term "utilization" means:
(I) Any amount in cash or in kind (including administrative
expenses) paid or utilized to accomplish one or more purposes for
which the accredited nongovernment organization was created or
organized.
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(ii) Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for which
the accredited nongovernment organization was created or
organized.
An amount set aside for a specific project which comes within one or
more purposes of the accredited nongovernment organization may
be treated as a utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has established to
the satisfaction of the Commissioner that the amount will be paid
for the specific project within a period to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, but not to exceed five (5)
years, and the project is one which can be better accomplished by
setting aside such amount than by immediate payment of funds.
(3) Valuation. — The amount of any charitable contribution of
property other than money shall be based on the acquisition cost of
said property.
(4) Proof of Deductions. — Contributions or gifts shall be allowable
as deductions only if verified under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
Donations to the following are partially deductible:
1.
To the government, exclusively for public purposes
•
Contributions to a government entity is deductible
when used exclusively for public purposes. Hence, the
contributions to the Christmas funds of the various
city police were held not to be deductible because the
Christmas funds were not spent for public purposes but
as Christmas gifts to the families of the members of the
different police. (Roxas v. CTA, G.R. No. L-25O43, April
26, 1968)
2.
To accredited domestic corporations or associations which are
organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural or
educational purposes, or for the rehabilitation of veterans, no
part of the net income of which inures to the benefit of any
private stockholder or individual
3.
To social welfare institutions
4.
To non-accredited NGOs
o
The amount that can be deducted should not exceed:
10% (individuals), or
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5% (corporations)
•
of the taxpayer's taxable income derived from
trade, business or profession before the deduction
for contributions and donations.
So, look at two things: 1. your charitable contributions; and 2.
10% or 5% (as the case may be) of your taxable income, and
then see what is lower. That amount is what you're allowed to
deduct.
Donations to the following are fully deductible:
1.
To the government, exclusively to finance activities in
education, youth, health, sports development, human
settlements, science and culture, and in economic
development according to the NEDA Plan (in other words,
government priority activities)
2.
To certain foreign institutions or international organizations
(treaty-based, etc.)
3.
To accredited NGOs
4.
Via special laws
NGOs are non-profit domestic corporations organized and operated
exclusively for scientific research, educational, character-building
and youth and sports development, etc., where no part of the
net income inures to the benefit of any private individual or
stockholder.
o
Their level of admin expenses cannot exceed 30% of the total
expenses, and they must utilize contributions not later than
15th day of the 3rd month after the close of the taxable year
when the donations were received.
O
It is the Philippine Council for NGO Certification which
accredits NGOs.
Note: In order to be I) exempt from donor's tax, and ii) to claim
full deduction of the donation given to qualified donee institutions
duly accredited by the PCNC, the donor engaged in business shall
give a notice of donation on every donation worth at least P50,000
to the Revenue District Office (RDO) which has jurisdiction over
his place of business within thirty (30) days after 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 thirty percent (30%) of the said donation/
gifts for the taxable year shall be used by such accredited nonstock, non-profit corporation/NGO institution (qualified-donee
institution) for administration purposes. (R.R. 12-2018)
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Special laws
•
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's tax and the same shall be allowable as a
deduction up to 150% of the value of the donation. (R.A. 9521)
•
Donations to foster child agencies are allowed as deductions to
the extent of the amount donated. (R.A. 10165)
Dr. Taimtim is an alumnus of the College of Medicine of Universal
University (UU), a privately-owned center for learning which grants
yearly dividends to its stockholders.
UU has a famous chape! located within the campus where the old
folks used to say that anyone who wanted to pass the medical
board examinations should offer a dozen roses on all the Sundays of
October. This was what Dr. Taimtim did when he was still reviewing
for the board examinations. In his case, the folk saying proved to
be true because he is now a successful cardiologist. Wanting to give
back to the chapel and help defray the costs of its maintenance, Dr.
Taimtim donated P50,000.00 to the caretakers of the chapel which
was evidenced by an acknowledgment receipt.
In computing his net taxable Income, can Dr. Taimtim use his
donation to the chapel as an allowable deduction from his gross
income under the National Internal Revenue Code (NIRC)? (2014
Bar Exam)
Suggested answer: No, the good doctor may not use the donation as
a deduction. A charitable donation to a domestic corporation can be
used as a deduction from gross income if the domestic corporation is
organized and operated exclusively for educational purposes and no
part of its net income inures to the benefit of any private stockholder
or individual. In this case, the donee grants yearly dividends to its
stockholders. Hence, donations to it are not allowable deductions.
(Congratulations to him though for being a successful cardiologist!)
Years ago, Krisanto bought a parcel of land in Muntlnlupa for only
PhP65,000. He donated the land to his son, Kornelio, in 1980 when
the property had a fair market value of PhP75,000, and paid the
corresponding donor's tax.
Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5
million and paid the capital gains tax, documentary stamp tax, local
transfer tax, and other fees and charges. Katrina, in turn, donated
the land to Klaret Schoo! last August 30, 2017 to be used as the site
for additional classrooms. No donor's tax was paid, because Katrina
claimed that the donation was exempt from taxation. At the time of
the donation to Klaret School, the land had a fair market value of
PhP 65 million.
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How much in deduction from gross income may Katrina claim on
account of the said donation? (2018 Bar Exam)
Suggested answer: Katrina may claim the value of the donation
but only up to 10% of her taxable income. Under the Tax Code,
donations to accredited domestic corporations organized and
operated exclusively for educational purposes can be deducted
from gross income, but the deduction should not exceed 10% of an
individual's taxable income before the deduction.
Research and Development (R&D)
Sec. 34. (I) Research and Development. —
(1) In General. — a 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 ordinary
and necessary expenses which are not chargeable to capital account.
The expenditures so treated shall be allowed as deduction during the
taxable year when paid or incurred.
(2) Amortization of Certain Research and Development
Expenditures. — At the election of the taxpayer and in accordance
with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as deferred
expenses:
(a) Paid or incurred by the taxpayer in connection with his trade,
business or profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to property of a
character which is subject to depreciation or depletion.
In computing taxable Income, such deferred expenses shall be
allowed as deduction ratably distributed over a period of not less
than sixty (60) months as may be elected by the taxpayer (beginning
with the month in which the taxpayer first realizes benefits from such
expenditures).
The election provided by paragraph (2) hereof may be made for any
taxable year beginning after the effectivity of this Code, but only if
made not later than the time prescribed by law for filing the return
for such taxable year. The method so elected, and the period selected
by the taxpayer, shall be adhered to in computing taxable income for
the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change
to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or
incurred during any taxable year for which the taxpayer makes the
election.
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(3) Limitations on Deduction. — This Subsection shall not apply
to:
(a) Any expenditure for the acquisition or improvement of land, or for
the improvement of property to be used in connection with research
and development of a character which is subject to depreciation and
depletion; and
(b) Any expenditure 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.
Expenses for R&D can be treated as ordinary and necessary
expenses provided that:
O
It is incurred during the taxable year; and
o
It is incurred in connection with his trade or business.
The taxpayer can either fully deduct it or amortize the deductions.
This is not applicable to the expenses:
O
for the acquisition or improvement of land or property to be
used in connection with R&D (these are subject to depreciation
or depletion)
O
incurred for the purpose of ascertaining the existence,
location, extent or quality of any deposit of minerals and oil.
Pension trusts
(J) Pension Trusts. — 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
under Subsection (A)(1) of this Section) a reasonable amount
transferred or paid into such trust during the taxable year In excess
of such contributions, but only if such amount (1) has not theretofore
been allowed as a deduction, and (2) is apportioned in equal parts
over a period often (10) consecutive years beginning with the year in
which the transfer or payment is made.
Two kinds of deduction for employer:
o
Under Subsection (A)(1): contributions to such trust to cover
the pension liability during the year
o
Under this Section: reasonable amount paid to the trust in
excess of such contributions
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The employer who established the pension trust for his employee's
benefit can deduct it but:
O
The amount paid to the trust is reasonable
O
It must not have been previously allowed for deduction
(double deduction)
O
Must be apportioned in equal parts over a period of 10
consecutive years, beginning with the year in which the
payment is made.
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. (R.R. 2011-17, with
R.A. 9505)
Additional requirements for deductibility
(K) Additional Requirements for Deductibility of Certain
Payments. — Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross income
or for which depreciation or amortization may be allowed under this
Section, shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the
Bureau of Internal Revenue in accordance with this Sections 58 and
81 of this Code.
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.
o
If no withholding was made, then the claimed deductions will
not be allowed.
•
o
For example, Dosan, a real estate lessor, can claim the
broker's fees he paid to Mr. Han as a deduction. However,
since broker's fees are subject to withholding tax, Dosan
must show that he previously withheld the taxes on the
broker's fees.
Even if no withholding was made, the deductions may still be
allowed in a few exceptional cases:
■
The payee reported the income and pays the tax due
thereon and the withholding agent pays the tax including
the interest and surcharges at the time of the audit/
investigation or reinvestigation/reconsideration,
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The recipient/payee failed to report the income on the
due date, but the withholding agent/taxpayer pays the
tax (with the interest and surcharges) at the time of the
audit/investigation or reinvestigation/reconsideration,
The withholding agent erroneously underwithheld the
tax but pays the difference between the correct amount
and the amount of tax withheld (with the interest and
surcharges) at the time of the audit/investigation or
reinvestigation/reconsideration. (R.R.. 06-2018)
Henry, a U.S. naturalized citizen, went home to the Philippines to
reacquire Philippine citizenship under RA 9225. His mother left him
a lot and building in Makati City and he wants to make use of it
in his trading business. Considering that he needs money for the
business, he wants to sell his lot and building and make use of the
consideration. However, the lot has sentimental value and he wants
to reacquire it in the future. A friend of Henry told him of the "saleleaseback transaction" commonly used in the U.S., which is also
used for tax reduction. Under said transaction, the lot owner sells his
property to a buyer on the condition that he leases it back from the
buyer. At the same time, the property owner is granted an option to
repurchase the lot on or before an agreed date. Henry approaches
you as a tax lawyer for advice.
Explain what tax benefits, If any, can be obtained by Henry and the
buyer from the sale-leaseback transaction? (2016 Bar Exam)
Suggested answer: Henry can use the rental expense on the lease
as a deduction. If he went a different route and got a mortgage to
get funds for his business, he will only be able to deduct interest
payments and depreciation for the property—which will most likely
be less than his rental expenses. Obtaining a mortgage on the
property would also give him less cash, as banks normally loan out
up to 70°/o of the value of the mortgaged property. With the saleleaseback, he gets more money for his business (the consideration
minus capita! gains tax which is just 6°/o) with the added bonus of
having a higher amount to deduct.
The buyer will have a higher return In leasing the property to Henry
than offering him a loan. Instead of interest payments on the loan
(which Is subject to restrictions on conscionability), he gets the full
amount of rent as income. He can also deduct depreciation expense
as he would now own the property.
Optional Standard Deduction
Sec. 34. (L) Optional Standard Deduction (OSD). — In lieu of the
deductions allowed under the preceding Subsections, an individual
subject to tax under Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not exceeding forty percent
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(40%) of his gross sales or gross receipts, as the case may be.
In the case of a corporation subject to tax under Sections 27(A)
and 28(A)(1), it may elect a standard deduction in an amount not
exceeding forty percent (40%) of its gross income as defined in
Section 32 of this Code. Unless the taxpayer signifies in his return
his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in
the preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is made:
Provided, That an individual who is entitled to and claimed for the
optional standard deduction shall not be required to submit with his
tax return such financial statements otherwise required under this
Code: Provided, further, That a general professional partnership and
the partners comprising such partnership may avail of the optional
standard deduction only once, either by the general professional
partnership or the partners comprising the partnership: Provided,
finally, That except when the Commissioner otherwise permits,
the said individual shall keep such records pertaining to his gross
sales or gross receipts, or the said corporation shall keep such
records pertaining to his gross income as defined in Section 32 of
this Code during the taxable year, as may be required by the rules
and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. (As amended by TRAIN)
Again, individuals, except nonresident aliens, can elect a standard
deduction not exceeding 40% of gross sales or gross receipts.
Corporations, except nonresident foreign corporations, can elect
a stand deduction not exceeding 40% of its gross income.
The OSD may be availed of by:
O
O
A citizen, whether resident or nonresident
Resident alien,
O
Domestic corporation,
O
Resident foreign corporation, (R.R. 16-08)
O
Partnerships, and
O
Taxable estate and trust.
■
•
Nonresident aliens and nonresident foreign corporations
cannot claim OSD.
The OSD allowed to individual taxpayer shall be a maximum of
40% of gross sales or gross receipts during the taxable year.
O
If one uses the accrual basis of accounting for his income and
deductions, the OSD shall be based on the gross sales during
the taxable year.
O
If one uses the cash basis, the OSD shall be based on his
gross receipts during the taxable year.
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O
The law is specific that for individual taxpayers the basis of
the 40% OSD shall be gross sales or gross receipts, not gross
income, for which reason the "cost of sales" and the "cost
of services" are not allowed to be deducted for purposes of
determining the basis of the OSD.
O
For other individual taxpayers allowed by law to report
their income and deductions under a different method
of accounting, the gross sales or gross receipts shall be
determined in accordance with the said acceptable method of
accounting. (R.R. 16-2008)
No need to substantiate with receipts.
The OSD allowed to corporate taxpayers shall be a maximum of
40% of the gross income during the taxable year.
Gross income shall mean the gross sales less sales returns,
discounts, and allowances and cost of goods sold.
O
•
O
Cost of goods sold includes the purchase price or cost
to produce the merchandise and all expenses directly
incurred in bringing them to their present location and
use.
In case of sellers of services, gross income means gross
receipts less sales returns, allowances, discounts and cost of
services. Cost of services include all direct costs and expenses
necessarily incurred to provide the services required by
customers and clients. (R.R. 16-2008)
The following are not allowed to use OSD and must use itemized
deductions:
O
O
For corporations, partnerships, and other non-individuals:
■
Those exempt under the Tax Code (like those in Section
30 and the exempt GOCCs in Section 27[C]) and other
special laws, with no other taxable income;
*
Those with income subject to special/preferential tax
rates; and
■
Those with income subject to income tax under Sections
27(A) and 28(A)(1) and also with income subject to
special/preferential tax rates.
For Individuals
Those exempt under the Tax Code and other special laws
with no other taxable income (like Barangay Micro Biz
Enterprises);
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•
Those with income subject to special/preferential tax
rates; and
•
Those with income subject to income tax under Section
24 and also with income subject to special/preferential
tax rates (R.R. 2-2014)
Example:
Suppose Park Saeroyi Santos, an individual engaged in selling
soju and whose accounting method is under the accrual basis has
gross sales of P1M with a cost of sales amounting to P800k, the
computation of the OSD shall be determined as follows,
Gross Sales
Pl,000,000
Less: CoGS
Basis of the OSD
x OSD Rate (max)
OSD Amount
Pl,000,000
.40
P400,000
If Park opts to use the OSD in lieu of the itemized deductions
allowed under Section 34 of the Tax Code, his net taxable income
shall be as follows:
Gross Sales
Pl,000,000
Less: CoGS
Gross Sales/Gross Income
i
Pl,000,000
Less: OSD (max)
400,000
Taxable Income
P600,000
In 2012, Dr. K decided to return to his hometown to start his own
practice. At the end of 2012, Dr. K found that he earned gross
professional Income In the amount of Pl,000,000.00; while he
Incurred expenses amounting to P560,000.00 constituting mostly of
his office space rent, utilities, and miscellaneous expenses related to
his medical practice. However, to Dr. K's dismay, only P320,000.00
of his expenses were duly covered by receipts. What are the options
available for Dr. K so he could maximize the deductions from his
gross income? (2015 Bar Exam)
Suggested answer: Dr. K can just opt to use the optional standard
deduction of 40%. The Tax Code allows Individual taxpayers to
deduct up to 40% of their gross sales or gross receipts. He will be
allowed to deduct P400,000.00 from his gross receipts, which Is
more than his substantiated and documented expenses
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Special Rule on GPPs and the choice of deductions (itemized or OSD)
•
A general professional partnership (like a law firm) and the
partners comprising such partnership may only use OSD once,
either by the GPP itself or the partners comprising the partnership.
•
So, if the GPP avails of OSD, then the partners may not. In fact, the
partners cannot claim further deductions from their distributive
share as the BIR considers the share already net of costs and
expenses, regardless if the GPP chooses itemized deductions or
OSD. (R.R. 8-2018)
Imposition of Ceilings by the Secretary of Finance
Notwithstanding the provision of the preceding Subsections, the
Secretary of Finance, upon recommendation of the Commissioner,
after a public hearing shall have been held for this purpose, may
prescribe by rules and regulations, limitations or ceilings for
any of the itemized deductions under Subsections (A) to (J) of
this Section: Provided, That for purposes of determining such
ceilings or limitations, the Secretary of Finance shall consider the
following factors: (1) adequacy of the prescribed limits on the
actual expenditure requirements of each particular industry; and
(2) effects of inflation on expenditure levels: Provided, further,
That no ceilings shall further be imposed on items of expense
already subject to ceilings under present law.
The Secretary of Finance can impose ceilings on the deductions
after a public hearing
o
The ceiling won't apply to OSD since it is under (L).
Non-deductibte expenses
Sec. 36. Items Not Deductible. —
(A) Genera! Rule. — In computing net income, no deduction shall In
any case be allowed in respect to —
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate;
This Subsection shall not apply to intangible drilling and development
costs incurred in petroleum operations which are deductible under
Subsection (G)(1) of Section 34 of this Code.
(3) Any amount expended In restoring property or in making good
the exhaustion thereof for which an allowance is or has been made; or
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(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 is directly or indirectly a beneficiary under such
policy.
(B) Losses from Sales or Exchanges of Property. — In computing
net income, no deductions shall in any case be allowed in respect of
losses from sales or exchanges of property directly or indirectly —
(1) Between members of a family. For purposes of this paragraph,
the family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or
for such individual; or
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for
the same individual if either one of such corporations, with respect
to the taxable year of the corporation preceding the date of the sale
of exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with respect
to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
The following are not deductible:
1.
Personal, living or family expenses
2.
Any amount paid for new buildings or for permanent
improvements made to increase the value of any property or
estate
3.
Any amount spent in restoring property or in making good
the exhaustion thereof for which an allowance has been made
4.
Premiums paid on any life Insurance policy covering the life of
any officer, or employee if the taxpayer is directly or indirectly
a beneficiary under the policy
No deductions shall be allowed for:
1.
Losses from sales or exchanges of property (Section 122,
R.R. 2-1940); or
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2.
Interest expense; or
3.
Bad debts
O
Where the transaction (either of 1, 2 or 3) is between
related taxpayers.
The following personal expenses are not deductible either:
1.
Insurance paid on a dwelling owned and occupied by the
taxpayer;
2.
Premiums paid for life insurance;
3.
When a professional man rents a property for residential
purposes but receives clients in connection with his work, no
part of the rent is allowable as business expense; (But if he
uses part of his house as an office, that portion is considered
business expense, thus deductible)
4.
Allowance given by daddy to kids;
5.
Alimony or allowance paid under a separation agreement.
(Section 119, R.R. 2-1940)
The following capital expenses are not deductible:
1.
New buildings, permanent improvements, or any amount
spent in restoring property;
2.
Cost of defending or perfecting title to property;
3.
Architect's services;
4.
Expense for administration of estate, court costs, attorney's
fees and executor's commissions;
5.
Amount assessed and paid under an agreement between
bondholders and shareholders of a corporation, to be used
in the reorganization of the corporation. (Section 120, R.R.
2-1940)
Premiums for life insurance of employees or of any person
financially interested in the business of the taxpayer when the
taxpayer is directly or indirectly a beneficiary under such policy
are not deductible. (Section 121, R.R. 2-1940)
L.
Capital Gains and Losses (Sale or Exchange of Property)
Capital gains and losses from the sale or exchange of property
also affect the taxable income of the taxpayer. Unlike the normal
rules on recognizing income and deductions, the sale or exchange
of capital assets has special rules (/.e., holding period, losses only to
the extent of gains, net capital loss carry-over) which will determine
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how much the income or deductions can be claimed by the taxpayer.
It is important to know that capital gains and losses from the sale or
exchange of property enter the taxpayer's taxable income.
Note that these rules on capital gains and losses do not apply
to the sale or exchange of: i) shares of stock not traded in the stock
market, and ii) real property held as capital assets; the sale or
exchange of either is subject to final tax.
Capital gains and losses
•
Net capital gain is the excess of the gains from such sales or
exchanges of capital assets over the losses from such sales or
exchanges.
O
Net capital loss is the opposite.
Net capital gain shall be reported in the taxpayer's income tax
return and shall be subject to the graduated income tax rates in
addition to the net income from other sources.
o
EXCEPT:
Capital gains from the sale of real property held as capital
assets (subject to final tax);
Capital gains from sale of shares of stock that are not
traded at the stock exchange (subject to final tax); and
Percentage tax on the sale or exchange of shares of stock
that are listed and traded at the stock exchange (based
on gross selling price).
Sec. 39. Capital Gains and Losses. —
(A) Definitions. — As used in this Title —
(1) Capita! Assets. — The term "capital assets" means property
held by the taxpayer (whether or not connected with his trade or
business), but does not include 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,
or property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or property used in the
trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(B) Percentage Taken Into Account. — In the case of a taxpayer,
other than a corporation, only the following percentages of the gain
or loss recognized upon the sale or exchange of a capital asset shall
be taken into account in computing net capital gain, net capital loss,
and net income:
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(1) One hundred percent (100%) if the capital asset has been held
for not more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more
than twelve (12) months;
(C) Limitation on Capita! Losses. — Losses from sales or
exchanges of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells any bond, debenture,
note, or certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any
loss resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the applicability of
such limitation to other losses.
(D) Net Capita! Loss Carry-over. — 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 twelve (12)
months.
(E) Retirement of Bonds, Etc. — For purposes of this Title, amounts
received by the holder upon the retirement of bonds, debentures,
notes or certificates or other evidences of indebtedness issued by
any corporation (including those issued by a government or political
subdivision thereof) with interest coupons or in registered form, shall
be considered as amounts received in exchange therefor.
(F) Gains or Losses From Short Sales, Etc. — For purposes of this
Title (1) Gains or losses from short sales of property shall be considered
as gains or losses from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or
options to buy or sell property shall be considered as capital gains or
losses.
•
What is a sale or exchange?
O
There is a sale or exchange of property when there is an
effective and actual transfer of ownership of the property
to another as would divest the transferors of the benefits
accruing from the ownership of the property for a valuable
consideration.
O
What is important is when
consummated, not perfected.
*
Thus, it includes:
the
sale
or
exchange
is
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Forced sales
•
Distribution in complete liquidation
209
The following are not considered sales or exchanges:
O
•
The conveyance of a trustee to a beneficiary of trust
property is treated as a continuation and confirmation of
title, not an exchange or sale. (BIR Ruling 329-12)
•
Conveyance of the common areas of a condominium
from the developer to the condominium corporation
(since no consideration and conveyance is merely for the
management of the common areas)
Capita! Assets
•
It is important to know whether the asset sold or exchanged was
held as ordinary asset or capital asset because of the different
rules which apply to each.
•
So, what are capital assets? Well, we know what they AREN'T.
The codal enumerates assets which are not considered capital
assets.
•
The codal enumerates what ordinary assets are. All assets other
than ordinary assets are capital assets.
O
So what if it is considered an ordinary asset?
■
If it is an ordinary asset, then the rules on capital assets
(7.e., holding period, losses only to the extent of gains,
net capital loss carry-over) will not apply.
Capital assets are property held by the taxpayer (whether or not
connected with his trade or business) but does NOT include:
1.
Stock in trade of the taxpayer;
2.
Other property of a kind which would properly be included in
the inventory of the taxpayer If on hand at the close of the
year;
3.
Property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business;
4.
Property used in trade or business of a character which is
subject to allowance for depreciation; and
5.
Real property used in trade or business.
Examples of properties classified as capital assets:
o
Personal property not used in trade or business
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O
Movable properties in one's residence, vehicles, appliances,
furniture, jewelry, sculpture of a zombie, securities held by
one by way of investment
O
Real property not used in trade or business
O
Residential house and lot, idle land not used in business
operations
Property initially classified as capital asset may later become
an ordinary asset and vice versa. (Calasanz v. CIR, G.R. No.
L-26284, October9, 1986, wherein inherited land was developed
into a subdivision, changing it from capital to ordinary asset; and
Tuason v. Lingad, G.R. No. L-24248, July 31, 1974)
Shares of stock would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or
an active trader in, securities. (China Banking Corporation v. CA,
G.R. No. L-125508, July 19, 2000)
In the hands, however, of another who holds the shares of
stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor become
worthless, the loss is deemed to be a loss from the sale or
exchange of capital assets.
O
Let's have some guidelines in determining whether real property
is a capital or ordinary asset: (R.R. 7-2003)
For those engaged in real estate business, the following are
ordinary assets:
o
O
■
All real properties acquired by the real estate dealer;
■
All real properties acquired by the real estate developer,
whether developed or undeveloped;
■
All real properties held for sale or lease in the ordinary
course of business or which would be properly be included
in the inventory;
•
All real properties acquired for lease/rent;
-
All real properties acquired in the ordinary course of
business by a taxpayer habitually engaged in the sale of
real estate.
Can the nature of the property change from ordinary to
capital asset?
■
Changing from real estate business to a non-real estate
business: NO
•
Ceasing operations of the real estate business: NO
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■
The properties acquired by the real estate business are
abandoned: NO
■
The properties acquired by the real estate business
become idle: NO
•
Real estate business transfers the property to an ordinary
person: YES
•
The nature of the property CAN change in the hands of
the buyer/transferee. Hence, if Pedro buys a lot from a
real estate dealer, the lot becomes a capital asset (from
ordinary) in the hands of Pedro.
•
In case of involuntary transfer (like expropriation or
foreclosure), the involuntary nature shall have NO effect
on the classification in the hands of the involuntary seller.
For those NOT engaged in the real estate business, real
property being used or have been used in the trade or
business are considered ordinary assets.
Can the nature of these change into capital assets?
■
•
O
211
YES, provided they show proof that the same have
not been used in business for more than two years
(prior to the taxable transaction).
For EXEMPT corporations, real property used in exempt
transactions shall not be considered for business purposes,
and thus are CAPITAL assets.
Rules on capital gains and losses
•
The rules on capital gains and losses are the following:
1.
First, determine if the asset is a capital asset or an ordinary
asset.
a.
2.
If it Is an ordinary asset, then the rules below don't apply.
Whatever gain or loss enters the taxpayer's Income,
without benefit of the rules.
Second, keep in mind that these rules do not apply to:
a.
Real property with a capital gain tax, and
b.
Shares of stock of a domestic corporation not traded in
the stock exchange with a capital gain tax,
I.
These two kinds of capital assets have their own rates.
(Remember the capital gains tax? The whole 6%,
5%/10% rates. Any capital gain subject to the capital
gains tax shall not be included in the computation of
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the taxable income and income tax at the end of the
year because these are subject to final tax already.)
3.
Next, the transaction on the capital asset should be a sale or
exchange.
4.
In the case of a taxpayer other than a corporation (for
individuals only), the following percentages of the gain or
loss shall be taken into account in computing net capital gain,
net capital loss and net income (percentage into account):
o
5.
6.
a.
100% of the gain/loss, if the asset has been held for
not more than 12 months;
b.
50% of the gain/loss, if the asset has been held for
more than 12 months.
For corporations, capital gains and losses are always
considered at 100%.
Losses from sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or
exchanges (limitation on capital loss) (see example below),
o
If the taxpayer incurs net capital loss, such loss cannot be
deducted from his ordinary income because the loss can
be deducted only to the extent of capital gains.
o
Note that the limitation on capital loss does not apply to
a bank or trust company incorporated under the laws of
the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture, note,
or certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in
registered form.
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 (taxable income) of such year,
shall be treated in the succeeding year as a loss from a sale
or exchange of a capital asset held for not more than twelve
months (meaning, 100% of the loss). This is what you call
the net capital loss carry over.
o
Corporations don't have net capital loss carry-over. (But
that's ok, because corporations don't have feelings.)
Example:
Sung Bo-ra Cay is in the business of graphic design. She had
ordinary income of P25,000, capital gains of P6,000 (from the sale
of her collection of vintage basketball cards, which she held for four
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years), and capital losses of P4,000 (from the sale of her diamondencrusted rice cooker, which she held for two years).
Ordinary net income
Gains from sale of capital asset
P25,000
P6,000
But held for four years, so 50%
Loss from sale of capital asset
P3,000
P4,000
But held for two years, so 50%
P2,000
Net taxable gain
Pl.000
P26,000
Taxable Income
Same facts, but Sung Bo-ra Cay had capital gains of P3,000,
and capital losses of P10,000.
Ordinary net income
Gains from sale of capital asset
P25,000
P3,000
50% only!
Loss from sale of capital asset
Pl,500
P10,000
50% only!
Net capital loss
P5,000
(P3.500'i
Taxable income
P25,000
You cannot deduct the capital loss of P3,500. Because you
can only deduct to the extent of vour capital gains.
Note that for corporations, the following are not applicable:
O
Holding period (so it is always 100%); and
o
Net capital loss carry-over.
Ordinary income
Sec. 22. (Z) The term “ordinary Income" includes any gain from the
sale or exchange of property which is not a capital asset or property
described in Section 39(A)(1). Any gain from the sale or exchange of
property which is treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain from the sale or
exchange of property which is not a capital asset as defined in Section
39(A)(1). The term 'ordinary loss' includes any loss from the sale or
exchange of property which is not a capital asset. Any loss from the
sale or exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall be treated as loss
from the sale or exchange of property which is not a capital asset.
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Ordinary income is any gain from sale or exchange of property
which is not a capital asset.
Ordinary loss is the opposite.
Note: there is no limit for ordinary gains or losses (compare with
capital gains)
Is it better for real property to be considered capital or ordinary
asset?
Depends.
O
•
For example, the corporation you're counsel for sells a
piece of land for P100,000. Do you want to consider it as
capital or ordinary?
•
If it were considered a capital asset, you'd get taxed
6% of P100,000 (capital gains tax since real property
classified as capital asset is subject to final capital gains
tax); that's P6,000. The corporation goes home with
P94,000. (Hopefully, as counsel, you get something out
of it as well.)
■
If it were ordinary, it'll be included in the corporation's
gross income, which will be taxed 30% after all the
deductions have been accounted for. The question is,
do you have enough deductions (and proof) which will
enable you to get a better deal (/.e.z more money after
all the taxes are paid out)?
Real estate transactions
•
BIR Ruling 27-02 gives some steps to determine the tax in real
estate transactions
First, determine the character of property being sold,
o
If property is not used in business of seller, then It is a capital
asset and the gain of the seller is subject to 6% capital gains
tax based on gross selling price or fair market value.
O
If the property is used in the business of the seller, it is
treated as ordinary asset, so the withholding tax rates below
shall apply. These rates will depend on:
-
Whether the seller is exempt or taxable
-
Whether the seller is engaged in real estate business or
not
If the seller is engaged in real estate business, what was
the gross selling price?
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Different Scenarios of Sale of Real Property (assumes that i. the
seller not exempt and ii. the real property is an ORDINARY asset)
Seller
Buyer
Tax Treatment
Corporation
engaged in real
estate business
(sells 6 parcels of
land within a year)
Corporation engaged
in real estate business
Creditable withholding
tax based on gross
selling price or fair
market value is
deducted by the buyer
(to be credited to the
seller)
If selling price is
P500,000 or less —
1.5%
If it's P500,000 to P2M
— 3%
If it is above P2M — 5%
Corporation
engaged in real
estate business
Corporation NOT
engaged in real
estate business
Same as above
Corporation engaged
in real estate business
If property considered
ordinary asset — 6%
creditable withholding
(R.R. 6-2001)
If property considered
capital asset — 6% final
tax
Corporation
engaged in real
estate business
Individual NOT
engaged in trade or
business
If on installment basis,
no withholding tax on
periodic installments, it
will be withheld on the
last payment
If on cash basis or
deferred payment,
buyer withholds the tax
on the first installment
Corporation
engaged in real
estate business
Individual engaged in
trade or business
If on installment, tax
withheld by the buyer
on EVERY installment
If it was on cash or
deferred payment,
buyer withholds the tax
on the first installment
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Installment plan: where the total payment in the year of sale
DOES NOT exceed 25% of the total selling price
Deferred payment plan: where the total payment in the year of
sale exceeds 25% of the total selling price
Remember the conditions for exemption from capital gains tax
from the sale or exchange of the principal residence (See Section
24[D][2], all the way near the start of this reviewer)
Mr. Pedro Aguirre, a resident citizen, is working fora targe real estate
development company in the country and in 2010, he was promoted
to Vice-President of the company. With more responsibilities comes
higher pay. In 2011, he decided to buy a new car worth P2 Million
and he traded-in his old car with a market value of P800,000 and
paid the difference of Pl.2 Million to the car company. The old car,
which was bought three (3) years ago by the father of Mr. Pedro
Aguirre at price of P700,000 was donated by him and registered in
the name of his son. The corresponding donor's tax thereon was duly
paid by the father.
a) How much is the cost basis of the old car to Mr. Aguirre? Explain
your answer.
b) What is the nature of the old car — capital asset or ordinary
asset? Explain your answer.
c) Is Mr. Aguirre liable to pay income tax on the gain from the sale
of his old car? Explain your answer. (2012 Bar Exam)
Suggested answers:
a) The cost basis of the old car is P700,000. The Tax Code states
that If the property was acquired by gift, the basis shall be the same
as if it would be in the hands of the donor or the last preceding
owner by whom it was not 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 loss, the basis shall be
such fair market value. In this case, the cost was P700,000, which Is
lower than the FMV of P800,000; hence the cost basis of the old car
is P700,000.
b) The old car Is a capita! asset. A capita! asset Is property held by
the taxpayer (whether or not connected with his trade or business),
but does not Include 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, or property held
by the taxpayer primarily for sale to customers In the ordinary course
of his trade or business, or property used in the trade or business, of
a character which is subject to the allowance for depreciation; or real
property used in trade or business of the taxpayer. The car is neither
of the property enumerated as ordinary assets; hence, it is a capita!
asset.
i
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c) Yes, he is liable to pay income tax from the gain of his old car.
The cost of the car was P700,000; but he was able to sell or transfer
it for P800,000. Hence, there were capital gains in the amount of
Pl00,000.
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 P250,000,000.00. 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 P300,000,000.00. Thereafter, GHI, Inc. was
dissolved on November 30, 2010.
i
a) Is the sale of the machineries and equipment to JKL Integrated
subject to normal corporate income tax or capital gains tax? Explain.
■
b) Distinguish an ordinary asset from a capital asset. (2019 Bar
Exam)
Suggested answer:
a)
The sale of the machineries and equipment is subject to normal
corporate income tax because these are ordinary assets. The
Tax Code states that ordinary assets include property used in
trade or business of a character which is subject to allowance
for depreciation. The machineries and equipment are subject
to depreciation and were presumably used between 2005 and
2010. Hence, these are ordinary assets, and their sale is subject
to normal corporate income tax.
b)
Capital assets are property held by the taxpayer (whether or
not connected with his trade or business) but does NOT include
stock In trade of the taxpayer, other property of a kind which
would properly be included in the Inventory of the taxpayer if
on hand at the close of the year, property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade
or business, property used in trade or business of a character
which is subject to allowance for depreciation and real property
used in trade or business. The rest are ordinary assets. Capital
assets are subject to capital gains and losses. Ordinary assets
are subject to ordinary income.
i
M. Determination of Gain or Loss from Sale or Transfer of
Property
Section 40 is chopped up in three parts. Keep this in mind for a
better understanding of the provision.
1.
Section 40(A) tells us how to arrive at the gain (or loss).
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2.
Section 40(C)(l-2) tells us the general rule and the exceptions
(tax-free exchanges)
3.
Section 40(C)(5) gives us the substituted basis; i.e., the basis for
tax-free exchanges when the transferor later sells the stock he
got in the tax-free exchange.
Sec. 40. Determination of Amount and Recognition of Gain or
Loss. —
(A) Computation of Gain or Loss. — The gain from the sale or
other disposition of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis for determining
gain, and the loss shall be the excess of the basis or adjusted basis
for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of
money received plus the fair market value of the property (other than
money) received;
Gain is the excess amount realized over the basis for determining
gain
Loss is the opposite
The amount realized is the sum of money received plus the fair
market value of the property (other than money) received
What is the basis of determining gain or loss?
(B) Basis for Determining Gain or Loss from Sale or Disposition
of Property. — The basis of property shall be —
(1) The cost thereof In the case of property acquired on or after
March 1, 1913, if such property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the
same was acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same
as if it would be In the hands of the donor or the last preceding owner
by whom it was not 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 loss, the basis shall be such
fair market value; or
(4) If the property was acquired for less than an adequate
consideration in money or money's worth, the basis of such property
is the amount paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the
property was acquired in a transaction where gain or loss is not
recognized under paragraph (C)(2) of this Section.
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Basis for Determining Gain or Loss from Sale or Disposition of
Property (R..R. 8-2001)
Mode of acquisition
Cost basis
1.
Acquired by purchase
The actual cost
2.
By inheritance
Fair market value
3.
By gift
The same as if it would be in the
hands of the donor or the last
preceding owner,
BUT if the basis is greater than the
FMV, then the basis shall be the FMV
(so, whatever's lower)
an
in
4.
Acquired for less than
adequate
consideration
money or its worth
5.
If acquisition cost is increased
by the amount of improvements
that materially added to the
value of the property or prolong
its
life
less
accumulated
depreciation
Adjusted basis of 1 to 4
6.
Acquired under a previous taxfree exchange
Substituted basis
Amount paid by the transferee for
the property
Example:
Jung-hwan the Torpe sold a car worth P100 to Friend Zone, Inc.
in exchange for Pl 10 worth of Friend Zone, Inc. stock, PIO cash,
and P20 property. How much is the gain for Jung-hwan the Torpe?
What about the loss for Friend Zone, Inc.?
Get the amount realized first:
P140 (cash + stock + property)
Deduct the basis:
P100 (value of car)
Gain:
P 40 (gain for Jung-hwan), loss
of P40 for Friend Zone, Inc.
How do you make the transaction a tax-free exchange? Check the
codal below.
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Tax-free Exchanges
(C) Exchange of Property. —
(1) General Rule. — Except as herein provided, upon the sale or
exchange or property, the entire amount of the gain or loss, as the
case may be, shall be recognized.
(2) Exception. — No gain or loss shall be recognized if in pursuance
of a plan of merger or consolidation —
(a) 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; or
(b) 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
(c) A security holder of a corporation, which is a party to
the merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such corporation, a
party to the merger or consolidation.
No gain or loss shall also be recognized if 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 (4) persons, gains
control of said corporation: Provided, That stocks issued for services
shall not be considered as issued in return for property.
General rule: in a sale or exchange of property, the entire amount
of gain or loss is recognized
o
EXCEPT (no gain or loss is realized):
•
In a merger/consolidation (m/c), where a corporation
exchanges property solely for stock in another corporation,
which is also a party to the m/c
■
In a m/c, where a shareholder exchanges stock In a
corporation for the stock of another corporation, also a
party to the m/c
•
In a m/c, where a security holder of a corporation
exchanges his securities in such corporation solely for
stock or securities in another corporation also a party to
the m/c
Where property is transferred to a corporation by a
person in exchange for stock in the corporation, and the
result of such exchange is that the person (and up to 4
other persons) gains control of the corporation, but the
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stocks issued for services are not considered as issued in
return for property
Definitions
(6) Definitions. —
(a) The term "securities" means bonds and debentures but not
"notes" of whatever class or duration.
(b) The term "merger" or "consolidation'!,] when used in this Section,
shall be understood to mean: (i) the ordinary merger or consolidation,
or (ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for
a transaction to be regarded as a merger or consolidation within the
purview of this Section, it must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of
taxation: Provided, further, That 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 transaction shall
be treated as a single unit: Provided, finally, That 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.
(c) The term "control'!,] when used in this Section, shall mean
ownership of stocks in a corporation possessing at least fifty-one
percent (51%) of the total voting power of all classes of stocks entitled
to vote.
(d) The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to issue rules and regulations for
the purpose "substantially all" and for the proper implementation of
this Section.
Securities mean bonds and debentures, but not notes of whatever
class or duration.
Merger or consolidation
•
•
Merger or consolidation means:
o
The ordinary merger or consolidation; or
o
The acquisition by one corporation of all or almost all the
properties of another corporation solely for stock (de facto
merger)
"Transfer of substantially 'all' the assets" means the acquisition
by one corporation of at least 80% of the assets, including cash,
of another corporation, which has the element of permanence
and not merely momentary holding. (RMR 1-2002)
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A corporate merger where the new corporation continued to
operate the business of the old corporation is not subject to
capital gains tax. The merger, however, must be undertaken for
a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation. (CIR v. Rufino, G.R. No. L-33665,
February 27, 1987, where the merger was done to extend the life
of the corporation, this was legitimate)
How does a statutory merger work?
O
Jhan Snuh, Inc. acquires all the assets of Dany's Dragons,
Inc. Dany's Dragons, Inc. gets Jhan Snuh, Inc. shares in
exchange. Dany's Dragons, Inc. then dissolves and distributes
these shares to its stockholders.
Difference between a de facto merger v. a statutory merger
O
In a de facto merger, the transferor is not automatically
dissolved. Likewise, there is no automatic transfer to the
transferee of all the rights, privileges and liabilities of the
transferor. (Revenue Memorandum Ruling [RMR] 1-2002)
Difference between a de facto merger v. a transfer to a controlled
corporation
O
In a de facto merger, the transferor is a corporation; while in
the latter, the transferor may be an individual or a corporation.
O
In a de facto merger, there is no requirement that the
transferor gains control (7.e.z 51% of the total voting powers
of all classes of stocks of the Transferee entitled to vote).
O
What is essential in a de facto merger is that the transferee
acquires all or substantially all of the properties of the
transferor.
Transfer for control
•
"Control" means ownership of stocks in a corporation possessing
at least 51% of the total voting power of all classes of stocks
entitled to vote
Transfer of property for shares of stock: no gain or loss Is
recognized when a person transfers property (not services) to a
corporation in exchange for shares of stock (alone or with four
others), where such person gains control of the corporation (at
least 51% of the total voting power)
o
No gain or loss is recognized even when the transferor already
has control of the corporation at the time of the exchange.
(CIR v. FHinvest Development Corporation, G.R. No. 163653,
July 19, 2011)
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The transfer of assets by one corporation to another must likewise
have a business purpose. (Gregory v. Helving, 293 U.S. 465,
January 7, 1935)
O
It must not be a mere device to evade taxes masquerading as
corporate reorganization.
Administrative requirements for tax-free exchanges
•
You have to submit the following to the BIR:
O
Sworn certificate on the basis of property to be transferred;
O
Certified true copies (CTC) of the Transfer Certificate of Title
and/or Condominium Certificates of Title;
O
CTC of the corresponding tax declaration of the real properties
to be transferred;
O
CTC of the certificates of stock evidencing shares of stock to
be transferred; and
O
CTC of the inventory of the property to be transferred (R.R.
18-2001)
Karlito, a Filipino businessman, is engaged in the business of
metal fabrication and repair of LPG cylinder tanks. He conducts
business under the name and style of "Karlito's Enterprises," a
single proprietorship. Started only five (5) years ago, the business
has grown so enormously that Karlito decided to incorporate it by
transferring all the assets of the business, particularly the inventory
of goods on hand, machineries and equipment, supplies, parts,
raw materials, office furniture and furnishings, delivery trucks and
other vehicles, buildings, and tools to the new corporation, Karlito's
Enterprises, Inc., In exchange for 100% of the capital stock of the
new corporation, the stock subscription to which shall be deemed
fully paid in the form of the assets transferred to the corporation by
Karlito.
As a result, Karlito's Enterprises, the sole proprietorship, ceased
to do business and applied for cancellation of its BIR Certificate of
Registration. The BIR, however, assessed Karlito VAT on account of
the cessation of business based on the current market price of the
assets transferred to Karlito's Enterprises, Inc.
Is the transfer subject to Income tax? (2018 Bar Exam)
Suggested answer: The transfer Is not subject to income tax. The Tax
Code states that no gain is recognized when property is transferred
to a corporation by a person in exchange for stock, the result of which
Is that said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation. This is exactly what
happened in this case. Karlito transferred all his assets in exchange
for all the shares in a corporation. It is a tax-free exchange.
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B transferred his ownership over a 1,000-square meter commercial
land and three-door 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 Interna! 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 Exam)
Suggested answer: B shouldn't pay taxes on the exchange. The Tax
Code states that no gain is recognized when property is transferred
to a corporation by a person in exchange for stock, the result of which
is that said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation. This is exactly what
happened in this case. B transferred all his assets in exchange for all
the shares in a corporation. It is a tax-free exchange.
Exchange Not Solely in Kind
(3) Exchange Not Solely in Kind. —
(a) If, in connection with an exchange described in the above
exceptions, an individual, a shareholder, a security holder or a
corporation receives not only stock or securities permitted to be
received without the recognition of gain or loss, but also money and/
or property, the gain, if any, but not the loss, shall be recognized
but in an amount not in excess of the sum of the money and fair
market value of such other property received: Provided, That as to
the shareholder, if the money and/or other property received has the
effect of a distribution of a taxable dividend, there shall be taxed as
dividend to the shareholder an amount of the gain recognized not
in excess of his proportionate share of the undistributed earnings
and profits of the corporation; the remainder, if any, of the gain
recognized shall be treated as a capital gain.
(b) If, In connection with the exchange described in the above
exceptions, the transferor corporation receives not only stock
permitted to be received without the recognition of gain or loss but
also money and/or other property, then (I) if the corporation receiving
such money and/or other property distributes it in pursuance of the
plan of merger or consolidation, no gain to the corporation shall be
recognized from the exchange, but (ii) if the corporation receiving
such other property and/or money does not distribute it in pursuance
of the plan of merger or consolidation, the gain, if any, but not the
loss to the corporation shall be recognized but in an amount not in
excess of the sum of such money and the fair market value of such
other property so received, which is not distributed.
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Explain an exchange not solely in kind in a merger or consolidation.
O
It involves an exchange of property NOT solely for stocks.
O
In other words, the absorbed corporation receives stocks
PLUS other property (cash or non-cash) in exchange for its
property.
O
In a merger, Seo Dan, Inc. transfers all its property costing
P15M in favor of Jo Cheol Philippines, Corp, (absorbing) in
exchange for the latter's shares of stock worth P15M plus
P1M cash.
•
The P1M gain resulting from the merger is taxable.
•
■
But if the plan of merger or consolidation expressly
provides that the amount shall be distributed to the
shareholders of Seo Dan, Inc., the gain shall not be
subject to income tax.
What if instead of P15M stock plus P1M cash, Seo Dan,
Inc. is given P8M stock plus P7M cash?
•
No gain, since none was realized anyway.
Assumption of Liability in Tax-Free Exchanges
(4) Assumption of Liability. —
(a) If the taxpayer, in connection with the exchanges described in
the foregoing exceptions, receives stock or securities which would be
permitted to be received without the recognition of the gain if it were
the sole consideration, and as part of the consideration, another party
to the exchange assumes a liability of the taxpayer, or acquires from
the taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and
shall not prevent the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the
liabilities to which the property is subject exceed the total of the
adjusted basis of the property transferred pursuant to such exchange,
then such excess shall be considered as a gain from the sale or
exchange of a capital asset or of property which is not a capital asset,
as the case may be.
If the transferor receives stock or securities in a transfer of
property, and as part of the consideration, the other party also
assumes the liability of the transferor or that the property he
assumes has a liability, then the property/liability acquired will
NOT be treated as money or other property, so that it still falls
under the exception of the Section 40(C) and no gain or loss is
recognized.
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But if the amount of the liability assumed exceeds the total of
the adjusted basis of the property transferred, then the excess
is considered a gain from sale of either a capital asset or an
ordinary asset, as the case may be.
Example:
Tomas Junjun Brady transfers property to Tampa Bay Piratas,
Inc. with an adjusted basis of P15M in exchange for Tampa Bay
Piratas, Inc.'s stock plus Tampa Bay Piratas, Inc. assumes Tomas
Junjun's liability of P10M. Tomas Junjun Brady gets control of
Tampa Bay Piratas, Inc. The exchange is considered tax-free.
But if the liability of Tomas Junjun is P20M, then this will exceed
the adjusted basis of P15M. So the P5M will be considered a gain
and it will be taxable. (Huhu, why'd you leave us, Tommy)
Cost or basis in tax-free exchanges
(5) Basis —
(a) The basis of the stock or securities received by the transferor
upon the exchange specified in the above exception shall be the same
as the basis of the property, stock or securities exchanged, decreased
by (1) the money received, and (2) the fair market value of the
other property received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain that was
recognized on the exchange: Provided, That the property received
as “boot" shall have as basis its fair market value: Provided, further,
That if as part of the consideration to the transferor, the transferee
of property assumes a liability of the transferor or acquires from the
latter property subject to a liability, such assumption or acquisition
(in the amount of the liability) shall, for purposes of this paragraph,
be treated as money received by the transferor on the exchange:
Provided, finally, That if the transferor receives several kinds of stock
or securities, the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee
shall be the same as it would be in the hands of the transferor
increased by the amount of the gain recognized to the transferor on
the transfer.
Remember that tax-free exchanges merely defers the recognition
of gain or loss.
o
When the transferor later on sells or exchanges the stock he
got tax-free, the basis for determining the gain or loss is the
substituted basis. This will also be the cost basis when the
transferee later on sells the property acquired.
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•
The term "boot" refers to the money received and other property
received in excess of the stock or securities received by the
transferor on a tax-free exchange. (R.R. 18-2001)
•
How to compute the substituted basis:
1.
Take the original basis of the property
2.
Subtract any money or the FMV of any property that may
have been received aside from the shares of stock
3.
Add the amount treated as dividend by the shareholder and
any gain that was recognized on the exchange (if any)
Example:
Jungbong Jonas transfers property to Soju For Days, Inc. for
shares of stock. The property's sale value was P5M and Jungbong
Jonas received an extra P1M from stock of inventory.
If he later sells his shares of stock to Madonna Jinju, the
substituted basis will be computed as (P5M - P1M) = P4M.
If he sells the shares to Madonna Jinju for P6M, his gain will be
(P6M - P4M) = P2M and it will be subject to capital gains tax.
N.
Fringe Benefits Tax
Sec. 33. Special Treatment of Fringe Benefit. —
(A) Imposition of Tax. — Effective January 1, 2018 and onwards,
a final tax of thirty-fix percent (35%) is hereby imposed on the
grossed-up monetary value of fringe benefit furnished or granted
to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the
fringe benefit is required by the nature of, or necessary to the trade,
business or profession of the employer, or when the fringe benefit is
for the convenience or advantage of the employer). The tax herein
Imposed is payable by the employer which tax shall be paid in the
same manner as provided for under Section 57(A) of this Code. The
grossed-up monetary value of the fringe benefit shall be determined
by dividing the actual monetary value of the fringe benefit by sixtyfive percent (65%) effective January 1, 2018 and onwards: Provided,
however, That fringe benefit furnished to employees and taxable
under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed
at the applicable rates imposed thereat: Provided, further, That the
grossed-up value of the fringe benefit shall be determined by dividing
the actual monetary value of the fringe benefit by the difference
between one hundred percent (100%) and the applicable rates of
income tax under Subsections (B), (C), (D), and (E) of Section 25. (As
amended by TRAIN)
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(B) Fringe Benefit defined. — For purposes of this Section, the term
"fringe benefit" means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee
(except rank and file employees as defined herein) such as, but not
limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and 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) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10)Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. — The following fringe benefits
are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax
under special laws;
(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; and
(4) De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of
the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, such rules and regulations as
are necessary to carry out efficiently and fairly the provisions of this
Section, taking into account the peculiar nature and special need of
the trade, business or profession of the employer.
Fringe Benefits Tax (FBT) is a final income tax:
O
Imposed on the managerial/supervisory employee,
O
Withheld by the employer who files the return and remits the
tax within 25 days from close of each calendar quarter
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Fringe benefit is any good, service, or other benefit granted in
cash or in kind by an employer to an employee (except rank and
file) such as:
1.
Housing
2.
Expense account
3.
Vehicle of any kind
4.
Household personnel, like maids and driver
5.
Interest on loan 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 in social and
athletic clubs or 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 premiums in excess
of what the law allows.
This list is not exclusive.
How do you compute for the FBT? Remember that FBT is a final
tax of 35% on the grossed up monetary value of fringe benefits.
The fringe benefit tax on the taxable fringe benefit is computed
as follows:
o
Determine the grossed-up monetary value of the fringe
benefit, f.e., the monetary value of the benefit divided bv
65%
Compute the fringe benefit tax by multiplying the
grossed-up monetary value of the fringe benefit by 35%
Actual Monetary Value/65% = Grossed-up Monetary Value
Grossed-up Monetary Value x 35% = FBT
TRAIN increased the FBT rate to 35%.
o
The grossed-up monetary value of the fringed benefit is now
divided by 65%.
For nonresident aliens not engaged in business in the Philippines,
the FBT rate is 25%. (R.R. 11-2018)
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O
For special aliens, as the preferential treatment has been
removed, then the FBT rate now seems to be the regular rate
of 35%.
The fringe benefit is also an expense which is deductible from the
employer's gross income.
O
The deduction for the employer is the grossed-up monetary
value of the fringe benefit.
The following benefits are not subject to the FBT:
1.
Fringe benefits which are authorized and exempted from
income tax under the NIR.C or under special law. Separation
benefits which are given to employees who are involuntarily
separated from work are not subject to FBT.
2.
Contributions of the employer for the benefit of the employee
to retirement, insurance, and hospitalization benefit plans;
3.
Benefits given to rank and file employees, whether granted
under a CBA or not;
4.
De minimis benefits (more on this later);
5.
Benefits granted to employees as required by the nature
of, or necessary to the trade, business or profession of the
employer
6.
Benefits granted for the convenience of the employer
a.
Housing privilege of military officers inside or near the
military camps;
b.
A housing unit situated inside or at most 50 meters from
the perimeter of the business premises;
Temporary housing of an employee for three months or
less;
d.
e.
Expenses of the employee which are reimbursed by the
employer which are:
i.
Receipted under the name of the employer and
ii.
Not personal expenses of the employee;
Business expenses which are paid for by the employer
for the foreign travel of his employees in connection with
business meetings or conventions. (R.R. 3-1998)
•
NOTE: While the benefits above may be exempt from
FBT, it may still form part of the employee's gross
compensation income which is subject to income tax.
(R.R. 3-1998)
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O
However, note that de
exempt from income tax.
minimis
benefits
are
Some tidbits from R..R. 13-1998
On housing privileges
Monetary Value
If employer leases a residential
property for the use of the employee
and the property is the usual place
of residence of the employee
50% of the monthly rental paid
purchases a
If the
employer
residential property on installment
basis and allows the employee to
use it as his usual place of residence
(Acquisition x 5%) x 50%
If the
employer purchases
a
residential property and transfers
ownership to the employee
Acquisition cost or FMV, whichever is
higher. If less than ER's cost: FMVEE's acquisition cost
Housing of military officials
Exempt
Housing which is situated inside
or adjacent to the premises of
a business or factory (within 50
meters)
Exempt
Temporary housing for employee
who stays for not more than 3
months
Exempt
If the property
employer
(Market value or zonal value x 5%)
x 50%
belongs
to
the
Expense Account
Subject to FBT or not?
If the expense was duly receipted
for and in the name of the employer,
and the expense is not in the nature
of a personal expense attributable
to the employee
No
If these are personal expenses such
as groceries, paid for or reimbursed
by the employer, even if these are
duly receipted for in the name of the
employer
Yes
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Monetary Value
Motor Vehicles
If employer purchases vehicle in the
name of the employee, regardless of
usage of the vehicle
100% of the value (acquisition cost)
If employer shoulders a portion of
the amount of the purchase price of
a vehicle owned by the employee
Amount shouldered by the employer
If employer owns and maintains a
fleet of vehicles for the use of the
business and the employees
50% of the value
Use of aircraft owned and maintained
by the employer
Exempt
Use of yacht
Value based on depreciation
Expenses for Foreign Travel
Monetary Value
If it is reasonable for the purpose
of attending business meetings or
conventions
Exempt
Cost of plane ticket if economy or
business class
Exempt
Cost of plane ticket if first class
30% of the value
Travel expense of family members
of the employee
100% of the value
Monetary Value
Educational Assistance
If the employee was granted a
scholarship by the employer and
the education or study is directly
connected to the trade or business
of the employer, and there is a
written contract that the employee
must remain in employ for a period
of time
Exempt
If the assistance was extended to
the employee's dependents and
was provided through a scholarship
program of the company
Exempt
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Premiums for Insurance
233
Monetary Value
If the contribution is pursuant to
existing law such as to the GSIS or
SSS
Exempt
If it is for the group insurance of the
employees
Exempt
Life or health insurance and other
non-life insurance
100%
For the others (household expenses, membership fees and
other expenses in social and athletic clubs, holiday and vacation
expenses), the monetary value will be 100% of the value of the
benefit received.
De minimis benefits
•
De minimis benefits are facilities and privileges of relatively small
value furnished or offered by an employer to his employees.
o
These are not considered compensation subject to income
tax (and consequently withholding tax) if these are offered
or furnished by the employer as means of promoting health,
goodwill, contentment, or efficiency of the employees. (R.R.
8-2000)
•
•
Is love a de minimis benefit? Doesn't matter, because
love can't be quantified in pesos—unless you're a gold
digger.
The following are considered de minimis benefits of ALL types of
employees. These are exempt from tax. (R.R. 8-2000)
1.
Monetized unused vacation leave credits of private employees,
not exceeding 10 days per year.
2.
Monetized value of vacation and sick leave credits paid to
government officials and employees. (R.R. 5-2011)
3.
Medical cash allowance to dependents of employees not
exceeding Pl,500/employee per sem or P250/month. (R.R.
11-2018)
4.
Rice subsidy of P2,000 or 1 sack of 50 kg rice per month
amounting to not more than P2,000. (R.R. 11-2018)
5.
Uniforms and clothing allowance not exceeding P6,000/
month. (R.R. 11-2018)
6.
Actual yearly medical benefits not exceeding P10,000/month.
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7.
Laundry allowance not exceeding P300/month.
8.
Employee achievement awards for length of service or safety
achievement in the form of tangible property (other than
cash or gift certificate) with value not exceeding PIO,000.
9.
Gifts given during Christmas and major anniversaries not
exceeding P5,000/year.
10.
Daily meal allowance for overtime work, not exceeding 25%
of the basic minimum wage.
11.
Benefits received by an employee by virtue of a collective
bargaining agreement and productivity incentive schemes
provided the total annual monetary value from both CBA and
productivity schemes combined do not exceed PIO,000. (R.R.
1-2015)
All other benefits given by employers which are not included in
the enumeration shall not be considered "de minimis" benefits,
and hence, shall be subject to income tax and withholding tax on
compensation income. (R.R. 5-2011)
The amount of de minimis benefits is not computed in determining
the P90,000 ceiling of "other benefits" excluded from gross
income under Section 32(B)(7)(e) of the Tax Code.
o
o
BUT, the excess of the de minimis benefits over their respective
ceilings shall be considered part of "other benefits" and the
employee receiving it will be subject to tax only on the excess
over the P90,000 ceiling. (R.R. 10-2008, read with the ceiling
change by TRAIN.J
In other words, when a benefit is de minimis with a ceiling, the
benefit is exempt from FBT up to the ceiling. Any excess over the
ceiling shall be part of the "other benefits" exempt up to P90,000.
Anything in excess of P90,000 will be taxable. (Think of it as
water spilling over past multiple barriers, one barrier higher than
the last. The barriers are your ceilings—the de minimis ceiling
and the P90,000 ceiling. Anything past those barriers is taxable.)
Any amount given by the employer as benefits, whether de
minimis or others, shall be deductible as business expense. (R.R.
10-2008)
To recap:
o
Fringe benefit given to rank and file employee is not subject
to the fringe benefit tax.
o
Fringe benefit given to a supervisory or managerial employee
is subject to the fringe benefit tax.
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235
De minimis benefit, whether given to rank and file employee
or to supervisory or managerial employee, is not subject to
the fringe benefit tax.
What are de minimis benefits and how are these taxed? Give three
(3) examples of de minimis benefits. (2015 Bar Exam)
Suggested answer: De minimis benefits are facilities and privileges of
relatively small value offered by an employer to his or her employees.
These are not subject to income tax if such facilities are offered by the
employer to promote the goodwill, health, contentment or efficiency
of the employees. Three examples would be 1) yearly medical
benefits not exceeding PIO,000, 2) laundry allowance not exceeding
P300/month, and 3) Christmas gifts not exceeding P5,000/year.
Mapagbigay Corporation grants all its employees (rank and file,
supervisors, and managers) 5% discount of the purchase price of
its products. During an audit investigation, the BIR assessed the
company the corresponding tax on the amount equivalent to the
courtesy discount received by all the employees, contending that
the courtesy discount is considered as additional compensation for
the rank and file employees and additional fringe benefit for the
supervisors and managers. In its defense, the company argues that
the discount given to the rank and file employees is a de minimis
benefit and not subject to tax. As to its managerial employees, it
contends that the discount is nothing more than a privilege and its
availment is restricted.
Is the BIR assessment correct? Explain. (2016 Bar Exam)
Suggested answer: The BIR assessment Is correct. As to its rank
and file employees, the 5% discount given cannot be considered a
de minimis benefit. The list of de minimis benefits in the BIR rules is
exclusive. Hence, any benefit not in the list is taxable. In this case,
employee discounts are not in the list of de minimis benefits, and are
therefore taxable.
As to the supervisors and managers, these are subject to fringe benefit
tax. FBT is a final tax on any good, service, or benefit granted to
non-rank and file employees, like supervisors and managers. In this
case, the discounts are benefits granted to Mapagbigay's supervisors
and managers and are therefore subject to FBT. However, the FBT
shall be based on the grossed up monetary value of the benefits, not
the amount equivalent to the courtesy discount.
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
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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 benefits tax? Explain. (2019 Bar
Exam)
Suggested answer: The cash equivalent value is not subject to fringe
benefits tax. The Tax Code and its rules state that housing for the
convenience of the employer are not subject to fringe benefits tax.
Here, the housing is within the premises of the compound and is
provided in order to help the employer deal with factory breakdowns.
Hence, it is not subject to fringe benefits tax.
O. Withholding Tax
•
In dealing with withholding tax, two things must be kept in mind
as not to be confused:
O
First, 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 (be it income
tax or VAT as we will discuss later) from the source.
O
There are two kinds of withholding tax for income tax —
creditable and final withholding tax. It is important to know
the difference between the two.
Difference between
withholding tax
o
withholding
tax
from
final
Income subject to creditable withholding tax shall form part
of the gross income to be reported in the ITR of the recipient.
■
o
creditable
Tax already withheld shall then be claimed as a tax credit,
i.e., to be deducted from the amount of income tax
computed according to the graduated income tax rates.
Final withholding tax shall no longer form part of the gross
income to be reported in the ITR.
■
The tax withheld, being a final tax, represents the true
and actual tax due on the income.
■
Generally, passive income are subjected to final taxes.
Before we proceed, let us first discuss what a withholding agent is.
Sec. 22. (K) The term "withholding agent"means any person required
to deduct and withhold any tax under the provisions of Section 57.
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A withholding agent is the person required to deduct and withhold
any tax.
A withholding agent also has the legal interest to file a claim for
refund for two reasons:
O
He is considered a taxpayer under the NIRC as he is personally
liable for the withholding tax (as well as for deficiency
assessments, surcharges, and penalties) should the amount
of tax withheld is less than what is required by law; and
O
As an agent of the taxpayer, his authority to file the necessary
income tax return and to remit the tax withheld to the
government impliedly includes the authority to file a claim for
refund and to bring an action for recovery of such claim. (CIR
v. Smart Communications, Inc., G.R. No. 179045, August 25,
2010)
■
However, if ever the withholding agent does get the
refund, the withholding agent has the obligation to remit
the same to the principal taxpayer. As a mere agent of
the taxpayer, he has the duty to return what he has
recovered; otherwise, he would be unjustly enriching
himself.
Is a person who withholds love a withholding agent?
O
No. He or she might just not be ready to commit yet.
Final Withholding Tax at Source
Sec. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject
to rules and regulations the Secretary of Finance may promulgate,
upon the recommendation of the Commissioner, requiring the filing
of income tax return by certain income payees, the tax imposed or
prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)
(2) , 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)
(3) , 27(D)(5); 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)
(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)
(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person and paid
In the same manner and subject to the same conditions as provided In
Section 58 of this Code.
•
Income subject to final tax refers to income wherein the tax due
is fully collected through the withholding tax system, wherein the
payor of the income withholds the tax and then remits it to the
government.
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Once full payment has been withheld and remitted, there is no
more tax obligation.
Principles of Final Withholding Tax (Section 2.57[A], R.R. 2-1998)
O
The amount of tax withheld is full and final.
O
The liability for payment of the tax rests primarily on the
withholding agent as payor.
O
In case he fails to withhold (or underwithholds),
withholding agent will be liable for the deficiency.
O
The payee is not required to file any income tax return for the
particular income.
O
The finality of the withheld tax is limited on that particular
income and will not extend to the payees' other tax liability
on said income.
•
the
For example a bank received income subject to final
withholding tax, the same income can still be subject to a
percentage tax.
Basically, items under passive income are subject to FINAL TAX.
And then you have other FINAL TAXES here and there (like the
FBT, BPRT, Capital Gains Tax, etc.). Anyway, here's a rundown.
Income Subject to Final Withholding Tax of
CITIZENS and RESIDENT ALIENS
Final Tax
1.
Interest under the expanded foreign currency
deposit system
15%
2.
Royalties from books, literary works, and musical
compositions
10%
3.
Royalties other than above
20%
4.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust
fund and similar arrangement
20%
5.
Prize exceeding P10,000
20%
6.
Other winnings (except Phil. Charity Sweepstakes
and Lotto winnings amounting to P10,000 or less
which shall be exempt)
20%
Dividend from a domestic corp., or from a
joint stock company, insurance or mutual fund
company, and regional operating headquarters of
multinational company or share in the distributive
net income after tax of a partnership (except a
general professional partnership), joint stock or
joint venture or consortium taxable as a corporation
10%
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8.
Capital gains from REAL PROPERTY located here
classified as CAPITAL assets
6%
9.
Capital gains from sale of shares of stock of a
domestic corporation, not traded through a local
stock exchange
15%
Nonresident Alien engaged in trade or business
1.
Interest under the expanded foreign currency
deposit system
Exempt
2.
Royalty from books, literary works, and musical
compositions
10%
3.
Royalty other than above
20%
4.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust
fund and similar arrangement
20%
5.
Prize exceeding PIO,000
20%
6.
Other winnings, except Phil. Charity Sweepstakes
& Lotto
20%
7.
Dividend from a domestic corp, or from a joint stock
company, insurance or mutual fund company, and
regional operating headquarters of multinational
company or share in the distributive net income
after tax of a partnership (except a general
professional partnership), joint stock or joint
venture or consortium taxable as a corporation
20%
8.
Capital gains from REAL PROPERTY located here
classified as CAPITAL assets
6%
9.
Capital gains from sale of shares of stock of a
domestic corporation, not traded through a local
stock exchange
15%
Nonresident Alien NOT engaged in trade or business
On income from ALL sources within the Philippines
(important!)
25%
Capital gains from REAL
classified as CAPITAL assets
here
6%
Capital gains from sale of shares of stock of a domestic
corporation, not traded through a local stock exchange
15%
PROPERTY
located
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Domestic Corporations
Final Tax
15%
1.
Interest under the expanded
deposit system
2.
Royalty of all types within the Philippines
o
Royalty from abroad, enters the taxable income
30% tax rate
3.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust
fund and similar arrangement
20%
4.
Income BY A DEPOSITORY BANK under the FCDU
10%
Capital gains from REAL PROPERTY located here
classified as CAPITAL assets (only applies to lands
and/or buildings)
6%
Capital gains from sale of shares of stock of a
domestic corporation, not traded through a local
stock exchange
15%
6.
foreign
currency
20%
Foreign Resident Corporations
1.
Interest under
deposit system
2.
Royalty of all types within the Philippines
o
Royalty from abroad, exempted (remember, only
taxed from sources within the Philippines)
3.
Interest on any current bank deposit, yield or other
monetary benefits from deposit substitute, trust
fund and similar arrangement
20%
4.
Capital gains from sale of shares of stock of a
domestic corporation, not traded through a local
stock exchange
5%/10%
6.
the
expanded
foreign
currency
7.5%
20%
Branch Profit Remittances
15%
Offshore Banking Unit
10%
Foreign Nonresident Corp.
1.
Income from ALL SOURCES within the Philippines
30%
2.
Nonresident
distributor
cinematographic
owner/
25%
3.
Gross rentals, lease and charter fees by a
nonresident owner or lessor of vessels to Filipino
citizens or corporations
4.5%
film
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4.
Dividends from a domestic corporation (subject to
mutual tax credit)
15%
5.
Interest on foreign loans
20%
Others
Fringe Benefits Taxes
35% on grossed
up monetary
value
25% on grossed
up monetary
value for
nonresident
aliens not
engaged in trade
or business
Informer's reward
10%
Creditable Withholding Tax
(B) Withholding of Creditable Tax at Source. — The Secretary of
Finance may, upon the recommendation of the Commissioner, require
the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/
persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall
be credited against the income tax liability of the taxpayer for the
taxable year: 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. (As amended by
TRAIN)
Under the creditable withholding tax system, 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.
o
Any excess shall be refunded to and any deficiency shall be
paid by the taxpayer.
The liability to withhold tax arises upon the accrual, not upon
actual remittance. The purpose of the withholding tax is to compel
the agent to withhold under all circumstances.
o
Thus, it is when the right to receive income arises that
determines when to include that income as gross income,
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and when to apply withholding tax. (FUipinas Synthetic Fiber
Corporation v. CA, G.R. No. 118498, October 12, 1999)
The obligation of the payor to deduct and withhold the tax
under Section 2.57 of these regulations arises at the time
an income is paid or payable, whichever comes first, the
term "payable" refers to the date the obligation become due,
demandable or legally enforceable.
O
Creditable withholding tax intends to approximate the tax on the
payee.
O
The subsequent remittal does not remove the burden on the
income recipient. He still has to file for the credit.
o
Simply, the payor withholds, and the payee gets credit.
Three types of creditable withholding taxes:
O
Expanded withholding tax on certain income payments made
by private persons to resident taxpayers
O
Withholding tax on compensation income in the Philippines
O
Withholding tax on money payments of the government
When expanded withholding tax will apply:
O
Expense is paid by the taxpayer, which is income to the
recipient thereof subject to income tax;
O
Income is fixed or determinable at the time of payment;
O
Income is one of the income payments listed in the regulations;
and
O
Income recipient is a resident of the Philippines liable to
income tax
*
What if the recipient is a nonresident taxpayer?
•
O
Then income payment is subject to final withholding
tax, not creditable.
Payor-withholding agent is also a resident of the Philippines
■
So foreign embassies in the Philippines and nonresident
foreign corporations cannot be compelled to act as
withholding agents (since government cannot enforce its
tax laws on them)
The withholding of creditable withholding tax shall not apply to
income payments made to the following:
o
National government and its instrumentalities and public
municipal corporations
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EXCEPT GOCCs
O
Those enjoying exemption from payment of income taxes
pursuant to law
Who are required to deduct and withhold for the creditable
withholding taxes? (R.R. 2-1998)
O
Any juridical person, whether or not engaged in trade or
business
O
An individual, with respect to payments made in connection
with his trade or business
•
O
But for the disposition of real property, even those not
engaged in trade or business are withholding agents
All government offices including government-owned or
controlled corporations, as well as provincial, city and
municipal governments.
Examples of Income Subject to CREDITABLE Withholding Tax
(R.R. 2-1998, as amended)
(Note: This is not an exhaustive list and is provided for illustration and
reference. If you want the OG list, check the relevant R.R.s.)
Professional fees, promotional and talent fees,
rendered by individuals, entertainers, and athletes
(R.R. 11-2018)
Individual payee:
If gross Income for the current year is more than
P3,000,000 or VAT-registered regardless of amount
10%
If gross income for the current year did not exceed
P3,000,000 (R.R. 14-2018)
5%
Non-indivldual payee:
If gross Income exceeds P720,000
15%
If gross income is equal to or does not exceed P720,000
10%
Rentals for continued use or possession of real
properties used in business, which the payor has not
taken title
5%
Also applies to rentals of personal property (in excess
of PIO,000 annually), billboards, transmission facilities
Cinematographic film rentals and other payments
5%
Income payments to certain contractors, general
engineering, general building, specialty and other
contractors
2%
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Income distributed to the beneficiaries of estates and
trusts (except if already subject to final withhold or
tax-exempt)
15%
Income payment to certain brokers and agents,
customs, insurance, real estate and commercial
brokers and fees of agents of pro entertainers
10%
Real property which are NOT capital assets sold by a
person engaged in the real estate business
1.5%/3%/5%
If NOT engaged in real estate business
6%
On additional payments by importers, shipping
and airline companies to government personnel for
overtime services
15%
On the amount paid by any credit card company to any
business entity representing the sale of goods, services
made by them to cardholders
1% of 1/2 of the
gross amounts
Payments made by any of the top withholding agents
to their local supplier of goods or services (R.R. 112018, as amended by R.R. 07-19)
1% (goods)
Payments by the government to local supplier of goods
(except if below PIO,000) (R.R. 11-2018)
2% (services)
1% (goods)
2% (services)
Income payments to partners of GPPs
If gross income exceeds P720,000
15%
If gross income is equal to or does not exceed P720,000
(R.R. 30-2003)_________________________________________
10%
Income payments made by political parties and
candidates for all purchases of goods and services
as campaign expenditures, as well as income
payments made by Individuals and juridical entities
for all purchases intended to be given as campaign
contribution (R.R. 10-2009)
5%
Interest income from other instruments (/.e., not
deposit substitutes or from banks, FCDUS, or OBUs)
(R.R. 01-2019)
15%
Return and Payment of Tax
Sec. SB. Returns and Payment of Taxes Withheld at Source. —
(A) Quarterly Returns and Payments of Taxes Withheld. —
Taxes deducted and withheld under Section 57 by withholding agents
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shall be covered by a return and paid to, except in cases where the
Commissioner otherwise permits, an authorized Treasurer of the city
or municipality where the withholding agent has his legal residence
or principal place of business, or where the withholding agent is a
corporation, where the principal office is located.
The taxes deducted and withheld by the withholding agent shall be
held as a special fund in trust for the government until paid to the
collecting officers.
The return for final and creditable withholding taxes shall be filed and
the payment made not later than the last day of the month following
the close of the quarter during which the withholding was made. (As
amended by TRAIN)
(B) Statement of Income Payments Made and Taxes Withheld.
— Every withholding agent required to deduct and withhold taxes under
Section 57 shall furnish each recipient, in respect to his or its receipts
during the calendar quarter or year, a written statement showing the
income or other payments made by the withholding agent during such
quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee,
but not later than the twentieth (20th) day following the close of
the quarter in the case of corporate payee, or not later than March
1 of the following year in the case of individual payee for creditable
withholding taxes. For final withholding taxes, the statement should
be given to the payee on or before January 31 of the succeeding year.
(C) Annual Information Return. — Every withholding agent
required to deduct and withhold taxes under Section 57 shall submit
to the Commissioner an annual information return containing the list
of payees and income payments, amount of taxes withheld from each
payee and such other pertinent information as may be required by
the Commissioner. In the case of final withholding taxes, the return
shall be filed on or before January 31 of the succeeding year, and
for creditable withholding taxes, not later than March 1 of the year
following the year for which the annual report is being submitted. This
return, if made and filed in accordance with the rules and regulations
approved by the Secretary of Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with the requirements of
Section 68 of this Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any
withholding agent a reasonable extension of time to furnish and
submit the return required In this Subsection.
(D) Income of Recipient. — Income upon which any creditable tax
Is required to be withheld at source under Section 57 shall be included
in the return of its recipient but the excess of the amount of tax so
withheld over the tax due on his return shall be refunded to him
subject to the provisions of Section 204; if the income tax collected at
source is less than the tax due on his return, the difference shall be
paid in accordance with the provisions of Section 56.
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Ail taxes withheld pursuant to the provisions of this Code and its
implementing rules and regulations are hereby considered trust funds
and shall be maintained in a separate account and not commingled
with any other funds of the withholding agent.
(E) Registration with Register of Deeds. — No registration of any
document transferring real property shall be effected by the Register of
Deeds unless the Commissioner or his duly authorized representative
has certified that such transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been paid: Provided, however.
That the information as may be required by rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, shall be annotated by the Register of Deeds in
the Transfer Certificate of Title or Condominium Certificate of Title:
Provided, further, That in cases of transfer of property to a corporation,
pursuant to a merger, consolidation or reorganization, and where the
law allows deferred recognition of income in accordance with Section
40, the information as may be required by rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, shall be annotated by the Register of Deeds at the
back of the Transfer Certificate of Title or Condominium Certificate of
Title of the real property involved: Provided, finally, That any violation
of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code.
Withholding agents must file a return and pay to:
O
An authorized agent bank
O
Revenue district officer
O
Collection agent
O
Duly authorized treasure of the city or municipality where he
resides or has his place of business
These taxes must be maintained in a separate account and NOT
commingled with any other funds of the withholding agent.
TRAIN has amended when to file and pay taxes withheld at
source.
O
The returns must be filed and the taxes paid not later than
the last day of the month following the close of the quarter
during which the withholding was made.
-
For example:
•
Withholding was made in February (which is in the
first quarter of the year), then the deadline for filing
the return and paying the taxes is on the last day of
April (which is the month following the close of the
quarter).
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If there is any excess, it shall be either credited or refunded.
If there is deficiency, then it shall be paid by the taxpayer.
XYZ Corp, is listed as a top 20,000 Philippine corporation by the
Bureau of Internal Revenue. It secured a loan from ABC Bank with a
6°/o per annum interest. All interest payments made by XYZ Corp, to
ABC Bank is subject to a 2°/o creditable withholding tax. At the same
time, XYZ Corp, has a trust deposit with ABC Bank in the amount of
Pl 00,000,000.00, which earns 2°/o interest per annum, but is subject
to a 20% final withholding tax on the interest income received by
XYZ Corp.
Who are the withholding agents in the case of: 1. the 20% final
withholding tax; and 2. the 2°/o creditable withholding tax? Explain.
(2019 Bar Exam)
Suggested answer: Under the withholding tax system, the income
payor must withhold. Hence, for the 20% final withholding tax, the
withholding agent is ABC Bank as the income payor for the interest
on the trust deposit. For the 2% CWT, the withholding agent is XYZ
Corp as the income payor for the interest payments on the loan.
Withholding on Wages
•
Applies to ALL EMPLOYED INDIVIDUALS whether citizens or aliens
(except nonresident aliens not engaged in trade or business)
deriving income from compensation for services rendered in the
Philippines. (R.R. 11-2018)
0
The withholding of wages applies to government employees
as well. (COURAGE v. CIR, G.R. No. 213446, July 3, 2018)
The employer is considered the withholding agent. (R.R. 2-1998)
O
The term "employer" also refers to the person having control
of the payment of the compensation in cases where the
services are or were performed for a person who does not
exercise such control, such as when the compensation is paid
by a trust. (RMC 39-2012)
Sec. 78. Definitions. — As used In this Chapter:
(A) Wages. — The term 'wages' means all remuneration (other than
fees paid to a public official) for services performed by an employee
for his employer, including the cash value of all remuneration paid in
any medium other than cash, except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where
the labor is performed, or
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(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or
business, or
(4) For services by a citizen or resident of the Philippines for a foreign
government or an international organization.
If the remuneration paid by an employer to an employee for services
performed during one-half (1/2) or more of any payroll period of not
more than thirty-one (31) consecutive days constitutes wages, all
the remuneration paid by such employer to such employee for such
period shall be deemed to be wages; but if the remuneration paid
by an employer to an employee for services performed during more
than one-half (1/2) of any such payroll period does not constitute
wages, then none of the remuneration paid by such employer to such
employee for such period shall be deemed to be wages.
(B) Payroll Period. — The term 'payroll period' means a period
for which payment of wages is ordinarily made to the employee by
his employer, and the term "miscellaneous payroll period" means a
payroll period other than, a daily, weekly, biweekly, semi-monthly,
monthly, quarterly, semi-annual, or annual period.
(C) Employee. — The term ‘employee' refers to any individual
who is the recipient of wages and includes an officer, employee or
elected official of the Government of the Philippines or any political
subdivision, agency or instrumentality thereof. The term "employee"
also includes an officer of a corporation.
(D) Employer. — The term "employer" means the person for whom
an individual performs or performed any service, of whatever nature,
as the employee of such person, except that:
(1) If the person for whom the individual performs or performed any
service does not have control of the payment of the wages for such
services, the term "employer" (except for the purpose of Subsection
[A]) means the person having control of the payment of such wages;
and
(2) In the case of a person paying wages on behalf of a nonresident
alien individual, foreign partnership or foreign corporation not engaged
in trade or business within the Philippines, the term "employer"
(except for the purpose of Subsection [A]) means such person.
Wages are all remuneration other than fees paid to a public official
for services performed by an employee for his employer (cash or
kind).
O
EXCEPT
Agricultural labor paid entirely in products of the farm
where the labor is performed
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Domestic service in a private home
Casual labor not in the course of the employer's trade or
business
-
Services by a citizen or resident of the Philippines for a
foreign government or international organization2
Backwages, allowances, and benefits awarded in a labor dispute
are considered income of the employee and are therefore subject
to withholding tax on wages. (RMC 39-2012)
Sec. 79. Income Tax Collected at Source. —
(A) Requirement of Withholding. — Except in the case of a
minimum wage earner as defined in Section 22(HH) of this code,
every employer making payment of wages shall deduct and withhold
upon such wages a tax determined in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Tax Paid by Recipient. — If the employer, in violation of the
provisions of this Chapter, fails to deduct and withhold the tax as
required under this Chapter, and thereafter the tax against which such
tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection
shall in no case relieve the employer from liability for any penalty or
addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.
(C) Refunds or Credits. —
(1) Employer. — When there has been an overpayment of tax under
this Section, refund or credit shall be made to the employer only to
the extent that the amount of such overpayment was not deducted
and withheld hereunder by the employer.
(2) Employees. — The amount deducted and withheld under this
Chapter during any calendar year shall be allowed as a credit to the of
this Title. Refunds and credits in cases of excessive withholding shall
be granted under rules and regulations promulgated by the Secretary
of Finance, upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer
shall be returned or credited within three (3) months from the
fifteenth (15th) day of April. Refunds or credits made after such time
shall earn interest at the rate of six percent (6%) per annum, starting
after the lapse of the three-month period to the date the refund of
credit is made.
2See also Section 2.78.1(B), R.R. 2-1998 for more income payments which
are exempt from the requirement of withholding tax on compensation.
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Refunds shall be made upon warrants drawn by the Commissioner or
by his duly authorized representative without the necessity of countersignature by the Chairman, Commission on Audit or the latter's
duly authorized representative as an exception to the requirement
prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of
Executive Order No. 292, otherwise known as the Administrative Code
of 1987.
(D) - repealed by TRAIN
(E) Withholding on Basis ofAverage Wages. — The Commissioner
may, under rules and regulations promulgated by the Secretary of
Finance, authorize employers to:
(1) estimate the wages which will be paid to an employee in any
quarter of the calendar year;
(2) determine the amount to be deducted and withheld upon each
payment of wages to such employee during such quarter as if the
appropriate average of the wages so estimated constituted the actual
wages paid; and
(3) deduct and withhold upon any payment of wages to such
employee during such quarter such amount as may be required to
be deducted and withheld during such quarter without regard to this
Subsection.
(F) - repealed by TRAIN
(G) Nonresident Aliens. — Wages paid to nonresident alien
individuals engaged in trade or business in the Philippines shall be
subject to the provisions of this Chapter.
(H) Year-End Adjustment. — On or before the end of the calendar
year but prior to the payment of the compensation for the last
payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year
in accordance with Section 24(A). The difference between the tax due
from the employee for the entire year and the sum of taxes withheld
from January to November shall either be withheld from his salary In
December of the current calendar year or refunded to the employee
not later than January 25 of the succeeding year.
General rule: Every employer making payment of wages shall
deduct and withhold from wages.
O
Except for Minimum Wage Earners
Refunds or credits
O
To the employer: when there was an overpayment but only to
the extent that the amount of overpayment was not withheld
by the employer.
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251
To the employee: any excess of taxes withheld shall be
returned or credited within three months from April 15, these
refunds will earn interest at 6% per annum after the lapse of
the three month period.
Sec. 80. Liability for Tax. —
(A) Employer. — The employer shall be liable for the withholding
and remittance of the correct amount of tax required to be deducted
and withheld under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as required to be withheld under
the provision of this Chapter, such tax shall be collected from the
employer together with the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and remit.
(B) Employee. — Where an employee fails or refuses to file
the withholding exemption certificate or willfully supplies false or
inaccurate information thereunder, the tax otherwise required to
be withheld by the employer shall be collected from him including
penalties or additions to the tax from the due date of remittance until
the date of payment. On the other hand, excess taxes withheld made
by the employer due to:
(1) failure or refusal to file the withholding exemption
certificate; or
(2) false and inaccurate information shall not be refunded to
the employee but shall be forfeited in favor of the Government.
Employer shall be liable if he fails to withhold and remit. It shall
be collected from him with penalties.
Employee shall be liable if he fails to file the withholding exemption
certificate. The tax withheld by the employer shall be collected
from the employee including penalties. Excess taxes withheld
because of his refusal to file the exemption certificate or giving
false information shall be forfeited to the government.
Sec. 81. Filing of Return and Payment of Taxes Withheld. —
Except as the Commissioner otherwise permits, taxes deducted and
withheld by the employer on wages of employees shall be covered
by a return and paid to an authorized agent bank; Collection Agent,
or the duly authorized Treasurer of the city or municipality where
the employer has his legal residence or principal place of business,
or in case the employer is a corporation, where the principal office is
located.
The return shall be filed and the payment made within twenty-five
(25) days from the close of each calendar quarter: Provided, however,
That the Commissioner may, with the approval of the Secretary
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of Finance, require the employers to pay or deposit the taxes
deducted and withheld at more frequent intervals, in cases where
such requirement is deemed necessary to protect the interest of the
Government.
The taxes deducted and withheld by employers shall be held in a
special fund in trust for the Government until the same are paid to the
said collecting officers.
Should be filed and paid within 25 days from the close of each
calendar quarter.
Sec. 82. Return and Payment in Case of Government Employees.
— If the employer is the Government of the Philippines or any 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.
A section in an RMO making the governor, mayor, barangay
captain, or officials holding the highest positions in GOCCs or
agencies the withholding agents for the wages of government
employees Is invalid. These positions do not have control of
the payment of wages. The proper withholding agents are the
treasurers or accountants. (COURAGE v. CIR, G.R. No. 213446,
July 3, 2018)
Sec. 83. Statements and Returns. —
(A) Requirements. — Every employer required to deduct and
withhold a tax shall furnish to each such employee in respect of his
employment during the calendar year, on or before January thirtyfirst (31st) of the succeeding year, or if his employment is terminated
before the close of such calendar year, on the same day of which
the last payment of wages is made, a written statement confirming
the wages paid by the employer to such employee during the
calendar year, and the amount of tax deducted and withheld under
this Chapter in respect of such wages. The statement required to be
furnished by this Section in respect of any wage shall contain such
other information, and shall be furnished at such other time and in
such form as the Secretary of Finance, upon the recommendation of
the Commissioner, may, by rules and regulation, prescribe.
(B) Annual Information Returns. — Every employer required to
deduct and withhold the taxes in respect of the wages of his employees
shall, on or before January thirty-first (31st) of the succeeding year,
submit to the Commissioner an annual information return containing
a list of employees, the total amount of compensation income of
j
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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. This return, if made and filed in accordance with rules
and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance
with the requirements of Section 68 of this Title in respect of such
wages.
(C) Extension of time. — The Commissioner, under such rules and
regulations as may be promulgated by the Secretary of Finance, may
grant to any employer a reasonable extension of time to furnish and
submit the statements and returns required under this Section.
Employees must submit annual return on or before January 31 of
the succeeding year containing all relevant employee information.
P.
Returns and Payments of Tax
Individual Return
Sec. 51. Individual Return. —
(A) Requirements. —
(1) Except as provided in paragraph (2) of this Subsection, the
following individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his
income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived
from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.
Who are required to file?
1.
Resident citizen, on income within and without the Philippines
2.
Nonresident citizen, on income within only
3.
Resident alien, on income within only
4.
Nonresident alien (engaged in business here), on income
within only
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Sec. 51. (A)
(2) The following individuals shall not be required to file an income
tax return;
(a) An individual whose taxable income does not exceed
two hundred fifty thousand pesos (P250,000) under Section
24(A)(2)(a): Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of profession
within the Philippines shall file an income tax return, regardless
of the amount of gross income; (As amended by TRAIN)
(b) An individual with respect to pure compensation
income, as defined in Section 32(A)(1), derived from such
sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year
shall file an income tax return;
(c) An individual whose sole income has been subjected to
final withholding tax pursuant to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in Section 22(HH)
of this Code or an individual who is exempt from income tax
pursuant to the provisions of this Code and other laws, general or
special.
(3) The foregoing notwithstanding, any individual not required to
file an income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
(As amended by TRAIN)
TRAIN has amended those who are not required to file income tax
returns:
O
Those whose taxable income does not exceed P250,000
*
O
But those engaged in business or practice a profession
must still file, regardless of their gross income
Purely compensation income earners
*
But those with two or more employers at any time during
the taxable year must still file their income tax return
(RMC 50-2018)
O
Those whose sole income has already been subjected to final
withholding tax
O
Minimum wage earners
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Indicate whether each of the following individuals Is required or not
required to file an income tax return:
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 Exam)
Suggested answer:
a) He need not file. A Filipino citizen residing abroad only has to file
an income tax return on income from sources within the Philippines.
b) He is required to file. A resident alien must file an Income tax
return on income from sources within the Philippines.
c) He is required to file. Generally, a resident citizen earning purely
compensation income need not file an ITR. However, if a resident
citizen derives income from two or more employers (as is the case
here) at any time during the taxable year, he must file an income tax
return.
d) He need not file. Minimum wage earners are not required to file
ITRs, as per the Tax Code.
e) He need not file. Individuals whose sole Income has been
subjected to final tax need not file an ITR as well, as per the Tax Code.
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in
architectural design, engineering, and construction work. Its principal
office Is located In Makati City, but It has various infrastructure
projects In the country and abroad. Thus, KKI employs both local
and foreign workers. The company has adopted a policy that the
employees' salaries are paid in the currency of the country where
they are assigned or detailed.
Below are some of the employees of KKI. Determine whether the
compensation they received from KKI in 2017 is taxable under
Philippine laws and whether they are required to file tax returns with
the Bureau of Internal Revenue (BIR).
a)
Kris Konejero, a Filipino accountant In KKI's Tax Department in
the Makati office, and married to a Filipino engineer also working
in KKI;
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i
I
b)
Klaus Kloner, a German national who heads KKI's Design
Department in its Makati office;
c)
Krisanto Konde, a Filipino engineer in KKI's Design Department
who was hired to work at the principal office last January 2017.
In April 2017, he was assigned and detailed in the company's
project in Jakarta, Indonesia, which project is expected to be
completed in April 2019;
d)
Kamilo Konde, Krisanto's brother, also an engineer assigned to
KKI's project in Taipei, Taiwan. Since KKI provides for housing
and other basic needs, Kamilo requested that all his salaries,
paid in Taiwanese dollars, be paid to his wife in Manila in its
Philippine Peso equivalent; and
e)
Karen Karenina, a Filipino architect in KKI's Design Department
who reported back to KKI's Makati office in June 2017 after KKi's
projectin Kuala Lumpur, Malaysia was completed. (2018BarExam)
Suggested answers:
I
a)
Kris Konejero's 2017 compensation is taxable, as Kris is a
resident citizen and resident citizens are taxable for their income
from worldwide sources. Kris does not have to file a tax return,
as Kris qualifies for substitute filing as he (or she) is an employee
receiving purely compensation income from only one employer
for the calendar year.
b)
Klaus'2017 compensation is taxable, as Klaus is a resident alien
and resident aliens are taxable for their income from Philippine
sources. Klaus does not have to file a tax return, as Klaus
qualifies for substitute filing as he is an employee receiving
purely compensation income from only one employer for the
calendar year.
c)
Kristanto's 2017 compensation is taxable, as Kristanto is still
a resident citizen and is taxable for income from worldwide
sources. He does not seem to qualify as a non-resident citizen,
as non-resident citizens are those who work and derive Income
from abroad and whose "employment thereat" require him to be
physically present for more than 183 days. He Is still employed
by a local company, hence the requirement of being "employed
thereat" is not met. In any case, he does not have to file a tax
return, as he qualifies for substitute filing as he is an employee
receiving purely compensation Income from only one employer
for the calendar year.
d)
Kamilo's 2017 compensation is taxable, similar to Kristanto's. He
is still a resident citizen and is taxable for Income from worldwide
sources. He does not seem to qualify as a non-resident citizen,
as non-resident citizens are those who work and derive income
from abroad and whose "employment thereat" require him to be
physically present for more than 183 days. He is still employed
by a local company, hence the requirement of being "employed
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thereat" is not met. In any case, he does not have to file a tax
return, as he qualifies for substitute filing as he is an employee
receiving purely compensation income from only one employer
for the calendar year.
e)
Karen's 2017 compensation is taxable, similar to Krisanto and
Kamilo. She is still a resident citizen and is taxable for income
from worldwide sources. She does not seem to qualify as a nonresident citizen, as non-resident citizens are those who work and
derive income from abroad and whose "employment thereat"
require him to be physically present for more than 183 days.
She is still employed by a local company, hence the requirement
of being "employed thereat" is not met. In any case, she does
not have to file a tax return, as she qualifies for substitute filing
as she is an employee receiving purely compensation income
from only one employer for the calendar year.
(4) The income tax return shall be filed in duplicate by the following
persons:
(a) A resident citizen — on his income from all sources;
(b) A nonresident citizen — on his income derived from
sources within the Philippines;
(c) A resident alien — on his income derived from sources
within the Philippines; and
(d) A nonresident alien engaged in trade or business in
the Philippines — on his income derived from sources within the
Philippines.
Sec. 51. (A) (S) - The income tax return (ITR) shall consist of a
maximum of four (4) pages in paper form or electronic form, and shall
only contain the following information:
(A) Personal profile and information;
(B) Total gross sales, receipts or Income from compensation for
services rendered, conduct of trade or business or the exercise of a
profession, except income subject to final tax as provided under this
Code;
(C) Allowable deductions under this Code;
(D) Taxable income as defined in Section 31 of this Code; and
(E) Income tax due and payable. (As amended by TRAIN)
SEC. 51-A. Substituted Filing of Income Tax Returns by
Employees Receiving Purely Compensation Income. —
Individual taxpayers 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
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correctly by the said employer (tax due equals tax withheld) shall
not be required to file an annual income tax return. The certificate
of withholding filed by the respective employers, duly stamped
'received' by the BIR, shall be tantamount to the substituted filing
of income tax returns by said employees. (As amended by TRAIN)
Employees receiving purely compensation income from one
employer during the calendar year do not have to file an annual
ITR. The certificate of withholding by their employers would, in
the words of Eliza Hamilton, be enough. (Substituted filing)
On April 30, 2015, Dary! resigned as the production manager of
52nd Avenue, a television studio owned by SSS Entertainment
Corporation. 52nd Avenue issued to her a Certificate of Withholding
Tax on Compensation (BIR Form No. 2316), which showed that
the tax withheld from her compensation was equal to her income
tax due for the period from January 2015 to April 30, 2015.
A month after her resignation, Dary! put up her own studio and started
producing short films. She was able to earn a meager income from
her short films but did not keep record of her production expenses.
Is Dary! qualified for substituted filing for taxable year 2015? Explain
your answer. (2017 Bar Exam)
I
Suggested answer: Daryl Is not qualified for substituted filing.
Substituted filing is only applicable to employees receiving purely
compensation income from only one employer for the calendar year.
Daryl is not a purely compensation earner because she also earns
income from her studio.
Mr. C is employed as a Chief Executive Officer of MNO Company,
receiving an annual compensation of PIO,000,000.00, while Mr.
S is a security guard in the same company earning an annual
compensation of P200,000.00. Both of them source their income
only from their employment with MNO Company.
•
a) At the end of the year, is Mr. C personally required to file an
annual income tax return? Explain.
b) How about Mr. S? Is he personally required to file an annual
income tax return? Explain. (2019 Bar Exam)
Suggested answer:
a)
Mr. C is not personally required to file an annual income tax
return. Employees receiving purely compensation income from
one employer during the calendar year do not have to file an
annual ITR. This applies to Mr. C, hence he need not file an
annual ITR.
1
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259
Mr. S is also not personally required to file an annual income
tax return. Employees receiving purely compensation income
from one employer during the calendar year do not have to file
an annual ITR. This applies to Mr. S, hence he need not file an
annual TTR. In any case, Mr. S earns below the P250,000.00
threshold and is therefore also not required to file an annual
income tax returns.
Where and when to file
(B) Where to File. — Except in cases where the Commissioner
otherwise permits, the return shall be filed with an authorized agent
bank, Revenue District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such person has his legal
residence or principal place of business in the Philippines, or if there
be no legal residence or place of business in the Philippines, with the
Office of the Commissioner.
(C) When to File. —
(1) The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income
for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded through
a local stock exchange as prescribed under Section 24(C) shall file
a return within thirty (30) days after each transaction and a final
consolidated return on or before April 15 of each year covering all
stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D)
shall file a return within thirty (30) days following each sale or other
disposition.
(D) Husband and Wife. — Married individuals, whether citizens,
resident or nonresident aliens, who do not derive income purely
from compensation, shall file a return for the taxable year to Include
the Income of both spouses, but where It is impracticable for the
spouses 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.
(E) Return of Parent to Include Income of Children. — The
income of unmarried minors derived from properly received from a
living parent shall be included in the return of the parent, except (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.
(F) Persons Under Disability. — If the taxpayer Is unable to make
his own return, the return may be made by his duly authorized agent
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or representative or by the guardian or other person charged with the
care of his person or property, the principal and his representative
or guardian assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. — The fact that an individual's
name is signed to a filed return shall be prima facie evidence for all
purposes that the return was actually signed by him.
Where to file?
1.
Authorized agent bank
2.
Revenue district officer
3.
Collection agent
4.
Duly authorized city treasurer where he is legally residing
5.
Office of the commissioner
When to file?
On or before April 15 of each year
What if husband and wife?
Those married individuals who do not derive income purely from
compensation shall file a return to include income from both
spouses. But if impractical, then they may file separate returns.
How about parents and kids?
•
Parents must include the income of unmarried minors derived
from property received from a living parent.
o
EXCEPT
When the donor's tax has already been paid on such
property
ii.
When the transfer of such property is exempt from
donor's tax
When to pay (applies to both individuals and corporations)
Sec. 56. Payment and Assessment ofIncome Tax for Individuals
and Corporation. —
(A) Payment of Tax. —
(1) In General. — The total amount of tax imposed by this Title shall
be paid by the person subject thereto at the time the return is filed. In
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the case of tramp vessels, the shipping agents and/or the husbanding
agents, and in their absence, the captains thereof are required to file
the return herein provided and pay the tax due thereon before their
departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold
the vessel and prevent its departure until proof of payment of the tax
is presented or a sufficient bond is filed to answer for the tax due.
(2) Installment of Payment. — When a tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation, may
elect to pay the tax in two (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, 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 the delinquency penalties. (As amended by
TRAIN)
(3) Payment of Capita! Gains Tax. — The total amount of tax
imposed and prescribed under Section 24(c), 24(D), 27(E)(2), 28(A)
(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed
therefor is filed by the person liable thereto: Provided, That if the
seller submits proof of his intention to avail himself of the benefit
of exemption of capital gains under existing special laws, no such
payments shall be required: Provided, further, That in case of failure
to qualify for exemption under such special laws and implementing
rules and regulations, the tax due on the gains realized from the
original transaction shall immediately become due and payable,
subject to the penalties prescribed under applicable provisions of this
Code: Provided, finally, That if the seller, having paid the tax, submits
such proof of intent within six (6) months from the registration of
the document transferring the real property, he shall be entitled to
a refund of such tax upon verification of his compliance with the
requirements for such exemption.
In case the taxpayer elects and Is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
Installment payment shall be paid within (30) days from the receipt
of such payments.
No registration of any document transferring real property shall be
effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been
reported, and the tax herein imposed, If any, has been paid.
(B) Assessment and Payment of Deficiency Tax. — After the
return is filed, the Commissioner shall examine it and assess the correct
amount of the tax. The tax or deficiency income tax so discovered
shall be paid upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the
term "deficiency" means:
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(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a deficiency,
and decreased by the amount previously abated, credited, returned
or otherwise repaid in respect of such tax; or (2) If no amount is
shown as the tax by the taxpayer upon this return, or if no return is
made by the taxpayer, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a
deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated,
credited returned or otherwise repaid in respect of such tax.
GR: It is "pay-as-you-file" and "pay-where-you-file."
A person may pay in installments if the tax due exceeds P2,000,
the second installment of which is due on October 15.
Filing of Return covering Capital Gains
Sale or exchange of stock NOT
traded through the local stock
exchange
Within 30 days after each transaction and final consolidated return on
or before April 15
Sale or disposition of real property
Within 30 days following each sale
or other disposition
Gains received by installment
Within 30 days from receipt of each
installment
Annual Declaration of income tax for individuals
Sec. 74. Declaration of Income Tax for Individuals. —
(A) In General. — Except as otherwise provided In this Section,
every individual subject to income tax under Sections 24 and 25(A)
of this Title, who is receiving self-employment income, whether it
constitutes the sole source of his income or in combination with
salaries, wages and other fixed or determinable Income, shall make
and file a declaration of his estimated income for the current taxable
year on or before May 15 of the same taxable year. In general, selfemployment income consists of the earnings derived by the individual
from the practice of profession or conduct of trade or business carried
on by him as a sole proprietor or by a partnership of which he is a
member. Nonresident Filipino citizens, with respect to income from
without the Philippines, and nonresident aliens not engaged in trade
or business in the Philippines, are not required to render a declaration
of estimated income tax. The declaration shall contain such pertinent
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information as the Secretary of Finance, upon recommendation of the
Commissioner, may, by rules and regulations prescribe. An individual
may make amendments of a declaration filed during the taxable
year under the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. (As amended
by TRAIN)
(B) Return and Payment of Estimated Income Tax by
Individuals. — The amount of estimated income as defined in
Subsection (C) with respect to which a declaration is required
under Subsection (A) shall be paid in four (4) installments. The first
installment shall be paid at the time of the declaration and the second
and third shall be paid on August 15 and November 15 of the current
year, respectively. The fourth installment shall be paid on or before
May 15 of the following calendar year when the final adjusted income
tax return is due to be filed. (As amended by TRAIN)
(C) Definition of Estimated Tax. — In the case of an individual, the
term "estimated tax" means the amount which the individual declared
as income tax in his final adjusted and annual income tax return for
the preceding taxable year minus the sum of the credits allowed under
this Title against the said tax. If, during the current taxable year, the
taxpayer reasonable expects to pay a bigger income tax, he shall file
an amended declaration during any interval of installment payment
dates.
Individuals who receive self-employment income must make and
file a declaration of his estimated income for the current year on
or before May 15
O
Remember this because as lawyers we will go under this
provision
Self-employed people do not need to file a new ITR on declaration
of estimated income tax since the annual ITR for the preceding
year may serve as the declaration.
Self-employment income consists of earnings from the practice of
a profession or conduct of trade or business carried on as the sole
proprietor or a partnership of which he is a member.
Quarterly payment of income tax, in four installments
O
First
at time of declaration
O
Second
August 15
O
Third
November 15
O
Fourth
On or before April 15
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Corporate returns
Sec. 52. Corporation Returns. —
(A) Requirements. — Every corporation subject to the tax herein
imposed, except foreign corporations not engaged in trade or
business in the Philippines, shall render, in duplicate, a true and
accurate quarterly income tax return and final or adjustment return
in accordance with the provisions of Chapter XII of this Title. The
income tax return shall consist of a maximum of four (4) pages
in paper form or electronic form, be filed by the president, vicepresident or other principal officer, shall be sworn to by such officer
and by the treasurer or assistant treasurer, and shall only contain the
following information:
(1) Corporate profile and information;
(2) Gross sales, receipts or income from services rendered, or
conduct of trade or business, except income subject to final tax as
provided under this Code;
(3) Allowable deductions under this Code;
(4) Taxable income as defined in Section 31 of this Code; and
(5) Income tax due and payable.
Provided, That the foregoing provisions shall not affect the
implementation of Republic Act No. 10708 or TIMTA. (As amended
by TRAIN)
(B) Taxable Year of Corporation. — A corporation may employ
either calendar year or fiscal year as a basis for filing its annual
income tax return: Provided, That the corporation shall not change
the accounting period employed without prior approval from the
Commissioner in accordance with the provisions of Section 47 of this
Code.
(C) Return of Corporation Contemplating Dissolution or
Reorganization. — Every corporation shall, within thirty (30)
days after the adoption by the corporation 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 Securities and Exchange
Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other information as the Secretary of
Finance, upon recommendation of the commissioner, shall, by rules
and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the
Issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of Finance, upon
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recommendation of the Commissioner, secure a certificate of tax
clearance from the Bureau of Internal Revenue which certificate shall
be submitted to the Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares
of Stock not Traded in the Local Stock Exchange. — Every
corporation deriving capital gains from the sale or exchange of shares
of stock not traded through a local stock exchange as prescribed
under Sections 24(c), 25(A)(3), 27(E)(2), 28(A)(8)(c) and 28(B)(5)
(c), shall file a return within thirty (30) days after each transactions
and a final consolidated return of all transactions during the taxable
year on or before the fifteenth (15th) day of the fourth (4th) month
following the close of the taxable year.
Sec. 53. Extension of Time to File Returns. — The Commissioner
may, in meritorious cases, grant a reasonable extension of time for
filing returns of income (or final and adjustment returns in case of
corporations), subject to the provisions of Section 56 of this Code.
All corporations, except foreign corporations not engaged in
trade or business in Philippines (because they are subject to final
withholding tax already), are required to file:
o
Quarterly income tax return, on a cumulative basis for the
preceding quarters
o
A final or adjustment return, on or before April 15
A corporation may use either calendar year or fiscal year basis for
filing.
Quarterly Income tax return
Sec. 75. Declaration of Quarterly Corporate Income Tax.
— 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 upon which the income tax, as
provided in Title II of this Code, shall be levied, collected and paid. The
tax so computed shall be decreased by the amount of tax previously
paid or assessed during the preceding quarters and shall be paid not
later than sixty (60) days from the close of each of the first three (3)
quarters of the taxable year, whether calendar or fiscal year.
•
A corporation must file tax return for preceding quarter within 60
days following the close of each quarter.
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Final adjustment return
Sec. 76. Final Adjustment Return. — Every corporation liable to
tax under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable income of that
year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
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 carryover 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.
A corporation must file the final return covering the preceding
fiscal or calendar year.
If the sum of the quarterly returns is not equal to the total tax
due, the corporation shall either
o
Pay the balance;
o
Carry over the excess credit perpetually: or
o
Be credited or refunded with the excess amount.
•
But the corporation can choose only one option and it
is irrevocable, even if you didn't get the benefit of the
overpayment.
See comments in the section on remedies (refunds).
Where and when to file
Sec. 77. Place and Time of Filing and Payment of Quarterly
Corporate Income Tax. —
(A) Place of Filing. — Except as the Commissioner otherwise
permits, the quarterly income tax declaration required in Section 75
and the final adjustment return required in Section 76 shall be filed
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with the authorized agent banks or Revenue District Officer or Collection
Agent or duly authorized Treasurer of the city or municipality having
jurisdiction over the location of the principal office of the corporation
filing the return or place where its main books of accounts and other
data from which the return is prepared are kept.
(B) Time of Filing the Income Tax Return. — The corporate
quarterly declaration shall be filed within sixty (60) days following the
close of each of the first three (3) quarters of the taxable year. The
final adjustment return shall be filed on or before the fifteenth (15th)
day of April, or on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the fiscal year, as the case may be.
(C) Time of Payment of the Income Tax. — The income tax due
on the corporate quarterly returns and the final adjustment income
tax returns computed in accordance with Sections 75 and 76 shall
be paid at the time the declaration or return is filed in a manner
prescribed by the Commissioner.
Where to file: same as individuals
When to file:
o
For quarterly declarations: within 60 days following the close
of the quarter
o
For final: on or before April 15, or the 15th day of the 4th
month following the close of the fiscal year
When to pay: same as individuals
a)
Differentiate between a calendar year and a fiscal year.
b) 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 Exam)
Suggested answer:
a)
A calendar year means an accounting period of 12 months
which ends on the last day of December. A fiscal year means an
accounting period of 12 months ending on the last day of any
month other than December.
b)
The deadline for the filing of a corporation's final adjustment
return for a calendar year Is on April 15. The deadline for those
following a fiscal year Is on the 15th day of the 4th month following
the close of the fiscal year.
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Filing of return covering capita! gains from shares of stock
Sec. 52. (D) Return on Capita! Gains Realized from Sale of
Shares of Stock not Traded in the Local Stock Exchange. —
Every corporation deriving capital gains from the sale or exchange
of shares of stock not traded through a local stock exchange as
prescribed under Sections 24(c), 25(A)(3), 27(E)(2), 28(A)(8)(c)
and 28(B)(5)(c), shall file a return within thirty (30) days after each
transactions and a final consolidated return of all transactions during
the taxable year on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the taxable year.
For sale or exchange of stock not traded through local stock
exchanges, within 30 days after each transaction and a final
consolidated return of ALL transactions during the year
Return of corporations contemplating dissolution/reorganization
Sec. 52. (C) Return of Corporation Contemplating Dissolution
or Reorganization. — Every corporation shall, within thirty (30)
days after the adoption by the corporation of a resolution or plan
for its dissolution, or for the liquidation of the whole or any part of
its capita! stock, Including a corporation which has been notified
of possible involuntary dissolution by the Securities and Exchange
Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other Information as the Secretary of
Finance, upon recommendation of the commissioner, shall, by rules
and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the
issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a certificate of tax
clearance from the Bureau of Internal Revenue which certificate shall
be submitted to the Securities and Exchange Commission.
After the corporation adopts a plan or resolution for its dissolution,
it must submit to the BIR, within 30 days from dissolution, a
short period return. The corporation must likewise secure a tax
clearance certificate from the BIR which it will submit to the SEC
before its dissolution. (Section 244, R.R. 2-1940)
They have to submit to the BIR:
o
A copy of the resolution
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O
Balance sheet at the date of dissolution and the income
statement covering the beginning of the year to the date of
dissolution
o
Names and addresses of the shareholders and their holdings
o
Value and a description of the assets received in liquidation
by each shareholder (Section 244, R.R. 2-1940)
Return of General Professional Partnerships
Sec. 55. Returns of General Professional Partnerships. — Every
general professional partnership shall file, in duplicate, a return of
its income, except income exempt under Section 32(B) of this Title,
setting forth the items of gross income and of deductions allowed
by this Title, and the names. Taxpayer Identification Numbers (TIN),
addresses and shares of each of the partners.
General professional partnerships and joint ventures for
construction, and other exempt corporations are STILL REQUIRED
to file their tax return, which should specify:
o
The items of gross income,
o
The deductions allowed, and
o
The names, TIN, addresses and shares of each partner.
Spouses Pablo Gonzales and Teresita Gonzales, both resident citizens,
acquire during their marriage a residential house and lot located in
Makati City, which Is being leased to a tenant for a monthly rental
of Pl 00,000. Mr. Pablo Gonzales is the President of PG Corporation
and he receives P50,000 salary per month. The spouses have only
one (1) minor child. In late June 2010, he was Immediately brought
to the hospital because of the heart attack and he was pronounced
dead on June 30, 2010. With no liabilities, the estate of the late Pablo
Gonzales was settled extra-judicially In early 2011.
a) Is Mr. Pablo Gonzales required to file income tax for 2010? If so,
how much Income must he declare for the year? How much personal
and additional exemption Is he entitled to? Explain your answer.
b) Is Mrs. Teresita Gonzales required to file income tax return for
2010? If so, how much Income must she declare for the year? How
much personal exemption Is she entitled to? Explain your answer.
c) Is the Estate of the late Pablo Gonzales required to file Income
tax return for 2010? If so, how much income must It declare for the
year? How much personal exemption is It entitled to? Explain your
answer. (2012 Bar Exam)
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Suggested answers:
a) Mr. Gonzales is required to file income tax for 2010, but this
can be done in conjunction with his wife. The Tax Code states
that married individuals who do not derive income purely from
compensation shall file a return for the taxable year to include the
income of both spouses. In this case, Mr. Gonzales does not earn
purely compensation income as he has income also from the lease to
the tenant. He must declare his income from his work as a president
(P300,000 as of the end ofJune) and his share from the lease rentals,
which I assume is half of the monthly rental (P300,000 as of the end
of June.) He can claim P50,000 persona! exemption and the P25,000
for their dependent.
b) Mrs. Gonzales is likewise required to file an income tax return
for 2010, but this shall be filed together with her husband's, for the
same reasons in a). In this case, we assume that Mrs. Gonzales
receives half of the rental income and should thus declare P6OO,OOO
which will cover her share for the entire 2010. As she earns income,
she can claim personal exemption of P50,000; but not the P25,000
as this was previously claimed by her husband.
c)
The estate is likewise required to file an income tax return for
2010; the return will cover P3OO,OOO which will cover Mr. Gonzales'
share of the rental income from the time he passed away until the
end of the year. The estate cannot claim any exemption because the
previous exemption has been repealed by TRAIN. (Answer adjusted
to reflect TRAIN, obvs.)
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A.
Principles and Definition
•
Estate tax is the tax on the right to transmit property at death
and on certain transfers by the decedent during his lifetime which
are made by the law equivalent of testamentary dispositions.
•
It accrues upon the death of the decedent.
•
A transmission by inheritance is taxable at the time of the
predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary.
(Lorenzo v. Posadas, G.R. No. L-43083, June 18, 1937)
•
The tax is measured by the value of the property transmitted at
the time of death, regardless of its appreciation or depreciation.
•
The accrual of the tax is distinct from the obligation to pay the
tax.
B.
Rates and Value
Sec. 84. Rates of Estate Tax. —There shall be levied, assessed,
collected and paid upon the transfer of the net estate as determined
in accordance with Sections 85 and 86 of every decedent, whether
resident or nonresident of the Philippines, a tax at the rate of six
percent (6%) based on the value of such net estate. (As amended by
TRAIN)
TRAIN has removed the graduated rates for estate tax.
As it now stands, estate tax has a flat rate of 6% based on the
value of the net estate.
Sec. 88. Determination of the Value of the Estate. —
(A) Usufruct. — To determine the value of the right of usufruct, use
or habitation, as well as that of annuity, there shall be taken into
account the probable life of the beneficiary in accordance with the
latest Basic Standard Mortality Table, to be approved by the Secretary
of Finance, upon recommendation of the Insurance Commissioner.
271
i
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(B) Properties. — The estate shall be appraised at its fair market
value as of the time of death. However, the appraised value of real
property as of the time of death shall be, whichever is higher of:
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values fixed
by the Provincial and City Assessors.
The properties comprising the gross estate shall be valued based
on the FMV as of the time of death.
In case of real property, the fair market value shall be:
O
The FMV as determined by the Commissioner; or
O
The FMV as shown in the schedule of values fixed by the
Provincial and City Assessors
■
Whichever is HIGHER
In case of personal property recently acquired by the decedent,
the purchase price may indicate the FMV.
O
In case of personal property not recently acquired, there
should be some evidence of the FMV.
For shares of stock, the FMV shall depend on whether the shares
are listed or unlisted in the stock exchange.
o
O
If unlisted
•
Common shares — based on their book value
■
Preferred shares — based on their par value
If listed
■
The mean between the highest and lowest quotation on
the date of death;
■
If none, then the date nearest the death.
For use of usufruct, there shall be taken into account the probable
life of the beneficiary in accordance with the latest basic standard
mortality table, to be approved by the Secretary of Finance.
C.
Gross Estate
Sec. 85. 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
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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.
(A) Decedent's Interest. — To the extent of the interest therein of
the decedent at the time of his death;
Sec. 104. Definitions. — For purposes of this Title, the terms
"gross estate" and "gifts" include real and personal property, whether
tangible or intangible, or mixed, wherever situated: Provided,
however. That where the decedent or donor was a nonresident alien
at the time of his death or donation, as the case may be, his real and
personal property so transferred but which are situated outside the
Philippines shall not be included as part of his "gross estate" or "gross
gift": Provided, further, That 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; shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the business of which 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, shall be considered
as situated in the Philippines: Provided, still further, that no tax shall
be collected under this Title in respect of intangible personal property:
(a) 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 (b) 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.
For estate tax purposes, residence refers to the domicile of the
person. (CIR v. de Lara, G.R. No. L-9456, January 6, 1958)
For residents and citizens, gross estate includes ALL properties,
real or personal, tangible or intangible, WHEREVER situated.
For nonresident aliens, gross estate includes only properties
situated in the Philippines.
O
Except with respect to INTANGIBLE personal property (IPP),
its inclusion to the gross estate is subject to the rule of
reciprocity.
*
If the foreign country of the nonresident alien does not
impose a transfer tax of any character on the IPP of
Filipinos not residents of that foreign country; or
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•
The foreign country of the nonresident alien allows a
similar exemption from transfer tax in respect of IPP
owned by Filipinos not residents of that foreign country,
•
Then IPPs of the nonresident alien here are exempt
from the estate tax.
•
Reciprocity must be total. If any of the two states or
countries collects or imposes and does not exempt
any transfer, death, legacy, or succession tax of any
character, reciprocity does not apply. (CIR v. Fisher, G.R.
No. L-11622, January 28, 1961)
■
Reciprocity in exemption does not require the "foreign
country" to possess international personality. (CIR v.
Campos Rueda, G.R. No. L-13250, October 29, 1971)
Gross estate includes any interest or right in the nature of
property, but less than title, having value or capable of having
value, like
O
Dividends declared, but paid after the death
O
Partnership profits
O
Right of usufruct
The following, among others, are intangible personal properties
located in the Philippines:
O
Franchise which must be exercised in the Philippines
O
Shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines
in accordance with its laws
O
Shares, obligations or bonds issued by any foreign corporation
85% of the business of which is located in the Philippines
•
Note that this is different from the 50% requirement in the
situs rules for dividends issued by a foreign corporation
for income tax,
O
Shares, obligations or bonds issued by ay foreign corporation
if such shares, obligations or bonds have acquired a business
situs in the Philippines, and
o
Shares or rights in any partnership, business or industry in
the Philippines.
Karissa is the registered owner of a beachfront property in Kawayan,
Quezon which she acquired in 2015. Unknown to many, Karissa was
only holding the property in trust for a rich politician who happened
to be her lover. It was the politician who paid for the full purchase
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price of the Kawayan property. No deed of trust or any other
document showing that Karissa was only holding the property in
trust for the politician was executed between him and Karissa.
Karissa died single on May 1, 2017 due to a freak surfing accident.
She left behind a number of personal properties as well as real
properties, including the Kawayan property. Karissa's sister,
Karen, took charge of registering Karissa's estate as a taxpayer
and reporting, for income tax and VAT purposes, the rental income
received by the estate from real properties. However, it was only on
October 1, 2017 when Karen managed to file an estate tax return for
her sister's estate.
Should the beachfront property be included In Karissa's gross estate?
(2018 Bar Exam)
Suggested answer: Yes, it should be included in Karissa's gross
estate. Gross estate includes all property of the decedent at the time
of his or her death. It also includes any interest or right in the
nature of property. In this case, she is the registered owner of the
property. Thus, even if she's holding it in trust (which her estate
will find difficult to prove given there is no deed of trust), it should
be part of the gross estate as she had an interest or right to the
property at the time of her death.
Properties not in the estate
•
There may be properties, which at the time of the decedent's
death, are not in the estate because they were transferred by him
during his lifetime.
O
These transfers are:
Transfers in contemplation of death;
Revocable transfers;
Transfers under a general power of appointment; and
Transfers for an insufficient consideration.
The values of these properties will be included in the determination
of the gross estate for estate tax purposes.
As such, the gross estate, for purposes of the estate tax, may
exceed the actual value of his assets at the time of his death as
it includes the value of transfers of property by him during his
lifetime that partake of the nature of testamentary dispositions.
These kinds of transfers have the following in common:
o
They are ostensible transfers, usually with the purpose to
evade the estate tax;
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O
They are extension of interests; and
O
If the transfers are in fact for a bona fide consideration, then
they will not form part of the gross estate (this proviso is
present in all the provisions regarding these transfers)
•
This is important. As long as the transfers were for a bona
fide consideration, then you don't have to add it anymore
in determining the gross estate.
Transfers in contemplation of death
(B) Transfer in Contemplation of Death. — To the extent of
any interest therein of which the decedent has at any time made
a transfer, by trust or otherwise, in contemplation of or intended to
take effect in possession or enjoyment at or after death, or of which
he has at any time made a transfer, by trust or otherwise, under
which he has retained for his life or for any period which does not in
fact end before his death (1) the possession or enjoyment of, or the
right to the income from the property, or (2) the right, either alone
or in conjunction with any person, to designate the person who shall
possess or enjoy the property or the income therefrom; except in
case of a bona fide sale for an adequate and full consideration in
money or money's worth.
A transfer in contemplation of death is a transfer motivated by
the thought of death, although death may not be imminent.
The following are examples of circumstances which may be taken
into consideration in determining whether the transfer was made
in contemplation of death:
o
We can look at the age and state of health of the decedent at
the time of the transfer (Is he terminally ill?)
o
Length of time between the transfer and the date of the
death.
o
Concurrent making of a will or making of a will within a short
time after the transfer.
The following are transfers in contemplation of death:
o
Transfers, by trust or otherwise, in contemplation or intended
to take effect (in possession or enjoyment) at or after death,
o
Transfers, by trust or otherwise, under which the decedent
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, or the right to
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designate the person who shall possess or enjoy the property
or the income therefrom.
But again, in the case of a bona fide sale for an adequate and
full consideration in money or money's worth, the value of the
property transferred will not be considered in determining the
gross estate.
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. Will the house and lot form part of Mr. Mayuga's estate? (2013
Bar Exam)
Suggested answer: Yes, the donation is a transfer under which he
has retained for his life the possession or enjoyment of the property.
This is considered a transfer in contemplation of death, and thus
should form part of his gross estate.
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 Exam)
I
Suggested answer: The BIR is once again wrong. The sale of the house
and lot to his son was made for valuable and sufficient consideration,
and hence is not deemed a transfer in contemplation of death. The
Tax Code explicitly states that transfers for a valuable and sufficient
consideration are not considered transfers in contemplation of death.
Revocable transfers
(C) Revocable Transfer. —
(1) To the extent of any interest therein, of which the decedent has
at any time made a transfer (except In case of a bona fide sale for an
adequate and full consideration in money or money's worth) 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 (in whatever
capacity exercisable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when or from
what source the decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is relinquished in
contemplation of the decedent's death.
I
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(2) For the purpose of this Subsection, the power to alter, amend or
revoke shall be considered to exist on the date of the decedent's death
even though the exercise of the power is subject to a precedent giving
of notice or even though the alteration, amendment or revocation
takes effect only on the expiration of a stated period after the exercise
of the power, whether or not on or before the date of the decedent's
death notice has been given or the power has been exercised. In such
cases, proper adjustment shall be made representing the interests
which would have been excluded from the power if the decedent had
lived, and for such purpose if the 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.
A revocable transfer is a transfer where the terms of the enjoyment
of the property may be altered, amended, revoked, or terminated
by the decedent.
It is sufficient that the decedent had the power to revoke, though
he did not exercise the power to revoke.
Again, the same rule with bona fide sales applies.
Transfers Under a General Power of Appointment
(D) Property Passing Under General Power of Appointment.
— To the extent of any property passing under a general power of
appointment exercised by the decedent: (1) by will, or (2) by deed
executed in contemplation of, or intended to take effect in possession
or enjoyment at, or after his death, or (3) by deed under which he has
retained for his life or any period not ascertainable without reference
to his death or for any period which does not in fact end before his
death (a) the possession or enjoyment of, or the right to the income
from, the property, or (b) the right, either alone or In conjunction with
any person, to designate the persons who shall possess or enjoy the
property or the income therefrom; except in case of a bona fide sale
for an adequate and full consideration in money or money's worth.
A power of appointment refers to the right to designate the person
or persons who will succeed the property of a prior decedent.
A general power of appointment is one which may be exercised in
favor of anybody. This forms part of the powerholder's estate.
o
Leo donated property to Andres, with a provision that Andres
can transfer the property to anyone. Andres transferred it to
Xavi. The property should be included in the gross estate of
Andres.
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A limited power of appointment is one which may be exercised
only in favor of a certain person or persons designated by the
prior decedent.
Leo donated property to Andres, with a provision that Andres
should transfer the property to Xavi, and only Xavi. The value
of the property should not be included in the gross estate of
Andres.
O
In order that property passing under a power of appointment
may be included in the gross estate of the transferor, the power
of appointment must be a general power of appointment.
Again, the bona fide sale rule applies.
Life Insurance Proceeds
(E) Proceeds of Life Insurance. — To the extent of the
amount receivable by the estate of the deceased, his executor, or
administrator, as insurance under policies taken out by the decedent
upon his own life, irrespective of whether or not the insured retained
the power of revocation, or to the extent of the amount receivable by
any beneficiary designated in the policy of insurance, except when
it is expressly stipulated that the designation of the beneficiary is
irrevocable.
Proceeds of insurance under policies taken out by the decedent
upon his life shall constitute part of the gross estate if the
beneficiary is:
1.
The estate of the decedent, his executor or administrator AS
SUCH;or
2.
A third person (not those in #1), and the designation of the
beneficiary is revocable.
The Insurance Code states that the designation of a beneficiary is
generally revocable.
o
Except of course, when the policy states that the designation
Is irrevocable. In such cases, the proceeds are not considered
as part of the decedent's estate.
For #1, doesn't matter if revocable or not. As long as the
beneficiary is the estate of the decedent, or his executor or
administrator as such, then you include that in the gross estate.
For #2, life insurance proceeds are excluded, provided:
o
Irrevocable, and
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O
Payable to beneficiary other than estate, executor, administrator
Life insurance proceeds must be taken out BY THE DECEDENT.
O
So not included in the computation of gross income if the
proceeds are from:
•
Company policy;
•
GSIS; or
■
SSS.
O
It must stem from life insurance to be included in the gross
estate.
o
If accident insurance, not included in the gross estate.
Transfers of Insufficient Consideration
(F) Prior Interests. — Except as otherwise specifically provided
therein, Subsections (B), (C) and (E) of this Section shall apply to the
transfers, trusts, estates, interests, rights, powers and relinquishment
of powers, as severally enumerated and described therein, whether
made, created, arising, existing, exercised or relinquished before or
after the effectivity of this Code.
(G) Transfers of Insufficient Consideration. — If any one of
the transfers, trusts, interests, rights or powers enumerated and
described in Subsections (B), (C) and (D) of this Section is made,
created, exercised or relinquished for a consideration in money or
money's worth, but Is not a bona fide sale for an adequate and full
consideration in money or money's worth, there shall be included in
the gross estate only the excess of the fair market value, at the time
of death, of the property otherwise to be included on account of such
transaction, over the value of the consideration received therefor by
the decedent.
In the transfers In contemplation of death, revocable transfer, or
transfer under a GPA, the value to include in the gross estate will
be determined under the following rules:
o
If the transfer was in the nature of a bona fide sale for an
adequate and full consideration in money or money's worth,
no value will be included in the gross estate;
o
If the consideration received on the transfer was less than
adequate and full, the value to include in the gross estate
■
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will be the excess of the fair market value at the time of the
decedent's death over the consideration received;
O
If there was no consideration received on the transfer
(donation mortis causa}, the value to include in the gross
estate will be the fair market value of the property at the time
of the decedent's death.
When looking at a transaction, ask yourself, "Was the consideration
insufficient?"
O
If yes, then add the balance of the FMV at the time of death
and the consideration.
O
If no, then it was a bona fide sale. Don't add the value to the
gross estate.
Capital of the Surviving Spouse
(H) Capital of the Surviving Spouse. — The capital of the surviving
spouse of a decedent shall not, for the purpose of this Chapter, be
deemed a part of his or her gross estate.
•
The capital of the surviving spouse shall not form part of the
decedent's gross estate.
Let's take a quick look at some cases on estate tax. Hopefully,
you already read the originals of these. If not, you still have time.
Was the
transferee a
voluntary or
compulsory
heir?
Time
between
transfer
and
death
Was
there a
will?
What did the
Supreme Court
say?
Zapanta v.
Posadas, G.R.
No. 29204,
December 29,
1928
Compulsory
None
Yes
Not considered
advances. Not
part of gross
estate.
Tuason v.
Posadas, G.R.
No. L-30885,
January 23, 1930
Voluntary
3 years
Yes
Considered
as advances,
because the
donees became
legatees in the
will. Part of gross
estate, include it.
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Dizon v.
Posadas, G.R.
No. L-36770,
November 4,
1932
Compulsory
1 day
No
Considered
advances. The
donee is a
compulsory heir.
Include it in the
gross estate
Vida! de Roces
v. Posadas, G.R.
No. L-34937,
March 13, 1993
Voluntary
9 months
Yes
Considered
advances.
Donees were
legatees in the
will. Include
that in the gross
estate
When it comes to transfers done during the lifetime of a decedent,
there is a disputable presumption that the transfers are in
contemplation of death if the recipients are compulsory heirs.
o
The government presumes that one is transferring property
beforehand to escape the estate tax, and instead pay the
lower donor's tax.
o
The case of Zapanta showed that the presumption is
disputable. There, the Court considered the gifts as not
advances even if the recipients were compulsory heirs. The
reason for this was the condition imposed upon the recipients
by the decedent (they had to pay the decedent a certain
amount of rice and money during his lifetime). It showed
that the transfer was not in contemplation of death, because
the decedent in fact, would benefit from the transfer.
The presence of a will also plays a part. In the cases of Tuason and
Vidal de Roces, the Court considered the transfers as advances
because a will was made making the transferees legatees. This
played a part in the Court's impression that there was an intention
of the decedent to minimize his gross estate.
Thus, when looking at cases like these, the totality of all the
factors and facts must be taken into consideration.
Does the government always want to consider a transfer an
advance (to be covered by the estate tax)? Not necessarily. There
are instances where they will argue for it to be considered under
the donor's tax.
In summary, gross estate is made up of:
1.
The decedent's interests at the time of his death
2.
Transfers made during his lifetime (in contemplation of death,
revocable, and under a GPA)
ESTATE TAX
283
3.
Life insurance proceeds
4.
Some other stuff required by law to be included in the gross
estate in order to allow deductions (claims against insolvent
persons, unpaid mortgage, value of the family home,
vanishing deductions, and the retirement benefits under R.A.
4917)
D. Computation for the Net Estate
•
The basic equation to determine the net taxable estate is (gross
estate — deductions)
•
The complication arises when the decedent is married at the time
of his death. We'll tackle that later.
•
First, let's take a look at the deductions.
Deductions for a Citizen or a Resident
The deductions from the gross estate are:
I:
s
£
F
J
3
1
r
r
K
■0
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o
Standard deduction of P5,000,000;
o
Claims against the estate;
o
Claims against insolvent persons;
o
Unpaid mortgages or indebtedness on property;
o
Accrued taxes and losses;
o
Vanishing deductions;
o
Transfers for public use;
o
Family home to the extent of P10,000,000;
o
Amounts received by heirs under R.A. 4917; and
o
Net share of the surviving spouse in the conjugal partnership,
if any.
These deductions are allowed for a citizen or resident of the
Philippines. Nonresident aliens have a different set of deductions.
Because of TRAIN, funeral expenses, medical expenses, and
judicial expenses are no longer deductions.
SEC. 86. Computation of Net Estate. — For the purpose of the
tax imposed in this Chapter, the value of the net estate shall be
determined:
(A) Deductions Allowed to the Estate of a Citizen or a Resident. — In
the case of a citizen or resident of the Philippines, by deducting from
the value of the gross estate —
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Standard Deduction
(1) Standard Deduction. — An amount equivalent to Five million
pesos (P5,000,000).
Don't forget to deduct P5,000,000 every time you compute for
the net estate. You don't need any substantiation either.
Claims against the estate
(2) For claims against the estate: Provided, That at the time the
indebtedness was incurred the debt instrument was duly notarized
and, if the loan was contracted within three (3) years before the
death of the decedent, the administrator or executor shall submit a
statement showing the disposition of the proceeds of the loan.
"Claims" means debts or demands of a pecuniary nature which
could have been enforced against the deceased in his lifetime and
could have been reduced to simple money judgments.
o
In other words, if enforceable against him when he was alive,
the obligations will be claims against his estate when he dies.
o
So, an obligation that has prescribed during his lifetime,
or that was unenforceable against him, will not be a claim
against his estate when he shall be dead.
Claims against the estate or indebtedness in respect of property
may also arise out of contract, tort, or operation of law. (R.R. 122018)
Requisites:
1.
The liability must represent a personal obligation of the
deceased at the time of his death,
2.
The liability was contracted in good faith and for adequate
and full consideration,
3.
The claim must be a debt or claim which is valid in law and
enforceable in court, and
4.
The indebtedness must not have been condoned by the
creditor during the lifetime of the decedent, or the actions to
collect must not have prescribed.
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Note that if the debts were condoned AFTER the decedent's death,
the debts are deductible, following the date-of-death valuation
rule. (Dizon v. CTA, G.R. No. 140944, April 30, 2008)
R.R. 12-2018 has outlined the documentary requirements for
different kinds of unpaid obligations:
O
For loans:
Debt instrument must be notarized at the time the
indebtedness was incurred
•
•
O
0
EXCEPT for loans granted by financial institutions
where notarization is not part of the business practice
■
Duly notarized certification from the creditor as to the
unpaid balance of the debt, including interest as of the
time of death;
■
Proof of financial capacity of the creditor to lend the
amount at the time the loan was granted; and
•
Statement under oath by the administrator or executor of
the estate reflecting the disposition of the proceeds of the
loan if said loan was contracted within three years prior
to the death of the decedent.
For unpaid obligations from purchase of goods or services:
•
Documents evidencing purchase of goods or service (like
official receipts, etc.) or contracts of service;
•
Duly notarized certification from the creditor as to the
unpaid balance of the debt, including interest as of the
time of death; and
■
Certified true copy of the latest audited balance sheet
of the creditor with a detailed schedule of tis receivable
showing the unpaid balance.
For settlements made through court, the documents filed in
court and the court order approving such claims, in addition
to the documents above.
There Is no requirement to add the amount to the gross estate
(as compared to claims against insolvent persons/mortgage).
This is a DIRECT DEDUCTION.
Claims against insolvent persons
(3) For claims of the deceased against insolvent persons where the
value of decedent's interest therein is included in the value of the
gross estate.
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Claims against insolvent persons are deductions from the gross
estate
O
SUBJECT to the condition that the full amounts of the
receivables are first included in the gross estate.
The deduction from the gross estate will be the uncollectible
portion.
Insolvent persons are those defined under FR.IA and other existing
laws. (R.R. 12-2018)
Unpaid mortgage or indebtedness on property
(4) For unpaid mortgages upon, or any indebtedness in respect to,
property where the value of decedent's interest therein, undiminished
by such mortgage or indebtedness, is included in the value of the
gross estate, but not including any income tax upon income received
after the death of the decedent, or property taxes not accrued before
his death, or any estate tax.
The deduction herein allowed in the case of claims against the estate,
unpaid mortgages or any indebtedness shall, when founded upon
a promise or agreement, be limited to the extent that they were
contracted bona fide and for an adequate and full consideration in
money or money's worth.
The mortgage or indebtedness will be claimed as a deduction
from the gross estate.
If the loan is merely an accommodation loan, where the proceeds
of the loan went to another person, the value of the unpaid loan
must be included in the receivable of the estate. (R.R. 12-2018)
For 1) claims against insolvent persons and 2) unpaid mortgage/
indebtedness on property, the values of each must first be added
to the gross estate.
o
These are called zero-sum computations. They do not
really benefit the heirs because these transactions were not
supposed to be part of the gross estate anyway. Note that the
value of the property undiminished by the mortgage must be
included in the gross estate. (R.R. 12-2018)
Example:
Kobe Ryan died leaving real property with a FMV of
P1M, subject to a mortgage in the amount of P600k.
Before the estate can deduct the P600k, it has to include
the total FMV of the property to the gross estate. (We
miss you, Bean.)
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Taxes
•
Taxes are deductions from the gross estate if such taxes accrued
prior to the decedent's death. (R.R. 12-2018)
•
Those that accrued after the decedent's death are not deductions
from gross estate.
•
These taxes can NOT be deducted:
O
Income tax on income received after death
O
Property taxes not accrued before death
O
Estate tax
Losses
There shall also be deducted losses incurred during the settlement of
the estate arising from fires, storms, shipwreck, or other casualties,
or from robbery, theft or embezzlement, when such losses are not
compensated for by insurance or otherwise, and if at the time of the
filing of the return such losses have not been claimed as a deduction
for the income tax purposes in an income tax return, and provided
that such losses were incurred not later than the last day for the
payment of the estate tax as prescribed in Subsection (A) of Section
91.
Losses are deductible from the gross estate if:
1.
Arising from fire, storm, shipwreck, or other casualty, robbery,
theft or embezzlement;
2.
Not compensated by insurance or otherwise;
3.
Not claimed as a deduction in an Income tax return of the
estate subject to income tax;
4.
Occurring during the settlement of the estate; and
5.
Occurring before the last day for the payment of the estate
tax (one year after the decedent's death, or the allowed
extension).
Example:
Ronaldo McDonaldo died January 1, 2018. A fire razed his mansion
on March 1, 2018. His estate was settled January 1, 2020. He can
claim a deduction, because the fire happened within a year of his
death.
Joe Li Bag died January 1, 2018. A fire razed his shanty on
January 19, 2019. He cannot claim a deduction, because the fire
happened more than a year after his death.
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Vanishing deductions
(5) Property Previously Taxed. — An amount equal to the value
specified below of any property forming a part of the gross estate
situated in the Philippines of any person who died within five (5) years
prior to the death of the decedent, or transferred to the decedent
by gift within five (5) years prior to his death, where such property
can be identified as having been received by the decedent from the
donor by gift, or from such prior decedent by gift, bequest, devise
or inheritance, or which can be identified as having been acquired in
exchange for property so received:
One hundred percent (100%) of the value, if the prior decedent
died within one (1) year prior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior
to his death;
Eighty percent (80%) of the value, if the prior decedent died more
than one (1) year but not more than two (2) years prior to the death
of the decedent, or if the property was transferred to him by gift
within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than
two (2) years but not more than three (3) years prior to the death of
the decedent, or if the property was transferred to him by gift within
the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than
three (3) years but not more than four (4) years prior to the death of
the decedent, or if the property was transferred to him by gift within
the same period prior to his death;
Twenty percent (20%) of the value, if the prior decedent died more
than four (4) years but not more than five (5) years prior to the death
of the decedent, or if the property was transferred to him by gift
within the same period prior to his death;
These deductions shall be allowed only where a donor's tax or estate
tax imposed under this Title was finally determined and paid by or
on behalf of such donor, or the estate of such prior decedent, as
the case may be, and only in the amount finally determined as the
value of such property in determining the value of the gift, or the
gross estate of such prior decedent, and only to the extent that the
value of such property is included in the decedent's gross estate, and
only if in determining the value of the estate of the prior decedent,
no deduction was allowable under paragraph (2) In respect of the
property or properties given in exchange therefor. Where a deduction
was allowed of any mortgage or other lien in determining the donor's
tax, or the estate tax of the prior decedent, which was paid in whole
or in part prior to the decedent's death, then the deduction allowable
under said Subsection shall be reduced by the amount so paid. Such
deduction allowable shall be reduced by an amount which bears the
same ratio to the amounts allowed as deductions under paragraphs
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(1) and (3) of this Subsection as the amount otherwise deductible
under said paragraph (2) bears to the value of the decedent's estate.
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.
•
Property may change hands within a very short period of time
by reason of the early death of the owner who received it by
inheritance or by donation (gift).
•
To provide relief to the burdened taxpayer, vanishing deductions
are allowed to reduce the gross estate.
•
Vanishing deductions are allowed when:
1.
The present decedent died within five years from receipt of
the property from a prior decedent or donor;
2.
The property on which the vanishing deduction is being
claimed must be located in the Philippines;
3.
The property must have formed part of the taxable estate of
the prior decedent, or of the taxable gift of the donor;
4.
The estate tax on the prior succession or the donor's tax on
the gift must have been finally determined and paid;
5.
The property must be identified as the one received from the
prior decedent or donor, or something acquired in exchange
therefore;
6.
No vanishing deduction on the property was allowable to the
estate of the prior decedent.
How do we compute?
Step 1: Get the basis. Either the value of the property in the prior
estate/value used for donor's tax purposes OR the value of
the property in the present estate, whichever is LOWER.
Step 2: The Step 1 value will be reduced by any payment made
by the present decedent on any mortgage or lien on the
property (when such mortgage/lien was used as a deduction
on the prior dead guy's estate, or gift of the donor)
Step 3: The Step 2 value shall be further reduced by:
Step 2 value
Gross Estate
x
Expenses, losses, indebtedness,
taxes and transfers for public use
This is done to prevent double deduction.
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Step 4: Look at the chart below and multiply to get the value that
you can actually deduct.
%
If received by inheritance or gift
100
Within one year prior to death of the decedent
80
More than one year but not more than two years
60
More than two years but not more than 3 years
40
More than 3 years but not more than 4 years
20
More than 4 years but not more than 5 years
Example:
Tony Stank inherited land from his pop, Howard Stank, with a fair
market value of P500k at the time of the inheritance. Two and a
half years later, Tony died after stealing Than Nosh's bejeweled
glove and getting electrocuted. The FMV of the land was P600k at
that time. The gross estate, on which the land was part, was P2M.
Deductions from the gross estate (not including the family home
medical expenses, standard deduction, or R.A. 4917 receivable)
amounted to P400k.
What is the vanishing deduction?
Step 1: Get the lower value.
P500k
Step 2: No mortgage mentioned, so
P500k
Step 3:
I
P500k
P2M
x
PlOOk
P400k =
Basis of the vanishing deduction (500K - 100K)
=
P400k
Vanishing deduction (60% of P400k)
=
P240k
During his lifetime, Mr. Sakitin obtained a loan amounting to PIO
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 Interna! 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 Exam)
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Suggested answer: I agree with the BIR. Unpaid mortgages can be
deducted from gross estate as long as the value of the mortgaged
property is included in the computation of the gross estate. The heirs
of Mr. Sakitin didn't include the value in his gross estate, so he can't
deduct it.
The heirs also assumed the unpaid mortgage was a claim against
the estate, which, to be fair to them, is a direct deduction that need
not be included in the computation of gross estate. However, they
assumed wrong and got burned. Just like a spurned lover.
Transfers for public use
(6) Transfers for Public Use. — The amount of all the 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.
•
Transfers for public use are dispositions in a last will and
testament, or a transfer to take effect after death, in favor of
the Government of the Philippines, or any political subdivision
thereof, for exclusively public purposes.
•
You can deduct the value of the property transferred to the
government.
Family home
(7) The Family Home. — An amount equivalent to the current fair
market value of the decedent's family home: Provided, however,
That If the said current fair market value exceeds Ten million pesos
(PIO,000,000), the excess shall be subject to estate tax.
•
The allowable deduction Is the amount equivalent to the current
FMV of the family home.
o
•
But the maximum amount you can deduct Is P10,000,000.
The family home follows the definition of the Family Code: it's
the dwelling house (including the land where it's situated), where
the husband and wife, or a head of the family, and members of
their family reside. It's deemed constituted on the house and lot
from the time it's actually occupied as a family residence and
considered as such for as long as any of its beneficiaries actually
resides therein.
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O
However, actual occupancy 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.
O
The family home is generally characterized by permanency.
O
A person may only constitute only one family home. (R.R. 122018)
O
Head of the family is an unmarried or legally separated man
or woman with one or both parents, or with one or more
brothers or sisters, or with one or more legitimate, recognized
natural or legally adopted children living with and dependent
upon him or her for their chief support, where such brothers
or sisters or children are not more than 21 years old,
unmarried and not gainfully employed or where such children,
brothers or sisters, regardless of age are incapable of selfsupport because of mental or physical defect, or any of the
beneficiaries mentioned in Article 154 of the Fam Code who
is living in the family home and dependent upon the head of
the family for legal support.
Requisites for deducting the family home:
O
Must be the actual home of the decedent and his family at the
time of his death, as certified by the Barangay Captain of the
locality;
O
Total value of the family home must be included as part of the
gross estate (zero-sum!); and
O
Deduction equivalent to current FMV, or the extent of the
Interest
(whether
decedent's
conjugal/community
or
exclusive property), whichever is lower, but not exceeding
P10,000,000. (R.R. 12-2018)
For a person married at the time of death, and who was under
a system of conjugal partnership or absolute community, the
deduction for the family home is 1/2 of the FMV, but should not
exceed PIO,000,000, if such family home was conjugal property
or community property. (Remember this!)
Amounts receivable under R. A. 4917
Amount Received by Heirs Under Republic Act No. 4917.
— Any amount received by the heirs from the decedent-employee as
a consequence of the death of the decedent-employee in accordance
with Republic Act No. 4917: Provided, That such amount is included
in the gross estate of the decedent.
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Retirement benefits received by employees of private firms in
accordance with a reasonable benefit plan maintained by the
employer are EXEMPT from all taxes, provided that the retiring
employee has been in the services of the same employer for at
least 10 years and is not less than 50 years old at the time of his
retirement.
The amount must:
O
have been received by the heirs of the decedent-employee as
a consequence of the latter's death, and
O
included in the gross estate of the decedent.
Net share of the surviving spouse in the conjugal partnership, if any
Sec. 86. (C) Share in the Conjugal Property. — The net share
of the surviving spouse in the conjugal partnership property as
diminished by the obligations properly chargeable to such property
shall, for the purpose of this Section, be deducted from the net estate
of the decedent.
If the decedent was married, we'll have to consider the share of
the surviving spouse in the conjugal partnership. The share of
the surviving spouse must be removed to ensure that only the
decedent's interest in the estate is taxed. (More on this later!)
State the conditions for allowing the following as deductions from the
gross estate of a citizen or resident alien for the purpose of imposing
estate tax:
a.
Claims against the estate
b.
Medical expenses (2015 Bar Exam)
Suggested answer:
!
i
I
a) For claims against the estate, the requisites are the following.
First, the liability must represent a personal obligation of the deceased
at the time of his death. Second, the liability was contracted in good
faith and for adequate and full consideration. Third, the claim must
be valid In law and enforceable In court. Fourth, It must not have
been condoned by the creditor during the lifetime of the deceased,
or it has not yet prescribed. Finally, If the claim arose out a debt
Instrument, the debt instrument must be notarized. Also, if the debt
was contracted within 3 years before the death of the decedent,
the estate must submit a statement showing the disposition of the
proceeds of the loan.
b) Medical expenses are no longer allowed as deductions. (TRAIN
amendment)
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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. PIO,000,000.00
constituting the value of their house in Aiabang as their family
home; and 2. P200,000.00 in funeral expenses because no other
expenses could be substantiated.
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. (2019 Bar Exam)
Suggested answer:
a)
The deduction for the family home is correct, as the Tax Code
allows a deduction of a max amount of PIO,000,000.00 for
the family home. The deduction for funeral expenses is wrong,
because the Tax Code no longer allows funeral expenses as a
deduction from gross estate.
b)
Yes, the standard deduction of P5,000,000.00 is allowed.
The Tax Code allows resident citizens a standard deduction
of P5,000,000.00 without need for proof. Hence, the heirs of
A, a resident citizen, may claim the P5,000,000.00 standard
deduction.
c)
Yes, they should include A's house in LA, California. Under the
Tax Code, the gross estate of resident citizens such as A include
all properties with and without the Philippines. Hence, the heirs
should include the house in California... (...LOVE. California
knows how to party, Californiaaaa, knows how to party. In the
city of LA. In the city of good oT Watts. In the city, city of
Compton. We keep it rockin' we keep it rockin. Please don't
include Tupac lyrics in your bar exam.)
Deductions for a NONRESIDENT, NOT CITIZEN of the Philippines
(B) Deductions Allowed to Nonresident Estates. — In the case
of a nonresident not a citizen of the Philippines, by deducting from
the value of that part of his gross estate which at the time of his
death is situated in the Philippines:
(1) Standard Deduction. — An amount equivalent to Five hundred
thousand pesos (P500,000);
(2) That proportion of the deductions specified in paragraphs (2),
(3) , and (4) of Subsection (A) of this Section which the value of such
part bears to the value of his entire gross estate wherever situated.
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(3) Transfers 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. (As amended by TRAIN)
The estate of a nonresident alien decedent at the time of death,
with properties within and outside the Philippines, is subject to
tax only on his or her estate within the Philippines.
The estate of a nonresident alien in the Philippines is allowed
deductions for:
O
Standard deduction of P500,000;
O
The proportion of the total losses and indebtedness which the
value of such part bears to the value of his entire gross estate
wherever situated. This includes:
■
Claims against the estate;
■
Claims against insolvent persons;
-
Unpaid mortgages, taxes, and casualty losses;
O
Vanishing deductions;
O
Transfers for public use; and
O
Net share of the surviving spouse in the conjugal property or
community property.
The allowable deduction for the proportion of total losses and
indebtedness shall be computed as follows:
Gross estate, Philippines
Gross estate, World
X
claims against the estate,
claims against insolvent persons,
unpaid mortgages, taxes, and
casualty losses
Mr. X, a Filipino residing In Alabama, U.S.A., died on January 2, 2013
after undergoing a major heart surgery. He left behind to his wife
and two (2) kids several properties, to wit:
(1) Family home In Makati City;
(2) Condominium unit in Las Pinas City;
(3) Proceeds of health Insurance from Take Care,
maintenance organization In the Philippines; and
(4) Land In Alabama, U.S.A.
a health
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The following expenses were paid:
(1) Funeral expenses;
(2) Medical expenses; and
(3) Judicial expenses in the testate proceedings.
a) What are the items that must be considered as part of the gross
estate income of Mr. X?
b) What are the items that may be considered as deductions from
the gross estate? (2014 Bar Exam)
Suggested answer:
a) The family home in Makati City, condo unit in Las Pinas, and
the land in Alabama, USA are included in the gross estate of Mr.
X. The Tax Code states that for residents and citizens, gross estate
includes all properties of the decedent, wherever situated. As a
Filipino citizen, his gross estate includes all his properties, wherever
situated. Hence, his properties in the Philippines and the US are
included. However, the proceeds from his health insurance are not
included in his gross estate.
The Tax Code states that only life insurance taken out by the
decedent, under certain conditions, is included in gross estate. In
this case, the insurance taken out is health insurance, and thus
excluded from gross estate.
b) He cannot claim funeral expenses, medical expenses, and judicial
expenses in the testate proceedings as these have been removed by
TRAIN. The estate can, however, claim the standard deduction of
P5,000,000 and the FMV of the family home, but only to the extent
of PIO,000,000. (Answer amended to reflect the changes of TRAIN)
E.
Net Estate Computation of Married Persons
Sec. 85. (H) Capita! of the Surviving Spouse. — The capital of
the surviving spouse of a decedent shall not, for the purpose of this
Chapter, be deemed a part of his or her gross estate.
Sec. 86. (C) Share in the Conjugal Property. — The net share
of the surviving spouse in the conjugal partnership property as
diminished by the obligations properly chargeable to such property
shall, for the purpose of this Section, be deducted from the net estate
of the decedent.
F.
Gross Estate
The gross estate of a decedent who was married and who was
under the system of absolute community of property or conjugal
property of gains during the marriage consists of:
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The EXCLUSIVE properties of the decedent, and
2.
The COMMUNITY properties
297
The exclusive properties are:
1.
Property acquired during the marriage by gratuitous title
(inheritance/donation) by either spouse, and the fruits as
well as the income thereof
•
2.
Property for personal and exclusive use of either spouse
•
3.
Unless the donor, testator or grantor states that they will
be part of the community property
But jewelry will form part of the community property
Property acquired BEFORE the marriage by either spouse who
has legitimate descendants by a former marriage, and the
fruits as well as the income of such property
Community property will consist of all properties owned by the
spouses at the time of the celebration marriage or acquired
thereafter (presumed to belong to the community)
The family home constituted by the husband and wife is
community property.
O
Proceeds of life insurance taken out by the decedent on his
own life, when includible in the gross estate, will be exclusive
property if the premiums were paid out of exclusive funds.
O
They will be community property if the premiums were paid
out of community funds.
Deductions from gross estate
•
The same rules and ceilings which were discussed on the part of
deductions will apply.
Example:
Elvis Rooney, a resident Filipino, was married under the system
of absolute community of property during the marriage. He died
leaving a family home worth P30,000,000, some real estate worth
P14,000,000, and a condo unit he was given by a friend during
his marriage worth P5,000,000. He had a claim against Fifi San
Pedro, an insolvent person, worth P2,000,000.
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Step 1:
Determine what are conjugal/community property and
what are exclusive. Add both up to get the gross estate.
(Spoiler: gross estate is P49,000,000)
Conjugal/community:
Step 2:
Family home
Real Estate
P30,000,000
P14,000,000
Exclusive:
Condo unit
P5,000,000
Subtract your ordinary deductions from the conjugal/
community property, to get your net conjugal/community estate. (Spoiler: net conjugal/community estate is
P42,000,000)
Ordinary deductions:
P2,000,000
Claims
against
insolvent person
Step 3:
Get the 1/2 share of the surviving spouse from the conjugal/
community property by dividing Step 2 by 2. Set that
aside. (Spoiler: share of surviving spouse is P21,000,000)
Step 4:
Subtract your ordinary deductions and special deductions
from the gross estate (your amount in Step 1). You'll end
up with the net estate. (Spoiler: net estate is P32,000,000)
Ordinary deductions:
P2,000,000
Claims
against
insolvent
Special deductions: Family home P10,000,000
P10,000,000 only? Because that's the max!)
person
(why
Standard deduction P5,000,000 (don't forget this. The
facts won't mention this but you still have to deduct this!)
Step 5:
G.
Subtract the 1/2 share of the surviving spouse (your
amount in Step 3) from your net estate to get the net
taxable estate of the decedent. (Spoiler: the net taxable
estate is Pll,000,000)
Exemption from Estate Tax
Sec. 87. Exemption of Certain Acquisitions and Transmissions.
— The following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of
another beneficiary, in accordance with the desire of the predecessor;
and
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(D) All bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income of which
insures to the benefit of any individual: Provided, however, That not
more than thirty percent (30%) of the said bequests, devises, legacies
or transfers shall be used by such institutions for administration
purposes.
The following are exempt from estate tax:
1.
Merger of usufruct in the owner of the naked title;
2.
Transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary;
3.
Transmission from the 1st heir, legatee or donee in favor
of another beneficiary in accordance with the desire of the
predecessor;
4.
All bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income
inures to the benefit of any individual, provided that not more
than 30% of the said bequests, devises, legacies or transfers
shall be used by such institutions for the administration
purposes;
5.
Irrevocable life insurance to someone other than the estate,
administrator, or executor;
6.
GSIS/SSS benefits;
7.
Retirement benefits of private firms approved by the BIR;
and
8.
Separate property of the surviving spouse.
Tax Credit for Foreign Estate Tax
(D) Tax Credit for Estate Taxes paid to a Foreign Country. —
(1) In General. — The tax imposed by this Title shall be credited
with the amounts of any estate tax imposed by the authority of a
foreign country.
(2) Limitations on Credit. — The amount of the credit taken under
this Section shall be subject to each of the following limitations:
(a) 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 this Title bears to his entire net estate; and
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(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
decedent's net estate situated outside the Philippines taxable under
this Title bears to his entire net estate.
To minimize the onerous effect of taxing the same property twice,
a tax credit against Philippine estate tax is allowed for estate
taxes paid to foreign countries.
One foreign country
What you paid to the foreign country
Tax Credit Limit =
Net Foreign Estate
Entire Net Estate
X Tax here in the
Philippines
Between what you paid to the foreign country and the tax credit
limit here, you choose whatever is lower as what you can credit.
See example in donor's tax part.
If tax is paid to two or more foreign countries:
Limitation A: see above
Limitation B: Tax Credit Limit =
Total Foreign Net Estate
Entire Net Estate
x
Tax here in the
Philippines
Between limitation A and B, you choose whatever is
tower as your credit.
H.
Estate Tax Returns
Sec 90 - Estate Tax Returns
(A) Requirements. — In all cases of transfers subject to the tax
imposed herein, or regardless of the gross value of the estate, where
the said estate consists of registered or registrable property such as
real property, motor vehicle, shares of stock or other similar property
for which a clearance from the Bureau of Internal Revenue is required
as a condition precedent for the transfer of ownership thereof in the
name of the transferee, the executor, or the administrator, or any of
the legal heirs, as the case may be, shall file a return under oath in
duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time of his
death, or in case of a nonresident, not a citizen of the Philippines, of
that part of his gross estate situated in the Philippines;
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(2) The deductions allowed from gross estate in determining the
estate as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable
and such supplemental data as may be necessary to establish the
correct taxes.
Provided, however, That estate tax returns showing a gross value
exceeding Five million pesos (PS,000,000) shall be supported with a
statement duly certified to by a Certified Public Accountant containing
the following:
(a) Itemized assets of the decedent with their corresponding gross
value at the time of his death, or in the case of a nonresident, not a
citizen of the Philippines, of that part of his gross estate situated in
the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86;
and
(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for Filing. — For the purpose of determining the estate
tax provided for in Section 84 of this Code, the estate tax return
required under the preceding Subsection (A) shall be filed within one
(1) year from the decedent's death.
A certified copy of the schedule of partition and the order of the
court approving the same shall be furnished the Commissioner within
thirty (30) after the promulgation of such order.
(C) Extension of Time. — The Commissioner shall have authority
to grant, in meritorious cases, a reasonable extension not exceeding
thirty (30) days for filing the return.
(D) Place of Filing. — Except in cases where the Commissioner
otherwise permits, the return required under Subsection (A)
shall be filed with an authorized agent bank, or Revenue District
Officer, Collection Officer, or duly authorized Treasurer of the city or
municipality in which the decedent was domiciled at the time of his
death or if there be no legal residence in the Philippines, with the
Office of the Commissioner. (As amended by TRAIN)
An estate tax return must be filed when the estate is:
1.
Subject to estate tax; and
2.
Regardless of the amount of the gross estate, where the said
gross estate consists of registered or registrable property,
motor vehicle or shares of stock, or other similar property
for which clearance from the BIR is required as a condition
precedent for the transfer of ownership thereof in the name
of the transferee.
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The return shall be under oath and shall include the following:
O
Value of the gross estate at the time of the decedent (for
nonresident aliens, the value of the gross estate here in the
Philippines);
O
Deductions allowed from the gross estate;
O
Whatever is necessary to establish the correct estate tax.
If the estate tax return shows that the gross estate exceeds
P5,000,000, it should be accompanied by a statement certified
by a CPA.
The estate tax return should be filed within one year from the
decedent's death.
The BIR can extend this, but not more than 30 days.
A return need not be complete in all particulars. It is sufficient
if it complies substantially with the law. There is substantial
compliance when:
o
The return is made in good faith and is not false or fraudulent;
o
It covers the entire period involved; and
o
It contains information as to the various items of income,
deductions and credits with such definiteness as to permit the
computation and assessment of the tax. (CIR v. Gonzales,
G.R. No. L-19495, November 24, 1966)
•
Where the return was made on the wrong form, it was
held that the filing thereof did not stop the running
of the period of limitations, and where the return was
very deficient, there was no return at all. (Ibig., CIR v.
Gonzales)
Approval of probate court is NOT mandatory in collection of estate
taxes.
I.
Payment of Tax
Sec. 91. Payment of Tax. —
(A) Time of Payment. — The estate tax imposed by Section 84 shall
be paid at the time the return is filed by the executor, administrator or
the heirs.
(B) Extension of Time. — When the Commissioner finds that the
payment on the due date of the estate tax or of any part thereof
would impose undue hardship upon the estate or any of the heirs,
he may extend the time for payment of such tax or any part thereof
not to exceed five (5) years, in case the estate is settled through the
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courts, or two (2) years in case the estate is settled extrajudicially. In
such case, the amount in respect of which the extension is granted
shall be paid on or before the date of the expiration of the period
of the extension, and the running of the Statute of Limitations for
assessment as provided in Section 203 of this Code shall be suspended
for the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional
disregard of rules and regulations, or fraud on the part of the taxpayer,
no extension will be granted by the Commissioner.
If an extension is granted, the Commissioner may require the executor,
or administrator, or beneficiary, as the case may be, to furnish a bond
in such amount, not exceeding double the amount of the tax and
with such sureties as the Commissioner deems necessary, conditioned
upon the payment of the said tax in accordance with the terms of the
extension.
(C) Payment by Installment. — In case the available cash of the
estate is insufficient to pay the total estate tax due, payment by
installment shall be allowed within two (2) years from the statutory
date for its payment without civil penalty and interest. (As amended
by TRAIN)
(D) Liability for Payment. — The estate tax imposed by Section
84 shall be paid by the executor or administrator before delivery
to any beneficiary of his distributive share of the estate. Such
beneficiary shall to the extent of his distributive share of the estate,
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.
For the purpose of this Chapter, the term "executor"or "administrator"
means the executor or administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and acting within the
Philippines, then any person in actual or constructive possession of
any property of the decedent.
Estate tax shall be paid at the time the return is filed.
•
O
TRAIN now allows payment by Installment for estate tax,
which should be made within two years.
O
R.R. 12-2018 also allows the partial disposition of estate and
the application of its proceeds to the estate tax due.
The Commissioner may extend the payment of such tax.
O
It should not exceed five years in case of judicial settlement,
and two years if extrajudicial settlement.
O
The running of the period of limitation for assessment shall
be suspended for the period of such extension.
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The estate tax shall be paid by the executor or administrator
before delivery to any beneficiary of his distributive share of the
estate.
O
Where there are two or more executors, all of them are
severally liable for the payment of the estate tax. (CIR v.
Gonzales, G.R. No. L-19495, November 24, 1996)
O
The inheritance tax, although charged against the account
of each beneficiary, should be paid by the executor or
administrator.
O
Such beneficiary shall be subsidiarily liable for the payment of
such tax to the extent of his share.
Claims for income tax need not be filed with the committee
on claims and appraisals in the course of testate proceedings,
and the amount thereof may be collected after the distribution
of the decedent's estate among his heirs, who shall be liable
in proportion to their share in the inheritance. (Government v.
Pamintuan, G.R. No. L-33139, October 11, 1930)
The government, in collecting unpaid taxes accruing before the
death of the decedent, has two ways of collecting the said taxes:
J.
O
By going after all the heirs and collecting from each one of
them the amount of the tax proportionate to the inheritance
received, or
O
By subjecting said property of the estate which is in the
hands of an heir or transferee to the payment of the tax due
the estate, (or, go against one heir for the entire tax, subject
to the heirs right of contribution from his co-heirs.) (CIR v.
Pineda, G.R. No. L-22734, September 15, 1967)
Miscellaneous Provisions
Sec. 92. Discharge of Executor or Administrator from Persona!
Liability. — If the executor or administrator makes a written
application to the Commissioner for determination of the amount of
the estate tax and discharge from personal liability therefore, the
Commissioner (as soon as possible, and in any event within one (1)
year after the making of such application, or if the application is
made before the return is filed, then within one (1) year after the
return is filed, but not after the expiration of the period prescribed
for the assessment of the tax in Section 203 shall not notify the
executor or administrator of the amount of the tax. The executor or
administrator, upon payment of the amount of which he is notified,
shall be discharged from personal liability for any deficiency in the
tax thereafter found to be due and shall be entitled to a receipt or
writing showing such discharge.
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Sec. 93. Definition of Deficiency. — As used in this Chapter, the
term "deficiency" means:
(a) The amount by which the tax imposed by this Chapter exceeds
the amount shown as the tax by the executor, administrator or any
of the heirs upon his return; but the amounts so shown on the return
shall first be increased by the amounts previously assessed (or
collected without assessment) as a deficiency and decreased by the
amount previously abated, refunded or otherwise repaid in respect of
such tax; or
(b) If no amount is shown as the tax by the executor, administrator
or any of the heirs upon his return, or if no return is made by the
executor, administrator, or any heir, then the amount by which the
tax exceeds the amounts previously assessed (or collected without
assessment) as a deficiency; but such amounts previously assessed
or collected without assessment shall first be decreased by the
amounts previously abated, refunded or otherwise repaid in respect
of such tax.
Sec. 94. Payment Before Delivery by Executor or Administrator.
— No judge shall authorize the executor or judicial administrator
to deliver a distributive share to any party interested in the estate
unless a certification from the Commissioner that the estate tax has
been paid is shown.
Sec. 95. Duties of Certain Officers and Debtors. — Registers of
Deeds shall not 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, unless a certification from the Commissioner that the
tax fixed in this Title and actually due thereon had been paid is
show, and they shall immediately notify the Commissioner, Regional
Director, Revenue District Officer, or Revenue Collection Officer or
Treasurer of the city or municipality where their offices are located, of
the non payment of the tax discovered by them. Any lawyer, notary
public, or any government officer who, 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, shall have the duty of furnishing the
Commissioner, Regional Director, Revenue District Officer or Revenue
Collection Officer of the place where he may have his principal office,
with copies of such documents and any information whatsoever
which may facilitate the collection of the aforementioned tax. Neither
shall a debtor of the deceased pay his debts to the heirs, legatee,
executor or administrator of his creditor, unless the certification of
the Commissioner that the tax fixed in this Chapter had been paid is
shown; but he may pay the executor or judicial administrator without
said certification if the credit is included in the inventory of the estate
of the deceased.
Sec. 96. Restitution of Tax Upon Satisfaction of Outstanding
Obligations. — If after the payment of the estate tax, new obligations
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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.
Sec. 97. Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights. — There shall not be transferred 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, unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have
been paid is shown.
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
any withdrawal from the said deposit account, subject to a final
withholding tax of six percent (6%). For this purpose, ali withdrawal
slips shall contain a statement to the effect that all of the joint
depositors are still living at the time of withdrawal by any one of the
joint depositors and such statement shall be under oath by the said
depositors. (As amended by TRAIN)
TRAIN now allows the withdrawal of bank deposits of dead
folks, subject to a final withholding tax of 6%, provided that the
withdrawal shall only be made within 1 year from the death of the
decedent. (R.R. 12-2018)
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A.
In General
Sec. 98. Imposition of Tax. —
(A) There shall be levied, assessed, collected and paid upon the
transfer by any person, resident or nonresident, of the property by
gift, a tax, computed as provided in Section 99.
(B) The tax shall apply whether the transfer is in trust or otherwise,
whether the gift is direct or indirect, and whether the property is real
or personal, tangible or intangible.
Donor's tax will be levied, assessed, collected and paid upon the
transfer by any person, resident or nonresident, of property by
gift
o
The property can be real or personal, tangible or intangible
o
The transfer can be in trust or otherwise
o
The gift can be direct or indirect
The donor's tax shall not apply unless and until there is a
completed gift. The transfer of property by gift is perfected from
the moment the donor knows of the acceptance by the donee; it
Is completed by the delivery, either actually or constructively, of
the donated property to the donee. Thus, the law in force at the
time of the perfection/completion of the donation shall govern
the Imposition of the donor's tax. (R.R. 12-2018)
A gift that is Incomplete because of reserved powers becomes
complete when either:
o
The donor renounces the power; or
o
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.
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Implications of Renunciation (R.R. 12-2018)
Renunciation
by
the
surviving
spouse of his/her share in the
conjugal partnership or absolute
community after dissolution of
the marriage in favor of the heirs
Subject to donor's tax
General renunciation by an heir,
including the surviving spouse, of
share in the hereditary estate left
by decedent
Not subject to donor's tax
Renunciation by an heir, including
the surviving spouse, of share in the
hereditary estate to a specified and
identified heir to the exclusion or
disadvantage of the other co-heirs
Subject to donor's tax
In the settlement of the estate of Mr. Barbera who died intestate,
his wife renounced her inheritance and her share of the conjugal
property in favor of their children. The BIR determined that there
was a taxable gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (2013 Bar Exam)
Suggested answer: The BIR is correct. 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 persons is subject to donor's
tax whereas 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 heirs to the exclusion or disadvantage
of the other co-heirs in the hereditary estate. In this case, the
renunciation was specifically made in favor of the children; hence,
donor's tax can be assessed on Mrs. Barbera.
In 2011, Solar Computer Corporation (Solar) purchased a proprietary
membership share covered by Membership Certificate No. 8 from
the Mabuhay Golf Club, Inc. for P500,000.00. On December 27,
2012, it transferred the same to David, its American consultant, to
enable him to aval! of the facilities of the Club. David executed a
Deed of Declaration of Trust and Assignment of Shares wherein he
acknowledged the absolute ownership of Solar over the share; that
the assignment was without any consideration; and that the share
was placed in his name because the Club required it to be done. In
2013, the value of the share increased to P800,000.00.
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Is the said assignment a "gift" and, therefore, subject to gift tax?
Explain. (2016 Bar Exam)
Suggested answer: The transfer is subject to donor's tax. The Tax
Code states that donor's tax will be levied and assessed on the
transfer of property by gift, whether the transfer is by trust or
otherwise. Transfers for less than adequate and full consideration
are considered gifts subject to donor's tax. In this case, there was no
consideration for the transfer, making it a gift, and the transfer, even
if by trust, will be subject to donor's tax.
B.
Gross Gifts
Sec. 104. Definitions. — For purposes of this Title, the terms
"gross estate "a nd "gifts" include real and personal property, whether
tangible or intangible, or mixed, wherever situated: Provided,
however, That where the decedent or donor was a nonresident alien
at the time of his death or donation, as the case may be, his real
and personal property so transferred but which are situated outside
the Philippines shall not be included as part of his "gross estate"
or "gross gift": Provided, further, That 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; shares, obligations or bonds
by any foreign corporation eighty-five percent (85%) of the business
of which 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,
shall be considered as situated in the Philippines: Provided, still
further, That no tax shall be collected under this Title in respect
of intangible personal property: (a) 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 (b) 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.
•
There are two kinds of donors (similar to estate tax):
1.
The resident or citizen of the Philippines, and
2.
The nonresident, not citizen of the Philippines
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If the donor is a resident or a citizen of the Philippines, gross gifts
would consist of:
1.
Real estate, regardless of location
2.
Tangible personal property, regardless of location
3.
Intangible personal property, regardless of location
If the donor is a nonresident and not a citizen of the Philippines,
gross gifts would consist of:
1.
Real estate located in the Philippines
2.
Tangible personal property located in the Philippines
3.
Intangible personal property located in the Philippines, subject
to the "reciprocity clause" (Similar to the rules for estate tax,
see discussion there for what constitutes intangible property)
a.
If the donor at the time of the donation was a citizen and
resident of a foreign country which at the time of the
donation did not impose a transfer tax of any character in
respect of intangible personal property of Filipino citizens
not residing in that country, or
b.
If the laws of the foreign country of which the donor was
a citizen and resident at the time of donation allow a
similar exemption from transfer taxes of every character
in respect of intangible personal property owned by
citizens of the Philippines not residing in that country
A donation made by a corporation to the heirs of a deceased
officer out of gratitude for his past services is subject to donor's
tax. It is not subject to deduction for the value of said services
that do not constitute a recoverable debt. (Pirovano v. CIR, G.R.
No. L-19865, July 31, 1965, where the heirs wanted to consider
it remuneratory so it won't be taxed as a gift.)
Badges of a donation inter vivos:
o
Made out of love and affection;
o
Reservation of usufruct in favor of the donor (/.e.z the naked
ownership has been transferred to the donee);
o
Donor reserved certain properties for himself (so he still had
something to live by);
o
The donee accepted the donation (no need for acceptance if
donation mortis causa). (Spouses Gestopa v. CA, G.R. No.
111904, Octobers, 2000)
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Also to be considered as gifts are the following:
1.
Transfers for insufficient consideration; and
2.
Cancellation of indebtedness.
C.
Transfer for Insufficient Consideration
SEC. 100. Transfer for Less Than Adequate and Full
Consideration. — Where property, other than real property referred
to in Section 24(D), is transferred for less than an adequate and
full consideration in money or money's worth, then the amount by
which the fair market value of the property exceeded the value of
the consideration shall, for the purpose of the tax imposed by this
Chapter, 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 any donative intent), will be considered
as made for an adequate and full consideration in money or money's
worth. (As amended by TRAIN)
A transfer of real/personal property will be considered a donation/
gift and subject to the donor's tax when:
1.
The transfer was for less than adequate and full consideration,
2.
Such transfer was effective during his lifetime (inter vivos),
and
3.
Other than real property in Section 24(D), NIRC, i.e., the
property was not subject to final capital gains tax (capital
asset).
Prior to the passage of TRAIN, the absence of donative intent did
not matter, as Section 100 categorically states that the amount
by which the fair market value of the property exceeds the value
of the consideration shall be deemed a gift. (Philippine American
Life and General Insurance v. Secretary of Finance, G.R. No.
210987, November 24, 2014) The amount by which the value
of the property exceeded the consideration received shall be
considered a donation.
o
For example, Bettina Cooper sold her car to Ronnie Lodge for
PlOOk. It had an FMV of P280k. The P180k will be considered
a donation and thus subject to tax.
o
But TRAIN now gives an exception:
*
When the transfer is made in the ordinary course of
business, it will be considered as made for an adequate
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and full consideration. The requisites for this type of
transfer are:
•
Bona fide transaction;
•
Arm's length; and
•
Free from any donative intent.
What are the implications if the real property sold was a capital
asset as against an ordinary asset?
O
For example, the real property had a cost of PlOOk, an FMV
of P200k, but sold for only P170k.
•
If it were classified as a capital asset, it will be taxed 6% of
the FMV (remember, the base is either the consideration
or the FMV, whichever is higher).
•
If it were classified as an ordinary asset, it will be taxed
twice. First, it will be taxed for income tax purposes (tax
base of P70k). Second, it will be taxed for donor's tax (tax
base of P30k). In this case, donor's tax will be attracted
unwittingly.
D. Cancellation of Indebtedness
•
If a creditor desires to benefit a debtor, and without any
consideration therefore, cancels the debt (and the debtor
"accepts"), the amount of the debt is a donation by the creditor
to the debtor. (Section 50, R.R. 2-1940)
E.
Value of the Gifts
Sec. 102. Valuation of Gifts Made in Property. — If the gift is
made in property, the fair market value thereof at the time of the gift
shall be considered the amount of the gift. In case of real property,
the provisions of Section 88(B) shall apply to the valuation thereof.
The fair market value of the property donated/given at the time
of the donation shall be the value of the gross gifts.
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
P200,000.00. At the time of donation, the fair market value of the two
parcels of land, as determined by the CIR, was P2,300,000.00; white
the fair market value of the same properties as shown in the schedule
of values prepared by the City Assessors was P2,500,000.00. What
is the proper valuation of Mr. L's gifts to his children for purposes of
computing donor's tax? (2015 Bar Exam)
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Suggested answer: The proper valuation is P2,500,000.00 or the
FMV based on the schedule of the City Assessors. According to the
Section 88 (B), Tax Code, for donor's tax purposes (and also estate
tax purposes), the FMV of real property is the higher value of either
the FMV as determined by the CIR or the FMV as determined by the
schedule prepared by the Provincial or City Assessor.
F.
Deductions from Gross Gifts Resident or Citizen Donors
Sec. 101. Exemption of Certain Gifts. — The following gifts or
donations shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. —
(1) 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
(2) 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: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes. For the purpose of the exemption,
a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic
organization and/or research institution or organization' is a school,
college or university and/or charitable corporation, accredited
nongovernment organization, trust or philanthropic organization and/
or research institution or organization, incorporated as a nonstock
entity, paying no dividends, governed by trustees who receive no
compensation, and devoting 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. (As amended by TRAIN)
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These "exemptions of certain gifts" should be taken to mean the
deductions allowed by law to arrive at the taxable net gifts.
•
The deductions allowed for a resident or citizen donor:
i
1.
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 government
2.
Gifts in favor of educational and/orcharitable, religious, cultural
or social welfare corporations, institutions, accredited NGOs,
trust or philanthropic organizations, research institutions or
organizations, provided that not more than 30% of said gifts
shall be used by such donee for administration purposes
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The entity must be:
Non-stock;
i
ii.
Paying no dividends;
iii.
Governed by trustees who receive NO compensation;
and
iv.
Devoting ALL its income to the accomplishment of
the purpose enumerated in its AOI. (R.R. 12-2018)
CMI School, Inc., a nonstock, non-profit corporation, donated its
three parcels of idle land situated in the Municipality ofCuyapo, Nueva
Ecija to SLC University, another nonstock, non-profit corporation,
in recognition of the latter's contribution to and participation in the
spiritual and educational development of the former.
a) Is CMI School, Inc. liable for the payment of donor's tax? Explain
your answer.
b) If SLC University later sells the three parcels of idle land to
Puregold Supermarket, Inc., a stock corporation, will SLC University
be liable for capital gains tax? Explain your answer.
c) If SLC University donates the three parcels of idle land in favor
of the Municipality of Cuyapo, Nueva Ecija, will SLC University
be liable for donor's tax? Explain your answer. (2017 Bar Exam)
Suggested answer:
a) CMI School, Inc. is not liable for donor's tax. Under the Tax
Code, donations to non-profit educational institutions are exempt
from donor's tax. The donation is to SLC University, a nonstock,
non-profit educational institution. Hence, it is exempt from donor's
tax.
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b) Assuming the Income from the sale Is actually, directly, and
exclusively used for educational purposes, the sale is exempt from
capita! gains tax. Under the Constitution, all revenues of non-stock,
non-profit educational institutions which are actually, directly, and
exclusively used for educational purposes are exempt from all taxes.
Hence, assuming this is the case with SLC University, then its sale to
Puregold is exempt from capita! gains tax.
c) The donation to the Municipality of Cuyapo is exempt from
donor's tax. Under the Tax Code, donations to the any political
subdivision of the government is exempt from donor's tax.
Years ago, Krisanto bought a parcel of land In Muntinlupa for only
PhP65,000. He donated the land to his son, Kornelio, in 1980 when
the property had a fair market value of PhP75,000, and paid the
corresponding donor's tax.
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Kornelio, in turn, sold the property In 2000 to Katrina for PhP 6.5
million and paid the capital gains tax, documentary stamp tax, local
transfer tax, and other fees and charges. Katrina, in turn, donated
the land to Klaret School last August 30, 2017 to be used as the site
for additional classrooms. No donor's tax was paid, because Katrina
claimed that the donation was exempt from taxation. At the time of
the donation to Klaret School, the land had a fair market value of
PhP 65 million.
Is Katrina Hable for donor's tax? (2018 Bar Exam)
Suggested answer: No, Katrina is not liable for donor's tax. Under
the Tax Code, donations to non-profit educational institutions are
exempt from donor's tax. Hence, assuming Klaret School is a nonprofit educational institution, then the donation is exempt from
donor's tax.
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Upon the death of their beloved parents in 2009, Karla, Karla, and
Karlie inherited a huge tract of farm land in Kanlaon City. The siblings
had no plans to use the property. Thus, they decided to donate the
land, but were not sure to whom the donation should be made. They
consult you, a well-known tax law expert, on the tax implications of
the possible donations they plan to make, by giving you a list of the
possible donees:
3
1. The Kanlaon City High School Alumni Association (KCHS AA),
since the siblings are all alumni of the same school and are active
members of the organization. KCHS AA is an organization intended
to promote and strengthen ties between the school and its alumni;
8
2. The Kanlaon City Water District which intends to use the land for
its offices; or
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3. Their second cousin on the maternal side, Klkay, who serves as
the caretaker of the property.
Advise the siblings which donation would expose them to the least
tax liability. (2018 Bar Exam)
Suggested answer: I would advise the siblings to donate the land to
the Kanlaon City Water District because the donation will be exempt
from donor's tax. Under the Tax Code, donations to any government
entity created by any of its agencies which is not conducted for profit
Is exempt from donor's tax. A water district, such as the donee here,
Is a government entity not organized for profit. Hence, the donation
will be exempt.
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
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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.
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 Exam)
Suggested answer:
a)
Gifts made to the national government or any of its political
subdivisions are exempt. Gifts to educational, charitable, social
welfare corporations or institutions, and accredited NGOs are
also exempt from donor's tax.
b)
It does not fall under any of the enumerated exemptions, but
it is still exempt from donor's tax because TRAIN states that
that a sale, exchange, or other transfer of property made in
the ordinary course of business (a transaction which is bona
fide, at arm's length, and free from any donative intent), will
be considered as made for an adequate and full consideration
in money or money's worth and therefore not subject to donor's
tax. In this case, the sale of its shares to an unrelated corporation
a little below the valuation was bona fide, at arm's length, and
free from any donative intent. Hence, it is exempt.
G. Deductions from the Gross Gifts by Husband and Wife
•
For deductions from gross gifts made by husband and wife, out
of community/conjugal property, each donor has his or her own
deductions. Their donations will be distributed equally among
them (1/2).
•
However, if what was donated is a conjugal or community property
and only the husband signed the deed of donation, there is only
one donor for donor's tax purposes, without prejudice to the right
of the wife to question the validity of the donation without her
consent pursuant to the pertinent provisions of the Civil Code of
the Philippines and the Family Code of the Philippines.
H.
Deductions for a Nonresident. Not Citizen Donor
(B) In the Case of Gifts Made by a Nonresident Not a Citizen
of the Philippines. —
(1) 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.
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(2) 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.
Same as the resident or citizen donor.
I.
Other Deductions
•
The BIR has allowed the following as deductions from gross gifts
to arrive at net gifts:
o
o
Encumbrance on the property donated, if assumed by the
donee
Those specifically provided by the donor as a diminution of
the property donated. (R.R. 12-2018)
Example:
Fabby Wabby donated land which was subject to a mortgage to
Elfie. The FMV of the land was P1M, but the mortgage was P400k.
Elfie agreed to assume the mortgage, hence the deduction of
P400k is allowed. The net gift is P600k.
3.
Exemptions Under Special Laws
Gifts and donations to the University of the Philippines is exempt
from donor's tax. (R.A. 9500)
Contributions to the National Book Trust Fund is exempt from
donor's tax. (R.A. 9521)
Donations to qualified foster care agencies are exempt from
donor's tax. (R.A. 10165)
Under R.A. 7166, contributions to candidates or political parties
duly reported to the BIR are not subject to any donor's tax.3
O
Any provision of law to the contrary notwithstanding, any
contribution in cash or in kind to any candidate or political
party or coalition of parties for campaign purposes, duly
reported to the Commission shall not be subject to the
payment of any gift tax. (R.R. 8-2009)
3Section 13. xxx Any provision of law to the contrary notwithstanding any
contribution in cash or in kind to any candidate or political party or coalition of
parties for campaign purposes, duly reported to the Commission shall not be
subject to the payment of any gift tax.
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Segue to income taxes: so what happens to the money
given to the candidate? (R.R.. 7-2011, February 8, 2011)
•
GR: The money given to the candidate will NOT go
into his taxable income, as long as it is utilized in his
campaign.
•
HOWEVER, unutilized/excess campaign funds shall
be subject to income tax.
•
Moreover, any candidate (winner or loser) must file
with the COMELEC his/her statement of expenditures.
If not, he/she will be precluded from using such
expenditures as deductions from his/her campaign
contributions. As such, the entire amount of such
contributions will be directly subject to income tax.
Mr. De Sarapen is a candidate in the upcoming Senatorial elections.
Mr. De Aimacen, 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 Aimacen 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 ofcash
and campaign materials subject to donor's tax? (2014 Bar Exam)
Suggested answer: No, they are actually exempt from donor's tax.
Campaign contributions, whether in cash or In kind, to any political
candidate is exempt from gift tax.
K. Tax Rates Payable by Donor
Sec. 99. Rates of Tax Payable by Donor. —
(A) In General. — The tax for each calendar year shall be six
percent (6%) computed on the basis of the total gifts in excess of
two hundred fifty thousand pesos (P250,000) exempt gift made
during the calendar year.
(B) 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. (As amended by TRAIN)
Donor's tax is reported by calendar year.
So if you want to avoid paying the tax, split the donation
(December 31 and January 1).
Donations made which are not over P250,000 in a calendar year
are exempt from donor's tax.
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Note that the P250,000 counts as a deduction from total gifts,
because the 6% rate is imposed on the total gifts in excess of
P250,000.
The basic tax formula is as follows:
On the first donation of a calendar year
Gross gifts
Less: Deductions from these gross gifts
Net Gifts
X Donor's tax rate
Donor's tax due on the net gifts
On a subsequent donation in the same calendar year
Gross gifts made on this date
Less: Deductions from these gross oifts
Net gifts made on this date
Plus: All prior net gifts given with the same calendar year
Aggregate net gifts
Donor's tax on aggregate net gifts
Less: Donor's tax on all prior net gifts within the same calendar
year
Donor's tax due on the net gifts of this date
L.
Donor's Tax Return
Sec. 103. Filing of Return and Payment of Tax. —
(A) Requirements. — Any Individual who makes any transfer by
gift (except those which, under Section 101, are exempt from the tax
provided for in this Chapter) shall, for the purpose of the said tax,
make a return under oath in duplicate. The return shall set forth:
(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; and
(5) Such further information as may be required by rules and
regulations made pursuant to law.
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(B) Time and Place of Filing and Payment. — The return of the
donor required in this Section shall be filed within thirty (30) days
after the date the gift is made and the tax due thereon shall be paid at
the time of filing. Except in cases where the Commissioner otherwise
permits, the return shall be filed and the tax paid to an authorized
agent bank, the Revenue District Officer, Revenue Collection Officer
or duly authorized Treasurer of the city or municipality where the
donor was domiciled at the time of the transfer, or if there be no legal
residence in the Philippines, with the Office of the Commissioner.
In the case of gifts made by a nonresident, the return may be filed
with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer, or directly with the Office of the
Commissioner.
The donor's tax return must be filed within 30 days after the date
of the donation.
On all donations of one date, only one donor's tax return is
required.
In case of husband and wife as donors, the donor's tax return of
the husband will be apart of the donor's tax return of the wife.
When and where to pay? The donor's tax will be paid at the time
the return is filed, and with the office where the return is filed.
Note: In order to be i) exempt from donor's tax, and ii) to claim
full deduction of the donation given to qualified donee institutions
duly accredited by the PCNC, the donor engaged in business shall
give a notice of donation on every donation worth at least P50,000
to the Revenue District Office (RDO) which has jurisdiction over
his place of business within thirty (30) days after 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 thirty percent (30%) of the said donation/
gifts for the taxable year shall be used by such accredited nonstock, non-profit corporation/NGO institution (qualified-donee
institution) for administration purposes. (R.R. 12-2018)
M. Donor's Tax Credit(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. —
(1) In General. — The tax imposed by this Title 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 tax of any character and description
imposed by the authority of a foreign country.
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(2) Limitations on Credit. — The amount of the credit taken under
this Section shall be subject to each of the following limitations:
(a) 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 this Title bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
donor's net gifts situated outside the Philippines taxable under this
title bears to his entire net gifts.
Only resident or citizen donors are allowed donor's tax credit.
O
Why? Because they are the only ones taxed worldwide. A
nonresident noncitizen is not taxed for his donations in foreign
jurisdictions.
For a foreigner's donor's tax paid to a foreign country, a credit
is allowed to reduce the Philippine donor's tax to pay, under the
formula:
Foreign donor's tax paid = xxxx
Limit:
Net foreign gifts
Net gifts, worldwide
x
Philippine Donor's Tax = xxxx
Allowed tax credit is whichever is lower of the foreign donor's
tax paid and the limit.
Example:
Mi Idolo Iniesta donated property to Liza I.S. Darna here in
the Philippines, net gift value of P200,000
He also donated to Claire Fraser in Scotland, net gift value
of P300,000. In Scotland, he paid a tax of PIO,000
Foreign donor's tax paid = P10,000
Donor's tax supposed to be paid worldwide, without the
credit = P14,000.
Credit is:
300,000
500,000
x P14,000 = 8,400
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So choose what is lower between the tax paid abroad and the
credit limitation. So, it is P8,400. That's the tax credit.
Mi Idolo Iniesta has to pay P5,600.
If two foreign countries
Limitation A: Foreign donor's tax paid to the foreign country
Net gifts, foreign country
Net gifts, world
x Philippine donor's tax
Allowed tax credit = whatever's lower
Limitation B (by totals)
Total of foreign donor's taxes paid to the foreign countries
Net gifts, outside the Phil
Net gifts, world
- x Philippine donor’s tax
Allowed tax credit = whatever's lower
Tax credit to apply is whatever is lower between Limitation A and
Limitation B
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A.
In General
TITLE IV
VALUE-ADDED TAX
CHAPTER I
IMPOSITION OF TAX
Sec. 105. Persons Liable. — Any person who, in the course of trade
or business, sells barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 106 to 108 of this
Code.
The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or services at the time
of the effectivity of Republic Act No. 7716.
VAT is imposed on any person who:
1.
Sells, barters, or exchanges goods or properties in the course
of trade or business; or
2.
Sells services in the course of trade or business; or
3.
Imports goods, whether or not in the course of trade or
business.
The VAT is a tax on consumption, levied on the sale, barter,
exchange, or lease of goods or properties and services in the
Philippines and the importation of goods into the Philippines.
o
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 or properties or
services.
o
VAT is imposed on the seller, not the buyer.
•
EXCEPT: in importation
323
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If the seller is VAT exempt, no need for payment on VAT on his
sales. He will have to shoulder the burden of the VAT passed to
him by his suppliers for his purchases.
Is VAT really a tax on the value-added?
Yes. Consider this:
O
Aragorn sells to Bo-ra a piece of wood — a nice, fine, wellsanded piece of wood.
Price:
VAT (12%):
Total:
P100
P12
P112
Bo-ra then expertly crafts the wood into a rocking chair and
sells it to Clint Barton.
Price:
Tax:
Total:
P150
P18
P168
Bo-ra has an output tax of P18, and an input tax of P12. She
has a P6 net VAT payable (output minus input). But where do we
see the tax on the "value added" by B?
We see that at the level of the price. By applying her skills
and labor (and masungit but cute charm), Bo-ra made a chair
out of the wood that she had bought from Aragorn. From P100,
the price increased to P150. There was a P50 increase because
of the value added by Bo-ra. And applying the VAT on this P50, it
results into the same amount, which is 6. This proves that the tax
is really on the "value added."
How do we know if the transaction is subject to VAT? What are
the elements?
1.
It must be done in the ordinary course of trade or business;
2.
There must be a sale, barter, exchange, lease of goods or
properties, or rendering of service in the Philippines; and
3.
It is not VAT-exempt or VAT zero-rated.
o
If all three are present, then the transaction is subject to
the 12% VAT. Absence of one will not make the transaction
subject to VAT.
■
But remember that importations are subject to VAT,
whether or not in the course of trade or business.
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As it is a tax on the transaction, there is no need whatsoever
for there to be a taxable gain (unlike in income tax). It is not
required by either law or jurisprudence.
O
In fact, the NIRC and CIR v. CA and Commonwealth
Management and Services Corporation (COMASERCO) (G.R.
No. 125355, March 30, 2000) state that nonstock, nonprofit
organizations are subject to VAT, as long as the service is
done for a fee or remuneration.
Ordinary course of trade or business
Sec. 105. —
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 nonstock, nonprofit 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.
The rule of regularity, to the contrary notwithstanding, services as
defined in this Code rendered in the Philippines by nonresident foreign
persons shall be considered as being course of trade or business.
"Ordinary course of trade or business" means the regular conduct
or pursuit of a commercial or an economic activity.
o
It also includes transactions incidental thereto.
o
It covers any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit organization
(irrespective of the disposition of its net income and whether
or not it sells exclusively to members or their guests), or a
government entity.
There should be
o
a commercial or economic activity, and
o
regularity In the action.
«
•
Regular involves more than one isolated transaction. It
requires repetition and continuity of action.
However, if the taxpayer Is a nonresident foreign person, there is
no need for the regularity of conduct. Services rendered by them
in the Philippines are considered as being in the course of trade
or business, and thus, subject to the VAT.
o
This is an exception to the "regularity" requirement.
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Any sale, barter, or exchange of goods or services in the course
of trade or business is subject to VAT.
•
O
The sale of a vehicle used in the business of the taxpayer,
while isolated, is subject to VAT as the transaction was an
incidental transaction made in the course of the taxpayer's
business. (Mindanao II Geothermal Partnership v. CIR, G.R.
No. 193301, March 11, 2013)
•
However, the involuntary sale of vessels by a taxpayer
not engaged in the sale of vessels pursuant to the
government's policy of privatization is not subject to
VAT because the sale was not in the course of trade or
business. (CIR v. Magsaysay Lines, Inc., G.R. No. 146984,
July 28, 2006)
■
The sale of a power plant by a GOCC due to a law
that mandated the privatization of NPC assets is also
not subject to VAT because it was not in pursuit of a
commercial or economic activity. (PSALM v. CIR, Inc.,
G.R. No. 198146, August 8, 2017)
When determining if this element/requisite exists, be mindful of
the following:
O
Was the transaction done regularly? Or isolated?
O
Was it incidental to the taxpayer's business?
O
Is the taxpayer a nonresident alien? (Because if he is, the
transaction need not be regular.)
Between an automobile shop that sells five parcels of land and a
real estate dealer who sold a parcel of land, both will be subject
to VAT. The automobile shop because of its regular conduct, and
the real estate dealer because of the nature of his business in the
pursuit of an economic activity.
This provision notwithstanding, importation of goods for personal
use is still subject to VAT because of Section 107.
O
This is an exception to "pursuit of a commercial or an economic
activity" requirement.
Sale, barter, exchange, lease of goods or properties, or rendering of
service in the Philippines
•
There must be a sale, barter, exchange, lease of goods or
properties, or rendering of service in the Philippines.
O
Hence, if a taxpayer renders service to an affiliate for a fee
(even if the fee is merely to reimburse costs), the service is still
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subject to VAT. (CIR v. CA and Commonwealth Management
and Services Corporation [COMASERCO], G.R. No. 125355,
March 30, 2000)
O
Similarly, the fees collected by toll way operators are subject
to VAT. Toll way operators are engaged in rendering service
(constructing, maintaining, and operating expressways).
(Diaz v. Secretary of Finance, G.R. No. 193007, July 19,
2011)
When there is no sale, barter or exchange of goods or properties,
then no VAT should be imposed.
O
Hence, 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)
O
Membership fees, association dues, and the like collected by
recreational clubs from its members are also not subject to
VAT, because the clubs aren't selling its service to its members.
There is no economic or commercial activity because these
dues are devoted to the operations and maintenance of the
facilities of the club. (Association of Non-Profit Clubs v. BIR,
G.R. No. 228539, June 26, 2019)
O
The same rule applies for membership fees, association
dues, and the like collected by condominium corporations.
These are not subject to VAT. (BIR v. First E-Bank Tower
Condominium Corp., G.R. Nos 215801 and 218924, January
15, 2020, which invalidated the controversial RMC 65-2012)
O
The allocation of condominium units to partners of a joint
venture is also not subject to VAT, as the allocation is not
a sale, barter, or exchange of goods, but a return of the
partners' capital Investments under the joint venture
agreement. (Malayan Insurance Company, Inc. v. St. Francis
Square Realty Corporation, G.R. No. 198916, July 23, 2018)
If the said transaction is outside the Philippines, then it is not
subject to VAT.
Masarap Kumain, Inc. (MKI) is a Value-Added 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
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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? (2014
Bar Exam)
Suggested answer: Yes, the sale is subject to VAT. The law states
that any person who, in the ordinary course of trade or business, sells
goods or properties is subject to VAT. Included in the ordinary course
of trade or business are incidental transactions. In this case, the sale
of the delivery van is incidental to the company's catering business.
Hence, it is subject to VAT. The Supreme Court has previously ruled
the same way in a similar case.
In June 2013, DDD Corp., a domestic corporation engaged in the
business of leasing real properties in the Philippines, entered into a
lease agreement of a residential house and lot with EEE, Inc., a nonresident foreign corporation. The residential house and lot will be
used by officials of EEE, Inc. during their visit to the Philippines. The
tease agreement was signed by representatives from DDD Corp, and
EEE, Inc. in Singapore. DDD Corp, did not subject the said lease to
VAT believing that it was not a domestic service contract. Was DDD
Corp, correct? Explain. (2015 Bar Exam)
Suggested answer: DDD Corp, is wrong. It is a domestic service
contract subject to VAT. VAT is imposed on the rendering of services
in the Philippines. In this case, the tease of the residential house
and tot is considered service in the Philippines because the service
performed (the lease of EEE, Inc. for use by its officials) is in the
Philippines. It is immaterial where the lease agreement was signed.
r
I
•
i
AH 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°/o to
account for the payment of the 12°/o 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.
a) What constitutes transactions done "in the course of trade or
business" for purposes of applying VAT?
b) Is Mr. X correct in stating that the association dues are subject
to VAT? Explain. (2019 Bar Exam)
Suggested answers:
a)
For VAT purposes, this means the regular conduct or pursuit
of a commercial or an economic activity, including incidental
transactions thereto. It covers any person regardless whether
or not the person engaged therein is a nonstock, nonprofit
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organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests),
or a government entity.
b)
Mr. X is wrong. Association dues are not collected in the course of
trade or business. Jurisprudence has stated that the associations
are not selling its services to its members. TRAIN has also stated
that the collection of association dues from homeowners are
VAT-exempt. Hence, Mr. X is wrong.
For the next part, we'll go by tax rates.
First, we'll look at those taxed at 12°/o (Usual VATable and
Importations). Next, those taxed at 0°/o. And then finally, the
exempt transactions.
B.
Normal VAT Transactions fl2°/o)
When it comes to normal VAT transactions or those subject to
12%, we have three categories:
1.
The sale of goods and properties,
2.
The sale of services, and
3.
Importation.
Let's start with sale of goods and properties first.
SEC. 106. Value-added Tax on Sale of Goods or Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
a value-added tax equivalent to twelve percent (12%) of the gross
selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.
(As amended by TRAIN)
In dealing with this element, you're dealing with two questions:
•
0
Is this a normal sale?
o
If not, is this at least a transaction which are deemed sales by
law (Section 106[B])?
Generally, the VAT rate is 12% on the gross selling price or
gross value in money of the goods, properties sold, bartered, or
exchanged.
o
We say "generally" because there are some transactions that
are subject to 0% or tax-exempt, but we'll tackle those later.
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For sale of goods or properties, the tax base is the gross selling
price.
Gross selling price
The term "gross selling price" means the total amount of money or
its equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter, or exchange of the goods
or properties, excluding the value-added tax. The excise tax, if any,
on such goods or properties shall form part of the gross selling price.
Sec. 106. (D) Sales Returns, Allowances and Sales Discounts.
— The value of goods or properties sold and subsequently returned
or for which allowances were granted by a VAT-registered person
may be deducted from the gross sales or receipts for the quarter in
which a refund is made or a credit memorandum or refund is issued.
Sales discount granted and indicated in the invoice at the time of
sale and the grant of which does not depend upon the happening of
a future event may be excluded from the gross sales within the same
quarter it was given.
The term "gross selling price" means the total amount of money
or its equivalent which the purchaser pays or is obligated to pay
to the seller in consideration of the sale, barter, or exchange
of the goods or properties, excluding the value-added tax. The
excise tax, if any, on such goods or properties shall form part of
the gross selling price.
o
In other words, the gross selling price includes everything
that the buyer pays the seller, except the VAT which is shifted
to the buyer.
■
o
For example, Elton sold a shirt to Sassy. The quoted
selling price was P100, but there were freight charges of
P50. The gross selling price is P150. You apply the VAT to
P150.
While the law says the VAT is based on the gross selling price,
"gross selling price" does not mean gross sales. The law and
regulations allow downward adjustments for:
•
Sales returns and allowances;
•
Sales discounts agreed upon at the time of the sale
indicated in the sales invoice, and availed of by the buyer.
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Goods or properties
Sec. 106. (A) (1) The term "goods" or "properties" shall mean
all tangible and intangible objects which are capable of pecuniary
estimation and shall include:
(a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television
time.
Goods or properties include:
•
1.
Real properties held primarily for sale to customers, or held
for lease in the ordinary course of trade or business;
2.
The right or privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
3.
The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
4.
The right or the privilege to use motion picture films, tapes
and discs; and
5.
Radio, television, satellite transmission and cable television
time.
This is not an exclusive list, obviously.
Transactions deemed sale
Sec. 106. (B) Transactions Deemed Sale. — The following
transactions shall be deemed sale:
(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;
(2) Distribution or transfer to:
(a) Shareholders or Investors as share in the profits of the VATregistered persons; or
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(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; and
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
By virtue of law, the following are considered sales in the course
of trade or business, and is subject to the VAT:
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;
2.
Distribution or transfer of inventory to shareholders or
investors as share in the profits of the VAT-registered persons;
(Property Dividends)
3.
Distribution or transfer of inventory to creditors in payment
of debt;
4.
Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and
5.
Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation, (includes capital goods — R.R. 16-2005)
For example, Ramen at Taek's Room, Inc. sells on a regular
basis kimchi ramen which is just absolutely delicious. It decides to
give its tax counsel, Deok Sun, a box of its best-selling kimchi ramen.
That transaction is a transaction deemed sale under (1).
(E) Authority of the Commissioner to Determine the
Appropriate Tax Base. — The Commissioner shall, by rules and
regulations prescribed by the Secretary of Finance, determine the
appropriate tax base in cases where a transaction is deemed a sale,
barter or exchange of goods or properties under Subsection (B)
hereof, or where the gross selling price is unreasonably lower than
the actual market value.
The CIR shall determine the appropriate tax base in cases where
transactions are deemed sales, or where the gross selling price is
unusually lower than the actual market value.
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Now let's look at sale of service and use or lease of properties.
Sec. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to twelve percent (12%)
of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase 'sale or exchange of services' means the
performance of all kinds of services in the Philippines for others for
a fee, remuneration or consideration, including those performed
or rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors
of property, whether personal or real; 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, resthouses, pension houses, inns, resorts; 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
companies, transmission, and distribution companies; services of
franchise grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of
whether or not the performance thereof calls for the exercise or use
of the physical or mental faculties. The phrase 'sale or exchange of
services' shall likewise include:
(1) The lease or the use of or the right or privilege to use
any copyright, patent, design or model plan, secret formula or
process, goodwill, trademark, trade brand or other like property
or right;
(2) The lease or the use of, or the right to use of any Industrial,
commercial or, scientific equipment;
(3) The supply of scientific, technical, Industrial or commercial
knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as Is
mentioned in subparagraph (3);
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(5) The supply of services by a nonresident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident
person;
(6) 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;
(7) The lease of motion picture films, films, tapes and discs;
and
(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
Any sale or exchange of services in the course of trade or business,
including the use or lease of properties, shall be subject to the
VAT.
For the sale or exchange of services, including the use or lease of
properties, the VAT rate is 12% of the gross receipts.
To be defined as "sales of services," the services:
O
Should be rendered in the Philippines,
O
Can be any and all kinds of services rendered to others
(provided there is no employer-employee relationship); and
O
There is a fee, remuneration or consideration.
Lease of properties shall be subject to VAT irrespective of the
place where the contract or lease or licensing agreement was
executed if the property is leased or used in the Philippines.
Sale of services in the course of trade or business includes those
performed or rendered by:
1.
construction and service contractors;
2.
stock, real estate, commercial, customs and immigration
brokers;
3.
lessor of property, whether personal or real;
4.
warehousing services;
5.
lessor or distributors of cinematographic films;
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6.
persons engaged in milling, processing, manufacturing or
repacking of goods for others;
7.
proprietors, operators, or keepers of hotels, motels, rest
houses, pension houses, inns, resorts;
8.
proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and
caterers;
9.
dealers in securities;
10.
lending investors;
11.
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;
12.
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;
13.
sales of electricity by generation companies, transmission
by any entity including the National Grid Corporation of the
Philippines, and distribution companies including electric
cooperatives; (R.R. No. 13-2018)
14.
services of franchise grantees of electric utilities, telephone
and telegraph, radio and television broadcasting and all other
franchise grantees, except those under Section 119 of the
NIRC;
15.
non-life insurance companies (except their crop insurances),
including surety, fidelity and bonding companies; and
16.
similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental
faculties.
Also included are:
1.
The lease or use of or right or privilege to use any copyright,
patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand and other like property or
right;
2.
The lease or the use of, or the right to use of any industrial,
commercial or scientific equipment;
3.
The supply of scientific, technical, industrial or commercial
knowledge or information;
4.
The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or
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enjoyment of any such property, or right as is enumerated in
number (2) hereof or any such knowledge or information as
is mentioned in number (3);
5.
The supply of services by a nonresident 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;
6.
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;
7.
The lease of motion picture films, tapes, and discs;
8.
The lease or use of or the right to use radio, television,
satellite transmission and cable television time.
•
The list is not exhaustive, obviously.
However, the exhibition of movies (as opposed to the lease
thereof) is not subject to VAT, but subject to amusement tax
imposed by local government units. (CIR v. SM Prime Holdings,
Inc., G.R. No. 183505, February 26, 2010)
Cash deposits or advances received by taxpayers other than GPP
from clients and customers shall be subject to VAT, if applicable
(/.e.z if the taxpayer exceeds the threshold or if it registered as a
VAT taxpayer). (RMC 16-2013)
o
But see Medicard Philippines, Inc. v. CIR (G.R. No. 222743,
April 5, 2017), which stated that amounts earmarked for
payment to a third party are not part of gross receipts and
therefore not subject to VAT.
For VAT, all gross receipts from services rendered by the partners
shall be entirely taxable to the partnership.
Sec. 108. The term 'gross receipts' means 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 actually or constructively received during the
taxable quarter for the services performed or to be performed for
another person, excluding value-added tax.
Gross receipts mean cash or its equivalent actually received or
constructively received (not including the VAT) as:
o
Payments on the contract price, compensation, service fee,
rental or royalty;
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O
Payments or materials supplied with the services; and
O
Deposits of advanced payments on the contract for services.
For example, Geralt of Cainta was a Filipino monster
hunter who specialized in hunting aswangs. He spent
P20,000,000 for materials and PIO,000,000 for labor.
People tossed him coins as payment amounting to gross
receipts of P30,000,000, the whole of which is VATable by
12%.
•
Constructive receipt occurs when the money consideration or its
equivalent is placed in the control of the person who rendered
the service without restriction by the payor, (like a bank deposit;
issuance by the debtor of a notice to offset any debt or obligation
and acceptance thereof by the seller as payment for the services
rendered)
Gross receipts do not include amounts earmarked for payment to
unrelated 3rd parties or received as reimbursement for advance
payment on behalf of another which do not redound to the benefit
of the payor. (R.R. 4-2007)
O
It is considered payment to a 3rd party if the same is made
to settle an obligation of another person (like a customer or a
client) to the said third party.
■
O
It is an advance payment on behalf of another if the payment
is to a 3rd party for a present or future obligation of said
another party.
■
O
The sales invoice or official receipt must be issued by the
3rd party to the obligor/debtor (the customer or a client
of the payor).
The sales invoice or official receipt must be Issued by
the obllgee/creditor to the obligor/debtor (the "another
party") for the sale of goods or services by the former to
the latter.
"Unrelated party" shall not include the taxpayer's employees,
partners, affiliates, relatives by consanguinity or affinity
within the 4th degree, and trust funds where the taxpayer
Is the trustor, trustee, or beneficiary, even if covered by an
agreement to the contrary.
Amounts earmarked by an HMO to Its medical service providers
on behalf of its clients do not form part of its gross receipts
for VAT purposes. (Medicare! Philippines, Inc. v. CIR, G.R. No.
222743, April 5, 2017, where the HMO also issued two official
receipts—one pertaining to the VATable portion that represented
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compensation for its services, the other pertaining to the nonVATable portion pertaining to the amounts earmarked for medical
utilization^
O
By earmarking said amounts, the HMO recognizes that
it possesses said funds not as an owner but as mere
administrator of the same. (Medicare! Philippines, Inc. v. CIR)
VAT on Importation
Sec. 107. Value-Added Tax on Importation of Goods. —
(A) In General. — 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.
Every importation of goods shall be subject to the VAT, whether
for use in business or not.
The imported goods shall be subject to 12% VAT.
The tax base is:
o
the total value used by the Bureau of customs in determining
tariff and customs duty, plus customs duties, excise tax (if
any), and other charges prior to the removal of the goods
from customs custody; OR
o
based on the landed cost, when the customs duties are
determined on the basis of the quantity or volume of the
goods. By "landed cost" is meant the invoice cost, freight,
insurance, customs duties, excise tax (if any), and other
charges prior to the removal of the goods from customs
custody.
(B) Transfer of Goods by Tax-Exempt Persons. — In the case of
tax-free importation of goods into the Philippines by persons, entities
or agencies exempt from tax where such 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 importers thereof, who shall be liable for any internal
revenue tax on such importation. The tax due on such importation
shall constitute a lien on the goods superior to all charges or liens on
the goods, irrespective of the possessor thereof.
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When a person who was exempt from the VAT on his importation
subsequently sells (transfers or exchanges) in the Philippines such
imported article to a non-exempt person or entity, the purchaser
(transferee or assignee) will be required to pay the VAT.
o
Tiki Taka, Inc. is a tax-exempt entity that imports high-end
soccer balls. Tiki Taka, Inc. then sold it to Diego Dribblers,
Inc., a non-exempt entity. Diego Dribblers, Inc. has to pay
for the VAT. Diego Dribblers, Inc. can claim the VAT paid as
creditable input taxes.
The VAT of an importation should be paid prior to the release of
the goods from customs custody. If it is subject to both excise tax
and VAT, the taxpayer has to pay both prior to the release.
A seller of goods or services who imports stuff can claim the
VAT paid on importations during a taxable period as input taxes
creditable against the output taxes on the sales of the same
period.
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.
Before tackling zero-rated and exempt transactions, let's have an
overview of the VAT system.
•
Understanding VAT is a matter of perspective.
•
Remember VAT is an indirect tax, hence the burden of paying the
VAT is passed on to the buyer. Our focus here is on Bellatrix, a
crazy strange witch who openly flirts with her boss in front of her
husband.
•
Albus sells Bellatrix a purple potion; Bellatrix shoulders the 12%
VAT on it.
O
Bellatrix can recover the amount she paid to Albus by selling
the purple potion to Cho, wherein Cho will shoulder the 12%
VAT.
The biggest difference between zero-rated/effectively zerorated transactions and VAT-exempt transactions is the ability to
recover VAT already paid to the seller.
O
Why do we look at the input tax and not the output tax?
•
Because the Input tax is what we all seek to recover, that
is what we shouldered.
•
Bellatrix wants to recover the 12% VAT that she had
paid to Albus.
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•
Output tax doesn't come out of our own pockets because
we can pass that burden to our buyers.
•
0
In zero-rated transactions, there is total relief for the
purchaser (Cho) from the burden of the tax since she does
not have to pay any VAT on the transaction.
■
0
•
Bellatrix's selling of the purple potion to Cho will
burden Cho, not Bellatrix.
On the side of the seller (Bellatrix), the input tax on her
purchases from her supplier (Albus) shall be available as
a tax credit or refund.
In exempt transactions, there is only partial relief because
the seller (Bellatrix) is not allowed any tax refund or credit for
input taxes paid on her purchases from her supplier (Albus).
In fact, some jurisdictions call zero-rated transactions "exempt
with credit" (because you can credit input tax) and VAT-exempt
transactions "exempt without credit" (because you can't credit
input tax). So that's a helpful way of remembering the difference
between zero-rated and VAT-exempt. You can get a credit with
zero-rated transactions and you can't get a credit with VATexempt transactions.
In normal VAT transactions, the VAT paid to the supplier (Albus) can
be recovered by selling the product to a purchaser (Cho).
Albus sells
to Bellatrix
Bellatrix
sells to Cho
VAT
TAXABLE
VAT
TAXABLE
P100
.+ Pl2 (VAT)
P112
P 150
+ P18
P168
Bellatrix paid Albus P12 as VAT.
But she recovered the P12 by
selling the product to Cho. In her
sale to Cho, she received P18
which covered the P12 she had
paid Albus. So, in essence, she
recovered the P12 she had paid
Albus.
What if the transaction of Bellatrix to Cho is VAT ZERO-RATED?
Albus sells
to Bellatrix
Bellatrix
sells to Cho
VAT
TAXABLE
VAT ZERORATED
P100
±_E12(VAD
P112
P150
+ P0
P150
Bellatrix paid Albus P12 as VAT.
But, her transaction to Cho
was zero-rated. So she did not
receive anything from Cho to
offset her VAT payment to Albus.
She has an output of zero, and
an input of P12.
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She can apply for a refund or a
tax credit of the P12 with the BIR
because the law allows this.
What if the transaction of Bellatrix to Cho is VAT EXEMPT?
Albus sells
to Bellatrix
Bellatrix sells to
Cho
VAT
TAXABLE
VAT EXEMPT
P100
+ P12 (VAT)
P112
P150
+ PO
P150
Bellatrix paid Albus P12 as
VAT. But, her transaction to
Cho was VAT-exempt. So
she did not receive anything
from Cho to offset her VAT
payment to Albus. She has
an output of zero, and an
input of P12.
However, unlike a zero-rated
transaction, she cannot apply
for a refund or a credit of the
P12 with the BIR because the
law does not allow this.
!
j
i
I
I
So, if we were Bellatrix, and we had a choice... what should
our next sale transaction be — normal VATable, zero-rated, or
exempt?
O
Clearly, we won't go for exempt, because we won't recover
the VAT we paid to our suppliers (Albus).
■
But what do you do with the unrecovered VAT in exempt
transactions?
It will be considered cost.
o
It Is a toss-up between going for normal VATable transactions
and zero-rated transactions.
■
In both these cases, we will recover the VAT we paid to
our suppliers. It will just depend on different factors.
•
If we go for a zero-rated transaction, do we want to go through
the hassle of having to deal with the BIR and paying the fees?
•
If we go for the normal VATable, the recovery would be quicker.
But this would mean we'd have to keep track of the VAT paid to us
and then have to pay the net VAT payable to the government. And
what if our line of business is really engaged in exporting (zerorated), should we go to the trouble of looking for buyers here in
the Philippines if that's not our main line of business anyway?
11
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C.
Zprn-rated/Effectively Zero-rated Transactions
Purpose:
•
To exempt the transaction completely from VAT previously
collected since input taxes passed to him may be recovered as
refunds or credits
For goods
Sec. 106. (2) Sec. 106. (2) The following sales by VAT-registered
persons shall be subject to zero percent (0%) rate:
(a) Export Sales. — The term 'export sales' means:
(1) The sale and actual shipment of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may
be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2)—Sale and delivery of goods to:
(f)—Registered enterprises within-u-scpur&te customs territory
os-provided under-special iaws^-and
(ii)—Registered-enterprises within tourism enterprise-zones os
deeiured by the Tourism—Infrastructure and-Enterprise Zone
Authority-(TIEZA) subject to the provisions under Republic- Act
No. 9593 or The Tourism Act of 2009. (Vetoed)
(3) Sale of raw materials or packaging materials to a nonresident
buyer for delivery to a resident local export-oriented enterprise
to be used in manufacturing, processing, packing or repacking in
the Philippines of the said buyer's goods and paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(4) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production;
(5) Those considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investment Code of 1987, and
other special laws; and
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations: Provided, That the goods, supplies, equipment and fuel
shall be used for international shipping or air transport operations.
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Provided, That subparagraphs (3), (4), and (5) hereof shall be
subject to the twelve percent (12%) value-added tax and no longer
be considered export sales subject to zero percent (0%) VAT rate
upon satisfaction of the following conditions:
(1) The successful establishment and implementation of an enhanced
VAT refund system that grants refunds of creditable input tax within
ninety (90) days from the filing of the VAT refund application with the
Bureau: Provided, That, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed and must
be decided within ninety (90) days from the filing of the VAT refund
application; and
(2) All pending VAT refund claims as of December 31, 2017 shall be
fully paid in cash by December 31, 2019.
I'
Provided, That the Department of Finance shall establish a VAT refund
center in the Bureau of Internal Revenue (BIR) and in the Bureau of
Customs (BOC) that will handle the processing and granting of cash
refunds of creditable input tax.
1
An amount equivalent to five percent (5%) of the total VAT collection
of the BIR and the BOC from the immediately preceding year shall be
automatically appropriated annually and shall be treated as a special
account in the General Fund or as trust receipts for the purpose of
funding claims for VAT refund: Provided, That any unused fund, at
the end of the year shall revert to the General Fund.
Provided, further, That the BIR and BOC shall be required to submit
to the Congressional Oversight Committee on the Comprehensive
Tax Reform Program (COCCTRP) a quarterly report of all pending
claims for refund and any unused fund.
I
I"
(b) Sales to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate. (As amended by TRAIN)
For goods, a rate of 0% of the gross selling price will be applied
If:
1.
Export sale; or
2.
Sales to persons or entities whose exemption under special
laws, or international agreements to which the Philippines is
a signatory (effectively-zero rated sales)
Export sales means:
o
The sales and actual shipments or exportations of goods
from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods
so exported, and
I
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Paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with the
rules and regulations of the BSP.
O
The following are also considered export sales:
•
1.
Sales of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented
enterprise to be used in manufacturing, processing, packing
or repacking in the Philippines of said buyer's goods and
paid for in acceptable foreign currency and accounted for in
accordance with BSP rules and regulations;
2.
Sale of raw materials or packaging materials to an exportoriented enterprise whose export sales exceed 70% of total
annual production (as long as 70% is exported, then 100% of
net input may be refunded);
3.
Those considered export sales under EO 226 and other special
laws; and
4.
Sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations, as long as the goods, supplies, equipment, and
fuel are used for international shipping or air transport
operations.
TRAIN has also set some standards to remove the zero-rating for
sale of packaging materials to nonresidents, sale of packaging
materials to export-oriented enterprises, and export sales under
EO 226.
These transactions will be subject to the normal 12% rate if a
successful VAT refund system is established, among others.
O
Under the cross-border principle or destination principle of the
VAT system, no VAT shall be imposed to form part of the cost
of goods destined outside of the territorial border of the taxing
authority. (CIR v. Seagate Technology [Philippines], G.R. No.
153866, February 11, 2005) While an ecozone is geographically
within the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil.
O
Since ecozones (such as the Clark Special Economic Zone and
Clark Freeport Zone) are considered foreign territories, a R.R.
which imposes VAT on the importation of petroleum products
into the ecozones is invalid. (Secretary of Finance v. Lazatin,
G.R. No. 210588, November 29, 2016)
•
Articles brought into and remain in ecozones are not
taxable importations, because the goods remain in
foreign territory.
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As long as the goods remain in the ecozone or re-exported
to a foreign jurisdiction, they are tax-free.
O
O
But once introduced into the Philippines customs
territory, it shall then be considered "technical
importation" subject to taxes and customs duties.
(Secretary of Finance v. Lazatin)
Thus, sales by suppliers from outside the ecozone to this
separate customs territory are deemed as exports and treated
as export sales. (CIR v. Sekisui Jushi Philippines, Inc., G.R.
No. 149761, July 21, 2006)
■
But what if suppliers erroneously impose VAT on goods
sold to an entity within a separate customs territory?
O
The purchaser's (/.e., the entity in the ecozone)
recourse is against the supplier, not the government.
The purchaser can't run after the government.
O
The supplier is the proper party to claim the refund
because VAT is an indirect tax and the supplier is the
one statutorily liable. (Coral Bay Nickel Corporation
v. CIR, G.R. No. 190506, June 13, 2016)
For services
Sec. 108. (B) Transactions Subject to Zero Percent (O°/o)
Rate. — The following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (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 nonresident person not engaged in business who
is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(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 zero
percent (0%) rate;
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(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 exclusively 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 seventy percent (70%) of total annual
production;
(6) Transport of passengers and cargo by domestic air or sea vessels
from the Philippines to a foreign country; and
(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.
(8)—Services rendered to:
(+)------Registered en terprises—within—a—separate—customs
territory us provided-under-specta! low; and
(0)----- Registered—enterprises—within—tourism—enterprise
zonesus-dedared by the TIEZA subject to the provisions under
Republic Act No. 9503 or The Tourism Act of 2009. (Vetoed!!!)
Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be
subject to the twelve percent (12%) value-added tax and no longer
be subject to zero percent (0%) VAT rate upon satisfaction of the
following conditions:
(1) The successful establishment and implementation of an enhanced
VAT refund system that grants refunds of creditable input tax within
ninety (90) days from the filing of the VAT refund application with the
Bureau: Provided, That, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed and must
be decided within ninety (90) days from the filing of the VAT refund
application; and
(2) All Pending VAT refund claims as of December 31, 2017 shall be
fully paid in cash by December 31, 2019.
Provided, That the Department of Finance shall establish a VAT refund
center in the Bureau of Internal Revenue (BIR) and in the Bureau of
Customs (BOC) that will handle the processing and granting of cash
refunds of creditable input tax.
An amount equivalent to five percent (5%) of the total value-added
tax collection of the BIR and the BOC from the immediately preceding
year shall be automatically appropriated annually and shall be
treated as a special account in the General Fund or as trust receipts
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for the purpose of funding claims for VAT Refund: Provided, That any
unused fund, at the end of the year shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be required to
submit to the COCCTRP a quarterly report of all pending claims for
refund and any unused fund. (As amended by TRAIN)
For services performed in the Philippines, a rate of 0% of the
gross receipts will be applied in the following instances:
1.
From processing, manufacturing or repacking of goods:
a.
For other persons doing business outside the Philippines,
b.
The goods are subsequently exported, and
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 processing, manufacturing or repacking
of goods, rendered to a:
a.
Person engaged
Philippines, or
b.
Nonresident person not engaged in business who is
outside the Philippines when the services are performed,
and
c.
The consideration is paid in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP
in
business conducted
outside the
3.
Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects such services to
zero rate;
4.
Services rendered to persons engaged in international
shipping or international air transport operations, including
leases of property for use thereof, as long as the services
shall be exclusively 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;
6.
Transport of passengers and cargo by domestic air and sea
vessels from the Philippines to a foreign country; and
[
I
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Sale of power or fuel generated through renewable sources of
energy (this does not cover the sale of services to maintain
the operation of these plants). (R.R. 13-2018)
7.
TRAIN has also set some standards to remove the zero-rating
for processing goods for persons doing business outside the
Philippines and services performed by contractors for exportoriented enterprises.
O
These transactions will be subject to the normal 12% rate if a
successful VAT refund system is established, among others.
For "services other than processing, manufacturing or repacking
of goods"
O
The phrase covers all aspects of the word "service" as long as
the service is done in the Philippines
«
O
Hence, when the Philippine branch facilitates the collection
of receivables from customers of its foreign affiliate, said
service qualifies under Section 108(b)(2) as zero-rated.
(CIR v. American Express International, Inc. [Philippine
Branch], G.R. No. 152609, June 29, 2005)
The recipient of the services (other than processing,
manufacturing, or repacking of goods under Section 108 [b]
[1]) must likewise be fora person engaged in business outside
the Philippines. (CIR v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc., G.R. No. 153205, January 22,
2007 where the recipient of the services was the Consortium
who was deemed doing business within the Philippines)
■
It is not enough that the recipient has no business
presence in the Philippines. The taxpayer has the burden
to prove that the recipient is engaged in business outside
the Philippines. (Accenture, Inc. v. CIR, G.R. No. 190102,
July 11, 2012)
The VAT system generally follows the "destination principle"
(exports are zero-rated whereas imports are taxed).
o
However, there is an exception in the form of services
performed in the Philippines for a recipient doing business
outside the Philippines (since the service is still done here)
(CIR v. Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., G.R. No. 153205, January 22, 2007).
Effectively-zero rated sales usually come from special laws and
international agreements
O
R.A. 7227, R.A. 7916, Asia Development Bank, Embassies,
etc. (R.R. 16-2005)
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Difference between zero-rated and effectively zero-rated transactions
(CIR v. Seagate Technology [Philippines], G.R. No. 153866, February
11, 2005).
•
Zero-rated transactions refer to the export sale of goods and
supply of services. The seller of such transactions charges no
output tax, but can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers. This is for the benefit of
the seller.
Effectively zero-rated transactions refer to the sale of goods or
supply of services to persons or entities whose exemption under
special laws or international agreements to which the Philippines
is a signatory effectively subjects such transactions to a zero
rate. Such rate does not yield any tax chargeable against the
purchaser. This is for the benefit of the purchaser.
O
Strictly speaking, it is the sales by the suppliers which are
zero-rated. But the entities are granted an indirect tax
exemption for policy and economic reasons.
In both zero-rated and effectively zero-rated transactions, the
seller who charges zero output tax can claim a refund or a tax
credit certificate for the VAT previously charged by suppliers.
XYZ Law Offices, a law partnership in the Philippines and a VATregistered 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.
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 and income taxes? (2013 Bar Exam)
i
Suggested answer: The payment of XYZ Law Offices is subject to
zero-rated VAT and income tax. It is subject to zero-rated VAT as
it was for services rendered for persons doing business outside the
Philippines and paid in foreign currency. The payment will form part
of the gross income of the Law Office (which will be distributed to
the partners) because these services were performed within the tax
jurisdiction of the Philippines.
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Pxpmnt Transactions
Sec. 109. Exempt Transactions. — (1) Subject to the provisions
of subsection (2) hereof, the following transactions shall be exempt
from the value-added tax:
(A) Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used as,
or yielding or producing foods for human consumption; and breeding
stock and genetic materials therefor.
Products classified under this paragraph shall be considered in their
original state 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. Polished and/or
husked rice, com grits, raw cane sugar and molasses, ordinary salt,
and copra shall be considered in their original state;
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals and other animals generally considered
as pets);
(C) Importation of personal and household effects belonging to the
residents of the Philippines returning from abroad and nonresident
citizens coming to resettle in the Philippines: Provided, That such
goods are exempt from customs duties under the Tariff and Customs
Code of the Philippines;
(D) Importation of professional instruments and implements, tools of
trade, occupation or employment, wearing apparel, domestic animals,
and personal and household effects belonging to persons coming to
settle in the Philippines or Filipinos or their families and descendants
who are now residents or citizens of other countries, such parties
hereinafter referred to as overseas Filipinos, in quantities and of
the class suitable to the profession, rank or position of the persons
importing said items, for their own use and not for barter or sale,
accompanying such persons, or arriving within a reasonable time:
Provided, That the Bureau of Customs may, upon the production
of satisfactory evidence that such persons are actually coming to
settle in the Philippines and that the goods are brought from their
former place of abode, exempt such goods from payment of duties
and taxes: Provided, further, That vehicles, vessels, aircrafts,
machineries and other similar goods for use in manufacture, shall
not fall within this classification and shall therefore be subject to
duties, taxes and other charges;
(E) Services subject to percentage tax under Title V;
(F) Services by agricultural contract growers and milling for others of
palay into rice, corn into grits and sugar cane into raw sugar;
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(G) Medical, dental, hospital and veterinary services except those
rendered by professionals;
(H) Educational services rendered by private educational institutions,
duly accredited by the Department of Education (DepEd), the
Commission on Higher Education (CHED), the Technical Education
and Skills Development Authority (TESDA) and those rendered by
government educational institutions;
(I) Services rendered by individuals pursuant to an employeremployee relationship;
(J) Services rendered by regional or area headquarters established
in the Philippines by multinational corporations which act as
supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and 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 under Presidential Decree No. 529;
(L) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority to their members as well as sale
of their produce, whether in its original state or processed form, to
non-members; their importation of direct farm inputs, machineries
and equipment, including spare parts thereof, to be used directly
and exclusively in the production and/or processing of their produce;
(M) Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development
Authority;
(N) Sales by non-agricultural, non-electricand non-credit cooperatives
duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does
not exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the
members;
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business or real
property utilized for low-cost and socialized housing as defined by
Republic Act No. 7279, otherwise known as the Urban Development
and Housing Act of 1992, and other related laws, residential lot
valued at One million five hundred thousand pesos (Pl,500,000)
and below, house and lot, and other residential dwellings valued at
Two million five hundred thousand pesos (P2,500,000) and below:
Provided, That beginning January 1, 2021, the VAT exemption shall
only apply to sale of real properties not primarily held for sale to
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352
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 (P2,000,000): Provided, further, That every three (3) years
thereafter, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index, as published by the Philippine
Statistics Authority (PSA);
(Q) Lease of a residential unit with a monthly rental not exceeding
Fifteen thousand pesos (P15,000);
(R) Sale, importation, printing or publication of books and any
newspaper, magazine, review or bulletin which appears at regular
intervals with fixed prices or subscription and sale and which is not
devoted principally to the publication of paid advertisements;
(S) Transport of passengers by international carriers;
(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;
(U) Importation of fuel, goods and supplies by persons engaged in
international shipping or airtransport operations: Provided, That the
fuel, goods, and supplies shall be used for international shipping or
air transport operations;
(V) Services of bank, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial intermediaries;
(W) Sale or lease of goods and services to senior citizens and persons
with disability, as provided under Republic Act Nos. 9994 (Expanded
Senior Citizens Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons with Disability), respectively;
(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC.
as amended;
(Y) Association dues, membership fees, and other assessments and
charges collected by homeowners associations and condominium
corporations;
(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
(AA)
Sale or importation of prescription drugs and medicines for
I)
diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
if) cancer, mental illness, tuberculosis,
diseases beginning January 1, 2023,
and
kidney
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Provided, that the DOH shall issue a list of approved drugs
and medicines for this purpose within sixty (60) days from the
effectivity of this Act; and
(BB)
Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed
the amount of Three million pesos (P3,000,000). (As amended by
TRAIN and further amended by R.A. 11467)
VAT-exempt transactions refer to the sale of goods or properties
and/or services and the use or lease of properties that is not
subject to VAT (output tax) and the seller is not allowed any tax
credit of VAT (input tax) on purchases.
O
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because
the said transaction is not subject to VAT. (R.R. 16-2005)
The seller does not charge VAT and he CANNOT claim exemption
from what has been passed to him.
A VAT-registered person may elect that the exemptions shall not
apply to his sales of goods or properties or services.
O
But once the election is made, it shall be irrevocable for a
period of three years counted from the quarter when the
election was made.
Let's go through the VAT-exempt transactions: (based on R.R.
16-2005, unless otherwise indicated)
O
Sale or importation of agricultural and marine food products
in their original state, livestock and poultry, and breeding
stock and genetic materials:
•
The term "livestock" does not include fighting cocks,
race horses, zoo animals and other animals generally
considered as pets.
-
"Original state" shall include even if the products
have undergone the simple process of preparation or
preservation for the market (like freezing, drying).
■
Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt and copra are considered
agricultural food products in their original state.
•
"Raw cane sugar" is the natural sugar extracted from
sugarcane through simple mechanical process by
pressing for the juice, boiling it to crystallize, filtering
using a centrifuge to separate these crystals, and
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drying—resulting to crystallized brown sugar. (R.R.
08-2015)
•
■
Only those falling under the new definition (which
includes muscovado) are exempt from VAT. (R.R. 082015)
"Specialty feeds" refer to non-agricultural feeds or food
for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets.
Provided the goods are exempt from customs duties
under the Tariff and Customs Code of the Philippines
Importation of professional instruments and implements,
wearing apparel, domestic animals, and personal household
effects (except vehicles, goods for use in manufacture and
merchandise for any kind commercial quantity)
O
•
Belonging to people coming to settle in the Philippines
and are not for sale;
O
Services subject to percentage tax
O
Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into
raw sugar
■
■
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•
Importation of personal and household effects belonging to
residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines
O
0
It shall only refer to raw cane sugar produced from
conducting only 1 stage of filtering and centrifuging
without any other further process applied thereto.
Sale or importation of fertilizers, seeds, seedlings, etc.’ except
specialty feeds:
O
|
•
Agricultural contract growers are folks producing for other
folks poultry, livestock, or other agricultural and marine
food products in their original state. This includes contract
growers who not only grow poultry or livestock, but also
process and dress poultry and livestock as a packaged
service to its contract growing. That's VAT exempt.
However, the processing and dressing services performed
independently from growing poultry, livestock, etc. are
subject to VAT, as these services are separated from the
VAT-exempt act of growing. (RMC 097-10)
Medical, dental, hospital and veterinary services, except
those rendered by professionals
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355
-
Laboratory services are exempted. But if the hospital
or clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
•
A health care company which merely provides and
arranges for the provision of pre-need health care services
to its members is NOT VAT-exempt as it merely arranges
for medical services. It does not provide the medical
services. (CIR v. Philippine Health Care Providers, Inc.,
G.R. No. 168129, April 24, 2007)
Educational services rendered by private educational
institutions, accredited by the DEPED, CHED, TESDA, and
those rendered by government educational institutions
Educational services do not include seminars, in-service
training, review classes and other similar services
rendered by persons who are not accredited by the
DEPED, CHED or TESDA
■
O
Services rendered by individuals pursuant to an employeremployee relationship
O
Services rendered by RAHQs
O
Transactions exempt under international agreements except
those granted under P.D. 529 or the Petroleum Exploration
Concessionaires
O
Sales by agricultural cooperatives duly registered and in good
standing with the Cooperative Development Authority (CDA)
to their members, as well as sale of the produce to nonmembers
•
Sale by agricultural cooperatives to non-members
can only be exempted from VAT if the producer of the
agricultural products sold is the cooperative itself. It the
cooperative is not the producer (like a trader), then only
those sales to Its members shall be exempted from VAT.
(R.R. 4-2007)
■
The sale or importation of agricultural food products in
their original state is exempt from VAT irrespective of the
seller and buyer thereof. (R.R. 4-2007)
■
To enjoy VAT exemption, the cooperative must:
•
Be registered with the CDA; and
•
Sell exclusively to its members, or
•
If it sells both to members and nonmembers, the
sale must be of its produce, whether in its original or
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processed state. (CIR v. United Cadiz Sugar Farmers
Association Multi-purpose Cooperative, G.R. No.
209776, December 7, 2016, where the cooperative
sold refined sugar—the exemption for raw sugar
didn't apply to them, but they were still exempt
because they were an agricultural cooperative that fit
the requisites for exemption)
•
O
Gross receipts from lending activities by credit or multipurpose cooperatives duly registered and in good standing
with the CDA
o
Sales by non-agricultural, non-electric
cooperatives duly registered with the CDA
•
and
non-credit
Provided, that share capital contribution of each member
does not exceed P15,000 and regardless of the aggregate
capital and net surplus ratably distributed among the
members;
o
Export sales by persons who are not VAT-registered
o
Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business;
•
o
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 main
business. (R.R. 4-2007)
Sale of real properties utilized for low-cost housing
•
o
In other words, if the agricultural cooperative only sells
produce or goods that it manufactures on its own, its
entire sales is VAT-exempt. (CIR v. United Cadiz)
"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 HLURB.
Sale of real properties utilized for socialized housing
•
"Socialized housing" refers to housing programs and
projects covering houses and lots or home lots only
undertaken by the Government or the private sector for
the underprivileged and homeless citizens.
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0
O
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Sale of the following:
•
residential lot valued at Pl,919,500 and below, or
•
house and lot and other residential dwellings valued at
P3,199,200 and below (R.R. 16-2011, to be read with
R.R. 3-2012)
•
If two or more adjacent residential lots, house and
lots or other residential dwellings are sold or disposed
in favor of one buyer from the same seller, for the
purpose of utilizing the lots, house and lots or other
residential dwellings as one residential area, the sale
shall be exempt from VAT only if the aggregate value
of the lots do not exceed Pl,919,500 for residential
lots, and P3,199,200 for residential house and lots
or other residential dwellings. Adjacent residential
lots, house and lots or other residential dwellings
although covered by separate titles and/or separate
tax declarations, when sold or disposed to one and
the same buyer, whether covered by one or separate
Deed of Conveyance, shall be presumed as a sale
of one residential lot, house and lots or residential
dwelling. (R.R. 13-2012)
•
This 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 and lot or a residential dwelling. Thus, the
sale is subject to VAT regardless of the selling price.
(R.R. 13-2012)
Beginning 2021, the VAT exemption for the sale of real
properties shall only apply to the:
•
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 under R..A. 7279;
•
sale of house and lot, and other residential dwellings with
selling price of not more than P2,000,000 (to be adjusted
every 3 years depending on the Consumer Price Index);
Lease of residential units where the monthly rental per
unit does not exceed P15,000, regardless of the amount
of aggregate rentals received by the lessor during the year
(R.R. 13-2018)
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•
However, the lease of residential units where the monthly
rental per unit exceeds P15,000 but the aggregate of
such rentals of the lessor during the year do not exceed
P3,000,000 shall likewise be exempt from VAT. However,
it shall be subjected to the 3% percentage tax. (R.R. 132018)
■
So, less than P15,000/month -> exempt
•
More than P15,000/month but less than P3,000,000/year
-> 3% Percentage tax.
•
More than P15,000/month and more than P3,000,000/
year -> 12% VAT. (Refer to R.R. 13-2018 on the various
iterations of this rule)
•
"Residential units" shall refer to apartments and houses
and lots used for residential purposes, and buildings or
parts or units thereof used solely as dwelling places.
Motels, hotels, lodging houses, inns and pension houses
are not included. (R.R. 13-2018)
•
"Units" refer to an apartment unit in case of apartments,
house in the case of residential houses, per person in the
case of dorms, boarding houses and bed spaces, and per
room in case of rooms for rent.
O
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 is not devoted principally to the publication of paid ads
O
Transport of passengers by international carriers
•
O
Sale, importation, or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof
for domestic or international transport operations;
■
O
The transport of cargo by international carriers is likewise
VAT-exempt as it is subject to percentage tax. (R.R. 152013)
Provided, however, 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 importation and mandatory vessel retirement
program of MARINA. (R.R. 15-2015)
Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations, provided
that such are used for international shipping or air transport
operations
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•
Said fuel, goods and supplies should be used exclusively
or should 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 passenger and/or cargoes that originated from
abroad, or to load passengers and/or cargoes bound for
abroad. (R.R. 4-2007)
■
If any portion of such fuel, goods or supplies is used
for purposes other than that mentioned, such shall be
subject to 12% VAT.
Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank
financial intermediaries
•
Services provided by such institutions, like money
changers or pawnshops, are subject to percentage tax.
(R.R. 4-2007)
O
Sale or lease of goods and services to senior citizens and
PWDs
O
Transfers of property based on Section 40(C)(2) or tax-free
exchanges
•
O
This includes the transfer of property to a REIT in
exchange for its shares. (R.R. 03-2020)
Association dues, membership fees, and other assessments
collected on a purely reimbursement basis by homeowners'
associations and condo corps established under either the
Magna Carta for Homeowners (R.A. 9904) or the Condo Act
(R.A. 4726)
•
For homeowners' associations, note that the homeowners'
association has to present a certification from the LGU
and other evidence that the association is providing
basic services to its residents. (BIR Ruling No. 391-16,
November 18, 2016, as related to R.A. 9904)
•
For condo corps, the association dues, membership fees,
and other assessments are not collected in the course of
trade or business. These are not subject to VAT. These
are collected to maintain the common areas of the
building and is done for the benefit of the condo owners.
It is not collected as a service fee for services provided
by the condominium to the owners. (BIR v. First E-Bank
Tower Condominium Corp., G.R. Nos. 215801 & 218924,
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January 15, 2020, which invalidated the controversial
RMC 65-2012>
O
O
o
Sale of gold to the BSP
Sale or importation of prescription drugs and medicines for
diabetes, high cholesterol, and hypertension (starting 2020)
and cancer, mental illness, TB, and kidney disease (starting
2023), provided the exemption only applies to the sale or
importation by the manufacturers, distributors, wholesalers,
and retailer of drugs and medicines included in the list of
approved drugs and medicines of the DOH I (R.R. 18-2020);
Sale or lease of goods or properties or the performance of
services other than the enumerated, the gross annual sales
and/or receipts do not exceed P3,000,000.
•
So if gross annual sales and/or receipts do not exceed
P3,000,000, a person need not register as a VAT-taxpayer.
Remember, qualified self-employed individuals and professionals
availing of the 8% income tax on gross sales and/or receipts are
exempt from 12% VAT. (R.R. 13-2018)
Are the fees, per diems, honoraria or allowances given to directors
of corporations exempt?
0
Yes, exempt since these are derived from an economic or
commercial activity. Said fees are remunerations paid in the
exercise of a right of an owner in the management of the
corporation.
0
Not even liable for 3% percentage tax. (RMC 77-2008)
What if the VAT-registered taxpayer erroneously imposes VAT on
a zero-rated or a VAT-exempt transaction?
o
It can claim a refund on the basis of erroneously paid taxes.
(CIR v. Acesite [Philippines] Hotel Corporation, G.R. No.
147295, February 16, 2007, where Acesite erroneously paid
VAT to the BIR on a zero-rated transaction with PAGCOR.)
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 Mandaiuyong
City.
b. Call Center operated by a domestic enterprise in Makati that
handles exclusively the reservations of a hotel chain which are all
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located in North America. The services are paid for in US$ and duty
accounted for with the Bangko Sentral ng Pilipinas.
c.
Sale of orchids by a flower shop which raises its flowers in
Tagaytay. (2010 Bar Exam)
Suggested answer:
a. Zero-rated, as this is a service to an entity whose exemption
under international agreements subjects it to a zero rate.
b. Zero-rated, as these are services performed for a foreign
corporation doing business outside the Philippines, paid in foreign
currency under the rules and regulations of the BSP.
c. VAT-able, as orchids are not agricultural food products and thus,
not exempt.
Karlito, a Filipino businessman, is engaged in the business of
metal fabrication and repair of LPG cylinder tanks. He conducts
business under the name and style of "Karlito's Enterprises,” a
single proprietorship. Started only five (5) years ago, the business
has grown so enormously that Karlito decided to incorporate it by
transferring all the assets of the business, particularly the inventory
of goods on hand, machineries and equipment, supplies, parts,
raw materials, office furniture and furnishings, delivery trucks and
other vehicles, buildings, and tools to the new corporation, Karlito's
Enterprises, Inc., in exchange for 100°/o of the capital stock of the
new corporation, the stock subscription to which shall be deemed
fully paid in the form of the assets transferred to the corporation by
Karlito.
As a result, Karlito's Enterprises, the sole proprietorship, ceased
to do business and applied for cancellation of its BIR Certificate of
Registration. The BIR, however, assessed Karlito VAT on account of
the cessation of business based on the current market price of the
assets transferred to Karlito's Enterprises, Inc.
Is the transfer subject to VAT? (2018 Bar Exam)
Suggested answer: No. The transfer is VAT-exempt. The Tax
Code states that Section 40 (C) (2) transfers or tax-free exchange
transfers are exempt from VAT. The transfer here is a 40 (C) (2)
transfer because property is transferred to a corporation by a person
In exchange for stock, the result of which is that said person, alone or
together with others, not exceeding four (4) persons, gains control of
said corporation. Hence, it is not subject to VAT.
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E.
Input VAT
Sec. 110. Tax Credits. —
(A) Creditable Input Tax. —
(1) Any input tax evidenced by a VAT invoice or official receipt issued
in accordance with Section 113 hereof on the following transactions
shall be creditable against the output tax:
(a) Purchase or importation of goods:
(0
For sale; or
For conversion into or intended to form part of a
(ii)
finished product for sale including packaging materials; or
(iii)
For use as supplies in the course of business; or
(iv)
For use as materials supplied in the sale of service; or
For use in trade or business for which deduction for
(v)
depreciation or amortization is allowed under this Code;
(b) Purchase of services on which a value-added tax has been
actually paid.
(2) The input tax on domestic purchase or importation of goods or
properties by a VAT-registered person shall be creditable:
(a) To the purchaser upon consummation of sale and on importation
of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to
the release of the goods from the custody of the Bureau of Customs.
X
X
X
X
X
(3) A VAT-registered person who is also engaged in transactions not
subject to the value-added tax shall be allowed tax credit as follows:
(a) Total input tax which, can be directly attributed to transactions
subject to value-add tax; and
(b) A ratable portion of any input tax which cannot be directly
attributed to either activity.
The term 'input tax' means the value-added tax due from or paid
by a VAT-registered person in the course of his trade or business on
Importation of goods or local purchase of goods or services, including
lease or use of property, from a VAT-registered person. It shall also
include the transitional input tax determined in accordance with
Section 111 of this Code.
The term 'output tax' means the value-added tax due on the sale
or lease of taxable goods or properties or services by any person
registered or required to register under Section 236 of this Code.
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Output tax
O
o
Output tax is the value-added tax due ON the sale or lease of
taxable goods/properties/services by any person registered
or required to register under the VAT system.
I
Output tax is what the taxpayer-seller passes on to the
purchaser.
Note, what is output tax for the seller is input tax to the
purchaser.
■
Input tax
o
Input tax is the VAT due from or paid by a VAT-registered
person on importation of goods or local purchases of goods,
properties, or services, including lease or use of properties,
from a VAT-registered person, in the course of his trade or
business.
It also includes:
■
•
the transitional input tax;
•
the presumptive input tax;
•
input taxes which can be directly attributed to
transactions subject to VAT plus a ratable portion of
any input tax which cannot be directly attributed to
either the taxable or exempt activity.
t
I
i
Any input tax on the following transactions evidenced by a VAT
invoice or official receipt by a VAT-registered person in accordance
with Sections 113 and 237 of the Tax Code shall be creditable
against the output tax:
1.
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
For use as supplies in the course of business, or
o
d.
For use as raw materials supplied in the sale of services,
or
e.
For use in trade or business for which deduction for
depreciation or amortization is allowed under the Tax
Code
Note that no depreciation shall be allowed for yachts,
helicopters, airplanes, and land vehicles is allowed if the value
I
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exceeds P2,400,000, unless the taxpayer's line of business
is transport operations or lease of transportation equipment
and the vehicles purchased are used in said operations. (R.R.
12-2012)
O
Hence, the input taxes on non-depreciable vehicles (z.e.,
those which exceed the threshold amount) and all input taxes
on the maintenance incurred thereon are not allowed for tax
purposes. (R.R. 12-2012)
2.
Purchase of real properties for which a VAT has actually been
paid,
Purchase of services in which a VAT has actually been paid,
4.
Transactions "deemed sale,"
5. Transitional input tax,
6.
Presumptive input tax. (R.R. 16-2005)
•
Input tax is what is passed on to the purchaser/taxpayer by the
seller. If the purchaser is a 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.
•
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. To the importer upon payment of VAT prior to the release of
goods from customs custody;
2.
To the purchaser of the domestic goods or properties upon
consummation of the sale; or
3.
To the purchaser of services or the lessee or licensee upon
payment of the compensation, rental, royalty or fee. (R.R.
16-2005)
As long as the invoices from the suppliers are Issued in the name
of the taxpayer and expenses were actually incurred by the
taxpayer, then the input tax pertaining to such expenses must
be credited to the taxpayer. Where the money came from to pay
these expenses is another matter all together but it does not
change the fact that input tax has been incurred. (CIR v. Sony
Philippines, Inc., G.R. No. 178697, November 17, 2010, wherein
Sony Philippines incurred advertising expenses using money
given to it by its affiliate.)
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Rule on capital goods
Provided, That the input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the
VAT component thereof, exceeds One million pesos (Pl,000,000):
Provided, however, That if the estimated useful life of the capital good
is less than five (5) years, as used for depreciation purposes, then
the input VAT shall be spread over such a shorter period: Provided,
further, That the amortization of the input VAT shall only be allowed
until December 31, 2021 after which taxpayers with unutilized input
VAT on capital goods purchased or imported shall be allowed to apply
the same as scheduled until fully utilized: Provided, finally, That in
the case of purchase of services, lease or use of properties, the input
tax shall be creditable to the purchaser, lessee or licensee upon
payment of the compensation, rental, royalty or fee. (As amended
by TRAIN)
I
I
I
I
I
Capital goods or properties refer to goods or properties
o
with estimated useful life of more than one year and
o
which are treated as depreciable under the income tax law,
o
used directly or indirectly, in the production or sale of taxable
goods or services.
If the aggregate acquisition cost on capital goods purchased or
imported in a calendar month does NOT exceed Pl,000,000, the
input tax will be allowed in the month of purchase.
ll
I
I r
If the aggregate acquisition cost of such goods in a calendar
month, excluding the VAT, exceeds Pl,000,000:
o
o
If the estimated life is five years or more, the input tax will
be evenly spread over the month of acquisition and the 59
succeeding months.
If the estimated life is less than five years, the input tax will
be spread evenly on a monthly basis by dividing the input tax
by the actual number of months comprising the estimated
useful life of the asset.
I
I
An asset acquired In installment for an acquisition cost of more
than P1M, excluding the VAT, will be subject to the amortization of
input tax despite the fact that the monthly payments/installments
may not exceed P1M.
I
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When an asset with an unamortized input tax is retired from
business, the unamortized input tax will be closed against the
output taxes on the taxable period in which it is retired.
Starting 2022, the amortization of input VAT for capital goods
shall no longer be allowed. Those taxpayers with unutilized input
VAT on capital goods purchased or imported shall be allowed to
apply the same as scheduled until fully utilized. (R.R. 13-2018)
Input tax allocation and mixed transactions
(3) A VAT-registered person who is also engaged in transactions not
subject to the value-added tax shall be allowed tax credit as follows:
(a) Total input tax which can be directly attributed to transactions
subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly
attributed to either activity.
The term "input tax" means the value-added tax due from or paid
by a VAT-registered person in the course of his trade or business on
importation of goods or local purchase of goods or services, including
lease or use of property, from a VAT-registered person. It shall also
include the transitional input tax determined in accordance with
Section 111 of this Code.
The term "output tax" means the value-added tax due on the sale
or lease of taxable goods or properties or services by any person
registered or required to register under Section 236 of this Code.
In crediting input tax, you have to look at two things:
1.
Those which can be directly attributed to transactions subject
to VAT, and
2.
Those which cannot be directly attributed to either a VAT
taxable or VAT-exempt transaction. For these cases, the
input tax shall be oro-rated to the VAT taxable and VATexempt transactions and only the ratable portion pertaining
to transactions subject to VAT may be recognized for input
tax credit.
R.R. 16-2005 states:
o
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 that can be directly
attributable to VAT taxable sales of goods and services to the
Government (or any of its political subdivisions, etc.) shall
not be credited against output taxes arising from sales to
non-Govemment entities, and
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If any input tax cannot be directly attributed to either a VAT
taxable or VAT-exempt transaction, the input tax shall be prorated to the VAT taxable and VAT-exempt transactions and
only ratable portion pertaining to transactions subject to VAT
may be recognized for input tax credit.
11
I
I
The 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 or expense.
For persons engaged in both zero-rated sales of services and
non-zero rated sales, the aggregate input taxes shall be allocated
ratably between the zero-rated sale of services and the non-zerorated sale.
Excess output or input tax
(B) Excess Output or Input Tax. — 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. If the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or
quarters: Provided, however, that any input tax attributable to
zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to
the provisions of Section 112. (R.A. 9361)
(C) Determination of Creditable Input Tax. — The sum of the
excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the amount of claim
for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable to
exempt sale.
!
Ii
:i
I
I
The claim for tax credit referred to in the foregoing paragraph shall
include not only those filed with the Bureau of Internal Revenue but
also those filed with other government agencies, such as the Board
of Investments and the Bureau of Customs.
•
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,
(known as the Net VAT payable)
•
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,
o
Provided, that any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or
applied for a tax credit certificate which may be used in the
i
I'
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payment of internal revenue taxes, (this is where you can get
input tax credit or refunds)
O
In other words, any input tax, attributable to zero-rated sales
may be:
•
Refunded, or
■
Credited against other internal revenue taxes of the VAT
taxpayer.
Unutilized creditable input taxes attributable to zero-rated sales
can only be recovered through a refund or tax credit. Unapplied
input taxes cannot be treated as deductible expense for income
tax purposes. (RMC 57-2013)
i
For purposes of value-added tax, define, explain or distinguish the
following terms:
a)
Input tax and output tax
b)
Zero-rated and effectively zero-rated transactions
c)
Destination principle (2019 Bar Exam)
Suggested answer:
a)
Input tax is the VAT due from or paid by a VAT-registered person
on importation of goods or local purchases of goods, properties,
or services, including lease or use of properties, from a VATregistered person, in the course of his trade or business. Output
tax is the value-added tax due ON the sale or lease of taxable
goods/properties/services by any person registered or required
to register under the VAT system.
b)
Zero-rated transactions refer to the export sale of goods and
supply of services. The seller of such transactions charges no
output tax, but can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers. This is for the benefit
of the seller. Effectively zero-rated transactions refer to the
sale of goods or supply of services to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate. Such rate does not yield any tax
chargeable against the purchaser. This is for the benefit of the
purchaser.
c)
Under the cross-border principle or destination principle of the
VAT system, no VAT shall be imposed to form part of the cost
of goods destined outside of the territorial border of the taxing
authority.
I
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Transitional and
Withholding VAT
Presumptive
Input
369
Tax
Credits
and
Transitional and Presumptive Input Tax Credits
Sec. 111. Transitional/Presumptive Input Tax Credits. —
(A) Transitional Input Tax Credits. — A person who becomes
liable to value-added tax or any person who elects to be a VATregistered person shall, subject to the filing of an inventory according
to rules and regulations prescribed by the Secretary of finance, upon
recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to
two percent (2%) of the value of such inventory or the actual valueadded tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.
Taxpayers who become VAT-registered persons upon exceeding
the minimum turnover of P3,000,000 in any 12-month period, or
who voluntarily register even if they do not reach the threshold
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 their present condition;
2.
Materials purchased for further processing, but which have
not yet undergone processing;
3.
Goods which have been manufactured by the taxpayer;
4.
Goods in process for sale; or
5.
Goods and supplies for use in the course of the taxpayer's
trade or business as a VAT-registered person. (R.R. 162005)
The transitional input tax shall be
o
2% of the value of the beginning inventory on hand, or
o
actual VAT paid on such goods, materials and supplies,
whichever is HIGHER.
The transitional input tax credit operates to benefit newly VATregistered persons, whether or not they previously paid taxes
(such as VAT) in the acquisition of their beginning inventory of
goods, materials and supplies. (Fort Bonifacio Development Corp,
v. CIR, G.R. No. 158885, April 2, 2009)
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O
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. (Fort Bonifacio Development
Corp. v. CIR, G.R. No. 158885, April 2, 2009)
(B) Presumptive Input Tax Credits. —
(1) Persons orfirms engaged in the processing of sardines, mackerel
and milk, and in manufacturing refined sugar and cooking oil and
packed noodle-based instant meals, shall be allowed a presumptive
input tax, creditable against the output tax, 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.
As used in this Subsection, 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.
•
Presumptive input tax credits are given for those engaged:
0
In the processing of sardines, mackerel, and milk; and
O
In manufacturing refined sugar, cooking oil, and packed
noodle-based instant meals.
•
The rate is 4% of the gross value in money.
•
They are given this 4% presumptive input tax because the goods
used in the said enumeration are VAT-exempt.
•
"Processing" means 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 its
original form or condition.
Withholding of creditable value-added tax
Sec. 114. (C) Withholding of Value-added Tax. — 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 each purchase
of goods and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold
a final value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That beginning January 1, 2021, the VAT
withholding system under this Subsection shall shift from final to a
creditable system: Provided, further, That the payment for lease
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or use of properties or property rights to nonresident owners shall
be subject to twelve percent (12%) withholding tax at the time of
payment: Provided, finally, That payments for purchases of goods
and services arising from projects funded by Official Development
Assistance (ODA) as defined under Republic Act No. 8182, otherwise
known as the 'Official Development Assistance Act of 1996/ as
amended, shall not be subject to the final withholding tax system
as imposed in this Subsection. For purposes of this Section, the
payor or person in control of the payment shall be considered as the
withholding agent. (As amended by TRAIN)
VAT is withheld in two instances:
1.
In sales of goods and services to the Government (5%
withheld by the government)
2.
In payment for lease or use of properties to nonresident
owners (12% withheld by the lessee)
Before 2021, transactions with the government were subject to
5% final withholding VAT. The final withholding VAT represented
the net VAT payable for the seller. The remaining 7% accounts
for the standard input VAT for sales of goods or services to the
government or any of its political subdivisions, in lieu of the
actual input VAT directly attributable or ratably apportioned to
such sales.
O
Should actual input VAT attributable to sales to government
exceed 7% of gross payments, the excess may form part of
the sellers' expense or cost.
O
If the actual input VAT attributable to sale to government is
less than 7%, the difference should be counted as income.
•
O
Kaka sells to the Philippine Government his services as a
master for P100. The VAT is P12. The P5 is withheld by
the government, so the Government only pays him P107.
In this scheme, the government assumes that your input VAT
will be 7%. If it is 7%, then all is well.
■
But if the input VAT is higher than 7% (in Kaka's case, for
example it was PIO), then the excess of P3 will be treated
as an expense. It will form part of the expense column in
the income statement.
-
But if the Input VAT is smaller than 7% (for example,
Kaka only spent P5), then there is income on Kaka's side,
this will form part of his income.
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In both instances, Kaka will lose or be benefited only by
30% (rate of income tax) because it will form part of his
income and subject to income tax.
.
•
Beginning 2021, the VAT withholding system for transactions with
the government shall shift from final to a creditable system. (So
it'll all depend when you're reading this if the VAT withheld by the
government is final or creditable!)
•
Also, while government payments are subject to 5% VAT
withholding, the purchase of goods and services arising from
projects funded by the Official Development Assistance will not
be subject to final or creditable withholding taxes. (R.R. 13-2018)
•
In transactions with nonresidents, 12% will be withheld with
respect to the following payments:
1.
Lease or use of properties or property rights owned by
nonresidents, and
2.
Other services rendered in the Philippines by nonresidents.
(R.R. 16-2005)
The government did this as a matter of enforcement. How
will the Government run after the VAT of a nonresident,
right? So, they just make the payors withholding agents.
O
■
O
Liza lives in the condo owned by nonresident Catriona.
Liza will withhold P12 of the total amount (including
VAT) of the lease of P112. Liza will only pay Catriona
P100.
The one who remits the 12% to the government, when
he files his return, can state that he/she is entitled to an
input tax credit.
■
In Liza's case, she can ask for the input tax credit of
P12.
G. VAT Refunds or Tax Credits
Refunds or Tax Credits on Input Tax
Sec. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-Rated or Effectively Zero-Rated Sales. — Any VATregistered person, whose sales are zero-rated or effectively zerorated 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: Provided, however,
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That in the case of zero-rated sales under Section 106(A)(2)(a)(l),
(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods of 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, it shall be allocated
proportionately on the basis of the volume of sales: Provided, finally,
That for a person making sales that are zero-rated under Section
108(B)(6), the input taxes shall be allocated ratably between his
zero-rated and non-zero-rated sales.
(B) Cancellation of VAT Registration. — A person whose
registration has been cancelled due to retirement from or cessation
of business, or due to changes in or cessation of status under Section
106(C) of this Code 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.
(C) Period within which Refund of Input Taxes shall be
Made. — In proper cases, the Commissioner shall grant a refund
for creditable input taxes within ninety (90) days from the date of
submission of the official receipts or invoices and other documents
in support of the application filed in accordance with Subsections (A)
and (B) hereof: 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.
In case of full or partial denial of the claim for tax refund, the taxpayer
affected may, within thirty (30) days from the receipt of the decision
denying the claim, appeal the decision with the Court of Tax Appeals:
Provided, however, That failure on the part of any official, agent, or
employee of the BIR to act on the application within the ninety (90)day period shall be punishable under Section 269 of this Code.
(D) Manner of Giving Refund. — Refunds shall be made upon
warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by the
Chairman, Commission on Audit, the provisions of the Administrative
Code of 1987 to the contrary notwithstanding: Provided, That
refunds under this paragraph shall be subject to post audit by the
Commission on Audit.
There are three instances where one can avail of a VAT refund:
1.
Zero-rated and effectively zero-rated sales
2.
Cessation of business or
3.
Cessation of VAT-status
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•
Note: for zero-rated transactions, a taxpayer cannot apply for
the issuance of a refund for transitional input tax.
•
For zero-rated and effectively zero-rated sales of goods, properties
or services, the application should be filed within two years after
Hose of the taxable quarter when such sales were made.
•
O
The two-year period is reckoned from the close of the taxable
quarter when the relevant sales were made pertaining to
the input VAT regardless when the input tax was paid. (CIR
v. Mirant Pagbilao Corp., G.R. No. 172129, September 12,
2008)
O
Thus, when a zero-rated VAT taxpayer pays its input VAT
(for the purchase from its supplier) a year after the pertinent
transaction (its sale to its purchaser), said taxpayer only
has a year left to file a claim for refund or tax credit of the
unutilized creditable input VAT.
Summary of rules regarding the two-year prescriptive period for
input VAT refunds (CIR v. Mindanao II Geothermal Partnership,
G.R. No. 191498, January 15, 2014*):
Administrative claim (two-year period)
0
General rule: the administrative claim must be filed within
the two-year prescriptive period. The reckoning date of the
prescriptive period is the close of the taxable quarter when
the relevant sales were made.
■
i
Except for the period June 8, 2007 to September 12,
2008, which follows the Atlas Consolidated Mining and
Development Corporation v. CIR (G.R. No. 141104, June
8, 2007) doctrine that the reckoning date is the filing of
the VAT return and the payment of the tax.
0
The mandatory period for the CIR to process the refund Is
now 90 days (as compared to the pre-TRAIN 120-day period).
O
If the BIR does not act on the application within 90 days, then
the relevant official, agent, or employee shall be liable under
Section 269.
4The case summarized the rules from Atlas Consolidated Mining and
Development Corporation v. CIR, G.R. No. 141104, June 8, 2007; CIR v. Alchi
Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010; and CIR v. San
Roque Power Corporation, G.R. No. 187485, February 12, 2013. Those cases talk
about the 120-day period, right? Well TRAIN has made the period 90 days, so the
notes above reflect this change.
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Judicial claim (90+30 day period)
O
The taxpayer can appeal in two ways:
■
File the judicial claim within thirty days after the CIR
denies the claim within the 90-day period, or
■
File the judicial claim within thirty days from the expiration
of the 90-day period if the CIR does not act within the 90day period.
The 30-day period always applies, whether there is denial or
inaction on the part of the CIR.
O
General rule: the 30-day period to appeal is both mandatory
and jurisdictional, i.e., if you do not follow the 30-day period,
your claim for refund will be dismissed by the CTA.
-
Except for premature judicial filings between December
10, 2003 and October 5, 2010 where BIR Ruling No. DA489-03 was still in force. Late judicial filing is absolutely
prohibited.
O
Note: the two-year prescriptive period only applies to the
filing of the administrative claim. The filing of the judicial
claim follows the 90-30 day period.
O
IMPORTANT: These rules only apply to claims for credit or
refund of input tax. Why not to refunds in general?
«
The Court added that the rules under Sections 204(C)
and 229 as cross-referred to Section 112 do not apply as
they only cover erroneous payments or illegal collections
of taxes which is not the case for refund of unutilized
input VAT.
•
Unutilized input VAT are not taxes paid erroneously or
collected illegally.
The application for VAT refund/tax credit must be accompanied
by complete supporting documents (the BIR provides a checklist
for this). The taxpayer must likewise attach a statement under
oath attesting to the completeness of the submitted documents.
No other documents shall be accepted from the taxpayer in the
course of the refund/tax credit evaluation. Without the complete
supporting documents, the application will be denied. (RMC 542014)
O
Because of RMC 54-2014, all claims must be filed with
complete supporting documents. (Pilipinas Total Gas, Inc. v.
CIR, G.R. No. 207112, Decembers, 2015)
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O
The 90-day period begins from the date of submission of the
official receipts or invoices and other documents in support
of the refund application. The application is considered to
have been filed only upon submission of these supporting
documents. (R.R. 26-2018)
The taxpayer claiming the refund must comply with the invoicing
and accounting requirements mandated by the Tax Code, as well
as the revenue regulations implementing them.
O
Hence, when the official receipts presented as evidence to
prove input tax is not in the name of the taxpayer, the input
tax pertaining to such official receipts cannot be given as a
refund or credit. (Bonifacio Water Corporation v. CIR, G.R.
No. 175142, July 22, 2013)
o
Similarly, when the official receipts issued by the taxpayer
engaged in zero-rated sales do not have "zero-rated"
stamped or printed on its official receipts, then the taxpayer
cannot claim for input tax pertaining to such sales. (Western
Mindanao Power Corporation v. CIR, G.R. No. 181136, June
13, 2012)
o
VAT receipts and invoices are not interchangeable. If a
taxpayer interchanges them and files for a refund, this will be
rejected for not complying with the invoicing requirements.
(Team Energy v. CIR, G.R. No. 197663, March 14, 2018)
For cessation of business, 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 Section 106(C), may within two years from the date of
cancellation, apply for the issuance of a tax credit certificate for
any unused input tax which he may use in payment of his other
internal revenue taxes.
o
Provided, 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.
o
The "date of cancellation" is the date of the issuance of the tax
clearance by the BIR, after full settlement of all tax liabilities
relating to the cessation of the business or the change of
status of the taxpayer. (R.R. 13-2018)
o
The filing of the claim shall be made only after completion of
the mandatory audit of internal revenue liabilities covering
the immediately preceding taxable year and the short period
return and the issuance of the applicable tax clearance by the
BIR. (R.R. 13-2018)
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More on cessation of business or change of status as VATregistered person (R.R. 16-2005):
O
O
Properties originally intended for sale or use in business and
capital goods existing at the time of the following are subject
to output tax:
■
Change of business activity from VAT taxable to VATexempt 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 reversion to exempt status for persons who voluntarily
registered to be VAT taxpayers.
Not subject to output tax:
•
Change of control of a corporation by the acquisition
of the controlling interest of such corporation by
another stockholder or group of stockholders. The
goods or properties will not be considered sold,
bartered, etc.
■
Change in the trade or corporate name of the business.
•
Merger or consolidation of corporations. The unused input
tax of the dissolved corporation shall be absorbed by the
surviving or new corporation.
Wreck Corporation Is a domestic corporation engaged in the
business of importing, refining and selling petroleum products.
During the period from September 1, 2014 to December 31, 2014,
Wreck Corporation imported 225 million liters of Jet A-l aviation
fuel and paid the excise taxes thereon. Seventy-five percent (75%)
of the total volume of aviation fuel imported were actually sold to
International carriers of Philippine and foreign registries for their
use or consumption outside of the Philippines in the period from
November 1, 2014 to December 31, 2014. Wreck Corporation did not
pass on to the international carriers the excise taxes it paid on the
Importation of petroleum products.
On June 25, 2015, Wreck Corporation filed an administrative claim
for refund or issuance of tax credit certificate amounting to the
excise taxes it had paid on the importation of 225 million liters of Jet
A-l aviation fuel.
If you were the Commissioner of Internal Revenue, will you grant
Wreck Corporation's administrative claim for refund or Issuance of
tax credit certificate? Explain your answer. (2017 Bar Exam)
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Suggested answer:
No, I will not. Under the Tax Code, creditable input tax of VATregistered taxpayers can be refunded if these are attributable to
zero-rated sales. It doesn't appear that Wreck Corporation is a VATregistered taxpayer which incurred input VAT that can be subject to
a refund for zero-rated sales. It incurred excises taxes, which is not
the subject of a refund for zero-rated sales.
NOTE: The following bar exam Q&As have not been updated to reflect the
new 90-day period. It would've been too unwieldy to change the answers. So
just take note that these Q&As were still under the old pre-TRAIN 120-day
period regime.
=
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
On December 22, 2013, GC filed with the Bureau of Internal Revenue
(BIR) an administrative claim for refund of its unutilized input ValueAdded Tax (VAT) for the calendar year 2012. After several months of
inaction by the BIR on its claim for refund, GC decided to elevate its
claim directly to the Court of Tax Appeals (CTA) on April 22, 2014.
i
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).
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 Exam)
Suggested answer:
a) No, the CTA Is wrong. Jurisprudence states that the
administrative claim must be filed within two years from the dose
of the taxable quarter when the relevant sales were made. In this
case, the administrative claim was filed well within two years from
the dose of the first quarter. Hence, the CTA is wrong.
b) If GC filed its claim before the CTA on February 22, 2014, Its
claim should be dismissed for prematurity. Jurisprudence states that
for judicial claims of refund for unutilized input VAT, the taxpayer
must wait for the 120-day period (for the CIR to decide) to expire
before elevating its claim to the CTA. It is only upon the expiration of
■
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the 120-day period can the taxpayer file its claim within 30 days to
the CTA. The 30-day period is mandatory and jurisdictional. Filing on
February 22, 2014 is premature because it is still within the 120-day
period for the CIR to decide.
For calendar year 2011, FFF, Inc., a VAT-registered corporation,
reported unutilized excess input VAT in the amount of Pl,000,000.00
attributable to its zero-rated sales. Hoping to impress his boss, Mr.
G, the accountant of FFF, Inc., filed with the Bureau of Internal
Revenue (BIR) on January 31, 2013 a claim for tax refund/credit
of the Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for
2011. Not having received any communication from the BIR, Mr. G
filed a Petition for Review with the CTA on March 15, 2013, praying
for the tax refund/credit of the Pl,000,000.00 unutilized excess
input VAT of FFF, Inc. for 2011.
a)
Did the CTA acquire jurisdiction over the Petition of FFF, Inc.?
b) Discuss the proper procedure and applicable time periods for
administrative and judicial claims for refund/credit of unutilized
excess input VAT. (2015 Bar Exam)
Suggested answer:
a) The CTA does not acquire jurisdiction over the Petition of FFF,
Inc. The Petition was filed prematurely. The BIR has 120 days to
rule on the administrative claim. Upon expiration of the 120 days (or
from denial by the BIR), the taxpayer has 30 days to elevate to the
CTA. The Supreme Court has ruled that this 120+30 day period is
mandatory and jurisdictional. In this case, FFF, Inc. filed outside the
period, hence, the CTA has no jurisdiction.
b) The taxpayer has two years from the close of the taxable
quarter when the relevant sales were made to file an administrative
claim for refund with the BIR. The BIR has 120 days to rule on the
administrative claim. Upon the expiration of the 120 days (or from
the denial by the BIR), the taxpayer has 30 days to file a petition
with the CIR. The two-year period only applies to the administrative
claim. The judicial claim with the CIR must be within the 30-day
period.
i.
i'
a) Explain the procedure for claiming refunds or tax credits of input
Value Added Tax (VAT) for zero-rated or effectively zero-rated sales
under Sec. 112 of the National Internal Revenue Code (NIRC) from
the filing of an application with the CIR up to the CTA.
b) Explain the procedure for claiming refunds of tax erroneously or
illegally collected under Sec. 229 of the NIRC from the filing of the
claim for refunds with the CIR up to the CTA. (2016 Bar Exam)
Suggested answer:
a) To claim refunds or tax credits for zero-rated sales, the taxpayer
must first file an administrative claim with the CIR within two years
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from the end of the taxable quarter when the relevant sales were
made. The CIR has 120 days to rule on the claim. The taxpayer then
has 30 days, from the decision of the CIR or from the expiration of
the 120 day period if the CIR does not act, to file a judicial claim with
the CTA, even if this is beyond the two-year period. This 120+30 day
rule is mandatory and jurisdictional.
I
=
b) To claim refunds for erroneously or illegally collected taxes, the
taxpayer must file both the administrative claim and the judicial claim
within two years from the payment of the tax. The administrative
claim is mandatory and the CTA will dismiss the case without it.
Amor Powers, Inc. (API) is a domestic corporation registered with
the BIR as a value-added taxpayer. API incurred excess input VAT in
the amount of P500,000,000.00 on August 3, 2008. Hence, it filed
with the BIR an administrative claim for the refund or credit of these
input taxes on August 15, 2010. Without waiting for the CIR to act on
its claim, API filed a Petition for Review with the CTA on September
15, 2010 before the lapse of two years after the dose of the taxable
quarter concerned.
In its Comment on the Petition, the CIR argues that API's Petition
should be dismissed as it was filed before the lapse of the 120day period given to the CIR by Sec. 112(D) of the NIRC, which
became effective on January 1, 1998. For the CIR, the 120-day
period is mandatory and jurisdictional so that any suit filed before its
expiration is premature and, therefore, dismissible.
I
I
API, on the other hand, invokes BIR Ruling No. DA-489-O3 issued
by the CIR on December 10, 2003 in answer to a query posed by
the Department of Finance regarding the propriety of the actions
taken by Lazl Bay Resources Development, Inc., which filed an
administrative claim for refund with the CIR and, before the lapse
of the 120-day period from its filing, filed a judicial claim with the
CTA. BIR Ruling No. DA-489-03 stated that the taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek
Judicial relief with the CTA.
I
i
i
Will API's Petition for Review prosper? Decide with reasons. (2016
Bar Exam)
Suggested answer: API's Petition for Review will prosper. The SC
has held that premature judicial filings between December IO, 2003
and October 5, 2010 are allowed as an exception to the 120+30 day
rule because of BIR Ruling No. DA-489-03. In this case, API filed its
Petition for Review on September 5, 2010, well within the exception
period; hence, it will prosper.
H. VAT on Real Properties
The sales of the following real properties are subject to VAT:
o
Those held for sale to customers in the ordinary course of
trade or business;
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O
Those held for lease in the ordinary course of trade or
business; and
O
Those used in the trade or business of the seller (as it is
incidental to the taxpayer's main business) (R.R. 4-2007)
The sale, transfer, or disposal of two or more adjacent lots, house
and lots, or other residential dwellings is also subject to VAT
when:
O
it is within a 12-month period,
O
in favor of one buyer from the same seller,
O
for the purpose of utilizing the lots, house and lots, or other
residential dwellings as one residential area,
O
where the aggregate value of the adjacent properties exceeds
O
•
Pl,919,500 for residential lots and
«
P3,199,200 for residential house and lots or other
dwellings. (R.R. 13-2012)
NOTE: Beginning 2021, the VAT exemption for the sale of real
properties shall only apply to the:
■
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 under R.A. 7279;
•
sale of house and lot, and other residential dwellings with
selling price of not more than P2,000,000 (to be adjusted
every 3 years depending on the Consumer Price Index).
(See discussion on VAT-exempt transactions)
•
A real estate dealer is any person engaged in the business of
buying, developing, selling, exchanging real property as principal
and holding himself out as a full or part-time dealer of real estate.
(R.R. 16-2005)
•
A sale on installment of real property by a real estate dealer
shall be subject to the 12% VAT on the installment payments,
including interest and penalties, actually and/or constructively
received by the dealer.
o
Sale of real property on installments means sales by a real
estate dealer, the initial payments of which in the year of sale
do not exceed 25% of the gross selling price.
-
If the initial payments exceed 25% of the selling price,
the transaction shall be considered a cash sale with a
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VAT at the time of the sale. This is a sale on a deferred
payment basis.
Initial payments are the payments
O
which the seller received before and upon the execution of
the instrument of sale, and
O
payments which he expects or is scheduled to receive in
cash or property (other than evidence of indebtedness of the
purchaser) during the taxable year of the sale or disposition.
O
It will include more than the down payment in the year of
sale.
O
It will not include the amount of mortgage on the real property
sold which was already there at the time of sale and which
was assumed by the buyer,
«
EXCEPT when such mortgage exceeds the cost or other
basis of the property to the seller, in which case the
excess shall form part of the initial payments.
For example, the mortgage assumed by the buyer was P600K,
and the cost to the seller was just P500K. The P100K excess will
be included as "initial payment."
The gross selling price is whichever is highest of the:
O
Consideration In the deed of sale;
o
Zonal value, per CIR; and
o
The fair market value per real property declaration with the
provincial or city assessor.
Take note that it is the agreed consideration that is used to
determine the initial payments, while it is the highest among
the consideration, zonal value and FMV which Is used for the
computation of the VAT.
VAT on Lease
All forms of property for lease, whether real or personal, are
liable to VAT except when the gross annual sales do not exceed
P3,000,000, In which case they will be exempt. (See discussion
on VAT-exempt transactions)
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.
See also rules just mentioned when the lessor is a nonresident.
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In a lease contract, the advance payment by the lessee may be:
1.
A loan to the lessor from the lessee, or
2.
Option money for the property, or
3.
Security deposit to insure the faithful performance of certain
obligations of the lessee to the lessor, or
4.
Pre-paid rental.
O
If the advanced payment is #1, 2 or 3, not subject to VAT.
o
If the advanced payment is #4, then such payment is
taxable to the lessor in the month when it was received,
irrespective of the accounting method employed by the
lessor.
o
If the security deposit (#3) is applied to rental, then it
shall be subject to VAT at the time of its application. (R.R.
16-2005)
On September 17, 2015, Data Realty, Inc., a real-estate corporation
duly organized and existing under Philippine law, sold to Jenny Vera
a condominium unit at Freedom Residences in Malabon City with an
area of32.31 square meters for a contract price of P4,213,000.00.
The condominium unit had a zonal value amounting to P2,877,000.00
and fair market value amounting to P550,000.00.
a)
Is the transaction subject to value-added tax and documentary
stamp tax? Explain your answer.
b)
Would your answer be the same if the property was sold by
a bank In a foreclosure sale? Explain your answer. (2017 Bar
Exam)
Suggested answer:
a)
Yes, It's still subject to VAT as the condo is held for sale to
customers in the ordinary course of trade or business of the real
estate corporation. Further, the contract price pushes the gross
sales of the seller above the P3,000,000 VAT threshold. Hence,
the sale is subject to VAT. (Answer reflects the amendment by
TRAIN)
b)
My answer will be the same even if It was sold by a bank In
a foreclosure sale. Under R.R. 9-2012, properties sold through
Involuntary sale under circumstances which warrant the
Imposition of VAT will still be subject to VAT. In this case, the
condo is an ordinary asset whose normal sale would be subject
to VAT. Hence, the involuntary sale should be subject to VAT as
well.
1
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Koko's primary source of income is his employment with the
government. He earns extra from the land he inherited from his
parents, and which land he has been leasing to a private, nonstock,
non-profit school since 2005.
Last January, the school offered to buy the land from Koko for an
amount equivalent to its zonal value plus 15% of such zonal value.
Koko agreed but required the school to pay, in addition to the
purchase price, the 12°/o VAT. The school refused Koko's proposal
to pass on the VAT contending that it was an entity exempt from
such tax. Moreover, it said that Koko was not regularly engaged
in the real estate business and, therefore, was not subject to VAT.
Consequently, Koko should not charge any VAT to the school.
I
a)
Is the contention of the school correct?
b)
Will your answer be the same if Koko signed up as a VATregistered person only in 2017? (2018 Bar Exam)
Suggested answer:
I.
a)
The school is wrong. VAT is an indirect tax, hence the liability
lies with Koko, not the school. The school may not use its tax
exempt status to refuse to shoulder the VAT, as jurisprudence
has stated that the tax exemption of the buyer does not exempt
him or her from the payment of indirect taxes. The sale of the
property is subject to VAT, as the land had been held for lease
in the ordinary course of Koko's trade or business. Hence, the
school's contention is wrong.
b)
The answer will be the same, as the sale Is subject to VAT in
the first place—with or without registration. If Koko does not
register as a VAT-registered person, the Tax Code states that
the sale will still be subject to VAT as if he were a VAT-registered
person but without the benefit of input tax credits.
Administrative Provisions
KA 7" Registration
•
Every taxpayer subject to the VAT must register with the BIR as
a VAT taxpayer and pay an annual registration fee of P500 for
every separate and distinct establishment, including facility types
where the business is conducted.
•
Every taxpayer not subject to VAT but subject to the excise
tax or percentage tax must register with the BIR and pay an
annual registration fee of P500 for every separate and distinct
establishment where the business is conducted.
o
VAT exempt persons under Section 109 who did not opt to
be registered as VAT taxpayers must register as non-VAT
taxpayers.
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Mandatory registration
Sec. 236. (G) — Persons required to register for Value-Added
Tax —
1) Any person, who in the course of trade or business, sells, barters
or exchanges goods or properties, or engages in the sale or exchange
of services, shall be liable to register for VAT if:
(a) 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 (P3,000,000); or
tl
(b) 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 (P3,000,000).
2) 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, and shall pay the annual registration fee
prescribed in Subsection (B) hereof. If he fails to register, he
shall be liable to pay the tax under Title IV as if he were a VATregistered person, but without the benefit of input tax credits for
the period in which he was not properly registered. (As amended
by TRAIN)
Any person who, in the course of trade or business, sells, barters
or exchanges goods or properties, or engages in the sale or
exchange of services shall be liable to register for VAT if:
1.
His gross sales or receipts for the past 12 months, other than
those exempt under Section 109(A) to (BB), have exceeded
P3,000,000; or
2. There are reasonable grounds to believe that his gross sales
or receipts for the next 12 months, other than those exempt
under Section 109(A) to (BB), will exceed P3,000,000.
If a person who is mandated to register does not, he shall:
o
Be liable to pay the tax as if he were a VAT-registered person,
and
o
Without the benefit of input tax credits.
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Optional registration
Sec. 236. (H) 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 valueadded 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.
(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.
Provided, That any person taxed under Section 24(A)(2)(b) and
24(A)(2)(c)(2)(a) of the NIR.C who elected to pay the eight percent
(8%) tax on gross sales or receipts shall not be allowed to avail of
this option.
For purposes of Title IV of this Code, any person who has registered
value-added tax as a tax type in accordance with the provisions
of Subsection (C) hereof shall be referred to as a ’VAT-registered
person' who shall be assigned only one Taxpayer Identification
Number (TIN). (As amended by TRAIN)
•
Any person who is not required to registered as a VAT taxpayer
may register for the VAT. He or she, however, cannot cancel his
or her registration for the next three years.
o
However, if an individual has elected to pay the 8% income
tax on gross receipts/sales, then that person may not register.
Cancellation of VAT registration
Sec. 236. (F) Cancellation of VAT registration. —
(1) A VAT-registered person may cancel his registration for VAT if:
(a) he makes written application and can demonstrate to the
Commissioner's satisfaction that his gross sales or receipts for the
following 12 months, over than those that are exempt under Section
109 (A) to (V), will not exceed (Pl,500,000), or
(b) he has ceased to carry on his trade or business, and does not
expect to recommence any trade or business within the next twelve
months.
The cancellation of registration will be effective from the first day of
the following month.
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TRAIN did not amend this provision. However, it should be read
to reflect the P3,000,000 VAT threshold (and not the Pl,500,000
written in the codal).
Compliance requirements
Sec. 113. Invoicing and Accounting Requirements for VATRegistered Persons. —
(A) Invoicing Requirements. — A VAT-registered person shall
issue:
(1) A VAT invoice for every sale, barter or exchange of goods or
properties; and
(2) A VAT official receipt for every lease of goods or properties, and
for every sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT Official
Receipt. — The following information shall be indicated in the VAT
invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed
by his taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay
to the seller with the indication that such amount includes the valueadded tax: Provided, That:
(a) The amount of the tax shall be shown as a separate
item in the invoice or receipt;
(b)
If the sale is exempt from value-added tax, the term
"VAT-exempt sale" shall be written or printed prominently on
the invoice or receipt;
If the sale is subject to zero percent (0%) value(c)
added tax, the term "zero-rated sale" shall be written or
printed prominently on the invoice or receipt;
(d)
If the sale involves goods, properties or services some
of which are subject to and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and
zero-rated components, and the calculation of the value-added
tax on each portion of the sale shall be shown on the invoice or
receipt: Provided, That the seller may issue separate invoices or
receipts for the taxable, exempt, and zero-rated components of
the sale;
(3) The date of transaction, quantity, unit cost and description of the
goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos
(Pl,000) or more where the sale or transfer Is made to a VAT-
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registered person, the name, business style, if any, address and
taxpayer identification number (TIN) of the purchaser, customer or
client.
(C) Accounting Requirements. — Notwithstanding the provisions
of Section 233, all persons subject to the value-added tax under
Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and subsidiary
purchase journal on which the daily sales and purchases are
recorded. The subsidiary journals shall contain such information as
may be required by the Secretary of Finance.
A VAT-registered person shall issue:
1.
A VAT invoice for every sale, barter, or exchange of goods or
properties; and
2.
A VAT official receipt for every lease of goods or properties,
and for every sale, barter or exchange of services
If the sale is exempt from VAT, the term "VAT-exempt sale" shall
be written or printed prominently on the invoice or receipt.
If the sale is subject to 0%, the term "zero-rated sale" shall be
written or printed prominently on the invoice or receipt.
If the sale involves some which are subject to VAT and some
which are zero-rated or VAT-exempt, the invoice or receipt shall
clearly indicate the breakdown of the sale price between the
taxable, exempt and zero-rated components.
o
The calculation of the VAT on each portion of the sale shall be
shown on the invoice or receipt.
o
But the seller may issue separate invoices or receipts for the
taxable, exempt and zero-rated components of the sale.
The date of the transaction, quality, unit cost and description of
the goods or properties or nature of the services must also be
indicated.
When the sale is Pl,000 or more to a VAT-registered person, the
name, business style, address and TIN of the purchaser, customer
or client must also be placed in the receipt or invoice.
What must be contained in the VAT receipt?
o
Statement that seller is a VAT-registered person, followed by
his TIN
o
Total consideration indicating that such amount includes the
VAT, which tax shall be shown as a separate item
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O
If VAT-exempt or zero-rated, must also be indicated as either
"VAT-EXEMPT SALE" or "ZERO-RATED SALE"
O
Clear breakdown of VAT, VAT-zero rated or VAT-exempt where
applicable, or separate invoices or receipts for the same
o
Date of the transaction, quantity, unit cost, and description of
the goods or properties or nature of the service
o
In case of sales of Pl,000 or more where the sale or transfer
is made to a VAT-Registered person, the name, business style
if any, address and TIN of the purchaser, customer or client
shall be indicated
VAT-liable taxpayers must have:
o
Subsidiary sales journal, and
o
Subsidiary purchases journal
■
In addition to the regular books of accounts
Issuing Erroneous VAT invoice or VAT official receipt
Sec. 113. (D) Consequence of Issuing Erroneous VAT Invoice
or VAT Official Receipt. —
If a person who is not a VAT-registered person issues an invoice or
receipt showing his Taxpayer Identification Number (TIN), followed
by the word "VAT":
(a) The issuer shall, in addition to any liability to other percentage
taxes, be liable to:
(1) The tax imposed in Section 106 or 108 without the benefit of any
input tax credit; and
(II) A 50% surcharge under Section 248(B) of this code;
(b) The VAT shall, if the other requisite information required
under Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section 110
of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official
receipt for a VAT-exempt transaction, but fails to display prominently
on the invoice or receipt the term "VAT-exempt Sale," the issuer shall
be liable to account for the tax imposed in Section 106 or 108 as if
Section 109 did not apply.
(E) Transitional Period. — Notwithstanding Subsection (B) hereof,
taxpayers may continue to issue VAT invoices and VAT official receipts
for the period July 1, 2005 to December 31, 2005, in accordance with
Bureau of Internal Revenue administrative practices that existed as
of December 31, 2004.
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If a person who is NOT a VAT-registered person issues an invoice
or receipt showing his TIN followed by the word "VAT," the issuer
shall be:
•
1.
Liable for the percentage tax due on his transaction
2.
Liable for the VAT, without credit for any input tax, and
3.
Subject to a 50% surcharge.
o
VAT shall be recognized as an input tax credit to the
purchaser under Section 110, provided the requisite
information required in invoices or receipts are shown on
the invoices or receipts.
o
If a VAT-registered person issues a VAT invoice or official
receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the term "VATexempt sale," he shall be subject to the VAT, as if Section
109 on exempt transactions did not apply.
o
Meaning, he has to pay VAT.
For zero-rated transactions, the failure to print the word "zerorated" on the VAT invoices or official receipts is fatal to claims for
a refund or credit of unutilized input VAT on the zero-rated sales.
(Northern Mindanao Power Corporation v. CIR, G.R. No. 185115,
February 18, 2015)
If the 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 the VAT.
The output tax shall be computed by multiplying the total amount
In the invoice by a fraction using the rate of VAT as the numerator
and 100% plus the rate of the VAT as the denominator.
R.R. 8-1999 states the penalties for violation of the requirement
that output tax on sale of goods and services should not be
separately indicated in the sales invoice or official receipt.
o
The amount appearing in the sales in voices/receipts Is thus
deemed inclusive of the Value-Added Tax due thereon.
o
The penalty for violation of the said requirement is a fine of
not less than One Thousand Pesos (Pl,000) but not more
than Fifty Thousand Pesos (P50,000), and imprisonment of
not less than two (2) years but not more than four (4) years.
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MMM, Inc., a domestic telecommunications company, handles
incoming telecommunications services for non-resident foreign
companies by relaying international calls within the Philippines. To
broaden the coverage of its telecommunications services throughout
the country, MMM, Inc. entered into various interconnection
agreements with local carriers. The non-resident foreign corporations
pay MMM, Inc. in US dollars inwardly remitted through Philippine
banks, in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas.
MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently,
MMM, Inc. timely filed with the BIR an administrative claim for the
refund of the amount of P6,321,486.50, representing excess input
VAT attributable to its effectively zero-rated sales in 2000. The BIR
ruled to deny the claim for refund of MMM, Inc. because the VAT
official receipts submitted by MMM, Inc. to substantiate said claim
did not bear the words "zero-rated" as required under Section 4.1081 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division
and the CTA en banc affirmed the BIR ruling.
MMM, Inc. appealed to the Supreme Court arguing that the NIRC
itself did not provide for such a requirement. RR No. 7-95 should
not prevail over a taxpayer's substantive right to claim tax refund
or credit.
a)
Rule on the appeal of MMM, Inc.
b) Will your answer in (a) be any different if MMM, Inc. was claiming
refund of excess input VAT attributable to its effectively zero-rated
sales in 2012? (2015 Bar Exam)
Suggested answer:
a) The appeal will not prosper. Jurisprudence (particularly,
Panasonic Communications v. CIR, G.R. No. 178090, February 8,
2010 [Note: I don't recommend citing the actual names of cases in
the bar exam; doing it here for academic purposes]) has stated that
R.R. 7-95 was a valid exercise of administrative rule-making power
by the CIR.
b) My answer will not be different. R.A. 9337, which took effect
In 2005, has actually made it explicit that the word "zero-rated"
must appear In official receipts or invoices pertaining to zero-rated
transactions.
Return and Payment of VAT
Sec. 114. Return and Payment of Value-Added Tax. —
(A) In General. — 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 the
close of each taxable quarter prescribed for each taxpayer: Provided,
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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.
(B) Where to File the Return and Pay the Tax. — Except as the
Commissioner otherwise permits, the return shall be filed with and
the tax paid to an authorized agent bank. Revenue Collection Officer
or duly authorized city or municipal Treasurer in the Philippines
located within the revenue district where the taxpayer is registered
or required to register. (As amended by TRAIN)
Every person liable to pay VAT shall file a quarterly return of the
amount of his quarterly gross sales or receipts within 25 days
following the close of the taxable quarter using the latest version
of Quarterly VAT Return.
The VAT-registered persons shall pay the VAT on a monthly basis.
Starting 2023, the filing and payment of VAT shall be done within
25 days following the close of each taxable quarter.
Power of the Commissioner
Sec. 115. Power of the Commissioner to Suspend the Business
Operations of a Taxpayer. — The Commissioner or his authorized
representative Is hereby empowered to suspend the business
operations and temporarily close the business establishment of any
person for any of the following violations:
(a) In the case of a VAT-registered Person. —
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required
under Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or receipts
for the taxable quarter.
(b)
Failure of any Person to Register as Required under Section 236. —
The temporary closure 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.
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PERCENTAGE TAXES
(Quick Hits Notes)
•
Percentage taxes are business taxes based on gross sales or
receipts.
o
Gross sales or receipts means cash actually or constructively
received.
•
The seller is generally liable for percentage taxes.
•
Generally, if a taxpayer is exempt from VAT, he or she is liable for
3% percentage tax.
o
There are other kinds of percentage taxes with different rates
(like those imposed on common carriers, franchises, banks,
finance companies, amusement places, etc.) but these are
outside the coverage of the Bar syllabus.
L
,1
Remember, qualified self-employed individuals and professionals
availing of the 8% income tax on gross sales and/or receipts are
exempt from 12% VAT and 3% percentage tax under Section 116,
NIRC.
j
EXCISE TAXES
(Quick Hits Notes)
Excise taxes are another kind of business tax.
o
Excise taxes in the NIRC are different from the excise or
privilege tax that's also mentioned in old tax cases—those
are imposed on the enjoyment of a privilege or the practice
of a profession or business.
•
It's confusing because they have the same name. *eye
roll*
Excise taxes apply to:
o
Goods manufactured or produced in the Philippines for
domestic sales or consumption or for another disposition;
and
o
Things imported.
Hence, excise taxes are applicable only to:
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•
Manufacturers, and
•
Importers.
There are two kinds of excise taxes, namely:
O
Specific tax, and
O
Ad valorem tax
•
Specific taxes are those based on weight or volume
capacity or any other physical unit of measurement.
•
•
Examples: those applied to alcohol and tobacco
products, petroleum
Ad valorem taxes are those based on the selling price or
other specified value of the article.
•
Examples: automobiles,
jewelry and perfume
non-essential
goods like
Excise tax is basically an indirect tax imposed on the consumption
of a specified list of goods or products.
The tax is directly levied on the manufacturer upon removal
of the taxable goods from the place of production but in
reality, the tax is passed on to the end consumer as part of
the selling price of the goods sold.
O
•
The main difference with VAT (which is also an indirect
tax) is the ability of the buyer to claim a refund.
■
In VAT, zero-rated buyers have express statutory basis
which allows them to claim refunds for the VAT passed on
them by their suppliers.
•
In excise tax, buyers cannot claim refunds because there
is no statutory basis. Hence, it Is only the statutory
taxpayer who can claim a refund.
Who pays the excise tax? Who's the statutory taxpayer?
o
For manufactured goods, the manufacturer or producer.
•
o
But, if they are removed from the place of production
without paying the tax, the owner or person having
possession thereof shall be liable.
For imported goods, the importer or the owner.
■
But, for tax-free articles brought or imported by persons
exempt from tax which are subsequently sold in the
Philippines to non-exempt persons, the purchasers shall
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395
be considered the importers and will have to pay the duty
and tax due on such importation.
When should the excise taxes be paid?
O
For locally manufactured goods, pay prior to the removal of
the article from the place of production.
O
For imported goods, pay prior to the release of the article
from customs custody.
■i
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I;
k.
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DOCUMENTARY STAMP TAXES
(Quick Hits Notes)
Documentary stamp taxes (DST) is an internal revenue tax
imposed upon documents, instruments, and other papers listed
in the NIRC.
While DST is imposed on the certain documents, it is actually
imposed on the underlying transaction rather than the
document. In a way, it's an excise tax levied on the privilege
granted to a taxpayer to enter into certain transactions.
o
•
This is the other kind of excise tax that we mentioned in
the previous page.
Who pays for it?
o
DST is paid by the person making, signing, issuing, accepting
or transferring the document.
•
EXCEPT:
•
Whenever one party to the taxable document enjoys
an exemption from the tax, the other party who is not
exempt shall be the one directly liable for DST.
When should it be paid?
o
Should be filed and paid within five days after the close of
the month when the document was made, signed, issued, or
accepted.
■
Basically, you file and pay for DST within the first five
days of the month following the date of the documents.
•
Example: Shares of stock were issued on March 30.
You have to pay the DST before April 5.
What happens if you don't stamp the taxable document and pay
the DST for it? What happens to the documents?
o
It will NOT affect the validity of the transaction or contract.
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397
However, there will be two legal implications:
•
The document will not be recorded, nor will the record of
transfer be admitted as evidence in court; and
•
A notary public is not allowed to add his jurat or
acknowledgment to the document.
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GOVERNMENT’S REMEDIES
Tax laws are simply words on a piece of parchment (or a tablet
if you're techie); to enforce them, the government must be given
powers to bring these words into concrete actions and the cash into
the treasury. The law provides the government a number of remedies,
which can be used to ensure that it gets sufficient money into its
coffers to keep the government machinery moving.
When it comes to national taxes, the main player is the Bureau of
Internal Revenue, with the Commissioner of Internal Revenue sitting
on the throne in Agham Road, ruling as the hand of the Secretary of
Finance and the President. Too much? Okay, let's begin then. Let's
take a look at the powers of the BIR and the CIR.
Powers of the BIR
A.
Sec. 2. Powers and Duties of the Bureau of Interna! Revenue.
— The Bureau of Internal Revenue shall be under the supervision
and control of the Department of Finance and its powers and duties
shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of
all forfeitures, penalties, and fines connected therewith, including the
execution of judgments in all cases decided in its favor by the Court
of Tax Appeals and the ordinary courts. The Bureau shall give effect
to and administer the supervisory and police powers conferred to it by
this Code or other laws.
Sec. 3. Chief Officials of the Bureau of Interna! Revenue. —
The Bureau of Internal Revenue shall have a chief to be known as
Commissioner of Internal Revenue, hereinafter referred to as the
Commissioner and four (4) assistant chiefs to be known as Deputy
Commissioners.
The BIR has the power and duty
o
to assess and collect all taxes, fees, and charges,
o
to enforce all forfeitures, penalties, and fines In connection
therewith,
*
this includes execution of judgments in all cases decided
in its favor
398
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Power to interpret tax laws and decide tax cases
I
Sec. 4. Power of the Commissioner to Interpret Tax Laws and
to Decide Tax Cases. — The power to interpret the provisions of
this Code 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 this Code or other laws
or portions thereof administered by the Bureau of Internal Revenue
is vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
The CIR has the exclusive power to
o
Interpret the NIRC and other tax laws, subject to review by
the Secretary of Finance; and
o
Decide:
Disputed assessments,
Refunds of internal revenue taxes, fees, penalties,
Other matters arising from the NIRC, subject to review
by the CTA.
■
■
The Secretary of Finance has the power to affirm, revise, modify,
or set aside rulings and issuances of the BIR/CIR.
o
•
But the Secretary of Finance does not have the power over
disputed assessments, refunds, penalties, or other matters
arising under the NIRC. (The CTA has exclusive appellate
jurisdiction over these cases.) (DOF Order No. 007-02)
All rulings issued before January 1, 1998 will no longer have any
binding effect. (R.R. 5-2012)
o
o
These rulings are only valid to:
-
The taxpayer who was issued the ruling, and
•
Covering the specific transaction which is the subject of
the transaction. (RMC 22-2012)
Hence, all BIR rulings issued prior to January 1, 1998 are not
to be used:
■
as precedent by any taxpayer to secure rulings or in
support of their position against any assessment, and
*
by any BIR action lawyer in issuing new rulings for request
for rulings involving current business transactions. (RMC
22-2012)
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Since the CIR has exclusive and original jurisdiction to interpret tax
laws, taxpayers acting in good faith should not be made to suffer
for adhering to general interpretative rules of the Commissioner
interpreting tax laws, should such interpretation later turn out to
be erroneous and be reversed by the Commissioner or this Court.
(CIR v. San Roque, G.R. No. 187485, February 12, 2013)
O
o
A general interpretative rule issued by the CIR may be relied
upon by taxpayers from the time the rule is issued up to
its reversal by the Commissioner or this Court. (CIR v. San
Roque, G.R. No. 187485, February 12, 2013)
Not all revenue regulations require public hearings or consultations
or even the registration with the UP Law Center. Revenue
regulations which merely interpret the law and give nothing else
than what the law prescribes do not need public hearings and
registration with the UP Law Center. (Association of International
Shipping Lines, Inc. v. Secretary of Finance, G.R. No. 222239,
January 15, 2020, where the validity of R.R. 15-2013 was on the
table,)
Power to obtain information and to summon and examine
Sec. 5. Power of the Commissioner to Obtain Information,
and to Summon, Examine, and Take Testimony of Persons. —
In ascertaining the correctness of any return, or in making a return
when none has been made, or in determining the liability of any
person for any internal revenue tax, or in collecting any such liability,
or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be
relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit
or investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities,
including the Bangko Sentral ng Pilipinas and government-owned or
-controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional
operating headquarters of multinational companies, joint accounts,
associations, joint ventures or consortia and registered partnerships,
and their members: Provided, That the Cooperative Development
Authority shall submit to the Bureau a tax incentive report, which
shall include information on the income tax, value-added tax, and
other tax incentives availed of by cooperatives registered and
enjoying incentives under Republic Act No. 6938, as amended:
Provided, further, That the information submitted by the Cooperative
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Development Authority to the Bureau shall be submitted to the
Department of Finance and shall be included in the database
created under Republic Act No. 10708, otherwise known as 'The
Tax Incentives Management and Transparency Act (TIMTA).' (as
amended by TRAIN)
(C) To summon the person liable for tax or required to file a return,
or any officer or employee of such person, or any person having
possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of
the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and
place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as
may be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from
time to time of any revenue district or region and inquire after and
concerning all persons therein who may be liable to pay any internal
revenue tax, and all persons owning or having the care, management
or possession of any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding, nothing
in this Section shall be construed as granting the Commissioner the
authority to inquire into bank deposits other than as provided for in
Section 6(F) of this Code.
The Commissioner is authorized by law to do a whole host of
things in
O
ascertaining the correctness of any return, or
O
making a return when none has been made, or
O
collecting any such liability, or
O
evaluating tax compliance, or
O
In determining the liability of any person for tax.
The CIR is authorized to:
O
examine any document which may be relevant or material to
an inquiry;
O
obtain information from a third party in relation to an
investigation or audit of a taxpayer;
O
summon the taxpayer or any person holding records of the
taxpayer to appear before the CIR and produce documents;
O
take testimonies of the person concerned;
O
cause BIR employees to canvass around and inquire on
persons who may be liable for any internal revenue tax.
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•
The law allows the BIR access to all relevant or material records
and data in the person of the taxpayer. In fact, the BIR can accept
documents which cannot be admitted in a judicial proceeding
where the Rules of Court are strictly observed. (Fitness by Design
v. CIR, G.R. No. 177982, October 17, 2008)
•
Taxpayers must preserve their books of accounts for a period of
10 years from the deadline to file the return or from the date of
actual filing, whichever is later. (R.R. 17-2013)
O
After a period of five years, taxpayers have the option of
retaining an electronic copy of their books of accounts,
subject to the maintenance of an Electronic Storage System.
(R.R. 5-2014)
Power to make assessments and inquire into bank deposits
Sec. 6. Power of the Commissioner to Make assessments and
Prescribe additional Requirements for Tax Administration and
Enforcement. —
(A) Examination of Returns and Determination of Tax Due. —
After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however; That failure to file a return
shall not prevent the Commissioner from authorizing the examination
of any taxpayer.
Any return, statement of declaration filed in any office authorized to
receive the same shall not be withdrawn: Provided, That within three
(3) years from the date of such filing, the same may be modified,
changed, or amended: Provided, further, That no notice for audit
or investigation of such return, statement or declaration has In the
meantime been actually served upon the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports
and other Documents. — When a report required by law as a basis
for the assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by laws or rules and regulations
or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper
tax on the best evidence obtainable.
In case a person fails to file a required return or other document at
the time prescribed by law, or willfully or otherwise files a false or
fraudulent return or other document, the Commissioner shall make or
amend the return from his own knowledge and from such information
as he can obtain through testimony or otherwise, which shall be prima
facie correct and sufficient for all legal purposes.
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(C) Authority to Conduct Inventory-taking, surveillance
and to Prescribe Presumptive Gross Sales and Receipts. —
The Commissioner may, at any time during the taxable year, order
inventory-taking of goods of any taxpayer as a basis for determining
his internal revenue tax liabilities, or may place the business operations
of any person, natural or juridical, under observation or surveillance
if there is reason to believe that such person is not declaring his
correct income, sales or receipts for internal revenue tax purposes.
The findings may be used as the basis for assessing the taxes for the
other months or quarters of the same or different taxable years and
such assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices
in violation of the requirements of Sections 113 and 237 of this Code,
or when there is reason to believe that the books of accounts or other
records do not correctly reflect the declarations made or to be made
in a return required to be filed under the provisions of this Code, the
Commissioner, after taking into account the sales, receipts, income
or other taxable base of other persons engaged in similar businesses
under similar situations or circumstances or after considering other
relevant information may prescribe a minimum amount of such gross
receipts, sales and taxable base, and such amount so prescribed
shall be prima facie correct for purposes of determining the internal
revenue tax liabilities of such person.
(D) Authority to Terminate Taxable Period. — When it shall come
to the knowledge of the Commissioner that a taxpayer is retiring from
business subject to tax, or is intending to leave the Philippines or to
remove his property therefrom or to hide or conceal his property,
or is 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, the Commissioner shall declare the tax period
of such taxpayer terminated at any time and shall send the taxpayer
a notice of such decision, together with a request for the immediate
payment of the tax for the period so declared terminated and the tax
for the preceding year or quarter, or such portion thereof as may be
unpaid, and said taxes shall be due and payable immediately and shall
be subject to all the penalties hereafter prescribed, unless paid within
the time fixed in the demand made by the Commissioner.
(E) Authority of the Commissioner to Prescribe Real Property
Values. — The Commissioner is hereby authorized to divide the
Philippines into different zones or areas and shall, upon mandatory
consultation with competent appraisers both from the private and
public sectors, and with prior notice to affected taxpayers, determine
the fair market value of real properties located in each zone or area,
subject to automatic adjustment once every three (3) years through
rules and regulations issued by the Secretary of Finance based on the
current Philippine valuation standards: Provided, That no adjustment
in zonal valuation shall be valid unless published in a newspaper of
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general circulation in the province, city or municipality concerned,
or in the absence thereof, shall be posted in the provincial capitol,
city or municipal hall and in two (2) other conspicuous public places
therein: Provided, further, That the basis of any valuation, including
the records of consultations done, shall be public records open to
the inquiry of any taxpayer. For purposes of computing any internal
revenue tax, the value of the property shall be, whichever is the
higher of:
(1) the fair market value as determined by the Commissioner; or
(2) the fair market value as shown in the schedule of values of the
Provincial and City Assessors. (As amended by TRAIN)
(F) Authority of the Commissioner to Inquire into Bank Deposit
Accounts and Other Related Information Heid by Financial
Institutions. — Notwithstanding any contrary provision of Republic
Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign
Currency Deposit Act of the Philippines, and other general and special
laws, the Commissioner is hereby authorized to inquire into the bank
deposits and other related information held by financial institutions
of:
(1) A decedent to determine his gross estate.
(2) Any taxpayer who has filed an application for compromise of his
tax liability under Sec. 204 (A)(2) by reason of financial incapacity to
pay his tax liability.
In case a taxpayer files an application to compromise the payment of
his tax liabilities on his claim that his financial position demonstrates
a clear inability to pay the tax assessed, his application shall not be
considered unless and until he waives in writing his privilege under
Republic Act No. 1405, Republic Act No. 6426, otherwise known as
the Foreign Currency Deposit Act of the Philippines, or under other
general or special laws, and such waiver shall constitute the authority
of the Commissioner to inquire into the bank deposits of the taxpayer.
(3) 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 Bureau of Internal Revenue for tax assessment, verification,
audit and enforcement purposes.
In case of 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.
The Commissioner shall provide the tax information obtained from
banks and financial institutions pursuant to a convention or agreement
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405
upon request of the foreign tax authority when such requesting foreign
tax authority has provided the following information to demonstrate
the foreseeable relevance of the information to the request:
(a) The identity of the person under examination or investigation;
(b) A statement of the information being sought including its nature
and the form in which the said foreign tax authority prefers to receive
the information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in
the Philippines or is in the possession or control of a person within the
jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person
believed to be in possession of the requested information;
(f) A Statement that the request is in conformity with the law and
administrative practices of the said foreign tax authority, such that
if the requested information was within the jurisdiction of the said
foreign tax authority then it would be able to obtain the information
under its law or in the normal course of administrative practice and
that it is conformity with a convention or international agreement;
and
(g) A statement that the requesting foreign tax authority has
exhausted all means available in its own territory to obtain the
Information, except those that would give rise to disproportionate
difficulties.
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 the
receipt of the request.
If the Commissioner is unable to obtain and provide the information
within ninety (90) days from the 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 of
refusal.
The term 'foreign tax authority,' as used herein, shall refer to the 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.
(G) Authority to Accredit and Register Tax Agents. — The
Commissioner shall accredit and register, based on their professional
competence, integrity and moral fitness, individuals and general
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406
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. Within one hundred
twenty (120) days from January 1, 1998, the Commissioner shall
create national and regional accreditation boards, the members of
which shall serve for three (3) years, and shall designate from among
the senior officials of the Bureau, one (1) chairman and two (2)
members for each board, subject to such rules and regulations as the
Secretary of Finance shall promulgate upon the recommendation of
the Commissioner.
Individuals and general professional partnerships and their
representatives who are denied accreditation by the Commissioner
and/or the national and regional accreditation boards may appeal such
denial to the Secretary of Finance, who shall rule on the appeal within
sixty (60) days from receipt of such appeal. Failure of the Secretary
of Finance to rule on the Appeal within the prescribed period shall
be deemed as approval of the application for accreditation of the
appellant.
(H) Authority of the Commissioner to Prescribe Additional
Procedural or Documentary Requirements. — The Commissioner
may prescribe the manner of compliance with any documentary
or procedural requirement in connection with the submission or
preparation of financial statements accompanying the tax returns.
The CIR is also authorized to:
o
conduct inventory-taking as a basis for determining the
taxpayer's internal revenue tax liabilities; or
o
place the business of any persons under observation or
surveillance.
-
The findings may be used to assess taxes and may be
used to prescribe a minimum amount of gross receipts,
sales, and taxable base (which will be considered prima
facie correct for determining tax liabilities).
The CIR is also authorized to divide the Philippines into different
zones and compute the fair market value.
o
For purposes of computing any internal revenue tax, the
value of the property shall be, whichever is the HIGHER of:
■
The FMV as determined by the CIR; or
■
The FMV as shown in the schedule of values of the
Provincial and City Assessors.
NOTE: Prescribing real property values and dividing
the Philippines into zones must done upon consultation
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with competent appraisers both from the public and
private sectors. It cannot be done unilaterally. (CIR v.
Aquafresh Seafoods, Inc., G.R. No. 170389, October
20, 2010)
O
Before the CIR prescribes real property values, TRAIN now
requires mandatory consultation with private and public
sectors and prior notice to affected taxpayers.
The values are subject to automatic adjustments once
every three years, but the adjustments have to be
published in a newspaper of general circulation to be
valid.
•
The rule on the "best evidence obtainable" (Section 6[B]) applies
when a tax report is required by law for the purpose of assessment
and it is not available or when the tax report is incomplete or
fraudulent. (Sy Po v. CTA, G.R. No. 81446, August 18, 1998)
O
The failure of the taxpayers to present their books of accounts
for examination is a reason for the CIR to resort to his powers.
O
The law allows the BIR access to all relevant or material
records and data in the person of the. taxpayer. It places no
limit or condition on the type or form of the medium by which
the record subject to the order of the BIR is kept. The purpose
of the law is to enable the BIR to get at the taxpayer's records
in whatever form they may be kept. (CIR v. Hantex Trading
Co, Inc., G.R. No. 136975, March 31, 2005)
•
HOWEVER, this does not give the CIR the authority to
use mere photocopies of records or documents. Such
photocopies are mere scraps of paper and have no
probative value for any deficiency income assessments
against a taxpayer.
•
The rule that assessments are presumed correct and in
good faith only applies when such assessment was based
on sufficient evidence. (CIR v. Hantex)
Bank deposits can be examined by the CIR, in the following
Instances:
O
A decedent to determine his gross estate, or
O
Any taxpayer who has filed an application for compromise
based on financial incapacity, or
O
Pursuant to an international convention or tax agreement,
which the Philippines is a signatory of. (R.A. 10021)
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Read with the amendment to Section 71 and Section 270,
NIRC.5
May the bank deposits — peso and foreign currency of the an individual
taxpayer be disclosed by a commercial bank to the Commissioner
of Internal Revenue, in connection with a tax investigation being
conducted by revenue officials, without violating the relevant bank
secrecy laws? Explain your answer. (2012 Bar Exam)
Suggested answer: No, there are only three instances wherein the
CIR may inquire into the bank deposits of a taxpayer: to determine
the gross estate of a decedent, in applications for compromise based
on financial incapacity, and pursuant to an international convention
or tax agreement where the Philippines is a signatory and there has
been a corresponding request from a foreign jurisdiction. Absent any
of these cases, the CIR may not inquire into the bank deposits of a
taxpayer.
SSEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers
and Filers. — After the assessment shall have been made, as provided in this Title,
the returns, together with any corrections thereof which may have been made
by the Commissioner, shall be filed in the Office of the Commissioner and shall
constitute public records and be open to inspection as such upon the order of the
President of the Philippines, under rules and regulations to be presented by the
Secretary of Finance, upon recommendation of the Commissioner.
"The Commissioner may, in each year, cause to be prepared and published in
any newspaper the lists containing the names and addresses of persons who have
filed income tax returns.
"Income tax returns of specific taxpayers subject of a request for exchange
of information by 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,
shall be open to inspection upon the order of the President if the Philippines under
rules and regulations as may be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
SEC. 270. Unlawful Divulgence of Information. — Except as provided In
Sections 6(F) and 71 of this Code and Section 26 of Republic Act No. 6388, any
officer or employee of the Bureau of Internal Revenue who divulges to any person
or makes known in any other manner than may be provided by law information
regarding the business, income, or estate of any taxpayer, the secrets, operation,
style or work, or apparatus of any manufacturer or producer, or confidential
information regarding the business of any taxpayer, knowledge of which was
acquired by him in the discharge of his official duties, shall, upon conviction for
each act or omission, be punished by a fine of not less than Fifty thousand pesos
(P50,000) but not more than One hundred thousand pesos (P100,000), or suffer
imprisonment of not less than two (2) years but not more than five (5) years, or
both.
"Any officer or employee of the Bureau of Internal Revenue who divulges or
makes known in any other manner to any person other than the requesting foreign
tax authority information obtained from banks and financial institutions pursuant
to Section 6(F), knowledge or information acquired by him in the discharge of
his official duties, shall, upon conviction, be punished by a fine of not less than
Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos
(P100,000), or suffer imprisonment of not less than two (2) years but not more
than five (5) years, or both.
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GOVERNMENT'S REMEDIES
In 2011, the Commissioner of the U.S. Internal Revenue Service
(IRS) requested in writing the Commissioner of Internal Revenue
to get the information from a bank In the Philippines, regarding
the deposits of a U.S. Citizen residing in the Philippines, who is
under examinations by the officials of the US IRS, pursuant to the
US-Philippine Tax Treaty and other existing laws. Should the BIR
Commissioner agree to obtain such information from the bank and
provide the same to the IRS? Explain your answer. (2012 Bar Exam)
Suggested answer: Yes, R.A. 10021 has amended the NIRC to allow
the CIR to inquire into the bank deposits upon request of a foreign
taxing authority. The case falls squarely into this amendment.
Authority to delegate power
Sec. 7. Authority of the Commissioner to Delegate Power. —
The Commissioner may delegate the powers vested in him under
the pertinent provisions of this Code to any or such subordinate
officials with the rank equivalent to a division chief or higher, subject
to such limitations and restrictions as may be imposed under rules
and regulations to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner: Provided, however, That the
following powers of the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules
regulations by the Secretary of Finance;
and
(b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204(A) and (B)
of this Code, any tax liability: Provided, however, That assessments
issued by the regional offices involving basic deficiency taxes of Five
hundred thousand pesos (P500,000) or less, and minor criminal
violations, as may be determined by rules and regulations to be
promulgated by the Secretary of finance, upon recommendation of
the Commissioner, discovered by regional and district officials, may be
compromised by a regional evaluation board which shall be composed
of the Regional Director as Chairman, the Assistant Regional Director,
the heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as
members; and
(d) The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or
kept.
The CIR may delegate the power to assess taxes to his
subordinates. (Republic v. Hizon, G.R. No. 130430, December
13, 1999, where the power to approve the filing of a tax collection
case was considered delegable.)
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410
But the CIR cannot delegate the power:
O
■
To recommend the promulgation of rules and regulations
by the Secretary of Finance,
•
To issue rulings of first impression or to reverse, revoke
or modify any existing ruling of the Bureau,
•
■
To compromise or abate any tax liability,
•
■
There is authority which states that a ruling of first
impression issued by the Deputy Commissioner is
invalid (as only the CIR can issue such), and thus,
not protected by the provision on non-retroactivity
of rulings (Section 246, NIRC). (CIR v. San Roque,
J. Leonen concurring and dissenting opinion; Metro
Pacific Corporation v. CIR, CTA Case No. 8318, June
11, 2014)
But if P500,000 or less, he can delegate
To assign or reassign officers to establishments where
excise tax articles are produced or kept.
Note that the CIR or his duly authorized representative may
delegate and authorize the examination of any taxpayer and the
assessment of the correct amount of tax.
O
Unless authorized by the CIR, a revenue officer cannot
examine a taxpayer. The authority is embodied in a Letter of
Authority (LOA).
O
Without the LOA, an assessment or examination by a revenue
officer is a nullity. Due process requires that revenue officers
secure a LOA before examining and assessing a taxpayer.
(Medicard Philippines, Inc. v. CIR, G.R. No. 222743, April 5,
2017)
O
Speaking of LOAs, a LOA should cover a taxable period not
exceeding one taxable year. It cannot cover the audit of
unverified prior years. If the audit includes more than one
taxable period, the other periods or years shall be specifically
identified. (CIR v. DLSU, G.R. No. 196596, November 9,
2016)
*
But having a LOA that covers a specific taxable year and
unverified prior years does not make the LOA void. The
assessment for the specific taxable year indicated in the
LOA is valid. (CIR v. DLSU)
The CIR may also delegate the power to approve and recommend
the filing of criminal cases under the NIRC. It is not a nondelegable function. (People v. Valeriano, G.R. No. 199480,
October 12, 2016)
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Duty of the CIR to ensure provision and distribution of forms, receipts,
etc.
Sec. 8. Duty of the Commissioner to Ensure the Provision and
Distribution of Forms, Receipts, Certificates, and Appliances,
and the Acknowledgment of Payment of Taxes. —
(A) Provision and Distribution to Proper Officials. — It shall
be the duty of the Commissioner, among other things, to prescribe,
provide, and distribute to the proper officials the requisite licenses
internal revenue stamps, labels all other forms, certificates, bonds,
records, invoices, books, receipts, instruments, appliances and
apparatus used in administering the laws falling within the jurisdiction
of the Bureau.
For this purpose, internal revenue stamps, strip stamps and labels
shall be caused by the Commissioner to be printed with adequate
security features.
Internal revenue stamps, whether of a bar code or fusion design,
shall be firmly and conspicuously affixed on each pack of cigars and
cigarettes subject to excise tax in the manner and form as prescribed
by the Commissioner, upon approval of the Secretary of Finance.
(B) Receipts for Payment Made. — It shall be the duty of the
Commissioner or his duly authorized representative or an authorized
agent bank to whom any payment of any tax is made under the
provision of this Code to acknowledge the payment of such tax,
expressing the amount paid and the particular account for which such
payment was made in a form and manner prescribed therefor by the
Commissioner.
B.
Tax Assessment
The first government remedy is its power to issue deficiency tax
assessments.
Sec. 56. Payment and Assessment of Income
Individuals and Corporation. —
Tax for
(A) Payment of Tax. —
(1) In General. — The total amount of tax imposed by this Title
shall be paid by the person subject thereto at the time the return
Is filed. In the case of tramp vessels, the shipping agents and/or
the husbanding agents, and in their absence, the captains thereof
are required to file the return herein provided and pay the tax due
thereon before their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the Bureau of Customs is
hereby authorized to hold the vessel and prevent its departure until
proof of payment of the tax is presented or a sufficient bond is filed
to answer for the tax due.
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(2) Installment of Payment. — When the tax due is in excess of
Two thousand pesos (P2,000), the taxpayer other than a corporation
may elect to pay the tax in two (2) equal installments in which case,
the first installment shall be paid at the time the return is filed and
the second installment, on or before July 15 following the close of
the calendar year. 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 the delinquency penalties.
(3) Payment of Capital Gains Tax. — The total amount of tax
imposed and prescribed under Sections 24(c), 24(D), 27(E)(2),
28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable thereto: Provided,
That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special
laws, no such payments shall be required: Provided, further, That
in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains
realized from the original transaction shall immediately become due
and payable, subject to the penalties prescribed under applicable
provisions of this Code: Provided, finally. That if the seller, having
paid the tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real property,
he shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the receipt
of such payments.
No registration of any document transferring real property shall be
effected by the Register of Deeds unless the Commissioner or his
duly authorized representative has certified that such transfer has
been reported, and the tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. — After
the return is filed, the Commissioner shall examine it and assess
the correct amount of the tax. The tax or deficiency income tax
so discovered shall be paid upon notice and demand from the
Commissioner.
As used in this Chapter, In respect of a tax imposed by this Title, the
term "deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a deficiency,
and decreased by the amount previously abated, credited, returned
or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this
return, or if no return is made by the taxpayer, then the amount by
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which the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously
assessed or collected without assessment shall first be decreased
by the amounts previously abated, credited returned or otherwise
repaid in respect of such tax.
Sec. 71. Disposition of Income Tax Returns, Publication of
Lists of Taxpayers and Filers. — After the assessment shall have
been made, as provided in this Title, the returns, together with any
corrections thereof which may have been made by the Commissioner,
shall be filed in the Office of the Commissioner and shall constitute
public records and be open to inspection as such upon the order of
the President of the Philippines, under rules and regulations to be
presented by the Secretary of Finance, upon recommendation of the
Commissioner.
The Commissioner may, in each year, cause to be prepared and
published in any newspaper the lists containing the names and
addresses of persons who have filed income tax returns.
Income tax returns of specific taxpayers subject of a request for
exchange of information by 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, shall be open to inspection
upon the order of the President if the Philippines under rules and
regulations as may be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. (As amended by R.A. 10021)
Sec. 228. Protesting an Assessment.
X
x
X
The taxpayers shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall
be void.
There are two kinds of assessment:
1.
Self-assessment (Section 56[A]): when the taxpayer computes
his own liability, files his return, and pays the tax based on his
computation
2.
Deficiency assessment (Section 56[B]): this occurs upon discovery
of the BIR that the self-assessment was either deficient, or when
no return was made by the taxpayer
•
An assessment (deficiency) is an official action by an administrative
officer to determine the tax due of the taxpayer.
It consists of:
o
A computation of the amount of tax that must be paid by the
taxpayer,
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Coupled with a demand to pay the tax within a specified period
of time. (CIR v. Pascor Realty and Development Corporation,
G.R. No. 128315, June 19, 1999)
O
Since it is a demand to pay, the final assessment notice
(FAN) must indicate the definite amount of tax to be paid
and the due date for the payment. Without the definite
amount or the date when the tax must be paid, it is not a
valid demand and Is therefore an invalid assessment. (CIR
v. Fitness by Design, Inc., G.R. No. 215957, November 9,
2016)
•
To be valid, the assessment must be in writing and must inform
the taxpayer of the law and the facts on which the assessment is
made. Otherwise, the assessment is void.
O
Hence, the advice of tax deficiency, given by the CIR to an
employee of the taxpayer, as well as the preliminary five-day
letter, are not valid substitutes for the mandatory notice in
writing of the legal and factual bases of the assessment. (CIR
v. Enron Subic Power Corporation, G.R. No. 166387, January
19, 2009)
■
O
The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and
assessment notice, not in any other document or paper
issued by the CIR.
•
But see Samar-I Electric Cooperative v. CIR (G.R.
No. 193100, December 10, 2014), which stated that
when the legal and factual bases can be found in a
series of correspondence between the BIR and the
taxpayer (and not in the formal letter of demand
and final assessment notice), there was substantial
compliance with the requirements of Section 228, as
the taxpayer was informed In writing.
•
CIR v. Fitness by Design, Inc. has also added that
the basis for allegations of fraud (needed to extend
the prescriptive period to 10 years, instead of three)
must also be indicated in the FAN to give the taxpayer
a chance to refute them.
Similarly, an affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and attached
to a criminal complaint for tax evasion, cannot be deemed a
valid assessment (not having been received by the taxpayer
and thus, the taxpayer was not informed of the law and facts
on which the assessment was made). (CIR v. Pascor Realty
and Development Corporation, G.R. No. 128315, June 19,
1999)
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The power to issue an assessment is with the CIR. However, he
can authorize any revenue officer to conduct an examination or
assessment.
O
Before the delegated revenue officer can conduct said
examination or assessment, there must a dear grant of
authority. This grant is embodied in a Letter of Authority
or LOA. (CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010)
•
Without the LOA, an assessment or examination is a
nullity. Due process requires that revenue officers secure
a LOA before examining and assessing a taxpayer.
(Medicard Philippines, Inc. v. CIR, G.R. No. 222743, April
5, 2017)
■
The LOA cannot be for "unverified prior years." The other
periods or years should be specifically indicated in the
LOA.
•
But, like mentioned earlier, having a LOA that covers
a specific taxable year and unverified prior years does
not make the LOA void. The assessment for the specific
taxable year indicated in the LOA remains valid. (CIR v.
DLSU, G.R. No. 196596, November 9, 2016)
Tax assessments by tax examiners are presumed correct and
made in good faith. The taxpayer has the duty to prove otherwise.
(Sy Po v. CTA, G.R. No. 81446, August 18, 1998)
O
O
However, assessments cannot be based on mere presumptions
on the part of the government.
•
There must be a minimum effort on the government
before the presumption of correctness sets in. (CIR v.
Benipayo, G.R. No. L-13656, January 31, 1962, wherein
the Court said that a charge of fraud against a taxpayer
Is a serious one and must be supported by clear and
convincing proof).
■
It must also be based on sufficient proof and not on
documents with no probative value. (CIR v. Hantex
Trading Co., Inc., G.R. No. 136975, March 31, 2005)
The presumption of regularity in the performance of the
Commissioner's official duties, such as complying with the
assessment procedure, cannot stand in the face of positive
evidence of irregularity or failure to perform a duty. (CIR v.
Avon Products Manufacturing, Inc., G.R. Nos. 201398-99,
Octobers, 2018)
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Mandamus does not lie to compel the CIR to impose a tax
assessment not found by him to be proper. (Meratco Securities
Corp. v. Savellano, G.R. No. L-36181, October 23, 1982, where
an informer wanted his reward)
The notices (preliminary assessment notice, final letter of
demand, final assessment notice, final decision on a disputed
assessment) may be served in the following modes:
O
Personal service (by personal delivery to known address of
taxpayer) — this is the preferred mode of service;
O
Substituted service (by leaving the notice with someone at
taxpayer's known address); or
O
Service by mail.
•
Service to the tax agent shall be deemed service to the
taxpayer. (R.R. 18-2013)
In 2010, pursuant to a Letter of Authority (LA) issued by the Regional
Director, Mr. Abcede was assessed deficiency income taxes by the
BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede
received another LA for the same year 2009, this time from the
National Investigation Division, on the ground that Mr. Abcede's
2009 return was fraudulent.
Mr. Abcede contested the LA on the ground that he can only be
investigated once in a taxable year. Decide. (2013 Bar Exam)
Suggested answer: Mr. Abcede is correct. For income tax purposes,
examination and inspection shall be made only once in a taxable
year, except in fraud, Irregularity or mistakes, as determined by the
Commissioner (among others). In this case, there is no indication
that the fraud was determined by the Commissioner. Hence, as the
case does not fall under the exception, the genera! rule will apply.6
6SEC. 235. Preservation of Books and Accounts and Other Accounting
Records. — All the books of accounts, including the subsidiary books and other
accounting records of corporations, partnerships, or persons, shall be preserved
by them for a period beginning from the last entry In each book until the last day
prescribed by Section 203 within which the Commissioner is authorized to make
an assessment. The said books and records shall be subject to examination and
inspection by internal revenue officers: Provided, That for income tax purposes,
such examination and inspection shall be made only once in a taxable year, except
in the following cases:
(a)
Fraud, irregularity or mistakes, as determined by the Commissioner;
(b) The taxpayer requests reinvestigation; (c) Verification of compliance with
withholding tax laws and regulations; (d) Verification of capital gains tax liabilities;
and (e) In the exercise of the Commissioner's power under Section 5(B) to obtain
information from other persons in which case, another or separate examination
and inspection may be made. Examination and inspection of books of accounts and
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Prescription of the government's right to assess
Sec. 203. Period of Limitation Upon Assessment and Collection.
— Except as provided in Section 222, internal revenue taxes shall
be assessed within three (3) years after the last day prescribed by
law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period
shall be counted from the day the return was filed. For purposes of
this Section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day.
Sec. 222. Exceptions as to Period of Limitation of Assessment
and Collection of Taxes. —
(a) In the case of a false or fraudulent return with intent to evade tax
or of failure to file a return, the tax may be assessed, or a proceeding
in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.
(b) If before the expiration of the time prescribed in Section 203 for
the assessment of the tax, both the Commissioner and the taxpayer
have agreed in writing to its assessment after such time, the tax may
be assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed within the
period of limitation as prescribed in paragraph (a) hereof may be
collected by distraint or levy or by a proceeding in court within five (5)
years following the assessment of the tax.
other accounting records shall be done in the taxpayer's office or place of business
or in the office of the Bureau of Internal Revenue. All corporations, partnerships
or persons that retire from business shall, within ten (10) days from the date of
retirement or within such period of time as may be allowed by the Commissioner
In special cases, submit their books of accounts, including the subsidiary books
and other accounting records to the Commissioner or any of his deputies for
examination, after which they shall be returned. Corporations and partnerships
contemplating dissolution must notify the Commissioner and shall not be dissolved
until cleared of any tax liability.
Any provision of existing general or special law to the contrary notwithstanding,
the books of accounts and other pertinent records of tax-exempt organizations or
grantees of tax Incentives shall be subject to examination by the Bureau of Internal
Revenue for purposes of ascertaining compliance with the conditions under which
they have been granted tax exemptions or tax incentives, and their tax liability, if
any.
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(d) Any internal revenue tax, which has been assessed within the
period agreed upon as provided in paragraph (b) hereinabove, may
be collected by distraint or levy or by a proceeding in court within
the period agreed upon in writing before the expiration of the five
(5)-year period. The period so agreed upon may be extended by
subsequent written agreements made before the expiration of the
period previously agreed upon.
(e) Provided, however, That nothing in the immediately preceding and
paragraph (a) hereof shall be construed to authorize the examination
and investigation or inquiry into any tax return filed in accordance
with the provisions of any tax amnesty law or decree.
•
Assessments made beyond the prescriptive period are not binding
on the taxpayer. (Tupaz v. Ulep, G.R. No. 127777, October 1,
1999)
•
General Rule: The right to assess must be exercised within three
years from:
O
The day the return was actually filed, or
0
From the last day for filing the return (if the return was filed
before the last day prescribed by law),
■
whichever is later.
•
Why "whichever is later"? To benefit the government,
so they have more time to make the assessment on
the taxpayer.
Exceptions:
1.
False or fraudulent return with intent to evade taxes: within
10 years from discovery of the falsity or fraud
2.
Failure or omission to file a return: within 10 years after
discovery of failure or omission to file the return
3.
Waiver of statute of limitations in writing, which must be made
before the expiration of the three-year period of assessment
of taxes: period agreed upon
Our tax law provides a statute of limitations in the collection of
taxes to safeguard taxpayers from any unreasonable examination,
investigation or assessment. Thus, it should be liberally construed
in order to afford protection to the taxpayers.
o
As a corollary, the exceptions to the law on prescription
should perforce be strictly construed. (CIR v. BF Goodrich
Phils., Inc., G.R. No. 104171, February 24, 1999, wherein
the Court said that the negligence or oversight on the part
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of the BIR with regard to make timely assessments cannot
prejudice taxpayers, considering that the prescriptive period
was precisely intended to give them peace of mind.)
O
Note however that surtax on excess profits (IAET) does not
prescribe there being no law providing a prescriptive period
therefore. (CIR v. Ayala Securities Corporation, G.R. No.
L-29485, November 21, 1980)
The prescriptive period applies to all internal revenue taxes,
which includes withholding taxes. (CIR v. La Flor dela Isabela,
G.R. 211289, January 14, 2019, where the assessment against
the withholding agent was deemed prescribed by the SC. In this
case, the CIR erroneously argued that withholding taxes were
more like penalties and therefore not included in the prescriptive
period rules.)
Prescriptive period
•
In computing years, months, and days, follow the rules under the
Administrative Code of 1987, not the Civil Code.7
o
•
A year shall be understood to be twelve calendar months.
Hence, the end of a three-year period from April 15, 2014 is
on April 14, 2017. (CIR v. Primetown Property Group, Inc.,
G.R. No. 162155, August 28, 2007)*
In determining if prescription to assess has indeed set in, the
important date to remember is the date when the demand letter
or notice is released, mailed or sent by the CIR to the taxpayer.
(Basilan Estates, Inc. v. CIR, G.R. No. L-22492, September 5,
1967)
O
Provided the release was effected before prescription sets
In, the assessment Is deemed made on time — even if the
taxpayer actually receives it after the prescriptive period.
O
However, the fact that the assessment notice was mailed
before prescription period sets in must be proved with
substantial evidence by the CIR. The presumption that a
’SECTION 31. Legal Periods. — "Year" shall be understood to be twelve
calendar months; "month" of thirty days, unless it refers to a specific calendar
month in which case It shall be computed according to the number of days the
specific month contains; "day," to a day of twenty-four hours and; "night" from
sunrise to sunset.
•A calendar month is "a month designated in the calendar without regard
to the number of days it may contain." It Is the "period of time running from the
beginning of a certain numbered day up to, but not including, the corresponding
numbered day of the next month, and if there is not a sufficient number of days in
the next month, then up to and including the last day of that month."
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letter duly directed and mailed was received in the regular
course of mail cannot be applied if there is no substantial
evidence to prove that the notice was indeed sent.
•
O
Moreso, if the taxpayer makes a direct denial of receipt of a
mailed demand letter, such denial shifts the burden to the
Government to prove that such letter was indeed received
by the taxpayer. (Republic v. CA, G.R. No. L-38540, April 30,
1987)
■
O
Deficiency income tax assessments cannot be enforced
where the tax collector cannot prove that said assessments
were served on the taxpayer. (Nava v. CIR, G.R. No.
L-19470, January 30, 1965)
This is an exception to the general rule that there is a
presumption of receipt of the demand letter by the
taxpayer. (But again, for the presumption to arise, the
government has to at least show with substantial evidence
that the demand was sent on time.)
If the date on which the assessment is due to prescribe falls on
a Saturday, the following day being a Sunday, it is understood
that the Government has until the next succeeding business
day or Monday within which to assess the tax. (CIR v. Western
Pacific Corporation, G.R. No. L-18804, May 27, 1965)
Returns as the starting point of the prescriptive period
•
In order that the filing of a return may serve as the starting point
of the period for the making of an assessment, the return must
be as substantially complete as to include the needed details on
which the full assessment may be made. {Republic v. Marsman
Development Company [MDC], G.R. No. L-18956, April 27, 1972,
wherein MDC failed to show when the returns were actually
made, and assuming that they did file a return, they also failed
to show that the return was substantially complete. Hence, the
Court ruled that the 10-year period would apply, as there was a
"failure to file a return")
If the taxpayer files an amended return which is substantially
different from the original return, the period of prescription of the
right to issue the deficiency assessment should be counted from
the filing of the amended return, and not the original return. (CIR
v. Phoenix Assurance Co., Ltd., G.R. No. L-19727, May 20, 1965)
O
To hold otherwise would pave the way for taxpayers to evade
the payment of taxes by simply reporting in their original
return heavy losses and amending the same after the CIR has
lost his authority to assess the proper tax.
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If the taxpayer files the wrong return, it is as though he filed no
return at all. This is true even if all the necessary information was
reflected in the erroneous return. In situations like this, the 10year prescriptive period will apply. (Butuan Sawmill, Inc. v. CA,
G.R. No. L-20601, February 28, 1966, wherein Butuan filed an
income tax return for sales tax purposes).
It is incumbent upon a taxpayer who wants to avail of the defense
of prescription to prove that he indeed submitted a return. If he
fails to do so, the conclusion should be that no such return was
filed, in which case the Government has 10 years within which to
make the corresponding assessments. (Taligaman Lumber Co.,
Inc. v. CIR, G.R. No. L-15716, March 31, 1962)
Fraud, falsity, and the imposition of the 10-year period
•
Fraud is a question of fact and the circumstances constituting fraud
must be alleged and proved in the court. Fraud is never lightly to
be presumed because it is a serious charge. Hence, if fraud is not
proven, the Government cannot use the 10-year period to make
the assessment. (CIR v. Ayala Securities Corporation, G.R. No.
L-29485, March 31, 1976)
O
It is not enough that fraud is alleged in the complaint, it
must be established. (Republic v. Lim De Yu, G.R. L-17438,
April 30, 1964, wherein the BIR was not even sure of the net
income of the taxpayer)
O
Claiming fictitious expenses as deductions is a proof of falsity
or fraud in the income tax return. (Tan Guan v. CTA, G.R.
L-23676, April 27, 1967)
O
An honest mistake as to the valuation of property cannot be
indicative of fraud. (Republic v. Heirs of Jalandoni, G.R. No.
L-18384, September 20, 1965)
There is a difference between "false return" and "fraudulent
return." (Aznar v. CTA, G.R. No. L-20569, August 23, 1974)
O
"False return" merely implies deviation from the truth. It is
usually due to mistake, carelessness, or ignorance.
O
"Fraudulent return" implies intentional or deceitful entry with
intent to evade the taxes due.
O
Be It false or fraudulent, what's the point? Either way, the
period to assess will be 10 years anyway. So, why make a
distinction?
•
The importance lies in the application of the penalty
surcharge. Remember, Aznar also teaches that actual
fraud, not constructive fraud, is subject to the 50%
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penalty surcharge. For the surcharge to apply, it must
be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another
to give up some legal right.
Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by
law.
The legal implications of Aznar are the following:
•
Just because the 10-year period kicks in, it doesn't
necessarily mean that the taxpayer will be slapped
with the penalty surcharge. This is what happened
in Aznar — the taxpayer was adjudged to have filed
a false return, but not a fraudulent one. So, the 10year period applies, but he wasn't slapped with the
penalty surcharge.
•
If you were the government and you want to use the
10-year period, it will be easier to impute falsity in
the part of the taxpayer. Falsity is easier to prove
than fraud.
•
The 30% threshold we will learn (or review) in
surcharges doesn't necessarily apply when it comes
to prescription purposes, as it merely raises a
presumption of fraud — which must in the end be
proven by the government.
The basis for allegations of fraud must be stated in the final
assessment notice. (CIR v. Fitness by Design, Inc., G.R. No.
215957, November 9, 2016)
O
It is incumbent on the CIR to clearly state the allegations of
fraud to aid the taxpayer in filling an effective protest. (CIR v.
Fitness by Design, Inc., although I would've liked an explicit
declaration that a FAN will be void without the allegations of
fraud.)
Waivers
Sec. 222
(b) If before the expiration of the time prescribed in Section 203 for
the assessment of the tax, both the Commissioner and the taxpayer
have agreed in writing to its assessment after such time, the tax may
be assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
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(d) Any internal revenue tax, which has been assessed within the
period agreed upon as provided in paragraph (b) hereinabove, may
be collected by distraint or levy or by a proceeding in court within
the period agreed upon in writing before the expiration of the five
(5)-year period. The period so agreed upon may be extended by
subsequent written agreements made before the expiration of the
period previously agreed upon.
Waivers apply to both assessments and collection. So, let's tackle
them together.
•
Why go for a waiver?
O
It is sometimes advisable to do so to allow the BIR to fix their
jeopardy assessments (which are usually excessive.)
The taxpayer and the government may extend by mutual
agreement in writing the prescriptive period for the assessment
and collection of taxes.
A waiver of the statute of limitations under the NIRC, to a certain
extent, is a derogation of the taxpayer's 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)
In 2016, the BIR replaced the previous requirements for a valid
waiver (which were previously found in RMO 20-90) with the
following guidelines in RMO 14-2016:
O
The waiver may be, but not necessarily, in the form previously
prescribed in RMO 20-90 or RDAO 05-01. Failure to follow the
forms will not invalidate the waiver, as long as the following
are complied with (it seems these are the new requisites of a
valid waiver):
•
The waiver should be executed before the expiration of
the period to assess or collect taxes.
•
The date of execution shall be specifically indicated in the
waiver.
-
The waiver shall be signed by the taxpayer or his duly
authorized representative. For corporations, the waiver
must be signed by any of its responsible officials.
•
The taxpayer is charged with the burden of ensuring
the waivers are validly executed by its authorized
representative. The authority of the representative
who participated in the audit or investigation shall
not be contested to invalidate the waiver.
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.
The expiry date of the period agreed upon to assess/
collect after the regular three-year period should be
indicated.
The waiver need not specify the particular taxes to be
assessed or the amount thereof.
O
■
But for waivers of collection, the particular taxes should
be indicated.
O
It is sufficient that the waiver is in writing. It need not be
notarized.
O
The waiver shall take legal effect and be binding on the
taxpayer upon its execution thereof.
O
The taxpayer has the duty to submit the duly executed waiver
to the relevant BIR officer.
•
The BIR officer shall indicate acceptance of the waiver by
signing the same.
•
■
•
Both the execution of the waiver and the acceptance
must be done prior to the expiration of the period to
assess or collect.
The taxpayer must retain a copy of the accepted waiver.
Take note of CIR v. Next Mobile (G.R. No. 212825, December
7, 2015), where the Supreme Court upheld waivers that did
not comply with either RMO 20-90 or RDAO 05-01 because the
taxpayer was estopped from questioning the validity of five
waivers executed by an unauthorized agent. The Court held that
the taxpayer deliberately executed defective waivers and could
therefore no longer question their validity.
0
Next Mobile does not seem to overturn CIR v. Kudos Metal
Corporation (G.R. No. 178087, May 5, 2010), where the SC
invalidated a waiver signed by an unauthorized company
representative), as the Court still recognized the general rule
that a waiver that does not comply with BIR regulations (then
RMO 20-90 and RDAO 05-01) is invalid. The Court treated
Next Mobile as an exception to the rule "due to its peculiar
circumstances."
•
The taxpayer's waiver of statute of limitations does not cover
taxes that have already prescribed. (Republic v. Lim De Yu, G.R.
L-17438, April 30, 1964)
•
The waiver must not reduce the prescriptive period granted by
law to the detriment of the state. (Republic v. Lopez, G.R. No.
L-18007, March 30, 1963)
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What if the waiver was invalid (like the CIR didn't sign it) but the
taxpayer still paid within the extended period provided by the
waiver, what happens?
O
Taxpayer is estopped from questioning the waiver. It had
impliedly admitted the validity of the said waivers. Had it
believed that the waiver was invalid and that the period to
assess had effectively prescribed, the taxpayer could have
refused to make any payment based on any assessment
against it. (RCBC v. CIR, G.R. No. 170257, September 7,
2011)
•
But see CIR v. Standard Chartered Bank (G.R. No.
192173, July 29, 2015) where the taxpayer impugned
the validity of a waiver and made partial payments of the
assessed deficiency tax. The SC said that the taxpayer is
not estopped as it did not waive the defense of prescription
as regards the tax deficiencies and continued to raise the
defense of prescription during trial.
The requisites for a valid waiver of the three-year (3-year)
prescriptive period for the BIR to assess taxes due in the taxable
year are prescribed by Revenue Memorandum Order (RMO) No. 2090:
n
1. The waiver must be in the proper form prescribed by RMO 2090.
2. The waiver must be signed by the taxpayer himself or his
duly authorized representative. In the case of a corporation, the
waiver must be signed by any of its responsible officials. In case
the authority is delegated by the taxpayer to a representative, such
delegation should be in writing and duly notarized.
3.
The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign
the waiver Indicating that the BIR has accepted and agreed to the
waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue
official authorized by him must make sure that the waiver is in the
prescribed form, duly notarized, and executed by the taxpayer or his
duly authorized representative.
5. Both the date of execution by the taxpayer and date of
acceptance by the Bureau should be before the expiration of the
period of prescription or before the lapse of the period agreed upon
in case a subsequent agreement is executed.
6. The waiver must be executed In three copies, the original copy
to be attached to the docket of the case, the second copy for the
taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated
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in the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement.
After being assessed by the BIR with alleged deficiency income taxes,
WV Corporation (VW) through Enrique, its President, executed a
waiver of the prescriptive period. The waiver was signed by Revenue
District Officer (RDO) Alfredo. However, the waiver did not state the
date of execution by the taxpayer and date of acceptance by the
BIR. Enrique was also not furnished a copy of the waiver by the BIR.
VW claims that the waiver is void due to non-compliance with RMO
20-90. Hence, the period for assessment had already prescribed.
Moreover, since the assessment involves P2 million, the waiver
should have been signed by the CIR and instead of a mere RDO. On
the other hand, the BIR contends that the requirements of RMO No.
20-90 are merely directory; that the execution of the waiver by VW
was a renunciation of its right to invoke prescription and that the
government cannot be estopped by the mistakes committed by its
revenue officers. Is VW liable? Explain. (2016 Bar Exam)
Suggested answer: VW is not liable because the waiver is invalid.
The Supreme Court has held that a waiver that does not comply with
BIR regulations is invalid. In this case, the waiver does not comply
with RMO 20-90 because it did not state the date of execution and
the date of acceptance by the BIR. The taxpayer was also not given
a copy of the waiver. As the waiver was invalid, the period to assess
was not extended.
The period to assess can likewise be suspended under Section
223. However, we will tackle this in the section on collection. It'll
be easier to understand it then because by that time, you'll have a
clearer understanding of the bigger picture.
C.
Imposition of Penalties
CHAPTER I
ADDITIONS TO TAX
Sec. 247. General Provisions. —
(a) The additions to the tax or deficiency tax prescribed In this
Chapter shall apply to all taxes, fees and charges imposed in this
Code. The amount so added to the tax shall be collected at the same
time, in the same manner and as part of the tax.
(b) If the withholding agent is the Government or any of
its agencies, political subdivisions or instrumentalities, or a
government-owned or controlled corporation, the employee thereof
responsible for the withholding and remittance of the tax shall be
personally liable for the additions to the tax prescribed herein.
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(c) The term "person,"as used in this Chapter, includes an officer or
employee of a corporation who as such officer, employee or member
is under a duty to perform the act in respect of which the violation
occurs.
Penalties and interests apply to ALL taxes, fees and charges
imposed by the NIRC.
Tax laws imposing penalties for delinquencies are intended to
hasten tax payments by punishing evasions or neglect of duty in
respect thereof.
O
It is mandatory to collect penalty and interest at the stated
rate in case of delinquency.
O
The intention of the law is to discourage delay in the payment of
taxes due the Government and, in this sense, the penalty and
interest are not penal but compensatory for the concomitant
use of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government. (Philippine
Refining Company v. CA, G.R. No. 118794, May 8, 1996)
Civil penalties
Sec. 248. Civil Penalties. —
(A) There shall be imposed, in addition to the tax required to be paid,
a penalty equivalent to twenty-five percent (25%) of the amount due,
in the following cases:
(1) Failure to file any return and pay the tax due thereon as required
under the provisions of this Code or rules and regulations on the date
prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return
with an Internal revenue officer other than those with whom the
return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any
return required to be filed under the provisions of this Code or rules
and regulations, or the full amount of tax due for which no return is
required to be filed, on or before the date prescribed for its payment.
(B) In case of willful neglect to file the return within the period
prescribed by this Code or by rules and regulations, or in case a
false or fraudulent return is willfully made, the penalty to be imposed
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shall be fifty percent (50%) of the tax or of the deficiency tax, in
case, any payment has been made on the basis of such return before
the discovery of the falsity or fraud: Provided, That a substantial
underdeclaration of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the Commissioner
pursuant to the rules and regulations to be promulgated by the
Secretary of Finance, shall constitute prima facie evidence of a false
or fraudulent return: Provided, further, That failure to report sales,
receipts or income in an amount exceeding thirty percent (30%) of
that declared per return, and a claim of deductions in an amount
exceeding (30%) of actual deductions, shall render the taxpayer
liable for substantial underdeclaration of sales, receipts or income or
for overstatement of deductions, as mentioned herein.
•
Civil penalties can be divided into two categories — those with a
25% surcharge, and those with a 50% surcharge.
•
A penalty of 25% on the amount due will be imposed in the
following cases:
1.
Failure to file any return AND pay the tax due;
2.
Filing a return with an internal revenue officer other than
those with whom the return is required to be filed;
3.
Failure to pay the deficiency tax within the time prescribed in
the notice of assessment;
4.
Failure to pay the full or part of the amount of tax stated in
the return (or full amount when no return is required) on or
before the date prescribed for its payment.
o
•
Note: There is NO 25% surcharge when you file on time,
pay the full amount stated in the return, but subsequently
find out that the return filed and the amount paid was
erroneous. See situation 4.1 and 4.2 below.
A penalty of 50% of the deficiency tax will be imposed in the
following cases:
1.
Willful neglect to file a return within the period prescribed by
law
2.
False or fraudulent return is willfully made
a.
There is a prima facie evidence of a false and fraudulent
return when there is substantial underdeclaration of
taxable income orsubstantial overstatement of deductions
(failure to declare an amount exceeding 30% for taxable
income or actual deductions)
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i.
This was used in CIR v. Gonzalez (G.R. No. 177279,
October 13, 2010) where the SC held that there
was prima facie evidence of a false return, therefore
placing the case into one of the exceptions in Section
235 (books to be examined only once a year).
ii.
And was also used in CIR v. Asalus Corporation (G.R.
No. 221590, February 22, 2017), wherein the CIR
was able to show that the amount of undeclared
VATable sales in a taxpayer's VAT returns was more
than 30% and therefore push the prescriptive period
from three years to 10 years.
Note on willful neglect: if the taxpayer voluntarily files the return,
without notice from the BIR, only 25% surcharge shall be imposed
for late filing and late payment of the tax.
o
o
But if the taxpayer files the return only after prior notice in
writing from the BIR, then the 50% surcharge will be imposed.
•
In other words, no demand on the BIR and the taxpayer
pays, albeit late, 25%.
•
With demand by the BIR, 50%.
If your significant other doesn't mind you because he/she's in
law school, is that considered willful neglect?
The 25% surcharge for non-payment of the sales tax is not
imposable where such non-payment arose from a legitimate
dispute on whether an article is subject or not to the sales tax.
{CIR v. Republic Cement, G.R. No. L-35668, August 10, 1983,
wherein Republic Cement's erroneous payment was based on the
original stand of the BIR regarding the classification of cement.
CIR should have abated the surcharge. Read with R.R. 13-2001
on abatement)
o
Where Imposition of a tax statute was controversial, the
taxpayer may not be held liable to pay surcharge and interest.
It should be liable only for tax proper and should not be held
liable for the surcharge and interest. (Cagayan Electric v.
CIR, G.R. No. L-60126, September 25, 1965)
Willful neglect to file the required tax return or the fraudulent
intent to evade the payment of taxes, considering that the same
is accompanied by legal consequences, cannot be presumed.
(CIR v. Air India, G.R. No. 72443, January 29, 1988)
o
The fraud contemplated by law is actual and not constructive.
It must be intentional fraud, consisting of deception willfully
and deliberately done or resorted to in order to induce another
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to give up some legal right. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to give up
some legal right. (Aznar v. CTA, G.R. No. L-20569, August
23, 1974)
Delinquency tax v. Deficiency tax
•
Delinquency tax pops up when the taxpayer fails:
0
To pay the amount of the tax due on any return required to
be filed (/.e.z the taxpayer filed a return but did not pay the
entire amount written in the return); or
0
To pay the deficiency tax on the date appearing in the demand
of the CIR.
•
•
Delinquent taxes can be collected administratively via
distraint or levy or by judicial action. {Sections 205-207,
NIRC)
Deficiency tax is the:
O
Amount by which the tax imposed by law as determined by
the CIR or his representative exceeds the amount shown as
the tax by the taxpayer in his return, or
0
If no amount is shown by the taxpayer, or if no return is
made, then the amount by which the tax as determined by
the CIR or his representative exceeds the amounts previously
assessed (or collected without assessment) as a deficiency.
•
Deficiency taxes must be assessed prior to collection, as
the deficiency has to be determined first.
Interest
Sec. 249. Interest. —
(A) In General. — 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 from the
date prescribed for payment until the amount is fully paid: Provided,
That in no case shall the deficiency and the delinquency interest
prescribed under Subsections (B) and (C) hereof, be imposed
simultaneously.
(B) Deficiency Interest. — Any deficiency in the tax due, as the
term is defined in this Code, shall be subject to the interest prescribed
in Subsection (A) hereof, which interest shall be assessed and
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collected from the date prescribed for its payment until the full
payment thereof, or upon issuance of a notice and demand by the
Commissioner of Internal Revenue, whichever comes earlier, (as
amended by TRAIN)
(C) Delinquency Interest. — In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due
date appearing in the notice and demand of the Commissioner, there
shall be assessed and collected on the unpaid amount, interest at
the rate prescribed in Subsection (A) hereof until the amount is fully
paid, which interest shall form part of the tax.
(D) Interest on Extended Payment. — If any person required to
pay the tax is qualified and elects to pay the tax on installment under
the provisions of this Code, but fails to pay the tax or any installment
hereof, or any part of such amount or installment on or before
the date prescribed for its payment, or where the Commissioner
has authorized an extension of time within which to pay a tax or
a deficiency tax or any part thereof, there shall be assessed and
collected interest at the rate hereinabove prescribed on the tax or
deficiency tax or any part thereof unpaid from the date of notice and
demand until it is paid.
There are four kinds of interest in this article:
o
General interest;
o
Deficiency;
o
Delinquency; and
o
Extended Payment interest.
TRAIN has lowered the interest from 20% to double the current
legal interest rate (which is 6%). So, the interest to be imposed
is now 12%.
Moreover, TRAIN has specifically stated that deficiency and
delinquency interest shall not be imposed simultaneously.
For general interest, the interest on unpaid taxes is 12% per
annum on any unpaid amount of tax from the date prescribed fQE
payment until the amount is fully paid.
For deficiency interest, the rate is 12% per annum on any
deficiency in the tax due, which interest shall be assed and
collected from the date prescribed for its payment until either full
payment thereof or upon issuance of a notice and demand by the
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Commissioner or his authorized representative, whichever comes
first. (R.R. 21-2018)
For riAiinquencv interest. 12% per annum on the unpaid amount
in case of failure to pay:
O
Amount of tax due on any return required to be filed, or
O
Amount of tax due for which no return is required, or
O
Deficiency tax, or any surcharge or interest thereon on the
due date appearing in the notice and demand of the CIR, until
the amount is fully paid, which interest shall form part of the
tax. (R.R. 21-2018)
For interest on extended payment, the rate is 12% per annum.
O
This is imposed when a taxpayer is qualified and elects to
pay the tax on installment, but fails to pay the tax or any
installment thereof, or pays it beyond the period of payment;
or
O
CIR has authorized an extension of time within which pay a
tax or a deficiency tax or any part thereof.
Let's look at some situations based on R.R. 12-1999, as amended by
TRAIN
1.
Late filing and late payment of the tax; no BIR intervention/
demand
Lovely Lee Ji-eun forgot to file on April 15. She filed on June 30
after she woke up in a cold sweat and realized her error.
Penalties:
25% surcharge for late filing and late payment
12% general interest from date due up to time paid
Result: Pay the tax due + penalties
2.
Tax return filed on time, but filed through an Internal revenue
officer other than with whom the return is required to be filed.
(Paid in the wrong venue)
Blooming Lee Ji-eun paid on April 15, but she got distracted by
her work in a hotel for the dead and paid to the wrong agent
bank.
Penalties: 25% surcharge only
No interest charge because he paid on time, just at
the wrong place
Result: Pay the surcharge (no need to pay the tax due)
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433
Late filing and late payment due to taxpayer's willful neglect; i.e.,
did not file, then BIR notified her to pay by a certain time, and
only then did she file and pay her tax.
Lee Ji-eun didn't file on April 15. She didn't care until a demand
letter was sent to her by the BIR to pay by June 30. She paid on
June 30.
Penalties: 50% surcharge
12% general interest from date due (not from
demand) up to time paid
Result: Pay tax, plus penalties
4.
Penalty or penalties for deficiency tax
As a rule, no surcharge is imposed on deficiency tax and on the
basic tax. However, if the amount due inclusive of penalties is not
paid on or before the due date stated on the demand letter, the
corresponding surcharge will be imposed.
4.1
Paid on time, error in computation resulting to deficiency
tax.
Lee Ji-eun filed her income tax return on time (April 15) and paid
P100,000. Upon pre-audit, it was discovered that there was an
error in computation. The correct amount due was P120,000. She
was assessed for deficiency income tax in a letter of demand and
assessment notice, telling her to pay by June 30. She did.
Penalties: 12% deficiency interest imposed on the deficiency tax
from date due up to time paid
No surcharge (Note here that the there are no grounds
for the imposition of the 25% surcharge)
4.2
Paid on time,
deficiency tax.
BIR disallowed deductions resulting to
Seri's Choice, Inc. filed its return and paid on time tax amounting to
P100,000. BIR disallowed its deductions, so their taxable income
went back up like a paraglider swept up by a freak tornado. Seri's
Choice, Inc. was sent a FAN stating that the correct amount due
was P170,000. They failed to protest. BIR sent them a formal
demand telling them to pay by June 30. They did.
Penalties:
12% deficiency interest imposed on deficiency tax
from date due up to time paid
No surcharge (No statutory basis for imposition of the
25% surcharge)
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4.3
Paid on time, but return found to be false and fraudulent
resulting to deficiency tax.
McJunahld's, Inc. filed its return on time in April 15 and paid
P175,000 for its income tax (it declared a P500,000 net taxable
income). However, the BIR discovered that it did not report a
taxable income of another P500,000 — a clear case of false and
fraudulent return. This amounted to a deficiency income tax of
another P175,000. They were informed by a PAN, but they failed
to protest. A formal letter of demand and assessment notice was
issued to them on May 31 demanding them to pay by June 30.
They paid.
Penalties: 50% surcharge (deficiency tax is the base)
12% deficiency interest imposed on deficiency tax
from date due up to time paid
5. Late payment of deficiency tax assessed
In general, the deficiency tax assessed shall be paid by the
taxpayer within the time prescribed in the notice and demand,
otherwise, such payer shall be liable for the delinquency interest
incident to the late payment.
Based on 4.3, the amount due (the deficiency assessed plus
the penalties) imposed on McJunahld's was P304,771.67. The
corporation did not pay on June 30, the deadline for the payment
of the assessment. As such, the corporation shall be considered
late in payment of the said assessment. They pay on July 31.
Penalties: 25% surcharge on the P304,771.67 (deficiency tax,
i.e, unpaid amount supposed to be paid on June 30)
12% delinquency interest imposed on the P304,
771.67 (i.e., total unpaid amount due on June 30),
from the day after the payment was due until time of
actual payment
In a case like this, he feels the full force of the law.
First, a 50% surcharge was imposed on him for his fraudulent
return, to be computed from the deficiency tax assessed by the
BIR.
Second, 12% deficiency interest was also imposed on the
deficiency tax assessed by the BIR.
Third, because of his late payment of the deficiency tax and the
corresponding penalties, a 25% surcharge is now imposed on
him based on the total unpaid amount he was supposed to pay.
(Statutory basis; Section 248[A]3, NIRQ
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Fourth, 12% delinquency interest is imposed on the total unpaid
amount he was supposed to pay on June 30.
(Note the difference of the base of the two interest impositions:
The deficiency interest imposition, computed from April 15 to
June 30, is computed based on the deficiency tax.
l|
The delinquency interest imposition, computed from July 1 to July
31, is computed based on the total unpaid amount due on the
prescribed date of payment [June 30])
6.
Computation of 12°/o interest per annum in case of partial or
installment payment of a tax liability. (Based on Section 249,
NIRC)
If a taxpayer requests to pay his income tax liability in installment
and the request is approved, no 25% surcharge shall be imposed
for the late payment of the tax since its deadline for payment has
been duly extended.
However, 12% interest per annum for the extended payment shall
be imposed if the taxpayer does not pay on time, computed based
on the diminishing balance of the "unpaid amount," pursuant to
Section 249(D).
If
If the taxpayer's request for extension of the period within which
to pay is made on or before the deadline prescribed for payment
of the tax due, no 25% surcharge.
o
But if the request is made after the deadline prescribed for
payment, the taxpayer is already late in payment, in which
case, the 25% surcharge shall be imposed, even if payment
of the delinquency be allowed in partial amortization.
Illustration
Actual Liability:
PIO,000,ooo
Arianne
Basis
Betheildah
Basis
1
I.
On April 15,
paid:
5,000,000
1. Late, but
unilaterally
pays the
balance
No
surcharge
12%
interest
0
Filed on
time, but
error in
computation, no BIR
demand.
25%
surcharge
12%
interest
Late
filing, late
payment,
no BIR
demand.
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2. BIR
demands to
pay on June
30, so paid
on June 30
No
surcharge
3. BIR
demands to
pay on June
30, but paid
on July 31
•
•
I
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12%
deficiency
interest
25%
surcharge
on unpaid
amount
12%
delinquency
interest
on unpaid
amount
Still filed on
time and error in computation.
BIR demands, but
paid on time
required by
BIR, so 248
(A3) no application.
BIR
demands
but does
NOT pay
on time
required
by BIR,
248 (A3)
applies.
25%
surcharge
12%
deficiency
interest
25%
surcharge
on unpaid
amount
12%
delinquency
interest
on unpaid
amount
Late filing,
late payment. BIR
demands,
but paid
on time
required
by BIR, so
248 (A3)
no application.
BIR
demands
but does
NOT pay
on time
required
by BIR,
248 (A3)
applies.
Analyzing the chart, if you compare situation 1 and situation 2,
they are identical, there is no additional violation. Why?
0
Because surcharge is imposed on deficiency tax (plus
penalties) only when it is NOT paid by the date indicated on
the demand period.
O
So, if you pay within the period in the demand letter, you
will not incur the additional 25% surcharge on the unpaid
deficiency tax (plus penalties),
Also note that there is no 25% surcharge when you file and pay
on time but it is subsequently discovered that there was an error.
Only the interest will be imposed in that case.
Sec. 250. Failure to File Certain Information Returns. — In the
case of each failure to file an information return, statement or list,
or keep any record, or supply any information required by this Code
or by the Commissioner on the date prescribed therefor, unless it Is
shown that such failure is due to reasonable cause and not to willful
neglect, there shall, upon notice and demand by the Commissioner,
be paid by the person failing to file, keep or supply the same, One
thousand pesos (Pl,000) for each failure: Provided, however, That
the aggregate amount to be imposed for all such failures during a
calendar year shall not exceed Twenty-five thousand pesos (P25,000).
Sec. 251. Failure of a Withholding Agent to Collect and Remit
Tax. — Any person required to withhold, account for, and remit any
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tax imposed by this Code or who willfully fails to withhold such tax,
or account for and remit such tax, or aids or abets in any manner to
evade any such tax or the payment thereof, shall, in addition to other
penalties provided for under this Chapter, be liable upon conviction
to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted.
Sec. 252. Failure of a Withholding Agent to refund Excess
Withholding Tax. — Any employer/withholding agent who fails or
refuses to refund excess withholding tax shall, in addition to the
penalties provided in this Title, be liable to a penalty to the total
amount of refunds which was not refunded to the employee resulting
from any excess of the amount withheld over the tax actually due
on their return.
D. Criminal Action and Other Penalties
Sec. 205. Remedies for the Collection of Delinquent Taxes. —
The civil remedies for the collection of internal revenue taxes, fees or
charges, and any increment thereto resulting from delinquency shall
be:
XXX
(b) By civil or criminal action.
xxx
The judgment in the criminal case shall not only impose the penalty
but shall also order payment of the taxes subject of the criminal case
as finally decided by the Commissioner.
Sec. 220. Form and Mode of Proceeding in Actions Arising
under this Code. — Civil and criminal actions and proceedings
Instituted in behalf of the Government under the authority of this
Code or other law enforced by the Bureau of Internal Revenue shall
be brought in the name of the Government of the Philippines and shall
be conducted by legal officers of the Bureau of Internal Revenue but
no civil or criminal action for the recovery of taxes or the enforcement
of any fine, penalty or forfeiture under this Code shall be filed in court
without the approval of the Commissioner.
No criminal action for the recovery of taxes shall be filed without
the approval of the CIR.
O
However, this required approval can be delegated to and
issued by subordinate officials because the approval of filing
of a criminal action is not one of the non-delegable functions
of the CIR under Section 7 of the NIRC. (People v. Valeriano,
G.R. No. 199480, October 12, 2016, where the Regional
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Director of a Revenue Region recommended the filing of a
criminal case against the accused.)
•
The judgment in the criminal case shall not only impose the
penalty, but shall also order payment of the taxes subject of the
criminal case as finally decided by the Commissioner.
•
A criminal complaint is instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code. (CIR v. Pascor
Realty and Development Corporation, G.R. No. 128315, June 29,
1999)
•
Acquittal of taxpayer in a criminal case does not exonerate him from
tax liability. His legal duty to pay taxes cannot be affected by his
attempt to evade payment. Said obligation is not a consequence
of the felonious acts charged in the criminal proceeding, nor is it
a mere civil liability arising from a crime that could be wiped out
by the judicial declaration of non-existence of the criminal acts
charged. (Republic v. Patanao, G.R. No. L-22356, July 21, 1967)
•
I
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O
Civil liability to pay taxes arises from the fact that, for
instance, one has engaged himself in business. His civil
liability to pay taxes arises not because of any felony but
upon the taxpayer's failure to pay taxes.
0
The criminal liability arises upon failure of the debtor to
satisfy his civil obligation.
Computation and assessment of deficiency taxes is not a
prerequisite for criminal prosecution under the NIRC. Hence,
protesting an assessment cannot stop criminal prosecution under
the NIRC. (Ungab v. Cusi, G.R. No. L-41919, May 30, 1980)
0
When fraudulent tax returns are involved, a proceeding in
court after the collection of such tax may be begun even
without assessment, as can be gleaned from Section 222(A).
(Adamson v. CA, G.R. No. 120935, May 21, 2009)
o
A crime Is complete when the violator has knowingly and
willfully filed a fraudulent return, with intent to evade and
defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made
an inaccurate return, and the government's failure to discover
the error and promptly to assess has no connection with the
commission of the crime. (Ungab v. Cusi, G.R. No. L-41919,
May 30, 1980)
•
NOTE however that for criminal prosecution to proceed
before assessment, there must be a prima facie showing
of a wilful attempt to evade taxes. If there was none, then
the criminal case may not be filed without the computation
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and assessment of taxes. {CIR v. CA & Fortune Tobacco
Corporation & Lucio Tan, G.R. No. 119322, June 4, 1996,
where the Court noted that there was a real issue on
what amount of taxes were meant to be paid; hence,
there was no willful attempt to evade taxes)
Willful blindness doctrine: A taxpayer can no longer raise
the defense that the errors on their tax returns are not their
responsibility or that it is the fault of the accountants they hired.
O
Intent to defraud need not be shown for a conviction of tax
evasion.
O
The only thing that needs to be proven is that the taxpayer
was aware of his obligation to file the tax return but he
nevertheless voluntarily, knowingly, and intentionally failed
to file the required returns. (People v. Kintanar, C.T.A. E.B.
No. 006, December 3, 2010, affirmed by the Supreme Court
in G.R. No. 196340; but compare with People v. Judy Anne
Santos, CTA Criminal Case No. 0-012, January 16, 2013)
Based on the Affidavit of the Commissioner of Internal Revenue
(CIR), an Information for failure to file income tax return under
Section 255 of the National Internal Revenue Code (NIRC) was filed
by the Department of Justice (DOJ) with the Manila Regional Tria!
Court (RTC) against XX, a Manila resident.
XX moved to quash the Information on the ground that the RTC
has no jurisdiction in view of the absence of a formal deficiency tax
assessment issued by the CIR.
Is a prior assessment necessary before an Information for violation
of Section 255 of the NIRC could be filed in court? Explain. (2010
Bar Exam)
i
i
Suggested answer: No. Jurisprudence states that an assessment is
not necessary before a criminal case can be filed. A criminal case
is based on the fraudulent intent and criminal acts of the taxpayer.
The crime Is complete when the taxpayer fraudulently fails to file his
return, with intent to evade tax. An assessment is not needed.
Explain the following statement:
The acquittal of the taxpayer In a criminal action under the Tax Code
does not necessarily result In a exoneration of said taxpayer from his
civil liability to pay taxes. (2012 Bar Exam)
Suggested answer: Gladly. A taxpayer's legal duty to pay taxes
cannot be affected by his attempt to evade payment. Said obligation
is not a consequence of the felonious acts charged in the criminal
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proceeding, nor is it a mere civil liability arising from a crime that
could be wiped out by the judicial declaration of non-existence of the
acts charged. Hence, an acquittal does not necessarily result in the
exoneration of the taxpayer from his civil liability to pay taxes.
The BIR Commissioner, in his relentless enforcement of the Run
After Tax Evaders (RATE) program, filed with the Department of
Justice (DOJ) charges against a movie and television celebrity.
The Commissioner alleged that the celebrity earned around PhP 50
million in fees from product endorsements in 2016 which she failed to
report in her income tax and VAT returns for said year. The celebrity
questioned the proceeding before the DOJ on the ground that she
was denied due process since the BIR never issued any Preliminary
Assessment Notice (PAN) or a Final Assessment Notice (FAN), both
of which are required under Section 228 of the NIRC whenever the
Commissioner finds that proper taxes should be assessed.
Is the celebrity's contention tenable? (2018 Bar Exam)
Suggested answer: No. Jurisprudence states that an assessment is
not necessary before a criminal case can be filed. A criminal case is
based on the fraudulent intent and criminal acts of the taxpayer. An
assessment is not needed.
I
=
I
The BIR assessed Kosco, Inc., an importer of food products,
deficiency income and value-added taxes, plus 50% surcharge after
determining that Kosco, Inc. had under-declared its sales by an
amount exceeding 30% of that declared in its income tax and VAT
returns. Kosco, Inc. denied the alleged under-declaration, protested
the deficiency assessment for income and value-added taxes and
challenged the imposition of the 50% surcharge on the ground that
the surcharge may only be imposed if Kosco, Inc. fails to pay the
deficiency taxes within the time prescribed for their payment in the
notice of assessment.
(a) Is the imposition of the 50% surcharge proper?
(b) If your answer to a) Is yes, may Kosco, Inc. enter Into a
compromise with the BIR for reduction of the amount of surcharge
to be paid? (2018 Bar Exam)
Suggested answer:
a)
Yes, it is proper. Under the Tax Code, an underdeclaration of
more than 30% constitutes substantial underdeclaration which,
in turn, is prima facie evidence of the filing of a false or fraudulent
return which is subject to the 50% surcharge.
b)
Yes, Kosco may still enter into a compromise. Under the
Tax Code, what may not be compromised are criminal tax
fraud cases which have been confirmed by the CIR or his/her
representatives. In this case, the fraud is merely prima facie and
hence not yet confirmed by the CIR.
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Prescription in Criminal Cases
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Sec. 281. Prescription for Violations of any Provision of this
Code. — All violations of any provision of this Code shall prescribe
after five (5) years.
Prescription shall begin to run from the day of the commission of the
violation of the law, and if the same be not known at the time, from
the discovery thereof and the institution of judicial proceedings for its
investigation and punishment.
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The prescription shall be interrupted when proceedings are instituted
against the guilty persons and shall begin to run again if the
proceedings are dismissed for reasons not constituting jeopardy.
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The term of prescription shall not run when the offender is absent
from the Philippines.
The prescriptive period for criminal cases is five years. When
it begins to run depends on the nature of the violation of the
taxpayer:
o
If failure or refusal to pay taxes due: from the service of final
notice and demand for payment of the deficiency taxes upon
the taxpayer.
o
If filing of false or fraudulent returns: from the discovery and
institution of judicial proceedings for its investigation and
punishment.
•
In the latter case, isn't this one-sided in favor of the
Government? Yes, it is. It would seem that cases of
fraudulent/false returns are practically imprescriptible for
as long as the period from the discovery and institution of
judicial proceedings for its investigation and punishment,
up to the filing of the information in court does not exceed
five years. But, that is what the law says. (Lim, Sr. v. CA,
G.R. No. L-48134, October 18, 1990)
Informer's reward
Sec. 282. Informer's Reward to Persons Instrumental in the
Discovery of Violations of the National Internal Revenue Code
and in the Discovery and Seizure of Smuggled Goods. —
(A) For Violations of the National Internal Revenue Code. —
Any person, except an internal revenue official or employee, or other
public official or employee, or his relative within the sixth degree of
consanguinity, who voluntarily gives definite and sworn information,
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not yet in the possession of the Bureau of Internal Revenue, leading
to the discovery of frauds upon the internal revenue laws or violations
of any of the provisions thereof, thereby resulting in the recovery of
revenues, surcharges and fees and/or the conviction of the guilty
party and/or the imposition of any of the fine or penalty, shall be
rewarded in a sum equivalent to ten percent (10%) of the revenues,
surcharges or fees recovered and/or fine or penalty imposed and
collected or One Million Pesos (Pl,000,000) per case, whichever is
lower.
The same amount of reward shall also be given to an informer
where the offender has offered to compromise the violation of
law committed by him and his offer has been accepted by the
Commissioner and collected from the offender: Provided, That should
no revenue, surcharges or fees be actually recovered or collected,
such person shall not be entitled to a reward: Provided, further, That
the information mentioned herein shall not refer to a case already
pending or previously investigated or examined by the Commissioner
or any of his deputies, agents or examiners, or the Secretary of
Finance or any of his deputies or agents: Provided, finally, That the
reward provided herein shall be paid under rules and regulations
issued by the Secretary of Finance, upon recommendation of the
Commissioner.
(B) For Discovery and Seizure of Smuggled Goods. — To
encourage the public to extend full cooperation in eradicating
smuggling, a cash reward equivalent to ten percent (10%) of the fair
market value of the smuggled and confiscated goods or One Million
Pesos (Pl,000,000) per case, whichever is lower, shall be given to
persons instrumental in the discovery and seizure of such smuggled
goods.
The cash rewards of informers shall be subject to income tax,
collected as a final withholding tax, at a rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding, all
public officials, whether incumbent or retired, who acquired the
information in the course of the performance of their duties during
their incumbency, are prohibited from claiming informer's reward.
•
The law provides rewards for informers.
•
An informer is any qualified person who voluntarily provides
definite and sworn information not yet in the possession of the
BIR nor of public knowledge, leading to the discovery of frauds
upon the NIRC, resulting to the recovery of revenues and fees
and/or conviction of the guilty party and/or imposition of any fine
or penalty. (R.R. 16-2010)
•
The Information must be novel and subsequently prove effective.
(Lihaylihay v. Treasurer of the Philippines, G.R. No. 192223,
July 23, 2018, where a self-proclaimed descendant of Lapu-
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Lapu claimed to have tipped off the BIR to the gold stolen by the
dictator Marcos)
The grant of an informer's reward for the discovery, conviction,
and punishment of tax offenses is a discretionary quasi-judicial
matter that cannot be the subject of a writ of mandamus. It is not
a legally mandated ministerial duty. (Lihayiihay v. Treasurer)
The following are disqualified to avail of the Informer's Reward:
O
A BIR official or any other incumbent public official or
employee;
O
Relative within the 6th civil degree of consanguinity of a BIR
official or employee, or other public official or employee;
O
Though already retired separated from service, BIR
officials or employees or other public officers who acquired
the information in the course of their duties during their
incumbency. (R.R. 16-2010)
Below are the codal provisions for the different crimes under the
NIRC.
CHAPTER II
CRIMES, OTHER OFFENSES AND FORFEITURES
Sec. 253. General Provisions. —
(a) Any person convicted of a crime penalized by this Code shall,
in addition to being liable for the payment of the tax, be subject to
the penalties imposed herein: Provided, That payment of the tax
due after apprehension shall not constitute a valid defense in any
prosecution for violation of any provision of this Code or in any action
for the forfeiture of untaxed articles.
(b) Any person who willfully aids or abets in the commission of a
crime penalized herein or who causes the commission of any such
offense by another shall be liable in the same manner as the principal.
(c) If the offender is not a citizen of the Philippines, he shall be
deported immediately after serving the sentence without further
proceedings for deportation.
If he is a public officer or employee, the maximum penalty prescribed
for the offense shall be imposed and, in addition, he shall be dismissed
from the public service and perpetually disqualified from holding any
public office, to vote and to participate in any election.
If the offender is a Certified Public Accountant, his certificate as a
Certified Public Accountant shall, upon conviction, be automatically
revoked or cancelled.
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(d) In the case of associations, partnerships or corporations, the
penalty shall be imposed on the partner, president, general manager,
branch manager, treasurer, officer-in-charge, and the employees
responsible for the violation.
(e) The fines to be imposed for any violation of the provisions of
this Code shall not be lower than the fines imposed herein or twice
the amount of taxes, interest and surcharges due from the taxpayer,
whichever is higher.
SEC. 254. Attempt to Evade or Defeat Tax. — Any person who
willfully attempts in any manner to evade or defeat any tax imposed
under this Code or the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof, be punished with
a fine of not less than Five hundred thousand pesos (P500,000) but
not more than Ten million pesos (P10,000,000), and imprisonment
of not less than six (6) years but not more than ten (10) years:
Provided, That the conviction or acquittal obtained under this Section
shall not be a bar to the filing of a civil suit for the collection of taxes.
(As amended by TRAIN)
Sec. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax Withhold and Remit Tax and Refund
Excess Taxes Withheld on Compensation. — Any person required
under this Code or by rules and regulations promulgated thereunder
to pay any tax, make a return, keep any record, or supply correct the
accurate information, who willfully fails to pay such tax, make such
return, keep such record, or supply correct and accurate information,
or withhold or remit taxes withheld, or refund excess taxes withheld
on compensation, at the time or times required by law or rules and
regulations shall, in addition to other penalties provided by law,
upon conviction thereof, be punished by a fine of not less than Ten
thousand pesos (PIO,000) and suffer imprisonment of not less than
one (1) year but not more than ten (10) years.
Any person who attempts to make it appear for any reason that he
or another has in fact filed a return or statement, or actually files a
return or statement and subsequently withdraws the same return
or statement after securing the official receiving seal or stamp of
receipt of internal revenue office wherein the same was actually filed
shall, upon conviction therefor, be punished by a fine of not less than
Ten thousand pesos (P10,000) but not more than Twenty thousand
pesos (P20,000) and suffer imprisonment of not less than one (1)
year but not more than three (3) years.
Sec. 256. Pena! Liability of Corporations. — Any corporation,
association or general co-partnership liable for any of the acts or
omissions penalized under this Code, in addition to the penalties
imposed herein upon the responsible corporate officers, partners,
or employees shall, upon conviction for each act or omission, be
punished by a fine of not less than Fifty thousand pesos (P50,000)
but not more than One hundred thousand pesos (P100,000).
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Sec. 257. Penal Liability for Making False Entries, Records or
Reports, or Using Falsified or Fake Accountable Forms. —
(A) Any financial officer or independent Certified Public Accountant
engaged to examine and audit books of accounts of taxpayers under
Section 232(A) and any person under his direction who:
(1) Willfully falsifies any report or statement bearing on any
examination or audit, or renders a report, including exhibits,
statements, schedules or other forms of accountancy work which
has not been verified by him personally or under his supervision or
by a member of his firm or by a member of his staff in accordance
with sound auditing practices; or
(2) Certifies financial statements of a business enterprise containing
an essential misstatement of facts or omission in respect of the
transactions, taxable income, deduction and exemption of his client;
or
(B) Any person who:
(1) Not being an independent Certified Public Accountant according
to Section 232(B) or a financial officer, examines and audits books of
accounts of taxpayers; or
(2) Offers to sign and certify financial statements without audit; or
(3) Offers any taxpayer the use of accounting bookkeeping records
for internal revenue purposes not in conformity with the requirements
prescribed in this Code or rules and regulations promulgated
thereunder; or
(4) Knowingly makes any false entry or enters any false or fictitious
name in the books of accounts or record mentioned in the preceding
paragraphs; or
(5) Keeps two (2) or more sets of such records or books of accounts;
or
(6) In any way commits an act or omission, in violation of the
provisions of this Section; or
(7) Fails to keep the books of accounts or records mentioned in
Section 232 in a native language, English or Spanish, or to make a
true and complete translation as required in Section 234 of this Code,
or whose books of accounts or records kept in a native language,
English or Spanish, and found to be at material variance with books
or records kept by him in another language; or
(8) Willfully attempts in any manner to evade or defeat any
tax imposed under this Code, or knowingly uses fake or falsified
revenue official receipts, Letters of Authority, certificates authorizing
registration, Tax Credit Certificates, Tax Debit Memoranda and other
accountable forms shall, upon conviction for each act or omission,
be punished by a fine not less than Fifty thousand pesos (P50,000)
but not more than One hundred pesos (P100,000) and suffer
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imprisonment of not less than two (2) years but not more than six
(6) years.
If the offender is a Certified Public Accountant, his certificate as
a Certified Public Accountant shall be automatically revoked or
cancelled upon conviction.
In the case of foreigners, conviction under this Code shall result in
his immediate deportation after serving sentence, without further
proceedings for deportation.
Sec. 258. Unlawful Pursuit of Business. — Any person who carries
on any business for which an annual registration fee is imposed
without paying the tax as required by law shall, upon conviction for
each act or omission, be punished by a fine of not less than Five
thousand pesos (P5,000) but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than six (6) months
but not more than two (2) years: Provided, That in the case of a
person engaged in the business of distilling, rectifying, repacking,
compounding or manufacturing any article subject to excise tax, he
shall, upon conviction for each act or omission, be punished by a fine
of not less than Thirty thousand pesos (P30,000) but not more than
Fifty thousand pesos (P50,000) and suffer imprisonment of not less
than two (2) years but not more than four (4) years.
Sec. 259. Illegal Collection of Foreign Payments. — Any person
who knowingly undertakes the collection of foreign payments as
provided under Section 67 of this Code without having obtained a
license therefor, or without complying with its implementing rules
and regulations, shall, upon conviction for each act or omission, be
punished by a fine of not less than Twenty thousand pesos (P20,000)
but not more than Fifty thousand pesos (P50,000) and suffer
imprisonment of not less than one (1) year but not more than two
(2) years.
Sec. 260. Unlawful Possession of Cigarette Paper in Bobbins
or Rolls, Etc. — It shall be unlawful for any person to have in his
possession cigarette paper in bobbins or rolls, cigarette tipping paper
or cigarette filter tips, without the corresponding authority therefor
issued by the Commissioner.
Any person, Importer, manufacturer of cigar and cigarettes, who
has been found guilty under this Section, shall, upon conviction for
each act or omission, be punished by a fine of not less than Twenty
thousand pesos (P20,000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment for a term of not less
than six (6) years and one (1) day but not more than twelve (12)
years.
Sec. 261. Unlawful Use of Denatured Alcohol. — Any person
who for the purpose of manufacturing any beverage, uses denatured
alcohol or alcohol specially denatured to be used for motive power
or withdrawn under bond for Industrial uses or alcohol knowingly
misrepresented to be denatured to be unfit for oral intake or who
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knowingly sells or offers for sale any beverage made in whole or in
part from such alcohol or who uses such alcohol for the manufacture
of liquid medicinal preparations taken internally, or knowingly sells
or offers for sale such preparations containing as an ingredient such
alcohol, shall upon conviction for each act or omission be punished
by a fine of not less than Twenty thousand pesos (P20,000) but
not more than One hundred thousand pesos (P100,000) and suffer
imprisonment for a term of not less than six (6) years and one (1)
day but not more than twelve (12) years.
Any person who shall unlawfully recover or attempt to recover by
distillation or other process any denatured alcohol or who knowingly
sells or offers for sale, conceals or otherwise disposes of alcohol
so recovered or redistilled shall be subject to the same penalties
imposed under this Section.
Sec. 262. Shipment or Removal of Liquor or Tobacco Products
under False Name or Brand or as an Imitation of any Existing
or Otherwise Known Product Name or Brand. — Any person
who ships, transports or removes spirituous, compounded or
fermented liquors, wines or any manufactured products of tobacco
under any other than the proper name or brand known to the trade
as designating the kind and quality of the contents of the cask, bottle
or package containing the same or as an imitation of any existing or
otherwise known product name or brand or causes such act to be
done, shall, upon conviction for each act or omission, be punished
by a fine of not less than Twenty thousand pesos (P20,000) but
not more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than six (6) years and one (1) day but not
more than twelve (12) years.
Sec. 263. Unlawful Possession or Removal of Articles Subject
to Excise Tax without Payment of the Tax. — Any person who
owns and/or is found in possession of imported articles subject
to excise tax, the tax on which has not been paid in accordance
with law, or any person who owns and/or is found in possession of
imported tax-exempt articles other than those to whom they are
legally issued shall be punished by:
(a) A fine of not less than One hundred thousand pesos (P100,000.00)
but not more than Two hundred thousand pesos (P200,000.00) and
Imprisonment of not less than sixty (60) days but not more than one
hundred (100) days if the appraised value, to be determined in the
manner prescribed In Republic Act No. 10863, otherwise known as
the 'Customs Modernization and Tariff Act (CMTA),' including duties
and taxes, of the articles does not exceed Two hundred fifty thousand
pesos (P250,000.00) (as amended by R.A. 11467)
(b) A fine of not less than Ten thousand pesos (P10,000) but not more
than Twenty thousand pesos (P20,000) and suffer imprisonment of
not less than two (2) years but not more than four (4) years, if the
appraised value, to be determined in the manner prescribed in the
Tariff and Customs Code, including duties and taxes, of the articles
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exceeds One thousand pesos (Pl,000) but does not exceed Fifty
thousand pesos (P50,000);
(c) A fine of not less than Thirty thousand pesos (P30,000) but not
more than Sixty thousand pesos (P60,000) and suffer imprisonment
of not less than four (4) years but not more than six (6) years, if the
appraised value, to be determined in the manner prescribed in the
Tariff and Customs Code, including duties and taxes of the articles is
more than Fifty thousand pesos (P50,000) but does not exceed One
hundred fifty thousand pesos (P150,000); or
(d) A fine of not less than Fifty thousand pesos (P50,000) but not
more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than ten (10) years but not more than
twelve (12) years, if the appraised value, to be determined in the
manner prescribed in the Tariff and Customs Code, including duties
and taxes, of the articles exceeds One hundred fifty thousand pesos
(P150,000).
Any person who is found in possession of locally manufactured
articles subject to excise tax, the tax on which has not been paid
in accordance with law, or any person who is found in possession
of such articles which are exempt from excise tax other than those
to whom the same is lawfully issued shall be punished with a fine
of not less than (10) times the amount of excise tax due on the
articles found but not less than Five hundred pesos (P500) and suffer
imprisonment of not less than two (2) years but not more than four
(4) years.
Any manufacturer, owner or person in charge of any article subject to
excise tax who removes or allows or causes the unlawful removal of
any such articles from the place of production or bonded warehouse,
upon which the excise tax has not been paid at the time and in the
manner required, and any person who knowingly aids or abets in
the removal of such articles as aforesaid, or conceals the same after
illegal removal shall, for the first offense, be punished with a fine of
not less than ten (10) times the amount of excise tax due on the
articles but not less than One thousand pesos (Pl,000) and suffer
imprisonment of not less than one (1) year but not more than two
(2) years.
The mere unexplained possession of articles subject to excise tax,
the tax on which has not been paid in accordance with law, shall be
punishable under this Section.
SEC. 263-A. Selling of Heated Tobacco Products and Vapor
Products at a Price Lower Than the Combined Excise and
Value-Added Taxes. — Any person who sells heated tobacco
products and vapor products at a price lower than the combined
excise and value-added taxes shall be punished with a fine of not less
than ten (10) times the amount of excise tax plus value-added tax
due but not less than Two hundred thousand pesos (P200,000.00)
nor more than Five hundred thousand pesos (P500,000.00), and
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Imprisonment of not less than four (4) years but not more than six
(6) years, (as amended by R.A. 11467)
Sec. 264. Failure or refusal to Issue Receipts or Sales or
Commercial Invoices, Violations related to the Printing of
such Receipts or Invoices and Other Violations. —
(a) Any person who, being required under Section 237 to issue
receipts or sales or commercial invoices, fails or refuses to issue
such receipts of invoices, issues receipts or invoices that do not
truly reflect and/or contain all the information required to be shown
therein, or uses multiple or double receipts or invoices, shall, upon
conviction for each act or omission, be punished by a fine of not less
than One thousand pesos (Pl,000) but not more than Fifty thousand
pesos (P50,000) and suffer imprisonment of not less than two (2)
years but not more than four (4) years.
(b) Any person who commits any of the acts enumerated hereunder
shall be penalized with a fine of not less than Five hundred thousand
pesos (P500,000) but not more than Ten million pesos (PIO,000,000),
and imprisonment of not less than six (6) years but not more than
ten (10) years:
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(1) Printing of receipts or sales or commercial invoices without
authority from the Bureau of Internal Revenue; or
(2) Printing of double or multiple sets of invoices or receipts;
(3) Printing of unnumbered receipts or sales or commercial invoices,
not bearing the name, business style, Taxpayer Identification
Number, and business address of the person or entity; or
(4) Printing of other fraudulent receipts or sales or commercial
invoices, (as amended by TRAIN)
SEC. 264-A. Failure to Transmit Sales Data Entered on
Cash Register Machine (CRM)/Point of Sales System (POS)
Machines to the BIR's Electronic Sales Reporting System.
— Any taxpayer required to transmit sales data to the Bureau's
electronic sales reporting system but fails to do so, shall pay, for
each day of violation, a penalty amounting to one-tenth of one
percent (1/10 of 1%) of the annual net income as reflected in the
taxpayer's audited financial statement for the second year preceding
the current taxable year for each day of violation or Ten thousand
pesos (P10,000), whichever is higher; Provided, That should the
aggregate number of days of violation exceed one hundred eighty
(180) days within a taxable year, an additional penalty of permanent
closure of the taxpayer shall be imposed: Provided, further, That if
the failure to transmit Is due to force majeure or any causes beyond
the control of the taxpayer the penalty shall not apply, (as amended
by TRAIN)
SEC. 264-B. Purchase, Use, Possession, Sale or Offer to
Sell, Installment, Transfer, Update, Upgrade, Keeping or
Maintaining of Sales Suppression Devices. — Any person who
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shall purchase, use, possess, sell or offer to sell, install, transfer,
update, upgrade, keep, or maintain any software or device designed
for, or is capable of: (a) suppressing the creation of electronic records
of sale transactions that a taxpayer is required to keep under existing
tax laws and/or regulations; or (b) modifying, hiding, or deleting
electronic records of sales transactions and providing a ready means
of access to them, shall be punished by a fine of not less than Five
hundred thousand pesos (P500,000) but not more than Ten million
pesos (PIO,000,000), and suffer imprisonment of not less than
two (2) years but not more than four (4) years: Provided, That a
cumulative suppression of electronic sales record in excess of the
amount of Fifty million pesos (P50,000,000) shall be considered as
economic sabotage and shall be punished in the maximum penalty
provided for under this provision, (as amended by TRAIN)
Sec. 265. Offenses Relating to Stamps. — Any person who
commits any of the acts enumerated hereunder shall, upon
conviction thereof, be punished by a fine of not less than Ten Million
pesos (P10,000,000) but not more than Five hundred million pesos
(P500,000,000) and suffer imprisonment of not less than five (5)
years but not more than eight (8) years: (a) making, importing,
selling, using or possessing without express authority from the
Commissioner, any dye for printing or making stamps, labels,
tags or playing cards; (b) Erasing the cancellation marks of any
stamp previously used, or altering the written figures or letters or
cancellation marks on internal revenue stamps; (c) Possessing false,
counterfeit, restored or altered stamps, labels or tags or causing the
commission of any such offense by another; (d) Selling or offering
for sale any box or package containing articles subject to excise tax
with false, spurious or counterfeit stamps or labels or selling from
any such fraudulent box, package or container as aforementioned;
or (e) Giving away or accepting from another, or selling, buying or
using containers on which the stamps are not completely destroyed.
Provided, That the cumulative possession of false/counterfelt/
recycled tax stamps in excess of the amount of Fifty million pesos
(P50,000,000.00) shall be punishable by a fine of Five hundred
million pesos (P500,000,000.00) or up to ten (10) times the value
of the illegal stamps seized, whichever is higher, and imprisonment
of not less than ten (10) years but not more than fifteen (15) years.
(As amended by R.A. 11467)
Sec. 266. Failure to Obey Summons. — Any person who, being
duly summoned to appear to testify, or to appear and produce books
of accounts, records, memoranda or other papers, or to furnish
information as required under the pertinent provisions of this Code,
neglects to appear or to produce such books of accounts, records,
memoranda or other papers, or to furnish such information, shall,
upon conviction, be punished by a fine of not less than Five thousand
pesos (P5,000) but not more than ten thousand pesos (P10,000) and
suffer imprisonment of not less than one (1) year but not more than
two (2) years.
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Sec. 267. Declaration under Penalties of Perjury. — Any
declaration, return and other statement required under this Code,
shall, in lieu of an oath, contain a written statement that they are
made under the penalties of perjury. Any person who willfully files a
declaration, return or statement containing information which is not
true and correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the Revised
Penal Code.
Sec. 268. Other Crimes and Offenses. —
(A) Misdedaration or Misrepresentation of Manufacturers
Subject to Excise Tax. — Any manufacturer who, in violation of
the provisions of Title VI of this Code, misdeclares in the sworn
statement required therein or in the sales invoice, any pertinent
data or information shall be punished by a summary cancellation or
withdrawal of the permit to engage in business as a manufacturer of
articles subject to excise tax.
(B) Forfeiture of Property Used in Unlicensed Business or Dies
Used for Printing False Stamps, Etc. — All chattels, machinery,
and removable fixtures of any sort used in the unlicensed production
of articles subject to excise tax shall be forfeited.
Dies and other equipment used for the printing or making of any
internal revenue stamp, label or tag which is in imitation of or
purports to be a lawful stamp, label or tag shall also be forfeited.
(C) Forfeiture of Goods Illegally Stored or Removed. — Unless
otherwise specifically authorized by the Commissioner, all articles
subject to excise tax should not be stored or allowed to remain in the
distillery warehouse, bonded warehouse or other place where made,
after the tax thereon has been paid; otherwise, all such articles shall
be forfeited.
Articles withdrawn from any such place or from customs custody or
imported into the country without the payment of the required tax
shall likewise be forfeited.
CHAPTER III
PENALTIES IMPOSED ON PUBLIC OFFICERS
Sec. 269. Violations Committed by Government Enforcement
Officers. — Every official, agent, or employee of the Bureau of
Internal Revenue or any other agency of the Government charged
with the enforcement of the provisions of this Code, who is guilty
of any of the offenses herein below specified shall, upon conviction
for each act or omission, be punished by a fine of not less than Fifty
thousand pesos (P50,000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment of not less than ten (10)
years but not more than fifteen (15) years and shall likewise suffer
an additional penalty of perpetual disqualification to hold public
office, to vote, and to participate in any public election:
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(a) Extortion or willful oppression through the use of his office
or willful oppression and harassment of a taxpayer who refused,
declined, turned down or rejected any of his offers specified in
paragraph (d) hereof;
(b) Knowingly demanding or receiving any fee, other or greater
sums that are authorized by law or receiving any fee, compensation
or reward, except as by law prescribed, for the performance of any
duty;
(c) Willfully neglecting to give receipts, as by law required, for any
sum collected in the performance of duty or willfully neglecting to
perform any other duties enjoined by law;
(d) Offering or undertaking to accomplish, file or submit a report or
assessment on a taxpayer without the appropriate examination of the
books of accounts or tax liability, or offering or undertaking to submit
a report or assessment less than the amount due the Government
for any consideration or compensation, or conspiring or colluding
with another or others to defraud the revenues or otherwise violate
the provisions of this Code;
(e) Neglecting or by design permitting the violation of the law by
any other person;
(f) Making or signing any false entry or entries in any book, or
making or signing any false certificate or return;
(g) Allowing or conspiring or colluding with another to allow the
unauthorized retrieval, withdrawal or recall of any return, statement
or declaration after the same has been officially received by the
Bureau of Internal Revenue;
(h) Having knowledge or information of any violation of this Code
or of any fraud committed on the revenues collectible by the Bureau
of Internal Revenue, failure to report such knowledge or information
to their superior officer, or failure to report as otherwise required by
law;
(I) Without the authority of law, demanding or accepting or
attempting to collect, directly or indirectly, as payment or otherwise
any sum of money or other thing of value for the compromise,
adjustment or settlement of any charge or complaint for any violation
or alleged violation of this Code; and
(j) Deliberate failure to act on the application for refunds within the
prescribed period provided under Section 112 of this Act.
Provided, That the provisions of the foregoing
paragraph
notwithstanding, any internal revenue officer for which a prima facie
case of grave misconduct has been established shall, after due notice
and hearing of the administrative case and subject to Civil Service
Laws, be dismissed from the revenue service: Provided, further, That
the term 'grave misconduct/ as defined in the Civil Service Law,
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shall include the issuance of fake letters of authority and receipts,
forgery of signature, usurpation of authority and habitual issuance of
unreasonable assessments, (as amended by TRAIN)
Sec. 270. Unlawful Divulgence of Information. — Except as
provided in Sections 6(F) and 71 of this Code and Section 26 of
Republic Act No. 6388, any officer or employee of the Bureau of
Internal Revenue who divulges to any person or makes known in any
other manner than may be provided by law information regarding the
business, income, or estate of any taxpayer, the secrets, operation,
style or work, or apparatus of any manufacturer or producer, or
confidential information regarding the business of any taxpayer,
knowledge of which was acquired by him in the discharge of his
official duties, shall, upon conviction for each act or omission, be
punished by a fine of not less than Fifty thousand pesos (P50,000)
but not more than One hundred thousand pesos (P100,000), or
suffer imprisonment of not less than two (2) years but not more
than five (5) years, or both.
Any officer or employee of the Bureau of Internal Revenue who
divulges or makes known in any other manner to any person other
than the requesting foreign tax authority information obtained from
banks and financial institutions pursuant to Section 6(F), knowledge
or information acquired by him in the discharge of his official duties,
shall, upon conviction, be punished by a fine of not less than Fifty
thousand pesos (P50,000) but not more than One hundred thousand
pesos (P100,000), or suffer imprisonment of not less than two (2)
years but not more than five (5) years, or both.
Sec. 271. Unlawful Interest of Revenue Law Enforcers in
Business. — Any internal revenue officer who Is or shall become
interested, directly or indirectly, in the manufacture, sale or
importation of any article subject to excise tax under Title VI of this
Code or in the manufacture or repair or sale, of any die for printing,
or making of stamps, or labels shall upon conviction for each act or
omission, be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Ten thousand pesos (PIO,000), or suffer
Imprisonment of not less than two (2) years and one (1) day but not
more than four (4) years, or both.
Sec. 272. Violation of Withholding Tax Provision. — Every officer
or employee of the Government of the Republic of the Philippines or
any of its agencies and instrumentalities, its political subdivisions, as
well as government-owned or controlled corporations, Including the
Bangko Sentral ng Pilipinas (BSP), who, under the provisions of this
Code or rules and regulations promulgated thereunder, is charged
with the duty to deduct and withhold any internal revenue tax and
to remit the same in accordance with the provisions of this Code and
other laws is guilty of any offense herein below specified shall, upon
conviction for each act or omission be punished by a fine of not less
than Five thousand pesos (P5,000) but not more than Fifty thousand
pesos (P50,000) or suffer imprisonment of not less than six (6)
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months and one (1) day but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any internal
revenue tax under any of the withholding tax laws and implementing
rules and regulations; (b) Failing or causing the failure to remit
taxes deducted and withheld within the time prescribed by law,
and implementing rules and regulations; and (c) Failing or causing
the failure to file return or statement within the time prescribed,
or rendering or furnishing a false or fraudulent return or statement
required under the withholding tax laws and rules and regulations.
Sec. 273. Penalty for Failure to Issue and Execute Warrant. —
Any official who fails to issue or execute the warrant of distraint or
levy within thirty (30) days after the expiration of the time prescribed
in Section 207 or who is found guilty of abusing the exercise thereof
by competent authority shall be automatically dismissed from the
service after due notice and hearing.
CHAPTER IV
OTHER PENAL PROVISIONS
Sec. 274. Penalty for Second and Subsequent Offenses. — In
the case of reincidence, the maximum of the penalty prescribed for
the offense shall be imposed.
Sec. 275. Violation of Other Provisions of this Code or Rufes
and Regulations in General. — Any person who violates any
provision of this Code or any rule or regulation promulgated by the
Department of Finance, for which no specific penalty is provided by
law, shall, upon conviction for each act or omission, be punished
by a fine of not more than One thousand pesos (Pl,000) or suffer
imprisonment of not more than six (6) months, or both.
Sec. 276. Penalty for Selling, Transferring, Encumbering or
in Any Way Disposing of Property Placed Under Constructive
Distraint. — Any taxpayer, whose property has been placed under
constructive distraint, who sells, transfers, encumbers or in any way
disposes of said property, or any part thereof, without the knowledge
and consent of the Commissioner, shall, upon conviction for each act
or omission, be punished by a fine of not less than twice the value
of the property so sold, encumbered or disposed of but not less than
Five Thousand pesos (P5,000), or suffer imprisonment of not less
than two (2) years and one (1) day but not more than four (4) years,
of both.
Sec. 277. Failure to Surrender Property Placed Under Distraint
and Levy. — Any person having in his possession or under his
control any property or rights to property, upon which a warrant of
constructive distraint, or actual distraint and levy has been issued
shall, upon demand by the Commissioner or any of his deputies
executing such warrant, surrender such property or right to property
to the Commissioner or any of his deputies, unless such property or
right is, at the time of such demand, subject to an attachment or
execution under any judicial process.
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Any person who fails or refuses to surrender any of such property or
right shall be liable in his own person and estate to the Government in
a sum equal to the value of the property or rights not so surrendered
but not exceeding the amount of the taxes (including penalties and
interest) for the collection of which such warrant had been issued,
together with cost and interest if any, from the date of such warrant.
In addition, such person shall, upon conviction for each act or
omission, be punished by a fine of not less than Five thousand pesos
(P5,000), or suffer imprisonment of not less than six (6) months and
one (1) day but not more than two (2) years, or both.
Sec. 278. Procuring Unlawful Divulgence of Trade Secrets. —
Any person who causes or procures an officer or employee of the
Bureau of Internal Revenue to divulge any confidential information
regarding the business, income or inheritance of any taxpayer,
knowledge of which was acquired by him in the discharge of his
official duties, and which it is unlawful for him to reveal, and any
person who publishes or prints in any manner whatever, not provided
by law, any income, profit, loss or expenditure appearing in any
income tax return, shall be punished by a fine of not more than Two
thousand pesos (P2,000), or suffer imprisonment of not less than six
(6) months nor more than five (5) years, or both.
Sec. 279. Confiscation and Forfeiture of the Proceeds or
Instruments ofCrime. — In addition to the penalty imposed for the
violation of the provisions of Title X of this Code, the same shall carry
with it the confiscation and forfeiture in favor of the government of
the proceeds of the crime or value of the goods, and the instruments
or tools with which the crime was committed: Provided, however,
That if in the course of the proceedings, it is established that the
instruments or tools used in the illicit act belong to a third person,
the same shall be confiscated and forfeited after due notice and
hearing in a separate proceeding in favor of the Government if
such third person leased, let, chartered or otherwise entrusted the
same to the offender: Provided, further, That in case the lessee
subleased, or the borrower, charterer, or trustee allowed the use of
the instruments or tools to the offender, such instruments or tools
shall, likewise, be confiscated and forfeited: Provided, finally, That
property of common carriers shall not be subject to forfeiture when
used in the transaction of their business as such common carrier,
unless the owner or operator of said common carrier was, at the
time of the illegal act, a consenting party or privy thereto, without
prejudice to the owner's right of recovery against the offender in a
civil or criminal action.
!
II
I
I
Articles which are not subject of lawful commerce shall be destroyed.
Sec. 280. Subsidiary Penalty. — If the person convicted for
violation of any of the provisions of this Code has no property with
which to meet the fine imposed upon him by the court, or is unable
to pay such fine, he shall be subject to a subsidiary personal liability
at the rate of one (1) day for each Eight pesos and fifty centavos
(P8.50) subject to the rules established in Article 39 of the Revised
Penal Code.
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Explain: Should the accused be found guilty beyond reasonable
doubt for violation of Section 255 of the Tax Code for failure to file
tax return or to supply correct information, the imposition of the civil
liability by the CTA should be automatic and no assessment notice
from the BIR is necessary. (2012 Bar Exam)
Suggested answer: The civil liability of the convicted felon should be
automatically imposed, even without the assessment notice. The Tax
Code states that a person convicted of a crime under the Tax Code
shall be liable for the payment of the tax.
After filing an Information for violation of Section 254 of the National
Interna! Revenue Code (Attempt to Evade or Defeat Tax) with the
CTA, the Public Prosecutor manifested that the People is reserving
the right to file the corresponding civil action for the recovery of the
civil liability for taxes. As counsel for the accused, comment on the
People's manifestation. (2015 Bar Exam)
Suggested answer: The public prosecutor is wrong. CTA Rules state
that the filing of the criminal action shall necessarily carry with it the
filing of the civil action and no right to reserve the filing of the civil
action separately shall be allowed.
E.
Power of Collection
Collection in cases where the assessment is final and unappealable
•
Generally, the government can only file a proceeding in court to
collect once the assessment has become final and unappealable.
(Section 203, NIRC)
o
Except: in the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, a judicial proceeding
for collection may be filed without assessment at any time
within 10 years after the discovery of the falsity, fraud, or
omission. (Section 222[a], NIRC)
The usual first step a taxpayer takes after an assessment Is
issued against him is to file an administrative protest with the BIR.
(Section 229, NIRC) The protest questions the assessment and
starts a process that begins with the BIR, goes to the CTA, and may
ultimately reach the Supreme Court. The BIR may summarily enforce
collection only when it has given the taxpayer administrative due
process, which includes the issuance of a valid assessment and the
denial of the taxpayer's protest. Because R.A. No. 9282, Section 11
states that no appeal taken to the CTA shall suspend the payment,
levy, distraint and/or sale of any property of the taxpayer for the
satisfaction of his tax liability, the BIR is free to collect once it denies
the protest. At this point, the assessment is final and unappealable
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in the administrative level. The collection, however, may be held in
abeyance in the judicial level if the taxpayer appeals to the CTA and
the CTA suspends collection. We will learn more about protests in the
section on the remedies given to taxpayers. Keep that in mind for the
meantime.
•
•
Without a valid assessment, the BIR is barred from undertaking
any summary administrative remedies against the taxpayer. (CIR
v. Pilipinas Shell, C.R. No. 197945, July 9, 2018)
When there is no valid protest to an assessment, the assessment
shall become final and unappealable, and thus the tax shall be
collectible.
O
To be a valid protest, the claim against the assessment must
be substantiated.
•
The requirement for the Commissioner to rule on disputed
assessments before bringing an action for collection
is applicable only in cases where the assessment was
actually disputed, adducing reasons in support thereto.
(Dayrit v. Cruz, G.R. No. L-39910, September 26, 1988,
wherein the petitioners did not actually contest the
assessments by stating the basis — they did not submit
the required position paper.)
Failure to question the assessments will cause the said assessment
to lapse into finality. (Marcos II v. CA, G.R. No. 120880, June 5,
1997, wherein the Marcoses not only failed to file the required
estate tax return, but they also never questioned the assessments
served upon them.)
Once the assessment is final and executory, an action to collect
the tax assessed is akin to an action to enforce a judgment. Hence,
there can no longer be any inquiry on merits of the original case.
O
Thus, raising the defense of prescription in the case for
collection is of no merit. (Mambulao Lumber v. Republic, G.R.
No. L-37061, Septembers, 1984)
O
The taxpayer's failure to appeal to the CTA in due time makes
the assessment in question final, executory and demandable.
Thus, when the action for collection is instituted, the taxpayer
is already barred from disputing the correctness of the
assessment or invoking any defense that would reopen the
question of its tax liability on the merits. (Republic v. Lim
Tian Teng, G.R. No. L-21731, March 31, 1966)
O
A taxpayer who fails to contest the BIR assessment in the
CTA cannot contest the same in the action to collect. (Basa v.
Republic, G.R. No. L-45277, August 5, 1985)
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The RTC can acquire jurisdiction over a claim for collection of
deficiency taxes only after the assessment made by the CIR has
become final and unappealable, not when there is still a pending
CTA case on the disputed assessment. (Yabes v. Flojo, G.R. No.
L-46954, July 20, 1982, wherein the Court ruled that the RTC did
not have jurisdiction because there was an appeal to the CTA of
the disputed assessment)
Modes of collection: civil remedies
CHAPTER II
CIVIL REMEDIES FOR COLLECTION OF TAXES
Sec. 205. Remedies for the Collection of Delinquent Taxes. —
The civil remedies for the collection of internal revenue taxes, fees or
charges, and any increment thereto resulting from delinquency shall
be:
(a) By distraint of goods, chattels, or effects, and other personal
property of whatever character, including stocks and other securities,
debts, credits, bank accounts and interest in and rights to personal
property, and by levy upon real property and interest in rights to real
property; and
(b) By civil or criminal action.
Either of these remedies or both simultaneously may be pursued in
the discretion of the authorities charged with the collection of such
taxes: Provided, however, That the remedies of distraint and levy
shall not be availed of where the amount of tax involve is not more
than One hundred pesos (P100).
The judgment in the criminal case shall not only impose the penalty
but shall also order payment of the taxes subject of the criminal case
as finally decided by the Commissioner.
The Bureau of Internal Revenue shall advance the amounts needed to
defray costs of collection by means of civil or criminal action, including
the preservation or transportation of personal property distrained and
the advertisement and sale thereof, as well as of real property and
improvements thereon.
The government is given two ways to collect:
O
Summary or administrative remedies, and
o
Judicial remedies (whether civil or criminal).
Collection by distraint and levy (among others) are known as the
summary, extrajudicial or administrative enforcement remedies.
o
They are distinguished from the judicial remedies of collection
by civil and criminal actions.
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However, the remedies of distraint and levy, as well as collection by
civil and criminal action may be pursued singly or independently
of each other or all of them simultaneously.
O
Remember that no criminal or civil case may be filed in court
without the approval of the CIR. (Section 220, NIRC)
Distraint is enforced on personal property; levy is enforced on
real property.
I
Distraint
There are two kinds of distraint:
o
ACTUAL distraint, wherein actual delinquency in tax payment
is necessary; and
o
CONSTRUCI1VE distraint, wherein no actual delinquency is
necessary.
Constructive distraint
i
i
Sec. 206. Constructive Distraint of the Property of a Taxpayer.
— To safeguard the interest of the Government, the Commissioner
may place under constructive distraint the property of a delinquent
taxpayer or any taxpayer who, in his opinion, is retiring from any
business subject to tax, or is intending to leave the Philippines or to
remove his property therefrom or to hide or conceal his property or to
perform any act tending to obstruct the proceedings for collecting the
tax due or which may be due from him.
The constructive distraint of personal property shall be affected by
requiring the taxpayer or any person having possession or control of
such property to sign a receipt covering the property distrained and
obligate himself to preserve the same intact and unaltered and not
to dispose of the same; In any manner whatever, without the express
authority of the Commissioner.
In case the taxpayer or the person having the possession and control
of the property sought to be placed under constructive distraint
refuses or fails to sign the receipt herein referred to, the revenue
officer effecting the constructive distraint shall proceed to prepare a
list of such property and, in the presence of two (2) witnessed, leave a
copy thereof in the premises where the property distrained is located,
after which the said property shall be deemed to have been placed
under constructive distraint.
Constructive distraint is resorted to when the CIR believes the
taxpayer:
o
Is retiring from any business subject to tax;
r
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O
Intends to leave the Philippines;
O
Intends to remove his property from the Philippines;
O
Intends to hide or conceal his property; or
O
Performs any act tending to obstruct the proceedings for
collecting the tax due.
•
As can be seen, there is no need for actual tax delinquency
for constructive distraint to apply.
How is constructive distraint effected?
O
O
The taxpayer will be required to sign a receipt covering the
property distrained and obligate himself to:
■
Preserve it intact and unaltered, and
•
Not dispose of it in any manner, without express authority
oftheCIR
If the taxpayer refuses, the officer will prepare a list of the
properties distrained and will leave a copy thereof in the
premises, in the presence of two witnesses.
Actual distraint
Procedure for actual distraint:
1.
Commencement of distraint proceedings
2.
Service of warrant of distraint
3.
Notice of sale of distrained property
4.
Release of distrained property, prior to sale
5.
Sale of property distrained
6.
Purchase by Government at sale upon distraint
Coda! provisions for the distraint process
Sec. 207. (A) Distraint of Personal Property. — Upon the failure
of the person owing any delinquent tax or delinquent revenue to
pay the same at the time required, the Commissioner or his duly
authorized representative, If the amount involved is in excess of
One million pesos (Pl,000,000), or the Revenue District Officer, if
the amount involved Is One million pesos (Pl,000,000) or less, shall
seize and distraint any goods, chattels or effects, and the personal
property, including stocks and other securities, debts, credits, bank
accounts, and interests in and rights to personal property of such
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persons; in sufficient quantity to satisfy the tax, or charge, together
with any increment thereto incident to delinquency, and the expenses
of the distraint and the cost of the subsequent sale.
A report on the distraint shall, within ten (10) days from receipt of the
warrant, be submitted by the distraining officer to the Revenue District
Officer, and to the Revenue Regional Director: Provided, That the
Commissioner or his duly authorized representative shall, subject to
rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, have the power to lift such
order of distraint: Provided, further, That a consolidated report by the
Revenue Regional Director may be required by the Commissioner as
often as necessary.
Actual distraint is resorted to upon the failure of the person owing
any delinquent tax or delinquent revenue to pay the same at the
time required.
The personal property of the person are actually seized by the
BIR.
Sec. 208. Procedure for Distraint and Garnishment. — The
officer serving the warrant of distraint shall make or cause to be made
an account of the goods, chattels, effects or other personal property
distrained, a copy of which, signed by himself, shall be left either with
the owner or person from whose possession such goods, chattels, or
effects or other personal property were taken, or at the dwelling or
place of business of such person and with someone of suitable age
and discretion, to which list shall be added a statement of the sum
demanded and note of the time and place of sale.
Stocks and other securities shall be distrained by serving a copy of
the warrant of distraint upon the taxpayer and upon the president,
manager, treasurer or other responsible officer of the corporation,
company or association, which issued the said stocks or securities.
Debts and credits shall be distrained by leaving with the person owing
the debts or having in his possession or under his control such credits,
or with his agent, a copy of the warrant of distraint. The warrant of
distraint shall be sufficient authority to the person owning the debts
or having In his possession or under his control any credits belonging
to the taxpayer to pay to the Commissioner the amount of such debts
or credits.
Bank accounts shall be garnished by serving a warrant of garnishment
upon the taxpayer and upon the president, manager, treasurer or
other responsible officer of the bank. Upon receipt of the warrant of
garnishment, the bank shall turn over to the Commissioner so much
of the bank accounts as may be sufficient to satisfy the claim of the
Government.
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Sec. 209. Sale of Property Distrained and Disposition of
Proceeds. — The Revenue District Officer or his duly authorized
representative, other than the officer referred to in Section 208 of
this Code shall, according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner,
forthwith cause a notification to be exhibited in not less than two (2)
public places in the municipality or city where the distraint is made,
specifying the time and place of sale and the articles distrained. The
time of sale shall not be less than twenty (20) days after notice. One
place for the posting of such notice shall be at the Office of the Mayor
of the city or municipality in which the property is distrained.
Sec. 210. Release of Distrained Property Upon Payment Prior
to Sale. — If at any time prior to the consummation of the sale all
proper charges are paid to the officer conducting the sale, the goods
or effects distrained shall be restored to the owner.
Sec. 209 (CONTINUED) At the time and place fixed in such notice,
the said revenue officer shall sell the goods, chattels, or effects, or
other personal property, including stocks and other securities so
distrained, at public auction, to the highest bidder for cash, or with
the approval of the Commissioner, through duly licensed commodity
or stock exchanges.
In the case of stocks and other securities, the officer making the
sale shall execute a bill of sale which he shall deliver to the buyer,
and a copy thereof furnished the corporation, company or association
which issued the stocks or other securities. Upon receipt of the copy
of the bill of sale, the corporation, company or association shall make
the corresponding entry in its books, transfer the stocks or other
securities sold in the name of the buyer, and issue, if required to do
so, the corresponding certificates of stock or other securities.
Any residue over and above what is required to pay the entire claim,
including expenses, shall be returned to the owner of the property
sold. The expenses chargeable upon each seizure and sale shall
embrace only the actual expenses of seizure and preservation of the
property pending the sale, and no charge shall be imposed for the
services of the local internal revenue officer or his deputy.
Sec. 212. Purchase by Government at Sale Upon Distraint. —
When the amount bid for the property under distraint is not equal to
the amount of the tax or is very much less than the actual market
value of the articles offered for sale, the Commissioner or his deputy
may purchase the same In behalf of the national Government for the
amount of taxes, penalties and costs due thereon.
Property so purchased may be resold by the Commissioner or
his deputy, subject to the rules and regulations prescribed by the
Secretary of Finance, the net proceeds therefrom shall be remitted to
the National Treasury and accounted for as internal revenue.
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Levy of real property
•
The procedure for levy of real property is:
1.
Commencement of levy proceedings
2.
Service of warrant of levy
3.
Advertisement for sale
4.
Public sale of the property under levy
5.
Redemption of property sold
6.
Forfeiture to the Government for want of bidder
7.
Resale of real estate taken for taxes
8.
Further distraint and levy
i
Coda! provisions for the levy process
Sec. 207. (B) Levy on Real Property. — After the expiration of
the time required to pay the delinquent tax or delinquent revenue as
prescribed in this Section, real property may be levied upon, before
simultaneously or after the distraint of personal property belonging
to the delinquent. To this end, any internal revenue officer designated
by the Commissioner or his duly authorized representative shall
prepare a duly authenticated certificate showing the name of the
taxpayer and the amounts of the tax and penalty due from him. Said
certificate shall operate with the force of a legal execution throughout
the Philippines.
Levy shall be affected by writing upon said certificate a description
of the property upon which levy is made. At the same time, written
notice of the levy shall be mailed to or served upon the Register of
Deeds for the province or city where the property is located and upon
the delinquent taxpayer, or if he be absent from the Philippines, to
his agent or the manager of the business In respect to which the
liability arose, or if there be none, to the occupant of the property
In question.
In case the warrant of levy on real property is not issued before or
simultaneously with the warrant of distraint on personal property,
and the personal property of the taxpayer is not sufficient to satisfy
his tax delinquency, the Commissioner or his duly authorized
representative shall, within thirty (30) days after execution of the
distraint, proceed with the levy on the taxpayer's real property.
Within ten (10) days after receipt of the warrant, a report on any
levy shall be submitted by the levying officer to the Commissioner
or his duly authorized representative: Provided, however, That
a consolidated report by the Revenue Regional Director may be
required by the Commissioner as often as necessary: Provided,
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further, That the Commissioner or his duly authorized representative,
subject to rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall have
the authority to lift warrants of levy issued in accordance with the
provisions hereof.
•
Failure of the heirs to receive a copy of notices of levy does NOT
bar its effectivity since the taxpayer is in fact the estate. (Marcos
II v. CA, G.R. No. 120880, June 5, 1997)
Sec. 213. Advertisement and Sale. — Within twenty (20) days after
levy, the officer conducting the proceedings shall proceed to advertise
the property or a usable portion thereof as may be necessary to
satisfy the claim and cost of sale; and such advertisement shall cover
a period of a least thirty (30) days. It shall be effectuated by posting
a notice at the main entrance of the municipal building or city hall and
in public and conspicuous place in the barrio or district in which the
real estate lies and by publication once a week for three (3) weeks in
a newspaper of general circulation in the municipality or city where
the property is located. The advertisement shall contain a statement
of the amount of taxes and penalties so due and the time and place
of sale, the name of the taxpayer against whom taxes are levied, and
a short description of the property to be sold. At any time before the
day fixed for the sale, the taxpayer may discontinue all proceedings
by paying the taxes, penalties and interest. If he does not do so, the
sale shall proceed and shall be held either at the main entrance of the
municipal building or city hall, or on the premises to be sold, as the
officer conducting the proceedings shall determine and as the notice
of sale shall specify.
Within five (5) days after the sale, a return by the distraining or
levying officer of the proceedings shall be entered upon the records
of the Revenue Collection Officer, the Revenue District officer and
the Revenue Regional Director. The Revenue Collection Officer, in
consultation with the Revenue district Officer, shall then make out
and deliver to the purchaser a certificate from his records, showing
the proceedings of the sale, describing the property sold stating the
name of the purchaser and setting out the exact amount of all taxes,
penalties and interest: Provided, however, That in case the proceeds
of the sale exceeds the claim and cost of sale, the excess shall be
turned over to the owner of the property.
The Revenue Collection Officer, upon approval by the Revenue District
Officer may, out of his collection, advance an amount sufficient to defray
the costs of collection by means of the summary remedies provided
for in this Code, including the preservation or transportation in case of
personal property, and the advertisement and subsequent sale, both
in cases of personal and real property including improvements found
on the latter. In his monthly collection reports, such advances shall be
reflected and supported by receipts.
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Sec. 214. Redemption of Property Sold. — Within one (1) year
from the date of sale, the delinquent taxpayer, or any one for him,
shall have the right of paying to the Revenue District Officer the
amount of the public taxes, penalties, and interest thereon from the
date of delinquency to the date of sale, together with interest on said
purchase price at the rate of fifteen percent (15%) per annum from
the date of purchase to the date of redemption, and such payment
shall entitle the person paying to the delivery of the certificate issued
to the purchaser and a certificate from the said Revenue District
Officer that he has thus redeemed the property, and the Revenue
District Officer shall forthwith pay over to the purchaser the amount
by which such property has thus been redeemed, and said property
thereafter shall be free form the lien of such taxes and penalties.
The owner shall not, however, be deprived of the possession of the
said property and shall be entitled to the rents and other income
thereof until the expiration of the time allowed for its redemption.
Sec. 215. Forfeiture to Government for Want of Bidder. — In
case there is no bidder for real property exposed for sale as herein
above provided or if the highest bid is for an amount insufficient
to pay the taxes, penalties and costs, the Internal Revenue Officer
conducting the sale shall declare the property forfeited to the
Government in satisfaction of the claim in question and within two
(2) days thereafter, shall make a return of his proceedings and the
forfeiture which shall be spread upon the records of his office. It shall
be the duty of the Register of Deeds concerned, upon registration with
his office of any such declaration of forfeiture, to transfer the title of
the property forfeited to the Government without the necessity of an
order from a competent court.
Within one (1) year from the date of such forfeiture, the taxpayer,
or any one for him may redeem said property by paying to the
Commissioner or the latter's Revenue Collection Officer the full
amount of the taxes and penalties, together with interest thereon
and the costs of sale, but if the property be not thus redeemed, the
forfeiture shall become absolute.
Sec. 216. Resale of Real Estate Taken for Taxes. — The
Commissioner shall have charge of any real estate obtained by the
Government of the Philippines In payment or satisfaction of taxes,
penalties or costs arising under this Code or In compromise or
adjustment of any claim therefore, and said Commissioner may, upon
the giving of not less than twenty (20) days notice, sell and dispose
of the same of public auction or with prior approval of the Secretary
of Finance, dispose of the same at private sale. In either case, the
proceeds of the sale shall be deposited with the National Treasury,
and an accounting of the same shall rendered to the Chairman of the
Commission on Audit.
Sec. 217. Further Distraint or Levy. — The remedy by distraint of
personal property and levy on realty may be repeated if necessary
until the full amount due, including all expenses, is collected.
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Suspension of collection
Sec. 218. Injunction not Available to Restrain Collection of
Tax. — No court shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee or
charge imposed by this Code.
R.A. 1125, Sec. 11, as amended by R.A. 9282. No appeal taken to
the CTA from the decision of the Commissioner of Internal Revenue or
the Commissioner of Customs or the Regional Trial Court, provincial,
city or municipal treasurer or the Secretary of Finance, the Secretary
of Trade and Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint, and/or sale of
any property of the taxpayer for the satisfaction of his tax liability
as provided by existing law: Provided, however, That when in the
opinion of the Court the collection by the aforementioned government
agencies may jeopardize the interest of the Government and/or the
taxpayer, the Court at any stage of the proceeding may suspend the
said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount
with the Court.
In criminal and collection cases covered respectively by Section
7(b) and (c) of this Act, the Government may directly file the said
cases with the CTA covering amounts within its exclusive and original
jurisdiction.
General rule: No court can issue an injunction to restrain collection
of internal revenue taxes, fees, or charges imposed by the NIRC.
o
Exception: Only the CTA can issue an injunction and it is dnly
allowed when the following conditions concur:
1.
There is an appeal to the CTA, and
2.
In the opinion of the court, the collection by the government
agencies may jeopardize the interest of the Government and/
or the taxpayer, and
3.
Taxpayer either to deposit the amount claimed or to file a
surety bond for not more than the double the amount with
the Court.
Despite the wording of the CTA law (Section 11, R.A. 1125, as
• amended by R.A. 9282, Section 9), the CTA can issue injunctive
writs to restrain the collection of taxes and to even dispense
with the deposit of the amount claimed or the bond, whenever
the method employed by the CIR in the collection of the tax
jeopardizes the interests of the taxpayer for being patently in
violation of the law. (Spouses Emmanuel and Jinkee Pacquiao v.
Court of Tax Appeals, G.R. No. 213394, April 6, 2016)
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O
Whenever the method employed by the CIR in the collection
of tax is not sanctioned by law, the bond requirement should
be dispensed with.
O
This prevents the absurd situation where the collection via
summary methods already violated the law yet the taxpayer
still needs to file a bond just to get an injunction.
If the amount of the surety bond is too high that it will practically
deny the taxpayer the meaningful opportunity to contest the
validity of the assessments and would likely impoverish the
taxpayer as to force it out of its business, then the amount of the
surety bond is void and must be lowered—even if it is still within
the "double the amount" limit set by law. (Tridharma Marketing
Corporation v. CTA, G.R. No. 215950, June 20, 2016, where the
SC remanded the case back to the CTA to determine the proper
amount of the bond>
Globesmart Services, Inc. received a final assessment notice with
formal letter of demand from the BIR for deficiency income tax,
value-added tax and withholding tax for the taxable year 2016
amounting to P48 million. Globesmart Services, Inc. filed a protest
against the assessment, but the Commissioner of Internal Revenue
denied the protest. Hence, Globesmart Services, Inc. filed a petition
for review in the CTA with an urgent motion to suspend the collection
of tax.
After hearing, the CTA Division issued a resolution granting the
motion to suspend but required Globesmart Services, Inc. to post a
surety bond equivalent to the deficiency assessment within 15 days
from notice of the resolution. Globesmart Services, Inc. moved for the
partial reconsideration of the resolution and for the reduction of the
bond to an amount it could obtain. The CTA Division issued another
resolution reducing the amount of the surety bond to P24 million.
The latter amount was still more than the net worth of Globesmart
Services, Inc. as reported in its audited financial statements.
a)
May the collection of taxes be suspended? Explain your answer.
b) Is the CTA Division justified In requiring Globesmart Services,
Inc. to post a surety bond as a condition for the suspension of the
deficiency tax collection? Explain your answer. (2017 Bar Exam)
Suggested answer:
a)
Yes, the collection of taxes may be suspended. Under the CTA
Law, the CTA can Issue an Injunction when there is an appeal
to the CTA, the collection will jeopardize the government and/
or the taxpayer, and the taxpayer either deposits the amount
claimed or files a surety bond of not more than double the
amount.
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b)
The CTA is not justified. Jurisprudence provides that the amount
of the surety bond should not be such that the taxpayer is
practically prevented from contesting the assessment. The
amount of the surety bond here is more than the net worth of
the taxpayer. This will impoverish the taxpayer and run it out of
business.
Tax Hens
Sec. 219. Nature and Extent of Tax Lien. — If any person,
corporation, partnership, joint-account (cuentas en participation),
association or insurance company liable to pay an internal revenue
tax, neglects or refuses to pay the same after demand, the amount
shall be a lien in favor of the Government of the Philippines from
the time when the assessment was made by the Commissioner
until paid, with interests, penalties, and costs that may accrue in
addition thereto upon all property and rights to property belonging
to the taxpayer: Provided, That this lien shall not be valid against
any mortgagee purchaser or judgment creditor until notice of such
lien shall be filed by the Commissioner in the office of the Register of
Deeds of the province or city where the property of the taxpayer is
situated or located.
A tax lien is another administrative remedy granted by law to the
BIR.
When a taxpayer neglects or refuses to pay his internal revenue
tax liability after demand, the amount demanded shall be a lien in
favor of the government from the time the assessment was made
by the CIR until paid with interest, penalties, and costs that may
accrue in addition thereto upon all property and rights to property
belonging to the taxpayer.
However, the lien shall not be valid against any mortgagee,
purchaser or judgment creditor until notice of such lien is
registered in the office of the RD.
Well-settled that the claim of the government predicated on a tax
lien is superior to the claim of a private litigant predicated on a
judgment. (CIR v. NLRC, G.R. No. 74965, November 9, 1994)
Compromise and abatement
•
The law also allows the tax liability of a taxpayer to be reduced
or even cancelled through compromise or abatement. Hence, the
two can be seen as a remedy of both the government and the
taxpayer.
j
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Remember, the authority of the CIR to compromise and abate
tax liabilities cannot be delegated.
■
Except:
•
for assessments issued by the regional offices
involving basic deficiency taxes of P500,000 or less,
and
minor criminal violations.
Let's begin with compromise!
Compromise
Sec. 204. Authority of the Commissioner to Compromise, Abate
and Refund or Credit Taxes. — The Commissioner may —
(A) Compromise the Payment of any Internal Revenue Tax, when:
(1) A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax. The compromise settlement of any
tax liability shall be subject to the following minimum amounts: For
cases of financial incapacity, a minimum compromise rate equivalent
to ten percent (10%) of the basic assessed tax; and
For other cases, a minimum compromise rate equivalent to forty
percent (40%) of the basic assessed tax.
Where the basic tax involved exceeds One million pesos (Pl,000,000)
or where the settlement offered is less than the prescribed minimum
rates, the compromise shall be subject to the approval of the
Evaluation Board which shall be composed of the Commissioner and
the four (4) Deputy Commissioners.
The grounds for compromise are:
1.
Doubtful validity of the claim against the taxpayer, or
2.
Financial incapacity of the taxpayer
The cases which may be compromised are:
1.
Delinquent accounts;
2.
Pending admin cases under admin protest after issuance of
final assessment notice to the taxpayer;
3.
Civil tax cases being disputed before the courts;
4.
Collection cases filed in courts;
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Criminal violations
5.
O
EXCEPT if 1) already filed in court, or 2) involving criminal
tax fraud (R.R. 30-2002)
The following cases can NOT be compromised:
1.
Withholding tax cases, unless the applicant-taxpayer invokes
provisions of law that cast doubt on the taxpayer's obligation
to withhold;
2.
Criminal tax fraud cases confirmed as such by the CIR or his
duly authorized representative;
3.
Criminal violations already filed in court;
4.
Delinquent accounts
installment payments:
5.
Cases where final reports of reinvestigation or reconsideration
have been issued resulting to reduction in the original
assessment and the taxpayer is agreeable to such decision
by signing the required agreement form for the purpose;
6.
Cases which become final and executory after final judgment
of a court, where compromise is requested on the ground of
doubtful validity of the assessment;
7.
Estate tax cases where compromise is requested on the
ground of financial incapacity of the taxpayer. (R.R. 30-2002)
with
duly
approved
schedule
What are the examples for doubtful validity?
1.
2.
Delinquent account/disputed assessment resulted from a
jeopardy assessment
•
Jeopardy assessment is an assessment without the benefit
of complete or partial audit by an authorized revenue
officer, who has reason to believe that the assessment
and collection of a deficiency tax will be jeopardized
because of the taxpayer's failure to comply with audit
and investigation requirements.
•
These assessments are usually done just before the end
of the prescriptive period.
•
Thus, they ar