TAXATION

SPECIAL PRE-WEEK BAR REVIEW

Atty. Vic C. Mamalateo

Sept. 9, 2010
SAN SEBASTIAN COLLEGE OF LAW
• INCOME TAX
 INCOME TAX
• INCOME TAX
– Tax on all yearly profits arising from property, professions, trades or
offices, or as a tax on a person’s income, emoluments, profits and the
like (Fisher v. Trinidad).
– Income tax is a direct tax on actual or presumed income (gross or net)
of a taxpayer received, accrued or realized during the taxable year.
• WITHHOLDING TAX
– It is not an internal revenue tax but a mode of collecting income tax in
advance on income of the recipient of income thru the payor of
income. [NOTE: Sec. 21, NIRC enumerates various internal revenue
taxes.]
– There are 2 types of withholding taxes, namely: (1) final withholding
tax; and (2) creditable withholding tax.
 FINAL WITHHOLDING TAX
• FINAL WITHHOLDING INCOME TAX
– FWT withheld by the payor of income (e.g., 20% FWT on interest
income on bank deposits) represents FULL payment of income tax due
on such income of the recipient.
– Income payee (or recipient of income) does not report income
subjected to FWT in his income tax return, although income is
reflected in his audited financial statements for the year. However, he
is not allowed to claim any tax credit on income subjected to FWT.
– Withholding agent files the withholding tax return, which includes the
FWT deducted from the income payee, and pays the tax to the BIR.
There is no Certificate of Tax Withheld issued to income payee.
– No Certificate of Tax Withheld (BIR Form 2307) is attached to the
income tax return of recipient of income because he does not claim
any tax credit in his tax return.
 INCOME TAX SYSTEMS
• GLOBAL TAX SYSTEM
– Compensation income not subject to FWT
– Business and/or professional income
– Capital gains not subject to FWT
– Passive investment income not subject to FWT
– Other income not subject to FWT
• SCHEDULAR TAX SYSTEM
– Compensation income subject to FWT (salary of OBU expat)
– Capital gains subject to FWT (real property in the Phil and shares of
domestic corporation)
– Passive investment income subject to FWT (interest on bank deposit)
– Other income subject to FWT (auto won on X’mas raffle)
• The Philippines adopted the semi-global or semi-schedular tax
system. Either the global or schedular system, or both
systems may apply to a taxpayer.
 FORMULA
• GLOBAL SYSTEM
• Gross sales/revenue
• Less: Cost of sales/service
• Gross income
• Less: Deductions
• PAE (for individual)
• Net taxable income
• Multiplied by applicable
rate (graduated or flat)
• Income tax due
• Less: Creditable WT
• Balance
• SCHEDULAR SYSTEM
• Gross selling price or fair
market value, whichever is
higher times applicable tax
rate = Tax due (real
property)
• Gross selling price less cost
or adjusted basis = Capital
gain times applicable tax
rate = Tax due (shares of
dom corp)
• Gross income times
applicable rate = Tax due
(passive inv income)
 NATURE OF ASSET
• ORDINARY ASSET • Inventory if on hand at end of
taxable year
• Stock in trade held primarily for
sale or for lease in the course of
trade or business
• Asset used in trade or business,
subject to depreciation
• Real property used in trade or
business

• All other assets, whether or not

• CAPITAL ASSET used in trade or business, other
than the above assets
 REAL PROPERTY TRANSACTIONS
• Sale of real property
– Who is seller?
• Person engaged in real property business (dealer, developer, or lessor)
• Person not engaged in real property business
– Non-stock, non-profit association (chamber of commerce, YMCA)
– Nature of property?
• Ordinary asset
• Capital asset
– Location of property?
• Within the Philippines
• Outside the Philippines
– Principal residence?
• Yes – exempt, if conditions for exemption are satisfied by seller-individual
• No – taxable
– Consideration?
• Full consideration or fair market value
• Inadequate consideration
 KINDS OF TAXPAYERS
• INDIVIDUAL
– CITIZEN
• Resident – Taxable on worldwide income
• Non-resident – Taxable on income from sources within the Phil
– Immigrant or permanent worker – NRC from date of departure from the Phil
– OFW (seamen) – NRC if his aggregate stay outside the Phil is more than 183 days
– ALIEN – Taxable on income from sources within the Phil
• Resident
• Non-resident
– Engaged in trade or business (more than 180 days in the Phil)
– Not engaged in trade or business (180 days or less stay in Phil)
• CORPORATION
– DOMESTIC – Taxable on worldwide income
– FOREIGN – Taxable on income from sources within the Phil
• Resident (e.g., Phil branch of foreign corporation)
• Non-resident
– TEST FOR TAX PURPOSES: Law of incorporation
 PARTNERSHIPS
• TAXABLE
– Partnerships, no matter how created or organized, including joint
ventures or consortiums

• EXEMPT
– General professional partnership (GPP), but partners are taxed on
their share of partnership profits actually or constructively paid during
the year
– Joint venture or consortium undertaking construction activity or
energy-related activities with operating contract with the government
• Agreement to manage and operate mine denominated as “Power of Attorney”
is in reality a partnership. Philex is a partner because it would receive 50% of
net profits as compensation under the agreement; it does not appear that
Baguio Gold was unconditionally obligated to pay the advances; it was unlikely
for a business to lend hundreds of millions without security or collateral and
without specific date when advance shall be due and payable (Philex Mining
Corp v. CIR, 2008).
 RESIDENT FOREIGN CORPS
• TAXABLE
– Ordinary branch of a foreign corporation in the Phil (30% of net
taxable income from sources within the Phil)
• PEZA- & SBMA-registered branch are exempt from branch profit
remittance tax
– Regional operating headquarters (ROHQ) – 10% of net taxable
income from sources within the Phil
– Offshore banking unit (OBU) and foreign currency deposit unit
(FCDU) [ING Bank Manila v. CIR] – 10% on gross interest income on foreign
currency loans
– International carriers by air or water – 2.5% of Gross Phil Billings
– Foreign contractor or sub-contractor engaged in petroleum
operations in the Phil – 8% of gross income
• EXEMPT
– Representative office
– Regional headquarters (RHQ)
 SOURCES OF INCOME
• Interest – Interest from sources within Phil and interest on bonds and obligations
of residents, corporate or otherwise
• Dividend – From domestic corporation and from foreign corporation, unless less
than 50% of gross income of foreign corporation for 3 years prior to declaration of
dividends was derived from sources within the Phil; hence, apply only ratio of Phil-
source income to gross income from all sources
• Services – Place where services are performed, except in case of international air
carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.
Revenues from trips originating from the Phil are considered as income from
sources within the Philippines, while revenues from inbound trips are treated as
income from sources outside the Philippines.
• Rentals and royalties – Location or use of property or property right in Phil
• Sale of real property – Located in the Philippines
• Sale of personal property – Located in the Philippines
• Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as
income from sources within the Philippines.
• Other intangible property – Mobilia sequuntur personam – it follows domicile of
owner
 GROSS INCOME
• SALE OF GOODS • SALE OF SERVICES
• Gross Sales • Gross Revenue
• Less: Cost of Sales: • Less: Cost of Service
• Beg. Inventory • consisting of all direct
+ Purchases • costs and expenses
Total available for sale • Gross income
- Ending inventory • Times 2%
Cost of Sales • MCIT
• Gross income NOTE: MCIT is imposed beginning on
the 4th taxable year immediately
• Times 2% following the year in which the
• MCIT corp commenced bus operations
(Sec 27(E)(1), NIRC)
• NOTE: MCIT is now computed Pay MCIT after 4 years immediately
on quarterly basis. If quarterly following the year bank
MCIT > than RCIT, excess MCIT commenced bus operations
of prior year is not allowed. (Manila Bank v CIR, GR 168118, Aug 28,
2006)
 INCOME
• INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit from
investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
– FBT is a tax on fringe benefits received by employees, although the tax is assumed by
the employer-payor of income.
• Return of capital is exempt from income tax (e.g., tax-free exchange of
property).

• To be taxable, there must be income, gain or profit; gain is received,

accrued or realized during the year; and it is not exempt from income tax
under the Constitution, treaty or law.
– Mere increase in the value of property does not constitute taxable income. It
is not yet realized during the year.
– Transfer of appreciated property to the employee for services rendered is
taxable income.
 TEST IN DETERMINING INCOME
• Realization test
– There must be separation from capital of something of
exchangeable value (e.g., sale of asset)
• Claim of right doctrine
– CIR v. Javier, 199 SCRA 824
• Economic benefit test
– Stock option given to the employee
– Payment of real property that has appreciated in value by
employer to its employee
• Income from whatever source
– All income not expressly exempted from income, irrespective of
voluntary or involuntary action of taxpayer in producing income
 NATURE OF INCOME
• COMPENSATION INCOME
– Existence of employer-employee relationship
• BUSINESS AND/OR PROFESSIONAL INCOME
– NO employer-employee relationship
• CAPITAL GAIN
– Real property in the Phil and shares of stock of domestic corporation
– Other sources of capital gain
• PASSIVE INVESTMENT INCOME
– Interest, dividend, and royalty income
– BIR cannot compute compounded interest on delay in payment of
promissory notes in the absence of stipulation in contract (CIR v. Isabela
Cultural Corp, GR 172231, Feb 12, 2007).
• OTHER INCOME
– Prizes and winnings
– All other income, gain or profit not covered by the above classes
 COST OR ADJUSTED BASIS
• FORMULA
– Amount realized/Selling price 100
– Less: Cost or adjusted basis 80
– Gain/(loss) from sale 20
• “Amount realized” shall be the sum of money received plus the fair market
value of the property (other than money) received (Sec 40A, NIRC).
• Basis of property:
– If acquired by purchase, cost;
– If acquired by inheritance, FMV at date of acquisition;
– If acquired by donation, basis in the hands of donor;
– If acquired for insufficient consideration, amount paid by
transferee for the property (Sec 40(B), NIRC).
 GROSS PHIL BILLINGS
• A. GPB applies on revenue from transport of passengers,
cargoes or mail originating from the Philippines
– INTERNATIONAL AIR CARRIER
• From Phil to foreign destination
– Continuous and uninterrupted flight
– Transhipment of passenger in another country on another foreign airline: GPB tax
applies only on aliquot portion of revenue on Philippine leg (Phil to foreign
country)
• From foreign country to the Phil
– This is treated as income from foreign sources; hence, exempt from Phil income tax
– INTERNATIONAL SHIPPING LINE
• From Phil to final foreign destination is taxable
• From foreign country to Phil is exempt
• B. ORDINARY INCOME
– Demurrage fees (for late return of containers) are akin to
rental income subject to ordinary corporate income tax
rate based on net taxable income from sources within the
Philippines
 INTEREST INCOME
• TYPES OF INTEREST INCOME
– Subject to FWT:
• (a) Interest income of depositor on bank deposits, deposit substitutes,
trust and other similar arrangements
– 20% FWT – peso deposit
– 7.5% FWT – foreign currency deposit with OBU/FCDU (if depositor is
resident) and exempt from tax, if depositor is a non-resident
• (b) Interest income of OBU/FCDU on foreign currency loans to (1)
residents – 10% of gross interest income; or (2) non-residents, OBUs,
local commercial banks, including branches of foreign banks – exempt
from all taxes.
– NOT subject to FWT but subject to regular tax rates (5%-32%, if individual; 30%, if
corporation): All other interest income or financing income
– Exempt income:
• Long-term deposit or investment by individuals
– Taxable income:
• Preferential tax rate – Pre-termination of long-term deposit by individual (20%: 1- less
than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and interest on foreign
loan
• Regular tax rate (30%) – All other cases
 DIVIDEND INCOME
• REQUISITES FOR DIVIDEND DECLARATION
– Presence of retained earnings
– No prohibition to declare dividend in loan agreement
– Declaration of dividend by Board of Directors

• TYPES OF DIVIDENDS
– Taxable
• Cash dividend
• Property dividend
– Exempt
• Stock dividend (except when there is change in proportionate interest
among stockholders and there is subsequent cancellation or redemption
of shares declared as stock dividend)

• Liquidating dividend – distribution of assets to stockholders

– Taxable on the part of stockholder under the global tax system
 DIVIDEND INCOME
• Inter-corporate dividend: Exempt from tax
– Corporation paying dividend: Domestic corporation
– Recipient of dividend: Another domestic corporation or resident
foreign corporation
• Dividend paid to non-resident foreign corporation
– Corporation paying dividend: Domestic corporation
– Recipient of dividend
• Foreign head office makes direct investment in Phil company: 15% FWT
• Phil branch of foreign corporation makes investment in Phil company:
Exempt from income tax
– Tax-sparing provision
• If foreign country does not impose income tax on dividend paid by foreign
corporation
 OTHER INCOME
• Income from any source whatever
• The words “income from any source whatever” discloses a legislative
policy to include all income not expressly exempted from the class of
taxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner vs.
BOAC). The words “income from any source whatever” is broad enough to
cover gains contemplated here. These words disclose a legislative policy
to include all income not expressly exempted within the class of taxable
income under our laws, irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31,
1955).
• Any economic benefit to the employee whatever may have been the
mode by which it is effected is taxable. Thus, in stock options, the
difference between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional
compensation income to the employee (Commissioner vs. Smith, 324 U.S. 177).
 EXCLUSIONS
• Life insurance proceeds
• Amount received by insured as return of premium
• Gifts, bequests and devises
• Compensation for injuries or sickness
• Income exempt under treaty
• Retirement benefits, pensions, gratuities
– R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
• Interest income of employee trust fund or accredited retirement plan is exempt
from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)
– Amount received as a consequence of separation because of death, sickness
(that will endanger life of employee) or other physical disability or for any
cause beyond the control of employee
• Miscellaneous items
– Income of foreign government
– Income of government or its political subdivisions from any public utility or
exercise of governmental function
 EXEMPT ASSOCIATIONS
• The phrase “any of their activities conducted for profit” does not qualify the
word “properties.”-- The phrase “any of their activities conducted for profit” does not
qualify the word “properties.” This makes income from the property of the organization
taxable, regardless of how that income is used – whether for profit or for lofty non-profit
purposes. Thus, the income derived from rentals of real property owned by the Young Men’s
Christian Association of the Philippines, Inc. (YMCA), established as a welfare, education and
charitable non-profit corporation, is subject to income tax. The rental income cannot be
exempted on the solitary but unconvincing ground that said income is not collected for profit
but is merely incidental to its operation. The law does not make a distinction. Where the law
does not distinguish, neither should we distinguish. Because taxes are the lifeblood of the
nation, the Court has always applied the doctrine of strict interpretation in construing tax
exemptions. YMCA is exempt from the payment of property taxes only but not income taxes
because it is not an educational institution devoting its income solely for educational
purposes. The term “educational institution” has acquired a well-known technical meaning.
Under the Education Act of 1982, such term refers to schools. The school system is
synonymous with formal education which “refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for
which certification is required in order for the learner to progress through the grades or
move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No.
124043, Oct. 14, 1998).
 DEDUCTIONS
• KINDS OF DEDUCTIONS
– Itemized Deductions
– Optional Standard Deductions
– Special Deductions
• ITEMIZED DEDUCTIONS
– Business expenses, incl. research and development
– Interests
– Taxes
– Losses
– Bad debts
– Depreciation
– Depletion
– Charitable contributions
– Contributions to pension trust
– Health or hospitalization premium
 DEDUCTIONS
• BUSINESS EXPENSES
• 1. The expense must be ordinary and necessary;
• 2. Paid or incurred during the taxable year;
• 3. In carrying on or which are directly attributable to the develop-
• ment, management, operation and/or conduct of the trade,
• business or exercise of profession;
• 4. Supported by adequate invoices or receipts;
• 5. Not contrary to law, public policy or morals. Operating expenses
• of an illegal or questionable business are deductible, but
• expenses of an inherently illegal nature, such as bribery and
• protection payments, are not.
• 6. The tax required to be withheld on the amount paid or payable is
• shown to have been paid to the BIR.
• CONVENIENCE OF THE EMPLOYER RULE: Living quarters or meals furnished to
employee shall be added to compensation income subject to tax. However, if such
living quarters or meals are furnished to an employee for the convenience of the
employer, the value thereof need not be included as compensation (RR 2-86 & 3-
98)
•
 ADVERTISING EXPENSE
• An expense is “ordinary” when it connotes a payment, which is normal in
relation to the business of the taxpayer and the surrounding
circumstances.
• An expense is “necessary” where the expenditure is appropriate or helpful
in the development of taxpayer’s business or that the same is proper for
the purpose of realizing a profit or minimizing a loss.
• P9.4 M paid in 1985 for advertising a product was staggering incurred to
stimulate future sales to “create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or profession of which the
taxpayer is a member.”
• “Goodwill” generally denotes the benefit arising from connection and
reputation, and efforts to establish reputation are akin to acquisition of
capital assets. Therefore, expenses related thereto are not business
expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr.
24, 2003).
 PROFESSIONAL FEES
• Legal and accountant’s fees for prior years were not billed in
corresponding years (1984-1985). It was paid by taxpayer in succeeding
year (1986) when it was billed by the lawyer and accountant. Taxpayers
uses accrual method of accounting.
• Accrual of income and expense is permitted when the “all events test” has
been met. This test requires (1) fixing a right to income or liability to pay,
and (2) the availability of reasonably accurate determination of such
income or liability. It does not, however, demand that the amount of
income or liability be known absolutely; it only requires that a taxpayer
has at its disposal the information necessary to compute the amount with
reasonable accuracy, which implies something less than an exact or
completely accurate amount.
• Moreover, deduction takes the nature of tax exemption; it must be
construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporation,
G.R. No. 172231, Feb. 12, 2007).
• Legal fees paid for defending title to property is a capital expenditure that
should form part of the cost of the asset, but is recovered by way of
depreciation over the life of the asset.
 DEDUCTIONS
• INTEREST EXPENSE
• 1. There must be a valid and existing indebtedness;
• 2. The indebtedness must be that of the taxpayer;
• 3. The interest must be legally due and stipulated in writing;
• 4. The interest expense must be paid or incurred during the taxable year;
• 5. The indebtedness must be connected with the taxpayer's trade, business or
• exercise of profession;
• 6. The interest payment arrangement must not be between related taxpayers as
• mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code;
• 7. The interest is not expressly disallowed by law to be deducted from the taxpayer’s
• gross income (e.g., interest on indebtedness to finance petroleum operations);
• and
• 8. The amount of interest deducted from gross income does not exceed the limit set
• forth in the law. In other words, the taxpayer’s otherwise allowable deduction for
• interest expense shall be reduced by forty-two percent (42%) of the interest
• income subjected to final tax beginning November 1, 2005 under R.A. 9337, and
• that effective January 1, 2009, the percentage shall be thirty-three percent (33%)
• [Sec. 34(B)(1), NIRC].
 DEDUCTIONS
• TAXES
• 1. Payments must be for taxes, national or local;
• 2. Taxes are imposed by law upon the taxpayer;
• 3. Taxes must be paid or accrued during the
• taxable year in connection with the
• taxpayer’s trade, business or profession; and
• 4. Taxes are not specifically excluded by law from
• being deducted from the taxpayer’s gross income.
• Ways to avoid double taxation: tax credit or tax deduction
– Foreign tax credit is deducted from Phil income tax, but amount of tax
credit is subject to a maximum amount based on formula.
– Tax deduction is deducted from gross income, without any limitation.
 DEDUCTIONS
• LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)
• 1. The loss must be that of the taxpayer;
• 2. The loss is actually sustained and charged off within the taxable
• year;
• 3. The loss is evidenced by a closed and completed transaction;
• 4. The loss is not claimed as a deduction for estate tax purposes;
• 5. The loss is not compensated for by insurance or otherwise;
• 6. In the case of an individual, the loss must be connected with his
• trade, business or profession, or incurred in any transaction
• entered into for profit though not connected with his trade,
• business or profession; and
• 7. In the case of casualty loss, it has been reported to the BIR
• within forty-five days from date of occurrence of the loss.
• Capital losses are deductible only to the extent of capital gains.
– Sale of real property classified as capital asset located in the Phil
– Sale of shares of stocks of a domestic corporation
– Sale of jewelry held for more than 12 months
 DEDUCTIONS
• BAD DEBTS

• 1. There must be an existing indebtedness due to the taxpayer

• which must be valid and legally demandable;
• 2. The same must be connected with the taxpayer's trade, business
• or practice of profession;
• 3. The same must not be sustained in a transaction entered into
• between related parties enumerated under Sec. 36(B) of the Tax
• Code of 1997;
• 4. The same must be actually charged off the books of accounts of
• the taxpayer as of the end of the taxable year; and
• 5. The same must be actually ascertained to be worthless and
• uncollectible as of the end of the taxable year.
 DEDUCTIONS
• TAX BENEFIT RULE
– The taxpayer is obliged to declare as taxable income any
subsequent recovery of bad debts in the year they were
collected to the extent of the tax benefit enjoyed by the
taxpayer when the bad debts were written off and claimed
as deduction from gross income.
– It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited
by the BIR. He has to report income to the extent of the
tax benefit derived in the year of deduction.
 DEDUCTIONS
• DEPRECIATION

• 1. The allowance for depreciation must be reasonable;

• 2. It must be for property arising out of its use in the trade or
business, or out of its not being used temporarily during the year;
• 3. It must be charged off during the taxable year from the taxpayer’s
books of accounts;
• 4. Depreciation shall be computed on the basis of historical cost or
adjusted basis. While financial accounting allows computation based on
appraised value, recovery of investment for tax purposes shall be limited to
historical cost.
 DEDUCTIONS
• CHARITABLE CONTRIBUTIONS

• 1. The charitable contribution must actually be paid or made to the

Philippine government or any political subdivision thereof exclusively for
public purposes, or any of the accredited domestic corporation or
association specified in the Tax Code;
• 2. It must be made within the taxable year;
• 3. It must not exceed 10% (individual) or 5% (corporation) of the
taxpayer’s taxable income before charitable contributions (whether
deductible in full or subject to limitation);
• 4. It must be evidenced by adequate receipts or records; and
• 5. The amount of charitable contribution of property other than money
shall be based on the acquisition cost of said property (Sec. 34(H), NIRC).
The limitation is imposed to prevent abuse of donating paintings and
other valuable properties and claiming excessive deductions therefrom.
 DEDUCTIONS
• D. Optional Standard Deduction

• Privilege is available only to citizens or resident aliens as well

corporations subject to the regular corporate income tax;
thus, non-resident aliens and non-resident foreign
corporations are not entitled to claim the optional standard
deduction.
• Standard deduction is optional; i.e., unless taxpayer signifies
in his/its return his/its intention to elect this deduction, he/it
is considered as having availed of the itemized deductions;
• Such election when made by the qualified taxpayer is
irrevocable for the year in which made; however, he can
change to itemized deductions in succeeding year(s);
 DEDUCTIONS
• Amount of standard deduction is limited to 40% of taxpayer’s gross sales or
receipts (in the case of an individual) or gross income (in the case of a
corporation). If the individual is on the accrual basis of accounting for his
income and deductions, OSD shall be based on the gross sales during the year.
If he employs the cash basis of accounting, OSD shall be based on his gross
receipts during the year. It should be noted that cost of sales or cost of services
shall not be allowed to be deducted from gross sales or receipts.
• A general professional partnership (GPP) may claim either the itemized
deductions or in lieu thereof, the OSD allowed to corporations in claiming the
deductions in an amount not exceeding 40% of its gross income. The net
income determined by either the itemized deduction or OSD from the GPP’s
gross income is the distributable net income from which the share of each
share is to be ascertained.
• Proof of actual expenses is not required; hence, he is not also required to keep
books of accounts and records with respect to his deductions during the year.
•
 PERSONAL EXEMPTIONS
• RA 8424: Jan 1, 1998
• Single and estate or trust –
P20,000
• Head of family – P25,000
• Married – P32,000
• For each child, not to
exceed 4 – P8,000
• RA 9504: July 6, 2009
• Individual, whether single,
HOF, or married – P50,000
• For each child, not to
exceed 4 – P25,000
• Law exempts income of
minimum wage earners and
increases OSD from 10% to
40% of gross sales or
receipts, for individuals, and
of gross income, for
corporations.
 PERSONAL EXEMPTIONS
• Status-at-the-end-of-the-year rule

• “Status-at-the-end-of-the-year rule” which means that whatever is the

status of the taxpayer at the end of the calendar year shall be used for
purposes of determining his personal and additional exemptions generally
applies. A change of status of the taxpayer during the taxable year
generally benefits, but does not prejudice, him. Thus, if he marries at the
end of the year, he shall be entitled to personal exemption of
P32,000/P50,000. If a child is born at any time during the calendar year,
even on the last day of the year, the taxpayer is entitled to claim his child
as a dependent entitling him to deduct additional exemption of
P8,000/P25,000 for that year. On the other hand, if one of his qualified
dependent children dies during the year, the law considers that the child
died on the last day of the year; hence, he is entitled to claim the full
amount of additional exemption of P8,000/P25,000 for the deceased child
for the year.
 EDUCATIONAL INSTITUTION
• Proprietary educational institutions (including those
administered by individuals or groups with an issued
permit to operate from DECS, CHED, or TESDA) and
hospitals which are non-profit shall pay 10% tax on net
taxable income, except those covered by Sec D hereof
(i.e., income subject to FWT), provided that gross
income from school-related activities exceeds 50% of
total gross income.
• However, if gross income from unrelated (not
substantially related to the exercise of educational
institution or hospital) trade, business or other activity
exceeds 50% of total gross income from all sources, net
income shall be subject to RCIT (30%).
 IMPROPERLY ACCUMULATED
EARNINGS TAX
• RATIONALE: If profits were distributed, shareholders would
be liable to pay income tax thereon; if not so distributed,
no tax. Thus, IAET is a penalty tax for improper
accumulated of earnings and a form of deterrent to the
avoidance of tax on shareholders.
• IAET = 10% x accumulated taxable income of corporation
• IAET does not apply to banks, insurance companies,
publicly-held corporations, taxable partnerships,
enterprises registered with PEZA, SBMA, and BOI.
• Once profit has been subjected to IAET, the same shall no
longer be subjected to IAET in later years, even if not
declared as dividends.
 IAET
• The following are considered “reasonable needs
of business”:
– Retained earnings is equal to or less than 100% of
paid-up capital of corporation;
– Earnings reserved for:
• Definite corporate expansion project or program requiring
considerable capital expenditure;
• Building, plants or equipment acquisition;
• Compliance with any loan covenant or pre-existing
obligation under a legitimate business agreement;
– In case of subsidiaries of foreign corporations,
earnings intended or reserved for investments within
the Phil as proven by corporate records.
 TAX-FREE EXCHANGE
• GENERAL RULE: The entire amount of gain or loss shall
be recognized upon the sale or exchange of property.
• EXCEPTIONS: No gain or loss at the time of exchange is
recognized:
– 1. MERGER OR CONSOLIDATION, where a corporation,
shareholder, or security holder exchanges property, shares
or securities solely for shares of stocks of a corporation,
which is a party to the merger.
– 2. TRANSFER OF PROPERTY FOR SHARES OF STOCKS, as a
result of which, he, alone or together with others not
exceeding four, gains control of said corporation.
 ACCOUNTING METHODS
• Cash method
• Accrual method
– All events test; amounts received in advance are not treated as
revenue of the period in which received but as revenue of future
periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar
24, 1997).
• Installment sales
– Sale on the installment plan
• Initial payments do not exceed 25% of GSP
– Deferred payment sale, not on the installment plan
• Initial payments exceed 25% of GSP
• Percentage of completion
• Crop year method
 FILING OF TAX RETURN
• SUBSTITUTED FILING OF ITR: No individual income tax return
for the year will be filed by the employee concerned, and the
employer is the one that files the return for him
– Applies only to individuals
– With only one (1) employer
– Who correctly withholds the income tax on compensation income paid
to the employee and remits the same to the BIR
• Substituted filing of return does not apply when the
conditions above are not met, such as when the individual has
(a) two or more employers, (b) mixed incomes, © correct WT
was not deducted from compensation income, etc.
 FILING OF TAX RETURN
• Individual deriving mixed income, or purely business/ professional income,
or other income must file his quarterly income tax returns (BIR Form 1700
Q) and annual income tax return (BIR Form 1700 ) as follows:

• Period Due Date for Filing Return

•
• Q1 Return
• Q2 Return
• Q3 Return
• Annual Return
•
April 15 of same year
August 15 of same year
November 15 of same year
April 15 of the following year
 FILING OF TAX RETURN
• A domestic corporation and resident foreign corporation shall file quarterly
corporate income tax return (BIR Form 1702 Q) and annual corporate income tax
return (BIR Form 1702 as follows:

• Q1 Return May 31 of same year

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

• Computation of the quarterly and annual tax returns of individuals (except those
receiving purely compensation income) and corporations shall be made on the
cumulative basis; i.e., gross income and deductions are consolidated and the
income tax liability is computed on the consolidated net income, and the income
taxes paid for the preceding quarter(s) are credited against the consolidated
income tax due.
•
 REFUND OR TAX CREDIT
• Taxpayer has 3 options: refund, tax credit, or carry over excess withholding tax or
payment.
• However, once taxpayer exercises option to carry over, such option is irrevocable
for that taxable period and no application for refund or tax credit shall be allowed
(Paseo Realty v CA, GR 119286, Oct 13, 2004).
• While a taxpayer is given the choice to claim refund or tax credit, such election is
not final. Prior verification and approval by CIR is required. Such remedy is not
absolute and mandatory (ibid).
• Conditions for grant of refund or tax credit: (1) claim was filed within 2 years from
date of payment; (2) income payment was declared in tax return; and (3) fact of
withholding is established by copy of BIR Form 2307 (BF Bank v. CA, GR 155682, Mar 27,
2007).
• In case of dissolution of corporation, the 2-year period for claim for refund is
counted 30 days after SEC approval of plan for dissolution, which is considered the
date of payment of taxes withheld on earned income (BPI v. CIR, GR 144653, Aug 28,
2001).
• Withholding agent in the Philippines is a proper party to file a claim for refund or
tax credit for tax erroneously or illegally paid to a foreign corporation. A person
liable to tax is also a person subject to tax (Procter & Gamble v. CIR).
 WITHHOLDING TAX
• An income payment is subject to the expanded withholding
tax, if the following conditions concur:
• a. An expense is paid or payable by the taxpayer, which is
income to the recipient thereof subject to income tax;
• b. The income is fixed or determinable at the time of
payment;
• c. The income is one of the income payments listed in the
regulations that is subject to withholding tax, except when
payor is a Top 20,000 Corporation;
• d. The income recipient is a resident of the Philippines liable
to income tax; and
• e. The payor-withholding agent is also a resident of the
Philippines.
 WITHHOLDING TAX
• EXEMPT FROM EWT
• 1. National government and its instrumentalities, including provincial, city or municipal
governments and barangays, except government-owned or controlled corporations;
• 2. Persons enjoying exemption from payment of income taxes pursuant to the provisions
of any law, general or special, such as but not limited to the following:
• a. Sales of real property by a corporation which is registered with and certified by HLURB
or HUDCC as engaged in socialized housing project where the selling price of the house
and lot or only the lot does not exceed P180,000 in Metro Manila and other highly
urbanized areas and P150,000 in other areas;
• b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from
income tax under E.O. 226, R.A. 7916, and R.A. 7227;
• c. Corporations which are exempt from income tax under Section 30 of the Tax Code,
such as GSIS, SSS, PHIC, PCSO, and PAGCOR;
• d. General professional partnerships; and
• e. Joint ventures or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
• f. International carriers (by air or water) subject to 2.5% Gross Phil Billings
• TRANSFER TAXES
 ESTATE TAX
• Death is the generating source of the power to tax (Lorenzo v. Posadas). No
manual or physical transfer of the property is required for the estate tax to
accrue.
• The law in force at the time of death of the decedent governs.
• “Residence” refers to the permanent home, the place to which whenever
absent, for business or pleasure, one intends to return, and depends on
facts and circumstances, in the sense that disclose intent (Corre v. Tan Corre).
It is not necessarily the actual place of residence at the time of death.
• All properties (real or persona, tangible or intangible) and interests in
properties of the decedent at the time of his death shall be included in his
gross estate. However, properties transferred or interests relinquished by
the decedent before his death are excluded from his gross estate.
• The estate shall be appraised at its fair market value at the time of death
(even if period to file return and pay tax is extended by CIR).
– Real property: fair market value as determined by the CIR
– Shares of stocks: fair market value as shown in the audited financial
statements closest to the date of death of the decedent
 ESTATE TAX
• Gross estate:
• Conjugal Exclusive Total
– Real property
– Personal property
• Less: Deductions:
– Funeral expenses
– Claims against the estate
– Unpaid taxes and mortgages
– Medical expenses
– Family home
– Standard deduction
– Properties previously taxed
– Share of the surviving spouse
• Net Taxable Estate
• Estate tax due (First P200,000 is exempt; 5% from P200,001; and 20% on over P10
M)
 ESTATE TAX
• WHO IS THE DECEDENT AND WHAT PROPERTIES FORM PART
OF HIS GROSS ESTATE?
– Resident decedent: Citizen or resident alien
• Include in his gross estate all properties, real or personal, tangible
or intangible, regardless of location (within or without the
Philippines)
– Non-resident decedent: Non-resident alien
• Include in his gross estate all properties located in the Philippines
• For intangible properties, use the principle of mobilia sequuntur
personam – Taxation of intangibles follows the residence or
domicile of the owner.
 ESTATE TAX
• THESE INTANGIBLE PROPERTIES HAVE SITUS IN THE
PHILIPPINES (Sec. 104, NIRC):
– Franchise which is exercised in the Phil
– Shares, obligations or bonds issued by any corporation
organized in the Phil
– Shares, obligations or bonds issued by any foreign
corporation, 85% of the business of which is located in the
Phil or if such properties have acquired business situs in
the Phil (Wells Fargo case)
– Shares or rights in partnership, business or industry
established in the Philippines
 ESTATE TAX
• DECEDENT’S GROSS ESTATE (Sec. 85, NIRC)
– Decedent’s interest (in property owned or possessed)
– Transfers in contemplation of death
– Revocable transfers
– Property passing under a general power of appointment
– Proceeds of life insurance
– Transfers for insufficient consideration
– Capital of the surviving spouse (depending on date of
marriage and applicable property regime between the
spouses)
 ESTATE TAX
• “Transfers in contemplation of death” refers to the thought of
death, as a controlling motive, which induces the disposition
of the property for the purpose of avoiding the tax.
• “Revocable transfers” covers transfers, by trust or otherwise,
where the enjoyment was subject at the date of his death to
any change or where such power is relinquished in
contemplation of death.
– Deceased declared her conveyance was a donation mortis causa and
forbade the registration of the deed until after her death (Puig v.
Penaflorida).
– It does not cover bona-fide sale of property for an adequate and full
consideration in money or money’s worth.
 ESTATE TAX
• Transfer of property under a general power of appointment
– By will, or by deed executed in contemplation of death, or by deed
where he retains for his life or any period not ascertainable without
reference to his death, which in fact does not end before his death
– Possession or enjoyment of, or the right to the income from, the
property, or the right to designate the persons who shall possess or
enjoy the property or the income thereof
– Except in case of bona-fide sale for an adequate and full consideration
in money or money’s worth.
• Power of appointment is “general” when it gives to the donee the power
to appoint any person he pleases, thus having as full dominion over the
property as though he owned it. It is “special” when the donee can
appoint only among a restricted or designated class of persons other than
himself.
 ESTATE TAX
• Proceeds of life insurance
• Taxable:
– Beneficiary is the estate of the deceased, his executor or
administrator, irrespective of whether or not the insured retained the
power of revocation
– Beneficiary is other than the decedent’s estate, executor or
administrator, when the designation of beneficiary is not expressly
made irrevocable. Under the Insurance Code, insurance policies are
presumed revocable.
• Not Taxable:
– Accident insurance proceeds (not life insurance)
– Proceeds of group insurance policies
– Beneficiary (NOT decedent’s estate, executor or administrator) is
designated irrevocably
– GSIS, SSS, and AFP RSBS
 ESTATE TAX
• REQUISITES OF PROPERTY PREVIOUSLY TAXED
(VANISHING DEDUCTION)
– Death
– Identity of the property
– Inclusion of the property (in gross estate or gross gift)
– Previous taxation of the property (estate tax or gift tax)
– No previous vanishing deduction on the property (to
preclude application of vanishing deduction on same
property more than once).
– Percentage of deduction decreases over a period of 5
years or 20% reduction every year
 ESTATE TAX
• FORMULA OF VANISHING DEDUCTION
• Value taken of property previously taxed (as declared in prior decedent’s
gross estate)
• Less: Mortgage debt paid (1st deduction)
• Initial basis
• Divided by the value of gross estate of present decedent = __%
• Multiplied by expenses, indebtedness, etc and transfers for public
purposes
• Equals 2nd deduction
• Initial basis less 2nd deduction = Final basis multiplied by applicable rate of
vanishing deduction =
• Amount of vanishing deduction deductible from the estate of second
decedent
 DONOR’S TAX
• Donor’s Tax is a tax on the privilege to transfer property from a living
person to another living person.
– It is an excise tax, and not a property tax.
– It is imposed on the donor of property.
– Donee’s tax was already abolished and incorporated into donor’s tax.
• Purposes of donor’s tax
– To supplement estate tax
– To prevent avoidance of income tax thru the device of splitting income
• Donation of property must be accepted by the donee.
• Sale or exchange of property for less than adequate and full consideration
is subject to donor’s tax, except where the property is capital gains tax,
such as real property located in the Phil and shares of stock of a domestic
corporation.
• Donated property must be valued at fair market value at the time of the
donation.
 DONOR’S TAX
• Transfer of property may be in trust or otherwise, direct or
indirect. Transfer becomes complete and taxable only when
the donor has divested himself of all beneficial interest in
himself or his estate.
• Donor’s tax rates
– Donee is member of the family
• First P100,000 of net gift is exempt
• 2% on P100,001 to P200,000
• 15% on amount over P10 M
– Donee is a stranger – 30% of net gift
• “Stranger” is a person who is not a (a) brother, sister (whether
by whole or half-blood), spouse, ancestor, and lineal
descendant; or (b) relative by consanguinity in the collateral
line within the fourth degree of relationship.
 DONOR’S TAX
• Donor
– Individual
• Citizen and resident alien -- Taxable
• Non-resident alien – Taxable on property located in the Phil
– Corporation
• Domestic corporation and resident foreign corporation -- Taxable
• Non-resident foreign corporation – Taxable on property located in
the Phil
• Donation of conjugal
– Made by both spouses – TWO donations
– Made only by one spouse (Tang Ho v. Board of Tax Appeals
[now CTA]) – ONE donation
 DONOR’S TAX
• Cumulative computation of donor’s tax is required for all
donations by the same donor during the calendar year, but no
cumulative computation is required for donations to
strangers.
• Exempt donations
– To Phil govt for scientific, engineering, etc purposes
– To social welfare, cultural, and charitable organizations, not more than
30% shall be used for administration purposes
– To IRRI and Ramon Magsaysay Awards Foundation
– To National Museum and National Library
– To Intramuros Administration
• VALUE ADDED TAX
 BUSINESS TAXES
• VAT
• Taxable transactions
– Sale or lease of goods or
properties
– Sale of services
– Importation of goods
• Formula for computing VAT
– Output Tax
– Less: Input Tax
– VAT Payable/(Excess Input
Tax)
• NON-VAT/EXEMPT FROM
VAT TRANSACTIONS
– Transaction is subject to
Other Percentage Tax (Title V,
NIRC) and exempt from VAT
– VAT is imposed on transaction
in addition to Excise Tax, if
any
• Tax is imposed on Gross Receipts
or Gross Income
– Transaction is exempt from VAT,
OPT, and Excise Tax (e.g., sale
of agricultural food products in
their original state)
 VALUE ADDED TAX
• CHARACTERISTICS OF VAT
– Tax on value added of taxpayer
– Transparent form of sales tax
– Broad-based tax on consumption of goods, properties and
services in the Phil
– Indirect tax: tax is imposed on seller but burden of tax is
shifted to the buyer
– Tax is collected thru the tax credit method
• Output tax on sales; input tax on purchases
– No cascading of tax in VAT system
– “Tax-inclusive method” is adopted by the Phil
 VALUE ADDED TAX
• TAXABLE PERSONS
– Seller of goods or properties
• Goods or properties are consumed or for consumption in the Phil
• In the course of trade or business
• Sales of goods or properties are not exempt from VAT
– Seller of services
• Listed services are performed or to be performed in the Phil
• In the course of trade or business
• For a valuable consideration
• Services are not exempt from VAT
– Importer of goods
• Whether done in the course of his trade or business or for
personal consumption
 VALUE ADDED TAX
• Seller of real properties is subject to VAT
– Seller executes a document of sale (DAS or CTS)
– Real property is located in the Phil
– Seller is engaged in real estate business either as dealer, developer or
lessor
– Real property is held primarily for sale or for lease in the ordinary
course of trade or business
– Sale is not exempt from VAT
• However, Rev. Regs. No. 4-2007 (Feb 2007) provides that “if
the real property sold is used in his trade or business, said
transaction is subject to VAT, being incidental to the main
business” of the taxpayer, who is a VAT-registered taxpayer
engaged in other types of business.
 VALUE ADDED TAX
• Sale, barter or exchange
– Sale, barter or exchange has the same tax consequence
– There must be valuable consideration; hence, donation is exempt from VAT
– Deemed sale is subject to VAT (output tax) in order to recoup previous VAT
(input tax) allowed
– Excise tax, if any, interest, and delivery charges form part of gross selling price
• In the course of trade or business
– The regular conduct or pursuit of a commercial or an economic activity,
including transactions deemed incidental thereto, regardless of whether or
not the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
– Isolated transactions are not subject to VAT.
– Incidental income follows taxation of the principal activity.
 VALUE ADDED TAX
– The absence of profit in the performance of taxable services does not
make such activity for a fee exempt from VAT (CIR v. COMASERCO, GR 125355, Mar 30, 2000).
• Goods or properties must be located in the Philippines and
consumed or destined for consumption in the Phil.
– Special economic zones under RA 7916 (PEZA Law) and freeport zones
under RA 7227 (BCDA Law) are treated as foreign territories by fiction
of law. Hence, importation of goods by a special economic or freeport
zone enterprise shall be exempt from VAT and customs duties and will
be subject to VAT and duties only upon their withdrawal from the
customs custody.
– Destination Principle:
• Export sales of goods are zero-rated (0% VAT)
• Import of goods into the Phil is taxable at 12% VAT
 VALUE ADDED TAX
• Tax base is “Gross Selling Price” (GSP) - the total amount of money or its
equivalent, which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding the VAT.
• As a rule, output tax accrues on sale of goods or properties (other than a
real property) at the time of sale, when the VAT sales invoice is issued,
although none or only a part of the gross selling price is paid by the buyer
at the time of sale.
• Excise tax, if any, shall form part of GSP.
• Sales discounts determined and granted at the time of sale, which are
expressly indicated in the sales invoice do not form part of the tax base.
Grant of discount must not depend upon the happening of a future event
or the fulfillment of certain condition. They must be recorded in the books
of accounts of the seller.
• 20% sales discounts to senior citizens under RA 9257 (Amended Senior
Citizens Law) shall be deducted from gross sales before applying the VAT
rate.
 VALUE ADDED TAX
• To determine Gross Selling Price (100%), divide Total Invoice
Amount (112%) by 1.12.
• If Total Invoice Amount includes EWT, determine first the
Gross Selling Price.
• Tax base for installment sales of real property
– If initial payments (consisting of down payment and all monthly
amortizations in the year of sale) exceeds 25% of the gross selling
price, the tax base is the entire gross selling price as shown in the
document of sale, even though only a part of it has been received
during the period
– If initial payments during the year of sale do not exceed 25% of gross
selling price, the tax base is only the amount received
• Tax rates
– 12% beginning Feb 1, 2006 (RA 9337)
– 0% VAT on zero-rated sales
 VALUE ADDED TAX
• Sales of goods subject to 0% VAT
– Actual export sales
– Deemed export sales
• Internal or constructive export sales under BOI law (EO 226) and special
laws (RA 7916 and RA 7227).
– Ecozones and freeport zones are deemed foreign territories by fiction
of law (CIR v. Seagate Technology (2005); CIR v. Toshiba Information Equipment (2005)
– For as long as the goods remain within the zone, consumed or
destroyed there, they will be duty-free and tax-free (Coconut Oil Refiners
Asso v. Torres (2005)
• Effectively zero-rated sales (sales to ADB, embassies, etc)
– Sales of gold to BSP
– Foreign currency denominated sales
– Sales of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations
 VALUE ADDED TAX
• ZERO-RATED SALE
• Transaction is completely free of
VAT; rate charged by seller is zero
• VAT-registered seller can reclaim
input taxes passed on to it by
sellers of goods or services from
BIR in form of refund or tax credit
• Zero-rated sales are taxable sales
for purposes of registration as
VAT taxpayer to determine
threshold
• EXEMPT SALE
• Exemption removes the VAT
at the exempt stage
• Exempt taxpayer cannot
reclaim VAT passed on to it
by VAT-registered sellers
• Exempt sales are not
taxable sales for VAT
purposes
 VALUE ADDED TAX
• PERSONS SELLING TAXABLE SERVICES
– Construction and service contractors
– Brokers
– Lessors of property, real or personal
– Warehousing services
– Lessors or distributors of cinematographic films
– Persons engaged in milling, processing, manufacturing or
repacking goods for others
– Proprietors or operators or keepers of hotels, motels,
resthouses, pension houses, inns and resorts
– Proprietors or operators of restaurants and other similar
establishments
 VALUE ADDED TAX
• PERSONS SELLING TAXABLE SERVICES
– Dealers in securities
– Lending investors
– Transportation contractors on their transport of goods or
cargoes
– Domestic common carriers by air and sea between points
in the Philippines
– Sales of electricity (by generation, transmission, and
distribution companies)
– Services of franchise grantees, except water and gas
– Non-life insurance companies, except crop insurance
– Similar services, regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties
 VALUE ADDED TAX
• “Gross receipts” means the total amount of money or its
equivalent, representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and
advance payments actually or constructively received during
the taxable quarter for the services performed or to be
performed for another person, excluding the VAT, except
those amounts earmarked for payment to unrelated third
party or received as reimbursement for advance payment on
behalf of another, which do not redound to the benefit of the
payor.

• For sale of services, the test is not whether services have

been performed or not, but whether amount of
compensation or fee is received, actually or constructively.
The rule is: NO RECEIPT OF PAYMENT, NO VAT LIABILITY.
 VALUE ADDED TAX
• ZERO-RATED SALES OF SERVICES
– Processing, manufacturing or repacking goods for other persons doing
business outside the Phil, which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with BSP rules and regulations
– Services other than processing, manufacturing or repacking rendered
to a person engaged in business conducted outside the Phil or to a
non-resident person not engaged in business who is outside the Phil
when the services are performed, the consideration for which are paid
for in acceptable foreign currency and accounted for in accordance
with BSP rules and regulations (CIR v. BWSC Mindanao, GR 153205, Jan 22,
2007)
– Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Phil is a
signatory effectively subjects the sale of services to 0% rate
 VALUE ADDED TAX
• ZERO-RATED SALES OF SERVICES
– Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof
– Services performed by subcontractors and/or contractors
in processing, converting or manufacturing goods for an
enterprise whose export sales exceeds 70% of total annual
production
– Transport of passengers and cargo by domestic air or sea
carriers from the Phil to a foreign country
– Sale of power or fuel generated thru renewable sources of
energy (biomass, solar, wind, hydropower, geothermal and
other emerging sources)
 VALUE ADDED TAX
• Tax Code not only requires that the services other than “processing,
manufacturing or repacking of goods” and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Sec 102(b)(2) is that the
recipient of such services is doing business outside the Phil.
• While this requirement is not expressly stated in the 2nd paragraph of Sec. 102(b),
this is clearly provided in the 1st paragraph of Sec 102(b) where the listed services
must be “for other persons doing business outside the Phil.”
• The above phrase not only refers to services enumerated in the first paragraph,
but also pertains to the general term “services” appearing in the second
paragraph.
• Otherwise, those subject to the regular VAT under Sec 102(a) can avoid paying the
VAT by simply stipulating payment in foreign currency inwardly remitted by the
recipient of services. To interpret Sec. 102(b)(2) to apply apply to a payer-recipient
of services doing business in the Phil is to make the payment of regular VAT
dependent on the generosity of the taxpayer.
• A tax is a mandatory exaction, not a voluntary contribution.
 VALUE ADDED TAX
• Significantly, the amended Section 108(b) [previously Sec 102(b)] of the present
Tax Code clarifies this legislative intent. For zero-rating of services, it must be
rendered to a person engaged in business conducted outside the Phil.
• The payer-recipient of respondent’s services is the Consortium which is a joint
venture doing business in the Phil. While the Consortium’s principal members are
non-resident foreign corps, the Consortium itself is doing business in the Phil. This
is shown in BIR Ruling 23-95, which states that the contract between Consortium
and NPC is for a 15-year term. Considering the length of time, the Consortium’s
operation and maintenance of NPC’s power barges cannot be classified as a single
or isolated transaction.
• This case is different from CIR v. American Express International, Inc. (Phil Branch),
because in the latter case, the recipient of services is AEII (HK Branch) doing
outside the Phil (CIR v. BWSC Mindanao, Inc., GR153205, Jan 22, 2007).
• CIR’s filing of its Answer before the CTA challenging claim for refund effectively
serves as a revocation of VAT Ruling 03-99 and BIR Ruling 23-95. However, such
revocation cannot be given retroactive effect since it will prejudice respondent.
 VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– A. Sale or importation of agricultural and marine food products in their
original state; livestock and poultry generally producing food for
human consumption; and breeding stock
– B. Sale or importation of fertilizers; seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry feeds (except specialty feeds for race
horses, fighting cocks and other pets)
– C. Importation of personal and household effects belonging to
residents of the Phil returning from abroad and non-resident citizens
coming to resettle in the Phil
– D. Importation of professional instruments and implements, and
personal effects (except vehicle, vessel, aircraft, machinery for use in
manufacture) belonging to persons coming to settle in the Phil
– E. Services subject to percentage tax under Title V
 VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– G. Medical, dental, hospital and veterinary services, except those
rendered by professionals
– H. Educational services rendered by private educ institutions
accredited by DepEd, CHED, TESDA, and those rendered by
government educational institutions
– I. Services rendered by individuals pursuant to an employer-employee
relationship
– O. Export sales by persons who are not VAT-registered
– P. Sale of real property not primarily held for sale to customers or for
lease in the ordinary course of trade or business, or real property for
low-cost and socialized housing, residential lot valued at P1.5 M or
below, house and lot and other residential dwellings valued at P2.5 M
or below
 VALUE ADDED TAX
• VAT-EXEMPT TRANSACTIONS
– Q. Lease of a residential unit with a monthly rental not
exceeding P10,000
– R. Sale, importation, printing or publication of books and
any newspaper or magazine which appear at regular
intervals with fixed prices and is not devoted principally to
publication of paid advertisements
– V. Sale or lease of goods or property or the performance
of services other than transactions mentioned above, the
gross sales or receipts do not exceed P1.5 M
 VALUE ADDED TAX
• Sale of medicines by the hospital pharmacy to in-patients is exempt from VAT, but
sale to out-patients is subject to 12% VAT (St. Luke’s Medical Center v. CTA and CIR,
1998).
• Tolling fees received by a hotel for PLDT is not part of its gross receipts
• Payment of VAT by the hotel on fees for providing limousine service to its client is
correct. It is not subject to the 3% common carrier’s tax. Claim for tax credit is
denied (Manila Mandarin Hotel v. CIR)
• Gross receipts of theatre owner or operator from sales of tickets to moviegoers are
exempt from VAT. Theatres and movie houses are not included in the enumeration
of taxable services in the VAT law. Our tax laws, past and present, did not adopt
more specific terms for “sale or exchange of services” to include showing of films
in public (SM Prime Holdings v. CIR, CTA Case 7079, 2006).
• PAGCOR is exempt from VAT pursuant to its charter, PD 1869. Being a special law,
PD 1869 prevails over RA 7716, a subsequent general law. To be valid, repeal of
special law should be express (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007).
 VALUE ADDED TAX
• CATEGORIES OF INPUT TAXES
– Input tax credit on importations of goods and current local purchases
of goods, properties and services
• Input tax on capital goods must be amortized over certain period
– Transitional input tax credit
– Presumptive input tax credit
– Withholding input tax credit
– Excess input tax credit
• Only VAT-registered persons are entitled to credit input taxes
against their output tax.
• Non-registration as a VAT taxpayer does not exempt him from
VAT output tax liability on his taxable sales of goods,
properties or services.
 VALUE ADDED TAX
• For sale of services, the rule is: NO PAYMENT OF FEE BY BUYER
AND ISSUANCE OF VAT RECEIPT BY SELLER, NO INPUT TAX FOR
BUYER!
• Transitional Input Tax
– 2% of value of inventory or actual VAT paid on such goods, materials
and supplies, whichever is higher
• Presumptive Input Tax
– Persons or firms engaged in the processing of sardines, mackerel and
milk, and in manufacturing refined sugar and cooking oil, and packed
noodle-based instant meals are entitled to presumptive input tax
equivalent to 4% of gross value in money of their purchases of primary
agricultural products which are used as inputs to their production (Sec.
111, NIRC)
 VALUE ADDED TAX
• Tax reliefs of VAT taxpayers on their excess input
taxes (EIT) attributable to zero-rated and effectively
zero-rated sales
– Carry over the excess input tax to the next quarter, until
excess is utilized
– File a claim for refund
– File a claim for tax credit, within two years after the close
of taxable quarter where the sales were made
• For non-zero-rated sales, remedy available is only to
carry over EIT to the next quarter(s)
 VALUE ADDED TAX
• Prescriptive period commences from the close of the
taxable quarter when the sales were made and not
from the time the input VAT was paid nor from the
time the official receipt was issued. Thus, when a
zero-rated VAT taxpayer pays its input VAT a year
after the pertinent transaction, said taxpayer only
has a year to file a claim for refund or tax credit of
the unutilized creditable input VAT. The reckoning
frame would always be the end of the quarter when
the pertinent sales or transaction was made,
regardless when the input VAT was paid (CIR v. Mirant
Pagbilao Corp, 2008).
• TAX REMEDIES UNDER THE TAX CODE
 ASSESSMENT CYCLE
• Filing of tax return • Law prescribes due date
• Tax audit by BIR • 120 days + 120 days
• Informal Conference
• Preliminary Assessment
Notice (PAN)
• Reply to PAN • 15 days from receipt
• Final Assessment Notice
(FAN) • 3 years or 10 years
• Protest to FAN • 30 days from receipt
• Supplemental Protest • 60 days from filing of
protest
 ASSESSMENT CYCLE
• BIR ACTION
– Cancell assessment • 180 days from filing of
– Deny protest protest, if any, or
– Revise assessment supplemental protest
• BIR INACTION
• Appeal to CTA • 30 days from date of receipt
of denial of protest or lapse
of 180 days
• Appeal to CTA en banc • 15 days from date of
receipt; addl 15 days may
be granted by CTA after
payment of docket fee.
 REMEDIES OF TAXPAYERS

• ADMINISTRATIVE REMEDY
– BEFORE PAYMENT OF TAX
• PROTEST OF ASSESSMENT
– AFTER PAYMENT OF TAX
• TAX CREDIT, OR
• REFUND
• JUDICIAL REMEDY
– APPEAL TO COURT OF TAX APPEALS
 NO PRE-ASSESSMENT NOTICE REQUIRED
• Deficiency tax is the result of mathematical error
• Discrepancy is between amount of tax withheld and amount
remitted to BIR
• Taxpayer who opted to claim refund/tax credit also carried
over and applied the same against tax of next taxable quarter
• Excise tax due has not been paid
• Constructive importation (Sec. 228, NIRC)
 ASSESSMENT

• WHAT IS AN ASSESSMENT?
– Notice that taxpayer owes government a sum
of money
– Contains computation of tax liability and a
demand for payment of tax within a certain
period (CIR v. Pascor Realty & Dev Corp)
• PURPOSE OF ASSESSMENT
– To establish tax liability where an assessment is
required
 ASSESSMENT
• FORMS OF ASSESSMENT
1. Formal assessment notice (FAN)
2. Collection letter
a. Letter demanding payment of erroneously
refunded amount (Guagua Electric Co v. CIR), or amount paid
by bouncing check (Republic v. Limaco & de Guzman)

b. Follow-up or collection letter duly received by

taxpayer within the prescriptive period (TAXPAYER DENIED
RECEIPT OF ORIGINAL DEMAND LETTER AND ASS. NOTICE) (Republic v. Nielson & Co)

NOTE: Letter from revenue officer granting opportunity to disprove

findings (SHOW-CAUSE LETTER) is NOT an assessment
 ASSESSMENT

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

– RETURN WAS FILED
• Not false or fraudulent – 3 years from filing of return
• False or fraudulent – 10 years from date of discovery of false
or fraudulent return
– NO RETURN WAS FILED
• 10 years from date of discovery of omission
• If assessment due falls on Saturday, government has next business
day within which to assess (CIR v. Western Pacific Corp)
 COUNTING OF PERIOD
• TAXABLE YEAR
– Normal year (365 days)
– Leap year (366 days)
• If there is a leap year within the prescriptive period (3 years
from filing of return), a year shall be deemed to have 365 days
only (NAMARCO v. Tecson, 29 SCRA 70). Thus, assessment issued on April 15 of the third
year from filing of return shall be treated as invalid due to prescription.
• EO 292 (Administrative Code of 1987), being the more recent law than
Civil Code, governs the computation of legal period. Accor-dingly, a year
shall be understood to be 12 calendar months; a month of 30 days, unless
it refers to a specific calendar month (CIR vs. Primetown Property Group, GR No.
162155, Aug 22, 2007).
 ASSESSMENT

• WHEN IS ASSESSMENT DEEMED MADE?

– Issue date of assessment notice is not reckoning point
for prescription
– Date the assessment notice and demand letter is
released, mailed or sent to taxpayer constitutes actual
assessment (Republic v. Limaco & de Guzman)
– Presumption of receipt in the regular course of mail
applies, if it was properly addressed, postage was
prepaid, and was mailed. If one element is absent,
presumption does not lie (Enriquez v. Sunlife of Canada)
 COMPLIANCE WITH SEC. 228
• BIR disallowed certain itemized deductions and considered some cost items as
subject to 5% tax, without indicating factual and legal bases. During the
preliminary stage, BIR informed taxpayer thru preliminary 5-day letter and
furnished copy of audit working paper. CTA considered assessment as void. CA
affirmed CTA decision.
• SC ruled above documents were not valid substitutes for mandatory notice in
writing of legal and factual bases of assessment. These steps were mere
perfunctory discharge of CIR’s duties in correctly assessing a taxpayer. Just
because CIR issued an advice, preliminary letter and final notice does not
necessarily mean taxpayer was informed of law and facts. Law requires that they
be stated in DL and FAN. Otherwise, the express provisions of Art. 228 of NIRC and
RR 12-99 would be rendered nugatory. The alleged “factual bases” in the advice,
preliminary letter and audit working papers did not suffice.
• Moreover, due to the absence of a fair opportunity to be informed of legal and
factual bases of assessment, the assessment is void. Old law merely required
taxpayer to be notified of assessment. This was changed in 1998 (CIR vs. Enron Subic
Power Corp, GR No. 166387, Jan. 19, 2009).
 ASSESSMENT NOTICE
• Preliminary collection letter presupposes the
existence of valid assessment notice.
• Preliminary collection letter shall serve as
assessment notice, if it was initial notice received by
taxpayer, taxpayer did not receive any assessment
notice, and no follow-up letter was sent or
preliminary conference was arranged.
• 30-day period to protest shall commence from date
of receipt of preliminary collection letter (United International
Pictures vs. CIR, CTA Case No. 5884, Jan. 5, 2002)
 PROTEST
• Valid protest of an assessment is one assailing the
formal assessment notice (FAN) and the letter of
demand, not the preliminary assessment notice
(PAN). PAN is required merely to inform the taxpayer
of the proposed assessment.
• Failure to protest within 30 days will make the formal
assessment notice final and executory.
• Failure to respond to PAN within 15 days will render
taxpayer in default and a FAN would subsequently be
issued (Cebu Rosver Pawnshop vs. CIR, CTA Case No. 6425, Mar. 17, 2003).
 PROTEST
• CIR vs. BPI
• Oct 28, 1988 – CIR assessed petitioner for def. percentage tax and DST for
1986
• Dec 10, 1988 -- BPI replied stating “Your def assessments are no
assessments at all… As soon as this is explained and clarified in a proper
letter of assessment, we shall inform you of the taxpayer’s decision on
whether to pay or protest the assessment.”
• June 27, 1991 -- BPI received letter from BIR, stating “.. Your letter failed to
qualify as a protest under RR 12-85… still we obliged to explain the basis of
the assessments.”
• July 6, 1991 -- BPI requested a reconsideration of assessments.
• Dec 12, 1991 -- BIR denied protest, which was received on Jan 21, 1992.
• Feb 18, 1992 -- BPI filed petition for review in CTA.
 PROTEST
• Nov 16, 1995 -- CTA dismissed petition for lack of jurisdiction; assessments had
become final and unappealable.
• May 27, 1996, CTA denied reconsideration.
• On appeal, CA reversed CTA’s decision. It ruled Oct 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual
bases therefor. It declared the proper assessments were those in May 8, 1991
letter which provided the reasons for claimed deficiencies. CIR elevated case to
SC.
• CIR did not inform BPI in writing of the law and facts on which assessments were
made. He merely notified BPI of his findings, consisting of the computation of the
tax liabilities and a demand for payment within 30 days from receipt. He relied on
former Sec. 270, NIRC, prior to its amendment by RA 8424.
• In CIR vs.Reyes, GR 159694, Jan 27, 2006, the only requirement was for the CIR to
“notify” or inform the taxpayer of his “findings.” Nothing in the old law required a
written statement to the taxpayer of the law and the facts. The Court cannot read
into the law what obviously was not intended by Congress. That would be judicial
legislation.
 PROTEST
• Jurisprudence simply required that assessments contain a computation of
tax liabilities, the amount to be paid plus a demand for payment within a
prescribed period.
• The sentence “the taxpayer shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the assessment shall
be void.” was not in old Sec. 270, but was only inserted in Sec. 228 in 1997
(R.A. 8424). The inserted sentence was not an affirmation of what the law
required; the amendment by RA 8424 was an innovation and could not be
reasonably inferred from the old law.
• The Oct 28, 1998 notices were valid assessments, which BPI should have
protested within 30 days from receipt. The Dec 10, 1988 reply it sent to
BIR did not qualify as a protest, since the letter itself stated “… we shall
inform you of the taxpayer’s decision on whether to pay or protest the
assessment.”
• BPI’s failure to protest the assessment made it final and executory. The
assessment is presumed to be correct (CIR vs BPI, GR 134062, Apr 17, 2007).
 DENIAL OF PROTEST
• DIRECT DENIAL
– Letter of CIR states in clear terms his denial of
protest.
• INDIRECT DENIAL
– Final Notice Before Seizure constitutes as a
decision on a protested assessment; hence,
appealable to the CTA (CIR vs. Isabela Cultural Corp, 361 SCRA 71
(2004)

– Issuance by BIR of Warrant of Distraint and Levy

constitutes a denial of the protest.
 INACTION OF COMMISSIONER
• The taxpayer has two options:
– Wait for the decision of the Commissioner on the protest and file the appeal
to the CTA within 30 days from date of receipt of the denial of protest; or
– File appeal to the CTA within 30 days from lapse of the 180-day period (Lascona Land
Co vs CIR, CTA Case No. 5777, Jan 4, 2000)
• BIR appealed CTA decision to CA.
• In the meantime, RA 9282 was signed by PGMA on Apr 2, 2004, which provides
that inaction of CIR during the 180-day period is construed as a denial of protest.
• Decision of the CTA on Lascona case was reversed by the CA. If there is no appeal
filed within 30 days after the lapse of 180 day period, the matter/decision under
protest becomes final. The word “decision” in Sec. 228 cannot be strictly ck strictly
construed as referring only to decision per se of CIR but should be considered
synonymous with disputed assessment (CIR vs. Lascona Land Co, CA GR SP No. 58061,
Oct 25, 2005).
• CA decision was appealed to SC, where it is still pending.
 COUNTING OF 180-DAY PERIOD
• Since the petitioner did not submit any
document in support of his protest within
sixty days from the filing of its protest, the
counting of the 180-day period was from the
filing of the protest. Accordingly, when
respondent failed to render his decision within
180 days from the filing of his protest,
petitioner has 30 days therefrom to file an
appeal to CTA (Oceanic Wireless Network vs. CIR, CTA Case No. 6111,
Nov. 3, 2004)
 APPEALS
• ADMINISTRATIVE APPEAL
– DECISION OF REGIONAL DIRECTOR MAY BE APPEALED TO COMMISSIONER
– PRIOR EXHAUSTION OF ADM REMEDIES GIVES ADM AUTHORITIES PRIOR
OPPORTUNITY TO DECIDE CONTROVERSIES WITHIN THEIR COMPETENCE
(Aguinaldo Industries Corp. v. CIR)
• JUDICIAL APPEAL
– FINAL DECISION OF COMMISSIONER MAY BE APPEALED TO COURT OF TAX
APPEALS
• Where a taxpayer filed a valid protest within 30 days from date of
receipt of assessment and on same day also filed with CTA a
petition for review, there is yet no final decision of CIR on the
protest that is appealable to CTA (Moog Controls Corp vs. CIR, CTA Case
No. 6700, Oct 18, 2004)
– CTA DIVISION DECISION IS APPEALED TO CTA EN BANC
– COURT OF APPEALS EN BANC DECISION APPEALED TO SUPREME COURT
 PETITION FOR REVIEW
• Petitioner maintains that its counsel’s neglect in not filing
petition for review within reglementary period (due to
counsel’s secretary) was excusable.
• The 30-day period to appeal is jurisdictional and failure to
comply would bar the appeal and deprive the CTA of its
jurisdiction. Such period is mandatory, and it is beyond the
power of the courts to extend the same (Chan Kian vs CTA, 105 Phil 906
(1959).

• The options granted to the taxpayer in case of inaction by the

CIR is mutually exclusive and resort to one bars the
application of the other. Petition for review was filed out of
time (more than 30 days after lapse of 180 days), and
petitioner did not file MR or appeal; hence, disputed
assessment became final and executory.
 PETITION FOR REVIEW
• After availing of the first option (filing petition for
review with CTA), petitioner cannot successfully
resort to the second option (awaiting final decision
of CIR) on the pretext that there is yet no final
decision on the disputed assessment because of CIR’s
inaction.
• Assessments are presumed to be correct unless
otherwise proven (RCBC vs CIR, GR No. 168498, Apr 24, 2007).
 PRESCRIPTION
• The 3-year period within which to assess any deficiency tax
commences after the last day prescribed by law for the filing
of the income tax return.
• For VAT, each taxable quarter shall have its own prescriptive
period. VAT return is filed quarterly and a final return is not
required at the end of the year.
• In case of creditable withholding taxes, the 3-year period shall
be counted shall be counted from the last day required by law
for filing monthly remittance return. Each monthly return is
already a complete return. The annual information return
submitted to BIR is just an annual report of income payments
and taxes withheld and is not in the nature of a final
adjustment return (HPCO Agridev Corp. vs. CIR, CTA Case No. 6355, July 18, 2002)
 PRESCRIPTION
• Request for reconsideration or clarification on the
assessment made by the taxpayer does not suspend
the running of the statute of limitations. However,
request for reinvestigation may suspend the running
of prescriptive period when it has been granted by
CIR (BPI vs. CIR, GR No. 139736, Oct 17, 2005)
• Mere filing of the protest letter without requesting
for a reinvestigation does not suspend the running of
the prescriptive period to collect (Phil Global Communications vs.
CIR, CTA EB Case No. 37, Feb. 2005)
 REQUISITES OF WAIVER
• Waiver must be in the form identified in RMO 20-90;
• Expiry date of period agreed upon is indicated in the waiver;
• Waiver form requires statement of the kind of tax and amount of tax due;
if not indicated in the waiver, there is no agreement;
• Waiver is signed by taxpayer or his authorized representative. In case of
corporation, waiver is signed by any responsible official.
• CIR or his authorized representative shall sign waiver indicating that BIR
has accepted and agreed to the waiver;
• Date of acceptance by BIR is indicated;
• Date of execution and acceptance by BIR should be before expiration of
prescriptive period;
• Waiver is executed in 3 copies; second copy is for taxpayer. Fact of receipt
by the taxpayer should be indicated in the original copy (Pfizer, Inc. vs. CIR, CTA
Case No. 6135, Apr. 21, 2003; FMF Dev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20, 2003)
 REQUISITES OF WAIVER
• Waiver must indicate definite expiration date agreed upon by
CIR and taxpayer
• Waiver should state date of acceptance by BIR. Without the
date, it cannot be determined whether waiver was accepted
before expiration of 3-year period.
• Taxpayer must be furnished copy of accepted waiver. Under
RMO 20-90, second copy of waiver is for taxpayer. Fact of
receipt by taxpayer of his copy should be indicated in the
original copy (Phil. Journalists vs. CIR, supra).
• RMO 20-90 must be strictly construed against the
government; they are mandatory in character. More-over, the
waiver of the statute of limitations is not a waiver of the right
to invoke the defense of prescription (CIR vs. FMF Dev Corp, GR No.
167765, June 30, 2008).
 FRAUD
• TAX AVOIDANCE is the tax saving device within the means sanctioned by
law, used in good faith and at arms length.

• TAX EVASION is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or
criminal liabilities. It connotes 3 factors: end to be achieved; an
accompanying state of mind that is described as evil, willful or deliberate;
and course of action which is unlawful.

• Altonaga’s sole purpose of acquiring and transferring title of properties on

same day was to create tax shelter. Sale to him by CIC was a sham and
without business purpose. Sale by Altonaga to RMI was tainted with fraud.
Even before the purported sale of property by CIC to Altonaga, it received
P40 M from RMI. That was reflected by RMI in its financial statement (CIR
vs. Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004)
•
• END OF PRESENTATION

• Atty. Vic C. Mamalateo

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

• Atty. Vic C. Mamalateo

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