Taxation law

INCOME TAX

--Atty. Vic C. Mamalateo-income payee, and pays the tax to the BIR. There is no Certificate of Tax Withheld issued to income payee. No Certificate of Tax Withheld (BIR Form 2307) is attached to the income tax return of recipient of income because he does not claim any tax credit in his tax return.

Tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, emoluments, profits and the like (Fisher v. Trinidad). Income tax is a direct tax on actual or presumed income (gross or net) of a taxpayer received, accrued or realized during the taxable year. WITHHOLDING TAX It is not an internal revenue tax but a mode of collecting income tax in advance on income of the recipient of income thru the payor of income. [NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.] There are 2 types of withholding taxes, namely: (1) final withholding tax; and (2) creditable withholding tax. FINAL WITHHOLDING INCOME TAX FWT withheld by the payor of income (e.g., 20% FWT on interest income on bank deposits) represents FULL payment of income tax due on such income of the recipient. Income payee (or recipient of income) does not report income subjected to FWT in his income tax return, although income is reflected in his audited financial statements for the year. However, he is not allowed to claim any tax credit on income subjected to FWT. Withholding agent files the withholding tax return, which includes the FWT deducted from the

INCOME TAX SYSTEMS GLOBAL TAX SYSTEM Compensation income not subject to FWT Business and/or professional income Capital gains not subject to FWT Passive investment income not subject to FWT Other income not subject to FWT SCHEDULAR TAX SYSTEM Compensation income subject to FWT (salary of OBU expat) Capital gains subject to FWT (real property in the Phil and shares of domestic corporation) Passive investment income subject to FWT (interest on bank deposit) Other income subject to FWT (auto won on Xmas raffle) The Philippines adopted the semi-global or semi-schedular tax system. Either the global or schedular system, or both systems may apply to a taxpayer.

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--Atty. Vic C. Mamalateo-FORMULA GLOBAL SYSTEM Gross sales/revenue Less: Cost of sales/service Gross income Less: Deductions PAE (for individual) Net taxable income Multiplied by applicable rate (graduated or flat) Income tax due Less: Creditable WT Balance SCHEDULAR SYSTEM Gross selling price or fair market value, whichever is higher times applicable tax rate = Tax due (real property) Gross selling price less cost or adjusted basis = Capital gain times applicable tax rate = Tax due (shares of dom corp) Gross income times applicable rate = Tax due (passive inv income) NATURE OF ASSET ORDINARY ASSET CAPITAL ASSET Inventory if on hand at end of taxable year Stock in trade held primarily for sale or for lease in the course of trade or business Asset used in trade or business, subject to depreciation Real property used in trade or business All other assets, whether or not used in trade or business, other than the above assets REAL PROPERTY TRANSACTIONS Sale of real property Who is seller? Person engaged in real property business (dealer, developer, or lessor) Person not engaged in real property business Non-stock, nonprofit association (chamber of commerce, YMCA) Nature of property? Ordinary asset Capital asset Location of property? Within the Philippines Outside the Philippines Principal residence? Yes exempt, if conditions for exemption are satisfied by seller-individual No taxable Consideration? Full consideration or fair market value Inadequate consideration

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--Atty. Vic C. Mamalateo-KINDS OF TAXPAYERS INDIVIDUAL CITIZEN Resident Taxable on worldwide income Non-resident Taxable on income from sources within the Phil Immigrant or permanent worker NRC from date of departure from the Phil OFW (seamen) NRC if his aggregate stay outside the Phil is more than 183 days ALIEN Taxable on income from sources within the Phil Resident Non-resident Engaged in trade or business (more than 180 days in the Phil) Not engaged in trade or business (180 days or less stay in Phil) CORPORATION DOMESTIC Taxable on worldwide income FOREIGN Taxable on income from sources within the Phil Resident (e.g., Phil branch of foreign corporation) Non-resident TEST FOR TAX PURPOSES: Law of incorporation PARTNERSHIPS TAXABLE Partnerships, no matter how created or organized, including joint ventures or consortiums EXEMPT General professional partnership (GPP), but partners are taxed on their share of partnership profits actually or constructively paid during the year Joint venture or consortium undertaking construction activity or energy-related activities with operating contract with the government Agreement to manage and operate mine denominated as Power of Attorney is in reality a partnership. Philex is a partner because it would receive 50% of net profits as compensation under the agreement; it does not appear that Baguio Gold was unconditionally obligated to pay the advances; it was unlikely for a business to lend hundreds of millions

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--Atty. Vic C. Mamalateo-without security or collateral and without specific date when advance shall be due and payable (Philex Mining Corp v. CIR, 2008). RESIDENT FOREIGN CORPS TAXABLE Ordinary branch of a foreign corporation in the Phil (30% of net taxable income from sources within the Phil) PEZA- & SBMA-registered branch are exempt from branch profit remittance tax Regional operating headquarters (ROHQ) 10% of net taxable income from sources within the Phil Offshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING Bank Manila v. CIR] 10% on gross interest income on foreign currency loans International carriers by air or water 2.5% of Gross Phil Billings Foreign contractor or sub-contractor engaged in petroleum operations in the Phil 8% of gross income EXEMPT Representative office Regional headquarters (RHQ) SOURCES OF INCOME Interest Interest from sources within Phil and interest on bonds and obligations of residents, corporate or otherwise Dividend From domestic corporation and from foreign corporation, unless less than 50% of gross income of foreign corporation for 3 years prior to declaration of dividends was derived from sources within the Phil; hence, apply only ratio of Phil-source income to gross income from all sources Services Place where services are performed, except in case of international air carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings. Revenues from trips originating from the Phil are considered as income from sources within the Philippines, while revenues from inbound trips are treated as income from sources outside the Philippines. Rentals and royalties Location or use of property or property right in Phil Sale of real property Located in the Philippines Sale of personal property Located in the Philippines Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as income from sources within the Philippines. Other intangible property Mobilia sequuntur personam it follows domicile of owner GROSS INCOME SALE OF GOODS Gross Sales Less: Cost of Sales: Beg. Inventory + Purchases

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Taxation law
Total available for sale

--Atty. Vic C. Mamalateo-Ending inventory period, whether as payment for services, interest or profit from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of capital assets. FBT is a tax on fringe benefits received by employees, although the tax is assumed by the employerpayor of income. Return of capital is exempt from income tax (e.g., tax-free exchange of property). To be taxable, there must be income, gain or profit; gain is received, accrued or realized during the year; and it is not exempt from income tax under the Constitution, treaty or law. Mere increase in the value of property does not constitute taxable income. It is not yet realized during the year. Transfer of appreciated property to the employee for services rendered is taxable income. TEST IN DETERMINING INCOME Realization test There must be separation from capital of something of exchangeable value (e.g., sale of asset) Claim of right doctrine CIR v. Javier, 199 SCRA 824 Economic benefit test Stock option given to the employee

Cost of Sales Gross income Times 2% MCIT NOTE: MCIT is now computed on quarterly basis. If quarterly MCIT > than RCIT, excess MCIT of prior year is not allowed. SALE OF SERVICES Gross Revenue Less: Cost of Service consisting of all direct costs and expenses Gross income Times 2% MCIT NOTE: MCIT is imposed beginning on the 4th taxable year immediately following the year in which the corp commenced bus operations (Sec 27(E)(1), NIRC) Pay MCIT after 4 years immediately following the year bank commenced bus operations (Manila Bank v CIR, GR 168118, Aug 28, 2006) INCOME INCOME means cash or its equivalent coming to a person within a specified

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Taxation law
--Atty. Vic C. Mamalateo-Payment of real property that has appreciated in value by employer to its employee Income from whatever source All income not expressly exempted from income, irrespective of voluntary or involuntary action of taxpayer in producing income NATURE OF INCOME COMPENSATION INCOME Existence of employer-employee relationship BUSINESS AND/OR PROFESSIONAL INCOME NO employer-employee relationship CAPITAL GAIN Real property in the Phil and shares of stock of domestic corporation Other sources of capital gain PASSIVE INVESTMENT INCOME Interest, dividend, and royalty income BIR cannot compute compounded interest on delay in payment of promissory notes in the absence of stipulation in contract (CIR v. Isabela Cultural Corp, GR 172231, Feb 12, 2007). OTHER INCOME Prizes and winnings All other income, gain or profit not covered by the above classes COST OR ADJUSTED BASIS FORMULA Amount realized/Selling price 100 Less: Cost or adjusted basis 80 Gain/(loss) from sale 20 Amount realized shall be the sum of money received plus the fair market value of the property (other than money) received (Sec 40A, NIRC). Basis of property: If acquired by purchase, cost; If acquired by inheritance, FMV at date of acquisition; If acquired by donation, basis in the hands of donor; If acquired for insufficient consideration, amount paid by transferee for the property (Sec 40(B), NIRC). GROSS PHIL BILLINGS A. GPB applies on revenue from transport of passengers, cargoes or mail originating from the Philippines INTERNATIONAL AIR CARRIER From Phil to foreign destination Continuous and uninterrupted flight Transhipment of passenger in another country on another foreign

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--Atty. Vic C. Mamalateo-airline: GPB tax applies only on aliquot portion of revenue on Philippine leg (Phil to foreign country) From foreign country to the Phil This is treated as income from foreign sources; hence, exempt from Phil income tax INTERNATIONAL SHIPPING LINE From Phil to final foreign destination is taxable From foreign country to Phil is exempt B. ORDINARY INCOME Demurrage fees (for late return of containers) are akin to rental income subject to ordinary corporate income tax rate based on net taxable income from sources within the Philippines INTEREST INCOME TYPES OF INTEREST INCOME Subject to FWT: (a) Interest income of depositor on bank deposits, deposit substitutes, trust and other similar arrangements 20% FWT peso deposit 7.5% FWT foreign currency deposit with OBU/FCDU (if depositor is resident) and exempt from tax, if depositor is a nonresident (b) Interest income of OBU/FCDU on foreign currency loans to (1) residents 10% of gross interest income; or (2) nonresidents, OBUs, local commercial banks, including branches of foreign banks exempt from all taxes. NOT subject to FWT but subject to regular tax rates (5%-32%, if individual; 30%, if corporation): All other interest income or financing income Exempt income: Long-term deposit or investment by individuals Taxable income: Preferential tax rate Pretermination of long-term deposit by individual (20%: 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and interest on foreign loan Regular tax rate (30%) All other cases DIVIDEND INCOME

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Taxation law
--Atty. Vic C. Mamalateo-REQUISITES FOR DIVIDEND DECLARATION Presence of retained earnings No prohibition to declare dividend in loan agreement Declaration of dividend by Board of Directors TYPES OF DIVIDENDS Taxable Cash dividend Property dividend Exempt Stock dividend (except when there is change in proportionate interest among stockholders and there is subsequent cancellation or redemption of shares declared as stock dividend) Liquidating dividend distribution of assets to stockholders Taxable on the part of stockholder under the global tax system DIVIDEND INCOME Inter-corporate dividend: Exempt from tax Corporation paying dividend: Domestic corporation Recipient of dividend: Another domestic corporation or resident foreign corporation Dividend paid to non-resident foreign corporation Corporation paying dividend: Domestic corporation Recipient of dividend Foreign head office makes direct investment in Phil company: 15% FWT Phil branch of foreign corporation makes investment in Phil company: Exempt from income tax Tax-sparing provision If foreign country does not impose income tax on dividend paid by foreign corporation OTHER INCOME Income from any source whatever The words income from any source whatever discloses a legislative policy to include all income not expressly exempted from the class of taxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner vs. BOAC). The words income from any source whatever is broad enough to cover gains contemplated here. These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31, 1955). Any economic benefit to the employee whatever may have been the mode by which

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Taxation law
--Atty. Vic C. Mamalateo-it is effected is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee (Commissioner vs. Smith, 324 U.S. 177). EXCLUSIONS Life insurance proceeds Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs) Interest income of employee trust fund or accredited retirement plan is exempt from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487) Amount received as a consequence of separation because of death, sickness (that will endanger life of employee) or other physical disability or for any cause beyond the control of employee Miscellaneous items Income of foreign government Income of government or its political subdivisions from any public utility or exercise of governmental function EXEMPT ASSOCIATIONS The phrase any of their activities conducted for profit does not qualify the word properties.-- The phrase any of their activities conducted for profit does not qualify the word properties. This makes income from the property of the organization taxable, regardless of how that income is used whether for profit or for lofty non-profit purposes. Thus, the income derived from rentals of real property owned by the Young Mens Christian Association of the Philippines, Inc. (YMCA), established as a welfare, education and charitable non-profit corporation, is subject to income tax. The rental income cannot be exempted on the solitary but unconvincing ground that said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. Where the law does not distinguish, neither should we distinguish. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educational institution devoting its income solely for educational purposes. The term educational institution has acquired a well-known technical meaning. Under the Education Act of 1982, such term refers to schools. The school system is synonymous with formal education which refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).

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Taxation law
--Atty. Vic C. Mamalateo-DEDUCTIONS KINDS OF DEDUCTIONS Itemized Deductions Optional Standard Deductions Special Deductions ITEMIZED DEDUCTIONS Business expenses, incl. research and development Interests Taxes Losses Bad debts Depreciation Depletion Charitable contributions Contributions to pension trust Health or hospitalization premium DEDUCTIONS BUSINESS EXPENSES 1. The expense must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. In carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession; ADVERTISING EXPENSE An expense is ordinary when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances. An expense is necessary where the expenditure is appropriate or helpful in the development of taxpayers business or that the same is proper for the purpose of realizing a profit or minimizing a loss. P9.4 M paid in 1985 for advertising a product was staggering incurred to stimulate future sales to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or 4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals. Operating expenses of an illegal or questionable business are deductible, but expenses of an inherently illegal nature, such as bribery and protection payments, are not. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR. CONVENIENCE OF THE EMPLOYER RULE: Living quarters or meals furnished to employee shall be added to compensation income subject to tax. However, if such living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as compensation (RR 2-86 & 3-98)

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--Atty. Vic C. Mamalateo-profession of which the taxpayer is a member. Goodwill generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not business expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr. 24, 2003). PROFESSIONAL FEES Legal and accountants fees for prior years were not billed in corresponding years (1984-1985). It was paid by taxpayer in succeeding year (1986) when it was billed by the lawyer and accountant. Taxpayers uses accrual method of accounting. Accrual of income and expense is permitted when the all events test has been met. This test requires (1) fixing a right to income or liability to pay, and (2) the availability of reasonably accurate determination of such income or liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. Moreover, deduction takes the nature of tax exemption; it must be construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007). Legal fees paid for defending title to property is a capital expenditure that should form part of the cost of the asset, but is recovered by way of depreciation over the life of the asset. DEDUCTIONS INTEREST EXPENSE 1. There must be a valid and existing indebtedness; 2. The indebtedness must be that of the taxpayer; 3. The interest must be legally due and stipulated in writing; 4. The interest expense must be paid or incurred during the taxable year; 5. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; 6. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code; 7. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income (e.g., interest on indebtedness to finance petroleum operations); and 8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A. 9337, and

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--Atty. Vic C. Mamalateo-that effective January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC]. DEDUCTIONS TAXES 1. Payments must be for taxes, national or local; 2. Taxes are imposed by law upon the taxpayer; 3. Taxes must be paid or accrued during the taxable year in connection with the taxpayers trade, business or profession; and 4. Taxes are not specifically excluded by law from being deducted from the taxpayers gross income. Ways to avoid double taxation: tax credit or tax deduction Foreign tax credit is deducted from Phil income tax, but amount of tax credit is subject to a maximum amount based on formula. Tax deduction is deducted from gross income, without any limitation. DEDUCTIONS LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79) 1. The loss must be that of the taxpayer; 2. The loss is actually sustained and charged off within the taxable year; 3. The loss is evidenced by a closed and completed transaction; 4. The loss is not claimed as a deduction for estate tax purposes; 5. The loss is not compensated for by insurance or otherwise; 6. In the case of an individual, the loss must be connected with his trade, business or profession, or incurred in any transaction entered into for profit though not connected with his trade, business or profession; and 7. In the case of casualty loss, it has been reported to the BIR within forty-five days from date of occurrence of the loss. Capital losses are deductible only to the extent of capital gains. Sale of real property classified as capital asset located in the Phil Sale of shares of stocks of a domestic corporation Sale of jewelry held for more than 12 months DEDUCTIONS BAD DEBTS 1. There must be an existing indebtedness due to the taxpayer

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--Atty. Vic C. Mamalateo-which must be valid and legally demandable; 2. The same must be connected with the taxpayer's trade, business or practice of profession; 3. The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; 4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and 5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. DEDUCTIONS TAX BENEFIT RULE The taxpayer is obliged to declare as taxable income any subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written off and claimed as deduction from gross income. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited by the BIR. He has to report income to the extent of the tax benefit derived in the year of deduction. DEDUCTIONS DEPRECIATION 1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or business, or out of its not being used temporarily during the year; 3. It must be charged off during the taxable year from the taxpayers books of accounts; 4. Depreciation shall be computed on the basis of historical cost or adjusted basis. While financial accounting allows computation based on appraised value, recovery of investment for tax purposes shall be limited to historical cost. DEDUCTIONS CHARITABLE CONTRIBUTIONS 1. The charitable contribution must actually be paid or made to the Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or association specified in the Tax Code; 2. It must be made within the taxable year; 3. It must not exceed 10% (individual) or 5% (corporation) of the taxpayers taxable income before charitable contributions

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--Atty. Vic C. Mamalateo-(whether deductible in full or subject to limitation); 4. It must be evidenced by adequate receipts or records; and 5. The amount of charitable contribution of property other than money shall be based on the acquisition cost of said property (Sec. 34(H), NIRC). The limitation is imposed to prevent abuse of donating paintings and other valuable properties and claiming excessive deductions therefrom. DEDUCTIONS D. Optional Standard Deduction Privilege is available only to citizens or resident aliens as well corporations subject to the regular corporate income tax; thus, non-resident aliens and non-resident foreign corporations are not entitled to claim the optional standard deduction. Standard deduction is optional; i.e., unless taxpayer signifies in his/its return his/its intention to elect this deduction, he/it is considered as having availed of the itemized deductions; Such election when made by the qualified taxpayer is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding year(s); DEDUCTIONS Amount of standard deduction is limited to 40% of taxpayers gross sales or receipts (in the case of an individual) or gross income (in the case of a corporation). If the individual is on the accrual basis of accounting for his income and deductions, OSD shall be based on the gross sales during the year. If he employs the cash basis of accounting, OSD shall be based on his gross receipts during the year. It should be noted that cost of sales or cost of services shall not be allowed to be deducted from gross sales or receipts. A general professional partnership (GPP) may claim either the itemized deductions or in lieu thereof, the OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income. The net income determined by either the itemized deduction or OSD from the GPPs gross income is the distributable net income from which the share of each share is to be ascertained. Proof of actual expenses is not required; hence, he is not also required to keep books of accounts and records with respect to his deductions during the year.

PERSONAL EXEMPTIONS RA 8424: Jan 1, 1998 Single and estate or trust P20,000 Head of family P25,000 Married P32,000 For each child, not to exceed 4 P8,000 RA 9504: July 6, 2009 Individual, whether single, HOF, or married P50,000 For each child, not to exceed 4 P25,000 Law exempts income of minimum wage earners and increases OSD from 10% to 40% of gross sales or receipts, for individuals, and of gross income, for corporations. PERSONAL EXEMPTIONS Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-Status-at-the-end-of-the-year rule Status-at-the-end-of-the-year rule which means that whatever is the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions generally applies. A change of status of the taxpayer during the taxable year generally benefits, but does not prejudice, him. Thus, if he marries at the end of the year, he shall be entitled to personal exemption of P32,000/P50,000. If a child is born at any time during the calendar year, even on the last day of the year, the taxpayer is entitled to claim his child as a dependent entitling him to deduct additional exemption of P8,000/P25,000 for that year. On the other hand, if one of his qualified dependent children dies during the year, the law considers that the child died on the last day of the year; hence, he is entitled to claim the full amount of additional exemption of P8,000/P25,000 for the deceased child for the year. EDUCATIONAL INSTITUTION Proprietary educational institutions (including those administered by individuals or groups with an issued permit to operate from DECS, CHED, or TESDA) and hospitals which are non-profit shall pay 10% tax on net taxable income, except those covered by Sec D hereof (i.e., income subject to FWT), provided that gross income from school-related activities exceeds 50% of total gross income. However, if gross income from unrelated (not substantially related to the exercise of educational institution or hospital) trade, business or other activity exceeds 50% of total gross income from all sources, net income shall be subject to RCIT (30%). IMPROPERLY ACCUMULATED EARNINGS TAX RATIONALE: If profits were distributed, shareholders would be liable to pay income tax thereon; if not so distributed, no tax. Thus, IAET is a penalty tax for improper accumulated of earnings and a form of deterrent to the avoidance of tax on shareholders. IAET = 10% x accumulated taxable income of corporation IAET does not apply to banks, insurance companies, publicly-held corporations, taxable partnerships, enterprises registered with PEZA, SBMA, and BOI. Once profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividends. IAET The following are considered reasonable needs of business: Retained earnings is equal to or less than 100% of paid-up capital of corporation; Earnings reserved for: Definite corporate expansion project or program requiring considerable capital expenditure; Building, plants or equipment acquisition; Compliance with any loan covenant or pre-existing obligation under a

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--Atty. Vic C. Mamalateo-legitimate business agreement; In case of subsidiaries of foreign corporations, earnings intended or reserved for investments within the Phil as proven by corporate records. TAX-FREE EXCHANGE GENERAL RULE: The entire amount of gain or loss shall be recognized upon the sale or exchange of property. EXCEPTIONS: No gain or loss at the time of exchange is recognized: 1. MERGER OR CONSOLIDATION, where a corporation, shareholder, or security holder exchanges property, shares or securities solely for shares of stocks of a corporation, which is a party to the merger. 2. TRANSFER OF PROPERTY FOR SHARES OF STOCKS, as a result of which, he, alone or together with others not exceeding four, gains control of said corporation. ACCOUNTING METHODS Cash method Accrual method All events test; amounts received in advance are not treated as revenue of the period in which received but as revenue of future periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar 24, 1997). Installment sales Sale on the installment plan Initial payments do not exceed 25% of GSP Deferred payment sale, not on the installment plan Initial payments exceed 25% of GSP Percentage of completion Crop year method FILING OF TAX RETURN SUBSTITUTED FILING OF ITR: No individual income tax return for the year will be filed by the employee concerned, and the employer is the one that files the return for him Applies only to individuals With only one (1) employer Who correctly withholds the income tax on compensation income paid to the employee and remits the same to the BIR Substituted filing of return does not apply when the conditions above are not met, such as when the individual has (a) two or more employers, (b) mixed incomes, correct WT was not deducted from compensation income, etc. FILING OF TAX RETURN Individual deriving mixed income, or purely business/ professional income, or other income must file his quarterly income tax returns (BIR Form 1700 Q) and annual income tax return (BIR Form 1700 ) as follows: Period Filing Return Due Date for

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--Atty. Vic C. Mamalateo-Q1 Return same year Q2 Return same year Q3 Return of same year Annual Return following year April 15 of August 15 of November 15 April 15 of the the preceding quarter(s) are credited against the consolidated income tax due.

REFUND OR TAX CREDIT Taxpayer has 3 options: refund, tax credit, or carry over excess withholding tax or payment. However, once taxpayer exercises option to carry over, such option is irrevocable for that taxable period and no application for refund or tax credit shall be allowed (Paseo Realty v CA, GR 119286, Oct 13, 2004). While a taxpayer is given the choice to claim refund or tax credit, such election is not final. Prior verification and approval by CIR is required. Such remedy is not absolute and mandatory (ibid). Conditions for grant of refund or tax credit: (1) claim was filed within 2 years from date of payment; (2) income payment was declared in tax return; and (3) fact of withholding is established by copy of BIR Form 2307 (BF Bank v. CA, GR 155682, Mar 27, 2007). In case of dissolution of corporation, the 2year period for claim for refund is counted 30 days after SEC approval of plan for dissolution, which is considered the date of payment of taxes withheld on earned income (BPI v. CIR, GR 144653, Aug 28, 2001). Withholding agent in the Philippines is a proper party to file a claim for refund or tax credit for tax erroneously or illegally paid to a foreign corporation. A person liable to tax is also a person subject to tax (Procter & Gamble v. CIR). WITHHOLDING TAX

FILING OF TAX RETURN A domestic corporation and resident foreign corporation shall file quarterly corporate income tax return (BIR Form 1702 Q) and annual corporate income tax return (BIR Form 1702 as follows: Q1 Return of same year Q2 Return 31 of same year Q3 Return November 30 of same year Annual Return April 15 of the following year (if on calendar year), or 15th day of the fourth month following the close of the fiscal year (if on fiscal year). Computation of the quarterly and annual tax returns of individuals (except those receiving purely compensation income) and corporations shall be made on the cumulative basis; i.e., gross income and deductions are consolidated and the income tax liability is computed on the consolidated net income, and the income taxes paid for May 31 August

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Taxation law
--Atty. Vic C. Mamalateo-An income payment is subject to the expanded withholding tax, if the following conditions concur: a. An expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income tax; b. The income is fixed or determinable at the time of payment; c. The income is one of the income payments listed in the regulations that is subject to withholding tax, except when payor is a Top 20,000 Corporation; d. The income recipient is a resident of the Philippines liable to income tax; and e. The payor-withholding agent is also a resident of the Philippines. WITHHOLDING TAX EXEMPT FROM EWT 1. National government and its instrumentalities, including provincial, city or municipal governments and barangays, except government-owned or controlled corporations; 2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: a. Sales of real property by a corporation which is registered with and certified by HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000 in Metro Manila and other highly urbanized areas and P150,000 in other areas; b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from income tax under E.O. 226, R.A. 7916, and R.A. 7227; c. Corporations which are exempt from income tax under Section 30 of the Tax Code, such as GSIS, SSS, PHIC, PCSO, and PAGCOR; d. General professional partnerships; and e. Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations f. International carriers (by air or water) subject to 2.5% Gross Phil Billings TRANSFER TAXES ESTATE TAX Death is the generating source of the power to tax (Lorenzo v. Posadas). No manual or physical transfer of the property is required for the estate tax to accrue. The law in force at the time of death of the decedent governs. Residence refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances, in the sense that disclose intent (Corre v. Tan Corre). It is not necessarily the actual place of residence at the time of death. All properties (real or persona, tangible or intangible) and interests in properties of the decedent at the time of his death shall be included in his gross estate. However, properties transferred or interests relinquished by the decedent before his death are excluded from his gross estate. The estate shall be appraised at its fair market value at the time of death (even if Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-period to file return and pay tax is extended by CIR). Real property: fair market value as determined by the CIR Shares of stocks: fair market value as shown in the audited financial statements closest to the date of death of the decedent ESTATE TAX Gross estate: Conjugal Exclusive Total WHO IS THE DECEDENT AND WHAT PROPERTIES FORM PART OF HIS GROSS ESTATE? Resident decedent: Citizen or resident alien Include in his gross estate all properties, real or personal, tangible or intangible, regardless of location (within or without the Philippines) Non-resident decedent: Nonresident alien Include in his gross estate all properties located in the Philippines For intangible properties, use the principle of mobilia sequuntur personam Taxation of intangibles follows the residence or domicile of the owner. ESTATE TAX THESE INTANGIBLE PROPERTIES HAVE SITUS IN THE PHILIPPINES (Sec. 104, NIRC): Franchise which is exercised in the Phil Shares, obligations or bonds issued by any corporation organized in the Phil Shares, obligations or bonds issued by any foreign corporation, 85% of the business of which is located in the Phil or if such properties have acquired business situs in the Phil (Wells Fargo case)

Real property Personal property Less: Deductions: Funeral expenses Claims against the estate Unpaid taxes and mortgages Medical expenses Family home Standard deduction Properties previously taxed Share of the surviving spouse Net Taxable Estate Estate tax due (First P200,000 is exempt; 5% from P200,001; and 20% on over P10 M) ESTATE TAX

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Taxation law
--Atty. Vic C. Mamalateo-Shares or rights in partnership, business or industry established in the Philippines ESTATE TAX DECEDENTS GROSS ESTATE (Sec. 85, NIRC) Decedents interest (in property owned or possessed) Transfers in contemplation of death Revocable transfers Property passing under a general power of appointment Proceeds of life insurance Transfers for insufficient consideration Capital of the surviving spouse (depending on date of marriage and applicable property regime between the spouses) ESTATE TAX Transfers in contemplation of death refers to the thought of death, as a controlling motive, which induces the disposition of the property for the purpose of avoiding the tax. Revocable transfers covers transfers, by trust or otherwise, where the enjoyment was subject at the date of his death to any change or where such power is relinquished in contemplation of death. Deceased declared her conveyance was a donation mortis causa and forbade the registration of the deed until after her death (Puig v. Penaflorida). It does not cover bona-fide sale of property for an adequate and full consideration in money or moneys worth. ESTATE TAX Transfer of property under a general power of appointment By will, or by deed executed in contemplation of death, or by deed where he retains for his life or any period not ascertainable without reference to his death, which in fact does not end before his death Possession or enjoyment of, or the right to the income from, the property, or the right to designate the persons who shall possess or enjoy the property or the income thereof Except in case of bona-fide sale for an adequate and full consideration in money or moneys worth. Power of appointment is general when it gives to the donee the power to appoint any person he pleases, thus having as full dominion over the property as though he owned it. It is special when the donee can appoint only among a restricted or designated class of persons other than himself. ESTATE TAX Proceeds of life insurance Taxable: Beneficiary is the estate of the deceased, his executor or administrator, irrespective of

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Taxation law
--Atty. Vic C. Mamalateo-whether or not the insured retained the power of revocation Beneficiary is other than the decedents estate, executor or administrator, when the designation of beneficiary is not expressly made irrevocable. Under the Insurance Code, insurance policies are presumed revocable. Not Taxable: Accident insurance proceeds (not life insurance) Proceeds of group insurance policies Beneficiary (NOT decedents estate, executor or administrator) is designated irrevocably GSIS, SSS, and AFP RSBS ESTATE TAX REQUISITES OF PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION) Death Identity of the property Inclusion of the property (in gross estate or gross gift) Previous taxation of the property (estate tax or gift tax) No previous vanishing deduction on the property (to preclude application of vanishing deduction on same property more than once). Percentage of deduction decreases over a period of 5 years or 20% reduction every year ESTATE TAX FORMULA OF VANISHING DEDUCTION Value taken of property previously taxed (as declared in prior decedents gross estate) Less: Mortgage debt paid (1st deduction) Initial basis Divided by the value of gross estate of present decedent = __% Multiplied by expenses, indebtedness, etc and transfers for public purposes Equals 2nd deduction Initial basis less 2nd deduction = Final basis multiplied by applicable rate of vanishing deduction = Amount of vanishing deduction deductible from the estate of second decedent DONORS TAX Donors Tax is a tax on the privilege to transfer property from a living person to another living person. It is an excise tax, and not a property tax. It is imposed on the donor of property. Donees tax was already abolished and incorporated into donors tax. Purposes of donors tax To supplement estate tax To prevent avoidance of income tax thru the device of splitting income

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Taxation law
--Atty. Vic C. Mamalateo-Donation of property must be accepted by the donee. Sale or exchange of property for less than adequate and full consideration is subject to donors tax, except where the property is capital gains tax, such as real property located in the Phil and shares of stock of a domestic corporation. Donated property must be valued at fair market value at the time of the donation. DONORS TAX Transfer of property may be in trust or otherwise, direct or indirect. Transfer becomes complete and taxable only when the donor has divested himself of all beneficial interest in himself or his estate. Donors tax rates Donee is member of the family First P100,000 of net gift is exempt 2% on P100,001 to P200,000 15% on amount over P10 M Donee is a stranger 30% of net gift Stranger is a person who is not a (a) brother, sister (whether by whole or halfblood), spouse, ancestor, and lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of relationship. DONORS TAX Donor Individual Citizen and resident alien -Taxable Non-resident alien Taxable on property located in the Phil Corporation Domestic corporation and resident foreign corporation -- Taxable Non-resident foreign corporation Taxable on property located in the Phil Donation of conjugal Made by both spouses TWO donations Made only by one spouse (Tang Ho v. Board of Tax Appeals [now CTA]) ONE donation DONORS TAX Cumulative computation of donors tax is required for all donations by the same donor during the calendar year, but no cumulative computation is required for donations to strangers. Exempt donations To Phil govt for scientific, engineering, etc purposes To social welfare, cultural, and charitable organizations, not more than 30% shall be used for administration purposes To IRRI and Ramon Magsaysay Awards Foundation To National Museum and National Library Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-To Intramuros Administration VALUE ADDED TAX BUSINESS TAXES VAT Taxable transactions Sale or lease of goods or properties Sale of services Importation of goods Formula for computing VAT Output Tax Less: Input Tax VAT Payable/(Excess Input Tax) NON-VAT/EXEMPT FROM VAT TRANSACTIONS Transaction is subject to Other Percentage Tax (Title V, NIRC) and exempt from VAT VAT is imposed on transaction in addition to Excise Tax, if any Tax is imposed on Gross Receipts or Gross Income Transaction is exempt from VAT, OPT, and Excise Tax (e.g., sale of agricultural food products in their original state) VALUE ADDED TAX CHARACTERISTICS OF VAT Tax on value added of taxpayer Transparent form of sales tax Broad-based tax on consumption of goods, properties and services in the Phil Indirect tax: tax is imposed on seller but burden of tax is shifted to the buyer Tax is collected thru the tax credit method Output tax on sales; input tax on purchases No cascading of tax in VAT system Tax-inclusive method is adopted by the Phil VALUE ADDED TAX TAXABLE PERSONS Seller of goods or properties Goods or properties are consumed or for consumption in the Phil In the course of trade or business Sales of goods or properties are not exempt from VAT Seller of services Listed services are performed or to be performed in the Phil In the course of trade or business For a valuable consideration Services are not exempt from VAT Importer of goods Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-Whether done in the course of his trade or business or for personal consumption VALUE ADDED TAX Seller of real properties is subject to VAT Seller executes a document of sale (DAS or CTS) Real property is located in the Phil Seller is engaged in real estate business either as dealer, developer or lessor Real property is held primarily for sale or for lease in the ordinary course of trade or business Sale is not exempt from VAT However, Rev. Regs. No. 4-2007 (Feb 2007) provides that if the real property sold is used in his trade or business, said transaction is subject to VAT, being incidental to the main business of the taxpayer, who is a VAT-registered taxpayer engaged in other types of business. VALUE ADDED TAX Sale, barter or exchange Sale, barter or exchange has the same tax consequence There must be valuable consideration; hence, donation is exempt from VAT Deemed sale is subject to VAT (output tax) in order to recoup previous VAT (input tax) allowed Excise tax, if any, interest, and delivery charges form part of gross selling price In the course of trade or business The regular conduct or pursuit of a commercial or an economic activity, including transactions deemed incidental thereto, regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Isolated transactions are not subject to VAT. Incidental income follows taxation of the principal activity. VALUE ADDED TAX The absence of profit in the performance of taxable services does not make such activity for a fee exempt from VAT (CIR v. COMASERCO, GR 125355, Mar 30, 2000). Goods or properties must be located in the Philippines and consumed or destined for consumption in the Phil. Special economic zones under RA 7916 (PEZA Law) and freeport zones under RA 7227 (BCDA Law) are treated as foreign territories by fiction of law. Hence, importation of goods by a special economic or freeport zone enterprise shall be exempt from VAT and customs duties and will be subject to VAT and duties only upon their withdrawal from the customs custody. Destination Principle: Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-Export sales of goods are zero-rated (0% VAT) Import of goods into the Phil is taxable at 12% VAT VALUE ADDED TAX Tax base is Gross Selling Price (GSP) 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 VAT. As a rule, output tax accrues on sale of goods or properties (other than a real property) at the time of sale, when the VAT sales invoice is issued, although none or only a part of the gross selling price is paid by the buyer at the time of sale. Excise tax, if any, shall form part of GSP. Sales discounts determined and granted at the time of sale, which are expressly indicated in the sales invoice do not form part of the tax base. Grant of discount must not depend upon the happening of a future event or the fulfillment of certain condition. They must be recorded in the books of accounts of the seller. 20% sales discounts to senior citizens under RA 9257 (Amended Senior Citizens Law) shall be deducted from gross sales before applying the VAT rate. VALUE ADDED TAX To determine Gross Selling Price (100%), divide Total Invoice Amount (112%) by 1.12. If Total Invoice Amount includes EWT, determine first the Gross Selling Price. Tax base for installment sales of real property If initial payments (consisting of down payment and all monthly amortizations in the year of sale) exceeds 25% of the gross selling price, the tax base is the entire gross selling price as shown in the document of sale, even though only a part of it has been received during the period If initial payments during the year of sale do not exceed 25% of gross selling price, the tax base is only the amount received Tax rates 12% beginning Feb 1, 2006 (RA 9337) 0% VAT on zero-rated sales VALUE ADDED TAX Sales of goods subject to 0% VAT Actual export sales Deemed export sales Internal or constructive export sales under BOI law (EO 226) and special laws (RA 7916 and RA 7227). Ecozones and freeport zones are deemed foreign territories by fiction of law (CIR v. Seagate Technology (2005); CIR v. Toshiba Information Equipment (2005) Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-For as long as the goods remain within the zone, consumed or destroyed there, they will be dutyfree and tax-free (Coconut Oil Refiners Asso v. Torres (2005) Effectively zero-rated sales (sales to ADB, embassies, etc) Sales of gold to BSP Foreign currency denominated sales Sales of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations VALUE ADDED TAX ZERO-RATED SALE Transaction is completely free of VAT; rate charged by seller is zero VAT-registered seller can reclaim input taxes passed on to it by sellers of goods or services from BIR in form of refund or tax credit Zero-rated sales are taxable sales for purposes of registration as VAT taxpayer to determine threshold EXEMPT SALE Exemption removes the VAT at the exempt stage Exempt taxpayer cannot reclaim VAT passed on to it by VAT-registered sellers Exempt sales are not taxable sales for VAT purposes VALUE ADDED TAX PERSONS SELLING TAXABLE SERVICES Construction and service contractors Brokers Lessors of property, real or personal Warehousing services Lessors or distributors of cinematographic films Persons engaged in milling, processing, manufacturing or repacking goods for others Proprietors or operators or keepers of hotels, motels, resthouses, pension houses, inns and resorts Proprietors or operators of restaurants and other similar establishments VALUE ADDED TAX PERSONS SELLING TAXABLE SERVICES Dealers in securities Lending investors Transportation contractors on their transport of goods or cargoes Domestic common carriers by air and sea between points in the Philippines Sales of electricity (by generation, transmission, and distribution companies) Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-Services of franchise grantees, except water and gas Non-life insurance companies, except crop insurance Similar services, regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties VALUE ADDED TAX 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 advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third party or received as reimbursement for advance payment on behalf of another, which do not redound to the benefit of the payor. For sale of services, the test is not whether services have been performed or not, but whether amount of compensation or fee is received, actually or constructively. The rule is: NO RECEIPT OF PAYMENT, NO VAT LIABILITY. VALUE ADDED TAX ZERO-RATED SALES OF SERVICES Processing, manufacturing or repacking goods for other persons doing business outside the Phil, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Phil or to a non-resident person not engaged in business who is outside the Phil when the services are performed, the consideration for which are paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations (CIR v. BWSC Mindanao, GR 153205, Jan 22, 2007) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Phil is a signatory effectively subjects the sale of services to 0% rate VALUE ADDED TAX ZERO-RATED SALES OF SERVICES Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof Services performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise whose export sales exceeds 70% of total annual production Transport of passengers and cargo by domestic air or sea carriers from the Phil to a foreign country

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Taxation law
--Atty. Vic C. Mamalateo-Sale of power or fuel generated thru renewable sources of energy (biomass, solar, wind, hydropower, geothermal and other emerging sources) VALUE ADDED TAX Tax Code not only requires that the services other than processing, manufacturing or repacking of goods and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Sec 102(b) (2) is that the recipient of such services is doing business outside the Phil. While this requirement is not expressly stated in the 2nd paragraph of Sec. 102(b), this is clearly provided in the 1st paragraph of Sec 102(b) where the listed services must be for other persons doing business outside the Phil. The above phrase not only refers to services enumerated in the first paragraph, but also pertains to the general term services appearing in the second paragraph. Otherwise, those subject to the regular VAT under Sec 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Sec. 102(b)(2) to apply apply to a payer-recipient of services doing business in the Phil is to make the payment of regular VAT dependent on the generosity of the taxpayer. A tax is a mandatory exaction, not a voluntary contribution. VALUE ADDED TAX Significantly, the amended Section 108(b) [previously Sec 102(b)] of the present Tax Code clarifies this legislative intent. For zero-rating of services, it must be rendered to a person engaged in business conducted outside the Phil. The payer-recipient of respondents services is the Consortium which is a joint venture doing business in the Phil. While the Consortiums principal members are nonresident foreign corps, the Consortium itself is doing business in the Phil. This is shown in BIR Ruling 23-95, which states that the contract between Consortium and NPC is for a 15-year term. Considering the length of time, the Consortiums operation and maintenance of NPCs power barges cannot be classified as a single or isolated transaction. This case is different from CIR v. American Express International, Inc. (Phil Branch), because in the latter case, the recipient of services is AEII (HK Branch) doing outside the Phil (CIR v. BWSC Mindanao, Inc., GR153205, Jan 22, 2007). CIRs filing of its Answer before the CTA challenging claim for refund effectively serves as a revocation of VAT Ruling 03-99 and BIR Ruling 23-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. VALUE ADDED TAX VAT-EXEMPT TRANSACTIONS A. Sale or importation of agricultural and marine food products in their original state; livestock and poultry generally producing food for human consumption; and breeding stock B. Sale or importation of fertilizers; seeds, seedlings and fingerlings;

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Taxation law
--Atty. Vic C. Mamalateo-fish, prawn, livestock and poultry feeds (except specialty feeds for race horses, fighting cocks and other pets) C. Importation of personal and household effects belonging to residents of the Phil returning from abroad and non-resident citizens coming to resettle in the Phil D. Importation of professional instruments and implements, and personal effects (except vehicle, vessel, aircraft, machinery for use in manufacture) belonging to persons coming to settle in the Phil E. Services subject to percentage tax under Title V VALUE ADDED TAX VAT-EXEMPT TRANSACTIONS G. Medical, dental, hospital and veterinary services, except those rendered by professionals H. Educational services rendered by private educ institutions accredited by DepEd, CHED, TESDA, and those rendered by government educational institutions I. Services rendered by individuals pursuant to an employer-employee relationship O. Export sales by persons who are not VAT-registered P. Sale of real property not primarily held for sale to customers or for lease in the ordinary course of trade or business, or real property for low-cost and socialized housing, residential lot valued at P1.5 M or below, house and lot and other residential dwellings valued at P2.5 M or below VALUE ADDED TAX VAT-EXEMPT TRANSACTIONS Q. Lease of a residential unit with a monthly rental not exceeding P10,000 R. Sale, importation, printing or publication of books and any newspaper or magazine which appear at regular intervals with fixed prices and is not devoted principally to publication of paid advertisements V. Sale or lease of goods or property or the performance of services other than transactions mentioned above, the gross sales or receipts do not exceed P1.5 M VALUE ADDED TAX Sale of medicines by the hospital pharmacy to in-patients is exempt from VAT, but sale to out-patients is subject to 12% VAT (St. Lukes Medical Center v. CTA and CIR, 1998). Tolling fees received by a hotel for PLDT is not part of its gross receipts Payment of VAT by the hotel on fees for providing limousine service to its client is correct. It is not subject to the 3% common carriers tax. Claim for tax credit is denied (Manila Mandarin Hotel v. CIR) Gross receipts of theatre owner or operator from sales of tickets to moviegoers are exempt from VAT. Theatres and movie

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Taxation law
--Atty. Vic C. Mamalateo-houses are not included in the enumeration of taxable services in the VAT law. Our tax laws, past and present, did not adopt more specific terms for sale or exchange of services to include showing of films in public (SM Prime Holdings v. CIR, CTA Case 7079, 2006). PAGCOR is exempt from VAT pursuant to its charter, PD 1869. Being a special law, PD 1869 prevails over RA 7716, a subsequent general law. To be valid, repeal of special law should be express (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007). VALUE ADDED TAX CATEGORIES OF INPUT TAXES Input tax credit on importations of goods and current local purchases of goods, properties and services Input tax on capital goods must be amortized over certain period Transitional input tax credit Presumptive input tax credit Withholding input tax credit Excess input tax credit Only VAT-registered persons are entitled to credit input taxes against their output tax. Non-registration as a VAT taxpayer does not exempt him from VAT output tax liability on his taxable sales of goods, properties or services. VALUE ADDED TAX For sale of services, the rule is: NO PAYMENT OF FEE BY BUYER AND ISSUANCE OF VAT RECEIPT BY SELLER, NO INPUT TAX FOR BUYER! Transitional Input Tax 2% of value of inventory or actual VAT paid on such goods, materials and supplies, whichever is higher Presumptive Input Tax Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, and packed noodle-based instant meals are entitled to presumptive input tax equivalent to 4% of gross value in money of their purchases of primary agricultural products which are used as inputs to their production (Sec. 111, NIRC) VALUE ADDED TAX Tax reliefs of VAT taxpayers on their excess input taxes (EIT) attributable to zero-rated and effectively zero-rated sales Carry over the excess input tax to the next quarter, until excess is utilized File a claim for refund File a claim for tax credit, within two years after the close of taxable quarter where the sales were made For non-zero-rated sales, remedy available is only to carry over EIT to the next quarter(s) VALUE ADDED TAX Prescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the official

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Taxation law
--Atty. Vic C. Mamalateo-receipt was issued. Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid (CIR v. Mirant Pagbilao Corp, 2008). TAX REMEDIES UNDER THE TAX CODE ASSESSMENT CYCLE Filing of tax return Tax audit by BIR Informal Conference Preliminary Assessment Notice (PAN) Reply to PAN Final Assessment Notice (FAN) Protest to FAN Supplemental Protest Law prescribes due date 120 days + 120 days 15 days from receipt 3 years or 10 years 30 days from receipt 60 days from filing of protest ASSESSMENT CYCLE BIR ACTION Cancell assessment Deny protest Revise assessment BIR INACTION Appeal to CTA Appeal to CTA en banc 180 days from filing of protest, if any, or supplemental protest 30 days from date of receipt of denial of protest or lapse of 180 days 15 days from date of receipt; addl 15 days may be granted by CTA after payment of docket fee. REMEDIES OF TAXPAYERS ADMINISTRATIVE REMEDY BEFORE PAYMENT OF TAX PROTEST OF ASSESSMENT AFTER PAYMENT OF TAX TAX CREDIT, OR REFUND JUDICIAL REMEDY APPEAL TO COURT OF TAX APPEALS NO PRE-ASSESSMENT NOTICE REQUIRED Deficiency tax is the result of mathematical error Discrepancy is between amount of tax withheld and amount remitted to BIR

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Taxation law
--Atty. Vic C. Mamalateo-Taxpayer who opted to claim refund/tax credit also carried over and applied the same against tax of next taxable quarter Excise tax due has not been paid Constructive importation (Sec. 228, NIRC) ASSESSMENT WHAT IS AN ASSESSMENT? Notice that taxpayer owes government a sum of money Contains computation of tax liability and a demand for payment of tax within a certain period (CIR v. Pascor Realty & Dev Corp) PURPOSE OF ASSESSMENT To establish tax liability where an assessment is required ASSESSMENT FORMS OF ASSESSMENT Formal assessment notice (FAN) Collection letter Letter demanding payment of erroneously refunded amount (Guagua Electric Co v. CIR), or amount paid by bouncing check (Republic v. Limaco & de Guzman) LETTER AND ASS. NOTICE) (Republic v. Nielson & Co)

NOTE: Letter from revenue officer granting opportunity to disprove findings (SHOW-CAUSE LETTER) is NOT an assessment ASSESSMENT WHEN MUST ASSESSMENT BE MADE? (Sec. 203 & 222, NIRC) RETURN WAS FILED Not false or fraudulent 3 years from filing of return False or fraudulent 10 years from date of discovery of false or fraudulent return NO RETURN WAS FILED 10 years from date of discovery of omission If assessment due falls on Saturday, government has next business day within which to assess (CIR v. Western Pacific Corp) COUNTING OF PERIOD TAXABLE YEAR Normal year (365 days) Leap year (366 days)

b. Follow-up or collection letter duly received by taxpayer within the prescriptive period (TAXPAYER DENIED RECEIPT OF ORIGINAL DEMAND

If there is a leap year within the prescriptive period (3 years from filing of return), a year shall be deemed to have 365 days only (NAMARCO v. Tecson, 29 SCRA 70). Thus, assessment issued on April 15 of the third year from filing of return shall be treated as invalid due to prescription.

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Taxation law
--Atty. Vic C. Mamalateo-EO 292 (Administrative Code of 1987), being the more recent law than Civil Code, governs the computation of legal period. Accor-dingly, a year shall be understood to be 12 calendar months; a month of 30 days, unless it refers to a specific calendar month (CIR vs. Primetown Property Group, GR No. 162155, Aug 22, 2007). ASSESSMENT WHEN IS ASSESSMENT DEEMED MADE? Issue date of assessment notice is not reckoning point for prescription Date the assessment notice and demand letter is released, mailed or sent to taxpayer constitutes actual assessment (Republic v. Limaco & de Guzman) Presumption of receipt in the regular course of mail applies, if it was properly addressed, postage was prepaid, and was mailed. If one element is absent, presumption does not lie (Enriquez v. Sunlife of Canada) COMPLIANCE WITH SEC. 228 BIR disallowed certain itemized deductions and considered some cost items as subject to 5% tax, without indicating factual and legal bases. During the preliminary stage, BIR informed taxpayer thru preliminary 5-day letter and furnished copy of audit working paper. CTA considered assessment as void. CA affirmed CTA decision. SC ruled above documents were not valid substitutes for mandatory notice in writing of legal and factual bases of assessment. These steps were mere perfunctory discharge of CIRs duties in correctly assessing a taxpayer. Just because CIR issued an advice, preliminary letter and final notice does not necessarily mean taxpayer was informed of law and facts. Law requires that they be stated in DL and FAN. Otherwise, the express provisions of Art. 228 of NIRC and RR 12-99 would be rendered nugatory. The alleged factual bases in the advice, preliminary letter and audit working papers did not suffice. Moreover, due to the absence of a fair opportunity to be informed of legal and factual bases of assessment, the assessment is void. Old law merely required taxpayer to be notified of assessment. This was changed in 1998 (CIR vs. Enron Subic Power Corp, GR No. 166387, Jan. 19, 2009). ASSESSMENT NOTICE Preliminary collection letter presupposes the existence of valid assessment notice. Preliminary collection letter shall serve as assessment notice, if it was initial notice received by taxpayer, taxpayer did not receive any assessment notice, and no follow-up letter was sent or preliminary conference was arranged. 30-day period to protest shall commence from date of receipt of preliminary collection letter (United International Pictures vs. CIR, CTA Case No. 5884, Jan. 5, 2002) PROTEST Valid protest of an assessment is one assailing the formal assessment notice (FAN) and the letter of demand, not the preliminary assessment notice (PAN). PAN is required merely to inform the taxpayer of the proposed assessment.

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Taxation law
--Atty. Vic C. Mamalateo-Failure to protest within 30 days will make the formal assessment notice final and executory. Failure to respond to PAN within 15 days will render taxpayer in default and a FAN would subsequently be issued (Cebu Rosver Pawnshop vs. CIR, CTA Case No. 6425, Mar. 17, 2003). PROTEST CIR vs. BPI Oct 28, 1988 CIR assessed petitioner for def. percentage tax and DST for 1986 Dec 10, 1988 -- BPI replied stating Your def assessments are no assessments at all As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment. June 27, 1991 -- BPI received letter from BIR, stating .. Your letter failed to qualify as a protest under RR 12-85 still we obliged to explain the basis of the assessments. July 6, 1991 -- BPI requested a reconsideration of assessments. Dec 12, 1991 -- BIR denied protest, which was received on Jan 21, 1992. Feb 18, 1992 -- BPI filed petition for review in CTA. PROTEST Nov 16, 1995 -- CTA dismissed petition for lack of jurisdiction; assessments had become final and unappealable. May 27, 1996, CTA denied reconsideration. On appeal, CA reversed CTAs decision. It ruled Oct 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared the proper assessments were those in May 8, 1991 letter which provided the reasons for claimed deficiencies. CIR elevated case to SC. CIR did not inform BPI in writing of the law and facts on which assessments were made. He merely notified BPI of his findings, consisting of the computation of the tax liabilities and a demand for payment within 30 days from receipt. He relied on former Sec. 270, NIRC, prior to its amendment by RA 8424. In CIR vs.Reyes, GR 159694, Jan 27, 2006, the only requirement was for the CIR to notify or inform the taxpayer of his findings. Nothing in the old law required a written statement to the taxpayer of the law and the facts. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation. PROTEST Jurisprudence simply required that assessments contain a computation of tax liabilities, the amount to be paid plus a demand for payment within a prescribed period. The sentence the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. was not in old Sec. 270, but was only inserted in Sec. 228 in 1997 (R.A. 8424). The inserted sentence was not an affirmation of what the law required; the amendment by RA 8424 was an innovation and could not be reasonably inferred from the old law. Updated/09-09-2010

Taxation law
--Atty. Vic C. Mamalateo-The Oct 28, 1998 notices were valid assessments, which BPI should have protested within 30 days from receipt. The Dec 10, 1988 reply it sent to BIR did not qualify as a protest, since the letter itself stated we shall inform you of the taxpayers decision on whether to pay or protest the assessment. BPIs failure to protest the assessment made it final and executory. The assessment is presumed to be correct (CIR vs BPI, GR 134062, Apr 17, 2007). DENIAL OF PROTEST DIRECT DENIAL Letter of CIR states in clear terms his denial of protest. INDIRECT DENIAL Final Notice Before Seizure constitutes as a decision on a protested assessment; hence, appealable to the CTA (CIR vs. Isabela Cultural Corp, 361 SCRA 71 (2004) Issuance by BIR of Warrant of Distraint and Levy constitutes a denial of the protest. INACTION OF COMMISSIONER The taxpayer has two options: Wait for the decision of the Commissioner on the protest and file the appeal to the CTA within 30 days from date of receipt of the denial of protest; or File appeal to the CTA within 30 days from lapse of the 180-day period (Lascona Land Co vs CIR, CTA Case No. 5777, Jan 4, 2000) BIR appealed CTA decision to CA. In the meantime, RA 9282 was signed by PGMA on Apr 2, 2004, which provides that inaction of CIR during the 180-day period is construed as a denial of protest. Decision of the CTA on Lascona case was reversed by the CA. If there is no appeal filed within 30 days after the lapse of 180 day period, the matter/decision under protest becomes final. The word decision in Sec. 228 cannot be strictly ck strictly construed as referring only to decision per se of CIR but should be considered synonymous with disputed assessment (CIR vs. Lascona Land Co, CA GR SP No. 58061, Oct 25, 2005). CA decision was appealed to SC, where it is still pending. COUNTING OF 180-DAY PERIOD Since the petitioner did not submit any document in support of his protest within sixty days from the filing of its protest, the counting of the 180-day period was from the filing of the protest. Accordingly, when respondent failed to render his decision within 180 days from the filing of his protest, petitioner has 30 days therefrom to file an appeal to CTA (Oceanic Wireless Network vs. CIR, CTA Case No. 6111, Nov. 3, 2004) APPEALS ADMINISTRATIVE APPEAL DECISION OF REGIONAL DIRECTOR MAY BE APPEALED TO COMMISSIONER PRIOR EXHAUSTION OF ADM REMEDIES GIVES ADM AUTHORITIES PRIOR

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Taxation law
--Atty. Vic C. Mamalateo-OPPORTUNITY TO DECIDE CONTROVERSIES WITHIN THEIR COMPETENCE (Aguinaldo Industries Corp. v. CIR) JUDICIAL APPEAL FINAL DECISION OF COMMISSIONER MAY BE APPEALED TO COURT OF TAX APPEALS Where a taxpayer filed a valid protest within 30 days from date of receipt of assessment and on same day also filed with CTA a petition for review, there is yet no final decision of CIR on the protest that is appealable to CTA (Moog Controls Corp vs. CIR, CTA Case No. 6700, Oct 18, 2004) CTA DIVISION DECISION IS APPEALED TO CTA EN BANC COURT OF APPEALS EN BANC DECISION APPEALED TO SUPREME COURT PETITION FOR REVIEW Petitioner maintains that its counsels neglect in not filing petition for review within reglementary period (due to counsels secretary) was excusable. The 30-day period to appeal is jurisdictional and failure to comply would bar the appeal and deprive the CTA of its jurisdiction. Such period is mandatory, and it is beyond the power of the courts to extend the same (Chan Kian vs CTA, 105 Phil 906 (1959). The options granted to the taxpayer in case of inaction by the CIR is mutually exclusive and resort to one bars the application of the other. Petition for review was filed out of time (more than 30 days after lapse of 180 days), and petitioner did not file MR or appeal; hence, disputed assessment became final and executory. PETITION FOR REVIEW After availing of the first option (filing petition for review with CTA), petitioner cannot successfully resort to the second option (awaiting final decision of CIR) on the pretext that there is yet no final decision on the disputed assessment because of CIRs inaction. Assessments are presumed to be correct unless otherwise proven (RCBC vs CIR, GR No. 168498, Apr 24, 2007). PRESCRIPTION The 3-year period within which to assess any deficiency tax commences after the last day prescribed by law for the filing of the income tax return. For VAT, each taxable quarter shall have its own prescriptive period. VAT return is filed quarterly and a final return is not required at the end of the year. In case of creditable withholding taxes, the 3-year period shall be counted shall be counted from the last day required by law for filing monthly remittance return. Each monthly return is already a complete return. The annual information return submitted to BIR is just an annual report of income payments and taxes withheld and is not in the nature of a final adjustment return (HPCO Agridev Corp. vs. CIR, CTA Case No. 6355, July 18, 2002)

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Taxation law
--Atty. Vic C. Mamalateo-PRESCRIPTION Request for reconsideration or clarification on the assessment made by the taxpayer does not suspend the running of the statute of limitations. However, request for reinvestigation may suspend the running of prescriptive period when it has been granted by CIR (BPI vs. CIR, GR No. 139736, Oct 17, 2005) Mere filing of the protest letter without requesting for a reinvestigation does not suspend the running of the prescriptive period to collect (Phil Global Communications vs. CIR, CTA EB Case No. 37, Feb. 2005) REQUISITES OF WAIVER Waiver must be in the form identified in RMO 20-90; Expiry date of period agreed upon is indicated in the waiver; Waiver form requires statement of the kind of tax and amount of tax due; if not indicated in the waiver, there is no agreement; Waiver is signed by taxpayer or his authorized representative. In case of corporation, waiver is signed by any responsible official. CIR or his authorized representative shall sign waiver indicating that BIR has accepted and agreed to the waiver; Date of acceptance by BIR is indicated; Date of execution and acceptance by BIR should be before expiration of prescriptive period; Waiver is executed in 3 copies; second copy is for taxpayer. Fact of receipt by the taxpayer should be indicated in the original copy (Pfizer, Inc. vs. CIR, CTA Case No. 6135, Apr. 21, 2003; FMF Dev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20, 2003) REQUISITES OF WAIVER Waiver must indicate definite expiration date agreed upon by CIR and taxpayer Waiver should state date of acceptance by BIR. Without the date, it cannot be determined whether waiver was accepted before expiration of 3-year period. Taxpayer must be furnished copy of accepted waiver. Under RMO 20-90, second copy of waiver is for taxpayer. Fact of receipt by taxpayer of his copy should be indicated in the original copy (Phil. Journalists vs. CIR, supra). RMO 20-90 must be strictly construed against the government; they are mandatory in character. More-over, the waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription (CIR vs. FMF Dev Corp, GR No. 167765, June 30, 2008). FRAUD TAX AVOIDANCE is the tax saving device within the means sanctioned by law, used in good faith and at arms length. TAX EVASION is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. It connotes 3 factors: end to be achieved; an accompanying state of mind that is described as evil, willful or deliberate; and course of action which is unlawful. Altonagas sole purpose of acquiring and transferring title of properties on same day

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Taxation law
--Atty. Vic C. Mamalateo-was to create tax shelter. Sale to him by CIC was a sham and without business purpose. Sale by Altonaga to RMI was tainted with fraud. Even before the purported sale of property by CIC to Altonaga, it received P40 M from RMI. That was reflected by RMI in its financial statement (CIR vs. Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004)

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