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TAXATION 1 PENALTY................................................................

21

General Principles of KINDS OF TAXES.............................................21


AS TO OBJECT....................................................... 21

Taxation....................................................2 AS TO BURDEN OR INCIDENCE.............................. 21


AS TO TAX RATES.................................................. 21
DEFINITION AND CONCEPT OF TAXATION 2 AS TO PURPOSES.................................................. 21
TAXATION................................................................2
TAXES......................................................................2 AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX )
.............................................................................. 22
AS TO GRADUATION.............................................. 22
NATURE OF THE POWER OF TAXATION....2
SCOPE OF TAXATION...............................................2
EXTENT OF THE LEGISLATIVE POWER TO TAX........2 Income Taxation.......................22
ESSENTIAL CHARACTERISTICS OF TAX...2 INCOME TAX SYSTEMS.................................22
GLOBAL TAX SYSTEM............................................22
POWER OF TAXATION COMPARED WITH SCHEDULAR TAX SYSTEM..................................... 22
OTHER POWERS...............................................4 SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
.............................................................................. 23
PURPOSE OF TAXATION.................................4
REVENUE-RAISING..................................................4 FEATURES OF THE PHILIPPINE INCOME TAX
NON-REVENUE/SPECIAL OR REGULATORY.............4 LAW.....................................................................23
DIRECT TAX...........................................................23
PRINCIPLES OF SOUND TAX SYSTEM.......4 PROGRESSIVE.......................................................23
COMPREHENSIVE.................................................. 23
THEORY AND BASIS OF TAXATION.............4 SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
LIFEBLOOD THEORY...............................................4 .............................................................................. 23
NECESSITY THEORY................................................5 NATIONAL TAX.......................................................23
BENEFITS-PROTECTION THEORY (SYMBIOTIC EXCISE TAX............................................................23
RELATIONSHIP).......................................................5
JURISDICTION OVER SUBJECT AND OBJECTS........5 CRITERIA IN IMPOSING PHILIPPINE INCOME
TAX.......................................................................23
DOCTRINES IN TAXATION..............................5 CITIZENSHIP OR NATIONALITY PRINCIPLE.............23
RESIDENCE PRINCIPLE..........................................23
PROSPECTIVITY OF TAX LAWS................................5
SOURCE OF INCOME PRINCIPLE............................23
NON-RETROACTIVITY OF RULINGS.........................5
IMPRESCRIPTIBILITY...............................................5
DOUBLE TAXATION..................................................6 TYPES OF PHILIPPINE INCOME TAX.........23
ESCAPE FROM TAXATION........................................6
EXEMPTION FROM TAXATION..................................7 TAXABLE PERIOD...........................................24
RATIONALE/GROUNDS FOR EXEMPTION.................8 INSTANCES WHEREBY SHORT ACCOUNTING PERIOD
REVOCATION OF TAX EXEMPTION...........................8 ARISES..................................................................24
COMPENSATION AND SET-OFF................................8 WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING
COMPROMISE..........................................................8 TAXABLE INCOME................................................. 24
TAX AMNESTY.........................................................9
CONSTRUCTION AND INTERPRETATION OF.............9 KINDS OF TAXPAYERS..................................24
DEFINITION OF EACH KIND OF TAXPAYER .............24
SCOPE AND LIMITATION OF TAXATION....11
INHERENT LIMITATIONS..........................................11 INCOME TAXATION.........................................26
CONSTITUTIONAL LIMITATIONS.............................14 DEFINITION............................................................26
NATURE.................................................................26
STAGES OR PROCESS OF TAXATION.......18 GENERAL PRINCIPLES.......................................... 26

REQUISITES OF A VALID TAX......................19 INCOME..............................................................26


DEFINITION............................................................26
TAX AS DISTINGUISHED FROM OTHER FORMS NATURE.................................................................26
OF EXACTIONS.................................................19 WHEN INCOME IS TAXABLE...................................26
TARIFF....................................................................19 TESTS IN DETERMINING WHETHER INCOME IS EARNED
TOLL......................................................................19 FOR TAX PURPOSES............................................. 29
LICENSE FEE..........................................................19
SPECIAL ASSESSMENT.........................................20 GROSS INCOME.............................................. 29
DEBT.....................................................................20 DEFINITION............................................................29
CONCEPT OF INCOME FROM
WHATEVER SOURCE DERIVED.............................. 30
GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXATION OF RESIDENT FOREIGN
TAXABLE INCOME................................................. 30 CORPORATIONS..............................................79
SOURCES OF INCOME........................................... 30 GENERAL RULE.....................................................79
SOURCES OF INCOME SUBJECT TO TAX...............30 WITH RESPECT TO THEIR INCOME FROM SOURCES
WITHIN THE PHILIPPINES.......................................79
SUBSTITUTED BASIS OF STOCK OR SECURITIES MINIMUM CORPORATE INCOME TAX...................... 79
RECEIVED BY TRANSFEROR UPON THE TAX ON CERTAIN INCOME......................................79
EXCHANGE.......................................................39
TAXATION OF NON-RESIDENT FOREIGN
SUBSTITUTED BASIS OF PROPERTY CORPORATIONS..............................................81
GENERAL RULE......................................................81
TRANSFERRED................................................39
TAX ON CERTAIN INCOME......................................81
SOURCE RULES IN DETERMINING INCOME FROM WITHIN
AND WITHOUT.......................................................45 IMPROPERLY ACCUMULATED EARNINGS OF
SITUS OF INCOME TAXATION.................................46 CORPORATIONS..............................................82
EXCLUSIONS FROM GROSS INCOME.....................46 COMPOSITION....................................................... 83
DEDUCTIONS FROM GROSS INCOME....................50 COVERED CORPORATIONS...................................83
EXEMPT CORPORATIONS......................................62 BIR RULING 025-02...........................................84

TAXATION OF RESIDENT CITIZENS, TAXATION OF PARTNERSHIPS...................84


NON-RESIDENT CITIZENS AND CLASSIFICATION OF
RESIDENT ALIENS..........................................63 PARTNERSHIPS FOR TAX PURPOSES....................84
GENERAL RULE THAT RESIDENT CITIZENS ARE TAXABLE OTHER PARTNERSHIPS (OR GENERAL CO-
ON INCOME FROM ALL SOURCES WITHIN AND WITHOUT PARTNERSHIPS)....................................................84
THE PHILIPPINES...................................................64 CO-OWNERSHIP....................................................84
TAXATION ON COMPENSATION INCOME................65 JOINT VENTURE AND CONSORTIUM......................85
TAXATION OF BUSINESS INCOME/INCOME FROM
PRACTICE OF PROFESSION.................................. 67 TAXATION OF GENERAL PROFESSIONAL
TAXATION OF PASSIVE INCOME............................ 67 PARTNERSHIPS...............................................85
SUMMARY TABLE OF RATES................................. 68 RULES................................................................... 85
TAXATION OF CAPITAL GAINS............................... 69 NOTES...................................................................85

TAXATION OF NON-RESIDENT ALIENS WITHHOLDING TAX........................................ 85


ENGAGED IN TRADE OR BUSINESS.........72 CONCEPT.............................................................. 85
GENERAL RULES...................................................72 KINDS....................................................................86
CASH AND /OR PROPERTY DIVIDENDS...................72 WITHHOLDING OF VAT........................................... 87
CAPITAL GAINS......................................................73 FILING OF RETURN AND
PAYMENT OF TAXES WITHHELD.............................87
NON-RESIDENT ALIENS NOT ENGAGED IN FINAL WITHHOLDING TAX AT SOURCE...................87
TRADE OR BUSINESS....................................73 CREDITABLE WITHHOLDING TAX...........................89
TIMING OF WITHHOLDING...................................... 91

INDIVIDUAL TAXPAYERS EXEMPT FROM


INCOME TAX.....................................................73 TAXATION 2
SENIOR CITIZENS...................................................73
MINIMUM WAGE EARNERS.....................................73
EXEMPTIONS GRANTED UNDER INTERNATIONAL
Estate Tax..........................................93
AGREEMENTS........................................................73
DEFINITION........................................................93
TAXATION OF DOMESTIC CORPORATIONS .. 74
TAX PAYABLE........................................................ 74 NATURE..............................................................93
ALLOWABLE DEDUCTIONS....................................77
TAXATION OF PASSIVE INCOME.............................77 PURPOSE OR OBJECT.................................. 93
TAXATION OF CAPITAL GAINS............................... 78 PURPOSE OF ESTATE TAX..................................... 93
TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND JUSTIFICATION (THEORIES) FOR THE IMPOSITION OF
NON-PROFIT HOSPITALS.......................................78 ESTATE TAX...........................................................93
TAX ON GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS, TIME AND TRANSFER OF PROPERTIES...93
AGENCIES OR INSTRUMENTALITIES......................78 TAXABLE TRANSFERS...........................................93

CLASSIFICATION OF DECEDENT...............93
DEFINITION OF RESIDENCE..................................94 SALE/EXCHANGE/TRANSFER OF PROPERTY FOR
INSUFFICIENT CONSIDERATION...........................107
GROSS ESTATE AND NET ESTATE............94 CONDONATION/REMISSION OF DEBT...................107
GROSS ESTATE.....................................................94
NET ESTATE..........................................................94 TRANSFER FOR LESS THAN ADEQUATE AND
TAX RATES APPLICABLE.......................................94 FULL CONSIDERATION................................107
DETERMINATION OF GROSS ESTATE CLASSIFICATION OF DONORS..................107
AND NET ESTATE..................................................94 INTANGIBLE PROPERTIES WHICH ARE CONSIDERED BY
LAW AS SITUATED IN THE PHILIPPINES............... 108
COMPOSITION OF THE GROSS ESTATE..95
VALUATION OF THE GROSS ESTATE......................95 DETERMINATION OF GROSS GIFT...........108

ITEMS TO BE INCLUDED IN GROSS ESTATE .. 95 COMPOSITION OF GROSS GIFT...............108


DECEDENTS GROSS ESTATE................................95
PROPERTIES NOT PHYSICALLY IN THE ESTATE....95 VALUATION OF GIFTS MADE IN PROPERTY . 108
REAL PROPERTY.................................................108
IMPROVEMENT.................................................... 108
DEDUCTIONS FROM ESTATE......................98
WHEN DEDUCTION NOT ALLOWED.......................98 HOW TO COMPUTE FOR DONORS TAX................108
TAX RATES APPLICABLE..................................... 108
ORDINARY DEDUCTIONS.......................................98
SPECIAL DEDUCTIONS........................................ 102
NET SHARE OF THE SURVIVING SPOUSE IN THE TAX CREDIT FOR DONORS TAXES PAID IN A
CONJUGAL PARTNERSHIP PROPERTY................ 103 FOREIGN COUNTRY..................................... 109
WHO MAY CLAIM TAX CREDIT..............................109
LIMITATIONS ON THE TAX CREDIT.......................109
EXEMPTIONS AND EXCLUSIONS FROM THE
GROSS ESTATE..............................................103
EXCLUSIONS UNDER SEC. 85 EXEMPTIONS OF GIFTS FROM
AND 86 OF THE TAX CODE.................................. 103 DONORS TAX.................................................109
EXCLUSIONS UNDER SEC. 87 OF THE TAX CODE 103 CAN BOTH PARENTS MAKING A DONATION TO A CHILD IN
EXCLUSIONS UNDER SPECIAL LAWS..................104 CONSIDERATION OF MARRIAGE AVAIL OF THE P10,000
DEDUCTION?.......................................................109
TAX CREDIT FOR ESTATE TAXES PAID IN A
FOREIGN COUNTRY.....................................104 PERSONS LIABLE..........................................110
TAX CREDIT.........................................................104 DONORS TAX RETURN.........................................110
WHO MAY AVAIL OF TAX CREDIT.........................104
AMOUNT ALLOWABLE AS TAX CREDIT................104 TAX BASIS........................................................110
NET GIFTS........................................................ 110
FILING OF NOTICE OF DEATH...................105

ESTATE TAX RETURN...................................105 VAT...............................................................111


WHEN REQUIRED.................................................105
CONTENTS...........................................................105 CONCEPT.......................................................... 111
WHEN FILED........................................................105
WHERE FILED...................................................... 105 CHARACTERISTICS/ELEMENTS OF A VAT-
PAYMENT OF ESTATE TAX....................................105 TAXABLE TRANSACTION.............................111
TRANSACTIONS SUBJECT TO VAT.........................111
CONSTITUTIONALITY OF VAT.................................111
Donors Tax..................................106
IMPACT OF TAX...............................................112
BASIC PRINCIPLES.......................................106
INCIDENCE OF TAX........................................112
DEFINITION......................................................106
TAX CREDIT METHOD...................................112
NATURE............................................................107
DESTINATION PRINCIPLE............................112
PURPOSE OR OBJECT................................ 107 APPLICABILITY OF ECOZONES.............................112
TAX TREATMENT OF SALES TO & BY PEZA-REGISTERED
REQUISITES OF VALID DONATION..........107 ENTERPRISE WITHIN & WITHOUT THE ECOZONE. 112

TRANSFERS WHICH MAY BE CONSTITUTED AS


DONATION.......................................................107 PERSONS LIABLE.......................................... 113
PRESUMPTIVE INPUT TAX....................................124
VAT ON SALE OF GOODS OR PROPERTIES TRANSITIONAL INPUT TAX...................................124
.............................................................................113
GOODS OR PROPERTIES......................................114
REQUISITES OF TAXABILITY OF SALE OF GOODS OR
PROPERTIES........................................................ 114
SALE OF REAL PROPERTY...................................114
ON INSTALLMENT PLAN....................................... 114

ZERO-RATED SALES OF GOODS OR


PROPERTIES, AND EFFECTIVELY ZERO-RATED
SALES OF GOODS OR PROPERTIES.......115
EXPORT SALES.................................................... 115
FOREIGN CURRENCY DENOMINATED SALE..........116
EFFECTIVELY ZERO-RATED SALES...................... 116

TRANSACTIONS DEEMED SALE...............116


TRANSFER, USE OR CONSUMPTION NOT IN THE COURSE
OF BUSINESS OF GOODS OR PROPERTIES ORIGINALLY
INTENDED FOR SALE OR FOR USE IN THE COURSE OF
BUSINESS.............................................................116
DISTRIBUTION OR TRANSFER TO SHAREHOLDERS ,
INVESTORS OR CREDITORS................................. 116
CONSIGNMENT OF GOODS IF ACTUAL SALE IS NOT MADE
WITHIN 60 DAYS FOLLOWING THE DATE SUCH GOODS
WERE CONSIGNED................................................117
RETIREMENT FROM OR CESSATION OF BUSINESS, WITH
RESPECT TO INVENTORIES OF TAXABLE GOODS EXISTING
AS OF SUCH RETIREMENT OR CESSATION...........117

CHANGE OR CESSATION OF STATUS AS VAT-


REGISTERED PERSON..................................117
UNDER RR 16-2005 SEC. 4.106 (B).....................117

VAT ON IMPORTATION OF GOODS............117


TRANSFER OF GOODS BY TAX EXEMPT PERSONS
..............................................................................117

VAT ON SALE OF SERVICE AND USE OR LEASE


OF PROPERTIES.............................................117
REQUISITES FOR TAXABILITY...............................118

ZERO-RATED SALE OF SERVICES...........120

VAT EXEMPT TRANSACTIONS...................121


VAT EXEMPT TRANSACTIONS , IN GENERAL.........121
EXEMPT TRANSACTION, ENUMERATED...............121

INPUT TAX AND OUTPUT TAX, DEFINED 124


INPUT TAX............................................................124
OUTPUT TAX........................................................124

SOURCES OF INPUT TAX............................124


PURCHASE OR IMPORTATION OF GOODS............124
PURCHASE OF REAL PROPERTIES FOR WHICH A VAT HAS
ACTUALLY BEEN PAID.........................................124
PURCHASE OF SERVICES IN WHICH VAT HAS ACTUALLY
BEEN PAID...........................................................124
TRANSACTIONS DEEMED SALE...........................124
PERSONS WHO CAN AVAIL OF INPUT TAX
CREDIT..............................................................125
CREDITABLE INPUT TAX .......................................125
TRANSITIONAL TAX..............................................125
PRESUMPTIVE INPUT TAX.................................... 125

DETERMINATION OF OUTPUT/INPUT TAX; VAT


PAYABLE; EXCESS INPUT TAX CREDITS
.............................................................................125
DETERMINATION OF OUTPUT TAX........................125
DETERMINATION OF INPUT TAX CREDITABLE......125
ALLOCATION OF INPUT TAX ON
MIXED TRANSACTIONS........................................125
DETERMINATION OF THE OUTPUT TAX AND VAT PAYABLE
AND COMPUTATION OF VAT PAYABLE OR EXCESS TAX
CREDITS...............................................................126

SUBSTANTIATION OF INPUT TAX CREDITS .. 127

REFUND OR TAX CREDIT OF EXCESS INPUT


TAX.....................................................................127
WHO MAY CLAIM FOR REFUND/APPLY FOR ISSUANCE OF
TAX CREDIT CERTIFICATE....................................127
PERIOD TO FILE CLAIM /APPLY FOR ISSUANCE OF TAX
CREDIT CERTIFICATE...........................................128
MANNER OF GIVING REFUND...............................128
DESTINATION PRINCIPLE
OR CROSS-BORDER DOCTRINE...........................128

INVOICING REQUIREMENTS......................128
INVOICING REQUIREMENTS IN GENERAL ............128
INVOICING AND RECORDING DEEMED SALE
TRANSACTIONS...................................................128
CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE
OR VAT OFFICIAL RECEIPT...................................129

FILING OF RETURN AND PAYMENT..........129


VAT RETURNS...................................................... 129
FINAL WITHHOLDING TAX.................................... 129
RR 16-2005: ADMINISTRATIVE
AND PENAL PROVISIONS.....................................130

WITHHOLDING OF FINAL VAT ON SALES TO


GOVERNMENT................................................130

Tax Remedies under the


NIRC.......................................................130
TAXPAYERS REMEDIES..............................130
ASSESSMENT......................................................130
COLLECTION........................................................136
REFUND................................................................141

GOVERNMENT REMEDIES..........................143
ADMINISTRATIVE REMEDIES................................143
JUDICIAL REMEDIES............................................144
TABLE OF OFFENSES AND PENALTIES................ 144
GOVERNMENT TAXABLE.....................................175
STATUTORY OFFENSES AND PENALTIES PURPOSE FOR IMPOSITION..................................175
............................................................................ 148 FLEXIBLE TARIFF CLAUSE...................................175
CIVIL PENALTIES..................................................148 REQUIREMENTS OF IMPORTATION.......................175
IMPORTATION IN VIOLATION OF TCC....................179
COMPROMISE AND ABATEMENT OF TAXES 148 CLASSIFICATION OF GOODS................................179
CASES WHICH MAY BE COMPROMISED............... 148 CLASSIFICATION OF DUTIES................................185
CASES WHICH CANNOT BE COMPROMISED........149 REMEDIES............................................................187

FLOWCHART: REMEDIES FROM SEIZURE AND


FLOWCHART: TAXPAYERS REMEDIES FROM
TAX ASSESSMENTNIRC.......................... 150 FORFEITURE CASESTCC........................ 191

TABLE OF SPECIAL DUTIES: WHEN IMPOSED


FLOWCHART: PROCEDURES FOR DISTRAINT
AND LEVYNIRC...........................................151 192

TABLE OF SPECIAL DUTIES: IMPOSING


Organization and Function AUTHORITY AND AMOUNT.........................193

of the BIR........................................152 JUDICIAL REMEDIES....................................194


JURISDICTION OF THE COURT OF TAX APPEALS .194
JUDICIAL PROCEDURES...................................... 195
RULE-MAKING AUTHORITY OF THE
TAXPAYERS SUIT IMPUGNING THE VALIDITY OF TAX
SECRETARY OF FINANCE...........................152 MEASURES OR ACTS OF TAXING AUTHORITIES. .199
AUTHORITY OF SECRETARY OF FINANCE TO PROMULGATE
RULES AND REGULATIONS..................................152
SPECIFIC PROVISIONS TO BE CONTAINED IN RULES AND
REGULATIONS.....................................................153
NON-RETROACTIVITY OF RULINGS......................153

POWER OF THE COMMISSIONER TO SUSPEND


THE BUSINESS OPERATION
OF A TAXPAYER............................................153
IN THE CASE OF A VAT-REGISTERED PERSON....153
FAILURE OF ANY PERSON TO REGISTER AS REQUIRED
UNDER SECTION 236...........................................153

LOCAL GOVERNMENT CODE OF 1991, AS


AMENDED........................................................153
LOCAL GOVERNMENT TAXATION.........................153
TABLE: SCOPE OF TAXING POWER..................... 154
TABLE: SPECIFIC TAXING POWER OF LGUS........155
TABLE: TAXING POWERS OF PROVINCES............156
TABLE: TAXING POWERS OF MUNICIPALITIES.....156
REAL PROPERTY TAXATION................................ 165

FLOWCHART: PROCEDURE FOR ASSESSMENT


OF LAND VALUE FOR REAL PROPERTY TAX
PURPOSESLGC..........................................172

FLOWCHART: TAXPAYERS REMEDIES


INVOLVING COLLECTION OF REAL PROPERTY
TAXLGC.........................................................173

FLOWCHART: PROCEDURE FOR LEVY FOR


PURPOSES OF SATISFYING REAL PROPERTY
TAXESLGC...................................................174

TARIFF AND CUSTOMS CODE OF 1978, AS


AMENDED........................................................ 175
TARIFF AND DUTIES, DEFINED............................. 175
GENERAL RULE: ALL IMPORTED ARTICLES ARE SUBJECT
TO DUTY. IMPORTATION BY THE
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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

General Principles of Taxation


DEFINITION AND CONCEPT OF TAXATION

TAXATION

existence and carry out their legitimate objectives.
242
























































a mode of raising revenue for public purpose;
243 the exercise of sovereign power to raise
revenue for the expense of the government;































































income to defray the necessary expenses of
244 government; a method of apportioning the cost of
government among those who in some measure
are privileged to enjoy its benefits and must,

therefore, bear its burdens, (see 51 Am. Jur. 341;

1 Cooley 72-93.)





















































as a power, it refers to the inherent power of the
245 state to demand enforced contributions for
public purpose or purposes.

TAXES
0 are enforced proportional contributions from
persons and property levied by the law-
making body of the State by virtue of its
sovereignty for the support of the government
and all public needs.
1 The enforced proportional and pecuniary
contributions from persons and property levied by
the law-making body of the state having
jurisdiction over the subject of the burden for the
support of the government and public needs.


Underlying theory and basis of taxation

The power of taxation proceeds upon the theory

that the existence of government is a necessity;

that it cannot continue without means to pay its

expenses; and that for those means it has the

right to compel all citizens and property within its

limits to contribute.


The basis of taxation is found in the reciprocal

duties of protection and support between the State
and its inhabitants. The State receives taxes that it
may be enabled to carry its mandates into effect
and perform the functions of government and the
citizen pays the portion of taxes demanded in order
that he may, by means thereof, be secured in the
enjoyment of the benefits of an organized society,
(see 51 Am. Jur. 42-43.) This is the so-called
benefits-received principle.
































2 Subject to constitutional and inherent limitations -
These limitations are those provided in the
fundamental law or implied therefrom, while the
NATURE OF THE POWER OF TAXATION rest spring from the nature of the taxing power
0 Inherent in sovereignty- power to tax is essential itself although they may or may not be provided
to the existence of every government. It exists in the Constitution.
apart from constitutions and without being
expressly conferred by the people (71
SCOPE OF TAXATION
Am.Jur.2d 397-398). Hence, it can be exercised
Subject to constitutional and inherent restrictions,
by the government even if the Constitution is
the power of taxation is regarded as supreme,
entirely silent on the subject. Constitutional
unlimited and comprehensive. The principal check
provisions relating to the power of taxation do
on its abuse rests only on the responsibility of the
not operate as grants of the power to the
members of the legislature to their constituents.
government. They merely constitute limitations
upon a power which would otherwise be
EXTENT OF THE LEGISLATIVE POWER TO TAX
practically without limit. (1 Cooley 150). While
the power to tax is not expressly provided for in Subject to constitutional and inherent
restrictions, the legislature has discretion to
our Constitution, its existence is recognized by
determine the incidence of the power to tax.
the provisions relating to taxation (infra).
23 The subjects or objects to be taxed refer to the
1 Essentially a legislative function- The power to coverage and the kind or nature of the tax. They
tax is peculiarly and exclusively legislative
may be persons, whether natural or juridical;
and cannot be exercised by the executive or
property, whether real or personal, tangible or
judicial branch of the government (1 Cooley
intangible; businesses, transactions, rights, or
160-161). Hence, only Congress, our national
legislative body, can impose taxes. The levy privileges. A state is free to select the subject of
of a tax, however, may also be made by a taxation and it has been repeatedly held that that
local legislative body subject to such inequalities which result from a singling out of one
limitations as may be provided by law. particular class for taxation or exemption infringe
no constitutional limitation so long as such
exemption is reasonable and not arbitrary.

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(see Lutz vs. Araneta, 98 Phil. 148; City of Incidentally, our Constitution mandates that "the
Baguio vs. De Leon, 25 SCRA 938 [1968]; rule of taxation shall be uniform and equitable." In
Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984]) a case, our Supreme Court said: "The power of
taxation is sometimes called also the power to
Thus, the power to tax carries with it the destroy. Therefore, it should be exercised with
power to grant exemption therefrom. caution to minimize injury to the proprietary rights
of the taxpayer. It must be exercised fairly, equally
0 The purpose or object of the tax so long as it and uniformly, lest the tax collector kills the 'hen
is a public purposeThe legislative bodys that lays the golden eggs.' And in order to maintain
determination, however, on the question of the general public's trust and confidence in the
what is a public purpose is not conclusive. government, this power must be used justly and
The courts can inquire into whether the not treacherously." (Roxas vs. Court of Tax
purpose is really public or private. Appeals, 23 SCRA276, App120, 1968; Philex
Mining Corp. vs. Comm. of Internal Revenue, 97
In the final analysis, therefore, the decision on the SCAD 777,294 SCRA 687, Aug. 28, 1998.)
question is not a legislative but a judicial function.
But once it is settled that the purpose is public, the 0 The manner, means, and agencies of collection
courts can make no other inquiry into the objective of the tax. - These refer to the administration of
of the legislature in imposing a tax (see Pascual the tax or the implementation of tax laws. The
vs. Sec. of Public Works, 110 Phil. 331 [1961]), or legislature possesses the sole power to
the wisdom, advisability, or expediency of the tax. prescribe the mode or method by which the tax
(Blunt vs. U.S., 255 Fed. 322.) shall be collected, and to designate the officers
through whom its will shall be enforced as well
Judicial action is limited only to a review as the remedies which the State or the taxpayer
where it involves: may avail in connection therewith.
0.0 The determination of the validity of the
tax in relation to constitutional precepts or ESSENTIAL CHARACTERISTICS OF TAX
provisions. Thus, a tax may be declared 23 It is an enforced contribution for its imposition
invalid because it violates the is in no way dependent upon the will or
constitutional requirement of uniformity assent of the person taxed.
and equity in taxation; or 24 It is generally payable in the form of money,
0.1 The determination in an appropriate although the law may provide payment in
case of the application of a tax law. (see1 kind (e.g. backpay certificates under Sec. 2,
Cooley 165.) Thus, a court may decide R.A. No. 304, as amended);
that a tax has been illegally collected 25 It is proportionate in character or islaid by
where the taxpayer is entitled to tax some rule of apportionment which is usually
exemption or his liability has already been based on ability to pay;
extinguished by reason of prescription. 26 It is levied on persons, property, rights, acts,
privileges, or transactions.
1 The amount or rate of the tax.- As a general 27 It is levied by the State which has jurisdiction
rule, the legislature may levy a tax of any or control over the subject to be taxed.
amount or rate it sees fit. If the taxes are 28 It is levied by the law-making body of the State.
oppressive or unjust, the only remedy is the The power to tax is a legislative power but is
ballot box and the election of new also granted to local governments, subject to
representatives. (see1 Cooley 178-181.) such guidelines and limitations as law may
provided (Sec. 5, Art. X, Constitution); and;
According to Chief Justice John Marshall, "the
29 It is levied for public purpose. Revenues
power to tax involves the power to destroy."
derived from taxes cannot be used for purely
(McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-
private purposes or for the exclusive benefit of
428, 4L. ed. 579.) To say, however, that the power
private persons. (Gaston v. Republic Planters
to tax is the power to destroy is to describe not the
Bank, 158 SCRA 626, March 15, 1988). The
purposes for which the taxing power may be used
public purpose or purposes of the imposition
but the extent to which it may be employed in
is implied in the levy of tax. (seeMendoza v.
order to raise revenues. (see1 Cooley 178.) Thus,
Municipality, 94 Phil. 1047[1954]), A tax levied
even if a tax should destroy a business, such fact
for a private purpose constitutes a taking of
alone could not invalidate the tax. (84 C.J.S. 46.)
property without due process of law.

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It is also an important characteristic of most the industry which constitutes one of the
taxes that they are commonly required to be great sources of the country's wealth and,
paid at regular periods or intervals (see 1 therefore, affects a great portion of the
Cooley 64) every year. population of the country.

POWER OF TAXATION COMPARED WITH OTHER Taxes may be levied with a regulatory purpose
POWERS to provide means for rehabilitation and
See Annex A. stabilization of a threatened industry which is
imbued with public interest as to be within the
PURPOSE OF TAXATION police power of the State. [Caltex v. COA]

REVENUE-RAISING As long as a tax is for a public purpose, its validity is


Primary purpose of taxation is to provide funds not affected by collateral purposes or motives of the
or property with which to promote the general legislature in imposing the levy, or by the fact that it
welfare and protection it its citizens. has a regulatory effect (51 Am. Jur. 381-382.) or it
discourages or even definitely deters the activities
Fees may be properly regarded as taxes even though taxed. The principle applies even though the revenue
they also serve as an instrument of regulation... If the obtained from the tax appears very negligible or the
purpose is primarily revenue, or if revenue is, at least, revenue purpose is only secondary. (seeUnited
one of the real and substantial purposes, then the States vs. Sanchez, 340 U.S. 42; Tio vs. Videogram
exaction is properly called a tax. [PAL v. Edu] Regulatory Board, 151 SCRA 208 [1987])

NON-REVENUE/SPECIAL OR REGULATORY PRINCIPLES OF SOUND TAX SYSTEM


Taxation is often employed as a device for
regulation by means of which certain effects or (1) FISCAL ADEQUACY - the sources of tax revenue
conditions envisioned by governments may be should coincide with, and approximate the
achieved. Thus, taxation can: needs of, government expenditures. The
0 Strengthen anemic enterprises or provide revenue should be elastic or capable of
incentive to greater productionthrough grant expanding or contracting annually in response
of tax exemptions or the creation of to variations in public expenditures.
conditions conducive to their growth.
1 Protect local industriesagainst foreign competition (2) ADMINISTRATIVE FEASIBILITY - Tax laws should
or decreased to encourage foreign trade. be capable of convenient, just and effective
2 On imported goods, as a bargaining tool by administration. Each tax should be capable of
setting tariff rates first at a relatively high uniform enforcement by government officials,
level before trade negotiations are entered convenient as to the time, place, and manner
into with another country. of payment, and not unduly burdensome
3 Halt inflationin periods of prosperity to curb upon, or discouraging to business activity.
spending power; ward off depression in
periods of slump to expand business. (3) THEORETICAL JUSTICE OR EQUALITY The tax burden
4 Reduce inequalities in wealth and incomes, as for should be in proportion to the taxpayers ability to
instance, the estate, donor's and income taxes, pay. This is the so-called ability to pay principle.
their payers being the recipients of unearned Taxation should be uniform as well as equitable
wealth or mostly in the higher income brackets.
5 Taxes may be levied to promote science and Note: The non-observance of the above principles
invention (see RA. No. 5448) or to finance will not necessarily render the tax imposed invalid
educational activities (see RA. No. 5447) or except to the extent those specific constitutional
to improve the efficiency of local police limitations are violated. (De Leon)
forces in the maintenance of peace and order
through grant of subsidy (see RA.No. 6141). THEORY AND BASIS OF TAXATION
6 As an implement of the police power to promote the
general welfare. In Lutz v Araneta, 78 Phil 148, it has LIFEBLOOD THEORY
been held that the Sugar Adjustment Act is an act Taxes are the lifeblood of the government and
enacted primarily under the police power and their prompt and certain availability is an
designed to obtain a readjustment of the benefits imperious need. [CIR v. Pineda]
derived by people interested in the sugar industry as
well as to rehabilitate and stabilize

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Taxes are the lifeblood of the government and so


should be collected without unnecessary hindrance. It is a cardinal rule that laws shall have no retroactive
On the other hand, such collection should be made in effect, unless the contrary is provided (citing Art. 4 of
accordance with law as any arbitrariness will negate the Civil Code).[Hydro Resources v.CA]The language
the very reason for government itself... It is said that of the statute must clearly demand or press that it
taxes are what we pay for civilized society. Without shall have a retroactive effect.[Lorenzo v.Posadas]
taxes, the government would be paralyzed for lack of
the motive power to activate and operate it.[CIR v. Exception to the exception:when retroactive
Algue] application would be so harsh and oppressive
(Republic v. Fernandez).
NECESSITY THEORY
The power of taxation proceeds upon theory that the Collection of interest in tax cases is not penal in
existence of government is a necessity; that is cannot nature; it is but a just compensation to the State.
continue without means to pay its expenses; and that The constitutional prohibition against ex post facto
for those means it has the right to compel all citizens laws is not applicable to the collection of interest on
and property within its limits to contribute. back taxes. [Central Azucarera v.CTA]

BENEFITS-PROTECTION THEORY (SYMBIOTIC NON-RETROACTIVITY OF RULINGS (SEC. 246)


RELATIONSHIP) General rule: Any revocation, modification or
This principle serves as the basis of taxation and is reversal of rules and regulations promulgated in
founded on the reciprocal duties of protection and accordance with Sections 244 and 245 of the Tax
support between the State and its inhabitants. Code and rulings or circulars promulgated by the
CIR, that is prejudicial to the taxpayer, as a general
Every person who is able to must contribute his share rule, shall NOT be given retroactive effect.
in the running of the government. The government for
its part is expected to respond in the form of tangible Exceptions:
and intangible benefits intended to improve the lives 23 Where the taxpayer deliberately misstates or
of the people and enhance their moral and material omits material facts from his return or any
values. This symbiotic relationship is the rationale of document required of him by BIR;
taxation and should dispel the erroneous notion that it 24 Where the facts subsequently gathered by
is an arbitrary method of exaction by those in the seat the BIR are materially different from the facts
of power. [CIR v Algue] on which the ruling is based; OR
25 Where the taxpayer acted in bad faith. (Sec.
The obligation to pay taxes rests upon the 246, NIRC)
necessity of money for the support of the state. For
this reason, no one is allowed to object to or resist IMPRESCRIPTIBILITY
the payment of taxes solely because no personal Unless otherwise provided by the tax itself, taxes are
benefit to him can be pointed out.[Lorenzo v. imprescriptible. (CIR v. Ayala Securities Corporation)
Posadas]
The law on prescription, being a remedial measure,
JURISDICTION OVER SUBJECT AND OBJECTS should be liberally construed in order to afford such
The limited powers of sovereignty are confined to protection. As a corollary, the exceptions to the law on
objects within the respective spheres of prescription should perforce be strictly construed.
governmental control. These objects are the proper [Commissioner v. C.A., G.R.No. 104171 (1999)]
subjects or objects of taxation and none else.
Prescriptions found in statutes
DOCTRINES IN TAXATION 0 National Internal Revenue Code- statute of
limitations (see Section 203 and 222) in the
PROSPECTIVITY OF TAX LAWS assessment and collection of taxes therein
General rule: Tax laws are prospective in imposed.
operation. Reason: Nature and amount of the
tax could not be foreseen and understood by the 1 Tariff and Customs Code- does not express any
taxpayer at the time the transaction. general statute of limitation; it provides, however,
that when articles have been entered and passed
Exception:Tax laws may be applied retroactively free of duty or final adjustments of duties made,
provided it is expressly declared or clearlythelegislative with subsequent delivery, such entry and passage
intent.(e.g increase taxes on income already earned) free of duty or settlements of duties will,

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after the expiration of one (1) year, from the If the tax law follows the constitutional rule on
date of the final payment of duties, in the uniformity, there can be no valid objection to taxing
absence of fraud or protest or compliance the same income, business or property twice.[China
audit pursuant to the provisions of this Code, Banking Corp. v. CA, G.R.No. 146749 (2003)]
be final and conclusive upon all parties,
unless the liquidation of the import entry was Double taxation in its narrow sense is undoubtedly
merely tentative. (Sec. 1603) unconstitutional but that in the broader sense is not
necessarily so. (De Leon, citing 26 R.C.L 264-
0 Local Government Code- prescribes prescriptive 265).Where double taxation (in its narrow sense)
periods for the assessment (5 years) and occurs, the taxpayer may seek relief under the
collection (5 years) of taxes. (seeSections 194 and uniformity rule or the equal protection guarantee.
270, Rep. Act No. 7160). (De Leon, citing 84 C.J.S.138).

DOUBLE TAXATION Modes of eliminating double taxation


Means taxing twice for the same tax period the 0 Allowing reciprocal exemption either by law or by treaty;
same thing or activity, when it should be taxed
but once, for the same purpose and with the 1 Allowance of tax credit for foreign taxes paid
same kind of character of tax. 2 Allowance of deduction for foreign taxes paid
3 Reduction of Philippine tax rate.
Strict sense (Direct duplicate Taxation)
0 the same property must be taxed twice when ESCAPE FROM TAXATION
it should be taxed once;
1 both taxes must be imposed on the same Shifting of tax burden
property or subject matter; SHIFTING - the transfer of the burden of a tax
2 for the same purpose; by the original payer or the one on whom the tax
3 by the same State, Government, or taxing was assessed or imposed to someone else.
authority; What is transferred is not the payment of the tax
4 within the same territory, jurisdiction or taxing but the burden of the tax.
district; All indirect taxes may be shifted; direct taxes
5 during the same taxing period; and cannot be shifted.
6 of the same kind or character of tax.
Ways of shifting the tax burden
Broad sense 0 Forward shifting - When the burden of the tax
There is double taxation in the broad sense or is transferred from a factor of production
there is indirect duplicate taxationif any of the through the factors of distribution until it
elements for direct duplicate taxation is absent. finally settles on the ultimate purchaser or
consumer. Example: VAT, percentage tax
It extends to all cases in which there is a burden
of two or more pecuniary impositions. For 1 Backward shifting - When the burden of the tax
example, a tax upon the same property imposed is transferred from the consumer or purchaser
by two different states. through the factors of distribution to the factor of
production. Example: Consumer or purchaser
Double taxation, standing alone and not being may shift tax imposed on him to retailer by
forbidden by our fundamental law, is not a valid purchasing only after the price is reduced, and
defense against the legality of a tax measure from the latter to the wholesaler, and finally to
(Pepsi Cola v. Mun. of Tanauan). But from it the manufacturer or producer.
might emanate such defenses against taxation
as oppressiveness and inequality of the tax. 2 Onward shifting - When the tax is shifted two
or more times either forward or backward.
Constitutionality of double taxation
There is no constitutional prohibition against Meaning of impact and incidence of taxation
double taxation in the Philippines. It is something Impact of taxation is the point on which a tax is
not favored, but is permissible, provided some originally imposed. In so far as the law is
other constitutional requirement is not thereby concerned, the taxpayer, the subject of tax, is the
violated.[Villanueva v. City of Iloilo (1968)] person who must pay the tax to the government.

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Incidence of taxation is that point on which the Since fraud is a state of mind, it need not be
tax burden finally rests or settles down. It takes proved by direct evidence but may be inferred
place when shifting has been effected from the from the circumstances of the case. Thus:
statutory taxpayer to another. 0 The failure of the taxpayer to declare for taxation
purposes his true and actual income derived from
Relationship between Impact, Shifting, and his business for two consecutive years has been
Incidence of a Tax held as an indication of his fraudulent intent to
The impact is the initial phenomenon, the shifting is cheat the government of its due taxes. (Republic
the intermediate process, and the incidence is the v. Gonzales, 13 SCRA 633 [1965]).
result. Impact is the imposition of the tax; shifting is 1 The substantial underdeclaration of income in
the transfer of the tax; while incidence is the setting the income tax returns of the taxpayer for
or coming to rest of the tax. (e.g impact in a sales four (4) consecutive years coupled with his
tax is on the seller who shifts the burden to the intentional overstatement of deductions
customer who finally bears the incidence of the tax) justifies the finding of fraud. (Perez v. CTA
and Collector, 103 Phil. 1167 [1958]).
Tax avoidance
The exploitation by the taxpayer of legally EXEMPTION FROM TAXATION
permissible alternative tax rates or methods of
assessing taxable property or income in order to Meaning of exemption from taxation
avoid or reduce tax liability. It is politely called The grant of immunity to particular persons or
tax minimization and is not punishable by law. corporations or to person or corporations of a
particular class from a tax which persons and
Example: A person refrains from engaging in corporations generally within the same state or
some activity or enjoying some privilege in order taxing district are obliged to pay. It is an immunity
to avoid the incidental taxation or to lower his tax or privilege; it is freedom from a financial charge or
bracket for a taxable year. burden to which others are subjected.
Strictly construed against the taxpayer.
Transformation
TRANSFORMATION method of escape in Taxation is the rule and exemption, the exception,
taxation whereby the manufacturer or producer and therefore, he who claims exemption must be
upon whom the tax has been imposed pays the tax able to justify his claim or right thereto, by a grant
and endeavors to recoup himself by improving his expressed in terms too plain to be mistaken and
process of production thereby turning out his units too categorical to be misinterpreted. If not
of products at a lower cost. The taxpayer escapes expressly mentioned in the law, it must at least be
by a transformation of the tax into a gain through within its purview by clear legislative intent.
the medium of production.
Nature of tax exemption
Tax evasion 0 Mere personal privilege- cannot be assigned or
TAX EVASION - is the use by the taxpayer of transferred without the consent of the
illegal or fraudulent means to defeat or lessen Legislature. The legislative consent to the
the payment of a tax. It is also known as tax transfer may be given either in the original act
dodging. It is punishable by law. granting the exemption or in a subsequent law
1 General rule: revocable by the government.
Example: Deliberate failure to report a taxable Exception: if founded on a contract which is
income or property; deliberate reduction of protected from impairment. But the contract
income that has been received. must contain the essential elements of other
contracts. An exemption provided for in a
Elements of Tax Evasion franchise, however, may be repealed or
0 The end to be achieved. Example: the payment of amended pursuant to the Constitution (see
less than that known by the taxpayer to be legally Sec. 11, Art. XII). A legislative franchise is in
due, or in paying no tax when such is due. the nature of a contract.
1 An accompanying state of mind described as 2 Implies a waiver on the part of the
being evil, in bad faith, willful or government of its right to collect taxes due to
deliberate and not accidental. it, and, in this sense, is prejudicial thereto.
2 A course of action (or failure of action) which Hence, it exists only by virtue of an express
is unlawful. grant and must be strictly construed.

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0 Not necessarily discriminatory, provided it has basis or justification for tax exemption, a law
reasonable foundation or rational basis. Where, may validly authorize the condonation of taxes
however, no valid distinction exists, the exemption on equitable considerations.
may be challenged as violative of the equal
protection guarantee or the uniformity rule. REVOCATION OF TAX EXEMPTION
General Rule: revocable by the government.
Kinds of tax exemption Exception: Contractual tax exemptions may not
768 Express or Affirmative - either entirely be unilaterally so revoked by the taxing authority
or in part, may be made by provisions of the without thereby violating the non-impairment
Constitution, statutes, treaties, ordinances, clause of the Constitution.
franchises, or contracts.
COMPENSATION AND SET-OFF
769 Implied or Exemption by Omission - General rule: Taxes cannot be the subject of set-off
when a tax is levied on certain classes without or compensation (Republic v. Mambulao Lumber).
mentioning the other classes. Every tax statute,
in a very real sense, makes exemptions since Reasons:
all those not mentioned are deemed exempted. 0 This would adversely affect the government
The omission may be either accidental or revenue system (Philex Mining v. CA).
intentional. Exemptions are not presumed, but 1 Government and the taxpayer are not creditors
when public property is involved, exemption is and debtors of each other. The payment of
the rule, and taxation, the exception. taxes is not a contractual obligation but arises
out of a duty to pay. (Republic v. Mambulao)
770 Contractual -in the real sense of the term
and where the non-impairment clause of the Exception: If the claims against the government
Constitution can rightly be invoked, are those have been recognized and an amount has already
agreed to by the taxing authority in contracts, such been appropriated for that purpose. Where both
as those contained in government bonds or claims have already become due and
debentures, lawfully entered into by them under demandable as well as fully liquidated,
enabling laws in which the government, acting in compensation takes place by operation of law
its private capacity, sheds its cloak of authority and under Art. 1200 in relation to Articles 1279 and
waives its governmental immunity. These 1290 of the NCC, and both debts are extinguished
contractual tax exemptions, however, are not to be to the concurrent amount.[Domingo v. Garlitos]
confused with tax exemptions granted under
franchises. A franchise partakes the nature of a Doctrine of Equitable Recoupment- a claim for
grant which is beyond the purview of the non- refund barred by prescription may be allowed to offset
impairment clause of the Constitution. (Manila unsettled tax liabilities. The doctrine FINDS NO
Electric Company v. Province of Laguna, G.R.No. application in this jurisdiction. (Collector v. UST).
131359, May 5, 1999)
COMPROMISE
RATIONALE/GROUNDS FOR EXEMPTION 0A contract whereby the parties, by making
reciprocal concessions avoid litigation or put
Rationale of Tax Exemption an end to one already commenced.(Art.
Such exemption will benefit the body of the people 2028, Civil Code). It involves a reduction of
and not particular individuals or private interest and the taxpayers liability.
that the public benefit is sufficient to offset the 1Requisites of a tax compromise:
monetary loss entailed in the grant of the exemption. 1.0 The taxpayer must have a tax liability.
1.1 There must be an offer (by the taxpayer
Grounds for tax exemption or Commissioner) of an amount to be paid
0 It may be based on contract. by the taxpayer.
1 It may be based on some ground of public policy. 1.2 There must be acceptance (by the
2 It may be created in a treaty on grounds of
Commissioner or the taxpayer, as the
reciprocity or to lessen the rigors of case may be) of the offer in settlement of
international or multiple taxation. the original claim.
2Generally, compromises are allowed and
enforceable when the subject matter thereof is not
But: equity is NOT a ground for tax exemption.
prohibited from being compromised and the
Exemption from tax is allowable only if there is a
person entering into it is duly authorized to do so.
clear provision. While equity cannot be used as a

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0 In the National Internal Revenue Code, the tax periods, hence of retroactive application.
Commissioner of Internal Revenue is (People v. Castaeda, 1988).
expressly authorized to enter, under
certain conditions, into a compromise of Tax exemption is an immunity from all civil liability only.
both the civil and criminal liabilities of the It is an immunity or privilege, a freedom from a charge or
taxpayer (Sec. 204, NIRC). burden of which others are subjected. (Greenfield v.
1 The power to compromise in respect of customs Meer, 77 Phil. 394 [1946]). It is generally prospective in
duties is, at best, limited to cases where application.(Dimaampao, 2005, p. 111)
potestive authority is specifically granted such
as in the remission of duties by the Collector of
CONSTRUCTION AND INTERPRETATION OF:
Customs (Sec. 709, Tariff and Customs Code)
and cases involving imposition of fines,
surcharges and forfeitures which may be Tax laws
In case of doubt, such are to be construed strictly against
compromised by the Commissioner subject to
the government and liberally in favor of the taxpayer.
the approval of the Secretary of Finance (Sec.
(Manila Railroad Co. v. Coll. of Customs, 52 Phil. 950
2316, Tariff and Customs Code).
[1929]).No person or property is subject to taxation
2 No provisions exist under the Local
unless within the terms or plain import of a taxing statute.
Government Code, while the tax (not
(see72 Am.Jur. 2d 44). Taxes, being burdens, they are
criminal) liability is not prohibited from
not to be presumed beyond what the statute expressly
being compromised (see Arts. 2034 and
2035, Civil Code); there is no specific and clearly declares. (Coll. v. La Tondena, 5 SCRA 665
authority, however, given to any public [1962]). Thus, a tax payable by
official to execute the compromise so as to individuals does not apply to corporations.Tax
render it effective. (Vitug, p. 48) statutes offering rewards are liberally construed
in favor of informers. (Penid v. Virata, 121 SCRA
166 [1983]).
TAX AMNESTY
Exceptions:
Definition
A tax amnesty partakes of an absolute forgiveness
or waiver by the Government of its right to collect 0 The rule of strict construction as
what otherwise would be due it, and in this sense, against the government is not applicable where
prejudicial thereto, particularly to give tax evaders, the language of the statute is plain and there is
who wish to relent and are willing to reform a chance no doubt as to the legislative intent. (see 51
to do so and become a part of the new society with a Am.Jur.368). In such case, the words employed
clean slate.[Republic v. IAC (1991)] are to be given their ordinary meaning. Ex.
Word individual was changed by the law to
A tax amnesty, much like a tax exemption, is never person. This clearly indicates that the tax
favored nor presumed in law. If granted, the terms of applies to both natural and juridical persons,
the amnesty, like that of a tax exemption, must be unless otherwise expressly provided.
construed strictly against the taxpayer and liberally in
favor of the taxing authority. For the right of taxation is
inherent in government. The State cannot strip itself 1 The rule does not apply where
of the most essential power of taxation by doubtful the taxpayer claims exemption from the tax.
words. He who claims an exemption (or an amnesty)
from the common burden must justify his claim by the Tax statutes are to receive a reasonable construction
clearest grant of organic or state law. It cannot be or interpretation with a view to carrying out their
allowed to exist upon a vague implication. If a doubt purpose and intent. They should not be construed as
arises as to the intent of the legislature, that doubt to permit the taxpayer easily to evade the payment of
must be resolved in favor of the state. (CIR v. tax. (Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Marubeni Corp.,372 SCRA 576 [2001]). Thus, the good faith of the taxpayer is not a sufficient
justification for exemption from the payment of
Distinguished from tax exemption surcharges imposed by the law for failing to pay tax
Tax amnestyis an immunity from all criminal and civil within the period required by law.
obligations arising from non-payment of taxes. It is a
general pardon given to all taxpayers. It applies to past Tax exemption and exclusion
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear legal
provisions. [NPC v. Albay]

General Rule: In the construction of tax statutes,


exemptions are not favored and are construed
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strictissimi juris against the taxpayer. (Republic administrative rule should be published if it
Flour Mills v. Comm. & CTA, 31 SCRA 520 [1970]). substantially adds to or increases the burden of
those governed. When an administrative rule is
0 NPC v. Albay: Tax exemptions must be merely interpretative in nature, its applicability
shown to exist clearly and categorically, and needs nothing further than its bare issuance for it
supported by clear legal provisions. gives no real consequence more than what the law
1 Floro Cement v. Gorospe: Claims for an exemption itself has already prescribed. When, upon the other
must be able to point out some provision of law hand, the administrative rule goes beyond merely
creating the right, and cannot be allowed to exist providing for the means that can facilitate or render
upon a mere vague implication or inference. least cumbersome the implementation of the law
2 CIR v. CA: Refunds are in the nature of but substantially adds to or increases the burden of
exemption, and must be construed strictly those governed, it behooves the agency to accord
against the grantee/taxpayer. at least to those directly affected a chance to be
3 Comm. V. Kiener Co. Ltd. (65 SCRA 142 [1975]): heard, and thereafter to be duly informed, before
Taxation is the rule and exemption the exception, that new issuance is given the force and effect of
and therefore, he who claims exemption must be law. (Commissioner v. Court of Appeals, G.R.No.
able to justify his claim or right thereto, by a grant 119761 [1996]).
expressed in terms too plain to be mistaken and
too categorical to be misinterpreted. Rep. of the Philippines v. Pilipinas Shell Petroleum
Corporation, G.R. No. 173918, April 8, 2008:
Exceptions: Tax regulations (issued by the CIR/DOF Secretary)
0 When the law itself expressly provides for a whose purpose is to enforce or implement existing
liberal construction, that is, in case of doubt, law must (a) be published in a newspaper of
it shall be resolved in favor of exemption; and general circulation (see Art. 2 of the Civil Code),
1 When the exemption is in favor of the government
AND (b) filed with UP Law Center ONAR (per
itself or its agencies, or of religious, charitable,
Chapter 2, Book VII of the Admin Code of 1987
and educational institutions because the general
(EO 292) before they can become effective.
rule is that they are exempt from tax.
2 When the exemption is granted under special
Such rules once established and found to be in
circumstances to special classes of persons.
consonance with the general purposes and
3 If there is an express mention or if the taxpayer
objects of the law have the force and effect of
falls within the purview of the exemption by clear
law, and so they must be applied and enforced.
legislative intent, the rule on strict construction (De Guzman v. Lontok, 68 Phil. 495 [1939]).
does not apply. (Comm. V. Arnoldus Carpentry They are, therefore, just as binding as if the
Shop, Inc., 159 SCRA 19 [1988]). regulations had been written in the law itself.
Tax rules and regulations
NOTE: Administrative rules and regulations must
The Secretary of Finance, upon recommendation
always be in harmony with the provisions of the
of the CIR, shall promulgate all needful rules and
law. In case of conflict with the law or the
regulations for the effective enforcement of the
Constitution, the administrative rules and
provisions of the NIRC. (Sec. 244) regulations are null and void.As a matter of
policy, however, courts will declare a regulation
Requisites for validity and effectivity of regulations
or provision thereof invalid only when the conflict
0 Reasonable with the law is clear and unequivocal.
1 Within the authority conferred
2 Not contrary to law and the Constitution (Art. Administrative interpretations and opinions
7, Civil Code) The power to interpret the provisions of the Tax
3 Must be published Code and other tax laws is under the exclusive and
original jurisdiction of the Commissioner of Internal
There are two kinds of administrative issuances: Revenue subject to review by the Secretary of
the legislative rules and the interpretative rules. A Finance (Sec. 4, par.1, NIRC). Revenue
legislative rule is in the nature of subordinate regulations are the formal interpretation of the
legislation, designed to implement a primary provisions of the NIRC and other laws by the
legislation by providing the details thereof. An Secretary of Finance upon the recommendation of
interpretative rule, on the other hand, is designed the Commissioner of Internal Revenue.
to provide guidelines to the law, which the
administrative agency is in charge of enforcing. An

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The Commissioner has the sole authority to


issue rulings but he also has the power to SCOPE AND LIMITATION OF TAXATION
delegate said authority to his subordinates. He
cannot, however, delegate to any of his INHERENT LIMITATIONS
subordinate officials the power to issue rulings of Public Purpose
first impression (i.e., question involved is new The proceeds of the tax must be used (a) for the
and important) or to reverse, revoke or modify support of the State or (b) for some recognized
any existing ruling of the BIR (Sec. 7[B], NIRC). objects of government or directly to promote the
welfare of the community.
Decisions of the Supreme Court and Court of Tax
Appeals Test: whether the statute is designed to promote the
Decisions of the Supreme Court applying or public interest, as opposed to the furtherance of the
interpreting existing tax laws are binding on all advantage of individuals, although each advantage to
subordinate courts and have the force and effect individuals might incidentally serve the public.
of law. As provided for in Article 8 of the Civil [Pascual v. Secretary of Public Works (1960)]
Code, they form part of the law of the land.
They constitute evidence of what the law means. The protection and promotion of the sugar industry
(People v. Licera, 65 SCRA 270 [1975]). is a matter of public concern; the legislature may
determine within reasonable bounds what is
The same is also true with respect to decisions necessary for its protection and expedient for its
of the Court of Tax Appeals. However, by the promotion. [Lutz v Araneta (1955)]
nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme Court
The public purpose of a tax may legally exist
by a petition for review on certiorari.
even if the motive which impelled the legislature
to impose the tax was to favor one industry over
Penal provisions of tax laws another. [Tio v. Videogram (1987)]
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the Tests in Determining Public Purpose:
language of a rule, however beneficent its 5888 Duty Test - Whether the thing to be
intention, beyond the fair and ordinary meaning furthered by the appropriation of public
of its language. revenue is something which is the duty of the
State as a government to provide.
A penal statute should be construed strictly against 5889 Promotion of General WelfareTest -
the State and in favor of the accused. The reason Whether the proceeds of the tax will directly
for this principle is the tenderness of the law for the promote the welfare of the community in equal
rights of individuals and the object is to establish a measure.
certain rule by conformity to which mankind would 5890 Character of the Direct Object of the
be safe, and the discretion of the court limited. Expenditure it is the essential character of the
(People v. Purisima, 86 SCRA 524 [1978]). direct object of the expenditure which must
determine its validity as justifying a tax and not the
Non-retroactivity of tax laws magnitude of the interests to be affected nor the
General rule: Tax laws are prospective in operation. degree to which the general advantage of the
The reason is that the nature and amount of the tax community, and thus the public welfare, may be
could not be foreseen and understood by the taxpayer ultimately benefited by their promotion. Incidental
at the time the transaction which the law seeks to tax advantage to the public or to the State, which
was completed. results from the promotion of private enterprises or
business, does not justify their aid with public
Exception:Tax laws may be applied retroactively money. [Pascual v. Sec. of Public Works]
provided it is expressly declared or clearlythelegislative
intent. (Lorenzo v. Posadas, 64 Phil. 353 [1937]). Inherently Legislative
Stated in another way, taxation may exceptionally be
Exception to the exception:a tax law should not be delegated, subject to such well-settled limitations as
given retroactive application when it would be so
harsh and oppressive for in such case, the 23 The delegation shall not contravene any
constitutional limitation of due process would be constitutional provision or the inherent
violated (Republic v. Fernandez, 99 Phil. 934 [1956]). limitations of taxation;

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0 The delegation is effected either by the 0 Delegation to administrative agencies - Limited


Constitution or by validly enacted legislative to the administrative implementation that calls for
measures or statute; and some degree of discretionary powers under
1 The delegated levy power, except when the sufficient standards expressed by law or implied
delegation is by an express provision of the from the policy and purposes of the Act.
Constitution itself, should only be in favor of the 0 There are certain aspects of the taxing process
local legislative body of the local or municipal that are not legislative and they may, therefore,
government concerned. [Vitug and Acosta] be vested in an administrative body. The
powers which are not legislative include:
General Rule: Delegata potestas non potest (1) the power to value property for purposes
delegari. The power to tax is exclusively vested in of taxation pursuant to fixed rules; (2) the
the legislative body and it may not be re-delegated. power to assess and collect the taxes; and
(3) the power to perform any of the
Legislature has the to determine: innumerable details of computation,
0 nature (kind), appraisement, and adjustment, and the
1 object (purpose), delegation of such details.
2 extent (rate), 1 The exercise of the above powers is really not
3 coverage (subjects) and an exception to the rule as no delegation of the
4 situs (place) of taxation. strictly legislative power to tax is involved.
2 The powers which cannot be delegated
The court cannot freely delve into those matters include the determination of the subjects to
which, by constitutional fiat, rightly rest on be taxed, the purpose of the tax, the amount
legislative judgment.[Tan v. Del Rosario (1994)] or rate of the tax, the manner, means, and
agencies of collection, and the prescribing of
Exceptions the necessary rules with respect thereto.
0 Delegation to local governments - This
exception is in line with the general principle that Territorial
the power to create municipal corporations for Rule: A state may not tax property lying outside its
purposes of local self-government carries with it, borders or lay an excise or privilege tax upon the
by necessary implication, the power to confer the exercise or enjoyment of a right or privilege derived
power to tax on such local governments. (1 from the laws of another state and therein exercise
Cooley 190). This is logical for after all, municipal and enjoyed. (51 Am.Jur. 87-88).
corporations are merely instrumentalities of the
state for the better administration of the Reasons:
government in respect to matters of local concern. 23 Tax laws (and this is true of all laws) do not
(Pepsi-Cola Bottling Co. of the Phil. Inc. v. Mun. of operate beyond a countrys territorial limits.
Tanauan, 69 SCRA 460 [1976]). Under the new 24 Property which is wholly and exclusively
Constitution, however, LGUs are now expressly within the jurisdiction of another state
given the power to create its own sources of receives none of the protection for which a
revenue and to levy taxes, fees and charges, tax is supposed to be a compensation.
subject to such guidelines and limitations as the
Congress may provide which must be consistent Note:Where privity of relationship exists. - It does not
with the basic policy of local autonomy. [Art X, Sec mean, however, that a person outside of state is no
5, 1987 Constitution] longer subject to its taxing powers. The fundamental
basis of the right to tax is the capacity of the
1 Delegation to the President government to provide benefits and protection to the
0 to enter into Executive agreements, and object of the tax. A person may be taxed where there
1 to ratify treaties which grant tax exemption is between him and the taxing state, a privity of the
subject to Senate concurrence. relationship justifying the levy. Thus, the citizens
The Congress may, by law, authorize the income may be taxed even if he resides abroad as
President to fix within specified limits, and the personal (as distinguished from territorial)
subject to such limitations and restrictions as it jurisdiction of his government over him remains. In
may impose, tariff rates, import and export this case, the basis of the power to tax is not
quotas, tonnage and wharfage dues, and other dependent on the source of the income nor upon the
duties or imposts within the framework of the location of the property nor upon the residence of the
national development program of the taxpayer but upon his relation as a citizen to the state.
Government. [Art. 6, Sec. 28 (2), 1987 Consti] As such citizen, he is entitled, wherever he may

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be, inside or outside of his country, to the International Comity


protection of his government. Comity - respect accorded by nations to each other
because they are sovereign equals. Thus, the
Within the territorial jurisdiction, the taxing property or income of a foreign state or government
authority may determine the situs. Situs of may not be the subject of taxation by another state.
taxation literally means the place of taxation.
The basic rule is that the state where the subject Reasons:
to be taxed has a situs may rightfully levy and 23 In par in parem non habet imperium. As
collect the tax; and the situs is necessarily in the between equals there is no sovereign
state which has jurisdiction or which exercises (Doctrine of Sovereign Equalityamong states
dominion over the subject in question. under international law). One state cannot
exercise its sovereign powers over another.)
Factors that Determine Situs: 24 In international law, a foreign government may
0 Nature of the tax; not be sued without its consent useless to
1 Subject matter of the tax (person, property, act impose a tax which could not be collected.
or activity); 25 Usage among states that when a foreign
2 Possible protection and benefit that may accrue sovereign enters the territorial jurisdiction of
both to the government and the taxpayer; another, there is an implied understanding
3 Citizenship of the taxpayer; that the former does not intend to degrade its
4 Residence of the taxpayer; dignity by placing itself under the jurisdiction
5 Source of income. of the other.
26 Rule in international law that a foreign
Kind of Tax Situs government may not be sued without its
Property Tax consent so that it is useless to assess the tax
anway since it cannot be collected.
Real property Where it is located (lexreisitae)
Tangible Where property is physically Exemption of Government Entities, Agencies, and
Personal located although the owner
Instrumentalities
property resides in another jurisdiction.
Intangible Gen Rule: Domicile of the owner. If the taxing authority is the National Government:
personal Mobiliasequunturpersonam General Rule:Agencies and instrumentalities of
property (e.g., (movables follow the person) the government are exempt from tax.
credits, bills
receivables, Exceptions: Note: Unless otherwise provided by law, the
bank deposits, (1) When property has acquired a exemption applies only to government entities
bonds, business situs in another through which the government immediately and
promissory jurisdiction; or directly exercises its sovereign powers. With
notes, (2) When the law provides for the respect to government-owned or controlled
mortgage situs of the subject of tax (e.g., corporations performing proprietary (not
loans, Sec 104, NIRC) governmental) functions, they are generally subject
judgments and to tax in the absence of tax exemption provisions in
corporate their charters or the law creating them.
stocks)
Excise Tax Reasons for the exemption: (1) To levy a tax upon
Income Source of the income, nationality public property would render necessary new taxes on
or residence of taxpayer (Sec. 23, other public property for the payment of the tax so laid
NIRC) and thus, the government would be taxing itself to
Donors Tax Location of property; nationality raise money to pay over for itself. (2) This immunity
or residence of taxpayer also rests upon fundamental principles of
Estate Location of property; nationality government, being necessary in order that the
or residence of taxpayer functions of government shall not be unduly impeded.
VAT Where transaction is made (1 Cooley 263). (3) The practical effect of an
Others exemption running to the benefit of the government is
Poll, Residence of taxpayer, regardless merely to reduce the amount of money that has to be
Capitation or of the source of income or handled by the government in the course of its
Community location of the property of the operations: It is for these reasons that provisions
Tax taxpayer granting exemptions to government agencies may

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be construed liberally in favor of non-tax liability among the taxpayers which under the
of such agencies. (Maceda v. Macaraig, Jr., 197 Constitution must be equitable. Equitable
SCRA 771 [1991]). means fair, just, reasonable and proportionate
tothe taxpayersability to pay. Taxation may be
Exception: When it chooses to tax itself. Nothing uniform but inequitable where the amount of the
can prevent Congress from decreeing that even tax imposed is excessive or unreasonable. (2)
instrumentalities or agencies of the government The constitutional requirement of equity in
performing governmental functions may be subject taxation also implies an approach which
to tax. (Mactan Cebu Airport v Marcos, 1996) employees a reasonable classification of the
There is no constitutional prohibition against the entities or individuals who are to be affected by
government taxing itself. (Coll. v. Bisaya Land a tax. Where the tax differentiation is not based
Transportation, 105 Phil. 338 [1959]). on material or substantial differences, the
guarantee of equal protection of the laws and
If the taxing authority is the local government the uniformity rule will likewise be infringed.
unit:RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its Taxation does not require identity or equality
agencies and instrumentalities and other LGUs. under all circumstances, or negate the
authority to classify the objects of taxation.
CONSTITUTIONAL LIMITATIONS
Classification to be valid, must, be reasonable and
this requirement is not deemed satisfied unless:
Provisions Directly Affecting Taxation 0 it is based upon substantial distinctions which
make real differences;
1 these are germane to the purpose of the
Prohibition against imprisonment for non- legislation or ordinance;
payment of poll tax 2 the classification applies, not only to present
Art III, Sec 20, 1987 Constitution- No person shall be conditions, but, also, to future conditions
imprisoned for debt or non-payment of a poll tax. substantially identical to those of the present;
and
Uniformity and equality of taxation 3 the classification applies equally to all those
Art VI, Sec 28(1), 1987 Constitution- The rule of who belong to the same class.
taxation shall be uniform and equitable. Congress (Pepsi-Cola v. Butuan City, 24 SCRA 789)
shall evolve a progressive system of taxation.
0 Uniformity- All taxable articles or properties of the The progressive system of taxation would place
same class shall be taxed at the same rate. (City stress on direct rather than indirect taxes, on non-
of Baguio v. de Leon, 25 SCRA 938). (1) essentiality rather than essentiality to the taxpayer
Uniformity of operation throughout tax unit - The of the object of taxation, or on the taxpayers ability
rule requires the uniform application and to pay. Example is that individual income tax
operation, without discrimination, of the tax in system that imposes rates progressing upwards as
every place where the subject of it is found. This the tax base (taxpayers taxable income)
means, for example, that a tax for a national increases. A progressive tax, however, must not be
purpose must be uniform and equal throughout confused with a progressive system of taxation.
the country and a tax for a province, city,
municipality, or barangay must be uniform and While equal protection refers more to like treatment
equal throughout the province, city, municipality or of persons in like circumstances, uniformity and
barangay. (2) Equality in burden Uniformity equity refer to the proper relative treatment for tax
implies equality in burden, not equality in amount purposes of persons in unlike circumstances.
or equality in its strict and literal meaning. The
reason is simple enough. If legislation imposes a Grant by Congress of authority to the
single tax upon all persons, properties,or President to impose tariff rates
transactions, an inequality would obviously result Delegation of Tariff powers to the President
considering that not all persons, properties, and under the flexible tariff clause [Art VI, Sec 28(2),
transactions are identical or similarly situated. 1987 Constitution], which authorizes the
Neither does uniformity demand that taxes shall President to modify import duties. (Sec. 401,
be proportional to the relative value or amount of Tariff and Customs Code)
the subject thereof. Taxes may be progressive.
1 Equity 1) Uniformity in taxation is effected
through the apportionment of the tax burden

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Prohibition against taxation of religious, TEST whether an enterprise is charitable or not:


charitable entities, and educational entities whether it exists to carry out a purpose
Art VI, Sec 28(3), 1987 Constitution: recognized in law as charitable or whether it is
0 Charitable institutions, churches and maintained for gain, profit, or private advantage.
personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all A charitable institution does not lose its character as
lands, buildings, and improvements, such and its exemption from taxes simply because it
1 actually, directly, and exclusively used for derives income from paying patients, whether out-
religious, charitable, or educational purposes patient, or confined in the hospital, or receives
shall be exempt from taxation. subsidies from the government, so long as the money
2 The tax exemption under this constitutional received is devoted or used altogether to the
provision covers property taxes only and not charitable object which it is intended to achieve; and
other taxes (Lladoc v. Commissioner, 14 no money inures to the private benefit of the persons
SCRA 292 [1965]). managing or operating the institution.

In general, special assessments are not covered Exclusive" - possessed and enjoyed to the
by the exemption because by nature they are exclusion of others; debarred from participation
not classified as taxes. [Apostolic Prefect v. City or enjoyment; "Exclusively" - "in a manner to
Treasurer of Baguio] exclude; as enjoying a privilege exclusively.

To be entitled to the exemption, the petitioner If real property is used for one or more commercial
must prove that: purposes, it is not exclusively used for the
0 it is a charitable institution exempted purposes but is subject to taxation.The
1 its real properties are actually, directly and words "dominant use" or "principal use" cannot be
exclusively used for charitable purposes. substituted for the words "used exclusively" without
doing violence to the Constitutions and the law.
Revenue or income from trade, business or other Solely is synonymous with exclusively. [Lung
activity, the conduct of which is not related to the Center of the Philippines v. Quezon City (2004)]
exercise or performance of religious, educational
and charitable purposes or functions shall be Note: Lung Center did not necessarily overturn the
subject to internal revenue taxes when the same is case of Abra Valley College v. Aquino (1988). Lung
not actually, directly or exclusively used for the Center just provided a stricter interpretation. In
intended purposes. (BIR Ruling 046-2000) Abra Valley, the court held: The primary use of the
school lot and building is the basic and controlling
Test of Use of the property, and not the guide, norm and standard to determine tax
Exemption ownership exemption, and not the mere incidental use thereof.
Actual, direct and exclusive use Under the 1935 Constitution, the trial court
Nature of Use for religious, charitable or correctly held that the school building as well as the
educational purposes. lot where it is built, should be taxed, not because
Real property taxes on facilities the second floor of the same is being used by the
which are Director and his family for residential purposes
(1) actual, (incidental to its educational purpose), but because
(2) incidental to, or the first floor thereof is being used for commercial
(3) reasonably necessary for the purposes. However, since only a portion is used for
accomplishment of said purposes of commerce, it is only fair that half of the
purposes such as in the case of assessed tax be returned to the school involved.
hospitals, a school for training
Scope of nurses, a nurses home, Prohibition against taxation of non-stock,
Exemption property to provide housing non-profit educational institutions
facilities for interns, resident ART XIV, SEC 4, 1987 CONSTITUTION
doctors and other members xxx
of the hospital staff, and 0 All revenues and assets of non-stock, non-profit
recreational facilities for educational institutions used actually, directly, and
student nurses, interns and exclusively for educational purposes shall be
residents, such as athletic exempt from taxes and duties.
fields. [Abra Valley College Proprietary educational institutions, including
v. Aquino] those cooperatively owned, may likewise be

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entitled to such exemptions, subject to the 5888 No law granting any tax exemption shall
limitations provided by law, including restrictions be passed without the concurrence of a
on dividends and provisions for reinvestment. majority of all the Members of the Congress.
0 Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used Basis: The inherent power of the state to impose
actually, directly, and exclusively for educational taxes carries with it the power to grant tax
purposes shall be exempt from tax. exemptions.

This provision covers only non-stock, non-profit Exemptions may be created by:
educational institutions 0 the Constitution or
1 statute subject to constitutional limitations
The exemption covers income, property, and donors
taxes, custom duties, and other taxes imposed by Vote required for the grant of exemption: Absolute
either or both the national government or political majority of the members of Congress (at least +
subdivisions on all revenues, assets, property or 1 of ALL the members voting separately)
donations, used actually, directly and exclusively for
educational purposes. (In the case of religious and Vote required for withdrawal of such grant of
charitable entities and non-profit cemeteries, the exemption: Relative majority is sufficient
exemption is limited to property tax.) (majority of the quorum).
The provision guaranteeing equal protection of
The exemption does not cover revenues derived the laws and that mandating the rule of taxation
from, or assets used in, unrelated activities or shall be uniform and equitable likewise limit,
enterprise. although not expressly, the legislative power to
grant tax exemption.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions by Grants in the nature of tax exemptions:
law subject to such limitations as it may provide, 5888 Tax amnesties
including restrictions on dividends and 5889 Tax condonations
provisions for reinvestment. The restrictions are 5890 Tax refunds
designed to insure that the tax-exemption
benefits are used for educational purposes. Note:
0 The LGU shall have the authority to grant local
Lands, buildings, and improvements actually, tax exemption privileges. (Sec. 192, LGC)
directly and exclusively used for educational 1 The President may, when public interest so
purposes are exempt from property tax (Sec. 28[3], requires, condone or reduce real property
Art. VI, 1987 Constitution), whether the educational taxes and interest. (Sec. 277, LGC)
institution is proprietary or non-profit.
Prohibition on use of tax levied for special purpose
Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3 All money collected on any tax levied for a
Charitable institutions, Non-stock, non-profit special purpose shall be treated as a special
churches and parsonages educational institutions. fund and paid out for such purpose only.
or convents appurtenant If the purpose for which a special fund was
thereto, mosques, non- created has been fulfilled or abandoned, the
profit cemeteries, and all balance, if any, shall be transferred to the
general funds of the Government (see Gaston v.
lands, buildings, and
Republic Planters Bank, 158 SCRA 626).
improvements, actually,
directly, and exclusively
used for religious, Presidents veto power on appropriation,
charitable, or educational revenue, tariff bills
purposes. ART VI, SEC 27(2),
1987 CONSTITUTION
Property taxes Income, property, and 0 The President shall have the power to veto any
donors taxes and particular item or items in an appropriation,
custom duties. revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object.
Majority vote of Congress for grant of tax exemption
ART VI, SEC 28, 1987 CONSTITUTION
xxx

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Non-impairment of jurisdiction of the Supreme Court


ART VIII, SEC 2, 1987 CONSTITUTION Exemption from real property taxes
The Congress shall have the power to define, ART VI, SEC 28(3), 1987 CONSTITUTION
prescribe, and apportion the jurisdiction of the Charitable institutions, churches and personages
various courts but may not deprive the Supreme or convents appurtenant thereto, mosques, non-
Court of its jurisdiction over cases enumerated profit cemeteries, and all lands, buildings, and
in Section 5 hereof. improvements, actually, directly, and exclusively
used for religious, charitable, or educational
ART VIII, SEC 5(2,B), 1987 CONSTITUTION purposes shall be exempt from taxation.
The Supreme Court shall have the following
powers: xxx (2) Review, revise, modify or affirm on No appropriation or use of public money for
appeal or certiorari, as the laws or the Rules of religious purposes
Court may provide, final judgments and orders of ART VI, SEC 29, 1987 CONSTITUTION
lower courts in xxx (b) all cases involving the 0 No money shall be paid out of the Treasury
legality of any tax, impost, assessment or toll or except in pursuance of an appropriation
any penalty imposed in relation thereto. made by law.
1 No public money or property shall be
San Miguel Corp v. Avelino: Even the legislative appropriated, applied, paid, or employed, directly
body cannot deprive the SC of its appellate or indirectly, for the use, benefit, or support of any
jurisdiction over all cases coming from inferior sect, church, denomination, sectarian institution,
courts where the constitutionality or validity of an or system of religion, or of any priest, preacher,
ordinance or the legality of any tax, impost, minister, other religious teacher, or dignitary as
assessment, or toll is in question. such, except when such priest, preacher, minister,
or dignitary is assigned to the armed forces, or to
ART VI, SEC 30, 1987 CONSTITUTION any penal institution, or government orphanage or
No law shall be passed increasing the appellate leprosarium.
jurisdiction of the Supreme Court without its 2 All money collected on any tax levied for a
advice and concurrence. special purpose shall be treated as a special
fund and paid out for such purpose only. If
Scope of Judicial Review in taxation: limited only the purpose for which a special fund was
to the interpretation and application of tax laws. created has been fulfilled or abandoned, the
Its power does not include inquiry into the policy balance, if any, shall be transferred to the
of legislation. Neither can it legitimately question general funds of the Government.
or refuse to sanction the provisions of any law
consistent with the Constitution. (Bisaya Land Provisions Indirectly Affecting Taxation
Transportation Co v. Collector, May 29, 1959)
Due process
Grant of power to the local government units ART III, SEC 1, 1987 CONSTITUTION
to create its own sources of revenue No person shall be deprived of life, liberty, or
LGUs have power to create its own sources of property without due process of law, nor shall any
revenue and to levy taxes, fees and charges, person be denied the equal protection of the laws.
subject to such guidelines and limitations as the
Congress may provide which must be consistent 0 Substantive Due Process An act is done
with the basic policy of local autonomy. [Art X, under the authority of a valid law or the
Sec 5, 1987 Constitution] Constitution itself.

Flexible tariff clause 1 Procedural Due Process An act is done


Delegation of Tariff powers to the President after compliance with fair and reasonable
under the flexible tariff clause [Art VI, Sec 28(2), methods or procedure prescribed by law.
1987 Constitution]
Due Process in Taxation requirements:
Flexible tariff clause: the authority given to the 0 public purpose
President, upon the recommendation of NEDA, 1 imposed within taxing authoritys territorial
to adjust the tariff rates under Sec. 401 of the jurisdiction
Code in the interest of national economy, 2 assessment or collection is not arbitrary or
general welfare and/or national security. oppressive

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No law shall be made respecting an establishment


The due process clause may be invoked where of religion, or prohibiting the free exercise thereof.
a taxing statute is so arbitrary that it finds no (non-establishment clause)
support in the Constitution, as where it can be The free exercise and enjoyment of religious
shown to amount to the confiscation of property. profession and worship, without discrimination or
(Sison v. Ancheta) preference, shall forever be allowed. (free
exercise clause)
Instances of violations of the due process clause: No religious test shall be required for the
0 If the tax amounts to confiscation of property; exercise of civil or political rights.
1 If the subject of confiscation is outside the
jurisdiction of the taxing authority; The free exercise clause is the basis of tax
2 If the tax is imposed for a purpose other than exemptions.
a public purpose;
3 If the law which is applied retroactively The imposition of license fees on the distribution and
imposes just and oppressive taxes. sale of bibles and other religious literature by a non-
4 If the law violates the inherent limitations on stock, non-profit missionary organization not for
taxation. purposes of profit amounts to a condition or permit for
the exercise of their right, thus violating the
Equal protection constitutional guarantee of the free exercise and
ART III, SEC 1, 1987 CONSTITUTION
enjoyment of religious profession and worship which
No person shall be deprived of life, liberty, or carries with it the right to disseminate religious beliefs
property without due process of law, nor shall any and information. [American Bible Society v. City of
person be denied the equal protection of the laws. Manila, L-9637 April 30, 1957]It is actually in the
nature of a condition or permit for the exercise of the
All persons subject to legislation shall be treated right.This is different from a tax in the income of one
alike under similar circumstances and conditions who engages in religious activities or a tax on
both in the privileges conferred and liabilities property used or employed in connection with those
imposed. (1 Cooley 824-825; See Sison v. activities. It is one thing to impose a tax on the income
Ancheta, 130 SCRA 654 [1984]). or property of a preacher. It is quite another thing to
exact a tax for the privilege of delivering a sermon.
The doctrine does not require that persons or (American Bible Society v. City of Manila)
properties different in fact be treated in laws as
though they were the same. Indeed, to treat them the The Constitution, however, does not prohibit
same or alike may offend the Constitution. What the imposing a generally applicable tax on the sale
Constitution prohibits is class legislation which of religious materials by a religious organization.
discriminates against some and favors others. As long (Tolentino v. Secretary of Finance, 235 SCRA
as there are rational or reasonable grounds for so 630 [1994])
doing, Congress may, therefore, group the persons or
properties to be taxed and it is sufficient Non-impairment of obligations of contracts
if all of the same class are subject to the same rate ART III, SEC 10, 1987 CONSTITUTION
and the tax is administered impartially upon them. No law impairing the obligation of contracts shall
(1 Cooley 608). be passed.
The equal protection clause is subject to reasonable
The Contract Clause has never been thought as
classification. Classification is valid as long as:
a limitation on the exercise of the State's power
0 classification rests on substantial distinctions of taxation save only where a tax exemption has
which make real differences, been granted for a valid consideration.
1 classification is germane to achieve the [Tolentino v. Secretary of Finance]
legislative purpose,
2 the law applies, all things being equal, to both
present and future conditions, and STAGES OR PROCESS OF TAXATION
3 the classification applies equally well to all The exercise of taxation involves three
those belonging to the same class. stages, namely:
(1) LEVY OR IMPOSITION This process involves the
Religious freedom passage of tax laws or ordinances through the
ART III, SEC 5, 1987 CONSTITUTION legislature. The tax laws to be passed shall
determine those to be taxed (person, property or

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rights), how much is to be collected (the rate and Taxes Toll


the base of tax), and how taxes are to be
implemented (the manner of imposing and
collecting tax). It also involves the granting of tax used.
exemptions, tax amnesties or tax condonation. Imposed only by the Imposed by the
(2) ASSESSMENT AND COLLECTION This process government government or by
involves the act of administration and private individuals or
implementation of tax laws by the executive entities.
through its administrative agencies such as
the Bureau of Internal Revenue or Bureau of A toll is a sum of money for the use of something,
Customs. generally applied to the consideration which is paid
(3) PAYMENT this process involves the act of for the use of a road, bridge or the like, of a public
compliance by the taxpayer in contributing nature. (1 Cooley 77.)
his share to pay the expenses of the
government. Payment of tax also includes The view has been expressed, however, that the
the options, schemes or remedies as may be taking of tolls is only another method of taxing
legally open or available to the taxpayer. the public for the cost of the construction and
repair of the improvement for the use of which
REQUISITES OF A VALID TAX the toll is charged. (71 Am. Jur. 2d 351.)
0 for a public purpose
1 rule of taxation should be uniform LICENSE FEE
2 the person or property taxed is within the Taxes License and Regulatory
jurisdiction of the taxing authority Fee
3 assessment and collection is in consonance Imposed under the Levied under the police
with the due process clause
taxing power of the power of the state.
4 The tax must not infringe on the inherent and
state for purposes of
constitutional limitations of the power of taxation
revenue.
TAX AS DISTINGUISHED FROM OTHER FORMS Forced contributions for Exacted primarily to
the purpose of regulate certain
OF EXACTIONS
maintaining businesses or
government functions. occupations.
TARIFF Generally, unlimited as Should not
Taxes Tariff to amount unreasonably exceed
the expenses of issuing
the license and of
All embracing term to A kind of tax imposed on supervision.
include various kinds of articles which are traded Imposed on persons, Imposed only on the
enforced contributions internationally property and to exercise right to exercise a
upon persons for the a privilege. privilege
attainment of public Failure to pay does not Failure to pay makes the
purposes necessarily make the act act or business illegal.
TOLL
or business illegal.

Penalty for non-


payment: surcharges
Taxes Toll or imprisonment
(except poll tax).
Paid for the support of Paid for the use of License or permit fee is a charge imposed under
the government anothers property. the police power for purposes of regulation.
Demand of sovereignty Demand of
proprietorship License is in the nature of a special privilege, of a
Generally, no limit on Amount paid depends permission or authority to do what is within its
the amount collected as upon the cost of terms. It makes lawful an act which would
long as it is not construction or otherwise be unlawful. A license granted by the
excessive, unreasonable maintenance of the State is always revocable. (Gonzalo Sy Trading vs.
or confiscatory public improvement Central Bank of the Phil., 70 SCRA 570 [1976])

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Importance of the distinctions Taxes Special Assessment


0 It is necessary to determine whether a particular
imposition is a tax or a license fee because some
limitations apply only to one and not to the other, Imposed regardless of Imposed because of an
and for the reason that exemption from taxes may public improvements increase in value of land
not include exemption from license fee. benefited by public
1 The power to regulate as an exercise of police improvement.
power does not include the power to impose Contribution of a Contribution of a person
fees for revenue purposes. The amount of tax taxpayer for the support for the construction of a
bears no relation at all to the probable cost of of the government. public improvement
regulating the activity, occupation, or property It has general Exceptional both as to
being taxed. (see Progressive Development application both as to time and locality.
Corp. vs. Quezon City, 172 SCRA 629 [1989]) time and place.
2 An exaction, however, may be considered both
a tax and a license fee. This is true in the case A special assessment is not a personal liability
of car registration fees which may be regarded of the person assessed, i.e., his liability is limited
as taxes even as they also serve as an only to the land involved. It is based wholly on
instrument of regulation. If the purpose is benefits (not necessity).
primarily revenue, or if revenue, is, at least, one
of the real and substantial purposes, then the A charge imposed only on property owners
exaction is properly called a tax. (Phil. Airlines, benefited is a special assessment rather than a
Inc. vs. Edu, 164 SCRA 320 [1988]) tax notwithstanding that the statute calls it a tax.
3 But a tax may have only a regulatory purpose. The The rule is that an exemption from taxation does
general rule, however, is that the imposition is a not include exemption from special assessment.
tax if its primary purpose is to generate revenue, But the power to tax carries with it the power to
and regulation is merely incidental; but if levy a special assessment.
regulation is the primary purpose, the fact that
incidentally revenue is also obtained does not Note: The term "special levy" is the name used in the
make the imposition a tax. (see Progressive present Local Government Code (RA. No. 7160). A
Development Corp. vs. Quezon City) province, city, or municipality, or the National
Government, may impose a special levy on lands
Progressive Development Corp v. QC (1989): To be especially benefited by public works or improvements
considered a license fee (PRIMARY PURPOSE TEST): financed by it (see Sec. 240, RA 7160).
0 imposition must relate to an occupation or
activity that so engages the public interest in DEBT
health, morals, safety and development as to Taxes Debt
require regulation for the protection and
promotion of such public interest;
1 imposition must bear a reasonable relation to Based on laws Generally based on
the probable expenses of regulation, taking into contract, express or
account not only the costs of direct regulation implied.
but also its incidental consequences as well. Generally cannot be Assignable
assigned
Note:Taxes may also be imposed for regulatory Generally paid in money May be paid in kind.
purposes. It is called regulatory tax. Cannot be a subject of Can be a subject of set
set off or compensation off or compensation (see
Fees may be properly regarded as taxes even though Art. 1279, Civil Code)
they also served as an instrument of regulation. If the A person cannot be Imprisonment is a
purpose is primarily revenue, or if revenue is, at least, imprisoned for non- sanction for non-
one of the real and substantial purposes, then the payment of debt (except payment of tax, except
exaction is properly called a tax.[PAL v. Edu (1988)] when it arises from a poll tax.
crime),
SPECIAL ASSESSMENT
Governed by the special Governed by the
Taxes Special Assessment prescriptive periods ordinary periods of
provided for in the NIRC. prescription.
Does not draw interest Draws interest when it is
Levied not only on land. Levied only on land. except only when so stipulated or where

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

Taxes Debt privilege tax and the two are often used
interchangeably. (e.g., income tax, value
added tax, estate tax, donors tax).
delinquent there is default.
Imposed only by public Can be imposed by AS TO BURDEN OR INCIDENCE
authority private individual 0 Direct Taxes taxes which are demanded from
persons also shoulder them; taxes for which the
A tax is not a debt in the ordinary sense of the word. taxpayer is directly or primarily liable or which
he cannot shift to another (eg. Income tax,
PENALTY estate tax, donors tax, community tax)
Taxes Penalty 1 Indirect Taxes taxes which are demanded from
one person in the expectation andintention that he
shall indemnify himself at the expense of another,
Violation of tax laws Any sanction imposed as falling finally upon the ultimate purchaser or
may give rise to a punishment for consumer; taxes levied upon transactions or
imposition of penalty. violation of law or acts activities before the articles subject matter thereof
deemed injurious reach the consumers who ultimately pays for them
Generally intended to Designed to regulate not as taxes but as part of the purchase price.
raise revenue conduct Thus, the person who absorbs or bears the
burden of the tax is other than the one on whom it
May be imposed only by May be imposed by the
is imposed and required by law to pay the tax.
the government government or private
Practically all business taxes are indirect. (e.g.,
individuals or entities
VAT, percentage tax; excise taxes on specified
Cannot be a subject of Can be a subject of set
goods; customs duties).
set off or compensation off or compensation (see
Art. 1279, Civil Code)
AS TO TAX RATES
0 Specific Tax a tax of a fixed amount imposed
KINDS OF TAXES by the head or number or by some other
standard of weight or measurement. It requires
AS TO OBJECT no assessment (valuation) other than the listing
0 Personal, Poll or Capitation Tax tax of a fixed or classification of the objects to be taxed. (e.g.,
amount imposed on persons residing within a taxes on distilled spirits, wines, and fermented
specified territory, whether citizens or not, without liquors; cigars and cigarettes)
regard to their property or the occupation or 1 Ad Valorem Tax a tax of a fixed proportion of the
business in which they may be engaged. (e.g. value of the property with respect to which the tax
community (formerly residence) tax) Taxes of a is assessed. It requires the intervention of
specified amount imposed upon each person assessors or appraisers to estimate the value of
performing a certain act or engaging in a certain such property before the amount due from each
business or profession are not, however, poll taxpayer can be determined. The phrase ad
taxes. (71 Am.Jur.2d 357). valorem means literally, according to value.
1 Property Tax tax imposed on property, real (e.g. real estate tax, excise tax on
or personal, in proportion to its value or in automobiles, non-essential goods such as
accordance with some other reasonable jewelry and perfumes, customs duties
method of apportionment. (e.g., real estate (except on cinematographic films)).
tax) The obligation to pay the tax is absolute 2 Mixed
and unavoidable and is not based upon the
voluntary action of the person assessed. AS TO PURPOSES
2 Privilege/Excise Tax any tax which does not fall
0 General Tax levied for the general or ordinary
within the classification of a pool tax or a property
purposes of the Government, i.e., to raise
tax. Thus, it is said that an excise tax is a charge
revenue for governmental needs, e.g. income
imposed upon the performance of an act, the
tax, value added tax, and almost all taxes.
enjoyment of a privilege, or the engaging in an
1 Special or Regulatory Tax levied for special
occupation, profession, or business. The
purposes i.e., to achieve some social or economic
obligation to pay the tax is based on the voluntary
ends irrespective of whether revenue is actually
action of the person taxed in performing the act or
raised or not, e.g. protective tariffs or customs
engaging in the activity which is subject to the
duties on imported goods to enable similar
excise. The term excise tax is synonymous with
products manufactured locally to compete with

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such imports in the domestic market. Tariff duties 0 Regressive the rate of which decreases as
intended mainly as a source of revenue are the tax base or bracket increases. There is
relatively low so as not to discourage imports. no such tax in the Philippines.

AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX ) Regressive/progressive system of taxation


0 National taxes imposed by the national 0 A regressive tax, must not be confused with
government. (e.g. national internal revenue regressive system of taxation. (a) In a society
taxes, customs duties, and national taxes where the majority of the people have low
imposed by laws) incomes, it exists when there are more indirect
1 Municipal or Local taxes imposed by local taxes imposed than direct taxes. Since the low-
governments (e.g. business taxes that may income sector of the population as a whole buys
be imposed under the Local Government more consumption goods on which the indirect
Code; professional tax) taxes are collected, the burden of indirect taxes
rests more on them than on the more affluent
AS TO GRADUATION groups. There should be no objection if indirect
0 Proportional based on a fixed percentage taxes are raised on luxury items consumed mainly
of the amount of the property receipts or by the higher income groups and reduced on
other basis to be taxed. basic commodities consumed by the lower income
Example: real estate tax, value added tax, segments of society. (b) Studies reveal that the
and other percentage taxes. progressive elements of the income and other
1 Progressive the rate of which increases as direct taxes have not sufficiently offset the
the tax base or bracket increases. regressive effects of the indirect taxes as a whole.
Example: income tax, estate tax, donors tax. 1 A progressive tax is, therefore, also different
2 Digressive Tax Rate progressive rate stops from a progressive system of taxation.
at a certain point. Progression halts at a
particular stage.
National Internal Revenue Code of 1997 as located in the Philippines (Sec. 24 (B), Sec. 25
amended (NIRC) (A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC).

Income Taxation Purpose of Income Tax:


0 To raise revenue to defray the expenses of
the government; and
0 Income Tax is defined as a tax on all yearly
profits arising from property, professions, 1 To mitigate the evils arising from the
trades, or offices, or as a tax on the persons inequalities of wealth by a progressive
income, emoluments, profits and the like scheme of taxation which places the burden
(Fisher v. Trinidad, 43 Phil. 981). of on those best able to pay (Madrigal v.
1 It may be succinctly defined as a tax on income,
Rafferty & Concepcion, 38 Phil. 414).
whether gross or net, realized in one taxable year.
2 Income tax is generally classified as an INCOME TAX SYSTEMS
excise tax. It is not levied upon persons, GLOBAL TAX SYSTEM
property, funds or profits but upon the right of Under a global tax system, it did not matter whether
a person to receive income or profits. the income received by the taxpayer is classified as
3 In the Philippines, income tax is imposed on the compensation income, business or professional
net income of citizens, resident aliens, domestic income, passive investment income, capital gain, or
corporations, and nonresident aliens and foreign other income. All items of gross income, deductions,
corporations engaged in trade or business within and personal and additional exemptions, if any, are
the Philippines (Sec. 24 (A), Sec. 25 (A), Sec. 27 reported in one income tax return, and one set of tax
(A), Sec. 28 (A), NIRC). It is also imposed on the rates are applied on the tax base.
gross income of nonresident aliens and foreign
corporations-not doing business in the Philippines SCHEDULAR TAX SYSTEM
(Sec. 25 (B), (C), (D), Sec. 28 (B), NIRC). Different types of incomes are subject to different
It is further imposed as a final tax on certain sets of graduated or flat income tax rates. The
passive income (interests, royalties, prizes, and applicable tax rate(s) will depend on the
other winnings), cash and property dividends, classification of the taxable income and the basis
capital gains from the sale of domestic shares of could be gross income or net income.Separate
stock and real property classified as capital assets income tax returns (or other types of return

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

applicable) are filed by the recipient of income CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
for the particular types of income received. CITIZENSHIP OR NATIONALITY PRINCIPLE
A citizen of the Philippines is subject to
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM Philippine income tax
All compensation income, business or professional 0 on his worldwide income, if he resides in the
income, capital gain and passive income not subject Philippines; or
to final tax, and other income are added together to 1 only on his income from sources within the
arrive at the gross income, and after deducting the Philippines, if he qualifies as a nonresident
sum of allowable deductions, the taxable income is citizen.
subjected to one set of graduated tax rates or normal
corporate income tax. With respect to such income RESIDENCE PRINCIPLE
the computation is global. A resident alien is liable to pay Philippine income
For those other income not mentioned above, tax on his income from sources within the
they remain subject to different sets of tax rates Philippines but is exempt from tax on his income
and covered by different returns. from sources outside the Philippines.

Note: The Philippines, under EO 37 (1986) and SOURCE OF INCOME PRINCIPLE


RA 8424 (1998), follows a semi-schedular and An alien is subject to Philippine income tax
semi-global tax system. because he derives income from sources within
the Philippines. Thus, a non-resident alien or
FEATURES OF THE PHILIPPINE INCOME TAX LAW non-resident foreign corporation is liable to pay
DIRECT TAX Philippine income tax on income from sources
The tax burden is borne by the income recipient within the Philippines, such as dividend interest,
upon whom the tax is imposed. rent, or royalty, despite the fact that he has not
set foot in the Philippines.
PROGRESSIVE
The tax rate increases as the tax base increases. It The income tax law adopts the most comprehensive
is founded on the ability to pay principle and is tax situs of nationality and residence of resident
consistent with Sec. 28, Art. VI, 1987 Constitution. citizens and domestic corporations that subject them
to income tax liability on their income from all sources
COMPREHENSIVE within and without the Philippines, while the law
The Philippines has adopted the most adopts the source rule with respect to income
comprehensive system of imposing income tax received by taxpayers, other than resident citizens
by adopting the citizenship principle, the and domestic corporations. (Tan v. Del Rosario, 237
residence principle, and the source principle. SCRA 324)
Any of the three principles is enough to justify
the imposition of income tax on the income of a TYPES OF PHILIPPINE INCOME TAX
resident citizen and domestic corporation that 0 Graduated income tax on individuals
are taxed on a worldwide income. 1 Normal corporate income tax on corporations
2 Minimum corporate income tax on
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM corporations
The Philippines follows the semi-schedular or semi- 3 Special income tax on certain corporations
global system of income taxation, although certain 4 Capital gains tax on sale or exchange of
passive investment incomes and capital gains from shares of stock of a domestic corp.
sale of capital assets, namely: (a) shares of stock of classified as capital assets
domestic corporations and (b) real property are 5 Capital gains tax on sale or exchange of real
subject to final taxes at preferential tax rates. property classified as capital asset
6 Final withholding tax on certain passive
NATIONAL TAX investment income paid to residents
It is imposed and collected by the National 7 Final withholding tax on income payments
Government throughout the country. made to non-residents
8 Fringe benefits tax on fringe benefits of
supervisory or managerial employees
EXCISE TAX 9 Branch profit remittance tax
It is imposed on the right or privilege of a person 10 Tax on improperly accumulated earnings of
to receive or earn income. It is not a personal corporations
tax or a property tax.

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TAXABLE PERIOD Classification


The accounting periods used in determining Citizens of Residents citizens
the taxable income of taxpayers are: the Non-resident citizens
0 Calendar Year - Accounting period of 12 Philippines
months ending on the last day of December Residents
1 Fiscal Year - Accounting period of 12 months Engaged in
ending on the last day of any month other Trade or
than December (Sec. 22(Q), NIRC). Business in
2 Short Period- Accounting period which starts after the
the first month of the tax year or ends before the Aliens Non- Philippines
last month of the tax year (less than 12 months). Individuals resident Not
s Engaged in
INSTANCES WHEREBY SHORT ACCOUNTING PERIOD ARISES
Trade or
0 When a corporation is newly organized. Business in
1 When a corporation is dissolved. the
2 When a corporation changes accounting period. Philippines
3 When the taxpayer dies.
Special Minimum Wage
"Taxable year" means the calendar year, or the Classes of
fiscal year ending during such calendar year, Earner
Individuals
upon the basis of which the net income is
computed under Title II (Tax on Income). Domestic Corporations
Resident
Taxable year includes, in the case of return Corporations Foreign Corporations
made for a fractional part of a year under the Corporations Non-resident
provisions of Title II, the period for which such Corporations
return is made (Sec. 22 (P), NIRC).
Estates and
WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING
Trusts
TAXABLE INCOME: Partnerships General Business Partnership
0 If the taxpayer's annual accounting period is General Professional Partnership
other than a fiscal year; or Co-
1 If the taxpayer has no annual accounting ownerships
period; or
2 If the taxpayer does not keep books of Individual Taxpayers
accounts; or Citizens
3 If the taxpayer is an individual (Sec. 43, NIRC). 0 Resident Citizens (RC)
1 Non-resident Citizens (NRC)
KINDS OF TAXPAYERS 0 Citizen of the Philippines who establishes
to the satisfaction of the Commissioner the
DEFINITION OF EACH KIND OF TAXPAYER fact of his physical presence abroad with a
Taxpayer- any person subject to tax imposed by definite intention to reside therein.
Title II of the Tax Code (Sec. 22(N), NIRC). 1 Citizen who leaves the Philippines during
the taxable year to reside abroad, either
Person- means an individual, a trust, as an immigrant or for employment on a
estate or corporation (Sec. 22(A), NIRC). permanent basis.
2 Citizen of the Philippines who works and
derives income from abroad and whose
For income tax purposes, taxpayers are
employment thereat requires him to be
classified generally as follows:
physically present abroad most of the time
0 Individuals;
during the taxable year.
1 Corporations;
3 Citizen previously considered as non-
2 Partnerships; and resident citizen and who arrives in the
3 Estates and Trusts. Philippines at any time during the taxable
year to reside permanently in the Philippines

Treated as NRC with respect to his
income derived from sources abroad until
Primary Sub-Classification(s) the date of his arrival in the Philippines

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Aliens 0 Domestic corporations A corporation


(1) Resident Alien created and organized under its laws (the law
of incorporation test).
An alien actually present in the Philippines who
is not a mere transient or sojourner is a resident 1 Foreign corporations A corporation which is
for income tax purposes. not domestic.

No/Indefinite Intention = RESIDENT: If he lives in Resident foreign corporations Foreign


the Philippines and has no definite intention as to corporation engaged in trade or business
his stay, he is a resident. A mere floating intention within the Philippines.
indefinite as to time, to return to another country is
not sufficient to constitute him a transient. Doing business The term implies a continuity of
commercial dealings and arrangements, and
Definite Intention = TRANSIENT: One who comes to contemplates, to that extent, the performance of
the Philippines for a definite purpose, which in its acts or works or the exercise of some of the
nature may be promptly accomplished, is a transient. functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose
Exception: Definite Intention but such cannot be and object of the business organization. (RA
promptly accomplished; If his purpose is of such 7042, Foreign Investments Act)
nature that an extended stay may be necessary
for its accomplishment, and thus the alien In order that a foreign corporation may be
makes his home temporarily in the Philippines, regarded as doing business within a State, there
then he becomes a resident. must be continuity of conduct and intention to
establish a continuous business, such as the
(2) Non-resident Alien appointment of a local agent, and not one of a
temporary character (CIR v. BOAC)
Engaged in trade or business within the Philippines -
If the aggregate period of his stay in the Philippines is Non-resident foreign corporations
more than 180 days during any calendar year. Foreign corporation not engaged in trade or
business within the Philippines
Not engaged in trade or business within the
Philippines - If the aggregate period of his stay Joint venture and consortium Essential
in the Philippines does not exceed 180 days. factors of a joint venture or consortium:
5888 Each party must make a contribution, not
Special class of individual employees necessarily of capital but by way of services,
Minimum Wage Earner skill, knowledge, material or money;
0 A worker in the private sector paid the 5889Profits must be shared among the
statutory minimum wage; parties;
1 An employee in the public sector with 5890There must be a joint proprietary
compensation income of not more than the interest and right of mutual control over
statutory minimum wage in the non- the subject matter of the enterprise;
agricultural sector where he/she is assigned. 5891There is a single business transaction.

Corporations 2 Partnership - The Tax Code mandates that


Includesall types of corporations, partnerships (no every other type of business partnership is
matter how created or organized), joint stock subject to income tax in the same manner and
companies, joint accounts, associations, or insurance at the same rate as an ordinary corporation.
companies, whether or not registered with the SEC.
3 General Professional Partnerships (GPP) - A
Excludes general professional partnerships (GPP), general professional partnership is a
joint venture or consortium formed for the purpose partnership formed by persons for the sole
of undertaking construction projects, joint venture purpose of exercising their common profession,
or consortium engaging in petroleum, coal, no part of the income of which is derived from
geothermal and other energy operations pursuant engaging in any trade or business.
to an operating or consortium agreement under a
service contract with the government. Not considered as a taxable entity for income tax
purposes. The partners themselves are liable, not

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the partnership, are liable for the payment of


income tax in their individual capacities. Taxpayer Within Without
Resident Citizen
0 Estates and Trusts - Taxable estates and Non-resident Citizen and OCW X
trusts are taxed in the same manner and on Resident and Non-resident X
the same basis as an individual. Alien
1 Co-ownership - For income tax purposes, the co-
Domestic Corporation
owners in a co-ownership report their share of the Foreign Corporation X
income from the property owned in common by
them in their individual tax returns for the year and INCOME
the co-ownership is not considered as a separate DEFINITION
taxable entity or a corporation. 5888 Income means all wealth which flows to
the taxpayer other than a mere return of
capital. It includes gain derived from the sale
INCOME TAXATION
or other disposition of capital assets. Income
DEFINITION
is a gain derived from labor or capital, or both
Income Tax is defined as a tax on all yearly profits
labor and capital; and includes the gain
arising from property, professions, trades, or offices, derived from the sale or exchange of capital
or as a tax on the persons income, emoluments, assets.
profits and the like (Fisher v. Trinidad). 5889 Conwi v. CTA: It is an amount of money
coming to a person within a specified time,
NATURE whether as payment for services, interest or profit
Income tax is generally classified as an excise from investment. Unless otherwise specified, it
tax. It is not levied upon persons, property, funds means cash or its equivalent. Income can also be
or profits but upon the right of a person to thought of as a flow of the fruits of one's labor.
receive income or profits.
NATURE
Income includes earnings, lawfully or unlawfully
GENERAL PRINCIPLES
acquired, without consensual recognition,
0 A citizen of the Philippines residing therein is express or implied, of an obligation to repay and
taxable on all income derived from sources without restriction as their disposition. (James v.
within and without the Philippines; US, 366 US 213)
1 A nonresident citizen is taxable only on income
derived from sources within the Philippines;
WHEN INCOME IS TAXABLE
2 An individual citizen of the Philippines who is Existence of taxable income
working and deriving income from abroad as
0 There is INCOME, gain or profit
an overseas contract worker is taxable only
1 RECEIVED or REALIZED during the taxable year
on income derived from sources within the
Philippines: 2 NOT EXEMPT from income tax

Provided, That a seaman shall be treated as 5888 Madrigal vs. Rafferty (1918): "The fact is
an overseas contract worker if he is a: that property is a tree, income is the fruit;
2.0 citizen of the Philippines;and labor is a tree, income the fruit; capital is a
tree, income the fruit." A tax on income is not
2.1 receives compensation for services
a tax on property. "Income," as here used,
rendered abroad as a member of the
can be defined as "profits or gains."
complement of a vessel engaged
exclusively in international trade 5889 A mere increase in the value of property
is not income, but merely unrealized increase
in capital.(1 Mertens, Sec. 5.06)The increase
3 An alien individual, whether a resident or not in the value of property is also known as
of the Philippines, is taxable only on income appraisal surplus or revaluation increment.
derived from sources within the Philippines;
4 A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
When is there INCOME?
5 A foreign corporation, whether engaged or
When there is a FLOW of wealth other than mere
not in trade or business in the Philippines, is
taxable only on income derived from sources return of capital during the taxable period.
within the Philippines. (Sec. 23)

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Income v. Capital (Madrigal v. Rafferty) Cash method vis--vis Accrual methodCash


Income Capital method generally reports income upon cash
collection and reports expenses upon payment.
If earned from rendering of services, income is
Denotes a flow of wealth Fund or property to be reported in the year when collected,
during a definite period existing at one distinct whether earned or unearned. (Sec. 108, NIRC).
of time. point in time.
Service of wealth Wealth itself Accrual method generally reports income when
Subject to tax Return of capital is not earned and reports expense when incurred. If
earned from sale of goods, income is to be
subject to tax
reported in the year of sale, irrespective of
Fruit Tree collection. (Sec. 106, NIRC).
When is income RECEIVED or REALIZED? Income realized pertains to the accrual basis of
Actual vis--vis Constructive receipt accounting, when recognition of income in the
0 Actual receipt Income is actually reduced to books is when it is realized and expenses are
possession. The realization of gain may take recognized when incurred. It is the right to receive
the form of actual receipt of cash. and not the actual receipt that determines the
1 Constructive receipt An income is considered
inclusion of the amount in gross income
constructively received when it is credited to the
account of, or segregated in favour of a person.
Examples:
The person may withdraw the said account
0 interest or rent income earned but not yet
credited in his favor anytime without any
received
substantial limitations or conditions upon which
1 rent expense accrued but not yet paid
payment or enjoyment is to be made or exercised.
2 wages due to workers but remaining unpaid
Examples of constructive receipt of income are:
5888 Interest credited on savings bank Generally, trade and manufacturing businesses
deposit use accrual method while servicing businesses use
5889 Matured interest coupons not yet cash method. If the service business opted to
collected by the taxpayer report on accrual basis, such method can only be
5890 Dividends applied by the applied when it comes to reporting of expense. To
corporation against the indebtedness of a prevent tax evasion, individual taxpayers whose
stockholder
business consists of the sale of inventories cannot
5891 Share in the profit of a partner in
use cash method. (Valencia)
a general professional partnership,
although not yet distributed, is regarded as
constructively received; or Installment method vis--vis Deferred method
vis--vis Percentage of completion method (in
5892 Intended payment deposited
in court long- term contracts) Installment Methodis a
(consignation). special method of accounting whereby income on
The doctrine of constructive receipt is installment sales of property during the year is
designed to prevent the taxpayer using the allowed to be reported in installments in proportion
cash basis from deferring or postponing to the installment payments actually received which
the actual receipt of taxable income. the gross profit bears to the total contract price
Without the rule, the taxpayer can (Sec. 49, NIRC). Income may be reported on the
conveniently select the year in which he installment basis in the following cases:
will report the income. (Dimaampao)
Sales of personal property by a dealer
For a taxpayer using the accrual method, the A dealer who regularly sells or otherwise disposes
determinative question is, when do the facts of personal property on the installment plan
present themselves in such a manner that the
taxpayer must recognize income or expense? Sales of real property (inventory) and casual
The accrual of income and expense is permitted sales of personalty
when the all-events test has been met. This test 5888 casual sale or other casual disposition of
requires: (1) fixing of a right to income or liability personal property (not of a kind which would be
to pay; and (2) the availability of the reasonable includible in the inventory of the taxpayer if on
accurate determination of such income or hand at the close of the taxable year) where the
liability [CIR v. Isabela Cultural Corporation].
selling price
Methods of accounting in reporting income
and expenses
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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

> P1,000 and the initial payments do not 5888 If the initial payments exceed 25% of the
exceed 25% of the selling price, or selling price, the gain realized may be
0 sale or other disposition of real property reported on a deferred payment method.
(inventory), if the initial payments do not exceed 5889 The taxable gain or income returnable during
25% of the selling price. Note: This sale is the year of sale is the difference between the
subject to creditable withholding tax and normal selling or contract price and the cost of the
tax which is 30% for corporate taxpayer or 5% property, even though the entire purchase price
to 32% for individual taxpayer. has not been actually received in the year of sale.
5890 The obligations of the purchaser received by
Sales of real property considered as capital the vendor are to be considered as equivalent of
asset by individuals cash.
An Individual who sells or disposes of real property,
considered as capital asset, if initial payments do Personal Property Real Property
not exceed 25% of the selling price, may pay the
capital gains tax in installments (Sec. 49(C),
NIRC). Note: This sale is subject to a capital gains Dealer
tax of 6% based on the selling price or zonal value, Dealer in personal Installment method;
whichever is higher. property who regularly Provided, initial
sells in installment payments donot
Note:Initial payments are the total payments received plan: Installment exceed 25% of selling
in cash or property (other than evidences of method price
indebtedness such as promissory notes, mortgages *held as ordinary Ifexceeds 25%--
given) by the seller upon or before the execution of
the instrument of sale during the taxable year of the assetregardless of Deferred payment
disposition of the real property. Considered as initial amount of percentage method
payments are the downpayment and all other of initial payments *held as inventory
payments received by the seller during the year of
sale, including excess mortgage assumed by the Casual Sale
buyer over the basis or cost of the property sold. It Installment method;
contemplates at least one other payment in addition Provided:
to the initial payment. If the entire purchase price is to
be paid in a lump sum in a later year, there being no 0 Selling price
payment during the first year, the income may not be exceeds php1,000
returned on the installment basis. 1 Initial payments do
not exceed 25% of
Selling price is the total amount or price of the sale selling price
including the cash or property received and all
notes of the buyer or mortgages assumed by him. If either of 2 or both
conditions not met
Contract price is the amount which the Deferred payment
purchaser contracts to pay the seller in cash. It method
includes the excess of the mortgages assumed
over the cost or other basis of the property sold. *personal property not
considered inventory
Change from accrual to installment basis Sale by Individuals
A taxpayer entitled to the benefits of a dealer in Installment method;
personal property may elect for any taxable year to Provided, initial
report his taxable income on the installment basis. payments do not
In computing his income for the year of change or exceed 25% of
any subsequent year, amounts actually received selling price
during any such year on account of sales or other
dispositions of property made in any prior year *held as capital asset
shall not be excluded. [see Sec. 49(D), NIRC].
Percentage of completion
Income from long-term construction contracts refers
to the earnings derived from construction of a
Deferred Payment building, installation or other construction contract
usually covering a period in excess of one year. When
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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

income is derived from long-term construction whatever may have been the mode by which it is
contracts, it is generally reported on the basis of effected, is taxable. Thus, in stock options, the
percentage of completion made every year that difference between the fair market value of the
will be evidence by the certificates of engineers shares at the time the option is exercised and the
or architects. The reportable income is option price constitutes additional compensation
calculated by deducting from the contract price income to the employee at the time of exercise
the actual cost of construction. (not upon the grant or vesting of the right).

In recognizing realized revenue for long-term (4)Income from whatever source All income
construction contracts, accountants usually not expressly excluded or exempted from the
follow two methods: class of taxable income, irrespective of the
voluntary or involuntary action of the taxpayer
0 Completed contract method requires in producing the income, and regardless of
recognition of revenue only when the contract the source of income, is taxable (Gutierrez v.
is finally completed; and Collector, 101 Phil. 713).
1 Percentage of completion method requires
recognition of income based on the progress All of the above tests are followed in the
of work. Philippines for purposes of determining
whether income is received by the taxpayer
Long-term contracts are no longer allowed to or not during the year (Mamalateo).
be reported based on the completed contract
method basis beginning January 1, 1998 GROSS INCOME
pursuant to RA 8424; hence, all long-term
contracts must be reported using the DEFINITION
percentage of completion method. Gross Income means the pertinent items of
income referred to in Section 32(A) of the Tax
TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR
Code. It includes all income derived from whatever
TAX PURPOSES sourcesource (unless exempt from tax by law),
0 Realization test no taxable income until there including but not limited to the following items:
is a separation from capital of something of (TRIP CARD GPP)
exchangeable value, thereby supplying the 5888 Gross income derived from the conduct
realization or transmutation which would result of
in the receipt of income (Eisner v Macomber). Tradeor business or the exercise of a profession
Thus, stock dividends are not income subject to 5889 Rents
income tax on the part of the stockholder when 5890 Interests
he merely holds more shares representing the 5891 Prizes and winnings
same equity interest in the corporation that 5892 Compensationfor servicesin whatever
declared stock dividends (Fisher v Trinidad). form paid, including, but not limited to fees,
salaries, wages, commissions, and similar
Under the doctrine of severance test of items
income, in order that income may exist, is 5893 Annuities
necessary that there be a separation from 5894 Royalties
capital of something of exchangeable value. 5895 Dividends
The income required a realization of gain. 5896 Gains derived from dealings inproperty
5897 Pensions
(2)Claim of right doctrine a taxable gain is
5898 Partners distributive share from the net
conditioned upon the presence of a claim of right income of the general professional
to the alleged gain and the absence of a definite partnership (GPP) [Sec 32A, NIRC]
unconditional obligation to return or repay that
which would otherwise constitute a gain. To collect 0 The list here is NOT exclusive
a tax would give the government an unjustified 1 The term gross income whenever used
preference as to the part of the money that without qualification, is comprehensive, as
rightfully and completely belongs to the victim. The defined above, and is different from the
embezzlers title is void. limited meaning of gross income for purposes
of minimum corporate income tax or the
(3)Economic benefit test any economic benefit gross income tax of corporations.Gross
to the employee that increases his net worth, income includes gross profit from ordinary
business and other income not subject to
passive income tax or final withholding tax.

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

0 Gross income means income, gain, or profit rule, incomes earned with the Philippines are
subject to income tax. taxable.
0 Derived entirely from sources without the
It includes the compensation for personal Philippines. Examples: compensation for labor
services, business income, profits, and or service rendered by overseas contract
income derived from any source whatever workers; interest on bonds, notes, deposits and
(whether legal or illegal) the like earned abroad; dividends declared by
nonresident foreign corporation; rental and
It excludesunless it is exempt from income tax royalties from property located outside the
under the Constitution, tax treaty, or statute or it is Philippines; and gains, profits and income from
subject to final withholding income tax in sale of real property as well as from personal
accordance with the semi-global or semi- property located outside the Philippines. As a
schedular tax system adopted by the Philippines. rule, incomes earned with the Philippines are
taxable.
It is the difference between gross sales/revenue 1 Derived from sources partly within or partly
and the cost of goods sold/services. The without the Philippines.Examples: gains, profits
definition of gross income is broad and and income from transportation or other
comprehensive to include proceeds from sales services rendered partly within and partly
of transport documents. (Mamalateo) outside, and dividend received by a resident
citizen from a resident foreign corporation.
CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED (Sec. 43(E), NIRC). In general, when an income
income derived from whatever sourcemeans is earned partly from within and partly from
inclusion of all income not expressly exempted without, only income within is taxable in the
within the class of taxable income under the Philippines, except if the taxpayer is a resident
laws irrespective of the voluntary or involuntary citizen or a domestic corporation. A Filipino
action of the taxpayer in producing the gains, citizen or a domestic corporation whose income
and whether derived from legal or illegal sources is derived from within and without the
(i.e. gambling, extortion, smuggling, etc.). Philippines is generally subject to tax.

GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXABLE SOURCES OF INCOME SUBJECT TO TAX
INCOME Compensation Income
5888 Gross income - means income, gain or Income arising from an employer-employee (ER-
profit subject to tax. EE) relationship. It means all remuneration for
5889 Net income means gross income less services performed by an EE for his ER, including
statutory deductions and/or exemptions (Sec. 31, the cash value of all remuneration paid in any
NIRC) medium other than cash [Sec. 78(A)],unless
5890 Taxable income means the pertinent specifically excluded by the Tax Code.
items of gross income specified in the Tax
Code, less the deductions and/or personal It includes, but is not limited to, salaries and wages,
and additional exemptions, if any, authorized honoraria and emoluments, allowances (e.g.,
for such types of income by the Tax Code or transportation, representation, entertainment),
other special laws (Sec. 31, NIRC). commissions, fees (including directors fees, if the
director is, at the same time, an employee of the
SOURCES OF INCOME payor-corporation), tips, taxable bonuses, fringe
Source is ascribed to the place wherein the benefits except those subject to Fringe Benefit Tax
income is earned. It is governed by the situs of (FBT) under Section 33 of the Tax Code, and taxable
taxation. This classification of income is pensions and retirement pay (e.g. retirement benefits
necessary to determine whether such income is
earned without meeting the conditions for exemption
subject to tax or not. Income may be:
0 Derived entirely from sources within the Philippines.
thereof e.g. retirement of less than 50 years of age.
Examples: compensation for labor or service
derived from Philippine sources; interest on
General Rule: every form of compensation income is
bonds, notes, deposits and the like earned in
taxable regardless of how it is earned, by whom it is
the Philippines; dividends declared by domestic
paid, the label by which it is designated, the basis
corporations; rentals and royalties from property
upon which it is determined, or the form in which it is
located within the Philippines; and gains, profits
received. The basis upon which remuneration is paid
and income from sale of real property as well as
is immaterial. It may be paid on the basis of piece of
from personal property in the Philippines. As a

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work, percentage of profits, hourly, weekly, services performed as consular or other officer or
monthly, or annually. employee of a foreign government or as a non-
diplomatic representative of such government.
Exception: The term wages does NOT include
remuneration paid: Compensation income including overtime pay,
0 For agricultural labor paid entirely in products holiday pay, night shift differential pay, and hazard
of the farm where the labor is performed, or pay, earned by MINIMUM WAGE EARNERS
1 For domestic service in a private home, or (MWE) who has no other returnable income are
2 For casual labor not in the course of the NOT taxable and not subject to withholding tax on
employer's trade or business, or wages [RA 9504]Provided, however, that an
3 For services by a citizen or resident of the employee shall not enjoy the privilege of being a
Philippines for a foreign government or an MWE and, therefore, his/her entire earning are not
intl organization. [Sec. 78(A)] exempt from income tax and, consequently, from
withholding tax if he receives/earns additional
Note: The term agricultural labor does not compensation such as commissions, honoraria,
include services performed in connection with fringe benefits, benefits in excess of the allowable
forestry, lumbering or landscaping. statutory amount of P30,000, taxable allowance,
and other taxable income other than the statutory
The term remuneration for domestic services minimum wage (SMW), holiday pay, overtime pay,
refers to remuneration paid for services of a hazard pay and night shift differential pay.
household nature performed by an employee in or
about the private home of the person whom he is MWEs receiving other income, such as income
employed.The services of household personnel from the conduct of trade, business, or practice
furnished to an employee (except rank and file of profession, except income subject to final tax,
employees) by an employer shall be subject to the in addition to compensation income are not
fringe benefits tax pursuant to Sec. 33 of the Tax exempted from income tax on their income
Code. A private home is the fixed place of abode of earned during the taxable year.
an individual or family. If the home is utilized
primarily for the purpose of supplying board or This rule, notwithstanding, the SMW, Holiday Pay,
lodging to the public as a business enterprise, it overtime pay, night differential pay and hazard pay
ceases to be a private home and remuneration shall still exempt from withholding tax.
paid for services performed therein is not
exempted. Services of the household nature in or Forms of compensation and how they are assessed
about a private home include services rendered by 5888 Cash If compensation is paid in cash,
cooks, maids, butlers, valets, laundresses, the full amount received is the measure of
gardeners, chauffeurs of automobiles for family the income subject to tax.
use. The remuneration paid for the services which 5889 Medium other than money If services
are performed in or about rooming or lodging are paid for in a medium other than money
houses, boarding houses, clubs, hotels, hospitals (e.g. shares of stock, bonds, and other forms
or commercial officer or establishments is of property), the fair market value (FMV) of
considered as compensation. Remuneration paid the thing taken in payment is the amount to
for services performed as a private secretary, even be included as compensation subject to tax.
if they are performed in the employers home is If the services are rendered at a stipulated
considered as compensation. price, in the absence of evidence to the
contrary, such price will be presumed to be
The term casual labor includes labor which is the FMV of the remuneration received.
occasional, incidental or regular. Not in the 5890 Living quarters or meals - General Rule:
course of the employers trade or business The value to the employee of the living quarters
includes labor that does not promote or advance and meals given by the employer shall be
the trade or business of the employer. added to his compensation subject to
withholding. Exception: If living quarters/meals
The term remuneration paid for services performed are furnished to an employee for the
as an employee of a foreign government or an convenience of the employer the value needed
international organization includes not only NOT be included as part of compensation
remuneration paid for services performed by income.
ambassadors, ministers and other diplomatic officers 5891 Facilities and privileges of a relatively small
and employees but also remuneration paid for value -
Facilities and privileges (such an entertainment,
medical services, or so called courtesy

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

discounts on purchases), otherwise known as position or office is a COMPENSATION subject


de minimis benefits furnished or offered by an to withholding tax. (Rev. Regs. 2-98)
employer to his employees generally, are NOT
considered as compensation subject to income tax Exception: Any amount paid specifically, either
and therefore withholding tax if such facilities are as advances or reimbursements for travelling,
offered or furnished by the employer merely as representation and other bona fide ordinary and
means of promoting the health, goodwill, necessary expenses incurred or reasonably
contentment, or efficiency of his employees. expected to be incurred by the employee in the
performance of his duties are NOT
(See RR 5-2011, as amended by RR 8-2012 for COMPENSATION subject to withholding tax,
ceilings of de minimis benefits.) The amount of de provided the following conditions are satisfied:
minimis benefits confirming to the ceiling prescribed
shall not be considered in determining the P30,000 0 It is for ordinary and necessary travelling and
ceiling of other benefits excluded from gross income representation or entertainment expenses paid
under Section 32 (b)(7)(e) of the Tax Code, or incurred by the employee in the pursuit of the
Provided, that the excess of the de minimis benefits employers trade, business or profession; and
over their respective ceilings prescribed by these 1 The employee is required to account or
regulations shall be considered as part of other liquidate for the foregoing expenses.
benefits and the employee receiving it will be subject 2 The excess of actual expenses over
to tax only on the excess over the P30,000 ceiling, advances made shall constitute taxable
Provided, further, that MWEs receiving, other income if such amount is not returned to the
benefits exceeding the P30,000 limit shall be taxable employer. The employee is required to
on the excess benefits, as well as on his salaries, account/liquidate for the expenses in
wages, and allowances, just like an employee
accordance with the specific requirements of
substantiation for each category of expenses
receiving compensation income beyond the SMW.
pursuant to Section 34 of the Tax Code.
Any amount given by the employer as benefits to its
employees, whether classified as de minimis
Note: Reasonable amounts of
benefits of fringe benefits, shall constitute as
reimbursements/advances for traveling and
deductible expense upon such employer. Where
entertainment expenses which are pre-
compensation is paid in property other than money, computed on a daily basis and are paid to an
the employer shall make necessary arrangements to employee while he is on an assignment or duty.
ensure that the amount of the tax required to be NOT subject to withholding tax on wages and
withheld is available for payment to the BIR. substantiation requirements.
Classification of Gross Compensation Income Commission usually a percentage of total sales
Basic salary or wage or on certain quota of sales volume attained as
0 Salary earnings received periodically for a part of incentive such as sales commission.
regular work other than manual labor.
Example: monthly salary of an employee Fees received by an employee for the services
1 Wages earnings received usually according rendered to the employer including a directors fee
to specified intervals of work, as by the hour, of the company, fees paid to the public officials
day, or week. Example: a carpenters wage.
such as clerks of court or sheriffs for services
rendered in the performance of their official duty
Honoraria payments given in recognition for
over and above their regular salaries.
services performed for which the established
practice discourages charging a fixed fee.
Tips and Gratuities those paid directly to the
Example: honorarium of a guest lecturer
employee (usually by a customer of the employer)
which are not accounted for by the employee to the
Fixed or variable allowances i.e. Transportation,
Representation, and other allowances such as employer. (taxable income but not subject to
Cost of Living Allowances (COLA) withholding tax) [RR NO. 2-98, Sec. 2.78.1]

General Rule: Fixed or variable transportation, Hazard or Emergency Pay additional payment
representation or other allowances that are received received due to the workers exposure to danger
by a public officer or employee of a private entity, in or harm while working. It is normally added to
addition to the regular compensation fixed for his
the basic salary together with the overtime pay
and night differential to arrive at gross salary.

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work, age, loss, or injury. Pension is taxable unless


Retirement Pay a lump sum payment received by the law states otherwise, or unless the BIR
an employee who has served a company for a approves the pension plan of a private company.
considerable period of time and has decided to
withdraw from work into privacy. [RR 6-82, Sec. 2b] Vacation and sick leave- rules in determining
whether money received for vacation and sick
In general, retirement pay is taxable except in leave is taxable or not:
the following instances: 0 If paid or availed of as salary of an employee who
5888 SSS or GSIS retirement pays. is on vacation or on sick leave notwithstanding his
5889 Retirement pay (R.A. 7641) due to old absence from work, it constitutes TAXABLE
age provided the following requirements are compensation income. [RR 6-82, 2d]
met: 1 Monetized value of unutilized vacation leave
5888The retirement program is approved by credits of ten (10) days or less which were
the BIR Commissioner; paid to private employees during the year
5889It must be a reasonable benefit plan. (Its and the monetized value of leave credits paid
implementation must be fair and equitable to government officials and employees are
for the benefit of all employees) not subject to income tax and to the
5890The retiree should have been employed withholding tax. [RR no. 2-98, Sec 2.78.1(A)
for 10 years in the said company; (7)] Note: monetization of sick leave credits
5891The retiree should have been 50 years of private employees even if not exceeding
old or above at the time of retirement; and 10 days is not exempt from income tax and
5892It should have been availed of for the withholding tax on wages.
first time. 2 Terminal leave or money value of accumulated
vacation and sick leave benefits received by
Separation pay taxable if VOLUNTARILY availed heir upon death of employee is not taxable.
of. It shall not be taxable if involuntary i.e. death,
sickness, disability, reorganization/merger of Thirteenth month pay and other benefits - Not
company and company at the brink of bankruptcy taxable if the total amount received is P30,000
or for any cause beyond the control of the said or less. Any amount exceeding P30,000 is
official or employee. taxable. [Sec. 32 (7)e, NIRC]

For any cause beyond the control. Overtime Pay premium payment received for
0 Connotes involuntariness on the part of the working beyond regular hours of work which is
official or employee included in the computation of gross salary of
1 The separation from the service of the official employee. It constitutes compensation.
or employee must not be asked for or
initiated by him. Profit Sharing the proportionate share in the
2 The separation was not of his own making. profits of the business received by the employee
3 Such fact shall be duly established by the in addition to his wages.
employer by competent evidence which
should be attached to the monthly return for Awards for special services awards for past
the period in which the amount paid due to services or suggestions to employers resulting in
the involuntary separation was made. the prevention of theft or robbery, etc. are also
4 Amounts received by reason of involuntary compensations.
separation remain EXEMPT from income tax even
if the official or the employee, at the time of Beneficial Payments such as where employer
separation, had rendered less than ten (10) years pays the income tax owed by an employee are
of service and/or is below fifty (50) years of age. additional compensation income.
5 Any payment made by an employer to an
employer to an employee on account of Other forms of compensation other forms
dismissal, constitutes compensation received due to services rendered are
regardless of whether theemployer is legally compensation paid in kind, e.g., insurance
bound by contract, statute, or otherwise, to premium paid by the employer for insurance
make such payment. coverage where the heirs of the employee are
the beneficiaries is the employees income.
Pension a stated allowance paid regularly to a
person on his retirement or to his dependents on his
death, in consideration of past services, meritorious

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Note: Any amount which is required by law to be income subject to income tax and withholding
deducted by the employer from the compensation of tax on compensation.
an employee including the withheld tax is considered
as part of the employees compensation and is
deemed to be paid to the employee as compensation Definition
at the time the deduction is made. (This also applies Fringe benefit means any good, service, or other
to deductions not required by law.) benefit furnished or granted by an employer, in cash
or in kind, in addition to basic salaries, to an individual
Withholding Tax on Compensation Income employee (except rank and file employees) such as,
The income recipient (i.e., EE) is the person but not limited to the following:
liable to pay the tax on income, yet to improve 5888 Housing
the collection of compensation income of EEs, 5889 Expense Account
the State requires the ER to withhold the tax 5890 Vehicle of any kind
upon payment of the compensation income. 5891 Household personnel, such as maid,
driver and others
Fringe Benefits 5892 Interest on loan at less than market rate
Special treatment of fringe benefits to the extent of the difference between the
Persons liable: The Employer (as a withholding market rate and actual rate granted.
agent), whether individual, professional partnership 5893 Membership fees, dues and other expenses
or a corporation, regardless of whether the borne by the employer for the employee in social
corporation is taxable or not, or the government and athletic clubs and similar organizations
and its instrumentalities, is liable to remit the fringe 5894 Expenses for foreign travel
benefit tax to the BIR once fringe benefit is given to 5895 Holiday and vacation expenses
a managerial or supervisory employee. 5896 Educational assistance to the employee
or his dependents; and
The fringe benefit tax (FBT) is a final tax on the 5897 Life or health insurance and other non-
employees income to be withheld by the employer. life insurance premiums or similar amounts
The withholding and remittance of FBT shall be on excess of what the law allows.[Sec. 33(B)]
made on a calendar quarterly basis.
Tax Rate and Tax Base
Managerial employee: one who is vested with 0 Tax base is based on the grossed-up
the powers or prerogatives to lay down and monetary value (GMV) of fringe benefits.
execute management policies and/or to hire, 1 Rate is generally 32%
transfer, suspend, lay-off, recall, discharge, 2 GMV represents: (a) the whole amount of income
assign or discipline employees. realized by the employee which includes the net
amount of money or net monetary value of
Supervisory employees: those who, in the interest property that has been received; and (b) the
of the employer, effectively recommend such amount of fringe benefit tax due from the
managerial actions if the exercise of such authority employee which has been withheld and paid by
is not merely routinary or clerical in nature but the employer for and in behalf of his employee..
requires the use of independent judgment.
How GMV is determined
All employees not falling within any of the above GMV is determined by dividing the actual monetary
definitions are considered rank-and-file employees. value of the fringe benefit by 68% [100% - tax rate
of 32%]. For example, the actual monetary value of
Basic Rule: Convenience of the Employer Rule the fringe benefit is P1,000. The GMV is equal to
0 If meals, living quarters, and other facilities P1,470.59 [P1,000 / 0.68]. The fringe benefit tax,
and privileges are furnished to an employee therefore, is P470.59 [P1470.59 x 32%].
for the convenience of the employer, and
incidental to the requirement of the Special Cases:
employees work or position, the value of that 0 For fringe benefits received by non-resident
privilege need not be included as alien not engaged in trade of business in the
compensation (Henderson v. Collector) Philippines (NRANETB), the tax rate is 25%
1 Fringe benefit tax is imposed on fringe benefits of the GMV. The GMV is determined by
received by supervisory and managerial dividing the actual monetary value of the
employees. The fringe benefits of rank and file fringe benefit by 75% [100% - 25%].
employees are treated as part of compensation

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768 For fringe benefits received by alien from the FBT, the same may, however, still form of
individuals and Filipino citizens employed by the employees gross compensation income which
regional or area headquarters, regional operating is subject to income tax; hence, likewise subject to
headquarters, offshore banking units (OBUs), or withholding tax on compensation income payment.
foreign service contractor or by a foreign
subcontractor engaged in petroleum operations in De minimis benefits (exempt from income tax as
the Philippines, or by any of their Filipino individual well as withholding tax on compensation income
employees who are employed and occupying the of both managerial and rank and file EEs):
same positions as those occupied by the alien 0 Monetized unused vacation leave credits of
employees, the tax rate is 15% of the GMV. The private employees not exceeding ten (10)
GMV is determined by dividing the actual days during the year;
monetary value of the fringe benefit by 85% [100% 1 Monetized value of vacation and sick leave credits
- 15%]. paid to government officials and employees;
769 What is the tax implication if the employer 2 Medical cash allowance to dependents of
gives employees, not exceeding P750 per
fringe benefits to rank-and-file employees? employee per semester or P125 per month;
Fringe benefits given to a rank-and-file 3 Rice subsidy of P1,500 or one (1) sack of 50
employee are treated as part of his kg. rice per month amounting to not more
compensation income subject to normal tax than P1,500;
rate and withholding tax on compensation 4 Uniform and Clothing allowance not
income, except de minimis benefits and exceeding P5,000 per annum (RR 8-2012)
benefits provided for the convenience of the 5 Actual medical assistance, e.g. medical
employer. allowance to cover medical and healthcare
needs, annual medical/executive check-up,
Payor of Fringe Benefit Tax (FBT): The employer maternity assistance, and routine consultations,
withholds and pays the FBTbut the law allows him not exceeding P10,000.00 per annum;
to deduct such tax from his gross income. 6 Laundry allowance not exceeding P300 per
month;
Taxable and non-taxable fringe benefits 7 Employees achievement awards, e.g., for
Fringe Benefits NOT subject to Tax length of service or safety achievement, which
0 Fringe benefits not considered as gross income must be in the form of a tangible personal
0 if it is required or necessary to the business property other than cash or gift certificate, with
of employer an annual monetary value not exceeding
1 if it is for the convenience or advantage of P10,000 received by the employee under an
employer established written plan which does not
1 Fringe Benefit that is not taxable under Sec. 32 discriminate in favor of highly paid employees;
(B) Exclusions from Gross Income 8 Gifts given during Christmas and major
2 Fringe benefits not taxable under Sec. 33 anniversary celebrations not exceeding
Fringe Benefit Tax: P5,000 per employee per annum;
0 Fringe Benefits which are authorized and 9 Daily meal allowance for overtime work and
exempted under special laws, such as the night/graveyard shift not exceeding twenty-
13th month Pay and Other Benefits with five percent (25%) of the basic minimum
the ceiling of P30,000. wage on a per region basis;
1 Contributions of the employer for the benefit
of the employee to retirement, insurance and All other benefits given by employers which are not
hospitalization benefit plans; included in the above enumeration shall NOT be
2 Benefits given to the Rank and File considered as "de minimis" benefits and hence,
Employees, whether granted under a shall be subject to withholding tax on
collective bargaining agreement or not; and compensation (rank and file employees) and FBT
3 The De minimis benefits benefits which are (managerial/supervisory employees)(RR 5-2011)
relatively small in value offered by the
employer as a means of promoting goodwill, Housing
contentment, efficiency of Employees Housing Privilege Fringe Benefit Tax Base
(Monetary Value)
The exemption of any FB from the FBT shall not be (1) LEASE of residential MV= 50% of lease
interpreted to mean exemption from any other income property for the payments
tax imposed under the Tax Code except if the same is residential use of
likewise expressly exempt from any other income tax
imposed under the Tax Code or under any other
existing law. Thus, if the FB is exempted
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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

Housing Privilege Fringe Benefit Tax Base of employees


(Monetary Value)
Professional Income
employees where MV = monetary
value of the FB Refers to fees received by a professional from
the practice of his profession, provided that
(2) Assignment of MV= [5% (FMV or ZV, there is NO employer-employee relationship
residential property whichever is higher) x between him and his clients.
owned by employer for 50%]
use of employees Income from Business
(3) Purchase of residential MV= 5% x acquisition 0Any income derived from doing business
property in installment cost x 50% 1Doing business: The term implies a continuity
basis for the use of the of commercial dealings and arrangements,
employee and contemplates, to that extent, the
(4) Purchase of residential MV= FMV or ZV, performance of acts or works or the exercise
property and whichever is higher of some of the functions normally incident to,
ownership is and in progressive prosecution of, the
transferred in the purpose and object of its organization.
name of the employee
Income from Dealings in Property
Non-taxable housing fringe benefit: Dealings in property such as sales or exchanges
0 Housing privilege of the Armed Forces of the may result in gain or loss. The kind of property
Philippines (AFP) officials i.e, those of the involved (i.e., whether the property is a capital
Philippine Army, Philippine Navy, or asset or an ordinary asset) determines the tax
Philippine Air Force implication and income tax treatment, as follows:
1 A housing unit, which is situated inside of
adjacent to the premises of a business or Taxable Net Capital Gains
factory maximum of 50 meters from Ordinary (other than those
Net = +
perimeter of the business premises Net Income subject to final
Income
2 Temporary housing for an employee who CGT)
stays in housing unit for three months or less
Ordinary Asset Capital Asset
Motor Vehicle
Motor Vehicle Fringe Benefit Tax
Base Gain from sale, exchange or other disposition
(1) Purchased in the name MV= acquisition cost Ordinary Gain (part of Capital Gain
of the employee Gross Income)
(2) Cash given to employee MV= cash given Loss from sale, exchange, or other disposition
to purchase in his own Ordinary Loss (part of
name Allowable Deductions Capital Loss
(3) Purchase on installment, MV= acquisition from Gross Income)
in the name of employee cost/ 5 years Excess of Gains over Losses
Where acquisition Part of Gross Income Net Capital Gain
Excess of Losses over Gains
cost is exclusive of Part of Allowable
interest Deductions from Gross Net Capital Loss
(4) Employee shoulders part MV= amount Income
of the purchase price, shouldered by
ownership in the name of employer Types of Properties
employee Capital v. Ordinary Asset
(5) Employer owns and MV= (AC/5) x 50% Ordinary Assets Capital Assets
maintains a fleet of
motor vehicles for use of
the business and of (1)Stock in trade of the Property held by the
employees taxpayer or other taxpayer, whether or
(6) Employer leases and MV= 50% of rental property of a kind not connected with his
maintains a fleet for the payment which would properly trade or business which
use of the business and be included in the is not an ordinary asset.

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Ordinary Assets Capital Assets 100%, regardless of the holding period of the
capital asset (Sec. 39(B), NIRC)

inventory of the Generally, they include: The tax rules for the gains or losses from sales
taxpayer if on hand at (1) stocks and securities or exchanges of capital assets over ordinary
the close of the held by taxpayers assets are as follows:
taxable year. other than dealers in
(2) Property held by the securities 0 Net capital gain is added to ordinary gain but net
taxpayer primarily for (2) real property not capital loss is not deductible from ordinary gain.
sale to customers in used in trade or 1 Net ordinary loss is deductible from ordinary
the ordinary course of business, such as gain.
his trade or business. residential house 2 Capital losses are deductible only to the
(3) Property used in the and lot, idle or extent of the capital gain.
trade or business of a vacant land or 3 There is a net capital loss carry-over on the
character which is building net capital assets loss in a taxable year
subject to the (3)investment property, which may be deducted as a short-term
allowance for such as interest in a capital loss from the net capital gain of the
depreciation, or partnership, stock subsequent taxable year; provided that the
following conditions shall be observed:
(4) Real property used in investment
3.0The taxpayer is other than a corporation;
the trade or business (4)Personal or non-
of the taxpayer, business properties, 3.1The amount of loss does not exceed the
income before exemptions at the year
including property such as family car,
when the loss was sustained; and
held for rent. home appliances,
3.2The holding period should not exceed 12
jewelry. months. (Valencia)
Types of Gains from dealings in property When a capital gain or capital loss is sustained by a
(1) Ordinary income vis--vis Capital gain. corporation, the following rules shall be observed:
If the asset involved is classified as ordinary, the
entire amount of the gain from the transaction shall be
0 There is no holding period; hence, there is no
included in the computation of gross income [Sec
net capital loss carry-over.
32(A)], and the entire amount of the loss shall be
1 Capital gains and losses are recognized to the
deductible from gross income. [Sec 34(D)]. (See XI. extent of their full amount.
Allowable Deductions from Gross Income - Losses) 2 Capital losses are deductible only to the extent
of capital gains.
If the asset involved is a capital asset, the rules on 3 Net capital losses are not deductible from
capital gains and losses apply in the determination ordinary gain or income but ordinary losses
of the amount to be included in gross income. (See are deductible from net capital gains.
Part V. Capital Gains and Losses). These rules do
not apply to: (a) real property with a capital gains Note: For sale, barter, exchange or other forms of
tax (final tax), or (2) shares of stock of a domestic disposition of shares of stock subject to the 5%/10%
corporation with a capital gains tax (final tax). Also, capital gains tax on the net capital gain during the
sale of shares of stock of a domestic corporation, taxable year, the capital losses realized from this type
held as capital assets, through the stock exchange of transaction during the taxable year are deductible
by either individual or corporate taxpayers, is only to the extent of capital gains from the same type
subject to of 1% percentage tax based on gross of transaction during the same period. If the transferor
selling price. of the shares is an individual, the rule on holding
period and capital loss carry-over will not apply,
The following percentages of the gain or loss notwithstanding the provisions of Section 39 of the
recognized upon the sale or exchange of a capital Tax Code as amended. (RR 6-2008, c.4)
asset shall be taken into account in computing net
capital gain, net capital loss, and net income: (2) Actual gain vis--vis Presumed gain
Presumed Gain:In the sale of real property located in
4 If the taxpayer is an individual the Philippines, classified as capital asset, the tax
100% if the capital asset has been held for base is the gross selling price or fair market value,
not more than 12 months; and whichever is higher. The law presumes that the seller
50% of the capital asset has been held for makes a gain from such sale. Thus, whether or not
more than 12 months

5 If the taxpayer is a corporation
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the seller makes a profit from the sale of real property, of the gift then, for the purpose of determining
he has to pay 6% capital gains tax. In fact, her has to loss, the basis shall be such FMV
pay the tax, even if he incurs an actual loss from the 0 Property acquired for less than an adequate
sale thereof. (Note, however, that where an individual consideration in moneys worth the amount
sells his real property classified as a capital asset to paid by the transferee for the property
the government, he has the option whether to be
taxed at the graduated income tax rates or at 6% (2)Cost or basis of the property exchanged in
capital gains tax.) corporate reorganizations: Sales or exchanges
resulting in non-recognition of gains or losses:
Actual Gain:The tax base in the sale of real
property classified as an ordinary asset is the Exchange Solely in Kind -
actual gain. If the seller incurs a loss from the sale, 0 If in pursuance of a plan of merger or
such loss may be deducted from his gross income consolidation, exchanges:
during the taxable year. The ordinary gain shall be 0 Between the corporations which are parties
added to the operating income and the net taxable to the merger or consolidation (property
income shall be subject to the graduated rates solely for stocks);
from 5% to 32% (if an individual) or to 30% 1 Between a stockholder of a corporation party
corporate tax or to 2% MCIT (if a corporation). to a merger or consolidation and the other
corporation, which is a party to the merger or
Computation of the amount of gain or loss consolidation (stock in a corporation solely
Amount realized from sale or other for the stock of another corporation);
disposition of property 2 Between a security holder of a corporation
Less: Basis or Adjusted Basis party to a merger or consolidation and the
other corporation, which is a party to the
NET GAIN (LOSS)
merger or consolidation (securities solely
for securities)
Note: Amount realized from sale or other disposition
1 Transfer to a controlled corporation a
of property = sum of money received + fair market
person transfers his property to a corporation
value of the property (other than money) received in exchange for stocks in such a corporation,
resulting in acquisition of corporate control by
Note: When a taxpayer sells a real or personal said person, alone or together with others not
property, he should deduct its cost from its exceeding four (4).
selling price to measure the gain or loss from the
sales transaction (Sec. 40, NIRC). Exchange Not Solely in Kind -Gain, but not the
loss, shall be recognized if, in connection with
For income tax purposes the following rules should an exchange described in the above exceptions:
be observed regarding the cost and expenses of 23 An individual, a shareholder, a security holder or a
the capital assets: (1) the costs and expenses of corporation receives not only stock or securities
the acquisition are to be capitalized, and (2) the permitted to be received without the recognition of
expenses of disposition are to be treated as gain or loss, but also money and/or property.
reduction from the selling price. (Valencia)
The gain, if any, but not the loss, shall be
(1) Cost or basis of the property sold: In computing recognized but in an amount not in excess of
the gain or loss from the sale or other disposition of the sum of the money and the fair market
property, the BASIS shall be as follows: value of such other property received.
23 Property acquired by purchase its
acquisition cost, i.e., the purchase price plus As to the shareholder, if the money and/or
expenses of acquisition. other property received has the effect of a
24 Property which should be included in the inventory distribution of a taxable dividend, there shall
its latest inventory value [RR-2 sec 136] be taxed as dividend to the shareholder an
25 Property acquired by devise, bequest or inheritance amount of the gain recognized not in excess
its fair market price or value as of the date of his proportionate share of the undistributed
of acquisition (inheritance) earnings and profits of the corporation.
26 Property acquired by gift or donation the basis is
the same as it would be in the hands of the donor The remainder, if any, of the gain recognized
or at last preceding owner by whom it was not shall be treated as a capital gain (Sec. 40 (C)
acquired by gift, EXCEPT that if such basis is (3) (a), NIRC).
greater than the FMV of the property at the time

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0 The transferor corporation receives not only 0 If as part of the consideration to the transferor,
stock permitted to be received without the the transferee of property assumes a liability of
recognition of gain or loss but also money the transferor or acquires from the latter
and/or other property, then - property subject to a liability, such assumption
0 if the corporation receiving such money or acquisition (in the amount of liability), shall
and/or other property distributes it in be treated as money received by the transferor
pursuance of the plan of merger or on the exchange
consolidation, no gain to the corporation 1 If the transferor receives several kinds of stocks
shall be recognized from the exchange, but or securities, the Commissioner is authorized to
1 if the corporation receiving such other allocate the basis among the several classes of
property and/or money does not distribute it stocks or securities received.
in pursuance of the plan of merger or
consolidation, the gain, if any, but not the
SUBSTITUTED BASIS OF PROPERTY
loss to the corporation shall be recognized.
TRANSFERRED:
The gain shall be recognized in an amount not
The basis of the property transferred in the hands
in excess of the sum of such money and the
fair market value of such other property so
of the transferee shall be the same as it would be
received, which is not distributed (Sec. 40 (C)
in the hands of the transferor increased by the
amount of the gain recognized to the transferor on
(3) (b), NIRC).
the transfer [Sec. 40 (C)(5), NIRC].
If an individual, stockholder, security holder or
corporation receives on the exchange not only stock (3)Recognition of gain or loss in exchange
or securities but also money and/ or property (boot), of property: General rule- Upon the sale or
the gain but not the loss shall be recognized, in an exchange of property, the ENTIRE amount of
amount not exceeding the sum of the money and fair
the gain or loss shall be recognized.
market value of the property received.
Exceptions- No gain or loss shall be recognized:
If the money or other property received has the 23 If in pursuance of a plan of merger or
consolidation:
effect of a distribution of a taxable dividend, there
23 A corporation, which is a party to a merger
shall be taxed as dividend to the stockholder an
or consolidation, exchanges property
amount of the gain recognized not in excess of his
solely for stock in a corporation, which is a
proportionate share of the undistributed earnings
party to the merger or consolidation;
and profits of the corporation.
24 A shareholder exchanges stock in a
corporation, which is a party to a merger
The remainder, if any, of the gain recognized or consolidation, solely for the stock of
shall be treated as a capital gain. another corporation also a party to the
merger or consolidation; or
SUBSTITUTED BASIS OF STOCK OR SECURITIES 25 A security holder of a corporation, which is
RECEIVED BY TRANSFEROR UPON THE a party to the merger or consolidation,
EXCHANGE: exchanges his securities in such
corporation, solely for stock or securities in
Original basis (cost) of the property, stock or another corporation, a party to the merger
securities exchanged/transferred or consolidation.
LESS: (a) money received, if any; and 24 If property is transferred to a corporation by a
(b) FMV of the other property person in exchange for stock or unit of
received. Balance participation in such a corporation, of which
ADD: (a) the amount treated as dividend of the as a result of such exchange, said person,
shareholder; and alone or together with others not exceeding 4
(b) the amount of any gain that was recognized persons, gains control of the corporation.
on the exchange. - Stocks issued for services shall not be
Basis (Cost) of the stock received considered as issued in property.

Notes: Meaning of merger, consolidation, control, securities


23 The property received as boot shall have as 0 Merger and consolidation for tax purposes -
basis its FMV shall mean (1) The ordinary merger or
consolidation; or (2) The acquisition by one

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corporation of all or substantially all the If an individual sustains in any taxable year a net
properties of another corporation solely for capital loss, such loss (in an amount not in
stock (Sec. 40(C )(6)(b), NIRC). excess of the net income for the year) shall be
0 Requirements to establish merger or treated in the succeeding taxable year as a loss
consolidation from the sale or exchange of a capital asset held
0 Must be undertaken for a bona fide business for not more than 12 months (Sec. 39(D), NIRC).
purpose and not solely for the purpose of
escaping the burden of taxation Dealings in real property situated in the Philippines
1 In determining whether a bona fide business
purpose exists, each and every step of the Persons Liable and Transactions Affected
transaction shall be considered and the 23 Individual taxpayers, estates and trusts
whole transaction or series of transaction 23 Sale or exchange or other disposition of real
shall be treated as a single unit property considered as capital assets.
2 The property transferred must constitute a 24 Includes "pacto de retro sale" and other
substantial portion of the property of the conditional sale.
transferor (Sec. 40(C)(6)(b), NIRC). Note: In 24 Domestic Corporation
determining whether the property transferred Sale or exchange or disposition of lands
constitutes a substantial portion of the and/or building which are not actually used in
property of the transferor, the term 'property' business and are treated as capital asset.
shall be taken to include the cash assets of
the transferor (Sec. 40(C)(b), NIRC). Rate and Basis of Tax
1 Substantially All: the acquisition by one A final withholding tax of 6% is based on the
corporation of at least 80% of the assets, gross selling price or fair market value or zonal
including cash, of another corporation, which value whichever is higher.
has the element of permanence and not
merely momentary holding. Note: Gain or loss is immaterial, there
2 Securities: bonds and debentures but not being a conclusive presumption of gain.
"notes" of whatever class or duration (Sec.
40(C)(6)(a), NIRC) Dealings in shares of stock of Philippine corporations
3 Control: ownership of stocks in a corporation Persons Liable to the Tax
possessing at least fifty-one percent (51%) of 0 Individual taxpayer, whether citizen or alien;
the total voting power of all classes of stocks 1 Corporate taxpayer, whether domestic or
entitled to vote (Sec. 40(C)(6)(c), NIRC). foreign; and
2 Other taxpayers not falling under (a) and (b)
Income tax treatment of capital loss above, such as estate, trust, trust funds and
pension funds, among others.
Capital loss limitation rule (applicable
to both corporations and individuals) Persons not liable
General Rule:Losses from sales or exchanges 0 Dealers in securities
of capital assets shall be allowed only to the 1 Investor in shares of stock in a mutual fund
extent of the gains from such sales or company
exchanges (Sec. 39(C), NIRC). 2 All other persons who are specifically exempt
from national internal revenue taxes under
EXCEPTION for Banks and Trust Companies:If a existing investment incentives and other
bank or trust company incorporated under the laws special laws.
of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond, Shares listed and traded through the stock exchange
debenture, note, certificate or other evidence of other than sale by a dealer in securities.
indebtedness issued by any corporation (including
one issued by a government or political subdivision 0 of 1% of the gross selling price of the
thereof) with interest coupons or in registered form, stock or gross value in money of the shares of
any loss resulting from such sale shall not be stock sold, bartered, exchanged or otherwise
subject to the foregoing limitationand shall not be disposed which shall be assumed and paid by the
included in determining the applicability of such seller or transferor through the remittance of the
limitation to other losses (Sec. 39(C), NIRC). stock transaction tax by the seller or transferors
broker.
Net loss carry-over rule (applicable only to individuals

1 Note: In the nature of percentage tax
and not income tax; exempt from income tax
per Section 127 (d):
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0.0An earning derived from depositing or


Any gain derived from the sale, barter, exchange lending of money, goods or credits.
or other disposition of share of stock under this [VALENCIA, Income Taxation 5th ed. (2009)]
section shall be exempt from taxes imposed in 0.1e.g., Interest income from government
Sections 24(C), 27(D)(2), 28(A)(8)(c), and securities such as Treasury Bills
28(B)(5)(c) of this Code and from the regular 0.2Unless exempted by law, interest income
individual or corporate income tax. received by the taxpayer, whether or not
0 Note: Percentage tax under Sec. 127 is NOT usurious, is subject to income tax.
DEDUCTIBLE for income tax purposes.
0 Dividend Income
Shares not listed and traded through 0 A form of earnings derived from the distribution
the stock exchange made by a corporation out of its earnings or
Net capital gains derived during the taxable year profits and payable to its stockholders, whether
from sale, exchange, or transfer shall be taxed in money or in property.
as follows (on a per transaction basis): 1 In general, dividends are included in the
gross income of the stockholder, unless
Amount of Capital Gain Tax Rate they are exempt from tax or subject to final
Not over P 100,000 - 5% ax at preferential rate under the Tax Code.
On any amount in excess of P
100,000 - 10% Cash dividend
Dividends are included in the gross income of the
stockholder, unless they are exempt from tax or
Sale of principal residence
subject to tax at preferential rate under the NIRC.
Principal residence: the family home of the
Cash dividend is the most common form of
individual taxpayer (RR 14-2000)
dividend, valued at the amount of money received
by the stockholder. Cash dividend and property
Disposition of principal residence (capital asset)
dividend are subject to income tax.
is exempt from Capital Gains Tax, provided:
23 Sale or disposition of the old principal residence;
24 By natural persons - citizens or aliens provided Stock dividend
that they are residents taxable under Sec. 24 of Stock dividend is generally exempt from
the Code (does not include an estate or a trust); income tax, EXCEPT:
23 If a corporation cancels or redeems stock
25 The proceeds of which is fully utilized in (a)
issued as a dividend at such time and in
acquiring or (b) constructing a new principal
such manner as to make the distribution
residence within eighteen (18) months from
and cancellation or redemption, in whole
date of sale or disposition;
or in part, essentially equivalent to the
26 Notify the Commissioner within thirty (30)
distribution of a taxable dividend, the
days from the date of sale or disposition
amount so distributed in redemption or
through a prescribed return of his intention to
cancellation of the stock shall be
avail the tax exemption;
considered as taxable income to the
27 Can only be availed of onlyonce every ten extent that it represents a distribution of
(10) years; earnings or profits (Sec. 73(B), NIRC); or
28 The historical cost or adjusted basis of his old 24 Where there is an option that some
principal residence shall be carried over to stockholders could take cash or property
the cost basis of his new principal residence dividends instead of stock dividends;
29 If there is no full utilization, the portion of the some stockholders exercised the option to
gains presumed to have been realized shall take cash of property dividends; and the
be subject to capital gains tax. exercise of option resulted in a change of
30 Portion of presumed gains subject to CGT: the stockholders proportionate share in
(Unutilized/GSP) x (higher of GSP or FMV) the outstanding share of the corporation.
Passive Income Property dividend
Under Sec 24(B), a final tax is imposed upon Dividends are included in the gross income of the
gross passive income of citizen and resident stockholder, unless they are exempt from tax or
aliens. An income is considered passive if the subject to tax at preferential rate under the NIRC.
taxpayer merely waits for it to be realized.
Cash dividend and property dividend are
subject to income tax.
(a) Interest Income

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interest, taxes, loans, insurance


premiums, etc.) [RR 19-86]
23 Rent income may be in the following forms:
Liquidating dividend 23 Cash, at the stipulated price
Represents distribution of all the property or 24 Obligations of the lessor to third
assets of a corporation in complete liquidation persons paid or assumed by the lessee
or dissolution. It is strictly not dividend income, in consideration of the contract of
but ratheris treated in effect, as a sale of shares lease, e.g., real estate tax on the
of stock resulting in capital gain or loss. The property leased assumed by the lessee
difference between the cost or other basis of 25 Advance payment
the stock and the amount received in liquidation 23 If the advance payment is actually a
of the stock is a capital gain or a capital loss. loan to the lessor, or an option money
Where property is distributed in liquidation, the for the property, or a security deposit for
amount received is the FMV of such property. the faithful performance of certain
The income is subject to ordinary income tax obligations of the lessee, such advance
rates and NOT to the FWT on dividends. payment is not income to the lessor.
24 However, a security deposit that is
applied to rental is taxable income
to the lessor.
25 If the advance payment is, in fact, a
pre-paid rental, received by the lessor
under a claim of right and without
restriction as to its use, then such
payment is income to the lessor.
26 Pre-paid rent must be reported in full in
the year of receipt, regardless of the
accounting method used by the lessor.

Lease of personal property


Rental income on the lease of personal property
located in the Philippines and paid to a non-
resident taxpayer shall be taxed as follows:

Non-Resident Non-
Corporation Resident
Alien
Vessel 4.5% 25%
Aircraft, machineries 7.5% 25%
and other Equipment
0 Royalty Income Other assets 30% 25%
0.0Royaltyis a valuable property that can be Lease of real property
developed and sold on a regular basis for a
consideration; in which case, any gain derived Lessor Tax Rate
therefrom is considered as an active business
income subject to the normal corporate tax.
0.1 Where a person pays royalty to another for Citizen
the use of its intellectual property, such Resident Alien Net taxable income
royalty is generally a passive income of the Non-resident alien shall be subject to the
owner thereof subject to withholding tax. engaged in trade or graduated income tax
business in the rates
1 Rental Income Philippines
1.0Refers to earnings derived from leasing real
Non-resident alien not Rental income from real
estate as well as personal property. Aside from
engaged in trade or property located in the
the regular amount of payment for using the
business in the Philippines shall be
property, it also includes all other obligations
Philippines subject to 25% final
assumed to be paid by the lessee to the third
withholding tax unless a
party in behalf of the lessor (e.g.,
lower rate is imposed

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Lessor Tax Rate to the extent that such loss was not compensated
by insurance (Sec. 49, Rev. Reg. No. 2),

pursuant to an effective
tax treaty
Domestic Corporation Net taxable income (b) VAT added to rental/paid by the lessee
Resident Foreign shall be subject to 30% If the lessee is VAT-registered, treat VAT paid as
Corporation corporate income tax or input VAT;
its gross income will be
subject to 2% MCIT If the lessee is not VAT-registered OR not liable
Non-resident Foreign Gross rental income to VAT, treat VAT paid as additional rent expense
Corporation from real property deductible from gross income.
located in the
Philippines shall be Annuities, Proceeds from life insurance or
subject to 30% other types of insurance
corporate income tax, 0 Annuities are installment payments received for
such tax to be withheld life insurance sold by insurance companies.
and remitted by the 1 The aleatory contract of life annuity binds the
lessee in the Philippines debtor to pay an annual pension or income
during the life of one or more determinate
Tax treatment of Leasehold improvements by lessee: persons in consideration of a capital consisting
of money or other property, whose ownership is
transferred to him at once with the burden of
(a) Leasehold improvements by lessee
the income. [Art. 2021, New Civil Code]
Rent Income from leasehold improvements:
0 Outright method- lessor shall report as income 2 The annuity payments represent a part that is
FMV of the buildings or improvements subject taxable and not taxable. If part of annuity
payment represents interest, then it is a
to the lease in the year of completion.
taxable income. If the annuity is a return of
1 Spread-out method- lessor shall spread over
premium, it is not taxable.
the remaining term of the lease the estimated
depreciated (book) value of such buildings or
Prizes and awards
improvements at the termination of the lease,
Contest prizes and awards received are
and reports as income for each remaining term
generally taxable. Such payment constitutes
of the lease an aliquot part thereof. estimated gain derived from labor.
BV at the end of the lease contract/ remaining
lease term = Income per year The EXCEPTIONS are as follows:
23 Prizes and awards made primarily in recognition of
If for any reason than a bona fide purchase from religious, charitable, scientific, educational, artistic,
the lessee by the lessor, the lease is terminated, so literary or civic achievements are EXCLUSIONS
that the lessor comes into possession or control of from gross income if:
the property prior to the time originally fixed, lessor 23 The recipient was selected without any
receives additional income for the year which the action on his part to enter a contest or
lease is so terminated to the extent of the value of proceedings; and
such buildings or improvements when he became 24 The recipient is not required to render
entitled to such possession exceeds the amount substantial future services as a condition
already reported as income on account of the to receiving the prize or award.
erection of such building or improvement. No 24 Prizes and awards granted to athletes in local
appreciation in value due to causes other than the and international sports competitions and
premature termination of lease shall be included tournaments held in the Philippines and
(Sec. 49, Rev. Reg. No. 2). abroad and sanctioned by their national
25 associations shall be EXEMPT from income tax.
If the building or other leasehold improvement is
destroyed before the expiration of the lease, the Pensions, retirement benefit, or separation pay
lessor is entitled to deduct as a loss for the year when 0 paid for past employment services rendered.
such destruction takes place, the amount previously 1 a stated allowance paid regularly to a person on his
reported as income because of the erection of the retirement or to his dependents on his death, in
improvement, less any salvage value, consideration of past services, meritorious

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work, age, loss or injury. It is generally taxable Case A Case B Case C


unless the law states otherwise. [VALENCIA, Year 1
Income Taxation 5th ed. (200/9)] Gross Income 500,000 400,000 500,000
Less: Allowable

Other Income Deductions


Income from any source whatever (before write-off
Inclusion of all income not expressly exempted of Uncollectible
within the class of taxanle income under the laws Accounts/Debts) (200,000) (480,000) (495,000)
irrespective of the voluntary or involuntary action of Taxable Income
the taxpayer in producing the gains, and whether (Net Loss) before 300,000 (60,000) 5,000
derived from legal or illegal sources. write-off
Deduction for
Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness Accounts (2,000) (2,000) (6,000)
may have any of three possible consequences: Receivable
23 It may amount to payment of income. If, for written off
example, an individual performs services to or for Taxable Income 298,000 (62,000) (1,000)
a creditor, who, in consideration thereof, cancels
the debt, income in that amount is realized by the (Net Loss) after
write-off
debtor as compensation for personal services.
Year 2
24 It may amount to a gift. If a creditor wishes
merely to benefit the debtor, and without any Recovery of
consideration therefore, cancels the debt, the Amounts Written 2,000 2,000 6,000
amount of the debt is a gift to the debtor and Off
need not be included in the latters report of Taxable Income 2,000 - 5,000
income.
25 It may amount to a capital transaction. If a on the Recovery
corporation to which a stockholder is
indebted forgives the debt, the transaction Explanation:
has the effect of a payment of dividend. 0 In Case A, the entire amount recovered (P2,000)
is included in the computation of gross income in
Tax Benefit Rule Year 2 because the taxpayer benefited by the
This isa general principle in taxation which states same extent. Prior to the write-off, the taxable
that is a taxpayer deducted an item on his income income was P300,000; after the write-off, the
tax return and enjoyed a tax benefit (reduced taxable income was reduced to P298,000.
hisincome tax) thereby, and in a subsequent year 1 In Case B, none of the P2,000 recovered would be
recovers all or part of that item, he will recognize recognized as gross income in Year 2. Note that
gross income in the year the deducted item is even without the write-off, the taxpayer would not
recovered. The rule has both an inclusionary and have paid any income tax anyway. The
an exclusionary component, i.e., the recovery is taxable income before the write-off was
included in the taxpayers gross income to the actually a net loss.
extent that the taxpayer obtained a tax benefit from 2 In Case C, only P5,000 of the P6,000 recovered
the prior years deduction, and the recovery is would be recognized as gross income in Year 2.
excluded to the extent that the prior years It was only to this extent that the taxpayer
deduction did not provide a tax benefit. benefited from the write-off. The taxpayer did
not benefit from the extra P1,000 because at
Example 1: Bad debts claimed as a deduction in the this point, the P1,000 was already a net loss.
preceding year(s) but subsequently recovered shall
be included as part of the taxpayers gross income in Example 2. Receipt of tax refunds or credit
the year of such recovery to the extent of the income General rule: a refund of a tax related to the
tax benefit of said deduction. There is an income tax business or the practice of profession, is taxable
benefit when the deduction of the bad debt in the prior income (e.g., refund of fringe benefit tax) in the year
year resulted in lesser income and hence tax savings of receipt to the extent of the income tax benefit of
for the company. (Sec. 4, RR 5-99) said deduction (i.e., the tax benefit rule applies).
Illustration:

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Exceptions: However, the following tax refunds NOTE: * of the corporation giving the dividend
are not to be included in the computation of As a rule, the situs of dividend income is the
gross income: (CAPIFFEDVAT) residence of the corporation declaring the dividend.
0 Philippine income tax, except the fringe benefit Services
tax Compensation for labor or personal services
1 Income tax imposed by authority of any foreign performedin the Philippines:As a rule, the situs
country, if the taxpayer claimed a credit for such of compensation is the place of performance of
tax in the year it was paid or incurred. the services.
2 Estate and donors taxes
3 Taxes assessed against local benefits of a kind Rentals And Royalties
tending to increase the value of the property From property located in the Philippines or
assessed (Special assessments) from any interest in such property, including
4 Value Added Tax rentals or royalties for (STACKEM)
5 Fines and penalties due to late payment of tax 768The use of or the right or privilege to use in
6 Final taxes the Philippines any copyright, patent, design
7 Capital Gains Tax or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
Note: The enumeration of tax refunds that are property or right;
not taxable (income) is derived from an 769The use of, or the right to use in the Philippines
enumeration of tax payments that are not any industrial, commercial or scientific equipment;
deductible from gross income. 770The supply of scientific, technical, industrial
or commercialknowledgeor information;
If a tax is not an allowable deduction from gross 771The supply of any assistance that is ancillary and
income when paid (no reduction of taxable income, subsidiaryto, and is furnished as a means of
hence no tax benefit), the refund is not taxable. enabling the application or enjoyment of, any such
property or right as is mentioned in (a), any such
SOURCE RULES IN DETERMINING INCOME FROM WITHIN equipment as is mentioned in (b) or any such
AND WITHOUT knowledge or information as is mentioned in (c);
The following items of gross income shall be 772The supply of servicesby a nonresident
treated as gross income from sources WITHIN person or his employee in connection with
the Philippines: the use of property or rights belonging to, or
the installation or operation of any brand,
Interests machinery or other apparatus purchased
Derived from sources within the Philippines, and from such nonresident person;
interests on bonds, notes or other interest- 773Technical advice, assistance or services
bearing obligation of residents. rendered in connection with technical
management or administration of any
Ultimately, the situs of interest income is the scientific, industrial or commercial
residence of the debtor. undertaking, venture, project or scheme; and
774The use of or the right to use:
Dividends 775Motion picture films;
Dividends received: 775.0 Films or video tapes for use in
23 from a domestic corporation; and connection with television; and
24 from a foreign corporation, UNLESS less 775.1 Tapes for use in connection with radio
than 50% of its gross income for the previous broadcasting.
3-year period was derived from sources
within the Philippines [in which case it will be As a rule, the situs of rental income is the place
treated as income partly from within and where the property is located. The situs of
partly from without]. royalty income is where the rights are exercised.

The income which is considered as derived from Sale Of Real Property


within the Philippines is obtained by using the As a rule, the situs of the income from sale of
following formula: real property is where the realty is located.

Philippine Gross Income* x Dividend = Income Sale Of Personal Property


Within Worldwide Gross Income* General Rule:Gains, profits and income from the sale
of personal property, subject to the following rules:

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Income Situs

Place of Place of Treatment**


PURCHASE SALE partly w/o
Philippines Abroad Income from (3) Manufactured w/o and sold
Without w/in: Partly w/in and partly
Abroad Philippines Income from w/o
Within (b) Intangible
** in other words, the situs of the income from the
sale of personal property is the place of sale. General rule: Place of Sale

Exceptions: Exception: Shares of stock of


0 Gain from the sale of shares of stock in a
domestic corporation domestic corporations: Place of
Treated as derived entirely from sources incorporation
within the Philippines regardless of where the Shares of Place of incorporation
said shares are sold. Stock of
Domestic
1 Gains from the sale of (manufactured) Corporation
personal property:
23 produced (in whole or in part) by the taxpayer EXCLUSIONS FROM GROSS INCOME
withinand sold without the Philippines, or Exclusions from gross income refer to income
24 produced (in whole or in part) by the received or earned but is not taxable as income
taxpayer withoutand sold within the because it is exempted by law or by treaty. Such tax-
Philippines Treated as derived partly from free income is not to be included in the income tax
sources within and partly from sources retrun unless information regarding it is specifically
without the Philippines. called for. Receipts which are not in fact income are,
of course, excluded from gross income. The exclusion
Place of Place of Treatment of income should not be confused with the reduction
PRODUCTION SALE of gross income by the application of allowable
Philippines Abroad Partly within, deductions. While exclusions are simply not taken into
partly without account in determining gross income, deductions are
Abroad Philippines Partly within, subtracted from gross income to arrive at net income.
partly without (De Leon)

Shares of stock of domestic corporation Items of Exclusions representing return of capital


Treated as derived entirely from sources within 0 Amount of capital is generally recovered
the Philippines regardless of where the said through deduction of the cost or adjusted
shares are sold. basis of the property sold from the gross
selling price or consideration, or through the
SITUS OF INCOME TAXATION deduction from gross income of depreciation
Income Situs relating to the property used in trade or
business before it is sold.
1 It may also related to indemnities, such as
Interest Residence of the debtor proceeds of life insurance paid to the insureds
Dividends Residence of the corporation beneficiaries and return of premiums paid by
Services Place of performance the insurance company to the insured under a
Rentals Location of the property life insurance, endowment or annuity contract.
Royalties Place of exercise 2 Damages, in certain instances, may also be exempt
Sale of Real Location of realty because they represent return of capital.
Property
Sale of (a) Tangible Items of Exclusion because it is subject to
Personal another internal revenue tax
(1) Purchase and sale: Location The value of property acquired by gift, bequest,
of Sale devise or descent is exempt from income tax on the
(2) Manufactured w/in and part of the recipient because the receipt of such
sold w/o: Partly w/in and

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

property is already subject to transfer taxes


(estate tax or donors tax) Tax Credit refer toamounts subtracted from the
computed tax in order to arrive at taxes payable.
Items of Exclusions because they are
expressly exempt from income tax 0 Under the Constitution


4 Under the Constitution 0 Income derived by the
government or its political subdivisions
5 Under a tax treaty from the exercise of any essential
governmental function
6 Under special laws

Rationale for the exclusions 1 Also, all assets and revenues of
The term exclusions refers to items that are not a non-stock, non-profit private educational
included in the determination of gross income institution used directly, actually and
because: exclusively for private educational
purposes shall be exempt from taxation.
0 They represent return of capital or are not
income, gain or profit; 1 Under the Tax Code (Sec. 32, NIRC)
1 They are subject to another kind of internal
revenue tax; Proceeds of life insurance policies.
2 They are income, gain or profit that are expressly General rule: The proceeds of life insurance policies
exempt from income tax under the Constitution, paid to his estate or to any beneficiary (but not a
tax treaty, Tax Code, or a general or special law. transferee for a valuable consideration), directly or in
(Mamalateo) trust, upon the death of the insured, are excluded
from the gross income of the beneficiary. However, if
Taxpayers who may avail of the exclusions such amounts are held by the insurer under an
agreement to pay interest thereon, the interest
Exclusion Taxpayer payments received by the insured shall be included in
gross income. The interest income shall be taxed at
the graduated income tax rates.
Return of capital All taxpayers since there
is no income. Return of premium paid.
Already subject to All taxpayers unless General rule: The amount received by the insured
internal revenue tax provided that income is as a return of premiums paid by him under life
to be included. insurance, endowment, or annuity contracts, either
Express exclusion As expressly provided. during the term or at the maturity of the term
mentioned in the contract or upon surrender of the
contract is a return of capital and not income.
Exclusions distinguished from deductions
This refers to the cash surrender value of the contract.
and tax credit
0 Exclusions from gross income refer to a flow of
wealth to the taxpayer which are not treated as Exception: If the amounts received by the insured
part of gross income for purposes of computing (when added to the amounts already received
the taxpayers taxable income, due to the before the taxable year under such contract)
following reasons: (1) it is exempted by the exceed the aggregate premiums or considerations
Constitution or a statute; or (2) it does not come paid (whether or not paid during the taxable year),
within the definition of income. then the excess shall be included in gross income.
Deductions, on the other hand, are the amounts
which the law allows to be subtracted from Amounts received under life insurance,
gross income in order to arrive at net income. endowment or annuity contracts.
Amounts received (other than amounts paid by
reason of the death of the insured and interest
1 Exclusions pertain to the computation of gross
payments on such amounts) under a life insurance,
income, while deductions pertain to the
endowment or annuity contracts are excluded from
computation of net income.
2 Exclusions are something received or earned by gross income, but if such amounts (when added to
the taxpayer which do not form part of gross amounts already received before the taxable year
income while deductions are something spent under such contract) exceed the aggregate premiums
or paid in earning gross income. of considerations paid (whether or not paid during the
taxable year), then the excess shall be included in gross
income. However, in the case of

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a transfer for valuable consideration, by assignment Retirement benefits, pensions, gratuities, etc..
or otherwise, of a life insurance, endowment , or These are
annuity contract, or any interest therein, only the 0 Retirement benefits under RA 7641, RA 4917, and
actual value of such consideration and the amount of Section 60(B) of the NIRC
the premiums and other sums subsequently paid by 1 Terminal pay
the transferee are exempt from taxation. 2 Retirement Benefits from foreign
government agencies
Value of property acquired by gift, 3 Veterans benefits
bequest, devise or descent. 4 Benefits under the Social Security Act
Gifts, bequests and devises (which are subject to 5 GSIS benefits
estate or gift taxes) are excluded from gross
income, BUT not the income from such property. If Retirement benefits received under RA 7641(The
the amount received is on account of services Retirement Pay Law) and those received by
rendered, whether constituting a demandable debt officials and employees of private firms under a
or not, or the use or opportunity to use of capital, reasonable private benefit plan (RPBP) maintained
the receipt is income (Pirovano v. Commissioner). by the employer under RA 4917 (now Section
32(B)(6)(a) of NIRC) are excluded from gross
Amount received through accident or health income subject to income tax.
insurance (Compensation for damages).
As a rule, amounts received through accident or RA 7641 RPBP
health insurance or under workmens compensation
acts, as compensation for personal injuries or
sickness, plus the amount of any damages received, Retiring employee must Retiring official or
whether by suit or agreement, on account of such be in the service of same employee must have
injuries or sickness are excluded from gross income. employer been in the service of the
CONTINUOUSLY for at same employer forat
Examples of nontaxable and taxable damages least five (5) years least ten (10) years.
recoveries are: Retiring employee must Retiring official or
be at least sixty (60) employee must be at
Nontaxable Taxable compensation years oldbut not more least fifty (50) years old
compensation for for damages on account than 65 years of age at at the time of retirement
damages on account of of the time of retirement
(1) Personal (physical) (1) Actual damages for Availed of only once, and Retiring employee shall
injuries or sickness loss of anticipated only when there is no not have previously
profits RPBP availed of the privilege
(2) Any other damages (2) .Moral and under a retirement
recovered on account exemplary damages benefit plan of the same
of personal injuries or awarded as a result or another employer
sickness of break of contract
(3) Exemplary and moral (3) Interest for non-
damages for out-of- taxable damages Plan must be
court settlement, above reasonable. Its
including attorneys implementation must be
fees fair and equitable for the
(4) Alienation of (4) Any damages as benefit of all employees
affection, or breach of compensation for (e.g. from president to
promise to marry unrealized income laborer)
(5) Any amount received Plan must be approved
as a return of capital by BIR
or reimbursement of
expenses A 'reasonable private benefit plan' means a
pension, gratuity, stock bonus or profit-sharing plan
Income exempt under tax treaty. maintained by an employer for the benefit of some
Income of any kind, to the extent required by or all of his employees wherein contributions are
any treaty obligation binding upon the made by such employer, or employees, or both for
Government of the Philippines. the purpose of distributing to such employees the

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earnings and principal of the fund thus accumulated Payments of benefits due or to become due to
by the trust in accordance with such plan (trust fund) any person residing in the Philippines under the
laws of the United States administered by the
Further, it should be provided in the plan that at United States Veterans Administration
no time prior to the satisfaction of all liabilities
with respect to employees under any trust, shall
any part of the corpus or income of the fund be Social Security Act benefits
used for, or be diverted to, any purpose other Payments of benefits received under the Social
than for the exclusive benefit of his employees. Security Act of 1954 (RA 8282), as amended,
e.g., Maternity Benefits
Terminal pay/Separation pay
Any amount received by an employee or by his heirs GSIS benefits
from the employer as a consequence of separation of Benefits received from GSIS under the GSIS Act of
such official or employee from the service of the 1937, as amended, and the retirement gratuity
employer because of death, sickness, other physical received by government officials and employees are
disability or for any cause beyond the control of the not taxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98]
employee. The phrase for any cause beyond the
control of the said official or employee means that Winnings, prizes and award, including
the separation of the employee must be involuntary those in sports competitions.
and not initiated by him. 0 All prizes and awards granted to athletes:
0 in local and international sports
The separation must not be of his own making. competitions and tournaments whether
held in the Philippines or abroad, AND
Notes: 1 sanctioned by their national sports
0 Sickness must be life-threatening or one which associations.
renders the employee incapable of working
1 Retrenchment of the employee due to shall not be included in gross income and
unfavorable business conditions or financial shall be tax exempt. [Sec. 32 B7d, NIRC]
reverses is considered as involuntary.
However, resignation or availment of an 0 Prizes and awards made primarily in
optional early retirement plan is voluntary and recognition of charitable, literary, educational,
bars a claim under this provision. artistic, religious, scientific, or civic
achievement (clear sc) are not taxable,
BIR Ruling 143-98: provided:
The terminal leave pay (amount paid for the 0 Recipient was selected without any action
commutation of leave credits) of retiring government on his part to enter the contest or
employees is considered not part of the gross salary, proceeding; and
and is exempt from taxes. The government 1 Recipient is not required to render
recognizes that for most public servants, retirement substantial future services as a condition
pay is always less than generous if not meager and to receiving the prize or award
scrimpy. Terminal leave payments are given not only
at the same time but also for the same policy 0 Under special laws
considerations governing retirement benefits. 0 Personal Equity and Retirement Account
(Commissioner v. Castaneda, 203 SCRA 72). 1 Others:
0 Under R.A. 6657 (Comprehensive
Retirement BENEFITS from foreign government Agrarian Reform Package Law), gain
agencies arising from the transfer of agricultural
The social security benefits, retirement property covered by the law shall be
gratuities, pensions and other similar benefits exempt from capital gains tax.
received by resident or non-resident citizens or 1 Under R.A. 6938 (Cooperative Code of the
aliens who come to reside permanently in the Philippines), as amended by R.A. 9520,
Philippines from foreign government agencies cooperatives transacting business with both
and other institutions, private or public; members and non-members shall not be
subject to tax on their transactions with
Payments of VETERANS benefits under U.S. members. In relation to this, the
Veterans Administration transactions of members with the
cooperative shall not be subject to any

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engaged in trade or business or practice of


profession in the Philippines;
1 optional standard deduction in Section 34(L)
taxes and fees, including but not limited available only to individual taxpayers deriving
to final taxes on members' deposits.



0 Under R.A. 7916
(PEZA Law), as amended, PEZA-registered
enterprises are given income tax holidays of
six or four years from the date of commercial
operations, depending on whether their
activities are considered pioneer or non-
pioneer.



1 Under R.A. 9178
(Barangay Micro Business Enterprises Act
of 2002), BMBEs shall be exempt from
income tax for income arising from the
operation of the enterprise.

DEDUCTIONS FROM GROSS INCOME


Deductions are items or amounts which the law
allows to be deducted from the gross of income of
a taxpayer in order to arrive at taxable income.

In general, deductions or allowable deductions are


business expenses and losses incurred which the law
allows to reduce gross business income to arrive at
net income subject to tax. (Sec. 65, Rev. Reg. No. 2)

Deductions are in the nature of an exemption from


taxation; they are strictly construed against the
claimant, who must point to a specific provision
allowing them and who has the burden of proving
that they falls within the purview of such provision.
Thus, all deductions must be substantiated, except
when the law dispenses with the records,
documents or receipts to support the deductions.

If the exemption is not expressly stated in the law,


the taxpayer must at least be within the purview of
the exemption by clear legislative intent
(Commissioner of Customs v. Philippine Acetylene Co.)
However, if there is an express mention in the
law or if the taxpayer falls within the purview of
the exemption by clear legislative intent, the rule
on strict construction will not apply.
(Commissioner v. AnoldusCaprentry Shop)

The purpose of deductions from gross income is to


provide the taxpayer a just and reasonable tax
amount as the basis of income tax. It is because
many taxpayers spend adequate expenditures in
order to obtain a legitimate income.

Types of deductions
There are three (3) types of deductions from
gross income:
0 itemized deductions in Section 34(A) to (J)
and (M) available to all kinds of taxpayers
0 Sale of inventory of goods by manufacturers
and dealers of properties:
business, professional, capital gains and In sales of goods representing inventory, the
passive income not subject to final tax, or amount received by the seller consists of return of
other income; and capital and gain from sale of goods or properties.
5888 thespecial deductions in Sections 37 That portion of the receipt representing return of
and 38 of the NIRC, and in special laws like capital is not subject to income tax. Accordingly,
the BOI law (E.O. 226).
cost of goods manufactured and sold (in the case
of manufacturers) and cost of sales (in the case of
dealers) is deducted from gross sales and is
reflected above the gross income line in a profit
General rules
and loss statement.
0 Deductions must be paid or incurred in
connection with the taxpayers trade,
business or profession 1 Sale of stock in trade by a real estate dealer
1 Deductions must be supported by adequate
and dealer in securities:
Real estate dealers and dealers in securities are
receipts or invoices (except standard deduction)
ordinarily not allowed to compute the amount
2 Additional requirement relating to withholding
representing return of capital through cost of
sales. Rather they are required to deduct the total
Return of capital (cost of sales or services)
cost specifically identifiable to the real property or
Income tax is levied by law only on income;
shares of stock sold or exchanged.
hence, the amount representing return of capital
should be deducted from proceeds from sales of
assets and should notbe subject to income tax. 2 Sale of services:
Their entire gross receipts are treated as part
Costs of goods purchased for resale, with proper of gross income.
adjustment for opening and closing inventories,
are deducted from gross sales in computing Itemized deductions
gross income (Sec. 65, Rev. Regs. 2) These are enumerated in Section 34 of the NIRC.
Additional deductions are granted to insurance

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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

companies in Section 37, while losses from wash expense to the business/trade of the
sales of stock or securities by a dealer in securities taxpayer);
are provided for in Section 38 of the NIRC. Other 0 Legitimately paid (not a BRIBE, kickback,
itemized deductions could be granted under or otherwise contrary to law, morals, public
general or special laws, e.g. additional training policy);
expenses are allowed to enterprises registered 1 If subject to withholding tax, the tax required
with PEZA, BOI, and SBMA. to be withheld on the expense paid or
payable is shown to have been properly
Timing of Claiming Deductions: withheld and remitted to the BIR on time;
A taxpayer has the right to deduct all authorized 2 Amount must be reasonable.
allowances for the taxable year. As a rule, if he does
not within any year deduct certain of his expenses, Note: The expenses allowable to a non-resident alien
losses, interest, taxes or other charges, he cannot or a foreign corporation consist of only such expenses
deduct them from the income of the next of any as are incurred in carrying on any business or trade
succeeding year. (Sec. 76, Income Tax Regulations). conducted within the Philippines exclusively.
(Sec. 77 RR 2)
Expenses
Business expenses deductible from gross income COHAN Rule: This relief will apply if the taxpayer
include the ordinary and necessary expenditures has shown that it is usual and necessary in the
directly connected with or pertaining to the trade to entertain and to incur similar kinds of
taxpayers trade or business. The cost of goods expenditures, there being evidence to show the
purchased for resale, with proper adjustment for amounts spent and the persons entertained,
opening and closing inventories, is deducted from though not itemized. In such a situation, deduction
gross sales in computing gross income. of a portion of the expenses incurred might be
allowed even if there are no receipts or vouchers.
Includes: Absence of invoices, receipts or vouchers,
0 Salaries, wages, and other forms of particularly lack of proof of the items constituting
compensation for personal services actually the expense is fatal to the allowance of the
rendered, including the grossed-up monetary deduction (Gancayco v. Collector,1 SCRA 980).
value of fringe benefits furnished or granted
by the employer to the employee Substantiation requirement
1 Travel expenses Sec. 34(A)(1)(b), NIRC: No deduction from gross
2 Rentals income shall be allowed unless the taxpayer shall
3 Entertainment, recreation and substantiate with sufficient evidence, such as
amusement expenses official receipts or other adequate records: (1) the
4 Other expenses such as repairs or those incurred by AMOUNT of the expense being deducted, and (2)
farmers and other persons in agribusiness the DIRECT CONNECTION or relation of the
expense being deducted to the development,
Requisites for deductibility of business expenses. management, operation and/or conduct of the
trade, business or profession of the taxpayer.
4 Ordinary AND necessary;
ORDINARY - normal and usual in relation to When to ACCRUE expenses: all events test states
the taxpayer's business and surrounding that under the accrual method of accounting,
circumstances; need not be recurring expenses are deductible in the taxable year in which:
NECESSARY - appropriate and helpful in the (1) all events have occurred which determine the
development of taxpayer's business or are liability; and (2) the amount of liability can be
proper for the purpose of realizing a profit or determined with reasonable accuracy.
minimizing a loss
Kinds of business expenses.
5 Paid or incurred during the taxable year; These are:
0 Salaries, wages and other forms of
6 Others: (not in the SC syllabus) compensation for personal services actually
0 Paid or incurred in carrying on or which are rendered, including the grossed-up
directly attributable to the development, monetary value of the fringe benefit
management, operation and/or conduct of the subjected to fringe benefit tax which tax
trade, business or exercise of profession; should have been paid (Compensation for
1 Substantiated by adequate proof 1 Travelling expenses
documented by official receipts or adequate
records, which reflect the amount of expense
deducted and the connection or relation of the
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UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION

0 Cost of materials not been deducted in determining the net


1 Rentals and/or other payments for use or income for any previous year.
possession of property
2 Repairs and maintenance
3 Expenses under lease agreements
4 Expenses for professionals Rentals and/or other payments for use or
5 Entertainment expenses possession of property
6 Political campaign expenses 0 Required as a condition for continued use or
7 Training expenses possession of property.
8 Others 1 For purposes of trade business or profession.
2 Taxpayer has not taken or is not taking title to
Salaries, wages and other forms of compensation the property or has no equity other than that
for personal services actually rendered, including of lessee, user, or possessor.
the grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should Repairs and maintenance
have been paid (Compensation for personal 0 Incidental or ordinary repairs are deductible
services actually rendered) Repairs which neither materially add to the value
of the property nor appreciably prolong its life, but
0 Given for personal services actually rendered keep it in an ordinarily efficient working condition,
1 Amount is reasonable may be deducted as expenses, provided the plant
or property account is not increased by the
Bonuses are deductible when: amount of such expenditure. The life of the asset
0 made in good faith referred to is the probable, normal, useful life for
1 given as additional compensation for the purpose of the allowance for the return of the
personal services actually rendered capital investment
2 such payments, when added to the stipulated not what the life that would have been if no
salaries, do not exceed a reasonable repairs had been made after the property was
compensation for the services rendered damaged by a casualty. Since the repairs
prolonged the lives of the said vessels of
Travelling expenses petitioners, the disallowance must be sustained.
This include transportation expenses and meals (Visayan Transportation Co. v. CTA, CTA
and lodging (Sections 65 and 66, Rev. Reg. No. 2) Case No. 1119, Sept. 30, 1964).
0 Expenses must be reasonable and necessary.
1 Must be incurred or paid while away from home 1 Extraordinary repairs are not deductible
they are capital expenditures
Tax home is the principal place of business, (1) Repairs which add material value to the
when referring to away from home property or appreciably prolong its life
(2) Repairs in the nature of replacement, to
2 Incurred or paid in the conduct of trade or the extent that they arrest deterioration
business. and appreciably prolong the life of the
property, should be charged against the
Note: However, necessary transportation expenses depreciation reserves if such account is
of the taxpayer (which are different from the kept. (Sec. 68, Rev. Regs. 2).
transportation expenses included in the term travel
expenses) in its tax home are deductible. Thus, Expenses under lease agreements
a taxpayer operating its business in Manila is Requisites for deductibility:
allowed transportation expenses from its office to 5888 Required as a condition for continued
its customers place of business and back. But the use or possession;
5889 For purposes of the trade, business or
transportation expenses of an employee from his
possession;
residence to its office and back are not deductible
as they are considered personal expenses.
5890 Taxpayer has not taken or is not taking
title to the property or has no equity other
than that of lessee, user, or possessor.
Cost of materials
Deductible only to the amount that they are actually
Expenses for professionals
consumed and used in operation during the year for
Deductible in the year the professional services
which the return is made, provided that their cost has
are rendered, not in the year they are billed,
provided that the all events is present.

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(6) Other expenses of a similar nature.


All events testrequires:
0 Fixing a right to income or liability to pay; and Political campaign expenses
1 The availability of reasonably accurate Amount expended for political campaign purposes
determination of such income or liability. or payments to campaign funds are not deductible
The all-events test does not demand that the either as business expenses or as contribution
amount of income or liability be known absolutely; (CTA Case No. 695, April 30, 1969, citing Mertens)
it only requires that a taxpayer has at its disposal
the information necessary to compute the amount Training expenses
with reasonable accuracy, which implies something BIR Ruling 102-97 (Sept. 29, 1997):
less than an exact or completely accurate amount. Under Section 30 of the Tax Code, as implemented
(Commissioner v. Isabela Cultural Corporation, by Sec. 20 of the Revenue Regulations No. 2,
GR. 172231, Feb. 12, 2007) check citation organization and pre-operating expenses of a
corporation (including training expenses) are
A professional may claim as deductions the cost of considered as capital expenditures and are
supplies used by him in the practice of his profession, therefore, not deductible in the year they are paid
expenses paid in the operation and repair of or incurred. But taxpayers who incur these
transportation equipment used in making professional expenses and subsequently enter the trade or
calls, dues to professional societies and subscriptions business to which the expenditures relate can elect
to professional journals. (Mamalateo) to amortize these expenditures over a period not
less than sixty (60) months.
Entertainment expenses
Requisites for deductibility: This rule, however, does not apply to a situation
0 Reasonable in amount. where an existing corporation incurs these same
1 Paid or incurred during the taxable period. expenditures for the purpose of expanding its
2 Directly connected to the development, business in a new line of trade, venture or activity.
management, and operation of the trade,
business or profession of the taxpayer, or Others
that are directly related to or in furtherance of 0 Expenses Allowable to Private Educational
the conduct thereof. Institutions:
3 Not to exceed such ceiling as the Secretary of 1 In addition to the expenses allowable as
Finance prescribe (under RR 10-02, in no deductions under the NIRC, a private
case to exceed 0.50% of net sales for sellers proprietary educational institution may at its
of goods or properties or 1% of net revenues OPTION, elect either:
for sellers of services, including taxpayers 0 To deduct expenditures otherwise
engaged in the exercise of profession and considered as capital outlays or depreciable
use or lease of properties) assets incurred during the taxable year for
4 Not incurred for purposes contrary to law, the expansion of school facilities, OR
morals, public policy or public order. 1 To deduct allowances for depreciation thereof.
5 Must be substantiated with sufficient evidence
such as receipts and/or adequate records. Thus, where the expansion expense has been
claimed as a deduction, no further claims for yearly
Exclusions from Entertainment, Amusement and depreciation of the school facilities are allowed.
Recreation (EAR) expenses:
0 Expenses which are treated as compensation Advertising Expenses
or fringe benefits for services rendered under The media advertising expenses which were found
an employer-employee relationship to be inordinately large and thus, not ordinary, and
1 Expenses for charitable or fund raising events which were incurred in order to protect the
2 Expenses for bona fide business meeting of taxpayers brand franchise which is analogous to
stockholders, partners or directors the maintenance of goodwill or title to ones
3 Expenses for attending or sponsoring an property, are not ordinary and necessary expenses
employee to a business league or but are capital expenditures, which should be
professional organization meeting spread out over a reasonable period of time. (CIR
4 Expenses for events organized for promotion v. General Foods (Phils.)Inc, GR No. 143672, April
marketing and advertising, including 24, 2003) rtens)
concerts, conferences, seminars, workshops,
conventions and other similar events; and
Interest

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Requisites for deductibility. 0 More than 50% of the outstanding stock of


0 There is an indebtedness. each is owned, directly or indirectly, by or
1 The indebtedness is that of the taxpayer for the same individual; or
2 The indebtedness is connected with the 23 Between parties to a trust-
taxpayers trade, profession, or business. 23 Grantorand Fiduciary; or
3 The interest must be legally due. 24 Fiduciary of a trust and fiduciary of
4 The interest must be stipulated in writing. another trust if the same person is a
5 The taxpayer is LIABLE to pay interest on grantor with respect to each trust; or
the indebtedness. 25 Fiduciaryand Beneficiary
6 The indebtedness must have been paid or
accrued during the taxable year. Interest subject to special rules.
7 The interest payment arrangement must not Interest paid in advance
be between related taxpayers 768 No deduction shall be allowed if within
8 The interest must not be incurred to finance the taxable year an individual taxpayer
petroleum operations. reporting income on cash basis incurs an
9 In case of interest incurred to acquire indebtedness on which an interest is paid in
property used in trade, business or exercise advance through discount or otherwise.
of profession, the same was nottreated as a 769 But the deduction shall be allowed in the
capital expenditure, year the indebtedness is paid

Limitation: The taxpayer's allowable deduction for Interest periodically amortized


interest expense shall be reduced by an amount If the indebtedness is payable in periodic
equal to 33% of the interest income subjected to amortizations, the amount of interest which
final tax (see chapter on taxation of passive corresponds to the amount of the principal
income for interest income); effective January 1, amortized or paid during the year shall be
2009. allowed as deduction in such taxable year

Non-deductible interest expense. Interest expense incurred to acquire property for


0 Interest paid in advance by the taxpayer who use in trade/business/profession
reports income on cash basis shall only be
allowed as deduction in the year the At the option of the taxpayer, interest expense
indebtedness is paid. on a capital expenditure may be allowed as:
1 If the indebtedness is payable in periodic 0 A deduction in full in the year when incurred;
amortizations, only the amount of interest which 1 A capital expenditure for which the taxpayer
corresponds to the amount of the principal may claim only as a deduction the periodic
amortized or paid during the year shall be amortization of such expenditure.
allowed as deduction in such taxable year.
2 Interest payments made between related Should the taxpayer elect to deduct the interest
taxpayers. payments against its gross income, the taxpayer
3 Interest on indebtedness incurred to finance cannot at the same time capitalize the interest
petroleum exploration. payments. In other words, the taxpayer is not entitled
to both the deduction from gross income and the
Related Taxpayers adjusted (increased) basis for determining gain or
0 Between members of the family, i.e. brothers and loss and the allowable depreciation charge.( Paper
sisters (whether by the whole or half-blood), Industries Corp. v. Commissioner, 250 SCRA 434)
spouse, ancestor, and lineal descendants; or
1 Except in case of distributions in liquidation, Reduction of interest expense/interest arbitrage
between an individual and a corporation, The taxpayer's allowable deduction for interest
where the individual owns directly or expense shall be reduced by an amount equal to
indirectly more than 50% of the outstanding 33% of the interest income subjected to final tax;
stock of the corporation effective January 1, 2009. (RA 9337)
2 Except in the case of distributions in
liquidation, between two corporations where: This limitation is apparently intended to counter the
0 Either one is a personal holding company tax arbitrage scheme where a taxpayer obtains an
of a foreign personal holding company interest-bearing loan and places the proceeds of
with respect to the taxable year preceding such loan in investments that yield interest income
the date of the sale of exchange; and

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subject to preferential tax rate of 20% final surcharge or penalty on delinquent taxes.
withholding tax. (Valencia and Roxas) However, interest on delinquent taxes, although
not deductible as tax, can be deducted as
Taxes interest expense at its full amount. (CIR v
Taxes Proper: Refers to national and local taxes; Palanca, 18 SCRA 496).

Requisites for deductibility. Although interest payment for delinquent taxes is


Such tax must be: not deductible as tax, the taxpayer is not precluded
0 Paid or incurred within the taxable year; thereby from claiming said interest payment as
1 Paid or incurred in connection with the deduction as such. (CIR v. Vda. de Prieto, 1960)
taxpayers trade, profession or business;
2 Imposed directly on the taxpayer. Treatment of special assessment.
3 Not specifically excluded by law from being Special assessments and other taxes assessed
deducted from the taxpayers gross income. against local benefits of a kind tending to
increase the value of the property assessed are
Non-deductible taxes. non-deductiblefrom gross income.
General Rule:All taxes, national or local, paid or
incurred during the taxable year in connection Tax credit vis--vis deduction.
with the taxpayer's profession, trade or Tax credit amount allowed by law to reduce the
business, are deductible from gross income Philippine income tax due, subject to limitations, on
account of taxes paid or accrued to a foreign country
Exceptions:
0 Philippine income tax, except Fringe Benefit Tax Credit Tax Deduction
Taxes;
1 Income tax imposed by authority of any
foreign country, if taxpayer avails of the Taxes are deductible Taxes are deductible
Foreign Tax Credit (FTC) from the Phil. Income from gross income in
1.768 Exception to exception: When tax itself computing the taxable
the taxpayer does NOT signify his desire income
to avail of the tax credit for taxes of foreign Effect: Reduces Effect: Reduces taxable
countries, the amount may be allowed as Philippine income tax income upon which the
a deductionfrom gross income of citizens liability tax liability is calculated
and domestic corporationssubject to the Sources: Only foreign Sources: Deductible
limitations set forth by law.
income taxes may be taxes (e.g. business tax,
2 Estate and donors taxes
claimed as credits excise tax)
3 Percentage tax on stock transaction;
against Philippine
4 Taxes assessed against local benefits of a
income tax.
kind tending to increase the value of the
property assessed (Special Assessments)
5 Value Added Tax An amount subtracted from an individual's or
6 Fines and penalties entity's tax liability to arrive at the total tax liability.
7 Final taxes A tax credit reduces the taxpayer's liability,
8 Capital Gains Tax compared to a deduction which reduces taxable
9 Import duties income upon which the tax liability is calculated. A
10 Business taxes credit differs from deduction to the extent that the
11 Occupation taxes former is subtracted from the tax while the latter is
12 Privilege and license taxes subtracted from income before the tax is
13 Excise taxes computed.( CIR v. Bicolandia Drug Corp.)
14 Documentary stamp taxes
15 Automobile registration fees The following may claim tax credits:
16 Real property taxes 0Resident citizens
17 Electric energy consumption tax under BP 36 1Domestic corporations, which include
all partnerships except general
Treatments of surcharges/interests/fines for professional partnerships
delinquency. 2Members of general professional partnerships
The amount of deductible taxes is limited to the 3Beneficiaries of estates or trusts
basic tax and shall not include the amount for any
The following may NOT claim tax credits:

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0 Non-resident citizens 0 Loss must be that of the taxpayer (e.g., losses


1 Aliens, whether resident or non-resident of the parent corp. cannot be deducted by its
2 Foreign corporations, whether resident on subsidiary);
non-resident 1 Actually sustained and charged off within the
taxable year;
Note: Tax credits for foreign taxes are allowed 2 Incurred in trade, business or profession;
only for income derived from sources outside the 3 Of property connected with the trade, business,
Philippines. The above taxpayers are not entitled or profession, if the loss arises from fires,
to tax credit; they are taxable only on income storms, shipwreck or other casualties, or from
derived from Philippine sources. robbery, theft, or embezzlement;
4 Sustained in a closed and completed transaction;
Limitations on Tax Credit. 5 Not compensated for by insurance or other
form of indemnity;
4 [Per Country Limit]The amount of tax credit 6 Not claimed as a deduction for estate tax
shall not exceed the same proportion of the tax purposes;
against which such credit is taken, which the 7 In case of casualty loss, filing of notice of loss
taxpayer's taxable income from sources within with the BIR within 45 days from the date of
such country bears to his entire taxable income the event that gave rise to the casualty; and
for the same taxable year; and 8 The taxpayer must prove the elements of the
loss claimed, such as the actual nature and
5 [Worldwide Limit]The total amount of the credit occurrence of the event and amount of the loss.
shall not exceed the same proportion of the tax
against which such credit is taken, which the No loss is recognized in the following.
taxpayer's taxable income from sources without 23 Merger, consolidation, or control securities
the Philippines taxable bears to his entire (where no gains are recognized either);
taxable income for the same taxable year. 24 Exchanges not solely in kind;
25 Related taxpayers (see above (c) Interest
Formula: expense incurred to acquire property for use
Limit #1 in trade/business/profession)
Taxable Limit on 26 Wash sales;
Income Per 27 Illegal transactions
amount of
Foreign
Phil. Income tax credit Other types of losses.
Country x =
Tax (Per Capital losses
World wide Country 0 Incurred in the sale or exchange of capital
Taxable
Limit) assets (allowable only to the extent of capital
Income
gains, except for banks and trust companies
under conditions in Sec. 39 of NIRC where
Limit #2 loss from such sale is not subject to the
Taxable foregoing limitation);
Income For Limit on 1 Resulting from securities becoming worthless
all Foreign Phil. Income amount of and which are capital assets (considered loss
Countries x = tax credit from sale or exchange) on last day of the
Tax
World wide (World taxable year ;
Taxable Wide Limit) 2 Losses from short sales of property;
Income 3 Losses due to failure to exercise privileges or
options to buy or sell property.
Note: Computation of FTC: Limit #2 applies
where taxes are paid to two or more foreign Securities becoming worthless
countries. Allowable tax credit is the lower 0 Loss in shrinkage in value of stockthrough
between the tax credit computed under Limit #1 fluctuation in the market is not deductiblefrom
and that computed under Limit#2. gross income. (To be deductible, the loss must be
actually suffered when the stock is disposed of.)
FTC Limitations lowest of the 3:
0 Actual FTC 1 Exception: If the stock of the corporation becomes
1 For taxes paid to one foreign country worthless, the cost or other basis may be
2 For taxes paid to 2 or more foreign countries deducted by its owner in the taxable year in which

Losses
Requisites for deductibility.
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the stock became worthless, provided a 0 AT LEAST 75% of the paid up capital of
satisfactory showing of its worthlessness be the corporation is held by or on behalf of
made, as in the case of bad debts. the same persons.

Losses on wash sales of stocks or securities Taxpayers Entitled to NOLCO


Wash Sale - a sale or other disposition of stock or 0 Individuals engaged in trade or business or in
securities where substantially identical securities the exercise of his profession (including
(substantially the same as those disposed of) are estates and trusts);
acquired or purchased (or there was an option to Note:An individual who avails of 40% OSD shall
acquire, and the acquisition or option should be by not simultaneously claim deduction of NOLCO.
purchase or exchange upon which gain or loss is However, the three-year reglementary period
recognized under the income tax law) within a 61- shall continue to run during such period
day period, beginning 30 days before the sale and notwithstanding the fact that the aforesaid
ending 30 days after the sale taxpayer availed of OSD during the said period.

General rule: Not deductible from gross income 1 Domestic and resident foreign corporations
Exception: If by a dealer in securities in the subject to the normal income tax (e.g.,
course of ordinary business, it is deductible. manufacturers and traders) or preferential tax
rates under the Code (e.g., private educational
Wagering losses institutions, hospitals, and regional operating
Losses from wagering (gambling) are deductible headquarters) or under special laws (e.g.,
only to the extent of gains from such transactions. PEZA-registered companies)
A wager is made when the outcome depends upon
CHANCE. Note: Domestic and resident foreign
corporations taxed during the taxable year
NOLCO (Net Operating Loss Carry Over) with Minimum Corporate
Net operating loss (NOL)is the excess of allowable Income Tax cannot enjoy the benefit of
deductions over gross income for any taxable year NOLCO. However, the three-year period for
immediately preceding the current taxable year. the expiry of he NOLCO is not interrupted by
the fact that the corporation is subject to
NOLCO: The NOL of the business or enterprise MCIT during such three-year period.
which had not been previously offset as deduction
from gross income shall be carried over as a Other Losses:
deduction from gross incomefor the next three (3) 23 Abandonment lossesin petroleum operation
consecutive taxable years immediately following and producing well.
the year of such loss, provided however, that any 24 Losses due to voluntary removal of
net loss incurred in a taxable year during which the buildingincident to renewal or replacements
taxpayer was exempt from income tax shall not be are deductible from gross income.
allowed as a deduction. (Sec. 34(3)(D), NIRC) 25 Loss of useful value of capital assetsdue to charges
in business conditions is deductible only to the extent
Exception: Mines other than oil and gas wells, where of actual loss sustained (after adjustment for
a net operating loss without the benefit of incentives improvement, depreciation and salvage value)
provided for under EO No. 226 (Omnibus 26 Losses from sales or exchanges of property
Investments Code) incurred in any of the first ten (10) between related taxpayersare not
years of operation may be carried over as a deduction recognized, but the gains are taxable.
from taxable income for the next five (5) years
immediately following the year of such loss. Losses of farmersincurred in the operation of
farm business are deductible.
Requisites for NOLCO:
23 The taxpayer was not exempt from income Bad debts
tax the year the loss was incurred; Debts resulting from the worthlessness or
24 There has been no substantial change in the uncollectibility, in whole or in part, of amounts due the
ownership of the business or enterprise wherein: taxpayer actually ascertained to be worthlessand the
23 AT LEAST 75% of nominal value of corresponding receivable should have been written off
outstanding issued shares is held by or on or charged off within the taxable year
behalf of the same persons; or

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Requisites for deductibility. off in a prior year


0 Valid and legally demandable debt due to the (2) Accounts receivable may be written off as bad
taxpayer debts even without conclusive evidence that
1 Debt is connected with the taxpayer's trade, they had definitely become worthless when:
business or practice of profession; 0 the amount is insignificant; and
2 Debt was not sustained in a transaction 1 collection through court action may be more
entered into between related parties; costly to the taxpayer
3 Actually ascertained to be worthless and
uncollectible as of the end of the taxable year Actually charged off from the taxpayers book of
(taxpayer had determined with reasonably accounts
degree of certainty that the claim could not Receivable which has actually become worthless
be collected despite the fact that the creditor at the end of the taxable year has been cancelled
took reasonable steps to collect); and and written off. Mere recording in the books of
4 Actually charged off the books of accounts of account of estimated uncollectible accounts does
the taxpayer as of the end of the taxable year not constitute a write-off.

General rule: Taxpayer must ascertain and Effect of recovery of bad debts.
demonstrate with reasonable certainty the Tax Benefit Rule on Bad Debts
uncollectibility of debt Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be
Exceptions: included as part of the taxpayers gross income
0 Banks as creditors BSP Monetary Board shall in the year of such recovery the extent of the
ascertain the worthlessness and uncollectibility income tax benefit of said deduction. Also called
of the debt and shall approve the writing off the equitable doctrine of tax benefit.
1 Receivables from an insurance or surety
company (as debtor) may be written off as bad 23 Allowance must be reasonable
debts only when such company is declared 24 Charged off during the taxable year from the
closed due to insolvency or similar reason taxpayers books of accounts.
25 Does not exceed the acquisition cost of the
The taxpayer must show that the debt is indeed property.
uncollectible even in the future. He must prove
that he exerted diligent efforts to collect: Methods of computing depreciation allowance.
23 Sending of statement of accounts (a) Straight-line cost- salvage value
24 Collection letters estimated life
25 Giving the account to a lawyer for collection (b) Declining balance cost depreciation x
26 Filing the case in court (Phil. Refining Corp. Rate
v. CA, G.R. No. 118794, May 8, 1996) estimated life
(c) Sum-of-the-year-digit nth period x cost-
In ascertaining the debt to be worthless, it is not (SYD) salvage
enough that the taxpayer acted in good faith. He SYD
must show that he had reasonably investigated 0 Any other method
the relevant facts from which it became evident, which may be
in the exercise of sound, objective business prescribed by the
judgment, that there remained no practical, but Secretary of Finance
only a vague prospect that the debt would be upon the
paid (Collector v. Goodrich, 1967) recommendation of
the CIR
Rev. Reg. No. 5-1999:
Actually ascertained to be worthless Charitable and other contributions
0 Determination of worthlessness must depend
Requisites for deductibility.
upon the particular facts and circumstances of the
0 Actually PAID or made to the ENTITIES or
case. A taxpayer may not postpone a bad debt
institutions specified by law;
deduction on the basis of a mere hope of ultimate
1 Made within the TAXABLE year.
collection or because of a continuance of attempts
2 It must be EVIDENCED by adequate receipts
to collect, where there is no showing that the or records.
surrounding circumstances differ from those 3 For Contributions Other than Money: The amount
relating to other notes which were charged shall be BASED on the acquisition cost of the

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th
property (i.e., not the fair market value at the not later than 15 day of the month following
time of the contribution). the close of its taxable year in which
23 For Contributions subject to the statutory contributions are received, unless an
limitation: It must NOT EXCEED 10% (individual) extended period is granted by the Secretary
or 5% (corporation) of the taxpayers taxable of Finance, upon recommendation of the CIR
income before charitable contributions 0 Administrative expense ,on an annual
basis, must not exceed 30% of total
Amount that may be deducted. expenses for the taxable year
Kinds of Contributions. 1 Upon dissolution, its assets would be
0 Contributions deductible in full; distributed to another accredited NGO
1 Contributions subject to the statutory limit. organized for a similar purpose or
purposes, OR to the State for public
Contributions Deductible in Full: (FoNG) purpose, OR would be distributed by a
0 Donations to the Government of the Philippines, competent court of justice to another
or to any of its agencies, or political subdivisions, accredited NGO to be used in such manner
including fully owned government corporations as in the judgment of said court shall best
0 Exclusively to finance, provide for, or to be accomplish the general purpose for which
usedin undertaking priority activitiesin the dissolved organization was organized.
(YEHHES)
0 Education Contributions subject to the Statutory Limit (DNGS)
1 Health These contributions are not deductible in full as
2 Youth and sports development specified by the law or such deduction has not met
3 Human settlements the requirements to be deducted in full.
4 Science and culture, and
5 Economic development Those made to:
1 in accordance with a National Priority Plan 0 Governmentor any of its agencies or political
determined by NEDA (otherwise, subject subdivisions exclusively for public
to statutory limit) purposes(contributions for non-priority activities)
1 Accredited domestic corporation or
1 Donations to Certain Foreign Institutions or associationsorganized exclusivelyfor
International Organizationswhich are fully 1.0 religious
deductible in compliance with agreements, 1.1 charitable
treaties or commitments entered into by the 1.2 scientific
Government of the Philippines and the foreign 1.3 youth and sports development
insgtutions or international organizations or in 1.4 cultural
pursuance of special laws 1.5 educational purposes or
1.6 rehabilitation of veterans
2 Donations to Accredited Non-government 2 Social welfare institutions
Organizations subject to conditions set forth in 3 Non-government organizations: No part of
RR No. 13-98 NGO means a non-stock non- the net income of which inures to the benefit
profit domestic corporation or organization: of any private stockholder or individual
(1) Organized and operated exclusivelyfor:
0 scientific, Statutory Limit:
1 research, 0 10% in the case of an individual (individual
2 educational, donor), and
3 character-building and youth and 1 5% in the case of a corporation (corporate donor),
sports development,
4 health, of the taxpayer's/donors income derived from
5 social welfare, trade, business or profession computed before
6 cultural or the deduction for contributions and donations
7 charitable purposes, or
8 a combination thereof, The amount deductible is the actual contribution or
0 No part of the net income of which inures the statutory limit computed, whichever is lower
to the benefit of any private individual
1 Directly utilizes contributions for the active Contributions to pension trusts
conduct of the activities constituting the Contribution to a pension trust may be claimed
purpose or function for which it is organized, as deduction as follows:

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0 Amount contributed for the 0 Taxpayer signifies in his
present/normal service cost 100%
return his intention to elect this deduction;
deductible
otherwise he is considered as having availed of

the itemized deductions.
1 Amount contributed for the past
service cost 1/10 of the amount contributed
is deductible in year the contribution is made, 1 Election is irrevocable
the remaining balance will be amortized for the year in which made; however, he
equally over nine consecutive years can change to itemized deductions in
succeeding years.
General Rule: An employerestablishing or
maintaining a pension trust to provide for the 0 Corporations, except non-resident foreign
payment of reasonable pensions to his corporations
employees shall be allowed as a deduction, a The option to elect Optional Standard
reasonable amount transferred or paid into such Deduction granted is now granted to
trust in excess of the contributions to such trust corporations (domestic and resident foreign
made during the taxable year. corporations) by virtue of RA 9504.
0 The OSD is 40% of its gross income.
Requisites for deductibility of payments to 1 The domestic and resident foreign
pension trusts. corporation shall keep such records
0 There must be a pension or retirement plan pertaining to his gross income as defined in
established to provide for the payment of Section 32 of the NIRC during the taxable
reasonable pensions to employees; year, as may be required by the rules and
1 The pension plan is reasonable and regulations promulgated by the Secretary of
actuarially sound; Finance upon recommendation of the CIR.
2 It must be funded by the employer; 2 Corporations availing of OSD are still required
3 The amount contributed must no longer be to submit their financial statements when they
subject to the employers control or file their annual ITR and to keep such records
disposition; and pertaining to its gross income. (RR 2-2010).
4 The payment has not theretofore been
allowed before as a deduction. 1 Partnerships
0 General Co-Partnership
Deductions under special laws. For purposes of taxation, the Code considers
0 Special deductions for productivity bonus and general co-partnerships as corporations.
manpower training under the Productivity Hence, rules on OSD for corporations are
Incentives Act of 1990 applicable to general co-partnerships.
1 Deductions for training expenses of qualified
jewelry enterprises (Jewelry Industry 0 General Professional Partnerships (GPP)
Development Act of 1998) 0 If the GPP availed of itemized deductions, the
2 Deductions under the Adopt-a-School Act of 1998 partners are not allowed to claim the OSD from
3 Deductions under the Expanded Senior their share in the net income because the OSD
Citizens Act of 2003. (Domondon) is a proxy for all the items of deductions
allowed in arriving at taxable income. This
Optional standard deduction. means that the OSD is in lieu of the items of
768 Individuals, except non-resident aliens deductions claimed by the GPP and the items
768.0 May be taken by an individual in of deduction claimed by the partners.
lieu of itemized deductions exceptthose 1 If the GPP avails of OSD in computing its
earning purely compensation income. net income, the partners comprising it can
768.1 If an individual opted to use no longer claim further deduction from
OSD, he is no longer allowed to deduct their share in the said net income for the
cost of sales or cost of services. following reasons:
768.2 Amount: 40% of gross sales or 0 The partners distributive share in the GPP
gross receipts(under RA 9504, effective July 6, is treated as his gross income not his gross
2008) sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be
Requisites: deducted not from his gross income but
0 Taxpayer is a citizen or resident alien; from his gross sales/receipts; and,
1 Taxpayers income is not entirely from 1 The OSD being in lieu of the itemized
compensation; deductions allowed in computing taxable
income as defined under Section 32 of the
Tax Code, it will answer for both the items

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of deduction allowed to the GPP and its 0 Married Individuals: Additional exemptions
partners. for QDC are claimed by only one spouse.
0 Since one-layer of income tax is imposed on
the income of the GPP and the individual Generally, the spouse who is the gross
partners where the law had placed the compensation earner is the claimant of the
statutory incidence of the tax in the hands of additional exemptions.
the latter, the type of deduction chosen by the
GPP must be the same type of deduction that 1 Where the husband and wife are both
can be availed of by the partners. Accordingly, compensation income earners: the husband is
if the GPP claims itemized deductions, all items the proper claimant of the additional
of deduction allowed under Sec. 34 can be exemptions EXCEPT if there is an express
claimed both at the level of the GPP and at the waiver by the husband in favor of his wife, as
level of the partner in order to determine the embodied in the application for registration
taxable income. On the other hand, should the (BIR Form No. 1902) or in the Certificate of
GPP opt to claim the OSD, the individual Update of Exemption and of Employers
partners are deemed to have availed also of and Employees Information (BIR Form
the OSD because the OSD is in lieu of the No. 2305), whichever is applicable.
itemized deductions that can be claimed in 2 When the spouses have business and/or
computing taxable income. professional income only: either may claim the
1 If the partner also derives other gross income additional exemptions at the end of the year.
from trade, business or practice of profession 3 The employed spouse shall be automatically
apart and distinct from his share in the net entitled to claim the additional exemptions
income of the GPP, the deduction that he can for children in the following instances:
claim from his other gross income would follow 0 spouse is unemployed
the same deduction availed of from his 1 spouse is a non-resident citizen deriving
partnership income as explained in the income from foreign sources
foregoing rules. Provided, however, that if the 4 Legally separated spouses: Additional
GPP opts for the OSD, the individual partner exemptions can be claimed by the spouse with
may still claim 40% of its gross income from custody of the child or children (but the total
trade, business or practice of profession but amount for the spouses shall not exceed the
not to include his share from the net income of maximum of four). [Sec 35(B), NIRC]
the GPP. (RR 2-2010) 5 If the taxpayer should have additional
dependents during the taxable year, he may
Personal and additional exemption (R.A. No. claim the corresponding additional exemption,
9504, Minimum Wage Earner Law). as the case may be, in full for such year.
0 Who is a dependent for purposes of
Basic personal exemptions additional exemptions?
According to RA 9504 (effective July 6, 2008) 0 A taxpayers child, whether legitimate,
basic personal exemption is Fifty thousand illegitimate or legally adopted child
pesos (P50,000) for each individual taxpayer, 1 chiefly dependent for support upon on the
regardless of status, i.e., whether single, married taxpayer
or head of the family. 2 living with the taxpayer
3 not more than 21 years old, unmarried and
But note Sec 35(A) of NIRC - In the case of not gainfully employed or
married individuals where only one of the 4 regardless of age, is incapable of self-
spouses is deriving gross income, only such support because of mental or physical
spouse shall be allowed the personal exemption. defect. (Sec 35 B, NIRC)

Additional exemptions for taxpayer with dependents Note:


0 An individual, whether single or married, shall Only children (not parents) may be considered
be allowed an additional exemption of P25,000 dependent for purposes of additional
for each qualified dependent child (QDC), exemptions.
provided that the total number of dependents
for which additional exemptions may be claimed The definition of the term dependent under
shall not exceed 4 dependents (depends on the Section 35(B) of the NIRC now includes a
number of qualified dependent children) Foster Child or a child placed under planned
temporary substitute parental care by a Foster

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Parent or a Foster Family. (RMC No. 41- trade, business or profession. Capital
20i3, Jan. 23, 2013) expenditures (e.g. acquisition cost of a building)
are also not deductible, because these are not
0 Who may claim personal exemptions? expenses, but form part of assets.
0 Citizens (whether resident or non-resident)
and resident aliens In computing taxable net income, no deduction
1 Non-resident aliens engaged in trade or shall be allowed in respect to:
business are entitled personal exemptions
subject to reciprocity. (See below) 0 Personal, living or family expenses (note:
they are not deductible from compensation
Status-at-the-end-of-the-year rule and business/professional income under
Change of Status[Sec 35(C), NIRC] Section 24(A), NIRC)
5888 If taxpayer marries during taxable year, 1 Any amount paid out for new buildings or for
taxpayer may claim the corresponding BPE in full permanent improvements, or betterments made
for such year (i.e., no need to pro-rate the to increase the value of any property or estate
exemption). 2 Any amount expended in restoring property
5889 If taxpayer should have additional or in making good the exhaustion thereof for
dependent(s) during taxable year, taxpayer may which an allowance [for depreciation or
claim corresponding AE in full for such year. depletion] is or has been made
5890 If taxpayer dies during taxable year, his 3 Premiums paid on any life insurance policy
estate may claim BPE and AE as if he died at covering the life of any officer, employee, or
the close of such year. any person financially interested in the trade or
5891 If during the taxable year business carried on by the taxpayer, individual
5888 spouse dies or or corporate, when the taxpayer is directly or
5889 any of the dependents dies or marries, indirectly a beneficiaryunder such policy
turns 21 years old or becomes gainfully 4 Interest expense and bad debts between
employed, taxpayer may still claim same related parties (See Sec. 36(B), NIRC).
exemptions as if the spouse or any of the 5 Losses from sales or exchanges of property
dependents died, or married, turned 21 betweenrelated taxpayers.
years old or became gainfully employed at 6 Non-deductible interest should the taxpayer
the close of such year. elect to deduct interest payments against its
gross income, he cannot at the same time
Note: When it comes to change of status, the capitalize such interest and claim depreciation
status beneficial to the taxpayer is used for on the undepreciated cost which includes the
purposes of claiming deductions as long as the interest. (PICOP v. Commissioner, G.R. No.
taxpayer achieved such status at any time 106949-50, Dec. 1, 1995)
during the taxable period. 7 Non deductible taxes
8 Non-deductible losses
Exemptions claimed by non-resident aliens Non- 9 Losses on Wash Sales (except if by dealer
resident aliens engaged in trade or business are in securities in ordinary course of
entitled personal exemptions subject to reciprocity. 10 business
It means that NRAETB shall be allowed a
personal exemption only if the income tax law in EXEMPT CORPORATIONS
his country grants allowance for personal These are:
exemptions to the citizens and residents of the 0 Proprietary Educational Institutions and hospitals
Philippines as stipulated in the reciprocity tax 1 Government owned and controlled corporations
treaty with the Philippine Government. 2 Others

Limit of PE Allowed to NRAETB: An amount Proprietary Educational Institutions and hospitals


equal to the exemptions allowed by the non- By way of exception, proprietary educational
resident aliens country to Filipino citizens not institutions and hospitals are liable for net
residing therein but deriving income therefrom, income at a rate of only ten percent (10%).
but not to exceed the amount fixed by NIRC.[In
other words, whichever is lower] (See Tax on Domestic Corporations, Tax on
Proprietary Educational Institutions and Hospitals)
Items not deductible.
General rule: In determining deductions, one of the Government owned and controlled corporations
general rules (see above) is that deductions must be
paid or incurred in connection with the taxpayers

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All corporations, agencies, or instrumentalities 0 Farmers', fruit growers', or like association


owned or controlled by the Government are organized and operated as a Sales agentfor
subject to income tax, except: the purpose of marketing the products of its
0 GSIS members and turning back to them the
1 SSS proceeds of sales, less the necessary selling
2 PHIC expenses on the basis of the quantity of
3 Local water districts (LWDs) produce finished by them;
4 PCSO
Note:
(See Tax on Domestic Corporations, Tax on 0 Notwithstanding the exemptions, income
Government-Owned or Controlled Corporations, of whatever kind and character of the
Agencies or Instrumentalities) enumerated organizations from any of
their properties, real or personal, or from
Others (CREB-CLEF-SMB) any of their activities conducted for profit
The following organizations shall not be taxed in regardless of the disposition made of
respect to income received by them as such: such income, shall be subject to tax.
23 Labor,agricultural or horticultural organization 1 RA 9178 Act to Promote the Establishment of
not organized principally for profit Barangay Micro Business Enterprises (BMBEs)
24 Mutual savings bank not having a capital stock implemented by DO 17-04, April 20, 2004
represented by shares, and cooperative bank 0 BMBEs shall be exempt from income
without capital stock organized and operated tax for income arising from the
for mutual purposes and without profit operations of the enterprise.
25 A Beneficiary society, order or association, 1 BMBE is any business entity or
operating for the exclusive benefit of the members enterprise engaged in the production,
such as a fraternal organization operating under the processing or manufacturing of products
lodge system, or mutual aid association or a non- or commodities, including agro-
stock corporation organized by employees providing processing trading and services, whose
for the payment of life, sickness, accident, or other total assets including those arising from
benefits exclusively to the members of such society, loans but exclusive of land on which the
order, or association, or non-stock corporation or particular business entitys office, plant
their dependents and equipment are situated, shall not be
26 CEMETERY company owned and operated more than P3M.
exclusively for the benefit of its members 2 Recreational Clubs - RMC 35-2012 (August
27 Non-stock corporation or association organized 3, 2012) clarifies taxability of clubs organized
and operated exclusively for Religious, exclusively for pleasure, recreation and other
charitable, scientific, athletic, orcultural purposes, non profit purposes (recreational clubs).
or for the rehabilitation of veterans, no part of its Income from whatever sources including but
net income or asset shall belong to or inure to not limited to membership fees, assessment
the benefit of any member, organizer, officer or dues, rental income, and service fees are
any specific person subject to income tax and VAT.
28 Business league chamber of commerce, or board
of trade, not organized for profit and no part of
the net income of which inures to the benefit of TAXATION OF RESIDENT CITIZENS, NON-
any private stock-holder, or individual RESIDENT CITIZENS AND RESIDENT ALIENS
29 Civic leagueor organization not organized
for profit but operated exclusively for the Summary Table for Taxation of Individuals (all
promotion of social welfare individual taxpayers, including non-resident aliens)
30 A non-stock and nonprofitEducational institution
Classification Taxable Basic Additional Tax
31 GovernmentEducational institution
Income Personal Personal Rates
32 Farmers' or other mutual typhoon or fire Exemption Exemption
insurance company, mutual ditch or Resident Income Allowed Allowed 5%-
irrigation company, mutual or cooperative Citizen from 32%
telephone company, or like organization of a sources
purely local character, the income of which within and
consists solely of assessments, dues, and outside
fees collected from members for the sole the
purpose of meeting its expenses and Philippines

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Classification Taxable Basic Additional Tax 0 A Filipino citizen working and deriving
Income Personal Personal Rates abroad as an Overseas Contract Worker
Exemption Exemption is taxable only on income from sources
Non- Income Allowed Allowed 5%- WITHIN the Philippines.
Resident from 32% 0 OCW refers to Filipino citizens in foreign
Citizen sources
countries, who are physically present in a
within the
Philippines
foreign country as a consequence of their
Resident Income Allowed Allowed 5%- employment in that country. Their
Alien from 32% salaries and wages are paid by an
sources employer abroad and is not borne by an
within the entity or person in the Philippines. They
Philippines must be duly registered with the
Non- Income Lower No 5%- Philippine Overseas Employment
resident from amount specific 32% Administration (POEA) with valid
Alien sources between provision Overseas Employment Certificate (OEC).
Engaged in within the PE 1 An OCWs income arising out of his
Trade or Philippines allowed to
overseas employment is exempt from
Business Filipinos in
the foreign
income tax.
country 1 A resident alien or non-resident alien is
where he taxable only on income from sources
resides vs. WITHIN the Philippines.
PE in the 0 A resident alien is an individual whose
Philippines residence is in the Philippines and
Non- Income Not Not 25% who is not a Filipino citizen.
resident from allowed allowed 1 A non-resident alien is an individual
Alien Not sources whose residence and citizenship is
Engaged in within the not in the Philippines.
Trade or Philippines 0 An alien actually present in the
Business
Philippine who is not a mere
transient or sojourner is a
GENERAL RULE THAT RESIDENT CITIZENS ARE TAXABLE resident of the Philippines for
ON INCOME FROM ALL SOURCES WITHIN AND WITHOUT purposes of the income tax.
THE PHILIPPINES 1 Whether he is a transient or not is
determined by his intentions with
General rule: A Filipino resident citizen is taxable regard to the length and nature of
on income from all sources (within and without his stay. A mere floating intention
the Philippines) indefinite as to time, to return to
another country is not sufficient to
0 Non-resident citizens: A non-resident citizen constitute him a transient.
is taxable only on income derived from 2 If he lives in the Philippines and
sources within the Philippines. has no definite intention to stay,
A non-resident citizen is a Filipino citizen who: he is a resident.
0 Establishes to the satisfaction of the CIR 3 One who comes to the Philippines
the fact of his physical presence abroad for a definite purpose which, in its
with a definite intention to reside therein nature, may be promptly
1 Leaves the Philippines during the taxable accomplished is a transient.
year to reside abroad (as immigrant or for 4 But if his purpose is of such a nature
employment on a permanent basis) that an extended stay may be
2 Works and derives income from abroad and necessary for its accomplishment,
whose employment requires him to be present and to that end the alien makes his
abroad most of the time during the taxable home temporarily in the Philippines,
year he becomes a resident, though it
3 Has been previously considered as a non- may be his intention at all times to
resident and arrives in the Philippines at return to his domicile abroad when
any time during the taxable year to reside the purpose of which he came has
here permanently (only with respect to his been consummated or abandoned.
income from sources abroad until the date
(Sec. 5, RR No.2)
of his arrival in the country)
1 Other considerations:

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0 In general, a non-resident alien individual who 0 It should have been availed of for
shall come to the Philippines and stay therein for the first time.
an aggregate period of more than 180 days during 0 Separation pay taxable if voluntarily
any calendar year shall be deemed a non-resident availed of. It shall not be taxable if
alien doing business in the Philippines. involuntary i.e. Death, sickness, disability,
0 Intended Stay in the Philippines: reorganization /merger of company and
Up to 180 days NRANETB company at the brink of bankruptcy or for
More than 180 days up to 2 years NRAETB any cause beyond the control of the said
Greater than 2 years Resident alien official or employee
0 Bonuses, 13th month pay, and other
TAXATION ON COMPENSATION INCOME benefits not exempt
Income arising from an ER-EE relationship. It 0 Tips and Gratuities those paid
means all remuneration for services performed directly to the employee (usually by a
by an EE for his ER, including the cash value of customer of the employer) which are
all remuneration paid in any medium other than not accounted for by the employee to
cash. (Sec. 78(A)). It includes, but is not limited the employer. (taxable income but not
to salaries and wages, commissions, tips, subject to withholding tax) (RR NO. 2-
allowances, bonuses, Fringe Benefits of rank 98, Sec. 2.78.1)
and file EEs and other forms of compensation. 1 Thirteenth month pay and other benefits -
Not taxable if the total amount received is
Inclusions P30,000 or less. Any amount exceeding
0 Monetary compensation If compensation is P30,000 is taxable. (Sec. 32 (7)e, NIRC)
paid in cash, the full amount received is the
measure of the income subject to tax. 2 Overtime Pay premium payment
0 Regular salary/wage received for working beyond regular
0 Salary earnings received periodically for a hours of work which is included in the
regular work other than manual labor, such computation of gross salary of
as monthly salary of an employee employee. It constitutes compensation.
1 Wages all remuneration (other than 1 Directors fees
fees paid to a public official) for Fees received by an employee for the
services performed by an employee for services rendered to the employer including
his employer, including the cash value a directors fee of the company, fees paid to
of all remuneration paid in any medium the public officials such as clerks of court or
other than cash. [Sec. 78A, NIRC] sheriffs for services rendered in the
1 Separation pay/retirement benefit performance of their official duty over and
not otherwise exempt above their regular salaries.
0 Retirement Pay a lump sum payment
received by an employee who has served
a company for a considerable period of
time and has decided to withdraw from 0 Nonmonetary compensation - If
work into privacy. [RR 6-82, Sec. 2b] services are paid for in a medium other than
money, the fair market value of the thing taken
General rule: retirement pay is taxable in payment is the measure of the income
Exceptions: subject to tax.
0 SSS or GSIS retirement pays. 0 Fringe benefit not subject to tax
1 Retirement pay (R.A. 7641) due to old (See Chapter on Gross Income for the
age provided the following discussion of Taxable and Non-taxable
requirements are met: fringe benefits)
0 The retirement program is approved
by the BIR Commissioner; If the recipient of the fringe benefits is a rank
1 It must be a reasonable benefit plan. and file employee, and the said fringe benefit is
(fair and equitable) not tax-exempt, then the value of such fringe
2 The retiree should have been employed benefit shall be considered as part of the
for 10 years in the said company; compensation income of such employee
3 The retiree should have been 50 subject to tax payable by the employee.
years old or above at the time of (Domondon)
retirement; and
Exclusions
(1) Fringe benefit subject to tax
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(See Chapter on Gross Income for the discussion regardless whether single, married or
of Taxable and Non-taxable fringe benefits) head of the family.

Where the recipient of the fringe benefit is not 0.0Additional Exemptions (AE)- depends on the
a rank and file employee, and the said benefit number of qualified dependent children
is not tax-exempt, then the same shall not be
included in the compensation income of such Amount allowed as a deduction P25,000
per dependent child, but not to exceed four
employee subject to tax. The fringe benefit children (RA 9504)
[tax] is instead levied upon the employer, who
is required to pay. (Domondon) 0 Health and hospitalization insurance
0 Premium Paid on Health or Hospitalization
Convenience of the ER Rule Insurance [Sec.34 (M)]
If meals, living quarters, and other facilities and 1 Amount of premium paid on health and/or
privileges are furnished to an employee for the hospitalization by an individual taxpayer (head
convenience of the employer, and incidental to the of family or married), for himself and members
requirement of the employees work or position, of his family during the taxable year.
the value of that privilege need not be included as
compensation (Henderson v. Collector). Requisites for Deductibility
Insurance must have actually been taken
0 De minimis benefits The amount of premium deductible does not
0 Facilities or privileges of relatively small exceed P2,400 per family or P200 per month
value furnished by an employer to his whichever is lower during the taxable year.
employees and are as a means of promoting That said family has a gross income of not more
the health, goodwill, contentment, or than P250,000 for the calendar year.
efficiency of his employees. In case of married individual, only the spouse
1 These are exempt from fringe benefit tax claiming additional exemption shall be
and compensation income tax. entitled to this deduction.

1 13th month pay and other benefits and Note: The spouse claiming the additional
payments specifically excluded from taxable exemptions for qualified dependent children
compensation income shall be the same spouse to claim the
0 Gross benefits received by employees of deductions for premium payments.
public and private entities provided that
the total exclusion shall not exceed The following may avail of the deduction
P30,000 (amounts in excess are Individual taxpayers earning purely
considered compensation income) compensation income during the year.
1 Benefits include: Individual taxpayer earning business income or
0 Benefits received by government in practice of his profession.
employees under RA 6686 Taxation of compensation income of a
1 Benefits received by employees pursuant minimum wage earner
to PD 851 (13th Month Pay Decree) Definition of Statutory Minimum Wage
2 Benefits received by employees not Statutory minimum wage earner shall
covered by PD 851 as amended by refer to rate fixed by the Regional
Memorandum Order No. 28; and, Tripartite Wage and Productivity Board,
3 Other benefits such as productivity as defined by the Bureau of Labor and
incentives and Christmas bonus Employment Statistics (BLES) of the
Department of Labor and Employment.
Deductions (Sec.22 GG, as amended by RA 9504)
0 Personal exemptions and additional Definition of Minimum Wage Earner
exemptions (See the Chapter on Deductions Minimum wage earner shall refer to a
for the full discussion of Personal and worker in the private sector paid the
additional exemptions) statutory minimum wage, or to an
0 Basic Personal Exemptions employee in the public sector with
compensation income of not more than
According to RA 9504 (effective July 6, 2008) the statutory minimum wage in the non-
basic personal exemption is Fifty thousand agricultural sector where he/she is
pesos (P50,000) for each individual taxpayer,

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assigned. (Sec.22 HH, as amended


by RA 9504) Should LTDIC holder pre-terminate LTDIC before
the 5th year, a final tax shall be imposed on the
The minimum wage shall be exempt entire income based on the remaining maturity:
from the payment of income tax on their
taxable income:Provided, further, That 4 years to less than 5 years 5%
the holiday pay, overtime pay, night shift 3 years to less than 4 years 12%
differential pay and hazard pay received less than 3 years 20%
by such minimum wage earners shall Royalties
likewise be exempt from income tax (See summary table)
Income also subject to tax exemption:
holiday pay, overtime pay, night shift Dividends from domestic corporation
differential, and hazard pay cash and/or property dividends actually or
constructively received by an individual from
Compensation income including a domestic corporation
overtime pay, holiday pay and hazard a joint stock company
pay, earned by minimum wage earners insurance or mutual fund companies
who has no other returnable income are regional operating headquarters of
NOT taxable and not subject to multinational companies
withholding tax on wages (RA 9504) share of an individual in the distributable net
income after tax of a partnership (except a
TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE general professional partnership) of which he
OF PROFESSION is a partner
All income obtained from doing business and/or share of an individual member or co-venturer in
engaging in the practice of a profession shall be the net income after tax of an association, a
included in the computation of taxable income. joint account, or a joint venture or consortium
taxable as a corporation
TAXATION OF PASSIVE INCOME RATE:
10%for residents (RC, RA) and non-resident
Passive income subject to final tax citizens (NRC);
Final tax means tax withheld from source, and the 20% for NRAETB(non-resident aliens
amount received by the income earner is net of the engaged in trade or business)
tax already. The tax withheld by the income payor A stock dividend representing the transfer of
is remitted by him to the BIR. The income having surplus to capital account shall not be
been tax-paid already, it need not be included in subject to tax.
the income tax return at the end of the year. These However, if a corporation cancels or redeems stock
passive income items are as follows: issued as a dividend at such time and in such
Interest income manner as to make the distribution and
Royalties cancellation or redemption, in whole or in part,
Dividends from domestic corporations essentially equivalent to the distribution of a
Prizes and other winnings taxable dividend,the amount so distributed in
redemption or cancellation of the stock shall be
Interest income considered as taxable income to the extent that
on any currency bank deposit, yield or any other it represents a distribution of earnings or profits.
monetary benefit from deposit substitutes, trust (Sec. 73B, NIRC)
funds and similar arrangements - 20% final tax In other words, stock dividends are generally
under the expanded foreign currency deposit not subject to tax as long as there are no
system (EFCDS) - 7.5% final tax for options in lieu of the shares of stock.
residents, exempt if non-residents On the other hand, a stock dividend constitutes
Treatment of income from long-term deposits income if it gives the shareholder an interest
different from that which his former
On long-term deposit or investment stockholdings represented.
certificates (LTDIC) in banks (e.g., savings,
common or individual trust funds, deposit Prizes and other winnings
substitutes, investment management Winnings, except Philippine Charity
accounts and other investments, which have sweepstakes / lotto winnings 20%
maturity of 5 years or more) exempt Prizes exceeding P10,000 20%

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transaction where the outcome depends upon


Prize, differentiated from winnings chance (e.g., betting).
A prize is the result of an effort made (e.g., prize in a
beauty contest), while winnings are the result of a
Summary Table of Rates
(Includes NRAETB and NRANETB)
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources

(1) INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS Citizens, NRAETB NRANETB
Residents
(a) Interest from any currency bank deposit 20% 20% 20%
(b) Yield or any other monetary benefit from deposit substitute 20% 20% 20%
(c) Yield or any other monetary benefit from trust funds and similar 20% 20% 20%
arrangements
(d) Royalties, in general (other than royalties described in letter e) 20% 20% 20%
(e) Royalties on books as well as other literary works and musical 10% 10% 25%
compositions
(f) Prizes exceeding P10,000 20% 20% 25%
(g) Other winnings (other than Philippine Charity Sweepstakes and 20% 20% 25%
Lotto winnings)
(h) Interest incomes received from a depositary bank under expanded 7 1/2% Exempt Exempt
foreign currency deposit system Note: NRC
Exempt
(RR 1-2011)
(i) Interest income from long-term deposit or investment evidenced by Exempt Exempt 25%
certificates prescribed by BSP. If preterminatedbefore fifth year, a
final tax shall be imposed based on remaining maturity:
(a) 4 years to less than 5 years
(b) 3 years to less than 4 years 5% 5% 25%
(c) Less than 3 years 12% 12% 25%
20% 20% 25%

(2) CASH AND/OR PROPERTY DIVIDENDS Citizens, NRAETB NRANETB


Residents
(a) Cash and/or property dividends actually or constructively received
from a domestic corp. or from a joint stock co., insurance or mutual
fund companies and regional operating headquarters of
multinational companies (beginning January 1, 2000) 10% 20% 25%

(b) Share of an individual in the distributable net income after tax of a


PARTNERSHIP (other than a general professional partnership)
(beginning January 1, 2000)
10% 20% 25%

Share of an individual in the net income after tax of an


ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE
or CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning January 1, 2000)
10% 20% 25%
(b) For interest from foreign currency loans granted
(a) For interest from foreign currency loans granted by OBUs to residents other than OBUs or local
by FCDUs to residents other than Offshore commercial banks, including branches of foreign
Banking Units (OBUs) or other depository banks banks that may be authorized by the BSP to
under the expanded system tax rate is 10% if
payors are RESIDENTS, whether individuals or transact business with OBUs - tax rate is 10% if
corporations. payors are RESIDENTS, whether individuals or
corporations.

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Gross income from all sources within the The transaction is exempt from income tax
Philippines derived by non-resident regardless of the nature of business of the seller
cinematographic film owners, lessors or or transferor. However, it is subject to the one-half
distributors tax rate is 25% if payee is: (a) of one percent (1/2 of 1%) stock transaction tax
non-resident alien individual, or (b) non- imposed under Sec. 127(A) of the Tax Code
resident foreign corporation. The term based on the gross selling price or gross value in
cinematographic films includes motion picture money of the shares of stock sold or transferred.
films, films, tapes, discs and other such similar
or related products. Shares not listed and traded in the stock
exchange subject to final tax
Informers reward given to persons who voluntarily On sale, barter, exchange or other disposition
provide definite and sworn information that lead to of shares of stockof a domestic corporation
or was instrumental in the discovery of fraud or not listed and traded through a local stock
violation of the provisions of the NIRC or special exchange, held as a capital asset:
laws being administered by the BIR and resulted
in the actual recovery or collection of revenues, On the net capital gain:
surcharges and fees and/or the conviction of the Not over P100,000 = Final Tax of 5%
guilty party or parties, and/or the imposition of any On any amount in excess of P100,000 = plus
fine or penalty or the actual collection of a Final Tax of 10% on the excess
compromise amount, in case of amicable
settlement, shall be subject to income tax, Key Definitions
collected as a final withholding tax, at the rate of Net capital gain: selling price less cost
10%, pursuant to Sec. 282 of the NIRC (RR 16- Selling price: consideration on the sale OR fair
2010). market value of the shares of stock at the
time of the sale, whichever is higher
Passive income not subject to tax Cost: original purchase price
Interest income from long-term deposit or
investment in the form of savings, common or Income from the sale of real property
individual trust funds, deposit substitutes, situated in the Philippines
investment management accounts and other
investments evidenced by certificates in such What property covered
form prescribed by the BSP shall be exempt Property located in the PH classified as capital assets
from tax
What transactions covered
But should the holder of the certificate pre- Sales, exchanges, or other disposition of real
terminate the deposit or investment before the 5
th property (classified as capital assets), including
year, a final tax shall be imposed on the entire pacto de retro sales and other forms of conditional
income and shall be deducted and withheld by the sales of the following: citizens, resident aliens,
depository bank from the proceeds of the long- NRAETB, NRANETB, domestic corporations.
term deposit or investment certificate based on the
remaining maturity thereof: Tax rate
Four (4) years to less than five (5) years - 5%; General rule:6% ofwhichever is higher
Three (3) years to less than four (4) years - Gross selling price, or
12%; and Fair market value (determined in accordance with
Less than three (3) years - 20%. Sec. 6(E)).
Any income of nonresidents, whether individuals
or corporations, from transactions with Except
depository banks under the expanded system In case of sales made to the government, any of
shall be exempt from income tax. its political subdivisions or agencies, or to
GOCCs, it can be taxed either:
Under Sec. 24(C)(1) 6% CGT, or
TAXATION OF CAPITAL GAINS Under Sec. 24(A), at the option of the
taxpayer.
Income from sale of shares of stock of a In case of the sale of or disposition of their
Philippine corporation principal residence by natural persons
Shares traded and listed in the stock exchange Requirements:
exempt

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Sale or disposition by a natural person of Determination of whether short- or long-


his principal residence, term: If held for <12 mos, then short-term.
The proceeds of which is fully utilized in Otherwise, long-term.
acquiring/constructing a new principal
residence, At 30% corporate income tax, if the seller is a
Such acquisition/construction taking corporation.
place within 18 calendar months from Rule: Capital gain/loss is recognized in full.
the date of sale or disposition,
The taxpayer notifies the Commissioner Capital assets shall refer to all real properties held by
within 30 days from the sale/disposition a taxpayer, whether or not connected with his trade or
through a prescribed return of his business, and which are not included among the real
intention to avail of the exemption, properties considered as ordinary assets under
The tax exemption can only be availed of Section 39(A)(1) of the NIRC.
once every 10 years.
Tax treatment: Exempt from capital gains tax Ordinary assets shall refer to all real properties
(CGT). If there is no full utilization of the specifically excluded from the definition of capital
proceeds of sale or disposition, the assets under Section 39(A)(1) of the NIRC, namely:
portion of the gain presumed to have Stock in trade of a taxpayer or other real
been realized from the sale or disposition property of a kind which would properly be
shall be subject to CGT. included in the inventory of the taxpayer if on
How taxable portion and tax determined: hand at the close of the taxable year; or
Real property held by the taxpayer primarily for
[ (
sale to customers in the ordinary course of
)] [ ]
his trade or business; or
Real property used in trade or business (i.e., buildings
and/or improvements) of a character which is
The historical cost or adjusted basis of the real subject to the allowance for depreciation provided
property sold or disposed shall be carried over for under Sec. 34(F) of the Code; or
to the new principal residence built or acquired. Real property used in trade or business of the
Computation for the basis of new principal taxpayer.
residence:
Historical cost of old principal residence XXX Summary Tables of Rates
(Tables include NRAETB and NRANETB)
Add: Additional cost to acquire new XXX
principal residence* Section 24(C).Capital Gains Tax from Sale of
Adjusted cost bases of the new principal XXX Shares of Stock of a domestic corporation
residence NOT TRADED in the Stock Exchange
*Additional cost to acquire new principal RES/CIT NRAETB NRANETB
residence: Tax base: Net
Cost to acquire new principal residence XXX Capital Gain
Less: Gross selling price of old principal (XXX) Tax rate: Not 5% 5% 5%
residence over P100,000 10% 10% 10%
Additional cost to acquire new principal XXX Amount in
residence
excess of
P100,000
Income from the sale, exchange, or other
disposition of other capital assets Section 24(D).Capital Gains Tax from Sale of
Other properties shall be subject to income tax Real Property Classified as Capital Asset
At the graduated income tax rates, if the seller is RES/CIT NRAETB NRANETB
an individual; Tax base: Gross
Long-term capital gains: only 50% is selling price or
recognized. current fair
Short-term capital asset transactions: 100% market value,
subject to tax. (Sec. 39(B)) whichever is
higher
Tax rate: 6% 6% 6%

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Resident Non-Resident
Category of Income CITIZEN ALIEN CITIZEN NRAETB NRANETB
All sources Within the Within the Within the Within the
Philippines Philippines Philippines Philippines
(1) Compensation / Business / Profession
(2) Prizes of P10,000 or less Based on Taxable (i.e, Net) Income GIW 25%
Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%) Not
Applicable
(3) Interest from any currency bank
deposit , etc., Royalties (other than
from books, literary works and musical Gross Income Within the Philippines (GIW) 20% Final
compositions), Winnings / Prizes Withholding Tax
(except prizes P10,000 and below)

(4) Royalties from books, literary works,


musical compositions GIW 10% Final Withholding Tax

(5) Interest from long-term deposit or EXEMPT; However:


investment certificates, which have a In case of pre-termination, with remaining maturity of:
maturity of 5 years or more 4 years to less than 5 years 5% on entire income
3 years to less than 4 years 12% on entire income
less than 3 years 20% on entire income
(6) Cash / Property Dividends from a
domestic corporation, etc., OR share
in the distributable net income after GIW 10% Final Withholding Tax GIW 20%
tax of a partnership (except a general
professional partnership), etc.

(7) Interest (Expanded Foreign Currency GIW 7.5% Final


Deposit System) EXEMPT
Withholding Tax
(8) Winnings on Philippine Sweepstakes /
Lotto EXEMPT

(9) Capital Gains on Sale of Shares of Net Capital Gains within:


Domestic Corp. (not traded in a
Not Over P100,000 5% Final Tax
domestic stock exchange)
Amount in Excess of P100,000 plus 10% Final Tax on the excess
(10) Capital Gains on Sale of Real Gross Selling Price or FMV, whichever is higher
Property in the Philippines
6% Final Withholding Tax
(11) Sale of Shares of Domestic Corp. of 1% of the Selling Price (Stock Transaction Tax)
(traded in a domestic stock exchange) Note: Stock Transaction Tax is not an income tax, but a business
(percentage) tax
(12) Sale of Real Property located Abroad Schedular Income Tax Rates (Sec. 24, NIRC)
(13) Sale of Shares of Foreign Corp
(i.e, 5% to 32%)
(14) Passive Income from Abroad

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Computations TAXATION OF NON-RESIDENT ALIENS


Pure Compensation Income ENGAGED IN TRADE OR BUSINESS
(See above summary tables)
Gross Compensation Income xx
Less: Personal & Additional Exemptions GENERAL RULES
and hospitalization/health insurance Subject to an income tax in the same manner as
premium xx an individual citizen and a resident alien
Taxable Income xx individual on taxable income from all sources
x Rate within the Philippines
Income Tax xx Nonresident alien doing business in the
Philippines: a non-resident alien individual
Less: Creditable Withholding Tax on
who shall come to the Philippines and stay
Compensation Income xx
therein for an aggregate period of more than
Tax Payable xx 180 days during any calendar year
Mixed-Income (i.e., compensation income and business
CASH AND /OR PROPERTY DIVIDENDS
income/income from the practice of profession) The following shall be subject to an income tax of
twenty percent (20%) on the total amount thereof:
Gross Compensation Income Xx Cash and/or property dividends from:
Less: Personal & Additional Exemptions A domestic corporation;
and hospitalization/health insurance A joint stock company;
premium Xx An insurance or mutual fund company;
Taxable Compensation Income Xx A regional operating headquarter of
ADD: Gross Business Income &/or multinational company;
Income from Practice of Profession Xx The share of a nonresident alien individual in
Less: Allowable Deduction (itemized the distributable net income after tax of a
or optional deduction) Xx partnership (except a general professional
Taxable Income Xx partnership) of which he is a partner;
x Rate The share of a nonresident alien individual in
Income Tax Xx the net income after tax of an association,
Less: Creditable Withholding Tax on a joint account, or a joint venture taxable
Compensation Income/Other as a corporation of which he is a member
Allowable Tax Credit Xx or a co-venturer;
Interests
Tax Payable Xx
Royalties (in any form); and
Pure Business/Professional Income Prizes (except prizes amounting to Ten thousand
pesos (P10,000) or less which shall be
subject to graduated tax) and other winnings
Gross Business Income &/ (except Philippine Charity Sweepstakes and
or Income from Practice of Profession Xx Lotto winnings);
Less: (a) Allowable Deduction
(itemized or optional deduction) xx Except:
(b) Personal & Additional The following Royalties shall be subject to a final
Exemptions tax of ten percent (10%) on the total amount
and hospitalization/health xx thereof:
insurance premium On books as well as other literary works; and
Total Taxable Income Xx On musical compositions
x Rate Cinematographic films and similar works shall
Income Tax Xx be subject to twenty-five percent (25%) of the
Less: Creditable Withholding Tax on gross income
Compensation Income/Other Interest income from long-term deposit or
Allowable Tax Credit Xx investment in the form of savings, common or
Tax Payable Xx individual trust funds, deposit substitutes,
investment management accounts and other

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investments evidenced by certificates in such remuneration and other emoluments, such as


form prescribed by the Bangko Sentral ng honoraria and allowances
Pilipinas (BSP) shall be exempt from the ta The same tax treatment shall apply to Filipinos
Butshould the holder of the certificate pre- employed and occupying the same positions as
terminate the deposit or investment before the fifth those of aliens employed by these multinational
(5th) year, a final tax shall be imposed on the entire companies, offshore banking units and petroleum
income and shall be deducted and withheld by the service contractors and subcontractors.
depository bank from the proceeds of the long-term
deposit or investment certificate based on the Note that the coverage of the special
remaining maturity thereof: classification (and the corresponding tax rate) is
Four (4) years to less than five (5) years - 5%; limited to income received as wages. Hence,
Three (3) years to less than four (4) years - any income earned from all other sources
12%; and within the Philippines by the alien employees
Less than three (3) years - 20%. shall be subject to the pertinent income tax
(example: sale of real property in the
CAPITAL GAINS Philippines is subject to 6% capital gain tax,
Capital gains realized from sale, barter or exchange imposed on the gross selling price or fair
of shares of stock in domestic corporations not traded market value of the property at the time of the
through the local stock exchange, and real properties sale, whichever is higher)
shall be subject to the similar tax prescribed on
citizens and resident aliens. INDIVIDUAL TAXPAYERS EXEMPT FROM
Sale, barter or exchange of Shares of stock in INCOME TAX
domestic corporation not traded Individual Taxpayers exempt from income tax are:
Net over P100,000 5% of net capital gains Senior Citizens
realized Minimum wage earners
On any amount in excess of P100,000 Exemptions granted under international
10% of net capital gains realized agreements
Sale, barter or exchange of real properties 6%
of gross selling price or current FMV SENIOR CITIZENS
whichever is higher Who covered: any resident citizen
At least 60 years old, and
NON-RESIDENT ALIENS NOT ENGAGED IN Who are considered minimum wage earners under
TRADE OR BUSINESS RA 9504. (Sec. 4 (b) RA 7432, as amended by RA
Alien individuals employed by: 9994) and/or the aggregate amount of gross
Regional or Area Headquarters (RAHQ) and income earned by the senior citizen during the
Regional Operating Headquarters (ROHQ) taxable year does not exceed the amount of his
established in the Philippines by personal exemptions (BPE and APE).
multinational companies
MINIMUM WAGE EARNERS
Rule: they shall be exempt from payment of
Multinational company, defined a
foreign firm or entity engaged in income tax on their taxable income
international trade with affiliates or Limit: however, if he receives other benefits in
subsidiaries or branch offices in the Asia- excess of the allowable statutory amount of
Pacific Region and other foreign markets
\ P30,000, then he shall be taxable on the
Offshore Banking Units established in the exceeds benefits as well as his salaries, wages,
Philippines and allowances, just like an employee receiving
compensation income beyond the statutory
Alien individuals who are permanent residents of minimum wage.
a foreign country but who are employed and
assigned in the Philippines by a foreign EXEMPTIONS GRANTED UNDER INTERNATIONAL

service contractor or by a foreign service AGREEMENTS (SEC. 32(B))


subcontractor engaged in petroleum See RMC No, 31-2013, April 12, 2013 taxation
operations in the Philippines of compensation income of Philippine nationals
and alien individuals employed by foreign
Tax Rate and Base - 15% of gross income received governments/embassies/diplomatic missions
as salaries, wages, annuities, compensation, and international organizations situated in the
Philippines

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Section 32(A) of the NIRC, except: (a) income exempt


from income tax, and (b) income subjected to FWT.
TAXATION OF DOMESTIC CORPORATIONS The computation by type of business.
TAX PAYABLE Merchandising/Manufacturing Service Concerns
Taxes payable are: Concerns
Net Sales P xxx Gross receipts/revenue P xxx
(1) Regular tax Less: Cost of Sales xxx Less: Direct cost of services xxx
Gross Income P xxx Gross income P xxx
(2) Minimum Corporate Income Tax
Regular Tax Net Sales is gross sales less sales returns,

discounts and allowances.


Normal Corporate Income Tax Rate: 30%of Taxable
Income (effective January 1, 2009) Direct cost of services includes salaries of
Gross Income XXX personnel rendering the services, expenses on the
facilities directly utilized, cost of supplies, and the
Less: Allowable Deductions XXX
like. Direct costs and expenses shall only pertain to
Taxable Income XXX those costs exclusively and directly incurred in
Minimum corporate income tax (MCIT) relation to the revenue realized by the sellers of
services. These refer to costs which are considered
(a) applies to domestic corporations and RFCs indispensable to the earning of the revenue such
whenever such corporations have zero or negative that without such costs, no revenue can be
taxable income or whenever the MCIT is greater generated.
than the normal income tax due from such
corporations. Pointers.
(b) Imposed upon any domestic corporation MCIT is in the nature of a tax credit, not an allowable
beginning the fourth taxable year in which such deduction. Its purpose is to prevent corporations
corporation commenced its business operations. from escaping being taxed by including frivolous
For purposes of the MCIT, the taxable year in expenses in their statement of income.
which business operations commenced shall be
the year when the corporation registers with the Is the Minimum Corporate Income Tax (MCIT) an
BIR (not in which the corporation started addition to the regular or normal income tax?
commercial operations). No, the MCIT is not an additional tax. The MCIT is
(c) Tax rate: 2% of the Gross Income compared with the regular income tax, which is due
Imposition of MCIT from a corporation. If the regular income is higher
than the MCIT,then the corporation does not pay the
Gross Sales XXX MCIT.
Less: Sales Returns XXX
Sales Discounts & Allowances XXX Who are covered by MCIT?
Cost of Goods Sold XXX XXX
MCIT GI XXX The MCIT covers domestic and resident foreign
corporations which are subject to the regular income
Computation of Gross Income. tax. The term regular income tax refers to the
The term Gross Income shall be equivalent to gross regular income tax rates under the Tax Code. Thus,
sales less sales returns, discounts and allowances corporations which are subject to a special corporate
and cost of goods sold. Cost of goods sold shall tax system do not fall within the coverage of the MCIT.
include all business expenses directly incurred to These special corporations are:
produce the merchandise to bring them to their
present location and use. (a) Corporations that are subject to ten percent (10%)
preferential tax rate: Proprietary educational
If apart from deriving income from core business institutions, nonprofit hospitals, Offshore Banking
activities there are other items of gross income Units (OBUs) on their income from foreign
realized or earned by the taxpayer which are subject currency transactions which has been subjected
to the normal corporate income tax, they must be to a final income tax at 10% of such income, and
included as part of gross income for computing depository banks under the expanded foreign
MCIT. (Sec. 27 (E), NIRC; RR 12-2007) currency deposit system on their income from
foreign currency transactions which has subjected
This means that the term gross income will also to final income tax at 10%; RFCs engaged in
business as Regional Operating Headquarters
include all items of gross income enumerated under
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Firms under special income tax regime such as


those under the PEZA law (Rep. Act 7916), the Annual Income Tax Computation.
Bases Conversion Development Act (Rep. Act The final comparison between the normal income
7227) and forms enjoying Income Tax Holiday tax payable and the MCIT shall be made at the end
(ITH) under Exec. Order No. 226; of the taxable year. The payable or excess
payment in the Annual Income Tax Return shall be
International carriers subject to tax at 2 % of computed taking into consideration corporate
their gross Philippine billings; income tax payment made at the time of filing of
quarterly corporate income tax returns whether this
Note:For domestic corporations whose operations or be MCIT or normal income tax.
activities are partly covered by the regular income tax
and partly covered under a special income tax In the computation of annual income tax due, if the
system, the MCIT shall apply on operations covered normal income tax due is higher than the computed
by the regular corporate income tax system. annual MCIT, the following shall be allowed to be
credited against the annual income tax: (a) quarterly
MCIT gross income differentiated from the MCIT payments, (b) quarterly normal income tax
normal tax gross income payments, (c) excess MCIT in the prior year/s (subject
the latter would include other incidental income to the prescriptive period allowed for its creditability),
items, such as rent income, interest, gain on (d) CWTs in the current year, (d) excess CWTs
sale of assets, certain tax refunds, etc. in the prior year.

What amount of income tax is paid by the If in the computation of annual income tax due,
corporation to the BIR? the computed annual MCIT due is higher than
Whichever is higher between the normal tax and the annual normal income tax due, the following
the minimum corporate income tax. may be credited against the annual income tax:
(a) quarterly MCIT payments of current taxable
Illustration. quarter, (b) quarterly normal income tax
E Co., a domestic trading corporation, in its payments in current year, (c) CWTs in the
fourth year of operations had a gross profit from current year, (d) excess CWTs in the prior year.
sales of P300,000 and net taxable income of
P100,000. How much was the income tax paid Excess MCIT from the previous taxable year/s
by the corporation for the year? shall not be allowed to be credited against the
annual MCIT due as the same can only be
MCIT (P300,000 x 2%) P6,000 applied against normal income tax.
Normal income tax
(P100,000 x 30%) P30,000 Manner of Filing and Payment.
Income Tax to be paid for the year The MCIT shall be paid in the same manner
(whichever is higher) P30,000 prescribed for the payment of the normal
corporate income tax which is on a quarterly and
Quarterly MCIT Computation. on a yearly basis.
The computation and the payment of MCIT shall
likewise apply at the time of filing the quarterly Carry forward of excess minimum tax
corporate income tax. In the computation of the Any excess of the minimum corporate income
tax due for the taxable quarter, if the quarterly tax over the normal income tax shall be carried
MCIT is higher than the quarterly normal income forward on an annual basis. The excess can be
tax, the tax due to be paid for such taxable credited against the normal income tax in the
quarter at the time of filing the quarterly nextthree (3) succeeding taxable years. [Sec.
corporate income tax return shall be the MCIT. 27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and (c)
MCIT paid in the previous taxable quarter(s). Illustration.
A domestic corporation had the following data on
Excess MCIT from the previous taxable year/s computations of the normal tax (NT) and the minimum
shall not be allowed to be credited against the corporate income tax (MCIT) for five years.
quarterly MCIT tax due.

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The excess MCIT over NT carry-forward is shown


Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 below:
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K
Year 4 Year 5 Year 6 Year 7 Year 8
MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000

NT is higher n/a n/a 40,000 n/a 70,000
Less: MCIT carry- > (20,000)
fwd
>(40,000)*
> (20,000)
From Year 4

From Year 5

From Year 7

Tax Due 80,000 50,000 - 40,000 30,000

Arrow pointing downward means that the normal fifteen percent (15%) of gross income as defined
tax is higher so that there can be an excess therein, after the following conditions have been
MCIT carry-forward against it. satisfied:

*Cannot carry forward an amount higher than the NT, hence Tax effort ratio 20% of GNP
the excess of 60K from Year 4 was reduced to 40K. The Ratio of Income Tax collection to 40%
unused P20,000 cannot be used in Year 8 because Year 8 total tax revenues
was beyond three years from Year 4. VAT tax effort 4% of GNP
Relief from the MCIT under certain conditions (Sec. 27 Ratio of Consolidated Public 0.90%
(E ), NIRC) Sector Financial Position (CPSFP)
The Secretary of Finance, upon the recommendation to GNP
of the Commissioner, may suspend the imposition of
the MCIT upon submission of proof by the applicant- Ratio of the Corporations Cost of Does not
corporation that the corporation sustained Sales to Gross Sales exceed 55%
substantial losses on account of the following (LMB):
(1) Prolonged labor dispute (losses from a strike Gross Sales XXX
staged by employees that lasts for more than 6
months and caused the temporary shutdown of Less: Sales Returns XXX
operations), or SalesDiscounts& Allowances XXX
(2) Force majeure (acts of God and other calamity; Cost of Goods Sold XXX XXX
includes armed conflicts like war or insurgency), GI XXX
or The election of the gross income tax option by the
(3) Legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic corporation shall be irrevocable for three (3)
reasons). consecutive taxable years during which the
corporation is qualified under the scheme.
Optional Gross Income Tax (OGIT). For purposes of gross income tax, gross income
Section 27 (A) of the NIRC provides for an optional
gross income tax of 15% based on gross income. The should be the same as gross income for purposes of
President, upon the recommendation of the MCIT in cases of trading, merchandising and
Secretary of Finance, may, effective January 1, 2000, manufacturing concern business. However, for
allow domestic corporations the option to be taxed at service enterprises, gross income means gross

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receipts less sales returns, discounts, Moreover, the rate was increased from 10% to
allowances and cost of services. 40%.

Note: At present, the OGIT has not been TAXATION OF PASSIVE INCOME
implemented in the Philippines.
Passive income subject to tax
Corporations exempt from the MCIT ( BIPTENG) Note: (1) and (5) below are more appropriate for
Banks and other non-bank financial the next section. The SC Syllabus, however,
intermediaries; included both in this section
Insurance companies;
Publicly-held corporations; Passive income subject to tax:
Taxable partnerships; Interest from deposits and yield or any other
General professional partnerships; monetary benefit from deposit substitutes
Non- taxable joint ventures; and and from trust funds and similar
Enterprises that are registered: arrangements and royalties
with the Philippine Economic Zone Authority Capital gains from the sale of shares of stock
(PEZA) under R.A. 7916; not traded in the stock exchange
pursuant to the Bases Conversion and Development Income derived from depository bank under the
Act of 1992 under R.A. 7227; and expanded foreign currency deposit system
under special economic zones declared by law Inter-corporate dividends
which enjoy payment of special tax rate on Capital gains realized from the sale, exchange, or
their registered operations or activities in lieu disposition of lands and/or buildings
of other taxes, national or local.
Interest from deposits and yield or any other
Note: Words in regular letters are found in Sec. monetary benefit from deposit substitutes and from
29(B)(2) of the NIRC. Words in italics are trust funds and similar arrangements and royalties
additions made by the revenue regulation to On any currency bank deposit, yield or any other
consolidate Sec. 29 with other pertinent laws. monetary benefit from deposit substitutes, trust
funds and similar arrangements - 20%
Applicability of the MCIT where a corporation
is governed both under the regular tax Capital gains from the sale of shares of
system and a special income tax system stock not traded in the stock exchange
For corporations whose operations or activities On sale, barter, exchange or other disposition of
are partly covered by the regular income tax and shares of stockof a domestic corporation not
partly covered under special income tax system, listed and traded through a local stock
the MCIT shall apply on operations by the exchange, held as a capital asset:
regular income tax system
On the net capital gain:
ALLOWABLE DEDUCTIONS First P100,000: Final Tax of 5%
Itemized deductions On any amount in excess of P100,000: plus
Bad debts 10% Final tax on the excess
Expenses
Losses Income derived from depository bank under
Taxes the expanded foreign currency deposit system
Depreciation Under the expanded foreign currency deposit system
Interest (EFCDS) - 7.5%
Depletion of oil and gas wells and mines
Charitable and other contributions
Research and development
Pension trusts Inter-corporate dividends
Dividends received from another domestic
Optional standard deduction corporation - exempt
Before RA 9504, effective July 6, 2009, OSD only
applied to individuals except non-resident aliens. Capital gains realized from the sale, exchange,
But by virtue of RA 9504, it now also applies to or disposition of lands and/or buildings
corporations, except non-resident foreign On the sale, exchange or disposition of lands and/or
corporation. buildings which are not actually used in the business

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of a corporation and are treated as capital On the sale, exchange or disposition of lands
and/or buildings which are not actually used in
assets On the gross selling price, or the the business of a corporation and are treated as
current fair market value at the time of the sale,
whichever is higher, a final tax of 6% capital assets On the gross selling price, or
Note: Tax treatment is the same as that of the current fair market value at the time of the
individuals. sale, whichever is higher, a final tax of 6%
The capital gains tax is applied on the gross
selling price, or the current fair market value Note: Tax treatment is the same as that of
at the time of the sale, whichever is higher. individuals.
Any gain or loss on the sale is immaterial The capital gains tax is applied on the gross selling
because there is a conclusive presumption price, or the current fair market value at the time of
by law that the sale resulted in a gain. the sale, whichever is higher. Any gain or loss on the
sale is immaterial because there is a conclusive
Passive income not subject to tax presumption by law that the sale resulted in a gain.
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with nonresidents, TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND
offshore banking units in the Philippines, local NON-PROFIT HOSPITALS
commercial banks, including branches of Tax Rate and Base 10% on net income
foreign banks that may be authorized by the (except on income subject to capital gains tax
Bangko Sentral ng Pilipinas (BSP) to transact and passive income subject to final tax) within
business with foreign currency depository and without the Philippines
system units and other depository banks under
the expanded foreign currency deposit system Caveat: If gross income from unrelated trade or
shall be exemptfromincome tax business or other activity exceeds 50%of total gross
income derived from all sources, the tax rate of 30%
Except: net income from transactions shall be imposed on the entire taxable income.
specified by the Secretary of Finance upon
recommendation by the Monetary Board Unrelated trade, business or other activity- any
trade, business or other activity, the conduct of
BUT: Interest income from foreign currency which is not substantially related to the exercise
loans granted by such depository banks under or performance by such educational institution or
said expanded foreign currency deposit system hospital of its primary purpose or function.
to residents, other than offshore banking units
in the Philippines, shall be subject to a final tax Proprietary educational institution- any private school
at the rate of 10%. maintained and administered by private individuals or
groups with an issued permit to operate from the
Any income of nonresidents, whether individuals DECS, CHED or TESDA. (Sec. 27(B), NIRC)
or corporations, from transactions with
depository banks under the expanded system
shall be exemptfrom income tax. TAX ON GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS, AGENCIES OR INSTRUMENTALITIES
TAXATION OF CAPITAL GAINS
Income from sale of shares of stock For GOCCs:
On sale, barter, exchange or other disposition of General rule:GOCCs are taxable as any other
shares of stockof a domestic corporation not corporation engaged in similar business,
listed and traded through a local stock industry or activity, except:
exchange, held as a capital asset: Government Service Insurance System (GSIS)
Social Security System (SSS)
On the net capital gain: Philippine Health Insurance Corporation (PHIC)
First P100,000: Final Tax of 5% Local water districts (LWDs)
On any amount in excess of P100,000: plus Philippine Charity Sweepstakes Office
10% Final tax on the excess (PCSO) (Sec. 27(C), NIRC)
Income from the sale of real property situated in the For instrumentalities and agencies of government:
Philippine & (iii) Income from the sale, exchange, or other General Rule: The government is exempt from tax.
disposition of other capital assets

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Exception: When it chooses to tax itself. Nothing acts or works, or the exercise of some of the
can prevent Congress from decreeing that even functions normally incident to, and in progressive
instrumentalities or agencies of the government prosecution of commercial gain or of the purpose
performing governmental functions may be and object of the business organization: Provided,
subject to tax. Where it is done precisely to fulfill however, That the phrase "doing business" shall
a constitutional mandate and national policy, no not be deemed to include mere investment as a
one can doubt its wisdom. (Mactan Cebu Airport shareholder by a foreign entity in domestic
v Marcos, 1996) corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having
If the taxing authority is the local govt unit a nominee director or officer to represent its
RA 7160 expressly prohibits LGUs from levying interests in such corporation; nor appointing a
tax on the Natl Govt, its agencies and representative or distributor domiciled in the
instrumentalities and other LGUs. Philippines which transacts business in its own
name and for its own account; (Sec. 3 (d))
TAXATION OF RESIDENT FOREIGN
CORPORATIONS WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN
THE PHILIPPINES
GENERAL RULE Resident foreign corporations are subject to
A resident foreign corporation is a corporation any or some of the following:
organized under the laws of a foreign country, which Capital Gains Tax
is engaged in trade or business in the Philippines. Final Tax on Passive Income
A Philippine branch of a foreign corporation duly Normal Tax [OR] Minimum Corporate Income Tax
licensed by the SEC is considered a resident (MCIT) [OR] Gross Income Tax (GIT)
foreign corporation. Thus, only the income of the Branch Profit Remittance Tax
Philippine branch from sources within the
Philippines is subject to Philippine income tax. MINIMUM CORPORATE INCOME TAX
Marubeni v. Commissioner: As general rule, the The discussion with respect to this topic (income
head office of a foreign corporation is the subject to normal tax, MCIT, or GIT) under the
same juridical entity as its branch in the subheading of domestic corporations is equally
Philippines following the single entity applicable to resident foreign corporations, both
concept. Thus, the income from sources as to concepts and computations, except that
within the Phils. of the foreign head office RFCs are taxed only on income from sources
shall thus be taxable to the Philippine branch. within the Philippines.

But, when the head office of a foreign corporation Normal Corporate Income Tax Rate 30% of net
independently and directly invested in a domestic taxable income from sources within the
Philippines [RA 9337]
corporation without the funds passing through its
Minimum Corporate Income Tax (MCIT) 2% of
Philippine branch, the taxpayer, with respect to the
MCIT Gross Income from sources within the
tax on dividend income, would be the non-resident Philippines. The MCIT is imposed on RFCsunder
foreign corporation itselfand the dividend income the same conditions as domestic corporations.
shall be subject to the tax similarly imposed on [Sec. 28(A)(2)]
non-resident foreign corporations.
Gross Income Tax (GIT) The President, upon the
recommendation of the Secretary of Finance, may
Definition of doing business under the Foreign allow resident foreign corporations the option to be
Investment Act of 1991 taxed at fifteen percent (15%) of gross income within
The phrase "doing business" shall include soliciting the Philippines, under the same conditions as
orders, service contracts, opening offices, whether domestic corporations. [Sec. 28(A)(1)]
called "liaison" offices or branches; appointing
representatives or distributors domiciled in the TAX ON CERTAIN INCOME
Philippines or who in any calendar year stay in the
country for a period or periods totaling one Interest from deposits and yield or any other
hundred eighty [180] days or more; participating in monetary benefit from deposit substitutes, trust
the management, supervision or control of any funds and similar arrangements and royalties
domestic business, firm, entity or corporation in the On any currency bank deposit, yield or any other
Philippines; and any other act or acts that imply a monetary benefit from deposit substitutes, trust
continuity of commercial dealings or arrangements funds and similar arrangements Final tax of 20%
and contemplate to that extent the performance of

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Income derived from a depository bank under Philippines to the point of transshipment[RR
the expanded foreign currency deposit system 15-2002]
Under the expanded foreign currency deposit
system (EFCDS) Final tax of 7.5% Air Canada vs. CIR (CTA Case No. 6572):
A foreign airline company selling tickets in the
Capital gain from sale of shares of stock not Philippines through their local agents shall be
traded in the stock exchange considered as resident foreign corporation
On sale, barter, exchange or other disposition of engaged in trade or business in the country.
shares of stockof a domestic corporation not The absence of flight operations within the
listed and traded through a local stock Philippine territory cannot alter the fact that
exchange, held as a capital asset: the income received was derived from
activities within the Philippines.
On the net capital gain: The test of taxability is the source, and the source is
First P100,000: Final Tax of 5% that activity which produced the income.
On any amount in excess of P100,000: plus
10% Final tax on the excess In the case of International Shipping, GPB means:
Gross revenue whether for passenger, cargo or
Intercorporate dividends mail originating from the Philippines up to final
Dividends received from a domestic corporation destination, regardless of the place of sale or
liable to tax under the NIRC- exempt payments of the passage or freight documents.

Exclude: Offshore banking units


International carrier
Offshore banking units Coverage of the Rule.
Branch profits remittances Only income derived by offshore banking units
Regional or area headquarters and regional from foreign currency transactions with:
operating headquarters of multination non-residents,
companies other offshore banking units
local commercial banks including branches of
(NOTE: Expressly excluded as indicated in foreign banks that may be authorized by the
the SC Syllabus. The following discussion is BangkoSentralngPilipinas (BSP) to transact
for information purposes) business with offshore banking units

International carrier Tax Rate.


Tax Rate and Base 2.5% on Gross Philippine Exempt from all taxes, except net income from
Billings (GPB) such transactions as may be specified by the
Secretary of Finance, upon recommendation by
What is GPB. the Monetary Board to be subject to the regular
In the case of International Air Carriers, GPB income tax payable by banks
refers to the amount of:
gross revenue derived from carriage of persons, Exception: Interest income derived from foreign
excess baggage, cargo and mail originating currency loans granted to residents other than
from the Philippines in a continuous and offshore banking units or local commercial
uninterrupted flight, irrespective of the place of banks, including local branches of foreign banks
sale or issue and the place of payment of the that may be authorized by the BSP to transact
ticket or passage document business with offshore banking units, shall be
gross revenue from tickets revalidated, subject only to a final tax at the rate of 10%.
exchanged and/or indorsed to another
international airline if the passenger boards a
plane in a port or point in the Philippines Branch profits remittances
for flights which originate from the Philippines, but Taxable transaction any profit remitted by a branch
transshipment of passenger takes place at of a multinational corporation to its head office
any port outside the Philippines on another
airline, the gross revenue consisting of only Tax Rate and Base 15% final tax based on the total
the aliquot portion of the cost of the ticket profits applied or earmarked for remittance without
corresponding to the leg flown from the any deduction for the tax component. The 15% final
tax should excluding: (a) profits on activities which

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are registered with the Philippine Economic Zone (11) Business development.
Authority (PEZA) and (b) passive income gains and
profits received not directly connected with the
conduct of its trade or business in the Philippines. TAXATION OF NON-RESIDENT FOREIGN
CORPORATIONS
Income not treated as branch profits unless
effectively connected with the conduct of trade GENERAL RULE
or business in the Philippines: Except as otherwise provided, the tax is 30% of the
Interests, dividends, rents, royalties gross income (except certain passive
remuneration for technical services income)received during each taxable year from all
salaries, wages premiums, annuities, sources within the Philippines, such as interests
emoluments (except interests on foreign loans, dividends, rents,
other fixed or determinable annual, periodic or royalties, salaries, premiums (except reinsurance
casual gains, profits, income premiums), annuities, emoluments or other fixed or
capital gains received during each taxable year determinable annual, periodic or casual gains,
from all sources within the Philippines profits and income, and capital gains EXCEPT
capital gains on the sale of shares of stock (not
Notes: listed and traded through a local stock exchange),
imposed whether the head office of the foreign of a domestic corporation which are subject to the
corporation is located in a tax treaty country, in tax rates prescribed for individuals and resident
a tax haven or other non-treaty country. foreign corporations.
imposed only on the profits remitted by a
Philippine branch to the head office of a TAX ON CERTAIN INCOME
foreign corporation.
Interest on foreign loans
Regional or area headquarters and Regional on foreign loans contracted on or after August 1,
operating headquarters of multinational companies 1986 20%
under the expanded foreign currency deposit
Regional or area headquarters: not subject to system (EFCDS) - exempt
income tax
Intercorporate dividends
Regional or area headquarters: a branch established (Intercorporate Dividend) 15%, as long as the
in the Philippines by multinational companies and country in which the nonresident foreign
which headquarters do not earn or derive income corporation is domiciledallowsa tax credit for taxes
from the Philippines and which act as supervisory, deemed paid in the Philippines equivalent
communications and coordinating center for their to at least15%
affiliates, subsidiaries, or branches in the Asia-Pacific 15% represents the difference between the regular
Region and other foreign markets. income tax of 30% on corporations and the
15% tax on dividends (tax sparing credit)
Regional operating headquarters If the country within which the NRFC is domiciled
10%of their taxable income does NOT allow a tax credit, a final withholding tax
a branch established in the Philippines by at the rate of30% is imposed on the dividends
multinational companies which are engaged in received from a domestic corporation.
any of the following services: (SMART - BAD
PPL) Capital gains from sale of shares of stock
general Administration and planning not traded in the stock exchange
business Planning and coordination On sale, barter, exchange or other disposition of
sourcing and Procurement of raw materials real property or on shares of stockof a
and components domesticcorporation not listed and traded through
corporate finance Advisory services a local stock exchange, held as a capital asset:
Marketing control and sales promotion
Training and personnel management On the net capital gain:
Logistic services First P100,000 Final Tax of 5%
Research and development services and On any amount in excess of P100,000 plus
product development Final Tax of 10% on the excess
technical Support and maintenance
Data processing and communications, and Exclude:

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Film rentals and other payments to non-resident Rentals, charter and other fees payable to non-
cinematographic film owner, lessor or resident owner or lessor of aircraft
distributor Final tax of 25% of gross income machineries and other equipment
from all sources within the Philippines Final tax of 7.5% of gross rentals or fees

Rental, lease and charter fees payable to non-


resident owner or lessor of vessels chartered Summary of Tax Bases and Rates of Special
by Philippine nationals Corporations
Final tax of 4.5% of gross rentals, lease or Quick Glance
charter fees from leases or charters to
Filipino citizens or corporations, as approved
by the Maritime Authority

Type of Corporation Tax Base Tax


Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non- Taxable Income from all sources 10%
profit)
Depository Banks (Foreign Currency Deposit Units)
(1) With respect to income derived under the expanded Exempt (except that net income from -
foreign currency deposit system from certain foreign such transactions is subject to the
currency transactions regular income tax payable by banks)
(2) With respect to interest income from foreign currency
loans to residents other than offshore units in the Amount of interest income 10%
Philippines or other depository banks under the
expanded system
Resident Foreign Corporations
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units
(1) With respect to income derived by offshore banking Exempt (except that net income from -
units from certain foreign currency transactions such transactions is subject to the
(2) With respect to interest income derived from foreign regular income tax payable by banks)
currency loans granted to residents other than offshore
banking units or local commercial banks Amount of interest income 10%

Resident Depository Bank (Foreign Currency Deposit Units)


(1) With respect to income derived under the expanded Exempt (except that net income from -
foreign currency deposit system from certain foreign such transactions is subject to the
currency transactions regular income tax payable by banks)
(2) With respect to interest income from foreign currency
loans to residents other than offshore units in the Amount of interest income 10%
Philippines or other depository banks under the
expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Taxable Income from within the 10%
Companies Philippines
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners, lessors or Gross Income from the Philippines 25%
distributors
Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter 4.5%
Philippine Nationals Fees from the Philippines
Non-resident Owner or Lessor of Aircraft, Machineries and Gross Rentals, Charges and Fees from 7.5%
Other Equipment the Philippines
IMPROPERLY ACCUMULATED EARNINGS OF See: Sec. 29, as implemented by RR 2-2001 which

CORPORATIONS prescribes rules governing the imposition of IAET

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Earnings reserved for compliance with any Loan


Rule:There is imposed for each taxable year, in Covenantor pre-existing obligation established
addition to other taxes, a tax equal to 10% of the under a legitimate business agreement;
improperly accumulated taxable income of domestic Earnings required by Law or applicable
and closely-held corporations formed or availed of for regulations to be retained by the corporation
the purpose of avoiding the income tax with respect to or in respect of which there is legal
its shareholders or the shareholders of any other prohibition against its distribution;
corporation, by permitting the earnings and profits of In the case of subsidiaries of foreign corporations in
the corporation toaccumulate instead of dividing them the Philippines, all undistributed earnings intended
among or distributing them to the shareholders. or reserved for Investments within the Philippines
as can be proven by corporate records and/or
Rationale: It is a tax in the nature of a penaltyto relevant documentary evidence.
the corporationfor the improper accumulation of
its earnings, and a deterrentto the avoidance of COVERED CORPORATIONS
tax upon shareholders who are supposed to pay Only domestic corporations classified as closely-
dividends tax on the earnings distributed to held corporationsare liable for IAET.
them. The touchstone of the liability is the
purpose behind the accumulation of the income Closely-held corporations are those:
and not the consequences of the accumulation. at least 50% in value of the outstanding capital
stock; or
Exception: The use of undistributed earnings and at least 50% of the total combined voting power
profits for thereasonable needs of the businesswould of all classes of stock entitled to vote
not generally make the accumulated or undistributed is owned directly or indirectly by or for not more
earnings subject to the tax. than 20 individuals. Domestic corporations not
falling under the aforesaid definition are,
What is meant by reasonable needs of the therefore, publicly-held corporations.
business is determined by the immediacy test
Todetermine whether the corporation is closely held
Immediacy Test - It states that the reasonable corporation, insofar as such determination is based on
needs of the businessare the stock ownership, the following rules shall be applied:
immediate needs of the business; and Stock Not Owned by Individuals. - Stock owned
reasonably anticipated needs. directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered
How to prove the reasonable needs of the business as being owned proportionately by its
The corporation should prove that there is shareholders, partners or beneficiaries.
an immediate need for the accumulation of the Family and Partnership Ownership. - An
earnings and profits; or individual shall be considered as owning the
adirect correlation of anticipated needs to such stock owned, directly or indirectly, by or for
accumulation of profits. his family, or by or for his partner.

COMPOSITION For purposes of this paragraph, the family of


The following constitute accumulation of earnings for an individual includes his brothers or sisters
the reasonable needs of the business: (ILL ABE) (whether by whole or half-blood), spouse,
Allowancefor the increase in the accumulation of ancestors and lineal descendants.
earnings up to 100% of the paid-up capital of
the corporation as of Balance Sheet date, Option to Acquire Stocks. - If any person has an
option to acquire stock, such stock shall be
considered as owned by such person.
inclusive of accumulations taken from other
years; For purposes of this paragraph, an option to
Earnings reserved for definite corporate acquire such an option and each one of a
Expansion projects or programsrequiring series of option shall be considered as an
considerable capital expenditure as approved option to acquire such stock.
by the Board of Directors or equivalent body;
Earnings reserved for Building, Plant or Constructive Ownership as Actual Ownership. -
Equipment Acquisition as approved by the Stock constructively owned by reason of the
Board of Directors or equivalent body; application of (a) or (c) shall, for purposes of

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applying (1) or (2), be treated as actually gains or profits that each partner shall include
owned by such person. in his individual tax return.
Other Partnerships (or General Co-partnerships)
But stock constructively owned by the individual by partnerships wherein all or part of their income
reason of the application of (b) shall NOT be is derived from the conduct of trade or
treated as owned by him for purposes of again business. An ordinary business partnership is
applying such paragraph in order to make considered as a corporation and is thus subject
another the constructive owner of such stock. to corporate tax of 30%.

BIR RULING 025-02 OTHER PARTNERSHIPS (OR GENERAL CO-PARTNERSHIPS)


The ownership of a domestic corporation for Rules:
purposes of determining whether it is a closely The partnership is subject to the same rules on
held corporation or a publicly held corporation is corporations (capital gains tax, final tax on
ultimately traced to the individual shareholders passive income, normal tax, minimum corporate
of the parent company. income tax [MCIT] and gross income tax [GIT]),
but is not subject to the improperly
Where at least 50% of the outstanding capital stock or accumulated earnings tax [IAET]. The
at least 50% of the total combined voting power of all partnership must file quarterly and year-end
classes of stock entitled to vote in a corporation is income tax returns.
owned directly or indirectly by at least 21 or more The taxable income of the partnership, less the
individuals, the corporation is considered as a normal corporate income tax (30%) thereon, is
publicly-held corporation, thus, exempt from IAET. the distributable net income of the partnership.

Determination of Reasonable Needs of the Business: The share of a partner in the part nerships
An accumulation of earnings or profits (including distributable net income of a year shall be deemed
undistributed earnings or profits of prior years) is to have been actually or constructively received by
unreasonable if it is not necessary for the the partners in the same taxable year and shall be
purpose of the business, considering all the taxed to them in their individual capacity, whether
circumstances of the case. actually distributed or not. [Sec. 73(D)] Such share
will be subjected to a final tax of 10% to be
To determine the reasonable needs of the withheld by the partnership. [Sec. 24(B)(2)]
business in order to justify an accumulation of
earnings, the Regulations adhere to the so-called CO-OWNERSHIP
Immediacy Test under American jurisprudence as There is co-ownership
adopted in this jurisdiction. Accordingly, the term When two or more heirs inherit and undivided
reasonable needs of the business means the property from a decedent.
immediate needs of the business, including When a donor makes a gift of an undivided
reasonably anticipated needs. In either case, the property in favor of two or more donees.
corporation should be able to prove: (a) an
immediate need for the accumulation of the When Co-ownership is not subject to tax
earnings and profits, or (b) the direct correlation of When the co-ownerships activities are limited
anticipated needs to such accumulation of profits. merely to the preservation of the co-owned
Otherwise, such accumulation would be deemed to property and to the collection of the income from
be not for the reasonable needs of the business, the property. The income derived by a co-owner
and the penalty tax would apply. from the property shall be reported in his
individual tax return regardless of whether such
TAXATION OF PARTNERSHIPS income is actually or constructively received.

CLASSIFICATION OF PARTNERSHIPS FOR TAX PURPOSES When Co-ownership is subject to tax


General Professional Partnerships (GPP) The following circumstances would render a co-
partnerships formed by persons for the sole ownership subject to a corporate income tax: (a)
purpose of exercising their common profession, no When a co-ownership is formed or established
part of the income of which is derived from voluntarily, or upon agreement of the parties; (b)
engaging in any trade or business. A GPP is When the individual co-owner reinvested his share
exempt from income tax. It is, however, required to in the co-ownership to produce another income-
file a tax return for its income for the purpose of generating activity, and (c) When the inherited
furnishing information as to the share in the property remained undivided for more than ten
years, and no attempt was ever made to divide to

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same among the co-heirs, nor was the property not be subject to the income tax. It is not a
under administration proceedings nor held in taxable entity for income tax purposes.
trust, the property should be considered as The partners shall only be liable for income tax
owned by an unregistered partnership. only in their separate and individual capacities.
For purposes of computing the distributive share
Automatically converted into an unregistered of the partners, the net income of the GPP
partnership the moment the said common properties shall be computedin the same manner as a
and/or the incomes derived from them are used as a corporation.
common fund with intent to produce profits for the Each partner shall report as gross income his
heirs in proportion to their respective shares in the distributive share, actually or constructively
inheritance as determined in a project partition either received, in the net income of the partnership.
duly executed in an extrajudicial settlement or The distributive share of a partner (actual or
approved by the court in the corresponding testate or constructive) shall be subject to a creditable
intestate proceeding. [Ona v. CIR, May, 25 1972] withholding income tax of 10% ifthe amount share
is not more than P720,000 and 15% if the amount
JOINT VENTURE AND CONSORTIUM of the share is more than P720,000. (RR 2- 1998)
To constitute a joint venture, certain factors are If the partnership sustains a net operating loss,
essential. Each party to the venture must make a the partners shall be entitled to deduct their
contribution, not necessarily of capital, but by way of respective shares in the net operating loss
services, skill, knowledge, material or money,; profits from their individual gross income.
must be shared among the parties; there must be a
joint proprietary interest and right of mutual control NOTES
over the subject matter of the enterprise; and usually, GPP is not a taxable entity
there is single business transaction. The GPP is deemed to be no more than a
mere mechanism or a flow-through entity
An unincorporated joint venture is taxed likes a in the generation of income by, and the
corporation. The share of the joint venture partners ultimate mechanism distribution of such
will no longer be taxable to them because they income to the individual partners. (Tan v.
partake of dividends if paid to a domestic or Commissioner [Oct. 3, 1994])
resident corporation. However, an unincorporated But the partnership itself is required to file
joint venture formed for the purpose of undertaking income tax returns for the purpose of
a construction project or engaging in petroleum furnishing information as to the share in the
operations pursuant to the consortium agreement gains or profits which each partner shall
with the Philippine Government is not subject to the include in his individual return. (RR 2- 1998)
corporate income tax. Only the joint venture
partners will be taxed on their respective shares in The share of an individual partner in the net profit of a
the income of the joint ventures. general professional partnership is deemed to
have been actually or constructively received by
Two elements necessary to exempt a joint the partner in the same taxable year in which such
venture or consortium from tax partnership net income was earned, and shall be
The joint venture must be an unincorporated taxed to them in their individual capacities,
entity formed by two or more persons whether actually distributed or not, at the
The joint venture was formed for the purpose of graduated income tax ranging from 5% to 32%.
undertaking a construction project, or engaging
in the petroleum and other energy operations Thus, the principle of constructive receipt of
with operating contract with the government. income or profit is being applied to
undistributed profits of GPPs. The payment [to
the partners] of such tax-paid profits in another
TAXATION OF GENERAL PROFESSIONAL year should no longer be liable to income tax.
PARTNERSHIPS (Mamalateo)

RULES WITHHOLDING TAX


A GPP is a partnership formed by persons for the
purpose of exercising their common profession, no CONCEPT
part of the income of which is derived from engaging Withholding tax is a method of collecting income tax
in trade or business. A GPP as suchshall in advance from the taxable income of the recipient of
income. It is a systematic way of collecting taxes at

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source, an indispensable method of collecting taxes who, at the same time, claims the expenses.
to ensure adequate revenue for the government. (RR 30-2003)

The withholding of income tax on compensation Duties and Obligations of the Withholding Agent
income, on certain income payments made to To Register - withholding agent is required to register
resident taxpayers, and on income payments made within ten (10) days after acquiring such status
to non-resident taxpayers is very important for all with the Revenue District office having jurisdiction
taxpayers, because the obligation to withhold and where the business is located
remit the tax is mandatory and prescribed by law. To Deduct and Withhold - withholding agent is
required to deduct tax from all money
In the operation of the withholding tax system, payments subject to withholding tax
the payee is the taxpayer, the person on whom To Remit the Tax Withheld - withholding agent is
the tax is imposed, while the payor, a separate required to remit tax withheld at the time
entity, acts no more than an agent of the prescribed by law and regulations
government for the collection of the tax in order To File Annual Return - withholding agent is
to ensure its payment. The amount thereby used required to file the corresponding Annual
to settle the tax liability is deemed sourced from Information Return at the time prescribed by
the proceeds constitutive of the tax base. In an law and regulations
ad valorem tax, the tax paid or withheld is not To Issue Withholding Tax Certificates - withholding
deducted from the tax base, except when the agent shall furnish Withholding Tax Certificates
law clearly spells out in defining the tax base. to recipient of income payments subject to
withholding (Available, BIR Website)
The duty to withhold is different from the duty to
pay income tax. The revenue officers generally KINDS
disallow the expenses claimed as deduction from Withholding of final tax of certain incomes
gross income, if no withholding of tax as required Subject to rules and regulations the Secretary of
by law or the regulations was withheld and remitted Finance may promulgate, upon the recommendation
to the BIR within the prescribed dates. of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or
In addition, the withholding tax that should have been prescribed by specific section of the NIRC on
withheld and remitted to the BIR as well as the specified items of income shall be withheld by payor-
penalties for non-, late or erroneous payment of the corporation and/or person and paid in the same
withholding tax such as surcharges and deficiency manner and subject to the same conditions as
interest are assessed by the BIR. (Mamalateo) provided in Section 58 of the NIRC.

Withholding Agent Withholding of creditable tax at source


Any person or entity who is required to deduct The Secretary of Finance may, upon the
and remit the taxes withheld to the government. recommendation of the Commissioner, require
In general, any juridical person, whether or not the withholding of a tax on the items of income
engaged in trade or business; payable to natural or juridical persons, residing
An individual, with respect to payments made in in the Philippines, by payor-corporation/persons
connection with his trade or business. However, as provided for by law, at the rate of not less
insofar as taxable sale, exchange or transfer of than one percent (1%) but not more than thirty-
real property is concerned, individual buyers who two percent(32%), which shall be credited
are not engaged in trade or business are also against the income tax liability of the taxpayer
constituted as withholding agents. In any case, no for the taxable year.
Certificate Authorizing Registration (CAR)/Tax
Clearance Certificate (TCL) shall be issued to the Withholding of Creditable Tax (RR 2-98)
buyer unless the withholding tax due on the sale, Under the creditable withholding taxsystem, taxes
transfer or exchange of real property has been withheld on certain income payments are
duly paid; ac. All government offices, including intended to equal or at least approximatethe tax
GOCCs, as well as local government units. due of the payee on said income.
The income recipient is still required to file an
All income payments which are required to be income tax return, to report the income
subjected to withholding tax shall be subject to the and/or pay the difference between the tax
corresponding withholding tax rate to be withheld withheld and the tax due on the income.
by the person having control over the payment and

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Taxes withheld on income payments covered by During the calendar year, on or before January
the expanded withholding tax and thirty-first (31st) of the succeeding yea; or
compensation income are creditable in nature. If his employment is terminated before the close of
such calendar year, on the same day of which
WITHHOLDING OF VAT the last payment of wages is made
On gross payments for the purchase of goods Submit to the Commissioner an annual
On gross payments for the purchase of services information return on or before January thirty-
Payments made to government public works first (31st) of the succeeding year containing:
contractors A list of employees;
Payments for lease or use of property or The total amount of compensation income of
property rights to non-resident owners each employee;
The total amount of taxes withheld therefrom
FILING OF RETURN AND PAYMENT OF TAXES WITHHELD during the year, accompanied by copies of
Where to file and pay: the written statements furnished to
Authorized agent bank; employees, and such other information as
Collection Agent; may be deemed necessary.
the duly authorized Treasurer of the city or
municipality where the employer has his legal The Commissioner may grant to any employer a
residence or principal place of business, or in reasonable extension of time to furnish and
case the employer is a corporation, where submit the statements and returns required.
the principal office is located; or
As Commissioner otherwise permits. FINAL WITHHOLDING TAX AT SOURCE
Under the final withholding tax system, the amount
Period for filing and payment: of income tax withheld by the withholding agent
The return shall be filed and the payment made is constituted as a full and final payment of the
within twenty-five (25) days from the close of income tax due from payee on the said income
each calendar quarter. (e.g., interest on deposits, royalties, etc.). The
The Commissioner may, with the approval of the liability for payment of the tax rests primarily on
Secretary of Finance, require the employers to the payor as a withholding agent. Thus, in case
pay or deposit the taxes deducted and withheld of the withholding agents failure to withhold the
at more frequent intervals, in cases where such tax or in case of under-withholding, the
requirement is deemed necessary to protect the deficiency tax shall be collected from him. The
interest of the Government. payee is not required to file an income tax
return for the particular income, nor is he liable
Taxes as Special Fund in Trust for the payment of the tax. (Sec. 2.57, RR No.
The taxes deducted and withheld by employers shall 2-98)
be held in a special fund in trust for the Government The finality of the withholding tax is limited only
until the same are paid to the said collecting officers. to the payees income tax liability on the
particular income. It does not extend to the
Return and payment in case of government employees payees other tax liability on said income,
If the employer is the Government of the such as when the said income is further
Philippines or any political subdivision, agency or
subject to a percentage tax, such as gross
receipts tax in the case of a bank.
instrumentality thereof, the return of the amount
deducted and withheld upon any wage shall be
made by the officer or employee having control of
Income payments subject to Final Withholding Tax:
the payment of such wage, or by any officer or
Income Payments to a Citizen or to a Resident
employee duly designated for the purpose.
Alien Individual
Interest on any peso bank deposit
Statements and returns
Royalties
Every employer required to deduct and withhold
Prizes (except prizes amounting to P10,000
a tax shall:
or less which is subject to tax under
Furnish to each such employee in respect of his
Sec. 25(A)(1) of the Tax Code
employment a written statement confirming the
Winnings (except from Philippine Charity
wages paid by the employer to such employee
Sweepstake Office and Lotto)
during the calendar year, and the amount of tax Interest income on foreign currency deposit
deducted and withheld and such other Interest income from long term deposit
information as the Commissioner may prescribe

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Cash and/or property dividends including pacto de retro sales and other
Capital Gains presumed to have been forms of conditional sales based on the
realized from the sale, exchange or gross selling price or fair market value
other disposition of real property as determined in accordance with Sec.
Income Payments to a Non-Resident Alien Engaged 6(E) of the NIRC, whichever is higher
in Trade or Business in the Philippines Income Payments to a Resident Foreign
On Certain Passive Income Corporation
cash and/or property dividend Offshore Banking Units
Share in the distributable net income of Tax on branch Profit Remittances
a partnership Interest on any currency bank deposits and yield
Interest on any bank deposits or any other monetary benefit from deposit
Royalties substitute and from trust funds and similar
Prizes (except prizes amounting to arrangements and royalties derived from
P10,000 or less which is subject to tax sources within the Philippines
under Sec. 25(A)(1) of the Tax Code. Interest income on FCDU
Winnings (except from Philippine Charity Income derived by a depository bank under
Sweepstake Office and Lotto) the expanded foreign currency deposits
Interest on Long Term Deposits system from foreign currency transactions
Capital Gains presumed to have been with local commercial banks
realized from the sale, exchange or Income Derived from all Sources Within the
other disposition of real property Philippines by a Non-Resident Foreign
Income Derived from All Sources Within the Corporation
Philippines by a Non-Resident Alien Gross income from all sources within the
Individual Not Engaged in Trade or Business Philippines such as interest, dividends,
On gross amount of income derived from all rents, royalties, salaries, premiums
sources within the Philippines (except re-insurance premiums),
On Capital Gains presumed to have been annuities, emoluments or other fixed
realized from the sale, exchange or determinable annual, periodic or casual
disposition of real property located in the gains, profits and income or capital gains
Philippines Gross income from all sources within the
Income Derived by Alien Individual Employed by Philippines derived by a non-resident
a Regional or Area Headquarters and cinematographic film owner, lessor and
Regional Operating Headquarters of distributor
Multinational Companies On the gross rentals, lease and charter fees
Income Derived by Alien Individual Employed by derived by a non-resident owner or lessor of
Offshore Banking Unit vessels from leases or charters to Filipino
Income of Aliens Employed by Foreign citizens or corporations as approved by the
Petroleum Service Contractors and Maritime Industry Authority
Subcontractors On the gross rentals, charter and other fees
Income Payment to a Domestic Corporation derived by a non-resident lessor of
Interest from any currency bank deposits and aircraft, machineries and other equipment
yield or any other monetary benefit from Interest on foreign loans contracted on or
deposit substitutes and from trust fund and after August 1, 1986
similar arrangements derived from
sources within the Philippines Fringe Benefits Granted to the Employee
Royalties derived from sources within the (except Rank and File)
Philippines
Interest income derived from a depository Goods, services or other benefits furnished
bank under the Expanded Foreign or granted in cash or in kind by an employer
Currency Deposit (FCDU) System to an individual employee (except rank and
Income derived by a depository bank under file) such as but not limited to the following:
the FCDU from foreign transactions with Housing
local commercial banks Vehicle of any kind
On capital gains presumed to have been Interest on loans
realized from the sale, exchange or other Expenses for foreign travel
disposition of real property located in the Holiday and vacation expenses
Philippines classified as capital assets,

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Educational assistance to employees or his are confined to attendance art and


dependents participation in the meetings of the
Membership fees, dues and other expense Board of Directors
in social and athletic clubs or other Professional fees, talent fees, etc for services of
similar organizations taxable juridical persons
- Health insurance Rental of real property used in business
Informers Reward Rental of personal properties in excess of P
10,000 annually
CREDITABLE WITHHOLDING TAX Rental of poles, satellites and transmission
Taxes withheld on certain income payments are facilities
intended to equal or at least approximate the tax due Rental of billboards
of the payee on the income. The income recipient is Cinematographic film rentals and other
still required to file his income tax return as prescribed payments
in Section 51 of the NIRC, wither to report the income Income payments to certain contractors
and/or pay the difference between the tax withheld General engineering contractors
and the tax due on the income. General building contractors
Specialty contractors
Expanded withholding tax Other contractors like:
a kind of withholding tax which is prescribed on Transportation contractors which include
certain income payments and is creditable common carriers for the carriage of
against the income tax due of the payee for goods and merchandise of whatever
the taxable quarter/year in which the kind by land, air or water, where the
particular income was earned. gross payments by the payor to the
An income payment is subject to the expanded same payee amounts to at least two
withholding tax if the following conditions concur: thousand pesos (P2,000) per month,
An expense is paid or payable by the taxpayer, regardless of the number of
which is income to the recipient thereof shipments during the month
subject to income tax; Filling, demolition and salvage work
The income is fixed or determinable at the time contractors and operators of mine
of payment; drilling apparatus
The income is one of the income payments Operators of dockyards
listed in the regulations that is subject to Persons engaged in the installation of
withholding tax; water system, and gas or electric
The income recipient is a resident of the light, hear or power
Philippines liable to income tax; and Operators of stevedoring, warehousing or
The payor-withholding agent is also a resident of forwarding establishments
the Philippines. Printers, bookbinders, lithographers and
publishers, except those principally
Income payments subject to Expanded engaged in the publication or printing
Withholding Tax: of any newspaper, magazine, review
Professional fees / talent fees for services or bulletin which appears at regular
rendered by the following individuals: intervals, with fixed prices for
Those individually engaged in the practice of subscription and sale
profession or callings Advertising agencies, exclusive of
Professional entertainers such as but not payments to media
limited to actors and actresses, singers Independent producers of television, radio
and emcees and stage performances or shows
Professional athletes including basketball Independent producers of "jingles"
players, pelotaris and jockeys Labor recruiting agencies
Directors involved in movies, stage, radio, Persons engaged in the installation of
television and musical directors elevators, central air conditioning
Insurance agents and insurance adjusters units, computer machines and other
Management and technical consultants equipment and machineries and the
Bookkeeping agents and agencies maintenance services thereon
Other recipient of talent fees Messengerial, janitorial, security, private
Fees of directors who are not employees of the detective and other business
company paying such fees whose duties agencies

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Persons engaged in landscaping Income payments on purchases of mineral,


services mineral products and quarry resources
Persons engaged in the collection and
disposal of garbage Withholding tax on compensation
TV and radio station operators on sale The tax withheld from income payments to
of TV and radio airtime, and individuals arising from an employer-employee
TV and radio blocktimers on sale of TV relationship.
and radio commercial spots
Persons engaged in the sale of Compensationisany remuneration received for
computer services, computer services performed by an employee from his
programmers, software employer under an employee-employer relationship.
developer/designer, etc.
Income distribution to the beneficiaries of The different kinds of compensation are:
estates and trusts Regular compensation - includes basic salary, fixed
Gross commission or service fees of customs, allowances for representation, transportation
insurance, stock, real estate, immigration and others paid to an employee
and commercial brokers and fees of agents Supplemental compensation - includes
of professional entertainers payments to an employee in addition to the
Commission, rebates, discounts and other regular compensation such as but not
similar considerations paid/granted to limited to the following:
independent and exclusive distributors, Overtime Pay
medical/technical and sales representatives Fees, including director's fees
and marketing agents and sub-agents of Commission
multi level marketing companies Profit Sharing
Income payments to partners of general Monetized Vacation and Sick Leave
professional partnerships Fringe benefits received by rank & file
Payments made to medical practitioners through employees
a duly registered professional partnership Hazard Pay
Payments for medical/dental/veterinary services Taxable 13th month pay and other benefits
thru hospitals/clinics/health maintenance Other remunerations received from an
organizations, including direct payments to employee-employer relationship
service providers
Gross selling price or total amount of Exemptions from Withholding tax on compensation:
consideration or its equivalent paid to the Remuneration as an incident of employment
seller/owner for the sale, exchange or
Retirement benefits received under RA 7641
transfer of real property
(Retirement Pay Law) and those received by
Additional income payments to government officials and employees of private firms,
personnel from importers, shipping and under a reasonable private benefit plan.
airline companies or their agents Any amount received by an official or employee or by
Certain income payments made by credit card his heirs from the employer due to death,
companies sickness or other physical disability or for any
Income payments made by the top 10,000 cause beyond the control of the said official or
private corporations to their purchase of employee such as retrenchment, redundancy or
goods and services from their local/resident
cessation of business
suppliers other than those covered by other
rates of withholding Social security benefits, retirement gratuities,
Income payments by government offices on their pensions and other similar benefits
purchase of goods and services, from Payment of benefits due or to become due to
local/resident suppliers any person residing in the Philippines under
Tolling fees paid to refineries the law of the US administered US Veterans
Payments made by pre-need companies to Administration
funeral parlors Payment of benefits made under the SSS Act of
Payments made to embalmers by funeral parlors 1954, as amended
Benefits received from the GSIS Act of 1937, as
Income payments made to suppliers of
amended, and the retirement gratuity received
agricultural products
by the government employee
Remuneration paid for agricultural labor
Remuneration for domestic services

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Remuneration for casual labor not in the course Tripartitie Wage and Productivity Board
of an employer's trade or business (RTWPB)/National Wages and Productivity
Compensation for services by a citizen or Commission (NWPC), applicable to the
resident of the Philippines for a foreign place where he/she is assigned
government or an international organization Compensation income of employees in the public
Payment for damages actual, moral, exemplary sector with compensation income of not more
damages received by an employee or his heirs than the SMW in the non-agricultural sector, as
pursuant to a final judgment or compromise fixed by RTWPB/NWPC, applicable to the
agreement arising out of or related to an place where he/she is assigned.
employer-employee relationship.
Proceeds of Life Insurance the proceeds of life TIMING OF WITHHOLDING
insurance policies paid to the heirs or The obligation of the payor to deduct and withhold
beneficiaries upon the death of the insured, the tax arises at the time an income payment is
whether in a single sum or otherwise; provided paid or payable, or the income payment is accrued
however, that interest payments agreed under or recorded as an expense or asset, whichever is
the policy for the amounts which are held by applicable, in the payors books, whichever comes
the insured under such an agreement shall be first. The term payable refers to the date the
INCLUDED in the gross income. obligation becomes due, demandable or legally
Amount received by the insured as a return of enforceable.
premium
Compensation for injuries or sickness amounts Where income is not yet paid or payable but the same
received through accident or health insurance has been recorded as an expense or asset,
or under Workmens Compensation Acts, as whichever is applicable, in the payors books, the
compensation for personal injuries or sickness, obligation to withhold shall arise in the last month of
plus the amount of any damages received the return period in which the same is claimed as an
whether by suit or agreement on account of expense or amortized for tax purposes. (Mamalateo)
such injuries or sickness.
Income exempt under Treaty
Thirteenth (13th) month pay and other benefits
(not to exceed P 30,000)
Mandatory 1 month basic salary received after
the twelfth *12th) month pay
Other benefits such as Christmas bonus,
productivity incentives, loyalty award, gift
in cash or in kind and other benefits of
similar nature actually received by officials
and employees of both government and
private offices including the Additional
Compensation Allowance (ACA) granted
and paid to all officials and employees of
the Nations Government (NGAs) including
State Universities and Colleges (SUCs),
Government-Owned-or-Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs)
De minimis benefits, given in excess of the
ceilings prescribed in regulations, shall
be taxable to the recipient employee
only if such excess is beyond the
P30,000 threshold.
GSIS, SSS, Medicare and other contributions GSIS,
SSS, Medicare and Pag-Ibig contributions, and
union dues of individual employees
Compensation income of MWEs who work in the
private sector and being paid the statutory
minimum wage (SMW), as fixed by Regional

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Estate Tax the tax and thus contributes to government


income.
Redistribution of wealth theory Receipt of
Estate tax laws rest in their essence upon the inheritance is a contributing factor to the
principle that death is the generating source from inequalities in wealth and income. The imposition
which the taxing power takes its being, and that it is of estate tax reduces the property received by the
the power to transmit or the transmission from the successor, this helping to promote a more
dead to the living on which the tax is more equitable distribution of wealth in society. The tax
immediately based. [Lorenzo v. Posadas, 64 Phil 353] base is the value of the property and the
progressive scheme of taxation is precisely
DEFINITION motivated by the desire to mitigate the evils of
A graduated tax imposed upon the privilege of the inheritance in the present form. The taxes paid by
decedent to transmit property at death and is rich people are programmed for disbursement by
based on the net estate, considered as a unit, Congress more for the benefit of the poor in terms
and it is determined by subtracting from the on social services, education, health, etc.
gross estate the allowable deductions.
Tax on the right to transmit property at death and TIME AND TRANSFER OF PROPERTIES
on certain transfers which are made by the Decedents interest is to its extent at the time of
statute the equivalent of testamentary his death. [Sec. 85(A), NIRC]
dispositions and is measured by the value of
property at time of death. Estate taxation is governed by the statute in force
at the time of death of the decedent. Estate tax
NATURE accrues as of the death of the decedent and the
It is in reality an excise or privilege tax imposed accrual of the tax is distinct from the obligation to
on the right to succeed to, receive, or take pay the same. Upon the death of the decedent,
property by or under a will or the intestacy law, succession takes place and the right of the State to
or deed, grant, or gift to become operative at or tax the privilege to transmit the estate vests
after death. [Lorenzo v. Posadas, 64 Phil 353] instantly upon death. [Sec. 3, RR2-2003]
PURPOSE OR OBJECT
TAXABLE TRANSFERS
Transfers Mortis Causa Gratuitous transfers
PURPOSE OF ESTATE TAX
after death, either testate or intestate.
The object of estate tax is to tax the shifting of
Transfers Inter Vivos Generally attract donors tax.
economic benefits and enjoyment of property
However, certain transfers inter vivos are treated
from the dead to the living.
by law as substitutes for testamentary dispositions
Death taxes are imposed to give added income
(i.e., transfers which are inter vivos in form but
to the government.
mortis causa in substance) where certain
circumstances provided by law are present, and
JUSTIFICATION (THEORIES) FOR THE IMPOSITION OF
are accordingly included in the computation of the
ESTATE TAX
gross estate in order to arrive at the proper estate
Benefit received theory The State collects the
tax liability.
tax because of the services it renders in the
distribution of the estate of the decedent, Transfers in contemplation of death [Sec.
either by law or in accordance with his will. 85(B), NIRC]
Privilege theory or state partnership theory Transfer with retention or reservation of
Succession to the property of a deceased certain rights [Sec. 85(B), NIRC]
person is not a right but a privilege granted Revocable transfers [Sec. 85(C), NIRC]
by the State and consequently, the legislature Transfers of property arising under general
can constitutionally burden such succession power of appointment [Sec. 85(D), NIRC]
with a tax.The State collects the tax because Transfers for insufficient consideration [Sec.
of the protection it provides in the acquisition 85(G), NIRC]
of large estates. Hence, the State is a silent
or passive partner in the accumulation of CLASSIFICATION OF DECEDENT
said large property. The decedent may be classified into:
Ability to pay theory Receipt of inheritance, which Citizen,
is in the nature of unearned wealth or windfall, Resident alien; or
place assets into the hands of the heirs and Non-resident alien.
beneficiaries. This creates an ability to pay

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DEFINITION OF RESIDENCE Citizen or Resident Alien Non-resident Alien


It refers to the permanent home, the place to which
whenever absent, for business or pleasure, one Tangible personal property outside the Philippines
intends to return, and depends on facts and
circumstances, in the sense that they disclose
Included Not included
intent. [Corre v. Tan Corre, 100 Phil 321] Intangible personal property in the Philippines
It is, therefore, not necessarily the actual place of
Included Included, unless
residence. The term residence and domicile are exempted on the basis
synonymous and are used interchangeably without of the principle of
distinction. [Collector v. Lara, 102 Phil 813; Velilla reciprocity
v. Posadas, 62 Phil 624] Intangible personal property outside the
Philippines
GROSS ESTATE AND NET ESTATE
Included Included
GROSS ESTATE
The total value of all property, real or personal, Reciprocity Rule
tangible or intangible, the actual and beneficial There is reciprocity if the foreign country of
ownership of which was in the decedent at the which the decedent was a citizenand resident at
time of his death. [Sec. 85, NIRC] the time of his death:
Did not impose a transfer tax of any character, in
NET ESTATE respect of intangible personal property of
Value of the estate after all deductions have citizens of the Philippines not residing in that
been made against the gross estate; subject to foreign country;
the graduated tax rates. [Sec. 6, RR 2-2003] Allowed a similar exemption from transfer tax in
respect of intangible personal property
TAX RATES APPLICABLE owned by citizens of the Philippines not
[Sec. 84, NIRC] residing in that country
If the net estate is:
But not Of the Note: In sum, both states must exempt nonresidents
Over Tax is Plus excess (citizens of the other state) from transfer taxes in
over respect of intangible personal property.
over
200,000 Exempt For the reciprocity rule to apply, there must be
200,000 500,000 0 5% 200,000 TOTAL reciprocity. [For instance,] in the
Philippines, both estate and inheritance taxes
500,000 2 million 15,000 8% 500,000 are imposed on the estate while in California
only inheritance tax is imposed. The reciprocity
2 million 5 million 135,000 11% 2 million
rule may not be availed of. Reciprocity has to be
5 million 10 465,000 15% 5 million total. [CIR v. Fisher, 110 Phil 686]
million
Reciprocity in exemption does not require the foreign
10 and over 1,215,000 20% 10 country to possess international personality in the
million million traditional sense (i.e., compliance with the requisites
DETERMINATION OF GROSS ESTATE AND NET ESTATE of statehood). Thus, Tangier, Morocco [Collector v.
Campos-Rueda, 42 SCRA 23] and California, a state
in the American Union [Collector v. de Lara, 102 Phil
Citizen or Resident Alien Non-resident Alien 813] were held to be foreign countries within the
Real property in the Philippines meaning of Section 104.

Included Included When the owner of personal property, during his lifetime,
Real property outside the Philippines extended his activities with respect to his interests so as
to avail himself of the protection and benefits of the
Included Not included laws of the Philippines, so as to bring his person or
Tangible personal property in the Philippines property within the reach of the Philippines, the reason
for a single place of taxation no longer obtains. His
Included Included property in the Philippines enjoys

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the protection of the government so that the Listed shares FMV is the arithmetic mean
right to collect the estate tax cannot be between the highest and lowest quotation at
questioned. (Collector v. Lara, 102 Phil 813) a date nearest the date of death, if none is
available on the date of death itself.
Intangible Properties Which Are Considered Situated Unlisted shares - COMMON shares are valued
in the Philippines based on BOOK VALUE; while PREFERRED
[Sec. 104, NIRC] shares are valued at PAR VALUE. Note: in
Franchise which must be exercised in the determining the book value, appraisal shares
Philippines shall not be considered as well as the value
Shares, obligations or bonds issued by any assigned to preferred shares, if any.
corporation or sociedad anonima organized Right to usufruct, use or habitation, annuity - in
or constituted in the Philippines in accordance with the latest basic standard mortality
accordance with its laws table taking into account the probable life of the
Shares, obligations or bonds issued by any beneficiary, to be approved by the Secretary of
foreign corporation 85% of the business of Finance, upon recommendation of the Insurance
which is located in the Philippines Commissioner (Sec. 88(A), NIRC).
Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations ITEMS TO BE INCLUDED IN GROSS ESTATE
or bonds have acquired a business situs in
the Philippines DECEDENTS GROSS ESTATE
Shares or rights in any partnership, business or [Sec. 85, NIRC]
industry established in the Philippines [Sec. Property owned by the decedent actually and
104, NIRC] physically present in his estate at the time of
his death;
COMPOSITION OF THE GROSS ESTATE Decedents interest;
The following properties, rights and interests are Properties not physically in the estate, such as:
included in the gross estate at the time of the Transfers in contemplation of death [Sec.
decedents death: 85(B), NIRC];
As to resident (citizen or alien) or citizen Transfers with retention or reservation of
(resident or non-resident) certain rights [Sec. 85(B), NIRC];
Real property wherever situated Revocable transfers [Sec. 85(C), NIRC];
Personal property (tangible or intangible) Property passing under general power of
wherever situated appointment [Sec. 85(D), NIRC];
As to non-resident alien Transfers for insufficient consideration [Sec.
Real property in the Philippines 85(G), NIRC];
Tangible personal property in the Philippines Proceeds of life insurance [Sec. 85(E), NIRC];
Intangible personal property in the Claims against insolvent persons; and
Philippines, unless excluded on the basis Capital of the surviving spouse [Sec. 85(H),
of reciprocity under Section 104 NIRC NIRC].
(see above)
Property Owned by the Decedent Actually and
VALUATION OF THE GROSS ESTATE Physically Present in His Estate at the Time of Death
[Sec. 88, NIRC] Land, buildings, shares of stock, vehicles, bank
General Rule: The properties comprising the deposits, etc.
gross estate shall be valued based on FAIR
MARKET VALUE (FMV) as of the time of death. Decedents Interest
Decedents interest refers to the extent of equity or
Real Property ownership participation of the decedent on any
FMV as determined by the Commissioner OR FMV as property physical existing and present in the gross
shown in the schedule of values fixed by the estate, whether or not in his possession, control or
provincial and city assessors, whichever is HIGHER. dominion; also refers to the value of any interest in
property owned or possessed by the decedent at
Personal Property the time of his death (interest having value or
FMV at the time of death. capable of being value or transferred. [cf. Sec.
85(A), NIRC] Examples: dividends declared before
Shares of Stock his death but received after death; partnership
[Sec. 5, RR 2-2003] profits which have accrued before his death.

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Exception:Bona fide sale for an adequate and


PROPERTIES NOT PHYSICALLY IN THE ESTATE full consideration.
Properties Not Physically in the Estate
These have already been transferred during the The power to alter, amend or revoke shall be
lifetime of the decedent but are still subject to considered to exist on the date of the decedents
payment of estate tax), such as the following: death EVEN THOUGH:
The exercise of the power is subject to a
Transfers in contemplation of death precedent giving of notice, or
[Sec. 85(B), NIRC] The alteration, amendment or revocation takes effect
The transfers referred to are those where the only on the expiration of a stated period after the
motivating factor or controlling motive is the thought of exercise of the power, whether or not on or before
death, regardless of whether the transferor was near the date of the decedents death notice has been
the possibility of death or not. Note: There is no given or the power has been exercised.
transfer in contemplation of death when the transfer of
property is a bona fide sale for an adequate and full If notice has not been given or the power has not
consideration in money or moneys worth. been exercised before the date of his death, such
notice shall be considered to have been given, or
Transfers with retention or reservation of certain rights the power exercised, on the date of his death.
[Sec. 85(B), NIRC]
It involves cases where the owner transfers his Property passing under general power of appointment
property during life but still retains economic benefits, [Sec. 85(D), NIRC]
such as the possession or enjoyment of the Power of appointment refers to the right to
property,or the power to designate the persons who designate the person or persons who will
may exercise such rights. By reason of the restriction succeed to the property of the prior decedent.
or encumbrance, the transferee is incapable of freely
enjoying and disposing of the property until the When general.The power of appointment is
transferors death, and the transfer may be regarded general when the power of appointment authorizes
as having been intended to take effect in possession the donee of the power to appoint any person he
or enjoyment at the transferors death. pleases. The power may be exercised in favor of
anybody including the done-decedent. The donee
Exception:Bona fide sale for an adequate and of a general power of appointment holds the
full consideration. appointed property with all the attributes of
ownership, and, thus, the appointed property shall
Illustration: form part of the gross estate of the donee of the
X transfers his property to Y in naked ownership and power upon his death.
to Z in usufruct throughout Zs lifetime subject to the
condition that if Z predeceases X, the property shall When special.Special power of appointment
return to X. If X dies during Zs life, the value of the exists when the done can appoint only from a
reversionary interest of X at death is includible in his restricted or designated class of persons other
gross estate (see Articles 756-757 of the Civil Code). than himself. Property transferred under a special
The transfer is taxable as intended to take effect at or power of appointment should be excluded from the
after death because the possibility of reversion to gross estate of the donee of the power because
X makes Zs interest conditional as long as X lives. the done-decedent only holds the property in trust.

Revocable Transfers Gross estate shall include any property passed


[Sec. 85(C), NIRC] or transferred under a general power of
Decedents transfer of any interest by trust or appointment exercised by the decedent:
otherwise, where the enjoyment thereof was subject By will, or
at the date of his death to any change through the By deed executed in contemplation of, or
exercise of power by the decedent ALONE or by the intended to take effect in possession or
decedent IN CONJUNCTION WITH ANY OTHER enjoyment at, or after his death, or
person, to alter, amend, revoke, or terminate such By deed under which he has retained (for his life
transfer, OR where such power which would bring the or any period not ascertainable without
property in the taxable estate is relinquished in reference to his death or for any period which
contemplation of the decedents death [Sec. 85(C does not in fact end before his death):
)(1), NIRC]. the possession or enjoyment of, or the right
to the income from, the property, or

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the right, either alone or in conjunction with Over Case Case Case
any person, to designate the persons who A B C
shall possess or enjoy the property or the
income therefrom [Sec. 85(D), NIRC]. FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Exception:Bona fide sale for an adequate and Consideration received 2,000 800 0
full consideration.
Value included in the Gross 0 1,200 2,000
Two kinds of appointment and their effects. Estate

General Special
Note: The transfer for insufficient consideration
As to nature. DONEE DONEE must appoint must fall under any of the following:
has power to appoint successor to the Transfer in contemplation of death;
any person he chooses property only within a Revocable transfer, or
who shall possess or limited group or class Property passing under a GPA.
Otherwise, the tax imposed is donors tax.
enjoy the property of persons
without restriction Proceeds of life insurance[Sec. 85(E), NIRC]
As to tax implications. Not includible in Proceeds of life insurance taken out by the
the Makes appointed gross estate of the decedent on his own life shall be included in the
property, for all legal DONEE when he dies gross estate in the following cases:
intents, the property of Beneficiary is the estate of the deceased, his
executor or administrator, irrespective of
the DONEE (includible
whether or not the insured retained the power
in his estate) of revocation; or
As to effects. DONEE DONEE holds the Beneficiary is other than the decedents estate,
holds the appointed appointed property in executor or administrator, when designation
of beneficiary is not expressly made
property with all the trust, or under the irrevocable [Sec. 85 (E), NIRC].
attributes of ownership, concept of trustee
under the concept of Note: Under the Insurance Code of 1978, if not
owner clear or silent, the designation of the beneficiary
is presumed to be revocable; hence, includible in
Transfers for insufficient consideration the decedents gross estate.
[Sec. 85(G), NIRC]
When a sale of transfer (other than a bona fide Cases when proceeds of life insurance not taxable.
sales of property for an adequate and full Accident insurance proceeds;
consideration in money or moneys worth) was Proceeds of a group insurance policy taken out
made for a price less than its fair market value at by a company for its employees;
the time of sale or transfer, the excess of the fair Amount receivable by any beneficiary irrevocably
market value of the transferred property at the designated in the policy of insurance by the
time of death over the value of the consideration insured. The transfer is absolute and the insured
received should be included in the gross estate. did not retain any legal interest in the insurance
[Sec. 85 (E), NIRC];
Case A: If bona fide sale no value shall be Proceeds of insurance policies issued by the
included in the gross estate GSIS to government officials and employees
Case B: If not a bona fide sale - the excess of [P.D. 1146], which are exempt from all taxes;
the fair market value at the time of death over Benefits accruing under the SSS law [RA 1161,
the value of the consideration received by the as amended]; and
decedent shall form part of his gross estate. Proceeds of life insurance payable to heirs of
Case C: If inter vivos transfer is proven deceased members of military personnel [RA
fictitious/simulated total value of the property 360].
at the time of death included in the gross estate.
To determine the conjugal or separate character of
proceeds, the following factors are considered:

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Policy taken before marriage Source of funds Resident or citizen Non-resident alien
determines ownership of the proceeds of life decedent decedent
insurance
(4) Amounts received use
Policy taken during marriage
under R.A. 4917 (4) Amounts received
Beneficiary is estate of the insured
Proceeds are presumed conjugal; under R.A. 4917
hence, one-half share of the surviving Special deductions
spouse is not taxable (a) Family home
Beneficiary is third person Proceeds are (b) Standard deduction
payable to beneficiary even in premiums (c) Medical expenses
were paid out of the conjugal
Share in conjugal Share in conjugal
property property
Claims Against Insolvent Persons
For estate tax purposes, an insolvent is a person
whose properties are not sufficient to satisfy, whether Note: For non-resident aliens, this formula is used
fully or partially, his debts. A judicial declaration of to compute for total allowable deductions of the
insolvency is not required but the incapacity of the first six items above [Sec. 7(1), RR 2-2003]:
debtor should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full amount of Gross Estate, Phils. World expenses, losses,
the claim against the insolvent person should be Gross Estate, X indebted-ness, taxes
included in the gross estate of the decedent. The World etc.
portion of the claim which is not collectible should be
allowed as a deduction from the gross estate. WHEN DEDUCTION NOT ALLOWED
No deduction shall be allowed in the case of a non-
Capital of the Surviving Spouse resident decedent not a citizen of the Philippines,
[Sec.85(H), NIRC] unless the executor, administrator, or anyone of the
It is NOT part of the gross estate of the heirs, as the case may be, includes in the return
deceased spouse. required to be filed under Section 90 of the Code
the value at the time of the decedents death of that
DEDUCTIONS FROM ESTATE part of his gross estate NOT situated in the
[Sec. 86, NIRC] Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
Resident or citizen Non-resident alien
decedent decedent ORDINARY DEDUCTIONS
Gross Estate
Expenses, Losses, Indebtedness and Taxes, Etc. (ELIT)
All property at the time of Includes only that part of
death, wherever situated gross estate located in the Funeral Expenses [Sec. 86 (A)(1), NIRC]
Philippines Allowable deduction is not to exceed P200,000
Deductions and whichever is lowerof:
Ordinary deductions Ordinary deductions The actual funeral expenses (whether or not
paid) up to the time of interment, or
(1) Expenses, losses, (1) Proportionate
An amount equal to 5% of the gross estate.
indebtedness, taxes, etc. deductions for expenses,
(ELIT) losses, indebtedness, Actual funeral expenses shall mean those which are
(a) Funeral expenses taxes, etc. (ELIT) actually incurred in connection with the interment or
(b) Judicial expenses (a) Funeral expenses
burial of the deceased and must be paid out of the
(c) Claims against the (b) Judicial expenses
estate and not by another person or out of
estate (c) Claims against the
contributions from friends and relatives. These must
(d) Claims against estate
be duly supported by receipts or invoices or other
insolvent persons (d) Claims against
evidence to show that they were actually incurred.
(e) Unpaid mortgage insolvent persons
and debt (e) Unpaid mortgage The unpaid portion of the funeral expenses incurred
(f) Taxes and debt which is in excess of the P200,000 threshold is NOT
(g) Losses (f) Taxes allowed to be claimed as a deduction under claims
(2) Vanishing deductions (g) Losses against the estate (see 1(c) below). [Sec. 6(A)(1), RR
(3) Transfers for public (2) Vanishing deductions 02-2003]
use (3) Transfers for public

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Examples of Funeral Expenses. Inventory-taking or collection of the assets


The term funeral expenses is not confined to its comprising the estate, their administration,
ordinary or usual meaning. [RR 2-2003, Sec. 6 (A)(1)] The payment of debts of the estate, as well as
The MOURNING APPAREL of the surviving the distribution of the estate among the heirs
spouse and unmarried minor children of the or those entitled thereto, DURING THE
deceased, bought and used on the occasion SETTLEMENT OF THE ESTATE BUT NOT
of the burial BEYOND THE LAST DAY PRESCRIBED
EXPENSES of the WAKE preceding the burial, BY LAW, or the extension thereof, FOR
including food and drinks THE FILING OF THE ESTATE TAX
PUBLICATION CHARGES for death notices RETURN. [Sec. 6 (A)(2), RR 02-2003]
TELECOMMUNICATIONS EXPENSES incurred in
informing relatives of the deceased The expenses should be supported by receipts
Cost of BURIAL PLOT, TOMBSTONES, or invoices or by a sworn statement of account
MONUMENT or MAUSOLEUM but not their issued by the creditor.
upkeep. In case the deceased owns a family
estate or several burial lots, only the value Although the Tax Code specifies judicial
corresponding to the plot where he is buried expenses of the testamentary and intestate
is deductible proceedings, there is no reason why expenses
INTERMENT and/or CREMATION FEES and incurred in the administration and settlement of
CHARGES an estate in extrajudicial proceedings should not
All other expenses incurred for the performance be allowed (CIR v. CTA, CTA and Pajonar, G.R.
of the RITES and CEREMONIES incident to No. 123296, March 22, 2000).
interment
Attorneys fees in order to be deductible from the
Expenses Not Deductible as Funeral Expenses. gross estate must be essential to the collection
Expenses incurred AFTER INTERMENT, such as for of assets, payment of debts or the distribution of
prayers, masses, entertainment, or the like the property to the persons entitled thereto. The
Any portion of the funeral and burial expenses services for which the fees are charged must
BORNE or DEFRAYED by RELATIVES and relate to the proper settlement of the estate.
FRIENDS of the deceased Attorneys fees paid by the heirs to their
Medical expenses as of the last illness will not respective lawyers arising from conflicting claims
form part of funeral expenses but should be are not deductible as judicial expenses. These
claimed as medical expenses. expenses should be separately borne by them.

Illustrations Examples of judicial expenses.


If five percent (5%) of the gross estate is Actual judicial or court expenses
P220,000 and the amount actually incurred is Fees of executor or administrator
P215,000, the maximum amount that may be Attorneys fees
deducted is only P200,000; Expenses of administration such as:
If five percent (5%) of the gross estate is P 100,000 Accountants fees
and the total amount incurred is P150,000 Appraisers fees
where P20,000 thereof is still unpaid, the only Clerk hire
amount that can be claimed as deduction for Costs of preserving and distributing the
funeral expenses is P100,000. The entire estate
P50,000 excess amount consisting of P30,000 Costs of storing or maintaining property of
paid amount and P20,000 unpaid amount can the estate
no longer be claimed as FUNERAL Brokerage fees for selling property of the
EXPENSES. Neither can the P20,000 unpaid estate
portion be deducted from the gross estate as
CLAIMS AGAINST THE ESTATE. The notarial fee paid for the extrajudicial
settlement is deductible since such settlement
Judicial Expenses of Testamentary and effected a distribution of the estate to the lawful
intestate Proceedings [Sec. 86 (A)(1), NIRC] heirs. Attorneys fees to be deductible from the
Allowable deductions are administration gross estate must be essential to the collection
expenses essential in the settlement of the of assets, payment of debts or the distribution of
estate or necessarily incurred, such as but not property to the persons entitled to it.
limited to the following: [Commissioner v. CA, 328 SCRA 666]

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The full amount owed by the insolvent must first be


Claims Against the Estate[Sec. 86 (A)(1), NIRC] included in the decedents gross estate; and
Claims are debts or demands of a pecuniary If the insolvent could only pay a partial amount,
nature which could have been enforced against the full amount owed shall be included in the
the deceased in his lifetime and could have gross estate, and the amount uncollectible
been reduced to simple money judgments. May shall be allowed as a deduction.
arise out of contract, tort or operation of law.
[Sec. 6 (A)(3), RR 2-2003] Unpaid Mortgages, Losses and Taxes
[Sec. 86 (A)(1), NIRC; Sec. 6 (A)(5), RR 2-2003]
Provided, if the indebtedness arises from a debt
instrument, the debt instrument was duly notarized Unpaid Mortgages.
at the time the indebtedness was incurred, except These are deductible from the gross estate, provided:
for loans granted by financial institutions where That the gross estate must include the fair
notarization is not part of the business market of the property encumbered by such
practice/policy of the financial institution-lender) mortgage or indebtedness;
and, if the loan was contracted within three (3) That the deduction shall be limited to the extent
years before the death of the decedent, the that they were contracted bona fide and for an
administrator or executor shall submit a statement adequate and full consideration in money or
under oath showing the disposition of the proceeds moneys worth, if such unpaid mortgages or
of the loan. [Sec. 6 (A)(1), RR 2-2003] indebtedness were founded upon a promise or
an agreement. [Sec. 6-A5(a), RR 2-2003]
Requisites for deductibility (PVN GF) [Sec. 6
(A)(3), RR 2-2003]. In case unpaid mortgage payable is being claimed
Must be a PERSONAL OBLIGATION of the by the estate, verification must be made as to who
deceased existing at the time of his death was the beneficiary of the loan proceeds. If loan is
(except unpaid funeral expenses and unpaid merely an accommodation loan where the loan
medical expenses, which are classified into proceeds went to another person, the value of the
their own separate categories) unpaid loan must be included as a receivable of
Liability must have been contracted in GOOD the estate. If there is a legal impediment to its
FAITH and for adequate and full recognition as a receivable, such unpaid
consideration in money or moneys worth obligation/mortgage payable shall NOT be allowed
The claim must be a debt or claim which is VALID IN as a deduction from the gross estate. [Sec. 6 (A)
LAW and ENFORCEABLE IN COURT (5), RR 2-2003] In all instances, the mortgaged
Indebtedness NOT CONDONED by the creditor or the property, to the extent of the decedent
action to collect from the decedent must NOT
HAVE PRESCRIBED. Taxes.
These are deductible from the gross estate if:
The term "claims" required to be presented against They have accrued as of the death of the
a decedent's estate is generally construed to mean decedent, and
debts or demands of a pecuniary nature which They were unpaid as of the time of death.
could have been enforced against the deceased in
his lifetime, or liability contracted by the deceased This deduction DOES NOT include income tax
before his death. Therefore, the claims existing at upon income received after death, or property
the time of death are significant to, and should be taxes accrued after his death, or the estate tax
made the basis of, the determination of allowable, due from the transmission of his estate. [Sec. 6
(and post-death developments, i.e. reduction or (A)(5)(b), RR 2-2003]
condonation through compromise agreements
entered into by the Estate with its creditors, should Losses.
not be considered). [Dizon v. CTA (2008)] These are deductible from the gross estate if
ALL of the following conditions are satisfied:
Claims Against Insolvent Persons[Sec. 86 (A)(1), The losses were INCURRED DURING the
NIRC] These are claims that are not collectible. To SETTLEMENT of the estate
be deductible from the gross estate: The losses arose from acts of God, such as FIRES,
The incapacity of the debtor to pay his obligation STORMS, SHIPWRECK or OTHER CASUALTIES, or
should be proven, although a judicial from acts of man, such as ROBBERY, THEFT or
declaration of insolvency is not required; EMBEZZLEMENT

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The losses are NOT COMPENSATED BY Previous taxation of the property the donor's tax on
INSURANCE or otherwise the gift or estate tax on the prior succession
The losses are not claimed as a deduction for (Mr. Bs succession) must have been finally
income tax purposes in an income tax return determined and paid by the donor or the prior
of the estate subject to income tax decedent, as the case may be.
The losses were incurred NOT LATER THAN THE No previous vanishing deduction on the property, or
LAST DAY FOR PAYMENT OF THE ESTATE the property exchanged therefor, was allowed in
TAX (6 months after the death of the determining the value of the net estate of the prior
decedent) [Sec. 6 (A)(5)(c), RR 2-2003] decedent. (Illustration of how this requirement
may NOT be met: In the example above, if Mr. B
The amount deductible is the amount of the received the same properties as a donation from
property lost. Mr. C in July 2002, a vanishing deduction on the
properties was claimed with respect to Mr. Bs
Property Previously Taxed estate. Thus, no more vanishing deduction may be
[Sec. 86 (A)(2), NIRC] claimed by Mr. As estate)
Deduction allowed on the property left behind by
the decedent, which he had acquired previously, Computation of Vanishing Deduction
by inheritance or donation. Using the facts above, assume that Mr. A
inherited a car and a piece of land from his
Rationale father Mr. B.
As a previous transfer tax had already been At the time of Mr. Bs death, the FMV of the car
imposed on the property, either the estate tax (if was P120,000 and the FMV of the land was
property inherited) or the donors tax (if property P800,000.
donated), to minimize the effects of a double tax At the time Mr. A inherited the land, it was
on the same property within a short period of subject to a mortgage of P80,000. Mr. A paid
time, i.e. five (5) years, the law allows a P70,000 of the mortgage during his lifetime
deduction to be claimed on the said property. (leaving a balance of P10,000).
The FMV of the properties at the time of Mr. As
Example: Mr. A died in December 2003. In March death were P850,000 for the land and
2003, Mr. B (Mr. As father) died and left Mr. A P70,000 for the car.
some properties as inheritance. May vanishing Mr. As gross estate amounted to P3,200,000
deductions be claimed as deductions in while total deductions (excluding medical
computing Mr. As net taxable estate? expenses, standard deductions, family home,
including the above unpaid mortgage of
YES, vanishing deductions shall be allowed if P70,000) amounted to P600,000.
the following conditions are met:
First, GET THE VALUE OF THE PROPERTY
Requisites for Deductibility [PINID] PREVIOUSLY TAXED (PPT): compare the values of
Death the present decedent (Mr. A) died within the property at the time of the prior decedents death
five years from date of death of the prior and at the time of the present decedents death. The
decedent (Mr. B) or date of gift; lower amount shall be the initial basis.
Identity of the property The property with in the example, the value of the PPT shall be
respect to which deduction is sought can be P800,000 for the land and P70,000 for the
identified as the one received from the prior car, for a total of P870,000
decedent or the donor, or as the property
acquired in exchange for the original property Note: The value used on the PPT is significant
so received. only for purposes of computing the amount of
Location of the property The property on vanishing deduction. The value included in the
which vanishing deduction is claimed must decedents gross estate is ALWAYS the fair
be located in the Philippines. market value at the time of his death.
Inclusion of the property The property must
have formed part of the gross estate situated Then, THE PPT VALUE SHALL BE REDUCED BY
in the Philippines of the prior decedent, or ANY PAYMENT MADE BY THE PRESENT
must have been included in the total amount DECEDENT ON ANY MORTGAGE or lien on
of the gifts of the donor made within five (5) the property
years prior to the present decedents death. Mr. A paid P70,000 of the mortgage. Thus,
P870,000 less 70,000 is P800,000

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The P800,000 is known as the INITIAL BASIS (3) FINAL BASIS


X RATES IN Sec 86A-2
The INITIAL BASIS shall be FURTHER
REDUCED by the SECOND DEDUCTION,an VANISHING DEDUCTION in an Estate Tax Return,
amount equal to: this is deducted from the Exclusive Properties of the
(INITIAL BASIS / Total amount of Gross decedent that form part of the gross estate.
Estate) X ordinary expenses or deductions*
Transfers for Public Purpose
*Ordinary, thus excluding family home, medical [Sec. 86 (A)(3), NIRC]
expenses, standard deduction and amounts These are dispositions in a last will and testament or
received under RA 4917 transfers to take effect after death in favor of the
Government of the Republic of the Philippines, or any
800,000/3,200,0008 x 600,000 equals political subdivision thereof, for exclusively public
150,000. This will be deducted from the purposes. The whole amount of all the BEQUESTS,
initial basis of P800,000, which gives a LEGACIES, DEVISES or TRANSFERS to or for the
balance of P650,000 use of shall be deductible from gross estate, provided
The 650,000 is known as the FINAL BASIS. such amount or value had been included in the
computation of the gross estate.
Finally, the remaining balance shall be multiplied
by the corresponding percentage: Amounts Received by Heirs Under RA 4917
[Sec. 86 (A)(7), NIRC]
Vanishing Any amount received by the heirs from the
Deduction If received by inheritance or gift decedents employer as a consequence of the
Rate death of the decedent-employee in accordance
100% Within one (1) year prior to the death of with RA No. 4917 (this law provides that
retirement benefits of private employees shall
the present decedent
not be subject to attachment, levy execution or
More than one year but not more than any tax),PROVIDEDthat such amount is
80% two years prior to the death of the included in the gross estate of the decedent.
decedent
More than two years but not more than SPECIAL DEDUCTIONS

60% three years prior to the death of the


Family Home (maximum: P1,000,000)
decedent
It is the dwelling house, including the land on which
More than three years but not more it is situated, where the husband and wife, or a
40% than four years prior to the death of the head of the family, and members of their family
decedent reside, as certified to by the Barangay Captain of
More than four years but not more than the locality. It is deemed constituted on the house
20% five years prior to the death of the and lot from the time it is actually occupied as the
decedent family residence and considered as such for as
long as any of its beneficiaries actually resides
therein. [Arts. 152 and 153, Family Code]
Since Mr. A received the inheritance in March
2003 (within 1 year from his death in
Temporary absence from the constituted family
December 2003], the balance of P650,000
home due to travel or studies or work abroad,
shall be multiplied by 100%. Thus, the etc. does not interrupt actual occupancy. The
allowable vanishing deduction is P650,000 family home is generally characterized by
permanency, that is, the place to which,
Formula whenever absent for business or pleasure, one
still intends to return. [Sec. 6(D), RR 2-2003]
FORMULA:
(1) VALUE TAKEN FOR PPT (always the lower values) It must be part of the ACP or CPG, or the
LESS: MORTGAGE (OR LIEN) PAID IF ANY(1ST exclusive properties of either spouse. It may
deduction) also be constituted by an unmarried head of a
(2) INITIAL BASIS (IB) family on his or her own property. [Sec. 6(D), RR
2-2003 citing Art. 156, FC]
LESS: 2ND deduction = (IB/GE) x (ELIT +
transfer for public use)

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For purposes of availing this deduction, a person PROVIDED, that in no case shall the deductible
may constitute only one family home. [Sec. 6(D), medical expenses exceed Five Hundred
RR 2-2003 citing Art. 161, FC] Thousand Pesos (P500,000).

Requisites for Deductibility Note: Any amount of medical expenses incurred


[Sec. 6(D)(b), RR 2-2003] within one year from death in excess of P500,000
The family home must be the actual residential shall no longer be allowed as a deduction under this
home of the decedent and his family at the subsection. Neither can any unpaid amount thereof in
time of his death, as certified by the barangay excess of the P500,000 threshold nor any unpaid
captain of the locality. amount for medical expenses incurred prior to the
The total value of the family home must be one-year period from date of death be allowed to be
included as part of the gross estate of the deducted from the gross estate under Claims against
decedent the estate. [RR 2-2003, Sec. 6-F]
Allowable deduction must be in an amount
equivalent to the current FMV of the family NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL
home as declared or included in the gross PARTNERSHIP PROPERTY
estate, or the extent of the decedents interest [Sec. 86(C), NIRC; Sec. 6(H), RR 2-2003]
(whether conjugal/community or exclusive The amount deductible is the net share of the
property), whichever is lower, but in no case surviving spouse in the conjugal partnership property.
shall the deduction exceed P1,000,000 The net share is equivalent to of 50% of the
The decedent was married or if single, was a conjugal property after deducting the obligations
head of the family. chargeable to such property. T the share of the
Along with the decedent, any of the beneficiaries* surviving spouse must be removed to ensure that only
must be dwelling in the family home. the decedents interest in the estate is taxed.
The family home as well as the land on which it Net share of the surviving spouse is neither an
stands must be owned by the decedent. ordinary nor a special deduction.
Therefore, the FMV of the family home
should have been included in the EXEMPTIONS AND EXCLUSIONS FROM THE
computation of the decedents gross estate. GROSS ESTATE
Beneficiaries of a Family Home EXCLUSIONS UNDER SEC. 85 AND 86 OF THE TAX CODE
The husband and wife, or an unmarried person Exclusive Property (capital/paraphernal) of
who is the head of a family; and surviving spouse [Sec. 85 (H), NIRC]
Their parents, ascendants, descendants, Property outside the Philippines of a non-
brothers and sisters, whether the relationship resident alien decedent
be legitimate or illegitimate, who are living in Intangible personal property in the Philippines of a
the family home and who depend upon the non-resident alien if there is reciprocity
head of the family for legal support. (226a)
EXCLUSIONS UNDER SEC. 87 OF THE TAX CODE
Standard Deduction (maximum: P1,000,000)
Merger of usufruct in the owner of the naked title
[Sec. 86(A)(5), NIRC; Sec. 6(E), RR 2-2003]
Transmission or delivery of the inheritance or
An amount equivalent to One million pesos
legacy by the fiduciary heir (1 st heir) to the
(P1,000,000) shall be deducted from the
fideicomissary (2ndheir). Pending
gross estate without need of substantiation.
transmission of the property, the fiduciary is
Medical Expenses (maximum: P500,000) entitled to all the rights of a usufructuary,
[Sec. 86(A)(6), NIRC; Sec. 6(F), RR 2-2003] although the fideicomissary is entitled to all
All medical expenses (cost of medicine, hospital bills, the rights of a naked owner.
doctors fees, etc.) incurred (whether paid or unpaid). Transmission from the first heir, legatee or done in
favour of another beneficiary, in accordance
Requisites for Deductibility with the desire of the predecessor.
[Sec. 6(F), RR 2-2003] All bequests, devises, legacies or transfers to social
The expenses were incurred by the decedent welfare, cultural and charitable institutions, no part
within one (1) year prior to his death of the net income of which inures to the benefit of
The expenses are duly substantiated with receipts any individual; provided, however, that not more
and other documents in support thereof than 30% of said bequest, devises, legacies or
transfers shall be used by such institutions for
administration purposes.

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Country H Net Estate 150,000


EXCLUSIONS UNDER SPECIAL LAWS
Tax paid/incurred:
Proceeds of life insurance benefits received by
members of the GSIS (RA 728) Philippines 15,000
Benefits received by members from the SSS by Country G 5,000
reason of death (RA 1792) Country H 1,400
Amounts received from the Philippine and the Net Estate Philippines (reduced by P1,050,000
U.S. Governments from the damages all allowable deductions, except
suffered during the last war (RA 227) standard deduction)
Benefits received by beneficiaries residing in the
Philippines under laws administered by the Net taxable estate is P500,000 (1,050,000 +
U.S. Veterans Administration (RA 360) 300,000 + 150,000 1,000,000 standard
deduction). The Philippine estate tax on
TAX CREDIT FOR ESTATE TAXES PAID IN A P500,000 is P15,000
FOREIGN COUNTRY
Solution Limitation A
TAX CREDIT (c) To get tax credit per country under Limitation A,
It is a remedy against international double this formula is followed:
taxation. To minimize the onerous effect of
taxing the same property twice, tax credit Net Estate in a
against Philippine estate tax is allowed for Particular Phil. Tax
estate taxes paid to foreign countries. Country x Estate =
Credit
Net Estate Tax
WHO MAY AVAIL OF TAX CREDIT
Only the estate of a decedent who was a Worldwide
citizen or a resident of the Philippines at the (d) The result after applying the formula above is
time of his death can claim tax credit for any
estate tax paid to a foreign country. compared to the tax actually paid for each
foreign country.
AMOUNT ALLOWABLE AS TAX CREDIT (e) The lower of the two amounts for each foreign
[Sec. 86(E), NIRC] country will be added to get the total tax credit
General Rule allowed under Limitation A.
The estate tax imposed by the Philippines shall
be credited with the amounts of any estate tax Amount
imposed by the authority of a foreign country. Allowed
(whichever
Limitations is lower)
The amount of the credit in respect to the tax Country G 3,000
paid to any country shall not exceed the
(300/1500 x 15,000) 3,000
same proportion of the tax against which
such credit is taken, which the decedent's net Actually paid to Country G 5,000
estate situated within such country taxable
under the NIRC bears to his entire net estate; Country H 1,500
(PER COUNTRY BASIS) and (150/1500 x 15,000) 1,400
The total amount of the credit shall not exceed the Actually paid to Country H 1,400
same proportion of the tax against which such
Tax credit allowed under Limitation A P 4,400
credit is taken, which the decedent's net estate
situated outside the Philippines taxable under Solution Limitation B:
the NIRC bears to his entire net estate.
(OVERALL BASIS) Net Estate in all
Foreign Countries x Phil. = Tax
Illustration.Assume the following: Net Estate Estate Tax Credit
Net Estate Philippines (reduced by P1,050,000 Worldwide
all allowable deductions, except
standard deduction) The result after applying the formula above is
compared to the tax actually paid in total to
Country G Net Estate 300,000
foreign countries.

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The lower of the two amounts will be added to get CONTENTS


the total tax credit allowed under Limitation B. [Sec. 90(A), NIRC]
The executor, or the administrator, or any of the
Amount legal heirs, as the case may be, shall file a
Allowed return under oath in duplicate, setting forth:
The value of the gross estate of the decedent at the
(Lower) time of his death, or in case of a nonresident, not
450/1500 x 15,000 4,500 a citizen of the Philippines, of that part of his gross
estate situated in the Philippines;
The deductions allowed from gross estate in
Total foreign income taxes 6,400 determining the net taxable estate; and
paid Such part of such information as may at the time be
Tax credit allowed under Limitation A P 4,400 ascertainable and such supplemental data as may
be necessary to establish the correct taxes.
For estate tax returns showing a gross value
Compare the tax credit allowed under Limitation A and
exceeding Two million pesos (P2,000,000) -
Limitation B. The lower of the two amounts is the final there must be a statement duly certified to by
allowable tax credit. In this case, the amount a Certified Public Accountant containing the
computed under Limitation A (4,400) is lower, thus it following:
becomes the final allowable tax credit. Itemized assets of the decedent with their
corresponding gross value at the time of his
If there is only one foreign country involved, both death, or in the case of a nonresident, not a
Limitations will yield the same answer. citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
To get the tax credit allowable, use the formula Itemized deductions from gross estate
in Limitation A. allowed in Section 86; and
The amount of tax due whether paid or still
The resulting amount will be compared to the due and outstanding.
actual tax paid to the foreign country. The lower
amount will be the final allowable tax credit. WHEN FILED
[Source: Reyes, Income Tax Law and Accounting] General Rule: Filed within six (6) months from
the decedent's death. [Sec. 90(B), NIRC]
FILING OF NOTICE OF DEATH
A written Notice of Death must be given to the BIR: Exception: The Commissioner shall have
Within two (2) months after the death of the authority to grant, in meritorious cases, a
decedent or reasonable extension not exceeding thirty (30)
Within two (2) months after the executor or days for filing the return [Sec. 90C]
administrator or executor qualifies as such.
In all cases of transfers subject to tax or where, WHERE FILED
though exempt from tax, the value of the gross [Sec. 90(D), NIRC]
estate exceeds P20,000. [Sec. 89, NIRC] Except in cases where the Commissioner
otherwise permits, the return shall be filed with:
ESTATE TAX RETURN An authorized agent bank (AAB), or
Revenue District Officer (RDO), or
WHEN REQUIRED Collection Officer,
When the estate is subject to estate tax, OR Duly authorized Treasurer of the city or
When, though exempt from tax, the gross value municipality in which the decedent was
of the estate exceeds Two hundred domiciled at the time of his death, or
thousand pesos (P200,000), OR If there be no legal residence in the Philippines,
Regardless of the gross value of the estate, when the with the Office of the Commissioner.
said estate consists of registered or registrable
property such as real property, motor vehicle, PAYMENT OF ESTATE TAX
shares of stock or other similar property for which
a clearance from the Bureau of Internal Revenue When paid
is required as a condition precedent for the [Sec. 91(A), NIRC]
transfer of ownership thereof in the name of the
transferee.

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At the time the return is filed by the executor, Who are liable for the payment of estate taxes
administrator or the heirs. [Sec. 91(C), NIRC]
Primarily, the estate, through the executor or
Note: Executor or administrator means the administrator.
executor or administrator of the decedent, or if Payment shall be made before the delivery of
there is none appointed, qualified, and acting the distributive share in the inheritance to any
within the Philippines, then any person in actual heir or beneficiary.
or constructive possession of any property of the If there are two or more executors or
decedent. [Sec. 91(C), NIRC] The estate tax administrators, all of them are severally liable
shall be paid by the executor or administrator for the payment of the tax.
before the delivery of the distributive share in the The estate tax clearance issued by the
inheritance to any heir or beneficiary. Commissioner or the Revenue District Officer
(RDO) having jurisdiction over the estate, will
Extension of Payment serve as the authority to distribute the
[Sec. 91(B), NIRC] remaining properties/share in the inheritance
The Commissioner may allow an extension of to the heir or beneficiary.
payment, if he finds that the payment on the due
date of the estate tax or of any part thereof Subsidiarily, heirs or beneficiaries, for the payment
would impose undue hardship upon the estate of that portion of the estate which his distributive
or any of the heirs: share bears to the value of the total net estate.
Extension not to exceed five (5) years, in case
the estate is settled judicially, or The extent of his liability, however, shall in no case
Two (2) years in case the estate is settled exceed the value of his share in the inheritance.
extrajudicially.
Claims for taxes, whether assessed before or after
Where the taxes are assessed by reason of the death of the deceased, can be collected from
negligence, intentional disregard of rules and the heirs even after the distribution of the
regulations, or fraud on the part of the taxpayer, no properties of the decedent, xxx. The heirs shall be
extension will be granted by the Commissioner. liable therefor, in proportion to their share in the
inheritance. (Marcos II v. Court of Appeals [1997])
If extension granted, the Commissioner may require
the executor, or administrator, or beneficiary, as the
case may be, to furnish a BOND in such amount, not
exceeding DOUBLE the amount of the tax and with
such sureties as the Commissioner deems necessary, Donors Tax
conditioned upon the payment of the said tax in
accordance with the terms of the extension. BASIC PRINCIPLES
The donors tax is imposed on donations inter vivos or
Effects of granting an extension those made between living persons to take effect
Payment of the amount in respect of which the during the lifetime of the donor. It supplements the
extension is granted on or before the date of estate tax by preventing the avoidance of the latter
the expiration of the period of the extension through the device of donating the property during the
Suspension of the running of statute of lifetime of the deceased.
limitations for deficiency assessment for the
period of any extension It shall not apply unless and until there is a completed
Any amount paid after the statutory due date of the gift. The transfer of property by gift is perfected from
tax, but within the extension period, shall be the moment the donor knows of the acceptance by
subject to interest but not to surcharge. the donee; it is completed by delivery, either actually
or constructively, of the donated property, to the
Can estate tax be paid in installments? donee. Thus, the law in force at the time of the
YES. In case the available cash of the estate is not perfection/completion of the donation shall govern the
sufficient to pay its total estate tax liability, the imposition of the donors tax. (Sec.
estate may be allowed to pay the tax by installment 11, RR 2-2003)
and a clearance shall be released only with respect
to the property the corresponding/computed tax on DEFINITION
which has been paid. [Sec. 9(F), RR 2-2003] A donors tax is levied, assessed, collected and
paid upon the transfer by any person, resident or

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nonresident, of the property by gift. (Sec. 98(A), IDENTIFIED heirs to the exclusion of other co-
NIRC). It shall apply whether the transfer is in trust heirs. [Sec. 11, RR 2-2003]
or otherwise, whether the gift is direct or indirect, TRANSFERS WHICH MAY BE CONSTITUTED AS
and whether the property is real or personal, DONATION
tangible or intangible. [Sec. 98(B), NIRC]
SALE/EXCHANGE/TRANSFER OF PROPERTY FOR
NATURE INSUFFICIENT CONSIDERATION
Donors tax is not a property tax but a tax imposed Where property, other than real property that has
on the transfer of property by way of gift inter vivos. been subjected to the final capital gains tax, is
[Sec 11, RR 2-2003 citing Lladoc v. CIR (1965)] transferred for less than an adequate and full
consideration in money or moneys worth, then
PURPOSE OR OBJECT the amount by which the FMV of the property at
To supplement estate tax; the time of the execution of the Contract of Sell
To prevent avoidance of income tax through the or execution of the Deed of Sale which is not
device of splitting income among numerous preceded by a Contract to Sell exceeded the
donees, who are usually members of a family or value of the agreed or actual consideration or
into many trusts, with the donor thereby escaping selling price shall be deemed a gift, and shall be
the effect of the progressive rates of income tax. included in computing the amount of gifts made
during the calendar year. [Sec. 11, RR 2-2003]
REQUISITES OF VALID DONATION
CONDONATION/REMISSION OF DEBT where the
A donation is an act of liberality whereby a
person (donor) disposes gratuitously of a debtor did not render service in favor of the
thing or right in favor of another (donee) who creditor
accepts it. [Art. 725, NCC] However, real property considered capital assets
In order that the donation of an immovable may be under the Tax Code are excepted from this rule.
valid, it must be made in a public document [Sec. 100 in relation to Sec. 24(d), NIRC]
specifying therein the property donated. The
acceptance may be made in the same Deed of Under Section 24(d), the fair market value
Donation or in a separate public document, but itself, if higher than the gross selling price, is
it shall not take effect unless it is done during the base for computing the capital gains tax
the lifetime of the donor. If the acceptance is imposed upon the sale of such capital assets.
made in a separate instrument, the donor shall
be notified thereof in an authentic form, and this Thus, what the seller avoids in the payment of the
step shall be noted in both instruments. (Sec. donors tax, it pays for in the capital gains tax.
11, RR 2-2003)
TRANSFER FOR LESS THAN ADEQUATE AND
The requisites of a valid donation are: FULL CONSIDERATION
The donor must have CAPACITY [Art 735, CC] at Where property, other than real property under
time of the making of donation [Art. 737, CC] Sec. 24(D), is transferred for less than an
There must be an INTENT TO DONATE adequate and full consideration in money or
The donee must ACCEPT the donation moneys worth, then the amount by which the fair
market value of the property exceeded the value of
A gift that is incomplete because of reserved the consideration shall be deemed a gift, and shall
powers; becomes complete when either: be included in computing the amount of gifts made
the donor renounces the power OR during the calendar year. [Sec. 100, NIRC]
his right to exercise the reserved power ceases
because of the happening of some event or CLASSIFICATION OF DONORS[Sec. 98(A), NIRC]
contingency or the fulfillment of some Citizens or Residents of the Philippines taxable on
condition, other than because of the donors ALL properties located not only within the
death. [Sec. 11, RR 2-2003] Philippines but also in foreign countries.
Nonresident Alien taxable on ALL real and
Note: Renunciation by a surviving spouse of his/her tangible properties WITHIN the PHILIPPINES,
share in the CPG or ACP after the dissolution of and intangible personal property, unless there is
marriage in favor of the heirs or any other person is reciprocity, in which case intangible personal
SUBJECT to donors tax. General renunciation by property is not taxable
ANY heir is NOT subject to donors tax UNLESS it
is specifically and categorically done in favor of

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INTANGIBLE PROPERTIES WHICH ARE CONSIDERED BY LAW HOW TO COMPUTE FOR DONORS TAX :
AS SITUATED IN THE PHILIPPINES This general formula shall be followed:
[See discussion on Estate Tax] Gross gifts made
Less: Deductions from the gross gifts
Rule on Reciprocity (see discussion on Estate Net gifts made
Tax) - This rule applies to the transmission by gift Multiplied by applicable rate
of intangible personal property located or with a Donors tax on the net gifts
situs within the Philippines of a nonresident alien.
If there were several gifts made during the
DETERMINATION OF GROSS GIFT[Sec. 98, NIRC] year, this formula is followed:
Gifts of real property and personal property Gross gifts made on this date
wherever situated belonging to the donor Less: Deductions from the gross
who is either a resident or citizen at the time gifts Net gifts made on this date
of the donation; and Add: all prior net gifts during the
year Aggregate net gifts
Gifts of real and tangible personal property Multiplied by applicable rate
situated in the Philippines, and intangible Donors tax on the aggregate net gifts
personal property with a situs in the Less: donors tax paid on prior net gifts
Philippines unless exempted on the basis of Donors tax due on the net gifts to date
reciprocity, belonging to the donor who is a
non-resident alien at the time of the donation TAX RATES APPLICABLE
The applicable donors tax rate is dependent upon
COMPOSITION OF GROSS GIFT the relationship between the donor and the donee.
Gross gift shall pertain to all donations inter vivos: If the donee is a stranger to the donor, the tax
Whether the transfer is in trust or otherwise; rate is equivalent to 30 % of the net gifts.
Whether the gift is direct or indirect;
Whether the property is real or personal, A stranger for purposes of the donors tax
tangible or intangible. [Sec. 98(B), NIRC] a person who is not a brother, sister (whether
by whole or half-blood), spouse, ancestor
Resident or Citizen Non resident Alien or lineal descendant, or
Real property in the Real Property in the a person who is not a relative by consanguinity
Philippines Philippines in the collateral line within the fourth degree
of relationship. [Sec. 99(B)]
Tangible or Intangible Tangible or Intangible
Personal Properties Personal Properties
(Within or without the (Within the Philippines) Note: that donations made between business
Philippines) Except: Reciprocity (Sec. organizations and those made between an
individual and a business organization shall be
104)
considered as donations made to a stranger.
[Sec. 10(B), RR 2-2003]
VALUATION OF GIFTS MADE IN PROPERTY[Sec.
102, NIRC] If the donee is not a stranger to the donor, the tax
Amount of gift = FMV at TIME OF DONATION for each calendar year shall be computed on the
basis of the total net gifts made during the
REAL PROPERTY FMV as determined by the CIR
calendar year [Sec. 99(A), NIRC]:
(Zonal Value) or FMV as shown in the latest
schedule of values of the provincial and city Over But not Tax Is Plus Of the
assessor (Market Value per Tax Declaration), Over Excess
whichever is HIGHER. If there is no zonal value, Over
the taxable base is the FMV that appears in the 0 100,000 Exempt
latest tax declaration. (Sec. 88(B), NIRC) 100,000 200,000 0 2% 100,000
200,000 500,000 2,000 4% 200,000
IMPROVEMENT - Value of improvement is the 500,000 1M 14,000 6% 500,000
construction cost per building permit and/or 1M 3M 44,000 8% 1M
occupancy permit plus 10% per year after year of 3M 5M 204,000 10% 3M
construction, or the FMV per latest tax declaration. 5M 10M 404,000 12% 5M
10M 1,004,000 15% 10M

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Note: A legally adopted child is entitled to all the CONSIDERATION OF MARRIAGE AVAIL OF THE P10,000
rights and obligations provided by law to DEDUCTION?
legitimate children, and therefore, a donation to Yes. If both spouses made the gift, then the gift
him shall not be considered as a donation made is taxable one-half to each donor spouse.
to a stranger. [Sec 10B, RR 2-2003] Separate donors tax returns must be filed; husband
and wife are considered as separate and distinct
TAX CREDIT FOR DONORS TAXES PAID IN A taxpayers for purposes of donors tax.
FOREIGN COUNTRY [Sec. 101 (C), NIRC] [Sec. 12, RR 2-2003]
A situation may arise when the property given as a However, where there is failure to prove that the
gift is located in a foreign country and the donor donation was actually made by both spouses, the
may be subject to donors tax twice on the donation is taxable as an exclusive act of the
same property: first, by the Philippine husband (Tang Ho v. BTA, 97 Phil 890), without
government and second, by the foreign prejudice to the right of the wife to question the
government where the property is situated. validity of the donation without her consent
The remedy of claiming a tax credit is, therefore, pursuant to the provisions of the Civil Code and
aimed at minimizing the burdensome effect of the Family Code. [Sec. 12, Supra]
double taxation by allowing the taxpayer to deduct
his foreign tax from his Philippine tax, subject to Gifts made to or for the use of the National
the limitations provided by law. Government or any entity created by any of its
agencies which is not conducted for profit, or to
WHO MAY CLAIM TAX CREDIT any political subdivision of the said Government
Only a resident citizen, non-resident citizen and
resident alien. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation,
LIMITATIONS ON THE TAX CREDIT: institution, accredited non-government
organization, trust or philanthropic organization or
(1) NET GIFT research institution or organization, Provided not
(foreigncountry)
x PHIL DONORS TAX more than 30% of said gifts will be used by such
ENTIRE NET donee for administration purposes.
GIFTS

(2) NET GIFT(all foreign countries) PHIL In the case of gifts made by a NONRESIDENT
x DONORS (Sec. 101(B), NIRC):
ENTIRE NET GIFTS TAX Gifts made to or for the use of the National
Government or any entity created by any of its
Note: The computation of the donors tax credit is agencies which is not conducted for profit, or to
the same as the computation for estate tax credit. any political subdivision of the said Government

EXEMPTIONS OF GIFTS FROM DONORS TAX [Sec. Gifts in favor of an educational and/or charitable,
101, NIRC] religious, cultural or social welfare corporation,
institution, accredited non-government
organization, trust or philanthropic organization or
In the case of gifts made by a RESIDENT (Sec.
research institution or organization, provided not
101(A), NIRC):
Dowries or donations made: (maximum:P10,000) more than 30% of said gifts will be used by such
donee for administration purposes
On account of marriage
Before its celebration OR within one year
thereafter Note:Donations made to entities exempted
By parents to each of their legitimate, under special laws, e.g.:
Aquaculture Department of the Southeast Asian
recognized, natural, or adopted children
Fisheries Development Center of the Philippines
To the extent of the first P10,000.
However, this exemption may not be availed Development Academy of the Philippines
of by a non-resident who is not a citizen of Integrated Bar of the Philippines
the Philippines. International Rice Research Institute
National Museum
National Library
National Social Action Council
Ramon Magsaysay Foundation
CAN BOTH PARENTS MAKING A DONATION TO A CHILD IN Philippine Inventors Commission

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Philippine American Cultural Foundation Accordingly, if a mortgaged property is


Task Force on Human Settlement on the donation transferred as a gift, but imposing upon the
of equipment, materials and services donee the obligation to pay the mortgage
liability, then the net gift is measured by
PERSONS LIABLE deducting from the fair market value of the
Every person, whether natural or juridical, property the amount of the mortgage
resident or non-resident, who transfers or assumed. (Sec. 11, RR 2-2003)
causes to transfer property by gift, whether in
trust or otherwise, whether the gift is direct or Illustration
indirect and whether the property is real or P100,000 donation to son by parents on account
personal, tangible or intangible. (Sec. 98, NIRC) of marriage:
Husband
DONORS TAX RETURN[Sec. 103, NIRC] Net Taxable Gift:
Contents of the Donors Tax Return, which shall be P50,000 10,000 = P40,000
made under oath, in duplicate [Sec. 103(A), NIRC]: Tax Due:
Each gift made during the calendar year which is None, since P40,000 is below P100,000
to be included in computing net gifts; Wife same as above
The deductions claimed and allowable;
Any previous net gifts made during the same P100,000 donation to son and daughter-in-law
calendar year; by parents on account of marriage:
The name of the donee; Husband
Relationship of the donor to the donee; Gift pertaining to the son
Such further information as the Commissioner Net Taxable Gift:
may require. P25,000 10,000 = P15,000
Tax Due:
When Filed [Sec. 103(B), NIRC] None, since P15,000 is below the
Filed within thirty (30) days after the date the gift P100,000 threshold
is made or completed. Gift pertaining to the daughter-in-law
The tax due thereon shall be paid at the same Net Taxable Gift:
time that the return is filed. P25,000
Tax Due:
Where Filed and Paid (Sec. 103(B), NIRC) P25,000 x 30% = P7,500
Unless the Commissioner otherwise permits, it Wife same as above
shall be filed and the tax paid to: Donations to donees not considered strangers
An authorized agent bank for tax purposes were made on:
The Revenue District Officer
Revenue Collection Officer or January 30, 2002 P 2,000,000
Duly authorized Treasurer of the city or March 30, 2002 P 1,000,000
municipality where the donor was domiciled August 15, 2002 P 500,000
at the time of the transfer, or
If there be no legal residence in the Philippines, After the After the After the third
with the Office of the Commissioner. first second donation
donation donation
In the case of gifts made by a non-resident, the Net Taxable Gift
return may be filed with: 2,000,000 January January
The Philippine Embassy or Consulate in the Donation - Donation -
country where he is domiciled at the time of P2,000,000 P2,000,000
the transfer, or March March Donation
Directly with the Office of the Commissioner. Donation - - 1,000,000
1,000,000
TAX BASIS
Total August
The tax for each calendar year shall be
P3,000,000 Donation -
computed on the basis of the total net gifts
500,000
made during the calendar. (Sec. 99, NIRC)
NET GIFTS Total
The net economic benefit from the transfer that P3,500,000
accrues to the donee. Corresponding Donors Tax (refer to schedule)

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124,000 P 204,000 P254,000 TRANSACTIONS SUBJECT TO VAT:


Sale, barter, or exchange, lease of goods or
Tax Due / Payable properties
124,000 Donors Tax Donors Tax Sale of services
P 204,000 P 254,000 Importation of goods
Less: Tax Less: Tax
Previously Paid Previously paid CONSTITUTIONALITY OF VAT
124,000 (124k+80k) ABAKADA Guro Party List, et. al. v Ermita (2005):
204,000 Thevalidity of raising the VAT rate from 10% to
Tax Due Tax Due 12% by the President was upheld by SC.
P80,000 P50,000 With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of the
input tax on capital goods purchased: It is not
oppressive, arbitrary, and confiscatory. The
VAT taxpayer is not permanently deprived of his
privilege to credit the input tax. For whatever is
the purpose, it involves executive economic
CONCEPT policy and legislative wisdom in which the Court
VAT is a percentage tax imposed at every stage of cannot intervene.
the distribution process on the sale, barter, or
The tax law is uniform: it provides a standard
exchange, or lease of goods or properties, and rate of 0% or 10% (or 12% now) on all goods
on the performance of service in the course of or services. The law does not make any
trade or business, or on the importation of distinction as to the type of industry or trade
goods, whether for business or non-business that will bear the 70% limitation on the
purposes. (CIR v. Benguet Corp., 2005) creditable input tax, 5-year amortization of
The taxpayer (seller) determines his tax liability input tax on purchase of capital goods, or the
by computing the tax on the gross selling 5% final withholding tax by the government.
price or gross receipt (output tax), and It is equitable: The law is equipped with a threshold
subtracting or crediting the earlier VAT on margin (P1.5M). Also, basic marine and
the purchase or importation of goods or on agricultural products in their original state are still
the purchase of service (input tax) against not subject to tax. Congress also provided for
the tax due on his own sale. mitigating measures to cushion the impact of the
VAT is a percentage tax imposed by law imposition of the tax on those previously exempt.
directly not on the thing or service but on the Excise taxes on petroleum products and natural
act (sale, barter, exchange, lease, gas were reduced. Percentage tax on domestic
importation, rendering service) carriers was removed. Power producers are now
It is also an excise tax, or a tax on the privilege exempt from paying franchise tax.
of engaging in the business of selling goods VAT, by its very nature, is regressive. BUT the
or services, or in the importation of goods
Constitution does not really prohibit the
but unlike excise, it not applied only to a few
imposition of indirect taxes (which is
selected goods
essentially regressive).
It is an ad valorem tax the amount is based on What it simply provides is that Congress shall
the gross selling price or gross value in
evolve a progressive system of taxation.
money of goods and services
In Tolentino v. Sec. of Finance, the Court said
that direct taxes are to be preferred, and as
CHARACTERISTICS/ELEMENTS OF A VAT-
much as possible, indirect taxes should be
TAXABLE TRANSACTION minimized but not avoided entirely because
It is a tax on consumption levied on the sale, it is difficult, if not impossible, to avoid them.
barter, exchange or lease of goods or
properties and services in the Philippines and
on importation of goods into the Philippines. Tolentino v. Guingona:
[RR 16-2005] Regressivity is not a negative standard for
It is an indirect tax, the amount of which may be courts to enforce.
shifted to or passed on the buyer, transferee,
or lessee of the goods, properties or What Congress is required by the Constitution to
services. [Sec. 105, NIRC] do is to evolve a progressive system of taxation.

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This provision is placed in the Consti as However, our VAT law itself provides for a clear
moral incentives to legislation, not as exception, under which the supply of service shall be
judicially enforceable rights. zero-rated when the following requirements are met:
the service is performed in the Philippines;
The regressive effects are corrected by the zero the service falls under any of the categories provided
rating of certain transactions and through the in Section 102(b) of the Tax Code; and
exemptions it is paid for in acceptable foreign currency that is
accounted for in accordance with the
IMPACT OF TAX regulations of the Bangko Sentral ng Pilipinas.
The impact of taxation is on the statutory
taxpayer, the one from whom the government APPLICABILITY OF ECOZONES
collects. The ECOZONES shall be managed and operated by the
The impact of VAT is on the seller or importer PEZA as separate customs territory. (Sec.
upon whom the tax has been imposed. (Sec. 8, RA 7916 Special Economic Zone Act of 1995)
105, NIRC) This means that in such zone is created the
legal fiction of foreign territory. (Deoferio Jr.
INCIDENCE OF TAX and Mamalateo, p. 227; CIR v. Seagate
The incidence of tax in on the one who bears the Technology, 2005)
burden of taxation. Consequently, sales made by a person in the
The incidence of VAT is on the final consumer. customs territory to a PEZA-registered entity
are considered exports to a foreign country and
TAX CREDIT METHOD thus, zero-rated. Conversely, sales by a PEZA-
The tax credit method refers to the manner by which registered entity to a person in the customs
the value added tax of a taxpayer is computed. The territory are deemed imports from a foreign
input taxes shifted by the sellers to the buyer are country. (CIR v. Seagate Technology, 2005)
credited against the buyers output taxes when he in
turn sells the taxable goods, properties or services. TAX TREATMENT OF SALES TO & BY PEZA-REGISTERED
ENTERPRISE WITHIN & WITHOUT THE ECOZONE [RMC
DESTINATION PRINCIPLE 74-99]:
It is the basis for the jurisdictional reach of the
VAT. Any sale of goods, property or services made by a
As a general rule, goods and services are taxed VAT registered supplier from the Customs
only in the country where they are consumed. Territory* to any registered enterprise operating
(Deoferio Jr. and Mamalateo. The Value in the ecozone, REGARDLESS of the class or
Added Tax in the Philippines, p. 43; CIR v. type of the latters PEZA registration, is actually
American Express International, 2005) qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
Corollarily, the Cross Border Doctrine mandates
that no VAT shall be imposed to form part of the Customs Territory shall mean the national
cost of the goods destined for consumption outside territory of the Philippines outside of the
the territorial border of the taxing authority. proclaimed boundaries of the ECOZONES except
those areas specifically declared by other laws
Hence, actual export of goods and services from and/or presidential proclamations to have the
the Philippines to a foreign country must be free of status of special economic zones and/or free
VAT, while those destined for use or consumption ports. [Sec. 2(g), Rule 1, Part I, RA 7916-IRR]
within the Philippines shall be imposed with 12%
VAT. [Deoferio Jr. and Mamalateo, p. 422; Atlas
By a VAT-Exempt Supplier from the Customs
Consolidated Mining & Dev. Corp. v. CIR, 2007]
Territory to a PEZA registered enterprise
Sale of goods, property and services by VAT-Exempt
CIR v. American Express (2005): supplier from the Customs Territory to a PEZA
The court enumerated the exceptions to the registered enterprise shall be treated EXEMPT
destination principle. FROM VAT, regardless of whether or not the PEZA
registered buyer is subject to taxes under the NIRC
As a general rule, the value-added tax (VAT) or enjoying the 5% special tax regime.
system uses the destination principle. By a PEZA Registered Enterprise
(1)Sale of Goods by a PEZA registered enterprise
to a buyer from the Customs Territory (ie

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domestic sales) -- this case shall be treated trade or business requires the regular conduct or
as a technical IMPORTATION made by the pursuit of a commercial or an economic activity,
buyer. Such buyer shall be treated as an regardless of WON the entity is profit-oriented.
IMPORTER thereof and shall be imposed
with the corresponding VAT. Hence, it is immaterial whether the primary purpose of
Sale of Services by a PEZA registered a corporation indicates that it receives payments for
enterprise to a buyer from the Customs services rendered to its affiliates on a reimbursement-
Territory this is NOT embraced by the on-cost basis only, without realizing profit, for
5% special tax regime, hence, such seller purposes of determining liability for VAT on services
shall be SUBJECT TO 12% VAT. rendered. As long as the entity provides service for a
Sale of Goods by a PEZA registered fee, remuneration or consideration, then the service
enterprise to Another PEZA registered rendered is subject to VAT.
enterprise (ie Intra-ECOZONE Sales of
Goods) this shall be EXEMPT from VAT. Membership fees and association dues collected
Sale of Services by ECOZONE enterprise, to by clubs organized and operated exclusively for
Another ECOZONE enterprise (Intra- pleasure, recreation and other non-profit
ECOZONE enterprise Sale of Service) purposes are subject to VAT. (RMC 35-2012)
if PEZA registered seller is subject to 5%
special tax regime - EXEMPT from VAT Condominium corporations are subject to VAT
if PEZA registered seller is subject to taxes on association dues, membership fees & other
under NIRC (ie not subject to 5% special assessments & charges collected from tenants
tax regime) subject to 0% VAT pursuant and members. (RMC 65-2012)
to cross border doctrine
Exception: When the annual sales do not
PERSONS LIABLE exceed P1,919,500*, the taxpayer shall be liable
Any person who, in the course of trade or business, instead to pay a percentage tax equivalent to
sells, barters, exchanges goods or properties, 3% of his gross monthly sales/receipts.
leases goods or properties, and
renders services. [Sec. 105, NIRC] To be subject to 3% percentage tax, the
following requisites must be satisfied:
in the course of trade or business The gross annual sales and/or receipts do not
Rule of Regularity: the regular conduct or pursuit of exceed P1,919,500.00; AND
a commercial or an economic activity, including The taxpayer is not a VAT-registered person.
transactions incidental thereto,by any person
regardless of whether or not the person engaged
However, marginal income earners are not
therein is a nonstock, nonprofit private organization
subject to business taxes because they are not
(irrespective of the disposition of its net income and
considered as engaged in trade or business. A
whether or not it sells exclusively to members or
marginal income earner is an individual deriving
their guests), or government entity.
gross sales or receipts of not exceeding P100,000
during any 12-month period (Rev. Reg. 11-2000)
Non-resident persons who perform services in
the Philippines are deemed to be making sales
in the course of trade or business, even if the The threshold amount has been increased from
performance of services is not regular. (Sec. P1,500,000 to P1,919,500per RR 16-2011.
105, NIRC; RR 16-2005)
Any person who imports goods
Any person who imports goods shall be subject
CS Garments, Inc. v. CIR(CTA Case No. 6520, to the VAT. [Sec. 105, NIRC]
Jan. 4, 2007)- Transactions that are made The importer, whether an individual or
incidental to the pursuit of a commercial or corporation and whether or not made in the
economic activity are considered as entered into course of his trade or business, shall be
in the course of trade or business. liable to pay VAT. [RR 16-2005]

CIR v. CA(329 SCRA 237, Mar. 30, 2000): Even a VAT ON SALE OF GOODS OR PROPERTIES
non-stock, non-profit, organization or government Rate: 12% VAT beginning 1 February 2006
entity, is liable to pay VAT, even in the absence of [RMC No. 7-06]
profit attributable thereto. The term in the course of

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Transactions: Every sale, barter or exchange, If GSP is based on the zonal value or market
or transactions deemed sale of taxable goods value of the property, the zonal or market
or properties (RR 16-2005) value shall be deemed EXCLUSIVE of VAT.
If the VAT is not billed separately, the selling
Basis: Gross selling price or gross value in money of price stated in the sales document shall be
the goods or properties sold, bartered or exchanged. deemed to be EXCLUSIVE of VAT.

Who Pays: Paid by SALE OF REAL PROPERTY[RR 16-2005]


SELLER/TRANSFEROR. (Sec. 106, NIRC) Person Liable: gross sales/receipts >
P1,919,500/year (per RR 16-2011)
GOODS OR PROPERTIES all tangible and intangible Any person (natural or juridical) engaged in sale
objects which are capable of pecuniary estimation, or exchange of real properties
including: Real estate lessors
Real properties held primarily for sale to Non-resident lessors (property located in the
customers or held for lease in the ordinary Philippines)
course of trade or business; Non-stock, Non-profit organizations
The right or the privilege to use patent, Government agencies, instrumentalities, GOCCs
copyright, design, or model, plan, secret
formula or process, goodwill, trademark, Taxable:
trade brand or other like property or right; On installment plan
The right or the privilege to use in the Pre-selling by real estate dealers
Philippines of any industrial, commercial or Sale of residential lot >P1,919,500 ; or house
scientific equipment; and lot/other residential dwelling>P3,199,200
The right or the privilege to use motion picture (RR 16-2011)
films, films tapes and discs; Lease of residential units (rental per unit
Radio, television, satellite transmission and >12,800/month OR total rental from ALL
cable television time. (Sec. 106, NIRC) units>P1,919,500/year)

REQUISITESOF TAXABILITY OF SALE OF GOODS OR Not taxable:


PROPERTIES Not primarily held for sale
The sale of goods (tangible or intangible) must be: Low cost or socialized housing
an actual or deemed sale of goods or properties Residential lot < P1,919,500
for a valuable consideration; house and lot/ other residential dwelling<
undertaken in the course of trade or business; P3,199,200
for the use or consumption in the Philippines; and Lease (rental per unit < 12,800/month and total
not exempt from value added tax under the Tax rental from all units < P1,919,500/ year)
Code, special law, or international agreement Transmission to a trustee (Except: transmission
is deemed sale transaction)
Gross Selling Price (GSP) The total amount of
money or its equivalent which the purchaser pays Transmission of property to a trustee shall NOT be
or is obligated to pay to the seller in consideration subject to VAT IF the property is to be merely held
of the sale, barter or exchange of the goods or in trust for the trustor and/or beneficiary. However,
properties, excluding the VAT. The excise tax, if IF the property transferred is originally intended for
any, on such goods or properties shall form part of sale, lease or use in the ordinary course of trade
the gross selling price. (Sec. 106, NIRC) or business AND the transfer constitutes a
completed gift, the transfer is subject to VAT as a
For real property, GSP means the higher of deemed sale transaction. The transfer is a
the ff values: (RR 16-2005) completed gift if the transferor divests himself
The consideration stated in the sales document, absolutely of control over the property, i.e.,
or irrevocable transfer of corpus and/or irrevocable
The fair market value (FMV), whichever is the designation of beneficiary.
HIGHER of:
FMV as determined by the Commissioner Transfer to corporation in exchange of shares of
(zonal value), or stocks (see Sec. 40, NIRC for Tax-free exchange)
FMV as shown in schedule of values of the Advance payment by the lessee
Provincial & City assessors (real property Security deposits for lease agreements
tax declaration)

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The real estate dealer shall be subject to VAT export-oriented enterprise to be used in
on the installment payments, including interest manufacturing, processing, packing or
and penalties, actually and/or constructively repacking in the Philippines of the said buyer's
received by the seller. goods AND paid for in acceptable foreign
currency AND accounted for in accordance with
ON INSTALLMENT PLAN [RR 16-2005] the rules and regulations of the BSP
Scope [Sec. 4.106 3]
Sale of raw materials or packaging materials to
Installment Plan Deferred Payment Export-oriented enterprise whose export
sales exceed seventy percent (70%) of total
annual production.
Initial payments in the Initial payment in the
year of sale do not exceed year of sale exceeds Any enterprise whose export sales exceed 70%
25% of the gross selling 25% of the gross selling of the total annual production of the
price price preceding taxable year shall be considered
Taxable only on the Treated as cash sale an export-oriented enterprise upon
payment actually or and the entire selling accreditation under the rules & regulations of
constructively received price is taxable on the Export Development Act, RA 7844 (RR 7-95)
month of sale
Sale of Gold to the Bangko Sentral ng Pilipinas
Initial payments payment/payments which (BSP)
the seller receives before or upon execution of
the instrument of sale and payments which he Those considered export sales under the
expects or is scheduled to receive in cash or Omnibus Investment Code of 1987, and
property during the year when the sale or other special laws (ex. Bases Conversion &
disposition of the real property was made. Development Act of 1992)
It includes down payment and all payments
actually or constructively received during the Under Omnibus Investment Code:
year of sale. Phil. port FOB value of export products exported
It does not include the amount of mortgage on the directly by a registered export producer; OR
real property sold (except as to the excess Net selling price of export products sold by a
when such mortgage exceeds the cost or other registered export producer to another export
basis of the property to the seller) and notes or producer, or to an export trader that
other evidence of indebtedness issued by the subsequently exports the same (only when
actually exported by the latter).
purchaser to the seller at the time of the sale.
Constructive Exports (without actual exportation):
ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO-RATED sales to bonded manufacturing warehouses of
export-oriented manufacturers;
SALES OF GOODS OR PROPERTIES
sales to export processing zones;
A zero-rated sale by a VAT-registered person is sales to registered export traders operating bonded
a taxable transaction for VAT purposes, but trading warehouses supplying raw materials in
shall not result in any output tax. the manufacture of export products;
However, input tax on purchases of goods, sales to diplomatic missions and other agencies
properties or services related to such zero- and/or instrumentalities granted tax
rated sale shall be available as tax credit or immunities, of locally manufactured,
refund. (RR 16-2005) assembled or repacked products, whether
paid for in foreign currency or not.
EXPORT SALES (IF-GONE) [Sec. 106(A)(2)(a), NIRC]
The sale and actual shipment of goods from the Export sales of registered export traders shall
Philippines to a Foreign country AND paid for in include commission income, and that exportation
acceptable foreign currency or its equivalent in of goods on consignment shall not be deemed
goods or services, AND accounted for in export sales until the export products consigned
accordance with the rules and regulations of the are in fact sold by the consignee, and
BSP
Sales by a VAT-registered supplier to a
Sale of raw materials or packaging materials to a manufacturer/producer whose products are 100%
Nonresident buyer for delivery to a resident local

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exported are considered export sales. A international agreements to which the Phil. is
certification to this effect must be issued by the signatory, such as
Board of Investment which shall be good for 1 year Asian Development Bank (ADB),
unless subsequently re-issued. (RR 16-2005) International Rice Research Institute (IRRI)

The sale of goods, supplies, equipment and fuel Note: RR 4-2007 removed the distinction
to persons engaged in International shipping between automatic and effectively zero-rated
or international air transport operations. transactions found in prior Revenue
(added by RA 9337) Regulations (including RR 16-2005) with respect
Limited to goods, supplies, equipment and to prior application. The paragraph requiring
fuel pertaining to or attributable to the prior application has now been deleted.
transport of goods and passengers from a
port in the Phil. directly to a foreign port CIR vs. Seagate Technology (Philippines)
without docking or stopping at any other February 11, 2005:
port in the Phil. The BIR regulations additionally requiring an
If any portion of such fuel, goods, or supplies approved prior application for effective zero rating
is used for purposes other than that cannot prevail over the clear VAT nature of
mentioned, such portion of fuel, goods, Seagates transactions (subject to zero-
and supplies shall be subject to VAT. (RR rating, as an entity registered with the PEZA).
16-2005) An effectively zero-rated transaction does not
and cannot become exempt simply because
FOREIGN CURRENCY DENOMINATED SALE (FCDS) an application therefor was not made or, if
Sale to a nonresident of goods, except those made, was denied.
mentioned in Sections 149 and 150
(automobiles and non-essential goods like TRANSACTIONS DEEMED SALE [Sec. 106 (B),
jewelry, perfume, and yachts), assembled or NIRC] [DRTC]
manufactured in the Philippines for delivery to a
Rate: 12% VAT
resident in thePhilippines paid for in acceptable
foreign currency AND accounted for in
Basis: Market value of the goods deemed sold as of
accordance with the rules and regulations of the
the time of the occurrence of the transactionsor as the
BSP. (Sec. 106(A)(2)(b), NIRC)
Commissioner shall prescribe. In the case of
Sales of locally manufactured or assembled
retirement/cessation of business, the tax base shall
goods for household and personal use to
be the acquisition cost or the current market price
Filipinos abroad and other non-residents of
of the goods or properties, whichever is lower. In the
the Philippines as well as returning Overseas
case of a sale where the gross selling price is
Filipinos under the Internal Export Program of
unreasonably lower than the fair market value, the
the government paid for in convertible foreign
actual market value shall be the tax base. The gross
currency AND accounted for in accordance with
selling price is unreasonably lower than the actual
the rules and regulations of the BSP shall also
market value if it is lower by more than 30% of the
be considered export sales. (RR 16-2005)
actual market value of the same goods of the same
quantity and quality sold in the immediate locality on
EFFECTIVELY ZERO-RATED SALES
or nearest the date of sale. (RR 16-2005)
Sales to persons or entities whose exemption
under special laws or international agreements
TRANSFER, USE OR CONSUMPTION NOT IN THE COURSE OF
to which the Philippines is a signatory effectively
subjects such sales to zero rate. ( 106(A2c)); BUSINESS OF GOODS OR PROPERTIES ORIGINALLY
the local sale of goods and properties by a VAT- INTENDED FOR SALE OR FOR USE IN THE COURSE OF
registered person to a person or entity who was BUSINESS(e.g. when a VAT-registered person
granted indirect tax exemption under special withdraws goods from his business for his personal
laws or international agreement. (RR 16-2005) use. (RR 16-2005)

DISTRIBUTION OR TRANSFER TO SHAREHOLDERS ,


Examples: INVESTORS OR CREDITORS
sales to enterprises duly registered & accredited Shareholders or investors as share in the profits
with the of the VAT-registered persons; or
Subic Bay Metropolitan Authority, Creditors in payment of debt;
Philippine Economic Zone Authority (PEZA),

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Property dividends which constitute stocks in trade


or properties primarily held for sale or lease Approval of request for cancellation of a
declared out of retained earnings on or after Jan. registration due to reversion to exempt status
1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the Approval of request for cancellation of
zonal value or FMV at the time of the distribution, registration due to desire to revert to exempt
whichever is applicable. (RR 16-2005) status after lapse of 3 consecutive yearsfrom the
time of registration by a person who voluntarily
CONSIGNMENT OF GOODS IF ACTUAL SALE IS NOT MADE registered despite being exempt under Sec. 109 (2)
WITHIN 60 DAYS FOLLOWING THE DATE SUCH GOODS WERE
CONSIGNED Approval of request for cancellation of registration of
Consigned goods returned by the consignee one who commenced business with the expectation of
within the 60-day period are not deemed sold. gross sales/receipts exceeding P1,919,500 (per RR 16-
(RR 16-2005) 2011) but who failed to exceed this amount during the
first 12 months of operation
RETIREMENT FROM OR CESSATION OF BUSINESS, WITH
RESPECT TO INVENTORIES OF TAXABLE GOODS EXISTING AS Not Subject to VAT goods or properties
OF SUCH RETIREMENT OR CESSATION . existing as of the occurrence of the following:
With respect to ALL goods on hand, whether
capital goods, stock-in-trade, supplies or Change of control of a corporation by the
materials, as of the date of such retirement or acquisition of the controlling interest of such
cessation, whether or not the business is corporation by another stockholder (individual or
continued by the new owner or successor. corporate) or group of stockholders.

Examples are change of ownership of the business Note: Exchange of goods or properties including
(e.g. when a sole proprietorship incorporates, or the the real estate properties used in business or
proprietor sells his entire business) and dissolution of held for sale or for lease by the transferor, for
a partnership and creation of a new partnership which shares of stocks, whether resulting in corporate
takes over the business. (RR 16-2005) control or not, is SUBJECT TO VAT (RR 10-11)
CHANGE OR CESSATION OF STATUS AS VAT- Change in the trade or corporate nameof the business
REGISTERED PERSON [Sec.106(C), NIRC]
Rate: 12% Merger or consolidation of corporations.The
Basis: the acquisition cost or the current market price unused input tax of the dissolved corporation, as
of the goods or properties, whichever is LOWER. of the date of merger or consolidation, shall be
absorbed the surviving or new corporation.
VAT shall apply to goods disposed of or
existing as of a certain date if under the VAT ON IMPORTATION OF GOODS
circumstances to be prescribed in rules and Rate: 12%
regulations to be promulgated by the Secretary of Basis: total value used by the Bureau of Customs
Finance, upon recommendation of the in determining tariff and customs duties, plus
Commissioner, the status of a person as a VAT- customs duties, excise taxes, if any, and other
registered person changes or is terminated. charges (such as postage, commission).

UNDER RR 16-2005 SEC. 4.106 (B): Where the customs duties are determined on
Subject to Vat - applicable to goods/properties the basis of the quantity or volume of the goods,
originally intended for sale or use in business the value-added tax shall be based on the
and capital goods which are existing as of the landed cost plus excise taxes, if any.
occurrence of the following:
Landed Cost = invoice amount + customs
Change of business activity from VAT duties + freight + insurance + other charges +
taxable status to VAT-exempt status excise tax (if any)
Example: A VAT-registered person engaged in a
taxable activity like wholesaler or retailer who Who Pays: IMPORTER prior to the release of such
decides to discontinue such activity and goods from customs custody (Sec. 107 (A), NIRC)
engages instead in life insurance business or in
any other business not subject to VAT.

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Importer = any person who brings goods into the The service is not exempt under the Tax Code,
Philippines, whether or not made in the course of his special law or international agreement
trade or business, including non-exempt persons or Person selling or rendering service is liable to VAT
entities who acquire tax-free imported goods from
exempt persons, entities or agencies (RR 16-2005) Lease of Properties:
Subject to the tax imposed irrespective of the
TRANSFER OF GOODS BY TAX EXEMPT PERSONS(Sec. 107 place where the contract of lease or licensing
(B), NIRC) agreement was executed if the property is
If importer is tax-exempt, the subsequent purchasers, leased or used in the Philippines.
transferees or recipients of such imported goods
shall be considered as importers who shall be Meaning of Sale/Exchange of Services - the
liable for the tax on importation. performance of all kind of services in the
The tax due on such importation shall constitute a Philippines for others for a fee, remuneration or
lien on the goods superior to all charges or liens consideration, whether in kind or in cash, including
on the goods, irrespective of the possessor those performed or rendered by the following:
thereof. (as amended by RA 9337) (unless otherwise indicated, from RR 16-2005)
Construction and service contractors
VAT ON SALE OF SERVICE AND USE OR LEASE OF
PROPERTIES Stock, real estate, commercial, customs and
Rate: 12% immigration brokers
Basis: Gross receipts derived from the sale or
Lessors of property, whether personal or real
exchange of services, including the use or lease
of properties.
In a lease contract, the advance payment
Gross Receipts: the total amount of money or its by the lessee may be:
equivalent representing the contract price, a loan to the lessor from the lessee - NOT
compensation, service fee, rental or royalty,
subject to VAT
including the amount charged for materials an option money for the property - NOT
subject to VAT
supplied with the services and deposits and
a security deposit to insure the faithful
advanced payments actually or constructively
performance of certain obligations of the
received during the taxable quarter for the services
lessee to the lessor - NOT subject to VAT
performed or to be performed for another person,
BUT if the security deposit is applied to
excluding VAT. (Sec. 108 (A), NIRC) rental, it shall be subject to VAT at the time
of its application
Constructive receipt occurs when the money Pre-paid rental - subject to VAT when
consideration or its equivalent is placed at the received, irrespective of the accounting
control of the person who rendered the service method employed by the lessor
without restrictions by the payor. Examples:
deposit in banks which are made available to the Persons engaged in warehousing services
seller of services without restrictions
issuance by the debtor of a notice to offset any Lessors or distributors of cinematographic films
debt or obligation and acceptance thereof by
the seller as payment for services rendered Persons engaged in milling, processing,
transfer of the amounts retained by the manufacturing or repacking goods for others are
contractee to the account of the contractor. subject to VAT, EXCEPT palay into rice, corn into
(RR 16-2005)
corn grits, and sugarcane into raw sugar

Proprietors, operators, or keepers of hotels,


motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses
REQUISITES FOR TAXABILITY
The service must be performed or is to be
performed in the course of trade or business Proprietors or operators of restaurants,
in the Philippines; refreshment parlors, cafes and other eating
For a valuable consideration actually or places, including clubs and caterers
constructively received; and
Dealers in securities

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Gross receipts means gross selling price less Sales of electricity by generation, transmission,
cost of the securities sold. RR 7-95: Pre-need and/or distribution companies
companies are considered dealers in securities. EXCEPT sale of power or fuel generated
through renewable sources of energy,
Lending investors such as, but not limited to, biomass, solar,
All persons OTHER than banks, non-bank wind hydropower, geothermal, ocean
financial intermediaries, finance companies energy, and other emerging energy
and other financial intermediaries NOT sources using technologies such as fuel
performing quasi-banking functions who cells and hydrogen fuels, which shall be
make a practice of lending money for subject to 0% rate of VAT (zero-rated).
themselves or others at interest The universal charge passed on and
collected by distribution companies and
Transportation contractors on their transport of electric cooperatives shall be excluded
goods or cargoes, including persons who from the computation of gross receipts.
transport goods or cargoes for hire and other
domestic common carriers by land relative to Franchise grantees of electric utilities,
their transport of goods or cargoes telephone and telegraph, radio and/or
television broadcasting and all other
Common carriers by air and sea relative to franchise grantees (including PAGCOR and
their transport of passengers, goods or its licensees/franchisees)
cargoes from one place in the Philippines to EXCEPT franchise grantees of radio
another place in the Philippines and/or television broadcasting whose
annual gross receipts of the preceding
On transportation: All receipts from service, year do not exceed Ten Million Pesos
hire, or operating lease of transportation (P10,000,000.00) (which shall be
equipment not subject to the percentage tax subject to 3% franchise tax under
on domestic common carriers and keepers of Sec. 119, subject to optional
garages shall be subject to VAT. registration), and franchise grantees
of gas and water utilities (under Sec.
Common Transporting Kind of Tax Liability 109, subject to 2% franchise tax)
carrier carrier With respect to franchise grantees of telephone
By land Persons Domestic 3% and telegraph services, amounts received for
percentage overseas dispatch, message, or
tax (Sec. 117, conversation originating from the Philippines
NIRC) are subject to the percentage tax under Sec.
Goods/ cargo Domestic 12% VAT 120 and hence exempt from
(Sec. 108,
VAT
NIRC)
By sea/air Domestic Domestic
Whether trip - 12% Non-life insurance companies (except their crop
transporting VAT insurances), including surety, fidelity,
persons or International indemnity and bonding companies; and
goods/ cargo trip zero- Insurance and reinsurance commissions, as
rated VAT opposed to premiums, whether life or non-
International Doing life, are subject to VAT.
business in Non-life insurance premiums are subject to
the VAT.
Philippines - Life insurance premiums are NOT subject to VAT,
3% for they are subject to percentage tax.
percentage
tax (Sec. 118,
NIRC)
Similar services regardless of whether or not the
International performance thereof calls for the exercise or
trip - zero- use of the physical or mental faculties
rated VAT
(Sec. 108 The lease or the use of or the right or privilege to use
(B)(6), NIRC) any copyright, patent, design or model, plan
secret formula or process, goodwill, trademark,
trade brand or other like property or right

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the services are performed, the consideration


The lease of the use of, or the right to use of any for which is paid for in acceptable foreign
industrial, commercial or scientific equipment currency AND accounted for in accordance
with the rules and regulations of the BSP
The supply of scientific, technical, industrial or
commercial knowledge or information The services referring to processing,
manufacturing, repacking and services other
The supply of any assistance that is ancillary than those in (1) both require (i) payment in
and subsidiary to and is furnished as a foreign currency; (ii) inward remittance; (iii)
means of enabling the application or accounted for by the BSP; AND (iv) that the
enjoyment of any such property, or right as service recipient is doing business outside the
is mentioned in #18 or any such knowledge Philippines. If this is not the case, taxpayers
or information as is mentioned in #19 can circumvent just by stipulating payment in
foreign currency. (CIR v. Burmeister)
The supply of services by a nonresident person
or his employee in connection with the use Services rendered to persons or entities whose
of property or rights belonging to, or the exemption under special laws or
installation or operation of any brand, international agreements to which the
machinery or other apparatus purchased Philippines is a signatory effectively subjects
from such nonresident person the supply of such services to zero percent
The supply of technical advice, assistance or (0%) rate (as amended by RA 9337)
services rendered in connection with
technical management or administration of Services rendered to persons engaged in
any scientific, industrial or commercial international shipping or international air
undertaking, venture, project or scheme transport operations, including leases of
property for use thereof [as amended by RA
The lease of motion picture films, films, tapes 9337]; Provided, however, that the services
and discs referred to herein shall not pertain to those
made to common carriers by air and sea
The lease or the use of or the right to use radio, relative to their transport of passengers,
television, satellite transmission and cable goods or cargoes from one place in the Phil.
television time to another place in the Phil. (the same being
subject to 12% VAT under Sec. 108)
ZERO-RATED SALE OF SERVICES[Sec. 108 (B),
NIRC] Services performed by subcontractors and/or
contractors in processing, converting, or
A zero-rated sale by a VAT-registered person is manufacturing goods for an enterprise whose
a taxable transaction for VAT purposes, but export sales exceed seventy percent (70%) of
shall not result in any output tax. total annual production.

Input tax on purchases of goods, properties or Transport of passengers and cargo by air or sea
services related to such zero-rated sale shall be vessels from the Philippines to a foreign country
available as tax credit or refund. (RR 16-2005) (as added by RA 9337) and;

Processing, manufacturing or repacking goods for Sale of power or fuel generated through
other persons doing business outside the renewable sources of energy such as, but not
Philippines which goods are subsequently limited to, biomass, solar, wind, hydropower,
exported, where the services are paid for in geothermal, ocean energy, and other emerging
acceptable foreign currency AND accounted for in energy sources using technologies such as fuel
accordance with the rules and regulations of the cells and hydrogen fuels. (as added by RA 9337)
BSP
Zero-rating shall apply strictly to the sale of
Services other than those mentioned in the preceding power or fuel generated through renewable
paragraph rendered to a person engaged in sources of energy, and shall not extend to the
business conducted outside the PhilippinesOR a sale of services related to the maintenance or
nonresident person not engaged in business who operation of plants generating said power.
is outside the Philippines when

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RR 4-2007 removed the distinction between and personal household effects belonging to
automatic and effectively zero-rated transactions persons coming to settle in the Philippines, for
found in prior Revenue Regulations (inc. RR 16-2005) their own use and not for sale, barter or exchange
with respect to prior application from the BIR.
Services subject to percentage tax
VAT EXEMPT TRANSACTIONS
VAT EXEMPT TRANSACTIONS , IN GENERAL Services by agricultural contract growers and
Sale of goods or properties and/or services and the milling for others of palay into rice, corn into
use or lease of properties that is NOT subject to grits and sugar cane into raw sugar
VAT (output tax) and the seller is not allowed any
tax credit of VAT (input tax) on purchases. Medical, dental, hospital and veterinary services
The person making the exempt sale of goods, except those rendered by professionals:
properties or services shall not bill any output
tax to his customers. (RR 16-2005) Laboratory services are exempted. If the
But, the VAT-registered person may elect that hospital or clinic operates a pharmacy or
the exemption not apply to its sale of goods drug store, the sale of drugs and medicine is
or properties or services; provided that the subject to VAT. [RR 16-2005]
election made shall be irrevocable for a
period of three (3) years from the quarter the Educational services rendered by private
election was made. (Sec. 109(2), NIRC) educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered
EXEMPT TRANSACTION, ENUMERATED by government educational institutions;
Sale/import of agricultural, marine food products in
original state; of livestock and poultry Educational services does not include
seminars, in-service training, review classes
Original state even if they have undergone and other similar services rendered by persons
the simple processes of preparation or who are not accredited by the DepED, CHED,
preservation for the market, such as and/or TESDA. [RR 16-2005]
freezing, drying, salting, broiling, roasting,
smoking or stripping.
Services rendered by individuals pursuant to an
employer-employee relationship
Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt,
Services rendered by regional or area
AND COPRA shall be considered in their
headquarters established in the Philippines by
original state
multinational corporations which act as
supervisory, communications and coordinating
Livestock or poultry does not include fighting centers for their affiliates, subsidiaries or
cocks, race horses, zoo animals and other animals branches in the Asia-Pacific Region and do not
generally considered as pets. [RR 16-2005] earn or derive income from the Philippines

Original state including preservation using Transactions which are exempt under
advanced technological means of packaging, international agreements to which the
such as shrink wrapping in plastics, vacuum Philippines is a signatory or under special
packing, tetra-pack, and other similar packaging laws, except those under PD No. 529
methods. [RR 16-2005] [Petroleum Exploration Concessionaires
under the Petroleum Act of 1949]
Sale/ import of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry Sales by agricultural cooperatives duly registered
feeds with the Cooperative Development Authority to
their members as well as sale of their produce to
Import of personal and household effects of Phil non-members. Exemption includes importation of
resident returning from abroad and nonresident direct farm inputs, machineries and equipment,
citizens coming to resettle in the Philippines including spare parts thereof, to be used directly
and exclusively in the production and/or
Import of professional instruments and implements, processing of their produce.
wearing apparel, domestic animals,

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Sale by agricultural cooperatives to non- other related laws, such as RA No. 7835 and
members can only be exempted from VAT if RA No. 8763, wherein the price ceiling per
the producer of the agricultural products sold unit is P225,000.00 or as may from time to
is the cooperative itself. If the cooperative is time be determined by the HUDCC and the
not the producer (e.g., trader), then only NEDA and other related laws.
those sales to its members shall be
exempted from VAT. [RR 16-2005] "Socialized housing" refers to housing
programs and projects covering houses and
Gross receipts from lending activities by credit or lots or home lots only undertaken by the
multi-purpose cooperatives duly registered Government or the private sector for the
with the Cooperative Development Authority underprivileged and homeless citizens which
shall include sites and services development,
Sales by non-agricultural, non- electric and non- long-term financing, liberated terms on interest
credit cooperatives duly registered with the payments, and such other benefits in
Cooperative Development Authority are accordance with the provisions of RA No.
exempt BUT their importation of machineries 7279and RA No. 7835 and RA No. 8763.
and equipment, including spare parts thereof, "Socialized housing" shall also refer to
to be used by them are SUBJECT to VAT. projects intended for the underprivileged and
homeless wherein the housing package
Export sales by persons who are not VAT- selling price is within the lowest interest rates
registered under the Unified Home Lending Program
(UHLP) or any equivalent housing program
Sale of real properties the ff. sales are exempt: of the Government, the private sector or non-
Sale of real properties NOT primarily held government organizations.
for sale to customers or held for lease in
the ordinary course of trade or business.
Sale of residential lot valued at P1,919,500
and below, or house & lot and other
However, even if the real property is not residential dwellings valued at
primarily held for sale to customers or held for P3,199,200 and below
lease in the ordinary course of trade or If two or more adjacent residential lots
business but the same is used in the trade or are sold or disposed in favor of one
business of the seller, the sale thereof shall be buyer, for the purpose of utilizing the
subject to VAT being a transaction incidental to lots as one residential lot, the sale
the taxpayers main business. [RR 4-2007] shall be exempt from VAT only if the
aggregate value of the lots does not
Sale of real properties utilized for low-cost exceed P1,919,500. [RR 13-2012]
housing as defined by RA No. 7279, Adjacent residential lots, although covered by
otherwise known as the "Urban Development separate titles and/or separate tax
and Housing Act of 1992" and other related declarations, when sold or disposed to one
laws, such as RA No. 7835 and RA No. 8763. and the same buyer, whether covered by
one or separate Deed of Conveyance,
Low-cost housing" refers to housing projects shall be presumed as a sale of one
intended for homeless low-income family residential lot. [RR 16-2005]
beneficiaries, undertaken by the Government
or private developers, which may either be a Sale, transfer or disposal within a 12-month
subdivision or a condominium registered and period of 2/more adjacent residential lots,
licensed by the Housing and Land Use house and lots or other residential dwellings
Regulatory Board/Housing (HLURB) under BP to one buyer, whether from the same or from
Blg. 220, PD No. 957 or any other similar law, different sellers shall be considered one
wherein the unit selling price is within the single transaction. Hence, the sale of the
selling price ceiling per unit of P750,000.00 adjacent lots shall be subject to VAT if the
under RA No. 7279, and other laws, such as aggregate value exceeds P1,919,500 for
RA No. 7835 and RA No. 8763. residential lots and P3,199,200 for
residential house lots or residential
Sale of real properties utilized for socialized dwellings, notwithstanding that
housing as defined under RA No. 7279, and

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the value of the individual properties do


not exceed the VAT exemption Sale, importation, printing or publication of
thresholds. Sale/purchase of parking books and any newspaper, magazine
lots shall not be considered a sale of review or bulletin which appears at
residential lot/dwelling. Hence, it shall regular intervals with fixed prices for
be subject to VAT regardless of its subscription and sale and which is not
selling price. [RR 13-2012] devoted principally to the publication of
paid advertisements;
Lease of residential units with a monthly
rental per unit not exceeding P12,800, Sale, importation or lease of passenger or
regardless of the amount of aggregate cargo vessels and aircraft, including
rentals received by the lessor during the engine, equipment and spare parts thereof
year. for domestic or international transport
operations [added by RA 9337];
Lease of residential units where the
monthly rental per unit exceeds P12,800 The exemption from VAT on the importation
but the aggregate of such rentals of the and local purchase of passenger and/or
lessor during the year do not exceed One cargo vessels shall be limited to those of 150
Million Five Hundred Pesos P1,919,500 tons and above, including engine and spare
shall likewise be exempt from VAT, parts of said vessels;
however, the same shall be subjected to
three percent (3%) percentage tax. Provided, further, that the vessels to be
imported shall comply with the age limit
In cases where a lessor has several requirement, at the time of acquisition
residential units for lease, some are counted from the date of the vessel's
leased out for a monthly rental per unit of original commissioning, as follows:
not exceeding P12,800 while others are for passenger and/or cargo vessels, the
leased out for more than P12,800 per unit, age limit is 15 years old,
his tax liability will be as follows: for tankers, the age limit is 10 years old,
The gross receipts from rentals not and
exceeding P12,800 per month per unit for high-speed passenger crafts, the age
shall be exempt from VAT regardless of limit is 5 years old [RR 16-2005]
the aggregate annual gross receipts.
The gross receipts from rentals exceeding Importation of fuel, goods, and supplies by
P12,800 per month per unit shall be persons engaged in international
subject to VAT IF the aggregate annual shipping or air transport operations;
gross receipts from said units only (not [added by RA 9337]
including the gross receipts from units
leased for not more than P12,800 ) The said fuel, goods and supplies shall
exceeds P1,919,500 . Otherwise, the be used exclusively or shall pertain to
gross receipts will be subject to the 3% the transport of goods and/or passenger
tax imposed under Section 116 of the from a port in the Philippines directly to
Tax Code. a foreign port without stopping at any
other port in the Philippines;
The term 'residential units' shall refer to If any portion of such fuel, goods or
apartments and houses & lots used for supplies is used for purposes other than
residential purposes, and buildings or that mentioned in this paragraph, such
parts or units thereof used solely as portion of fuel, goods and supplies shall
dwelling places (e.g., dormitories, rooms be subject to 12% VAT starting Feb. 1,
and bed spaces) except motels, motel 2006. [RR 16-2005]
rooms, hotels and hotel rooms.
The term 'unit' shall mean an apartment
Services of banks, non-bank financial
unit in the case of apartments, house in the
intermediaries performing quasi-banking
case of residential houses; per person in the functions and other non-bank financial
case of dormitories, boarding houses and intermediaries; and
bed spaces; and per room in case of rooms
for rent. [RR 16-2005]

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Sale or lease of goods or properties or the For use as materials supplied in the sale of
performance of services other than the service; or
transactions mentioned in the preceding For use in trade or business for which deduction
paragraphs, the gross annual sales for depreciation or amortization is allowed
and/or receipts do not exceed the under the Code.
amount of P1,919,500
PURCHASE OF REAL PROPERTIES FOR WHICH A VAT HAS
For purposes of the threshold of ACTUALLY BEEN PAID
P1,919,500, the husband and the wife
shall be considered separate taxpayers. PURCHASE OF SERVICES IN WHICH VAT HAS ACTUALLY
However, the aggregation rule for each BEEN PAID
taxpayer shall apply.
TRANSACTIONS DEEMED SALE
For instance, if a professional, aside from the
practice of his profession, also derives PRESUMPTIVE INPUT TAX [Sec. 111(B), NIRC]
revenue from other lines of business which Persons or firms engaged in the processing of
are otherwise subject to VAT, the same shall sardines, mackerel and milk, and in
be combined for purposes of determining manufacturing refined sugar and cooking oil and
whether the threshold has been exceeded. packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable
The VAT-exempt sales shall NOT be against the output tax, equivalent to FOUR
included in determining the threshold. PERCENT (4%) of the gross value in money of
[RR 16-2005] their purchases of primary agricultural products
which are used as inputs to their production.
INPUT TAX AND OUTPUT TAX, DEFINED
TRANSITIONAL INPUT TAX
INPUT TAX the VAT due on or paid by a VAT- 2% of the value of the beginning inventory on hand
registered person on importation of goods or local or actual VAT paid on such, goods, materials
purchases of goods, properties, or services, and supplies, whichever is HIGHER, which
including lease or use of properties, in the course amount shall be creditable against the output
of his trade or business. tax of VAT-registered person.
It includes the transitional input tax and the The value allowed for income tax purposes on
presumptive input tax as determined in inventories shall be the basis for the
accordance with Section 111 of the Code. computation of the 2% transitional input tax,
It includes input taxes which can be directly EXCLUDING goods that are exempt from VAT
attributed to transactions subject to the VAT under Sec. 109 of the Tax Code. (RR 16-2005)
plus a ratable portion of any input tax which A real estate dealer is entitled to claim
cannot be directly attributed to either the transitional input VAT based on the value of
taxable or exempt activity. the entire real property sold regardless of
Input tax must be evidenced by a VAT invoice or whether there was in fact actual payment of
official receipt issued by a VAT-registered VAT on the purchase of the real property. At
person in accordance with Secs. 113 and 237 the time the purchase was made, there was
of the Code. [RR 16-2005] still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)
OUTPUT TAX the VAT due on the sale or lease of
taxable goods or properties or services by any Claiming of input VAT on motor vehicles subject to the
person registered or required to register under ff conditions: (1) Purchase of vehicle must be
Section 236 of the Code. (Sec. 110 (A), NIRC) substantiated with official receipts and other records;
(2) Taxpayer has to prove the direct connection
SOURCES OF INPUT TAX of the motor vehicle to the business; (3) Only
one vehicle for land transport is allowed for the use
PURCHASE OR IMPORTATION OF GOODS of an official/employee with value not exceeding
For sale; or P2.4 million; (4) No depreciation shall be allowed
For conversion into or intended to form part of a for yachts, helicopters, airplanes or land vehicles
finished product for sale including packaging over P2.4 million unless the vehicle is used in the
materials; or company's transport operations or lease of
For use as supplies in the course of business; or transport equipment. [RR 12-2012]

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DETERMINATION OF OUTPUT/INPUT TAX; VAT


PERSONS WHO CAN AVAIL OF INPUT TAX PAYABLE; EXCESS INPUT TAX CREDITS
CREDIT
DETERMINATION OF OUTPUT TAX
CREDITABLE INPUT TAX (Sec. 110(A)(2), NIRC) - If at the end of any taxable quarter, the output tax
Input tax on domestic purchase or importation of exceeds the input tax, the excess shall be paid by
goods or properties shall be creditable: the VAT-registered person. (Sec. 110(B), NIRC)
To the purchaser upon consummation of sale and
on importation of goods or properties; and DETERMINATION OF INPUT TAX CREDITABLE (Sec. 110 ,
To the importer upon payment of the VAT prior NIRC)
to the release of the goods from the custody The sum of the excess input tax carried over from the
of the Bureau of Customs. preceding month or quarter and the input tax
The input tax on goods purchased or imported in a creditable to a VAT-registered person during the
calendar month for use in trade or business for taxable month or quarter shall be reduced by the
which deduction for depreciation is allowed amount of claim for refund or tax credit for value-
under the Code, shall be spread evenly over added tax and other adjustments, such as
the month of acquisition and the fifty-nine (59) purchase returns or allowances and input tax
succeeding months if the aggregate acquisition attributable to exempt sale.
cost for such goods, excluding the VAT The claim for tax credit referred to includes not
component thereof, exceeds One million pesos only those filed with the BIR but also those filed
(P1,000,000) with other government agencies, such as the
However, if the estimated useful life of the capital Board of Investments the Bureau of Customs.
good is less than five (5) years, as used for
depreciation purposes, then the input VAT shall ALLOCATION OF INPUT TAX ON MIXED
be spread over such a shorter period TRANSACTIONS A VAT-registered person who is
To the purchaser of services or the lessee or also engaged in transactions not subject to VAT
licensee upon payment of the compensation, shall be allowed to recognize input tax credit on
rental, royalty or fee. transactions subject to VAT as follows:

TRANSITIONAL TAX [Sec. 111(A), NIRC] All the input taxes that can be directly attributed
Any person liable for VAT or who elects to be a VAT- to transactions subject to VAT may be
registered person shall be allowed INPUT TAX in his recognized for input tax credit
beginning inventory of goods, materials and supplies
equivalent to TWO PERCENT (2%) of the value Input taxes that can be directly attributable to
of such inventory; OR VAT taxable sales of goods and services to the
the actual VAT paid on such goods, materials Government or any of its political subdivisions,
and supplies, whichever is HIGHER, which instrumentalities or agencies, including GOCCs
shall be creditable against the OUTPUT TAX. shall not be credited against output taxes
arising from sales to non-Government entities
PRESUMPTIVE INPUT TAX (Sec. 111(B), NIRC)
Persons or firms engaged in the processing of If any input tax cannot be directly attributed to
sardines, mackerel and milk, and in manufacturing either a VAT taxable or VAT-exempt
refined sugar and cooking oil and packed noodle transaction, the input tax shall be pro-rated
based instant meals, shall be allowed a presumptive to the VAT taxable and VAT-exempt
input tax, creditable against the output tax, equivalent transactions and ONLY the ratable portion
to 4% of the gross value in money of their purchases pertaining to transactions subject to VAT
of primary agricultural products which are used as may be recognized for input tax credit.
inputs to their production.
Illustration: ERA Corporation has the following sales
"Processing" shall mean pasteurization, canning and during the month:
activities which through physical or chemical process Sale to private entities subject to 12% 100,000.00
alter the exterior texture or form or inner substance of Sale to private entities subject to 0% 100,000.00
a product in such manner as to prepare it for special
use to which it could not have been put in its original Sale of exempt goods 100,000.00
form or condition. [RR 16-05]
Sale to gov't. subjected to 5% final VAT 100,000.00

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Amount of input
tax x not directly
attributa
ble

Total creditable input tax for the month:


P18,000.00 (P5,000+P3,000+P10,000)
w/holding Step 2: The input tax attributable to sales
400,000.0 to government for the month shall be
computed as follows:
Total sales for the month 0 Input tax on sale to gov't. P4,000.00
The following were its input taxes (or passed on by
its VAT suppliers): Ratable portion of the input tax not
Input tax on taxable goods (12%) 5,000.00 directly attributable to any activity,
Input tax on zero-rated sales 3,000.00 computed as follows:
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00 Taxable sales Amount of input tax
Input tax on depreciable capital good not directly
Total Sales x
not attributable to any specific attributable
activity P100,000.00
(monthly amortization for 60 months) 20,000.00
P400,000.00 x P20,000.00 = P5,000.00
Step 1: The creditable input tax for the month
shall be computed as follows: Total input tax attributable to sales to
Input tax on sale subject to 12% P5,000.00 government: P9,000.00 (P4,000 +
Input tax on zero-rated sale P5,000)
3,000.00
Ratable portion of the input tax not directly
attributable to any activity, computed below These amounts are not available for input
Taxable sales tax credit but may be recognized as cost
or expense. That is because as far as
(0% and 12%)
sales to government are concerned,
Total Sales there is a VAT that is finally withheld (at
5%).
P200,000.00 =
P400,000.00 x P20,000.00 P10,000.00 PAGE 126
Step 3: The input tax attributable to VAT-exempt sales for
the month shall be computed as follows:
Input tax on VAT-exempt sales P2,000.00

Ratable portion of the input tax not directly attributable


to any activity, computed below:

VAT-exempt sales Amount of input tax


x not directly
Total Sales attributable
P100,000.00

P400,000.00 x P20,000.00 = P5,000.00


Total input tax attributable:P7,000.00
VAT-exempt sales (P2,000+ P5,000)

These amounts are not available for input tax credit but
may be recognized as cost or expense.

DETERMINATION OF THE OUTPUT TAX AND VAT PAYABLE


AND COMPUTATION OF VAT PAYABLE OR EXCESS TAX
CREDITS[Sec. 110 (B), NIRC]

How output tax computed: [RR 16-05]


In a sale of goods/properties

GROSS REGULAR OUTPUT


SELLING X = TAX
RATE OF VAT
PRICE
For sellers of services

GROSS REGULAR OUTPUT


X = TAX
RECEIPTS RATE OF VAT

Where VAT erroneously billed


Where the basis for computing the output tax is either the
gross selling price/gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total invoice amount
shall be presumed to be comprised of the gross selling
price/gross receipts plus the correct amount of VAT.
Hence,

Total Invoice Rate of VAT Output


Amount X 100% + rate = Tax
of VAT

Accordingly, the input tax that can be claimed by the buyer


shall be the corrected amount of VAT computed in
accordance with the formula prescribed.

VAT payable & excess input tax


(1) If at the end of any taxable month orquarter:
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the output tax exceeds the input tax, the remittance of VAT due which was withheld by
excess shall be paid by the VAT- the payor.
registered person
the input tax exceeds the output tax, the ADVANCE VAT ON SUGAR shall be supported
excess shall be carried over to the by the Payment Order showing payment of
succeeding quarter or quarters the advance VAT.
Any input tax attributable to zero-rated sales by
a VAT-registered person may at his option be REFUND OR TAX CREDIT OF EXCESS INPUT TAX
refunded or applied for a tax credit certificate
which may be used in the payment of internal WHO MAY CLAIM FOR REFUND/APPLY FOR ISSUANCE OF
revenue taxes. TAX CREDIT CERTIFICATE (TCC)
Zero-Rated Sales (Sec. 112(A), NIRC)
SUBSTANTIATION OF INPUT TAX CREDITS Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may apply for the
RR 16-2005: issuance of a tax credit certificate/refund of
INPUT TAXES must be substantiated and creditable input tax due or paid attributable to
supported by the following documents, and such sales, EXCEPT transitional input tax, to
must be reported in the information returns the extent that such input tax has not been
required to be submitted to the Bureau: applied against output tax, within two (2) years
For the importation of goods= Import entry or after the close of the taxable quarter when the
other equivalent document showing actual sales were made. The input tax that may be
payment of VAT on the imported goods. subject of the claim shall exclude the portion of
For the domestic purchase of goods and input tax that has been applied against the
properties = Invoice showing the output tax.
information required under Secs. 113 The acceptable foreign currency exchange
(Invoicing and Accounting Requirements proceeds must have been duly accounted for
for VAT-Registered Persons) and 237 in accordance with the rules and regulations of
(Issuance of Receipts or Sales or the Bangko Sentral ng Pilipinas (BSP) in the
Commercial Invoices) of the Tax Code. case of zero-rated transactions paid for in
For the purchase of real property = public acceptable foreign currency and requiring that
instrument i.e., deed of absolute sale, such be accounted for in accordance with BSP
deed of conditional sale, rules & regulations (Secs. 106(A)(2)(a)(1) and
contract/agreement to sell, etc., together
(2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1)
with VAT invoice issued by the seller.
and (2), NIRC).
For the purchase of services =official
Where the taxpayer is engaged in zero-rated or
receipt showing the information required
effectively zero-rated sale and also in taxable
under Secs. 113 and 237 of the Tax Code.
or exempt sale of goods of properties or
services, and the amount of creditable input tax
A cash register machine tape issued to a due or paid cannot be directly and entirely
registered buyer shall constitute valid proof attributed to any one of the transactions, it
of substantiation of tax credit only if it shows shall be allocated proportionately on the
the information required under Secs. 113 basis of the volume of sales.
and 237 of the Tax Code. In the case of a person engaged in the transport
of passenger and cargo by air or sea
TRANSITIONAL INPUT TAX shall be supported by vessels from the Philippines to a foreign
an inventory of goods as shown in a detailed country, the input taxes shall be allocated
list to be submitted to the BIR. ratably between his zero-rated sales and
non-zero-rated sales (sales subject to
Input tax on "DEEMED SALE" TRANSACTIONS regular rate, subject to final VAT withholding
shall be substantiated with the invoice required. and VAT-exempt sales). (RR 16-2005)
INPUT TAX FROM PAYMENTS MADE TO NON- The absence of the word zero-rated on
RESIDENTS (such as for services, rentals and the invoices and receipts of a taxpayer will
royalties) shall be supported by a copy of the result in the denial of the claim for tax
Monthly Remittance Return of Value Added Tax refund. (Eastern Telecommunications
Withheld (BIR Form 1600) filed by the resident Philippines, Inc. v. CIR)
payor in behalf of the non-resident evidencing

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Cancellation of VAT Registration. (Sec. 112 A VAT-registered person shall issue:


(C), NIRC) A VAT invoice for every sale, barter or
A person whose registration has been cancelled due exchange of goods or properties; and
to retirement from or cessation of business, or A VAT official receipt for every lease of goods
due to changes in or cessation of status under or properties, and for every sale, barter or
Section 106(C) of the Code may, within two (2) exchange of services.
years from the date of cancellation, apply for the
issuance of a tax credit certificate for any Only VAT-registered persons are required to print their
unused input tax which may be used in payment TIN followed by the word VAT in their invoice or
of his other internal revenue taxes. ORs. Said documents shall be considered as a
He shall be entitled to a refund if he has no VAT Invoice or VAT official receipt. All
internal revenue tax liabilities against which purchases covered by invoices/receipts other
the tax credit certificate may be utilized. than VAT Invoice/VAT OR shall not give rise to
any input tax. [RR 16-05]
PERIOD TO FILE CLAIM /APPLY FOR ISSUANCE OF TAX
CREDIT CERTIFICATE(Sec. 112 (D), NIRC) Information Contained in the VAT Invoice or
In proper cases, the Commissioner of Internal VAT Official Receipt: (RR 16-2005)
Revenue shall grant a tax credit certificate/refund A statement that the seller is a VAT-registered
for creditable input taxes within one hundred person,followed by his taxpayer's
twenty (120) days from the date of submission of identification number (TIN);
complete documents in support of the application. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication
In case of full or partial denial of the claim for that such amount includes the VAT:
tax credit certificate/refund as decided by the The amount of the tax shall be shown as a
Commissioner of Internal Revenue: separate item in the invoice/receipt;
The taxpayer may appeal to the Court of Tax If the sale is exempt from VAT, the term "VAT-
Appeals (CTA) within thirty (30) days from the exempt sale" shall be written or printed
receipt of said denial, otherwise the decision prominently on the invoice or receipt;
shall become final. If the sale is subject to zero percent (0%)
If no action on the claim for tax credit value-added tax, the term "zero-rated
certificate/refund has been taken by the sale" shall be written or printed
Commissioner of Internal Revenue after the prominently on the invoice or receipt;
one hundred twenty (120) day period from If the sale involves goods, properties or services
the date of submission of the application with some of which are subject to and some of
complete documents, the taxpayer may which are VAT zero-rated or VAT-exempt, the
appeal to the CTA within 30 days from the invoice or receipt shall clearly indicate the
lapse of the 120-day period. [RR 16-2005] breakdown of the sale price between its
taxable, exempt and zero-rated
MANNER OF GIVING REFUND components, and the calculation of the value-
Refunds shall be made upon warrants drawn by added tax on each portion of the sale shall be
the Commissioner or by his duly authorized shown on the invoice or receipt. The seller has
representative without the necessity of being the option to issue separate invoices or
countersigned by the Chairman, Commission on receipts for the taxable, exempt, and zero-
Audit, the provisions of the Administrative Code rated components of the sale.
of 1987 notwithstanding: provided that refunds
shall be subject to post audit by the Commission The date of transaction, quantity, unit cost and
on Audit. (Sec. 112(D), NIRC) description of the goods or properties or
nature of the service; and
DESTINATION PRINCIPLE OR CROSS-BORDER DOCTRINE
In the case of sales in the amount of one
thousand pesos (P1,000) or more where the
The destination of the goods determines sale or transfer is made to a VAT-registered
taxation or exemption from tax. Export sales of person, the name, business style, if any,
goods are subject to zero percent (0%) rate address and taxpayer identification number
while imports of goods are subject to 12% VAT. (TIN) of the purchaser, customer or client.
INVOICING REQUIREMENTS INVOICING AND RECORDING DEEMED SALE TRANSACTIONS

INVOICING REQUIREMENTS IN GENERAL

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Transaction Invoicing Requirement Issuance of a VAT Invoice or VAT Receipt by


a non-VAT person - If a person who is not a
VAT-registered person issues an invoice or
Transfer, use or Memorandum entry in receipt showing his Taxpayer Identification
consumption not in the the subsidiary sales Number (TIN), followed by the word "VAT",
course of business of journal to record the erroneous issuance shall result to the ff:
goods or properties withdrawal of goods for The non-VAT person shall be liable to:
originally intended for personal use percentage taxes applicable to his
sale or for use in the transactions;
course of business VAT due on transactions under Section 106
Distribution or transfer to Invoice, at the time of or 108 of the Code, without the benefit of
shareholders/investors or the transaction, which any input tax credit; and
creditors should include all the a 50% surcharge under Section 248 (B) of
info prescribed above; the code;
data in the invoice shall The VAT shall, if the other requisite information
required is shown on the invoice/receipt, be
be duly recorded in the
recognized as an input tax credit to the
subsidiary sales journal
purchaser.
Consignment of goods if Invoice, at the time of
actual sale is not made the transaction, which Issuance of a VAT Invoice or VAT Receipt on an
within 60 days should include all the Exempt Transaction by a VAT-registered Person - If a
info prescribed above; VAT-registered person issues a VAT invoice or VAT
data in the invoice shall official receipt for a VAT-exempt transaction, but fails to
be duly recorded in the display prominently on the invoice or receipt the
subsidiary sales journal term "VAT-exempt Sale", the transaction shall become
Retirement from or An inventory shall be taxable and the issuer shall be liable to pay VAT thereon.
cessation of business with prepared and The purchaser shall be entitled to claim an input tax
respect to all goods on submitted to the RDO credit on his purchase. [RR 16-05]
hand who has jurisdiction
over the taxpayers FILING OF RETURN AND PAYMENT
principal place of VAT RETURNS(Sec. 114, NIRC)
business not later than Filed by person liable to pay the VAT
30 days after Quarterly return of the amount of his gross
retirement or cessation sales or receipts within twenty-five (25) days
from business. An after the close of each taxable quarter
invoice shall be prescribed for each taxpayer.
prepared for the entire The monthly VAT Declarations of taxpayers
inventory, which shall whether large or non-large shall be filed and the
be the basis of the entry taxes paid not later than the 20th day
into the subsidiary sales following the end of each month.
journal. The invoice Note: VAT paid on a monthly basis. Payments
need not enumerate in the monthly VAT declarations shall be
the specific items credited in the quarterly VAT return to arrive at
appearing in the the net VAT payable or excess input tax/over-
inventory regarding the payment as of the end of a quarter.
description of the
goods. If the business FINAL WITHHOLDING TAX
is to be continued by As a general rule, withholding tax does not apply on
the new owners or transactions subject to VAT. The exceptions are:
successors, the entire Gross payments by the government shall be
amount of output tax subject to the 5% final withholding tax;
on the amount deemed Gross payments by resident VAT-taxpayers to non-
sold shall be allowed as resident foreign persons of rentals, royalties,
input taxes. reinsurance premiums, and services done in the
Philippines12% (Sec. 114(c), NIRC)
CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE
OR VAT OFFICIAL RECEIPT(Sec. 113 (D), NIRC)

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* Beginning Nov. 1, 2005, when R.A. 9337 became


effective, all sales of goods, properties, or services RR 16-2005: The 5% final VAT shall represent the
to the government shall be subject to the 5% final net VAT payable of the seller. The remaining 7%
withholding tax. The government shall, before effectively accounts for the standard input VAT, in
making payment on account of each purchase of lieu of the actual input VAT directly attributable or
goods and/or services taxed at 10% or 12% VAT ratably apportioned to such sales.
(Sec. 106 and 108) deduct and withhold a final VAT (This means that where the 5% final VAT
due at the rate of 5% of the gross payment thereof. applies, the basic formula of output tax less
(Mamalateo, Reviewer on Taxation, 2008) input tax does not apply.)
Should actual input VAT exceed 7% of the gross
RR 16-2005: ADMINISTRATIVE AND PENAL PROVISIONS. payments, the excess may form part of the
Suspension of business operations. In addition to sellers expense or cost.
other administrative and penal sanctions provided On the other hand, if actual input VAT is less than 7%
for in the Tax Code and implementing regulations, of gross payment, the difference must be closed to
the Commissioner of Internal Revenue or his duly expense or cost, in effect reducing it.
authorized representative may order suspension
or closure of a business establishment for a period However, 12% final VAT shall be withheld with
of not less than five (5) days for any of the respect to the following:
following violations: Lease or use of properties or property rights
Failure to issue receipts and invoices. owned by non-residents;
Failure to file VAT return as required under the Services rendered to local insurance companies,
provisions of Sec. 114 of the Tax Code. with respect to reinsurance premiums
Understatement of taxable sales or receipts by payable to non-residents; and;
30% or more of his correct taxable sales or Other services rendered in the Philippines by
receipt for the taxable quarter. non-residents.
Failure of any person to register as required
under the provisions of Sec. 236 of the
Tax Code.

Surcharge, interest and other penalties. The


Tax Remedies under the
interest on unpaid amount of tax, civil penalties
and criminal penalties imposed in Title XI of the
NIRC
Tax Code shall also apply to violations of the TAXPAYERS REMEDIES
provisions of Title IV of the Tax Code (VAT).
ASSESSMENT
WITHHOLDING OF FINAL VAT ON SALES Concept of assessment
TO GOVERNMENT[Sec. 114 (C), NIRC] Assess means to impose a tax; to charge with a tax;
The Government or any of its political to declare a tax to be payable; to apportion a tax to be
subdivisions, instrumentalities or agencies, paid or contributed, to fix a rate; to fix or settle a sum
including GOCCs shall, before making to be paid by way of tax; to set, fix or charge a certain
payment on account of each purchase of
sum to each taxpayer; to settle determine or fix the
goods and services which are subject to the
amount of tax to be paid (84 C.J.S 74-750)
VAT (Secs. 106 and 108, NIRC), deduct and
withhold a final VAT due at the rate of five
percent (5%) of the gross payment thereof. An assessment is the notice to the effect that the
The payment for lease or use of properties or amount therein stated is due from a taxpayer as
property rights to nonresident owners shall a tax with a demand for payment of the same
be subject to 12% withholding tax at the time within a stated period of time. (Commissioner v.
of payment. CTA, 27 SCRA 1159)
The payor or person in control of the payment is
considered as the withholding agent. Requisites for valid assessment:
The VAT withheld shall be remitted within ten The taxpayer shall be informed in writing of the
(10) days following the end of the month law and the facts on which the assessment is
the withholding was made. made (Sec. 228, NIRC)
An assessment contains not only a computation of
[NOTE: This 5% final VAT withheld by the tax liabilities, but also a demand for payment
government is an innovation of RA 9337.] within a prescribed period (CIR v. PASCOR)

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An assessment must be served on and received Jeopardy Assessment


by the taxpayer (CIR v. PASCOR) A tax assessment made by an authorized Revenue
Officer (RO) without the benefit of complete or
Constructive methods of income determination partial audit, in light of the ROs belief that the
Rely upon circumstantial evidence of assessment and collection of the deficiency tax will
determining the correct income or transaction of be jeopardized by delay caused by the taxpayers
a taxpayer (Indirect Method) failure to: i) comply with audit and investigation
requirements to present his books of accounts
Expenditure Method It proceeds on the theory and/or pertinent records or ii.) substantiate all or
that where the amount of money which a taxpayer any of the deductions, exemptions or credits
spends during a given year exceeds his reported
income, and the source of such money is claimed in his return.
otherwise unexplained, it may be inferred that It is usually issued when statutory prescriptive periods
such expenditures represent unreported income. for the assessment or collection of taxes are about to
lapse due principally to the taxpayers fault.
Percentage Method This method is a
computation whereby determinations are made Tax Delinquency v. Tax Deficiency
by the use of percentages or ratios considered
typical of the business under investigation. By Deficiency - amount still due and collectible from
reference to similar business or situations, taxpayer upon audit or investigation. A deficiency tax
percentage computations are secured to has to go through the process of filing the protest
determine sales, gross profit or even net profit.
against the assessment by the by the taxpayer and
denial of such protest by the BIR. (Mamalateo, 2008)
Unit and Value Method The determination of
gross receipts may be computed by applying Delinquency - failure of the taxpayer to pay the
price and profit figures to the known tax due on the date fixed by law or indicated in
ascertainable quality of business done by
taxpayer the assessment notice or letter of demand.

Inventory method for income determination Powers of the Commissioner:


(Net Worth Method) (A) To make assessments and prescribe
Holland v US: In a typical net worth prosecution, additional requirements for tax administration
the Government, having concluded that the and enforcement (Sec. 6, NIRC)
taxpayer's records are inadequate as a basis for Examination of Returns and Determination of
determining income tax liability, attempts to Tax Due (Sec. 6(A), NIRC)
establish an "opening net worth" or total net value After a return has been filed, the CIR may
of the taxpayer's assets at the beginning of a given authorize the examination of any taxpayer and
year. It then proves increases in the taxpayer's net the assessment of the correct amount of tax.
worth for each succeeding year during the period Failure to file a return shall not prevent the
under examination, and calculates the difference CIR from authorizing the examination.
between the adjusted net values of the taxpayer's Best evidence obtainable (Sec 6(B), NIRC)
assets at the beginning and end of each of the The CIR shall assess the proper tax on the
years involved. The taxpayer's nondeductible best evidence obtainable when:
expenditures, including living expenses, are added the taxpayer fails to submit the required
to these increases, and if the resulting figure for returns, statements reports and other
any year is substantially greater than the taxable
documents
income reported by the taxpayer for that year, the there is a reason to believe that any such
report is false, incomplete or erroneous
Government claims the excess represents
Conduct INVENTORY-TAKING, SURVEILLANCE and
unreported taxable income.
to PRESCRIBE presumptive gross sales and
receipts (Sec. 6(C), NIRC)
Formula: Inventory-taking at any time during the
Increase in Net worth
taxable year, for the purpose of
Add: Non-deductible Item
determining the correct tax liabilities.
Less: Non-taxable income or receipts Surveillance done if there is reason to
subjected to final tax transfer taxes believe that the taxpayer is not declaring
Taxable Net Income his correct income, sales or receipts for
Less: Personal and additional tax purposes.
exemptions Prescribe presumptive gross sales and
NET INCOME SUBJECT TO TAX receipts if:

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It is found that the taxpayer has failed to In relation to the manner of compliance of
issue receipts and invoices, or any requirement in connection with the
When there is reason to believe that the submission or preparation of financial
books of accounts or other records do statements accompanying the tax returns.
not correctly reflect the declarations
made by the taxpayer (B) To obtain information and to summon, examine,
TERMINATE Taxable Period (Sec. 6(D), NIRC) and take testimony of persons (Sec. 5, NIRC)
Terminating taxable period and ordering the EXAMINE RETURNS and DETERMINE TAX
immediate payment of the tax for the DUE (Sec 5, NIRC)
terminated period and any remaining tax that Authorizing the examination of any
is unpaid, when the taxpayer is: taxpayer and the assessment of the
retiring from business subject to tax, or correct amount of tax, WON a return has
intending to leave the Philippines or to been filed by such taxpayer.
remove his property therefrom or to hide
or conceal his property; Note: Any return filed with the Commissioner
performing any act tending to obstruct the shall not be withdrawn, BUT the taxpayer may
proceedings for the collection of the tax for the
MODIFY, CHANGE or AMEND such return
past or current quarter or year or to render the
within three (3) years from the date of filing,
same totally or partially ineffective unless such
provided that no notice for audit or
proceedings are begun immediately
investigation of such return has been actually
PRESCRIBE Real Property Values (Sec. 6(E), served on the taxpayer.
NIRC)
Dividing the Philippines into different zones or
areas, and determining the FMV of real ACCESS Letter(Sec. 5(B), NIRC)
Obtaining on a regular basis, from any person
properties in each zone or area, upon
OTHER THAN the person whose tax
consultation with competent appraisers
from private and public sectors. liability is subject to audit or
For the purpose of computing any internal revenue investigation, or from any office or officer
tax, the value of the property shall be of the national and local governments,
WHICHEVER IS HIGHER OF: government agencies or instrumentalities,
including BSP and GOCCs,
The FMV as determined by the
Commissioner, or any information such as, but not limited to,
The FMV as shown in the schedule of values costs and volumes of production,
of the provincial and city assessors receipts or sales and gross incomes of
INQUIRE into Bank Deposit Accounts (Sec. taxpayers, and the names addresses, and
6(F), NIRC) financial statements of corporations, mutual
Notwithstanding any contrary provision of fund companies, insurance companies etc.
R.A. 1405 (Bank Secrecy Law) and other
general or special laws, the Commissioner is Note: This is known as the Third Party
authorized to inquire into bank deposits of: Information Rule.
A decedent to determine his gross estate, and
Any taxpayer who has filed an application for (C) INTERPRET Tax LAWS and to DECIDE Tax
compromise of tax liability by reason of CASES (Sec. 4, NIRC; RMC 44-01)
financial incapacity: the taxpayer must waive Shall be under the exclusive and original
in writing his privilege under R.A. 1405 and jurisdiction of the Commissioner, subject to
other relevant laws, before the Commissioner review by the Secretary of Finance.
may inquire into his bank accounts. A ruling by the BIR Commissioner shall be
ACCREDIT and REGISTER Tax Agents (Sec presumed VALID unless modified, reversed
6(G), NIRC) or superseded by the Secretary of Finance.
Accrediting and registering tax agents (may A taxpayer who receives an adverse ruling from
be individuals or general professional the Commissioner may, within thirty (30)
partnerships) based on the following criteria: days from the date of receipt of such ruling,
Professional competence seek its review by the Secretary of Finance,
Integrity either by himself/itself or though his/its duly
Moral fitness authorized representative.
PRESCRIBE additional PROCEDURAL OR A reversal or modification of the BIR ruling shall
DOCUMENTARY requirements (Sec. 6(H), NIRC) terminate its effectivity upon the receipt by the

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taxpayer or the BIR of written notice of reversal present in the reinvestigation. It may also involve
or modification, whichever came earlier. a question of fact or law or both.

Note: DOF Order 7-02 added that the Secretary of Note: A request for reconsideration does not toll
Finance may review the rulings MOTU PROPRIO. the running of the prescription period for the
collection of an assessed tax. (Phil Global
Communication v. CIR)
When the taxpayer Cannot be located in the
When Assessment is Made
Prescriptive period for assessment (Sec. 203, NIRC) Address given by him in the return filed upon
If the taxpayer filed a return: internal revenue taxes which a tax is being assessed or collected, BUT
shall be assessed within three years after the last if the taxpayer informs the Commissioner of any
day prescribed by law for the filing of the return. change in address, the running of the statute of
limitations shall not be suspended
If a return is filed beyond the period
prescribed by law: the three-year period shall When the warrant of distraint or levy is duly
be counted from the day the return was filed. served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and No Property is
Exception:(i) False return, (ii) Fraudulent return
located
with intent to evade tax, (iii) Failure to file a
return (Sec. 222, NIRC) When the taxpayer is Out of the Philippines

Waiver of Period for Assessment General Provisions on Additions to the Tax


The taxpayer and the Commissioner may agree (a) Civil penalties (Sec. 248, NIRC)
in writing, before the expiration of the time
prescribed in Sec. 203, to extend the period of Surcharge
assessment (Sec. 222(b), NIRC) A civil penalty imposed by law as an addition to
The waiver of prescription must be executed the basictax required to be paid. A surcharge
properly, otherwise, invalid and results to added to the main tax is subject to interest.
prescription of the right to assess/collect.
(Philippine Journalists Inc. vs. CIR, Rates of Surcharge:
December 16, 2004) There shall be imposed a penalty equivalent to
Requirements for a valid waiver under RMO 20- twenty-five percent (25%) of the amount due,
90: i) definite agreed date, ii) date of in the following cases:
acceptance indicated, and iii) taxpayer must FAILURE TO FILE ANY RETURN and PAY THE TAX
be furnished with a copy of the waiver. DUE THEREON on the date prescribed; or
Filing a return with an internal revenue officer
Suspension of running of statute of than those with whom the return is required
limitations (Sec. 223, NIRC) (P-CORN) to be filed (except when authorized by the
Period during which the commissioner is Commissioner); or
Prohibited from making the assessment or FAILURE TO PAY THE DEFICIENCY TAX within
beginning distraint or levy or a proceeding in the time prescribed for its payment
court, and for sixty (60) days thereafter FAILURE TO PAY THE FULL OR PART of the
When the taxpayer requests for a Reinvestigation amount of tax shown on any return required to
which is granted by the Commissioner be filed, or the full amount of tax due for which
no return is required to be filed, on or before the
date prescribed for its payment.
RR 12-85 (Difference between
Reconsideration &Reinvestigation)
The penalty shall be fifty percent (50%) of the tax
or of the deficiency tax, in the following cases:
RECONSIDERATION refers to a plea of re-
evaluation of the assessment on the basis of WILLFUL NEGLECT to FILE THE RETURN
within the period prescribed
existing records WITHOUT NEED OF
ADDITIONAL EVIDENCE. It may involve both A FALSE OR FRAUDULENT RETURN is wilfully
question of fact or of law or both made
Prima-facie evidence of false or fraudulent return:
REINVESTIGATION refers to a plea of re- i.) substantial under declaration of taxable sales,
evaluation of an assessment on the basis of NEWLY- receipts or income (failure to report sales, receipts
DISCOVERED EVIDENCE that a taxpayer intends to
or income in an amount exceeding 30% of that
declared per return) or ii)substantial overstatement

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of deductions (a claim of deduction in an amount Revenue Officer who audited the taxpayers
exceeding 30% of actual deductions) records shall state in his report WON
taxpayer agrees with his findings that the
(b) Interest (Sec 249, NIRC) taxpayer is liable for deficiency taxes.
20% per annum on any unpaid amount of tax,
from the date prescribed for payment until the If the taxpayer is not amenable: the taxpayer shall be
amount is fully paid. informed, in writing, of the discrepancies in his/her
Deficiency Interest the interest due on any payment of taxes, for the purpose of
amount of tax due or installment thereof which is Informal Conference, in order to afford the
not paid on or before the date prescribed for its taxpayer with an opportunity to present his
payment (Mamalateo, 2008) side of the case.
Taxpayer is given the time to respond: 15 days
Delinquency Interest- the interest required to be from receipt of notice
paidin case of failure to pay:tax due on any return If he/she fails to respond: taxpayer is considered in
required to be filed, ortax due for which no return is default; the case shall be endorsed to the
required, ora deficiency tax, or any surcharge or Assessment Division for review and issuance of
interest thereon on the due date appearing in the a deficiency tax assessment.
notice and demand of the Commissioner, there shall
be assessed and collected on the unpaid amount, Third Step: Issuance of Preliminary Assessment
interest at the rate prescribed until the amount is fully Notice (PAN) (Sec 228, NIRC; RR 12-99)
paid, which interest shall form part of the tax The Assessment Division issues PAN if it
determines that there exists sufficient basis to
(c) Compromise penalties assess the taxpayer for any deficiency tax. It
shall show in detail the facts and the law on
Compromise penalty v. Compromise which the proposed assessment is based.
Compromise penalty - an amount of money paid by
a taxpayer to compromise a tax violation that he has Fourth Step: Reply to PAN
committed, which may be the subject of criminal Taxpayer is given time to respond: 15 days from
prosecution. The basis of the amount paid is the date of receipt of PAN
gross sales or receipts during the year or the tax due. If he/she fails to respond: taxpayer is considered in
default; a formal letter of demand and assessment
Compromise - an amount of money paid by the notice shall be issued to the taxpayer
taxpayer to settle his civil liability for tax assessed The regulations use the term reply to distinguish
by the government. The basis of the amount paid is the written objection(s) against a FAN issued by
the basic tax assessed. (Mamalateo, 2008) the BIR, where the generic term
protest or the specific term request for
Assessment Process[Sec. 228, NIRC; RR 12-99] reconsideration or request for
First Step: Tax Audit reinvestigation is utilized.
In a tax audit, revenue officers examine the books
of account and other accounting records of The notice for informal conference and the PAN
taxpayers to determine the correct tax liability. This shall not be required in any of the ff cases, in
is through the issuance of a Letter of Authority. which case, issuance of the Formal Assessment
Notice (FAN) shall be sufficient:
Letter of Authority:An official document that The finding for any deficiency tax is the result of
empowers a Revenue Officer to examine and MATHEMATICAL ERROR in the computation of
the tax as appearing on the face of the return; or
scrutinize a taxpayers books of accounts and
A DISCREPANCY has been determined between the
other accounting records, in order to determine the
TAX WITHHELD and the amount ACTUALLY
taxpayers correct internal revenue tax liabilities.
REMITTED by the withholding agent; or
Cases which need not be covered by a valid LA: A taxpayer who opted to claim a refund or tax
Cases involving civil/criminal tax fraud which fall credit of excess creditable withholding tax for
under the jurisdiction of the tax fraud division of a taxable period was determined to have
the Enforcement Services, and
carried over and automatically applied the
same amount claimed against the
Policy cases under audit by the special teams
estimated tax liabilities for the taxable quarter
in national offices
or quarters of the succeeding taxable year; or
Second step: Notice for informal conference (RR 12-99)

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The EXCISE TAX due on excisable articles has


not been paid; or Submission of documents within 60 days
An article locally purchased or imported by an exempt from filing of protest
person, such as, but not limited to, vehicles, Within sixty (60) days from filing of the protest,
capital equipment, machineries and spare parts, all relevant supporting documents must be
has been sold, traded or transferred to a non- submitted, otherwise the assessment shall
exempt person. (Sec. 228, NIRC) become final. (Sec. 228)

Fifth Step: Issuance of formal letter of demand Effect of failure to protest: the assessment
and final assessment notice shall become final, executory and demandable.
A Final Assessment Notice (FAN) is a declaration of
deficiency taxes issued to a taxpayer who: (d)Period provided for protest to be acted
fails to respond to a pre-assessment notice upon:Protest should be acted upon within 180
within the prescribed period of time, or days from submission of documents
whose reply to the PAN was found to be
without merit. Rendition of Decision by Commissioner
Sec 228: The taxpayer shall be informed in CIRs actions deemed equivalent to denial of protest:
writing of the law and the facts on which the Filing of collection suit against taxpayer (CIR v.
assessment is made; otherwise the Union Shipping)
assessment shall be void Issuing a warrant of distraint and levy
An assessment contains not only a computation of (Commissioner v. Algue)
tax liabilities, but also a demand for payment Where there is a request for reconsideration,
within a prescribed period. final demand letter from BIR (CIR v. Isabela
Cultural Corp)
Sixth Step: Disputed Assessment Notice of delinquency (CIR v. Ayala Securities
The taxpayer or his duly authorized representative Inaction by Commissioner - If the protest is not
may protest administratively against the formal acted upon within one hundred eighty (180)
letter of demand and assessment notice within days from submission of documents, the
thirty days (30) from date of receipt. inaction by the Commissioner is considered
as a denial of protest.
Seventh Step: Administrative decision on a
disputed assessment Remedies of Taxpayer to Action by Commissioner
The power to decide disputed assessments, (a) In case of denial of protest
refunds of internal revenue taxes, fees or other If the Commissioner DENIES THE PROTEST
charges, penalties imposed in relation thereto, filed by the taxpayer, the latter may appeal to the
or other matters is vested in the Commissioner, CTA within 30 days from receipt of the decision
subject to the exclusive appellate jurisdiction of denying the protest (Sec. 228, NIRC)
the Court of Tax Appeals. The 30-day period starts when the taxpayer
receives the decision of the
Protesting Assessment [Sec 228, NIRC; RR 12-99] Commissioner denying the protest.
Protest of assessment by taxpayer The decision of the Commissioner must
Made within thirty (30) days from receipt of categorically state that his action on the
the assessment. disputed assessment is final, otherwise
Protest is either a request for reconsideration or a period to appeal will not commence to run.
request for reinvestigation, or both (Advertising Associates Vs. CA)
A protest is considered validly made if it satisfies
the following conditions: 1) it is made in Note: A Division of the CTA shall hear the
writing, and addressed to the appeal. (Sec. 11, RA 1125 as amended by
Commissioner of Internal Revenue, 2) it RA 9282 [2004])
contains the information required by the rule,
It states the FACTS, applicable LAW, (b) In case of inaction by Commissioner within
RULESandREGULATIONSor 180 days from submission of documents
JURISPRUDENCE on which his protest If the Commissioner did NOT ACT UPON THE
is based, otherwise the protest shall be PROTEST within 180 days from the time the
considered void and without force and documents were submitted, the taxpayer may either:
effect and 4) It is filed within the period Appeal to the CTA within thirty days from the
prescribed by law lapse of the 180-day period OR

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Wait until the Commissioner decides before


he elevates the case to the CTA. Injunction not available
No court may grant injunction to restrain the
RCBC v. CIR (2007): In case the Commissioner collection of any national internal revenue tax,
failed to act on the disputed assessment within fee or charge. (Sec. 218, NIRC)
the 180-day period from date of submission of
documents, a taxpayer can either: Exception:
When the all of the following conditions concur:
file a petition for review with the Court of
It is an appeal to the CTA from a decision of the
Tax Appeals within 30 days after the
CIR, or Commissioner of Customs or the RTC,
expiration of the 180-day period; OR
await the final decision of the Commissioner on provincial, city or municipal treasurer or the
the disputed assessments and appeal such Secretary of Finance, the case may be, AND
final decision to the Court of Tax Appeals In the opinion of the Court of Tax Appeals, the
within 30 days after receipt of a copy collection may jeopardize the interest of the
Government and/or the taxpayer. (Sec. 11,
of such decision.
R.A. 1125 as amended by R.A. 9282)
However, these options are mutually
exclusive, and resort to one bars the
Requisite before availing of injunction
application of the other.
Taxpayer has to deposit the amount claimed; OR
File an injunction bond with the Court for not
Remedy if the taxpayer is not satisfied with the CTA
more double the amount (R.A. 1125)
Divisions ruling:
FIRST, he may file a motion for reconsideration Prescriptive periods
before the same Division of the CTA within Where return Where no return
fifteen (15) days from notice thereof. (Sec. 11, filed was NOT filed, or the
RA 1125 as amended by RA 9282 [2004])
false or return was false
fraudulent: or fraudulent:
THEN, a party adversely affected by a resolution of a
Division of the CTA on a motion for reconsideration
Collection with should be should be made
may file a petition for review with the CTA en banc.
prior made within 5 within 5 years
(Sec. 18, RA 1125 as amended by RA 9282 [2004])
assessment years from the from the date of
date of assessment
assessment of (based on Sec.
Remedy if the taxpayer is not satisfied with the
decision of the CTA en banc: the tax. (Sec. 222(c), NIRC)
A party adversely affected by a decision or ruling of 203 in relation
the CTA en banc may file with the Supreme Court to Sec. 222,
a verified petition for review on certiorari pursuant NIRC) by distraint or
to Rule 45 of the 1997 Rules of Court. (Sec. 19, RA levy, or by
1125 as amended by RA 9282 [2004]) by distraint or judicial
levy, or by proceedings
(c) Effect of failure to appeal judicial
If the taxpayer fails to file an appeal, the assessment proceedings
shall become final, executory and demandable. Collection should be should be made
without prior made within 3 within ten years
COLLECTION assessment years from the after the
date of filing of discovery of the
Requisites return or date falsity, fraud or
When the government may avail of the return is due, omission to file
remedies of collection: whichever is a return.
General Rule: When the assessment shall have LATER (based
become final, executory and demandable. on Sec. 203, by judicial
NIRC) proceedings
Exception: In case of false or fraudulent return with
intent to evade tax or of failure to file a return, a by judicial
proceeding in court for collection may be filed without proceedings
assessment within 10 years from discovery of falsity,
fraud or omission. (Sec. 222(a), NIRC) Waiver of prescriptive period

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If tax was assessed within the different period agreed possession or control of such property to sign a
upon by the Commissioner and the taxpayer, it may receipt covering the property distrained and
be collected by distraint or levy or by a proceeding in obligate himself to preserve the same intact and
court within the period agreed upon in writing before unaltered and not to dispose of the same in any
the expiration of the 5-yr period.(Sec. 222d, NIRC) manner whatever, without the express authority
of the Commissioner
Remedies of the Government in Collection (2) If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
Administrative presence of two witnesses
Distraint of Personal Property including In case the taxpayer or the person having the
garnishment deposit possession and control of the property refuses
Summary remedy of levy on real property or fails to sign the receipt, the revenue officer
Forfeiture to the government for want of effecting the constructive distraint shall proceed
bidder to prepare a list of such property and, in the
Further Distraint or Levy presence of two (2) witnesses, leave a copy
Tax Lien thereof in the premises where the property
Compromise and Abatement distrained is located (Sec. 206, NIRC)
Penalties and Fines
Note: In constructive distraint, the property is not
Judicial actually confiscated or seized by the revenue officer.
Civil
Criminal Actual distraint - placed on a person who owes
any delinquent tax or delinquent revenue (see Sec.
207, NIRC); involves actual seizure of the property
Distraint of Personal Property
Distraint remedy enforced on the goods, chattels, Garnishment taking of personal properties, usually
or effects, and other personal property of whatever cash or sums of money, owned by a delinquent
character including stocks and other securities, debts, taxpayer which is in the possession of a third party
credits, bank accounts, and interest in and rights to
personal property (Sec. 205(a), NIRC) Distraint of intangible properties (Sec. 208, NIRC)
Stocks and other securities: by serving a copy of
Kinds of Distraint: the warrants of distraint on the taxpayer, AND
Constructive Distraint upon the president, manager, treasurer or other
Actual Distraint responsible officer of the corporation, company or
association which issued the stocks or securities.
Constructive Distraint may be placed by the Debts and credits: by leaving with the person
Commissioner on any taxpayer to safeguard the owing the debts or having in his possession or
interest of the Government (Sec. 206, NIRC). under his control such credits, or with his agent,
Delinquency of the taxpayer is not necessary. a copy of the warrant of distraint. The person
owing the debts shall then pay the
Grounds for Constructive Distraint: Commissioner instead of his creditor (taxpayer)
When in the opinion of the Commissioner, on the strength of such warrant.
the taxpayer is retiring from any business Bank accounts: by serving a warrant of garnishment
subject to tax; or upon the taxpayer AND upon the president,
the taxpayer is intending to leave the manager, treasurer or other responsible officer of
Philippines; or the bank. The bank shall then turn over to the
the taxpayer is intending to remove his property Commissioner so much of the bank accounts as
from the Philippines or to hide or conceal his may be sufficient to satisfy the claim of the
property; or Government. (NOTE:distraint of bank accounts is
the taxpayer is planning to perform any act called GARNISHMENT)
tending to obstruct the proceedings for
collecting the tax due or which may be due Procedure for Actual Distraint
from him (Sec. 206, NIRC) (A) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
How constructive distraint is effected: Commissioner or his duly authorized
(1) Signing of receipt by the taxpayer representative where the amount involved
By requiring the taxpayer or any person having is more than P1M

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Revenue District Officer where the amount If the proceeds from the sale of the distrained
involved is P1M or less (Sec. 207(A), NIRC) properties are not sufficient to satisfy the tax
delinquency, the Commissioner or his duly
Service of Warrant of Distraint authorized representative shall within thirty
How actual distraint is effected: (30) days after execution of the distraint,
The proper officer shall seize and distraint any proceed with the levy on the taxpayers real
goods, chattels, or effects, and the personal property, property. (Sec. 207(B), NIRC)
including stocks and other securities, debts, credits,
bank accounts and interests in and rights to personal (G) Release of the Properties from Distraint
property of the taxpayer in sufficient quantity to satisfy If at any time prior to the consummation of the sale
the tax, expenses of distraint and the cost of the all proper charges are paid to the officer
subsequent sale. (Sec. 207(A), NIRC) conducting the sale, the goods or effects distrained
shall be restored to the owner. (Sec. 210, NIRC)
Report on the Distraint
A report shall be submitted by the distraining Purchase by the government at sale upon distraint
officer to the Revenue District Officer, and to the If the amount offered by the highest bidder is not
Revenue Regional Director. equal to the amount of the tax or is very much less
than the actual market value of the articles offered for
(D) Power of the CIR or proper officer to lift the sale, the Commissioner or his deputy may purchase
order of distraint the same in behalf of the National Government for the
The taxpayer may request that the warrant be amount of taxes, penalties and costs due. The
lifted. The commissioner may, in his discretion, property so purchased may be resold by the
allow the lifting of the order of distraint. He may Commissioner or his deputy. (Sec. 212, NIRC)
ask for a bond as a condition for the cancellation
of the warrant. (Sec. 207(A), NIRC) Report of sale to BIR
Within two (2) days after the sale, the officer
(E)Notice of Sale of Distrained Properties making the same shall make a report of his
The Revenue District Officer or his duly authorized proceedings in writing to the Commissioner and
representative (not the officer who served the shall himself preserve a copy of such report as
warrant), shall cause a notification of the public an official record. (Sec. 211, NIRC)
sale to be posted in not less than two
(2) public places in the municipality or city Summary Remedy of Levy on Real Property
(one of which is the Office of the Mayor) Levy seizure of real property, an interest in or rights
where the distraint was made. to such property in order to enforce the payment of
The notice shall specify the time and place of taxes. (Sec. 205, NIRC) The real property under levy
the sale. The time of sale shall not be less shall be sold in a public sale, if the taxes involved are
than twenty (20) days after notice to the not voluntarily paid following such levy.
owner and the publication or posting of such
notice. (Sec. 209, NIRC) When levy may be effected: after the expiration of
time required to pay the delinquent tax, real property
(F)Sale at Public Auction may be levied upon, before, simultaneously or after
At the time of the public sale, the revenue officer shall the distraint of personal property belonging to the
sell the goods, chattels, or effects, or other personal delinquent. (Sec. 207(B), NIRC)
property, including stocks and other securities so
distrainedat a PUBLIC AUCTION, to the HIGHEST In case the warrant of levy is NOT issued before or
BIDDER for CASHor with the approval of the simultaneously with the warrant of distraint on the
Commissioner, through a DULY LICENSED personal property AND the personal property of the
COMMODITY or STOCK EXCHANGES. taxpayer is not sufficient to satisfy his tax
Any residue over and above what is required to delinquency: the CIR or his duly authorized
pay the entire claim, including expenses of representative shall within 30 days after execution
sale and distraint, shall be RETURNED to the of the distraint, proceed with the levy on the
owner of the property sold. Expenses shall taxpayers real property. (Sec. 207(B), NIRC)
be limited to actual expenses of SEIZURE
and PRESERVATION of the property pending Procedure for Levy
the sale, no charge shall be imposed for the (A) Issuance of Warrant of Levy
services of the local internal revenue officer The IR officer designated by the Commissioner or his
or his deputy. (Sec. 209, NIRC) duly authorized representative shall prepare a

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DULY AUTHENTICATED CERTIFICATE (F) Redemption of Property Sold


showing the name of the taxpayer and the At any time before the day fixed for the sale, the
amounts of tax and penalty due from him. taxpayer may discontinue all proceeding by
This certificate shall operate with the force of LEGAL paying the taxes, penalties and interest.
EXECUTION throughout the Philippines. (Sec. 213, NIRC)
The certificate shall contain a description of the Within one (1) year from the date of sale, the
property upon which levy is made. (Sec. taxpayer or anyone for him, may pay to the
207(B), NIRC) Revenue District Officer the total amount of the
following: public taxes + penalties + interest from
(B) Service of the Warrant the date of delinquency to the date of sale +
Levy shall be effected by writing upon said interest on said purchase price at the rate of
certificate a description of the property upon fifteen percent (15%) per annum from the date of
which levy is made. sale to the date of redemption. (Sec. 214, NIRC)
At the same time, written notice of the levy shall be
mailed to or served upon the Register of Deeds Note:If the property was forfeited in favor of the
of the province or city where the property is government, the redemption price shall include
located and upon the taxpayer (If he is absent only the taxes, penalties and interest plus costs
from the Philippines: to his agent or manager of of sale no interest on purchase price since the
business in respect to which the liability arose Government did not purchase the property
or to the occupant of the property in question). anyway, it was forfeited)
(Sec. 207(B), NIRC)
Note:The taxpayer-owner shall not be
(C) Advertisement of the Sale deprived of possession of the said property
Within twenty (20) days after the levy, the officer and shall be entitled to rents and other income
conducting the proceedings shall proceed to until the expiration of the period for redemption
advertise for SALE the property or a portion (Sec. 214, NIRC)
as may be necessary to satisfy the claim and
costs of sale. Such advertisement shall cover a (G) Final Deed of Purchaser
period of at least thirty (30) days. The notice After the period of redemption, a final deed of
shall be posted at the main entrance of the city sale is issued in favor of the purchaser.
or municipal all AND in a public and
conspicuous place in the barrio or district where Forfeiture to Government for Want of Bidder
the real property lies. The notice must also be Forfeiture implies a divestiture of property without
published in a newspaper of general circulation compensation in consequence of a default or
in the place where the property is located, once offense. The effect of forfeiture is to transfer the
a week for three (3) weeks. title of the specific thing from the owner to the
CONTENTS of notice: statement of amount of government. (De Leon, NIRC Annotated, p. 412)
taxes, and penalties due, time and place of
sale, name of taxpayer, short description of Instances when forfeiture is appropriate
property. (Sec. 213, NIRC) All chattels, machinery, and removable fixtures
of any sort used in the unlicensed production
(D) Sale of articles (Sec. 268, NIRC)
The sale shall be held either at the main entrance of Dies and other equipment used for the printing or
the municipal or city hall or on the premises to be making of any internal revenue stamp, label or
sold. Property will be awarded to the highest bidder. tag which is in imitation of or purports to be a
In case the proceeds of the sale exceeds the claim lawful stamp, label or tag. (Sec. 268, NIRC)
and costs of sale, the excess shall be turned over to Liquor or tobacco shipped under a false name or
the owner of the property. (Sec. 213, NI