!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 3. Input tax on Vat 4. Creditable w/holding tax system under NIT 5.

Tax credit certificate. Q: Who are allowed to claim it? A: RC and DC only. Q: suppose you paid the 100K NIT to US, can you claim as a deduction the whole 100K? what is the formula? "same procedure for (1) income tax paid to foreign country; (2) estate tax paid to foreign country; and (3) Donors tax paid to foreign country. A: Formula: STEP 1 GI from sources w/in NIT: _____________________ GI from entire world STEP 2 Quotient x RATE = amount w/c can be claimed as a deduction A: you cannot claim the whole 100K, you can only claim the product of the quotient times the rate TAKE NOTE: deduct at the bottom of the formula ( sa computation ng GI) Q: Suppose you are a RC, you pay NIT to US, will you be able to claim it as a tax deduction? A: 1. generally, you can claim it as tax credit. 2. you can claim under Sec. 34 C (1) b "if the taxpayer did not signify in his return his intention to avail himself of the benefit of tax credit for taxes paid to foreign country. "taxes incurred not related to the trade or business, you have the option to: a. claim it as tax credit; or b. claim it as a deduction "law gives you this privilege. Q: When is taxes not allowed as a deduction? A: Sec. 34 C (1) 1. Income tax; 2. Income tax imposed by authority of any foreign country; 3. Estate and Donor tax; and FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE NET INCOME TAX CREDIT) 34 D LOSSES Q: Is always a requirement that it is incurred in pursuit of trade, bus. or profession? A: No. Sec. 34 D(1) provides for 2 kinds of losses: a. incurred in pursuit of trade, bus. or profession; b. property connected with t,b,p, if the loss arises from fire, storms, shipwrecks or other casualties or from robbery, theft or embezzlement (arising from natural calamity). Q: What is the requirement? A: 1. Loss actually sustained during the taxable year 2. Not compensated for by insurance or other forms of indemnity. 3. Not claimed as a deduction for estate tax purposes. Q: This is your itemized deduction which can be claimed as a deduction from? A: Gross income TAKE NOTE: Q: Who are not allowed to claim deductions? A: Under 34 C (3) - NRC, NRA; and N/RFC TAKE NOTE: 1. NRAE and NFC allowed deduction only if and to the extent that they are connected with income from sources within the Phils. 2. Taxes that had been allowed as deduction but are later in refunded should be treated as part of the gross income during the year that it is received (34 1 last paragraph) Q: Which would you choose? Tax credit or deduction? A: tax credit because it is deducted from the taxable income while deductions are deducted from the GI. 4. taxes assessed against local benefits of a kind tending to increase the value of the property.

46

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan " The itemized deduction of losses, however, is not confined to section 34B. it is also found under section 86A (1) (e) which also pertains to deductions available under the estate tax law. "Losses within six (6) months after the death of the decedent can be claimed as itemized deduction of losses under Section 34B. However, may be claimed as deduction under estate tax return provided that the same are not claimed as itemized deduction of losses under Section 34B. Q: How many carry-overs do we have under the Code? A: 3. Namely: 1. Section 27 E (32) Carry forward of excess minimum Tax 2. Section 39 D Net Capital Loss Carryover 3. Section 39 D 3 Net Operating Loss Carry-Over. KINDS OF LOSSES AND THEIR CARRYOVERS: A. ORDINARY LOSS NOLCO ( #3 above) Q: Why is there a need for a carry over under Sec. 34 D # when you can claim the loss from both capital and ordinary loss? A: if the loss exceeds the income for the taxable year, you cannot deduct the entire amount of loss from your income for that year so the excess may be deducted for the taxable year following the loss. B. CAPITAL LOSS NET CAPITAL LOSS CARRY OVER ( # 2 above) NET CAPITAL LOSS CARRY-OVER NET OPERATING LOSS CARRY-OVER 1. taxpayers is an individual only not corporation. 2. involves capital loss net 1. taxpayer may be an individual or corp; 2. losses incurred or connected with T or B; 3. Business losses not previously offset as a deduction from the GI carried over as such for the next 3 consecutive years; 4. can be deducted from capital gains and/or ordinary gains.

3. carry-over as loss from sale of capital asset in the next succeeding year

4. can only be deducted from capital gains.

NET OPERATING LOSS CARRY REQUIREMENTS: 1.Net operating loss of the business or enterprise incurred w/in the taxable year 2. not previously off-set as a deduction from the GI 3. carried over as a deduction from the GI for the next 3 consecutive taxable years immediately following the year of such loss. Q: Can the period be extended? A: yes, for mines other than oil and gas well. 1. net operating loss w/out the benefit incentives provided by law; 2. incurred in any of the first 10 years of operation. 3. carried over as a deduction from the GI for the next 5 years following such loss. 4. no substantial change in the ownership of the business or enterprise. Q: What is the limit? A: 75% of the nominal value of outstanding shares is held by or on behalf of the same persons/ corporation " individual no problem, problem lies with corporations or enterprises. ABANDONMENT LOSSES 1. contract area where petroleum operations are undertaken is partially or wholly abandoned;

47

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan " all (1) accumulated exploration and (2) development expenditures pertaining thereto shall be allowed as a deduction. 2. a producing well is subsequently abandoned: "unamortized cost and undepreciated cost of equipment directly used therein shall be allowed as a deduction in the years it was abandoned. TAKE NOTE: 1. if abandoned well is reentered and production is resumed; or 2. if equipment or facilities are restored into service in the year of resumption or restoration and shall amortized or depreciated. Q: What is the Tax benefit rule? A: Last Par. of Sec. 34 E (1): recovery of bad debts previously allowed as deduction in the preceding year shall be included as part of the gross income in the year of recovery to the extent of the income tax benefits of said deduction. Q: What is a Bad Debt? A: Bad debts shall refer to those debts resulting from the worthlessness or incollectibility in whole or in part of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold and services rendered. CHINA BANK VS. CA " bad debts can only be claimed if pursuant to a contract of loan - no bad debts for loss of instruments. Q: Who claims it? A: a. creditor b.money lender Q: What year can it be claimed? A: can be claimed in the year it was actually sit ascertained to be worthless and charged off, meaning cancelled in the books of account. Q: Do you need to file an action before you can claim? A: No, all you have to do is prove that you did exert effort to claim or recover the same. Q: What cannot be deducted as bad debts? A: 1. debts not incurred in connection with the trade, business and profession of taxpayer. 2. transactions, mered into between parties mentioned under Section 36 (B) namely. a) between members of the family b) between an individual who owns more than 30% of outstanding capital stock of a corporation and that corporation c) between two (2) corporations more that 50% of the outstanding capital stock of which is owned by or for the same individual d) between a grantor and fiduciary of any trust e) between two (2) fiduciaries of two (2) trusts who has the same grantor f) between a fiduciary of a trust and above fiduciary of such trust SECURITIES BECOMING WORTHLESS 1. ascertained to be worthless and charged off within the taxable year 2. capital asset 3. taxpayer, other than a Bank or trust company incorporated under Phil. Laws 4. substantial part of business is the receipt of deposit 5. considered as a loss from the sale of capital assets on the last day of such taxable year 34 F DEPRECIATION Q: What is depreciation? A: It is the gradual dimension in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence. Q: What kind of property is involved? A: 1. Real property except parcel of land 2. Personal Property REQUISITES: 1. depreciation deduction must be reasonable 2. for the exhaustion, wear and tear, including reasonable allowance for obsolescence 3. property used in the trade of business

48

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: What do you mean by reasonable allowance? A: it shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: 1.Straight-line method 2.Declining balance method 3.Sum-of-the-year-digital method; and 4.any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONS 1. properties directly related to production of petroleum 2. allowed under (1) straight line or (2) declining balance method 3. useful life of properties used or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the Commissioner. 4. for property not used directly in the production of petroleum (1) depreciated under the straight line method, and useful life is only five (5) years DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS ALLOWANCE FOR DEPRECIATION: 1.all properties used in mining operations other than petroleum operations shall be computed as follows: a. if the expected life is ten (10) years or less normal rate of depreciation b. if the expected life is more than ten (10) years depreciated over any number of years between five (5) years and the expected life. REQUIREMENTS: 1. depreciation is allowed as a deduction from 61; and 2. contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate shall be used. DEPRECIATION DEDUCTIBLE BY NRAETB OR RFC " reasonable allowance for the deterioration of property 1. 2. 3. arising out of its use or employment or non-use in the business, trade or profession property is located in the Philippines

34 G DEPLETION OF OIL and GAS WELLS and MINES " only deduction which is a not self executing deduction Q: What is depletion? A: the exhaustion wear and tear of natural resources as in mines, oil, and gas wells "the natural resources called wasting assets DEPRECIATION vs DEPLETION 1.involves property 2. ordinary and tear equipments wear of 1. involves natural resources 2. ordinary wear and tear of natural resources

TAKE NOTE: "Equipment used in mining operation is deductible in depreciation Q: Method for computing depletion? A: cost depletion method Q: to whom allowed? A: only mining entities owning economic interest in mineral deposits "Economic interest: capital investments in mineral deposits 34H CHARITABLE & OTHER CONTRIBUTIONS TAKE NOTE: 1.unique because deducted from the taxable net income and not from the gross income "second step of the formula deduction Q: Who is claiming the deduction? A: the donor Q: Who are the Donees? A: 1.Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purpose

49

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 2. Accredited Domestic corporation or association organized and operated exclusively for religions, lion, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institution, or to non government organization and no part of its net income inures to the benefit of any private stock holder or individual Q: How many kinds of deduction? A: Two (2) kinds: 1.partial deduction "10% of taxable income in case of an individual "5% of taxable income in case of corporations 2. full /total deduction Q: Which of the two kinds is the General Rule? A: General Rule: Partial deduction Exception: Total /Full deduction Q: Suppose Mr. A made a cash donation of P1M. How much can he claim as a deduction? A: First determine the taxable income of Mr A since he is an individual, he can only deduct 10% of his taxable income. Q: What if the Donee is not one of those mentioned under the law, can he claim a deduction? A: No. TAKE NOTE: Donee is never an individual. Q: If the Donor is a pure compensation income earner and he donates P100,000 to the church, can he claim it as a deduction? A: No. pure compensation income earner can only claim a deduction under Sec 34 M Q: If Donee is the Philippine Government, what is the requirement? A: it must be made exclusively for public purposes Q: What if the Donee is a province? A: there must be a qualification that it is for public purpose Q: If the Donee is a Domestic Corporation, what is the requirement? 4. annual administrative expense does not exceed 30% of the total expenses and 5. in case of dissolution, the assets of which would be distributed to: a) another non profit domestic corporation organized for similar purpose or purposes b) to the state for public purpose c) distributed by the court to another organization to be used in such a manner which would accomplish the general purpose for within the dissolve organization was organized 34I RESEARCH AND DEVELOPMENT "In the old law, this is not allowed as a deduction. To remedy this, they felt that A: no part of its income inures to the benefit of any private shareholder or individual Q: What are those contributions which can be deductible in full? A: 1.Donations to the Government no conflict with partial (different requirement) "Partial donated for exclusively public purposes "Full, used in undertaking priority activities of NEDA 2.Donations to certain Foreign Institutions or International Organizations "in compliance with agreement, treaties or commitment entered into by the Philippine Government and such donees 3.Donations to Accredited government organizations government organization, non domestic corporation Non Non profit

REQUIREMENTS: 1. organized and operated exclusively for scientific, research, educational, character building and youth and sport development, health, social welfare, cultural or charitable purposes or a combination thereof 2. no part of the net income of which inures to the benefit of any private individual 3. uses the contributions directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated

50

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan those should be a separate deduction for research and development. REQUISITES: "tax payer may treat research and development expenditures as ordinary and necessary expenses provided: 1. it is paid or incurred during the taxable year 2. incurred in connection with trade, business or profession; and 3. not chargeable to capital account. Q: Treated as such when? A: during the taxable year it is paid or incurred AMORTIZATION OF CERTAIN RESEARCH AND DEVELOPMENT EXPENDITURES "at the election of the taxpayer, the following shall or may be treated as deferred expenses: a. paid or incurred by the taxpayer in connection with his trade, business or profession; b. not treated as expenses under par 1 and c. chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion Q: How to compute taxable income: A: deferred expenses shall be allowed as deduction ratably distributed over a period of not less than 10 months as may be elected by the taxpayer (beginning with the month the taxpayer first expenditures.) realizes benefits from "allowed as a deduction only if shown that the tax required to be deducted and withheld there from has been paid to the BIR in accordance with Section 58 and Section 81 34 L OPTIONAL STANDARD DEDUCTION KINDS OF DEDUCTIONS: 1.Itemized deduction 2.Optional Standard Deduction 3.Personal /Additional Deduction OPTIONAL STANDARD DEDUCTION: "can be availed of by an individual who may elect a standard deduction in an amount not exceeding 10% of his gross income " may apply in lieu of the other deductions under Section 34 2. Any expenditure paid or incurred for the purpose of undermining the existence, location, extent or quality of any deposit of one or other mineral including oil or gas. " not for mineral exploration 34 J PENSION TRUST Q: Claimed by Whom? A: the employer Q; What is a Pension Trust contribution? A: a deduction applicable only to employer on account of its contribution to a private pension plan for the benefit of its employee deduction is purely business in character. Q: Requisites? A: 1.the employer must have established a pension or retirement plan to provide for the payment or reasonable pension of his employees 2. pension plan must be reasonable and actually sound; 3. it must be funded by the employer 4. the amount contributed must no longer be subject to his control or disposition 5. the amount has not yet been allowed as a deduction and 6. the amount has or is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. 34 K ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF CERTAIN PAYMENTS

"the election or option may be exercised for any taxable year after the effectivity of the code but not later than the time prescribed by law for filing the return for such taxable year. LIMITATION ON DEDUCTION Q: When not deductible? A: 1.Any expenditure for the (1) acquisition or improvement of land or (2) for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion and office site

51

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan "the taxpayer must signify in his return his intention to elect the optional standard deduction, otherwise, he shall be considered as having availed of the itemized deduction. Q: Who can claim this deduction? A: all individual taxpayers except non resident alien not engaged in trade or business (NRANETB) Reason: he is not liable to pay by way of the NIT, thus, follows he cannot claim this deduction because he is liable to pay by way of GIT. TAKE NOTE: "can co-exist with additional exemption personal and / or "all can claim both personal and additional exemption Q: Why not include NRAETB? Can the latter claim any exemption? A: NRAETB is not included because Section 35 A refers to Section 24 A "NRAETB can claim personal deductions but not additional exemptions pursuant to Sec 35 D REQUIREMENTS: 1.NRAETB should file a true and accurate return 2. the amount to be claimed as personal exemptions should not exceed the amount provided for under Philippine Laws TAKE NOTE: AEMOP: can be a RA or NRAETB BASIC PERSONAL EXEMPTIONS: 1. Single individual; or individual judicially decreed as legally separated with no qualified dependents. " 20, 000 2. For head of the family can be single or legally separated with qualified dependents. " 25, 000 3. For each married individual if only one of the spouse, earns or derives gross income, only such spouse can claim the personal exemption. "32, 000 Q: Who is the head of the family? A: 1.unmarried or legally separated man or woman 2. With (1) one or both parties or (2) With one or more brothers and sisters (3) with one or more legitimate, recognized, natural or legally adopted children 3. living with and dependents upon him for their chief support 4. whose such brother or sisters or children are (1) not more than 11 years old and (2) not gainfully employed, (3) unmarried 5. OR, regardless of age, the same are incapable of self support because of mental or physical defect.

34 M PREMIUM PAYMENTS ON HEALTH AND /OR HOSPITALIZATION INSURANCE OF AN INDIVIDUAL TAXPAYER " for (1) Health and /insurance (2) Hospitalization REQUIREMENTS: 1. amount of premiums, paid by taxpayer for himself and members of his family, 2. amount of premiums should not exceed (1) P2,400 per family or (2) P200 a month 3. gross income of the family for the taxable year is not more than P250,000

Q: Who can avail of this deduction? A: 1.individual taxpayer earning purely compensation income during the year; 2. individual taxpayer availing itemized or optional standard deduction; and 3. individual taxpayer earning both compensation income and income from business SECTION 35 ALLOWANCE FOR PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER Q: When do we apply this? A: apply if individual taxpayer is paying by way of NIT Q; Who are taxpayer? A: those mentioned under Section 24 (A) 1. RC 2. NRC 3. OCW 4. RA

52

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: Why do we have to determine who the head of the family is? A: only legally separated individuals can claim additional exemptions if they have qualified dependents. TAKE NOTE: "R.A. 7432 and RR 2-98: a senior citizen can also be a dependent. Q: Can a widower claim exemptions? A: exemptions must be strictly construed, widower not included in the list under Section 35 A but can claim under sec 35B "widower, married or used to be married MARRIED INDIVIDUALS "each legally married individuals can claim the personal exemption. Husband and wife = P64,000 Q: Who are allowed to claim? A: Normally , it is the husband who claims unless he executes a waiver that the wife will claim the same (RR2-98) Additional Exemptions: (35B) -additional exemption of P8,000 for each dependent not execeeding four (4) Q: Who can claim the same? A: 1.Married couples: only one of the spouses can claim it; 2.legally separated individuals: can be claimed by the spouse who has custody of the child or children "the additional exemption claimed by both shall not exceed the maximum additional exemption herein allowed. Q: Define dependents A: legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is (1) not more than 21 years of age, (2) unmarried, and (3) not gainfully employed or (4) if such dependent, regardless of age is incapable of self support because of mental or physical defect. Q: What if widower has illegitimate children, can claim additional exemption? A: can claim, can be considered as head of the family w/ dependent Q: What if the children are temporarily away from the parents? A: still considered living with parents, can claim exemption CHANGE OF STATUS: (SEC 35 C) Q: Reckoning Period? A: end of the year or close of such year when such change of status occurred. TAKE NOTE: "always choose the higher amount of exemption if you are filing a return covering the period within which the change of status occurred 1. if the taxpayer should (1) marry or (2) have additional dependents during the taxable year, he may claim the corresponding exemption in full for the year. Illustration: 1.Single Jan 1, 2005 2.Married June 1, 2005 on April 15, 2006 status: legally married can claim P 32,000 2. if the taxpayer should die during the taxable year, estate can claim personal exemption. Illustration 1.Jan. 25, 2005 taxpayer married w/ one child can claim on April 15, 2006 P32,000+ P8,000

} P40,000

" In this case, as if the change of status occurred at the close of taxable year. If taxpayers spouse or child dies within the taxable year or the dependents became (1) gainfully employed (2) got married or (3) became 21 as if the change as status occurred at the close of taxable year. Illustration: 1. Taxpayers tragic story wife died Jan. 25, 2005 and child died the next day then another child eloped and get married. 2. Taxpayer despite the tragedy can claim ton of money on April 15, 2006. P 32,000 P 16,000 (8,000 per child) 48,000 Section 36. Items not Deductible

53

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 36 A. General Rule: In computing net income, no deduction shall be allowed: (1) Personal, living or family expenses not related to trade or business (2) Section 36 A (2) and Section 36 A (3) General Rule: No deductions allowed for 1. Any amount paid out for new buildings or for permanent improvements, or betterments, made to increase the value of any property or estate 2. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Exceptions: 1. Option granted to Private Educational Institution to deduct the same as capital outlays. TAKE NOTE: "Amount paid for new buildings, can be deducted if it involves intangible drilling and development cost incurred in petroleum operations (Sec 34 6 (A) PREMIUMS POLICY : PAID ON LIFE INSURANCE Gen. Rule: NO DEDUCTION Except: distribution in liquidation or less than 50% of the outstanding capital stock 3) 4) 5) 6) Two corporations Grantor or Fiduciary Two fiduciaries of two trust Fiduciary and beneficiary of trust

Sec. 37 Special provisions regarding deductions of insurance companies. Codal Provisions Section 38: Losses From Wash Sales of Stock or Securities Q: What is a wash sale? A: It is a sales or other disposition of stock securities where substantially identical securities are purchased within 61 days, beginning 30 days before the sale and ending 30 days after the sale. Q: What period? A: 61 day period beginning 30 days before and ending 30 days after the sale Q: Jan 20 you purchased share of stock, and disposed of the same on Feb 5, 2005. Is this a wash sale? A: No Q: If it is a loss in wash sale, happens? A: General Rule: (Sec 131 RR No. 2) gains from wash sale are taxable but losses are non-deductible Exception: "unless claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer Q: Reason why losses in wash sale cannot be deducted? A: 1. to avoid too much speculation in the market 2. taxpayer not telling the truth, because he may say he incurred a loss instead of a gain Section 40. Determination of Amount and Recognition of Gain or Loss GENERAL RULE: This is totally irrelevant if the income is subject to fit. In fit gain is presumed.

1. covering the life of any officer or employee or any person financially invested in any trade of business carried on by the taxpayer. 2. taxpayer is directly or indirectly the beneficiary under such policy. LOSSES FROM SALES OR EXCHANGES OF PROPERTY (between related parties) 1) between family members Q: Who is considered the family of the taxpayer? A: a. brothers and sister (whole is ! blood) b. spouses c. ancestors d. lineal descendants Q: are uncles or nieces included? A: no

IN DONORS TAX "Relatives includes relatives by consanguinity within the 4th civil code. Nephew is a stranger and relative ang nephew. 2) individual and corporations

54

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan EXCEPT: sale of shares of stock where you have to determine actual gain or loss Q: When is there a gain? A: excess of the amount realized over the basis or adjusted basis for determining gain. (amount realized from the sale or other disposition of property) Q: When is there a loss? A: the amount realized is not in excess of B or AB Illustration: 1987 Bar (Juan dela Cruz sold jewelry for 300,000 ) contract of sale "amount realized is 300,000 Q: What will be the basis of the gain? A: Sec. 40 B (1), property was acquired by purchase "Cost: purchase price + expenses Q: If there is a gain, is the whole gain subject to income tax? A: it depends "if ordinary asset = 100% is subject to income tax "if capital assets a. short term(less than 12 months) : 100% taxable b. long term (more than 12 months): 50% taxable Q: suppose property sold is a parcel of land will the rule be the same? A: No, and it depends "ordinary asset: apply the cost "capital asset: 6% FMV or selling price which ever is higher Q: Do we apply the holding period? A: No, holding period does not apply to the sale of real property. This is an absolute rule: "If realty is ordinary holding period does not apply. "If realty is capital asset 6% FMV or selling price applies. "Holding period applies only to sale of personal property which is a capital asset except sale of shares of stocks. "Holding period corporations. also do not apply to Q: If the property is acquired through inheritance, what is the basis? A: Sec 40 B (2) fair market value or price as of the date of acquisition. Q: Suppose it was a sale of personal property, do we apply the same principles? A: No. Q: What if it involves a sale of real property? A: Apply the same principles Suppose it was a result of swindling, theft, robbery or estafa, do we apply the same principles? A: Law is silent, take note of the old CIA ruling on this one Q: Feb 14, 2006, your GG gave you a jewelry in Sept your GG breaks up with you. GG request the jewelry be returned but you already sold it for P200,000. Will the entire P200,000 be included in gross income? A: Basis: (1) same as if it would be in the hands of the Donor (FMV as of date of acquisition); or (2) last owner who did not acquire the same by gift (cost) Q: A: If it involves a parcel of land? apply the same rules Section 40 B (4) what is the basis? 1. Property was acquired for less than an adequate consideration in money or moneys worth: the basis would be the amount paid by the transferee for the property.

Q: Section 40 B (5) what is the basis? A: 40 C (5) " if the property was acquired in a transaction where gain or loss is not recognized (pursuant to a merger or consolidation plan) a. corporation, party to a merger or consolidation, exchanges property solely for stocks in another corporation, also a party to the merger or consolidation b. is a party to the merger or consolidation, solely for the stocks of another corporation also a party to the merger or consolidation, or c. Security holder of a corporation, party to a merger or consolidation, exchanges his securities solely for stock or security in another

55

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan corporation, also a party to the merger or consolidation. person transfers property to corporation to gain control 40 C EXCHANGE OF PROPERTY GENERAL RULE: In sale or exchange of property, the control amount of gain or loss shall be recognized. 1. gain is taxable 2. losses are deductible Exception: If permanent to a merger or consolidation plan, no gain or loss shall be recognized 1. gain is exempt 2. losses are not deductible REQUISITES: 1. the transaction involves a contract of exchange 2. the parties are members of the merger or consolidation 3. the subject matter is only limited or confined with the one provided for by law "no gain to the corporation shall be recognized 2. Transferor corporation receives money and / or property, does not distribute it pursuant to the merger or consolidation plan "the gain shall be recognized but in an amount not in excess of the sum of such money and the FMV of such other property so received. Q: What is the rule? A: 40 C (3) (a) 1. gain taxable 2. loss not deductible "40 C (3) (b) It depends on how distributed: 1. pursuant to the merger consolidation plan: "gain exempt "loss not deductible 2. not pursuant to merger consolidation plan: "gain taxable "loss not deductible.

or

or

"Merger and Consolidation in corporation code and tax code are not the same. "Sec 40 (2) (a) "a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation Illustration: Transferor gives 1M Transferee gives 700,000 = not taxble gain P300,000 "If other property received by transferee (40 C (3) (a) TRANSFEREE "if the party receives not just the subject matter permitted to be received: lie if the party receives money and /or property, the gain, if any, but not the loss, shall be recognized (meaning taxable) but in an amount not in excess of the sum of the money and the FMV of such other property received. (40 C (3) (b) TRANSFEROR 1.Transferor corporation receives money and / or property, distributes it pursuant to the merger or consolidation plan

Sec 40 C (1) (b) "a shareholder exchanges stock in a corporation which is a party to a merger or consolidation, solely for the stock of another corporation which is a party to the merger or consolidation Sec 40 C (2) (c) " a security holder of a corporation which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock securities in another corporation. "The rule is similar in 40 C (3), (a), (b) and (c) although different property are involve, that is why the last paragraph of 40 C is a separate paragraph. "Therefore, Sec 40 C (3) (a,b,c) the rule is 1. gain exempt 2. loss not deductible 40c last paragraph " the transferee becomes a stockholder, parties are not members of the merger "the individual wants to be a shareholder but does not want to purchase shares but willing to give up

56

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan property as a result of the exchange , the person gains control of the corporation "The rule is: a. gain is exempt b. loss not deductible Requisites: 1. There is A contract of exchange where property was transferred by the person in exchange of stock or unit of participation in a corporation. 2. As a result, the person alone or together with others (not exceeding of 4 persons) gains control of the corporation. Q: What is control? A: ownership of stocks in a corporation possessing at least 51% of total voting power. Sec 40 B (5) "non applicability of income tax is only temporary Reason : Basis will be 40 C (5) 1. 40 C (5) (a) Transferor "basis of stock or securities received by the transferor: same as the basis of the property, stock or securities exchanged: "decreased by the (1) money and (2) FMV of the property received; and "increased by (a) amount treated as dividend and (b) amount of gain recognized 2. 40 C (5) (b) Transferee "as it would be in the hands of transferor increased by the amount of gain recognized. Sec 40 (c) (4) Assumption of Liability 1. Taxpayer, in connection with the exchanges described receives securities or stocks permitted (no gains recognized) it is sole consideration of the same the other party assumes liability of the same the acquisition of liability not treated as money and / or other property the exchange still falls within the exceptions. 2. If amount of liabilities assumed + amount of liabilities to which property is subjected to exceeds adjusted basis of the property transferred the excess shall be considered a gain from the sale of a capital asset or of property which is not a capital asset, as the case may be. SECTION 41 INVENTORIES Purpose: Change of inventory to determine clearly the income of any taxpayer/ to reflect the true income. Limitation: 1. once every 3 years 2. approval of the secretary of finance Section 43 Accounting Periods 1. Fiscal year 2. use of calendar year a. no annual accounting b. does not keep books of account c. individuals "Use of method as in the opinion of the commissioner clearly reflects the income: 1. no accounting method has been employed 2. the method does not clearly reflect the income Sec 44 Period in which items of Gross Income included and Sec 45 Period for which Deductions and Credit Taken "Under Sec 44 amount of all items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer "Under Sec 45 deductions shall be taken for the taxable year in which paid or accrued or paid or incurred. "Sec 44 and Sec 45 are mentioned in the code because of the death of the person. Illustration: Facts: taxpayer dies in the middle of year January 1, 2006 June 15, 2006 "June 26, 2006 to Dec 31, 2006 estate is the taxpayer "So the income and deductions from 1 to June 25,, included in computation Section 46 Change of Accounting Period Q: Who is the taxpayer? the the Jan the

57

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: corporation (taxpayer other than individual) Q: What kinds of accounting period? A: 1.fiscal year 2. calendar year Q: Changes contemplated? A: 1. fiscal to calendar 2. calendar to fiscal 3. fiscal to another fiscal "with the approval of the Commissioner, net income shall be computed on the basis of the new accounting period. Q: Calendar to calendar, correct? A: not correct statement Section 47 (A) Taxpayer: Corporation 1. Fiscal to calendar " separate final or adjusted return shall be made for the period between the so close of the last fiscal year for which the return was made and (2) the following Dec 31. 2. Calendar to Fiscal "separate final or adjusted return shall be made for the period between the close of the last calendar year and the date designated as the close of the fiscal year. 3. Fiscal to fiscal "separate final or adjusted return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. "File return indicating the change in accounting method Section 48 Accounting for Long Term Contracts Q: Who are the professionals involved? A: applies to architects and engineers Q: What is a long term contract? A: it means building, installation or construction contracts covering a period in excess of one (1) year. Q: Basis of income? A: a. persons whose gross income is derived in whole or in part from such contract shall report such income upon the basis of percentage of consumption. b. the return shall be accompanied by a certificate of architects or engineers showing the percentage of completion c. deduction of expenditures made during the taxable year, on account of the contract is allowed Section 49 Installment Basis "contemplates a seller of the property Q: Is it important to know if the personal or real? A: Yes property is

Q: Sale of Real Property is it important to know if it is a casual sale or regular sale? A: No Requirement: The initial payments do not exceed 25% of the selling price. Q: If the initial payment exceeds 25% what do you call it? A: called deferred sale Q: Consequence? A: you must pay the whole amount of the tax Q: Sale of Personal Property, is it important to know if it is a casual or regular sale? A: Yes Casual Sale has Requirements: 1. selling price exceeds P1,000 2. initial payment not exceeding 25% selling price "Regular sale no requirements Case of Baas 1. subject matter 2. sold by way 3. agreement 4. cash deposit 5. post dated promissory notes (installments) 3. 1st installment promissory note was disconnected 4. 2nd installment exchanged with cash these two exceeds the selling price 5. you only compute cash

58

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan H: Initial payment exceeds 25% installment basis is not applicable RR 2; Section 175: In payment by way of installment promissory note, bills of exchange and checks will not be considered in computing the 25% initial downpayment. Section 50 Allocation of Income and Deductions "tremendous power of the Commissioner to allocate the income and deduction of several corporations having the same interest. Q: Same interest? A: stockholders substantially the same Q: Limitations? A: None "That is why it is a great source of corruption Section 51 Individual Returns Who are required to file? (ITR) 1. RC 2. NRC 3. RA 4. NRAETB sources within Q: Who is not mentioned in Sec 51 but liable to pay by way of NIT? A: OCW/ seaman Exception: RC OR ALIENS: engaged in trade or practice of profession in Phil. Shall file ITR regardless of the amount of gross income. Q: If OFW is exempt from filing a return, what is he required to file? A: Information Return Q: who are not required to file a return? A: a. an individual whose gross income does not exceed his total personal and additional exemptions for dependents b. worker (compensation income earners) regardless of the amount of compensation shall not required to file ITR because the management files it. (RR 3-2002) c. individuals whose sole income is subject to FIT d. individuals who income tax are exempt from

Exception: IT 1. the management files an incorrect return 2. the employee has two or more employer 51 A (3) A: not required to file ITR may be required to file information return 51 B - Where to file? 1. authorized agent bank 2. revenue district officer 3. collection agent 4. duly authorized treasurer of the city or municipality where taxpayer resides or has principal place of business 5. office of commissioner if no legal residence or place of business in Phil 51 C Q: When to file? A: filed on or before the 15th day of each year

April

51 C (1) NIT Payers using CY "two days provided (calendar) 1. on April 15; or 2. before April 15 (January, Feb or March) " not December because the calendar year is not yet over Fiscal year: 15th day of the 4th following the close of the fiscal year. month

51 C (2) individuals subject to tax on capital gains Exception: General Rules Sec 58 1. Sale of shares of stocks "return filed within 30 days after each transaction and "Final consolidated return on or before April 15 2.Sale of Real Property "return filed within 30 days following each sale 51 D Husband and Wife 1. Pure compensation income earner separate return RR 3-2000 pure compensation income earner regardless of amount of income not file ITR. 2. Not pure compensation: joint return

59

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 51 E. Return of Parent to Include Income of Children " unmarried minor receives income from property received from living parent included in the parents ITR. Exception: 1.Donors tax has been paid 2.Property exempt from donors tax 51 F. Persons Under Disability Q: Who makes the return? A: 1.duly authorized agent 2. duly authorized representatives 3. guardians 4.other persons charged with the care of his person or property "both incapacitated taxpayer and agent will be liable for: 1.erroneous return 2. false or fraudulent return 51 G Signature Presumed Correct " prima facie evidence the return was actually signed by the taxpayer Section 52 Corporation Return "go back to Sec 51 A (2) General Rule: Sec 58 Final Income Tax "return and creditable withholding tax return is filed monthly Exception: Sale of Shares of Stocks (Sec 51 A (2)) Sale of Real Property "RR -17-2003: Sale of Real Property subject to final withholding tax, the buyer is deemed the agent. Sale of Shares of Stocks Q: Reasons for filing Final Income tax or Final Consolidated Return? A: Reasons: 1. FIT whose actual determination of gain or loss 2. in connection with Sec 24 C the basis of the tax is not the gross income but the net capital gains realized. In connection with Sec 40: "actual determination of loss or gain "file a return within 30 days from date of transaction TAKE NOTE: In all other income subject to FIT, the gains are presumed INCOME OF MINORS Q: Minor below 18: Will it be included in the Minors ITR? A: it depends 1. income from property received from parents " included in parents ITR Except: a.Donors tax paid b.Property exempt from donors tax 2. income from minors own industry "Minors ITR accomplished by guardian or parents Q: if the individual is exempt from income tax, can be required to file a return? A: General Rule: No Exceptions: 1.engaged in trade or business; or 2.exercise of profession Sec 51 A (2) SEC 52 CORPORATION RETURNS A.Requirements Taxpayer: DC or RFC (except NRFC) ITR Filed: 1. TRUE AND ACCURATE a. quarterly income tax return b. final or adjusted income tax return Filed by: 1.President; 2.Vice President 3. Other principal officer "ITR must be sworn by such officer and the treasurer or assistant treasurer B. Taxable Year 1. fiscal; or 2. calendar " corporation cannot change accounting method employed without the approval or prior approval of the commissioner (Sec 47) C. Return of Corporation Contemplatory Dissolution or Recognition 1.Within 30 days after: a. the adoption by the corporation of a resolution or plan for its dissolution; or b. liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the SEC; or c. for its reorganization

60

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 2.Render a correct return verified under oath setting form: a. forms of the resolution or plan; b. such other information prescribed 3.Secure a tax clearance from the BIR and file it with the SEC 4.Thereafter, SEC issued a Certificate of Dissolution or Reorganization. D. Sale of Stocks ITR look at the previous notes about it Section 53 Extension of Time to File Returns Q: To whom granted? A: Corporations Grounds: Meritorious case "subject to the provisions of Sec 56 Time Extension Section 54 Returns or Receivers, Trustees in Bankruptcy or Assignees "the aforementioned persons shall make returns of net income as and for such corporation in the same manner and form as such organization is required to make. Section 55 Returns of General Professional Partnership " file a return of its income setting forth 1. items of gross income and of deductions allowed by this title (Title II Tax on Income) 2. Names of partners 3. Taxpayer identification number (TIN) 4. address of partners 5. shares of each partners "GPP is exempt from corporate income tax Q: Why is the GPP obliged to file a return? A: to determine the shares of each partners Section 56 Payment and Assessment of Income Tax for Individuals and Corporations A. Payment of Tax Q: Who pays the tax of tramp vessels? A: 1.the shipping agents and or husbanding agent the 2.in their absence, the captains thereof "those people are required to file a return and pay the tax due before departure Q: What is the effect of failure to file the return and pay the tax due? A: 1.Bureau of Customs may hold the vessel and prevent its departure until: a. proof of payment of tax is presented; or b. a sufficient bond is filed to answer for the tax due. Installment Payments Tax due: more than P2,000 Taxpayer: individuals only (other than corporation) Elect to pay the tax in two (2) equal installments a. 1st installment: paid at the time the return is filed b. 2nd installment on or before July 15 following the close of the calendar year Q: What is the effect of non payment on the date fixed? A: The whole amount of tax unpaid becomes due and demandable together with the delinquency penalties. Payment of capital gains tax : Q: Paid when? A: on the date the return is filed Avail exemption for capital gains: a. no payments shall be required; b. if you fail to qualify for exemption tax due shall immediately become due and payable and subject to penalties c. seller pays tax submit intention or proof of intent within six (6) months from the registration of document transferring Q: when is the real property entitled to refund? A: upon verification of compliance with the requirements for exemption. "Report gains on installments under Sec 49 tax due from each installment payment shall be paid within 30 days from the receipt of such payments. "No registration of document transferring real property

61

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 1. without a certification from commissioner or his duly authorize representative that a. transfer has been reported b. tax has been paid B. Assessment and Payment of Deficiency Tax " Return is filed, the commissioner examiner and assess the correct amount of tax "tax deficiency discovered shall be paid upon notice and demand from the commissioner. 3 INSTANCES CONTEMPLATED 1. file the return and pay the tax 2. file the return but not pay the tax 3. not file the return and not pay the tax Section 57 Withholding of Tax at Source A. Withholding of Taxes "subject to the Rules and Regulations the Section of Finance may promulgate, upon recommendation of commissioner: Require the filing up of certain income tax return by certain income payees. Q: Enumeration is all about what? A; Enumer ation about Final Income Tax Except: Gross Income Tax 1. 25 B (NRANETB) 2. 28 B (NRFC) B. Withholding of Creditable Tax at Source "The Sec. of Finance, upon recommendation of the commissioner require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Phil, by payor-corporation/ person the same shall be credited against the income tax liability of the taxpayer for the taxable year. At the rate of not less than 1% but not more than 32% thereof. Q: What is the maximum? A: Maximum: now 35% pursuant to RA 9337 Q: When will you allow withholding beyond 15%? A: For NIT 15% is the maximum 1. FIT the amount of withholding is totally 2. GIT - equal to the amount of tax Tax Free Covenant Bond A. Quarterly Returns and Payment of Taxes Withheld at Source 1. covered by a return and paid to: a. authorized agent bank b. revenue district officer c. collection agent d. duly authorized treasurer of city or municipality where withholding agent has: 1. his legal residence; or 2. principal place of business; or 3. if corporation , where principal office is located 2.Tax deducted and withheld "held as a special fund in trust for the government until paid to the collecting officers. 3.Return for final withholding tax "filed and paid within 25 days from the close of each calendar quarter 4.Return for Creditable withholding taxes "filed and paid not later than last day of the month following the close of the quarter during which withholding was made 5. Commissioner, with approval of Sec Finance " require withholding agents to pay or deposit taxes at more frequent intervals where necessary to protect the interest of the government B. Statement of Income Payments Made and Taxes Withheld "the bonds, mortgages, deeds of trust or other similar obligations of DC or RFC "contains a contract or provision where the obligor (debtor) agrees to pay the tax imposed herein "normally between the creditor and debtor Q: Who pays the tax? A: Creditor pays the tax by virtue of an agreement the debtor assumes the liability and the creditor is now free from payment of tax before it can transfer the property to the buyer. Section 58 Returns and Payment of Taxes Withheld at Source

62

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan "Withholding agent shall furnish payee a written statement showing: 1. income or other payments made by WHA during such quarter or year and 2. amount of tax deducted and withheld " statement given simultaneously upon payment at the request of the payee. Creditable withholding taxes 1. corporate payee not later than the 20th day following the close of the quarter 2. individuals payee not later than March 1 of the following year Final Withholding taxes "the statement should be given to the payee on or before January 31 of the succeeding year. C. Annual Information Return "Withholding agent shall submit to the commissioner an annual information return containing : 1. the list of payees and income required 2. amount of taxes withheld from each payees 3. other pertinent information required Final Withholding Tax: AIR "filed on or before January 31 of the succeeding year Creditable withholding tax: AIR "not later than March 1 of the year following the year for which the annual report is being submitted "Commissioner may grant WHA reasonable extension of time to furnish and submit the return required herein. D. Income of Recipient 1. Income upon which any creditable tax is required to be withheld at source shall be included in the return of its recipient. 2. the excess of the amount of tax so withheld over the tax due on his return shall be refunded 3. income tax collected at source is less than the tax due on his return difference shall be paid 4. all taxes withheld 1. considered trust fund 2. maintained in separate account 3. not commingled with other funds of WHA E. Registration with Register of Deeds "No registration of any document transferring real property shall be effected by the Register of Deeds unless the commissioner or his duly authorize representative has certified that the transfer (1) has been reported and (2) tax due has been paid "Register of Deeds requires payment of tax before transfer of property Section 59 Tax on Profits Collectible from Owner of other Persons "Tax imposed under this title upon gains, profits and income not falling under the foregoing and not returned and paid by virtue of the foregoing shall be assessed by personal return Intent and Purpose of this Title 1. All gains, profits and income of a taxable class shall be charged and assessed with the corresponding tax. 2. Said tax be paid by the owner of the gains, profit or income or the person having the receipt, custody, control or disposal of the same Determination of Ownership: "determined as of the year for which a return is required to be filed CHAPTER X: ESTATES AND TRUSTS Section 60: Imposition of Tax 1. Estate " property of the decedent created by an agreement, trust or by last will and testament 2. Trust "agreement, contract or last will and testament Status: 1. Estate: same status as decedent 2. Trust: same status as the grantor Income taxpayer is the Estate: "income of the estate pending partition or no partition at all: Three kinds of partition: 1. judicial 2. extra judicial partition 3. or no partition at all

63

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan During partition Estate earns income: 1. individual income tax 2. corporation corporate income tax 3. estate (Taxpayer = TP) a.Impose Income as if TP is individual b.Impose income as if TP is corporation c.Impose income as if estate itself "depends whether there is a (1) judicial (2)extra judicial partition or (3) no partition at all When there is a judicial settlement which is final and executory but no partition: Two possibilities: 1.Creation of unregistered partnership "Income of the Estate: corporate income tax 2.Creation of Co-ownership "Income of the Estate: Income tax on individual -co-owner liable in their individual company Ponce Case: H: After finality heirs did not divide the property, the applicable income tax is corporate income tax because they contributed money to engage in real estate. SECTION 61 TAXABLE INCOME (Important) Taxable income of the estate or trust shall be computed in the same manner and on the same basis as ill the use of an individual. Section 62: Applies during Pendency of Extra Judicial Settlement Personal Exemption (P20,000) Individual " it will depend whether he/she is classified as single, head of the family or married Estate "regardless Special deductions:Income distributed to the heirs "if you distribute nothing you cannot claim this special deductions "if there is a distribution, the heir shall be liable to pay whether individual capacity "if there is no distribution, heirs are not liable to pay anything "Special deduction not apply if individual tax is paid by the Estate itself. Payment: made by executor, administrator, to creditor to preserve the estate Sec. 61 and Sec 62 "does not apply if estate is subject to income or corporate income tax "it applies if the estate pays itself during the pendency of the judicial settlement Basis: Sec 60 C during the period of administration settlement of the estate. or

Taxpayer is a Trust: Q; When liable to pay income tax? A: If the trust is revocable (if revocable, Sec 61 and 62 also apply) Parties: 1.Grantor /creator /trustor 2.fiduciary / trustee 3.beneficiary / Les Qui trust Q: Who is liable to pay tax: A: If trust revocable: " obligation of the trustee "liability of trust itself and not personal Liability of trustee: If trust irrevocable "obligation of the grantor "personal liability of the grantor as an individual TWO WAYS OF REPORTING INCOME: PURSUANT TO RR2 (1949) 1. report only once (building paid once) 2. after the span of 25 years (payment of building divided per year) ESTATE TAX: 1.Sec 60 2.Real Estate Tax 3. Estate Tax "transfer tax impose on the Net Estate for the transfer of property to the heirs or beneficiary whether real, personal, tangible or intangible 3 KINDS OF TRANSFER TAX: 1.Estate Tax 2. Donors Tax 3. Sec 135 of LGU Transfer of Real Property Q: We dont have inheritance tax and donees tax, why? A: 1973 Marcos issued P.D. 69

64

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Explain: Sec 84, rate is max of 20% of net before the rate is 60% plus additional amount. "resulted to many gimiks through tax avoidance scheme, like creating a family corporation (only taxable is the stockholders which is exempt) "Congress enacted RA 7449 decreased 60% to 35% and then RA 8424 35% to 20% Q: Now is it safe to create a family corporation? A: No more. Q: Now: Iba na ang scheme which is better sale or donation? A: 1.Sale of RP considered capital assets "6% to 1.5% doc. Tax 7.5 % better 2.Sale of RP considered ordinary asset "5% to 52% as per use may be 3.Donation if given to all compulsory heir " relative lower than 20% which is 15% " stranger: 30% so go with 20% Q: Who are the taxpayers? A: Sec 104 Estate and Donors 1.Estate a. RC b.NRC c. RA d. NRA 2. Donors Tax a. RC b.NRC c. RA d. NRA e. DC f. FC "A corporation cannot die of a natural death. Q: What is the reason for classifying the taxpayers? A: 1. NRA and Estate 2. NRA and FC Donors = property outside Phil exempt 3. all, other than these 3 taxable w in and w/out Q: Is Section 104 relevant to all taxpayers? A: No, material only to NRA and FC Section 104 speaks of intangible personal property located in the Philippines. 1.Franchise which must be exercised in the Philippines; 2.S.O.B. issued by a Domestic corporation; 3.S.O.B. issued by foreign corporation at least 85% of the business of which is located in the Philippines. do not confuse with 42 (2nd par) 4.S.O.B. of foreign corporation which acquired a business situs in Phil 5.S.R. in business, partnership or industry established in the Phils Q: NRA, German donates SOS of FG to Filipina gf, is it subject to donors tax? A: it depends (you must qualify) 1.Subject to donors tax if: 1.S.O.B. FG at least 85% of business located in the Phil 2.S.O.B. FG which acquired a business situs in Phil 2.Exempt 1.personal property outside of Phil; or 2.intangible personal property net taxable if following requisites concern: A decedent at the time of his death or the donor at the time of donation was a citizen and resident. 1.of a foreign country which at the time of his death or donation did not impose a transfer tax of any manner, in respect of intangible personal property of citizens of Philippines not residing in that foreign country; or 2. the laws of the foreign country allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. Q: What if citizen of one country and resident of another country will the exemption apply? A: No, law requires that he must be a citizen and resident of the foreign country. Campos Rueda Case: F: NRA died married to Moroccan man, so she was a Moroccan resident. Donated SS in DC administrator claims exemption, ground: In Morocco, intangible personal property of Filipinos not residing therein is exempt from transfer tax. BIR contends: Morocco is not a country but a colony of Spain.

65

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan H: claim granted even if it is not a full pledged state, or its a mere colony, what matter is that the foreign law provides for an exception. SECTION 84 RATES OF ESTATE TAX Q: What is the formula for Estate tax? A: Gross Estate (Sec 85) - Deductions (Sec 86) -------------Net Estate x Rate ------------Taxable net income - Tax credit --------------------Tax due Gross estate (define) Sec 104 "gross estate include real and personal property, whether tangible or intangible, or mixed, wherever situated NRA: Decedent / Donor property situated outside of Philippines not included on the gross estate Section 85 Gross Estate (inclusion) A.Decedents interest "includes property (1) owned at the time of death and (2) property not owned at the time of death Classic example: Usufruct Q: if terminated by the death of usufructuary, is it subject to estate tax? A: Not subject to estate tax Reason: Exempt Transmission under Sec 87 (a) "merger of the usufruct in the owner of the naked title Q: is there a conflict between Sec 88 a and Sec 87 a? How do you reconcile? A: No conflict 1.Section 87 a contemplates a situation where the usufruct is terminated. 2.Section 88a contemplates a usufruct for a fixed period. Ex contract of lease Q: How do you determine the value of usufruct? A: Sec. 88 a provides to determine the value of the right of usufruct, take into account the probable life of the beneficiary. Q: Why definition of gross estate is longer than definition of gross gift? A: transfer occurring after death. estate tax absolute Transfer during the life time "Normally Donors tax However there are exceptions: 1.transfer in contemplation of death (85B) 2.revocable transfer (85 C) 3.transfer for insufficient consideration B. Transfer in contemplation of death Roces case: F: during lifetime, the following document were instituted or executed simultaneously 1.will and 2. donation The heirs insisted to pay Donors tax, Posados the collector tried to collect inheritance tax. unique thing: Donees were also the heirs in the last will and testament Donees wanted to pay donors tax because it is always lower than the estate tax except when the donee is a stranger H: this is a transfer in contemplation of death Dizon Case: F: Deed of Donation was executed Dizon died several days thereafter son claims Donors tax H:Transfers in contemplation of death Q: What are transfers deemed in contemplation of death? A: 1.Property was transferred during the lifetime but the decedent: a. retains possession or receive income or fruits of property; or b.retains the right to designate persons who will possess the property or the right to receive fruits or income c.Revocable Transfers 1.revocable transfers are included in the gross estate Reason: the decedent retains tremendous power and control over the property 2.Irrevocable transfers are not included in the gross estate: exempt Reason: the decedent losses control over the property Notice Not Required because the person has the control over the property D. Property passing under general power of appointment

66

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan " same with fidel commissary substitution 3 parties: 1.testator / decedent 2.1st heir 3.2nd heir TAKE NOTE: To determine whether included in Estate or not, know who has the choice to designate the 2nd heir: "if decedent instructs the 1st heir that he can transfer the property to whomever he wants included in gross estate "1st heir choice included in gross estate E. Proceed of Life Insurance 1.Beneficiary is the estate "included in gross estate designation is revocable or not 2.Beneficiary is 3rd person " revocable included "irrevocable not included F. Prior Interest "important only due to the codification of the tax code B,C,E, included whether before or after the effectivity of the code G. Transfer for insufficient consideration Q: Similar provision in Sec 100 (Donors tax) can you apply the two (2) provisions simultaneously? A: No, alternative application, one or the other but not both. The application will depend on the time of transfer or motive: 1.If transferred because of impending death " estate tax 2.If transfer because of generosity "Donors tax Q: Parcel of land was sold for less than adequate consideration (adequate) to relative for P600,000 when FMV is 1 million pesos. Is this subject to transfer tax? Is it subject to Donors tax? A: No, Sec 100 provides the property should be other than real property referred to in Section 24 (D) "Not subject to Donors tax, the applicable tax is 6% FIT Q: Will your answer be the same if sold? SOS are A: No, answer not the same, SOS not property contemplated in Sec 24 D (1) "in this case, the amount by which the FMV of prop exceeds the value of the consideration shall be deemed a gift and included in the computation of the gross gift: subject to Donors Tax Q: What is the subject matter in 85 G? A: paragraphs 85 B, 85 C, 85 D Sale in good faith as a defense: 1.under Section 100 is not a defense 2. under Section 85 G, it is a defense H. Capital of Surviving Spouse "correlate with Sec 86 C "both speak of legally married individual "pertains to the separate property of spouse who survived "capital used in its generic sense "surviving spouse may be man or woman Section 86 (c) "to determine the limitations of 1. Funeral Expense 2. Whether written notice is required 3. to determine whether gross value is at least P200,000 (Sec 90) 4.to determine if gross value is at least 42 M Q: Who are the taxpayers under 86 A? A: 1.RC 2.NRC 3.RA Q: Who is the taxpayer under 86 B? A: NRA Q: Why do we need to know this? A: NRA cannot avail of the following deductions: 1.family income 2.standard deduction 3.hospitalization 4.retirement pay under RA 4917 A. Deductions Allowed to the Estate of a Citizen or Resident 1.ELIT (expenses, losses, indebtedness and taxes) a) 1.Actual Funeral Expenses; or 2.amount equal to 5% of gross estate "apply whichever is lower Limitation:

whether

67

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan a)amount equal to 5% of gross estate should not exceed P200,000 (basis is the gross value) b) Judicial Expenses "no limitation 1.losses incurred during the settlement of the estate; 2.arising from fire, storms, shipwreck or other casualties, or from robbery, theft or unbezzlement 3.losses not compensated by insurance 4.losses not been claimed as a deduction for income as purpose 5. losses incurred not better than the last day for the payment of the estate tax Property Previously Taxed "Vanishing Deduction Return Requirement: 1.person acquires the property by virtue of donation or inheritance Q: What if acquired through purchase? A: Not apply, the property must be acquired by inheritance or donation 2.Estate tax or Donors tax already paid by the Estate of the Decedent (1st par) 3.Any person who died within five (5) years prior to the death of the decedent Q: What are the amounts? A: Prior Decedent died within: 1.5years 20% 2.4years 40% 3.3 years -60% 4. 2years 80% 5. 1 year -100% Q: Suppose the person died within 1 year and it was inherited by son, suppose the son also died within 1 year or may be 2 years, should we apply the vanishing deductions? A: No more (last par Sec 86 A2) Transfer for Public Use "amount of all bequest, legacies, devises or transfers Recipient:government or any political subdivision "exclusively for public purpose Take Note: 30% of which not used for administrative purpose is not a requirement FAMILY HOME "amount equivalent to the current FMV of the Family Home of decedent. Limit: FMV should not exceeds 1 million otherwise the excess will be subject to estate tax. Requirements: (RR 2-2003)

Pajonar vs Commissioner I: Whether or not extra-judicial expenses may be allowed as a deduction H: This law has been copied from U.S. In US, expenses to be claimed as a deduction both judicial and extra judicial expenses. Claims against the estate "Estate is the debtor Requirements: 1.at the time the indebtedness was incurred the debt instrument was duly notarized; 2.loan contracted within 3 days before death; 3.the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan Claims of the deceased against insolvent person "Estate is the creditor Requirement: "the only requirement is that the (only) amount of loan is included in the gross estate "notarization and certification not required Unpaid Mortgage, taxes and losses Q: In unpaid mortgage who is the mortgagor? "decedent mortgagor 1. Unpaid mortgage 1.value of the decedents interest in the property is undiminished by such mortgage; 2.included in the value of the gross estate; Illustration: 1 million FMV but mortgage is only 600,000 you include 1 million 2.Estate tax 3.Losses Requirements:

68

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 1.Person is legally married GR: if single not allowed to claim Except: if head of the family 2.Family Home actual residence of the decedent 3.Certification of Barangay Captain of locality STANDARD DEDUCTIONS "automatic: RR 2-2003 no requirement provided the decedent is the one in 86 (A) (RC, NRC, RA) MEDICAL EXPENSES Requirements: 1.amount not exceeding P500,000 2.medical expenses incurred by the decedent within one (1) year prior to his death. "must be duly substantiated with receipt RETIREMENT PAY UNDER RA 4917 (RETIREMENT PAY WITH PRIVATE PLAN) Requirements: 1.plan duly approved by the BIR 2.person at least 50 years old 3. 10 years in service 4. avail only once TAKE NOTE: This is a deduction in the nature of exemption, all other retirement plan is excluded B. Deductions Allowed to Non resident Estates 1.ELIT 2.Property Previously taxed 3.Transfers for public use C. Shares in the Conjugal Property D. Miscellaneous Provisions For NRA: No deduction allowed unless include in the return the value at the time of his death that part of his gross estate not situated in the Philippines. For proper deduction must include E. below E. Tax Credit for Estate Tax Paid to Foreign Country SECTION 87 EXEMPTION OF CERTAIN ACQUISITION AND TRANSMISSIONS 1. Merger of usufruct in the owner of the naked title; 2. transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; 3. transmission from the first heir, legatee or legacy donee in favor of another beneficiary, in accordance with the desire of the predecessor; 4. All bequest, devises, legacies or transfers to (1) social welfare (2) cultural and (3) charitable institution Requirements: 1.no part of the net income insures to the benefit of any individual; 2.not more than 30% of donation (BDL) shall be used by such institutions for administration purposes. SECTION 88 DETERMINATION OF THE VALUE OF THE ESTATE A.Usufruct 1.Determine value of right of usufruct: "consider the probable life of the beneficiary based on the latest Basic Standard Mortality Table B.Properties "fair market value of the Estate at the time of death 1.FMV determined by Commissioner 2.FMV schedule of values fixed by the Provincial or City Assessors SECTION 89 NOTICE OF DEATH TO BE FILED Q: What is the Basis? A: the gross estate of the person Q:When is the notice required to be filed? A: 1.all cases of transfer subject to tax 2.although exempt, when gross values of the estate exceeds P200,000 Q: When filed? A: within two (2) months 1. after decedents death 2.same period after qualifying as executor or administrator "give a written notice Q: If the Net Estate is at least P16,000 will you in form the commissioner? A: yes, the gross is at least 3-4 million SECTION 90 ESTATES TAX RETURNS Q: When required to file return? A: 1.all cases of transfer subject to tax

69

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 2.even though exempt, gross value of the estate exceeds P200,000 3.regardless of gross value of the estate, when the same consists of registered or registrable prop such as: a.real property b.motor vehicle c. shares of stocks d. other similar property where clearance from BIR necessary for transfer of ownership in the name of the transferee "return must set forth the following: 1.value of the gross estate at time of death 2.deductions allowed 3.information necessary to establish correct taxes Q: What if Estate is exempt, is it required to file a return? A: General Rule: No Exception: a. gross value exceeds P200,000 b.estate contains registrable property Q: if the estate or gross estate exceeds 2 million, what is the requirement? A: return must be duly certified by a CPA B. Time of Filing "filed within 6 months from decedents death "within 30 days for filing the return "within 30 days after promulgation of such order 1.certified copy of the schedule of partition and 2.order of court approving the same C. Extension of Time Time: 30 days Grounds: meritorious cases Who grants: Commissioner D. Place of filing: "return shall be filed with: 1.authorized agent bank 2.revenue district officer 3. collection officer 4. duly authorized treasurer "city or municipality in which decedent was domiciled at the time of his death Q: What if non resident? A: NR with no legal residence here, with the office of the commissioner. Q: Let us say there are 3 compulsory heirs, namely A, B, and C. A renounces his inheritance coming from the parents, but A renounces his inheritance in favor of his 2 siblings, brother and sister B and C. Is this subject to donors tax? A: NO. It is exempt. Q: But if in the given example, A said I am renouncing my inheritance, but I am giving it to my sister B, is this subject to donors tax? A: YES. Renunciation is to the disadvantage of the brother. TAXATION UNDER THE LOCAL GOVERNMENT CODE: 1. Local Tax 2. Real Property Tax LOCAL TAXATION (186, 187, then go to 151, 128 down) Q: Mayor Binay of Makati ordered the collection of elevator tax (for elevator in the city hall). Is the order of Mayor Binay legally tenable? A: NO. There should always be a tax ordinance after conducting a public hearing. (186) tax ordinance Q: Can BIR collect the tax even in the absence of a revenue regulation? A: YES. Q: Can a province, city, municipality or barangay collect the tax if there is no tax ordinance? A: NO. Q: Why is it that there should be a tax ordinance as required by 186? A: The rationale is not mentioned in 186, but if you read the other provisions of the LGC, you will come to set of conclusions of the reason why there must be a tax ordinance. In most of these provisions, it always say: one-half if the town or municipality shall collect a tax of not exceeding 1% of the gross receipt.

70

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan TAKE NOTE: There is no exact amount; hence, it is the tax ordinance which will fix the exact amount. A: Within 60 days from the time the appeal was filed. Failure to decide within this time, the taxpayer has the remedy to file an action with the regular courts. If the decision was made within the 60 day period, and receives the decision, his remedy is to file an appeal within 30days form the receipt of the decision to court of competent jurisdiction ! RTC. Beginning April 23, 2004, from the ruling of the RTC, pursuant to RA 9282 (the law uplifting the standards of the CTA), the ruling of RTC on local tax cases, is appealable to the CTA en banc. TWO APPEALS DECIDED BY THE CTA EN BANC: 1. decisions of RTC involving local tax cases 2. decision of the Central Board of Assessment Appeals. From CTA en banc, the appeal must be file with the SC within 15days. Go to 151: The city could impose the tax already imposed by the province of by the municipality. Q: What are the numerous taxes imposable by the province which a city now allowed to impose? A: Those enumerated in 135 to 141 of the LGC Reasons why a municipality wanted to be converted into a city: 1. 151 2. 233 (real estate tax) In addition, the law says that the city could increase the rate of the tax by not more than 50% of the maximum EXCEPT those enumerated in 139: a) professional tax b) amusement tax A. General Principles (128-130) " reiteration provisions of the constitutional tax

public hearing In Congress, the requirement is not absolute (by discretion only). Under local taxation (last phrase of 186), the requirement is ABSOLUTE. REYES vs. SECRETARY (320 SCRA 486) F: In the municipality of San Juan (just beside Mandaluyong) there was a tax ordinance passed. Reyes, a resident, claims that there was no public hearing conducted, he maintains that under 186 last phrase, there should always be a public hearing. H: The SC said: yes, that requirement is an absolute one, but since the petitioner failed to produce evidence to support his allegation, if there is no proof presented other than his own statement, we hereby rule that the ordinance was passed in accordance to the procedure mandated by law. While it is true that a public hearing is an absolute requirement, he who alleges, must prove the same. Q: If you dont agree with the validity or the constitutionality of the tax ordinance, what will be your remedy? A: Within 30 days from the effectivity of the ordinance, the taxpayer should file an appeal with the office of the Secretary of the DOJ (187) REYES vs. SECRETARY (320 SCRA 486) F: Reyes asserted the validity and constitutionality of the tax ordinance only after the lapse of thirty (30) days (perhaps his lawyer was thinking that an ordinary statute may be contested anytime with the RTC, CA or SC). H: With regard to a tax ordinance, w have a specific rule, failure to assail the validity with the specific period of time, is fatal to the taxpayer. Since it was filed beyond the 30day period, we do not disturb the validity of the ordinance. Q: Within what period should the Sec. of Justice decide?

" notice that the constitutional limitations on taxation do not only apply to the national government but also to local government units.

71

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan B. Definitions (132) Local Taxing Authority (132) ! for a province, it is the provincial board or the provincial council (sangguniang panlalawigan) ! for a city, we have the city council (sangguniang panlusod) ! for the municipality, we have the municipal council (sangguniang pangbayan) ! for the barangay or barrio, we have the barangay council. C. Common limitations on power of the LGUs (133) the taxing fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (133(D)) wharfage due is a custom fee imposed on the weight of the cargoes. wharf a pier special levy on public works (240) allows provinces cities and municipalities to impose a special real estate tax known as special levy or public works let us say the municipality established a pier for a minimal value of P10M; out of P10M, under 240, 60% of this may be recovered; the other 40% may be recovered by warfage due. v. Tax, fee or charge for goods or commodities coming out or passing through the territorial jurisdiction even if in the guise of a toll or a fee (133(E)) an absolute prohibition commodities marketed in a public market, lets say in the city of Pasig, where the commodities came from Laguna then to Tanay, Cainta, Taytay; just imagine if each of the towns will impse 1peso for every head of a chicken or 50cents for every bundle of vegetable. PALMA DEVT CORP v. MALANGAS ZAMBOANGA DEL SUR (113 SCRA 572) F: Municipal council passed a tax ordinance entitled police surveillance fee which provide that ALL motor vehicle passing through a particular street in the town proper of Malangas which will lead to the pier or wharf will pay a certain sum of money whether it is camote, copra, palay,or rice. One of the owners of the motor vehicle is Palma Devt Corp. carrying copra, banana and coconut to be loaded in a ship docked at pier of Malangas. The lawyer of petitioner assailed the validity of the ordinance stating that it is a clear violation of 133(E). H: It is not the title of the ordinance which is controlling but it is the essence of the substance of the tax ordinance. The tax ordinance clearly violated 133(E), therefore, the SC had no option but to declare the tax ordinance null and void for being in violation of the law. VI. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen (133(F)) Q: Don Antonio Florendo, a person coming from Pampanga who settled in

Under the old law this was 5 of the Local Tax Code. Q: Why common? A: Because the limitations or prohibitions apply to all LGUs, the provinces, cities, municipalities and barangays. Two Common Crimes (under 133) 1. absolute prohibition 2. relative prohibition It shall be unlawful for the LGUs to collect: I. Income Tax EXCEPT when levied on banks and other financing institutions (133(A)) the term other financing institution shall include money changer, lending investor, pawnshop (131(E)) rate of tax: does not mention rate of tax, so long as it is fair, just and reasonable It cannot be prohibited taxation, because the element of imposed by the same taxing power is not present. One is imposed by the national government and the other is by the LGU. II. Documentary Stamp Tax (133(B)) absolute prohibition III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in 135 (133(C)) transfer tax on the transfer of realty to be imposed by provinces and cities (135) NOTE: this is not a real estate tax, this is a local tax. IV. Custom duties, charges or fees for the registration of vessels or ships, wharfages

72

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Davao City, employed thousands of workers in the different banana plantation. Can the LGU impose tax on the agricultural product which is a banana? A: YES. The LGU can impose because Don Antonio is not a marginal farmer. It is only prohibited if it is sold by a marginal farmer. Marginal Farmer a farmer or a fisherman for subsistence only, whose immediate members are the immediate members of the family (131(P)) VII. Tax, fee or charge on pioneer and nonpioneer enterprise duly registered with the board of investments for a period of 6yrs and 4yrs respectively (133(G)) relative prohibition because after the period, the LGU concerned may now impose the tax. VIII. Excise tax on articles and tax, fees and charges on petroleum products (133(G)) relative prohibition since under 143(H), it says there that taxes which are prohibited such as excise tax, percentage tax and value added tax nonetheless, the LGU may impose a tax not exceeding 2% of the gross receipt (for cities 3%). My former student an assistant in the city legal attorney in a city in Metro Manila, received a summon from the RTC (on complaint of a supermarket in Metro Manila) questioning the validity of the tax ordinance under 143(H) since the rate imposed was 3% I said, ineng, una file kayo ng motion to dismiss. Nak ng puta, absent ka na naman ata eh, you invoke 151 stating that a city can impose a tax higher than the rate provided for by law not more than 50% of the maximum (50% of the maximum of 2% is 1, therefore, 2+1 is 3%) BULACAN v. CA (299 SCRA 442) *first case decide by the SC which interpreted both the LGC and the NIRC. F: The then governor, Obet Panganiban together with his provincial council passed an ordinance imposing tax on quarrying under the provision of 138 of the LGC. The problem is that the ordinance applies to ALL entities quarrying in the province. One of the taxpayers, Republic Cement obliged to pay the tax, argued that under 138 of the LGC, the tax on quarrying on which the province may be allowed shall only be with regard to quarrying private land, and not only that but under 133(H), there is a prohibition to impose excise tax and tax on quarrying under the IRC is an excise tax. H: The tax on quarrying allowed to provincial governments shall only be with regard to lands which are public lands, and since this is a private tax on quarrying refers to a lot without any distinction. Hence, if the LGC made a qualification as to the kind of land (where it says it should be public land), by implication, it should refer to private land under 151 (although the law did not distinguish); and since it is a tax by the national government, it should be collected by the BIR (not the LGU), and also the SC agreed that it is an excise tax where LGUs are prohibited from collecting; thus, the SC declared the tax ordinance null and void for being contrary to law. Sir, why is it a problem when the law is clear that under 138, it shall only apply to public land? Perhaps the provincial council thought that the subject matter of the tax ordinance may be a subject matter provided in any book including the IRC, or worse, that it may impose a tax on a subject matter not mentioned in any book. Moral lesson: although a tax ordinance may be passed even if the subject matter is not provided for in any law, it has to comply with the limitations. PETRON v. PENILLA (198 SCRA 86) * The facts here arose under the old law under 5 (now 133) of the local tax code (PD 231) F: Petron has a factory/plant in Penilla where the raw materials petroleum products are being converted into refined petroleum products. The municipal council of Penilla imposed a tax by way of a tax ordinance saying that they are invoking the old 19 (now 143(A)) stating that municipalities are authorized to impose tax of the manufacture of any commodity, hence, since it is manufacture of a petroleum product, the LGU must e authorized. However, Petron objected since under 5 (now 133(H)), the prohibition includes the prohibition to impose excise tax and not only that,

73

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan under this par., the tax on petroleum products is an excise tax. Under this par., the law is clear it does not only prohibit the imposition of tax, fee or charge over petroleum products. H: The controlling provision here the old 19 (now 143(A)) that LGUs are authorized to impose the business tax for the manufacturing over any kind of commodity by and petroleum product is any kind of commodity. Q: What do you think? A: I dont agree with this ruling because between 133(H) and 143(A), it is the former which is more specific. IX. Value added tax and percentage (133(I) EXCEPT 143(H) Relative prohibition. X. Tax, fee or charge on common carriers whether by land, water or air (133(J)) FIRST HOLDING CO. v.BATANGAS CITY (300 SCRA 661) * 2nd SC ruling discussing both the IRC and LGC. F: This revealed to the public the existence of 2 very big oil pipelines coming form Batangas City with a distance of more than 100km, one going to Pandacan Oil Depot and the other one is going to Brgy. Bicutan, Taguig. The Batangas City council deemed it necessary to impose a tax on the gross receipt of the 1st holding company for the operation of the oil pipeline, but the operator argued that the oil pipeline is not a common carrier. H: The SC reasoned out like in the case of Pajunar v. Comm (328SCRA666), saying that we have copied the code of carrier law form the US where the definition of a common carrier is one habitually carrying not only individuals or passengers but also goods or commodities, and since the oil pipelines is habitually carrying petroleum products which is a commodity, we rule this as a common carrier which is under 133(J), LGU is prohibited from imposing tax on common carriers, and not only that but under 170 of the LGC, the law is very explicit, that ALL LGUs are prohibited to impose percentage tax on common carriers. With that, the tax ordinance passed was declared null and void for being contrary to law. XI. Premiums on re-insurance (133(K)) absolute prohibition. XII. Tax, fee or charge on registration of motor vehicles and for the issuance of license and permit for driving thereof EXCEPT tricycles. (133(L)) BATUAN CITY v. LTO (322 SCRA 805) I: Which function was delegated to the LGU? The LTO registering motor vehicles or the LTFRB granting franchise and regulation of common carriers? H: Under 133(L), the function of the LTO is prohibited, an therefore what may be delegated to the LGU is the function of LTFRB. XIII. Tax, fee or charge on exportation of products and is actually exported EXCEPT under 143(C) where the LGU is authorized to impose business tax on exportation (133(M)) XIV. Tax, fee or charge on cooperatives duly registered under the cooperative cod (RA 6938) and Business Kalakalan (RA 6810) (133(N)) A cooperative is exempt from local tax, provided it is duly registered with the cooperative code and the cooperative development authority or Business Kalakalan (not kalkalan) XV. Tax, fee or charge over the national government, political subdivisions and agencies and instrumentalities of the government (133(O)) Relative prohibition since it admits of an exception under 154 of the LGC where it says that a LGU may be authorized to impose a fee or charge for the operation of a public utility provided it is owned, maintained and operated by such LGU. NAIA v. PARANAQUE (JULY 2006) H: SC ruled in favor of the airport. Paranaque being a LGU cant impose tax on a government instrumentality. Airport owned by the government is not an agency, it being an instrumentality. Q: May the government tax itself it the taxing power is the local government? A: NO. The local government cannot impose tax on the national government, and with more reason that it cannot impose a tax with equal LGU. D. Taxes that can either be imposed by Provinces or Cities I. tax on transfer of realty (135) " Note that this is not a real estate tax, this is a local tax for the simple reason that it is

74

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan not provide for under the topic of real estate tax (198-280) " Law says it should not exceed ! of 1% of the consideration (NOTE: do not use zonal value since this is used only under the IRC, not the LGC. Q: Since all the provinces and cities must follow the limitation of the rate (not exceeding ! of 1%), is it violative of the equal protection clause? A: NO, because the sangguninan had to determine the actual rate considering the status of the province. Q: Why is that Makati fix the rate of 75% or 3/4 of 1%? A: Because cities are authorized to increase the rate of 50% of the maximum, that is 50% of ! is 25% (50+25 is 75%). NOTE: Do not apply transfer of realty pursuant to RA 6657 (CARP) ! this is the Comprehensive Agrarian Reform Program ! this is exempt. II. tax on printing an publication (136) " Normally, a province cannot impose this because the tax on business can only be imposed by a city or municipality EXCEPT this one, on printing and publication of magazines and periodicals. III. franchise tax (137) " The old national franchise tax under the old tax code was already abolished. " We still have franchise tax other than this one, known as national franchise tax ! provided for in the republic act granting franchise. Two kinds of Franchise Tax: 1. local franchise tax (under LGC 137) 2. national franchise tax (provided for in the statute or republic act authorizing the franchise) Q: May LGUs impose local franchise tax? A: We have to consider here many supreme court decisions and also 193 of the LGC. Under 193, it says there unless especially provided for in this code, exemptions granted to natural juridical persons are hereby withdrawn (abolished) EXCEPT: 1. local water districts 2. cooperatives registered under the cooperative code (RA 6938) 3. non-profit and non-stock educational institution. BASCO v. PAGCOR (197 SCRA 52) F: The city council passed a tax ordinance imposing tax on PAGCOR, an agency of the government. PAGCOR objected saying that the local city is prohibited under the old local authority act to impose tax on an agency of the government. H: The SC declared null and void the tax ordinance saying Manila cannot do that. CEBU v. MACTAN (261 SCRA 667) F: Cebu government was trying to collect real estate tax from the Mactan airport (note: real property tax is a territorial tax, meaning it should only be collected within its territorial jurisdiction). Lawyers of Mactan airport argued that under 13(O), Cebu, a LGU, cannot impose tax on an agency of the government, and they also invoked the ruling in BASCO. H: The lawyer of Mactan airport is devoid of any merit at all, it is 100% erroneous since the real estate tax is not a local tax, hence, why invoke a SC ruling and codal provision which can only be applied to local tax. Therefore, Mactan airport should pay Real Property Tax. " Before the codification in 1991 (to take effect January 1, 1992), local taxation was embodied in a separate book known as Local Tax Code (PD 231) while real property tax was provided for in a separate book known as Real Property Tax Code (PD 464) LRT v. CITY OF MANILA (342 SCRA 692) F: The Manila city government tried to collect real property tax but the management of the LRT said no you cannot do that to us since it is exclusively for public use. H: NO, you are not exclusively for public use since every time a person wants to use the LRT he has to pay. Q: Why not use the defense that it is owned by the government?

75

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: Because in real estate tax, the defense that it is owned by the government is not a defense. The LGC in 199(B) and in 217, both provisions says that the basis for the imposition of real estate tax is the ACTUAL USE of anybody who is using that (maybe in the concept of usufructuary or in the concept of a lessee, or in the concept of an owner); the basis is not ownership. " in 134, the taxes here must not only be imposed by provinces, it may also be imposed by cities in line with 151 ! those enumerated in 135 to 141. CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS OCCIDENTAL (181 SCRA 38) * This was the prevailing rule for more than 10years from 1988 H: In the franchise or the republic act, there are only two (2) kinds of franchise, one is a franchise which provide for a condition that this tax (referring to the franchise tax) shall be in lieu of all other taxes, and the other franchise is the one which do not provide for such provision; the province or the city can impose local franchise tax if the franchise belong to the second example. REYES v. SAN PABLO CITY (305 SCRA 353) * Here the SC uniformly ruled H: A provision on exemption under 193 dont only refer to exemptions provided for by different statutes, but it includes those which claim exemptions by virtue of the case of Cagayan de Oro (because SC decisions are also laws). PLDT v. DAVAO (363 SCRA 750) F: The franchise holders of Smart and Globe are claiming exemptions from the local franchise tax because they are saying that they are holding a franchise which says that it is a franchise enacted by the house of Congress in 1995 which carries with it an exemption form local franchise tax. H: By the very explicit provision of 193, the removal of exemptions granted by different statutes and also by SC decisions applies only to statutes and decided by the SC on or before Jan. 1, 1992, because 193 says upon effectivity of this law. For exemptions covered by 193 therefore, Smart and Globe are authorized to claim exemptions because the statue enacted on 1995. (RA 7082) was

IV. tax on sand, gravel and other quarry resources (138) " We are through with that in the case of Bulacan V. professional tax (139) " this must be correlated with the tax under 147. " NOTE that this is an exemption to the rule that a city may increase the rate of the tax ! under 151 of the LGC, the increase is not allowed. " both 139 and 147 are taxes imposed on persons exercising professional calling. Section 139 are to be imposed by provinces and cities are applicable to workers who must pass a government examination (e.g. engineers, physicians, etc) there is a maximum (P300) NOTE: it is not always 300, since the exact amt must be fixed by the ordinance. Section 147 are to be imposed by municipalities and cities are applicable to persons who are working but are not required to take government examinations It does not provide for any amount, the only requirement is that it must be reasonable

VI. amusement tax (140) " under the IRC, there is also amusement tax under 125. PBA v. QUEZON CITY (137 SCRA 358) F: The city government enacted a tax ordinance trying to collect amusement tax including amusement tax on the PBA (in Araneta, Cubao); but PBA and no, we are already paying amusement tax to the national government through the BIR because of 125 of the IRC H: QC government can no longer collect on the ground that it is already being collected by the national government and secondly, in the enumerations of

76

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan amusement under 140, you will never see professional basketball. Most of all, it is the intention of the author that it is only the national government. *nak ng putang katangahan yan.. the local tax code PD 231 was enacted in 1974 when we dont have any professional basketball.. since professional basketball was born May 1975. * ano ba dapt tama diyan? ! both the national government and the QC government can collect. There is no violation of the prohibited double taxation, because the taxing powers are different, and not only that 140 speaks of amusement tax on admission fee but under 125, it is abut gross receipts. VII. delivery van (141) Q: What if not a delivery van, but sako lang? ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607) F: Ilo-ilo Bottlers was already paying a business tax on manufacturing under 143(A) to the city government by virtue of a tax ordinance. Later on, they are obliged to pay by virtue of another tax ordinance imposing business tax on wholesaling. Naturally, Ilo-ilo Bottlers argued, how could it be, if you manufacture, it necessary follows that you sell the commodity so, with the payment of the business tax on manufacturing, it carries with it the business of wholesaling. H: NO, you have to determine the marketing system of the company. If wholesaling is also being done in the place of manufacture, the business tax on wholesaling should no longer be paid it should only be the business tax on manufacturing. But if the marketing system of the company provides that wholesaling shall be done in a separate place (maybe several kilometers away), the manufacturer must still pay the business tax on wholesale because now it could be argued that they have the separate business of wholesaling. Q: On the business of retailing, should the business tax of retailing be imposed by the city or by the municipality OR by the barangay in the city or the barrio in the municipality? A: 143(D) must be correlated with 152, the tax to be imposed by the barangay. It depends: a. city if the gross receipt of the retailer exceeds P50T in a minimum of one year, it is the right and privilege of a city to impose the business tax on retailing. b. barangay if the gross receipt of the retailer did not exceed P50T, it is the barangay council where the business of retailing is located. c. municipality if the gross receipt of the retailer did not exceed P30T within a period of one year. d. barrio if the gross receipt of the retailer did not exceed P30T within a period of one year.

A: The applicable tax is under 143(G) (peddlers tax, one imposed by municipalities and cities. If may dalang sasakyan, yari siya ng province sa tax. NOTE: 135-141, these are taxes that can be imposed by PROVINCES and CITIES. 143-150 are taxes to be imposed by MUNICIPALITIES, which can also be imposed by CITIES. E. Taxes that can either be imposed by Municipalities or Cities I. Business Tax (143(A-H)) a. manufacturing, repacking, processing, including the manufacturer of permitted liquor and also its dealer b. wholesaling c. exportation d. retailing e. contractors tax f. tax on banking institution and financing institution g. peddlers tax h. the exemption under 133(i)

Q: If you have two branches, how many business taxes do you have to pay? A: You pay only one business tax (146)

77

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan NOTE: These distinctions do not apply in wholesaling. These are only for retailing. " Paragraph H: for the imposition of excise tax, percentage tax and value added tax, the municipality may impose a tax not exceeding 2% of the gross receipt (with regard to a city, it may go as far as 3%) II. Municipalities in Metro Manila who can increase their rate (144) " Right now municipalities: 1. San Juan 2. Pateros there are only two Q: What if there is an agreement that commodities would be delivered and that the buyer would be waiting in some other town, is the answer still the same? A: YES, the answer is still the same because delivery to the carrier is delivery to the buyer where delivery has been termed within the territorial jurisdiction of Cebu. SHELL v. CEBUCOT, CAMARINES SUR (105 PHIL 1063) F: The petroleum products were purchased at the motor vehicle traversing the neighboring towns of Cebucot like Bason, Dimalaon, all towns in Camarines Norte. The contract of sale was negotiated and perfected in different municipalities where the motor vehicle of Shell was traveling. H: Although the oil depot was located in Cebucot, the said municipality cannot impose tax on that because the contract of sale was negotiated and perfected in the different nearby towns of Camarines. Q: Is there a conflict with the case of Shell and Phil Matches? A: NONE. As a matter of fact, these two decisions complement each other. G. Taxing Powers of the Barangay (152) " Only a minimal sum (fair and reasonable) Power to impose tax: 1. On commercial breeding of fighting cocks, cockfights and cockpits must be for commercial purposes 2. On places of recreation which charge administration fee 3. On billboards, signboards, neon signs and outdoor advertisements especially for the barrios and barangays along the highway they came from different towns of the Visayan Region. May the business tax ordinance of Cebu be imposed on those transactions even if the buyers did not come from the territorial jurisdiction of Cebu? H: Since in this case the contract booked and paid, meaning, it was negotiated perfected and consummated in the warehouse where it was located in Cebu City, the Cebu City government has the right to collect business tax.

III. Professional Tax (147) " we are through with that IV. Fees for sealing and licensing of weights and measures (148) V. Fishery rentals, fees and charges (149) F. Situs of Tax (150)

! The tax referred to in here is the business tax on wholesaling and retailing. Q: RFM is manufacturing commodities, one of them is Swift hotdogs, this is being sold not only in Mandaluyong, Metro Manila, but also to the inter country from Batanes to Tawi-tawi. Where should the business tax of wholesaling or the business tax of retailing be paid? Should it be in the principal office (Mandaluyong) or the place where the commodities are sold? A: It will be paid in the place where it had been sold PROVIDED there is a branch office or a sales outlet (150(A)). " If it so happens that the company has a factory different from the place where the principal office is located ! 30% should be pain in the principal office and 70% in the municipality or city where the branch is located. PHIL MATCHES v. CEBU (81 SCRA 99) F: Phil Matches were produced in Nagtahan, Manila. In Cebu city, there was a warehouse where the matches were stored. Many of the customers, by way of wholesale in the warehouse in Cebu City,

78

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 4. For barangay clearance if you want to engage in the business of retailing or wholesaling ! if barangay captain will not approve that ! within 7days go to the municipal hall or city hall for approval 5. For the use of barangay property for instance the barangay has a plaza. H. Common (153-155) Revenue Raising Powers After several months, the government announced in the radio that the party in the case of Padua, mutually agreed that the collection shall be resumed in order to have money for the maintenance and repair of the highway. Exceptions to 155 (collection of toll fees) 1. members of AFP 2. members of the PMP 3. post office personnel delivering mail 4. physically handicapped 5. disabled citizens 65 years and older. I. Community Tax (156)

Q: Why common? A: All the LGU could impose the same. But it does not follow that all the provinces, cities, municipalities could impose the same. Only the LGU which operate, establish, maintain the entity If established by the province, it should only be the province. These are: 1. service fee and charges for services rendered 2. public utility charges provided owned, operate and maintained by them 3. toll fees and charges tax or toll for the use of a bridge or a street " Padua filed a civil action in the MakatI RTC trying to stop the government form collecting a toll free in the South Express including the North expressway alleging that he is affected as a taxpayer because he is from Paranaque. He argued that if you use the property of the government like a street or a public plaza, you do not pay. He made the analogy, that if you go to Luneta, you do not pay the city government of Manila. The Makati RTC, the CA and SC had a uniform ruling that the operator should be prohibited from collecting further toll fess because if the operator had already recovered his investment and earned an income already, he should be stopped. As argue by the SC, it copied the argument of the lawyer (re: Luneta). NOTE: that Res Judicata do not apply here. When the ruling became final an executory in 1993, the North and South Express were totally dismantled and totally destroyed by the DPWH to give way to the final and executory ruling of the Court, that It should no longer be collected.

" In the old days, known as residence tax certificate. Q: If the Filipino is a resident of a foreign country (NRC), is he liable to pay the community tax certificate? A: NO, because the basis of imposition of this tax is whether or not you are an inhabitant of the Philippines. Meaning you are a resident of the Philippines. Q: What about a foreigner residing in the Philippines (RA)? A: YES. You have to pay unless the foreigner is a trans-investor for not more than 3months. " This is applied to both natural and juridical persons. Requirements: 1. for a natural person ! at least 18 years of age 2. for corporations ! upon registration with the SEC Q: What if you become 18 in the month of January or November or December? A: For those who celebrated their birthday before July 1 (that is up to June 30), they are liable to pay the tax, for this year. For those who celebrated their birthday on or after July 1, they are not yet liable to pay this year, but have to wait until next year. Q: Is there a difference for those who reached 18 in the months of Jan-Feb-March and those who reached 18 in the months of April-May-June? A: YES. For those who celebrated birthdays in the months of Jan-Feb-March, they have a

79

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan grace period of 20days within which to pay. Those who celebrated their 18th birthday in the month of April-May-June, they do not have any grace period at all, they have to pay the tax immediately. Q: If you have a community tax certificate for this year (2006), can it be used only until December 31, 2006? A: NO. It shall be valid up to April 15, 2007. (163(C)) J. Accrual of the Tax (166) " There was a return filed and it is not fraudulent and not false II. Abnormal/Extraordinary assessment and collection " There was: 1. an omission or failure to file the return; 2. if there was a return filed, it was fraudulent, or; 3. the return was false Q: Is a false and fraudulent return presumed? A: NO, false and fraudulent return is not presumed. The burden of proof to prove that the return was false and fraudulent lies against the government through the BIR. The mere fact that the return is erroneous will not make the return fraudulent, it must be proven by the BIR. Q: Why is it important to know whether the assessment is under normal or abnormal condition? A: It is important to know because the prescriptive period between normal and abnormal assessment differ. Prescriptive Period for Assessment 1. Normal/Ordinary Assessment 3 years from the time the return has been filed (not the payment of the tax) (Sec. 203, NIRC) " 3 Ways of filing the return under Sec. 203, NIRC: 1. filed before the deadline (for any tax under NIRC) 2. filed on the date of deadline 3. filed after the deadline " 2 Ways of counting the 3 year period of Assessment: 1. if return is filed before or on the day of the deadline, the prescriptive period starts on the date of the deadline; 2. if return is filed after the deadline, the prescriptive period starts on the date the return has been filed. For the calendar year of 2004, a return must be filed and paid for Net Income Tax on or before April 15, 2005. Since he was not able to meet the deadline, the taxpayer is now being assessed for tax due for 2004. To minimize interest and surcharges, it has been suggested by the BIR that the taxpayer file a late return. Supposed he filed his return

" January 1 Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007? A: NO. You have the right to collect that in July 1, because the law is saying that it should be collected in the next succeeding quarter (167) " Mayor Binay had a tax ordinance in May, sabi ng mga bata niya: bosing, collect na tayo ng June. Binay: hindi nga pupwede, maghintay pa tayo ng July 1. Q: What if the tax ordinance had been existing for several years already? A: The time of accrual will always be January 1. REMEDIES UNDER THE INTERNAL REVENUE CODE 1. Remedies of the Government 2. Remedies of the Taxpayer Remedies of the government: 1. Assessment 2. Collection Under the NIRC, assessment and collection have 2 kinds: 1. Normal/Ordinary assessment and collection Sec. 203, NIRC 2. Abnormal/Extraordinary assessment and collection Sec. 222, NIRC I. Normal/Ordinary collection assessment and

80

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan covering 2004 on April 1, 2006. In this example, the reckoning point is the deadline of April 15, 2005. The starting point of the counting the 3 yr. period is on the date the return is filed which is April 1, 2006. Suppose it is not a late filing of return, the counting of the period is on the date of the deadline which is April 15. 2. Abnormal/Extraordinary Assessment " the government has 2 options: a. Assess and Collect the prescriptive period for assessment shall be 10 years from the discovery of none filing or false or fraudulent return (Sec. 222, par. o, NIRC) the prescriptive period for collection shall be 5 years from the date of final assessment (Sec. 222, par c, NIRC) b. Collect Without Assessment through Judicial Action since there is no assessment there is no prescriptive period for assessment prescriptive period for collection shall be 10 years from the date of discovery of none filing of return or false or fraudulent return. " These options are available only if the Assessment is under the Abnormal/Extraordinary Conditions. These are not available under Normal/Ordinary Assessment Prescriptive Period for Collection 1. Normal/Ordinary Collection Sec. 203 did not provide for the prescriptive period for the collection Intention of the author: 5 years from the date of final assessment Reasons: (Sababan agrees with the 5 year prescriptive period) Prescriptive period of collection under 1st option on Abnormal Assessment is 5 years from final assessment (Sec. 222, par c, NIRC) 1. under the old code of 1939, 1977, and 1985, if the prescriptive period for collection under abnormal is 3 years, then the prescriptive period for collection under normal is also 3 years. If now a days, it is 5 years in abnormal, the prescriptive period for normal should also be 5 years. 2. to say that there is a prescriptive period for collection under Abnormal and there is none under Normal is too abnormal. It should be the other way around. 2. Abnormal/Extraordinary Collection a. assess and collect 5 years from the final assessment b. collect without assessment through judicial action 10 years from date of discovery of none filing, or false, or fraudulent return. Q: How to apply these periods? A: Annual net income tax return filed by individual using a calendar year. The return should be filed on or before April 15, 2000. It was filed on April 15, 2000. Q Without stating the date of final assessment, can it be collected in 2007? A: Under normal condition, first determine the date of final assessment. If the BIR finally assessed the tax in November 2001, then 2007 is way beyond the 5year period to collect. Count the prescriptive period for collection from the date of final assessment. Q: (same facts) Supposed it was finally assed on March 2003, can it be collected in 2007? A: Yes, because it is within the prescriptive period of 5years. BASILAN v. COMMISSIONER (21 SCRA 17) F: Supposed the notice of assessment was given within the period but it was received by the taxpayer outside the period. I: Whether or not the assessment is within the period of 3 years. H: Yes. It is within the period. If the notice is sent through registered mail, the running of the prescriptive period is stopped. What matters is the sending of the notice is made within the period of prescription. " It is the sending of the notice and not the receipt that tolls the prescriptive period. Q: What if the return has been amended, how would you compute the period of assessment?

81

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: NIRC is silent. PHOENIX v. COMMISIONER (14 SCRA 52) If the amendment of the return is substantial as distinguished from superficial, the counting of the prescriptive period is also amended. The prescriptive period shall be reckoned on the date the substantial amendment was made. If the amendment is superficial, the counting of the prescriptive period is still the original period. Procedure for Assessment (Sec. 228, NIRC; RR 12-99) Steps of assessment 1. Sec. 228, NIRC (2 steps) 2. RR 12-99 (3 steps) 2 Steps under Sec. 228, NIRC 1. Pre-assessment notice 2. Final assessment notice 3 Steps under RR 12-99 1. Notice of Informal Conference 2. Preliminary Assessment Notice 3. Formal Letter of Demand and Notice to Pay the Tax PROCEDURE (Sec. 228, NIRC; RR 12-99) 1. Upon receipt of the notice of informal conference, file a reply within 15 days from receipt of notice; 2. Failure to file a reply, 2 things may happen: a. BIR will send again the Notice of Informal Conference or b. BIR will send a Preliminary Notice of Assessment 3. Upon receipt of Preliminary Assessment Notice (PAN), file a reply within 15 days from receipt 4. Failure to file a reply will result in either: a. BIR will repeat PAN b. Declare the taxpayer in default, and send you a Final Assessment Notice (FAN) 5. Upon receipt of FAN, taxpayer may file a protest within 30 days. Q: Is FAN the one appealable to the Court of Tax Appeals (CTA)? A: NO. This is because 228, NIRC and RR 12-99 requires the exhaustion of administrative remedy of protest. After the receipt of FAN or formal demand within 30days must file a protest before the office of the commissioner of internal revenue. FORMS OF PROTEST 1. Local Tax (Sec. 125, Local Government Code (LGC)) 2. Real Property Tax (Sec. 252, LGC) 3. Tariff and Customs Code (Sec. 2313, RA 7651) " In all protest under the different codes, payment under protest is only necessary under the Real Estate Tax. RR 12-99 " If the taxpayer receives 2 final assessments, one under the Net Income Tax (NIT) and the other in VAT. If the taxpayer dont want to file protest under VAT but want to file a protest under NIT. The taxpayer in order to be allowed to file a protest under the NIT must first pay the VAT where he does not intend to file a protest. " This is not payment under protest because, payment under protest is the one mentioned in Real Property Tax under Sec. 252, LGC. Under NIRC, Protest is referred to as: 1. disputing of final assessment or 2. file a motion for reconsideration or reinvestigation Q: What should be done after filing a protest? A: Count 60days is the period to file the necessary documents and receipts in support of the protest. Q: What is the effect of failure to file the supporting documents? A: Failure to file the necessary and supporting documents within the 60day period, to be counted on the day the protest is filed, the final assessment shall become final and executory. " On the 51st day you filed the necessary document, you have to count another period, which is 180 days from the day you filed the necessary documents. Relevance of the 180 Days: 180 days is the time given to the BIR to decide the case

82

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: Supposed it did not decide the case within 180days? A: Do not invoke the Lascano case because it was rejected by RA 9282 In the Lascano case, before you file an appeal although the 180 days have lapsed, you have to wait for the BIR to take positive action. The case was ruled only by the CTA, hence it is not a law. The jurisdiction of the CTA has been amended by RA 9282. RA 9282 provides that in case of inaction of the commissioner after the lapse of 180days, remedy is to file an appeal. RR 12-99 says that after lapse of 180days but within 30days after 180days, that is the time to file an appeal. Q: Supposed the BIR rule within 180? A: Within 30days from receipt of the decision file an appeal to the CTA sitting in division. Q: Supposed the CTA decided not in your favor? A: File a motion for reconsideration within 15days to the same division deciding the case. Q: Supposed the CTA, in division decided not in you favor? A: File an appeal to the CTA sitting en banc. Q: Supposed the CTA en banc decided not in your favor? A: File an appeal within 15days from receipt of decision to Supreme Court. Q: During the pendency of the protest in the office of the Commissioner, supposed you receive a notice of collection, levy and/ or distraint, what is your remedy? A: 1. YABES v. COMMISSIONER (150 SCRA 278) 2. UNION SHIPPING LINES v. COMMISSIONER (185 SCRA 547) YABES v. COMMISSIONER (150 SCRA 278) F: The taxpayer receives a notice of collection while waiting for the decision of his protest. He then filed an appeal with the CTA contending his protest has been denied because he did not receive a decision but receive a notice of collection. Simultaneously, the BIR filed before the CFI an ordinary civil action for the collection of sum of money. When the judge of the CFI, was about to conduct the hearing of the case, the taxpayer filed an injunction with the SC to prohibit the judge of the CFI contending that a single cause of action is pending in two courts, one in the CTA and another in CFI. H: Injunction was granted prohibiting the Judge of the CFI and requiring the Judge to transfer the records to the CTA saying that the remedy made by the taxpayer was the correct remedy. Q: Was the appeal made on time? A: Yes, when the BIR filed an ordinary action, the protest is deemed denied. Hence an appeal is a proper remedy. UNION SHIPPING LINES v. COMMISSIONER F: The taxpayer was waiting for the decision of his protest. But instead, he received a notice of collection. Immediately, he filed a Motion for Reconsideration and Clarification asking whether his protest has been denied. The BIR did not reply or answer but instead filed an Ordinary Civil Action before the CFI. When the taxpayer received summons, he did not answer but instead filed an Appeal before the CTA. I: Whether or not the remedy of Appeal was the correct remedy and Whether or not it was filed on time. H: Yes. The remedy of appeal is the correct remedy and the appeal was filed on time. The reckoning period within which to file an appeal is the time the taxpayer received the summons. While an Appeal is pending before the CTA, the CTA will determine: 1. If the decision was made within 180 days, whether the appeal was made within 30 days from the receipt of the said decision, or 2. if there was no decision after the lapse of 180 days, whether the appeal was made within 30 days upon the expiration or the lapse of the 180-day period. Q: Pending appeal with the CTA, can the BIR amend the final assessment? A: 2 SCHOOLS OF THOUGHT: 1. GUERRERO v. COMMISSIONER (19 SCRA 25) 2. BATANGAS v. COLLECTOR (102 PHIL 822)

83

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan GUERRERO v. COMMISSIONER (19 SCRA 25) H: No. Because it is no longer the disputed assessment. BATANGAS v. COLLECTOR (102 PHIL 822) H: Yes. In order to avoid multiplicity of suits " ACCORDING TO JUSTICE VITUG: BATANGAS v. COLLECTOR (102 PHIL 822) is the better ruling PROTEST UNDER LOCAL TAX (Sec. 195, LGC) " Under NIRC, protest is filed in the Office of the Commissioner " Under LGC, protest is filed with the same City or Provincial or Municipal Treasurer who issued the assessment Period to file Protest 60 days from receipt of assessment Q: If the treasurer did not decide within a 60day period, remedy? A: Go to the court of competent jurisdiction (RTC) Q: If the RTC decided not in you favor? A: File an appeal with CTA en banc (beginning April 23, 2004) Q: If the CTA decided not in your favor? A: Appeal to the SC. NOTE: Pursuant to RA 9282, direct appeal to CTA en banc can be made from: 1. Decision of the RTC involving local taxation exercising appellate jurisdiction 2. Decision of the Central Board of Assessment Appeal exercising appellate jurisdiction. PROTEST UNDER REAL PROPERTY (Secs. 226, 230, and 252) Remedy shall be the same TAX This is the only instance where payment under protest is necessary

Q: How is payment under protest made? A: At the back of the receipt there will be an annotation that there was a payment under protest within 60days from receipt of the notice of assessment within the same treasurer who issued the assessment. Q: If the treasurer rules against the taxpayer, remedy? A: The remedy is to file an appeal to the Local Board of Assessment within 30days from the receipt of the decision. Q: From the decision of the Local Board of Assessment? A: Appeal should be made to the Central Board of Assessment Appeal. " Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It can now be appealed to the CTA, sitting en banc. PROTEST UNDER THE TARIFF AND CUSTOMS CODE (TCC) (Sec. 2313, as amended by RA 7651) " Formerly, the automatic appeal under the TCC applied only to protest; but now a days, the automatic appeal applies to both protest and forfeiture. For Forfeiture Under the Tariff and Customs Code " Refers to the Order of the Collector confiscating the imported goods or commodities Doctrine of Primary Jurisdiction If the Collector ordered the forfeiture of the imported commodities the order of the Collector shall be to the exclusion of all government offices and authority. Importer of Chemical, under the TCC, the custom duties is only P27 but the collector says it should be P52. The importer will then file a protest with the Office of the Collector. In the old days, there is an automatic appeal from the decision of the collector under protest. But under RA 7651, the remedy of automatic appeal is applicable to both protest and forfeiture.

Sec. 252, LGC If the taxpayer receives a Notice of Assessment from municipal, city, or provincial treasurer, the remedy is to file a protest but there must be first Payment Under Protest.

84

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan I. In both cases of protest and forfeiture, if the importer lose the case and the government wins, the remedy is to file an appeal within 15 days before the Office of the Commissioner. From the ruling of the Commissioner, the importer should file an appeal within 30 days before the CTA, sitting in division. From the ruling of the CTA in division, the importer should file an MR within 15 days before the same division hearing the case. From the ruling of the CTA in division, deciding on the MR, the importer should file an appeal within 15 days before the CTA sitting en banc. From the CTA en banc, appeal to SC within 15 days. II. If the importer-taxpayer wins the case, the government lose the case, Sec. 2313 of TCC as amended by RA 7651, there shall be an automatic review within 15 days. Q: Where should the automatic review be made? A: It depends. Publish the value of the commodity. 1. IF P5 MILLION OR MORE AUTOMATIC REVIEW SHALL BE BEFORE THE SECRETARY OF THE DEPT. OF FINANCE. 2. IF LESS THAN P5 MILLION AUTOMATIC REVIEW SHALL BE BEFORE THE OFFICE OF THE COMMISSIONER Q: Suppose the commissioner decide or did not decide within 30days, what happens? A: If the commissioner reverses the ruling of the collector, the ruling is final and executory. If the commissioner affirms or did not decide within 30days, there shall be an automatic appeal before the sec. of finance. Q: Between the two which will be appealed to the CTA? A: The decision of the secretary which passes through the office of the commissioner (RA 9282) But not all the decision of the secretary which passes the office of the commissioner affirms or did not decide within 30days and appealed before the secretary of finance will appeal to the CTA be allowed. There are 3 instances when the Secretary of Finance renders a decision appealable to the CTA: 1. decision of the Secretary by virtue of automatic review passing through the Commissioner 2. cases of anti-dumping duty, where the anti-dumping duty was ordered by the Secretary 3. decision of the Secretary of Finance on countervening duty. COMPROMISE (Sec. 204, NIRC) 3 Questions asked in 2004 BAR: 1. May the Government compromise criminal cases and civil cases? 2. Supposed the corporation is already dissolved, can the stockholder be obliged to pay? 3. Suppose the civil case filed by the BIR is final and executor, can it be subject to compromise? CAN THERE BE COMPROMISE IN: 1. CIVIL CASES? YES, IN ANY STAGE OF THE PROCEEDING EXCEPT WHEN THE CIVIL CASE IS ALREADY FINAL AND EXECUTORY BECAUSE IT WILL BE VIOLATIVE OF THE SEPARATION OF POWERS 2. CRIMINAL CASES? YES, EXCEPT: a. IF ALREADY FILED IN COURT (RTC) OR; b. IF IT INVOLVES FRAUD 3. IF THE CORPORATION IS ALREADY DISSOLVED, CAN THE STOCKHOLDER BE HELD LIABLE TO PAY TAX? GENERAL RULE: NO EXCEPT: a. IF IT IS PROVEN THAT THE ASSETS OF THE COPORATION IS TAKEN BY ONE STOCKHOLDER OR; b. IF THE STOCKHOLDER DID NOT PAY HIS UNPAID SUBSCRIPTION Minimum Amount to be Compromised (Sec. 204) 1. If the ground is financial incapacity of the taxpayer, the minimum shall not

85

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan be less than 10% of the original assessment. 2. If based on other grounds, the minimum amount shall not be lower than 40% of the original assessment. Q: Can it be lower than that prescribed by law? A: As a rule, no. EXCEPT, if allowed by the evaluation board consisting of the: a) commissioner; and b) deputy commissioner. Instances when the Final Assessment becomes final and executor: 1. If the taxpayer did not file the protest on time 2. Failure to submit the supporting documents within the 60-day period 3. After the lapse of the 180-day period, you did not file an appeal within the 30-day period to the CTA 4. An appeal was filed but made beyond the reglementary period to appeal METHODS OF COLLECTION (SEC. 205) 1. Judicial Action a. Civil b. Criminal 2. Administrative Action a. Distraint b. Levy c. Tax lien Q: Why is it important to know whether the final assessment is under normal or abnormal conditions? A: It is important because of the requirement under 222. If the final assessment becomes final and executory, the government (BIR) can exercise the remedies under 205 in any order or simultaneously (207). But it is not always the case, because the right of the government to collect is limited in case of abnormal assessment/collection under 222. Under the second option, the right of the government is limited to judicial action either civil or criminal. Administrative remedies such as distraint, levy, or tax lien is not available under such condition. Q: In distraint, levy or tax lien, is the 10 year period of collection applicable? A: No, only the 5year period should apply. Distraint Kinds: 1. Constructive (Sec. 206) 2. Distraint of Intangible (Sec. 208) 3. Actual (Sec. 207, par. a, and Sec. 209) 1. Constructive Distraint " The distraining officer shall make a list of the personal property of the property to be distraint in the presence of the owner of the property or the person in possession of the property. " The owner shall be requested to sign the receipt. Q: What if the owner refuses to sign the receipt? A: Sec. 206: The distraining officer shall require 2 individuals within the neighborhood with the warning that they should not allow the taxpayer to dispose, transfer, or sell the property subject of distraint. Grounds for Constructive Distraint (Sec. 206): 1. The taxpayer intends to leave the Philippines 2. The taxpayer leaves the Philippines 3. The taxpayer ceases or retires from business 4. The taxpayer obstructs the collection of the tax. " THESE GROUNDS ALSO ANSWER THE QUESTION: WHAT ARE THE TAXABLE PERIOD LESSER THAN 12 MONTHS? 2. Distraint of Intangible Property Limited to 1. 2. 3. 3 Intangible Properties: Shares of stocks Bank accounts Credits and debits

Share of stocks " Warrant of distraint furnished to the taxpayer or the officer of the corporation with the warning that the property is subject of distraint and it should not dispose of it. Bank Accounts " Warrant of distraint furnished to the taxpayer or the officer of the bank with the warning that the taxpayer should not be allowed to withdraw.

86

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Debits and Credits " Warrant of distraint furnished to the debtor and creditor 3. Actual Distraint Levy " Personal property shall be physically taken by the distraining officer. " Within 10 days from the receipt of the warrant, a report of the distraint shall be submitted to the BIR (Sec. 207, par a last par.) " The property subject of distraint shall be sold at a public auction EXCEPT bank accounts and debits and credits. Notice of sale shall be by posting in 2 conspicuous place, stating the date and the place of the sale (No publication requirement) " Sec. 211: after the sale and within 2 days, a report shall be made to the BIR Q: If the property sold is a personal property, is there a right of redemption? A: NO. The rule is absolute. Q: If the property is a personal property, is there a right of preemption? A: SEC. 210: Before the scheduled sale, the taxpayer is allowed to recover the property by paying all the property by paying all the proper charges as well as the interest, cost and penalties. During the Scheduled Auction Sale, 2 Things may happen: 1. There is bidder and the bid is enough 2. There is no bidder or there is a bidder but the bid is not enough Q: What is the relevance of knowing the difference? A: 1. If there is a bidder and the bid is enough In case of insufficiency, there shall be further distraint to cover the liability. (217) In case of excess, the excess shall be returned to the taxpayer. 2. If there is no bidder or the bid is not enough. It will be purchase by the government and the later sold in a public auction again (212) " Other than the delinquent taxpayer, warrant of levy is served to the register of deeds having jurisdiction over the real property (Sec. 213) " Within 10 days from the receipt of the warrant, a report of the levy shall be submitted to the BIR (Sec. 207 (b) last par) Notice of Sale in Public Auction: 1. Posting in 2 conspicuous places 2. Publication in newspaper of general circulation once a week for 3 consecutive weeks. Q: Is there a right of pre emption? A: Yes, 213. Q: Is there A: Yes. a right of redemption? In case of insufficiency, no further distraint, 217 applies only if there was a bidder. In case of excess, the excess shall not be returned to the taxpayer but shall be remitted to the national treasury.

2 Things may happen in a Public Auction: 1. There is a bidder and the bid is enough 2. There is no bidder or the bid is not enough Q: What if there is no bidder or the bid is not enough? A: Forfeiture shall be made (215) 3 Definitions of Forfeiture under the Internal Revenue Code 1. Violation of Excise Tax Law (Sec. 224) 2. If there is no bidder or the bid is not enough (Sec. 215) 3. The order of the Collector to confiscate imported commodities (Sec. 2313, TCC) Relevance of the Choice of Words: " Under sec. 212, the law says purchase " Under sec. 215, the law says forfeiture under 215: the real property shall be automatically registered in the name of the Government (forfeiture)

87

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan under 212: the real property is not automatically registered in the name of the Government (purchase) Q: If sold at a private sale, what is the requirement? A: There must be an approval of the Secretary of Finance (216) Q: After sale, if there was deficiency? A: There shall be no further levy, because 215 says that it shall be to the total satisfaction of the taxpayer. Q: After sale, if there was an excess? A: It shall not be returned to the taxpayer but shall be remitted to the national treasury. Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216 Sec. 218: no court shall issue an injunction to restrain the collection of tax under this code Determine what kind of injunction is referred to here: 1. Prohibitory referred in Sec. 218 because it restrains the collection of tax. 2. Mandatory Q: Is the provision limited to tax under this code? A: Limited to internal revenue taxes. EXCEPT: CTA (Regular Court) ! RA 1125 and 9282: CTA is authorized to issue injunction to restrain the collection of taxes or fees collected under other code. Q: Is the rule of distraint or levy the same under local taxation? A: Yes, local tax. 175 for DISTRAINT 176 for LEVY Q: How about real property tax? A: No, distraint is not authorized (256, LGC), because the remedy is only Judicial Action and Levy. Tax Lien " Non payment of tax, the government has the right to claim a lien over the property of the taxpayer 1. NIRC Sec. 219, NIRC 2. Local Tax Sec. 173, NIRC 3. Real Property Tax Sec. 257, NIRC Q: Supposed a parcel of land is about to be levied by the government, but the same is being foreclosed by the mortgagee, which of the 2 obligee, the government or the mortgagee shall be preferred? A: 219, last portion: The government is the preferred one if the lien is annotated and recorded in the registry of deed. In the absence of annotation in the registry of deeds, the mortgagee is preferred. Q: Do we have the same rule under Local Tax and Real Property Tax? A: NO. Both 173 and 257, the government is always the preferred one. The lien can only be removed by payment of tax, interest and penalty. Sec. 220: approving of filing an ordinary civil action for violation of the internal revenue code " The approval must be made by the Commissioner of Internal Revenue HIZON v. REPUBLIC (320 SCRA 574) F: An ordinary civil action for violation of the tax code was filed in the city of San Fernando. But the filing was only approved by the Revenue Regional Director of Central Luzon. The plaintiff opposed the filing in the court on the ground that it should be approved by the Commissioner and the Revenue RD. H: Sec. 220 should be read with Sec. 7 of the NIRC General Rule: powers and functions of the Commissioner may be delegated but not to a position lower than a Division Chief Under Sec. 7, there are powers which can not be delegated a) Power to recommend to the Secretary of Finance to issue rules and regulation b) Power to decide a case of fist impression c) Power to enter into a compromise agreement d) Power to assign BIR officer in the place of production subject to income tax

88

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Since the case does not fall under the prohibited delegation, the filing of the case is legal and tenable. " Decision of the Commissioner of Internal Revenue (CIR) is appealable to CTA. Q: When is a decision of the cir appealable to the Secretary of Finance? A: 4, on matters of interpretation of tax laws. SEC. 223: SUSPENSION OF THE RUNNING OF PRESCRIPTIVE PERIOD Q: A Filipino taxpayer went to Canada, after 15years he went back, he is being assessed by the BIR under normal assessment. Has the right of the government to asses the tax already prescribed? A: NO. When he went to Canada, the running of the prescribed period is suspended. Q: What if the change of address is within the Philippines, say only from manila to Pasay City, is the running of the prescriptive period suspended? A: In order that the running of the prescriptive period will not be suspended, especially if the change is district office, 223 provides that the taxpayer must send a written notice of change of address to the BIR. In the absence of the written notice, the period will be suspended. Q: Change of address is from Philippines to abroad? A: The period will be suspended. 3. Sec. 136, Local Tax 4. Sec. 253, Real Property Tax 5. None except sec. 1603, Tariff and Custom Written claim for refund under the input tax (Sec. 112) " Period is also 2 years from the close of the taxable quarter when the transaction was made Q: Can we apply 229 to VAT? A: Yes, because there is no conflict. 112 is refund under input tax system. 229 is refund for: 1. errors in payment or; 2. collected without authority; or 3. assessment without authority. " The period to claim refund is 2years. Doctrine of Equitable Recoupment " If a taxpayer is entitled to a written claim for refund but the prescriptive period to claim has lapsed, the taxpayer is allowed to credit his written claim for refund which he failed to recover to his existing tax liability. Computed from; a. Individual counted on the day the tax has been paid 1. paying by way of withholding tax system, the reckoning point is the end of the taxable year. 2. paying by way of installment, reckoning point is the date the last installment is paid. 3. if sold to public auction through distraint or levy, the date the proceeds is applied to the satisfaction of the tax liability. b. Corporation 1. Existing 1992, *** v. Commissioner (205 SCRA 184) 1995, Commissioner v. Philam life (244 SCRA 446) 1998, Commissioner v. CTA (301 SCRA 435) 2. Non-existing 2001, BPI v. Commissioner (363 SCRA 840) 1. Existing the counting of the prescriptive period is 2 years on the day the annual adjusted return is

Other Grounds for Suspension: 1. During collection if there is no property found, the period is suspended 2. If the BIR is prohibited from making assessment such when the subject property is under litigation 3. In distraint of levy, the BIR officer cant locate the property CLAIM FOR REFUND (SEC 229) Written claim for refund: 1. Sec. 229, NIRC 2. Sec. 112, VAT

89

!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan filed, because it is at that day that the tax liability is known. 2. Non-existing the counting of the prescriptive period should also be reckoned on the day the annual return is filed. But the corporation is no longer required to wait till the taxable period is over to file the return. Upon receipt of a notice from the SEC to dissolve the corporation, within 30 days thereafter, a return should be filed. Q: Suppose there is a supervening event, and the taxpayer was not able to file a written claim of refund within the period? A: Regardless of supervening event, a written claim for refund must be filed within 2years. Q: Suppose the 2 year period is about to expire and there is no decision yet as to your refund? A: Remedy is to file an appeal before the CTA (deemed a denial) Q: Suppose the BIR decided within 2 years against the refund? A: Appeal within 30days from the decision, provided it is still within the 2 year period. Q: Suppose there is only 21days remaining after receiving the decision, when to file an appeal? A: Within 21days before the end of the 2 year period. " A written claim for refund should be filed within 2 years " Sec 204 (c) last phrase: in case of over payment a written claim is not necessary because a return constitutes a written claim for refund. Q: May the commissioner of internal revenue open the bank account of a taxpayer? A: General Rule: NO. EXCEPT: 1. To determine the gross value of the estate; and 2. To enter into a compromise agreement. (under 204(A)) " The written claim for refund to determine the gross value of the estate because the taxpayer is already dead In case of compromise, there consent. must be

90