Taxation Law Reviewer

Taxation Law Review
TAXATION LAW REVIEW NOTES

I. BASIC PRINCIPLES OF TAXATION
A. TAXATION AS AN INHERENT POWER OF THE STATE
Power to tax is inherent in sovereignty
the moment the State exists, the power to tax automatically exists
enforceable even without any delegation by the Constitution or legislation from Congress
LGUs have no inherent power to tax; but expressly granted by the Constitution or legislation
Lifeblood heory !C"# v $lgue%
ax is necessary to meet the expenses of government without which the latter cannot
operate
&very person must contribute his share in the running of the government
B. PHASES AND SCOPE OF TAXATION
Levy ' where Congress enacts a statute to impose taxes
Collection
Sub(ect )atter ' refers to persons, things, transaction, privilege, etc*
C. INHERENT LIMITATIONS
+* axation should be for public use
a* Public welfare should be the penultimate ob(ective*
b* axation may be used to implement the State,s police power*
-* axation is inherently legislative*
.* he Government is self/explanatory*
a* LGUs are expressly prohibited from levying tax from the 0G
b* 0g may tax G1CCs, agencies and instrumentalities
2* erritoriality
a* axing authority cannot impose taxes on sub(ects beyond its territorial (urisdiction*
b* "t may determine the tax situs*
D. CONSTITUTIONAL LIMITATIONS
Constitution is not the source of the taxing power* "t simply defines and delimits the power*
+* 3ue Process Clause !Section +, $rt* """%
&nforced contribution from the people cannot be made without a law authori4ing the same
Substantive 3ue Process
#e5uires that the tax statute must be within the constitutional authority of Congress and that
it must be fair, (ust and reasonable*
Procedural 3ue Process
#e5uires notice and hearing, or at least an opportunity to be heard*
Prepared by: Michael Gines Munsayac
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-* &5ual Protection Clause !Section +, $rt* """%
)eans that taxpayers of the same footing should be treated ali6e, both as to privileges
conferred as well as on obligations imposed*
7iolations !7illegas v 8siu Chiong sai Poi%
9hen classification is made where there should be none
9hen no classification is called for
7alid Classification !Pp v Cayat%
here must be substantial distinctions that ma6e real differences*
hese must be germane and relevant to the purpose of law*
he distinction must not only be applicable to present but also to future conditions*
he distinction must apply to persons, things and transactions belonging to the same class*
.* :reedom of #eligion !Section ;, $rt* """%
0on &stablishment Clause
Covers the prohibition to establish a national or official religion since in that case, there will
be an appropriation from taxes paid by the people*
:ree &xercise Clause
his is the basis of tax/exemption granted to religious institutions*
2* 0on/"mpairment of Contracts !Section +<, $rt* """%
$pplications
People,s right and freedom to contract
Sanctity of contracts
3oes not apply to franchises
0ot applicable to police power and eminent domain
;* 0on/imprisonment for 0on/Payment of ax !Section -<, $rt* """%
Poll tax ' tax imposed on persons without any 5ualification !e*g* CC%; payment is not
mandatory !merely permissive%
E. DOCTRINE OF EQUITABLE RECOUPMENT VS. DOCTRINE OF SET-OFF
3octrine of &5uitable #ecoupment
#efers to a case where the taxpayer has a claim for refund but he was not able to file a
written claim due to the lapse of the prescription period within which to ma6e a refund*
he taxpayer is allowed to credit such refund to his existing tax liability*
$llowed only in common law countries, not in the Philippines
3octrine of Set/off or Compensation
$pplies when the government and taxpayer are mutually debtors and creditors of each other*
$lso not allowed in the Philippines since taxes are not in the nature of contracts between
parties*
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axes grow out of duty to, and are the positive acts of the government to the ma6ing and
enforcing of which, the personal consent of the individual taxpayer is not re5uired* !#epublic
v* )abulao%
F. DOUBLE TAXATION
3ouble axation
he imposition of the same taxing body of two taxes on what is essentially the same thing
he imposition of two taxes on the same property during the same period and for the same
taxing purpose
$llowed in the Philippines because there is no prohibition in the Constitution or any statute
9hen not allowed= &lements>
he taxes are levied by the same taxing authority
Same sub(ect matter
Same taxing period
Same purpose
"nternational ?uridical 3ouble axation
he imposition of comparable taxes in - or more States on the same taxpayer in respect of
the same sub(ect matter and for identical periods*
Can be eliminated by - contracting States*
Should be eliminated in order to encourage foreign investors to invest in the Philippines
)ost :avored 0ation Clause
Grants the contracting party terms and condition not less favorable than those granted to the
@most favoredA among the other contracting parties*
"ntended to establish the principle of e5uality of international treatment by providing the
citi4ens of the contracting parties privileges accorded by either party to those of the ):0
)ethods to minimi4e burden
By granting tax exemptions
By giving tax credits
By reducing the rate of tax
G. EXEMPTION FROM REAL ESTATE TAX
0ote> he properties must be $CU$LLC, 3"#&CLC and &DCLUS"7&LC used for religious,
educational and charitable purposes to be exempt from taxation* !Section -EF.G, $rt* 7"%*
II. INCOME TAXATION (RA 8242 Tax R!"#$ A%& "! '(()*
A. INDIVIDUALS
Classification of taxpayers
+* #esident Citi4en !#C%
a* Citi4en of the Philippines residing therein
b* Citi4en residing outside the Philippines without the intention of residing thereat
permanently
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c* Citi4en who did not manifest to the total satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein perm*
-* 0on/#esident Citi4en !0#C%
a* Citi4en who established to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein*
b* Citi4en who leaves the Philippines during the taxable year to reside abroad as
immigrants*
.* 1verseas Contract 9or6er !1C9%
a* Covers only those individuals with a wor6ing contract abroad
b* 0s are not considered 1C9s but are usually classified as #Cs
2* #esident $lien !#$%
a* $n individual residing in the Philippines who is not a citi4en thereof
b* "ntention to reside in the Philippines is not necessary
;* 0on/resident $lien &ngaged in rade or Business in the Philippines !0#$ &B%
a* &ngaged in retail trade or business
b* &ngaged in the exercise of profession therein
c* Staying for an aggregate period of more than +E< days for the calendar year
H* 0on/resident $lien 0ot &ngaged in rade of Business in the Phils* !0#$ 0&B%
a* 0#$s not engaged in business but deriving income in the country
I* $liens &mployed in )0Cs, 1BUs, J Petroleum Service Contractors
B. CORPORATIONS
3efinition> 0"#C defines a corporation as including partnerships, no matter how created or
organi4ed, (oint stoc6 companies, (oint accounts, associations, insurance companies but does not
include general professional partnerships and ?7 formed for the purpose of underta6ing construction
pro(ects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
agreement under a service contract with the government*
Classification of Corporations
+* 3omestic Corporations
-* #esident :oreign Corporations &B
.* 0on/#esident :oreign Corporations 0&B
III. +INDS OF INCOME TAXES
0et "ncome ax; Gross "ncome ax; :inal "ncome ax; )C", "$&; 1ptional Corporate "ncome ax
A. NET INCOME TAX
axable "ncome> Gross "ncome
Less: Deductions (Personal & Additional)
0et "ncome
Multiplied by: Tax Rate
0et "ncome ax Payable
Less: Tax Credits
0et "ncome ax 3ue
0ote> his 6ind of income tax allows deduction, personal as well as additional exemptions
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J tax credits*
he determination of actual gain or loss is material since the tax shall be based on 0&
he rate of this tax is .-K for individual J .;K for corporate taxpayers*
B. GROSS INCOME TAX
Unli6e the net income tax, the gross income tax does not allow deductions, hence he formula is>
Gross "ncome D ax #ate L ax 3ue
0otes> he application of this tax B$#S the application of the income tax*
he gross income tax is always sub(ect to the :inal 98*
C. FINAL INCOME TAX
his is the only income tax applicable to all types of taxpayers without distinctions* he formula is>
Gross "ncome D ax #ate L ax 3ue
0otes> Under final income tax, the rate is multiplied to each income individually as each income may
have a different rate*
his tax does not allow deductions*
he determination of gain or loss is immaterial since the basis of taxation is the G#1SS,
8ence actual gain or loss does not matter*
$n income which is sub(ect to final income tax is no longer sub(ect to net income taxM
9ithholding agent is responsible in filing the income tax returns*
$pplicable only to passive income and income from sources within the Phils*
"f the taxpayer fails to pay, the withholding agent shall be liableMMM
D. MINIMUM CORPORATE INCOME TAX , 2- ". G#"// I.%"$
he -K )C" on gross income is imposed on corporations beginning the 2
th
year of the corporation*
he formula is>
Gross "ncome D -K L )C"
Pay the )C" or the 0et "ncome ax, whichever is higherM
#ationale> o prevent corporations from claiming too many deductions*
E. IMPROPERL0 ACCUMULATED EARNINGS TAX , '1- "! Taxa23 I.%"$
his tax is imposed on the improperly accumulated earnings by corporations*
Purpose> o discourage the practice of corporations of accumulating earnings
J profits in avoidance of the payment of taxes*
o avoid this> 3istribute earnings among the shareholders*
F. OPTIONAL CORPORATE INCOME TAX , '4- ". G#"// I.%"$
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Corporations may opt to be taxed at +;K of their gross income in lieu of the 0et "ncome ax or the
)C"* his may be imposed by the President upon the recommendation of the 31:*
IV. SOURCES OF INCOME
9hat is the relevance in determining the sources=
"ts relevance relates to the income tax liability of the taxpayers* #C and domestic corporations are
the only taxpayers liable for income derived from sources within and without the Philippines*
A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (S%&5". 426a7*
+* "nterest from sources within the Philippines
o "nterests derived from sources within the Philippines
"nterest earned from domestic ban6 deposits
o "nterests on bonds, notes or other interest/bearing obligations of residents, corporate
or otherwise*
he determining factor is the residence of the obligor, whether individual or
corporation*
-* 3ividends
o $ny distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or property*
o 3ividends issued by foreign corporations are considered income from sources within
provided the - re5uisites are present>
$t Least ;<K of its gross income is from sources within the Phils*
Such gross income must be for the ./year period ending with the close of the
taxable year*
.* Services
o his is the compensation for labor or personal services performed in the Phils*
o he determining factor is the place of performance* he place of payments is
"##&L&7$0M
2* #entals and #oyalties from property located in the Phils*
o Use of copyright, patent, design or model, plan, secret formula or process, goodwill,
trademar6, trade brand or other li6e property or right in the Phils*
o Use of industrial, commercial or scientific e5uipment in the Phils*
o he supply of scientific, technical, industrial or commercial info*
o he supply of services by a non/resident person or his employee in connection with
the use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non/resident person*
o echnical advise, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial underta6ing*
o he use or right to use motion picture films, films or video tapes for use or in
connection with 7, J tapes use in connection with radio broadcasting*
;* Sale of #eal Property
o Gains, profits and income from sale of real property located in the Phils*
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o Location of the property is the controlling factor to determine the source of the
income*
H* Sale of Personal Property
B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.
$ny income not falling under any of the H above is an income derived from sources outside the
Philippines*
C. INCOME FROM SOURCES PARTL0 WITHIN 8 PARTL0 WITHOUT THE PHILIPPINES
he taxable income is computed by first deducting the expenses, losses or other deductions
apportioned or allocated thereto and ratable part of any expense, loss or other deduction which
cannot definitely be allocated to some items or classes of gross income; and the portion of such
taxable income attributable to sources within the Phils*
Basic :ormula> Gross "ncome 9ithin
Gross "ncome 9orld
L #ate D &xpenses 9orld
L &xpenses to be allowed
o illustrate> Suppose the Gross "ncome 9ithin is P+<6; the Gross "ncome 9orld is P+<<N; and the
&xpenses/9orld is P;<6, thus>
P+<6O L +<K D P;<N L P;N*
P+<<6
"n this illustration, only P;6 should be allowed as deduction against the gross income derived in the
Phils*
D. SALE OF PERSONAL PROPERT0
Guidelines>
+* :or those produced, in whole or in part, by the taxpayer within and sold without the
Philippines, or produced in whole or in part, by the taxpayer without and sold within the
Philippines ' the income shall be treated as partly within and partly without from sources
within the Philippines and partly from sources without the Phils*
-* :or those purchased within and sold without the Philippines, or for purchase of personal
property without and sold without ' the gains, profits or income shall be treated as derived
entirely from sources within the country where the property is sold; &DC&P ' gains from the
sale of shares of stoc6 in a domestic corporation shall be treated as derived entirely from
sources within the Phils*, regardless of the place where the shares were sold*
V. CAPITAL GAINS AND LOSSES
9hat is a capital asset=
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Capital assets are property held by the taxpayer, but does not include>
+* Stoc6 in trade of the taxpayer P inventory on hand at the close of the taxable year
-* Property held primarily for sale to customers in the ordinary course of his business
.* Property used in the business, of a character which is sub(ect to the allowance for
depreciation*
2* #eal property used in business of the taxpayer*
9hat is the relevance for the determination=
+* 8olding period ' percentage ta6en into account
-* Loss Limitation #ule ' limitation on Capital Losses
.* 0et Capital Loss Carry 1ver #ule
A. PERCENTAGE TA+EN INTO ACCOUNT
8olding period !percentage ta6en into account% is defined as the length of time or duration by which
an individual held the capital asset*
"n sale of exchange of a capital asset, there are - percentages which should be ta6en into account
in recogni4ing the gain or loss from such sale or exchange>
+* +<<K if the capital asset has been held for not more than +- months !S%
-* ;<K, if held for more than +- months !L%
.* Capital $ssets held by Corporation ' not included
Sales not sub(ect to the rule>
+* Sale or exchange of shares of stoc6s which is a capital asset*
-* Sale or exchange of real property held as a capital asset*
0otes> Capital gain is included in the gross income sub(ect to net income tax*
$ capital gain or loss is included in the gross income
B. LIMITATIONS ON CAPITAL LOSSES
Loss Limitation #ule provides that @losses from sales of exchanges of capital assets shall be allowed
only to the extent of the capital gains from such sale or exchange*A
$ capital loss can only be deducted from capital gains but never from an ordinary gain, while an
ordinary loss may de deducted from both capital and ordinary gain* $pplicable to individual and
corporations*
#ationale>
+* 1rdinarily, a capital gain is included in the gross income* he items included in the gross
income are ordinary gains and losses ' those related to the ordinary business*
-* 9ith respect to capital losses, these are not related to the ordinary business of the taxpayer*
C. NET CAPITAL LOSS CARR0-OVER
$ capital loss may only be deducted from a capital gain, if there is any* 9hat then is the remedy of
the taxpayer where is capital loss but there is no capital gain=
$pply the 01LC1 #ule*
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01LC1 #ule>
$ny capital loss sustained by the taxpayer during a taxable year shall be treated in the
succeeding taxable year as a loss from sale or exchange of capital asset held for not more
than +- months*
#e5uisites
o $mount of loss should not exceed net income for the taxable year when the loss was
incurred*
o here should be capital gain from which the carried over loss can be deducted
o Can only be availed by individualsM
D. GAINS AND LOSSES FROM SHORT SALES
Short Sale is defined as a sale where the seller is selling a property without distinction of what 6ind
of property he is selling, whether a share of stoc6 or not* he seller is selling property which he is not
in his possession*
$ny gains or losses are considered as capital gains or losses*
E. CAPITAL TO ORDINAR0 ASSET9 VICE VERSA
Calasan4 7 C"#
$ conversion from capital to ordinary asset is allowed provided that it is>
o "n furtherance of the taxpayer,s business
o Substantially improved or very actively sold or both*
## I/-<<.
Properties classified as ordinary assets are automatically converted into capital assets upon
showing of proof that the same have not been used in business for more than - years prior to
the consummation of the taxable transactions involving said properties*
VI. TAX ON INDIVIDUALS
he #C is the only individual taxpayer who is liable for income derived from all sources, within and
without the Philippines*
A. RESIDENT CITI:EN9 NON-RESIDENT CITI:EN9 OCW AND SEAMEN AND RESIDENT ALIEN
+* 0et "ncome ax
a* 3efined as the pertinent items of gross income less deductions andPor personal and
additional exemptions*
b* his is the only 6ind of income tax which admits of deductions, personal and
additional exemptions*
c* )arried individuals shall compute separately their individual income tax* 8owever,
this is applicable only for individuals earning purely compensation income*
d* )arried individuals who do not derive income purely from compensation, shall file a
consolidated return to include income of both spouses, except where it is
impracticable*
e* #$ Q;<2 exempts minimum wage earners from the payment of net income tax*
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-* :inal "ncome ax ! for Passive income%
a* "nterest, #oyalties, Pri4es and other 9inning
i* $pplicable tax is -<K
ii* Passive income should be derived from sources within the Philippines
iii* :C3U deposits ' apply I*;K
iv* Long erm deposits or investments ' exempt from final tax
2 to R ; years ' ;K
. to R 2 years ' +-K
R . years ' -<K
:or pri4es, before tax is imposed>
)ust be derived from sources within the Phils*
)ust be SP+<6
)ust be pursuant to a promotion or contest
Pri4es exempted from tax>
#eceived primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement
he recipient was selected without any action on his part to enter the contest or
proceeding
he recipient is not re5uired to render substantial future services as a condition to
receiving the pri4e or award*
9innings are sub(ect to :98 of -<K including winnings pursuant to gambling !except
PCS1%*
b* Cash andPor Property 3ividends
i* 1nly cash and property dividends are sub(ect to +<K final income tax
ii* Stoc6 dividends are not taxable since such dividends are only a transfer of the
surplus profit from the retained earnings to the authori4ed capital stoc6*
iii* Share of an individual in the distributable net income after tax of a partnership
of which he is a partner is sub(ect to final income tax
c* Capital Gains from Sale of Shares of Stoc6 not raded in the Stoc6 &xchange
i* he net capital gains from sale, barter, exchange or other disposition of
shares of stoc6 in a domestic corporation not listed and traded is sub(ect to a
final tax rate of ;K for the first P+<<6 of the net capital gain; and +<K of the
net capital gain of any amount in S P+<<6*
ii* &lements re5uired
+* Shares must be shares in a domestic corporation*
-* Shares are capital assets*
.* he shares are not listed and traded in the local bourse*
iii* :or listed shares, the gains are not sub(ect to income tax but sub(ect to a
business tax !percentage tax% at the rate of T of +K of the gross selling price*
d* Capital Gains from Sale of #eal Property
i* $ final income tax of HK based on the gross selling price or :)7, whichever is
higher shall be imposed on CG provided>
+* the property sold is real property
-* located in the Philippines
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.* classified as a capital asset
ii* Sale of a natural person,s principal residence maybe exempted from payment
of the HK CG when the proceeds of the sale are fully utili4ed in ac5uiring or
constructing a new principal residence within +E months from the date of
notari4ation of the 3eed of Sale*
iii* Sale of mortgaged property ' taxable only if the buyer is other than a financial
institution*
B. NON RESIDENT ALIEN ENGAGED IN TRADE OF BUSINESS IN THE PHILIPPINES
+* 0et "ncome ax
$n 0#$ &B is sub(ect to the net income tax*
Liable only for income derived from sources within the Phils*
-* :inal "ncome ax
a* Cash andPor property dividends or share in the distributable net income of a
partnership !not general partnership%, "nterests, #oyalties and 1ther winnings*
-<K final income tax levied on letter a*
:or pri4es less than P+<6, the applicable tax is the net income tax*
Pri4es from PCS1 and Lotto are exempt from income tax*
#oyalties for literary wor6 ' sub(ect to tax rate of only +<K*
"nterest income from L deposits and investments are exempt fro
final income tax*
b* Capital Gains
Same as #$ &B in the Phils*
C. NON RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILS.
+* 0et "ncome ax
0#$ 0&B shall be liable for the entire income he received from all sources
within the Philippines by way of the gross income tax*
ax rate is -;K on gross income
-* :inal "ncome ax
Sale of shares of stoc6 or sale of real property which are capital assets, use tax
rate in the next section which is +;K final income tax*
D. ALIENS EMPLO0ED B0 MNCS9 OBUS AND PETREOLEUM SERVICE CONTRACTORS
+* "ncome ax Liability for Salaries and Compensation
hese alien individuals are liable for final income tax at a rate of +;K on their
gross income
Same tax treatment is applicable to :ilipinos employed and occupying the same
position as the aliens employed therein*
he +;K final income tax does not apply #J: employees ' both aliens and
:ilipinos*
-* "ncome ax Liability for 1ther "ncome
3epends upon the taxpayer,s classification or status*
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VII. TAX ON CORPORATIONS
A. DOMESTIC CORPORATIONS
+* "n General
a* $ domestic corporation is generally liable for net income tax because the
0"#C says>Ataxable income*A
b* he net income tax is imposed at a rate of .;K on all income derived from
sources within and without the Phils*
-* 1ptional Corporate "ncome ax
a* he tax rate is +;K
b* "mmaterial since the President has not yet implemented this option*
.* Proprietary &ducational "nstitutions and 8ospitals
Liable for net income tax at a rate of only +<K provided>
a* "t must a stoc6 and non/profit institutions
b* "t must be a private educations institution or hospital
c* heir gross income from unrelated activity does not exceed ;<K*
d* )ust have been issued a permit to operate from the government*
0ote> 0on/stoc6 and non/profit educational institution is exempt from income tax
2* G1CCs, $gencies or "nstrumentalities
he .;K net income tax rate is applicable to all G1CCs except the following>
a* SSS
b* Philhealth
c* PCS1
d* GS"S
;* :inal "ncome ax
"nterest from deposits and yield from deposit substitutes and from trust funds and
similar arrangements, and royalties from sources within the Philippines are sub(ect to
-<K final income tax*
"f these are derived from sources without , these shall be sub(ect to the net income
tax and not the final income tax*
H* Capital Gains from the Sale of Shares of Stoc6 0ot raded in the Stoc6 &xchange
$pply rules on individuals
I* ax on "ncome 3erived under the &xpanded :oreign Currency 3eposit System
he depository ban6 is the income earner and is sub(ect to the net income tax of .;K
8owever, when the depository ban6 under the system transacts with the following, its
income is exempt from net income tax>
a* 0on/residents
b* 1BUs
c* Local commercial ban6s
d* bBranches of foreign ban6s authori4ed by the BSP
e* 1ther depository ban6s under the system
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9ith regard to :D loans, income derived therefrom shall be sub(ect to a final tax
at the rate of +<K
E* "nter/corporate 3ividends
he domestic corporation is the stoc6holder of another domestic corporation*
Being a stoc6holder, it is entitled to dividends* he dividends received by it shall
not be sub(ect to tax, in other words, exempt*
Q* Capital Gains #eali4ed from the Sale, &xchange or 3isposition of Lands andPor Buildings
$pply final income tax rate of HK is imposed on the gain presumed to have been
reali4ed
B. RESIDENT FOREIGN CORPORATIONS
+* "n General
Li6e a domestic corporation, a resident foreign corporation is sub(ect to the net
income tax at a rate of .;K*
8owever, unli6e a domestic corporation, a resident foreign corporation is only
liable for income derive by it from sources within the Philippines*
-* 1ptional Corporate "ncome ax of +;K
ax rate is +;K of Gross "ncome
.* )C"
Compare the -K of Gross "ncome versus net income, choose higher of the -*
2* "nternational Carrier 3oing business in the Philippines
Liable to pay tax of -TK on its Gross Philippine Billings !GPB%
:or international air carriers, the following re5uisites must be present>
o he persons, excess baggage, cargo, and the mail must be originating in
the Philippines
o "n a continuous and uninterrupted flight or shipment
o "rrespective of the place of sale or issue and the place of payment of the
tic6et*
:or international shipping carriers, the following are the pre/re5uisites>
o "t must originate from the Philippines
o "t must be up to the final destination
o #egardless of the place of sale or payments of the passage or freight
documents
;* 1ffshore Ban6ing Units
$ final income tax at the rate of +<K is imposed on income derived by 1BUs
authori4ed by the BSP from its foreign currency transactions !e*g branches of
commercial ban6s%*
ransactions of these 1BUs are exempt from final income tax provided it is with
the following>
a* 0onresidents
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b* 1ther 1BUs
c* Local commercial ban6s
d* Branches of foreign ban6s
H* ax on Branch Profit #emittance
$ +;K final income tax based on the total profits applied or earmar6ed for
remittance is imposed on any profit remitted by a branch to its head office*
"f the profit remitted us nor from activities connected with the conduct of its
business in the Phils*, the net income tax rate of .;K shall apply*
his tax does not apply to local subsidiaries of foreign corps* !for branch offices
only%
I* #egional $rea 8ead5uarters and #egional 1perating 8ead5uarters of )0Cs
#$8 ' a branch established in the Phils by )0C and which head5uarters do not
earn or derive income from the Philippines and which acts supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the $sia/Pacific #egions and other foreign mar6ets*
#18 ' a branch established in the Philippines by )0Cs which are engaged in
any of the following> general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; mar6eting and control and sales promotion;
training and personnel management; logistic services; # J 3; product
development; technical support and maintenance; data processing and
communication; and business development*
#$8 is exempt from income tax, #18 is sub(ect to a net income tax of +;K*
E* :inal "ncome ax
"nterest income and #oyalties ' sub(ect to -<K final income tax
"ncome derived from &xpanded :oreign Currency 3eposit Systems ' he income
earner is a resident foreign corporation depository ban6 * he tax rate is .;K*
"ntercorporate 3ividends ' he income received by the foreign corporation from
the domestic corporation shall be exempt from income tax*
C. NON-RESIDENT FOREIGN CORPORATIONS
+* "n General
Liable for gross income tax at the rate of .;K on income derived from sources within the
Philippines*
-* "nterest on foreign loans
$ final 98 at the rate of -<K is imposed on the amount of interest on foreign loans*
Contemplated transaction here is one where the lender is a non/resident foreign
corporation and the borrower is a domestic corporation*
&xemption applies only when the lender is a foreign government or any of its G:",
international and regional financial institutions !supra/nationals%*
.* "ntercorporate 3ividends
$mong the three corporate taxpayers, only the 0# foreign corporation is liable for dividends
received by it from a domestic corporation at the rate of .;K*
Taxation Law Review
ax deemed paid credit rule !tax sparing rule% ' he country of domicile of the non/resident
foreign corporation allows a tax credit of -<K for taxes deemed paid in he Philippines to be
entitled to the lower rate of +;K*
2* CG from Sale of Shares not raded in the Stoc6 &xchange
#ules on individuals apply*
VII. MINIMUM CORPORATE INCOME TAX
0ota Bene>
his tax is imposed on two types of corporations> the domestic corporation and the
resident foreign corporation*
o discourage these corporations from claiming too many deduction to avoid
payment of tax, the )C" of -K on the gross income is imposed in lieu of the net
income tax of .;K
A. IMPOSITION OF THE TAX
he -K )C" cannot be imposed simultaneously with the net income tax of .;K* "mpose
whichever is higherM
he )C" can be imposed only at the beginning of 2
th
taxable year immediately following the
year in which the corporation commenced its operations*
B. CARR0 FORWARD IF EXCESS MINIMUM TAX
his is the -
nd
carry over tax under the 0"#C* he first is the 01LC1*
$ny excess of the )C" over the net income tax shall be carried forward and credited
against the net income tax over the net income tax shall be carried forwards and credited
against the net income tax for the . immediately succeeding taxable years*
Unli6e the 01LC1, the )C" can be carried over for the . immediately succeeding years*
C. RELIEF FROM THE MCIT
he Secretary of :inance is authori4ed to suspend the )C" on any corporation who suffers
losses on account of>
o Prolonged labor dispute
o :orce ma(eure
o Legitimate business reverses
IX. IMPROPERL0 ACCUMULATED EARNINGS TAX
A. IN GENERAL
Generally, a tax of +<K is imposed on the improperly accumulated income for the purpose of
avoiding the income tax with respect to its shareholders*
he tax compels the corporations to declare dividends*
"nclusion> only domestic corporations and closely/held corporations*
Taxation Law Review
Closely held corporations are those with at least ;<K in value of the outstanding capital
stoc6 or at least ;<K of the total combined voting power of all classes of stoc6 entitled to
vote is owned directly or indirectly by or for not more than -< individuals*
B. EXEMPTED CORPORATIONS
Under the 0"#C, the following are exempted from the application of this tax without
5ualification>
o Publicly/held corporations
o Ban6s and 0B:"s
o "nsurance companies
Under the ## -/-<<+, the following were added to the list with the proviso that the improperly
accumulated earnings must be for reasonable needs of the business>
o axable partnerships
o General professional partnerships
o 0on/taxable (oint ventures
o &nterprises located within economic 4ones*
C. IMPROPERL0 ACCUMULATED TAXABLE INCOME
"$" is @taxable incomeA ad(usted by>
o "ncome exempt from tax
o "ncome excluded from tax
o "ncome sub(ect to final income tax
o he amount of 01LC1 deducted, and reduced by the sum of dividends actually
or constructively paid and income tax paid for the year*
D. EVIDENCE OF PRUPOSE TO AVOID INCOME TAX
here are - instanced which are to be considered>
o he fact that the company is a mere holding company or investment company
o he fact that the earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business*
o he presence of either brings a prima facie evidence of the purpose to avoid payment
of this tax*
o he intention of the taxpayer at the time of accumulation is controlling to determine
whether the profits are accumulated beyond the reasonable needs of the business*
o 3efiniteness of plans coupled with actions ta6en towards its consummation are
essential*
X. EXEMPT CORPORATIONS
A. GENERAL PROFESSIONAL PARTNERSHIPS
Taxation Law Review
$ GPP is a partnership formed by persons for the sole purpose of exercising their common
profession, no part of income of which is derived from engaging in any trade or business* $ny other
partnership is liable for corporate income tax*
$ GPP may be exempted from corporate income tax if these - re5uisites are met>
+* "t is formed by persons for the sole purpose of exercising their
common profession*
-* 0o part of the income of which is derived from engaging in any trade
or business*
0otes>
"f the GPP is exempt from corporate income tax, the share of each partner is sub(ect to
income tax* &ach partner is liable in his separate and individual capacity*
"f the - re5uisites are absent, the partnership is deemed a corporation and is sub(ect to
corporate income tax* he share of each partner, whether actually or constructively received,
is deemed as a dividend which is SUB?&C to final income tax*
"f there is other income but the income derived is passive !e*g* interest income, which is
sub(ect to final income tax of -<K%, still the partnership can be exempt from the corporate
income tax* Passive income is not included in the partnership,s annual return*
B. ;OINT VENTURE UNDER A SERVICE CONTRACT WITH THE GOVERNMENT
he ?7 which is exempt from corporate income tax, is a merger of two or more corporations for the
purpose of engaging in construction pro(ects or energy operations pursuant to a consortium
agreement or a service contract with the government* he corporations must be engaged in the
same line of business*
0otes>
"t is only the ?7 which is exempt from corporate income tax, not the income of each
corporation from the ?7*
hus, each corporation is liable for corporate income tax*
C. GOVERNMEN-OWNED OR CONTROLLED CORPORATIONS
he net income tax is applicable to all G1CCs except the following>
SSS
P8"C
PCS1
GS"S
D. OTHER EXEMPT CORPORATIONS
he following are exempt under Section .< of the 0"#C>
+* Labor and agricultural organi4ations ."& "#<a.5=> ?#5.%5?a33@ !"# ?#"!5&*
-* )utual savings ban6 ."& AaB5.< a %a?5&a3 /&"%C represented by shares, and cooperative
ban6 D5&A"E& %a?5&a3 /&"%C organi4ed and operated !"# $E&Ea3 ?E#?"// a.> D5&A"E&
?#"!5&*
.* $ beneficiary society operating !"# &A x%3E/5B 2.!5& "! &A $$2#/, such as a
fraternal organi4ation operating under a lodge system, or a mutual aid association or a non/
stoc6 corporation organi4ed by employees ?#"B5>5.< !"# &A ?a@$.& "! 35!9 /5%C.//9
Taxation Law Review
a%%5>.&9 "# "&A# 2.!5&/ x%3E/5B3@ &" &A $$2#/ of such society or their
dependents*
2* Cemetery companies owned and operated x%3E/5B3@ !"# &A 2.!5&/ "! 5&/ $$2#/*
;* 0on/stoc6 corporations organi4ed and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, ." ?a#& "! 5&/ .&
5.%"$ "# a//& /Aa33 23".< &" "# 5.E# &" &A 2.!5& "! a.@ $$2#9 "#<a.5=#9
"!!5%# "# a.@ /?%5!5% ?#/".*
H* Business league, chamber of commerce, or board of trade, ."& "#<a.5=> !"# ?#"!5& a.> ."
?a#& "! &A 5.%"$ "! DA5%A 5.E#/ &" &A 2.!5& "! a.@ ?#5Ba& /&"%CA"3># "#
5.>5B5>Ea3*
I* $ non/stoc6 and non/profit educational institution*
E* Government educational institution*
Q* :armers, or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company , or li6e organi4ation satisfying the
following re5uirements>
a* he organi4ation must be operating within a 3"%a35&@
b* he income of such organi4ation must be used to meet the necessary expenses*
+<* :armers, associations for organi4ed and operated as a sales agent !"# &A ?E#?"/ "!
$a#C&5.< &A ?#">E%&/ "! 5&/ $$2#/ and turning bac6 to them the proceeds of sales
less necessary selling expenses on the basis of 5uantity of produce*
0otes>
$n exempt corporation can be held liable for corporate income tax if it derives income from
any of their property or any of their activities conducted for profit regardless of the disposition
made of such income*
$bove corporations are only exempt from income tax under Section .< but this same section
doe not bar the applicability of other axes to these corporations*
CHAPTER XI. GROSS INCOME AND EXCLUSIONS
Section .- of the 0"#C spea6s of gross income and exclusions* o arrive at the gross income, the
exclusions must be deducted from all the income, hence the formula is>
$ll income ' &xclusions L Gross "ncome
A. GROSS INCOME INCLUSIONS
Gross income is defined by Section .- 5uite broadly, as @all income derived from whatever source*A
his is an open ended definition, suggestive of an intention to include rather exclude* he following
items comprise the gross income sub(ect to income tax>
+* Compensation for services in whatever form paid, including but not limited to fees, salaries,
wages, commissions, and similar items*, &DC&P for the following>
a* hose received by taxpayers who are sub(ect to the Gross "ncome ax
b* hose received by $liens employed by )0Cs, 1BUs and Petroleum Service
Contractors because their compensation are sub(ect to the +;K :inal tax unless they
choose pay by way of final income tax*
-* Gross income derived from the conduct of trade or business or the exercise of a profession*
.* Gains derived from dealings in property*
Taxation Law Review
a* "f the real property is capital, the gain therefrom is sub(ect to income tax and not
included as gross income*
b* "f the real property is ordinary, it should be included*
2* "nterest income
a* "nterests from loans are always included in the gross income*
b* "nterests from ban6 deposits are not included since they are sub(ect to final income
tax*
;* #ental income
H* #oyalties
a* he royalty is sub(ect to final income tax if it is derived from sources within the
Philippines*
b* "f the source is outside the Philippines, the net income tax is applicable*
I* 3ividends
E* $nnuities
Q* Pri4es and winnings, instances to be included in the gross income>
a* "t should be derived from sources within the Philippines and should be less than or
e5ual to P+<6
b* he pri4e is derived from sources without the Philippines
c* he taxpayer is a corporation*
+<* Pensions !unless excluded%
++* Partner,s distributive share from the net income of the GPP
B. EXCLUSIONS
Classes of income not included in the gross income>
Passive income, since this is already sub(ect to final income tax*
"ncomes which are exempt under the income tax law*
"ncome classified as exclusions under Section .-!b%*
he following are the exclusions provided in section .-!b%>
+* Life "nsurance payable upon death of the insured*
-* $mount received by "nsured a #eturn of Premium
.* Gifts, be5uests and 3evises
hese are gratuitous in nature* 8ence, exempt from gross income tax but is
sub(ect to donor,s tax*
2* Compensation for "n(uries and Sic6ness
;* "ncome exempt under treaty
H* #etirement Benefits, Pensions, Gratuities, etc*
a* #etirement Pay
i* #etirement benefits under #$ IH2+ !retirement benefits of private firms
without retirement plan%
+* he retiring employee is between H< to H; years old*
-* 8e must have served the company for at least ; years*
ii* #etirement benefits pursuant to #$ 2Q+I !retirement under private retirement
plan%
+* #etiring employee must not be less than ;< years old*
-* )ust have been in the service for at least +< years*
.* &xemption must be availed only once*
2* he private benefit plan must be approved by the B"#*
iii* #etirement pay given by GS"S, SSS and P7$1 are exempted from income
tax without any 5ualification
Taxation Law Review
iv* #etirement gratuities, pensions and other similar benefits given by foreign
government agencies and other institutions, private or public to residents,
nonresident citi4ens of the Philippines or aliens who come to reside in the
Phils*, without any 5ualification*
b* Separation Pay
i* &xempted from income tax as long as the cause for separation from service is
death, sic6ness, physical disability or for any cause beyond the control of the
employee*
ii* "f from foreign government agencies and other institutions, tax exempt also*
c* erminal Leave Benefits
i* &1 -Q+ provides that terminal leave benefits of government employees are
exempt from tax
ii* :or private employees, if terminal leave benefits are paid upon retirement,
such benefits are exempt from income tax*
iii* 8owever, if given annually, ## -/QE provides>
+* "f sic6 leave ' not exempt
-* "f less than +< days 7L ' exempt
.* "f more than +< days 7L ' sub(ect to income tax*
I* )iscellaneous items
a* "ncome derived by foreign government*
i* :oreign government
ii* :inancing institutions owned or controlled by foreign government
iii* "nternational or regional financial institutions established by foreign
governments*
b* "ncome derived by the Government or its political subdivisions from>
i* $ny public utility
ii* he exercise of any essential government function
c* Pri4es and $wards
i* Primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement*
ii* he recipient was selected without any action on his part to (oin the contest*
iii* he recipient is not re5uired to render future service as a condition to receive
the pri4e or award*
d* Pri4es and $wards in Sports Competition
i* 8eld locally or internationally and
ii* Sanctioned by national sports association
e* +.
th
)onth Pay and other Benefits
i* $pplied both to the government and the private sector
ii* &xemption covers only the maximum amount of P.<,<<<
f* GS"S, SSS, Philhealth, and Pag/ibig contributions
g* Gains from sale of bonds, debentures or other certificate of indebtedness
i* )aturity must be more than ; years to be exempt
ii* "f less than ; years, sub(ect to final income tax*
h* Gains from redemption of shares in )utual fund
XII. FRINGE BENEFITS TAX
his tax was introduced in +QQE* $ final income tax of .-K is imposed on the grossed/up
monetary value of the fringe benefit furnished or granted to the employee by the employer*
Taxation Law Review
9ho is liable to pay the final income tax on fringe benefits=
he employee shall be liable because>
he law did not say that it is the liability of the employer but it says that is payable*
he law did not say that it is the of the employer period, but the law referred to Section ;I!a%
' 9ithholding of :inal ax on Certain "ncomes
he law admits that is the liability of the managerial employee
A. EXCLUSIONS
By way of exception, the following benefits are not sub(ect to final income tax>
hose received by #J: employees
he fringe benefit is necessary for business
he fringe benefit is for the convenience or advantage of the employer*
"f the fringe benefit is exempted from income tax under the code*
&mployer contributions to employee retirement, insurance, and hospitali4ation benefit plans*
3e minimis benefits which limited to facilities or privileges furnished or offered by an
employer to his employees that are relatively small value and are given as a means of
promoting health, goodwill, contentment, or efficiency of his employees*
B. INCLUSIONS
:ringe benefit is any good, service, or other benefit furnished or granted in cash or in 6ind by an
employer to an individual employee such as but not limited to>
+* 8ousing, except>
## ./QE provides that a housing unit situated inside or ad(acent to the premises of a
business within maximum of ;< meters shall not be considered as a taxable fringe
benefit*
emporary housing for an employee who stays in the housing unit for . months or
less shall not be considered a taxable fringe benefit*
-* &xpense $ccount ' refers those incurred by the managerial wor6er which are to be
reimbursed by management*
.* 7ehicle of any 6ind
2* 8ousehold personnel, such as maid, driver and others*
;* "nterest on loans at less than prevailing mar6et rate to the extent of the difference between
the mar6et rate and actual rate granted*
H* )embership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organi4ations*
I* &xpenses fore foreign travel
E* 8oliday and vacation expenses*
Q* &ducational assistance to the employee or his dependents*
+<* Life or health insurance and other non/life insurance premiums in excess of GS"S and SSS*
XIII. ALLOWABLE DEDUCTIONS
his provision is applicable only to net income since it is only income tax which allows deductions*
3eductions are allowed because they are necessary to generate income
Pure compensation earners are not allowed under Section .2 for any deduction
&xception is for premium paid for health andPor hospitali4ation insurance*
Taxation Law Review
he following deductions are allowed for a taxpayer under the net income tax>
A. EXPENSES
+* 1rdinary and necessary trade, business or professional expenses*
"n General, re5uirements are>
he expenses are incurred within the taxable year
hese are ordinary and necessary
he expenses are incurred pursuant to the trade or business or the exercise of
profession
hese should be supported by evidence*
a* $ reasonable wages and salary, other forms of compensation for personal services
actually rendered, and the grossed/up monetary value of fringe benefits provided the
final income tax thereof has been paid*
b* $ reasonable allowance for travel expenses, here and abroad, while away from home
in the pursuit of trade, business or profession*
c* $ reasonable allowance for rentals andPor other payments which are re5uired as a
condition for the continued use or possession, for purposes of trade, business or
profession, of property to which the taxpayer has not ta6en or is not ta6ing title or in
which he has no e5uity other than a lessee, user or possessor*
d* $ reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer*
Conditions for an expense to be deductible>
he expense must be ordinary and necessary*
"t must be paid or incurred within the taxable year*
"t must be paid or incurred while carrying on a trade or business*
0ote> Bribes, Nic6bac6s and other similar payments are not ordinary and necessary to the
trade, business or profession of the taxpayer, therefore not deductibleM
-* &xpenses allowable to Private &ducational "nstitutions
a* o deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during a taxable year for the expansion of school facilities; or
b* o deduct allowance for depreciation thereof*
0"#C expressly prohibits the deduction of>
$ny amount paid out for new buildings or for permanent improvements or betterments
made to increase the value of any property*
$ny amount expended in restoring property or in ma6ing good the exhaustion thereof
for which an allowance is or has been made*
B. INTEREST
+* he amount of interest paid and incurred by the taxpayer within the taxable year shall be
allowed as a deduction from gross income*
Taxation Law Review
"nterest expense to be deducted is limited by the proviso which provides that the
allowable deduction shall be reduced by 2-K of the interest income which was
previously sub(ected to final income tax*
-* By way of exception, the 0"#C enumerated several instances where the interest expense
incurred by a taxpayer is allowed as a deduction but such is sub(ect to 5ualifications>
a* "f within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on an interest paid in advance through discount or otherwise,
provided>
i* hat such interest shall be allowed as a deduction in the year the
indebtedness is paid*
ii* hat if the indebtedness is payable in periodic amorti4ations, the amount of
interest which corresponds to the amount of the principal amorti4ed or paid
during the taxable year shall be allowed as deduction in such taxable year*
b* "f both the taxpayer and the person to whom payment has been made or is to be
made are persons specified under Section .H!b%*
.* he interest expense may be treated as part of the value of the property ac5uired which
property will be treated as a capital expenditure which is sub(ect to the allowance for
depreciation*
C. TAXES
here are - ways to minimi4e a taxpayer,s liability>
ax 3eductions !deducted from gross income%
ax Credits !deducted from the income tax due%
:ormula> Gross "ncome
Less> 3eductions
0et "ncome
D ax #ate
Les> ax Credits
0et "ncome ax Payable
he taxes paid or incurred by a taxpayer during the taxable year in connection with his trade
or business, shall be allowed as deduction, except>
"ncome ax
"ncome taxes imposed by authority of any foreign country, but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire o have
any extent of the benefits of Section .2!c%F.G*
o he tax credit for taxes paid or incurred in any foreign country should not
exceed the taxes from which the tax credit is ta6en*
o Said tax should be compared with the tax to be paid in the Philippines by the
taxpayer and such credit should not exceed the amount of tax to be paid in the
Philippines
&state and donor,s taxes
axes assesses against local benefits of a 6ind tending to increase the value of the
property assesses*
D. LOSSES
Taxation Law Review
Losses may be deducted from the gross income provided the following re5uisites are present>
he losses are actually sustained during the taxable year*
Said losses are not compensated for by insurance or other forms of indemnity
Losses must be incurred from the exercise of business or from property connected
with the business or profession
Loss shall not be allowed as deduction if such loss has been claimed as a deduction
for estate tax purposes in the estate tax return*
01LC1 #UL&
his rule provides that the net operating loss of the business for the taxable year
preceeding the current taxable year can be carried over as a deduction from the
gross income for the next . consecutive years immediately following the year the loss
was incurred*
:or mining companies, net operating loss incurred during the first +< years may be
carried over as a deduction from taxable income for the next ; years*
0ot allowed if there was substantial change in ownership of the business for
corporations*
E. BAD DEBTS
Bad debts result from the unpaid receivables of the taxpayers from its customers in the
exercise of his trade, business or profession* hese can be deducted and charged off within
the taxable year, &DC&P in the following instances>
hose not connected with the profession, trade or business of the taxpayer
hose between related parties
ax Benefit #ule
he rule provides that where the creditor was allowed a deduction of bad debts but
said debts are subse5uently recovered, the previous deduction will not be cancelled
but the recovered amount will be added in the computation of the gross income*
F. DEPRECIATION
3epreciation is the expense which can be deducted by the taxpayer for several years as the
case may be* his deduction is an exception to the rule that expenses to be deducted
should have been incurred during the taxable year*
"ncurred due to the ordinary exhaustion, wear and tear, including allowance for
obsolescence of property used in business*
Since the property is used for more than a year, it is only reasonable that the
expense be spread over the usual life of the property*
&very property can be sub(ect to depreciation &DC&P land*
)ethod of depreciation allowed under the 0"#C>
Straight line method
3eclining balance method
Taxation Law Review
Sum/of/the/years digit method*
$ny other method prescribed by the 31: and B"#
G. DEPLETION OF OIL 8 GAS WELLS AND MINES
$ reasonable allowance for depletion or amorti4ation is allowed as deduction from gross
income in accordance with the cost/depletion method* he provision is not self/executing*
his needs approval of the B"# and 31:*
H. CHARITABLE 8 OHER CONTRIBUTIONS
his deduction is deducted from the net income, not from the gross income since one of the
bases of the amount to be deducted is a percentage of the net income*
9ho is entitled to claim the deduction for charitable contributions=
he donor is the one entitled to this deduction since, obviously, he was the one who
incurred this expense*
$ pure compensation earner cannot claim this deduction
here are - types of deduction>
Partial deduction may be claimed if the donee is ay of the following>
o G1P
o $ccredited domestic corporations or associations organi4ed and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehab of veterans*
o Social welfare institutions
o 0G1s
o 3eduction should not exceed +<K of the taxable income for individuals and
should not exceed ;K of its taxable income for corporations*
:ull deduction
o G1P, exclusively to finance underta6ings in educations, health, youth and
sports development, human settlements, science and culture and in economic
development*
o :oreign institutions or international organi4ations in compliance with treaties,
agreements or special laws*
o 0G1s accredited by the government certifying body
I. RESEARCH 8 DEVELOPMENT
Generally, expenses incurred for #J3 are treated as ordinary and necessary expenses
which are not chargeable to the capital account* hese expenses can only be allowed and
claimed during the taxable year when such expenses are incurred or paid*
# J 3 expenses can be treated as deferred expenses over a period of Ho months>
hose incurred in connection with the business or profession
hose not treated as expense under Section .2!"%+*
Taxation Law Review
hose chargeable to the capital account but not chargeable to a property of a
character which is sub(ect to depreciation or depletion*
his deduction is 01 $LL19&3 for>
$ny ac5uisition or improvement of land !except for private educational institutions in
case of school expansion%
$ny expenditure related to ascertaining the existence, location, extent or 5uality of
mineral or oil deposits*
;. PENSION TRUSTS
he deduction refers to the reasonable amount transferred or paid by the employer into the
pension trusts of the employees* Prere5uisites>
0ot have been previously allowed as a deduction
Be apportioned in e5ual parts over a period of +< consecutive years*
+. OPTIONAL STANDARD DEDUCTION a/ a$.>> 2@ RA 4(14
"ndividual and corporate taxpayers, instead of availing the itemi4ed deductions, can claim a
deduction in an amount not exceeding 2<K of their gross income* 1nce this option is
chosen, this will be irrevocable for the taxable year* 0ote that an 0#$ 0&B is excluded
since his liability is by way of the gross income tax where deductions are not allowed*
L. PREMIUM PA0MENTS ON HEALTH 8 HOSPITALI:ATION INSURANCE
his is the only deduction which can be claimed by a pure compensation earner* Life
insurance premium is not included as a deduction*
Limitations>
$mount to be deducted shall not exceed P-,2<<*<< per family
$llowed only if the said family has a gross income of not more than P-;<,<<<*<<
:or married couple, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction*
XIV. ALLOWANCE FOR PERSONAL EXEMPTIONS
he exemption provided in Section .; is available to the following taxpayers> #C; 0#C;
1C9 J Seamen; #$ &B; and 0#$ &B*
A. SECTION F4A AS AMENDED B0 RA (414
:or purposes of determining the net income of the taxpayer, a personal exemption of
P;<,<<< shall be allowed for single individuals, legally separated, head of the family, and
married individuals*
Taxation Law Review
0ote that individual taxpayers are no longer classified as such* he P;<,<<< exemption is
regardless of status* :or married individuals, only the earning spouse shall be allowed
personal exemption
B. ADDITIONAL EXEMPTIONS FOR DEPENDENTS
$n additional exemption of P-;,<<< shall be allowed for each dependent not to exceed 2*
$pplicable only for married individuals and shall be claimed by only one of the spouses*
hey must be legally married* "n case of legally separated spouses, the one who has
custody of the children can claim*
3ependent is a child chiefly dependent upon and living with the taxpayer, not more than -+
years of age, unmarried and not gainfully employed, or is incapable of self/support because
of mental or physical defect*
9ith the passage of #$ Q;<2, a family of H can now claim a total of P-<<,<<<*
C. CHANGE OF STATUS
he change of status of the taxpayers shall be effective only if such change will benefit the
taxpayer* hus, the rule is the higher exemption will be the applicable exemption for the
taxpayer*
D. PERSONAL EXEMPTION ALLOWABLE TO NRA
0#$ &B shall be allowed personal exemptions in the amount e5ual to the exemptions
allowed in the income tax law in the country of which they are citi4ens*
XV. ITEMS NOT DEDUCTIBLE
hese items are usually not related to the trade, business or profession of the taxpayer*
A. SECTION 2G(A* IN GENERAL
he following items are not deductible>
+* Personal, living or family expenses
-* $ny amount paid out for new buildings or for permanent improvements
.* Property restoration
2* Premiums paid on any life insurance policy covering the life of any officer or
employee and when the taxpayer is directly or indirectly a beneficiary of such
policy*
B. LOSSES FROM SALES OR EXCHANGE OF PROPERT0
Such losses are not allowed as deduction>
+* Between members of the family
Taxation Law Review
-* Between an individual and a corporation more than ;<K in value is owned by
or for such individual
.* Between - related corporations !more than ;<K of each owned by the same
individual%
2* Between a grantor and a fiduciary of any trust
;* Between a fiduciary of a trust and a beneficiary of such trust
:or number 2 to H, the law presumes irregularity*
XVI. DETERMINATION OF AMOUNT 8 RECOGNITION OF GAIN OR LOSS
his shall be applicable to the income tax only since it is the only tax where the
determination of gain or loss is material*
A. COMPUTATION OF GAIN OR LOSS
:or this purpose, the @amount reali4ed from the sale or other disposition of the propertyA is
defined as the sum of money received plus the :)7 of the property received*
0otes>
9ith respect to personal property, the gain or loss should always be determined
since any gain or loss from the sale of such property is sub(ect to the net income tax
!except gain from sale of shares not traded which is a capital asset which is sub(ect
to final income tax*
$s regards real property, determine first whether the property is a capital asset or
not* "f it is a capital asset, the gain or loss is immaterial since the basis of the tax is
the :)7 or assessed value of the property* he sale is sub(ect to final income tax* "f
the property is an ordinary asset, the gain or loss is material since it is sub(ect to net
income tax*
B. BASIS OF DETERMINING GAIN OR LOSS
he following are the rules to be considered>
+* "f the property was ac5uired by purchase, the ac5uisition cost shall be the basis of
determining the gain or loss* !Cost L purchase price U expenses%
-* "f ac5uired through inheritance, the cost at the time of ac5uisition should be
determined*
.* "f ac5uired by gift, the basis shall be the same as if the property was in the hands of
the donor who did not ac5uire the property by gift* hus, the basis may either be the
ac5uisition cost or the :)7 at the time of ac5uisition*
2* "f property was ac5uired for less than ade5uate consideration, the basis is the
amount paid by the transferee for the property*
C. EXCHANGE OF PROPERT0
Taxation Law Review
$s a rule, the entire amount of the gain or loss shall be recogni4ed sub(ect to the following
exceptions under Section 2<!C%>
+* "t is a contract if exchange
-* he parties are parties to the merger and consolidation
.* he sub(ect matter is the one specifically provided by law*
Basic elements in order for the gain to be not taxable and loss not deductible>
+* he parties are not members of a merger or consolidation
-* Property is given in exchange of stoc6s, if cash is given, this is not applicable
.* $fter the exchange, said giver, alone or together with others not exceeding 2, gains
control over the corporation*
XVII. SITUS OF ESTATE AND DONORHS TAX
he following are the taxpayers under the estate tax>
#C
0#C
#$
0#$
Under the donor,s tax, the taxpayers are the following>
#C
0#C
#$
0#$
3omestic corporations
:oreign corporations
0ote that a corporation is incapable of death, hence not a taxpayer under estate tax* "t is
sub(ect to donor,s tax since it is a (uridical person who can enter into contract of donations,
thus may be sub(ect to donor,s tax*
1nly the 0#$s and foreign corporations are liable for property within the Philippines* 1thers
are liable for properties located within and without the Philippines*
he following are intangibles deemed located in the Philippines>
:ranchise exercised in the Phils*
Shares issued in the Phils*
Shares of foreign corporations, E;K of the business of which is located in the Phils*
Shares of any corporation which have ac5uired a business situs in the Phils*
Shares r rights in any partnership established in the Phils*
he enumeration is relevant to 0#$ and foreign corporations only*
Taxation Law Review
&xceptions>
+* 9hen the national law of the decedent does not impost a transfer tax in respect of
intangible personal property of citi4ens of the Philippines residing in that foreign
country
-* "f the laws of the foreign country allow similar exemption from transfer taxes*
XVIII. ESTATE TAX
he formula for this tax is>
Gross &state
Less: Deductions__
0et &state
D #ateOOOOOOOOOO
axable 0et &state
Less: Tax Credit___
&state ax Payable
A. GROSS ESTATE
his shall consist of the value of all the property, real or personal, tangible or intangible,
wherever situated with the exception of non/resident aliens since they are only liable for
property located in the Philippines*
"n addition to the property owned by the decedent, there are certain properties which
although are not owned by the decedent, still form part of the gross estate>
+* 3ecedent,s interest at the time of his death
-* ransfer in contemplation of death !"C13%
.* #evocable transfer !because of the tremendous power and control which the
transferor can exercise, he can revo6e the transfer anytime%
2* Property passing under General Power of $ppointment !executed by the decedent
similar to "C13%
;* Proceeds of life insurance in which the beneficiary is the estate*
H* Prior interests
I* ransfers of insufficient consideration, &DC&P in case of a bona fide sale*
E* Capital of surviving spouse ' his is an exclusion in the gross estate*
0ote> ransfer is a "C13 if>
he decedent still retained the possession
0otwithstanding the transfer, the decedent continued to receive the income of
the fruits
he decedent retained the right to designate the person who shall possess or
en(oy the property or the income there from*
B. COMPUTATION OF NET ESTATE
Taxation Law Review
B!a% 3eductions $llowed to the &state of a Citi4en or #esident
+* &xpenses, Losses, "ndebtedness, and axes
a* :uneral expenses not to exceed ;K of the gross estate not to exceed
P-<<,<<<
i* )ourning apparel of spouse and unmarried minor children
ii* Catering and food expenses during the wa6e
iii* Publication charges for death notices
iv* elecommunication expenses incurred in informing relatives of the
deceased
v* Cost of burial plot, tombstones, mausoleum
vi* "nterment andPor cremation fees*
vii* &xpenses incurred for the performance of interment rites &DCLU3&
expenses incurred during 2< days, 6alag lu6sa and death anniversary*
b* ?udicial &xpenses
i* &xpenses incurred in the testamentary or intestate proceedings for he
settlement of estate
ii* $lso include &? expenses for the settlement of the estate of he
deceased
c* Claims $gainst the &state; the following re5uisites must be present>
i* $mount of the indebtedness
ii* he debt instrument must be notari4ed at the time of indebtedness
iii* Statement showing the disposition of the proceeds of loan
iv* Certification on the unpaid balance of loan
d* Claim $gainst "nsolvent Persons
e* )ortgage "ndebtedness, axes which accrued before the death of the
decedent !exclude &state ax% and Losses by virtue of natural calamities !no
insurance coverage%
-* 7anishing 3eduction
a* his refers to a property which forms part of the gross estate of any person
who died within ; years prior to his death*
b* he following percentages should be ta6en into account in the computation of
the net estate
i* +<<K / 9ithin + year
ii* E<K / + to - years
iii* H<K / - to . years
iv* 2<K / . to 2 years
v* -<K / 2 to ; years
.* ransfers for Public Use
a* "nclude the amount of all be5uests, legacies, devises or transfers to the G1P
b* he property should be used for public purpose*
2* :amily 8ome, conditions>
a* he amount to be deducted should not exceed P+*<), excess is sub(ect to
estate tax
b* Certification from the Barangay Captain that the family home is the actual
residence of the decedent*
c* Legally married or head of the family
d* he amount of the family home must be included in the gross estate*
;* Standard 3eduction
Taxation Law Review
a* he standard deduction is P+*< )illion
b* $utomatic, no conditions attached*
H* )edical &xpenses
a* )ust be incurred within + year prior to death of decedent
b* )ust be substantiated by official receipts
c* )aximum limit> P;<<,<<<*<<
I* #etirement Pay
a* #eceived under #$ 2Q+I
b* )ust satisfy the ;< and +< #ule
B!b% 3eductions allowed to 0#$s are the following>
+* &xpenses, losses, indebtedness and taxes
-* 7anishing deduction
.* ransfers for Public Use
he rules deductions on residents and citi4ens are applicable to 0#$s except the following>
+* :amily home
-* Standard deduction
.* 8ospitali4ation expenses
2* #etirement pay
B!c% Share in the con(ugal property
he net share of the surviving spouse in the con(ugal partnership is considered as a
deduction from the gross estate* he relevance lies in determining whether or not it is
necessary to comply with the re5uirements under Sections EQ and Q<>
+* 9ritten notice to the Commissioner
-* :iling of an estate return
.* $ statement duly certified by a CP$
B!d% )iscelaneous Provisions
"n cases of 0#$s, for purposes of the estate tax return, all the properties of such 0#$,
whether situated in the Philippines or outside, shall be included in the return* :ailure to
comply will bar the estate to claim any deductionM
C. Ex$?&5". "! C#&a5. A%IE5/5&5"./ a.> T#a./$5//5".
he following shall not be taxed>
+* he merger of the usufruct in the owner of the na6ed title
a* he decedent is the usufructuary !no fixed period%
b* Property is not included in his estate
-* he transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary
a* he decedent is the fiduciary heir
b* Upon his death, the property is transferred to the heir of the decedent*
.* he transmission from the first heir, legatee or donee in favour of another
beneficiary, in accordance with the desire of the predecessor
Taxation Law Review
2* $ll be5uests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, provided>
a* 0o part of the income of such institution inures to the benefit of the individual
b* 0ot more than .<K of said be5uest, devise, legacy or transfer shall be used
by such institutions for administration purposes*
D. D&#$5.a&5". "! &A Va3E "! &A E/&a&
+* Usufruct for a fixed period
a* his forms part of the estate since the period has not yet lapsed
b* he value is determined by ta6ing into account the probable life of the
beneficiary in accordance with the latest Basic Standard )ortality table, to be
approved by the 31:, upon recommendation of the "C*
-* Properties
a* Personal Property
i* Use :)7 at the time of death
ii* Listed shares ' highest value immediately before the death
iii* Unlisted Preferreds ' Use par value
iv* Unlisted Commons ' Boo6 value
b* #eal Property, us higher of the two>
i* :)7 as determined by the B"# !Vonal 7alue%
ii* :)7 as determined by the $ssessor,s 1ffice !$ssessed 7alue%
&* N"&5% "! Da&A &" 2 F53>
Guidelines>
+* :ile the notice if the gross estate exceeds P-<,<<<
-* &xecutor, administrator or any legal heir may file
.* :iling period is within H< days after decedent,s death
E. E/&a& Tax R&E#./
Guidelines>
+* :iling is re5uired when the gross estate exceeds P-<<,<<<*<<
-* :ile even if below P-<<6 when the gross estate consists of real property, motor
vehicle, shares of stoc6 or other similar property
.* 9hen the gross estate exceeds P-*< )illion, estate tax return shall be supported by
a CP$ certification
2* he estate tax return shall be filed within H months from the decedent,s death*
;* "n meritorious cases, C"# may grant .< day extension*
H* 9here to file=
a* $uthori4ed $gent Ban6
b* #31
c* Collection 1fficer
d* City or )unicipal reasurer
e* "f there is no legal residence in the Philippines, file with the C"#
G. Pa@$.& "! Tax
Taxation Law Review
Guidelines
+* General #ule> Pay/as/you/file system
-* C"# may give ;/year extension in case of (udicial settlement
.* C"# may give -/year extension in case of &?:
2* $cceptable ground for extension> if payment of tax would impose undue hardship
upon the estate or any of the heirs*
;* #e5uirement for extension> Bond andPor surety*
H. D5/%Aa#< "! Ex%E&"# "# A>$5.5/&#a&"# !#"$ P#/".a3 L5a2535&@
his will ta6e place upon payment of the estate tax*
I. D!5%5.%@
3efinitions>
+* he amount by which the state tax exceeds the amount shown in the estate tax
return
-* "f no amount is shown upon the return or if there is no return, the amount by which
the tax exceeds the amounts previously assessed*
;. Pa@$.& 2!"# >35B#@ 2@ Ex%E&"# "# A>$5.5/&#a&"#
Before a (udge can authori4e the delivery of the distributive shares, there must be first a
certification from the Commissioner that the estate tax has been paid*
+. DE&5/ "! C#&a5. O!!5%#/ a.> D2&"#/
#egister of 3eeds ' must register the transfer upon showing a certification from the
C"# that the estate tax has been paid
$ttorney ' the one who executed the settlement if obliged to file a petition or pleading
with the court
0otary Public ' the who will notari4e the settlement
City or Provincial &ngineer ' the one who ma6es the cadastral survey for purposes of
partition
3ebtor ' obliged to pay only after a certification of the C"# that the tax has been paid*
L. R/&5&E&5". "! Tax E?". Sa&5/!a%&5". "! OE&/&a.>5.< O235<a&5"./
0ote> &ven if the estate tax has been paid but new obligations of the decedent has
appeared and been settled by the estate, the tax corresponding to that amount of the new
debt shall be restituted to the estate*
M. Pa@$.& "! Tax A.&%>.& &" &A T#a./!# "! SAa#/9 B".>/ "# R5<A&/
0otes>
Taxation Law Review
Show certification from the Commissioner that the estate tax has been paid before
allowing transfer to the new owner*
Ban6s shall not allows withdrawal from deposits f deceased depositors without the
clearance from the B"#
C"# may authori4e the administrator or any one of the heirs to withdraw an amount
not exceeding P-<,<<<*
XIX. DONORHS TAX
3onor,s tax shall be imposed upon any transfer by any person or any property by gift*
$pplicable whether the transfer is by trust or otherwise, whether the gift is direct or indirect,
and whether the property is real or personal, tangible or intangible*
he formula for this tax is>
Gross Gifts
Less: Deductions___
0et Gifts
D #ateOOOOOOOOOOO
axable 0et Gifts
Less: Tax Credit____
3onor,s ax Payable
A. S&#a.<# B/. R3a&5B
+* #elatives
a* Brother, sister !whether full or half blood%, spouse, ancestor and lineal
descendant
b* #elative by consanguinity in the collateral line within the 2
th
degree
-* Strangers !.<K donor,s tax%
/ those not listed as relatives above
B. CE$E3a&5B B/. S?35&&5.< M&A">
a* Cumulative )ethod ' 9hen the donor ma6es - or more donations within the
same calendar year, it is re5uired that said donations be included in the
returns for the last deduction
b* Splitting )ethod ' $pplicable if the donor ma6es two or more donations during
different calendar years
C. D".a&5"./ &" a.@ %a.>5>a&9 ?"35&5%a3 ?a#&@ "# %"a35&5".
a* he &lection Code exempts donation to a candidate, a political prty or a
coalition of parties
b* #e5uirement> #eport donation to the C1)&L&C
D. T#a./!# !"# I.a>IEa& C"./5>#a&5"./
Taxation Law Review
0ote> if the sub(ect property is located in the Philippines and is a capital asset, apply HK
final income tax on the :)7 or gross selling price whichever is higher*
E. Ex$?&5". "! C#&a5. G5!&/
+* Gifts made by residents
a* 3owries
i* 3onation propter nuptias
ii* 9ithin + year after the celebration of marriage
iii* 3onor is the parent
iv* 3onee is the legitimate, recogni4ed, adopted child of the donor
v* &xempt only to the extent of the first P+<,<<<
b* Gifts to the Government !exclude proprietary agencies%
c* Gifts in favour of a 5ualifed non/profit organi4ation
-* Gifts made by a non/resident, not a citi4en of the Philippines
/ #e5uirement> 0ot more than .<K of the gift should be used for
administration purposes
.* ax Credit for 3onor,s ax Paid to a :oreign Country
/ Shall not exceed the same proportion of the tax against such credit is ta6en
F. Va3Ea&5". "! G5!&/ Ma> 5. P#"?#&@
a* Personal Property ' use :)7 at the time of donation
b* #eal Properties ' higher of Vonal 7alue or $ssessed 7alue
G. F535.< "! R&E#./ a.> Pa@$.& "! Tax
a* :ile within .< days after the the date the gift was made
b* Pay as you file system is used
c* 0o extension allowed !unli6e estate tax%
XX. VALUE ADDED TAX
7$ ' indirect tax
"ndirect ax ' the amount of the tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, property or services*
"nput ax ' means the 7$ due from or paid by a 7$/registered person in the course of
his trade or business from a 7$/registered person*
1utput ax ' refers to the 7$ due on the sale or lease of taxable goods or properties or
services by any person registered or re5uired to register under 7$*
0ote> he input tax paid by the taxpayer is to be deducted from his output tax to arrive at his
7$ payable or creditable*
1utput ax
Less: Input Tax________
Taxation Law Review
7$ Payable !Creditable%
A. P#/"./ L5a23
+* $ny person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties
-* $ny person who renders services
.* $ny person who imports goods
2* $ny person who is engaged in exportation
7$ ransactions
ransfer, use or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business
3istribution of transfer to>
/ Shareholders or investors as shares in the profits of 7$/registered
persons
/ Creditors in payments of debt
Consignment of goods if actual sale is not made within H< days
#etirement from or cessation of business, with respect to inventories
B. VAT ". Sa3 "! G"">/ "# P#"?#&5/
+* #ate and Base ' +-K of the gross selling price or gross value in money shall be
imposed on the following>
#eal properties for sale or lease
#ight to use patent, copyright, design or model plan, secret formula or
process, goodwill, trademar6, trade brand or the li6e
he privilege to use in the Philippines any industrial, commercial or scientific
e5uipment
he right to use motion picture, films, tapes and discs*
#adio, 7, satellite transmission and cable 7 time
:ormula> Gross Selling Price D +-K L 1utput ax
-* Vero #ated
$n entity that is 7$/registered is sub(ect to <K, meaning the gross selling
price of his goods or properties shall be multiplied by <K, hence, his output
tax shall be e5uivalent to P<*<<*
1n the other hand, since he is 7$/registered, he may claim input tax for the
purchases he made from 7$/registered entities*
he result will be a 7$ creditable amount or a creditable input tax which can
serve as a tax credit which can be deducted from any tax under the 0"#C*
$dvantage of being sub(ect to <K rather than being tax/exempt is obvious '
the input tax can be credited against any 0"#C tax*
he following are sub(ect to <K 7$>
o &xport Sales
Shipment of goods from the Philippines to a foreign country
Taxation Law Review
Sale of goods to a non/resident for delivery to the Philippines
Sale of raw materials or pac6aging materials to export/oriented
enterprise whose sales exceed I<K of total annual production
Sale of gold to the BSP
hose considered export sales under the 1mnibus "nvestment
Code
Sale to persons engaged in international shipping or
international air transport operations
o :oreign Currency 3enominated Sale
his is a sale to a non/resident of goods assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid in acceptable foreign currency
o Sales to persons exempted under special laws or international
agreements
C. VAT ". I$?"#&a&5". "! G"">/
+-K 7$ based on the total value used by the B1C shall be assessed and
collected
D. VAT ". Sa3 "! S#B5%/ a.> U/ "# La/ "! P#"?#&5/
+* #ate and Base of ax ' +-K7$ on the gross receipts derived from the sale of
exchange of services, including the use or lease of properties>
Construction and service contractors
Stoc6, real estate, commercial, customs and
immigration bro6ers
Lessors of property
9arehouse services
Lessors or distributors of cinematographic film
Persons engaged in milling, processing, manufacturing
or repac6aging goods for others
Proprietors, operators or 6eepers of hotels, motels,
resthouses, pension houses, inns, resorts
Proprietors or restaurants, cafes and other eating
places, clubs and caterers
3ealers in securities
Lending investors
ransportation contractors
Services of franchise grantees of telephone and
telegraph, radio and 7 broadcasting and all other franchise grantees*
-* ransactions Sub(ect to <K
Shipment of goods from the Philippines !export% paid for by any
acceptable foreign currency
Services paid in acceptable foreign currency !e*g* recruitment agencies%
Services rendered to persons or entities rated 4ero by special laws or
international agreements
Taxation Law Review
Services rendered to vessels engaged exclusively in international trade
Services performed by subcontractors andPor contractors in processing,
converting, or manufacturing goods for an enterprise whose export
sales exceeds I<K of total annual production
ransport of passengers and cargo by air or sea from vessels from the
Philippines to a foreign country
Sale of power or fuel generated through renewable energy sources
E. Ex$?& T#a./a%&5"./
&!a% &xempt ransactions ' Part + !Section +<QF+G%
he following transactions are exempt from the coverage of 7$
+* Sale of importation or agricultural and marine products in the
original state
-* Sale of importation of fertili4ers, seeds, seedlings and fingerlings,
fish prawn, poultry and livestoc6 feeds*
.* "mportation of personal and household effects belonging t the
residents of the Philippines returning from abroad and 0#Cs coming to settle in
the Philippines
2* "mportation of professional instruments and implements, apparel,
domestic animals and personal household effects !except any vehicle or
machinery% belonging to persons coming to settle in the Philippines, for their own
se and not for sale*
;* Services sub(ect to percentage tax under itle 7 of the 0"#C
H* Services by agricultural contract growers and milling for others of
palay into rice, corn into grits and sugar cane into raw sugar*
I* )edical, dental, hospital and veterinary services except those
rendered by professional
E* &ducational services
Q* Services rendered by individuals pursuant to an employer/
employee relationship
+<* Services rendered by regional or area head5uarters established
by )0Cs in the Philippines !do not earn income from the Philippines
++* ransactions which are exempt under special laws and
international agreements
+-* Sales by agricultural cooperatives duly registered with the C3$
+.* Gross receipts from lending activities by credit or multi/purpose
cooperatives duly registered with the C3$
+2* Sales by non/agricultural, non/electric and non/credit
cooperative duly registered with the C3$ provided that the share capital
contribution of each member does not exceed P+;,<<<
+;* &xport sales by persons who not 7$ registered
+H* Sale of low/cost housing !Below P+*; )illion for residential lots
and P-*; million for house and lot and other residential dwellings%
+I* Lease of a residential unit with a monthly rental not exceeding
P+<,<<<
Taxation Law Review
+E* Sale or publication of boo6s and newspapers, maga4ines which
appear at regular interval nor devoted principally to the publication of paid
advertisements*
+Q* Sale, importation or lease of passenger or cargo vessels
-<* "mportation of fuel, goods and supplies by persons engaged in
shipping or air transport
-+* Services of financial intermediaries
--* Sale or lease of goods or performance of services other that
those mentioned above and the gross receipts andPor annual sales must not
exceed P+*; million
& !b% 1ptions available ' Part "" !Section +<QF-G%
$ 7$/registered person is given the option to be 7$/exempt or be sub(ect to 7$*
#ationale> Such 7$/exempt person may incur a large amount of input tax in excess of his
output tax, and such input tax can be credited against any tax under the 0"#C*
Such election is irrevocable for a period of . years from the 5uarter the election was made*
& !c% Creditable "nput ax
0ote> he input tax shall be creditable against the output tax incurred by a 7$/registered
person* he rule is that only purchases from 7$/registered persons have input tax*
& !d% ransitionalPPresumption "nput ax Credits
+* ransitional "nput ax Credit
/ $ person who becomes liable to 7$ or any person who elects to be
7$/registered is allowed to claim input tax on his beginning inventory of
goods, materials and supplies e5uivalent to -K of the value of such
inventory or the actual 7$ paid on such goods, materials and supplies,
whichever is higher*
-* Presumptive ax "nput Credits
/ :or persons or firms engaged in the processing of sardines, mac6erel or
mil6, manufacturing refined sugar and coo6ing oil, and manufacturing
pac6ed noodle/based instant meals, a presumptive input tax e5uivalent
to 2K of the gross value in money of their purchases of primary
agricultural products are used as inputs to their production*
& !e% #efunds or ax Credits of "nput ax
/ - $vailable options !period> within - years%
/ $pply for tax credit
/ $pply for a refund of the creditable input tax
& !f% "nvoicing and $ccounting #e5uirements
7$/registered person must issue
Taxation Law Review
/ a 7$ invoice for every barter, sale or exchange of goods or
properties
/ a 7$ 1fficial #eceipt for every lease of goods and services, and for
every sale, barter of or exchange or services
Components of 7$ "nvoice or 7$ 1*#*
+* Statement that the seller is a 7$/registered person followed by his "0
-* he total amount which the purchased is obligated to pay to the seller
a* he amount of tax shall be shown as a separate item in the invoice or
receipts
b* "f the sale is exempt from 7$, the term @7$/exempt saleA shall be written
or printed prominently on the invoice or receipt*
c* "f the sale is sub(ect to <K 7$, the term @Vero/ratedA shall be written or
printed prominently on the invoice or receipt
d* he date of transaction, 5uantity, unit cost and description of the goods or
properties or nature of service
.* "n sales of P+<<< or more, the name, business style, address and "0 of the
purchaser*
& !g% #eturn and Payments
/ &very person liable to pay 7$ shall file a 5uarterly return of the
amount of his gross sales or receipts within -; days following the
close of each taxable 5uarter prescribed for each taxpayer* 8owever,
the payment of the 7$ shall be made on a monthly basis*
& !h% Power of the Commissioner to Suspend the Business 1perations of a taxpayer
7iolations
/ "n case of 7$/registered persons
failure to issue invoices or receipts
failure to file a 7$ return as re5uired
Understatement of taxable sales or receipts by .<K or more of
his correct taxable sales
/ :or failure of any person to register as re5uired
temporary closure for not less than ; days
Lifted only upon compliance of the re5uirements
XXI REMEDIES
A. R$>5/ &" &A G"B#.$.& (A////$.& 8 C"33%&5".*
+* 0ormal or 1rdinary $ssessment and Collection
$vailable to the Government if there was a return filed by the taxpayer
and such return is not false or fraudulent*
Government may ma6e the assessment within . years after the last day
prescribed by law for filing the return ' not from the time of payment*
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"f the return is filed beyond the period of filing prescribed by law, the ./
year period shall be counted from the day of the filing of the return*
Prescription period for collection is ; years from final assessment*
-* $bnormal or &xtraordinary $ssessment and Collection
his remedy is resorted in cases where>
o he taxpayer omits or fails to file his return
o he taxpayer files a return but the return was fraudulent
o he return filed by the taxpayer was false*
0ote> legal presumption is that the return filed by the taxpayers is true and
correct* herefore, the burden of proof lies in the government to prove that
such return is fraudulent or false*
#emedies !options available%>
o $ssessment and collection
Prescriptive period for assessment is +< years from the
discovery of the non/filing of the return or the fraudulent or
false return
Period for collection prescribes in ; years from the date of
final assessment
o Collection without $ssessment
0o prescriptive period for assessment
Prescriptive period for collection is +< years from the
discovery of non/filing or fraudulent or false return*
B. P#"%>E# !"# A////$.&
Section --E of the 0"#C provides for - steps for assessment
o pre/assessment notice
o final assessment notice
## 0o* +-/QQ provides for . steps, namely>
o 0otice of informal conference
o Preliminary notice of assessment !P$0%
o :ormal letter of demand and notice to pay the tax !:$0%
+* Pre/assessment 0otice !P$0%
/ issued to a taxpayer who fails to file a return, or files a return but fails
to pay the tax, or files a return, pays the tax but such payment is
insufficient*
/ he following are instances where P$0 is not necessary !Section
--E%
)athematical error in computation
3iscrepancy discovered by the withholding agent
9hen a taxpayer who opted to claim a refund or tax credit of
excess creditable 98 for a taxable period was determined t
have carried over and automatically applied the same amount
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claimed against the estimated tax liabilities for the taxable
5uarter or 5uarters of the succeeding taxable year
9hen the excise tax due on excisable articles has not been paid*
9hen an article locally purchased or imported by an exempt
person has been sold, traded, or transferred to non/exempt
persons !e*g* vehicles, capital e5uipment, machinery%
-* :inal $ssessment 0otice !:$0% is issued when>
he taxpayer, having received a pre/assessment notice, fails to
respond within the period provided by the rules
Under the ; instances enumerated under Section --E
.* Protest
$fter receipt of the :$0, the taxpayer cannot immediately appeal to
the C$* he Code mandates that before such appeal can be
made, a protest must first be filed by the taxpayer*
Protest is an action disputing the final assessment* his is in
accordance with the principle of exhaustion of administrative
remedies*
B"# is given +E< days within which to decide on the matter
Upon denial of the protest or the lapse of the +E</day period without
action from B"#, taxpayer may appeal to the C$ within .< days
from receipt of the denial or lapse of the period*
"f no appeal is made, the decision shall become final, executory and
demandable*
2* $ppeal to the C$
Upon denial or lapse of the +E</day period, appeal to the C$
3ivision
Pending appeal, B"# may amend the assessment during the
pendency of the appeal to avoid multiplicity of suits*
;* $ppeal to the Supreme Court
"f the C$ decision is unfavorable, taxpayer may file an )# within
+; days from receipt of the decision of the C$ sitting in division*
"f the decision in )# is still unfavorable, elevate the appeal to the
C$ en banc
"f the decision of the C$ en banc is still unfavorable, the taxpayer
is given the remedy to file a petition for certiorari to the SC under
#ule H;*
1nly grave abuse of discretion amounting to lac6 or excess of
(urisdiction can be a ground for petition*
1b(ections to assessments should only be raised to the B"# as well
as the C$, not via petition for certiorari*
:inal assessment becomes final and executory when>
o he protest is not filed on time
o he supporting documents were not filed within the H</day
period
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o 0o appeal was filed to the C$ within .< days after the lapse
of the +E</day period
o here was an appeal filed but such was beyond the period to
appeal*W
C. F"#$/ "! P#"&/&
+* Protest under the Local ax
LGC provides that when the local treasurer finds that correct taxes,
fees, or charges have not been paid, he shall issue a notice of
assessment stating the nature of the tax, fee, or charge the amount of
deficiency, the surcharges, interests and penalties
he taxpayer may file a protest within H< days from the receipt of the
notice of assessment*
0on filing will ma6e the assessment final and executory
Local treasurer may grant the protest, wholly or partly or deny the
protest, wholly or partly*
he taxpayer is given a period of .< days from the receipt of the denial
or the lapse of the H</day period, within which to appeal to the court of
competent (urisdiction, the #C
"n case the #C renders an unfavorable decision, the taxpayer may
appeal such decision to the C$ sitting en banc*
&levate to the SC in case the decision of C$ en banc in unfavorable*
-* Protest under #eal Property ax
)ade by the taxpayer who is not satisfied with the action of the assessor in
the assessment of his property*
axpayer has H< days from the date of receipt of the written notice of
assessment to appeal to the LB$$*
Before this protest may be entertained, the LGC re5uires that the taxpayer
first pay the tax* his is referred as payment under protest !annotated on
the tax receipt%*
he protest must be filed within .< days from the payment of the tax*
LB$$ shall decide within +-< days from receipt of the appeal*
Burden proof re5uired is substantial evidence only*
"n case the LB$$ renders unfavorable decision, he may appeal to the
CB$$*
"f the CB$$ li6ewise render an unfavorable decision, the taxpayer may
appeal to the C$, and thereafter to the SC*
.* Protest under the ariff and Customs Code
Under the CC, if the importer loses the case, his remedy is to appeal the
decision within +; days before the Commissioner*
"n case the Commissioner decides in favor of the government, the imposter
may file an appeal to the C$ sitting in division within .< days from receipt
of the decision*
"f the C$ decides in favor of the government, the importer may file an )#
before the same division within +; days*
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"n case of unfavorable decision from the C$ division, the importer may
appeal before the C$ sitting en banc*
"n case the importer still fails to have a decision in his favor, he may appeal
to the SC within +; days from receipt of the unfavorable decision*
$ second situation is provided in case the importer/taxpayer prevails over
the government*
here will be an automatic review within ; days*
:iling> Secretary of :inance in case the value of the commodity is P;million
above; and Commissioner if the value of commodity is less than P;million
he Commissioner is given a period of .< days within which to decide*
"f the Commissioner reverses the ruling of the Collector and renders a
decision in favor of the government, such decision shall be final and
executory
"f the Commissioner affirms the Collector or does not render a decision
within the .< day period, there shall be automatic review before the
Secretary of :inance*
he decision of the Secretary, in case it is unfavorable to the importer/
taxpayer, shall be appealable to the C$*
"t is the decision of the Secretary that is appealable to the C$*
3* Compromise
he Commissioner may compromise the payment of any internal revenue tax under
- instances>
9hen a reasonable doubt as to the validity of the claim against the taxpayer
exists*
9hen the financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax*
)ay the government compromise both criminal and civil cases=
o "n civil cases, the government may compromise the liability of the
taxpayer at any stage of the proceeding except when the case is
already final and executory*
o "n criminal cases, compromise is also allowed except if the criminal
case is already files before the #C or if the case involves fraud*
Suppose the civil case is already final and executory, can it still be sub(ect to
compromise=
o "f this would be allowed, the doctrine of separation of powers will be
violatedM
Suppose the corporation is already dissolved, can the stoc6holder still be
compelled to pay the tax liability=
o 0o, except in the following cases>
"f there is evidence to prove that the assets of the corporation
were ta6en by the stoc6holder
"f the stoc6holder has unpaid subscription*
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Limitations on Compromise $greements>
:or cases of financial incapacity, the minimum rate shall be e5uivalent
to +<K of the basic assessed tax*
:or other cases, the minimum rate shall be e5uivalent to 2<K of the
basic assessed tax*
0ote> 9here the basic tax involved exceeds P+million or where the
settlement offered is less than the prescribed minimum, the
compromise shall be sub(ect to the approval of the &valuation Board
!composed of the Commissioner U 2 3eputy Commissioners%
&* #emedies for Collection of 3elin5uent axes
+* ?udicial $ction
Civil $ction
Criminal $ction
-* $dministrative $ction
3istraint
Levy
ax Lien
:* 3istraint
+* Constructive 3istraint
"f delin5uent taxpayer is retiring from any business sub(ect to tax
"f 3 is intending to leave the Philippines
"f 3 is intending to remove his property in the Philippines
"f 3 is intending to hide or conceal his property
"f 3 is intending to perform any act to obstruct the proceedings for
collecting the tax due or which may be due to him*
0ote> he sub(ect of the distraint is the personal property of the taxpayer*
3istraint is effected by>
o #e5uiring the taxpayer or any person having possession or control
of such property to sign a receipt covering the property distrained
o 1bligate himself to preserve the same intact and unaltered and not
to dispose of the same in any manner whatever, without the
authority of the Commissioner
"n case the taxpayer refuses to sign the receipt, revenue officer can (ust
leave a copy in the premises in the presence of - witnesses*
-* 3istraint of "ntangible Properties
Stoc6s and other securities
o $ copy of the warrant of distraint shall be served upon the taxpayer
and upon the President, manager, treasurer, or other responsible
officer of the corporation which issues the stoc6 certificates
3ebts and credits
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o $ copy of the warrant is left with the person owing the debts or
having in his possession or under his control of such credits, or his
agent
Ban6 accounts
o Shall be garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manager, treasurer, or other
responsible person of the ban6*
.* $ctual 3istraint
he personal property of the taxpayer is physically ta6en by the distraining
officer*
9ithin +< days from the receipt of the warrant, a report on the distraint is
submitted to the #31 and ##3*
he property distrained shall be sold in public auction !the time of sale
shall not be less than -< days after notice to the owner or possessor of the
property
G* Levy
his remedy is applicable to real property* Levy may be simultaneously or
after the distraint of personal property*
9ritten notice shall me mailed or served upon the #3 of the place where the
property is located and upon the delin5uent taxpayer, his agent or the
manager of the business*
0ote that at any time before the day fixed for the same, the taxpayer may
discontinue all proceedings by paying the taxes, penalties and interest*
!#"G8 1: P#&&)P"10%
Unli6e in cases of distraint, in cases of levy of real property, the taxpayer has
also the #"G8 1: #&3&)P"10*
#edemption price is the e5ual to the amount of public taxes, penalties, and
interest thereon from the date of delin5uency to the date of sale*
"f there is no bidder, the property shall be forfeited to the Government !with +
year redemption period%*
"n case there is a bidder and the bid is not enough, the rules on distraint of
personal property and other real property shall be applicable*
0ote> "n case of forfeiture, the title to the property is automatically transferred to the
government after registration of such forfeitures with the #3 while in cases of
distraint, the title to the property is not automatically registered*
8* "n(unction
he 0"#C prohibits any court to have the authority to grant an in(unction to restrain the
collection of any 0"#C tax, fee or charge*
By way of exception, the C$ is authori4ed to issue writs of in(unction for 0"#C taxes*
"* ax Lien
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"n case where the taxpayer neglects or refuses to pay an internal revenue tax, the
amount due shall constitute as a lien in favor of the Government*
e tax lien shall not be valid against any mortgagee, purchaser or (udgment creditor until
the notice of such lien is filed by the C"# to the #3*
hus, before such lien can affect the rights of the mortgagee, it should be registered first
with the #3* !1therwise, it is the mortgagee who will prevail over the government*
?* $pproval of the Commissioner
Before an action, civil or criminal, may be filed in court, the Commissioner must first
approve such filing of the action*
he Commissioner may delegate powers vested in him under the 0"#C to any
subordinate with the ran6 of a division chief or higher*
he following are the powers of the C"# which cannot be delegated>
o Power to promulgate rules and regulation by the Secretary of :inance
o Power to issue rulings of first impression or to reverse, revo6e or modify any
existing ruling of the Bureau*
o Power to compromise or abate any tax liability
o Power to assign or reassign internal revenue officers to establishments where
articles sub(ect to excise tax are produced*

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TAXATION LAW REVIEW NOTES

Prepared by: Michael Gines Munsayac

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