I. General Principles A.

Definition and Concept of Taxation As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens. As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes. Taxation is a symbiotic relationship, whereby in exchange for the protection that the citizens get from the government, taxes are paid.1 B. Nature of Taxation 1. It is an inherent attribute of sovereignty 2. It is legislative in character C. Characteristics of Taxation 1. The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does need constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it.2 2. The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, except where the Constitution provides otherwise.3 The Congress may by law authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.4
1 2

Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 1988 Churchill and Tait v. Concepcion, 34 Phil 969 3 Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2. 4 Art. X, Sec. 5

3. It is subject to Constitutional and inherent limitations; hence, it is not an absolute power that can be exercised by the legislature anyway it pleases. D. Power of Taxation Compared With Other Powers 1. Police Power 2. Power of Eminent Domain Taxation Raising revenue Police Power Purpose Promote public welfare thru regulations Amount of exaction No limit Limited to the cost of No exaction, regulations, issuance of compensation paid by the the license or surveillance government Benefits received No special or direct benefits received but the enjoyment of the privileges of living in an organized society No direct benefits but a Direct benefit results in healthy economic standard the form of just of society or damnum compensation absque injuria is attained Non-impairment of contracts The impairment rule subsist Contracts may be impaired Transfer of property rights Taxes paid become part of public No transfer but only Property is taken by the funds restraint on the exercise of govt upon payment of property right exists just compensation Scope Affects all persons, property and Affects all persons, excise property, privileges, and even rights Affects only the particular property comprehended Contracts may be impaired Eminent Domain Taking of property for public use

Basis Public necessity Public necessity and the right of the state and the public to self-protection and self-preservation Authority which exercises the power Only by the government or Only by the government or May be granted to public its political subdivisions its political subdivisions service, companies, or public utilities Public necessity, private property is taken for public use

E. Purpose of Taxation 1. Revenue-raising To provide funds or property with which the State promotes the general welfare and protection of its citizens. 2. Non-revenue/special or regulatory Promotion of General Welfare Taxation may be used as an implement of police power in order to promote the general welfare of the people.5 As in the case of taxes levied on excises and privileges like those imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc.6 This is made possible through the progressive system of taxation where the objective is to prevent the underconcentration of wealth in the hands of few individuals. In the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote

Regulation

Reduction of Social Inequality

Encourage Economic Growth

5 6

see Lutz vs. Araneta, 98 Phil 148 and Osmea vs. Orbos, G.R. No. 99886, Mar. 31, 1993 In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public industry like the oil industry.

the countrys economic growth. e. Protectionism In some important sectors of the economy, as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs

F. Principles of Sound Tax System 1. Fiscal Adequacy The sources of tax revenue should coincide with, and approximate the needs of government expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs of government would be in keeping with the principle. 2. Administrative Feasibility Tax laws should be capable of convenient, just and effective administration 3. Theoretical Justice The tax burden should be in proportion to the taxpayers ability to pay7. The 1987 Constitution requires taxation to be equitable and uniform. G. Theory and Basis of Taxation 1. Lifeblood Theory Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need.8 Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. 2. Necessity Theory Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute. 9

7 8

ability-to-pay principle Collector of Internal Revenue vs. Goodrich International Rubber Co ., Sept. 6, 1965 9 In a case, the Supreme Court held that: Taxation is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come with the States terri tory and facilities, and protection which a

3. Benefits-Protection Theory10 The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. 4. Jurisdiction over subject and objects Rules: a) Tax laws cannot operate beyond a States territorial limits. b) The government cannot tax a particular object of taxation which is not within its territorial jurisdiction. c) Property outside ones jurisdiction does not receive any protection of the State.

d) If a law is passed by Congress, it must always see to it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority. H. Doctrines in Taxation 1. Prospectivity of tax laws General Rule Taxes must only be imposed prospectively. Exception The language of the statute clearly demands or express that it shall have a retroactive effect.

2. Imprescriptibility General Rule Taxes are imprescriptible. Exception When provided otherwise by the tax law itself.11

government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA 775) 10 Symbiotic Relationship 11 Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposed. The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. ( CIR vs CA. G.R. No. 104171, Feb. 24, 1999)

3. Double taxation a. Strict sense Referred to as direct duplicate taxation, it means: 1. Taxing twice; 2. by the same taxing authority; 3. within the same jurisdiction or taxing district; 4. for the same purpose; 5. in the same year or taxing period; 6. some of the property in the territory b. Broad sense Referred to as indirect double taxation, it is taxation other than direct duplicate taxation. It extends to all cases in which there is a burden of two or more impositions. c. Constitutionality of double taxation Unlike in the United States Constitution, our Constitution does not prohibit double taxation. However, while it is not forbidden, it is something not favored. Such taxation should, whenever possible, be avoided and prevented. In addition, where there is direct double taxation, there may be a violation of the constitutional precepts of equal protection and uniformity in taxation.12

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The argument against double taxation may not be invoked where one tax is imposed by the State and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or activity by both the State and a political subdivision thereof. And where the statute or ordinance in question, there is no infringement of the rule on equality ( City of Baguio v. De Leon, 25 SCRA 938)

d. Modes of eliminating double taxation Two (2) methods of relief:13 Exemption method The income or capital which is taxable at the state of source or situs is exempted at the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital Although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital, whereas the credit method focuses upon the tax.

Credit method

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A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief on order to avoid double taxation.

4. Escape from taxation a. Shifting of tax burden14 1) Ways of shifting the tax burden a. Forward shifting When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer.15 When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.16 When the tax is shifted two or more times either forward or backward.17 2) Taxes that can be shifted Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.

b. Backward shifting

c. Onward shifting

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The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. Process by which such tax burden is transferred from statutory taxpayer to another without violating the law. What is transferred is not the payment of the tax, but the burden of the tax 15 Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer 16 Example: Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer 17 Example: Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all. 18 e.g. VAT 19 e.g. Income tax

3) Meaning of impact and incidence of taxation Impact of taxation The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax. Incidence of taxation The point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another.

b. Tax avoidance20 The exploitation of the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liabilit c. Tax evasion21 The use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.

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also known as tax minimization; it is not punished by law also known as tax dodging; it is punishable by law Elements of tax evasion: 1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that tax is due 2. An accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not accidental 3. A course of action (or failure of action) which is unlawful Indicia of fraud in tax evasion: 1. Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years; or 2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years coupled with unintentional overstatement of deductions Evidence to prove tax evasion: Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the circumstances of the case. Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of its due taxes. (Republic vs. Gonzales, 13 SCRA 638)

5. Exemption from taxation a. Meaning of exemption from taxation It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected.22 b. Nature of tax exemption 1) It is a mere personal privilege of the grantee. 2) It is generally revocable by the government unless the exemption is founded on a contract which is contract which is protected from impairment. 3) It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is prejudicial thereto. 4) It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis. 5) It is not transferable except if the law expressly provides so. c. Kinds of tax exemption 1) Express23 When certain persons, property or transactions are, by express provision, exempted from all certain taxes, either entirely or in part. 2) Implied24 When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.25

22

Exemption is allowed only if there is a clear provision therefor. It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis. Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation is the exemption. 23 or affirmative exemption 24 or exemption by omission No tax exemption by implication It must be expressed in clear and unmistakable language 25 Every tax statute makes exemptions because of omissions.

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3) Contractual Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws. d. Rationale/grounds for exemption

Rationale for granting tax exemptions Its avowed purpose is some public benefit or interests which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption. The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property.

Grounds for granting tax exemptions 1) May be based on contract.26 2) May be based on some ground of public policy.27 3) May be based on grounds of reciprocity or to lessen the rigors of international double or multiple 28 taxation.

e. Revocation of tax exemption It is an act of liberality which could be taken back by the government unless there are restrictions. Since taxation is the rule and taxation therefrom is the exception, the exemption may be withdrawn by the taxing authority.29

26

In such a case, the public, which is represented by the government is supposed to receive a full equivalent therefor, i.e. charter of a corporation. 27 i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption. 28 Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor. 29 Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.

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6. Compensation and Set-off30 General Rule Taxes are not subject to set-off or legal compensation. The government and the taxpayer are not creditors and debtors or each other. Obligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity.31 7. Compromise A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced.33 8. Tax amnesty a. Definition A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue to collect what otherwise would be due it and, in this sense, prejudicial thereto.34
30

Exception Where both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liquated.32

Requisites of Compensation in taxation 1. The tax assessed and the claim against the government be fully liquidated. 2. The tax assessed and the claim against the government is due and demandable, and 3. The government had already appropriated funds for the payment of the claim (Domingo v. Garlitos, L-18904, June 29, 1963) 31 Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 622 32 see Domingo vs. Garlitos, supra 33 Art. 2028, New Civil Code Requisites: 1. Taxpayer must have a tax liability. 2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer. 3. There must be acceptance of the offer in settlement of the original claim. When taxes may be compromised: 1. A reasonable doubt as to the validity if the claim against the taxpayer exists; 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. 3. Criminal violations, except: a. Those already filed in court b. Those involving fraud. 34 Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must be construed strictly against the taxpayer, who must show compliance with the law. The government is not estopped from questioning the tax liability even if amnesty tax payments were already received Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors by its agents.

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b. Distinguished from tax exemption Tax amnesty Partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to reform are given a chance to do so and therefore become a part of the society with a clean slate. Tax exemption The grant of immunity to particular persons or corporations of a particular class from a tax of which persons and corporations generally within the same state or taxing district are obliged to pay.

Immunity from all criminal, civil and Immunity from civil liability only administrative liabilities arising from nonpayment of taxes Applies only to past tax periods, hence Prospective application retroactive application

There is revenue loss since there was actually taxes due but collection was waived by the government.

None, because there was no actual taxes due as the person or transaction is protected by tax exemption.

Never favored nor presumed in law, and is granted by statute. The terms of the amnesty or exemption must be strictly construed against the taxpayer and liberally in favor of the government.

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9. Construction and Interpretation of: a. Tax laws General Rule Exception

Tax laws are liberally interpreted in favor of Liberal interpretation does not apply to tax the taxpayer and strictly against the exemptions which should be construed in government. strictissimi juris against the taxpayer.35

b. Tax exemption and exclusion General Rule In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer.36 The fundamental theory is that all taxable property should bear its share in the cost and expense of the government. Exceptions 1. The law itself expressly provides for a liberal construction thereof.

2. In cases of exemptions granted to religious, charitable and educational institutions or to the government or its agencies or to public property because the Taxation is the rule and exemption. He who general rule is that they are exempted from claims exemption must be able to justify his tax. claim or right thereto by a grant express in terms too plain to be mistaken and too categorical to be misinterpreted. If not expressly mentioned in the law, it must be at least within its purview by clear legislative intent.

35 36

Reason: Lifeblood doctrine Strict interpretation does not apply to the government and its agencies Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]

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c. Tax rules and regulations 1) General rule only They shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers.37 d. Penal provisions of tax laws Tax laws are civil and not penal in nature, although there are penalties provided for their violation. The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. e. Non-retroactive application to taxpayers 1) Exceptions A statute may operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive. I. Scope and Limitation of Taxation 1. Inherent Limitations a. Public Purpose38 The tax must be used: 1) for the support of the state or 2) for some recognized objects of governments or 3) directly to promote the welfare of the community39

37 38

Sec. 246 Test in determining Public Purposes in tax: a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government. b. Promotion of General Welfare Test whether the law providing the tax directly promotes the welfare of the community in equal measure. The term public purpose is synonymous with governmental purpose; a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. A tax levied for a private purpose constitutes a taking of property without due process of law. The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.

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b. Inherently Legislative 1) General Rule Taxation is purely legislative, Congress cannot delegate the power to others. This limitation arises from the doctrine of separation of powers among the three branches of government. 2) Exceptions a) Delegation to local governments40 The power of local government units to impose taxes and fees is always subject to the limitations which the Congress may provide, the former having no inherent power to tax.41 The power to tax is primarily vested in the Congress, however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation but pursuant to direct authority conferred by Section 5,42 Article X of the1987 Constitution, subject to guidelines and limitations which Congress may provide which must be consistent with the basic policy of local autonomy.43 b) Delegation to the President44 The power granted to Congress under this constitutional provision to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates and other duties and imposts include tariffs rates even for revenue purposes only. Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequently imposed for both revenue-raising and regulatory purposes.45 c) Delegation to administrative agencies With respect to aspects of taxation not legislative in character.46

The test is not as to who receives the money, but the character of the purpose for which it is expended; not the immediate result of the expenditure but rather the ultimate. In the imposition of taxes, public purpose is presumed. 39 taxation as an implement of police power 40 Art. X. Sec. 5 41 Basco v. PAGCOR 42 Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. 43 MCIAA v. Marcos, 261 SCRA 667 44 Art.VI, Sec. 28(2) 45 Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 1992 46 Example: assessment and collection

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c. Territorial 1) Situs of Taxation47 a) Meaning Literally means the place of taxation. The place or the authority that has the right to impose and collect taxes.48 It is premised upon the symbiotic relation between the taxpayer and the State. b) Situs of Income Tax 1) From sources Philippines 2) From sources Philippines within without the the

Determined by the nationality, residence of the taxpayer and source of income.49 3) Income partly within and partly without the Philippines Allocated or apportioned to sources within or without the Philippines.50
Certain aspects of the taxing process that are not really legislative in nature are vested in administrative agencies. In these cases, there really is no delegation, to wit: a) power to value property b) power to assess and collect taxes c) power to perform details of computation, appraisement or adjustments. For the delegation to be constitutionally valid, the law must be complete in itself and must set forth sufficient standards. 47 It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because: 1. Tax laws do not operate beyond a countrys territorial limit. 2. Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. However, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy. 48 Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 2001 49 Sec. 42 Theories: 1. Domicillary theory - the location where the income earner resides is the situs of taxation 2. Nationality theory - the country where the income earner is a citizen is the situs of taxation 3. Source rule - the country which is the source of the income or where the activity that produced the income took place is the situs of taxation. 50 For the purpose of computing the taxable income therefrom, where items of gross income are separately allocated to sources within the Philippines, there shall be deducted: (a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

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c) Situs of Property Taxes (1) Taxes on Real Property sitae.51 The place where the property is located. The applicable concept is lex situs or lex rei (2) Taxes on Personal Property Tangible personal property Intangible personal property

Where the property is physically located The place where the owner is located. The although the owner resides in another applicable concept is mobilia sequuntur jurisdiction.52 personam.53

d) Situs of Excise Tax (1) Estate Tax (2) Donors Tax Determined by the nationality and residence of the taxpayer and the place where the property is located.

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. 51 We can only impose property tax on the properties of a person whose residence is in the Philippines. 52 51 Am Jur. 467 53 movables follow the owner or domicile of the owner Exceptions: 1. When the property has acquired a business situs in another jurisdiction; 2. When an express provision of the statute provide for another rule.

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e) Situs of Business Tax The place where the act or business is performed or occupation is engaged in.54 (1) Sale of Real Property The place or location of the real property.55 (2) Sale of Personal Property The place of sale. (3) VAT Where the goods, property or services are destined, used or consumed. d. International Comity56 The property of a foreign state or government may not be taxed by another.57

54

where the transaction is performed because it is that place that gives protection The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the exercise, nor upon the physical location of the property or in connection with the act or occupation taxed, but depends upon the place on which the act is performed or occupation engaged in. Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs) 55 So, if the property sold is situated within the Phils., the income derived from such sale is considered as income within. 56 Comity is the respect accorded to other sovereign nations. 57 The grounds for the above are: 1. sovereign equality among states 2. usage among states that when one enter into the territory of another, there is an implied understanding that the power does not intend to degrade its dignity by placing itself under the jurisdiction of the latter 3. foreign government may not be sued without its consent so that it is useless to assess the tax since it cannot be collected 4. reciprocity among states

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f. Exemption of Government Entities, Agencies, and Instrumentalities i. Agencies performing governmental functions - tax exempt58 ii. Agencies performing proprietary functions - subject to tax. 2. Constitutional Limitations a. Provisions Directly Affecting Taxation 1) Prohibition against imprisonment for non-payment of poll tax No person shall be imprisoned for debt or non-payment of poll tax.59 2) Uniformity and equality of taxation The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.60

58

The exemption applies only to governmental entities through which the government immediately and directly exercises its sovereign powers. Tax exemption of property owned by the Republic of the Philippines refers to the property owned by the government and its agencies which do not have separate and distinct personality ( NDC vs. Cebu City) Those created by special charter (incorporated agencies) are not covered by the exemption 59 Sec. 20, Art. III The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec. 161, LGC) The prohibition is against imprisonment for non -payment of poll tax. Thus, a person is subject to imprisonment for violation of the community tax law other than for non-payment of the tax and for nonpayment of other taxes as prescribed by law. The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate or non-payment of other taxes. 60 Sec. 28(1), Art. VI Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every place where the subject of it is found. Equitable means fair, just, reasonable and proportionate to ones ability to pay. Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers ability to pay Inequality which results in singling out one particular class for taxation or exemption infringes no constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27) The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable.

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3) Grant by Congress of authority to the President to impose tariff rates The Congress may, by law, authorize the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.61 4) Prohibition against taxation of religious, charitable entities, and educational entities Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.62 5) Prohibition against taxation of non-stock, non-profit institutions All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.63 6) Majority vote of Congress for grant of tax exemption No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress.64
61 62

Art. 28 (2), Art. VI Sec. 4(4), Art. XIV. The exemption granted to non-stock, non-profit educational institution covers income, property, and donors taxes, and custom duties. To be exempt from tax or duty, the revenue, assets, property or donation must be used actually, directly and exclusively for educational purpose. In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax. The said constitutional provision granting tax exemption to non-stock, non-profit educational institution is self-executing. Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative implementation. Their tax exemption is not self-executing. Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed are exempt from property tax, whether the educational institution is proprietary or non-profit 63 Sec. 4 (3), Art. XIV Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because the transaction was an isolated one (Manila Polo Club vs. CTA) Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax because the operation of those entities was merely incidental to the primary purpose of the exempt corporation (St. Paul Hospital of Iloilo vs. CIR) Where the educational institution is private and non-profit (but a stock corporation), it is subject to income tax but at the preferential rate of ten percent (10%) 64 Sec. 28(4), Art. VI The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all members of the Congress.

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7) Prohibition on use of tax levied for special purpose All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned the balance, if any, shall be transferred to the general funds of the government.65 8) Presidents veto power on appropriation, revenue, tariff bills The President shall have the power to veto any particular item or items in an Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which he does not object.66 9) Non-impairment of jurisdiction of the Supreme Court The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Sec. 567 hereof.
65

Sec. 29(3), Art. VI An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of imported crude oil. In a decide case, it was held that where under an executive order of the President, this special fund is transferred from the general fund to a trust liability account, the constitutional mandate is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit ( Osmea vs Orbos, et al., G.R. No. 99886, Mar. 31, 1993) 66 Sec. 27(2), Art. VI 67 The Supreme Court shall have the following powers: 1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus. 2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: a. All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. c. All cases in which the jurisdiction of any lower court is in issue. d. All criminal cases in which the penalty imposed is reclusion perpetua or higher. e. All cases in which only an error or question of law is involved. 3. Assign temporarily judges of lower courts to other stations as public interest may require. Such temporary assignment shall not exceed six months without the consent of the judge concerned. 4. Order a change of venue or place of trial to avoid a miscarriage of justice. 5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading, practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish, increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall remain effective unless disapproved by the Supreme Court. 6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)

22

10) Grant of power to the local government units to create its own sources of revenue Each local government unit has the power to create its own revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide.68 11) Flexible tariff clause This clause provides the authority given to the President to adjust tariff rates under Section 40169 of the Tariff and Customs Code.70 12) Exemption from real property taxes Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.71
68

Sec 5, Art. X Local government units have no power to further delegate said constitutional grant to raise revenue, because what is delegated is not the enactment or the imposition of a tax, it is the administrative implementation. The power of local government units to impose taxes and fees is always subject to the limitations which Congress may provide, the former having no inherent power to tax. Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal corporations. Congress therefore has the power to control over local government units. If Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for exemptions or even take back the power (Basco vs. PAGCOR) 69 In the interest of national economy, general welfare and/or national security, the President upon the recommendation of the National Economic and Development Authority is empowered: 1) To increase, reduce or remove existing protective rates of import duty, provided that the increase should not be higher than 100% ad valorem 2) To establish import quota or to ban imports of any commodity 3) To impose additional duty on all imports not exceeding 10% ad valorem. 70 Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992) 71 Sec. 28(3), Art. VI Lest of the tax exemption: the use and not ownership of the property To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned. The word exclusively means primarily. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The constitutional exemption applies only to property tax. However, it would seem that under existing law, gifts made in favor or religious charitable and educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC) The constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educational purposes. ( Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

23

13) No appropriation or use of public money for religious purposes No public money or property shall be appropriated, applied, paid or employed, directly or indirectly for the use, benefit, support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.72 b. Provisions Indirectly Affecting Taxation 1) Due process No person shall be deprived of life, liberty or property without due process of law73 x x x. 2) Equal protection xxx nor shall any person be denied the equal protection of the laws.74 3) Religious freedom No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall be forever allowed. 75 4) Non-impairment of obligations of contracts No law impairing the obligation of contract shall be passed.76

72

Sec. 29(2), Art. VI Public property may be leased to a religious group provided that the lease will be totally under the same conditions as that to private persons (amount of rent). Congress is without power to appropriate funds for a private purpose. 73 Sec. 1, Art. III 74 Ibid. 75 Sec. 5 Art. III License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the nature of a condition or permit of the exercise of the right. However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs Secretary of Finance, 235 SCRA 630) 76 Sec. 10, Art. III A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation. The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires.

24

J. Stages of Taxation 1. Levy Determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes. 2. Assessment and Collection The manner of enforcement of the obligation on the part of those who are taxed.77 The two processes together constitute the taxation system. 3. Payment The act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available. 4. Refund The recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully collected. K. Definition, Nature, and Characteristics of Taxes Definition Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs. They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to ensure uniformity of contribution and a just apportionment of the burdens of government. 1. It is levied by the law-making body of the State.78 2. It is an enforced contribution.79 3. It is generally payable in money.80
77 78

Nature

Characteristics

This includes payment by the taxpayer and is referred to as tax administration The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability. 79 A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

25

4. It is proportionate in character.81 5. It is levied on persons or property.82 6. It is levied for public purpose or purposes.83 7. It is levied by the State which has jurisdiction over the persons or property.84

L. Requisites of a valid tax 1) It should be for a public purpose 2) The rule of taxation should be uniform 3) Either the person or property taxed be within the jurisdiction of the taxing authority 4) The assessment and collection be in consonance with the due process clause 5) The tax must not infringe on the inherent and constitutional limitations of the power of taxation.85 M. Tax as distinguished from other forms of exactions 1. Tariff May be used in three (3) senses: a. A book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same. b. Duties payable on goods imported or exported.86 c. The system or principle of imposing duties on the importation/exportation of goods.
80

Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of taxes. 81 It is ordinarily based on the taxpayers ability to pay. 82 A tax may also be imposed on acts, transactions, rights or privileges. 83 Taxation involves, and a tax constitutes, a burden to provide income for public purposes. 84 The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state. 85 Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But their collection should not be tainted with arbitrariness 86 P.D. No. 230

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2. Toll Sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge of the like, of a public nature. Tax Demand of sovereignty Paid for the support of the government Generally, no limit as to amount imposed Toll Demand of proprietorship Paid for the use of anothers property Amount depends on the cost of construction or maintenance of the public improvement used Imposed by the government or private individuals or entities

Imposed only by the government

3. License fee A charge imposed under the police power for the purposes of regulation.87 Tax License/Permit Fee

Enforced contribution assessed by sovereign Legal compensation or reward of an officer authority to defray public expenses for specific purposes For revenue purposes
87

For regulation purposes

Three kinds of licenses are recognized in the law: 1. Licenses for the regulation of useful occupations. 2. Licenses for the regulation or restriction of non-useful occupations or enterprises 3. Licenses for revenue only Importance of the distinctions between tax and license fee: 1. Some limitations apply only to one and not to the other, and that exemption from taxes may not include exemption from license fees. 2. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases) 3. An extraction, however, maybe considered both a tax and a license fee. 4. But a tax may have only a regulatory purpose. 5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon City, 172 SCRA 629)

27

An exercise of the taxing power

An exercise of the police power

Generally no limit in the amount of tax to be Amount is limited to the necessary expenses paid of inspection and regulation Imposed also on persons and property 4. Special assessment An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements.88 Tax Imposed on persons, property and excise Personal liability of the person assessed Special Assessment Levied only on land Not a personal liability of the person assessed, i.e. his liability is limited only to the land involved Based wholly on benefits Imposed on the right to exercise privilege

Based on necessity as well as on benefits received General application89

Exceptional both as time and place

88

Since special assessments are not taxes within the constitutional or statutory provisions on tax exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to special assessments. However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which are actually, directly and exclusively used for religious, charitable and educational purposes are not exactly exempt from real property taxes but are exempt from the imposition of special assessments as well. (see Aban) The general rule is that an exemption from taxation does not include exemption from special assessment. 89 see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547

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5. Debt Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts between parties for their private interest or resulting from their own acts or omissions. Tax Based on law Generally, cannot be assigned Generally payable in money Generally not compensation subject to set-off Debt Based on contracts, express or implied Assignable May be paid in kind or May be subject to set-off or compensation

Imprisonment is a sanction for non-payment No imprisonment for non-payment of debt of tax except poll tax Governed by special prescriptive periods Governed by the ordinary periods of provided for in the Tax Code prescriptions Does not draw interest except only when Draws interest when so stipulated, or in case delinquent of default

29

N. Kinds of Taxes 1. As to object Personal, capitation, or poll tax Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged.90 Property tax Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment. Privilege tax A charge imposed upon performance of an act, enjoyment of privilege, the engaging in occupation. the the or an

2. As to burden or incidence Direct Demanded from the person who also shoulders the burden of the tax. It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another. Indirect Demanded from a person in the expectation and intention that he or she shall indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates Specific Ad valorem Mixed are and partly partly

The computation of the tax Tax upon the value of the Tax rates or the rates of the tax is article or thing subject to progressive already provided for by law. taxation; the intervention of regressive. another party is needed for the computation of the tax.

90

i.e. community tax.

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4. As to purposes General or fiscal Special, regulatory, or sumptuary

Imposed for the purpose of raising public Imposed primarily for the regulation of funds for the service of the government. useful or non-useful occupation or enterprises and secondarily only for the purpose of raising public funds. 5. As to scope or authority to impose National internal revenue taxes Imposed by the National Government. Local real property tax, municipal tax Imposed by the municipal corporations or local government units.

6. As to graduation Progressive Regressive Proportionate

Rate or amount of tax Tax rate decreases as the Tax based on a fixed increases as the amount of amount of income to be percentage of the amount of the income or earning to be taxed increases. the property receipts or taxed increases. other basis to be taxed.91

91

Example: real estate tax.

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II. National Internal Revenue Code of 1997 as amended (NIRC) A. Income Taxation 1. Income Tax Systems a. Global Tax System All income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a fixed rate. b. Schedular Tax System The various types or items of income92 are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Schedular system There are different tax rates Global system There is a single tax rate

There are different categories of taxable There is no need for classification as all income taxpayers are subjected to a single tax rate. Usually used in the income taxation of Usually applied to corporations. individuals c. Semi-schedular or semi-global tax system93 A system where the compensation, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income not subject to final tax, and other income, in the case of corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates; method of taxation under the law.

92 93

compensation, business or professional income approach used in the Philippines

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2. Features of the Philippine Income Tax Law Direct tax Progressive Comprehensive Semi-schedular semi-global system94 or tax

One assessed upon the property, person, business income, etc. of those who pay them.

The tax rates increase as the tax base increases. In certain cases, however, final taxes are imposed on passive income.95

The Philippine Income tax law adopted the so-called comprehensive tax situs comprehensive in the sense that it practically applies all possible rules of tax situs.

3. Criteria in Imposing Philippine Income Tax Citizenship Principle Residence Principle Source Principle An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his income from sources within the Philippines96 despite the fact that he has not set foot in the Philippines.

A citizen of the Philippines is A resident alien is liable to subject to Philippine income pay income tax on his tax income from sources within the Philippines but exempt (a) on his worldwide income, from tax on his income from if he resides in the sources outside the Philippines, or Philippines. (b) only on his income from sources within the Philippines, if he qualifies as nonresident citizen.

94 95

supra The individual income tax system, in the main, is progressive in nature 96 such as dividend, interest, rent, or royalty

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4. Types of Philippine Income Tax Presumptive Income Tax A scale of income taxes is imposed in relation to a group of persons actual expenditure and the presumed income. Composite Tax A tax consisting of a series of separate quasi-personal taxes, assessed on the particular source of income with a superimposed personal tax on the income as a whole. Unitary Income Tax Incomes are arranged according to source. The separate items are added together and the rate applied to the resulting total income.

5. Taxable Period Calendar Period A period of twelve (12) months commencing from January 1 and ending December 31. Fiscal Period Short Period

An accounting period of 12 A period of less than twelve months ending on the last (12) months. day of any month other than December.97

97

ex. Feb. 1 to Jan. 31

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6. Kinds of Taxpayers a. Individual Taxpayers 1) Citizens a) Resident citizens98 Citizens of the Philippines who are residing therein. b) Non-resident citizens99 1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Phils. who leaves the country during the taxable year to reside abroad, either as immigrant or for employment or on permanent basis. 3. A citizen of the Phils. who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously considered as non-resident citizen and who arrives in the Phils. at any time during the taxable year to reside permanently in the country.100 5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end of the year.101

98 99

Taxable for income derived from all sources based on taxable (i.e., net) income Taxable for income derived within the Philippines based on taxable (i.e., net) income 100 He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his income derived from sources abroad until the date of his arrival in the Phils. 101 Sec. 22 (E) The continuity of residence abroad is not essential. If physical presence is established, such physical presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73, November 26, 1973) An overseas contract worker is taxable only on income from sources within the Philippines. (Sec. 23 (c). A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as member of the complement of a vessel engaged exclusively in international trade is treated as an overseas contract worker. Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence abroad, however, need not be continuous. [RR1-79]

35

2) Aliens102 a) Resident aliens Those whose residence are within the Philippines but who are not citizens thereof.103 b) Non-resident alien104 Those not residing in the Phils. and who are not citizens thereof.105 (1) Engaged in trade or business An alien who stays in the Philippines for more than 180 days.106

102

What makes an alien a resident or non-resident alien is his intention with regard to the length and nature of his stay. Thus: a. One who comes to the Philippines for a definite purpose which in its very nature may be promptly accomplished is not a resident citizen. b. One who comes to the Philippines for a definite purpose which in its very nature would require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (Sec. 5, RR 2) Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one (1) year by the end of the taxable year is a resident alien An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines, regardless of whether he owns 1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory) 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (example: Merchandise Inventory) 3. Property used in the trade or business which is subject to the allowance for depreciation (example: Office Equipment) actually engages in trade or business therein. (Mamalateo) 103 Sec. 22 [F], NIRC A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. For tax purposes, a resident alien is; 1. An alien who lives in the Phils. with no definite intention to stay as a resident. 2. One who comes in the Phils. for definite purposes which in its very nature would require an extended stay and to that end, makes his home temporarily in the Phils. 3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils. 104 A non-resident alien individual who came to the Phils. and stayed therein for an aggregate period of more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils. 105 Sec. 22 (G), id. 106 Sec. 25 [A], NIRC

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(2) Not engaged in trade or business An alien who stays in the Philippines for 180 days or less.107 (3) Special Class of Individual Employees a) Minimum wage earner A worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.108 By virtue of the passage of R.A. 9504, minimum wage earners are exempted from the payment of the net income tax.109 b) Corporations110 1) Domestic corporations Created or organized in the Phils. or under its laws.111 2) Foreign corporations Created, organized or existing under any laws other than those of the Phils. (1) Resident Engaged in trade or business112 within the Phils.

107

Sec. 25 [B], id. It is the length of stay in the Philippines that determines whether or not he is engaged in trade or business. The number of transaction he entered into is immaterial. 108 Sec. 22 (HH), id. as amended by R.A. 9504 109 They are not required to file an income tax return Thus: xxx, That minimum wage earners shall be exempt from the payment of income tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. 110 The term shall include partnership, no matter how created or organized, joint stock companies, joint accounts, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to operating or consortium agreement under a service contract with the government. (Sec. 24(b), id) 111 liable for income from sources within and without the Philippines (Sec 22[C], id.) 112 The term implies a continuity of commercial dealings and arrangements and contemplates to that extent, the performance of acts or works or the exercise of some of the functions normally insistent to and in the progressive prosecution of commercial gain or for the purpose and the object of the business organization (Comm. vs. British Overseas Airways Corporation BOAC case 149 SCRA 395)

37

(2) Non-resident Not engaged in trade or business within the Phils. c. Partnerships113 Partnership is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.114 d. General Professional Partnerships Formed by persons for the role purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade & business.115 e. Estates and Trusts Estate Trust

The mass of property, rights and obligations An arrangement created by will or coleft behind by the decedent upon his death.116 agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus117 to be distributed in accordance with the directions of the creator as expressed in the governing instrument.118
113

An ordinary business partnership is considered as a corporation and is thus subject to tax as such. Partners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends. 114 Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable. What are taxable unregistered partnerships? The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even associations or joint accounts which have no legal personalities apart from their individual members. Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1] 115 Sec. 22 (b) e. g. Law firm General professional partnerships are not taxable but partners are taxed on their share of partnership profits actually or constructively paid during the year. 116 Estates may be classified as follows: 1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership. - The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs shall include in their respective returns their distributive shares of the net income of the estate. 2. Estates under judicial settlement - are subject to income tax in the same manner as individual. - Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor, trustee, and administrator). - The return should be filed by executor or administrator of the trust. 117 principal 118 Two (2) Kinds of Trust :

38

f. Co-ownerships119 It is created whenever the ownership of an undivided thing or right belongs to different persons. 7. Income Taxation a. Definition A tax on all yearly profits arising from property, profession, trade or business, or a tax on persons income, emoluments, profits and the like.120 b. Nature It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but on the privilege of receiving said income or profit.

1. Irrevocable Trust - is considered as a separate taxpayer. 2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of the trust is vested: (a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or (b) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom. The tax shall be imposed on taxable income of the grantor. 119 General rule: Co-ownership is exempt from income tax because the activities of the co-owners are usually limited to the preservation of the properties owned in common and the collection of the income therefrom. Exceptions: (When co-ownership is subject to tax). (1) When the income of the co-ownership is invested by the co-owners in other income-producing properties or income-producing activities, and (2) When there is no attempt to divide inherited property for more than ten (10) years and the said property was not under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist. Tax liability of co-owners: The co-owners in exempt co-ownership shall be liable for income tax only in their separate and individual capacity. Filing of return: The owners shall report and include in their respective personal income tax returns their shares of the net income of the co-ownership. Test to determine whether co-ownership is a taxable unregistered partnership: Find out whether the heirs have made substantial improvements on the inherited property. If so, the implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the coownership will be taxed as an unregistered partnership. 120 Fisher v. Trinidad, GR L-19030, Oct. 20, 1922

39

c. General principles 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. 3. An individual citizen of the Philippines, who is working and deriving income from abroad as an overseas contract worker, is taxable only on income derived from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. 4. An alien individual, whether or not a resident of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. 8. Income a. Definition It means cash or its equivalent coming to a person within a specified period, whether as payment for services, interest or profit from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of capital assets.121 b. Nature All wealth which flows to the taxpayer other than a mere return of capital. It is an amount of money coming to a person/corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor.122
121

It denotes the amount of money or property received by a person or corporation within a specified time, whether as payment for services, interests, or profits from investments ( Fisher vs. Trinidad, 43 Phil 973) Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of exchange transactions. 122 Conwi v. Court of Tax Appeals

40

Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as their disposition. c. When income is taxable 1) Existence of income There must be gain a value received in the form of cash or its equivalent as a result of rendition of service or earnings in excess of capital invested.123 2) Realization of income a) Tests of Realization Unless income is deemed realized, then there is no taxable income. Revenue is generally recognized when both conditions are met: a. The earning process is complete or virtually complete; and b. An exchange has taken place.124 b) Actual vis--vis Constructive receipt Actual receipt Constructive receipt

Income may be actual receipt or physical When money consideration or its equivalent receipt. is placed at the control of the person who rendered the service without restriction by the payor.125

123

A mere expectation of profits is not an income A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not give rise to or create taxable income. Items or amounts received which do not add to the taxpayers net worth or redound to his benefits such as amounts merely deposited or entrusted to him are not considered as gains ( CIR vs. Tours Specialist, 183 SCRA 402). Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts indebtedness, or gain from exchange of property. 124 Manila Mandarin Hotels, Inc. v. CIR 125 Sec. 4.108-A, RR 16-2005 Examples of income constructively received: a. Deposit in banks which are made available to the seller of services without restrictions b. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered c. Transfer of the amounts retained by the payor to the account of the contractor d. Interest coupons that have matured and are payable but have not been encashed e. Undistributed share of a partner in the profits of a general partnership

41

3) Recognition of income a. There is income, gain or profit b. The income, gain or profit is received or realized during the taxable year c. The income gain or profit is not exempt from income tax 4) Methods of accounting a) Cash method vis--vis Accrual method Cash method Accrual method

Recognition of income and expense Gains and profits are included in gross dependent on inflow or outflow of cash.126 income when earned whether received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income b) Installment payment vis--vis Deferred payment vis-vis Percentage completion127 Installment payment Appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made. Deferred payment Initial payments exceed 25% of the gross selling price and such transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. Percentage completion Persons whose gross income is derived from long-term contracts shall report such income upon the basis of percentage of completion.

126

meaning, you recognize the income when you actually receive the cash payment for the sale, and you recognize the expense when you actually pay cash for the expense 127 in long term contracts

42

d. Tests in determining whether income is earned for tax purposes 1) Realization test No taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.128 2) Claim of right doctrine or Doctrine of ownership, command, or control A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay. The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence, the realization of the income by him who exercises it. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid. 3) Economic benefit test, Doctrine of proprietary interest Income realized is taxable only to the extent that the taxpayer is economically benefited. Any economic benefit to the employee that increases his net worth is taxable. 4) Severance test There is no taxable income until there is a separation from capital of something which is of exchangeable value129 thereby supplying the realization or transmutation which would result in the receipt of income. Thus, income is not taxable unless separated or severed from the capital or labor that bore it. 5) All events test Requires that the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is

128 129

There must be separation from capital of something of exchangeable value (e.g., sale of asset) Eisner vs. Macomer, 252 US 189

43

unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.130 9. Gross Income a. Definition All income derived during a taxable year by a taxpayer from whatever source, whether legal or illegal,131 including the following items: 1. Gross income derived from the conduct of trade or business or the exercise of a profession. 2. Rents 3. Interests 4. Prizes and winnings to 5. Compensation for services in whatever form paid, including, but not limited fees, salaries, wages, commissions, and similar items 6. Annuities 7. Royalties 8. Dividends 9. Gains derived from dealings in property 10. Pensions 11. Partner's distributive share from the net income of the general professional partnership.132
130 131

CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007 As such, income includes the following, among others: 1. Treasure found; 2. Punitive damages representing profit lost; 3. Amount received by mistake; 4. Cancellation of the taxpayer indebtedness; 5. Receipt of usurious interest; 6. Illegal gains; 7. Taxes paid and claimed as deduction subsequently refunded; 8. Bad debt recovery. 132 The above enumeration can be simplified into five (5) categories: 1. Compensation Income - income derived from rendering of services under an employer-employee relationship. 2. Professional Income - fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers, engineers and the like.

44

b. Concept of income from whatever source derived Implies the inclusion of all income under the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains.133 All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income.134 c. Gross Income vis--vis Net Income vis--vis Taxable Income Gross Income Net Income or Taxable Income As to deductions Allows deductions As to exemptions Grants no exemptions Grants exemptions As to tax base Gross Income Net Income Advantages/Disadvantages Simplifies the income tax system Confusing and complex process of filing income tax return Vulnerable to corruption on account of margin of discretion in the grant of deductions Provides equitable releifs in the form of deductions, exemptions and tax credit

Allows no deductions

Substantial reduction in corruption and tax evasion as the exercise of discretion, to allow or disallow deductions, is dispensed with. More administratively feasible

3. Business Income - gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and long-term contracts. 4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which includes, but not limited to interest income, royalty income, dividend income, prizes and winnings. 5. Gains from Dealings in Property It includes all income derived from the disposition of property whether real, personal or mixed. 133 It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud. 134 Gutierrez v. CIR, CTA case

45

Does away with wastage of manpower and supplies

Tax audit minimizes fraud

d. Classification of Income as to Source 1) Gross income and taxable income from sources within the Philippines 1) Interests: a) Interests derived from sources within the Phils. b) Interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise.135 2) Dividends: a) From a domestic corporation, and b) From a foreign corporation 50% or more of the gross income of which for the 3-year period ending with the close of the taxable year preceding the declaration of such dividends, or for such part of such period as the corporation within the Phils.136 has been in existence, was derived from sources. It must be only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. 3) Compensation for labor or personal services performed in the Phils.137 4) Rentals and Royalties from property located in the Phils. or from any interest in such property, including rentals or royalties for a) The use of, or the right or privilege to use in the Phils. any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or night; b) The use of, or the right to use in the Phils. any industrial, commercial or scientific equipment; c) The supply of scientific, technical, industrial or commercial knowledge or information; d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in
135 136

Sec. 42, (A)( 1) Id. (A)(2) 137 Id. (A)(3)

46

paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and g) The use of, or the right to use: 1. motion picture films; 2. films or video tapes for use in connection with television; and 3. tapes for use in connection with radio broadcasting 5) Gains, profits, and income from the sale of real property located in the Phils. and 6) Gains, profits, and income from sale of personal property, treated as derived entirely from the country where it is sold.138 2) Gross income and taxable income from sources without the Philippines 1) Interest other than those derived from sources within the Phils. 2) Dividends other than those derived from sources within the Phils.

138

Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated as derived entirely from sources within the Phils. regardless of where the shares are sold. Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of where and when the title to the goods passes from the seller to the buyer is decisive. Enumeration in Section 42 not all-inclusive. In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the Supreme Court held: xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Phils. a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered xxx The Supreme Court further held: xxx The absence of flight operations to and from the Phils. is not determination of the source of income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx which produced the income. Unquestionably the passage documentations in these cases were sold in the Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils. xxx

47

a. Dividends from foreign corporations in general; and b. Dividends derived from foreign corporations, 50% or more of the gross income of which for the 3-year period preceding the declaration of dividends. 3) Compensation for labor or personal services performed outside the Phils. 4) Rentals or royalties from property located outside the Phils. or from any interest in such property including rentals or royalties for the use of or for the privilege of using outside the Phils., patents, etc. 5) Gains, profits and income from the sale of real property located outside the Phils. 6) Gains, profits and income from the sale of personal property located outside the Phils., and 7) Income derived from the purchase of personal property within and its sale outside the Phils.139 3) Income partly within or partly without the Philippines 1) Income from transportation such as foreign steamship companies whose vessel touch the Phil. ports140 and other services rendered partly within and partly outside the Phils. such as foreign corporations carrying on the business of transmission of telegraph and cable messages between points outside the Phils.141 2) Income from the sale of personal property produced in whole or in part by the taxpayer within and sold outside the Phils. or produced by the taxpayer outside and sold within the Phils.

139 140

Sec. 42 Sec. 163, Regulations 141 Sec. 164, id.

48

e. Sources of income subject to tax 1) Compensation Income142 All remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash.143 It includes all remuneration for services rendered by an employee for his employer unless specifically excluded under the NIRC.144 2) Fringe Benefits145 a) Special treatment of fringe benefits Applied to fringe benefits given or furnished to managerial or supervising employees and not to the rank and file.146 b) Definition Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employee.

142

Forms of Compensation a. money b. in kind Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid to the employee in cash. Living quarters furnished to the employee in addition to cash salary. The rental value should be reported as income. Meals given to employee, the value thereof substitutes income. 143 Sec. 78(A) It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances 5. Bonuses 6. Fringe Benefits of rank and file employees It does not include remuneration paid: For agricultural labor paid entirely in products of the farm where the labor is performed, or For domestic service in a private home, or For casual labor not in the course of the employer's trade or business, or For services by a citizen or resident of the Philippines for a foreign govt or an intl organization. 144 Sec. 2.78.1, RR 2-98 145 Sec. 33 The fringe benefit covered refers to those enjoyed by managerial and supervisory employees 146 Pursuant to Revenue Regulations No. 3 98 (dated May 21, 1998) implementing section 33 of the Tax Code.

49

c) Taxable and non-taxable fringe benefits Taxable fringe benefits 1) Housing Privileges Non-taxable fringe benefits 1) Fringe benefits which are authorized and exempted from tax under special laws;

(a) Lease of residential property for the use of the employee as his usual place of 2) Contributions of the employer for the residence. benefit of the employee to retirement, insurance and hospitalization benefit plans; (b) Residential Property owned by employer and assigned to employee as his 3) Benefits given to the rank and file usual place of residence. employees, whether granted under a collective bargaining agreement or not; (c) Residential property purchased by employer on installment basis for the use of 4) De minimis benefits; employer as his usual place of residence. 5) When the fringe benefit is required by the nature of, or necessary to the trade, business (d) Residential property purchased by or profession of the employer ER and ownership is transferred to EE as his usual place of residence. 6) When the fringe benefit is for the convenience of the employer. This is known (e) Residential property transferred to as Employers Convenience Rule.156 employee at less than employers acquisition cost.147 2) Household Expenses refer to expenses of the employee paid by the employer for household personnel or other personal expenses, which shall include: (a) salaries of household helper (b) personal driver of the employee (c) payment for homeowner assoc., etc. 3) Interest on loan at less than market rate148
147

Non taxable Housing Fringe Benefits (a) Housing privilege of military officials of AFP (b) Housing unit, which is situated inside or adjacent to the premise of a business or factory. A housing unit is considered adjacent if it is located within the maximum 50 meters from the perimeter of the business premises. (c) Housing benefit granted to employees on a temporary basis not exceeding three (3) months 148 If the employer lends money to his employee:

50

4) Expenses for Foreign Travel General rule: Expenses for foreign travel insured by the employee and/or family members of the employee borne by the employer shall be treated as taxable fringe benefits of the employee. Except: Where the expenses for foreign travel paid by the employer for the employee are for the purpose of attending business meeting or convention. The exemption covers only the following expenses: a) Inland travel expenses except lodging cost in hotel averaging US$ 300 or less per day;149 and b) Cost of economy or business class airline ticket.150 5) Membership fees, dues and other expenses borne by the employer for his employee, in social or athletic clubs or other similar organizations.151 6) Life or Health Insurance General rule: The cost of life or health insurance and other non life insurance premiums or similar amounts in excess of what the law
Free of interest or at a rate lower than 12% (or prevailing market rate) the interest foregone by the employer or the difference of the interest assumed by the employer and the 12% rate shall be treated as taxable fringe benefit. Applicable to installment payment or loan with interest rate lower than 12% starting January 1, 1998. 156 Sec. 32, NIRC; Sec. 2.33 [C], RR 3-98 149 Travel expenses should be supported by documents proving the actual occurrences of the meetings or conventions. Likewise, documents and evidence showing the business purpose of the employees travel must be presented otherwise, the entire cost will be considered taxable fringe benefit. 150 However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe benefit tax. 151 These are treated as taxable Fringe Benefits of the employee in full.

51

allows borne by the employer for his employees shall be treated as taxable fringe benefits. Except: a) Contribution of the employer for the benefits of the employee pursuant to existing laws.152 b) The cost of premium borne by the employer for the group insurance of his employees. 7) Holidays and Vacation Expense 8) Motor Vehicle a) Motor vehicle purchased employer in name of employee. by

b) Cash for the purchased provided by the employer, the ownership is placed in the name of the employee c) Purchase on Installment basis, the ownership is placed in the name of the employee d) Portion of shouldered by employer purchased price

e) Fleet of motor vehicle leased by the employer f) Fleet of Motor vehicles owned and maintained by employer.153
152 153

such as R.A. 8287 (SSS) or R.A. 8291 (GSIS). In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal purpose of the employee and partly for the benefit of his employer, the monetary value shall be the entire value of the benefit. Under letters e and f, the fleet of motor vehicles is for the use of the business and the employees. The value of the benefit shall be the rental payments (e) or the acquisition cost (f) of all motor vehicles not normally used for sales, freight, delivery service and non-personal use. The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit the value of the benefit shall be measured based on the depreciation of the Yacht at an estimated useful life of 20 yrs.

52

9) Expense Account a) Expenses incurred by the employee but paid by his employer. b) Expenses paid by the employee but reimbursed by his employer.154 10) Educational Assistance General Rule: The cost of the educational assistance to the employee or his dependents which are borne by the employer shall be treated as Taxable Fringe Benefits. Exception: a) Education granted to employee155 b) Educational Assistance granted to the dependents of the employee in the nature of educational assistance to the dependents of the employee through a competitive scheme under a scholarship program of the company.

The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not subject to FBT. 154 Expense account not subject to FBT. a) expenses duly receipted for in the name of the employer and b) The expenditures do not partake the nature of personal expenses attributable to the employee. Personal expenses of the employee (like groceries) paid for or reimbursed by the employer are taxable fringe benefits, whether or not duly receipted for in the name of the EE. Representation and Transportation Allowances (RATA) refers to fixed amounts which are regularly received by the employees as part of their monthly compensation income. They are not treated as Taxable Fringe Benefits but the same are treated as Taxable Compensation Income. 155 Requisites: 1. Educational grant whereby the study is directly connected with the trade, business or profession of the ER. 2. And there is a written contract obligating the EE to remain under the employment for a certain period.

53

3) Professional Income The fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients. 4) Income from Business The income derived from merchandising, mining, manufacturing and farming operations. 5) Income from Dealings in Property a) Types of Properties (1) Ordinary assets Properties held by the taxpayer in the pursuit of his profession, trade or business: i. Stock in Trade; ii. Property of a kind which would properly be included in the inventory if on hand at the close of the taxable year; iii. Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; iv. Property used in trade or business which in subject to the allowance for depreciation; and v. Real property used in trade or business.157 (2) Capital assets Properties not specifically included in the statutory definition158 constitutes capital assets, the profits or losses on the sale or the exchange of which are treated as capital gains or capital.159 The statutory definition of "capital assets" practically excludes from its scope, all property held by the taxpayer if used in connection with his trade or business.

157 158

Sec. 39, [A] Include personal property (not used in trade or business) such as movables in ones residence, personal vehicles, appliances and furniture for personal use, jewelries etc. as well as real property (not used in trade or business) such as residential land, idle land not used in business operations and residential house. 159 Sec. 39, [A] This is an enumeration by exclusion, all others not enumerated are capital assets.

54

b) Types of Gains from dealings in property (1) Ordinary income vis--vis Capital gain Ordinary gain Capital gain

Any gain from the sale or exchange of Any gain from the sale or exchange of property which is not a capital asset.160 property which is a capital asset. (2) Actual gain vis--vis Presumed gain Actual gain Excess of the cost from a sale of asset. Presumed gain Presumption of law that the seller realized gains, which is taxed at 6% of the selling price or fair market value, whichever is higher. (3) Long term capital gain vis--vis Short term capital gain Long term capital gain Short term capital gain

The profit realized from selling or The profit realized from selling or exchanging a capital asset held for more than exchanging a capital asset held for less than a a specified period, usu. one (1) year.161 specified period, usu. one (1) year.162 (4) Net capital gain, Net capital loss Net Capital gain Net capital Loss

The excess of the gains from sales or The excess of the losses from sales or exchange of capital assets over the losses exchanges of capital assets over the gains from such sales or exchanges.163 from such sales or exchanges.164

160 161

Sec. 22, [Z] th Blacks Law Dictionary, 9 Ed. 162 ibid. 163 Sec. 39, [A, 2] 164 Sec. 39, [A, 3]

55

(5) Computation of the amount of gain or loss The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property received.165 (6) Income tax treatment of capital loss (a) Capital rule166 loss limitation

Capital losses are deductible only to the extent of capital gains. (b) Net loss carry-over rule167 If any taxpayer168 sustains in any taxable year a net capital loss 1. Such net capital loss cannot be deducted from ordinary income due to the loss limitation rule; 2. Such loss could be carried over to the next taxable year as a deduction against net capital gain in an amount not in excess of the taxable income in the year the loss was sustained; and 3. Such loss shall be treated as a loss from the sale or exchange of capital assets held for not more than twelve (12) months.169 (7) Dealings in real property situated in the Philippines170 6% final tax - on the gross selling price, or the current fair market value at the time of the sale, whichever is higher.171
165 166

Sec. 40 (A) applicable to both corporations and individuals 167 applicable only to individuals 168 other than a corporation 169 Sec. 39 [D] 170 The real property involved must be considered capital asset. A capital asset is property held by the taxpayer whether or not connected in his trade or business except: 1. Stock in trade or other property of any kind which would be included in the inventory of the taxpayer if on hand at the end of the taxable year. 2. Property primarily held for sale to customers in the ordinary course of trade or business. 3. Property used in trade or business subject to depreciation. 4. Real property used in trade or business. 171 Sec. 24 (D)

56

(8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange Not subject to income tax but to percentage tax of of 1% of the gross selling price. (b) Shares not listed and traded in the stock exchange A final tax at the rates as follows: Not over P100,000........ 5% On any amount in excess of P100,000. 10% (9) Sale of principal residence Not liable for capital gains tax when: a. Sold or disposed of by natural persons. b. The proceeds of the sale are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition. c. The Commissioner is duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption. d. A deposit is made of the 6% capital gain tax otherwise due, in cash or managers check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same shall be released to the taxpayer when the proceeds of the sale shall have been utilized as intended. e. The tax exemption can only be availed of once every 10 years.172
172

Sec. 24 (D)(2) Conditions for tax exemption of gain from the sale or exchange of principal residence: 1. Proceeds are fully utilized in acquiring or constructing a new principal residence within18 months from the date of sale or disposition; 2. Historical cost or adjusted basis or the real property sold or disposed shall be carried over to the new principal residence built or acquired; 3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days from the date of sale or disposition; and 4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax

57

6) Passive Investment Income a) Interest Income An earning derived from depositing or lending of money, goods or credits.173 b) Dividend Income174 (1) Cash dividend A dividend paid in cash and is taxable to the extent of the cash received. (2) Stock dividend A transfer of a portion of retained earnings to capital stock by action of stockholders. It simply means the capitalization of retained earnings.175 (3) Property dividend A dividend paid in property176 held by the corporation and to the extent of the FMV of the property received at the time of the distribution. (4) Liquidating dividend A dividend distributed to the shareholders upon dissolution of the corporation.

173

General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax. Except: When interest income is exempted by law from income tax. 174 Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of its earnings or profits and payable to its SHs in money or other property. 175 General rule: A mere issuance of stock dividends is not subject to income tax, because it merely represents capital and it does not constitute income to its recipient. Before disposition thereof, stock dividends are nothing but a representation of interest in the corporate entity. Exceptions: When stock dividends are subject to tax; a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by the stockholder to the extent of such contribution. Under the NIRC, if a corporation, after the distribution of a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a tax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent that it represents a distribution of earnings or profits. (Sec.73 (B), NIRC). Depending on the circumstances, corporate earnings may be distributed under the guise of initial capitalization by declaring the stock dividends previously issued and later redeem or cancel said dividends by paying cash to the stockholder. This process amounts to distribution of taxable dividends which is just delayed so as to escape the tax. (CIR vs. CA, 301 SCRA 152) b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483) c) A change in the stockholders equity results by virtue of the stock dividend issuance. 176 such as stock investment, bonds or securities

58

c) Royalty Income Compensation or payment for the use of property and is paid to the owner of a right. d) Rental Income (1) Lease of personal property (2) Lease of real property Earnings derived from leasing of real estate as well as personal property. 177 It includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor. (3) Tax treatment of (a) Leasehold improvements by lessee Outright Method Spread Out Method

The fair market value of the building or Allocate the depreciated value over the improvement shall be reported as additional remaining term of the lease contract. Every rent income. year, an aliquot part of the depreciated value should be reported as additional rent in addition to the regular rent income. (b) VAT added to rental/paid by the lessee Any additional amount paid, directly or indirectly, by the lessee in consideration for the lease is considered rental. Therefore, taxes paid by the lessee on leased property are part of rental income of the landlord. (c) Advance rental/long term lease Advanced rental is a Security Deposit which Advance rental is prepaid rental received restricts the lessor as to its use without restriction as to its use The amount shall be excluded in the The entire amount is taxable in the year it determination of rental income. is received.

177

Taxes paid by the tenant (lessee) to or for a lessor for a business property are additional rent and constitute income taxable to the lessor.

59

7) Annuities, Proceeds from life insurance or other types of insurance Annuities Amounts payable yearly or at other regular intervals for a certain or uncertain period. They also represent as installment payments for life insurance sold by insurance companies.178 Paid by reason of the death of the insured to his estate or to any beneficiary,179 directly or in trust.

Proceeds of life insurance

Return of insurance premium180 8) Prizes and awards Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor.181

178

If the part of annuity payments represent interest = taxable income. If the annuity is a mere return of premium = not taxable. 179 Individual, partnership, or corporation, but not a transferee for a valuable consideration. If the proceeds are retained by the insurer, the interest thereon is taxable; 180 If such amounts (when added to amounts already received before the taxable year under such contracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in the gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. No loss is realized on surrender of a life insurance policy for its surrender value. 181 Exceptions: 1. Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are exclusions from gross income if: a. The recipient was selected without any action on his part to enter a contest or proceedings; and b. The recipient is not required to render substantial future services as a condition to receiving the prize or award. 2. Prizes and awards granted to athletes in local and intl sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be exempt from income tax.

60

9) Pensions, retirement benefit, or separation pay Pension refers to allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury. Retirement benefits received under RA 7641 and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer.182 Any amount received by an employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness, other physical disability or for any cause beyond the control of the employee.183 The social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions. Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration Benefits received from or enjoyed under the Social Security System. Benefits received from the GSIS, including retirement gratuity received by government officials and employees. 10) Income from any source whatever All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income.184

182

Requisites: 1. The retiring employee has been in the service of the same employer for at least 10 years. 2. The retiring employee is not less than 50 years of age at the time of his retirement 3. The benefits shall be availed of by an employee only once. 4. That there be a reasonable private benefit plan as defined below. 183 i.e., the separation of the employee must be involuntary and not initiated by him 184 Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.

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a) Forgiveness of indebtedness Dependent upon the circumstances, may amount to: 1. income;185 2. a gift;186 or 3. a capital transaction.187 b) Recovery of accounts previously written off To be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction.188 There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence, tax savings for the company.189 c) Receipt of tax refunds or credit190 As a general rule, a refund of a tax related to the business or the practice of profession is taxable income in the year of receipt to the extent of the income tax benefit of said deduction.191

185

If, for example, an individual performs services for a creditor who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. 186 If, however, a creditor merely desires to benefit a debtor and without any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latters gross income. 187 If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of dividends (Sec. 50, Rev. Reg. 2) 188 Tax Benefit Rule 189 Sec. 4, RR 5-99 190 Tax credit takes place upon the issuance of a tax certificate or tax credit memo, which can be applied against any sum that may be due and collected from the taxpayer. 191 i.e., the tax benefit rule applies However, the following tax refunds are not to be included in the computation of gross income: 1. Philippine income tax, except the fringe benefit tax 2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred. 3. Estate and donors taxes 4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) 5.ValueAddedTax 6. Fines and penalties due to late payment of tax 7.Final taxes 8. Capital Gains Tax

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d) Income from any source whatever192 f. Source rules in determining income from within and without193 Income from sources within the Philippines: 1) Interests Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise. 2) Dividends The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. 3) Services Compensation for labor or personal services performed in the Philippines. 4) Rentals Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or
192 193

supra Sec. 42

63

information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. 5) Royalties194 6) Sale of real property Gains, profits and income from the sale of real property located in the Philippines. 7) Sale of personal property Gains, profits and income from the sale of personal property Items of gross income treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines (2) Dividends other than those derived from sources within the Philippines (3) Compensation for labor or personal services performed without the Philippines;
194

See 4) Rentals, supra

64

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. 8) Shares of stock of domestic corporation Gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. g. Situs of Income Taxation195 h. Exclusions from Gross Income196 Income received or earned but is not taxable as income because it is exempted by law or by treaty. Receipts which are not in fact income are also excluded from Gross Income.197 1) Rationale for the exclusions They a. Represent return of capital; b. Are not income, gain or profit; c. Are subject to another kind of internal revenue tax; d. Are income, gain or profit that are expressly exempt from income tax.198 2) Taxpayers who may avail of the exclusions All kinds of taxpayers - individuals, estates, trusts and corporations, whether citizens, aliens, whether residents or non-residents.

195 196

See Inherent Limitations, Territorial, supra See Sec. 32 (B) 197 Exclusions are in the nature of tax exemptions, thus, the claimant must establish them convincingly. 198 under the Constitution, Tax treaty, Tax Code, or general or a special law.

65

3) Exclusions distinguished from deductions and tax credit Exclusions Income received or earned but is not taxable because by law or treaty. Such tax free income is not to be included in the income tax return unless information regarding it is specifically called for.199 Deductions The items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income.200 Tax credit An amount subtracted from an individuals or entitys tax liability to arrive at the total tax liability.201

4) Under the Constitution a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function From: 1) any public utility; and 2) the exercise of any essential governmental function.202 5) Under the Tax Code a) Proceeds of life insurance policies Paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise.203 b) Return of premium paid Paid by the insured under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term of the contract or upon surrender.204
199 200

Sec. 61, RR No. 2 Secs. 34 and 35, NIRC 201 M.E. Holding Corp. vs. Commissioner of Internal Revenue , CTA Case No. 5314, prom. August 17, 1998 th citing Blacks Law Dictionary, 6 Ed. 202 Thus, income from sources other than those mentioned is subject to income tax. 203 Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the proceeds thereof are considered indemnity rather than a gain or profits. Instances when proceeds from insurance are taxable: a) Where proceeds are held by the insurer under an agreement to pay interest. The interest is included in determination of gross income. b) Where the transfer is for valuable consideration.

66

c) Amounts received under life insurance, endowment or annuity contracts If the insured dies, and the beneficiary receives the life insurance proceeds, these are not taxable income because they are excluded from gross income. If the insured does not die and survives the designated period, the amount pertaining to the premiums he paid are excluded from gross income, but the excess shall be considered part of his gross income. d) Value of property acquired by gift, bequest, devise or descent The income from such property, as well as gift, bequest, devise, or descent of income from property, in cases of transfers of divided interest, shall be included in gross income. The estate of the testator or the decedent is subject to estate tax, while the heirs or beneficiary/ies are not required to pay donees tax as the same was already abolished. The value of the bequest and/or the devise received by the heirs or beneficiary/ies is not included in the computation of their gross income since gifts, bequest and devises are excluded from gross income.205 e) Amount received through accident or health insurance As compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on the account of such injuries or sickness.206 f) Income exempt under tax treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.207

204

Reason for the exclusion: The return of premium is a mere return of capital. However, where the included in the gross amount received exceed the aggregate premiums paid, the excess shall be income 205 Sec. 32[B], NIRC 206 Example of damages recovered from personal injuries: Moral damages for personal injuries. If the award of damages is to compensate loss of property or an award of damages to compensate loss of income / profits, such is subject to tax. 207 Sec. 32[B](5), id.

67

g) Retirement benefits, pensions, gratuities, etc. a) Retirements benefits received under RA 7641 and those received by officials and employees of private firms in accordance with reasonable private benefit plan.208 b) Any amount received by an official or employees or by his heirs from the employer as a consequence of separation from service due to death, sickness or other physical disability beyond the control of the said official or employer. c) Terminal leave and other social security benefits.209 d) Benefits received under the US veterans Administration. e) Benefits received from SSS f) Benefits received from GSIS. h) Winnings, prizes and awards, including those in sports competition 1) Prizes and Awards - to be excluded, the following conditions must concur: a. Prizes and award made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. b. The recipient was selected without any action on his part to enter the contest or proceeding. c. The recipient is not required to render substantial future services as a condition in receiving the award. 2) Prizes and Awards in Sports Competition All prizes and award granted to athletes in local and international sports competitions and tournaments whether held in the Phils. or abroad and sanctioned by sports associations.
208

Requisites: 1. The retiring official or employees has been in service of the same employer for at least ten years. 2. Is not less than 50 yrs. of age at the time of his retirement and 3. Available to official or employee only once. A reasonable private benefit plan means a pension; gratuity, stock bonus o r profit sharing plan maintained by an employer for the benefit of some or all of his employees a. wherein contributions are made by such employer or employees, or both, for the purpose of distributing to such employer the earnings and principal of the fund thus accumulated; and b. wherein said plan provides that at no time shall any part of the principal or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of said employee 209 The terminal leave pay of government employees whose employment is co-terminus is exempt since it falls within the meaning of the phrase for any cause beyond the control of the said official or employees (BIR Ruling 143-98)

68

6) Under Special Laws a) Prizes received by winners in charity horse race sweepstakes from PCSO. b) Back pay benefits c) Income of cooperative marketing association d) Salaries and stipends in dollars received by non - Filipino citizens on the technical staff of International Rice Research Institutes (IRRI) e) Supplemental allowances per diem, benefits received by officer or employees of the Foreign Service. f) Income from bonds and securities for sale in the international market. i. Deductions from Gross Income210 1) General rules a) Deductions must be paid or incurred in connection with the taxpayers trade, business or profession It must be directly connected with trade or business or profession of the taxpayer. b) Deductions must be supported by adequate receipts or invoices211 The claimed deduction must be evidenced by official receipts or other adequate records.212

210

These are items or amounts authorized by the law to be subtracted from the pertinent items of the gross income to arrive at the taxable income. Basic Principles Governing Tax Deductions: He who claims it must point to the specific provision of the statute authorizing it, and he must be able to prove that he is entitled to it. If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent. However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction against the taxpayer-claimant will not apply. Unlike gross income, there is no catch-all provision for deductions. Deductions must comply with the substantiation requirement. 211 except standard deduction 212 The evidence must establish the following; a) the amount of expenses being deducted b) the direct relation of such to the development, management, operation, and/or conduct of the trade, business or profession of the taxpayer.

69

c) The taxpayer must:

Additional withholding

requirement

relating

to

1. Point to some specific provisions of the statute authorizing the deduction; 2. Able to prove that he is entitled to the deduction authorized or allowed; 3. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation/amortization may be allowed, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR;213 and 4. Deductions for income tax purposes partake of the nature of tax exemptions hence, if tax exemptions are to be strictly construed, then it follows that deductions must also be strictly construed. 2) Return of capital (cost of sales or services) Exempt from income tax.214 To be taxable, there must be income, gain or profit; gain is received, accrued or realized during the year;and it is not exempt from income tax under the Constitution, treaty or law a) Sale of inventory of goods by manufacturers and dealers of properties b) Sale of stock in trade by a real estate dealer and dealer in securities c) Sale of services

213 214

Sec. 34, NIRC e.g., tax-free exchange of property

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3) Itemized deductions215 a) Expenses216 (1) Requisites for deductibility 1. It must be ordinary and necessary. 2. It must be paid or incurred during the taxable year. 3. It must be paid or incurred in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession. 4. The amount must be reasonable. 5. It must be substantiated with sufficient evidence, such as official receipts or other adequate records, showing: i. the amount of the expense being deducted, and ii. the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer 6. It is not contrary to law, public policy or morals. 7. The tax required to be withheld on the amount paid or payable must have been paid to the BIR by the taxpayer, who is constituted as a withholding agent of the government.217

215

The following can claim itemized deductions: a. Corporations, whether domestic or (resident) foreign b. General Professional Partnerships c. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien doing business in the Philippines) d. Estates and trusts engaged in trade or business e. Proprietary educational institutions and hospitals (non-profit) f. Government-owned or controlled corporations Only individuals, except non-resident aliens, can elect between itemized deductions and optional standard deduction. 216 Sec. 34(A) Only deductions allowable are ordinary and necessary trade, business or professional expenses 217 For instance, withholding tax on compensation income paid to employees, fringe benefit tax on fringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5, RR 2-98 as amended by Sec. 6, RR 14-2002)

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(a) Ordinary

Nature: Ordinary necessary218

and

Necessary

When it connotes a payment, which is Where the expenditure is appropriate or normal in relation to the business of the helpful in the development of taxpayers taxpayer and the surrounding circumstances. business or that the same is proper for the purpose of realizing a profit or minimizing a loss. (b) Paid and incurred during taxable year Paid Incurred

The payment is on cash receipt basis, The payment thereof is on accrual basis, expenses are deductible in the year they are expenses are deductible in the year they are incurred. incurred, whether paid or not.

(2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid219 (3) Travel/Transportation expenses220

218

The two conditions must concur. A court may decide on when an expense is, or is not, ordinary, but as much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of an expense. 219 Sec. 34 (A)(1)(a)(i) 220 For travel expenses, here and abroad, while away from home, in the pursuit of trade, business or profession. Include meals and lodging, here and/or abroad. While away from home means away from principal place of business If the trip is undertaken for purposes other than business or exercise of profession, the transportation expenses are personal expenses and the meals and lodging are living expenses and are not deductible. Transportation expenses of an employee from his residence to his office and back are not deductible. They are personal expenses. However, transportation expenses from his office to his customers place of business and back are deductible. They are business expenses.

72

(4) Cost of materials221 (5) Rentals and/or other payments for use or possession of property222 (6) Repairs and maintenance223 (7)Expenses under lease agreements224 (8) Expenses for professionals (9) Entertainment expenses225 (10) Political campaign expenses (11) Training expenses b) Interest226 (1) Requisites for deductibility a. There must be a valid and existing indebtedness b. The indebtedness must be that of the taxpayer; c. The interest must be legally due and stipulated in writing; d. The interest expense must be paid or incurred during the taxable year; e. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; f. The interest payment arrangement must not be between related taxpayers;227

221

Materials and supplies are deductible only to the amount actually consumed or used in the operation during the taxable year. 222 Required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor. 223 Extraordinary repairs - those in the nature of replacements, alteration, and expansion to the extent that they arrest deterioration and prolong the life of the property. Ordinary repairs - those made to keep the property ordinarily efficient working condition and do not materially add to the value of the property 224 See 5) Rentals, etc., supra 225 Include representation expenses and/or depreciation or rental expense relating to entertainment facilities. (1st par., Sec. 2, Rev. Regs. 110-2002) 226 The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec. 34, B (1)) 227 infra

73

g. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income;228 and h. The amount of interest deducted from gross income does not exceed the limit set forth in the law.229 (2) Non-deductible interest expense a. Interest on preferred stock, which in reality is dividend b. Interest on unpaid salaries and bonuses c. Interest calculated for cost keeping d. Interest paid where parties provide no stipulation in writing to pay interest e. If the indebtedness is incurred to finance petroleum exploration f. Interest paid on indebtedness between related taxpayers230 g. Interest on indebtedness paid in advance through discount or otherwise and the taxpayer reports income on cash basis.231 (3) Interest subject to special rules (a) Interest paid in advance If the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year.

228 229

e.g., interest on indebtedness to finance petroleum operations In other words, the taxpayers otherwise allowable deductio n for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A. 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%) (Sec.34(B)(1) 230 1. Members of the same family, brothers and sisters, whether in full or half blood, spouse, ancestors and lineal descendants 2. Stockholders and a corporation, when he holds more than 50% in value of its outstanding capital stock, except in case of distribution in liquidation 3. Corporation and another corporation, with interlocking stockholders 4. Grantor and fiduciary in a trust 5. Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor with respect to each trust 6. Fiduciary of a trust and beneficiary of such trust 231 Interest is allowed as a deduction in the year the indebtedness is paid, not when the interest was paid in advance.

74

(b)

Interest amortized232

periodically

(c) Interest expense incurred to acquire property for use in trade/business/profession At the option of the taxpayer, may be allowed as a deduction or treated as a capital expenditure.233 (d) Reduction of interest expense/interest arbitrage

It is a strategy which takes advantage of the difference in tax rates or tax systems as the basis for profit. c) Taxes234 (1) Requisites for deductibility 1. It must be paid or incurred within the taxable year. 2. It must be paid or incurred in connection with the taxpayers trade, profession or business.235 3. It must be imposed directly on the taxpayer. 4. It must not be specifically excluded by law from being deducted from the taxpayers gross income.

232 233

See a), above Sec. 34 (B)(3) 234 The word taxes means taxes proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2) 235 Examples: 1. Import duties 2. Business taxes 3. Occupation taxes 4. Privilege and license taxes 5. Excise taxes 6. Documentary stamp taxes 7. Automobile registration fees 8. Real property taxes Limitation: In the case of a nonresident alien individual engaged in trade or business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.

75

(2) Non-deductible taxes Taxes not allowed as deduction from gross income to arrive at taxable income: a. Income tax provided under the NIRC b. Income taxes imposed by authority of any foreign country236 (3)Treatment/of surcharges/interests/fines/for delinquency237 (4) Treatment of special assessment238 Deductible as taxes where these are made for the purpose of: 1. Maintenance or repair of local benefits, if the payment of such assessment is ordinary and necessary in the conduct of trade, business or profession 2. Constructing local benefits tending to increase the value of the property assessed, the payments are in the nature of capital expenditures.239

236

Income tax imposed by a foreign country are deductible only if: a) the taxpayer is qualified to avail of tax credit; b) He does not signify in its return his desire to avail of the same. The right to deduct income taxes paid to a foreign government is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes. Limitation on deduction: a) non resident alien engaged in trade or business in the Phils. b) resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Phils. 237 See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra 238 An enforced proportional contribution from owners of lands, especially or peculiarly benefited by public improvements. 239 The burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes.

76

(5) Tax credit240 vis--vis deduction Tax Credit Deducted from Phil. income tax Tax deduction Deducted from the gross income

All taxes are allowed to be deducted with the Only foreign income taxes may be claimed as exception of the taxes expressly excluded credits d) Losses Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity.241 (1) Requisites for deductibility242 a) The loss must be that of the taxpayer.243 b) There must be an actual loss suffered in a closed and completed transaction.244 c) The loss must be connected with the taxpayers trade, business or profession. d) The loss must not be compensated for by insurance or otherwise. e) The loss must be actually sustained and charge off during the taxable year.245

240

Refers to the taxpayers right to deduct from the income tax due, the amount of tax he has paid to foreign country. Persons entitled to tax credit 1 .Resident Citizen of the Philippines 2. Domestic Corp. except General Professional Partnership 3. Members of the GPP 4. Beneficiaries of Estates and Trusts. Persons not entitled to Tax credit 1. Non Resident Citizen 2. Aliens, whether residents or non residents 3. Foreign Corporation, whether residents or non - residents 241 Sec. 34 D [1] 242 Despite concurrence of requisites, when is loss nonetheless not deductible? In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B) 243 The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a predecessor partnership is not deductible by a successor corporation. The loss of the parent company may not be deducted by its subsidiary. 244 Closed transaction means that taxable year when the amount of loss was finally ascertained. 245 The deduction shall be in full or not at all.

77

f) In the case of casualty loss, declaration of loss 246 must be filed within 45 days from the occurrence of the casualty loss.247 g) The loss must not be claimed as deduction for estate tax purposes in the estate tax return. (2) Other types of losses (a) Capital losses Losses from sale or exchange of capital assets. Deductible to the extent of capital gains only. (b) Securities worthless248 becoming

The loss resulting therefrom to the taxpayer249 is not considered as a bad debt but as a capital loss. (c) Losses on wash sales of stocks or securities Not deductible when: 1) A taxpayer who is not a dealer of stocks in trade has disposed shares and 2) Within the period of 60(sixty) days beginning 30 days before the date of such sale and ending 30 days after such date, the taxpayer has acquired substantially identical stocks or securities.250 (d) Wagering losses Deductible only to the extent of the gains from such wagering transaction. If there is no gain from the wagering transaction, the loss therefrom cannot be deducted from gross income.251
However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation). Deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187) 246 Sworn Declaration of Loss 247 RR 12-77 248 Securities which are capital assets ascertained to be worthless and charged-off within the taxable year. 249 other than a bank or trust company incorporated under the laws of the Phil. 250 However, if losses from wash sales are claimed by a dealer in securi ties in the ordinary course of business, such losses are deductible. 251 Wagering transactions - those in which the outcome is uncertain or those that involve games of chance.

78

(e) NOLCO252 It is the excess of allowable deductions over gross income of business for any taxable year which had not been previously offset as deduction from gross income. It shall be carried over as deduction from gross income for the next 3 consecutive years following the year of such loss. Provided that: 1. The taxpayer was not exempt from income tax in the year of such net operating loss; and 2. There has been no substantial change in the ownership of the business or enterprise. e) Bad debts Debts due to the taxpayer when actually ascertained to be worthless253 and chargedoff within the taxable year.254 They refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered.255 (1) Requisites for deductibility 1) There must be a valid and subsisting debt.256 2) The same must be connected with the taxpayers trade, business or practice of profession. 3) The same must not be sustained in a transaction entered into between related parties.257
252 253

Net Operating Loss Carry over In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. While a mere hope probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be collected at all. 254 Sec.34 [E1] 255 Sec.2 [a], RR No.5-99 256 A valid and subsisting debt is one the collection of which may be enforced in a court of law. A debt which had prescribed is no longer valid and subsisting. 257 infra

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4) The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year.258 5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.259 (2) Effect of recovery of bad debts The taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written off and claimed as deduction from gross income.260 f) Depreciation The gradual diminution in the useful value of tangible property used in trade or business resulting from exhaustion, wear and tear, and normal obsolescence. The term is also applied to amortization of value of intangible assets the use of which in trade or business is definitely limited in duration.261 (1) Requisites for deductibility a) The allowance for depreciation must be reasonable262 b) It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year263 c) It must be charged-off during the taxable year;264 d) A statement on the allowance must be attached to the return. e) The property must have a limited useful life.

258

A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at all (Fernandez Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of Appeals, 70 SCAD 544, 256 SCRA 667). 259 In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is determined upon the exercise of a sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and circumstances of the case. 260 Tax Benefit rule 261 Basilan Estates, Inc. vs. Comm., 21 SCRA 17 262 Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969 263 Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966). 264 The deduction must be made in the year in which the wear & tear occurs. Depreciation may not be accumulated.

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(2)

Methods of computing depreciation allowance (a) Straight-line method265

Spreads the total depreciation over the useful life of the asset and generally results in an equal depreciation per unit of time regardless of the use to which the properties are put. (b) Declining-balance method Uses a rate to the declining book value of the asset. Depreciation is largest in amount the first year and declines in the years thereafter. (c)Sum-of-the-years-digit method Requires the application of a changing fraction to the cost basis of the property, reduced by the estimated residual salvage value. g) Charitable and other contributions266 (1) Requisites for deductibility a) Must actually be paid or made to the Phil. Government or any of its agencies or political subdivision or to any domestic corporations or associations. b) Must be made within the taxable year; c) Must not exceed 10% of the individuals taxable income and 5% of the corporations taxable income before deducting the contribution; and d) Must be evidenced by adequate records or receipts.267 (2) Amount that may be deducted Subject to limit268 a) Donations to the Philippine government or any of its agencies or any political subdivision thereof exclusively for public purposes;
265 266

Deductible in full a) Donations to the government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations exclusively to

Fixed Percentage Method Kinds of contributions allowed as deduction: 1) Ordinary or contributions with limit or subject to limitation 2) Special or contributions deductible in full 267 Sec. 34 (H) 268 5%/10%

81

finance, to provide for, or to be used in b) Donations to accredited domestic undertaking priority activities in: corporations or associations organized and operated exclusively for: 1. Education; 1. Religions; 2. Charitable; 3. Scientific; 4. Youth and sports development; 5. Cultural; or 6. Educational purposes; or for the 2. Health; 3. Youth and sports development; 4. Human settlements; 5. Science and culture; and 6. Economic development.

b) Donations to foreign institutions or international organizations in pursuance or 7. Rehabilitations of veterans; and compliance with agreements, treaties, or commitments entered into by the c) Donations to social welfare institutions or government of the and the foreign laws or to non-government organizations in international organizations or in pursuance accordance with rules and regulations of special laws, and promulgated by the Secretary of Finance, provided no part of the net income of which c) Donations to certain accredited noninures to the benefit of any private government organization.270 stockholders or individual.269 h) Contributions to pension trusts (1) Requisites for deductibility a) The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees; b) The pension plan is reasonable and actuarially sound.271 c) It must be funded by the employer; a) The amount contributed must no longer be subject to its control or disposition; and b) The payment has not therefore been allowed as a deduction.

269 270

Sec. 34 (H)(1) Ibid.,( 2) 271 Sec. 118, Regs.

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(i) Deductions under special laws These are deductions usually allowed only for particular business or enterprises and not to others, or may be allowed for all but are not provided for under the provisions of the NIRC but under special laws. 4) Optional standard deduction a) Individuals, except non-resident aliens A maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. The cost of sales or the cost of services is not allowed to be deducted for purposes of determining the basis of the OSD inasmuch as the law272 is specific as to the basis thereof which states that for individuals, the basis of the 40% OSD shall be the gross sales or gross receipts and not gross income.273 b) Corporations, except non-resident foreign corporations Not exceeding forty percent (40%) of their gross income. c) Partnerships 1. If the GPP avails of itemized deductions under Sec. 34 of the NIRC in computing net income, the partners may still claim itemized deductions on their net distributive share that have not been claimed by the GPP; 2. The partners, however, are not allowed to claim OSD on their share of net income because the OSD is a proxy for all items of deductions allowed in arriving at taxable income; 3. If the GPP avails of OSD in computing net income, the partners may no longer claim further deductions from their net distributive share, whether itemized or OSD; 4. The election to claim either the OSD or itemized deductions must be signified in the income tax return filed for the first quarter of the taxable year; once the election is made, the same type of deduction must be consistently applied for all succeeding quarters and in the annual income tax return; and

272 273

R.A. 9504, Minimum Wage Earner Law Rev. Reg. No. 16-2008

83

5. A taxpayer who is required but fails to file the quarterly income tax return for the first quarter shall be deemed to have elected to avail of itemized deductions for the taxable year.274 5) Personal and additional exemption275 a) Basic personal exemptions Fifty thousand pesos (P50,000) each individual taxpayer.276 b) Additional exemptions for taxpayer with dependents Twenty-five thousand pesos (P25,000) - each dependent277 not exceeding four (4).278 c) Status-at-the-end-of-the-year rule 1. Taxpayer marries during taxable year - may claim the corresponding BPE in full for such year. 2. Taxpayer should have additional dependent(s) during taxable year - may claim corresponding AE in full for such year. 2. Taxpayer dies during taxable year - his estate may still claim BPE and AE for himself and his dependent(s) as if he died at the close of such year. 4. If during the taxable year a. spouse dies, or b. any of the dependents dies or marries, turns 21 years old or becomes gainfully employed, taxpayer may still claim same exemptions as if the spouse or any of the dependents died, or married, turned 21 years old or became gainfully employed at the close of such year.279

274 275

RR No. 2-2010 R. A. 9504 276 Sec. 4, id. In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. 277 A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. 278 In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: The total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. (ibid) 279 Sec. 35 (C)

84

d) Exemptions claimed by non-resident aliens They can be entitled to personal and additional exemptions subject to the rule on reciprocity. 1. Their foreign country allows personal exemptions to citizens of the Philippines not residing therein; 2. File an accurate return of their income from all sources within the Philippines on time; and 3. Amount allowable is not to exceed our maximum allowable personal exemption. 6) Items not deductible a) General rules These items are not related to the trade, business or profession of the taxpayer. b) Personal, living or family expenses These are personal expenses and not related to the conduct of trade or business. c) Amount paid for new buildings or for permanent improvements These are capital expenditures added to the cost of the property and the periodic depreciation is the amount that is considered as deductible expense.280 d) Amount expended in restoring property281 They are capital expenditures or those expenditures that result in obtaining benefits of a permanent nature.282 e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested When the taxpayer is directly or indirectly a beneficiary under such policy.283

280 281

Does not apply to intangible drilling and development cost incurred in petroleum operations. major repairs 282 such as lands, buildings and machineries 283 Sec. 36 [A]

85

f) Interest expense, bad debts, and losses from sales of property between related parties Interest Expense Bad Debts Losses from sales of property between related parties (1) Between members of a family;287 or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust
284 285

In general, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business.284

In general, debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties.285 Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.286

Sec. 34 (B) supra 286 Id., (E) 287 The family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants;

86

and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust.288 g) Losses from sales or exchange or property In general, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity: 1. If incurred in trade, profession or business; 2. Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.289 h) Non-deductible interest290 i) Non deductible taxes291 j) Non-deductible losses 1. Losses from illegal transactions 2. Losses from sales or exchanges of property between related taxpayers292 but the gains are taxable k) Losses from wash sales of stock or securities293

288 289

Sec. 36 (B) Sec. 34 (D)(1) 290 supra 291 Ibid. 292 ibid 293 Ibid.

87

j. Exempt Corporations 1) Proprietary educational institutions and hospitals 2) Government owned or controlled corporations i. Government Service Insurance System (GSIS), ii. the Social Security System (SSS), iii. the Philippine Health Insurance Corporation (PHIC), and iv. the Philippine Charity Sweepstakes Office (PCSO). 3) Others profit; (A) Labor, agricultural or horticultural organization not organized principally for

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A non-stock and nonprofit educational institution; (I) Government educational institution;

88

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) 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; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.294 10. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens a. General rule that resident citizens are taxable on income from all sources within and without the Philippines A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 1) Non-resident citizens Taxable only on his income derived from sources within the Philippines.` b. Taxation on Compensation Income 1) Inclusions a) Monetary compensation (1) Regular salary/wage Compensation income derived from an employer-employee relationship in consideration of services rendered, except in the case of a minimum wage earner.295 (2) Separation pay/retirement benefit not otherwise exempt Separation pay received by an employee who voluntarily resigns is subject to income tax. Retirements benefits may be subject to tax if it does not comply with the provision of Sec. 32 (B)(6)(a).296
294 295

Sec. 30 infra

89

(3) Bonuses, 13th month pay, and other benefits not exempt Amount in excess of Thirty thousand pesos (P30,000.00). (4) Directors fees297 b) Non-monetary compensation (1) Fringe benefit not subject tax298 (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits.299 (5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business, or profession of the employer. (6) If the grant of the fringe benefits is for the convenience of the employer.300 2) Exclusions a) Fringe benefit subject to tax Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee301 such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others;

296 297

See Reference See (1) Regular salary/wage, supra 298 Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98 299 infra 300 Convenience of the employer rule 301 except rank and file employees

90

(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.302 b) De minimis benefits Limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer as a means of promoting the health, goodwill, contentment, or efficiency of his employees. They include: Monetized unused vacation leave credits of employees 1. Private employees: a. Vacation leave - exempt up to 10 days b. Sick leave always taxable 2. Government employees: Vacation and sick leave are always tax exempt regardless of the no. of days. Medical cash allowance to dependents of employees Not exceeding P750 per semester or P125 per month

302

A: If the benefit is not tax-exempt and the recipient is: 1. A rank and file employee the value of such fringe benefit shall be considered as part of the compensation income of such employee subject to tax payable by the employee. 2. Where the recipient is not a rank and file employee the value shall not be included in the compensation income of such employee subject to tax. The fringe benefit tax is instead levied upon the employer who is required to pay. (Sec. 33)

91

Rice subsidy P1,500 or one sack of 50-kg rice per month amounting to not more than P1,500 Uniforms and clothing allowances medical benefits Actual medical benefits Laundry allowance Employee achievement awards303 actual Not exceeding P4,000 per annum

Not exceeding P10,000 per annum Not exceeding P300 per month In the form of tangible personal property other than cash or gift certificate with an annual monetary value not exceedingP10,000

Gifts given during Christmas and major Not exceeding P5,000 per anniversary celebrations employee per annum Flowers, fruits and books or similar items Reasonable value depending given to employees under certain on the employers capacity circumstances Daily meal allowance for overtime work Not exceeding 25% of the basic minimum wage.304 c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income Gross benefits received by officials and employees of public and private entities, the total exclusion of which shall not exceed Thirty thousand pesos (P30,000) which shall cover: (a) Benefits received by officials and employees of the national and local government.305 (b) Benefits received by employees.306
303 304

e.g. for length of service or safety achievement RR 5-2008 305 under R.A. No. 6686;

92

(c) Benefits received by officials and employees not covered by (b) (d) Other benefits307 3) Deductions a) Personal exemptions exemptions Basic personal exemption and additional

Additional exemption

Fifty thousand pesos (P50,000) for each Twenty-five thousand pesos (25,000) for individual taxpayer.308 each dependent not exceeding four (4).309 b) Health and hospitalization insurance The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year taken by the taxpayer for himself, including his family who has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year. In the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.310 c) Taxation of compensation income of a minimum wage earner (1) Definition of Statutory Minimum Wage The rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).311
306 307

under P.D. No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986 such as productivity incentives and Christmas bonus 308 Sec. 35(A), as amended by R.A. 9504 In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption 309 Sec. 35 (B), id. The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: The total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed. 310 Sec. 34 (M) 311 Sec. 22, as amended by R.A. 9504

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(2) Definition of Minimum Wage Earner312 (3) Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard pay313 c. Taxation of Business Income/Income from Practice of Profession Optional Standard Deduction (OSD) or Itemized deductions. Optional Standard Deductions 10 % of the gross income. May be availed only by individuals314 who are not purely compensation income earners. This is in lieu of the itemized deductions. d. Taxation of Passive Income 1) Passive income subject to final tax a) Interest income i) Treatment of income from longterm deposits Subject to a Final Withholding Tax (FWT) at the rate of twenty percent (20%).315 b) Royalties 20% Royalties, except on books, as well as other literary works and musical compositions Royalties on books literary works and musical compositions 10% c) Dividends from domestic corporation Cash and or property dividend actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies. 10%

312 313

See II. (A) (6), Kinds of Taxpayers, supra Sec. 24(A)(2) as amended by R.A. 9504 314 except non-resident aliens 315 Sec. 3(2) of RR 14-2012

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d) Prizes and other winnings Prizes over P10,000 20% Prizes less than P10,000 are included in the income tax of the individual subject to the schedular rate of 5% up to P125,000 + 32% of excess of P500,000. Other winnings, except PCSO and Lotto, derived from sources within the Philippines 20% 2) Passive income not subject to final tax Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates - exempt from final tax.316 e. Taxation of capital gains 1) Income from sale of shares of stock of a Philippine corporation a) Shares traded and listed in the stock exchange The gains are not subject to income tax. The tax applicable will be a business tax known as percentage tax. A tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor.317 b) Shares not listed and traded in the stock exchange A final tax as follows:: Not over P100,000..... 5% Amount in excess of P100,000.. 10%318

316 317

See Sec. 24 (B)(1) Sec. 127 (A) 318 Sec. 27 (D)(2)

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2) Income from the sale of real property situated in the Philippines A final tax of six percent (6%) based on the gross selling price or current fair market value, whichever is higher, upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts xxx.319 3) Income from the sale, exchange, or other disposition of other capital assets A final tax of 6% on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. 11. Taxation of Non-resident Aliens Engaged in Trade or Business a. General rules A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines.320 b. Cash and/or property dividends 10% final tax, on cash and or property dividend actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies. 321 c. Capital gains322 12. Individual Taxpayers Exempt from Income Tax a. Senior citizens A senior Citizen is: 1. any resident citizen of the Philippines 2. at least sixty (60) years old, including those who have retired from both government offices and private enterprises, and

319 320

Sec. 24 (D) A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines (Sec. 25 (A)(1)) 321 Id., (A)(2) 322 See e. Taxation of capital gains, supra

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3. has an income of not more than sixty thousand pesos (P60,000.00) per annum subject to the review of the National Economic Development Authority(NEDA) every three (3) years. b. Minimum wage earners323 c. Exemptions granted under international agreements NRAETB324 may deduct personal exemption325 but only to the extent allowed by his country to Filipinos not residing therein, and shall not exceed the aforementioned amounts. NRANETB cannot claim any personal or additional exemption. 13. Taxation of Domestic Corporations326 a. Tax payable 1) Regular tax Thirty percent (30%)327 of taxable income. 2) Minimum corporate income tax (MCIT) a) Imposition of MCIT328 Two percent (2%) on the gross income. b) Carry forward of excess minimum tax Any excess of the minimum corporate income tax (MCIT) over the normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.

323 324

supra Non-resident alien engaged in trade or business 325 but not additional exemption 326 The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. (Sec. 22(B)) 327 beginning January 1, 2009 (R.A. 9337) 328 a. It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in which such corporation starts its business operation. b. It is imposable only if such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.

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c) Relief from the MCIT under certain conditions The imposition of MCIT may be suspended, upon showing that the corporation suffers losses due to any of the following causes: a. Prolonged labor dispute329 b. Legitimate business reverses330 c. Force majeure331 d) Corporations exempt from the MCIT 1. Proprietary Educational Institution

2. Non-profit hospitals 3. Depository banks under expended FCDU 4. International carriers 5. Offshore Banking Units 6. ROHQs of resident foreign corp. e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system Only one may be imposed. A minimum corporate income tax of 2% of the gross income xxx is imposed xxx on a corporation332 xxx when the minimum income tax is greater than the (net income tax)333 b. Allowable deductions 1) Itemized deductions Business334 expenses which are ordinary and necessary in the conduct of business.335

329 330

e.g. strikes for more than 6 months Ibid. 331 e.g. war 332 domestic and resident foreign 333 Secs. 27 (E) and 28 (A)(2) 334 or professional 335 or in the exercise of profession

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2) Optional standard deduction336 May be taken by an individual, in lieu of itemized deductions.337 c. Taxation of Passive Income 1) Passive income subject to tax a) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties338 Twenty percent (20%) final tax. b) Capital gains from the sale of shares of stock not traded in the stock exchange On the net capital gain: Not over P100,000 Final Tax of 5% On any amount in excess of P100,000 plus 10% Final tax on the excess c) Income derived under the expanded foreign currency deposit system339 Ten percent (10%) final tax. Exempt - any income of nonresidents, whether individuals or corporations, from transactions with depository banks.

336 337

See also (9)(h)(4)(b), supra Section 34(L) Requisites: a. Available only to citizens and resident aliens b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions. c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years. 338 received by domestic corporations derived from sources within the Philippines 339 by a depository bank with local commercial banks, including branches of foreign banks authorized by the BSP to transact business with foreign currency deposit system units.

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d) Intercorporate dividends Not subject to tax. e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings Six percent (6%) final tax340- on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. 2) Passive income not subject to tax341 d. Taxation of Capital Gains 1) Income from sale of shares of stock342 2) Income from the sale of real property situated in the Philippines343 3) Income from the sale, exchange, or other disposition of other capital assets344 e. Tax on proprietary educational institutions345 and hospitals Ten percent (10%) on their taxable income.346 Thirty percent (30%) - if gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources.348
347

340 341

Tax treatment is the same as that of individuals supra 342 See 10 (e), Taxation of Capital Gains, supra 343 Ibid. 344 See (A)(10)(e)(3), Taxation of Capital Gains, supra 345 A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. 346 except on certain passive incomes (Sec. 27 (D)) 347 The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. 348 Sec. 27 (B)

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f. Tax on government-owned or controlled corporations, agencies or instrumentalities Such rate of tax imposed upon corporations or associations engaged in similar business, industry, or activity, except 1. The Government Service Insurance System (GSIS), 2. The Social Security System (SSS), 3. The Philippine Health Insurance Corporation (PHIC), and 4. The Philippine Charity Sweepstakes Office (PCSO). 349 14. Taxation of Resident Foreign Corporations350 a. General rule Resident foreign corporations are subject to any or some of the following: 1. Capital Gains Tax 2. Final Tax on Passive Income 3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT) 4. Branch Profit Remittance Tax b. With respect to their income from sources within the Philippines351 c. Minimum corporate income tax352 d. Tax on certain income (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties353

349 350

Id., (C) Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT) under the subheading of domestic corporations is equally applicable to resident foreign corporations, both as to concepts and computations, except that RFCs are taxed only on income from sources within the Philippines. 351 See Tax Payable under Taxation of Domestic Corporations, supra 352 ibid. The MCIT is imposed on RFCs under the same conditions as domestic corporations (Sec. 28(A)(2)) 353 See Taxation of Passive Income under Taxation of Domestic Corporations, supra

101

(2) Income derived under the expanded foreign currency deposit system354 (3) Capital gain from sale of shares of stock not traded in the stock exchange355 (4) Intercorporate dividends356 15. Taxation of Non-resident Foreign Corporations a. General rule Non-resident foreign corporations are subject to any or some of the following: 1. Capital Gains Tax 2. Final Tax on Passive Income 3. Final Tax on [Other] Gross Income from sources within the Philippines b. Tax on certain income (1) Interest on foreign loans Twenty percent (20%) final withholding tax. 357 (2) Intercorporate dividends Fifteen percent (15%) - as long as the country in which the nonresident foreign corporation is domiciled allows a tax credit for taxes deemed paid in the Philippines equivalent to 15%. Thirty percent (30%) withholding tax - if the country within which the NRFC is domiciled does not allow a tax credit.358 (3) Capital gains from sale of shares of stock not traded in the stock exchange359

354 355

ibid. ibid. 356 ibid. 357 Sec. 28 (B)(5)(2) 358 Sec. 28 (B)(5)(b) In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Income from sources within the Philippines. 359 See 10 (e)(1)(b), under Taxation of capital gains

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16. Improperly Accumulated Earnings of Corporations Every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. 17. Exemption from tax on corporations360 18. Taxation of Partnerships361 Rules: 1. Subject to the same rules on corporations,362 but is not subject to the improperly accumulated earnings tax [IAET]. The partnership must file quarterly and year-end income tax returns. 2. The taxable income of the partnership, less the normal corporate income tax thereon, is the distributable net income of the partnership. 3. Ten percent (10%) final tax - the share of a partner in the partnerships distributable net income of a year deemed to have been actually or constructively received by the partners in the same taxable year taxed to them in their individual capacity, whether actually distributed or not,363 withheld by the partnership.364 19. Taxation of General Professional Partnerships365 Rules: 1. Not subject to income tax.

360 361

See Other exempt corporations, supra partnerships wherein all or part of their income is derived from the conduct of trade or business 362 capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT] 363 Sec. 73(D) 364 Sec. 24(B)(2) 365 GPP is not a taxable entity The partnership is a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism distribution of such income to the individual partners. (Tan v. Commissioner [Oct. 3, 1994]) But, the partnership itself is required to file income tax returns for the purpose of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. (RR 2- 1998) The share of an individual partner in the net profit of a general professional partnership is deemed to have been actually or constructively received by the partner in the same taxable year in which such partnership net income was earned, and shall be taxed to them in their individual capacities, whether actually distributed or not, at the graduated income tax ranging from 5% to 32%. Thus, the principle of constructive receipt of income or profit is being applied to undistributed profits of GPPs. The payment [to the partners] of such tax-paid profits in another year should no longer be liable to income tax. (Mamalateo)

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2. The partners shall only be liable for income tax only in their separate and individual capacities. 3. For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. 4. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. 15%.
366

5. The share of a partner shall be subject to a creditable withholding income tax of 20. Withholding tax367 a. Concept

The requirement that taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations and/or persons from payments made to payeescorporations and/or persons for the former to pay the same directly to the BIR. R. Hence, the taxes are collected practically at the same time the transaction is made or when the taxable transaction occurs. It is taxation at source. b. Kinds Withholding of final tax of certain income Withholding of creditable tax at source As to income subject of the system 1. Passive incomes 2. Fringe benefits 1. Compensation Income 2. Professional/talent fees 3. Rentals 4. Cinematographic film rentals and other payments 5.Income payments to certain contractors As to whether or not income should be reported as part of the gross income The recipient may not report the said The employee is required to include the income in his gross income because the tax income in his gross income withheld constitutes final and full
366 367

RR 2- 1998 also known as taxation at source

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settlement of the tax liability As to the effect of the tax withheld The tax withheld cannot be claimed as tax The tax withheld can be claimed as a tax credit credit or may be deducted from the tax due or payable As to filing of ITR If the only source of income is subject to There is a necessity to file on final tax, no need to file an ITR on the part the earner of the earner c. Withholding of VAT (a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%) VAT, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers expense or cost. On the other hand, if actual input VAT is less than seven percent (7%) of gross payment, the difference must be closed to expense or account. (b) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations(GOCCs), as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Other services rendered in the Philippines by non-residents.368

368

RR 16-2005, as amended by RR 4-2007

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d. Filing of return and payment of taxes withheld 1) Return and payment in case of government employees The return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose.369 2) Statements and returns (A) Requirements Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this Section in respect of any wage shall contain such other information, and shall be furnished at such other time and in such form as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulation, prescribe.

(B) Annual Every employer required to deduct and withhold the taxes in respect Information Returns. of the wages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary.370

369 370

Sec. 82 see Sec. 83

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e. Final withholding tax at source371 f. Creditable withholding tax 1) Expanded withholding tax372 2) Withholding tax on compensation Every employer must withhold from compensation paid, an amount computed in accordance with the regulations. 373 Exception: Where such compensation income of an individual: 1. Does not exceed the statutory minimum wages; or 2. Five thousand pesos (P5,000) monthly374 - whichever is higher f. Timing of withholding It is payable when the obligation becomes due, demandable or legally enforceable. At the time the income is paid or payable or accrued or recorded as an expense or asset whichever is applicable in the payors books, whichever comes first. B. Estate Tax 1. Basic principles The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death.375 Not a direct tax on the property transmitted or transferred although its amount is based thereon.

371 372

Sec. 57 (A), supra Id. (B), supra 373 Elements of Withholding on Compensation: 1. There must be an employer-employee relationship 2. There must be payment of compensation or wages for services rendered 3. There must be a payroll period 374 P60,000 a year 375 Sec. 3, RR 2-2003

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2. Definition A graduated tax imposed on the privilege of the decedent to transmit property at death and is based on the entire net estate, regardless of the number heirs and relations to the decedent. 3. Nature A tax imposed on the privilege of transmitting property upon the death of the owner. The liability for estate tax is generated by death and accrues at the time of death. It is governed by the law in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. Consequently, all properties that are included in the taxable estate should be valued at the moment of death of a decedent. 4. Purpose or object a) Benefit-Received Theory For the performance of services rendered by the government in the distribution of the estate of the decedent and other benefits that accrue to the estate and the heirs, the state collects the tax. b) Redistribution of Wealth Theory A contributing factor to the inequalities in wealth and income. The imposition of death tax reduces the property received by the successor bringing about a more equitable distribution of wealth in society. c) Ability-to pay- theory The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby creating an ability to pay the tax and thus to contribute to governmental income; and d) Privilege theory or State Partnership theory Inheritance is not a right but a privilege granted by the state and large estates have been acquired only with the protection of the state. The State, as a passive and silent partner in the accumulation of property has the right to collect the share which is properly due to it 5. Time and transfer of properties At the time of death.376
376

The tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon.

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6. Classification of decedent a) resident decedent b) non resident alien decedent 7. Gross estate vis--vis Net estate Gross estate The total value of all property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines. Net estate Determined by deducting from the value of the gross estate the following items of deductions: 1. Expenses, losses indebtedness, and taxes.

2. Property previously taxed. In the case of a nonresident alien decedent, it shall include only property situated in the 3. Transfers for public use. Philippines. 4. The Family Home 5. Standard Deductions 6. Medical Expenses 7. Amount received by heirs under R.A. 4917 8. Net share of the surviving spouse in the conjugal partnership or community property. 8. Determination of gross estate and net estate Decedent is a resident or nonresident citizen, or a resident alien All properties, real or personal, tangible or intangible, wherever situated. Decedent is a non-resident alien Only properties situated in the Philippines provided that, intangible personal property is subject to the rule of reciprocity provided for under Section 104 of the NIRC.377

377

Sec. 85

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9. Composition of gross estate Decedent is a resident or nonresident citizen, Decedent is a non-resident alien or a resident alien Value at the time of death of all: 1. Real property wherever situated 2. Personal property, tangible or intangible, wherever situated 3. To the extent of the interest therein of the decedent at the time of his death. Value at the time of death of all: 1. Tangible personal property situated in the Philippines 2. Intangible personal property with situs in the Philippines unless exempted on the basis of reciprocity

10. Items to be included in gross estate

a. Decedent's interest

It includes any interest having value or capable of being valued, transferred by the decedent at his death. A transfer motivated by the thought of impending death although death may not be imminent: 1. When the decedent has, at any time, made a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death; or 2. When decedent has, at any time, made a transfer under which he has retained for his life or for a period not ascertainable without reference to his death or any period which does not in fact end before his death: a. Possession, enjoyment or right to income from the property; or b. The right alone or in conjunction
110

b. Transfer in contemplation of death

with any other person to designate the person who will possess or enjoy the property or income there from.378 c. Revocable transfer A transfer by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power to alter or amend or revoke or terminate such transfer by: a. Decedent alone; b. By the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power, to alter, amend, revoke or terminate; or c. Where any such power is relinquished in contemplation of the decedents death other than a bone fide sale for an adequate and full consideration in money or moneys worth.379 d. Property passing under general power The right to designate the person who will appointment succeed to the property of the prior decedent, in favor of anybody, including himself, his estate, his creditors, or the creditors of his estate. If the donation contains a provision of reversion to the donor, this is similar to a revocable transfer.380 e. Proceeds of life insurance
378

When the beneficiary is:

Sec. 85[B] The concept of transfer in contemplation of death has a technical meaning. This does not constitute any transfers made by a dying person. It is not the mere transfer that constitutes a transfer in contemplation of death but the retention of some type of control over the property transferred. In effect, there is no full transfer of all interests in the property inter vivos. 379 Sec. 85(C)(1) 380 A power is not general (specific) if it can be exercised only in favor of one or more designated person or classes of persons exclusive of the decedent, his estate, his creditors and creditors of his estate, or if it expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate.

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a. The estate of the decedent, his executor or administrator regardless of whether the designation is revocable or irrevocable; and b. A third person, other than the decedents estate, executor, or administrator provided that the designation is revocable.381 f. Prior interests All transfers, trusts, estates, interests, rights, powers and relinquishment of powers made, created, arising existing, exercised or relinquished before or after the effectivity of the Tax Code.382 Only the excess of the fair market value of the property at the time of the decedents death over the consideration received shall be included in the gross estate.

g. Transfers of insufficient consideration383

11.Deductions from estate Decedent is a resident citizen, non-resident citizen, or resident alien Ordinary deductions: a. Funeral Expenses384
381

Decedent is a nonresident alien The deductions allowed to citizens or residents of the Philippines are also extended to a non-resident alien decedent with respect

Not part of the gross estate when: a. Proceeds receivable by a beneficiary designated as irrevocable provided that the beneficiary is not the decedents estate, executor and administrator; and b. Where the insurance was not taken by the decedent upon his own life and the beneficiary is not the decedents estate, executor, or administrator. (Section 85(E) 382 Sec.85 383 b, c, d and g - properties not physically in the estate (these have already been transferred during the lifetime of the decedent but are still subject to payment of estate tax) - are transfers inter vivos which are considered part of gross estate. 384 The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses whichever is lower, but in no case to exceed P200, 000. Actual funeral expenses are those which were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of said deceased. Funeral expenses include: a) Costs of coffin, tombstone, mausoleum, and burial lot; b) Funeral parlor fees; c) Mourning clothing of the surviving spouse and the unmarried minor children;

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b. Medical expenses

385

to his estates situated in the Philippines at the time of his death.

c. Judicial expenses of the testamentary or In case of deductions for expenses, losses, intestate proceedings.386 indebtedness and taxes, the amount of the allowable deduction is limited only to the d. Claims against the decedents estate387 proportion of such deductions with the value of such part of his gross estate which at the e. Claims against insolvent persons388 time of his death, is situated in the 389 f. Unpaid mortgages indebtedness Philippines, bears to the value of his entire gross estate wherever situated.396
d) Costs of obituary notices; and e) Expenses during the wake The following cannot be deducted under funeral expenses: a) Cash advances of the surviving spouse and the heirs; b) Expenses paid by the relatives and friends; and c) Expenses after the burial. 385 Provided, that the following requisites are met: a. Must be incurred by the decedent within one (1) year prior to his death b. Must be duly substantiated by receipts; and c. Must not exceed P500, 000.00. 386 Include administration expenses to those actually incurred in the administration of the estate Examples: a) fees of the executor or administrator; b) attorneys fees; c) accountants fees; d) court fees; e) salaries of employees; and All other expense related to the administration of the estate. Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. 387 Debts or obligations of the decedent that is enforceable against the estate provided that the following requisites are met: a) They were contracted in good faith and for an adequate and full consideration in money or moneys worth. b) They must be existing against the estate. c) They must be legally enforceable obligations of the decedent and ought to be enforced by the claimants. d) They must be reasonably certain in amount; and; e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. 388 Requisites for deductibility: a) The amount of said claims has been initially included as part of the gross estate; and b) The incapacity of the debtors to pay their obligations is proven and not merely alleged. 389 Requisites for deductibility: a. The fair market value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estate; and b. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or moneys worth.

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g. Casualty Losses390 h. Unpaid Taxes391 i. Vanishing deduction392 j. Transfer for public use393 k. Family home394

396 390

Sec. 86 (B) They include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement. Provided, that the following requisites are met: a. Losses not compensated by an insurance or otherwise; b. Losses not have been claimed as a deduction for income tax purposes; and c. Losses incurred not later than the last day for payment of the estate tax (6 months from death). 391 Unpaid income tax on income due or received before death of the decedent, and real property taxes, which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of the year but may be paid before or at the end of each quarter) are deductible. Income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax cannot be deducted because they are chargeable to the income of the estate. 392 Property previously taxed An amount allowed to reduce the taxable estate of a decedent where the property: a. received by him from prior decedent by gift, bequest, devise or inheritance, or b. transferred to him by gift, has been the object of previous transfer deduction. It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirely vanishes depending upon the time interval between the two (2) successive transfers. Two (2) factors necessary in vanishing deduction, these are; a. There are two (2) deceased persons and the first is the donor; and b. The second decedent dies within five (5) years after the death of the prior decedent or in the case of gifts the decedent donee dies within the same period after the date of the gift. 393 Requisites: a. The disposition must be testamentary in character. b. To take effect after death. c. In favor of the government of the Philippines, or any political subdivision thereof. d. Exclusively for public purpose. 394 Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or an unmarried person who is the head of the family and members of their immediate family resides as certified by the Barangay Captain of the locality. For the purpose of availing of a family home deduction to the extent provided by law, a person may constitute only one family home. The amount deductible is equivalent to the current fair market value of the deceden ts family home if said current fair market value exceeds P1, 000,000.00., the excess shall be subject to estate tax. Requisites to be deductible: a. The family home must be the actual residential home of the decedent and his family at the time of his death as certified by the barangay Captain of the locality where the family is situated. b. The total value of the family home must be included in the gross estate of the decedent. c. The allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate not exceeding P1, 000,000.00.

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l. Standard deduction equivalent to P1, 000,000.00395 m. Amounts received by heirs under R.A. No. 4917 from the decedents employer as a consequence of the death of the decedent employee provided that such amount is included in the gross estate of the decedent. n. Net share of the surviving spouse in the conjugal partnership or community property. o. Tax credit for estate tax paid to a foreign country. 12. Exclusions from estate The following properties are excluded from gross estate:397 a) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. b) Proceeds of a group insurance policy taken out by a company for its employees. c) Proceeds of insurance policies issued by the GSIS to government officials and employees. d) Benefits accruing under the Social Security Act. e) Proceeds of life insurance payable to the heirs of deceased members of the military personnel of the United States Army or Philippine Army under laws administered by the United State veterans Administration. f) Accident insurance proceeds.398 g) Separate property of the surviving spouse.

395 397

does not include the P 200,000.00 exemption In the determination of the gross estate, the nature of the property, whether common property of the spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of vital importance. What regime of property relations shall govern the spouses? Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed by the Absolute Community of Property, unless a different regime was agreed upon in the marriage settlement. 398 Items a - f are proceeds of insurance not includible in the gross estate of the decedent

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13. Tax credit for estate taxes paid in a foreign country The estate tax imposed by the tax code shall be credited with the amount of any estate tax paid to a foreign country. 14. Exemption of certain acquisitions and transmissions a. The first P200, 000.00 value of the estate.399 b. The merger of the usufruct in the owner of the naked title. c. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor. d. All bequest, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inured to the benefit of any individual and provided that not more than 30% of the said bequest, etc. shall be used by such institution for administration purposes. e. Intangible personal property of non-resident aliens under the principle of reciprocity. f. Retirement benefits of employees of private firms from private pension plans approved by the BIR. g. Amount received for war damages. h. Grants and donations to the Intramuros administration. 15. Filing of notice of death Within two (2) months after the decedents death400 to the Commissioner of Internal Revenue where the gross value of the estate exceeds twenty thousand pesos (P 20,000.00).401 16. Estate tax return To be filed by the executor, administrator, or any of the legal heirs; In cases of: 1. Transfers subject to tax 2. Where gross value of estate exceeds P200,000 3. Where estate consists of registered or registrable property, regardless of Amount.402
399 400

Sec. 84 or within like period after the executor or administrator qualifies as such 401 Sec. 89

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C. Donors Tax 1. Basic principles It is levied, assessed, collected and paid upon the transfer of any person, resident or non-resident, of the property by gift inter vivos. It applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.403 Donors tax shall be imposed whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. A gift is merely subjected to donors tax. 2. Definition A tax on the privilege of transmitting ones property or property rights to another or others without adequate and full valuable consideration. 3. Nature It is an excise tax on the privilege of the donor to give or on the transfer of property by way of gift inter vivos. It is not a property tax. 4. Purpose or object To: a. Raise revenues b. Tax the wealthy and to reduce certain other excise taxes c. Discourage inter vivos transfers of property which could reduce mortis causa transfers on which a higher tax404 can be collected d. Prevent avoidance of income tax throughthe device of splitting income among numerous donees who are usually members of a family or into many trusts, with the donor thereby escaping the effect of the progressive rates of income taxation

402 403

Sec. 90 (A) Sec. 98 404 estate tax

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5. Requisites of valid donation a. The donor must have capacity to donate405 b. There must be an intent to donate406 c. There must be delivery, either actual or constructive d. The donee must accept the donation 6. Transfers which may be constituted as donation a. Sale/exchange/transfer of property for insufficient consideration407 If bona fide sale No value shall be included in the gross estate. The excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. Total value of the property at the time of death included in the gross estate.408

If not a bona fide sale

If inter vivos transfer is proven fictitious

b. Condonation/remission of debt If the creditor condones the indebtedness of the debtor the following rules apply: 1. On account of debtors services to the creditor the same is in taxable income to the debtor. 2. If no services were rendered but the creditor simply condones the debt, it is taxable gift and not a taxable income.

405 406

The donors capacity shall be determined as of the time of the making of the donation (Art. 737, NCC) Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way of sale, exchange or other transfer of property as contemplated in cases of transfers for less than adequate and full consideration (Sec. 100, NIRC), not always essential to constitute a gift. 407 Transfers that are not bona fide sales of property for an adequate and full consideration in money or moneys worth 408 Sec. 85 (G)

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7. Transfer for less than adequate and full consideration The amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.409 8. Classification of donor Taxable within and outside Philippines a. Resident citizen b. Non-resident citizen c. Resident alien d. Domestic corporation 9. Determination of gross gift All property, real or personal, tangible or intangible, that was given by the donor to the donee by way of gift, without the benefit of any deduction.410 10. Composition of gross gift Resident citizen, non-resident citizen, and resident alien a. Real property wherever situated; Non-resident alien a. Real property Philippines; situated within the Taxable only within the Philippines a. Non-resident aliens b. Foreign corporation

b. Personal property wherever situated, tangible or intangible. b. Personal property: i. Tangible property situated Philippines within the

ii. Intangible personal property with situs in the Philippines unless exempted on the basis of reciprocity.411

409 410

Sec. 100 Sec. 104 411 Where the decedent or donor was a nonresident alien at the time of his death or donation, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his "gross estate" or "gross gift (see Sec. 104)

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11. Valuation of gifts made in property Personal property Real property

The fair market value of the property given The fair market value at the time of donation at the time of the gift. or the value fixed by the assessor, whichever is higher.412 12. Tax credit for donors taxes paid in a foreign country The tax imposed upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country. 413 13. Exemptions of gifts from donors tax 1. Donation for political campaign purposes414 2. Certain gifts made by residents415 3. Certain gifts made by non-residents416
412 413

Sec. 102. Sec. 101(C) 414 Sec. 99[C] 415 (1) Dowries or gifts made on account of marriage and before its celebration or within one (1) year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000): (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and (3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization. Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes (Sec.101[A]) For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. 416 (1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. (2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization. Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes (Sec.101[B])

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4. Donation of intangibles subject to reciprocity417 5. Donation for athletes prizes and awards418 6. Donation under the Adopt-a-School Program419 7. Exemption under other special laws.420 14. Person liable Any person, resident or nonresident, of the property transferred by gift. Any person making a donation unless the donation is specifically exempted under NIRC or other special laws, is required for every donation to accomplish under oath a donors tax return in duplicate. 15. Tax basis The total net gifts made during the calendar year.421

417 418

Sec. 104 1. The donation must be prizes and awards given to athletes in local and international tournaments and competitions; 2. held in the Philippines or abroad; and 3. sanctioned by their respective sports association. (Sec. 1, R.A. 7549) 419 Any aid, help, contribution or donation provided by an adopting private entity to a government school, whether elementary, secondary or tertiary are exempt from donors taxes. The assistance may be in the form of, but not limited to infrastructure, teaching, and skills development, learning, support, computer and science laboratories and food and nutrition (R.A. 8525) 420 1. Donation to International Rice Research Institute (IRRI) 2. Donation to Ramon Magsaysay Award Foundation 3. Donation to Philippines Inventors Convention (PIC) 4. Donation to Integrated Bar of the Philippines (IBP) 5. Donation to the Development Academy of the Philippines 6. Donation to social welfare, cultural or charitable institution, no part of the net income of which inures to the benefit of any individual, if not more than 30% of the donation shall be used by the done for administration purposes 7. Donation to Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines 8. Donation to the National Museum 9. Donation to the National Library 10. Donation to the National Social Action Council 11. Donation to the Philippine American Cultural Foundation 12. Donation to Task Force on Human Settlement on the donation of equipment, materials, and services 421 Sec. 99 (A)

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D. Value-Added Tax (VAT) 1. Concept VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange, or lease of goods or properties, and on the performance of service in the course of trade or business, or on the importation of goods, whether for business or non-business purposes. It is a business tax levied on certain transactions involving a wide range of goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The tax is so- called because it is imposed on the value not previously subjected to VAT.422 It is also an excise tax, or a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods. The taxpayer423 determines his tax liability by computing the tax on the gross selling price or gross receipt424 and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the sale of service425 against the tax due on his own sale. 2. Characteristics It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee, or lessee of the goods, properties or services.426 It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic marine and agricultural products in their original state are still not subject to tax. Congress also provided for mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. VAT, by its very nature, is regressive. But the Constitution does not really prohibit the imposition of indirect taxes which is essentially regressive. What it simply provides is that Congress shall evolve a progressive system of taxation.427
422 423

De Leon, The National Internal Revenue Code Annotated, 2000 edition seller 424 output tax 425 input tax 426 Sec. 105 This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of R.A. No. 9337 (RR 16-2005) 427 In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred, and as much as possible, indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them. The Constitution mandate to evolve a progressive system of taxation simply means that direct taxes are to be preferred as much as possible, and indirect taxes should be minimized. Resort to indirect taxes should be minimized but not avoided entirely. Also, the regressive effects are corrected by the zero rating

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Other Characteristics: a. It is consumption-based b. It is imposed on the value-added in each stage of distribution c. It is a credit-invoice method value-added tax d. It is not a cascading tax. 3. Impact of tax428 The seller429 upon whom the tax has been imposed. 4. Incidence of tax430 It is on the final consumer, the place at which the tax comes to rest. The tax is shifted to the buyer of the goods, properties, or services. 5. Tax credit method431 The input tax shifted by the seller to the buyer is credited against the buyers output taxes when he in turn sells the taxable goods, properties or services. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.432 If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes.433
of certain transactions and through the exemptions. The transactions which are subject to VAT are those which involve goods and services which are used or availed of mainly by higher income groups (Real properties held primarily for sale to customers, right or privilege to use patent, copyright.) 428 The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax 429 manufacturer 430 That point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another 431 also called invoice method 432 Commissioner of Internal Revenue v. Seagate Technology Philippines , G. R. No. 153866, February 11, 2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) 433 Commissioner of Internal Revenue v. Seagate Technology (Philippine s), G. R. No. 153866, February 11, 2005 citing various cases and authorities

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6. Destination principle434 Under this doctrine, goods and services are taxed only in the country where they are consumed. No VAT shall be imposed to form part of the cost of goods destined outside the territorial border of the taxing authority. Thus, exports are zero-rated, while imports are taxed. Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following the destination principle being adhered to by our VAT system. VAT is imposed in the country in which the products or services are actually consumed or used. Exports exempt, imports taxable.435 7. Persons liable436 A. Any person who, in the regular course of trade or business437 1) sells, barters, exchanges goods or properties, 2) leases goods or properties, 3) renders services; and 4) any person who imports goods.438 Consequently, any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.439

434 435

or the Cross Border Doctrine Situs: country of Consumption. Exception to the destination principle: A zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. 436 whether or not in the regular course of business (Sec. 105) Present law requires a threshold amount of P1,500,000.00 gross sale or gross receipt to become liable for value-added tax. 437 The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity (Sec. 105) 438 The importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to pay VAT. (RR 16-2005) 439 Commissioner v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006

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8. VAT on sale of goods or properties a. Requisites of taxability of sale of goods or properties: 1. There is an actual or deemed sale, barter or exchange of goods or personal properties for valuable consideration; 2. The sale is in the course of trade or business or exercise of profession in the Philippines; 3. The goods or properties are located in the Philippines and are for use or consumption therein; and 4. The sale is not exempt from VAT under Section 109 of NIRC, special law, international agreement binding upon the government of the Philippines.440 9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or properties The gross selling price of goods or properties is multiplied by 0% VAT rate. Zerorated sale of goods or properties by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. However, the input tax on the purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. Zero-rated sales of goods by a VAT-registered person: a. Export Sales441 b. Foreign Currency Denominated Sale442 c. Sale to persons or entities which is VAT exempt under special laws or international agreements to which the Philippines is a signatory443 d. Transactions subject to zero-rated (0%)444

440

Absence of any of the above requisites exempts the transaction from VAT. However, percentage taxes may apply (Section 116, NIRC). 441 as provided in Section 106(A)(2)(a), See Reference 442 id. (A)(2)(b) 443 id. (A)(2)(c) 444 as provided in Section 108(B)

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10. Transactions deemed sale445 a. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business. e.g. when a VAT-registered person withdraws goods from his business for his personal use. b. Distribution or transfer to shareholders, investors or creditors 1. Shareholders or investors as share in the profits of the VAT-registered persons; or 2. Creditors in payment of debt.446 c. Consignment of goods if actual sale not made within 60 days from date of consignment sold.447 Consigned goods returned by the consignee within the 60-day period are not deemed d. Retirement from or cessation of business with respect to inventories on hand As of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. Examples are change of ownership of the business448 and dissolution of a partnership and creation of a new partnership which takes over the business.449

445

Sec. 106 (B) The transactions are deemed sale because in reality there is no sale, but still the law provides that the following transactions are considered as sale and are thus subject to VAT. 446 Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings on or after Jan. 1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or FMV at the time of the distribution, whichever is applicable. ( RR 16-2005) 447 RR 16-2005 448 e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business 449 RR 16-2005

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11. Change or cessation of status as VAT-registered person VAT shall apply to goods disposed of or existing as of a certain date if under the circumstances, the status of a person as a VAT-registered person changes or is terminated. a. Subject to VAT Subject to output tax - applicable to goods/properties originally intended for sale or use in business and capital goods which are existing as of the occurrence of the following: 1) Change of business activity from VAT taxable status to VAT-exempt status 2) Approval of request for cancellation of a registration due to reversion to exempt status 3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years450 b. Not subject to VAT 1) Change of control of a corporation By the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in the business or those comprising the stock-in trade of the corporation will not be considered sold, bartered or exchanged despite the change in the ownership interest. However, exchange of property by corporation acquiring control for the shares of stocks of the target corporation is subject to VAT. 2) Change in the trade or corporate name Change in the trade or corporate name of the business. 3) Merger or consolidation of corporations The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corp.

450

from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2)

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12. VAT on importation of goods VAT shall be assessed and collected upon goods brought into the Philippines, whether or not goods are for use in business. a. Transfer of goods by tax exempt persons The subsequent purchasers, transferees or recipients of such imported goods shall be considered as importers who shall be liable for the tax on importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.451 13. VAT on sale of service and use or lease of properties a. Requisites for taxability 1. There is a sale or exchange of service or lease or use of property enumerated in the law or other similar services; 2. The service is performed or to be performed in the Philippines; 3. The service is in the course of trade of taxpayers trade or business or profession; 4. The service is for a valuable consideration actually or constructively received; and 5. The service is not exempt under the Tax Code, special law or international agreement.452 14. Zero-rated sale of services453 1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. 2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

451 452

Sec. 107 (B) Absence of any of the requisites renders the transaction exempt from VAT but may be subject to other percentage tax under Title V of the Tax Code. 453 Ibid. (B)

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3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate. 4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof;454 Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Phil. to another place in the Phil., the same being subject to 12% VAT under Sec. 108.455 5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. 6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country and; 7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.456 Zerorating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power. 15. VAT exempt transactions a. VAT exempt transactions, in general It involves goods or services which, by their nature, are specifically listed in and expressly exempted from VAT under the Tax Code, without regard to the tax status of the party to the transaction. b. Exempt transactions, enumerated 1. Sale/ import of agricultural, marine food products in original state;457 of livestock and poultry.458

454 455

Ibid.. supra 456 Ibid. 457 Original state including preservation using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods (RR 16-2005) Original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. 458 Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets

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Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state. 2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds. 3. Import of personal and household effects of Phil resident returning from abroad and nonresident citizens coming to resettle in the Philippines 4. Import of professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange. 5. Services subject to percentage tax. 6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; 7. Medical, dental, hospital and veterinary services except those rendered by professionals.459 8. Educational services rendered by private educational institutions, duly accredited by DEPED, CHED, TESDA, and those rendered by government educational institutions. 9. Services rendered by individuals pursuant to an employer-employee relationship; 10. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; 11. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under P.D. No. 529.460 12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce. Exemption includes importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. 13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority.

459

Ibid Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. [RR 16-2005] 460 Petroleum Exploration Concessionaires under the Petroleum Act of 1949

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14. Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority are exempt but their importation of machineries and equipment, including spare parts thereof, to be used by them are subject to vat. 15. Export sales by persons who are not VAT- registered; 16. Sale of real properties the ff. sales are exempt: a. Sale of real properties NOT primarily held for sale to customers or held for lease in the ordinary course of trade or business. b. Sale of real properties utilized for low-cost housing461 c. Sale of real properties utilized for socialized housing.462 d. Sale of residential lot valued at P1.5M and below, or house & lot and other residential dwellings valued at P2.5M and below, where the instrument of sale/transfer/disposition was executed on or after July 1, 2005.463 17. Lease of residential units with a monthly rental per unit not exceeding P10K, regardless of the amount of aggregate rentals received by the lessor during the year. Lease of residential units where the monthly rental per unit exceeds P10K but the aggregate of such rentals of the lessor during the year do not exceed One Million Five Hundred Pesos (P1.5M) shall likewise be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage tax.

461

Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under B.P. Blg. 220, P.D. No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under R.A. No. 7279, and other laws, such as R.A. No. 7835 and R.A. No. 8763. 462 "Socialized housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA No. 7279 and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-government organizations 463 To be adjusted every 3 years from Jan 31, 2009 If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots does not exceed P1.5M. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot (RR 16-2005)

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In cases where a lessor has several residential units464 for lease, some are leased out for a monthly rental per unit of not exceeding P10K while others are leased out for more than P10K per unit, his tax liability will be as follows: a. The gross receipts from rentals not exceeding P10K per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. b. The gross receipts from rentals exceeding P10K per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only465 exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax. 18. Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; 19. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations. 20. Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport operations. 21. Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries; and 22. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,500,0000.466 16. Input tax and output tax, defined Input tax The VAT due from or paid by a VATregistered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VATregistered person. It includes the transitional
464

Output tax The VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236470 of the Code.

The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. [RR 16-2005] 465 not including the gross receipts from units leased for not more than P10K 466 Sec. 109

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input tax determined in accordance with Section 111467 of this Code. It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Input tax must be evidenced by a VAT invoice or official receipt issued by a VAT- registered person in accordance with Secs. 113 and 237468 of the Tax Code.469 17. Sources of input tax a. Purchase or importation of goods471 b. Purchase of real properties for which a VAT has actually been paid c. Purchase of services in which VAT has actually been paid d. Transactions deemed sale472 e. Presumptive input The gross value of the purchases of primary agricultural products used as inputs to production by persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals.

470 467

See Reference Ibid. 468 Ibid. 469 RR 16-2005 471 (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1) 472 supra

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e. Transitional input The value of the beginning inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher. 18. Persons who can avail of input tax credit (a) Purchaser - upon consummation of sale and on importation of goods or properties;473 and (b) Importer - upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs. However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.474 19. Determination of output/input tax; VAT payable; Excess input tax credits a. Determination of output tax Sellers of goods or properties: Gross selling price (X) VAT rate Sellers of service: Gross receipts (X) VAT rate b. Determination of input tax creditable The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies.475

473

In the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee. 474 Sec. 110 (A)(2) 475 such as the Board of Investments or the Bureau of Customs (Sec. 110 (C))

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c. Allocation of input tax on mixed transactions A VAT-registered person who is also engaged in transactions not subject to Vat shall be allowed to recognize input tax credit on transactions subject to Vat as follows: 1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit. Input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government entities; and 2. If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.476 d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits Output tax Less: Input tax VAT payable/ excess tax credits 20. Substantiation of input tax credits477 Transactions Input taxes on domestic purchases of goods VAT invoice or properties made in the course of trade or business Input tax on purchases of real property a. Cash/deferred basis Public instrument478 together with the VAT invoice for the entire selling price and non-VAT Official Receipt for the initial and succeeding payments. Required Support

476

Input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost of goods sold. For persons engaged in both zero-rated sales and nonzero rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated and non-zero rated sales. 477 RR 16-2005 478 i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.

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b. Installment basis

Public instrument and VAT Official Receipt for every payment VAT Official Receipt Import entry or other equivalent document showing actual payment of VAT on the imported goods Inventory of goods as shown in a detailed list to be submitted to the BIR Required invoices

Input tax on domestic purchases of service Input tax on importation of goods

Transitional input tax

Input tax on deemed sale transaction

Input tax from payments made to non- Monthly Remittance Return of Value Added residents479 Tax Withheld480 filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor. Advance VAT on sugar Payment order showing payment of the advance VAT

479 480

such as for services, rentals, or royalties BIR Form 1600

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21.Refund or tax credit of excess input tax a. Who may claim for refund/apply for issuance of tax credit certificate (TCC) Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax.481 b. Period to file claim/apply for issuance of TCC Within two (2) years after the close of the taxable quarter when the sales were made. c. Manner of giving refund Upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, subject to post audit by the Commission on Audit.482 d. Destination principle or Cross-border doctrine483 Destination principle Cross border doctrine

Goods and services are taxed only in the Mandates that no VAT shall be imposed to country where these are consumed form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. 22. Invoicing requirements a. Invoicing requirements in general For every sale, a VAT-registered person shall issue an invoice or receipt. Aside from the information required under Section 237,484 the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and

481 482

Sec. 112 (A) Id. (E) 483 See also (D)(7), supra 484 See Reference

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(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. b. Invoicing and recording deemed sale transactions Transaction Invoicing Requirement

Transfer, use or consumption not in Memorandum entry in the subsidiary sales the course of business of goods or journal to record withdrawal of goods for properties originally intended for sale personal use or for use in the course of business Distribution or transfer to shareholders/investors or creditors Consignment of goods if actual sale is not made within 60 days

Invoice, at the time of the transaction, which should include all the info prescribed in Sec. 113 (B)485

Retirement from or cessation of An inventory shall be prepared and business with respect to all goods in submitted to the RDO who has jurisdiction hand over the taxpayers principal place of business not later than 30 days after retirement or cessation from the business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory regarding the description of the goods. If the business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes.

485

Ibid.

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c. Consequences of issuing erroneous VAT invoice or VAT official receipt 1. In case of non-VAT registered person who issues a VAT invoice/receipt shall be held liable to: a. payment of percentage tax if applicable; b. payment of VAT without input tax; c. 50% surcharge on tax due; and d. the purchaser shall be allowed to recognize an input tax credit provided that the invoice/official receipt contains the required information. 2. In case of VAT-registered who issues a VAT invoice/official receipt for a VAT exempt sale without the words VAT Exempt Sale shall be held liable to pay 12% VAT.486 23.Filing of return and payment Every person liable to pay the VAT shall file a quarterly return of the amount of his gross sales or receipts within 25 days following the close of each taxable quarter prescribed for each taxpayer. Required to file VAT return: 1. Every person or entity who in the course of trade or business, sells or leases goods, properties, and services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed P1.5 million for any twelve month period 2. A person required to register as VAT taxpayer but failed to register 3. Any person who imports goods 4. Professional practitioners.487 VAT-registered shall pay the VAT on a monthly basis. The monthly return shall be filed not later than the 20th day following the end of each month.

486 487

Sec. 113 (D) Services of Professional Practitioners are subject to: VAT if the gross professional fees exceed P1.5 million for a 12-month period; or 3% percentage tax if the gross professional fees does not exceed P1.5 million for a 12-month period (RR 16-2005)

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24. Withholding of final VAT on sales to government The Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods and/or services taxed at 12% shall deduct and withhold a final VAT of 5% of the gross payment.488 E. Tax Remedies under the NIRC 1. Taxpayers Remedies a. Assessment 1) Concept of assessment The notice that the amount therein stated is due as a tax, with a demand for payment within a stated period of time.489 The official action of the administrative officer in determining the tax due from a taxpayer.490
488

Sec. 114 (C) The five percent (5%) final VAT withholding rate shall represent the net VAT payable to the seller The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual Input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceed seven percent (7%) of gross payments, the excess may form part of the sellers expense or cost If actual input VAT attributable to sale to government is less than 7% of gross payment, the difference must be closed to expense or cost. 489 A notice of assessment contains not only a computation of tax liabilities but also a demand for the payment within a prescribed period. It also signals the time when penalties and interests begin to accrue. 490 The following are not considered assessments: 1. A letter containing a computation of supposed liabilities, giving the taxpayer an opportunity to show the incorrectness of the findings, or urging the taxpayer to produce his books or records for verification, or to present his side. 2. A letter-notice that did not provide, even in a general way, reasons why deficiency taxes were being collected 3. An affidavit by a revenue officer stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion. 4. A pre-assessment notice signed by a revenue official. 5. A deficiency assessment outside the scope of the letter of authority (a nullity). The following may be considered assessments: 1. A letter from the Commissioner demanding the amount of a rubber check previously paid by a taxpayer, if it declares the tax to be payable and demands the settlement thereof. 2. A preliminary collection letter, if it was the initial notice received by the taxpayer regarding his internal revenue tax liabilities, a. and if it can be proven that the taxpayer did not receive any assessment notice, b. and no follow up letter was sent nor was a preliminary conference arranged. An assessment is relevant:

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a) Requisites for valid assessment The assessment must: 1. Be in writing and signed by the BIR; 2. Contain the law and the facts on which the assessment is made; and 3. Contain a demand for payment within the prescribed period.491 b) Constructive methods determination of income

1. Percentage method

The computed amount of revenues based on the percentage computation is compared to the amount of revenues reflected on the return. The percentages used may be obtained from the taxpayer, industry publication, prior years audit results, or third parties. The comparison will provide an indication on the possibility of revenue being understated. A method of reconstructing income which is based on the theory that if the taxpayers net worth has increased in a given year in an amount larger than his reported income, he has understated his income for that year. The net worth on a fixed starting date is compared with the net worth on a fixed ending date. Any increase in net worth is presumed to be income not declared for tax purposes.492 The bank records of the taxpayer are analyzed and the BIR estimates income on

2. Net worth method

3. Bank deposit method

1. as an essential step towards the initiation of administrative proceeding or judicial action to collect taxes, 2. to enforce taxpayer liabilities and matters relating to it (imposition of surcharges and interest), 3. to apply the statute of limitations, 4. to the establishment of tax liens, 5. in estimating the revenues that may be collected by the government in the coming year. 491 Sec. 228 492 The difficulty of establishing the opening net worth of a tax payer has led to the Cohan Rule which is the use of estimates or approximations of the amount of cash and other asserts where the taxpayer lacks adequate records.

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the basis of the total bank deposits after eliminating non-income items. This method stands on the premise that deposits represent taxable income unless otherwise explained as being non-taxable items. This method may be used only where the BIR has been legally allowed access to the taxpayers bank records. Assumes that the excess of a taxpayers expenditures during the tax period over his reported income for that period is taxable to the extent not disproved otherwise The determination or verification of gross receipts may be computed by applying price and profit figures to the known ascertainable quality of business of the taxpayer.

4. Cash expenditure method

5. Unit and value method

6. Third party information or access to The BIR may require third parties, public or records method private to supply information to the BIR, and thus, obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities including the Bangko Sentral ng Pilipinas and government-owned or controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names , addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters or multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members.493 A
493

letter sent by the Bureau of Internal

Sec. 5 (B), NIRC of 1997

142

7. Surveillance and assessment method

Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of an assessment notice. It is part of the due process rights of a taxpayer.494

c)

Inventory method495 determination496

for

income

d) Jeopardy assessment A delinquency tax assessment made without the benefit of a complete or partial investigation by a belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the taxpayers failure to: a. Comply with audit and investigation accounts and/or pertinent records, or return. An assessment made demanding immediate payment of the tax due without the usual formalities in instances when the Commissioner believes that if the tax will be collected under normal procedures, the collection of such tax is at risk which might result in loss to the government. 497
494

requirements to present his books of

b. Substantiate all or any of the deductions, exemptions or credits claimed in his

As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessment notice because it is part of the due process rights of a taxpayer to be given notice in the form of a preassessment notice, and for him to explain why he should not be the subject of an assessment notice. 495 also called Net Worth Method 496 See table 497 This is issued when the revenue officer finds himself without enough time to conduct an appropriate or thorough examination in view of the impending expiration of the prescriptive period for assessment. To prevent the issuance of a jeopardy assessment, the taxpayer may be required to execute a waiver of the statute of limitations. Instances when jeopardy assessment may be issued: When it shall come to the knowledge of the Commissioner that a taxpayer is: 1. retiring from business subject to tax; or 2. intending a. to leave the Philippines or remove his property therefrom; or b. to hide or conceal his property; 3. performing any act tending a. to obstruct the proceedings for the collection of the tax for the past or current quarter or year; or b. to render the same totally or partly ineffective unless such proceedings are begun immediately (Sec. 6 (D), R.A. 8424) Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]

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e) Tax delinquency and tax deficiency Delinquency Tax Deficiency Tax

A taxpayer is considered delinquent in the a. The amount by which the tax imposed by payment of taxes when: law as determined by the CIR or his authorized representative exceeds the a. Self-assessed tax per return filed by the amount shown as tax by the taxpayer upon taxpayer on the prescribed date was not paid his return;499 or at all498 or only partially paid; or b. If no amount is shown as tax by the b. Deficiency tax assessed by the BIR taxpayer upon his return is made by the becomes final and executory. taxpayer, then the amount by which the tax500 exceeds the amounts previously assessed or collected without assessment as deficiency. Collection Can immediately be collected administratively through the issuance of a warrant of distraint and levy, and/or judicial action Civil Action The filing of a civil action for the collection The filling of a civil action at the ordinary of the delinquent tax in the ordinary court is court for collection during the pendency of a proper remedy protest may be the subject of a motion to dismiss. In addition to a motion to dismiss, the taxpayer must file a petition for review with the CTA to toll the running of the prescriptive period

498 499

The taxpayer did not file a return The taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax due and the tax paid. 500 as determined by the CIR or his authorized representative

144

Penalties A delinquent tax is subject to administrative A deficiency tax is generally not subject to penalties such as 25% surcharge, interest, the 25% surcharge, although subject to and compromise penalty interest and compromise penalty

2) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement a) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons The Commissioner is authorized: (A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry; (B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members; (C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and (E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed.

145

The Commissioner has no authority to inquire into bank deposits other than as provided for in Section 6(F)501 of this Code.502 3) When assessment is made When it is released, mailed or sent by the collector of internal revenue to the taxpayer within the three-year or ten-year period, as the case may be.503 a) Prescriptive period for assessment (1) False, fraudulent, and non-filing of returns Ten (10) years from the discovery of the falsity, fraud or omission to file the return.504 b) Suspension of running of statute of limitations 1) Periods suspended: (a) periods for assessment (b) beginning of distraint or levy (c) proceeding in court for collection 2) Grounds for suspension of prescriptive periods: a) Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for 60 days thereafter b) Taxpayer requests for Reinvestigation which is granted505 c) Taxpayer cannot be located in the address given in the return filed, except if the taxpayer informs the Commissioner of a change in address the prescriptive period will not be suspended d) When the warrant is duly served upon the taxpayer and no property could be located506 e) When the taxpayer is out of the Phils.507
501 502

see Reference Sec. 5 503 CIR v. Pascor, G.R. 128315, June 29, 1999 504 Sec. 222 505 A request for reconsideration alone does not suspend the period to assess/collect. 506 proper only for suspension of the period to collect

146

f) When there is an Answer filed by the BIR to the petition for review in the CTA508 where the court justified this by saying that in the answer filed by the BIR, it prayed for the collection of taxes. 4) General provisions on additions to the tax a) Civil penalties b) Interest509 Additions to the tax consist of the: (1) civil penalty, otherwise known as surcharge, which may either be 25% or 50 % of the tax depending upon the nature of the violation; (2) interest either for a deficiency tax or delinquency as to payment510 (3) other civil penalties or administrative fines such as for failure to file certain information returns and violations committed by withholding agents.511 c) Compromise penalties They are certain amounts of money paid in lieu of criminal prosecution and cannot be imposed in the absence of a showing that the taxpayer consented thereto.

507 508

Sec. 223 Hermanos v. CIR, GR. No. L-24972. Sept.30, 1969 509 This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed for payment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC) 510 Interest is classified into: 1.Deficiency interest Any deficiency in the tax due shall be subject to the interest of 20% per annum, or such higher rate as may be prescribed by rules and regulations, which shall be assessed and collected from the date prescribed for its payment until the full payment thereof (Sec. 249 [B], 1997 NIRC) 2.Delinquency interest This kind of interest is imposed in case of failure to pay: a. The amount of the tax due on any return required to be filed, or b. The amount of the tax due for which no return is required, or c. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner. 511 General Considerations on the Addition to tax a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax Code. b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part of the tax. c. If the withholding agent is the government or any of its agencies, political subdivisions or instrumentalities, or a government owned or controlled corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge and the 20% interest per annum on the delinquency (Secs. 248 and 249 [C], 1997 NIRC)

147

5) Assessment process512 a) Tax audit The process of examining, going over, or scrutinizing the books and records of the taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer. It can only be performed upon a Letter of Authority issued by the Commissioner or Regional Director. b) Notice of informal conference A written notice informing a taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid. If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency tax assessments, this recommendation is communicated by the Bureau to the taxpayer concerned during an informal conference called for this purpose, the taxpayer shall have 15 days from receipt of the notice of informal conference to explain his side. c) Issuance of preliminary assessment notice (PAN) Communication issued by the Regional Assessment Division or any other concerned BIR office, informing a taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings. The assessment shall be in writing, and should inform the taxpayer of the law and the facts on which the assessment is made; otherwise, the assessment is void. d) Exceptions to Issuance of PAN (a) The finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) A discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) A taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) The excise tax due on excisable articles has not been paid; or
512

Assessments prima facie correct. Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L- 81446 August 18, 1988.)

148

(e) The article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.513 e) Reply514 to PAN Within 15 days, the taxpayer has to file a written reply contesting the proposed assessment if he disagrees with the findings of the PAN. Failure of the taxpayer to file a reply would now enable the RO to issue a FAN.515 However no liability for additional or deficiency tax arises from such failure. f) Issuance of formal letter of demand and assessment notice/final assessment notice516 Notice of Assessment is a formal letter of demand where a declaration of deficiency taxes is issued to a taxpayer who fails to respond to a pre-assessment notice within the prescribed period of time, or whose reply to the PAN was found to be without merit.517 g) Disputed assessment When the taxpayer, indicates its protest against the delinquent assessment of the RO and requests for reconsideration, through a letter. After the request is filed and received by the BIR, the assessment becomes a disputed assessment.518

513 514

Sec. 3.1.3, RR 12-99 For purposes of contesting a PAN, the regulations used the word reply to distinguish it from the written objections to a FAN wherein the generic word protest or specific term request for reconsideration or request for reinvestigation is used. 515 If fails to respond, he shall be considered in default. A formal letter of demand or assessment notice shall be issued by the Assessment Division of the Revenue Regional Office or the Commissioner or his authorized representative. 516 General rule: Taxes are self-assessing and do not require the issuance of an assessment notice in order to establish the tax liability of a taxpayer. Exceptions: 1. Tax period of a taxpayer is terminated (Sec. 6 (d), NIRC) 2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC) 3. Tax lien (Sec. 219, NIRC) 4. Dissolving Corporation (Sec. 52 (c), NIRC) 517 This is commonly known as the Final Assessment Notice. An assessment contains not only a computation of underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions. 518 CIR v. Isabela Cultural Corp., GR 135210, July 11, 2001

149

j) Administrative decision on a disputed assessment The taxpayer may elevate the protest to the CIR within 30 days from receipt of the decision for a request for reconsideration and that his case is referred to the Bureaus Appellate Division. Otherwise, it becomes final and appeal to the CTA may be taken. 519 6) Protesting assessment It is the act by the taxpayer of questioning the validity of the imposition of the corresponding delinquency increments for internal revenue taxes as shown in the notice of assessment and letter of demand. a) Protest520 of assessment by taxpayer (1) Protested assessment The taxpayer files an administrative protest against the assessment. Such protest may either be a request for reconsideration or for reinvestigation. Prescriptive period provided by law to make collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer protests the assessment and requests for its cancellation. (2) When to file a protest Within thirty (30) days from receipt of assessment. (3) Forms of protest Request for reconsideration A claim for re-evaluation of the assessment based on existing records without need of additional evidence. It may involve a question of fact or law or both. It does not toll the statute of limitations. Request for reinvestigation A claim for re-evaluation of the assessment based on newly-discovered or additional evidence. It may also involve a question of fact or law or both. It tolls the statute of limitations.

519

But where the taxpayer adversely affected has not received the decision or ruling, he could not appeal the same to the CTA within 30 days from notice. Hence, it could not become final and executory (Republic vs. De la Rama, 18 SCRA 861) Motion for reconsideration suspends the running of the 30 - day period of perfecting an appeal. Must advance new grounds not previously alleged to toll the reglementary period; otherwise, it would be merely pro-forma (Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962) 520 A vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case of administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuations of the CIR. This is equivalent to a pleading.

150

(4) Content and validity of protest The protest must be: 1. In writing; 2. Addressed to the CIR; 3. Accompanied by a waiver of the Statute of Limitations in favor Government. Without the waiver the prescriptive period will not be tolled;521 of the

4. State the facts, applicable law, rules and regulations or jurisprudence on which the protest is based otherwise the protest would be void; and 5. Must contain the following: a. Name of the taxpayer and address for the immediate past 3 taxable years; b. Nature of the request, specifying the newly discovered evidence to be presented; c. Taxable periods covered by the assessment; d. Amount and kind of tax involved and the assessment notice number; e. Date of receipt of the assessment notice or letter of demand; f. Itemized statement of the finding to which the taxpayer agrees (if any) as basis for the computation of the tax due, which must be paid upon filing of the protest; agree; g. Itemized schedule of the adjustments to which the taxpayer does not h. Statements of facts or law in support of the protest; and i. Documentary evidence as it may deem necessary and relevant to support its protest to be submitted 60 days from the filing thereof. b) Submission of documents within 60 days from filing of protest All relevant documents should be filed, otherwise assessment becomes final and cannot be appealed.522
521 522

BPI v. CIR, GR 139736, Oct. 17, 2005 Sec. 228

151

c) Effect of failure to protest It makes the FAN final and executory, and the taxpayer loses his right to contest the assessment, at the administrative and judicial levels.523 d) Period provided for the protest to be acted upon Within one hundred eighty (180) days from submission of documents. 7) Rendition of decision by Commissioner a) Denial of protest Direct Denial Indirect Denial

The decision of the Commissioner or his a. Commissioner did not rule on the duly rep. shall taxpayers MR of the assessment it was only when respondent received summons on a. state the facts, applicable law, rules and the civil action for the collection of regulations or jurisprudence on which his deficiency income tax that the period to protest is based, otherwise the protest shall appeal commenced to run.525 be considered void and without force and effect, in which case the same shall not be b. Referral by the Commissioner of request considered a decision a disputed assessment for reinvestigation to the Solicitor General526 and c. Reiterating the demand for immediate b. that the same is his final decision.524 payment of the deficiency tax due to taxpayers continued refusal to execute waiver527 d. Preliminary collection letter may serve as assessment notice528

Submission of documents within the 60 days period is optional to the taxpayer. The relevant supporting documents mentioned in the law refers to such documents which the taxpayer feels would be necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the taxpayer would always be at the mercy of the BIR which may require production of such documents which taxpayer could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001) 523 Thus, the filing of the protest within 30 days from the receipt of the assessment would be mandatory for the taxpayer to use the other administrative and judicial remedies. 524 Sec. 3.1.5, RR 12-99 525 CIR vs. Union Shipping Corp. 526 Republic vs. Lim Tian Teng Sons 527 CIR vs. Ayala Securities Corp 528 United Intl Pictures vs. CIR

152

(1) Commissioners actions equivalent to denial of protest (a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy These actions of the CIR serve as bases for appeal to the CTA. (2) Inaction by Commissioner The protest is not acted upon by the Commissioner within 180 days from submission of documents. 8) Remedies of taxpayer to action by Commissioner a) In case of denial of protest Appeal the decision to the Court of Tax Appeals (CTA) within 30 days from receipt of decision denying the protest.529 b) In case of inaction by Commissioner within 180 days from submission of documents The taxpayer has two alternative options: 1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period; or 2. Wait for the final decision of the CIR on the disputed assessment and appeal the final decision to the CTA within 30 days from the receipt of the decision. c) Effect of failure to appeal 1. The decision or assessment becomes final and executory. 2. In an action for the collection of the tax by the government, the taxpayer is barred from re-opening the question already decided. 3. The assessment is considered correct which may be enforced by summary or judicial remedies.

529

If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the final decision of the CIRs duly authorized representative, such decision will not be final and executory.

153

4. In a proceeding for collection of tax by judicial action, the taxpayers defenses are similar to those of the defendant in a case for the enforcement of a judgment by judicial action. 5. The assessment which has become final and executory cannot be superseded by a new assessment. b. Collection 1) Requisites Collection is only allowed when there is already a final assessment made for the determination of the tax due. Assessments are deemed final when: 1. The taxpayer failed to file a protest 30 days from receipt of the assessment 2. After the 180 day period and the CIR has not yet acted on the protest the taxpayer fails to appeal it appeal. 3. After 30 days from the receipt of the decision of the CIR the taxpayer fails to 2) Prescriptive periods Assessment was made False or fraudulent return or failure to file a return,

By distraint or levy or by a proceeding in A proceeding in court for the collection of court - within three (3) years following the such tax may be filed without assessment - at assessment released, mailed, or sent.530 any time within ten (10) years after the discovery of the falsity, fraud or omission.531

530 531

BPI v. CIR, G.R. 139736, Oct. 17, 2005 Sec.222 [a]

154

3)

Distraint of garnishment

personal

property

including

a) Purchase by the government at sale upon distraint a. When the amount for the bid property under distraint is not equal to the amount of the tax; b. When the amount for the bid is very much less than the actual market value of the articles for sale; The property purchased may be resold by the Commissioner or his deputy.532 b) Report of sale to Bureau of Internal Revenue (BIR) Within two (2) days after the sale, the officer making the same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record.533 c) Constructive distraint to protect the interest of the government The Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property or to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. The constructive distraint of personal property shall be affected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same ;in any manner whatever, without the express authority of the Commissioner. In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnesses, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.534

532 533

Sec. 212 Sec. 211 534 Sec. 206

155

4) Summary remedy of levy on real property a) Advertisement and sale 1. Twenty days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of the sale and such advertisement shall be for a period of at least 30 days. 2. The notice of sale shall: a. Be posted at the main entrance of the municipal building; and b. public and conspicuous place in the barrio or district; and c. be published once a week for three consecutive weeks in a newspaper of general circulation. 3. Right of Pre-emption At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties, and interest. 4. 5 days after the sale, a return by the distraining or levying officer of the proceedings shall be entered upon the records of the Revenue Collection Officer (RCO), the RDO and Revenue Regional Director. 5. A certificate of sale shall be delivered to the purchaser. 6. Excess of the proceeds of the sale shall be delivered to the taxpayer.535 b) Redemption of property sold Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free from the lien of such taxes and penalties. The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption.536

535 536

Sec. 213 Sec. 214

156

c) Final deed of purchaser In case the taxpayer shall not redeem the property, the Revenue District Officer shall, as grantor, execute a deed conveying to the purchaser so much of the property as has been sold, free from all liens of any kind whatsoever, and the deed shall succinctly recite all the proceedings upon which the validity of the sale depends.537 5) Forfeiture to government for want of bidder a) Remedy of enforcement of forfeitures (1) Action to contest forfeiture of chattel In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest the validity of the forfeiture may, at any time before sale or destruction of the property, bring an action against the person seizing the property or having possession thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the sale and within six (6) months, he may bring an action to recover the net proceeds realized at the sale.538 b) Resale of real estate taken for taxes The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days notice, sell and dispose of the same of public auction or dispose of the same at private sale. In either case, the proceeds of the sale shall be deposited with the National Treasury, and an accounting of the same shall be rendered to the Chairman of the Commission on Audit.539 c) When property to be sold or destroyed Upon forfeiture, distilled spirits, liquors, cigars, cigarettes, other manufactured products of tobacco, and all apparatus used in or about the illicit production of such articles may be destroyed by order of the Commissioner, when the sale of the same for consumption or use would be injurious to public health or prejudicial to the enforcement of the law.540

537 538

Sec. 202 Sec. 231 539 Sec. 216 540 All other articles subject to excise tax, which have been manufactured or removed in violation of the Code, as well as dies for the printing or making of internal revenue stamps and labels which are in imitation of or purport to be lawful stamps, or labels may, upon forfeiture, be sold or destroyed in the discretion of the Commissioner (Sec. 225)

157

Forfeited property shall not be destroyed until at least twenty (20) days after seizure.541 d) Disposition of funds recovered in legal proceedings or obtained from forfeiture All judgments and monies recovered and received for taxes, costs, forfeitures, fines and penalties shall be paid to the Commissioner or his authorized deputies as the taxes themselves are required to be paid and shall be accounted for and dealt with the same way.542 6) Further distraint or levy The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected.543 7) Tax lien544 A legal claim or charge on property, either real or personal, established by law as a security in default of the payment of taxes. 8) Compromise545 a) Authority of the Commissioner compromise and abate taxes546 Compromise the payment of any internal revenue tax
541 542

to

Abate or cancel a tax liability

ibid. Sec. 226 543 Sec. 217 Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his property would escape payment of his tax liability by sacrificing an insignificant portion of his holdings. 544 Nature: A lien in favor of the government of the Philippines when a person liable to pay a tax neglects or fails to do so upon demand. Duration: Exists from time assessment is made by the CIR until paid, with interests, penalties and costs. Extent: Upon all property and rights to property belonging to the taxpayer. Effectivity against third persons: Only when notice of such lien is filed by the CIR in the Register of Deeds concerned. 545 Contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. 546 The power to compromise or abate shall not be delegated by the Commissioner except in the following cases: 1. Assessments issued by the Regional Offices involving basic tax of P 500,000 or less; 2. Minor criminal violations All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud (Sec. 204 (A)(B))

158

When:

When:

1. There is reasonable doubt as to the validity 1. The tax or any portion thereof appears to of the claim against the taxpayer; or be unjustly or excessively assessed; or 2. The financial position of the taxpayer 2. The administration and collection costs demonstrates a clear inability to pay the involved do not justify the collection of the assessed tax.547 amount due. 9) Civil and criminal actions a) Suit to recover tax based on false or fraudulent returns If tax is collected under an assessment that the list, statement or return is false/fraudulently made, it cannot be recovered by any suit unless it is proved that the said list, statement or return was not false nor fraudulent & did not contain any understatement or undervaluation.548 c. Refund549 1) Grounds and requisites for refund Grounds a. Tax is erroneously or illegally collected. Requisites

a. There must be a written claim with the CIR, as it would enable the CIR to correct b. Sum collected is excessive or in any the errors of his subordinate and to notify manner wrongfully collected. the government;

All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud (Sec. 204 (A)(B)) 547 Minimum Compromise Amounts: 1. Financial incapacity 10% of the basic tax assessed; 2. Other cases 40% of the basic tax assessed When approval of Evaluation Board necessary: 1. The basic tax involved exceeds one million pesos; 2. Where the settlement offered is less than the prescribed minimum rate. 548 Not applicable to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells & mines. 549 A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has been paid under protest or duress (Sec. 229) Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC), however, under protest is necessary to claim for a. real property taxes (Sec. 252, LGC) b. custom duties (Sec. 2308, TCC)

159

c. Penalty is collected without authority.

b. Must be a categorical claim for refund or credit; c. Must be filed within 2 years after the payment of the tax or penalty otherwise no refund or credit could be taken. No suit or proceeding shall be instituted after the expiration of the 2 year period regardless of any supervening cause that may arise after payment; and d. Present proof of payment of the tax.

2) Requirements for refund as laid down by cases a) Necessity of written claim for refund This requirement is mandatory.550 Except: Where on the face of the return upon which payment is made, such payment appears clearly to have been erroneous.551 b) Claim containing a categorical demand for reimbursement c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause552 The requirement is a condition precedent and non-compliance therewith bars recovery.553 It refers not only to the administrative claim that the taxpayer should file within 2 years from date of payments with the BIR, but also the judicial claim or the action for refund the taxpayer should commence with the CTA.554
550

Reasons: a. to afford the commissioner an opportunity to correct the action of subordinate officer and b. to notify the government that the taxes sought to be refunded are under question and that, therefore, such notice should then be borne in mind in estimating the revenue available for expenditure (Bermejo vs. CIR, 87 Phil 96) 551 Sec. 229 552 Secs.204 (c) & 229 553 Phil. Acetylene Co. Inc, vs. Commissioner, CTA Case No. 1321, Nov. 7, 1962

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3) Legal basis of tax refunds Legal principle of quasi-contracts or solutio indebiti.555 The Government is within the scope of the principle of solutio indebiti.556 4) Statutory basis for tax refund under the Tax Code a) Scope of claims for refund The Commissioner may credit or refund taxes: a) Erroneously or illegally assessed or collected internal revenue taxes b) Penalties imposed without authority c) Any sum alleged to have been excessive or in any manner wrongfully collected.557 b) Necessity of proof for claim or refund Refund claim partakes of the nature of an exemption which cannot be allowed unless granted in the most explicit and categorical language.558 Failure to discharge burden of giving proof is fatal to claim. It must be shown that payment was an independent single act of voluntary payment of a tax believed to be due, collectible and accepted by the government, and which therefore, become part of the state moneys subject to expenditure and perhaps already spent or appropriated.559 c) Burden of proof for claim of refund Written claim for refund or tax credit filed by the taxpayer with the Commissioner. d) Nature of erroneously paid tax/illegally assessed collected Taxpayer pays under the mistake of fact, as for instance in a case where he is not aware of the existing exemption in his favor at the time payments were made. A tax is illegally collected if payments are made under duress.
554 555

see Gibbs vs.. Collector of Internal Revenue, 107 Phil 232 see Art. 2142 & 2154, CC 556 CIR vs. Firemans Fund Insurance Co 557 Secs. 204 and 209 558 CIR vs. Johnson and Sons 559 CIR vs. Li Yao, L-11875,Dec. 28, 1963

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e) Tax refund vis--vis tax credit560 Tax refund Tax credit

Requires a physical return of the sum Generally refers to an amount that is erroneously paid by the taxpayer. subtracted directly from ones total tax liability, an allowance against the tax itself, or a deduction from what is owned. The taxpayer to whom the tax is refunded would have the option, among others, to Reduces the tax due, including whenever invest for profit the returned sum, an option applicable the income tax that is not proximately available if the taxpayer determined after applying the corresponding chooses instead to receive a tax credit.561 tax rates to taxable income.562 f) Essential requisites for claim of refund 1. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax. 2. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and 3. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom.563 5) Who may claim/apply for tax refund/tax credit a) Taxpayer/withholding agents of nonresident foreign corporation A withholding agent is subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under the law. A person liable for tax has been held to be a person subject to tax and properly considered a taxpayer. xxx By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes.564

560

It may be that there is no essential difference between a tax refund and a tax credit since both are moves of recovering taxes erroneously or illegally paid to the government. ( Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004) 561 Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation , ibid. 562 Commissioner of Internal Revenue v. Central Luzon Drug Corporation , G. R. No. 159647, April 15,2005 563 Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007 564 CIR vs. Procter and Gamble PMC, 204 SCRA 377

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6) Prescriptive period for recovery of tax erroneously or illegally collected Two (2) years from the date of payment of the tax or penalty. 7) Other consideration affecting tax refunds a) Taxpayer may file an action for refund in the CTA even before the Commissioner decides his pending claim in the BIR.565 b) Suspension of the 2-year prescriptive period may be had when: i. there is a pending litigation between the two parties (government and taxpayer) as to the proper tax to be paid and of the proper interpretation of the taxpayers charter in relation to the disputed tax; and ii. the commissioner in that litigated case agreed to abide by the decision of the Supreme Court as to the collection of taxes relative thereto.566 c) Even if the 2-year period has lapsed, the same is not jurisdictional and may be suspended for reasons of equity and other special circumstances.567 d) 2-year prescriptive period for filing of tax refund or credit claim computed from date of payment of tax of penalty except in the following: i. Corporations: 2-year prescriptive period for overpaid quarterly income tax is counted not from the date the corporation files its quarterly income tax return, but from the date the final adjusted return is filed after the taxable year.568 ii. Taxes payable in installment: 2-year period is counted form the payment of the last installment.569 iii. Withholding Taxes Prescriptive period counted not from the date the tax is withheld and remitted to the BIR, but from the end of the taxable year.570

565 566

Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966 Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819 567 CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995 568 Commissioner of Internal Revenue vs. TMX Sales, Inc ., G.R. No.83736, Jan. 15, 1992 569 CIR vs. Palanca, Jr., supra 570 Gibbs vs. Commissioner of Internal Revenue, supra

163

iv. VAT Registered Person whose sales are zero-rated or effectively zerorated 2-year period computed from the end of the taxable quarter when the sales transactions were made.571 e) Interest on Tax Refund: The Government cannot be required to pay interest on taxes refunded to the taxpayer unless: i. The Commissioner acted with patent arbitrariness572 ii. In case of Income Tax withheld on the wages of employees.573 2. Government Remedies a. Administrative remedies 1) Tax lien574 2) Levy and sale of real property Levy - is the seizure of real property and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer. The requisites are the same as that of distraint.575

571 572

Sec. 112 (A) Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions ( CIR vs.Victorias Milling Corp., Inc. L-19607, Nov. 29,1966) 573 Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within 3 months from the fifteenth (15th) day of April. Refund or credit after such time earn interest at the rate of 6% per annum, starting after the lapse of the 3-month period to the date the refund or credit is made (Sec 79 (c) (2)) 574 supra 575 Ibid.

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3) Forfeiture of real property to the government for want of bidder576 Implies a divestiture of property without compensation, in consequence of a default or offense. Includes the idea of not only losing but also having the property transferred to another without the consent of the owner and wrongdoer. 4) Further distraint and levy577 5) Suspension of business operation578 6) Non-availability of injunction to restrain collection of tax No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code.579 Exception: Injunction may be issued by the CTA in aid of its appellate jurisdiction.580

576

Effect: Transfer the title to the specific thing from the owner to the government. When available: a. No bidder for the real property exposed for sale. b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs. - Within two days thereafter, a return of the proceeding is duly made. How enforced: a. In case of personal property by seizure and sale or destruction of the specific forfeited property. b. In case of real property by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require. 577 supra 578 Ibid. 579 Sec. 218 580 Under Sec. 11 of R.A. 1125, (as amended by RA 9282) - when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer, the Court, at any stage of the proceeding, may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

165

b. Judicial remedies581 Civil Action582 Criminal Action583

1. By filing a civil case584 to collect internal Generally resorted to by the BIR when the revenue taxes in regular courts585 summary remedies for the collection of taxes have proven ineffective and futile.587 2. By filing an answer to the petition for review filed by the taxpayer with the CTA586 Instituted not to demand payment but to penalize taxpayer for the violation of the NIRC.

581

Civil and Criminal Actions: 1. Brought in the name of the Government of the Philippines. 2. Conducted by Legal Officer of BIR 3. Must be with the approval of the CIR, in case of action, for recovery of taxes, or enforcement of a fine, penalty or forfeiture. 582 For tax remedy purposes, these are actions instituted by the government to collect internal revenue taxes in the regular courts after assessment by CIR has become final and executory. It includes, however, the filing by the government of claims against the deceased taxpayer with the probate court. 583 The criminal charge is filed directly with the Department of Justice with the approval of the CIR. The information should be filed: 1. CTA - on criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR and the BOC where the principal amount of taxes and fees, exclusive of charges and penalties claimed is P1 million and above. 2. RTC, MTC, MeTC - on criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR and the BOC where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than P1 million. (Sec. 7, R.A. 9282) 584 within 5 years from the date of the assessment 585 RTC or MTCs, depending on the amount involved When assessment made has become final and executory for failure or taxpayer to: a. Dispute same by filing protest with CIR b. Appeal adverse decision of CIR to CTA Jurisdiction: If case involves collection of assessed principal taxes amounting to 1M or more- CTA If lower than 1M- RTC and other lower courts 586 If Commissioner files the case- Republic of the Phils. is the party plaintiff; when it is the taxpayer who files a petition for review in CTA, the respondent is the Commissioner. 587 A direct mode of collection of taxes, the judgment of which shall not only impose the penalty but also order payment of taxes. An assessment of a tax deficiency is not necessary to a criminal prosecution for tax evasion, provided there is a prima facie showing of willful attempt to evade.

166

3. Statutory Offenses and Penalties a. Civil penalties They are imposed in addition to the tax required to be paid. 1) Surcharge A civil penalty imposed by law as an addition to the main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayers fraud.588 A surcharge added to the main tax is subject to interest. 2) Interest a) In General Assessed and collected on any unpaid amount of tax at the rate of twenty percent (20%) per annum from the date prescribed for payment until the amount is fully paid.589 b) Deficiency interest The interest due on any amount of tax due or installment thereof which is not paid on or before the date prescribed for its payment computed at the rate of 20% per annum, 590 from the date prescribed for its payment until it is fully paid. c) Delinquency interest The interest of 20% per annum required to be paid in case of failure to pay: (1) The amount of the tax due on any return to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner.591

588 589

A surcharge added to the main tax is subject to interest. Sec. 249 (A) 590 or such higher rate as may be prescribed by the rules and regulations 591 Id., (C)

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d) Interest on extended payment If any person required to pay the tax is qualified and elects to pay the tax on installment but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid.592 4. Compromise and Abatement of taxes593 a. Compromise Involves a mere reduction of the tax. b. Abatement A cancelation of the entire liability.

592 593

Id., (D) supra

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G. Organization and Function of the Bureau of Internal Revenue 1. Rule-making authority of the Secretary of Finance a. Authority of Secretary of finance to promulgate rules and regulations Upon recommendation of the Commissioner, for the effective enforcement of the provisions of the Code.594 b. Specific provisions to be contained in rules and regulations (1) The time and manner in which Revenue Regional Director shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept; (2) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labelling, branding or marking shall be effected; (3) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labelled, branded or marked; (4) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings; (5) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses; (6) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business ort by the person for whom such denaturing is done or by whom, such alcohol is dealt in; (7) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes;

594

Sec. 244

169

(8) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and regulations which the Commissioner may consider suitable for the enforcement of the said Title III; (9) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics; (10) The manner in which internal revenue taxes595 shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax. c. Non-retroactivity of rulings If the revocation, modification or reversal will be prejudicial to the taxpayers, except: (a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith.596 2. Power of the Commissioner to suspend the business operation of a taxpayer597

595

such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes 596 Sec. 246 597 supra

170

III. Local Government Code of 1991, as amended A. Local Government Taxation598 1. Fundamental principles599 a. Taxation shall be uniform600 in each LGU b. Taxes, fees, charges and other impositions shall be: 1. Equitable and based on the taxpayers ability to pay. 2. For public purpose.601 3. Not unjust, excessive, oppressive or confiscatory. 4. Not contrary to law, public policy, national economic policy, or in restraint of trade. c. The collection of local taxes, fees, charges and other impositions shall in no case be Let to any private person; d. The revenue collected pursuant to the provisions of the LGC shall Inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and e. Each LGU shall, as far as practicable, evolve a progressive system of taxation.602

598

The power to tax which may be exercised by local legislative bodies is no longer merely by nature of a valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution (Mactan Ceby Intnl Airport vs. Marcos, G.R. No. 120082, Sept 11, 1996) Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax power (MERALCO vs. Prov. of Laguna, G.R. No 131359, May 5, 1999 599 also known as the requisites of municipal taxation 600 Uniformity of Taxation Equality and uniformity of local taxation is that all taxable articles of the same class shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority. 601 Public Purpose Proceeds obtained are to be used to support the existence of the LGU. 602 Just Taxation Municipal corporations are allowed a wide range in determining tax rates of imposable taxes and license fees.

171

2. Nature and source of taxing power a. Grant of local taxing power under the Local Government Code Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units.603 b. Authority to prescribe penalties for tax violations The sanggunian of a local government unit is authorized to prescribe fines or other penalties for violation of tax ordinances but in no case shall such fines be less than One thousand pesos (P1,000.00) nor more than Five thousand pesos (P5,000.00), nor shall imprisonment be less than one (1) month nor more than six (6) months. Such fine or other penalty, or both, shall be imposed at the discretion of the court. The sangguniang barangay may prescribe a fine of not less than One hundred pesos (P100.00) nor more than One thousand pesos (P1,000.00).604 c. Authority to grant local tax exemptions Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary.605 d. Withdrawal of exemptions Tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.606 e. Authority to adjust local tax rates LGUs are given authority to adjust the tax rates, but the adjustment should be made not oftener than once every 5 years but in no case shall the adjustment exceed 10% of the rates fixed under the LGC.607
603 604

Sec. 129 Sec. 516 605 Sec. 192 The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU. 606 Sec. 193 607 Sec 191

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f. Residual taxing power of local governments LGUs may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the 1. Local Government Code; 2. National Internal Revenue Code; or 3. Other applicable laws.608 g. Authority to issue local tax ordinances The power to impose a tax, fee, or charge or to generate revenue shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance.609 3. Local taxing authority a. Power to create revenues exercised thru LGUs Local governments are authorized to impose and collect the following charges: 1. Reasonable fees and charges for services rendered.610 2. Public Utility Charges if: a. Owned, operated and maintained b. Within their jurisdiction611 3. Tools, Fees or Charges for: a. Use of public road, pier or wharf, waterway bridge, ferry or telecommunication system b. Funded and constructed by the local government612

608 609

Sec. 186 Sec. 132 610 Sec. 153 611 Sec. 154 612 Sec. 155

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b. Procedure for approval and effectivity of tax ordinances 1. The procedure applicable to local government ordinances in general should be observed.613 The following procedural details must be complied with: a. Necessity of quorum b. Submission for approval by the local chief executive c. The matter of veto and overriding the same d. Publication and effectivity614 2. Public hearings are required before any local tax ordinance is enacted.615 3. Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In the absence of such newspaper in the province, city or municipality, then the ordinance may be posted in at least two conspicuous and publicly accessible places.616 4. Scope of taxing power a. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall exclusively accrue to it.617 b. All local government units are granted general powers to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the NIRC, as amended, or other applicable laws. The levy must not be unjust, excessive, oppressive, confiscatory or contrary to a declared national economic policy.618 c. No such taxes, fees or charges shall be imposed without a public hearing having been held prior to the enactment of the ordinance.619 d. Copies of the provincial, city, and municipal tax ordinances or revenue measures shall be published in full for three consecutive days in a newspaper of local circulation or posted in at least two conspicuous and publicly accessible places.620
613 614

Sec. 187 Secs. 54, 55, and 59 615 Sec. 187 616 Sec. 188 & 189 617 Sec. 129 618 Sec. 186 619 Sec. 187

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5. Specific taxing power of local government unit (LGUs) a. Taxing powers of provinces 1) Tax on transfer of real property621 ownership Transaction taxed Sale, barter, or any other mode of transferring ownership of, or title to, real property At not more than 50% of 1% total consideration.622 The sale, transfer or other disposition of real property pursuant to R.A. 6657.623 2) Tax on business of printing and publication Transaction taxed Business of printing and publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and other similar nature Not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, in the case of newly started business, not to exceed 1/20 of 1% of the capital investment The receipts from the printing and/ or publishing of books or other reading materials prescribed by the DECS as school text or references are not subject to the tax imposed

Rate Exception from tax

Tax Rate

Exception

620 621

Sec. 188 Real Property refers only to lands, buildings, and machineries intended by the owner of the land or building for an industry or works which may by carried on in a building or on a piece of land and which tend directly to meet the needs of the industry or works. 622 Tax base 1. total consideration or 2. fair market value, whichever is higher 623 Comprehensive Agrarian Reform Law

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3) Franchise tax624 Franchise Generally refers to a privilege conferred by the government on an individual or corporation, which does not belong to the citizens by common right Not exceeding 50% of 1%, if newly started business, 1/20 of 1 % Gross annual receipts of preceding calendar year based on: a) Incoming receipts, or b) Realized within territorial jurisdiction. 4) Tax on sand, gravel and other quarry services625 Tax Rate Issuance of Permit Not more than 10% of fair market value To permit to extract the sand, gravel and other quarry resources shall be issued exclusively by the provincial governor pursuant to the ordinance of the sangguniang panlalawigan

Tax Rate

Tax base

624

Purpose of Franchise Tax to be in addition to the franchise tax imposed by the national government 624 on business which are holders of franchise except when otherwise prohibited by law. 625 Distribution of the Proceeds The proceeds of the tax shall be distributed as follows a. Province 30% b. Component city or municipality where the sand, etc are extracted 30% c. Barangay where the sand, etc. are extracted 40%

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5) Professional tax626 Tax rate In such as Sanggunian may determine and in no case to exceed P300 On or before Jan. 20 Paid on the place where you practice your profession.627 6) Amusement tax628 Tax Rate Not more than 30% of the gross receipt from admission fees Operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentation Pop, rock, or similar concert. 7) Tax on delivery truck/van Transaction taxed Use of truck, van vehicle in the delivery or distribution of distilled spirits, fermented liquors, softdrinks, cigar and cigarettes and other products, determined by the Sanggunian to sales outlets or

When paid Where

Exemption

Exceptions to exemption

626

Profession a calling w/c requires the passing of an appropriate government board or bar examination, such as the practice of law, medicine, public accounting, engineering, etc. Nature of Tax professional tax applies only to natural or physical persons and not to juridical entities. Said tax is fixed on the privilege of exercising or engaging in a profession. The tax is not based on the amount of earnings of the taxpayer. 627 government employees are exempted from paying PT 628 Amusement pleasurable diversion and entertainment Amusement Place includes theaters, cinemas, concert halls, circuses and other places of amusement where one seeks admission to entertain himself by seeing or viewing the show or performance (Sec 131 (c))

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consumers. Tax rate Not exceeding P500 for every truck, van or any vehicle used Exempt from tax on peddlers. b. Taxing powers of cities Cities are authorized specifically to impose taxes, fees and charges that provinces and municipalities may levy. Rate: May be above the maximum established for provinces and municipalities but not exceeding 50% of such maximum rates except the rates of professional and amusement taxes c. Taxing powers of municipalities Municipality may levy taxes, fees and charges not otherwise levied by provinces and cities 1) Tax on various types of businesses Rate Manufacturers, assemblers, repackers liquors, distilled spirits and wines of At graduated annual fixed tax based on gross sales or receipts for the preceding calendar year in an amount not to exceed P6.5 M or more, a rate not exceeding 37 of 1% is imposed

Exemption

Wholesalers, distributors or dealers in any Graduated annual fixed rate based on article of Commerce gross sales or receipts not exceeding P2M or more, the rate not exceeding 50% of 1% Exporters, manufacturers, millers, producers Not exceeding of the rates prescribed of essential commodities in (a) and (b)629
629

supra

178

Contractors contractors

and

other

independent Graduated annual fixed rate when the gross receipts exceeds P2M the rate is not exceeding 50% of 1% Not exceeding 50% of 1% on the gross receipts of preceding calendar year Not exceeding 50% per peddler annually As the Sanggunian may deem proper. When subject to excise, VAT or percentage tax, it shall not exceed 2% of gross receipts of the preceding calendar year.630 Ceiling on business tax impossible municipalities within Metro Manila on

Banks and other financial institutions

Peddlers Any business not otherwise specified

2)

The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding Section.631 3) Tax on retirement on business A business subject to tax shall, upon termination thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired. If the tax paid during the year be less than the tax due on said gross sales of receipts of the current year, the difference shall be paid before the business is considered officially retired.632 4) Rules on payment of business tax a. It shall be payable for every separate or distinct establishment or place where the business subject to the tax is conducted and one line of business does not become exempt by being conducted with some other business for which such tax has been paid.
630 631

Sec. 143 Sec. 144 632 Sec. 145

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b. The tax on a business must be paid by the person conducting the same. c. In cases where a person conducts or operates 2 or more of the businesses: 1. subject to the same rate of tax - the tax shall be computed on the combined total gross sales or receipts of the said 2 or more related businesses. 2. subject to different rates of tax - the gross sales or receipts of each business shall be separately reported for the purpose of computing the tax due from each business. 5) Fees and charges for regulation & licensing The municipality may impose and collect such reasonable fees and charges on business and occupation except professional taxes reserved for provinces.633 a. Fees for Sealing and Licensing of Weights and Measures634 b. Fishery Rentals, Fees and Charges, including the authority to grant fishery privileges within municipal waters, as well as issue licenses for the operation of fishing vessels of three tons or less. c. The sanggunian may penalize the use of explosives, noxious or poisonous substances, electricity, muro ami, and other deleterious methods of fishing and prescribe a criminal penalty therefore.635

633 634

Sec. 147 Sec. 148 635 Sec. 149

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6) Situs of tax collected Situation Payment of tax The tax shall be payable to With branch or sales office All sales made in the locality the city or municipality or warehouse where the branch or office where the same is located. or warehouse is located Where there is no branch or The municipality where the sales sale or transaction is made. office or warehouse . The sale shall be recorded in the principal office along with the sales made by said principal office The tax shall accrue to the city or municipality where said principal office is located Recognition of sale

Branch office a fixed place in a locality which conducts operations of the business as an extension of the principal office. Principal office head or main office of the business appearing in pertinent documents submitted to the SEC and specifically mentioned in the Articles of Incorporation. Where there is a factory, project office, plant or plantation in pursuit of business Of all sales recorded in the principal office: 1. 30% taxable to the city or municipality where the principal office is located.

If plantation is at a place other than where the factory All sales shall be recorded in 2. 70% taxable to the city or the principal office municipality where the is located factory, plant, etc. is located. The 70% (above) shall be divided as follows: If manufacturer, contractor, etc. has two or more factories, project offices, plants or plantations located in different localities. 1. 60% to the city or municipality where the factory is. 2. 40% to the city or municipality where the plantation is located.

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d. Taxing powers of barangays Taxes on stores / retailers with fixed Rate: Not exceeding 1% on such gross sales business establishment with gross sales or or receipts receipts of the preceding calendar year of P50,000 or less in the cities & municipalities Service Fees/ Charges It may collect reasonable fees or charges for services rendered in connection with the regulation or the use of barangay owned property or service facilities No city municipality may issue any license/ permit for any business / activity is located. For such clearance, the sangguniang brgy. may impose reasonable fee. The brgy. may levy reasonable fees & charges a) On commercials breeding of fighting cocks & cockpits; b) On places of recreation w/c charge admission fees; and c) On billboards, signs boards, neon signs and outdoor advertisement

Barangay Clearance

Other fees & charges

182

e. Common revenue raising powers 1) Service fees and charges LGUs may impose and collect such reasonable fees and charges for services rendered.636 2) Public utility charges LGUs may fix the rates for the operation of public utilities owned, operated and maintained by them within their jurisdiction.637 3) Toll fees or charges The sanggunian concerned may prescribe the terms and conditions and fix the rates for the imposition of toll fees or charges for the use of any public road, pier, or wharf,waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned.638 f. Community tax The community tax, which replaced the residence tax, is essentially a poll or capitalization tax. It is of fixed amount imposed upon certain inhabitants of the country without regard to the property/ occupation in which they may be engaged. Who are authorized to levy Cities or municipalities may levy a community tax, as well as the rates & accrual of the proceeds thereof.639 1. Individuals Rate: P5.00 an annual additional tax of P1.00 for every P1,000 income regardless of whether from business, exercise of profession or from property w/c in no case shall exceed P5,000. 2. Corporations Rate: Annual community tax of P500 and an annual additional tax w/c in no case shall
636 637

Persons liable to tax

Sec. 153 Sec. 154 638 Sec. 155 639 Sec. 156

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exceed P10,000 Exemptions from the Community Tax 1. Diplomatic and consular representatives and 2. Transient visitors when their stay in the Phil. Does not exceed 3 mos. Estates of deceased persons, being neither corporations nor individuals, are not subject to the tax, but the heirs must declare their proportionate shares of their income. Community Tax Certificate shall be issued to every person or corporation upon payment of the community tax. It may also be issued to any corporation/person not subject to the community tax.640

640

Sec 162

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6. Common limitations on the taxing powers of LGUs641 Unless otherwise provided herein, the exercise of the taxing power of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: 1. Income tax642 2. Documentary Stamp Tax 3. Tax on estates, inheritance, gifts, legacies and other acquisitions mortis causa643 4. Excise taxes on articles enumerated under the NIRC,644 as amended, and taxes, fees or charges on petroleum products. 5. Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services exchanges or similar transactions on goods or services except as otherwise provided herein645 6. Taxes on the gross receipts of transportation of contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water except as provided by the code.646 7. Taxes, fees and charges imposed under the Tariff and Customs Code and other Special Laws 8. Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all other kinds of customs fees, charges and dues, except wharfage on wharves constructed and maintained by LGU concerned. 9. Taxes, fees and charges and other Impositions which contravene Existing Government Policies or which are violative of the Fundamental Principles of Taxation.
641 642

Sec 133 Exception: banks and other financial institutions 643 Exception: tax on transfer of real property ownership 644 Taxable Articles embodied in the NIRC are: 1. Alcoholic products 2. Tobacco products 3. Petroleum products 4. Miscellaneous articles 5. Mineral products Local governments can tax the selling of these finished products or the raw materials. 645 Percentage of taxes imposed when there is set of ration between the amount of tax and the volume of sales. 646 Transportation contractors including persons who transport passengers for hire and other domestic carriers by land, air or water for transport of passengers, except owners of bancas and owners of animal drawn two-wheeled vehicle are subject to 3% percentage tax on their gross quarterly receipt (Sec 117, NIRC) Sec. 117 of NIRC specifies that the gross receipt of common carriers derived from their incoming and outgoing freight shall not be subjected to local taxes imposed under LGC.

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10.Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdiction of LGU in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatever upon such goods or merchandise. 11. Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fishermen. 12. Taxes on business enterprises certified to by the Board of Investment as pioneer or non-pioneer who enjoy tax holidays647 for a period of 6 and 4 years, respectively from the date of registration 13. Taxes on premiums paid by way of reinsurance or retrocession. 14. Taxes, fees or other charges on Philippine products actually exported, excepted otherwise provided herein in the LGC. 15. Taxes, fees or charges on Countryside and Baranggay Business Enterprises and Cooperative duly registered under RA No. 6810 and RA 6938 otherwise known as the Cooperative Code of the Phil. Respectively. 16. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and LGU. 17. Taxes, fees, and charges imposed under special laws. 18. Taxes, fees or charges for registration of motor vehicles.648

647 648

exemption from income tax only Exception: Tricycles

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7. Collection of business tax a. Tax period and manner of payment The calendar year,649 which may be paid in quarterly installments.650 b. Accrual of tax On the 1st day of January of each year.651 New taxes, fees or charges or changes accrue on the 1st day of the quarter next following the effectively of the ordinance imposing such new rates.652 c. Time of payment Within the first 20 days of January or of each subsequent quarter.653 Not exceeding 6 months in case of extension of payment.654 d. Penalties on unpaid taxes, fees or charges A surcharge not exceeding 27% of the amount of taxes, fees or charges and an interest at the rate not exceeding 2% per month until such amount is fully paid. In no case the total interest on the unpaid amount or portion thereof exceed 36 months655 e. Authority of treasurer in collection and inspection of books All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer as his deputy to collect local taxes, fees, or charges. In case a bond is required for the purpose, the provincial, city or municipal government shall pay the premiums thereon in addition to the premiums of bond that may be required under this Code.656 The provincial, city, municipal or barangay treasurer may, by himself or through any of his deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any person, partnership, corporation, or association subject to local taxes, fees
649 650

unless otherwise provided Sec. 165 651 unless otherwise provided 652 Sec 166 653 unless otherwise provided 654 Sec 167 655 Sec 168 656 Sec. 170

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and charges in order to ascertain, assess, and collect the correct amount of the tax, fee, or charge. Such examination shall be made during regular business hours, only once for every tax period, and shall be certified to by the examining official. Such certificate shall be made of record in the books of accounts of the taxpayer examined. In case the examination herein authorized is made by a duly authorized deputy of the local treasurer, the written authority of the deputy concerned shall specifically state the name, address, and business of the taxpayer whose books, accounts, and pertinent records are to be examined, the date and place of such examination, and the procedure to be followed in conducting the same. For this purpose, the records of the revenue district office of the Bureau of Internal Revenue shall be made available to the local treasurer, his deputy or duly authorized representative.657 8. Taxpayers remedies a. Periods of assessment and collection of local taxes, fees or charges658 Assessment Collection

- within five years from the date they - within 5 years from the date of assessment become due. by administrative or judicial action - within 10 years, in case of fraud of intent to evade payment b. Protest of assessment a. Assessment made by the local Treasurer b. Taxpayer has 60 days from receipt to file written protest with Treasurer, otherwise it shall become final and executor. c. Treasurer has 10 days within which to decide.659

657 658

Sec. 171 Suspension of the running of the prescriptive Period a. Treasurer legally prevented from the making the assessment or collection b. Taxpayer requests for reinvestigation and executes waiver in writing c. Taxpayer out of the country d. Taxpayer cannot be located 659 Treasurer cancels assessment Treasurer denies protest - Taxpayer appeals within 30 days after receipt of denial Treasurer does not act within 60 days - Taxpayer has 30 days from the lapse of 60 days to appeal

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c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge A written claim for refund or credit is filed with the local Treasurer within 2 years from the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit 9. Civil remedies by the LGU for collection of revenues a. Local governments lien for delinquent taxes, fees or charges 1. Superior to all items, charges or encumbrances in favor of any person, enforceable by the administrative of judicial action 2. Covers not only property or rights subject to the lien but also upon property used in business. b. Civil remedies, in general 1) Administrative action 1. Distraint of goods, chattels or effects and other personal property of whatever character 2. Levy upon real property and interest in or rights to real property 2) Judicial action Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of local government unit concerned.660

660

Sec 174

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B. Real Property Taxation 1. Fundamental principles a) Real property shall be appraised at its current and fair market value. b) Real property shall be classified for assessment purposes on the basis of its actual use. c) Real property shall be assessed on the basis of a uniform standard within each local government unit. d) The appraisal, assessment, and collection of real property tax shall not be let to any private person; and e. ) The appraisal and assessment of real property shall be equitable661 2. Nature of real property tax Property taxes are assessed on all property, or all property of a certain class located within a certain territory on a specified date in proportion to its value or in accordance with some other reasonable method of apportionment.662 In the Philippines, a real property tax is an annual ad valorem tax imposed by LGUs on real property within their jurisdiction, determined on the basis of a fixed proportion of the value of the property. 3. Imposition of real property tax a. Power to levy real property tax A province or city or a municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted.663

661 662

Sec. 198 The function of a property tax is to raise revenue. Such tax does not impose any condition nor does it place any restriction upon the use of the property taxed. 663 Sec. 232

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b. Exemption from real property tax664 i. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted to a taxable person; ii. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes. iii. All pieces of machinery and equipment that are actually, directly, and exclusively used by local water districts, and government owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power. iv. All real property owned by duly registered cooperatives,665 and v. Machinery and equipment used for pollution control and environmental protection. 4. Appraisal and assessment of real property tax a. Rule on appraisal of real property at fair market value All real property, whether taxable or exempt, shall be appraised at the current and fair market value prevailing in the locality where the property is situated.666 b. Declaration of real property It shall be the responsibility of the owner, administrator or their representatives to declare, under oath, the true value of real property, taxable or exempt, within 60 days after the acquisition. The sworn declaration shall be filed once every 3 years before June 30 th of the year commencing 1992. The failure or refusal to make that declaration within the prescribed period would authorize the provincial or city assessor to declare the property in the name of the defaulting owner, if known, or against an unknown owner as the case may be, and to assess the property for taxation.667

664

Real properties of review schools are subject to tax (why? Considered an ordinary corporation) Non-stock, nonprofit private schools are exempt. Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property is actually, directly and exclusively used for educational purposes. The term exclusively under the Constitution does not mean solely but only primarily (Roman Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other cases). 665 as provided for under R.A. 6938 666 Sec. 201 667 Secs. 201-204

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c. Listing of real property in assessment rolls (a) In every province and city, including the municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the provincial, city or municipal assessor an assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the territorial jurisdiction of the local government unit concerned. Real property shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property. (b) The undivided real property of a deceased person may be listed, valued and assessed in the name of the estate or of the heirs and devisees without designating them individually; and undivided real property other than that owned by a deceased may be listed, valued and assessed in the name of one or more co-owners. Such heir, devisee, or co-owner shall be liable severally and proportionately for all obligations and the payment of the real property tax with respect to the undivided property. (c) The real property of a corporation, partnership, or association shall be listed, valued and assessed in the same manner as that of an individual. (d) Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease.668 d. Preparation of schedules of fair market value Before any general revision of property assessment is made, there shall be prepared a schedule of fair market values by the provincial, city and municipal assessor of the municipalities within the Metropolitan Manila Area for the different classes of real property situated in their respective local government units for enactment by ordinance of the sanggunian concerned. The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places therein.669 1) Authority of assessor to take evidence For the purpose of obtaining information on which to base the market value of any real property, the assessor of the province, city or municipality or his deputy may summon the owners of the properties to be affected or persons having legal interest therein and witnesses, administer oaths, and take deposition concerning the property, its ownership, amount, nature, and value.670

668 669

Sec. 205 Sec. 212 670 Sec. 213

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2) Amendment of schedule of fair market value The provincial, city or municipal assessor may recommend to the sanggunian concerned amendments to correct errors in valuation in the schedule of fair market values. The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety (90) days from receipt thereof.671 e. Classes of real property For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special. The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances.672 f. Actual use of property as basis of assessment Regardless of where located, whoever owns it, and whoever uses it.673 g. Assessment of real property 1) Assessment levels The assessment levels to be applied to the fair market value of real property to determine its assessed value shall be fixed by ordinances of the sangguniang panlalawigan, sangguniang panlungsod or sangguniang bayan of a municipality within the Metropolitan Manila Area, at the rates not exceeding the following: (a) On Lands: CLASS ASSESSMENT LEVELS Residential Agricultural Commercial Industrial Mineral Timberland 20% 40% 50% 50% 50% 20%

671 672

Sec. 214 Sec. 215 673 Sec. 217

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(b) On Buildings and Other Structures: (1) Residential Fair market Value Over P175,000.00 P175,000.00 300,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 5,000,000.00 10,000,000.00 (2) Agricultural Fair Market Value Over Not Over P300,000.00 P300,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 Assessment Levels 25% 30% 35% 40% 45% 50% Not Over Assessment Levels

0% 300,000.00 10% 500,000.00 20% 750,000.00 25% 1,000,000.00 30% 2,000,000.00 35% 5,000,000.00 40% 10,000,000.00 50% 60%

(3) Commercial / Industrial Fair Market Value Over Not Over P300,000.00 P300,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 5,000,000.00 10,000,000.00 Assessment Levels

30% 500,000.00 35% 750,000.00 40% 1,000,000.00 50% 2,000,000.00 60% 5,000,000.00 70% 10,000,000.00 75% 80%

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(4) Timberland Fair Market Value Over Not Over P300,000.00 P300,000.00 500,000.00 750,000.00 5,000,000.00 2,000,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 70% Assessment Levels 45% 50% 55% 60% 65%

(c) On Machineries Class Assessment Levels Agricultural Residential Commercial Industrial 40% 50% 80% 80%

(d) On Special Classes: The assessment levels for all lands buildings, machineries and other improvements; Actual Use Assessment Level

Cultural 15% Scientific 15% Hospital 15% Local water districts 10% Government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power 10%674 2) General revisions of assessments and property classification Within two (2) years after the effectivity of this Code and every three (3) years thereafter, the provincial, city or municipal assessor shall undertake a general revision of real property assessments.675
674 675

Sec. 218 Sec. 219

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3) Date of effectivity of assessment or reassessment Made after the first (1st) day of January of any year - shall take effect on the first (1st) day of January of the succeeding year.676 4) Assessment of property subject to back taxes Real property declared for the first time shall be assessed for taxes for the period during which it would have been liable but in no case of more than ten (10) years prior to the date of initial assessment. Such taxes shall be computed on the basis of the applicable schedule of values in force during the corresponding period.677 5) Notification of new or revised assessment When real property is assessed for the first time or when an existing assessment is increased or decreased, the provincial, city or municipal assessor shall within thirty (30) days give written notice of such new or revised assessment to the person in whose name the property is declared. The notice may be delivered personally or by registered mail or through the assistance of the punong barangay to the last known address of the person to be served. h. Appraisal and assessment of machinery (a) The fair market value of a brand-new machinery shall be the acquisition cost.678 (b) If the machinery is imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges at the present site.679

676

The reassessment of real property due to its partial or total destruction, or to a major change in its actual use, or to any great and sudden inflation or deflation of real property values, or to the gross illegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90) days from the date any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment. 677 Sec. 222 678 In all other cases, the fair market value shall be determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost. 679 The cost in foreign currency of imported machinery shall be converted to peso cost on the basis of foreign currency exchange rates as fixed by the Central Bank.

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5. Collection of real property tax a. Date of accrual of real property tax On the first day of January.680 b. Collection of tax 1) Collecting authority The responsibility of the city or municipal treasurer concerned. The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay: Provided, the barangay treasurer is properly bonded for the purpose and the premium on the bond shall be paid by the city or municipal government concerned.681 2) Duty of assessor to furnish local treasurer with assessment rolls The provincial, city or municipal assessor shall prepare and submit to the treasurer of the local government unit, on or before the thirty-first (31st) day of December each year, an assessment roll containing a list of all persons whose real properties have been newly assessed or reassessed and the values of such properties.682 3) Notice of time for collection of tax On or before the thirty-first (31st) day of January each year or any other date to be prescribed by the sanggunian concerned/ Said notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks. c. Periods within which to collect real property tax Within five (5) years from the date they become due.683 Within ten (10) years from discovery - in case there is fraud or intent to evade payment of the tax.684
680

From that date it shall constitute a lien on the property which shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the delinquent tax (Sec. 246) 681 Sec. 247 682 Sec. 248 683 No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration of such period. 684 Sec. 270

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d. Special rules on payment 1) Payment of real property tax in installments The owner of the real property or the person having legal interest therein may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due thereon without interest in four (4) equal installments; the first installment to be due and payable on or before March Thirty-first (31st); the second installment, on or before June Thirty (30); the third installment, on or before September Thirty (30); and the last installment on or before December Thirty-first (31st), except the special levy the payment of which shall be governed by ordinance of the sanggunian concerned. Payments of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only after said delinquencies are settled may tax payments be credited for the current period.685 2) Interests on unpaid real property tax Two percent (2%) per month, until the delinquent tax shall have been fully paid. In no case shall the total interest on the unpaid tax or portion thereof exceed thirtysix (36) months.686 3) Condonation of real property tax In case of a general failure of crops or substantial decrease in the price of agricultural or agri-based products, or calamity in any province, city or municipality, the sanggunian concerned, by ordinance passed prior to the first (1st) day of January of any year and upon recommendation of the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in the city or municipality affected by the calamity.687 The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area.688

The period of prescription within which to collect shall be suspended for the time during which: 1. The local treasurer is legally prevented from collecting the tax; 2. The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and 3. The owner of the property or the person having legal interest therein is out of the country or otherwise cannot be located 685 Sec. 250 686 Sec. 255 687 Sec. 276 688 Sec. 277

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e. Remedies of LGUs for collection of real property tax 1) Issuance of notice of delinquency for real property tax payment To be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the local government unit concerned. The notice of delinquency shall also be published once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality.689 2) Local governments lien The basic real property tax and any other tax levied constitutes a lien on the property subject to tax, superior to all liens, charges or encumbrances in favor of any person, irrespective of the owner or possessor thereof, enforceable by administrative or judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses.690 3) Remedies in general The local government unit concerned may avail of the remedies by administrative action thru levy on real property or by judicial action.691 4) Resale of real estate taken for taxes, fees or charges The sanggunian concerned may, by ordinance duly approved, and upon notice of not less than twenty (20) days, sell and dispose of the real property acquired at public auction. The proceeds of the sale shall accrue to the general fund of the local government unit concerned.692

689

Such notice shall specify the date upon which the tax became delinquent and shall state that personal property may be distrained to effect payment. It shall likewise state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made, and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax is due except when the notice of assessment or special levy is contested administratively or judicially, the delinquent real property will be sold at public auction, and the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or any person having legal interest therein to redeem the property within one (1) year from the date of sale (Sec. 254) 690 Sec. 257 691 Sec. 256 692 Sec. 264

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5) Further levy until full payment of amount due Levy may be repeated if necessary until the full amount due, including all expenses, is collected.693 6. Refund or credit of real property tax a. Payment under protest (a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be annotated on the tax receipts the words "paid under protest". The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt. (b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer concerned. (c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability. (d) In the event that the protest is denied or upon the lapse of the sixty (60) day period prescribed in subparagraph (a), the taxpayer may appeal.694 b. Repayment of excessive collections When an assessment of basic real property tax or any other tax levied is found to be illegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file a written claim for refund or credit for taxes and interests with the provincial or city treasurer within two (2) years from the date the taxpayer is entitled to such reduction or adjustment. The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may appeal.695

693 694

Sec. 265 Sec. 252 695 Sec. 253

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7. Taxpayers remedies a. Contesting an assessment of value of real property 1) Appeal to the Local Board of Assessment Appeals (LBAA) Within sixty (60) days from the date of receipt of the written notice of assessment, any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may appeal to the Board of Assessment Appeals of the provincial or city by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.696 2) Appeal to the Central Board of Assessment Appeals (CBAA) Within thirty (30) days after receipt of the decision of said Board, the owner of the property or the person having legal interest therein or the assessor who is not satisfied with the decision of the Board, may appeal to the Central Board of Assessment Appeals. The decision of the Central Board shall be final and executory.697 3) Effect of payment of tax Appeal on assessments of real property shall, in no case, suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor, without prejudice to subsequent adjustment depending upon the final outcome of the appeal.698 b. Payment of real property under protest 1) File protest with local treasurer699 2) Appeal to the Local Board of Assessment Appeals700 3) Appeal to the Central Board of Assessment Appeals701

696 697

Sec. 226 Sec. 229 (c), last par. 698 Sec. 231 699 See B. (6)(a), under Refund or credit of real property tax, supra 700 See (a)(1), supra 701 See (a)(2), supra

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4) Appeal to the CTA By filing a petition for review702 with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction, from the expiration of the period fixed by law to act thereon.703 5) Appeal to the SC By filing with the said Court of Appeals a notice of appeal and with the Supreme Court a petition for review, within thirty (30) days from the date he receives notice of the ruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, the said ruling, order or decision shall become final and conclusive against him. If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision may file with said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty (30) days from the filing of said notice of intention to appeal, no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section. If any ruling, order or decision of the Court of Tax Appeals be adverse to the Government, the Collector of Internal Revenue, the Commissioner of Customs, or the provincial or city Board of Assessment Appeals concerned may likewise file an appeal therefrom to the Supreme Court in the manner and within the same period as above prescribed for private parties.704

702 703

under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure Sec. 11, RA No. 1125 704 Any proceeding directly affecting any ruling, order or decision of the Court of Tax Appeals shall have preference over all other civil proceedings except habeas corpus, workmen's compensation and election cases.

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IV. Tariff and Customs Code of 1978, as amended (TCC) A. Tariff and duties, defined Custom duties Tariff

Duties which are one charged upon A book of rates, a table or catalogue drawn commodities on their being imported into or usually in alphabetical order containing the exported out of a country. names of several kinds of merchandise with the duties to be paid for the same as settled or agreed upon between several states that holds commerce together. B. General rule: All imported articles are subject to duty. Importation by the government taxable. All articles when imported from a foreign country including those previously exported from the Philippines are subject to duty unless otherwise specifically provided for in the Tariff and Customs Code or other laws.705 C. Purpose for imposition For the protection of consumers and manufacturers, as well as Phil. products from undue competition posed by foreign-made products. D. Flexible tariff clause A provision in the Tariff and Customs Code,706 which implements the constitutionally delegated power to the Congress to further delegate to the President of the Philippines, in the interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others.

705 706

Sec. 100 Sec. 401

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E. Requirements of importation 1. Beginning and ending of importation Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unload707 therein. Importation is deemed terminated upon payment of duties, taxes and other charges due upon the articles or secured to be paid at a port of entry and the legal permit for withdrawal shall gave been granted or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs.708 2. Obligations of importer a. Cargo manifest A cargo manifest shall in no case be changed or altered, except after entry of the vessel, by means of an amendment by the master, consignee, or agent thereof, under oath, and attached to the original manifest.709 b. Import entry It is a declaration to the BOC showing particulars of the imported article that will enable the customs authorities to determine the correct duties. An importer is required to file an import entry. It must be accomplished from disembarking of last cargo from vessel. c. Declaration of correct weight or value The declaration, ascertainment or verification of the correct weight of the cargo at the port of loading is the duty or obligation of the master, pilot, owner, officer or employee of the vessel.710 If he omits or disregards this duty and a punishable discrepancy between the declared weight and actual weight of the cargo exists, the inevitable conclusion is that he is negligent or careless.711 Similarly, if in the exercise or performance of this duty, he is negligent or careless resulting in the commission of excessive discrepancy in the weight of the ship's cargo penalized under the law, carelessness or incompetency is, nonetheless, imputable to him.

707

Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place because importation has already begun. 708 Sec. 1202 709 rd Sec. 1228, 3 par., Rev. Adm. Code 710 Sec. 2523 711 See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs , C.T.A. Case No. 2685, Feb. 15, 1977; Macondray & Co., Inc. vs. Commissioner of Customs , C.T.A. Case No. 274 1, Feb. 3, 1977; Macondray & Co., Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21, 1977 and cases cited therein.

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d. Liability for payment of duties The liability for duties, taxes, fees and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced while such articles are in custody or subject to the control of the government.712 e. Liquidation of duties If the Collector shall approve the returns of the appraiser and the report of the weights, gauge or quantity, the liquidation shall be made on the face of the entry showing the particulars thereof, initiated by the liquidating clerk, approved by the chief liquidator, and recorded in the record of liquidations. A daily record of all entries liquidated shall be posted in the public corridor of the customhouse, stating the name of the vessel or aircraft, the port from which she arrived, the date of her arrival, the name of the importer, and the serial number and date of the entry. A daily record must also be kept by the Collector of all additional duties, taxes and other charges found upon liquidation, and notice shall promptly be sent to the interested parties.713 If to determine the exact amount due under the law, some future action is required, the liquidation shall be deemed to be tentative as to the item or items affected and shall to that extent be subject to future and final readjustment and settlement. The entry in such case shall be stamped "Tentative liquidation".714 When articles have been entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative.715 In determining the total amount of duties, taxes, surcharges, wharfage and/or other charges to be paid on entries, a fraction of a peso less than fifty centavos shall be disregarded, and a fraction of a peso amounting to fifty centavos or more shall be considered as one peso. In case of overpayment or underpayment of duties, taxes, surcharges, wharfage and/or other charges paid on entries, where the amount involved is less than five pesos, no refund or collection shall be made.716 f. Keeping of records

712 713

Sec. 1204 Sec. 1601 714 Sec. 1602 715 Sec. 1603 716 Sec. 1604

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F. Importation in violation of TCC 1. Smuggling a. An act of any person who shall: 1. Fraudulently import any article contrary to law, or 2. Assist in so doing, or 3. Receive, conceal, buy, sell, facilitate, transport, conceal or article knowing its illegal importation.717 4. Export contrary to law.718 b. The Philippines is divided into various ports of entry entry other than port of entry, will be smuggling. 2. Other fraudulent practices Any person who makes or attempts to make any entry of imported or exported article by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any false or fraudulent practice whatsoever, or shall be guilty of any willful act or omission by means of whereof the Government might be deprived of the lawful duties, taxes and other charges accruing from the article or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission, shall, for each offense, be punished by a fine of not less than six hundred pesos nor more than five thousand pesos and by imprisonment for not less than six months nor more than two (2) years. If the offender is an alien, he shall be deported after serving the sentence.719 G. Classification of goods 1. Taxable importation All articles imported from any foreign country into the Philippines, upon each importation, even though previously exported from the Philippines, except as otherwise specifically provided.720 sell such

717 718

Sec. 3601 Sec. 3514 719 Sec. 3602 720 Sec. 101

206

2. Prohibited importation a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and detached parts thereof, except when authorized by law.1awphil b. Written or printed article in any form containing any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines, of forcible resistance to any law of the Philippines, or containing any threat to take the life of or inflict bodily harm upon any person in the Philippines. c. Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings or other representation of an obscene or immoral character. d. Articles, instruments, drugs and substances designed, intended or adapted for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly information where, how or by whom human conception is prevented or unlawful abortion produced. e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances. f. Lottery and sweepstakes tickets except those authorized by the Philippine Government, advertisements thereof and lists of drawings therein. g. Any article manufactured in whole or in part of gold silver or other precious metal, or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness or quality of said metals or alloys. h. Any adulterated or misbranded article of food or any adulterated or misbranded drug in violation of the provisions of the "Food and Drugs Act." i. Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or may hereafter be declared habit forming by the President of the Philippines, any compound, manufactured salt, derivative, or preparation thereof, except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue, for medicinal purposes only. j. Opium pipes and parts thereof, of whatever material. k. All other articles the importation of which is prohibited by law.721

721

Sec. 102

207

H. Classification of duties 1. Ordinary/Regular duties Imposed on imported articles that enter the country of the Philippines in avoidance with the schedules and classifications provided under the Tariff and Customs Code. a. Ad valorem; Methods of valuation 1) Transaction value The price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding: a. The following to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods: 1. Commissions and brokerage fees;722 2. Cost of containers; 3. The cost of packing, whether for labour or materials; 4. The value, apportioned as appropriate, of the following goods and services: materials, components, parts and similar items incorporated in the imported goods; tools; dies; moulds and similar items used in the production of imported goods; materials consumed in the production of the imported goods; and engineering, development, artwork, design work and plans and sketches undertaken elsewhere than in the Philippines and necessary for the production of imported goods, where such goods and services are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods; 5. The amount of royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods to the buyer; b. The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller; c. The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines; d. Loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Philippines; and
722

except buying commissions

208

e. The cost of insurance.723 2) Transaction value of identical goods Where the dutiable value cannot be determined under method one, the dutiable value shall be the transaction value of identical goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Identical goods" shall mean goods which are the same in all respects, including physical characteristics, quality and reputation. Minor differences in appearances shall not preclude goods otherwise conforming to the definition from being regarded as identical.724 3) Transaction value of similar goods Where the dutiable value cannot be determined under the preceding method, the dutiable value shall be the transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the goods being valued. "Similar goods" shall mean goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark shall be among the factors to be considered in determining whether goods are similar.725 xxx 4) Deductive value Based on the unit price at which the imported goods or identical or similar imported goods are sold in the Philippines, in the same condition as when imported, in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons not related to the persons from whom they buy such goods, subject to deductions for the following: (1) Either the commissions usually paid or agreed to be paid or the additions usually made for profit and general expenses in connection with sales in such country of imported goods of the same class or kind; (2) The usual costs of transport and insurance and associated costs incurred within the Philippines; and (5); and (3) Where appropriate, the costs and charges referred to in subsection (A) (3), (4) and

723 724

Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC Sec. 1 (B), Id. 725 Sec. 1 (C), id.

209

(4) The customs duties and other national taxes payable in the Philippines by reason of the importation or sale of the goods.726 xxx 5) Computed value The sum of: (1) The cost or the value of materials and fabrication or other processing employed in producing the imported goods; (2) The amount for profit and general expenses equal to that usually reflected in the sale of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the Philippines; (3) The freight, insurance fees and other transportation expenses for the importation of the goods; (4) Any assist, if its value is not included under paragraph (1) hereof; and (5) The cost of containers and packing, if their values are not included under paragraph (1) hereof.727 xxx 6) Fallback value If the dutiable value cannot be determined under the preceding methods described above, it shall be determined by using other reasonable means and on the basis of data available in the Philippines. If the importer so requests, the importer shall be informed in writing of the dutiable value determined under Method Six and the method used to determine such value. No dutiable value shall be determined under Method Six on the basis of: (1) The selling price in the Philippines of goods produced in the Philippines; (2) A system that provides for the acceptance for customs purposes of the higher of two alternative values; (3) The price of goods in the domestic market of the country of exportation; (4) The cost of production, other than computed values, that have been determined for identical or similar goods in accordance with Method Five hereof; (5) The price of goods for export to a country other than the Philippines; (6) Minimum customs values; or
726 727

Sec. 1 (D), id. Sec. 1 (E), id.

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(7) Arbitrary or fictitious values.728 b. Specific Duty based on the dutiable weight of goods number or measurement. 2. Special duties Imposed in addition to regular or ordinary duties principally in order to protect local industries against unfair competition from foreign manufacturers or procedures; consumer against possible deceptions; and national interest. a. Dumping duties Imposed by the Secretary of Finance, upon the recommendation of the Tariff Commission when: a. The price of the imported article is deliberately or continually fixed at less than the fair market value or cost of production; and b. Importation would cause or likely cause and injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment. Amount of special duty: extent of the underpricing. b. Countervailing duties Special duty imposed on imported articles which are granted any kind or form of subsidy by the government in the country or origin or exportation, the importation of which has caused or threatens to cause material injury to a domestic industry or has materially relaided the growth or, prevents the establishment of a domestic industry.729 c. Marking duties Special duty of five percent (5%) ad valorem imposed or articles properly marked, collected by the commissioner, except when such article is exported or destroyed under the customs supervision and prior to final liquidation of the corresponding entry.730
728 729

Sec. 1 (F), id. R.A. 8751 Requisites: 1. The levy of an excise tax or inland tax or local goods of the same or similar class as the article imported or the grant of subsidy to the foreign exporter by his government; and 2. The importation is likely to insure materially established local industries or prevent their establishments. Amount of special duty: Equal to the bounty or subsidy or subvention. 730 Purpose: To prevent possible deception of the consumers.

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d. Retaliatory/Discriminatory duties Imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such a manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. e. Safeguard Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them.731 The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures.732 The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition. I. Remedies 1. Government a. Administrative/Extrajudicial 1) Search, seizure, forfeiture, arrest For the enforcement of the customs and tariff laws, the following persons are authorized to effect searches, seizures and arrests conformably with the provisions of said laws: a. Officials of the Bureau of Customs, collectors, assistant collectors, deputy collectors, surveyors, security and secret-service agents, inspectors, port patrol officers and guards of the Bureau of Customs. b. Officers of the Philippine Navy when authorized by the Commissioner. c. Any person especially authorized in writing by the Commissioner. d. Officers generally empowered by law to effect arrests and execute processes of courts, when acting under direction of the Collector. e. Any person especially authorized by a Collector, subject to restrictions.

731 732

Safeguard measures that may be imposed. Additional tariffs, import quotas or banning of imports. as provided under Rep. Act No. 8800, the Safeguard Measures Act (SMA) ( Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

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Persons exercising the powers hereinabove conferred shall, in the exercise thereof, have the same authority, be entitled to the proper protection, and shall be governed by the same law as other officers exercising police authority in general.733 Persons acting under authority conferred pursuant to subsection (e) may exercise their authority within the limits of the collection district only and in or upon the particular vessel or aircraft, or in the particular place, or in respect to the particular article specified in the appointment. All such appointments shall be in writing, and the original shall be filed in the customhouse of the district where made. All other persons exercising the powers hereinabove conferred may exercise the same at any place within the jurisdiction of the Bureau of Customs.734 It shall be within the power of a customs official or person authorized as aforesaid, and it shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or other movable property when the same is subject to forfeiture or liable for any fine imposed under customs and tariff laws, and also to arrest any person subject to arrest for violation of any customs and tariff laws.735 It shall be the duty of any person exercising authority as aforesaid, upon being questioned at the time of the exercise thereof, to make known his official character as an officer or official of the Government, and if his authority is derived from special authorization in writing to exhibit the same for inspection, if demanded.736 Any person exercising police authority under the customs and tariff laws may demand assistance of any police officer when such assistance shall be necessary to effect any search, seizure or arrest which may be lawfully made or attempted by him. It shall be the duty of any police officer upon whom such requisition is made to give such lawful assistance in the matter as may be required.737 For the more effective discharge of his official duties, any person exercising the powers herein conferred, may at anytime enter, pass through, or search any land or enclosure or any warehouse, store or other building, not being a dwelling house.738 A warehouse, store or other building or enclosure used for the keeping of storage of articles does not become a dwelling house within the meaning hereof merely by reason of the fact that a person employed as watchman lives in the place, nor will the fact that his family stays there with him alter the case.

733 734

Sec. 2203 Sec. 2204 735 Sec. 2205. 736 Sec. 2206 737 Sec. 2207. 738 Sec. 2208.

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A dwelling house may be entered and searched only upon warrant issued by a judge or justice of the peace, upon sworn application showing probable case and particularly describing the place to be searched and person or thing to be seized.739 It shall be lawful for any official or person exercising police authority under these provisions to go aboard any vessel or aircraft within the limits of any collection district, and to inspect, search and examine said vessel or aircraft and any trunk, package, box or envelope on board, and to search any person on board the said vessel or aircraft and to this end to hail and stop such vessel or aircraft if under way, to use all necessary force to compel compliance; and if it shall appear that any breach or violation of the customs and tariff laws of the Philippines has been committed, whereby or in consequence of which such vessels or aircrafts, or the article, or any part thereof, on board of or imported by such vessel or aircraft, is liable to forfeiture, to make seizure of the same or any part thereof. The power of search shall extend to the removal of any false bottom, partition, bulkhead or other obstruction, so far as may be necessary to enable the officer to discover whether any dutiable or forfeitable articles may be concealed therein. No proceeding herein shall give rise to any claim for the damage thereby caused to article or vessel or aircraft.740 It shall also be lawful for a person exercising authority as aforesaid to open and examine any box, trunk, envelope or other container, wherever found where he has reasonable cause to suspect the presence therein of dutiable or prohibited article or articles introduced into the Philippines contrary to law, and likewise to stop, search and examine any vehicle, beast or person reasonably suspected of holding or conveying such article as aforesaid.741 All persons coming into the Philippines from foreign countries shall be liable to detention and search by the customs authorities under such regulations as may be prescribed relative thereto. Female inspectors may be employed for the examination and search of persons of their own sex.742 Upon making any seizure, the Collector shall issue a warrant for the detention of the property; and if the owner or importer desires to secure the release of the property for legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in an amount to be fixed by him, conditioned for the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the case. The articles the importation of which is prohibited by law shall not be released under bond.743

739 740

Sec. 2209 Sec. 2210 741 Sec. 2211 742 Sec. 2212 743 Sec. 2301

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When a seizure is made for any cause, the Collector of the district wherein the seizure is effected shall immediately make report thereof to the Commissioner and to the Auditor General.744 The Collector shall give the owner or importer of the property or his agent a written notice of the seizure and shall give him an opportunity to be heard in reference to the delinquency which was the occasion of such seizure. For the purpose of giving such notice and of all other proceedings in the matter of such seizure, the importer, consignee or person holding the bill of lading shall be deemed to be the "owner" of the article included in the bill. For the same purpose, "agent" shall be deemed to include not only any agent in fact of the owner of the seized property but also any person having responsible possession of the property at the (missing) of the seizure, if the owner or his agent in fact is unknown or cannot be reached.745 Notice to an unknown owner shall be effected by posting a notice for fifteen days in the public corridor of the customhouse of the district in which the seizure was made, and, in the discretion of the Commissioner, by publication in a newspaper or by such other means as he shall consider desirable.746 The Collector shall also cause a list and particular description of the property seized to be prepared and an appraisement or classification of the same at its wholesale value in the local market in the usual wholesale quantities to be made by at least two appraising officials, if there are such officials at or near the place of seizure; in the absence of such officials, then by two competent and disinterested citizens of the Philippines, to be selected by him for that purpose, residing at or near the place of seizure, which list and appraisement shall be properly attested to by such Collector and the persons making the appraisal.747 If, within fifteen days after the notification prescribed in section twenty-three hundred and four748 of this Code, no owner or agent can be found or appears before the Collector, the latter shall declare the property forfeited to the government to be sold at auction in accordance with law.749 If, in any seizure case, the owner or agent shall, while the case is yet before the Collector of the district of seizure, pay to such Collector the fine imposed by him or, in case of forfeiture, shall pay the appraised value of the property, or, if after appeal of the case, he shall pay to the Commissioner the amount of the fine as finally determined by him, or, in case of forfeiture, shall pay the appraised value of the property, such property shall be forthwith surrendered, and all liability which may or might attach to the property by virtue of
744 745

Sec. 2302 Sec. 2303 746 Sec. 2304 747 Sec. 2305 748 supra 749 Sec. 2306.

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the offense which was the occasion of the seizure and all liability which might have been incurred under any bond given by the owner or agent in respect to such property shall thereupon be deemed to be discharged. Redemption of forfeited property shall not be allowed in any case where the importation is absolutely prohibited or where the surrender of the property to the person offering to redeem the same would be contrary to law.750 b. Judicial 1) Rules on appeal including jurisdiction The party aggrieved by a ruling of the Commissioner in any matter brought before him upon protest or by his action or ruling in any case of seizure may appeal to the Court of Tax Appeals. Unless an appeal is made to the Court of Tax Appeals, the action or ruling of the Commissioner shall be final and conclusive.751 2) Taxpayer a. Protest When a ruling or decision of the Collector is made whereby liability for duties, fees, or other money charge is determined, except the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision by presenting to the Collector at the time when payment of the amount claimed to be due the Government is made, or within thirty (30) days thereafter, a written protest setting forth his objections to the ruling or decision in question, together with the reasons therefor. No protest shall be considered unless payment of the amount due after final liquidation has first been made.752 In all cases subject to protest, the interested party who desires to have the action of the Collector reviewed, shall make a protest, otherwise, the action of the Collector shall be final and conclusive against him, except as to matters correctible for manifest error.753 Every protest shall point out the particular decision or ruling of the Collector to which exception is taken or objection made, and shall indicate with reasonable precision the particular ground or grounds upon which the protesting party bases his claim for relief. The scope of a protest shall be limited to the subject matter of a single adjustment or other independent transaction; but any number of issues may be raised in a protest with reference to the particular item or items constituting the subject matter of the protest.

750 751

Sec. 2307 Sec. 2402 752 Sec. 2308 753 Sec. 2309

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"Single adjustment" refers to the entire content of one liquidation, including all duties, fees, surcharges or fines incident thereto.754 If the nature of the articles permit, importers filing protests involving questions of fact must, upon demand, supply the Collector with samples of the articles which are the subject matter of the protests. Such samples shall be verified by the custom official who made the classification against which the protest are filed.755 When a protest in proper form is presented in a case where protest in required, the Collector shall reexamine the matter thus presented, and if the protest is sustained, in whole or in part, he shall enter the appropriate order, the entry reliquidated if necessary. In seizure cases, the Collector, after a hearing, shall in writing make a declaration of forfeiture or fix the amount of the fine or take such other action as may be proper.756 The person aggrieved by the decision or action of the Collector in any matter presented upon protest or by his action in any case of seizure may, within fifteen (15) days after notification in writing by the Collector of his action or decision, give written notice to the Collector of his desire to have the matter reviewed by the Commissioner. Thereupon the Collector shall forthwith transmit all the records of the proceedings to the Commissioner, who shall approve, modify or reverse the action or decision of the Collector and take such steps and make such orders as may be necessary to give effect to his decision.757 Notice of the decision of the Commissioner shall be given to the party by whom the case was brought before him for review, and in seizure cases such notice shall be effected by personal service if practicable.758 If in any case involving the assessment of duties the importer shall fail to protest the ruling of the Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should, in the opinion of the department head, be erroneous and unfavorable to the Government, the department head may require the Commissioner to order a reliquidation.759 b. Abandonment Express - when it is made direct to the Collector by the interested party in writing. Implied when an intention to abandon can be clearly inferred from the action or omission of the interested party. The failure of any interested party to file the import entry within fifteen days or any extension thereof from the discharge of the vessel or aircraft shall be implied abandonment.
754 755

Sec. 2310 Sec. 2311 756 Sec. 2312 757 Sec. 2313 758 Sec. 2314 759 Sec. 2315

217

An implied abandonment shall not be effective until the article is declared by the Collector to have been abandoned after notice thereof is given to the interested party as in seizure cases. Any person who abandons an imported article renounces all his interests and property rights therein.760 The owner or importer of any articles may, within ten (10) days after filing of the import entry, abandon to the Government all or a part of the articles included in an invoice, and, thereupon, he shall be relieved from the payment of duties, taxes and all other charges and expenses due thereon. The portion so abandoned is not less than ten per cent (10%) of the total invoice and is not less than one package, except in cases of articles imported for personal or family use. The article so abandoned shall be delivered by the owner or importer at such place within the port of arrival as the Collector shall designate, and upon his failure to so comply, the owner or importer shall be liable for all expenses that may be incurred in connection with the disposition of the articles. Nothing shall be construed as relieving such owner or importer from any criminal liability which may arise from any violation of law committed in connection with the importation of the abandoned article.761 The owner or importer of an article impliedly abandoned may, at any time before it is sold or otherwise disposed of, reclaim such article provided all legal requirements regarding its importation are complied with and the corresponding duties, taxes and other charges as well as all expenses incurred as a consequence of the abandonment, are paid.762 c. Abatement and refund No abatement of duties shall be made on account of damage incurred or deterioration suffered during the voyage of importation; and duties will be assessed on the actual quantity imported, as shown by the return of weighers, gaugers, measures, examiners or appraisers, as the case may be.763 When any package or packages appearing on the manifest or bill of lading are missing, a remission or refund of the duty thereon shall be made if it is shown by proof satisfactory to the Collector that the package or packages in question have not been imported into the Philippines.764

760 761

Sec. 1801 Sec. 1802 762 Sec. 1803 763 Sec. 1701 764 Sec. 1702

218

If, upon opening any package, a deficiency or absence of any article, or of part of the contents thereof, as called for by the invoice shall be found to exist, such deficiency shall be certified to the Collector by the appraiser; and upon the production of proof satisfactory to the Collector showing that the shortage occurred before the arrival of the article in the Philippines, the proper abatement or refund of the duty shall be made.765 A Collector may abate or refund the amount of duties accruing or paid, and may likewise make a corresponding allowance or credit on the entry bond, or other document, upon satisfactory proof of the injury, destruction, or loss by theft, fire or other causes of any article as follows: a. While within the limits of any port of entry prior to unlading under customs supervision. b. While remaining in customs custody after unlading. c. While in transit under bond from the port of entry to any port in the Philippines. d. While released under bond to export, except in case of loss by theft.766 Where it is satisfactorily shown to the Collector that an animal which is the subject of importation dies or suffers injury before arrival, or while in customs custody, the duty shall be correspondingly abated by him, provided the carcass of any dead animal remaining on board or in customs custody be removed in the manner required by the Collector and at the expense of the importer.767 The Collector shall in all cases of allowances, abatements or refunds of duties, cause an examination and report in writing to be made as to any fact discovered during such examination which tends to account for the discrepancy or difference and cause the corresponding adjustment to be made on the import entry.768 Manifest clerical errors made in an invoice or entry, errors in return of weight, measure and gauge, when duly certified to by the surveyor or examining official769 and errors in the distribution of charges on invoices not involving any question of law and certified to by the examining official, may be corrected in the computation of duties, if such errors be discovered before the payment of duties, or, if discovered within one year after the final liquidation, upon written request and notice of error from the importer, or upon statement of error certified by the Collector.

765 766

Sec. 1703 Sec. 1704 767 Sec. 1705 768 Sec. 1706 769 when there are such officials at the port

219

For the purpose of correcting the specified errors, the Collector is authorized to reliquidate entries and collect additional charges, or to make refunds on statement of error within the statutory time limit.770 All claims for refund of duties shall be made in writing, and forwarded to the Collector to whom such duties are paid, who upon receipt of such claim shall verify the same by the records of his office, and if found to be correct and in accordance with law, shall certify the same to the Commissioner with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct.771

770 771

Sec. 1707 Sec. 1708

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V. Judicial Remedies772 A. Jurisdiction of the Court of Tax Appeals 1. Exclusive appellate jurisdiction over civil tax cases a. Cases within the jurisdiction of the Court en banc (a) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: (1) Cases arising from administrative agencies Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; (2) Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and (3) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos; (b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their appellate jurisdiction; (c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction; (d) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over tax collection cases;

772

Republic Act 1125, as amended, and the Revised Rules of the Court of Tax Appeals The Court of Tax Appeals (CTA) is a court of special appellate jurisdiction and a part of our judicial system. The proceedings therein are judicial in nature although the Court is not bound by the technical rules of evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966) It is a regular court vested with exclusive appellate jurisdiction over cases arising under the: 1. National Internal Revenue Code 2. Tariff and Customs Code 3. Assessment law The CTA is a highly specialized body specially created for the purpose of reviewing tax cases, its findings will not be ordinarily be reviewed absent a showing of gross error or abuse on its part. These findings are binding upon the Supreme Court and in the absence of strong reasons for the court to delve on facts, only questions of law are open for determination.

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(e) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; (f) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs; (g) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; and (h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph (f).773 b. Cases within the jurisdiction of the Court in divisions (a) Exclusive original or appellate jurisdiction to review by appeal the following: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action. In case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228774 of the National Internal revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case. Should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty day-

773 774

Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals supra

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period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8775 of these Rules. In the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229776 of the National Internal Revenue Code; (3) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their original jurisdiction; (4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (5) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2315777 of the Tariff and Customs Code; and (6) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture, in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302,778 respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties; (b) Exclusive jurisdiction over cases involving criminal offenses, to wit: (1) Original jurisdiction over all criminal offenses arising from violations of the National internal Revenue Code or Tariff and Customs Code and other laws
775

A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review filed within thirty (30) days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. In case of inaction of the Commissioner of Internal revenue on claims for refund of internal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review within the two-year period prescribed by law from payment or collection of the taxes. 776 supra 777 Supervisory Authority of Commissioner And of Department Head in Certain Cases. If in any case involving the assessment of duties the importer shall fail to protest the ruling of the Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should, in the opinion of the department head, be erroneous and unfavorable to the Government, the department head may require the Commissioner to order a reliquidation. 778 supra

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administered by the Bureau of Internal Revenue of the Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more; and (2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in their original jurisdiction in criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than one million pesos or where there is no specified amount claimed; (c) Exclusive jurisdiction over tax collections cases, to wit: (1) Original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more; and (2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them within their respective territorial jurisdiction.779 2. Criminal cases a. Exclusive original jurisdiction Over all criminal cases arising from violations of the NIRC or Tariff and Customs Code and other laws administered by the BIR or the Bureau of Customs Where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less than one million pesos (P1,000, 000. 00) or where there is no specified amount claimed - the offenses or penalties shall be tried by the regular courts and the jurisdiction of the CTA shall be appellate. The criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall, at all times, be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action will be recognized. b. Exclusive appellate jurisdiction in criminal cases Over appeals from the judgments, resolutions or orders of the RTC in tax cases originally decided by them, in their respective territorial jurisdiction.
779

Rule 4, Sec. 3, Revised Rules of the Court Of Tax Appeals

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Over petitions for review of the judgments, resolutions, or orders of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts in their respective jurisdiction. B. Judicial Procedures 1. Judicial action for collection of taxes a. Internal revenue taxes Upon the issuance of any ruling, order or decision by the CTA favorable to the national government, the CTA shall issue an order authorizing the Bureau of Internal Revenue, through the Commissioner to seize and distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and/or levy the real property of such persons in sufficient quantity to satisfy the tax or charge together with any increment thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude the Court from availing of other means under the Rules of Court.780 b. Local taxes 1) Prescriptive period Five (5) years from date of assessment. 2. Civil cases a. Who may appeal, mode of appeal, effect of appeal Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein. Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42781 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal: With respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a procedure analogous to that
780 781

Sec. 13, R.A. No. 1125, as amended by Sec. 9 of RA No. 9282 See Reference

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provided for under Rule 43782 of the 1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc. All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteens (15) days from notice thereof: Provide, however, That in criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply. No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law. When in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the Government may directly file the said cases with the CTA covering amounts within its exclusive and original jurisdiction.783 1) Suspension of collection of tax a) Injunction not available to collection restrain

Sec. 11 of RA No. 1125784 grants CTA power to suspend collection of tax if such collection works to serious prejudice of either taxpayer or government. However, Sec. 218 of the Tax Code provides that no court may grant injunction to restrain collection of any tax, fee or charge imposed by Tax Code. 785 Appeal to the CTA does not automatically suspend collection unless CTA issues suspension order at any stage of proceedings.

782 783

Ibid. Sec. 11 of R.A. No. 1125, id. 784 as amended by Sec. 9 of RA No. 9282 785 The provision in the Tax Code refers to courts other than the CTA ( Blaquera vs. Rodriguez, GR No. L11295, March 29, 1958)

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2) Taking of evidence The Court may direct that a case, or any issue thereof, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises upon motion or otherwise in any stage of the proceedings, or when the taking of an account is necessary, or when the determination of an issue of fact requires the examination of a long account. The hearing before such member shall proceed in all respects as though the same had been made before the Court. Upon the recommendation of such hearing of such member, he shall promptly submit to the Court his report in writing, stating his findings and conclusions; and thereafter, the Court shall render its decisions on the case, adopting, modifying, or rejecting the report or the Court may recommit it with instructions, or receive further evidence.786 3) Motion for reconsideration or New trial A party adversely affected by a decision or resolution of a Division of the Court on a motion for reconsideration or new trial may appeal to the Court by filing before it a petition for review within fifteen days from receipt of a copy of the questioned decision or resolution. Upon proper motion and the payment of the full amount of the docket and other lawful fees and deposit for costs before the expiration of the reglementary period herein fixed, the Court may grant an additional period not exceeding fifteen days from the expiration of the original period within which to file the petition for review.787 An appeal from a decision or resolution of the Court in Division on a motion for reconsideration or new trial shall be taken to the Court by petition for review.788 The Court en banc shall act on the appeal.789 b. Appeal to the CTA, en banc No civil proceeding involving matter arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, until and unless an appeal has been previously filed with the CTA and disposed of.790 "A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc. c. Petition for review on certiorari to the Supreme Court A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari.791
786 787

Sec. 12, R.A. 1125 Sec. 3 (b), Revised Rules of the CTA 788 as provided in Rule 43 of the Rules of Court 789 Sec. 4 (b), Revised Rules of the CTA 790 Sec. 18, id. 791 pursuant to Rule 45 of the 1997 Rules of Civil Procedure (Sec. 19. Id.)

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3. Criminal cases a. Institution and prosecution of criminal actions 1) Institution on civil action in criminal action In cases within the jurisdiction of the Court, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding. The filing of the criminal action shall necessarily carry with it the filing of the civil action. No right to reserve the filing of such civil action separately from the criminal action shall be allowed or recognized.792 b. Appeal and period to appeal 1) Solicitor General as counsel for the People and government officials sued in their official capacity The Solicitor General shall represent the People of the Philippines and government officials sued in their official capacity in all cases brought to the Court in the exercise of its appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenue in cases brought under the National Internal Revenue Code or other laws enforced by the Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau of Customs, to appear in behalf of the officials of said agencies sued in their official capacity. Such duly deputized legal officers shall remain at all times under the direct control and supervision of the Solicitor General.793 c. Petition for review on certiorari to the Supreme Court A party adversely affected by a decision or ruling of the Court en banc may appeal therefrom by filing with the Supreme Court a verified petition for review on certiorari within fifteen (15) days from receipt of a copy of the decision or resolution.794 If such party has filed a motion for reconsideration or for new trial, the period herein fixed shall run from the partys receipt of a copy of the resolution denying the motion for reconsideration or for new trial.795

792 793

Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court Sec. 10, id. 794 as provided in Rule 45 of the Rules of Court 795 Rule 16, Sec. 1, id.

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C. Taxpayers suit impugning the validity of tax measures or acts of taxing authorities a. Taxpayers suit, defined A case where the act complained of directly involves the illegal disbursement of public funds derived from taxation.796 b. Distinguished from citizens suit The plaintiff in a taxpayers suit is in a different category from the plaintiff in a citizens suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern.797 c. Requisites for challenging the constitutionality of a tax measure or act of taxing authority 1) Concept of locus standi as applied in taxation It is a partys personal and substantial interest in the case, such that the party has sustained or will sustain direct injury as a result of the government act being challenged. It calls for more than just a generalized grievance.798 A party need not be a party to the contract to challenge its validity.799 2) Doctrine of transcendental importance The Court has adopted a rule that even where the petitioners have failed to show direct injury, they have been allowed to sue under the principle of "transcendental importance."800
796

Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 Requisites for a taxpayers petition: 1. That money is being extracted and spent in violation of specific constitutional protections against abuses of legislative power 2. That public money is being deflected to any improper purpose 3. That the petitioner seeks to restrain respondents from wasting public funds through the enforcement of an invalid or unconstitutional law. The Supreme Court has discretion whether or not to entertain taxpayers suit and could brush aside lack of locus standi (Kilos Bayan vs. Guingona) 797 Beauchamp v. Silk As held by the New York Supreme Court in People ex rel Case v. Collins: "In matters of mere public right, howeverthe people are the real partiesIt is at least the right, if not the duty, of every citizen to interfere and see that a public offence be properly pursued and punished, and that a public grievance be remedied." With respect to taxpayers suits, Terr v. Jordan held that "the right of a citizen and a taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied." 798 Abaya v. Ebdane, G. R. No. 167919, February 14, 2007 799 Ibid. 800 David v. Arroyo, G.R. No. 171396 (2006)

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The doctrine applies when paramount public interest is involved. 3) Ripeness for judicial determination In our jurisdiction, the issue of ripeness is generally treated in terms of actual injury to the plaintiff. Hence, a question is ripe for adjudication when the act being challenged has had a direct adverse effect on the individual challenging it.801 An alternative road to review similarly taken would be to determine whether an action has already been accomplished or performed by a branch of government before the courts may step in.802 To be ripe for judicial adjudication, the petitioner must show a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable decision of the Court.803

An issue is of transcendental importance because of the following: 1. the character of the funds or other assets involved in the case; 2. the presence of a clear disregard of a constitutional or statutory prohibition by an instrumentality of the government; and 3. the lack of any other party with a more direct and specific interest in raising the question. (Francisco vs. House of Representatives, 415 SCRA 44; Senate v. Ermita G.R. No. 169777 (2006)) 801 Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998). 802 Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003). 803 ABAKADA Guro Party List, etc., v. Purisima, etc., citing Cruz v. Secretary of Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion

230

Reference
National Internal Revenue Code of the Phils.804
Sec. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement. xxx (F) Authority of the Commissioner to inquire into Bank Deposit Accounts. Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of: (1) a decedent to determine his gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. Sec. 24

Sec. 32 (B)(6)(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirtythree percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the
804

R.A. 8424, as amended

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employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. (B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expenseaccount; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. SEC. 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

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(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. (C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (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 authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. Sec.. 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or

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assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. Sec. 106 (a) Export Sales. - The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. (b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. Sec. 108 (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate. (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; ` (4) Services rendered to vessels engaged exclusively in international shipping; and

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(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

SEC. 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. (B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition. (2) Public works contractors shall be allowed a presumptive input tax equivalent to one and onehalf percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom. SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. (B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made. (C) Cancellation of VAT Registration. - A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes.

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(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of compete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.(E) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit. SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. (A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. (B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance. Sec. 143. Tax on Business. - The municipality may impose taxes on the following businesses: (a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with the following schedule: With gross sales or receipts for the preceding Amount calendar year in the amount of: Annum Less than 10,000.00 P 10,000.00 or more but less than 15,000.00 15,000.00 or more but less than 20,000.00 20,000.00 or more but less than 30,000.00 30,000.00 or more but less than 40,000.00 40,000.00 or more but less than 50,000.00 165.00 220.00 202.00 440.00 660.00 825.00 of Tax Per

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50,000.00 or more but less than 75,000.00 75,000.00 or more but less than 100,000.00 100,000.00 or more but less than 150,000.00 150,000.00 or more but less than 200,000.00 200,000.00 or more but less than 300,000.00 300,000.00 or more but less than 500,000.00 500,000.00 or more but less than 750,000.00 750,000.00 or more but less than 1,000,000.00 1,000,000.00 or more but less than 2,000,000.00 2,000,000.00 or more but less than 3,000,000.00 3,000,000.00 or more but less than 4,000,000.00 4,000,000.00 or more but less than 5,000,000.00 5,000,000.00 or more but less than 6,500,000.00

1,320.00 1,650.00 2,200.00 2,750.00 3,850.00 5,500.00 8,000.00 10,000.00 13,750.00 16,500.00 19,000.00 23,100.00 24,375.00

6,000,000.00 or more at a rate not exceeding thirty-seven and a half percent (37%) of one percent (1%) (b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule: With gross sales or receipts for the preceding Amount of Tax Per calendar year in the amount of: Annum Less than 1,000.00 P 1,000.00 or more but less than 2,000.00 2,000.00 or more but less than 3,000.00 3,000.00 or more but less than 4,000.00 4,000.00 or more but less than 5,000.00 5,000.00 or more but less than 6,000.00 6,000.00 or more but less than 7,000.00 7,000.00 or more but less than 8,000.00 8,000.00 or more but less than 10,000.00 10,000.00 or more but less than 15,000.00 15,000.00 or more but less than 20,000.00 20,000.00 or more but less than 30,000.00 30,000.00 or more but less than 40,000.00 40,000.00 or more but less than 50,000.00 50,000.00 or more but less than 75,000.00 18.00 33.00 50.00 72.00 100.00 121.00 143.00 165.00 187.00 220.00 275.00 330.00 440.00 660.00 990.00

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75,000.00 or more but less than 100,000.00 100,000.00 or more but less than 150,000.00 150,000.00 or more but less than 200,000.00 200,000.00 or more but less than 300,000.00 300,000.00 or more but less than 500,000.00 500,000.00 or more but less than 750,000.00 750,000.00 or more but less than 1,000,000.00 1,000,000.00 or more but less than 2,000,000.00

1,320.00 1,870.00 2,420.00 3,300.00 4,400.00 6,600.00 8,800.00 10,000.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%). (c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half () of the rates prescribed under subsection (a), (b) and (d) of this Section: (1) Rice and corn; (2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; (3) Cooking oil and cooking gas; (4) Laundry soap, detergents, and medicine; (5) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; (6) Poultry feeds and other animal feeds; (7) School supplies; and (8) Cement. (d) On retailers. With gross sales or receipts for the preceding Rate of Tax Per calendar year in the amount of: Annum P400,000.00 or less more than P400,000.00 2% 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities, and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities.

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(e) On contractors and other independent contractors, in accordance with the following schedule: With gross sales or receipts for the preceding Amount of Tax Per calendar year in the amount of: Annum Less than 5,000.00 P 5,000.00 or more but less than P 10,000.00 10,000.00 or more but less than 15,000.00 15,000.00 or more but less than 20,000.00 20,000.00 or more but less than 30,000.00 30,000.00 or more but less than 40,000.00 40,000.00 or more but less than 50,000.00 50,000.00 or more but less than 75,000.00 75,000.00 or more but less than 100,000.00 100,000.00 or more but less than 150,000.00 150,000.00 or more but less than 200,000.00 200,000.00 or more but less than 250,000.00 250,000.00 or more but less than 300,000.00 300,000.00 or more but less than 400,000.00 400,000.00 or more but less than 500,000.00 500,000.00 or more but less than 750,000.00 750,000.00 or more but less than 1,000,000.00 1,000,000.00 or more but less than 2,000,000.00 27.50 61.60 104.50 165.00 275.00 385.00 550.00 880.00 1,320.00 1,980.00 2,640.00 3,630.00 4,620.00 6,160.00 8,250.00 9,250.00 10,250.00 11,500.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%) (f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium. (g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually. (h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, valueadded or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein.

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SEC. 236. Registration Requirements. (A) Requirements. - Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer: (1) Within ten (10) days from date of employment, or (2) On or before the commencement of business,or (3) Before payment of any tax due, or (4) Upon filing of a return, statement or declaration as required in this Code. The registration shall contain the taxpayer's name, style, place of residence, business and such other information as may be required by the Commissioner in the form prescribed therefor. A person maintaining a head office, branch or facility shall register with the Revenue District Officer having jurisdiction over the head office, brand or facility. For purposes of this Section, the term "facility" may include but not be limited to sales outlets, places of production, warehouses or storage places. (B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos (P500) for every separate or distinct establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year thereafter on or before the last day of January: Provided, however, That cooperatives, individuals earning purely compensation income, whether locally or abroad, and overseas workers are not liable to the registration fee herein imposed. The registration fee shall be paid to an authorized agent bank located within the revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place of business or branch is registered. (C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register with the Bureau of Internal Revenue under Subsection (A) hereof, shall register each type of internal revenue tax for which he is obligated, shall file a return and shall pay such taxes, and shall updates such registration of any changes in accordance with Subsection (E) hereof. (D) Transfer of Registration. - In case a registered person decides to transfer his place of business or his head office or branches, it shall be his duty to update his registration status by filing an application for registration information update in the form prescribed therefor. (E) Other Updates. - Any person registered in accordance with this Section shall, whenever applicable, update his registration information with the Revenue District Office where he is registered, specifying therein any change in type and other taxpayer details. (F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the Revenue District Office where he is registered an application for registration information update in a form prescribed therefor. (G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts subject to value-added tax in excess of the amount prescribed under Section 109(z) of this Code for the next 12month period from the commencement of the business, shall register with the Revenue District Office which has jurisdiction over the head office or branch and shall pay the annual registration fee prescribed in Subsection (B) hereof. (H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts in any 12-month period exceeds the amount prescribed under Subsection 109(z) of this Code for exemption from

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the value-added tax shall register in accordance with Subsection (A) hereof, and shall pay the annual registration fee prescribed within ten (10) days after the end of the last month of that period, and shall be liable to the value-added tax commencing from the first day of the month following his registration. (I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from value-added tax under Section 109(z) of this Code; or any person whose transactions are exempt from the value-added tax under Section 109(a), (b), (c), and (d) of this Code, who opts to register as a VAT taxpayer with respect to his export sales only, may update his registration information in accordance with Subsection (E) hereof, not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registration fee prescribed in Subsection (B) hereof. In any case, the Commissioner may, for administrative reasons, deny any application for registration including updates prescribed under Subsection (E) hereof. For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as VAT-registered person who shall be assigned only one Taxpayer Identification Number. (J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the authority of this Code to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shall indicate in certain documents, such as, but not limited to the following: (1) Sugar quedans, refined sugar release order or similar instruments; (2) Domestic bills of lading; (3) Documents to be registered with the Register of Deeds of Assessor's Office; (4) Registration certificate of transportation equipment by land, sea or air; (5) Documents to be registered with the Securities and Exchange Commission; (6) Building construction permits; (7) Application for loan with banks, financial institutions, or other financial intermediaries; (8) Application for mayor's permit; (9) Application for business license with the Department of Trade & Industry; and (10) Such other documents which may hereafter be required under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall be supplied in accordance with the provisions of this Section. In the case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the Revenue District Office where he is registered: Provided, however, That in case such executor or administrator is not registered, registration of the estate shall be made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legal residence. Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person who shall secure more than one Taxpayer Identification Number shall be criminally liable under the provision of Section 275 on 'Violation of Other Provisions of this Code or Regulations in General'.

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Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser. The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period. The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax from compliance with the provisions of this Section. SEC. 248. Civil Penalties. xxx (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein. SEC. 282. Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal Revenue Code and in the Discovery and Seizure of Smuggled Goods. (A) For Violations of the National Internal Revenue Code. - Any person, except an internal revenue official or employee, or other public official or employee, or his relative within the sixth degree of consanguinity, who voluntarily gives definite and sworn information, not yet in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds upon the internal revenue laws or violations of any of the provisions thereof, thereby resulting in the recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected or One Million Pesos (P1,000,000) per case, whichever is lower. The same amount of reward shall also be given to an informer where the offender has offered to compromise the violation of

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law committed by him and his offer has been accepted by the Commissioner and collected from the offender: Provided, That should no revenue, surcharges or fees be actually recovered or collected, such person shall not be entitled to a reward: Provided, further, That the information mentioned herein shall not refer to a case already pending or previously investigated or examined by the Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance or any of his deputies or agents: Provided, finally, That the reward provided herein shall be paid under rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner. (B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend full cooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the fair market value of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods. The cash rewards of informers shall be subject to income tax, collected as a final withholding tax, at a rate of ten percent (10%). The provisions of the foregoing Subsections notwithstanding, all public officials, whether incumbent or retired, who acquired the information in the course of the performance of their duties during their incumbency, are prohibited from claiming informer's reward. -------------------------------------------------------------------------------------------------------------------

RULES OF COURT
RULE 42 Petition for Review From the Regional Trial Courts to the Court of Appeals Section 1. How appeal taken; time for filing. A party desiring to appeal from a decision of the Regional Trial Court rendered in the exercise of its appellate jurisdiction may file a verified petition for review with the Court of Appeals, paying at the same time to the clerk of said court the corresponding docket and other lawful fees, depositing the amount of P500.00 for costs, and furnishing the Regional Trial Court and the adverse party with a copy of the petition. The petition shall be filed and served within fifteen (15) days from notice of the decision sought to be reviewed or of the denial of petitioner's motion for new trial or reconsideration filed in due time after judgment. Upon proper motion and the payment of the full amount of the docket and other lawful fees and the deposit for costs before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (n) Section 2. Form and contents. The petition shall be filed in seven (7) legible copies, with the original copy intended for the court being indicated as such by the petitioner, and shall (a) state the full names of the parties to the case, without impleading the lower courts or judges thereof either as petitioners or respondents; (b) indicate the specific material dates showing that it was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised, the specification of errors of fact or law, or both, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for the allowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of the judgments or final orders of both lower courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of plain copies thereof and of the pleadings and other material portions of the record as would support the allegations of the petition. The petitioner shall also submit together with the petition a certification under oath that he has not theretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or

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proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. (n) Section 3. Effect of failure to comply with requirements. The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof. (n) Section 4. Action on the petition. The Court of Appeals may require the respondent to file a comment on the petition, not a motion to dismiss, within ten (10) days from notice, or dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised therein are too insubstantial to require consideration. (n) Section 5. Contents of comment. The comment of the respondent shall be filed in seven (7) legible copies, accompanied by certified true copies of such material portions of the record referred to therein together with other supporting papers and shall (a) state whether or not he accepts the statement of matters involved in the petition; (b) point out such insufficiencies or inaccuracies as he believes exist in petitioner's statement of matters involved but without repetition; and (c) state the reasons why the petition should not be given due course. A copy thereof shall be served on the petitioner. (a) Section 6. Due course. If upon the filing of the comment or such other pleadings as the court may allow or require, or after the expiration of the period for the filing thereof without such comment or pleading having been submitted, the Court of Appeals finds prima facie that the lower court has committed an error of fact or law that will warrant a reversal or modification of the appealed decision, it may accordingly give due course to the petition. (n) Section 7. Elevation of record. Whenever the Court of Appeals deems it necessary, it may order the clerk of court of the Regional Trial Court to elevate the original record of the case including the oral and documentary evidence within fifteen (15) days from notice. (n) Section 8. Perfection of appeal; effect thereof. (a) Upon the timely filing of a petition for review and the payment of the corresponding docket and other lawful fees, the appeal is deemed perfected as to the petitioner. The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed in due time and the expiration of the time to appeal of the other parties. However, before the Court of Appeals gives due course to the petition, the Regional Trial Court may issue orders for the protection and preservation of the rights of the parties which do not involve any matter litigated by the appeal, approve compromises, permit appeals of indigent litigants, order execution pending appeal in accordance with section 2 of Rule 39, and allow withdrawal of the appeal. (9a, R41) (b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the judgment or final order unless the Court of Appeals, the law, or these Rules shall provide otherwise. (a) Section 9. Submission for decision. If the petition is given due course, the Court of Appeals may set the case for oral argument or require the parties to submit memoranda within a period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading or memorandum required by these Rules or by the court itself. (n)

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RULE 43 Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of Appeals Section 1. Scope. This Rule shall apply to appeals from judgments or final orders of the Court of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasijudicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil Service Commission, Central Board of Assessment Appeals, Securities and Exchange Commission, Office of the President, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer, National Electrification Administration, Energy Regulatory Board, National Telecommunications Commission, Department of Agrarian Reform under Republic Act No. 6657, Government Service Insurance System, Employees Compensation Commission, Agricultural Invention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments, Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n) Section 2. Cases not covered. This Rule shall not apply to judgments or final orders issued under the Labor Code of the Philippines. (n) Section 3. Where to appeal. An appeal under this Rule may be taken to the Court of Appeals within the period and in the manner herein provided, whether the appeal involves questions of fact, of law, or mixed questions of fact and law. (n) Section 4. Period of appeal. The appeal shall be taken within fifteen (15) days from notice of the award, judgment, final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsideration duly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (n) Section 5. How appeal taken. Appeal shall be taken by filing a verified petition for review in seven (7) legible copies with the Court of Appeals, with proof of service of a copy thereof on the adverse party and on the court or agency a quo. The original copy of the petition intended for the Court of Appeals shall be indicated as such by the petitioner. Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of Appeals the docketing and other lawful fees and deposit the sum of P500.00 for costs. Exemption from payment of docketing and other lawful fees and the deposit for costs may be granted by the Court of Appeals upon a verified motion setting forth valid grounds therefor. If the Court of Appeals denies the motion, the petitioner shall pay the docketing and other lawful fees and deposit for costs within fifteen (15) days from notice of the denial. (n) Section 6. Contents of the petition. The petition for review shall (a) state the full names of the parties to the case, without impleading the court or agencies either as petitioners or respondents; (b) contain a concise statement of the facts and issues involved and the grounds relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a certified true copy of the award, judgment, final order or resolution appealed from, together with certified true copies of such material portions of the record referred to therein and other supporting papers; and (d) contain a sworn certification against forum shopping as provided in the last paragraph of section 2, Rule 42. The petition shall state the specific material dates showing that it was filed within the period fixed herein. (2a) Section 7. Effect of failure to comply with requirements. The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the

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deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof. (n) Section 8. Action on the petition. The Court of Appeals may require the respondent to file a comment on the petition not a motion to dismiss, within ten (10) days from notice, or dismiss the petition if it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised therein are too unsubstantial to require consideration. (6a) Section 9. Contents of comment. The comment shall be filed within ten (10) days from notice in seven (7) legible copies and accompanied by clearly legible certified true copies of such material portions of the record referred to therein together with other supporting papers. The comment shall (a) point out insufficiencies or inaccuracies in petitioner's statement of facts and issues; and (b) state the reasons why the petition should be denied or dismissed. A copy thereof shall be served on the petitioner, and proof of such service shall be filed with the Court of Appeals. (9a) Section 10. Due course. If upon the filing of the comment or such other pleadings or documents as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the records the Court of Appeals finds prima facie that the court or agency concerned has committed errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals. (n) Section 11. Transmittal of record. Within fifteen (15) days from notice that the petition has been given due course, the Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to the record. (8a) Section 12. Effect of appeal. The appeal shall not stay the award, judgment, final order or resolution sought to be reviewed unless the Court of Appeals shall direct otherwise upon such .terms as it may deem just. (10a) Section 13. Submission for decision. If the petition is given due course, the Court of Appeals may set the case for oral argument or require the parties to submit memoranda within a period of fifteen (15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading or memorandum required by these Rules or by the court of Appeals. (n)

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