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TAXATION

SPECIAL PRE-WEEK BAR REVIEW


A"y. Vic C. Mamalateo
Sept. 7, 2010
GAPUZ LAW REVIEW, SM ARROCEROS

INCOME TAX

INCOME TAX
INCOME TAX
Tax on all yearly prots arising from property, professions, trades or
oces, or as a tax on a persons income, emoluments, prots and the
like (Fisher v. Trinidad).
Income tax is a direct tax on actual or presumed income (gross or net)
of a taxpayer received, accrued or realized during the taxable year.

WITHHOLDING TAX
It is not an internal revenue tax but a mode of collecYng income tax in
advance on income of the recipient of income thru the payor of
income. [NOTE: Sec. 21, NIRC enumerates various internal revenue
taxes.]
There are 2 types of withholding taxes, namely: (1) nal withholding
tax; and (2) creditable withholding tax.

FINAL WITHHOLDING TAX


FINAL WITHHOLDING INCOME TAX

FWT withheld by the payor of income (e.g., 20% FWT on interest


income on bank deposits) represents FULL payment of income tax due
on such income of the recipient.
Income payee (or recipient of income) does not report income
subjected to FWT in his income tax return, although income is
reected in his audited nancial statements for the year. However, he
is not allowed to claim any tax credit on income subjected to FWT.
Withholding agent les the withholding tax return, which includes the
FWT deducted from the income payee, and pays the tax to the BIR.
There is no CerYcate of Tax Withheld issued to income payee.
No CerYcate of Tax Withheld (BIR Form 2307) is aeached to the
income tax return of recipient of income because he does not claim
any tax credit in his tax return.

INCOME TAX SYSTEMS


GLOBAL TAX SYSTEM

CompensaYon income not subject to FWT


Business and/or professional income
Capital gains not subject to FWT
Passive investment income not subject to FWT
Other income not subject to FWT

SCHEDULAR TAX SYSTEM

CompensaYon income subject to FWT (salary of OBU expat)


Capital gains subject to FWT (real property in the Phil and shares of
domesYc corporaYon)
Passive investment income subject to FWT (interest on bank deposit)
Other income subject to FWT (auto won on Xmas rae)

The Philippines adopted the semi-global or semi-schedular tax


system. Either the global or schedular system, or both
systems may apply to a taxpayer.

FORMULA
GLOBAL SYSTEM
Gross sales/revenue
Less: Cost of sales/service
Gross income
Less: DeducYons
PAE (for individual)
Net taxable income
MulYplied by applicable
rate (graduated or at)
Income tax due
Less: Creditable WT
Balance

SCHEDULAR SYSTEM
Gross selling price or fair
market value, whichever is
higher Ymes applicable tax
rate = Tax due (real
property)
Gross selling price less cost
or adjusted basis = Capital
gain Ymes applicable tax
rate = Tax due (shares of
dom corp)
Gross income Ymes
applicable rate = Tax due
(passive inv income)

NATURE OF ASSET
ORDINARY ASSET

CAPITAL ASSET

Inventory if on hand at end of


taxable year
Stock in trade held primarily for
sale or for lease in the course of
trade or business
Asset used in trade or business,
subject to depreciaYon
Real property used in trade or
business
All other assets, whether or not
used in trade or business, other
than the above assets

KINDS OF TAXPAYERS
INDIVIDUAL
CITIZEN

Resident Taxable on worldwide income


Non-resident Taxable on income from sources within the Phil

Immigrant or permanent worker NRC from date of departure from the Phil
OFW (seamen) NRC if his aggregate stay outside the Phil is more than 183 days

ALIEN Taxable on income from sources within the Phil


Resident
Non-resident

Engaged in trade or business (more than 180 days in the Phil)


Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION

DOMESTIC Taxable on worldwide income


FOREIGN Taxable on income from sources within the Phil
Resident (e.g., Phil branch of foreign corporaYon)
Non-resident

TEST FOR TAX PURPOSES: Law of incorporaYon

PARTNERSHIPS
TAXABLE

Partnerships, no maeer how created or organized,


including joint ventures or consorYums

EXEMPT

General professional partnership (GPP), but partners


are taxed on their share of partnership prots actually
or construcYvely paid during the year
Joint venture or consorYum undertaking construcYon
acYvity or energy-related acYviYes with operaYng
contract with the government

RESIDENT FOREIGN CORPS


TAXABLE

Ordinary branch of a foreign corporaYon in the Phil (30% of net


taxable income from sources within the Phil)
PEZA- & SBMA-registered branch are exempt from branch prot
remieance tax

Regional operaYng headquarters (ROHQ) 10% of net taxable


income from sources within the Phil
Oshore banking unit (OBU) and foreign currency deposit unit
(FCDU) [ING Bank Manila v. CIR] 10% on gross interest income on foreign
currency loans
InternaYonal carriers by air or water 2.5% of Gross Phil Billings
Foreign contractor or sub-contractor engaged in petroleum
operaYons in the Phil 8% of gross income

EXEMPT

RepresentaYve oce
Regional headquarters (RHQ)

SOURCES OF INCOME

Interest Interest from sources within Phil and interest on bonds and obligaYons
of residents, corporate or otherwise
Dividend From domesYc corporaYon and from foreign corporaYon, unless less
than 50% of gross income of foreign corporaYon for 3 years prior to declaraYon of
dividends was derived from sources within the Phil; hence, apply only raYo of Phil-
source income to gross income from all sources
Services Place where services are performed, except in case of internaYonal air
carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.
Revenues from trips originaYng from the Phil are considered as income from
sources within the Philippines, while revenues from inbound trips are treated as
income from sources outside the Philippines.
Rentals and royalJes LocaYon or use of property or property right in Phil
Sale of real property Located in the Philippines
Sale of personal property Located in the Philippines
Gain from sale of shares of stocks of a domesJc corporaJon is ALWAYS treated as
income from sources within the Philippines.
Other intangible property Mobilia sequuntur personam it follows domicile of
owner

GROSS INCOME

SALE OF GOODS
Gross Sales
Less: Cost of Sales:
Beg. Inventory

SALE OF SERVICES
Gross Revenue
Less: Cost of Service
consisYng of all direct
costs and expenses
+ Purchases
Gross income
Total available for sale
Times 2%
- Ending inventory
MCIT
Cost of Sales
NOTE: MCIT is imposed beginning
Gross income
on the 4th taxable year
Times 2%
immediately following the year in
which the corp commenced bus
MCIT
operaYons (Sec 27(E)(1), NIRC)
NOTE: MCIT is now computed
MCIT aver 4 years immediately
on quarterly basis. If quarterly Pay following
the year bank
MCIT > than RCIT, excess MCIT
of prior year is not allowed. commenced bus operaYons
(Manila Bank v CIR, GR 168118, Aug 28,
2006)

INCOME
INCOME means cash or its equivalent coming to a person within a

specied period, whether as payment for services, interest or prot from


investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
FBT is a tax on fringe benets received by employees, although the tax is assumed by
the employer-payor of income.

Return of capital is exempt from income tax (e.g., tax-free exchange of


property).
To be taxable, there must be income, gain or prot; gain is received,
accrued or realized during the year; and it is not exempt from income tax
under the ConsYtuYon, treaty or law.

Mere increase in the value of property does not consYtute taxable income. It
is not yet realized during the year.
Transfer of appreciated property to the employee for services rendered is
taxable income.

TEST IN DETERMINING INCOME


RealizaYon test
There must be separaYon from capital of something of
exchangeable value (e.g., sale of asset)

Claim of right doctrine


CIR v. Javier, 199 SCRA 824

Economic benet test


Stock opYon given to the employee
Payment of real property that has appreciated in value by
employer to its employee

Income from whatever source


All income not expressly exempted from income, irrespecYve of
voluntary or involuntary acYon of taxpayer in producing income

NATURE OF INCOME
COMPENSATION INCOME

Existence of employer-employee relaYonship

BUSINESS AND/OR PROFESSIONAL INCOME


NO employer-employee relaYonship

CAPITAL GAIN

Real property in the Phil and shares of stock of domesYc corporaYon


Other sources of capital gain

PASSIVE INVESTMENT INCOME

Interest, dividend, and royalty income


BIR cannot compute compounded interest on delay in payment of
promissory notes in the absence of sYpulaYon in contract (CIR v. Isabela
Cultural Corp, GR 172231, Feb 12, 2007).

OTHER INCOME

Prizes and winnings


All other income, gain or prot not covered by the above classes

GROSS PHIL BILLINGS


A. GPB applies on revenue from transport of passengers,
cargoes or mail originaYng from the Philippines
INTERNATIONAL AIR CARRIER

From Phil to foreign desYnaYon

ConYnuous and uninterrupted ight


Transhipment of passenger in another country on another foreign airline: GPB tax
applies only on aliquot porYon of revenue on Philippine leg (Phil to foreign
country)

From foreign country to the Phil

This is treated as income from foreign sources; hence, exempt from Phil income
tax

INTERNATIONAL SHIPPING LINE

From Phil to nal foreign desYnaYon is taxable


From foreign country to Phil is exempt

B. ORDINARY INCOME

Demurrage fees (for late return of containers) are akin to


rental income subject to ordinary corporate income tax
rate based on net taxable income from sources within the
Philippines

INTEREST INCOME
TYPES OF INTEREST INCOME

Subject to FWT: Interest income on bank deposits, deposit


subsYtutes, trust and other similar arrangements
20% FWT peso deposit
7.5% FWT foreign currency deposit

NOT subject to FWT but subject to regular tax rates (5%-32%, if


individual; 30%, if corporaYon): All other interest income or nancing
income
Exempt income:
Long-term deposit or investment by individuals

Taxable income:

PreferenYal tax rate Pre-terminaYon of long-term deposit by individual


(20%: 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5
yrs); and interest on foreign loan
Regular tax rate (30%) All other cases

DIVIDEND INCOME
REQUISITES FOR DIVIDEND DECLARATION

Presence of retained earnings


No prohibiYon to declare dividend in loan agreement
DeclaraYon of dividend by Board of Directors

TYPES OF DIVIDENDS
Taxable

Cash dividend
Property dividend

Exempt

Stock dividend (except when there is change in proporYonate interest


among stockholders and there is subsequent cancellaYon or redempYon
of shares declared as stock dividend)
LiquidaYng dividend distribuYon of assets to stockholders

Taxable on the part of stockholder under the global tax system

DIVIDEND INCOME
Inter-corporate dividend: Exempt from tax
CorporaYon paying dividend: DomesYc corporaYon
Recipient of dividend: Another domesYc corporaYon or resident
foreign corporaYon

Dividend paid to non-resident foreign corporaYon


CorporaYon paying dividend: DomesYc corporaYon
Recipient of dividend
Foreign head oce makes direct investment in Phil company: 15% FWT
Phil branch of foreign corporaYon makes investment in Phil company:
Exempt from income tax

Tax-sparing provision
If foreign country does not impose income tax on dividend paid by foreign
corporaYon

OTHER INCOME
Income from any source whatever
The words income from any source whatever discloses a legislaYve
policy to include all income not expressly exempted from the class of
taxable income under our laws (Madrigal vs. Raerty, supra; Commissioner vs.
BOAC). The words income from any source whatever is broad enough to
cover gains contemplated here. These words disclose a legislaYve policy
to include all income not expressly exempted within the class of taxable
income under our laws, irrespecYve of the voluntary or involuntary acYon
of the taxpayer in producing the gains (GuVerrez vs. Collector, CTA Case 65, Aug.
31, 1955).

Any economic benet to the employee whatever may have been the
mode by which it is eected is taxable. Thus, in stock opYons, the
dierence between the fair market value of the shares at the Yme the
opYon is exercised and the opYon price consYtutes addiYonal
compensaYon income to the employee (Commissioner vs. Smith, 324 U.S. 177).

EXCLUSIONS

Life insurance proceeds


Amount received by insured as return of premium
Givs, bequests and devises
CompensaYon for injuries or sickness
Income exempt under treaty
ReYrement benets, pensions, gratuiYes

R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)

Interest income of employee trust fund or accredited reYrement plan is exempt


from FWT (CIR v. GCL ReVrement Plan, 207 SCRA 487)

Amount received as a consequence of separaYon because of death, sickness


(that will endanger life of employee) or other physical disability or for any
cause beyond the control of employee

Miscellaneous items

Income of foreign government


Income of government or its poliYcal subdivisions from any public uYlity or
exercise of governmental funcYon

EXEMPT ASSOCIATIONS

The phrase any of their ac2vi2es conducted for prot does not qualify the word
proper2es.-- The phrase any of their acYviYes conducted for prot does not qualify
the word properYes. This makes income from the property of the organizaYon taxable,
regardless of how that income is used whether for prot or for lovy non-prot purposes.
Thus, the income derived from rentals of real property owned by the Young Mens ChrisYan
AssociaYon of the Philippines, Inc. (YMCA), established as a welfare, educaYon and
charitable non-prot corporaYon, is subject to income tax. The rental income cannot be
exempted on the solitary but unconvincing ground that said income is not collected for prot
but is merely incidental to its operaYon. The law does not make a disYncYon. Where the
law does not disYnguish, neither should we disYnguish. Because taxes are the lifeblood of
the naYon, the Court has always applied the doctrine of strict interpretaYon in construing tax
exempYons. YMCA is exempt from the payment of property taxes only but not income taxes
because it is not an educaYonal insYtuYon devoYng its income solely for educaYonal
purposes. The term educaYonal insYtuYon has acquired a well-known technical meaning.
Under the EducaYon Act of 1982, such term refers to schools. The school system is
synonymous with formal educaYon which refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for
which cerYcaYon is required in order for the learner to progress through the grades or
move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No.
124043, Oct. 14, 1998).

DEDUCTIONS
KINDS OF DEDUCTIONS

Itemized DeducYons
OpYonal Standard DeducYons
Special DeducYons

ITEMIZED DEDUCTIONS

Business expenses, incl. research and development


Interests
Taxes
Losses
Bad debts
DepreciaYon
DepleYon
Charitable contribuYons
ContribuYons to pension trust
Health or hospitalizaYon premium

DEDUCTIONS
BUSINESS EXPENSES

1. The expense must be ordinary and necessary;


2. Paid or incurred during the taxable year;
3. In carrying on or which are directly aeributable to the develop-
ment, management, operaYon and/or conduct of the trade,
business or exercise of profession;
4. Supported by adequate invoices or receipts;
5. Not contrary to law, public policy or morals. OperaYng expenses
of an illegal or quesYonable business are deducYble, but
expenses of an inherently illegal nature, such as bribery and
protecYon payments, are not.
6. The tax required to be withheld on the amount paid or payable is
shown to have been paid to the BIR.

DEDUCTIONS
An expense is ordinary when it connotes a payment, which is normal in
relaYon to the business of the taxpayer and the surrounding
circumstances.
An expense is necessary where the expenditure is appropriate or helpful
in the development of taxpayers business or that the same is proper for
the purpose of realizing a prot or minimizing a loss.
P9.4 M paid in 1985 for adverYsing a product was staggering incurred to
sVmulate future sales to create or maintain some form of goodwill for
the taxpayers trade or business or for the industry or profession of which
the taxpayer is a member.
Goodwill generally denotes the benet arising from connecYon and
reputaYon, and eorts to establish reputaYon are akin to acquisiYon of
capital assets. Therefore, expenses related thereto are not business
expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr.

24, 2003).

DEDUCTIONS
Legal and accountants fees for prior years were not billed in
corresponding years (1984-1985). It was paid by taxpayer in succeeding
year (1986) when it was billed by the lawyer and accountant. Taxpayers
uses accrual method of accounYng.
Accrual of income and expense is permieed when the all events test has
been met. This test requires (1) xing a right to income or liability to pay,
and (2) the availability of reasonably accurate determinaYon of such
income or liability. It does not, however, demand that the amount of
income or liability be known absolutely; it only requires that a taxpayer
has at its disposal the informaYon necessary to compute the amount with
reasonable accuracy, which implies something less than an exact or
completely accurate amount.
Moreover, deducYon takes the nature of tax exempYon; it must be
construed strictly against the taxpayer (Commissioner vs. Isabela Cultural CorporaVon,
G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS

INTEREST EXPENSE

1. There must be a valid and exisYng indebtedness;


2. The indebtedness must be that of the taxpayer;
3. The interest must be legally due and sYpulated in wriYng;
4. The interest expense must be paid or incurred during the taxable year;
5. The indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
6. The interest payment arrangement must not be between related taxpayers as
mandated in SecYon 34(B)(2)(b), in relaYon to SecYon 36(B), of the Tax Code;
7. The interest is not expressly disallowed by law to be deducted from the taxpayers
gross income (e.g., interest on indebtedness to nance petroleum operaYons);
and
8. The amount of interest deducted from gross income does not exceed the limit set
forth in the law. In other words, the taxpayers otherwise allowable deducYon for
interest expense shall be reduced by forty-two percent (42%) of the interest
income subjected to nal tax beginning November 1, 2005 under R.A. 9337, and
that eecYve January 1, 2009, the percentage shall be thirty-three percent (33%)
[Sec. 34(B)(1), NIRC].

DEDUCTIONS
TAXES

1. Payments must be for taxes, naYonal or local;


2. Taxes are imposed by law upon the taxpayer;
3. Taxes must be paid or accrued during the
taxable year in connecYon with the
taxpayers trade, business or profession; and
4. Taxes are not specically excluded by law from
being deducted from the taxpayers gross income.

DEDUCTIONS
LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)

1. The loss must be that of the taxpayer;


2. The loss is actually sustained and charged o within the taxable
year;
3. The loss is evidenced by a closed and completed transacYon;
4. The loss is not claimed as a deducYon for estate tax purposes;
5. The loss is not compensated for by insurance or otherwise;
6. In the case of an individual, the loss must be connected with his
trade, business or profession, or incurred in any transacYon
entered into for prot though not connected with his trade,
business or profession; and
7. In the case of casualty loss, it has been reported to the BIR
within forty-ve days from date of occurrence of the loss.

DEDUCTIONS
BAD DEBTS

1. There must be an exisYng indebtedness due to the taxpayer


which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business
or pracYce of profession;
3. The same must not be sustained in a transacYon entered into
between related parYes enumerated under Sec. 36(B) of the Tax
Code of 1997;
4. The same must be actually charged o the books of accounts of
the taxpayer as of the end of the taxable year; and
5. The same must be actually ascertained to be worthless and
uncollecYble as of the end of the taxable year.

DEDUCTIONS
TAX BENEFIT RULE
The taxpayer is obliged to declare as taxable income any
subsequent recovery of bad debts in the year they were
collected to the extent of the tax benet enjoyed by the
taxpayer when the bad debts were wrieen o and claimed
as deducYon from gross income.
It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited
by the BIR. He has to report income to the extent of the
tax benet derived in the year of deducYon.

DEDUCTIONS
DEPRECIATION
1. The allowance for depreciaYon must be reasonable;
2. It must be for property arising out of its use in the trade or
business, or out of its not being used temporarily during the year;
3. It must be charged o during the taxable year from the taxpayers
books of accounts;
4. DepreciaYon shall be computed on the basis of historical cost or

adjusted basis. While nancial accounJng allows computaJon based on


appraised value, recovery of investment for tax purposes shall be limited to
historical cost.

DEDUCTIONS
CHARITABLE CONTRIBUTIONS
1. The charitable contribuYon must actually be paid or made to the
Philippine government or any poliYcal subdivision thereof exclusively for
public purposes, or any of the accredited domesYc corporaYon or
associaYon specied in the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed 10% (individual) or 5% (corporaYon) of the
taxpayers taxable income before charitable contribuYons (whether
deducYble in full or subject to limitaYon);
4. It must be evidenced by adequate receipts or records; and
5. The amount of charitable contribuYon of property other than money
shall be based on the acquisiYon cost of said property (Sec. 34(H), NIRC).
The limitaYon is imposed to prevent abuse of donaYng painYngs and
other valuable properYes and claiming excessive deducYons therefrom.

DEDUCTIONS
D. OpJonal Standard DeducJon
Privilege is available only to ciYzens or resident aliens as well
corporaYons subject to the regular corporate income tax;
thus, non-resident aliens and non-resident foreign
corporaYons are not enYtled to claim the opYonal standard
deducYon.
Standard deducYon is opYonal; i.e., unless taxpayer signies
in his/its return his/its intenYon to elect this deducYon, he/it
is considered as having availed of the itemized deducYons;
Such elecYon when made by the qualied taxpayer is
irrevocable for the year in which made; however, he can
change to itemized deducYons in succeeding year(s);

DEDUCTIONS

Amount of standard deducYon is limited to 40% of taxpayers gross sales or


receipts (in the case of an individual) or gross income (in the case of a
corporaYon). If the individual is on the accrual basis of accounYng for his
income and deducYons, OSD shall be based on the gross sales during the year.
If he employs the cash basis of accounYng, OSD shall be based on his gross
receipts during the year. It should be noted that cost of sales or cost of services
shall not be allowed to be deducted from gross sales or receipts.
A general professional partnership (GPP) may claim either the itemized
deducYons or in lieu thereof, the OSD allowed to corporaYons in claiming the
deducYons in an amount not exceeding 40% of its gross income. The net
income determined by either the itemized deducYon or OSD from the GPPs
gross income is the distributable net income from which the share of each
share is to be ascertained.
Proof of actual expenses is not required; hence, he is not also required to keep
books of accounts and records with respect to his deducYons during the year.

PERSONAL EXEMPTIONS
RA 8424: Jan 1, 1998
Single and estate or trust
P20,000
Head of family P25,000
Married P32,000
For each child, not to
exceed 4 P8,000

RA 9504: July 6, 2009


Individual, whether single,
HOF, or married P50,000
For each child, not to
exceed 4 P25,000
Law exempts income of
minimum wage earners and
increases OSD from 10% to
40% of gross sales or
receipts, for individuals, and
of gross income, for
corporaYons.

PERSONAL EXEMPTIONS
Status-at-the-end-of-the-year rule
Status-at-the-end-of-the-year rule which means that whatever is the
status of the taxpayer at the end of the calendar year shall be used for
purposes of determining his personal and addiYonal exempYons generally
applies. A change of status of the taxpayer during the taxable year
generally benets, but does not prejudice, him. Thus, if he marries at the
end of the year, he shall be enYtled to personal exempYon of P32,000/
P50,000. If a child is born at any Yme during the calendar year, even on
the last day of the year, the taxpayer is enYtled to claim his child as a
dependent enYtling him to deduct addiYonal exempYon of P8,000/
P25,000 for that year. On the other hand, if one of his qualied
dependent children dies during the year, the law considers that the child
died on the last day of the year; hence, he is enYtled to claim the full
amount of addiYonal exempYon of P8,000/P25,000 for the deceased child
for the year.

ACCOUNTING METHODS
Cash method
Accrual method
All events test; amounts received in advance are not treated as
revenue of the period in which received but as revenue of future
periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar
24, 1997).

Installment sales
Sale on the installment plan
IniYal payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan


IniYal payments exceed 25% of GSP

Percentage of compleYon
Crop year method

FILING OF TAX RETURN


SUBSTITUTED FILING OF ITR: No individual income tax return
for the year will be led by the employee concerned, and the
employer is the one that les the return for him
Applies only to individuals
With only one (1) employer
Who correctly withholds the income tax on compensaYon income paid
to the employee and remits the same to the BIR

SubsYtuted ling of return does not apply when the


condiYons above are not met, such as when the individual has
(a) two or more employers, (b) mixed incomes, correct WT
was not deducted from compensaYon income, etc.

FILING OF TAX RETURN


Individual deriving mixed income, or purely business/ professional income,
or other income must le his quarterly income tax returns (BIR Form 1700
Q) and annual income tax return (BIR Form 1700 ) as follows:

Period

Q1 Return
Q2 Return
Q3 Return
Annual Return

Due Date for Filing Return

April 15 of same year


August 15 of same year
November 15 of same year
April 15 of the following year

FILING OF TAX RETURN

A domesYc corporaYon and resident foreign corporaYon shall le quarterly


corporate income tax return (BIR Form 1702 Q) and annual corporate income tax
return (BIR Form 1702 as follows:

Q1 Return

Q2 Return

Q3 Return

Annual Return



ComputaYon of the quarterly and annual tax returns of individuals (except those
receiving purely compensaYon income) and corporaYons shall be made on the
cumula2ve basis; i.e., gross income and deducYons are consolidated and the
income tax liability is computed on the consolidated net income, and the income
taxes paid for the preceding quarter(s) are credited against the consolidated
income tax due.


May 31 of same year

August 31 of same year

November 30 of same year
April 15 of the following year (if on calendar
year), or 15th day of the fourth month following
the close of the scal year (if on scal year).

REFUND OR TAX CREDIT


Taxpayer has 3 opYons: refund, tax credit, or carry over excess
withholding tax or payment.
However, once taxpayer exercises opYon to carry over, such opYon is
irrevocable for that taxable period and no applicaYon for refund or tax
credit shall be allowed (Paseo Realty v CA, GR 119286, Oct 13, 2004).
While a taxpayer is given the choice to claim refund or tax credit, such
elecYon is not nal. Prior vericaYon and approval by CIR is required. Such
remedy is not absolute and mandatory (ibid).
CondiYons for grant of refund or tax credit: (1) claim was led within 2
years from date of payment; (2) income payment was declared in tax
return; and (3) fact of withholding is established by copy of BIR Form 2307
(BF Bank v. CA, GR 155682, Mar 27, 2007).
In case of dissoluYon of corporaYon, the 2-year period for claim for refund
is counted 30 days aver SEC approval of plan for dissoluYon, which is
considered the date of payment of taxes withheld on earned income (BPI v.
CIR, GR 144653, Aug 28, 2001).

WITHHOLDING TAX
An income payment is subject to the expanded withholding
tax, if the following condiYons concur:
a. An expense is paid or payable by the taxpayer, which is
income to the recipient thereof subject to income tax;
b. The income is xed or determinable at the Yme of
payment;
c. The income is one of the income payments listed in the
regulaYons that is subject to withholding tax, except when
payor is a Top 20,000 CorporaYon;
d. The income recipient is a resident of the Philippines liable
to income tax; and
e. The payor-withholding agent is also a resident of the
Philippines.

WITHHOLDING TAX

EXEMPT FROM EWT

1. NaYonal government and its instrumentaliYes, including provincial, city or municipal


governments and barangays, except government-owned or controlled corporaYons;
2. Persons enjoying exempYon from payment of income taxes pursuant to the provisions
of any law, general or special, such as but not limited to the following:
a. Sales of real property by a corporaYon which is registered with and cerYed by HLURB
or HUDCC as engaged in socialized housing project where the selling price of the house
and lot or only the lot does not exceed P180,000 in Metro Manila and other highly
urbanized areas and P150,000 in other areas;
b. CorporaYons registered with the BOI, PEZA, and SBMA, enjoying exempYon from
income tax under E.O. 226, R.A. 7916, and R.A. 7227;
c. CorporaYons which are exempt from income tax under SecYon 30 of the Tax Code,
such as GSIS, SSS, PHIC, PCSO, and PAGCOR;
d. General professional partnerships; and
e. Joint ventures or consorYum formed for the purpose of undertaking construcYon
projects or engaging in petroleum, coal, geothermal and other energy operaYons
f. InternaYonal carriers (by air or water) subject to 2.5% Gross Phil Billings

VALUE ADDED TAX

BUSINESS TAXES
VAT
Taxable transacYons
Sale or lease of goods or
properYes
Sale of services
ImportaYon of goods

Formula for compuYng VAT


Output Tax
Less: Input Tax
VAT Payable/(Excess Input
Tax)

NON-VAT/EXEMPT FROM
VAT TRANSACTIONS
TransacYon is subject to
Other Percentage Tax (Title V,
NIRC) and exempt from VAT
VAT is imposed on
transacYon in addiYon to
Excise Tax, if any
Tax is imposed on Gross
Receipts or Gross Income

TransacYon is exempt from


VAT, OPT, and Excise Tax (e.g.,
sale of agricultural food
products in their original state)

VALUE ADDED TAX


CHARACTERISTICS OF VAT
Tax on value added of taxpayer
Transparent form of sales tax
Broad-based tax on consumpVon of goods, properYes and
services in the Phil
Indirect tax: tax is imposed on seller but burden of tax is
shived to the buyer
Tax is collected thru the tax credit method
Output tax on sales; input tax on purchases

No cascading of tax in VAT system


Tax-inclusive method is adopted by the Phil

VALUE ADDED TAX


TAXABLE PERSONS

Seller of goods or properYes

Goods or properYes are consumed or for consumpYon in the Phil


In the course of trade or business
Sales of goods or properYes are not exempt from VAT

Seller of services

Listed services are performed or to be performed in the Phil


In the course of trade or business
For a valuable consideraYon
Services are not exempt from VAT

Importer of goods

Whether done in the course of his trade or business or for


personal consumpYon

VALUE ADDED TAX


Seller of real properYes is subject to VAT

Seller executes a document of sale (DAS or CTS)


Real property is located in the Phil
Seller is engaged in real estate business either as dealer, developer or
lessor
Real property is held primarily for sale or for lease in the ordinary
course of trade or business
Sale is not exempt from VAT

However, Rev. Regs. No. 4-2007 (Feb 2007) provides that if


the real property sold is used in his trade or business, said
transacYon is subject to VAT, being incidental to the main
business of the taxpayer, who is a VAT-registered taxpayer
engaged in other types of business.

VALUE ADDED TAX


Sale, barter or exchange

Sale, barter or exchange has the same tax consequence


There must be valuable consideraYon; hence, donaYon is exempt from VAT
Deemed sale is subject to VAT (output tax) in order to recoup previous VAT
(input tax) allowed
Excise tax, if any, interest, and delivery charges form part of gross selling price

In the course of trade or business

The regular conduct or pursuit of a commercial or an economic acYvity,


including transacYons deemed incidental thereto, regardless of whether or
not the person engaged therein is a non-stock, non-prot private organizaYon
(irrespecYve of the disposiYon of its net income and whether or not it sells
exclusively to members or their guests), or government enYty.
Isolated transacYons are not subject to VAT.
Incidental income follows taxaYon of the principal acYvity.

VALUE ADDED TAX


The absence of prot in the performance of taxable services does not
make such acYvity for a fee exempt from VAT (CIR v. COMASERCO, GR 125355, Mar 30, 2000).

Goods or properYes must be located in the Philippines and


consumed or desYned for consumpYon in the Phil.
Special economic zones under RA 7916 (PEZA Law) and freeport zones
under RA 7227 (BCDA Law) are treated as foreign territories by cYon
of law. Hence, importaYon of goods by a special economic or freeport
zone enterprise shall be exempt from VAT and customs duYes and will
be subject to VAT and duYes only upon their withdrawal from the
customs custody.
DesYnaYon Principle:
Export sales of goods are zero-rated (0% VAT)
Import of goods into the Phil is taxable at 12% VAT

VALUE ADDED TAX


Tax base is Gross Selling Price (GSP) - the total amount of money or its
equivalent, which the purchaser pays or is obligated to pay to the seller in
consideraYon of the sale, barter or exchange of the goods or properYes,
excluding the VAT.
As a rule, output tax accrues on sale of goods or properYes (other than a
real property) at the Yme of sale, when the VAT sales invoice is issued,
although none or only a part of the gross selling price is paid by the buyer
at the Yme of sale.
Excise tax, if any, shall form part of GSP.
Sales discounts determined and granted at the Yme of sale, which are
expressly indicated in the sales invoice do not form part of the tax base.
Grant of discount must not depend upon the happening of a future event
or the fulllment of certain condiYon. They must be recorded in the books
of accounts of the seller.
20% sales discounts to senior ciYzens under RA 9257 (Amended Senior
CiYzens Law) shall be deducted from gross sales before applying the VAT
rate.

VALUE ADDED TAX


To determine Gross Selling Price (100%), divide Total Invoice
Amount (112%) by 1.12.
If Total Invoice Amount includes EWT, determine rst the
Gross Selling Price.
Tax base for installment sales of real property

If iniYal payments (consisYng of down payment and all monthly


amorYzaYons in the year of sale) exceeds 25% of the gross selling
price, the tax base is the enYre gross selling price as shown in the
document of sale, even though only a part of it has been received
during the period
If iniYal payments during the year of sale do not exceed 25% of gross
selling price, the tax base is only the amount received

Tax rates

12% beginning Feb 1, 2006 (RA 9337)


0% VAT on zero-rated sales

VALUE ADDED TAX


Sales of goods subject to 0% VAT

Actual export sales


Deemed export sales
Internal or construcYve export sales under BOI law (EO 226) and special
laws (RA 7916 and RA 7227).
Ecozones and freeport zones are deemed foreign territories by
cYon of law (CIR v. Seagate Technology (2005); CIR v. Toshiba InformaVon
Equipment (2005)

For as long as the goods remain within the zone, consumed or


destroyed there, they will be duty-free and tax-free (Coconut Oil Reners
Asso v. Torres (2005)

EecYvely zero-rated sales (sales to ADB, embassies, etc)


Sales of gold to BSP
Foreign currency denominated sales
Sales of goods, supplies, equipment and fuel to persons engaged in
internaYonal shipping or internaYonal air transport operaYons

VALUE ADDED TAX


ZERO-RATED SALE
TransacYon is completely free of
VAT; rate charged by seller is zero
VAT-registered seller can reclaim
input taxes passed on to it by
sellers of goods or services from
BIR in form of refund or tax credit
Zero-rated sales are taxable sales
for purposes of registraYon as
VAT taxpayer to determine
threshold

EXEMPT SALE
ExempYon removes the VAT
at the exempt stage
Exempt taxpayer cannot
reclaim VAT passed on to it
by VAT-registered sellers
Exempt sales are not
taxable sales for VAT
purposes

VALUE ADDED TAX


PERSONS SELLING TAXABLE SERVICES

ConstrucYon and service contractors


Brokers
Lessors of property, real or personal
Warehousing services
Lessors or distributors of cinematographic lms
Persons engaged in milling, processing, manufacturing or
repacking goods for others
Proprietors or operators or keepers of hotels, motels,
resthouses, pension houses, inns and resorts
Proprietors or operators of restaurants and other similar
establishments

VALUE ADDED TAX


PERSONS SELLING TAXABLE SERVICES

Dealers in securiYes
Lending investors
TransportaYon contractors on their transport of goods or
cargoes
DomesYc common carriers by air and sea between points
in the Philippines
Sales of electricity (by generaYon, transmission, and
distribuYon companies)
Services of franchise grantees, except water and gas
Non-life insurance companies, except crop insurance
Similar services, regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculYes

VALUE ADDED TAX


Gross receipts means the total amount of money or its
equivalent, represenYng the contract price, compensaYon,
service fee, rental or royalty, including the amount charged
for materials supplied with the services and deposits and
advance payments actually or construcYvely received during
the taxable quarter for the services performed or to be
performed for another person, excluding the VAT, except
those amounts earmarked for payment to unrelated third
party or received as reimbursement for advance payment on
behalf of another, which do not redound to the benet of the
payor.
For sale of services, the test is not whether services have
been performed or not, but whether amount of
compensaYon or fee is received, actually or construcYvely.
The rule is: NO RECEIPT OF PAYMENT, NO VAT LIABILITY.

VALUE ADDED TAX


ZERO-RATED SALES OF SERVICES

Processing, manufacturing or repacking goods for other persons doing


business outside the Phil, which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with BSP rules and regulaYons
Services other than processing, manufacturing or repacking rendered
to a person engaged in business conducted outside the Phil or to a
non-resident person not engaged in business who is outside the Phil
when the services are performed, the consideraYon for which are paid
for in acceptable foreign currency and accounted for in accordance
with BSP rules and regulaYons (CIR v. BWSC Mindanao, GR 153205, Jan 22,
2007)
Services rendered to persons or enYYes whose exempYon under
special laws or internaYonal agreements to which the Phil is a
signatory eecYvely subjects the sale of services to 0% rate

VALUE ADDED TAX


ZERO-RATED SALES OF SERVICES

Services rendered to persons engaged in internaYonal


shipping or internaYonal air transport operaYons,
including leases of property for use thereof
Services performed by subcontractors and/or contractors
in processing, converYng or manufacturing goods for an
enterprise whose export sales exceeds 70% of total annual
producYon
Transport of passengers and cargo by domesYc air or sea
carriers from the Phil to a foreign country
Sale of power or fuel generated thru renewable sources of
energy (biomass, solar, wind, hydropower, geothermal
and other emerging sources)

VALUE ADDED TAX

Tax Code not only requires that the services other than processing,
manufacturing or repacking of goods and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essenYal condiYon for qualicaYon to zero-raYng under Sec 102(b)(2) is that the
recipient of such services is doing business outside the Phil.
While this requirement is not expressly stated in the 2nd paragraph of Sec. 102(b),
this is clearly provided in the 1st paragraph of Sec 102(b) where the listed services
must be for other persons doing business outside the Phil.
The above phrase not only refers to services enumerated in the rst paragraph,
but also pertains to the general term services appearing in the second
paragraph.
Otherwise, those subject to the regular VAT under Sec 102(a) can avoid paying the
VAT by simply sYpulaYng payment in foreign currency inwardly remieed by the
recipient of services. To interpret Sec. 102(b)(2) to apply apply to a payer-
recipient of services doing business in the Phil is to make the payment of regular
VAT dependent on the generosity of the taxpayer.
A tax is a mandatory exacYon, not a voluntary contribuYon.

VALUE ADDED TAX

Signicantly, the amended SecYon 108(b) [previously Sec 102(b)] of the present
Tax Code claries this legislaYve intent. For zero-raYng of services, it must be
rendered to a person engaged in business conducted outside the Phil.
The payer-recipient of respondents services is the ConsorYum which is a joint
venture doing business in the Phil. While the ConsorYums principal members are
non-resident foreign corps, the ConsorYum itself is doing business in the Phil. This
is shown in BIR Ruling 23-95, which states that the contract between ConsorYum
and NPC is for a 15-year term. Considering the length of Yme, the ConsorYums
operaYon and maintenance of NPCs power barges cannot be classied as a single
or isolated transacYon.
This case is dierent from CIR v. American Express InternaVonal, Inc. (Phil Branch),
because in the laeer case, the recipient of services is AEII (HK Branch) doing
outside the Phil (CIR v. BWSC Mindanao, Inc., GR153205, Jan 22, 2007).
CIRs ling of its Answer before the CTA challenging claim for refund eecYvely
serves as a revocaYon of VAT Ruling 03-99 and BIR Ruling 23-95. However, such
revocaYon cannot be given retroacYve eect since it will prejudice respondent.

VALUE ADDED TAX


VAT-EXEMPT TRANSACTIONS

A. Sale or importaYon of agricultural and marine food products in their


original state; livestock and poultry generally producing food for
human consumpYon; and breeding stock
B. Sale or importaYon of ferYlizers; seeds, seedlings and ngerlings;
sh, prawn, livestock and poultry feeds (except specialty feeds for race
horses, ghYng cocks and other pets)
C. ImportaYon of personal and household eects belonging to
residents of the Phil returning from abroad and non-resident ciYzens
coming to reseele in the Phil
D. ImportaYon of professional instruments and implements, and
personal eects (except vehicle, vessel, aircrav, machinery for use in
manufacture) belonging to persons coming to seele in the Phil
E. Services subject to percentage tax under Title V

VALUE ADDED TAX


VAT-EXEMPT TRANSACTIONS
G. Medical, dental, hospital and veterinary services, except those
rendered by professionals
H. EducaYonal services rendered by private educ insYtuYons
accredited by DepEd, CHED, TESDA, and those rendered by
government educaYonal insYtuYons
I. Services rendered by individuals pursuant to an employer-employee
relaYonship
O. Export sales by persons who are not VAT-registered
P. Sale of real property not primarily held for sale to customers or for
lease in the ordinary course of trade or business, or real property for
low-cost and socialized housing, residenYal lot valued at P1.5 M or
below, house and lot and other residenYal dwellings valued at P2.5 M
or below

VALUE ADDED TAX


VAT-EXEMPT TRANSACTIONS
Q. Lease of a residenYal unit with a monthly rental not
exceeding P10,000
R. Sale, importaYon, prinYng or publicaYon of books and
any newspaper or magazine which appear at regular
intervals with xed prices and is not devoted principally to
publicaYon of paid adverYsements
V. Sale or lease of goods or property or the performance
of services other than transacYons menYoned above, the
gross sales or receipts do not exceed P1.5 M

VALUE ADDED TAX

Sale of medicines by the hospital pharmacy to in-paYents is exempt from VAT, but
sale to out-paYents is subject to 12% VAT (St. Lukes Medical Center v. CTA and CIR,
1998).
Tolling fees received by a hotel for PLDT is not part of its gross receipts
Payment of VAT by the hotel on fees for providing limousine service to its client is
correct. It is not subject to the 3% common carriers tax. Claim for tax credit is
denied (Manila Mandarin Hotel v. CIR)
Gross receipts of theatre owner or operator from sales of Yckets to moviegoers
are exempt from VAT. Theatres and movie houses are not included in the
enumeraYon of taxable services in the VAT law. Our tax laws, past and present,
did not adopt more specic terms for sale or exchange of services to include
showing of lms in public (SM Prime Holdings v. CIR, CTA Case 7079, 2006).
PAGCOR is exempt from VAT pursuant to its charter, PD 1869. Being a special law,
PD 1869 prevails over RA 7716, a subsequent general law. To be valid, repeal of
special law should be express (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007).

VALUE ADDED TAX


CATEGORIES OF INPUT TAXES
Input tax credit on importaYons of goods and current local purchases
of goods, properYes and services
Input tax on capital goods must be amorYzed over certain period

TransiYonal input tax credit


PresumpYve input tax credit
Withholding input tax credit
Excess input tax credit

Only VAT-registered persons are enYtled to credit input taxes


against their output tax.
Non-registraYon as a VAT taxpayer does not exempt him from
VAT output tax liability on his taxable sales of goods,
properYes or services.

VALUE ADDED TAX


For sale of services, the rule is: NO PAYMENT OF FEE BY
BUYER AND ISSUANCE OF VAT RECEIPT BY SELLER, NO INPUT
TAX FOR BUYER!
TransiYonal Input Tax
2% of value of inventory or actual VAT paid on such goods, materials
and supplies, whichever is higher

PresumpYve Input Tax


Persons or rms engaged in the processing of sardines, mackerel and
milk, and in manufacturing rened sugar and cooking oil, and packed
noodle-based instant meals are enYtled to presumpYve input tax
equivalent to 4% of gross value in money of their purchases of primary
agricultural products which are used as inputs to their producYon (Sec.
111, NIRC)

VALUE ADDED TAX


Tax reliefs of VAT taxpayers on their excess input
taxes (EIT) aeributable to zero-rated and eecYvely
zero-rated sales
Carry over the excess input tax to the next quarter, unYl
excess is uYlized
File a claim for refund
File a claim for tax credit, within two years aver the close
of taxable quarter where the sales were made

For non-zero-rated sales, remedy available is only to


carry over EIT to the next quarter(s)

VALUE ADDED TAX


PrescripYve period commences from the close of the
taxable quarter when the sales were made and not
from the Yme the input VAT was paid nor from the
Yme the ocial receipt was issued. Thus, when a
zero-rated VAT taxpayer pays its input VAT a year
aver the perYnent transacYon, said taxpayer only
has a year to le a claim for refund or tax credit of
the unuYlized creditable input VAT. The reckoning
frame would always be the end of the quarter when
the perYnent sales or transacYon was made,
regardless when the input VAT was paid (CIR v. Mirant
Pagbilao Corp, 2008).

TAX REMEDIES UNDER THE TAX CODE

ASSESSMENT CYCLE

Filing of tax return


Tax audit by BIR
Informal Conference
Preliminary Assessment
NoYce (PAN)
Reply to PAN
Final Assessment NoYce
(FAN)
Protest to FAN
Supplemental Protest

Law prescribes due date


120 days + 120 days

15 days from receipt


3 years or 10 years
30 days from receipt
60 days from ling of
protest

ASSESSMENT CYCLE
BIR ACTION
Cancell assessment
Deny protest
Revise assessment

BIR INACTION
Appeal to CTA

Appeal to CTA en banc

180 days from ling of


protest, if any, or
supplemental protest
30 days from date of receipt
of denial of protest or lapse
of 180 days
15 days from date of
receipt; addl 15 days may
be granted by CTA aver
payment of docket fee.

REMEDIES OF TAXPAYERS
ADMINISTRATIVE REMEDY
BEFORE PAYMENT OF TAX
PROTEST OF ASSESSMENT

AFTER PAYMENT OF TAX


TAX CREDIT, OR
REFUND

JUDICIAL REMEDY
APPEAL TO COURT OF TAX APPEALS

NO PRE-ASSESSMENT NOTICE REQUIRED


Deciency tax is the result of mathemaYcal error
Discrepancy is between amount of tax withheld and amount
remieed to BIR
Taxpayer who opted to claim refund/tax credit also carried
over and applied the same against tax of next taxable quarter
Excise tax due has not been paid
ConstrucYve importaYon (Sec. 228, NIRC)

ASSESSMENT

WHAT IS AN ASSESSMENT?
NoYce that taxpayer owes government a sum
of money
Contains computaYon of tax liability and a
demand for payment of tax within a certain
period (CIR v. Pascor Realty & Dev Corp)

PURPOSE OF ASSESSMENT
To establish tax liability where an assessment
is required

ASSESSMENT
FORMS OF ASSESSMENT
1. Formal assessment noYce (FAN)
2. CollecYon leeer
a. Leeer demanding payment of erroneously
refunded amount (Guagua Electric Co v. CIR), or amount paid
by bouncing check (Republic v. Limaco & de Guzman)

b. Follow-up or collecYon leeer duly received by
taxpayer within the prescripYve period (TAXPAYER DENIED
RECEIPT OF ORIGINAL DEMAND LETTER AND ASS. NOTICE) (Republic v. Nielson & Co)

NOTE: Leeer from revenue ocer granYng opportunity to disprove


ndings (SHOW-CAUSE LETTER) is NOT an assessment

ASSESSMENT
WHEN MUST ASSESSMENT BE MADE? (Sec. 203 & 222, NIRC)

RETURN WAS FILED


Not false or fraudulent 3 years from ling of return
False or fraudulent 10 years from date of discovery of false
or fraudulent return

NO RETURN WAS FILED


10 years from date of discovery of omission
If assessment due falls on Saturday, government has next business
day within which to assess (CIR v. Western Pacic Corp)

COUNTING OF PERIOD
TAXABLE YEAR
Normal year (365 days)
Leap year (366 days)

If there is a leap year within the prescripYve period (3 years


from ling of return), a year shall be deemed to have 365
days only (NAMARCO v. Tecson, 29 SCRA 70). Thus, assessment issued on April 15 of

the third year from ling of return shall be treated as invalid due to prescripYon.

EO 292 (AdministraYve Code of 1987), being the more recent law than
Civil Code, governs the computaYon of legal period. Accor-dingly, a year
shall be understood to be 12 calendar months; a month of 30 days, unless
it refers to a specic calendar month (CIR vs. Primetown Property Group, GR No.
162155, Aug 22, 2007).

ASSESSMENT
WHEN IS ASSESSMENT DEEMED MADE?
Issue date of assessment noYce is not reckoning point
for prescripYon
Date the assessment noYce and demand leeer is
released, mailed or sent to taxpayer consYtutes actual
assessment (Republic v. Limaco & de Guzman)
PresumpYon of receipt in the regular course of mail
applies, if it was properly addressed, postage was
prepaid, and was mailed. If one element is absent,
presumpYon does not lie (Enriquez v. Sunlife of Canada)

COMPLIANCE WITH SEC. 228

BIR disallowed certain itemized deducYons and considered some cost items as
subject to 5% tax, without indicaYng factual and legal bases. During the
preliminary stage, BIR informed taxpayer thru preliminary 5-day leeer and
furnished copy of audit working paper. CTA considered assessment as void. CA
armed CTA decision.
SC ruled above documents were not valid subsYtutes for mandatory noYce in
wriYng of legal and factual bases of assessment. These steps were mere
perfunctory discharge of CIRs duYes in correctly assessing a taxpayer. Just
because CIR issued an advice, preliminary leeer and nal noYce does not
necessarily mean taxpayer was informed of law and facts. Law requires that they
be stated in DL and FAN. Otherwise, the express provisions of Art. 228 of NIRC and
RR 12-99 would be rendered nugatory. The alleged factual bases in the advice,
preliminary leeer and audit working papers did not suce.
Moreover, due to the absence of a fair opportunity to be informed of legal and
factual bases of assessment, the assessment is void. Old law merely required
taxpayer to be noYed of assessment. This was changed in 1998 (CIR vs. Enron Subic
Power Corp, GR No. 166387, Jan. 19, 2009).

ASSESSMENT NOTICE
Preliminary collecYon leeer presupposes the
existence of valid assessment noYce.
Preliminary collecYon leeer shall serve as
assessment noYce, if it was iniYal noYce received by
taxpayer, taxpayer did not receive any assessment
noYce, and no follow-up leeer was sent or
preliminary conference was arranged.
30-day period to protest shall commence from date
of receipt of preliminary collecYon leeer (United InternaVonal
Pictures vs. CIR, CTA Case No. 5884, Jan. 5, 2002)

PROTEST
Valid protest of an assessment is one assailing the
formal assessment noYce (FAN) and the leeer of
demand, not the preliminary assessment noYce
(PAN). PAN is required merely to inform the
taxpayer of the proposed assessment.
Failure to protest within 30 days will make the
formal assessment noYce nal and executory.
Failure to respond to PAN within 15 days will render
taxpayer in default and a FAN would subsequently be
issued (Cebu Rosver Pawnshop vs. CIR, CTA Case No. 6425, Mar. 17, 2003).

PROTEST
CIR vs. BPI
Oct 28, 1988 CIR assessed peYYoner for def. percentage tax and DST for
1986
Dec 10, 1988 -- BPI replied staYng Your def assessments are no
assessments at all As soon as this is explained and claried in a proper
leeer of assessment, we shall inform you of the taxpayers decision on
whether to pay or protest the assessment.
June 27, 1991 -- BPI received leeer from BIR, staYng .. Your leeer failed
to qualify as a protest under RR 12-85 sYll we obliged to explain the
basis of the assessments.
July 6, 1991 -- BPI requested a reconsideraYon of assessments.
Dec 12, 1991 -- BIR denied protest, which was received on Jan 21, 1992.
Feb 18, 1992 -- BPI led peYYon for review in CTA.

PROTEST

Nov 16, 1995 -- CTA dismissed peYYon for lack of jurisdicYon; assessments had
become nal and unappealable.
May 27, 1996, CTA denied reconsideraYon.
On appeal, CA reversed CTAs decision. It ruled Oct 28, 1988 noYces were not
valid assessments because they did not inform the taxpayer of the legal and
factual bases therefor. It declared the proper assessments were those in May 8,
1991 leeer which provided the reasons for claimed deciencies. CIR elevated case
to SC.
CIR did not inform BPI in wriYng of the law and facts on which assessments were
made. He merely noYed BPI of his ndings, consisYng of the computaYon of the
tax liabiliYes and a demand for payment within 30 days from receipt. He relied on
former Sec. 270, NIRC, prior to its amendment by RA 8424.
In CIR vs.Reyes, GR 159694, Jan 27, 2006, the only requirement was for the CIR to
noYfy or inform the taxpayer of his ndings. Nothing in the old law required a
wrieen statement to the taxpayer of the law and the facts. The Court cannot read
into the law what obviously was not intended by Congress. That would be judicial
legislaYon.

PROTEST
Jurisprudence simply required that assessments contain a computaYon of
tax liabiliYes, the amount to be paid plus a demand for payment within a
prescribed period.
The sentence the taxpayer shall be informed in wriYng of the law and the
facts on which the assessment is made; otherwise, the assessment shall
be void. was not in old Sec. 270, but was only inserted in Sec. 228 in 1997
(R.A. 8424). The inserted sentence was not an armaYon of what the law
required; the amendment by RA 8424 was an innovaYon and could not be
reasonably inferred from the old law.
The Oct 28, 1998 noYces were valid assessments, which BPI should have
protested within 30 days from receipt. The Dec 10, 1988 reply it sent to
BIR did not qualify as a protest, since the leeer itself stated we shall
inform you of the taxpayers decision on whether to pay or protest the
assessment.
BPIs failure to protest the assessment made it nal and executory. The
assessment is presumed to be correct (CIR vs BPI, GR 134062, Apr 17, 2007).

DENIAL OF PROTEST
DIRECT DENIAL
Leeer of CIR states in clear terms his denial of
protest.

INDIRECT DENIAL
Final NoYce Before Seizure consYtutes as a
decision on a protested assessment; hence,
appealable to the CTA (CIR vs. Isabela Cultural Corp, 361 SCRA 71
(2004)

Issuance by BIR of Warrant of Distraint and Levy


consYtutes a denial of the protest.

INACTION OF COMMISSIONER
The taxpayer has two opYons:

Wait for the decision of the Commissioner on the protest and le the appeal
to the CTA within 30 days from date of receipt of the denial of protest; or
File appeal to the CTA within 30 days from lapse of the 180-day period (Lascona Land
Co vs CIR, CTA Case No. 5777, Jan 4, 2000)

BIR appealed CTA decision to CA.


In the meanYme, RA 9282 was signed by PGMA on Apr 2, 2004, which provides
that inacYon of CIR during the 180-day period is construed as a denial of protest.
Decision of the CTA on Lascona case was reversed by the CA. If there is no appeal
led within 30 days aver the lapse of 180 day period, the maeer/decision under
protest becomes nal. The word decision in Sec. 228 cannot be strictly ck
strictly construed as referring only to decision per se of CIR but should be
considered synonymous with disputed assessment (CIR vs. Lascona Land Co, CA GR SP
No. 58061, Oct 25, 2005).
CA decision was appealed to SC, where it is sYll pending.

COUNTING OF 180-DAY PERIOD


Since the peYYoner did not submit any
document in support of his protest within
sixty days from the ling of its protest, the
counYng of the 180-day period was from the
ling of the protest. Accordingly, when
respondent failed to render his decision
within 180 days from the ling of his protest,
peYYoner has 30 days therefrom to le an
appeal to CTA (Oceanic Wireless Network vs. CIR, CTA Case No. 6111,
Nov. 3, 2004)

APPEALS

ADMINISTRATIVE APPEAL

DECISION OF REGIONAL DIRECTOR MAY BE APPEALED TO COMMISSIONER


PRIOR EXHAUSTION OF ADM REMEDIES GIVES ADM AUTHORITIES PRIOR
OPPORTUNITY TO DECIDE CONTROVERSIES WITHIN THEIR COMPETENCE
(Aguinaldo Industries Corp. v. CIR)

JUDICIAL APPEAL

FINAL DECISION OF COMMISSIONER MAY BE APPEALED TO COURT OF TAX


APPEALS

Where a taxpayer led a valid protest within 30 days from date of


receipt of assessment and on same day also led with CTA a
peJJon for review, there is yet no nal decision of CIR on the
protest that is appealable to CTA (Moog Controls Corp vs. CIR, CTA Case

No. 6700, Oct 18, 2004)


CTA DIVISION DECISION IS APPEALED TO CTA EN BANC
COURT OF APPEALS EN BANC DECISION APPEALED TO SUPREME COURT

PETITION FOR REVIEW


PeYYoner maintains that its counsels neglect in not ling
peYYon for review within reglementary period (due to
counsels secretary) was excusable.
The 30-day period to appeal is jurisdicYonal and failure to
comply would bar the appeal and deprive the CTA of its
jurisdicYon. Such period is mandatory, and it is beyond the
power of the courts to extend the same (Chan Kian vs CTA, 105 Phil 906
(1959).
The opYons granted to the taxpayer in case of inacYon by the
CIR is mutually exclusive and resort to one bars the
applicaYon of the other. PeYYon for review was led out of
Yme (more than 30 days aver lapse of 180 days), and
peYYoner did not le MR or appeal; hence, disputed
assessment became nal and executory.

PETITION FOR REVIEW


Aver availing of the rst opYon (ling peYYon for
review with CTA), peYYoner cannot successfully
resort to the second opYon (awaiYng nal decision
of CIR) on the pretext that there is yet no nal
decision on the disputed assessment because of
CIRs inacYon.
Assessments are presumed to be correct unless
otherwise proven (RCBC vs CIR, GR No. 168498, Apr 24, 2007).

PRESCRIPTION
The 3-year period within which to assess any deciency tax
commences aver the last day prescribed by law for the ling
of the income tax return.
For VAT, each taxable quarter shall have its own prescripYve
period. VAT return is led quarterly and a nal return is not
required at the end of the year.
In case of creditable withholding taxes, the 3-year period shall
be counted shall be counted from the last day required by law
for ling monthly remieance return. Each monthly return is
already a complete return. The annual informaYon return
submieed to BIR is just an annual report of income payments
and taxes withheld and is not in the nature of a nal
adjustment return (HPCO Agridev Corp. vs. CIR, CTA Case No. 6355, July 18, 2002)

PRESCRIPTION
Request for reconsideraYon or claricaYon on the
assessment made by the taxpayer does not suspend
the running of the statute of limitaYons. However,
request for reinvesYgaYon may suspend the running
of prescripYve period when it has been granted by
CIR (BPI vs. CIR, GR No. 139736, Oct 17, 2005)
Mere ling of the protest leeer without requesYng
for a reinvesYgaYon does not suspend the running of
the prescripYve period to collect (Phil Global CommunicaVons vs.
CIR, CTA EB Case No. 37, Feb. 2005)

REQUISITES OF WAIVER
Waiver must be in the form idenYed in RMO 20-90;
Expiry date of period agreed upon is indicated in the waiver;
Waiver form requires statement of the kind of tax and amount of tax due;
if not indicated in the waiver, there is no agreement;
Waiver is signed by taxpayer or his authorized representaYve. In case of
corporaYon, waiver is signed by any responsible ocial.
CIR or his authorized representaYve shall sign waiver indicaYng that BIR
has accepted and agreed to the waiver;
Date of acceptance by BIR is indicated;
Date of execuYon and acceptance by BIR should be before expiraYon of
prescripYve period;
Waiver is executed in 3 copies; second copy is for taxpayer. Fact of receipt
by the taxpayer should be indicated in the original copy (Pzer, Inc. vs. CIR, CTA
Case No. 6135, Apr. 21, 2003; FMF Dev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20, 2003)

REQUISITES OF WAIVER
Waiver must indicate denite expiraYon date agreed upon by
CIR and taxpayer
Waiver should state date of acceptance by BIR. Without the
date, it cannot be determined whether waiver was accepted
before expiraYon of 3-year period.
Taxpayer must be furnished copy of accepted waiver. Under
RMO 20-90, second copy of waiver is for taxpayer. Fact of
receipt by taxpayer of his copy should be indicated in the
original copy (Phil. Journalists vs. CIR, supra).
RMO 20-90 must be strictly construed against the
government; they are mandatory in character. More-over,
the waiver of the statute of limitaYons is not a waiver of the
right to invoke the defense of prescripYon (CIR vs. FMF Dev Corp, GR
No. 167765, June 30, 2008).

FRAUD
TAX AVOIDANCE is the tax saving device within the means sancYoned by
law, used in good faith and at arms length.
TAX EVASION is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or addiYonal civil or
criminal liabiliYes. It connotes 3 factors: end to be achieved; an
accompanying state of mind that is described as evil, willful or deliberate;
and course of acYon which is unlawful.
Altonagas sole purpose of acquiring and transferring Ytle of properYes on
same day was to create tax shelter. Sale to him by CIC was a sham and
without business purpose. Sale by Altonaga to RMI was tainted with fraud.
Even before the purported sale of property by CIC to Altonaga, it received
P40 M from RMI. That was reected by RMI in its nancial statement (CIR
vs. Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004)

END OF PRESENTATION

ADy. Vic C. Mamalateo


Mobile: 0918-9037436
Email: vic.mamalateo@vcmlaw.com.ph;
vicmamalateo@yahoo.com

END OF PRESENTATION

A"y. Vic C. Mamalateo


Mobile: 0918-9037436
Email: vic.mamalateo@vcmlaw.com.ph;
vicmamalateo@yahoo.com

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