COVERAGE OF TAXATION LAW REVIEW a) b) Basic Principles of Constitutional Limitations Due process clause which could be either substantive due process and procedural due process clause Equal protection clause Read: Ormoc Sugar Central vs. City Treasurer 22 SCRA 603 Tiu vs. CA 301 SCRA 178 Article III sec. 1 of the 1987 Constitution non-impairment clause Article III sec. 5 freedom of religion Article III sec. 20 non-payment of poll tax Article VI sec. 28 par. 2 flexible tariff clause Article VI sec. 28 par. 3 exemption from real property tax Read: Herrera vs. Quezon City 3 SCRA 186 Abra vs. Hernando 107 SCRA 104 Abra Valley vs. Aquino 52 SCRA 106 Philippine Lung Center vs. Quezon City 433 SCRA 119 Article VI sec. 28 par. 4 qualified majority in tax exemption International double taxation CIR vs. Johnson 309 SCRA 87 j) Doctrine of equitable recoupment k) Doctrine of Set-off or compensation in taxation Republic vs. Mambulao 4 SCRA 622 Domingo vs. Garlitos 8 SCRA 443 Francia vs. IAC 162 SCRA 753 Caltex vs. COA 208 SCRA 726 Philex vs. CIR 294 SCRA 687 I. Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E) Overseas Contract Workers Sec. 23 (C), 24 (A) (b) Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c) Non-Resident Aliens Engaged in trade or business sections 25 (A) (1) Non-Resident Aliens Not Engaged in trade or business sec. 25 (B) Aliens Employed in Multi-National Corporations sec. 25 (C) and Rev. Reg. 12-2001 Aliens Employed in Offshore Banking Units sec 25 (D) Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers Domestic Corporations sec. 23 (E), and sec 27 of NIRC Resident Foreign Corporations sec. 22 (H) and (28)A Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC
c) d) e) f) g)
h) i)
Different Kinds of Income Tax 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A) 2. Gross Income Tax secs. 25 (B) first part and 28 (B) (1) 3. Final Income Taxes sec. 57 (A) 4. Minimum Corporate Income Tax of 2% of the Gross Income secs. 27 (E), 28 (A) (2) 5. Improperly Accumulated Earnings Tax of 10% of its taxable income sec. 29 NIRC Rev. Reg. 2-2001
Optional Corporate Income Tax of 15% of its gross income sections 27 (A) 4th to 10th par. And 28 A(1) but only up to the 4th paragraph
II. Income Tax Law Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of: 1. Income Taxpayers 2. Income Taxes 3. Sources of Income sec. 42 of NIRC - Income Taxpayers a) Individuals b) Corporation c) Estates and Trusts -Individuals are classified Resident Citizens sec. 23 (A), sec 24 (A) (a)
-Proceed to section 42 and 23 of the NIRC NDC vs. Comm 151 SCRA 472 Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14 Anscor vs. Comm. 301 SCRA 152 -Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a) Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC
IV. Donors Tax Law Sections 98-104 G and Cumulative methods of filing donors tax returns sections 99 (A), 103 (A) (1) and RR 2-2003 Sections 100 and 85 (9) V. Value Added Tax - Sections 105-115 -Read RA 9337 -Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005 VI. Remedies Under the Internal Revenue Code -Sections 202-229 -RR 12-99 Phoenix vs Comm 14 SCRA 52 Basilan vs. Comm. 21 SCRA 17 Yabut vs. Flojo 115 SCRA 278 Union Shipping vs. Comm 185 SCRA 547 Comm. vs. TMX 205 SCRA 184 Comm. vs. Philamlife 244 SCRA Comm. vs. CA & BPI 301 SCRA 435 BPI vs. Comm. 363 SCRA 840 -Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of the LGC, sec. 1603 of Tariff and Customs Code -Protest sec. 228 of NIRC and RR 12-99 sec. 195 of LGC, 252 LGC, sec. 2313 of Tariff & Customs Code and RA 7651 VII. Local Taxation - Sections 128-196 of LGC -Proceed 1st to sec. 186 read Bulacan vs. CA 299 SCRA 442 -Then proceed to 187 -Then to 151 -128 -Under sec. 133 (e) read Palma vs. Malangas 413 SCRA 572 -Under 133 (h) read Pililia vs. Petron 198 SCRA 82 -Under 133 (i) read First Holdings Co. vs. batangas City 300 SCRA 661
VIII. Real Property Tax Sections 197-294 Sec. 235 LRT vs. Manila 342 SCRA 692 Cebu City vs. Mactan 261 SCRA 667 IX. Tariff & Customs Code Special Customs Duty sec. 301-304 of TCC Regukar Customs Duty sec. 104 of TCC RA 7631
Rules in the Classroom: 1. do not be absent if you are absent, you have to transcribe what happened in class when you were out. The next meeting you attend class, consider yourself a resident of balic-balic, babalikbalikan ka sa recit. Exception: if you get married. 2. read the assignment. Wag zapote ang aral. 3. holiday make up class probably on a Sunday 4. allowed to glance at your notes, wag lang pahalata/garapal 5. materials:
Q: What do you mean by INHERENT? A: The power to tax is not provided for in the law, statute or constitution; it depends on the existence of the state. No law or legislation for the exercise of the power to tax by the national government. Q: Do local governments exercise this inherent power? A: No. Only the National Government exercises the inherent power to impose taxes. Q: The taxing power of local governments is a DELAGATED power. Delegated by whom? A: Delegated by Congress through law in case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region. Cities, provinces and municipalities power granted under Art. X Sec. 5&6 of the Constitution
1.
Art. 8, Sec. 17 (3), 1973 Constitution charitable institutions, churches, parsonages or convents appurtenant thereto, mosque, and non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY, and EXCLUSIVELY used for RELIGIOUS and CHARITABLE purposes shall be exempt from taxation. (educational entity was removed) Art. 6, Sec. 28 (3), 1987 Constitution charitable institutions, churches, and parsonages or convents appurtenant thereto, mosque, non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY used for RELIGIOUS, EDUCATIONAL and CHARITABLE purposes shall be exempt from taxation. (It is important to know the governing Constitution; the grounds on Real Estate Tax differ/varies.) HERRERA v. QC-BOARD OF ASSESSMENT 3 SCRA 186 (1935 Constitution) Q: What is involved in this case? A: A charitable institution, St. Catherines Hospital. The hospital was previously exempt from taxation until it was reclassified and subsequently assessed for the payment of real property tax. The contention of the respondent is that the hospital was no longer a charitable institution because it accepts pay-patients, it also operates a school for midwifery and nursing, and a dormitory. Since it is not exclusively used for charitable purposes it is not exempt from taxation. (properties are subject to assessment) H: The Court ruled that petitioner is not liable for the payment of real estate taxes. It is a charitable institution, thus exempt from the payment of such tax. The hospital, schools and dormitory are all exempt fro taxation because they are incidental to the primary purpose of the hospital. NOTE: this arose during the 1935 Constitution. (Note: Incidental to the Primary Purpose of the Hospital) Exempted by virtue of incidental purpose was merely coined by the Supreme Court. Thus, it does not apply to other taxes except Real Estate Tax. PROVINCE OF ABRA v. HERNANDO 107 SCRA 104 (1981) Q: What is involved in this case? A A religious institution was involved in this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratory relief after assessed for
Q: A:
Q: A:
( RP- US Treaty has no matching tax credit provision) (Art. 13(2)(b)(III)) (The lowest rate of Phil. Tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a 3rd StateGermany 10% on Royalties) (Matching Credit tax paid in country at sources may be credited to the tax due at the country of national) (Under similar circumstances- the 2 countries provides that a similar tax is being paid in the country at sources and the country of the national) (Most taxes are direct tax except VAT) (Set-off subjects are debts: Tax is not a debt and taxpayer and government are not mutual debtor and creditor) (tax and debt are of different sources)
Q: How many kinds of individual taxpayers are there? A: There are seven (7). Namely: 1. Resident Citizen (23A and 24A);
2.
10
Resident Citizen (RC) Q: How many types of RC? A: There are two (2), namely: 1. RC residing in the Philippines; and 2. Filipino living abroad with no intention to reside permanently therein. Q: If you are abroad, and you have the intention to permanently reside therein, can you still be considered a RC? A: Yes. If such intention to permanently reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC. OCW and Seamen OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered. A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. Consequently, if he is not a member of the complement or even if he is but the vessel where he works is not exclusively engaged in international trade, said seaman is not deemed to be an OCW. He is either a RC or a NRC depending on where he stays most of the time during the taxable year. If he stays in the Philippines most of the time during the taxable year, he is considered a RC, otherwise, a NCR. If you are a seaman in the US Navy, you are not the one being referred to. The importance of ascertaining whether or not a seaman is a RC or a NRC, is that if he is a RCm he is taxable on ALL income derived from all sources within and without. If he is a NRC, he is taxable only on income derived form sources within the Philippines. Q: What is the significance of using OCW?
11
1. 2. 3.
Domestic Corporation (DC) created or organized under Philippine laws. Resident Foreign Corporation (RFC) corporation created under foreign law, and engaged in trade or business. Nonresident Foreign Corporation (NRFC) created under foreign law, and NOT engaged in trade or business.
Q: What are deemed corporations under the NIRC? A: The term corporation shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government. 1. Partnerships and others no matter how created 2. Joint Stock Companies 3. Joint Accounts 4. Associations 5. Insurance Companies CIR v. COURT OF APPEALS The phrase no matter how created or organized was interpreted. Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation. Reason: because of the possibility of earning profits form sources within the Philippines. Q: Are partnerships always considered corporations? Is there no exception? A: General Rule: a partnership is a corporation. Exception: General Professional Partnerships (GPP) Q: What is a GPP? A: It is a partnership formed by persons for the sole purpose of exercising their profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder) Two (2) Kinds of GPP formed for: 1) Exercise of a profession not a corporation; exempt from Corporate Income Tax (CIT)
Their status may either be RA or NRA because Section 25 C and D does not distinguish. Liable to pay 15% from Gross Income received from their employer
Income earned from all OTHER sources shall be subject to the pertinent income tax, as the case may be. Aliens Employed in Multinational and Offshore Banking Units Q: How are they classified? A: If they derived income from other sources aside from their employer, you may classify them either as RA, NRAETB, or NRANETB. Aliens Employed Subcontractors in Petroleum Service Contractors and
Status: ALWAYS NRA. If they derive income from other sources, such income shall be subject to the pertinent income tax, as the case may be.
12
Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent. The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien.
13
KINDS OF INCOME TAX Q: How many kinds of income tax? A: There are Six (6), namely: 1. Net Income Tax (NIT); 2. Gross Income Tax (GIT); 3. Final Income Tax (FIT); 4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT) 5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income; 6. Optional Corporate Income Tax of 15% on the Gross Income I. NET INCOME TAX
Q: what is the formula? A: Gross Income Deductions and Personal Exemptions = Taxable Income Taxable Income x Tax Rate = Net Income Taxable Net Income Tax Credit = Taxable Net Income Due Net Income means Gross Income less deductions and Formula: GI - deductions Net Income x Tax Rate Income Tax Due Q: What is the rate? A: Individual: 32% Corporation: 35% NOTE: the formula allows for deduction, personal exemptions and tax credit. Q: What are the other terms for NIT? A: NIRC: a. taxable income b. gross income (wlang kasunod) only income tax from improperly accumulated earnings does not use this term. 1. CFA: to be included in the gross income
14
Characteristics: Q: Who are not liable to pay NIT? A: 1. NRANETB (liable for GIT); 2. NRFC (GIT also); 3. With certain modifications, AEMOP, if they derive income from other sources; Q: Is the taxable net income subject to withholding tax? A: It is subject to withholding tax if the law says so. Q: What if the law is silent? A: If the law is silent, it is not subject to withholding tax. Q: What is another term for withholding tax? A: It is also known as the creditable withholding tax system under the income tax law. Q: Do we have to determine if there is an actual gain or loss? A: Yes because the formula for deductions, etc. Q: If you fail to pay, will you be held liable? A: Yes, you will be held liable. II. GROSS INCOME TAX (GIT)
Q: What is the formula? A: (Each Income) x (Particular Rate) Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25% or 35%, as the case may be, in final income tax, you cannot join all the income in one group because each income has a particular rate. Q: What is the rate? A: 35% as the case may be. NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit. Characteristics: Q: Who are liable to pay FIT? A: All taxpayers are liable to pay FIT provided the requisites for its application are present. Q: Do you still have to pay NIT? A: No. if you are liable for FIT, no need to pay NIT or else there will be double taxation. NOTE: as time passed by, the number of FIT increased. before 1979 proceeds from the sale of real property not exempt, it is subject to NIT or GIT, as the case may be. after 1979 capital gains tax. Proceeds from the sale of real property is exempt. Q: If you fail to pay, will you be liable? A: No. the withholding agent is liable to pay FIT. Case of Juday, Richard and Regine
Q: What is the formula? A: Gross Income x Rate Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC NOTE: the formula does not allow any deduction, personal exemptions and tax credit. Characteristics: NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines.
15
Q: Why is it that the rate of withholding is always lower, and why is it that the rate of GIT and FIT is always equal? A: 1. NIT allows deductions; 2. GIT and FIT do not allow deductions. Q: Do you have to determine whether there is an actual loss or gain? A: No need to determine because the formula does not allow deductions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?) IV. MINIMUM CORPORATE INCOME TAX (MCIT)
Q: What is the formula? A: Gross Income x 2% Q: Who pays this tax? A: DC and RFC only. Q: May it be applied simultaneous with NIT? A: No. there must be a computation of the NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT. Reason: to discourage corporations from claiming too many deductions. V. OPTIONAL CORPORATE INCOME TAX Q: Under what section is this found? A: Section 27A 4th paragraph and Section 28 A(1) 4th paragraph.
16
2.
to determine the kind of income tax applicable to them; to determine their tax liability.
F:
Q: Under Section 23, who are liable for income within and income without? A: Only 1. RC 2. DC The rest of the taxpayers will be liable for income coming from sources within. Income from sources without, no liability, therefore exempt.
NOTE: The income taxpayer is not a RC or a DC. Determine if the income came from sources within or without to know the taxpayers liability. If the facts are specific, do not qualify your answer. Answers must be responsive to the question. Q: Is section 42 relevant to all the taxpayers? A: NO. SECTION 42 IS NOT MATERIAL TO ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without. Section 42 is applicable only to taxpayers who are liable for income within, the rest of the taxpayers are otherwise exempt. Q: Section 42(A)(1) provides for how many kinds of interests? A: It establishes two (2) kinds of interests, namely: 1. interest derived from sources within the Philippines. 2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise. Q: What is the determining factor in order to know if the income is from within? A: 1. location if the bank is from within the Philippines (pursuant to a Revenue Reg.) residence of the obligor (whether an individual or a corp.) contract of loan with respect to the interest earned thereon.
The National Development Company (NDC) entered into a contract with several Japanese shipbuilding companies for the construction of 12 oceangoing vessels. The contract was made and executed in Tokyo. The payments were initially in cash and irrevocable letters of credit. Subsequently, four promissory notes were signed by NDC guaranteed by the Government. Later on, since no tax was withheld from the interest on the amount due, the BIR was collecting the amount from NDC. The NDC contended that the income was not derived from sources within the Philippines, and thus they are not liable to withhold anything. NDC said that since the contract was entered into and was executed in Japan, it is an income without. H: The governments right to levy and collect income tax on interest received by a foreign corporation not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment is the determining factor of the source of the income. Accordingly, if the obligor is a resident of the Philippines, the interest paid by him can have no other source than within the Philippines. Q: Suppose a NRFC, an Indonesian firm, becomes a stockholder of two corporations, a DC and a RFC, and both corporations declared dividends, what is the liability of the Indonesian firm if the same received the dividends? A: 1. Dividends received from DC: the Indonesian firm is liable to pay taxes. NRFC, under the law, is liable if the income is derived from sources within. (Sec 42a) 2. Dividends received from RFC: the Indonesian firms liability will depend on amount of gross income from sources within the Philippines. The NRFC will be liable to pay income tax if the following requisites are present: 1. at least 50% is income from sources within; (gross income)
2.
2.
the (last) 1st requisite is for the three (3) preceding taxable years from the time of declaration of the dividends.
For example the borrower is a NRAETB, he borrowed money from a RA. The interest earned by the loan will be considered as an income without. RA is not liable to pay tax since RA is liable only for income within, therefore exempt from paying the tax. NATIONAL DEVELOPMENT CO. v. CIR
In the absence of any or both requisites, the income will be considered from sources without, thus exempting the Indonesian firm from payment of income tax. Q: Same scenario, but this time the shares of stock of the two corporations were being disposed off. What is the tax liability of the Indonesian firm? A:
17
Q: Filipino Executive, assigned to Hong Kong, receiving two salaries, one from the Philippines, the other from HK. The performance of the job was in HK. Is he liable for both salaries? A: No, he is not liable for the two incomes. His status is an OCW (note facts: working in HK under contract). The compensation he received is not subject to tax pursuant to Section 42(c). Compensation for labor or personal services performed in the Philippines is considered an income within. When it comes to services, it is the place where the same is rendered which is controlling. In the case at bar, the services were rendered abroad, thus it is an income derived from sources without, irrespective of the place of payment. Q: Suppose a DC hired a NRFC to advertise its products abroad. What is the liability of the NRFC? Will there be a withholding tax imposed? A: The income is derived from sources without since the services in this case were performed abroad. As such, the NRFC is not liable and therefore exempt from the payment of tax. If the NRFC is not subject to NIT, then it is not also subject to withholding tax. Q: What is the controlling factor? A: The controlling factor is the place where the services were performed and not where the compensation therefore was received. (Suppose there was declaration of dividends where the recipient is an Indonesian corporation; If declared by DC- always income within; If declared by FC, within if 2 requisites are present) RENTALS AND ROYALTIES income from sources within Q: Granted by who? A: NRFC Q: Suppose you are the franchise holder, how much is the withholding? A: 35% (GIT) Q: if the franchise is granted by RFC, how much is the withholding? A: 10% (NIT) and in some cases 15% Section 42(4) MEMORIZE FOR RECIT (CEKSTTM)
Q: What is the rule as regards the sale of real property? A: Gains, profits, and income from the sale of real property located within the Philippines considered income within. Q: What about the sale of personal property, what is the rule? A: Determine first if the property is produced or merely purchased. 1. 2. it the property is manufactured in the Philippines and sold abroad, or vice-versa, it is an income partly within and partly without. if the property is purchased, considered derived entirely from the sources within the country where it is sold.
EXCEPTION: shares of stock of domestic corporation, it is an income within wherever it is sold. COMMISSIONER v. IAC Q: What is the issue here? A: They cannot determine if the business expense was incurred in the Philippines. Q: if you are the BIR, and the taxpayer is not sure, will you disallow the deduction? A: No. determine it pro rata. Formula: GI from within GI from without Example: 100,000 1,000,000 = 10% Hence, 10% is the ratable share in the deduction. If the deduction being asked is 100,000 not all of it will be allowed. Only 10,000 or 10% of 100,000 will be allowed as deduction. CAPITAL GAINS AND LOSSES Section 39 Q: What is capital asset? A: Capital asset is an asset held by a taxpayer which is not an ordinary asset. The following are ordinary assets:
18
All other property not mentioned in the foregoing are considered capital assets. Q: What is a capital gain? What is a capital loss? A: Capital gains are gains incurred or received from transactions involving property which are capital assets. Capital losses are losses incurred from transactions involving capital assets. Q: What is ordinary gain? Ordinary loss? A: Ordinary gains are those received from transactions involving ordinary assets. Capital losses are losses incurred in transactions involving ordinary assets. Q: What is the relevance of making a distinction? A: It is relevant because Section 39B,C, and D apply to capital assets only. 1. time when property was held (39B) (holding period applies only to individuals); 2. limitations on capital losses (39C); (loss limitation rule- capital losses shall be to the extent of capital gain) 3. Net Capital Carry-Over (39D) (The 3 above apply only to Capital Assets; Ordinary Assets are not applicable) I. CAPITAL ASSETS
Q: What is the holding period? A: If capital asset is sold or exchanged by an individual taxpayer, only a certain percentage of the gain is subject to income tax. It is the length of time or the duration of the period by which the taxpayer held the asset. Q: What is the requirement? A: 1. the taxpayer must be an individual. Section 39B states in case of a taxpayer, other than a corporation.. 2. property is capital in nature. Q: What is the term?
19
20
Q: What is the tax liability of NRAETB? A: Section 25 (1) NRAETB is subject to income tax in the same manner as those individuals mentioned in Section 24. Q: What about Domestic Corporations? A: 1. Sec. 27 A,B, and C 2. Sec. 26- GPP is not subject to income tax. Q: What about Resident Foreign Corporations? A: Sec 28 (l) it is subject to 35% Net Income Tax Q: What about Non Resident foreign Corporation and Non Resident Alien not engaged in Trade or Business? A: Not Subject to Net Income Tax but they are liable for Gross Income tax. Q: Do legally married husband and wife need to file separately or jointly? A: It depends if: 1. Pure compensation income- separate 2. Not Pure compensation income- joint Passive Income Interest, Royalties, prizes and Other winnings ( What if bank is located abroad? Most TP exempt but DC & RC subject to NIT) Interest Q: Bank Interest, what is the requirement? A: The bank must be located in the Phils. because the income must be derived from sources w/in. Q: Do you include this in your ITR? A: No! because it is subject already to FIT. The bank is the one liable for the payment of this. NOTE: Liability for NIT, GIT, and MCIT will depend on the elements present.
Q: If the money earns interst in abroad who is liable? A: RC and DC only by NIT, the rest are exempt. No FIT abroad because we do not have withholding agent abroad. Q: MCIT applies to DC and RFC in relation to bank interest? A: If the bank interest is derived abroad, RFC is exempt but DC is liable. Impose NIT if it is higher than the MCIT, otherwise apply MCIT if its higher than the NIT
21
22
Not Liable? 1. 2. 3. 4. 5.
NOTE: Lower rate of 10% applies to all except NRANETB Q: When do we apply NIT to Royalties? A: 1. TP is RC or DC 2. Income is from w/out 3. TP is RF and income is w/in
Q: What are dividends? A: Any distribution made by Corporation to its stockholders outside of its earnings or profits and payable to its stockholders whether in money or in property (Sec. 73) COMM. vs. MANNING Q: Where did it come from? A: shares come from another shareholder Q: What are the dividends included? A: Sec. 24 refers to cash or property dividend H: For stock Dividends to be exempt it must come from the profit of the corporation. Stock Dividends it is the transfer of the surplus profit from the authorized capital stocks. Q: Assuming that there are 5 Incorporators the Corpo has a P5 M Authorized Capital stock. It distributed 1 M stock dividends, is it taxable? A: NO, the dividends did not go to the Stock holder but to the Auth Capital Stock. Only cash and Prop Stock go to the Stock holder.
Q: Determine the tax liability of the following? A: 1. DC a Stockholder of DC= Exempt 2. RFC stockholder of DC= Exempt also 3. DC stockholder of RF= Liable for NIT. Capital Gains From Sale of Shares of Stock Not Traded (24C)
23
ELEMENT # 3 It must be a capital asset. Q: When is it considered an ordinary asset? A: 1. When the broker or dealer a. used it in trade or business b. held for sale in the ordinary course of trade or business 2. to all other assets, it will be considered a capital asset NOTE: if all elemts are present it will be subj to FIT (why is it important to know Ordinary Assts? To determine that shares are capital asssets) If the shares are ordinary asset 1. Ordinary shares in DC- income w/in a. Most of the taxpayer will pay NIT except NRFC and NRANETB 2. Ordinray assets of foreign corporations a. Income within if sold in the Phils: most will pay except NRANETB and NRFC b. Income w/out if sold abroad: most will be exempt except RC and DC MCIT Q: When is a RFC subj to NIT? A: 1. Sale of shares of stock of a Foreign corp in the Phil. 2. sale of shares of stock of DC which are ordinary asset DC and RFC are subj to MCIT which may be imposed if the NIT is lower than the MCIT2% MCIT will be imposed if MCIT is higher than NIT. Capital Gains From Sale of Real Property (24D) In 39 B the holding period does not apply because the basis of income tax is the gross selling price (GSP) or the Fair market value (FMV) whichever is higher6% FIT Requirements:
24
RFC not liable for FIT but liable to pay NIT if all the elements are present.
ELEMENT # 3 The real prop must be a capital asset Q: When considered a capital asset? A: Read R.R. 7- 2003 Q: Ordinary asset- shall refer to all real property specifically excluded from the definition of capital asset under Sec. 39 A: Other property not mentioned are capital asset. Q: What if all the elements are not present? A: most will be liable to pay NIT Except NRANETB and NRFC liable for GIT Q: May a RC be liable to pay NIT even if all the elements are present? A: YES, disposition made to the Govt. Thus, the taxpayer has the option of paying 32% NIT or 6% FIT Q: Which is more advantageous? A: It depends determine first if theres a loss or a gain. If theres a gain choose to be taxed at 6% FIT. In this case the gain is always presumed. If theres a loss choose to be taxed at 32% because losses may be considered an allowable deduction . Other transactions are covered: 1. sale 2. barter 3. exchange 4. other disposition NOTE: If the prop is under mortgage contract and the mortgagee is a bank or financial inst, the FIT does not apply because the property is not yet transferred because theres a period of redemption If after a year the mortgagor failed to redeem the property that is the only time that the FIT will apply because theres now a change of ownership. If
SEC. 27A RATES OF INCOME TAX Q: How many income taxes are paid by a DC? A: 1. NIT 2. MCIT 3. FIT 4. 10%Improperly Accumulated Earnings 5. Optional corporate income tax of 15% of the gross DC liable for five, but the optional is not yet applicable so only 4. ONLY 3
25
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. & HOSP. Who are the taxpayers? 1. Non- Profit Proprietary Educl. Inst and 2. Non Profit Proprietary Hospital Q: What if the school or hospital is non profit only, is it exempt? A: No, subject to 10% on their taxable incomeexcept those covered by subsection (D) PROVIDED that gross income from unrelated business, trade or activity must not exceed 50% of its total gross income derived by such educational inst or hospital from all sources Requirements: 1. It is a private school or hospital 2. it is stock corp 3. it is non profit 4. that gross income from unrelated business, trade or activity must not exceed50% of its total gross income derived by such educational inst or hospital from all sources 5. has permit to operate from DECS, TESDA, or CHED Q: What do you mean by unrelated trade business or activity? A: It means any trade, Business, or activity which is not substantially related to the exercise or performance by such entity of its primary purpose or performance Q: May a school or hospital be exempt from paying tax? What are the req? A: 1. It must be non- stock and non- profit 2. the assets property and revenues must be used actually, directly, and exclusively fro the primary purpose ( All revenues and assets of Non-stock non-profit educational institutions used actually, directly & exclusively for educational purpose shall be exempt from taxes and duties , Art. 14, Sec.4 Par. 3) Q: Under what law? Is it the constitution or the NIRC which provides fro the exemption? A: It is under Sec. 30 of NIRC and not under Sec.4 Art. 14 of the Constitution. The provision of the NIRC is the specific law which prevails over the Constitution which is the general law. exempt from all taxes and custom duties Q: What about exemption from real property tax?
SEC. 23: GOCC, AGENCIES, INST of the GOVT. GEN RULE: Subj to tax. EXCEPTIONS: 1. GSIS 2. SSS 3. PHIC 4. PCSO PAGCOR no longer included.
Q: If the GOCC is not one of those enumerated does it follow all of its income is automatically subject to tax?
26
2.
If the taxing authority is the local government units, as a rule NO. LGUs are expressly prohibited from levying tax against: (Sec 133(o) 1. National Govt. 2. Its agencies and instrumentalities 3. local government units Exception: Sec 154 of LGC says that LGUs may fix rate for the operationof public utilities owned and maintained by the within their jurisdiction. PAL CASE July 20 2006 H: The SC used 133 (o)an exception to pay tax, real estate tax, imposed by City of PAranaque on NAIA. The SC said that the airport is not an agency or GOCC but mere instrumentality of the Govt. This is Gross ignorance of the law Sec. 133 (o) is for local taxation not real property taxation which is the one involved in the present case. NOTE: Mactan- Cebu Airport case SEC. 27 D(1) Q: How many possible incomes were mentioned? A: Two (2): bank interest and royalties REQ: 1. 2. Bank interest must be received by a Domestic Corp Royalties derived from sources within
27
Q: Who is the income earner? A: Non Residents whether individual or Corporations Q: Derived from whom? A: Depositary Bank under EFCDS NOTE: Sec. 24 B Nonresident exempt from bank interest under EFCDS Q: What is the difference between 24 b1 from 27 D3 A: In 24 B1, NR is exempt only from bank interst derived from EFCDS while 27D3 exempts NR from any income from transactions with depositary bank under EFCDS SEC. 27 D(4)- Intercorporate dividends- exempt 27 D5 Capital Gains from sale of Real Prop. Q: What is the tax? A: 6% FIT Q: What is the difference if the seller is an individual and a DC? A: Individual can sell all kinds of real property DC can only dispose land and/or buildings. SEC 27 (E) MCIT Q: Applicable to whom? A: DC and RFC Q: Can it be applied simultaneously with NIT? A: NO, imposed in lieu of the NIT, whichever is higher. Q: What is the Rationale? A: to prevent corporations from claiming too many deductions Q: When will it be imposed? A: 1. On the 4th year immediately ff the year in which such corp commenced its business. 2. When the MCIT is higher than the NIT Q: What is the carry over rule? Kind: 1. 2. Air carrier ships Sec. 28 B2 MCIT on RFC same with Sec. 27 Sec 28 A1 Q: What Kinds of taxes are paid by the RFC? A: NIT MCIT
An intl. carrier doing business in the Phils. shall pay 2 % on its Gross Phil Billings (GPB) Q: Is 28 A3 the Gen. rule or the Exception? A: It is the general rule because it is under 28 A3 GPB is in the nature of FIT, applies only if all the requirements are present.
RFC will be liable for NIT, hence a RFC engaged in common carriage does not pay GPB but NIT Income without: EXEMPT
International Carrier: GPB refers to the amount of revenue derived from: carriage of persons, excess baggage, cargo and mail originitang from the Phils in a continouos and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the tickets or passage document. REQ: 1. 2. 3. Originating from the Phils. Continouos and uninterrupted flight; irrespective of the place of sale or issue and the place of the payment of tickets or passage document.
28
REQ: it must originate from the Phils. up to final destination regardless of the place of sale or payments of passenger or freight documents Sec28 A(4) OFF SHORE BANKING UNITS OBUs
1.
2. 3. 4.
Q: What if its the same airline but different plane? A: GPB does not apply, it must be to another airline Q: What if it did not originate from the Phils.? A: Determine if its income within or without. if ticket was purchased in the Phils. it is income within hence apply NIT if purchased outside, it is income without, hence exempt Transhipment REQ: flight originates from the Phils transhipment of passenger takes placeat any port outside the Phils. the passenger transferred on another airline Q: How do you apply GPB? A: Only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Phils to the point of transhipment shall from part of the GPB. Q: Is it liable for the whole flight? A: From the Phils to the point of transhipment, it is income w/in From transhipment to final destination, its income w/out- EXEMPT International Shipping
only acceptable foreign currencies always a foreign corporation (subj to NIT) except #3 Exempt if income is derived by the OBU from EFCDS Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils.
Difference with EFCDS: EFCDS 1. Acceptable foreign currency, Phil. Currency or both 2. Can be a domestic or foreign corporation 3. Exempt if income derived by DC or RFC from EFCDS 4. Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils e) Other banks under EFCDS FOREIGN CURRENCY LOAN 10% FIT If: Lender- OBU Borrower- Resident Citizen EXCEPT: 1. OBU 2. Local Commercial Banks Transactions of Non Residents: 1. Income earner: Non- Residents 2. Lender: OBUs
29
Q: How do you apply the rate? A: multiplied to the total profit applied or earmarked for remittance w/o deductions It applies for branches that are: 1. the profit remitted is effectively connected with the conduct of its trade or business in the Phils. 2. One not registered with PEZA MARUBENI CASE F: A branch was established with AG&P, there was investment with AG&P Q: Did the petitioner participate with the negotiation? A: NO
Regional Operating HQ is a branch established in the Phils by a multinational company engaged in any of the services: 1. Gen. Administration and Planning 2. Business Planning and Coordination 3. Sourcing and procurement of Raw materials and components. 4. Corporate Finance and Advisory Services 5. Marketing Control and sales promotion 6. Training and personal management 7. logistic services 8. research and development services and product development 9. technical support and maintenance 10. data processing and communication and business development Rationale: Why liable? Because the claim for exemption of resident airlines shall be minimized
30
SEC 28 B2 Non Resident Cinematographic film owner, lessor or distributor liable for 25% GIT
Sec. 28A7b Income derived under EFCDS 1. Income derived from foreign currency transactions with: a) Non Residents b) OBU c) Local commercial bank d) Foreign bank branches e) Other depository bank under the EFCDS As a Gen Rule: the above transaction is Exempt SEC 28 B3 Non Resident owner or lessor of Vessels chartered by Philippine Nationals. liable for 4 GIT
Elements: 1. Chartered to Filipino Citizens or Corporations 2. Approved by MARINA SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and other Equipments. liable for 7 1/2 % GIT
EXCEPTION: Income from such transaction as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to regular income tax payable by any banks. 2. Interst income from foreign currency loans granted by depository bank under said EFCDS to others shall be subject to 10% FIT Exempt if granted to: 1. Other OBU in the Phils, and 2. Other depository bank under the EFCDS SEC. 28 A7c: Capital Gains from Shares of Stocks not Traded in the Stock exchange 5% or 10% as the case maybe SEC 28A7d: INTERCORPORATE DIVIDENDS DC- RFC= EXEMPT, not subj to tax
SEC 28 b5a Interest on Foreign Loans Must be read with Sec. 32 B7a
SEC 28 B1 Q: What kind of tax? A: 35% GIT on the ff income 1. Interest 2. Dividends 3. Rents 4. Royalties
Interest on Foreign Loans, if the lender is 1. NRFC liable to 20% FIT 2. Foreign Govt. Exempt because it is an exclusion (Sec 32 b7a: income derived by a foreign govt from investments in the Phils on loans, stocks, bond, and other domestic securities or from interest on deposits in banks by: a) Foreign govt. b) Financing inst owned controlled or enjoying, refinancing from foreign govt; and c) Inter nation or Regional financial inst established by foreign govt. COMMISIONER OF INTERNAL REV. vs. MITSUBISHI METAL CORP. (180 SCRA 214) F: Atlas Mining enetered into a Loan and Sales Contract with Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes of projected expansion of the productivity capacity of the formers mines in Cebu. The contract provides that Mitsibushi will extend a loan to Atlas in the amount 20 M dollar, so that Atlas will be able install a new concentrator for copper production.
31
32
NOTE: the corporations belonging in the 1st group are normally liable but they can show that the accumulation of earnings is justified for reasonable needs of business, they incur no liability and exempt from payments of the same. B) Corporations which are exempt whether or not it is for reasonable needs of the business: 1. Banks, and other non- bank financial intermediaries. 2. Insurance companies 3. Publicly- held corporations 4. Taxable partnerships 5. General Professional Partnerships 6. Non- taxable joint- ventures 7. Enterprises registered with a) PEZA b) Bases Conversion Devt Act of 1992 (RA 9227) c) Special Economic Zone declared by law Q: What is a closely- held corporations? A: Those corporation at least 50% in value of the outstanding capital stock or at least 50% of thetotal combined voting power all classes of stock entitled to vote is owned directly, or indirectly by or for not more than 20 individuals NOTE: Publicly held Corp. has more than 20 shareholders Q: What is the time for paying this tax? A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is 2006. You have 1 year to declare after the close of the taxable year. 2006 is the grace period. You will pay on January 2007. Q: If youre not mentioned to be exempted, will you still be liable? A: No, if you invoke adjustments SEC 30. EXEEMPTIONS FROM TAX ON CORPORATIONS Determine the Corporations exemptions under Sec. 30 27 C and 22B. 1. Sec 30, the corporations shall not be taxed under this title (tax on income) in respect to income receive by them as such.
33
Joint Venture w/ service contract w/ government not a corporation, otherwise, it is liable. Assignment: Sec. 35 August 21, 2006 Midterms August 14, 2006 Q: What is the reason for not including the corporations exempt under section 27C and Section 22B under Section 30? A: Because there is an exemption which does not apply to all exempt corporation. The exemption under Section 30 is not absolute while the exemption under Section 27 C is absolute and without any conditions. In addition, Section 22B provides that a joint venture is generally taxable unless it has a service contract with the government, a generally taxable corporation cannot be joined with the group as generally not taxable corporation. General Professional Partnership is exempt but the exemption is not the same as provided by Section 30. TAKE NOTE: Las Paragraph of Section 30. exemption to the exemption: income of whatever kind and character of the foregoing organizations from: 1. any of their properties, real or personal; 2. any activities conducted for profit regardless of the disposition of said income, shall be subject to tax.
6. 7.
CIR vs. YMCA Q: What is the basis of Manila BIR for the imposition of the tax? A: last paragraph of Section 30, because YMCA was conducting an activity for profit. F: the CTA and the CA invoked the doctrine laid down in Herrera and Abra Valley case which involves an exemption from the payment of Real property Tax. H: The SC revised the ruling. YMCVA is liable to pay income tax applying the last paragraph of Section 30. YMCA Is exempt from the payment of property tax, but not to income tax on rentals from its property. The tax code specifically mandates that the income of exempt organizations (under section 30) from any of their properties, real or personal, shall be subject to tax, including the rent income of the YMCA from its real prop. 8. a non-stock and non profit educational institution; 9. govt educational institution; 10. Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, or like organization of a purely local character, the income of which consists solely of assessment, dues and fees, collected from members for the sole purpose of meeting its expenses; 11. Farmers, fruit growers or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. TAKE NOTE: income of sales agent is exempt.
Q: Enumerate the exempt corporations under Section 30; What is the requirement? A: 1. Labor, agricultural or horticultural organization not organized principally for profit; 2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purpose and without profit; 3. a beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under lodge system. (lodge system: operating world wide) or a mutual old association or a non-stock corporation:
34
35
Q: When is winning subject to NIT? A: 1. When derived from income without; 2. when the income earner is a DC or RC. 10. Pensions [Sec. 32 A (10)] Q: What kind of pension? A: Included in the gross income if not exempt never subject to fit (?) 11. Partners distributive share from the net income of the general professional partnership (GPP).
36
SEC 32 B EXCLUSIONS FROM GROSS INCOME Q: What do you mean by exclusions? Are these exempt from income tax? A: these are not included in the gross income, THUS, exempt. TAKE NOTE: Exemptions, exclusions, deductions, have the same characteristics all tax do not apply. 1. Life insurance [Sec. 31 B (1)] Q: What is the requirement? A: only one requirement for exemption: that the proceeds of the life insurance be payable upon the death of the insured. Q: Does it matter who the beneficiary is or paid in a lump sun or single sum? A: No. it does not matter. Exception: amounts held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in the gross income. 2. Amount received by insured as return of premium [Sec. 32 B (2)] Q: if the insurance is payable within a certain time, say 10 years and thereafter the insured did not die, how much will be excluded? A: only the amount received by the insured as a return of the premiums. Ex. 1 M 100 thousand = capital It is exempt (100K) 900K is taxable. Q: Why is it excluded? A: because the amount received merely represents a return of capital.
37
Examples:
38
Q: What is terminal leave pay? A: the accumulated vacation leave and sick leave benefits converted to cash or money to be given either every year or upon retirement or separation. Terminal Leave Pay granted upon retirement or separation: uder PD220, TLP in the Govt or in the Private Sector shall be exempt from income tax if given or granted upon retirement or separation. TLP granted on a yearly basis: 1. employee in the private sector: a. accumulated sick leave subject to income tax. b. Accumulated vacation leave: if more than 10 days (meaning 11 pataas) subject to income tax; If 10 days or less exempt. 2. Govt Employee: governing law: EO 291 of Pres. Estrada, RMC 16-2000. Rule: Govt workers (both officers or non-officers) granted TLP on a yearly basis exempt from income tax. there is no qualification as to vacation or sick leave. Take Note of 3 cases. be reminded of EO 291, Sec. 2. 78.2 par. 97, RR2-98, RR16-200 (3).
Case of Zialcita retired from DOJ, contention: TLP should be exempt from income tax pursuant to the old law. SC: on a different ground TLP is exempt because it is similar to Retirement pay, thus exempt but the rulings application is limited only to DOJ employees. Borromeo case: Same as the Zialcita case Issues: WON the TLP is subject to income tax and WON COLA and RATA are included? SC: RULED TLP is Exempt! Modified: the rule applies not only to DOJ officers but also to CSC commissioners. COMMISSIONER v. CASTAEDA - Castaeda DFA officer in Phil. Embassy in England. 1. TLP is exempt. 2. Ruling applies to DFA officers. Q: Does the rule or decision applies to Govt officials only? A: No. PD220: Exemption applies to both private and public sectors(?)
39
40
taxpayers allowable deduction for interest expense shall be deducted by an amount equal to 42% (RR 10-2000) of the interest income subject to FIT.
Q: Who claims this deduction? A: the debtor claims this deduction. Q: What kind of interest is this? A: interest on loan. interest on debt - when one borrows money to finance his business interest in connection with the taxpayers profession trade or business. REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a) a borrower or taxpayer can claim the interest paid in advance as itemized deduction when he filed his income tax return (ITR) depending on whether or not the principal obligation has been paid. 1. if the entire amount or entire principal obligation has been paid the entire amount of interest can be claimed as itemized deduction. 2. if only of the obligation had been paid, then the entire amount of of that interest can be claimed as a deduction. 3. if no payment had been paid on the principal obligation, the advance interest paid cannot be claimed as a deduction on the years that it was paid. REQUIREMENTS FOR REDISCOUNTING OF PAPERS: 1. incurred within the taxable year.
41
1. if within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance or through discount or otherwise. 2. if both taxpayer and the person to whom the payments has been made or is to be made are persons specified under Sec. 36 (B): a. member of a family b. bet. an individual and a corp., more than 50% in advance of the outstanding stock of which is owned directly or indirectly by or for such individual; c. Bet. 2 corp., more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual. d. bet. the grantor and a fiduciary of any trust; e. bet. the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. bet. a fiduciary of trust and a beneficiary of such trust. Q: Who are not allowed to claim interest under sec 36 B? A: interest incurred between related parties. Q: What if half-brother? A: not allowed to claim deduction for interest. TAKE NOTE: interest incurred from the exploration of petroleum refers not just in interest incurred on loan of money but also interest incurred for installment payments. Q: Who are related parties? A: individuals and corporations. OPTIONAL TREATMENT OF INTEREST EXPENSE: 1. interest incurred to acquire property used in trade, business or exercise of profession can be claimed a an itemize deduction a. on interest; or b. depreciation (as capital expenditure?)
deducted from the gross income; deducted from the Net Income
MERCURY DRUG CASE - Discount of senior citizens SC: discount claimed by senior citizens shall create a tax credit and must be deducted at the bottom of the formula. Q: What is a tax deduction? Example? A: example is business tax. tax deduction is allowed if the taxes were paid or incurred within the taxable year and it must be connected to the trade, business or profession of the tax payer. Q: Who are entitled to claim it? A: those liable to pay NIT. (Tax credit only for NIT) Q: What is a tax credit?
Q: What is this interest income? A: the money borrowed was deposited in a bank so that it will warn interest. (RR13-2000)
A: refers to the taxpayers right to deduct from the income tax due the amount of tax the taxpayer paid to foreign country, subject to limitations. Q: What is the tax credit being referred to under 34 C (3)?
42
Q: Who are not allowed to claim deductions? A: Under 34 C (3) - NRC, NRA; and N/RFC TAKE NOTE: 1. NRAE and NFC allowed deduction only if and to the extent that they are connected with income from sources within the Phils. 2. Taxes that had been allowed as deduction but are later in refunded should be treated as part of the gross income during the year that it is received (34 1 last paragraph) Q: Which would you choose? Tax credit or deduction? A: tax credit because it is deducted from the taxable income while deductions are deducted from the GI. FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE NET INCOME TAX CREDIT) 34 D LOSSES Q: Is always a requirement that it is incurred in pursuit of trade, bus. or profession? A: No. Sec. 34 D(1) provides for 2 kinds of losses: a. incurred in pursuit of trade, bus. or profession; b. property connected with t,b,p, if the loss arises from fire, storms, shipwrecks or other casualties or from robbery, theft or embezzlement (arising from natural calamity). Q: What is the requirement? A: 1. Loss actually sustained during the 2. Not compensated for by insurance or 3. Not claimed as a deduction for estate Q: This is your itemized deduction which can deduction from?
43
NET OPERATING LOSS CARRY REQUIREMENTS: 1.Net operating loss of the business or enterprise incurred w/in the taxable year 2. not previously off-set as a deduction from the GI 3. carried over as a deduction from the GI for the next 3 consecutive taxable years immediately following the year of such loss. Q: Can the period be extended? A: yes, for mines other than oil and gas well. 1. net operating loss w/out the benefit 2. incurred in any of the first 10 years of 3. carried over as a deduction from the GI such loss. 4. no substantial change in the ownership
incentives provided by law; operation. for the next 5 years following of the business or enterprise.
KINDS OF LOSSES AND THEIR CARRY-OVERS: A. ORDINARY LOSS NOLCO ( #3 above) Q: Why is there a need for a carry over under Sec. 34 D # when you can claim the loss from both capital and ordinary loss? A: if the loss exceeds the income for the taxable year, you cannot deduct the entire amount of loss from your income for that year so the excess may be deducted for the taxable year following the loss. B. CAPITAL LOSS NET CAPITAL LOSS CARRY OVER NET CAPITAL LOSS NET OPERATING CARRY-OVER LOSS CARRY-OVER 1. taxpayers is an individual only not corporation. 2. involves net capital loss 3. carry-over as loss from sale of capital asset in the next 1. taxpayer may be an individual or corp; 2. losses incurred or connected with T or B; 3. Business losses not previously off-set as a deduction from the GI carried over as ( # 2 above)
Q: What is the limit? A: 75% of the nominal value of outstanding shares is held by or on behalf of the same persons/ corporation individual no problem, problem lies with corporations or enterprises. ABANDONMENT LOSSES 1. contract area where petroleum operations are undertaken is partially or wholly abandoned; all (1) accumulated exploration and (2) development expenditures pertaining thereto shall be allowed as a deduction. 2. a producing well is subsequently abandoned: unamortized cost and undepreciated cost of equipment directly used therein shall be allowed as a deduction in the years it was abandoned. TAKE NOTE: 1. if abandoned well is reentered and production is resumed; or 2. if equipment or facilities are restored into service in the year of resumption or restoration and shall amortized or depreciated. Q: What is the Tax benefit rule?
44
45
2.
3.
arising out of its use or employment or non-use in the business, trade or property is located in the Philippines
profession
34 G DEPLETION OF OIL and GAS WELLS and MINES only deduction which is a not self executing deduction Q: What is depletion? A: the exhaustion wear and tear of natural resources as in mines, oil, and gas wells the natural resources called wasting assets DEPRECIATION vs DEPLETION 1.involves property 2. ordinary and tear equipments wear of 1. involves natural resources 2. ordinary wear and tear of natural resources
individual corporations
Q: Suppose Mr. A made a cash donation of P1M. How much can he claim as a deduction? A: First determine the taxable income of Mr A since he is an individual, he can only deduct 10% of his taxable income. Q: What if the Donee is not one of those mentioned under the law, can he claim a deduction? A: No. TAKE NOTE: Donee is never an individual. Q: If the Donor is a pure compensation income earner and he donates P100,000 to the church, can he claim it as a deduction? A: No. pure compensation income earner can only claim a deduction under Sec 34 M
TAKE NOTE: Equipment used in mining operation is deductible in depreciation Q: Method for computing depletion? A: cost depletion method Q: to whom allowed? A: only mining entities owning economic interest in mineral deposits Economic interest: capital investments in mineral deposits
46
REQUIREMENTS: 1. organized and operated exclusively for scientific, research, educational, character building and youth and sport development, health, social welfare, cultural or charitable purposes or a combination thereof 2. no part of the net income of which inures to the benefit of any private individual 3. uses the contributions directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated 4. annual administrative expense does not exceed 30% of the total expenses and 5. in case of dissolution, the assets of which would be distributed to: a) another non profit domestic corporation organized for similar purpose or purposes b) to the state for public purpose c) distributed by the court to another organization to be used in such a manner which would accomplish the general purpose for within the dissolve organization was organized 34I RESEARCH AND DEVELOPMENT
47
Q: Requisites? A: 1.the employer must have established a pension or retirement plan to provide for the payment or reasonable pension of his employees 2. pension plan must be reasonable and actually sound; 3. it must be funded by the employer 4. the amount contributed must no longer be subject to his control or disposition 5. the amount has not yet been allowed as a deduction and 6. the amount has or is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made.
34 K ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF CERTAIN PAYMENTS allowed as a deduction only if shown that the tax required to be deducted and withheld there from has been paid to the BIR in accordance with Section 58 and Section 81 34 L OPTIONAL STANDARD DEDUCTION KINDS OF DEDUCTIONS: 1.Itemized deduction 2.Optional Standard Deduction 3.Personal /Additional Deduction OPTIONAL STANDARD DEDUCTION: can be availed of by an individual who may elect a standard deduction in an amount not exceeding 10% of his gross income may apply in lieu of the other deductions under Section 34 the taxpayer must signify in his return his intention to elect the optional standard deduction, otherwise, he shall be considered as having availed of the itemized deduction.
48
1.
20, 000
Single individual; or individual judicially decreed as legally separated with no qualified dependents.
such change
of status
TAKE NOTE: R.A. 7432 and RR 2-98: a senior citizen can also be a dependent. Q: Can a widower claim exemptions?
TAKE NOTE: always choose the higher amount of exemption if you are filing a return covering the period within which the change of status occurred
49
1. if the taxpayer should (1) marry or (2) have additional dependents during the taxable year, he may claim the corresponding exemption in full for the year. Illustration: 1.Single Jan 1, 2005 2.Married June 1, 2005 on April 15, 2006 status: legally married can claim P 32,000 2. if the taxpayer should die during the taxable year, estate can claim personal exemption. Illustration 1.Jan. 25, 2005 taxpayer married w/ one child can claim on April 15, 2006 P32,000+ P8,000
the life of any officer or employee or any person financially invested in any trade of business carried on by the taxpayer. taxpayer is directly or indirectly the beneficiary under such policy.
LOSSES FROM SALES OR EXCHANGES OF PROPERTY (between related parties) 1) between family members Q: Who is considered the family of the taxpayer? A: a. brothers and sister (whole is blood) b. spouses c. ancestors d. lineal descendants Q: are uncles or nieces included? A: no
} P40,000
In this case, as if the change of status occurred at the close of taxable year. If taxpayers spouse or child dies within the taxable year or the dependents became (1) gainfully employed (2) got married or (3) became 21 as if the change as status occurred at the close of taxable year. Illustration: 1. Taxpayers tragic story wife died Jan. 25, 2005 and child died the next day then another child eloped and get married. 2. Taxpayer despite the tragedy can claim ton of money on April 15, 2006. P 32,000 P 16,000 (8,000 per child) 48,000 Section 36. Items not Deductible 36 A. General Rule: In computing net income, no deduction shall be allowed: (1) Personal, living or family expenses not related to trade or business (2) Section 36 A (2) and Section 36 A (3) General Rule: No deductions allowed for 1. Any amount paid out for new buildings or for permanent improvements, or betterments, made to increase the value of any property or estate 2. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Exceptions: 1. Option granted to Private Educational Institution to deduct the same as capital outlays. TAKE NOTE: Amount paid for new buildings, can be deducted if it involves intangible drilling and development cost incurred in petroleum operations (Sec 34 6 (A) PREMIUMS PAID ON LIFE INSURANCE POLICY :
IN DONORS TAX Relatives includes relatives by consanguinity within the 4 th civil code. Nephew is a stranger and relative ang nephew. 2) individual and corporations Gen. Rule: NO DEDUCTION Except: distribution in liquidation or less than 50% of the outstanding capital stock 3) 4) 5) 6) Two corporations Grantor or Fiduciary Two fiduciaries of two trust Fiduciary and beneficiary of trust provisions regarding deductions of insurance
Codal Provisions Section 38: Losses From Wash Sales of Stock or Securities Q: What is a wash sale? A: It is a sales or other disposition of stock securities where substantially identical securities are purchased within 61 days, beginning 30 days before the sale and ending 30 days after the sale. Q: What period? A: 61 day period beginning 30 days before and ending 30 days after the sale
50
Suppose it was a result of swindling, theft, robbery or estafa, do we apply the same principles? A: Law is silent, take note of the old CIA ruling on this one Q: Feb 14, 2006, your GG gave you a jewelry in Sept your GG breaks up with you. GG request the jewelry be returned but you already sold it for P200,000. Will the entire P200,000 be included in gross income? A: Basis: (1) same as if it would be in the hands of the Donor (FMV as of date of acquisition); or (2) last owner who did not acquire the same by gift (cost) Q: If it involves a parcel of land? A: apply the same rules Section 40 B (4) what is the basis? 1. Property was acquired for less than an adequate consideration in money or moneys worth: the basis would be the amount paid by the transferee for the property. Q: Section 40 B (5) what is the basis? A: 40 C (5) if the property was acquired in a transaction where gain or loss is not recognized (pursuant to a merger or consolidation plan)
51
40 C EXCHANGE OF PROPERTY GENERAL RULE: In sale or exchange of property, the control amount of gain or loss shall be recognized. 1. gain is taxable 2. losses are deductible Exception: If permanent to a merger or consolidation plan, no gain or loss shall be recognized 1. gain is exempt 2. losses are not deductible REQUISITES: 1. the transaction involves a contract of exchange 2. the parties are members of the merger or consolidation 3. the subject matter is only limited or confined with the one provided for by law
Merger and Consolidation in corporation code and tax code are not the same. Sec 40 (2) (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation Illustration: Transferor gives 1M Transferee gives 700,000 = not
If other property received by transferee (40 C (3) (a) TRANSFEREE if the party receives not just the subject matter permitted to be received: lie if the party receives money and /or property, the gain, if any, but not the loss, shall be recognized (meaning taxable) but in an amount not in excess of the sum of the money and the FMV of such other property received. (40 C (3) (b) TRANSFEROR
52
Section 43 Accounting Periods 1. Fiscal year 2. use of calendar year a. no annual accounting b. does not keep books of account c. individuals Use of method as in the opinion of the commissioner clearly reflects the income: 1. no accounting method has been employed 2. the method does not clearly reflect the income Sec 44 Period in which items of Gross Income included and Sec 45 Period for which Deductions and Credit Taken Under Sec 44 amount of all items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer Under Sec 45 deductions shall be taken for the taxable year in which paid or accrued or paid or incurred. Sec 44 and Sec 45 are mentioned in the code because of the death of the person. Illustration: Facts: taxpayer dies in the middle of the year January 1, 2006 June 15, 2006 June 26, 2006 to Dec 31, 2006 the estate is the taxpayer So the income and deductions from Jan 1 to June 25,, included in the computation Section 46 Change of Accounting Period Q: Who is the taxpayer? A: corporation (taxpayer other than individual) Q: What kinds of accounting period? A: 1.fiscal year 2. calendar year Q: Changes contemplated?
53
4.
5.
2nd installment exchanged with cash price you only compute cash
H: Initial payment exceeds 25% installment basis is not applicable RR 2; Section 175: In payment by way of installment promissory note, bills of exchange and checks will not be considered in computing the 25% initial downpayment. Section 50 Allocation of Income and Deductions
54
55
56
a. b.
1st installment: paid at the time the return is filed 2nd installment on or before July 15 following the close of the calendar year
Q: What is the effect of non payment on the date fixed? A: The whole amount of tax unpaid becomes due and demandable together with the delinquency penalties.
57
58
E. Registration with Register of Deeds No registration of any document transferring real property shall be effected by the Register of Deeds unless the commissioner or his duly authorize representative has certified that the transfer (1) has been reported and (2) tax due has been paid Register of Deeds requires payment of tax before transfer of property Section 59 Tax on Profits Collectible from Owner of other Persons Tax imposed under this title upon gains, profits and income not falling under the foregoing and not returned and paid by virtue of the foregoing shall be assessed by personal return Intent and Purpose of this Title 1. All gains, profits and income of a taxable class shall be charged and assessed with the corresponding tax. 2. Said tax be paid by the owner of the gains, profit or income or the person having the receipt, custody, control or disposal of the same Determination of Ownership: determined as of the year for which a return is required to be filed CHAPTER X: ESTATES AND TRUSTS Section 60: Imposition of Tax 1. Estate property of the decedent created by an agreement, trust or by last will and testament 2. Trust agreement, contract or last will and testament Status: 1. Estate: same status as decedent 2. Trust: same status as the grantor Income taxpayer is the Estate: income of the estate pending partition or no partition at all:
59
60
Section 85 Gross Estate (inclusion) A.Decedents interest includes property (1) owned at the time of death and (2) property not owned at the time of death Classic example: Usufruct Q: if terminated by the death of usufructuary, is it subject to estate tax? A: Not subject to estate tax Reason: Exempt Transmission under Sec 87 (a) merger of the usufruct in the owner of the naked title Q: is there a conflict between Sec 88 a and Sec 87 a? How do you reconcile? A: No conflict 1.Section 87 a contemplates a situation where the usufruct is terminated. 2.Section 88a contemplates a usufruct for a fixed period. Ex contract of lease Q: How do you determine the value of usufruct? A: Sec. 88 a provides to determine the value of the right of usufruct, take into account the probable life of the beneficiary. Q: Why definition of gross estate is longer than definition of gross gift? A: transfer occurring after death. estate tax absolute
61
62
63
FAMILY HOME amount equivalent to the current FMV of the Family Home of decedent. Limit: FMV should not exceeds 1 million otherwise the excess will be subject to estate tax. Requirements: (RR 2-2003) 1.Person is legally married GR: if single not allowed to claim Except: if head of the family 2.Family Home actual residence of the decedent 3.Certification of Barangay Captain of locality STANDARD DEDUCTIONS automatic: RR 2-2003 no requirement provided the decedent is the one in 86 (A) (RC, NRC, RA) MEDICAL EXPENSES Requirements: 1.amount not exceeding P500,000 2.medical expenses incurred by the decedent within one (1) year prior to his death. must be duly substantiated with receipt RETIREMENT PAY UNDER RA 4917 (RETIREMENT PAY WITH PRIVATE PLAN) Requirements: 1.plan duly approved by the BIR 2.person at least 50 years old 3. 10 years in service 4. avail only once
64
D. Place of filing: return shall be filed with: 1.authorized agent bank 2.revenue district officer 3. collection officer 4. duly authorized treasurer city or municipality in which decedent was domiciled at the time of his death Q: What if non resident? A: NR with no legal residence here, with the office of the commissioner. Q: Let us say there are 3 compulsory heirs, namely A, B, and C. A renounces his inheritance coming from the parents, but A renounces his inheritance in favor of his 2 siblings, brother and sister B and C. Is this subject to donors tax? A: NO. It is exempt. Q: But if in the given example, A said I am renouncing my inheritance, but I am giving it to my sister B, is this subject to donors tax? A: YES. Renunciation is to the disadvantage of the brother. TAXATION UNDER THE LOCAL GOVERNMENT CODE: 1. Local Tax 2. Real Property Tax LOCAL TAXATION (186, 187, then go to 151, 128 down) Q: Mayor Binay of Makati ordered the collection of elevator tax (for elevator in the city hall). Is the order of Mayor Binay legally tenable? A: NO. There should always be a tax ordinance after conducting a public hearing. (186) tax ordinance
65
Go to 151: The city could impose the tax already imposed by the province of by the municipality. Q: What are the numerous taxes imposable by the province which a city now allowed to impose? A: Those enumerated in 135 to 141 of the LGC Reasons why a municipality wanted to be converted into a city: 1. 151 2. 233 (real estate tax) In addition, the law says that the city could increase the rate of the tax by not more than 50% of the maximum EXCEPT those enumerated in 139: a) professional tax b) amusement tax A. General Principles (128-130) reiteration of the constitutional tax provisions
Q: If you dont agree with the validity or the constitutionality of the tax ordinance, what will be your remedy? A: Within 30 days from the effectivity of the ordinance, the taxpayer should file an appeal with the office of the Secretary of the DOJ (187) REYES vs. SECRETARY (320 SCRA 486) F: Reyes asserted the validity and constitutionality of the tax ordinance only after the lapse of thirty (30) days (perhaps his lawyer was thinking that an ordinary statute may be contested anytime with the RTC, CA or SC). H: With regard to a tax ordinance, w have a specific rule, failure to assail the validity with the specific period of time, is fatal to the taxpayer. Since it was filed beyond the 30day period, we do not disturb the validity of the ordinance. Q: Within what period should the Sec. of Justice decide?
notice that the constitutional limitations on taxation do not only apply to the national government but also to local government units. B. Definitions (132) Local Taxing Authority (132)
for a province, it is the provincial board or the provincial council (sangguniang panlalawigan) for a city, we have the city council (sangguniang panlusod)
66
C. Common limitations on the taxing power of the LGUs (133) Under the old law this was 5 of the Local Tax Code.
Q: Why common? A: Because the limitations or prohibitions apply to all LGUs, the provinces, cities, municipalities and barangays. Two Common Crimes (under 133) 1. absolute prohibition 2. relative prohibition It shall be unlawful for the LGUs to collect: I. Income Tax EXCEPT when levied on banks and other financing institutions (133(A)) the term other financing institution shall include money changer, lending investor, pawnshop (131(E)) rate of tax: does not mention rate of tax, so long as it is fair, just and reasonable It cannot be prohibited taxation, because the element of imposed by the same taxing power is not present. One is imposed by the national government and the other is by the LGU. II. Documentary Stamp Tax (133(B)) absolute prohibition III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in 135 (133(C)) transfer tax on the transfer of realty to be imposed by provinces and cities (135) NOTE: this is not a real estate tax, this is a local tax. IV. Custom duties, charges or fees for the registration of vessels or ships, wharfages fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (133(D)) wharfage due is a custom fee imposed on the weight of the cargoes. wharf a pier special levy on public works (240) allows provinces cities and municipalities to impose a special real estate tax known as special levy or public works let us say the municipality established a pier for a minimal value of P10M; out of P10M, under 240, 60% of this may be recovered; the other 40% may be recovered by warfage due. v. Tax, fee or charge for goods or commodities coming out or passing through the territorial jurisdiction even if in the guise of a toll or a fee (133(E)) an absolute prohibition
67
68
Q: May LGUs impose local franchise tax? A: We have to consider here many supreme court decisions and also 193 of the LGC. Under 193, it says there unless especially provided for in this code, exemptions granted to natural juridical persons are hereby withdrawn (abolished) EXCEPT: 1. local water districts 2. cooperatives registered under the cooperative code (RA 6938) 3. non-profit and non-stock educational institution.
We still have franchise tax other than this one, known as national franchise tax provided for in the republic act granting franchise. Two kinds of Franchise Tax: 1. local franchise tax (under LGC 137)
69
VI. amusement tax (140) under the IRC, there is also amusement tax under 125.
V. professional tax (139) this must be correlated with the tax under 147. NOTE that this is an exemption to the rule that a city may increase the rate of the tax under 151 of the LGC, the increase is not allowed. both 139 and 147 are taxes imposed on persons exercising professional calling.
PBA v. QUEZON CITY (137 SCRA 358) F: The city government enacted a tax ordinance trying to collect amusement tax including amusement tax on the PBA (in Araneta, Cubao); but PBA and no, we are already paying amusement tax to the national government through the BIR because of 125 of the IRC H: QC government can no longer collect on the ground that it is already being collected by the national government and secondly, in the enumerations of amusement under 140, you will never see professional basketball. Most of all, it is the intention of the author that it is only the national government. *nak ng putang katangahan yan.. the local tax code PD 231 was enacted in 1974 when we dont have any professional basketball.. since professional basketball was born May 1975. * ano ba dapt tama diyan? both the national government and the QC government can collect. There is no violation of the prohibited double taxation, because the taxing powers are different, and not only that 140 speaks of amusement tax on admission fee but under 125, it is abut gross receipts. VII. delivery van (141) Q: What if not a delivery van, but sako lang? A: The applicable tax is under 143(G) (peddlers tax, one imposed by municipalities and cities. If may dalang sasakyan, yari siya ng province sa tax.
70
Q: If you have two branches, how many business taxes do you have to pay? A: You pay only one business tax (146)
IV. Fees for sealing and licensing of weights and measures (148) V. Fishery rentals, fees and charges (149) F. Situs of Tax (150) The tax referred to in here is the business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities, one of them is Swift hotdogs, this is being sold not only in Mandaluyong, Metro Manila, but also to the inter country from Batanes to Tawi-tawi. Where should the business tax of wholesaling or the business tax of retailing be paid? Should it be in the principal office (Mandaluyong) or the place where the commodities are sold? A: It will be paid in the place where it had been sold PROVIDED there is a branch office or a sales outlet (150(A)).
71
H. Common Revenue Raising Powers (153-155) Q: Why common? A: All the LGU could impose the same. But it does not follow that all the provinces, cities, municipalities could impose the same. Only the LGU which operate, establish, maintain the entity If established by the province, it should only be the province. These are: 1. service fee and charges for services rendered 2. public utility charges provided owned, operate and maintained by them 3. toll fees and charges tax or toll for the use of a bridge or a street Padua filed a civil action in the MakatI RTC trying to stop the government form collecting a toll free in the South Express including the North expressway alleging that he is affected as a taxpayer because he is from Paranaque. He argued that if you use the property of the government like a street or a public plaza, you do not pay. He made the analogy, that if you go to Luneta, you do not pay the city government of Manila. The Makati RTC, the CA and SC had a uniform ruling that the operator should be prohibited from collecting further toll fess because if the operator had already recovered his investment and earned an income already, he should be stopped. As argue by the SC, it copied the argument of the lawyer (re: Luneta). NOTE: that Res Judicata do not apply here. When the ruling became final an executory in 1993, the North and South Express were totally dismantled and totally destroyed by the DPWH to give way to the final and executory ruling of the Court, that It should no longer be collected. After several months, the government announced in the radio that the party in the case of Padua, mutually agreed that the collection shall be resumed in order to have money for the maintenance and repair of the highway. Exceptions to 155 (collection of toll fees) 1. members of AFP 2. members of the PMP 3. post office personnel delivering mail 4. physically handicapped 5. disabled citizens 65 years and older. I. Community Tax (156)
Power to impose tax: 1. On commercial breeding of fighting cocks, cockfights and cockpits must be for commercial purposes 2. On places of recreation which charge administration fee 3. On billboards, signboards, neon signs and outdoor advertisements especially for the barrios and barangays along the highway 4. For barangay clearance if you want to engage in the business of retailing or wholesaling if barangay captain will not approve that within 7days go to the municipal hall or city hall for approval
72
Remedies of the government: Requirements: 1. for a natural person at least 18 years of age
2.
Under the NIRC, assessment and collection have 2 kinds: 1. 2. I. Normal/Ordinary assessment and collection Sec. 203, NIRC Abnormal/Extraordinary assessment and collection Sec. 222, NIRC Normal/Ordinary assessment and collection There was a return filed and it is not fraudulent and not false
Q: What if you become 18 in the month of January or November or December? A: For those who celebrated their birthday before July 1 (that is up to June 30), they are liable to pay the tax, for this year. For those who celebrated their birthday on or after July 1, they are not yet liable to pay this year, but have to wait until next year. Q: Is there a difference for those who reached 18 in the months of Jan-FebMarch and those who reached 18 in the months of April-May-June? A: YES. For those who celebrated birthdays in the months of Jan-Feb-March, they have a grace period of 20days within which to pay. Those who celebrated their 18th birthday in the month of April-May-June, they do not have any grace period at all, they have to pay the tax immediately. Q: If you have a community tax certificate for this year (2006), can it be used only until December 31, 2006? A: NO. It shall be valid up to April 15, 2007. (163(C)) J. Accrual of the Tax (166) January 1
II. Abnormal/Extraordinary assessment and collection There was: 1. an omission or failure to file the return; 2. if there was a return filed, it was fraudulent, or; 3. the return was false Q: Is a false and fraudulent return presumed? A: NO, false and fraudulent return is not presumed. The burden of proof to prove that the return was false and fraudulent lies against the government through the BIR. The mere fact that the return is erroneous will not make the return fraudulent, it must be proven by the BIR. Q: Why is it important to know whether the assessment is under normal or abnormal condition? A: It is important to know because the prescriptive period between normal and abnormal assessment differ. Prescriptive Period for Assessment 1. Normal/Ordinary Assessment 3 years from the time the return has been filed (not the payment of the tax) (Sec. 203, NIRC) 3 Ways of filing the return under Sec. 203, NIRC:
Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007? A: NO. You have the right to collect that in July 1, because the law is saying that it should be collected in the next succeeding quarter (167) Mayor Binay had a tax ordinance in May, sabi ng mga bata niya: bosing, collect na tayo ng June. Binay: hindi nga pupwede, maghintay pa tayo ng July 1.
73
2. filed on the date of deadline 3. filed after the deadline 2 Ways of counting the 3 year period of Assessment: 1. if return is filed before or on the day of the deadline, the prescriptive period starts on the date of the deadline; 2. if return is filed after the deadline, the prescriptive period starts on the date the return has been filed. For the calendar year of 2004, a return must be filed and paid for Net Income Tax on or before April 15, 2005. Since he was not able to meet the deadline, the taxpayer is now being assessed for tax due for 2004. To minimize interest and surcharges, it has been suggested by the BIR that the taxpayer file a late return. Supposed he filed his return covering 2004 on April 1, 2006. In this example, the reckoning point is the deadline of April 15, 2005. The starting point of the counting the 3 yr. period is on the date the return is filed which is April 1, 2006. Suppose it is not a late filing of return, the counting of the period is on the date of the deadline which is April 15. 2. Abnormal/Extraordinary Assessment the government has 2 options: a. Assess and Collect the prescriptive period for assessment shall be 10 years from the discovery of none filing or false or fraudulent return (Sec. 222, par. o, NIRC) the prescriptive period for collection shall be 5 years from the date of final assessment (Sec. 222, par c, NIRC) b. Collect Without Assessment through Judicial Action since there is no assessment there is no prescriptive period for assessment prescriptive period for collection shall be 10 years from the date of discovery of none filing of return or false or fraudulent return. These options are available only if the Assessment is under the Abnormal/Extraordinary Conditions. These are not available under Normal/Ordinary Assessment Prescriptive Period for Collection 1. Normal/Ordinary Collection Sec. 203 did not provide for the prescriptive period for the collection Intention of the author: 5 years from the date of final assessment Reasons: (Sababan agrees with the 5 year prescriptive period) Prescriptive period of collection under 1st option on Abnormal Assessment is 5 years from final assessment (Sec. 222, par c, NIRC)
2.
2. Abnormal/Extraordinary Collection a. assess and collect 5 years from the final assessment b. collect without assessment through judicial action 10 years from date of discovery of none filing, or false, or fraudulent return. Q: How to apply these periods? A: Annual net income tax return filed by individual using a calendar year. The return should be filed on or before April 15, 2000. It was filed on April 15, 2000. Q Without stating the date of final assessment, can it be collected in 2007? A: Under normal condition, first determine the date of final assessment. If the BIR finally assessed the tax in November 2001, then 2007 is way beyond the 5year period to collect. Count the prescriptive period for collection from the date of final assessment. Q: (same facts) Supposed it was finally assed on March 2003, can it be collected in 2007? A: Yes, because it is within the prescriptive period of 5years. BASILAN v. COMMISSIONER (21 SCRA 17) F: Supposed the notice of assessment was given within the period but it was received by the taxpayer outside the period. I: Whether or not the assessment is within the period of 3 years. H: Yes. It is within the period. If the notice is sent through registered mail, the running of the prescriptive period is stopped. What matters is the sending of the notice is made within the period of prescription. It is the sending of the notice and not the receipt that tolls the prescriptive period. Q: What if the return has been amended, how would you compute the period of assessment? A: NIRC is silent. PHOENIX v. COMMISIONER (14 SCRA 52) If the amendment of the return is substantial as distinguished from superficial, the counting of the prescriptive period is also amended. The prescriptive period shall be reckoned on the date the substantial amendment was
74
PROCEDURE (Sec. 228, NIRC; RR 12-99) 1. Upon receipt of the notice of informal conference, file a reply within 15 days from receipt of notice; 2. Failure to file a reply, 2 things may happen: a. BIR will send again the Notice of Informal Conference or b. BIR will send a Preliminary Notice of Assessment 3. Upon receipt of Preliminary Assessment Notice (PAN), file a reply within 15 days from receipt 4. Failure to file a reply will result in either: a. BIR will repeat PAN b. Declare the taxpayer in default, and send you a Final Assessment Notice (FAN) 5. Upon receipt of FAN, taxpayer may file a protest within 30 days. Q: Is FAN the one appealable to the Court of Tax Appeals (CTA)? A: NO. This is because 228, NIRC and RR 12-99 requires the exhaustion of administrative remedy of protest. After the receipt of FAN or formal demand within 30days must file a protest before the office of the commissioner of internal revenue. FORMS OF PROTEST 1. Local Tax (Sec. 125, Local Government Code (LGC)) 2. Real Property Tax (Sec. 252, LGC) 3. Tariff and Customs Code (Sec. 2313, RA 7651) In all protest under the different codes, payment under protest is only necessary under the Real Estate Tax.
Q: Supposed it did not decide the case within 180days? A: Do not invoke the Lascano case because it was rejected by RA 9282 In the Lascano case, before you file an appeal although the 180 days have lapsed, you have to wait for the BIR to take positive action. The case was ruled only by the CTA, hence it is not a law. The jurisdiction of the CTA has been amended by RA 9282. RA 9282 provides that in case of inaction of the commissioner after the lapse of 180days, remedy is to file an appeal. RR 12-99 says that after lapse of 180days but within 30days after 180days, that is the time to file an appeal. Q: Supposed the BIR rule within 180? A: Within 30days from receipt of the decision file an appeal to the CTA sitting in division.
75
Q: Supposed the CTA en banc decided not in your favor? A: File an appeal within 15days from receipt of decision to Supreme Court. Q: During the pendency of the protest in the office of the Commissioner, supposed you receive a notice of collection, levy and/ or distraint, what is your remedy? A: 1. YABES v. COMMISSIONER (150 SCRA 278) 2. UNION SHIPPING LINES v. COMMISSIONER (185 SCRA 547) YABES v. COMMISSIONER (150 SCRA 278) F: The taxpayer receives a notice of collection while waiting for the decision of his protest. He then filed an appeal with the CTA contending his protest has been denied because he did not receive a decision but receive a notice of collection. Simultaneously, the BIR filed before the CFI an ordinary civil action for the collection of sum of money. When the judge of the CFI, was about to conduct the hearing of the case, the taxpayer filed an injunction with the SC to prohibit the judge of the CFI contending that a single cause of action is pending in two courts, one in the CTA and another in CFI. H: Injunction was granted prohibiting the Judge of the CFI and requiring the Judge to transfer the records to the CTA saying that the remedy made by the taxpayer was the correct remedy. Q: Was the appeal made on time? A: Yes, when the BIR filed an ordinary action, the protest is deemed denied. Hence an appeal is a proper remedy. UNION SHIPPING LINES v. COMMISSIONER F: The taxpayer was waiting for the decision of his protest. But instead, he received a notice of collection. Immediately, he filed a Motion for Reconsideration and Clarification asking whether his protest has been denied. The BIR did not reply or answer but instead filed an Ordinary Civil Action before the CFI. When the taxpayer received summons, he did not answer but instead filed an Appeal before the CTA. I: Whether or not the remedy of Appeal was the correct remedy and Whether or not it was filed on time. H: Yes. The remedy of appeal is the correct remedy and the appeal was filed on time. The reckoning period within which to file an appeal is the time the taxpayer received the summons.
NOTE: Pursuant to RA 9282, direct appeal to CTA en banc can be made from: 1. Decision of the RTC involving local taxation exercising appellate jurisdiction 2. Decision of the Central Board of Assessment Appeal exercising appellate jurisdiction.
76
77
78
Share of stocks Warrant of distraint furnished to the taxpayer or the officer of the corporation with the warning that the property is subject of distraint and it should not dispose of it. Bank Accounts Warrant of distraint furnished to the taxpayer or the officer of the bank with the warning that the taxpayer should not be allowed to withdraw. Debits and Credits Warrant of distraint furnished to the debtor and creditor 3. Actual Distraint Personal property shall be physically taken by the distraining officer. Within 10 days from the receipt of the warrant, a report of the distraint shall be submitted to the BIR (Sec. 207, par a last par.) The property subject of distraint shall be sold at a public auction EXCEPT bank accounts and debits and credits. Notice of sale shall be by posting in 2 conspicuous place, stating the date and the place of the sale (No publication requirement) Sec. 211: after the sale and within 2 days, a report shall be made to the BIR Q: If the property sold is a personal property, is there a right of redemption? A: NO. The rule is absolute. Q: If the property is a personal property, is there a right of preemption? A: SEC. 210: Before the scheduled sale, the taxpayer is allowed to recover the property by paying all the property by paying all the proper charges as well as the interest, cost and penalties. During the Scheduled Auction Sale, 2 Things may happen: 1. There is bidder and the bid is enough 2. There is no bidder or there is a bidder but the bid is not enough Q: What is the relevance of knowing the difference?
2 Things may happen in a Public Auction: 1. There is a bidder and the bid is enough 2. There is no bidder or the bid is not enough Q: What if there is no bidder A: Forfeiture shall be made (215) or the bid is not enough?
3 Definitions of Forfeiture under the Internal Revenue Code 1. Violation of Excise Tax Law (Sec. 224) 2. If there is no bidder or the bid is not enough (Sec. 215) 3. The order of the Collector to confiscate imported commodities (Sec. 2313, TCC) Relevance of the Choice of Words: Under sec. 212, the law says purchase Under sec. 215, the law says forfeiture
79
Q: After sale, if there was deficiency? A: There shall be no further levy, because 215 says that it shall be to the total satisfaction of the taxpayer. Q: After sale, if there was an excess? A: It shall not be returned to the taxpayer but shall be remitted to the national treasury. Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216 Sec. 218: no court shall issue an injunction to restrain the collection of tax under this code Determine what kind of injunction is referred to here: 1. Prohibitory referred in Sec. 218 because it restrains the collection of tax. 2. Mandatory Q: Is the provision limited to tax under this code? A: Limited to internal revenue taxes. EXCEPT: CTA (Regular Court) RA 1125 and 9282: CTA is authorized to issue injunction to restrain the collection of taxes or fees collected under other code. Q: Is the rule of distraint or levy the same under local taxation? A: Yes, local tax. 175 for DISTRAINT 176 for LEVY Q: How about real property tax? A: No, distraint is not authorized (256, LGC), because the remedy is only Judicial Action and Levy. Tax Lien Non payment of tax, the government has the right to claim a lien over the property of the taxpayer 1. NIRC Sec. 219, NIRC
Q: Supposed a parcel of land is about to be levied by the government, but the same is being foreclosed by the mortgagee, which of the 2 obligee, the government or the mortgagee shall be preferred? A: 219, last portion: The government is the preferred one if the lien is annotated and recorded in the registry of deed. In the absence of annotation in the registry of deeds, the mortgagee is preferred. Q: Do we have the same rule under Local Tax and Real Property Tax? A: NO. Both 173 and 257, the government is always the preferred one. The lien can only be removed by payment of tax, interest and penalty. Sec. 220: approving of filing an ordinary civil action for violation of the internal revenue code The approval must be made by the Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574) F: An ordinary civil action for violation of the tax code was filed in the city of San Fernando. But the filing was only approved by the Revenue Regional Director of Central Luzon. The plaintiff opposed the filing in the court on the ground that it should be approved by the Commissioner and the Revenue RD. H: Sec. 220 should be read with Sec. 7 of the NIRC General Rule: powers and functions of the Commissioner may be delegated but not to a position lower than a Division Chief Under Sec. 7, there are powers which can not be delegated a) Power to recommend to the Secretary of Finance to issue rules and regulation b) Power to decide a case of fist impression c) Power to enter into a compromise agreement d) Power to assign BIR officer in the place of production subject to income tax Since the case does not fall under the prohibited delegation, the filing of the case is legal and tenable. Decision of the Commissioner of Internal Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable to the Secretary of Finance? A: 4, on matters of interpretation of tax laws.
80
Q: Suppose there is a supervening event, and the taxpayer was not able to file a written claim of refund within the period? A: Regardless of supervening event, a written claim for refund must be filed within 2years. Q: Suppose the 2 year period is about to expire and there is no decision yet as to your refund? A: Remedy is to file an appeal before the CTA (deemed a denial) Q: Suppose the BIR decided within 2 years against the refund? A: Appeal within 30days from the decision, provided it is still within the 2 year period. Q: Suppose there is only 21days remaining after receiving the decision, when to file an appeal? A: Within 21days before the end of the 2 year period.
81
82