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CRITICAL AREAS IN TAXATION Atty. Vic C. Mamalateo Sept.

11, 2009 San Sebastian College of Law-Recoletos GENERAL PRINCIPLES OF TAXATION ASPECTS OF TAXATION Levy: Congress or LGU (Tax Policy) Assessment and collection: BIR Administration) Payment: Taxpayer (Tax Compliance)

or

BOC

(Tax

BASIS OF TAXATION Lifeblood Theory: Existence of government is a necessity. Without taxation, no government can exist or endure. Governments ability to serve and protect the people depends largely on taxes. This theory is used to justify the summary nature of remedies in the collection of taxes. No injunction shall be issued by any court to restrain the collection of taxes, except the CTA. Benefits-Protection Theory (Symbiotic Relationship): Taxes are what we pay for a civilized society. Without taxes, government would be paralyzed for lack of the motive power to activate and operate it. Every person who is able to must contribute his share in the running of government, and government is expected to respond in the form of tangible and intangible benefits to improve the lives of the people and enhance the values of their property. Taxes are positive acts of government and are not contractual. Taxes are fixed by law and are not subject to contract between the taxpayer and the tax officer, except when there is an actual compromise. If such agreements are made, they cannot serve to defeat or discharge the tax liability that the law fixes as the full amount of the tax. The acceptance of any amount by employees or officials, which does not constitute full payment of the amount fixed by law, is no ground or reason for the claim for exemption by the taxpayer from liability for the remaining amount due (CIR v. McGrath, 1 SCRA 639). If the fee is designed to raise substantially more than the cost of the regulation to which it purports to be an incident, its purpose is to raise revenue. If it is a fee attached to a particular provision for regulation and appears to be imposed to cover the cost of that regulation, and does substantially only that, then it is merely for the cost-paying part of the regulatory measure (City of Iloilo v. Villanueva, 105 Phil 337). The license fees charged therein are not merely for regulation but for revenue, because the fee of P24 per annum charged for every apartment far exceeds the expense of issuing the license, plus the cost of inspection or police surveillance, and other incidental expenses.

QUASI-LEGISLATIVE FUNCTION OF BIR Rule-making power must be confined to details for regulating the mode or proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law (LBP v. CA, 327 Phil 1047 (1996). An administrative agency issuing regulations may not enlarge, alter or restrict the provisions of law it administers, and it cannot engraft additional requirements not contemplated by the legislature. The plain meaning rule (verba legis) should be applied where the words of the statute are clear, plain and free from ambiguity and they must be given their literal meaning and applied without attempted interpretation (CIR v. Central Luzon Drug Corp, GR 159647, Apr 15, 2005). Any revocation, modification or reversal of any of the rules and regulations promulgated by the DOF Secretary or any of the rulings or circulars promulgated by the CIR shall not be given retroactive application, if the revocation, modification or reversal will be prejudicial to the taxpayers, except: Where taxpayer deliberately misstates or omits material facts Where the facts subsequently gathered by BIR are materially different from the facts on which the ruling is based Where the taxpayer acted in bad faith (Sec. 246, NIRC) Where a regulation is revoked, the revocation shall be made prospectively. However, if the revocation is due to the fact that the regulation is erroneous or contrary to law, the revocation is retroactive so as to affect past transactions. A wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer (Hilado v. CIR, 100 Phil 288) SPECIAL LAWS PREVAIL OVER GENERAL LAWS The demand to pay overpaid refund by the BIR is a deficiency franchise tax assessment. Hence, the right to assess (3 years) and to collect (5 years) the same is governed by the Tax Code rather than by provisions of the Civil Code (6 years). Tax Code is a special law which must prevail over the Civil Code, a general law (Guagua Electric Light Plant Co. v. CIR, 19 SCRA 790). RA 7716 imposes VAT on all franchise grantees except electricity, water and gas. PAGCOR, a GOCC, claimed exemption from all taxes, direct and indirect, based on its Charter, PD 1869. SC ruled in favor of PAGCOR. The repeal or modification of PD 1869, a special law, by a subsequent general law (RA 7716) must

be express and not just implied (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007). [NOTE: RA 9337 (Nov 1, 2005) repealed income tax exemption of PAGCOR.] PRINCIPLE OF ESTOPPEL The government is not bound by the errors committed by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Although the government may generally be estopped thru the affirmative acts of public officers acting within their authority, their neglect or omission of public duties should not produce that effect. Taxes are the lifeblood of the nation thru which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of administrative officers should never be allowed to jeopardize the governments financial position, especially where the amount involves millions of pesos (CIR v. CTA, 234 SCRA 348). Defense of reliance in good faith on rulings of CIR requiring no withholding tax on reinsurance premiums may free the taxpayer from payment of penalties, but would not exculpate it from liability to pay the tax (Phil Guaranty Co v. CIR, 13 SCRA 775; Intra-Strata Assurance Corp v. Republic, GR 156571, July 9, 2008). On Aug 30, 1989, CIC, domestic corp owned by Benigno Toda, sold the Cibeles property (land and building) to Altonaga, close business associate of Toda, for P100 M. On the same day, Altonaga sold the property to RMI for P200 M. He later on paid the 5% capital gains tax on the sale (P10 M). CIC filed ITR and declared income of P75,728. During the investigation by BIR, it was found out that on May 4, 1989, RMI paid P40 M to CIC and reflected as Investments in its books. On July 31, 1989, RMI another P40 M. BIR Letter of Authority was not served to Altonaga for he left for the U.S.A. During the CTA hearing, CIC admitted the sales are part of tax planning scheme. In 1990, Toda sold his shares in CIC to Choa for P12.5 M. 3 years later, he died. In 1994, BIR sent deficiency income tax assessment and demand letter. As owner of CIC is new, BIR issued FAN to Estate of B. Toda. FAN was protested, which CIR denied. CTA ruled in favor of Estate of Toda. BIR failed to prove fraud. CA affirmed CTA decision, reasoning that CTA is better situated to determine the correctness, propriety and legality of assessment. SC reversed CA decision. All 3 factors in tax evasion are present. Estate admitted Altonaga was mere conduit. Making it appear there were 2 sales cannot be considered as legitimate tax planning. Sale to Altonaga was more to mitigate tax liability rather than for legitimate business purpose. To allow transaction is to sanction circumvention of laws (CIR v. Estate of Toda, GR 147188, Sept 14, 2004) 3

Hope Luxury, Premium More and Champion were considered as local cigarette brands subject to ad valorem tax of 20-45%. On July 1, 1993, or 2 days before the effectivity of RA 7654, CIR issued RMC 37-93, reclassifying above local brands to foreign brands subject to 55% tax. Copy of RMC was sent to Fortune Tobacco via telefax but it was addressed to no one in particular. On July 15, 1993, Fortune Tobacco received by ordinary mail certified copy of RMC. Respondent sought review of RMC but was denied by BIR. On July 30, 1993, BIR assessed deficiency ad valorem tax. Respondent went to CTA on petition for review. CTA ruled CIR failed to observe due process of law in issuing RMC 37-93, as there was no prior notice and hearing. SC ruled that when the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of a law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be informed, before that new issuance is given the force and effect of law (CIR v. CA, CTA and Fortune Tobacco Corp, 1996).

INCOME TAX INCOME TAX 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, gain or profit (gross or net) of a taxpayer received, accrued or realized during the taxable year that is not exempt. The law existing at the time of the transaction shall be applied. 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 (on income paid to resident or nonresident); and (2) creditable withholding tax (on income paid to resident).

FINAL WITHHOLDING TAX FINAL WITHHOLDING INCOME TAX How much tax is withheld? -- 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. Who is the taxpayer? -- 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. Who files return and pays tax? -- Withholding agent files the withholding tax return, which includes the FWT deducted from the income of 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.

INCOME TAX SYSTEMS GLOBAL TAX SYSTEM (Total gross income less total deductions times applicable rate of tax) 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 (Type of income less cost, if allowed = gross income, or GSP or FMV times applicable rate of tax) Compensation income subject to FWT Capital gains subject to FWT Passive investment income subject to FWT Other income subject to FWT The Philippines adopted the semi-global or semi-schedular tax system. Either the global or schedular system, or both systems, may apply on income of a taxpayer, depending on nature of income.

FORMULA GLOBAL SYSTEM Gross sales Less: Cost of sales Gross income Less: Deductions PAE (for ind.) 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 (Taxed under global system) CAPITAL ASSET (Taxed under schedular or global tax system) Inventory if on hand at end of taxable year (mfr or dealer) Stock-in-trade primarily held for sale or for lease in the course of trade or business (dealer in securities or realty) 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-stated ordinary assets (Sec. 39, NIRC) Guidelines in determining nature of asset: If taxpayer is engaged in real estate business (either as dealer, developer or lessor), real property is ordinary asset. If registered with HLURB or HUDCC, taxpayer is habitually engaged in real estate business; if not registered, he is deemed engaged in real estate business if he has at least six (6) transactions, regardless of amount. If he is not engaged in real estate business, real property currently or previously used in trade or business is considered as ordinary asset. Property classified as ordinary asset for being used in business by taxpayer other than person engaged in real estate business is automatically converted into capital asset, if not used in business for more than two (2) years prior to the consummation of taxable transaction involving said property (Rev Regs. No. 7-2003, Dec 27, 2002)

KINDS OF TAXPAYERS INDIVIDUAL CITIZEN Resident Taxable on worldwide income Non-resident immigrant, permanent worker; OFW [most of the time during the taxable year = more than 183 days] ALIEN 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 Organized under Phil laws; taxable on worldwide income FOREIGN Organized under laws of a foreign country; taxable only on income from sources within the Philippines Resident (e.g., Phil branch of foreign corporation) 6

Non-resident TEST: Law of incorporation determines type corporation; ownership of shares is not important.

of

KINDS OF TAXPAYERS CO-OWNERSHIP Each co-owner is taxed individually on his distributive share. Before extra-judicial partition of estate: co-ownership After extra-judicial partition of estate: If co-owner allows his share to be held in common with his coheirs under a single management for profit, there is an unregistered partnership (Ona v. CIR, 1972). Transfer of property from father to children : After completing installments on 2 lots, father transferred rights to 4 children. After 1 year, they sold property at profit and paid tax on capital gain (Obillos v. CIR) Isolated transactions of unimproved properties : Petitioners bought 2 lots in 1965 and 3 lots in 1966. In 1968, sold 2 lots at profit, and in 1970, sold 3 lots at profit (Pascual v. CIR, 1988) PARTNERSHIP Lease of properties under common management: 3 sisters borrowed money from father, bought 24 properties and leased them for 15 years, and appointed brother to manage; corporation includes partnerships, no matter how created or organized (Evangelista v. CIR)

PARTNERSHIPS EXEMPT General professional partnership (GPP) Revenue comes from exercise of common profession only Partners shall report their share of partnership profits in their individual tax returns, whether distributed or not Joint venture undertaking construction activity or energyrelated activities with operating contract with the government TAXABLE Business partnerships, no matter how created or organized, other than those mentioned above

RESIDENT FOREIGN CORPS TAXABLE Ordinary branch of a foreign corporation in the Phil: 30% x net income from income sources within the Phil 7

PEZA- & SBMA-registered branch: exempt from 15% BPRT Regional operating headquarters (ROHQ): 10% x net income from sources within the Phil arising from sale of services Offshore banking unit (OBU) and foreign currency deposit unit (FCDU): 10% x interest income on forex loans to residents International carriers by air or water: GPB (outbound trip) x 2.5% Foreign contractor or sub-contractor engaged in petroleum operations in the Phil: 8% x gross income EXEMPT (not engaged in business in the Phil) Representative office Regional headquarters (RHQ)

JOINT VENTURE Insurance pool or clearing house An insurance pool or clearing house, composed of 41 non-life insurance corporations, whose role was limited to its principal function of allocating and distributing the risks arising from the original insurance among the signatories to the treaty or the members of the pool on their ability to absorb the risks ceded as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, and which did not insure or assure any risk in its own name, was treated as a partnership or association subject to tax as a corporation. Article 1767 of the Civil Code recognizes the creation of a contract of partnership when 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. Its requisites are mutual contribution to a common stock, and a joint interest in the profits (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).

JOINT VENTURE Agreement to manage and operate mine denominated as Power of Attorney Philex Mining Corporation entered into an agreement denominated as Power of Attorney with Baguio Gold Mining Corporation to manage and operate the latters mining claim. In managing the project, Philex made advances of cash and property. The mine suffered continuing losses resuling in Philexs withdrawal as manager and cessation of mine operations. A Compromise with Dation in Payment was executed by the parties, where Baguio Gold admitted its liabilities to Philex and agreed to pay the same. Philex wrote off in the books the remaining outstanding indebtedness of Baguio Gold by charging a portion of the amount to allowances and reserves that were set up in 1981 and a portion to the 1982 operations. The amount allocated to 1982

was deducted from the 1982 gross income as loss on settlement of receivables. The BIR disallowed the deduction for bad debt and assessed Philex deficiency taxes because the advances are Philexs investment in a partnership with Baguio Gold for the exploitation and development of the mine. The totality of the circumstances and the stipulations in the parties agreement indubitably lead to the conclusion that a partnership was formed between the parties. First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by Philex under the agreement. Second, the Tax Court correctly observed that it was unlikely for a business corporation to lend hundreds of millions to another corporation with neither security nor collateral or a specific deed evidencing the terms and conditions of such loans. The parties also did not provide for a specific maturity date for the advances to become due and demandable, and the manner of payment was unclear. Third, the strongest indication that Philex was a partner is the fact that it would receive 50% of the net profits as compensation under the agreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187, Apr. 16, 2008) .

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 (outbound) 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 Gross Phil Billings (GPB) INTERNATIONAL AIR CARRIER From Phil to foreign destination (outbound trip) Revenue from carriage of passengers, excess cargo and mail originating from the Phil in a continuous and uninterrupted flight is income from sources within the Phil, regardless of place of issue or payment of ticket 9

Transhipment of passenger in another country on another foreign airline: GPB tax applies only on aliquot portion of revenue on Philippine leg (Phil to foreign country) From foreign country to the Phil (inbound trip) This is treated as income from foreign sources; hence, exempt from Phil income tax INTERNATIONAL SHIPPING LINE Revenue for carriage of cargoes from Phil to final foreign destination is taxable. No similar rule on transhipment of passenger or cargo of international air carrier Revenue for carriage of cargoes from foreign country to Phil is treated as foreign-source income; hence, exempt from income tax

INCOME INCOME means cash or its equivalent coming to a person within a specified 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. In its broad sense, income means all wealth that flows into the taxpayer other than as mere return of capital. Return of capital (e.g., payment of liability) is exempt from income tax. 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. All requisites above are present.

TEST IN DETERMINING INCOME Severance or Realization test There must be separation from capital of something of exchangeable value (e.g., sale of asset). Stock dividend is not income. Claim of right doctrine CIR v. Javier, 199 SCRA 824 (Mellon Bank case where $1,000 was erroneously remitted as $1,000,000) Economic benefit test or equivalent of cash doctrine Stock option given to the employee: taxable compensation income is excess of FMV over exercise price Income from whatever source All income not expressly exempted from income, irrespective of voluntary or involuntary action of taxpayer in producing income, whether it comes from legal or illegal source

NATURE OF INCOME 10

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 (taxed under schedular tax system) Other sources of capital gain (taxed under global tax system) PASSIVE INVESTMENT INCOME Interest, dividend, and royalty income OTHER INCOME Prizes and winnings All other income, gain or profit not covered by the above classes

COMPENSATION INCOME Compensation income falling within the meaning of statutory minimum wage(SMW) under R.A. 9504, effective July 6, 2008, as implemented by Revenue Regulations No. 10-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax. Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the above exemption. However, an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and withholding tax.

COMMISSION INCOME Commissions paid for marketing services rendered abroad for a Philippine company is considered foreign-source income. The source of the income is the property, activity or service that produced the income. Place where services are rendered determines taxation. Since taxpayer is an alien, she is taxed only on income from sources within the Philippines. The fact that recipient of commission income is President and majority stockholder of the Philippine company does not alter the source of income. There are only two ways by which the President and other members of the Board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders agree to give it to them. If none of these conditions are present, commission income cannot be automatically attributed to petitioners position in the company (Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003) Documents faxed to Philippine company bearing instructions as to sizes, designs and fabrics to be used in finished products and 11

sample sales orders relayed to clients abroad are not enough to show services were performed abroad. Said documents must show that instructions or orders ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel, GR No. 153793, Aug 29, 2006).

ONSHORE AND OFFSHORE INCOME Construction and installation works were done in the Philippines by a Phil contractor; hence, income is from sources within the Philippines. However, some pieces of equipment and supplies for NDC project and ammonia storage tanks and refrigeration units were completely designed and engineered in Japan. All services for the design, fabrication, engineering and manufacture of materials and equipment under Japanese Yen portion were made and completed in Japan; hence, they are exempt from Phil income tax on the part of the foreign corporation. Onshore and offshore service income from turn-key contract on a project in the Phil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).

INTEREST INCOME TYPES OF INTEREST INCOME Subject to FWT: Interest income on bank deposits, deposit substitutes, trust and other similar arrangements 20% FWT peso deposit 7.5% FWT foreign currency deposit NOT subject to FWT: All other interest income or financing income Exempt income: Long-term deposit or investment by individuals Taxable income: Preferential tax rate Pre-termination 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 (20%) Regular tax rate All other cases (graduated rates of 5% to 32% for individuals and 30% for corporations)

DIVIDEND INCOME 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 12

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 is not truly dividend that must come from Retained Earnings of the corporation. Excess of fair market value over cost shall be taxed under the global tax system.

Intra-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 country of residence of foreign corporation will allow credit not only of the 15% tax actually paid but also the 15% tax deemed paid to the Phil govt 15% FWT; otherwise, 30%. If foreign country does not impose income tax on dividend paid by foreign corporation 15% FWT Dividends are prima facie the income of the owner of the stock as of the date of declaration of the dividend and are taxable to such owner. But where the record owner has sold the stock under an escrow agreement under which title is to be retained by him, the dividends received by such owner and applied in reduction of the purchase price are not taxable to him. While there is transfer of the shares of stock/securities to the Borrower pursuant to the Securities Borrowing and Lending (SBL) Agreement, the Lender retains certain rights accruing to the shares of stock/securities lent, such as the right to receive cash, stock dividends or interest which the Borrower is obliged to manufacture or reimburse to the Lender during the borrowing period. These cash, stock dividends or interest which the Borrower is required to manufacture or reimburse to the Lender are otherwise referred to as " Manufactured Dividends or Benefits". The Lender may likewise retain voting rights over the loaned shares of stock/securities while in the possession of the Borrower, if mutually agreed upon by the parties. Receipt of the Manufactured Dividends or Benefits shall not be a taxable income of the Lender since it just represents dividends/other benefits that the lender would have received had the share not been loaned pursuant to SBL agreement. However, the payment of such amount by the Borrower shall not be a tax deductible expense. On the other hand, the receipt of (actual) cash dividend from the issuing company by the Borrower or

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Buyer shall be subject to the provisions of existing laws (e.g., final withholding tax of 10% on gross dividend paid to a citizen). 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 NDC v. CIR, 1987: Interest on PNs issued re purchase of vessels is subject to tax; undertaking signed by Sec. of Finance has no inhibition to collect disputed tax. NDC is not one being taxed; it is only a withholding agent. 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 or other physical disability or for any cause beyond the control of employee Tax exemption applies to salary or cash equivalent of accumulated leave credits, such as terminal leave pays of retiring government employees which are considered not part of gross salary (CIR v. Castaneda, 1991). COA alleged that DBP is actual owner of the trust fund and its income because: DBP made the contribution to the Fund Trustees of the Fund are merely administrators DBP employees only have an inchoate right to the Fund DBP responded that the Trustees received and collected income and profit from the Fund and they maintained separate books for that purpose. The principal and income will not revert to DBP, even if trust is subsequently modified or terminated. SC ruled that the beneficiaries of the Fund are the DBP officials and employees who will retire. It is not always necessary that the beneficiaries should be named or even be in existence at the time the trust is created in his favor, provided they are sufficiently certain or identifiable. The Salary Loan Program did not terminate the trust to the Funds trustee. That the DBP Board of Directors confirms the approval of the SLP by the Funds trustees does not make the fund property of DBP (DBP v. COA, 2004). Miscellaneous items Income of foreign government, or international or regional financial institutions owned by foreign governments Income of government or its political subdivisions from any public utility or exercise of governmental function Atlas Mining Corp borrowed from Mitsubishi Metal Corp an amount to be used for the improvement of the formers copper production and the latter agreed to purchase all the copper concentrates produced from the improved facilities for 15 years. 14

Mitsubishi turned around and borrowed equivalent amount in Yen from Export-Import Bank of Japan, financial institution owned by the Japanese government, and a consortium of Japanese banks. SC ruled that when Mitsubishi secured funds, it was on its own independent capacity and not as conduit of consortium of Japanese banks or Eximbank. The sole creditor of Atlas is Mitsubishi (not Eximbank) as there was nowhere in the contract could it be inferred that Mitsubishi acted for and in behalf of Eximbank (CIR v. Mitsubishi Metal Corp, 1990). Miscellaneous items Prizes and awards Prizes amounting to P10,000 or less is subject to global tax system; more than P10,000 20% FWT In recognition of religious, charitable, artistic, literary achievement, etc., he did not enter contest and is not required to render substantial future services Granted to athletes in local and international sports competitions, sanctioned by their national sports associations 13th month pay and other benefits (up to P30,000) Gains from sale of long-term (more than 5 years) bonds, debentures and other certificates of indebtedness (received by ANY person) Gains from redemption of shares in mutual fund (sale of share by investor is made thru surrender to the mutual fund company)

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; Expenses partly for business purposes are apportioned (Jamir v. CIR); Promotion expenses are for combined business and medical trip (Zamora v. CIR) 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 deductible. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR. An expense is ordinary when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances.

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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 create or maintain some form of goodwill for the taxpayers trade or business or for the industry or 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). 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) . D. Optional Standard Deduction Privilege is available only to citizens or resident aliens as well as 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); 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 of an individual. 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

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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.

ACCOUNTING METHODS Cash method Year of receipt or payment determines when income or expense shall be reported Accrual method All events test; amounts received in advance (unearned revenues) 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 (down payment and all monthly installments in the YEAR OF SALE) do not exceed 25% of GSP Deferred payment sale, not on the installment plan (is taxed like a cash sale) Initial payments exceed 25% of GSP Percentage of completion (for long-term construction projects) 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; and Employer 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, or (b) mixed incomes, or the correct WT was not deducted from compensation income by the employer, etc. 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 Q1 Return Q2 Return Q3 Return Annual Return Due Date for Filing Return April 15 of same year August 15 of same year November 15 of same year April 15 of the following year

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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 Q2 Return Q3 Return Annual Return calendar month following on fiscal year). May 31 of same year August 31 of same year November 30 of same year April 15 of the following year (if on year), or 15th day of the fourth the close of the fiscal year (if

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 the preceding quarter(s) are credited against the consolidated income tax due.

REFUND A taxpayer must do two things to be able to successfully make a claim for the tax refund of withholding tax on compensation income: (a) declare the income payments it received as part of its gross income and (b) establish the fact of withholding. SC denied the refund claim for the following reasons: The amounts of total taxes withheld for each redundant employees cannot be verified against the Summary of Gross Compensation and Taxes Withheld for 1995 due to the fact that this summary enumerates the amounts of income taxes withheld on per district/area basis. The SGV certification cannot be appreciated in PLDTs favor as the courts cannot verify such claim. Besides, the documents from which SGV traced the Alpha List to the Monthly Remittance Returns of Income Taxes have not been presented to the court, and this is fatal to PLDT. The cash salary vouchers for the rank and file employees do not have acknowledgment receipts (PLDT v. CIR, GR 157264, Jan 31, 2008). Requisites of claim for refund are: Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes were withheld were included in the return of the recipient; and Fact of withholding is established by a copy of statement (BIR Form 1743.1) duly issued by payor (withholding agent) to payee, showing amount paid and amount of tax withheld (RR 6-85). CTA found above requisites were satisfied. Findings of facts of CTA are entitled to great weight and will not be disturbed on appeal, unless it is shown that the lower court committed gross error in the appreciation of facts.

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Failure of respondent to indicate its option in its annual ITR to avail itself of either tax refund or tax credit is not fatal to its claim for refund. Sec. 76, NIRC offers two options: refund or tax credit. The options are alternative and the choice of one precludes the other. However, in Philam Asset Mgt v. CIR, this Court ruled that failure to indicate a choice will not bar a valid request for refund, should this option be chosen by the taxpayer later on. The requirement is only for the purpose of easing tax administration, particularly the selfassessment and collection aspects. Failure of respondent to present in evidence the 1998 ITR is not fatal to its claim for refund. CTA denied claim for 1997 tax credit of PERF because it failed to submit its 1998 ITR. PERF attached its 1998 ITR to its motion for reconsideration. The ITR is part of the records of the case and clearly showed that income taxes were not claimed as tax credit in 1998. Technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This provision should be taken in the light of RA 1125; proceedings therein shall not be governed strictly by technical rules of evidence. No one shall unjustly enrich oneself at the expense of another. This applies not only to individuals but to the State as well. In the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. The harsh power of taxation must be tempered with evenhandedness (CIR v. PERF Realty Corp., GR 163345, July 4, 2008).

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. Transfer of ownership over the property of the decedent is by operation of law. 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. The estate shall be appraised at its fair market value at the time of death. Real property: fair market value/zonal 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

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Estate tax return shall be filed and the tax due must be paid within six (6) months from date of death 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: Non-resident alien Include in his gross estate all real and tangible personal 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, except for certain intangible properties mentioned in Sec. 104, NIRC, which have situs in the Philippines. INTANGIBLE PROPERTIES THAT HAVE SITUS IN THE PHILIPPINES (Sec. 104, NIRC): Franchise which is exercised in the Philippines Shares, obligations or bonds issued by any corporation organized in the Philippines 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) Shares or rights in partnership, business or industry established in the Philippines 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 shall not form part of the estate of the deceased spouse Gross estate: Conjugal Exclusive Total Real property Personal property Less: Deductions: Funeral expenses (5% x gross estate, not to exceed P200,000) Claims against the estate (debt instrument was notarized & statement of disposition of loan proceeds, if death occurred within 3 years) Unpaid taxes and mortgages Medical expenses (incurred within 1 year prior to death, not to exceed P500,000) Family home (equal to FMV of decedents family home) not to exceed P1 Million Standard deduction (P1 Million) Properties previously taxed (vanishing deduction) Transfers for public use (to government or political subdivision) 20

Amount received by heirs under RA 4917, provided such amount is part of gross estate Share of the surviving spouse (50% of net conjugal estate) Net Taxable Estate Estate tax due (First P200,000 is exempt; 5% from P200,001; and 20% on over P10 M) 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 FORMULA FOR DETERMINING AMOUNT 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 (within 1 year, 100%; 2 years, 80%; 3 years, 60%; 4 years, 40%; and 5 years, 20%) = 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 Donation of property must be accepted by the donee in the same or another document. Sale or exchange of property for less than adequate and full consideration is subject to donors tax, except where the property is subject to 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. 21

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 or sister (whether by whole or half-blood), spouse, ancestor, and lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of relationship. Donors tax return shall be filed and the donors tax paid within 30 days from date of donation. Each donor-spouse must file a return. Donor Individual Citizen and resident alien Taxable on all properties, regardless of location Non-resident alien Taxable on property located in the Phil Corporation Domestic corporation and resident foreign corporation Taxable on all properties, regardless of location Non-resident foreign corporation Taxable on property located in the Phil Donation of conjugal property to a child Made by both spouses TWO donations Made by one spouse only (Tang Ho v. Board of Tax Appeals [now CTA]) ONE donation Cumulative computation of donors tax is required for the second and succeeding donations by the same donor to members of the family during the calendar year, but no cumulative computation of donors tax is required for donations to strangers because it is subject to a flat rate of 30%. Exempt donations To Phil government 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 To Intramuros Administration Donation propter nuptias P10,000, provided donation is made within one year before or after the wedding of child

BUSINESS TAXES VAT (Title IV, NIRC) Taxable transactions Sale or lease of goods or properties Sale of services 22

Importation of goods

Formula Output Tax Less: Input Tax VAT Payable/(Excess Input Tax) NON-VAT/EXEMPT FROM VAT Transaction is subject to Other Percentage Tax (Title V, NIRC); VAT will no longer be imposed. Tax is imposed on Gross Receipts or Gross Income VAT is imposed in addition to Excise Tax (Title VI, NIRC) Some transactions are not subject to any kind of business tax -VAT or OPT (e.g., sale of agri food products in its original state; sale of books; etc)

VALUE ADDED TAX CHARACTERISTICS OF VAT Tax on value added of taxpayer Transparent form of sales tax VAT must be separately indicated in the VAT invoice or receipt Broad-based tax on consumption of goods, properties and services in the Phil Indirect tax Tax is collected thru the tax credit method Output tax on sales less input tax on purchases No cascading of tax in VAT system Tax-inclusive method is adopted by the Phil VAT is deemed included in total invoice amount in VAT invoice or receipt Destination principle tax imports, zero-rate exports 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 Whether done in the course of his trade or business or for personal consumption SPECIAL TYPES OF PERSONS Husband and wife are separate taxpayers Joint venture undertaking construction or engaged in energy-related projects is subject to VAT, although exempt from income tax Government 23

Governmental function: Exempt from VAT Proprietary function: Subject to VAT Non-stock, non-profit association Association dues and special assessments; guest fees and fees for use of facilities exempt from VAT Income from operating restaurant, boutique or shop or for leasing facilities -- taxable

Seller of real properties is subject to VAT Seller executes a document of sale (DAS or CTS) Real property is located in the Philippines 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. 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: Export sales of goods are zero-rated (0% VAT) Import of goods into the Phil is taxable at 12% VAT Tax base for sale of goods or property 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. 24

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) are automatically zero-rated. Ecozones and freeport zones are deemed foreign territories by fiction of law (CIR v. Seagate Technology (2005); CIR v. Toshiba Information Equipment (2005) For as long as the goods remain within the zone, consumed or destroyed there, they will be duty-free and tax-free (Coconut Oil Refiners Asso v. Torres (2005) Effectively zero-rated sales (sales to ADB, embassies, etc) need approval from BIR before sale; otherwise, sale is exempt. Sales of gold to BSP; but sale of silver or copper is taxable at 12% VAT Foreign currency denominated sales Sales of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations 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 The words ZERO-RATED SALE must be printed on invoice or receipt EXEMPT SALE Exemption removes the VAT at the exempt stage Exempt taxpayer cannot reclaim VAT passed on to it by VATregistered sellers; VAT becomes part of the cost of asset or expense Exempt sales are not taxable sales for VAT purposes The words EXEMPT SALE must be printed on invoice or receipt 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. 25

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 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). 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 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). NOTE: It appears that the SC strictly interprets the provision of Sec. 112 of the Tax Code, even with respect to sale of services. In other words, where the law does not qualify, it is not for the court nor the BIR to so qualify.

DUTIES OF BIR DUTIES OF BIR To assess and collect taxes To enforce forfeitures, fines and penalties To execute judgments in all cases decided in its favor by the tax court and ordinary courts To administer supervisory and police powers conferred upon it by law POWERS OF CIR To interpret tax laws and regulations To decide disputed assessments and refunds/credits To examine books and records of taxpayers and to assess correct taxes. When a report required by law is not forthcoming within the time fixed by law or rules, or there is reason to believe that such report is false, incomplete or erroneous, CIR shall assess proper tax based on best evidence obtainable

ASSESSMENT CYCLE 26

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 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.

ADMINISTRATIVE REMEDIES TAX LIEN COMPROMISE AND ABATEMENT DISTRAINT AND/OR LEVY SALE FORFEITURE PENALTIES AND FINES Surcharge, interest, and compromise penalty TAX CLEARANCE No distribution of assets before payment of tax liabilities Unpaid subscription receivable of stockholders COMPROMISE GROUNDS FOR COMPROMISE Reasonable doubt of assessment 27

Minimum is 40% of basic tax assessed Financial position of taxpayer demonstrates clear inability to pay assessed tax Minimum is 10% of basic tax assessed Taxpayer waives in writing his bank secrecy privilege under RA 1405 Where the percentage or amount offered for compromise is lower than the minimum, it shall be approved by the National Evaluation Board ALL CRIMINAL VIOLATIONS MAY BE COMPROMISED, EXCEPT THOSE ALREADY FILED IN COURT OR INVOLVING FRAUD (Sec. 204(A), NIRC)

ABATEMENT ABATEMENT MEANS ENTIRE TAX LIABILITY IS CANCELLED Tax is unjustly or excessively assessed Administrative and collection costs do not justify collection of the amount due POWER TO COMPROMISE OR ABATE SHALL NOT BE DELEGATED BY CIR, EXCEPT: Regional assessments P500T or less Minor criminal violations (Sec. 204(B)& Sec. 7, NIRC)

DISTRAINT, LEVY OR GARNISHMENT DISTRAINT PERSONAL PROPERTY Actual distraint: Delinquency sets in Constructive distraint Preventive remedy to forestall possible dissipation of assets when delinquency takes place Tax liability has preferential lien over constructive distraint to answer for judgment lien in favor of employees of company for unpaid wages LEVY REAL PROPERTY GARNISHMENT BANK DEPOSITS

JUDICIAL REMEDIES Judicial actions Civil action Criminal action Case to be filed in the name of the Govern-ment of the Philippines (Sec. 220, NIRC) No civil or criminal action may be filed without the approval of the Commissioner of Internal Revenue Civil action is resorted to when tax liability becomes collectible

CIVIL ACTION COLLECTIBILITY OF DELINQUENT TAX Final assessment is not protested within 30 days from date of receipt (Marcos II v. CIR, 273 SCRA 47) , or timely protested but BIR conditions for request for reinvestigation 28

are not complied with by taxpayer (Dayrit v. Cruz; Republic v. Ledesma) Self-assessed tax shown in the return is not paid within the date prescribed by law (e.g., 2nd installment) Protest against assessment is denied by BIR (Basa v. Republic), or 180-day period lapses and taxpayer failed to appeal to CTA within 30 days from date of receipt of denial of protest or from lapse of 180-day period (Lascona Land Co. v. CIR)

The taxpayers failure to appeal to the CTA in due time made the assessment final and executory (Republic v. Mla Port Service, L18208, Nov 27, 1964). And when the action for collection of the tax was instituted, the taxpayer was barred from disputing the correctness of the assessment or invoking any defense that would reopen the question of its tax liability on the merit (Republic v. Albert, 3 SCRA 717) . Otherwise, the period of 30 days for appeal to CTA would make little sense (Republic v. Lopez, 7 SCRA 566). WHO APPROVES? CIR, Regional Director (Arches v. Bellosillo) , or Chief, Legal Division (Republic v. Hizon) Solicitor General, or BIR special attorneys outside Metro Manila, affirmed by SolGen (Republic v. Domecillo) WHERE FILED? RTC (less than P1 M basic tax), or CTA (P1 M basic tax or more) HOW CIVIL ACTION BEGUN? File complaint with RTC (for amount less than P1 M); and File Answer in CTA to taxpayers petition for review and pray for payment of tax; hence, even if no RTC case was filed, right to collect has not prescribed (Mambulao Lumber v. Republic)

CRIMINAL ACTION Form and Mode of Proceeding in Actions Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the BIR shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the BIR. 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 (Sec. 220, NIRC). According to the OSG, [t]he primary responsibility to conduct civil and criminal actions lies with the legal officers of the BIR such that it is no longer necessary for BIR legal officers to be deputized by the OSG or the Secretary of Justice before they can commence any action under the 1997 Tax Code. The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which shall be conducted by legal officers of the BIR is not in dispute. An appeal from such court, is not a matter 29

of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings (Resolution in CIR vs. La Suerte Cigar & Cigarette Factory, G.R. No. 144942, July 4, 2002). FILING OF CRIMINAL ACTION DURING PENDENCY OF PROTEST Assessment is not necessary to criminal prosecution for willful attempt to evade tax. Crime is complete when violator has knowingly and willfully filed fraudulent return with intent to evade tax What is involved here is not collection of taxes where assessment may be reviewed by RTC, but criminal prosecution for violation of Tax Code There is no precise computation and assessment of tax before there can be criminal prosecution There can be no civil action to enforce collection before assessment procedures have been followed [Ungab v. Cusi (1980)] CRIMINAL CHARGE WITHOUT ASSESSMENT Assessment is not necessary before a criminal charge (for non-filing of return) is filed Criminal charge need only be proved by prima facie showing of failure to file required return and such fact need not be proved by an assessment Issuance of assessment is different from filing of complaint for criminal prosecution supported by an affidavit executed by the revenue officers showing computation of deficiency taxes [CIR v. Pascor Realty & Dev Corp (1999)] For criminal prosecution to proceed before assessment, prima facie showing of willful attempt to evade tax must exist [CIR v. Fortune Tobacco (1997)] Fortune Tobaccos situation is factually apart from Ungab Registered wholesale price approved by BIR is presumed the actual selling price Not fraudulent, unless BIR has final determination of what is the correct tax Preliminary investigation may be enjoined under exceptional circumstances

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

COUNTING OF PERIOD TAXABLE YEAR 30

Normal year (365 days) Leap year (366 days) 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. EO 292 (Administrative Code of 1987), being the more recent law than Civil Code, governs the computation of legal period. Accordingly, 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).

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).

PROTEST CIR v. Reyes May 19, 1998 - the heirs of Tancinco received FAN and DL for deficiency estate tax of P14.91 M, inclusive of penalties. June 1, 1998 - protest was filed on ground that decedent had sold property in 1990. CIR issued collection letter, followed by Final Notice Before Seizure dated Dec 4, 1998. WDL was served upon estate. Heirs protested WDL and offered compromise by paying 50% of basic estate tax. CIR denied offer and demanded P18.03 M; otherwise, property would be sold. April 11, 2000 - Reyes proposed to pay 100% of basic tax. As tax was not paid on April 15, 2000, BIR notified Reyes on June 6, 2000 that property would be sold at public auction in August, 2000. June 13, 2000 - Reyes filed protest with BIR Appellate Div and offered to pay estate tax without penalties. Without acting on

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protest and offer, CIR instructed CED to proceed with auction sale. Reyes filed petition for review with CTA and BIR filed Motion to Dismiss on ground that CTA has no jurisdiction; assessment was already final and petition was filed out of time. CTA denied motion. In meantime, BIR issued RR 6-2000 and RMO 42-2000, offering taxpayers with disputed assessments to compromise cases. Nov 25, 2000 - Reyes filed application for compromise and paid P1.06 M. While waiting for approval by BIR NEB, Reyes filed with CTA a motion to declare application as perfected compromise, which CTA denied since NEB approval is needed. Reyes filed for judgment on the pleadings, which was granted. CTA denied the petition. Reyes filed appeal to CA, which granted petition, saying FAN and DL should have stated the facts and law on which assessment was based. Since FAN and DL did not state facts and law, assessment was void and proceedings emanating from them were also void, and any order emanating from them could never attain finality. BIR appealed to SC. SC ruled that Sec. 228 of Tax Code is clear and mandatory taxpayer shall be informed in writing of the law and facts on which assessment is based; otherwise, it is void. Reyes was only notified of the findings by the CIR, who merely relied on provisions of former Sec. 229 prior to its amendment by RA 8424. General rule is that laws apply prospectively. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule. Since Sec. 228 of Tax Code, as amended by RA 8424, does not state that pending actions are excepted from the operation of Sec. 228, or that applying it to pending proceedings would impair vested rights, said law may be applied retroactively (CIR vs. Reyes, and Reyes vs. CIR, GR Nos. 159694 and 163581, Jan. 27, 2006) 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. Nov 16, 1995 -- CTA dismissed petition for lack of jurisdiction; assessments had become final and unappealable. May 27, 1996, CTA denied reconsideration.

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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. 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. 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 (Union Shipping v. CIR) INDIRECT DENIAL Final Notice Before Seizure (preparatory to the issuance of WDL) constitutes as a decision on the 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 (WDL) 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

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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 ADMINISTRATIVE AUTHORITIES PRIOR OPPORTUNITY TO DECIDE CONTROVERSIES WITHIN THEIR COMPETENCE (Aguinaldo Industries Corp. v. CIR) SINCE COMMISSIONER HAS DELEGATED THE POWER TO ISSUE ASSESSMENT NOTICES, REGARDLESS OF AMOUNT, TO REGIONAL DIRECTORS, DENIAL OF PROTEST BY REGIONAL DIRECTOR MAY BE APPEALED TO THE CTA 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

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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.

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 protest) 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 ANNUAL 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) Request for reconsideration or clarification on the assessment made by the taxpayer does not suspend the running of the statute of limitations to collect assessed tax. 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;

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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) 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).

LOCAL BUSINESS TAXES The right of local government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of local governments and the object of the LGC that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals (FELS Energy v. Prov of Batangas). In interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations. Such policy is also echoed in Sec 5(a) of the LGC, which states that any provision on a power of a local government unit shall be liberally interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower LGU. However, this power does not extend to taxing petroleum products and BOI-registered activities (Petron v. Mayor of Malabon City, 2009). FUNDAMENTAL PRINCIPLES Taxation shall be uniform in each local government unit Taxes, fees, and charges shall be equitable and based as far as practicable on the taxpayers ability to pay; levied and collected only for public purposes; not be unjust, excessive, oppressive or confiscatory; not be contrary to law, public policy and national economic policy, nor in restraint of trade The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person The revenue collected under the Code shall inure solely to the benefit of, and subject to disposition by, the local government unit levying the tax, fee, charge or other imposition, unless otherwise specifically provided for in the Code; and

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Each LGU shall, as far as practicable, evolve a progressive system of taxation (Sec. 130, LGC). COMMON LIMITATIONS ON LGUs Unless otherwise provided, the exercise of the taxing powers of LGUs shall not extend to the levy of the following: Income tax, except when levied on banks and other financial institutions Documentary stamp tax Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided in the Code Customs duties, registration fees of vessels, etc. Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise COMMON LIMITATIONS ON LGUs Taxes, fees and charges on agricultural and aquatic products when sold by the marginal farmers or fishermen Taxes on business enterprises certified to by the BOI as pioneer or non-pioneer for a period of 6 and 4 years, respectively, from the date of such registration Excise taxes on articles enumerated under NIRC and taxes, fees or charges on petroleum products Percentage tax or VAT on sales or exchanges of goods or services or similar transactions thereon, except as otherwise provided herein Taxes on gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight for hire and common carriers by air, land or water, except as provided for in this Code Taxes on premiums paid for reinsurance or retrocession COMMON LIMITATIONS ON LGUs Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles Taxes, fees or charges on Philippine products actually exported, except as provided for in this Code Taxes, fees or charges on Countryside Business and Barangay Enterprises and on cooperatives duly organized and registered under RA 6810 and 6938 Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local governments (Sec. 133, LGC). NIRC levies an excise tax on all quarry resources, regardless of origin, whether extracted from public or private land. However, Sec. 138, LGC expressly authorizes the provinces to impose excise tax on quarry resources extracted from public lands (Prov of Bulacan v. CA, 299 SCRA 442 (1998). The 6-year tax holiday provided under Sec. 133(g), LGC should commence on the date of its registration with BOI, not from the commencement of its actual commercial operations as certified to by the BOI (supra).

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Grantee of pipeline concession is a common carrier under the Civil Code and is exempt from local business tax under Sec. 133(j), LGC (First Phil Industrial Corp v CA, 300 SCRA 661 (1998) . A common carrier is one who holds himself out to the public as engaged in the business of transportation of persons or property from place to place, for hire or compensation, offering services to all persons who may choose to employ and remunerate him. The true test is whether it is the legal duty to carry for all alike (US v Quinajon, 31 Phil 187; RA 386). Sec. 133(e), RA 7160 prohibits the imposition, in the guise of wharfage, of fees as well as all other taxes or charges in any form whatsoever on goods or merchandise. It is irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing thru the territorial jurisdiction of the municipality is clearly prohibited by Sec. 133(e). Under Sec. 131(y), wharfage is defined as a fee assessed against the cargo of vessel based on quantity or weight. It is apparent that a wharfage does not lose its basic character by being labeled as a service fee for police surveillance on all goods (Palma Dev Corp v. Mun of Malangas, Zambo del Sur, 413 SCRA 572 (2003).

REAL PROPERTY TAX Chong Hua Hospital Medical Arts Center (CHHMAC) is an integral part of CHH. It is undisputed that doctors and medical specialists holding clinics in CHHMAC are those duly accredited by CHH. This fact alone takes away CHHMAC from being categorized as commercial since tertiary hospital like CHH is required by law to have a pool of physicians. The fact that doctors are holding office in a separate building (100 meters away) does not take away the essence and nature of their services vis--vis the over-all operation of the hospital and the benefits to the hospitals patients. Their transfer to a more spacious and convenient place and location for the benefit of the hospitals patients does not remove them from being an integral part of the operation of the hospital. It would have been different if CHHMAC was also open for nonaccredited physicians. Although CHHMAC facility is not indispensable, it is definitely incidental to and reasonably necessary for the operation of CHH. The operation of a hospital is not only for confinement and surgical operations where hospital beds and operating theaters are required. The usual course is that patients have to be diagnosed, and then treatment and follow-up consultations follow or are required. Charging rentals for the offices used by its accredited physicians cannot be equated to a commercial venture. First, CHHMAC is only for its consultants or accredited doctors and medical specialists. Second, charging of rentals is a practical necessity to recoup investment cost of building, to cover rentals for the lot, and to maintain the building and its facilities. Third, it pays proper taxes for its rental income, and fourth, the net income, if any, does not inure to any private or individual person as it will be used for other charitable projects.

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Secs 215 and 216, LGC provides hospital shall be treated as special property subject to 10% special assessment level and not as commercial property subject to 35% level (City Assessor of Cebu v. Association of Benevola de Cebu, GR 152904, June 8, 2007). REAL PROPERTY Power barges, which are floating and movable, are real property subject to tax. Art 415(a) of NCC provides that docks and structures which though floating are intended by their nature and object to remain at a fixed place on a river, lake or coast are considered immovable property. The mere understanding with NPC under the Agreement that it shall be responsible for the payment of real property taxes and assessments does not justify its exception. The privilege granted to NPC cannot be extended to FELS. The covenant does not bind third persons not privy thereto (FELS Energy v. Prov of Batangas, 2007). REAL PROPERTY EXEMPT FROM TAX Real property owned by the Republic of the Phil or any of its political subadivision, except when the beneficial use has been granted, for consideration or otherwise, to a taxable person Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes All machineries and equipment that are actually, directly and exclusively used by local water districts and GOCC engaged in the supply and distribution of water and/or generation and transmission of electric power All real property owned by duly registered cooperatives under RA 6938; and Machinery and equipment used for pollution control and environmental protection (Sec. 234, LGC) Except as provided herein, any exemption from payment of RPT previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all GOCCs, are hereby withdrawn upon the effectivity of this Code (Jan 1, 1992). TESTS OF EXEMPTION Ownership exemption (government and cooperatives) Character exemption (charitable institutions, churches and non-profit or religious cemeteries) Usage exemption (religious, charitable or educational purposes; local water districts and GOCCs engaged in water and electric power; pollution control and environmental protection) Under the BOT Agreement, can the GOCC (NPC) be deemed the actual, direct and exclusive user of machinery and equipment for tax exemption? If not, can it pass on its tax-exempt status to its BOT partner, a private corporation, thru the BOT agreement? GOCC is exempt from RPT when it owns and/or actually uses the machinery and equipment for generation and transmission of electric power. In this case, it is BPPC, a non-government entity, which owns, maintains and operates the machinery and 39

equipment. Using these, it generates electricity, which it then sells to NPC. NPC is not the registered owner of machinery and equipment. This is confirmed by BOT Agreement. Thus, Sec. 234 does not apply. Liability for payment of RPT is determined by law and not by agreement of the parties. It must be expressly granted by law. Tax exemption is also not transferable. And it is strictly construed. SC cited FELS Energy v. Prov of Batangas, where it was provided that NPC shall pay all of FELSreal estate taxes and assessments. Exemption of NPC was not recognized since it was not the actual, direct and exclusive user of the barge. That BOT Agreement is merely a financing scheme, where BPPC is the financier and NPC is the actual user of properties is belied by the BOT Agreement itself. The proponent will construct the project at its own cost and subsequently operates and manages it. At the end of 15 years, the proponent transfers the ownership of the facility to NPC. Thus, BPPC has complete ownership both legal and beneficial of the project (NPC v. CBAA, LBAA-La Union, GR 171470, Jan 30, 2009). Records of the Constitutional Commission reveal that what is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. What is meant by actual, direct and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. In sum, SC ruled the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from taxes (Lung Center of the Phil v. QC Assessor, GR 144104, June 29, 2004). FUNDAMENTAL PRINCIPLES The appraisal, assessment, levy and collection of real property for taxation purposes shall be guided by the following: Real property shall be appraised at its current and fair market value Real property shall be classified for assessment purposes on the basis of its actual use Real property shall be assessed on the basis of a uniform classification within each local political subdivision The appraisal, assessment and levy of real property and the collection of the real property tax shall not be let to any private person The appraisal and assessment of real property shall be equitable (Sec. 198, LGC) Under Sec 226 of RA 7160, the last action of the local assessor on a particular assessment shall be the notice of assessment; it is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor. To allow this procedure would invite corruption in the system of 40

appraisal and assessment. It conveniently courts a graft-prone situation where values of real property may be initially set unreasonably high, and then subsequently reduced upon the request of the property owner (Callanta v Office of Ombudsman, Jan 30, 1998, cited in FELS Energy v. Prov of Batangas, 2007). Atty. Vic C. Mamalateo Mobile: 0918-9037436 Email: vic.mamalateo@vcmlaw.com.ph; vicmamalateo@yahoo.com

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